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spk10: Good morning, and welcome to Whole Earth Brand's second quarter 2022 results conference call. All participants are in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's conference is being recorded. At this time, I would like to turn the conference over to Jeff Sonick, Investor Relations at ICR. So, please go ahead.
spk11: Thank you, and good morning. Today's presentation will be hosted by Albert Manzoni, Chief Executive Officer, and Duane Portwood, Chief Financial Officer. Executive Chairman Erwin Simon is also participating on the call today and will be available for Q&A. The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release which can be found on our investor relations website, investor.wholeearthbrands.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. Additionally, we've provided a supplemental earnings presentation on the investor relations website that may be useful in your analysis of the company's performance. With that, I'd now like to turn the call over to Albert Manzoni, CEO.
spk09: Thank you, Jeff, and thanks to everyone for joining the call today. I'm pleased to report the business delivered a consolidated product revenues of $133.5 million, an increase of 8.5% on a constant currency basis and 5.5% on a reported basis, and generated $19.7 million of adjusted EBITDA. These results were consistent with our plan and made possible by our team's hard work amid this challenging operating environment. Our North American supply chain reinvention project allowed us to improve customer service levels and meet demand, which supported 8.1% constant currency revenue growth for the branded CPG segment during the second quarter. Our wholesome sweetener business continues to perform strongly, which helps drive an approximate 2% increase in volumes at our branded CPG segment. excluding the impact of our SKU rationalization initiatives. Our emerging international market sales, comprised of Asia Pacific, India, Middle East and Africa, and Latin America, which represent approximately 15% of our branded CPG segment, all increased at a double-digit growth rate during the second quarter, confirming the strong secular demand trends for our categories and products. Additionally, Segment revenue growth was further supported by price actions that were instituted in response to inflationary forces. Our flavors and ingredients segment continues to carry momentum with above trend growth rates and posses constant currency revenue growth of 10%, driven by both volume and price. Our concerted effort to drive use in new markets and categories has been central to these results. While we navigate the ongoing market disruptions and macroeconomic headwinds, we remain undeterred in our mission and core strategy. Despite the temporary shifts in consumer behavior, the underlying long-term trends remain more relevant today than ever, and our mission to help consumers achieve healthier lifestyles remains at the heart of our growth strategy. The health and wellness forces at play are powerful, In fact, 73% of U.S. consumers are trying to limit or avoid sugars, which speaks to the increased focus on personal health. Globally, our premium and baking-oriented brands such as Wholesome, Swerve, and Whole Earth are successfully addressing the expected shift to at-home indulgence and healthier lifestyle. And our mainstream brands such as Canderel, Equal, and Pure Via continue to address shopper needs for accessibility, affordability, and quality. As we look ahead to the oversight of this macroeconomic cycle, we believe our portfolio will be even stronger. Our slate of innovations is especially exciting as we head into the second half of this year. We have several launches planned this fall around the holidays and the ramp up of the baking season. Our new innovations are tapping into a high-growth segment of sugar substitutes with monk fruit, which is seeing consumption growth of more than 30%, and allulose, which is growing at more than 40% versus a year ago. We are reinvigorating Swerve, which is a leading natural bag product used by 2 million loyal households, by launching exciting new innovations to tap into new products and adjacency cross-purchases. We will launch Swerve products with natural monk fruit and allulose sweeteners. You will also see us in the market with blends such as monk fruit and cane sugar to help consumers transition toward a sugar-free lifestyle. Another innovation we're especially excited about is Swerve sweetened chocolate chips in the baking adjacency. Chocolate baking chips have a strong natural link to existing Swerve baking behaviors. and is a segment of interest for sugar reducing consumers. Our innovation efforts have also driven our share growth across our international markets, where today the whole of Brent's portfolio holds the number one position for the year-to-date 2022 period. For example, take our work in Australia, where we now have almost 23 shares of the natural segment which increased nearly 16 points over the past two years following the introduction of our Baker Secrets products and Moncro Sugar innovations under the Whole Earth brands. Additionally, our focus on availability remains at the forefront of our Power of One sales strategy, with our team gaining 1,700 additional doors in North America across our brands through the first Alpha 22 versus a year ago. This door expansion was driven primarily by the mass channel and by Whole Earth and the Swerve brands. We continue to see success in our global expansion strategy as well. For the first half of 2022, we gain 8,400 additional doors in aggregate across all of our international markets. Now, shifting to operational matters. While the environment has been unrelenting in its variability, we continue to be fortunate given our ongoing execution of our North America supply chain reinvention project. With respect to our new Alabama facility that services our legacy North American branded CPG business, our second quarter manufacturing was significantly more consistent in terms of total production, which reflects the hard work we have done to stabilize production. We're now producing to demand customer service and field rates are significantly improved. And this is immediately visible in the step up of our branded CPG segments, constant currency revenue growth of 8.1% versus the 3.3% growth we reported in the first quarter. Beyond the supply chain, we're also combating inflationary forces for a combination of tools, including price, cross net optimization, productivity, and prudent expense management. We're committed to defending our margins, and we will be using this tool to ensure that we continue to deliver on our commitments to the markets. We're also focused on maximizing investment in areas of trade promotion effectiveness and reallocating resources to strategic growth areas. For instance, take e-commerce, which today already represents low double digits of our branded CPG sales. Between .com and Omnichannel, we see a tremendous growth roadmap ahead of us and globally. We have expanded our e-commerce teams to accelerate growth and build channel infrastructure. We have reallocated and optimized resources to ensure we're investing adequately in talent across e-commerce advertising and operations and in capabilities and tools. With respect to our pricing actions, we instituted a mid-single-digit price increase during the first quarter, which, as expected, helped drive revenue growth in our branded CPG portfolio in the second quarter. Cost inflation has not abated, and in some areas, has accelerated. As a result, we have taken additional pricing actions that will be effective in the third quarter. While not as large as the earlier price increases, we continue to take action to protect margin dollars. Next, productivity. The SKU rationalization we executed at the beginning of the year, which was a year-over-year headwind of 1.6% in the second quarter, was largely focused on underperforming SKUs and reallocating those resources toward innovation. This is an excellent complement to our pricing strategy and something that we can control in response to external forces. Finally, expense management. The strategy we put in place during first quarter had us well positioned during the second quarter to deliver our plan, and we feel good about the levers it provides as we look to the second half of the year. We continue to be vigilant about expenses in this environment, for being smarter about our marketing cadence and are laser-focused on revenue-generative activities such as innovation. Shifting to our flavors and ingredients segment, we continued to generate above-trend revenue growth, achieving 10% at constant currency rates in the second quarter. This growth was driven primarily through volume, along with some pricing actions. This marks the third consecutive quarter of strong growth for the segment following the implementation of new leadership who have developed a set of commercial initiatives aimed at driving adoption of natural, non-GMO, flavor-enhancing, licorice-related ingredients in our hand markets across food and beverage, cosmetics, healthcare, and industrial. Together with a significantly improved cost structure, following our footprint optimization project, we also have an ability to drive more competitive prices. Taken together, the team has the tools necessary to drive growth and we're very excited about the results they are generating for the business. Flavors & Ingredients is a strong free cash flow generator with high barriers of entry and a global leadership position that will support our broader growth initiatives as we further diversify and grow all our friends. This diversification in both revenue and cash flow is valued in a fluid environment such as this, allowing us to deliver greater consistency in our operating results. In summary, our proactive efforts across Holder Friends are creating a stronger foundation that we will build upon. We are pleased with our progress to meet our goals for 2022. Holder Friends is the global leader in the better-for-you sweetener and reduced sugar categories. Our team continues to pursue four priorities. First, disrupt the massive 100 billion total addressable refined sugar market, which is being displaced by fast-growing sweeteners. Second, drive category leadership through best-in-class innovation and brand building, expand our global distribution, and leverage our strong supply chain capability. Third, continue to build out our ESG credentials and evolve our brands and products toward becoming a large, organic, natural plant-based food company. And four, work on enhancing our cash flow management and reducing balance sheet leverage. With that, I will pass the call over to Duane for his financial review.
spk02: Thank you, Albert, and good morning to everyone. As a reminder, please refer to our non-GAAP reconciliations at the end of the press release for additional detail, and I encourage you to view the supplemental earnings presentation on our investor relations website. When the second quarter ended June 30, 2022, consolidated product revenues grew 5.5% to $133.5 million versus the prior year quarter. On a constant currency basis, product revenue increased 8.5% versus the prior year second quarter. The increase was driven by a combination of increased volume and pricing actions. Reported gross profit was $37.3 million compared to $41.4 million in the prior year second quarter. The decrease was largely driven by cost inflation and costs associated with the supply chain reinvention project, partially offset by pricing actions and a $1.0 million favorable change in non-cash purchase accounting adjustments related to inventory revaluations. Adjusted gross profit of $42.6 million was essentially flat with the prior year period. Reported gross profit margin was 27.9% in the second quarter of 2022, compared to 32.7% in the prior year period. Adjusted gross profit margin was 31.9%, down from 34.0% in the prior year. The majority of this decline was a function of largely offsetting higher cost of goods sold due to cost inflation, on a dollar-for-dollar basis through increased prices. This resulted in higher sales to protect year-over-year gross profit, which on a percentage basis lowers gross profit margins. Consolidated operating income was $7.7 million compared to operating income of $6.0 million in the prior year second quarter, and consolidated net income was $1.3 million compared to net income of $3.7 million in the prior year period. Consolidated adjusted EBITDA was $19.7 million compared to $22.0 million in the prior year second quarter. The decrease was primarily due to an unfavorable foreign currency impact of $1.2 million and $.5 million of higher bonus expense as a portion of the prior year bonus program was settled in stock compared to an all-cash bonus program in the current year. Now shifting to the segment results for Q2. Branded CPG segment product revenues increased $5.0 million, or 5.0%, to $104.1 million for the second quarter of 2022, compared to $99.1 million for the same period in the prior year. On a constant currency basis, segment product revenues increased 8.1% to the prior year, driven primarily by pricing actions implemented during the quarter. Overall, volume was flat due to the discontinuance of certain private label SKUs at the beginning of the year. Excluding the impact of the SKU rationalization, branded CPG volume increased 1.6% versus the prior year quarter. Operating income for the branded CPG segment was $5.6 million in the second quarter of 2022 compared to operating income of $10.3 million for the same period in the prior year. The decrease was driven by costs associated with the company's supply chain reinvention project, the impact of cost inflation, and an unfavorable impact from a stronger U.S. dollar, partially offset by revenue growth. The company's supply chain reinvention project is expected to improve efficiencies, help offset inflationary pressures, and improve competitiveness in the marketplace over the longer term. Our flavors and ingredients segment product revenues increased 7.4% to $29.4 million for the second quarter of 2022, compared to $27.4 million for the same period in the prior year. On a constant currency basis, segment product revenues increased 9.9%, primarily due to strong volume growth of 6%, driven by growth in licorice extracts and pure derivatives resulting from the company's commercial expansion and innovation efforts. In addition, higher pricing contributed approximately 4% to the overall segment growth. Operating income for the flavors and ingredients segment was $9.0 million in the second quarter of 2022 compared to operating income of $3.7 million in the prior year period, primarily due to revenue growth, improved efficiencies following the footprint optimization initiative completed in the first half of 2021, and a $2.8 million decrease in restructuring and other expenses included in prior year results that did not reoccur in 2022. Operating expenses for corporate for the second quarter of 2022 were $6.9 million compared to $8.0 million of operating expenses in the prior year period. The decrease is primarily due to the lower M&A transaction and public company readiness costs. Now I will briefly cover our June year-to-date results. As a reminder, we acquired Wholesome on February 5th, 2021. I will speak to reported results, which include Wholesome for the full first quarter of 2022. Additionally, we will provide some select pro forma results as if we owned Wholesome for the entirety of 2021 year-to-date period to assist in your analysis of the organic growth of the combined portfolio. For the six-month period ended June 30, 2022, consolidated product revenues grew 13.7% on a reported basis to $264.1 million versus the prior year six-month period. On a pro forma basis, organic constant currency product revenue increased 6.7% compared to the prior year. Consolidated operating income was $14.8 million compared to $2.9 million for the prior year period. and consolidated adjusted EBITDA decreased 5.1% to $37.5 million, which included $1.7 million of unfavorable foreign currency. Now, I'll move to the cash flow and the balance sheet. Cash flow used by operating activities for June year to date was $12.0 million, driven principally by increased inventory levels due to both timing of purchases and a strategic build in certain inventories to improve service levels. Capital expenditures for the six months ended June 30th, 2022 were $4.4 million. Free cash flow for the first half of 2022 was negative $16.4 million. Excluding non-REGA occurring or unusual items, first half 2022 free cash flow was negative $8.2 million. We do expect to generate positive free cash flow during the second half of the year and for the year in total. As of June 30, 2022, we had cash and cash equivalents of $27.6 million and $432.3 million of long-term debt net of unamortized debt issuance costs. During the quarter, we amended our credit agreement to increase the size of our revolving credit facility by $50 million, from $75 million to $125 million. Combining available capacity under the revolver along with our cash balance, we ended the quarter with approximately $76 million in total available liquidity. Note that our long-term debt increased from year-end 2021 by approximately $49 million, primarily due to $50 million of draws on the revolving credit facility to fund a portion of the wholesome earn-out payment in the first quarter and to fund increased inventory levels associated with the seasonal nature of the wholesome business as well as strategic purchases to protect against price increases and shortages and improve customer service. Reducing balance sheet leverage continues to be a corporate priority. While we seek to reduce leverage this fiscal year, our latest expectation is for our net debt leverage ratio at the end of 2022 to be approximately flat as compared to 2021, in large part due to the strong performance of Wholesome and our need to support that business with higher inventory investments. Now shifting to our full year outlook. We are reaffirming our 2022 guidance, which includes the full year impact of wholesome acquisition. As a reminder, our outlook represents our expectations for growth on a pro forma organic basis. We define pro forma organic growth to be as if the company old wholesome for the full year of 2021. For 2022, we continue to expect consolidated product revenues to be in the range of $530 to $545 million with a bias towards the high end of the range given year-to-date performance and planned price actions in the second half. We continue to expect consolidated adjusted EBITDA in the range of $84 to $87 million with a bias toward the low end of the range due to our expectation for some ongoing pressure from cost inflation and the stronger U.S. dollar. And we continue to expect total capital expenditures will be approximately $10 million. That concludes our prepared remarks. Operator, now back to you. Please open the call for questions and answers.
spk10: Thank you, Sal. Ladies and gentlemen, at this stage, if you would like to ask a question, please press star and then 1 now. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question we have is from Brian Holland from Cohen and Company.
spk03: Yeah, thanks. Good morning. I guess for the first question, I didn't see it in the deck this quarter. I know you've spoken to it in prior quarters. There's been some share erosion in the U.S. I'm just curious, any update on the progress that you're making there in the second quarter and then maybe just more broadly today? Across your global footprint if the share gains that you have reported past quarters still tracking up Sure good morning Brian, this is Albert.
spk09: Thank you for the question So let me let me maybe start by saying that obviously a lot of the share in North America is linked to to our supply chain reinvention and And this is why, as in our prepared remark, we talked about our servicing of our legacy branded CPG, which is now producing to demand with customer service levels the last four weeks of June at 90% as very positive, because that allows us to bring all the products back at retail on the shelf. And that will go a long way to the share recovery. And I would say that at this point we have really hit a stabilization point. So that's point number one. Point number two, as I have highlighted, you will have in the second half significant innovation coming with the baking season and coming to the shelf. You have a swerve reinvigoration plan with innovation and new products that we are launching. So all this bodes very well for the second half of the year. which, of course, Brian, when you're able to have all the products back, you are also able to promote those products, which we didn't do year-over-year comparison in the first half of the year. So that's with regard to the U.S., and one thing that I will point to you is that our Nielsen measure channel is about 23% of our U.S. mix. So as I talked, we're doing very well in growing double-digit in food service, in e-commerce, in our club business. So when you look at the full picture, what you see, which I think is very important in the current economic cycle, and I continue to talk about the U.S., is really about a very well-balanced portfolio. And that portfolio is balanced in terms of premium brands. And as we're going to see with the economic crisis, people starting to spend, again, more time home, We see opportunities here for home indulgence and personal health. We have at the same time mainstream brands which provide accessibility, affordability, and quality, and those are the equal that you know, the Pure Via in the U.S. and Candle Red in international. And finally, I would say a very well-balanced channel split in between e-commerce, food service, and retail in North America. In international, We play from strengths. We have significant market share leads everywhere, and we're able to really continue to build our presence and dominance in our international market. The last thing I would say, Brian, in addition to the brand building and innovation, is also the distribution. In the first half of the year, I'm very pleased to report that in North America, we were able to gain 1,700 doors. That's about 3%, 4% of our total universe in North America. So, again, I think that with supply chain reinvention coming upstream and the progress we're making in our Alabama plant, we feel comfortable from a share standpoint in the second half in the U.S., and we will continue to drive leadership in our international markets.
spk03: I appreciate all the color. If I could just shift to gross margin. So, And please, if you address this in your prepared remarks, and I missed it, but Q2 gross margins obviously lower than Q4, which I think we were hoping was sort of the trough there. So I guess I'm looking at potential drivers here. One, I call that cost inflation. Was there a killer pressure point that moved counting what you were anticipating maybe going into the quarter? And two, was mix a factor at all because, you know, I'm thinking about that in the context of trade down. I know you called out the strength and carrying some more inventory around there, but I think that generally holds lower margins. I'm just trying to make sure I understand the moving parts on growth as we think through the second half of the year. Thank you.
spk02: Yeah, Brian, this is Dwayne. Good morning. Appreciate you joining the call. From a gross margin perspective, I think it's easiest to think about it from an adjusted perspective. And our adjusted gross profit margin was down around 210 basis points from 34.0 to 31.9. Almost all of that is explained through the price increases that essentially dollar for dollar offset the cost inflation that we saw. So essentially what you have is the same margin dollars on a higher revenue base. From an inflation perspective, I think we're seeing inflation across the spectrum of our cost structure, whether that's transportation, whether that's raw material costs, whether that's wages, packaging, the like. Some are more acute possibly than we had anticipated. And I would maybe point to, and it's really incrementally, It's not the one reason for movement, but labor continues to be a pressure. Transportation continues to be a pressure, as we saw gas prices for the quarter, which were a little bit more than we had thought. As we go forward, that's one of the reasons that Albert alluded to, another price increase that we've implemented and will be effective this quarter, Q3, to offset some of that. From a mixed perspective, there's some goes ins and goes outs. Wholesome continues to perform very well, which from a gross margin perspective is a little bit of a negative mix, but we're seeing a rebound in North America anyway with Equal and Whole Earth, which is a bit of an offset. And then as Albert alluded to, our international markets growing. very well, which is also good from a gross margin perspective. So some offsetting things, and at the end of the day, mix is kind of muted for the quarter.
spk03: Appreciate the call, Dwayne. I'll leave it there.
spk13: Best of luck, everyone. Thank you, Brian. Thanks, Brian.
spk10: The next question we have is from Rob Dickinson from Jefferies.
spk04: Great. Thanks so much. I just had a question maybe for you, Albert, on consumer behavior. And I think in some of the prepared remarks you'd mentioned, there could, I guess, be some shift in behavior. But at the same time, in Q2, kind of X, the ski rationalization piece, the volumes on the CPG side were actually up a little bit, you know, regardless of the pricing. So just trying to get some feel as we get through the year of you know, would seem like there would be some increased elasticity risk on those volumes, but at the same time, you're also speaking to the supply chain getting a little bit better just given the North American effort. So just, you know, I guess simplistically, how do you think about that volume trend in the back half given the pricing? Did I have a follow-up?
spk09: Yeah. Good morning, Rob, and thanks for the question. I would say that the Again, on the net-net, I look at the net positive. And this is because you have, as you said, obviously, you need to keep a balance. But I think we have, first of all, very positive health and wellness forces at play. And as I've always said, those are with us for decades to come. And the increased focus on personal health, you know, in a huge addressable market is is very significant and will continue to play out positively for us. I mean, again, just think about the fact that our household penetration in developed markets is about 26% to 77% of sugar. And think about how many people are really taking health seriously, both in our core sweetener, but also adjacencies, which are all the categories where we have ability to play. So I see that as a net-net the macroeconomic cycle is positive for the long term. That being said, you have obviously some pricing elasticity, which we are going to see. I think all of us are learning it and seeing as we go through. But what is important with the pricing we're taking, as Duane said, for Q3, what is important is really having a balanced portfolio. And I think that What you are seeing, if you go back to the previous crisis or economic crisis, what you see is that there is space for premium. And when you think about people shifting more at home from restaurants, and there you have indulgence and personal health. And we have great brands like Swerve, like Wholesome playing there. And then What is important is that we have also a mainstream brand, which is Candor Red International, equal in the U.S., Pure Via in North America, and those are providing affordability. So all in all, the best we can do is to balance across our brands, balance across the channels, club, e-commerce, food service, and retail, and we feel net-net. we're going to be on a net positive as we look at the second half.
spk04: Okay, super. Thank you. And then just secondly, SG&A was somewhat benign in the quarter, I guess, relative to history and obviously relative to Q1. So although gross profit came in a little lower, SG&A is fairly attractive. And so I'm just curious, you know, is the majority of that coming from this optimization plan within North America? And is that a run rate that we should be thinking about going forward, which offsets some of the incremental inflationary aspects flowing through in the gross profit line? And that's it for now. Thanks.
spk02: Thanks, Rob. And I think you're looking at that correctly. I mean, yeah, kind of, I guess, kind of benign, although some may have other points of view. But as Albert said in the script, we are very vigilant on costs. And we're very much focused on making sure what costs we have is as productive as it possibly can be towards revenue-generate efforts. So that will continue to be a focus. We'll address increases in costs with the lack of a better way to put it, productivity from an SG&A perspective. I wouldn't say it's necessarily related to optimization, you know, like a formal project that's optimization. It's just our ongoing mantra of making sure that we don't have a bloated cost structure and keeping that as lean as we possibly can.
spk13: Okay. Got it. Thank you. Thank you.
spk10: Thank you. The next question we have is from Scott Michigan from R5 Capital.
spk05: Hey guys, thanks for, thanks for taking my questions. So I kind of had three avenues I want to explore here. Um, one is going back to the U S market. And I think in the, in the, uh, permit prepared remarks, talked about the mass channel and that you're gaining traction there. You know, one of the challenges with that channel is sometimes you can get in there, but then you can get kicked out pretty quickly, depending on what's going on with velocities. So I was hoping you could give us some granularity on how you're doing there, and is it the velocities where you think they should be or maybe even higher? So just a little granularity there.
spk09: Yes, Scott, good morning. The simplest way I can answer to you is that we just went through the reviews with math, and so looking at what has been decided for the 12 months ahead of us is positive with net gains. which is driving our distribution growth that I talked about. This is coming on the shelf Q3 and is with us. So I will talk to the fact that, you know, as one of the things that we have done, Scott, as we were ramping up our Alabama facility for brands like Equal and All Earth, is what you want to do is to be extremely targeted, right? And so even for now, we're very excited to have an average 90% service level One of the things that we have done is obviously to be very clear on who are our key customers and making sure that we do everything right for them. So I would say that with regard to mass, we're in a good place. That played out. And what I did talk about this morning is essentially what's ahead of us.
spk08: And Albert, can I just add something to that? Hi, Scott. Good morning. Good, good. I think you can come back and look at the portfolio, you know, with Whole Earth. with the new products in Equal, with Wholesome and Swerve, the portfolio we have. Going through, we've been a two-year-old public company, and now as you bring all this together, the distribution opportunities, the white space out there for us is tremendous. We've had to consolidate sales organizations, had to consolidate brands. Swerve did not have the innovation. The team now feels real good about where we are and the products we have. So we have supply, we have products, we have them all pulled together. We have, you know, sales organizations. We have infrastructures in North America, Europe, Middle East. So, you know, the team is in a good place now to drive that volume and growth and, you know, drive cash flow, drive margins, and do steps.
spk05: That's perfect. Actually, it's a good segue, Erwin, and guys, into my second question around what's going on with Europe. We had another CPG company, which you guys are familiar with, especially Erwin, that had a big pre-announcement this morning based on what's going on over in Europe. You guys have a pretty big operation over there, and I noticed it didn't seem to impact you all that much. The question is, is the other parts of the business – growing faster, the other international parts of the business than expected. And you were facing headwinds there. And then secondarily on the U.S. dollar, where there's some surprises there with the strength. Thanks.
spk08: Scott, I'll just say one thing. Maybe we got people in place that know how to run just our European business. We do not have the complexity there in Europe. And, you know, Albert, who spends a lot of time there, I mean, we get some strong brands in Europe with, you know, again, lots of opportunities to grow, whether it's the Middle East or India or throughout Europe. Yes, you know, higher power costs, higher input costs and where the currency is. But I think where we are in Europe today with, you know, our product line, demand for our product line, And we've been in Europe a long time. There's still lots of opportunities in the European market. And we've been able to get pricing. Albert, you want to add to that?
spk07: No, I think you said it very well, Erwin.
spk09: Our European business is, I usually call this a fortress. We do have very strong position. We source our manufacturing needs from our plants in Czech which is best in class, gets awards after awards, very competitively priced. We just have a fantastic team, very strong position, very strong brands. And essentially we're, you know, nothing is easy today, but I will give big kudos to the team for the fantastic job that they are. In international, outside in developing markets, as I said this morning, of course, we're growing like weeds. You know, we are entering India, as I said. We're entering new geographies where we have added, as I said this morning, you know, just in the first half, 8,500 doors. So what is great and what I just said before to Rob is this continues to give confidence that this health and wellness trends are true around the world. And it's up to us to really raise to the challenge. Erwin, do you want to comment to Duane on the second piece of the Scott question?
spk02: Yeah, Scott, you had asked about currency. I think, generally speaking, Europe has come in as we had anticipated, excluding the currency impact. Currency is a bigger headwind than we were anticipating, certainly at the beginning of the year. And that may continue based on what we're seeing in July and going into August. But, you know, there's areas of other parts of the business that are making up for that currency piece, and we'll strive to continue to make that particular circumstance happen.
spk08: But the good news is, Scott, Europe is, you know, not a major part of our business today. It's North America where our growth and, you know, what we expect that to come from I mean, so I think that's the good news from a standpoint. And, you know, we see tremendous opportunities in Europe. And, you know, Albert knows Europe well. So I'm really excited what the team can do there. But the big opportunity for us absolutely is North America.
spk05: Hey, guys, thanks for all the color. I'll yield. I have one more question, but I'll take that offline. Thanks again. Thank you, Scott.
spk10: Thank you. The next question we have is from Ryan Mayes from Lake Street Capital Markets.
spk00: Hey, guys. Thanks for taking my question. First one for me, just wondering if you can highlight kind of how you're thinking about new product launches in the second half, maybe as we head into the baking season. And then also, what was the sales mix during the quarter from new products?
spk09: Yes. So on the good morning, on the second piece of your question, you know, we essentially strive to and continue to perform at about in between 15 and 17% of our net sales come from innovation on a three-year CAGR basis. And that's essentially the trend we have been on for the last three years that's best in class in consumer products. And we are investing in R&D and marketing and insights and managing are stage-gated to deliver that consistently. So we're very happy about that, Mark, and that is true for this year. As you look at the second half, I talked earlier to the question about mass and the fact that we have gained distribution this year, and that's obviously driven by And so this innovation, what you do have, as you said, is you have a bunch of things playing, and I will focus on the U.S. Number one is you have new ingredients. So we talked about the growth of allulose. We talked about the growth of monk fruit, and we're bringing those ingredients across some of our brands, different price points and different benefits. You do have a significant swerve reinvigoration that is going on as we speak. You will see a lot of those products through our e-commerce and then retail as the month goes by. And that is geared to, one, capturing those ingredients that consumers are now excited about and looking for that bake or taste like sugar. Number two, gearing up to the baking season. The last thing I would say, and then happy to follow up in any way, shape, or form you want, is the fact that we are also seeing success increasingly into our adjacencies. And if you take the two million loyal households of Swerve consumers, they are giving us permissions and looking forward to us expanding into the adjacency. I talked about the chocolate chip cookies, which is non-sugar added, which is non-sugar, which is a very natural space, and we are also seeing good successes in those adjacency areas.
spk00: Got it. No, that makes sense. And then last one for me, when you think about the supply chain reinvention project, what sort of inning of that are you guys in, and when do you think that things are going to be kind of running at max capacity or running optimally?
spk09: So, Mark, not being a sport expert of baseball in the U.S., I will let the inning piece to Dwayne. But what I will tell you is that we're happy with the progress we have made. Obviously, taking over the plant, what we saw from the beginning was labor disruption, and we are now stabilizing the workforce. We have uh, we're happy with where we're at. So we are, we have done a lot of training, uh, for this. We have put in places, a lot of processes. And I would say that, um, you can expect, you know, a little bit more in the months ahead in terms of hitting our stride. Um, but, uh, but we're getting closer to, to being in a very good place. Dwayne, any reference to the hearings?
spk02: Yeah, I'd say we're in the seventh inning stretch. Um, So, you know, for the back half, you're going to see less dollars going that way than you saw in the first half, and the majority of those dollars will be in the third quarter. So there may be some that dribbles into the fourth quarter, but, again, I think the inning analogy is probably a nice one, and I'd characterize it as a seven-inning stretch.
spk13: Great. No, that's super helpful. Thanks, guys. Thanks, Mark.
spk10: Thank you. Next question we have is from George Kelly from Roth Capital Partners.
spk14: Hey, everybody. Thanks for taking my questions. So just a couple for you. The first one, the flavors ingredients and ingredients business performed really well again. So that segment's been strong. The question for you is, it seems like since you... Fixed up the facility or change facilities. I guess it's the savings expected or the amount that you've realized has exceeded the amount that you talked about going in, I believe. So I guess correct me if that's the case, but if that's not the case, but is this 30% operating margin that you just reported? Is that a good place to model going forward? Or was there anything kind of unique in the quarter that impacted that number?
spk02: I would say given the current complement of customers, which isn't necessarily unique, I would think that's a fairly decent way to model it going forward. As it relates to kind of quarter dynamics, the team continues to do a great job in terms of how they set themselves up for success in the prior year. And that coming to fruition in terms of a more diversified portfolio of customers, you know, whether that's confectionary or industrial or otherwise. But, uh, you know, I think from a margin perspective, we're probably about where we're going to be. You know, as we, as we get into the back half of the year, obviously compare starts, compares start to get very difficult. So the, you know, we had great growth in the back half last year, particularly in Q4. But from a margin rate perspective, nothing unusual really going on in Q2.
spk14: Okay, excellent. And then last question has to do with your commentary in the prepared remarks about leverage expectations at year end. It seems like you changed the expectation a little bit. I think you said flat year over year, and on recent calls, I think you were planning for it to decline slightly. So just curious what the – I'm guessing it's supply chain reinvention costs, but is there any kind of cash flow stuff you can talk about that's different than it was prior?
spk02: The real thing that we're – as we navigate through this environment of supply chain challenges external to us, there's kind of three things to consider. One is just protecting supply, both in wholesome and our legacy business in terms of making sure that we can sustain our fill rates, making sure that we're maximizing our quota as it relates to wholesome. So that's one thing. We don't want to be caught shorthanded. And so it's an environment where we want to not be too risky from what we're what we're holding and what we're planning, obviously increased costs have a, have an impact on overall, uh, overall inventory balances. And, um, and then finally there's, there's a little bit of timing going on on this quarter, but, uh, and, and I do expect some of that to reverse, but, you know, at the, at the end of the day, uh, inventory levels are, are, are going to be a little bit higher than what I anticipated at the beginning of the year. And that's, That's strictly to make sure that we can service the customers, making sure that we're protecting our supply, and making sure that we're optimizing quota and other things.
spk14: Okay. Understood. Thank you.
spk12: Thanks. Sure.
spk10: Thank you. The last question we have is from Alex Arnold from Odeon Capital.
spk01: Hey, guys. Two quick ones. One, when you think about the timing of price action or taking price relative to the cost shifts in the backdrop and think about margins coming into this next quarter, are you a step ahead or keeping pace or a step behind slightly with regard to the timing of the price action?
spk02: We're not ahead. It would be great to be ahead, but it's hard to react that quickly. That said, I think the team has done a great job of reacting to what we're experiencing. So I would say there's, you know, full transparency probably a step behind, but that's to be expected, but not terribly behind. Kind of Goldilocks, if you will. Got you.
spk01: Okay, and the other one is just with regard to the consumer and what's going on in terms of wallet squeeze. Can you sort of characterize the demand shifts across channels as well as the substitution effect that's taking place, kind of net of distribution gains? What are you seeing in terms of channel shift and substitution or trade down?
spk09: Yeah. Good morning, Alex. I would say that what – What we have seen in the first half is obviously a very nice comeback of food service in general across the world. You know, that's about now back to 20. If you take food service, for example, we're ahead of 2019 now. So we're back pre-COVID and we're doing better than where we were in 2019. That's obviously also driven by the fact that wholesome and swerve at small presence or no presence in food service, and we were able to leverage the power of one of which I talk often. So I would say that is doing well. I would say e-commerce, as you know, continues to be a great opportunity. This is now, you know, double-digit, mid-high double-digit in terms of our e-commerce business, where 14%, 15% of our mix We continue to invest because we have opportunities there, not only with PurePlay, but also with e-tailers, as you know. And so we talked earlier about masks, but, you know, with the Walmart.com or Tesco.com or Woodworth.com in Australia, there is a lot of avenues, and we continue to invest in our organization to continue to build competencies there. And so I would say that then on the retail, I think the next, For the first six months of the year, we have seen growth in e-commerce, growth in food service. Remains to be seen the second half, how that's going to play out. But I would say we're well balanced. In terms of where consumers are going, as I said, in uncertain time, I think the premium is going to work out fine. And I think that the value side, and we have also good presence in private label, as you know, we are extremely well positioned. on our branding and private label business to essentially continue to deliver to the consumer the health journey they are on according to the different price points. And I think that is one of our strengths both in the U.S.
spk07: as well as in the international.
spk01: Okay. Thanks, guys.
spk10: Thank you. Ladies and gentlemen, We have reached the end of our question and answer session, and I would like to turn the call back to Albert Manzon for closing remarks.
spk09: Yeah, thank you very much, and thank you, everybody, for joining. Listen, I and Erwin, please add anything you want, but what I think is important to say is this quarter we, you know, executed our plans. And I talked a lot about on this call about the strengths of the macro trends, the strengths of our portfolio, SCR coming back, the innovation on the back out, the distribution gains and the power of one. But one of the things important that I want to really put forward is the team, which has been at this and passionate about this journey for many years. So the team knows each other well. And what you want in uncertain times is people that can go from vision to to strategy, to execution. And this is what we have, whether you look in any region with our region heads, which drive fantastic commercial work together with our functions, be the finance, be the supply chain. And we talked a lot about supply chain. So I just want to congratulate and salute the team who is doing all and hitting all the strides in what is uncertain time that we have not seen before. And I think they are doing a fantastic job.
spk12: Erwin, anything you want to add? Okay. Back to you. Back to you. Albert, can you hear me? Thank you. Yes. Hello? We can hear you.
spk08: Albert, I echo what you say. I am very proud of what the team has accomplished in its short period of being a public company and dealing with becoming a public company, integrating the four businesses, setting up the infrastructure. building out global brands, and for where we are today. Thank you very much for joining our call today. Sorry that I was having some technical problems here.
spk12: Thank you, sir.
spk10: Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
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