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spk07: Good day and welcome to Whole Earth Brands Inc. Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Startdown 1 on a touch-tone phone. To withdraw your question, please press Startdown 2. Please note this event is being recorded. I would like to turn the conference over to Jess and Sonic Please go ahead.
spk01: 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 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 refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on the investor relations website, investors.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 IR website that may be useful in your analysis of the company's performance. With that, I'd like to turn the call over to Albert Manzoni, CEO.
spk09: Thank you, Jeff. And thanks to everyone for joining the call today. Our business generated an over quarter of consistent growth. In the third quarter, we drove consolidated constant currency revenue growth of 8.1% and generated adjusted EBITDA of 21.5 million. At the segment level, Our branded CPG business grew 5.9% on a constant currency basis driven by price. Our branded CPG portfolio is well positioned in the current environment with a diverse assortment of strong brands. The diversification in terms of its channel presence, product assortment, and geographical reach is a strength that continues to drive results. In North America, 80% of revenue is generated within unmeasured channels, such as club, e-commerce, food service, private label, and ingredients. We continue to see nice growth in these channels during the third quarter, and we believe they would remain a significant force for future growth. Within our measured channels, which represent 20% of North America revenue, We planned for and expected a slowdown in velocity on our branded business due to the price increases and reduction in trade promotions. This strategy speaks to our focus on profitable growth, gross profit dollar growth, and ultimately cash flow. Looking at the progression, we saw trends improve sequentially in third quarter versus the first half. And then looking ahead to the fourth quarter, we expect to see further improvement as well, which should put us in a good position to generate growth in the measured data in 2023. Our international branded CPG businesses grew revenue 8% in the third quarter on a constant currency basis with both volume and price increasing. contributing as we continue to grow share in our international markets. Globally, our product assortment is well positioned with a host of brands that address unique consumer preferences and offer entry-level price points for consumers that are feeling the effects of the ongoing macroeconomic headwinds. Our private label and ingredients business complemented the branded portfolio nicely through stronger and broader customer relationships and purchasing scale. As the world experiences unprecedented pressure from market disruptions and macroeconomic headwinds, our mission and core strategy remain more relevant than ever to consumers. With approximately three in four consumers aiming to limit or avoid refined sugar, as well as powerful movement toward wellness and personal health, our mission to help consumers achieve healthier lifestyle positions asks for success. Globally, our portfolio of brands is well-suited to address a variety of consumer needs. Our premium and baking-oriented brands, including Wholesome, Swerve, and Whole Earth in the US are optimal solutions for at-home indulgence and healthier lifestyles. Our mainstream brands, such as Candorail and Equal, present a strong value proposition, delivering affordability without sacrificing quality. We continue to see net gains in our distribution across our global footprint. In North America, through our ongoing focus on improving production rates and service levels, we are seeing distribution wins, driven by increasing momentum with national and regional customers. Our emerging international markets comprise of Asia Pacific, India, Middle East and Africa, and Latin America, which represent 15% of our branded CPG segment, once again, collectively posted a strong double-digit growth during the third quarter, confirming the strong secular demand trends for our products. Innovation is a core capability of our business and today represents 17.5% of our North American branded CPG sales and 12% of our global branded CPG sales over the trading three year period. Our new innovations are tapping into high growth segments of sugar substitutes with monk fruit, which is seeing consumption growth of 42% and allulose, which is growing at nearly 14% versus a year ago for the 13-week period ended October 1st. For instance, we are bringing these growing ingredients into our Swerve portfolio and leveraging Swerve's powerful consumer loyalty to drive cross-purchases. Nearly half of all Swerve consumers are repeat purchasers that will help drive brand growth on the heels of the innovations we're bringing to market. You would see us in the market with blends such as monk fruit and cane sugar to bring in new users to the sugar substitute category and to help consumers transition toward a sugar-free lifestyle. Another innovation we're especially excited about is worth no sugar added chocolate chips in the large 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. And we're also bringing exciting adjacencies in North American chocolate, cookies, and flour, to name a few, coming on shelves soon. Stay tuned. Our innovation efforts have also driven our share growth across our international markets. For example, take our work in Australia, where we now have 23% share of the natural segment, which increased nearly 12 points over the past two years following the introduction of our Whole Earth, Baker's Secret range, and Monk Fruit range, including our latest launch, the raw variant. As we look to the future of web, we focus on building our brands both in their core categories, and through potential adjacency expansion. By putting various innovation levers across ingredients, occasions, value propositions, and new categories, our brands can solve a variety of consumer needs and ultimately grow the category household penetration. Moving to supply chain, and as communicated previously, we took control of the Decatur Alabama facility that manufactures sachets and bags in the second half of 2021. This was a deliberate move as our co-manufacturer went into financial distress, there was no such availability in the U.S., and significant supply chain disruptions exacerbated by COVID and low unemployment rates. Since then, we have stabilized operations at the Decatur Alabama facility, improved service rates, supply to demand, and reinvigorated growth of our North American branded CPG business, despite facing a series of macroeconomic challenges along the way. Following the stabilization of our North American supply and the improvement in customer service that followed, we will streamline our North American supply chain network and pursue an asset-light model with increased use of strategic partners that possess proven operating capabilities and cost advantages across manufacturing, warehousing, and distribution. We expect that this will allow us to improve costs and drive positive free cash flow in 2023, while continuing to deliver sustainable supply for our customers and allow our teams to focus on our core competencies, driving growth through innovation, brand building, and distribution. Beyond the supply chain, we're also combating inflationary forces through a combination of tools, including price, productivity, and prudent expense management. We are on track in 2022 to deliver about $40 million of pricing and cost savings to offset inflationary and currency pressures. With respect to our pricing actions, We instituted a mid-single-digit price increase earlier in the year and took another round of price in the third quarter of low single digits to fend off the persistent cost inflation. We will continue to take actions as needed 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 third quarter, was largely focused on less profitable 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. We continue to be vigilant about expenses and reduce headcount and expenses throughout the year to ensure our organization is right-sized and appropriate for the current operations and environment. Shifting to our flavors and ingredients segments, we continue to generate above-trend revenue growth in the third quarter at 17% on a constant currency basis. This growth was driven primarily through volume and, to a lesser extent, pricing actions. This marks the fourth consecutive quarter of strong growth for the segment following the implementation of new leadership. We have developed a set of commercial initiatives aimed at driving adoption of our natural, non-GMO, flavor-enhancing licorice-related ingredients in our end markets across food and beverage, cosmetics, healthcare, and industrial. Together with a significantly improved cost structure following our footprint optimization projects, we also have an ability to drive more competitive pricing. 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. Flavoring Ingredients is a strong free cash flow generator with high barriers to entry and a global leadership position that would support our broader growth initiatives as we further diversify and grow all our brands. 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 Hall of Friends are creating a stronger foundation that we will build upon. We are pleased with our progress to meet our goals for 2022. Hall of Friends is the global leader in the better for you sweetener and reduced sugar categories. Our team, who I want to thank today on this call for all the work done to date, continues to pursue four priorities. Disrupt, the massive 100 billion total addressable refined sugar market, which is being displaced by fast-growing alternative sweeteners. Drive category leadership through best-in-class innovation and brand building. Expand our global distribution and leverage our supply chain capabilities. Continue to build out our ESG credentials and evolve our brands and products portfolio towards becoming a large, organic, natural plant-based food company, and work on enhancing our cash flow management and reducing balance sheet leverage. With that, I'll pass the call for the financial review.
spk05: 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 details. and I encourage you to view the supplemental earnings presentation in our investor relations website. As the third quarter ended September 30, 2022, consolidated product revenues grew 4.9% to $135.3 million versus the prior year quarter. On a constant currency basis, product revenues increased 8.1% versus the prior year third quarter. The increase was driven primarily by strong pricing growth along with increased volume. Reported gross profit was $35.0 million compared to $43.0 million in the prior year third quarter. The decrease was largely driven by cost inflation, cost associated with our supply chain reinvention project, and $2.8 million of favorable non-cash purchase accounting adjustments related to inventory revaluations in the prior year period that did not reoccur, partially offset by pricing actions. Adjusted gross profit was $41.7 million compared to $43.4 million in the prior year period. Reported gross profit margin was 25.9 percent in the third quarter of 2022 compared to 33.4 percent in the prior year period. Adjusted gross profit margin was 30.8 percent compared to 33.6 percent in the prior year. The majority of this decline was primarily a function of higher cost of goods sold due to cost inflation, mostly offset by increased prices. This resulted in higher sales to predict year-over-year gross profit dollars, but on a percentage basis, results in a lower gross profit margin. Consolidated operating income was $6.8 million compared to operating income of $13.5 million in the prior year third quarter. Consolidated net loss was $2.5 million compared to net income of $8.8 million in the prior year period. Consolidated adjusted EBITDA was $21.5 million compared to $22.1 million in the prior year third quarter. Decrease was primarily due to an unfavorable foreign currency impact of approximately $1.3 million. Now shifting to the segment results for Q3. Branded CPG segment product revenues increased $2.7 million, or 2.6%, to $105.4 million for the third quarter of 2022, compared to $102.7 million for the same period in the prior year. On a constant currency basis, segment product revenues increased 5.9% compared to the prior year, driven primarily by pricing actions. Overall, volume was down 2.0% 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 was essentially flat versus the prior year quarter. Operating income for the branded CPG segment was $5.5 million in the third quarter of 2022 compared to operating income of $10.1 million for the same period in the prior year. The decrease was driven by costs associated with our supply chain reinvention project, the impact of cost inflation, and an unfavorable impact from a stronger U.S. dollar, partially offset by pricing actions. Flavors and ingredients segment product revenues increased 13.9% to $29.9 million for the third quarter of 2022, compared to $26.2 million for the same period in the prior year. On a constant currency basis, segment product revenues increased 16.9%, primarily due to strong volume growth of 12.3%, driven by growth in licorice extracts and pure derivatives resulting from the company's commercial expansion and innovation efforts. Pricing was also a contributor, but to a lesser extent, increasing 4.6% versus prior year. Operating income for the flavors and ingredients segment. was $7.3 million in the third quarter of 2022 compared to operating income of $9.5 million in the prior year period. The decrease was primarily driven by $2.8 million of favorable purchase accounting adjustments in the prior year period related to inventory evaluations that did not reoccur in the current quarter, along with higher severance and related expenses. Operating expenses for corporate for the third quarter of 2022 were $6.0 million compared to $6.1 million in the prior year period. During the quarter, increased insurance expense and salaries were offset by lower M&A transaction and public company readiness costs. Now I will briefly cover our September 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 first full quarter of 2022. Additionally, we will provide some select pro forma results as if we had 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 nine-month period ended September 30th, 2022, consolidated product revenues grew 10.6% on a reported basis, to $399.4 million versus the prior year nine months period. On a pro forma basis, organic constant currency product revenue increased 7.2% compared to the prior year. Consolidated operating income was $21.6 million compared to $16.4 million in the prior year period. Consolidated adjusted EBITDA decreased 4.2% to $59.0 million which included $3.0 million of unfavorable foreign currency. Now, moving to the cash flow and the balance sheet. Cash used in operating activities for September year-to-date was $17.3 million driven by increased inventory levels due to both timing of purchases and strategic build in certain inventories to improve service levels, as well as the pull-through of inflation in our inventory. which approximates roughly 50% of the year-over-year inventory built. Capital expenditures for the nine months ended September 30, 2022, were $6.9 million. Free cash flow for the first nine months of 2022 was a negative $24.2 million. With respect to our near-term expectations, we anticipate an improvement in working capital during the fourth quarter, which combined with limited capital spending will contribute to positive reported free cash flow for the quarter. As of September 30, 2022, we had cash and cash equivalents of $20.8 million and $435.7 million of long-term debt net of unamortized debt issuance costs. Our long-term debt increased from year-end 2021 by approximately $52 million, primarily due to $54 million of draws on the revolving credit facility. These proceeds were used to fund a portion of the wholesome earn-out payment in the first quarter and to fund increased net working capital levels, primarily related to higher levels of inventory resulting from increased costs and to improve customer service, as well as timing related to seasonality. At September 30, 2022, there was $79 million drawn on our $125 million revolving credit facility. 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 5.0 times. As we look to 2023, we believe we can reduce that ratio to the low to mid-4s with improved costs and improved networking capital. Now shifting to our outlook, we are updating our 2022 guidance to account for year-to-date sales momentum and currency headwind. More precisely, we are narrowing our range of expectations for net product revenues towards the higher end of our previously stated range and lowering our expectations for adjusted EBITDA due to unfavorable foreign currency impacts, which are now reflected in our guidance. As a reminder, Our outlook is presented on a reported basis, which includes the impact of foreign currency translation, and our expectations for growth are presented on a pro forma organic basis. We define pro forma organic growth to be as if the company owned Wholesome for the full year 2021. For 2022, we now expect consolidated product revenues to be in the range of $535 to $545 million, which reflects a $5 million increase from the bottom end of our previous range and accounts for our year-to-date performance and the impact of planned pricing actions through the remainder of the year. We are lowering our adjusted EBITDA to a new range of $79 to $81 million, which reflects the expected impact of approximately $5 million of currency headwind that we anticipate for the full year, in addition to some persistent cost pressures due to inflation that have not yet been fully covered by our pricing actions. Last, we continue to expect total capital expenditures will be approximately $10 million. That concludes our prepared remarks. Operator, now back to you. Please open up the call for Q&A.
spk07: We will now begin the question and answer session. To ask a question, you may press 1 on your touch-tone phone. To withdraw your question, please press 2. The first question is from Scott Mashkin with R5 Capital. Please go ahead.
spk12: Hey, guys. Thanks for taking my questions. So I guess I wanted to talk a little bit about framing 2023. I know you talked about, you know, the goals of getting the debt down. How else, you know, just, I know you're not going to give guidance, but how should we be thinking about 2023?
spk09: Good morning, Scott. This is Albert, and I will ask kindly Dwayne to answer that first question of yours.
spk05: Yeah, Scott, I appreciate the question, and good morning.
spk09: Good morning.
spk05: From, you know, well, obviously we'll give guidance later, for 2023 next time we're on earnings after year end. But as we think about 2023, from an operating perspective, we are seeing a lag in pricing, offsetting inflation, which we do expect to catch up in 2023, have expectations that next year is more in sync with our long-term algorithm of kind of mid-single digits top line growth with some leverage on EBITDA. And then I think importantly from a cash flow perspective, expect significant tailwinds from working capital investments that we've made in 2022. Don't see the severity of those carrying forward, actually much less severity. as, uh, that's already kind of cost the, the cost of flowing through to the, to the working capital side, as well as just, uh, more improved costs overall, uh, as Albert alluded to the streamlining, the, the, uh, operating model going forward in, in North America. So, um, you know, very, very positive, excuse me, positive, uh, outlook from our perspective, as we, as we exit 22 and enter 23 with, uh, with costs more in line or pricing more in line with costs and investments kind of already under the bridge, so to speak, from a networking capital perspective.
spk08: Scott, let me add to that. Hi, Scott. How are you? Nice to hear from you. I think the big thing here, you know, as we put all these companies together, it happened just that in between COVID and It happened with higher costs. It happened with two acquisitions, an international business, and with a lot of new team members. I think as we look at this business today, what hit us on currency, a $4 to $5 million issue in EBITDA where we didn't get the pricing through. Some of the things that happened in our DPAC facility, and some of the capex. And I think going into 23, I will tell you the team is focused on free cash, getting our debt levels down into the low fours, and getting the growth in the business that's necessary. And I think that's the four or five things that they'll focus on. But the more important thing is it's the history that they have in operating these businesses today. that sort of came together over the last couple of years. And then all the different challenges with COVID with pricing and that, that affected them. So I think there's much more visibility and much more knowledge there in front of us that will help us with 23 to get to, you know, the numbers that we expected. Well, I know you have a long history of not, oh, go ahead.
spk12: Sorry.
spk05: No, sorry, Scott. Just, just building on, not that I need to build on what everyone said, but, Yeah, I mean, the currency headwinds that we've experienced this year are, to a certain extent, unprecedented. And, of course, it intensified as the year has gone on. So, you know, who knows where currency goes, but I would say two years of this would be unlikely.
spk08: And the big thing is, Scott, just on the other hand, you know, the majority of our business is North America. So the good news, that's from a good news standpoint from where we are. But, you know, we do have, you know, a good-sized business still in Europe, nowhere near, I think it's about 20%. So I think there's, you know, we know where we're starting from now.
spk12: I was going to say, Aaron, you've always hated debt. So having confidence you guys getting it down is high, just because I know of the track record there.
spk08: Well, I still hate it. Scott, I still hate it, and I hate it even more with these interest rates. So I will tell you, this team is laser-focused, and you know me from my days. Threes were numbers I liked at levels, but this is a tremendous cash flow business, so you're absolutely right.
spk12: And so then just my follow-up, and then I'll yield. And I can appreciate Europe is a much smaller part of the business at this stage, but how should we think of the risk into 2023? Do you guys feel like you kind of get your arms around it? I mean, obviously, there's a war going on, so you can't, you know, maybe manage it all. But how do we think about Europe specifically?
spk04: Albert, do you want to take that? Right.
spk09: As you wish. Okay. So, I would tell you that in Europe we have a very strong position, and I don't foresee concerns for next year. We are already, I would say, from a recessionary, as you know, in Europe, or energy prices probably in the situation that we're going to encounter next year. And talking to the strengths of our portfolio, we have very strong brands, innovations, and different price points. And if you just take France as an example, in Q3 alone, we gained 4.1 share of markets and we're now 76.5 of the market. So we continue to gain share. We continue to be competitively advantage versus competition. We have been able to take prices here too and position essentially our different brands from a value midpoint and high points. Um, so I would say actually that, you know, from past experience in those type of situation, um, this is, this is an opportunity for us to get even stronger in this downturn. Um, as, uh, as one of the key players in Europe, we are from a currency standpoint producing in Europe. And so, you know, it's contained and, um, I will tell you that, you know, from a performance standpoint, the Europe is strong, notwithstanding, of course, the exchange rates.
spk12: Thanks, guys. And just say, like, with everything that's been thrown at you this year, it's easy for us to shoot at you guys, but it's been an amazing, you know, I think you've done actually a good job. So thank you. Thank you, Scott.
spk07: The next question is from Bobby Burleson with Connector. Please go ahead.
spk02: Thanks for taking my questions.
spk11: So I guess the first one is just if we look at cost inflation, maybe help us understand across your portfolio where you see the most acute issues kind of for the balance of this year.
spk09: Sure, I can start and then Duane, please build up. But I would say cost inflation is obviously across a number of items from inputs cost to freight and logistics and labor, as you know. So I think you have the whole panacea of COGS increase. As Duane said, we have taken price. and we will continue to take price as needed. Price has been a lagging indicator, and we expect, as Dwayne said, to catch up nicely in 2023. And in addition to price, we have taken cost out of the business and have been extremely disciplined. So we're looking for the full year of 2022 to deliver $40 million of cost. Savings in between the pricing and the cost initiatives in terms of the organization are gross to net and every other SG&A items. So that's what we see from an inflation, as I told you, and this is what we're doing about it. We don't expect, again, from an inflationary standpoint, the situation to be the same next year, and we will at that point benefit from the lagging factor of pricing.
spk08: Dwayne? And, Albert, you should just add to that. I think, you know, as you saw in our press release, between cost savings and price, you know, on the annualized basis, the team was able to get about $40 million, which, again, we'll have that for, you know, the whole year next year, so that should be very helpful. So I think, you know, and if you ask where we got inflation, I think it's freight, it's ingredients, it's labor, you know, it's currency. As you're well aware, you don't get pricing right away, so just the timing of that. I think that's what's important is the team has, as Albert said, been able to get pricing and cut costs at the same time.
spk05: I don't know that I'll have much to pile on, but one thing that maybe we haven't talked too much about because there hasn't been much in the way of cost there before. But, you know, on our wholesome business, which is doing quite well, as I think everyone knows and as we've seen throughout this year, what the dynamic that's been happening in the back half of 2022, where the demand for the product has been high enough to where we're having to take sugar out of bond, which means we're having to pay a little bit more tier one penalties than we normally would. So that's also contributing to cost inflation in 2022. Don't know that that's going to recur, but it's certainly an impact in the current year. Again, you know, it's for the greater good, but it's money that is inflated.
spk11: Thanks. And then just in the opening comments and in the press release, I believe in the press release as well. You guys talked about door growth with some of your own distribution partners. And I'm wondering, you know, just regionally where you're expecting the most door growth going forward, just looking at the U S. Yep.
spk09: So, so that's a great question. And you know, people have a visibility into Nielsen. And so let me start there by saying that, you know, Nielsen for us, uh, in North America represents less than 20%. It's actually 19% of our sales. And so if I look at the data specific channel, uh, what you have had going into this year, is obviously, and I talked in my remarks about what we have done from a supply chain standpoint, but we had some supply chain disruptions, as you know, in Q4, Q1, and part of Q2 that affected that. The second, we did take price, and we have been just talking about it extensively, and we have done it ahead of hours to protect our margins. And the third thing is with that discipline on our promoted level and gross to net. So all those things that went into were very deliberate, knowing that profitable growth was more important than growth at all costs. When you look at that channel, what you see is that we do have distribution wins with our innovations, which I've also talked extensively in my opening remarks. And we expect the momentum here to continue to start building Q3, Q4, and into 2023. Now, 80% of our sales, more than 80%, are done outside of Nielsen. And then, of course, we have been growing nicely, contributing to the 5.9% growth that we have had in branded CPGs. and there what we see is growth across all the channels outside of Nielsen that we play in, big club, food service, and e-commerce, and so on. So we are very pleased with the perfect private table, of course, which is benefiting in this current environment and ingredients. So we're seeing growth across our 81% and we are fixing or the 19% that I just talked about. But for us, the priority this year has been after restoring supply chain has been profitable growth and we would continue that way.
spk04: Great, thank you. Thanks, Mubi.
spk07: The next question is from Ryan Myers with Lake Street. Please go ahead.
spk10: Yeah, good morning, guys. Thanks for taking my questions. It's kind of a follow-up to the last question I asked, but you did call out kind of in the prepared remarks some growth in retail doors. I'm just wondering if you guys could maybe quantify that for us, maybe kind of how many doors you guys have added sort of year to date and maybe how many you added during the quarter and then kind of looking at it from a full year standpoint.
spk09: So I won't give you the full year because obviously that's not a number. We're working it all the time, as you know. But in terms of doors added, i.e. penetration into the including penetration, how many SKUs we have added into the U.S. were about 1,700. And that's for a total about 49,000 point of sales. So we are right into the selling season, as you know, and we have grown into a number of accounts and, you know, we're continuing to have those meetings top to top with all the retailers to continue to drive the penetration for those innovation importantly, versus what I have said before, we have also seeing significant wins in terms of doors in, you know, what we call, sugar replacement adjacencies. And so I talked about chocolate chips cookies. I talked about items coming that we're discussing right now with retailers. Those are obviously not captured into Nielsen because they are not in the definition of sugar replacement, which is just sugar and sugar alternatives. But obviously that doesn't deter us. from uh promoting those initiatives because obviously those are very big categories like the chocolate chips baking for swerve and would contribute very nicely to the acceleration of our growth as we grow as a company got it that makes sense and then second one for me just looking at the flavors and ingredients business uh you know the past few quarters we've seen some pretty healthy growth here do you feel like there's enough tailwinds in this business and you guys are in a
spk10: good spot from the supply chain reinvention project, uh, that we can see some of these elevated growth rates going forward here.
spk09: Sure. I'm, I'm happy to take this on. And then Erwin, if you want to add and, uh, and, uh, Dwayne, but I would tell you this, this business is, uh, is, uh, is a rocket and we're very excited about it. And, um, you know, we made some leadership changes, um, back when we went public, uh, which we discussed about, we invested in, uh, sales and R and D and, uh, What I think you are seeing is that across our end consumers, be food and beverage, cosmetics, healthcare, and industrial, there is a growing demand for natural, non-GMO ingredients. That's exactly what we're offering. So being the leader into a product that has multiple benefits, but importantly, natural and non-GMO is what I will tell you is really the secular tailwind that we're going to continue to benefit on. And considering our leadership position worldwide in that ingredient, I would say that the macro trend powered by very strong sales and R&D and in-market performance globally positions us well for the future.
spk08: And just to follow up on that, I think what we've realized is And the good news, every product has ingredients and every product, every company today is looking to simplify their ingredients with natural ingredients or plant-based ingredients. And licorice happens to be that ingredient. And we're very fortunate to have a great share of that category, have great supply. And our business portfolio has changed dramatically, you know, into confectionery, into personal care products, into other snack products. And the team has done some great jobs on innovation where these ingredients can be used. And like I said, you know, it's been a rocket for us where that has not always been the case with this business.
spk10: No, that's super helpful. And that's it for me. Thanks for taking my question, guys. Thank you.
spk07: The next question is from Alex Arnold with Audion Capital. Please go ahead.
spk06: Hi, guys. Thanks for taking my question. It's just sort of a high-level question on margins and trying to unpack how they may look over the next couple quarters. So could you sort of just speak to the, you know, break down the margins a little bit, but also sort of the timing of taking price last quarter and how that may normalize as it flows through for a full quarter this quarter. And if you're seeing any cost abatement on any front that may offset some of the cost increases you've been seeing, because it feels like I think a couple hundred basis points of sequential margin pressure each quarter for the past couple quarters. And I'm just trying to figure out how that flows forward. Good morning, Alex. I would like to kick it off.
spk05: Yeah, morning, Alex. Hey. So from a margin perspective, yeah, the story is fairly consistent with Q2. I guess, first of all, to your pricing question, the price that we took in Q3 was pretty much effective throughout Q3. So don't see a lot of quarter-on-quarter sequential improvement there, or more price, I should say. Really, what's happening is all the price we're taking and a little bit more is being eaten up by increased costs. In this quarter alone, just thinking about $8.5 million of price benefit that we saw, we had costs at least equal to that. Just the as I call it, the math, when revenues go up $8.5 million on our base and costs go up about the same amount, that alone accounts for all the 30 basis points of the movement. So as we go, I think the message is, as we go forward, from a gross margin perspective, I would expect that to remain fairly similar. Now, as we've talked about, on a couple of questions prior to this. We do see ways to improve costs in 2023. So that should have margin expansion impacts. But as it relates to kind of 2022, it's infrastructural relative to the cost inflation that we've seen and the price actions we've taken.
spk04: All right. Thanks, guys. Have a good one. Thank you.
spk07: The last question is from JP Wollum with Ross Capital Partners. Please go ahead.
spk13: Hi, guys. Thanks for taking my question. I want to just focus on pricing first. So I believe you commented that you had taken low single digits in 3Q, and I just wanted to clarify. That was consolidated pricing. That was just for branded CPG. If you could just break out kind of what you took in CPG. branded CPT versus flavors and ingredients. That would be great. And then also kind of plans for taking more. I think maybe there was a comment that you will take as needed. And then also maybe a comment about there was planned price action. So if you could just let me know kind of what you're thinking in terms of going forward and if there's anything already planned.
spk09: Dwayne, do you want to start?
spk05: Sure. the pricing that we took in Q3 was primarily related to the branded CPG, uh, segment. And, um, you know, as for the, for the full year, we'll have kind of mid, mid single digit millions, uh, impact. Um, we did take, we, we had taken price in, in, uh, our flavors and ingredients segments, but those were kind of put in, those were put into effect, uh, primarily in Q2, uh, did have a little bit of impact in, in, uh, in Q3, but the primary impact is branded CPG. So, you know, and again, that was on top of the increases that we took at the beginning of the year. So, you know, overall, we're on a consolidated basis. Price impact for 2022 is in the low 30s, 31, 32 million dollars. And there will be carryover impact in 2023, both from the first price increase as it didn't, you know, it wasn't effective for the full quarter of 20, it wasn't effective for the first quarter of 2022. And then obviously the price increases that we took, again, primarily related to branded CPG in Q3 will have a rollover impact in 2023 as well.
spk13: Great. Thank you. And looking forward. Go ahead.
spk09: Right. No, I was saying to answer the second piece of your question, we, you know, on a global basis, we do take price, first of all, in different geographies, different markets at the right time. So that is something that we always do, especially in our international markets on flavors and ingredients. As we discussed, we have a strong momentum in the we would do what we need to do. And on the North America, there are still places where we can get more targeted. And there are opportunities as we need them. The objective, as I said, is profitable growth. And that's what we're focused on for 2023.
spk02: Great. Thank you.
spk13: And then just quickly as a follow-up to one of the earlier questions about cash flow, I was just hoping, you know, we've seen kind of two consecutive quarters of negative operating cash flow. I think you talked a little bit about plans for working capital, but can you maybe just give us a sense of timing on when we should see kind of positive operating cash flow and when you really start getting some working capital benefits?
spk05: Sure. And I think that starts in in the quarter we're in currently. You know, important to note, you know, Q2 and Q3, particularly Q2, but we're, you know, we invested significantly in working capital, obviously for the health of the business, both, you know, from an inventory perspective, we had, you know, one of the impacts, of course, is just cost inflation pulling through to, you know, ultimately inventory levels. And from an inventory perspective, cost inflation amounts to about half of the increase in inventory. The other half is related to making sure that we're servicing our customers well, some of it's related to timing. And then the other part of working capital, of course, is making sure that we have positive vendor relationships. Everybody's suffering through the same kind of dynamics. And so it's all one big organism and we're trying to win together. So the big investment in Q2, continued investment in Q3, although at a much slower pace. And as we enter Q4, I see that subsiding and actually expect working capital to be a source of cash for the quarter itself. So Q4, I expect positive free cash flow. And, of course, I think that'll, with kind of the cost inflation already embedded in the working capital investment that we've taken, customer service levels back to where we want it to be, and a team that's going to work hard on making sure we're optimizing the networking capital investment in 2023, I don't expect the pressure to be nearly as high as we have seen in 2022. At this point, I'm not going to say working capital is going to be a source of cash in total for 2023, but I expect dramatic improvement in that metric.
spk04: Perfect. Thank you very much.
spk07: This concludes our Q&A session. I'd like to turn the conference back over to management for any closing remarks.
spk04: Hello? Can you hear me? Yeah.
spk09: I just wanted to take the opportunity to thank everybody for joining us today. And as we said, we are very satisfied with delivering consistent growth for the third quarter. And that's something that we're excited about. And I think we have had a great opportunity to talk about how we see 2023 from a and EBITDA cash flow and the margin standpoint. And so looking forward to our follow-up calls, I want to take this opportunity also to thank the team, as Erwin said earlier, that is working very hard into this volatile environment and delivering those results. Erwin, anything else you want to add?
spk08: I mimic what you say, but... Again, we've been through, you know, like every other consumer package company, challenge is out there. But and as this company has come together over the last couple of years and these acquisitions and, you know, they're great businesses in great categories with lots of potential. It's just now pulling it all together and. As Scott Mushkin mentioned, you know, we're focused on debt. We're focused on free cash flow. We're focused on how we spend, you know, our capex, our manufacturing, and our cost. And, you know, as a smaller company, these public company costs, you know, creep up on us and how we manage that. Yeah. They are things that are laser focused to make sure that we're, you know, cash flow positive and we get those debt numbers down and we get that growth. So thank you very much and I want to thank the team for all their hard work.
spk03: The conference is now concluded. Thank you for attending today's presentation.
spk07: You may now disconnect.
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