B&G Foods, Inc.

Good day, and welcome to the B&G Foods second quarter 2022 earnings call. Today's call, which is being recorded, is scheduled to last about one hour, including remarks by B&G Foods management and the question and answer session. I would now like to turn the call over to Sarah Gerolim, Senior Director of Corporate Strategy and Business Development for B&G Foods. Sarah?

Good afternoon, and thank you for joining us. With me today are Casey Keller, our Chief Executive Officer, and Bruce Walker, our Chief Financial Officer. You can access detailed financial information on the quarter in the earnings release we issued today, which is available at the investor relations section of bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to B&G Foods' annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial conditions. B&G Foods undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. We will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA, adjusted net income, adjusted diluted earnings per share, and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release. CC will begin the call with opening remarks and discuss various factors that affected our results selected business highlights, and his thoughts concerning the outlook for the remainder of fiscal 2022 and beyond. Bruce will then discuss our financial results for the second quarter of 2022 and our guidance for full year fiscal 2022. I would now like to turn the call over to Casey.

Good afternoon. Thank you, Sarah. And thank you all for joining us today for our second quarter earnings call. The second quarter was difficult. Similar to Q1, we experienced continued pressure from inflation ahead of recovering price actions. Total Q2 net sales increased 3.1% versus last year, with adjusted EBITDA at $54.1 million, a 35.4% decline to prior year. Simply put, our pricing actions have not yet caught up to the higher inflation flowing into our cost of goods sold. Within the quarter, we saw improvement in June results after a tough April-May behind some early realization from pricing implemented in June. And we expect to see further improvement starting in mid-July with additional pricing actions across the portfolio. Some key perspectives on the quarterly results. Pricing. The price increases effective in the last couple months, Crisco plus 25%, Green Giant plus 8%, have been implemented and are yielding benefits. but are just taking effect in the market with the required customer lead times. We realized $56.7 million of pricing benefit in the first half of fiscal year 22, slightly below initial expectations. In addition, elasticity on some brands have increased modestly in recent weeks, although still well below historical levels. Crisco elasticity, for example, is now at 0.5 to 0.6, with the last increase as a few consumers trade down to private label. Inflation. The total cost of goods sold inflation impact in the P&L is now projected at $270 to $280 million year over year, or over a 20% increase. The latest culprit is fuel and energy costs, which have driven up our freight, transportation, and utility costs rapidly. The July pricing action covered diesel costs at roughly $5.10, with a forthcoming price increase across the portfolio covering costs closer to projected levels. Downsized conversions. Q2 sales were also impacted by delays in the conversion of the Crisco 48 to 40-ounce bottle and the new reduced Ortega taco shell packs. Retail inventories took longer to work through before shipments started on the new bottles and shell packs. The good news is that we are seeing most bottles and packs shipping and converting on shelf now. Spices and seasonings. B&G's spices and seasonings portfolio was down versus last year, impacting volume and mix in Q2 results. Key drivers were the overall category contraction against elevated pandemic demand in early 2021, as well as supply and customer service issues related to Q1 disruptions and labor shortages in our Ankeny spices and seasonings facility. Customer service levels have now significantly improved and recovered to over 92% in July. Despite the recent trend, both the category and our spices and seasonings are up double digits versus pre-pandemic levels. We are also seeing improved trends in most recent month results. Looking forward, we expect to return to last year adjusted EBITDA performance in the back half behind pricing catching up to costs. Specifically, Looking at the flow and timing of pricing against rising costs in 2022, first half pricing realization covered about 50% of actual year-over-year inflation. Q3 total pricing is projected to cover approximately 85% of year-over-year inflation, and Q4 total pricing is projected to fully cover year-over-year inflation. As a result, Q3 adjusted EBITDA is expected to be below last year with more pricing actions implemented against rising costs, and Q4 higher than last year with full pricing benefit against stabilized costs and service recovery compared to the Omicron and Delta challenges in Q4 2021. Now, let me shift gears to talk about the recent changes we announced to create a business unit structure effective August 1st. We are making these changes to, one, establish clear focus and expectations within the complex and fragmented B&G Foods portfolio. The business units define the categories and brands that we will resource and grow, the platforms for future acquisitions, the brands that will run for efficiency and cash flow, and the businesses we may exit over time. Two, push accountability and multifunctional responsibility down to more closely managed parts of the broad B&G Foods portfolio. improving the speed and clarity of decision-making to deliver growth and financial performance. For example, the BU structure will make us more effective in the current inflationary environment, improving visibility to brand and product-specific cost drivers and accelerating decisions to drive productivity and implement pricing to recover higher input costs. Three, improve the external visibility and understanding of the relative performance and composition of the broad B&G Foods portfolio. In moving to a BU structure, we expect over time to be able to provide analysts and investors with deeper insights into the financial performance and key priorities for each unit. We announced the formation of the four business units last month. They are Spices and Seasonings, representing approximately 18% of B&G Foods' net sales and the number two player in the high-margin spices and seasonings category, with a strong portfolio of consumer-facing brands including Dash, Weber, Spice Islands, et cetera. Our aspirations are to grow this business organically in the low single digits long-term and add new positions to the B&G Foods portfolio through product expansion and acquisition. This unit will be led by Jordan Greenberg, formerly B&G's Chief Commercial Officer. Meals. representing approximately 22% of B&G's net sales, capitalizing on elevated at-home breakfast and casual lunch dinner occasions driven by remote working. This unit has a strong position in the growing Mexican category with Ortega, Las Palmas, et cetera, as well as a solid breakfast foundation with Cream of Wheat, McCann's, and Maple Grove Farms. Our aspirations are to grow this business organically in the low to mid single digits and add targeted new positions to build scale in specific subcategories and occasions. We expect to announce the appointment of the meals president shortly following an external search. Frozen and vegetables, representing approximately 27% of P&G's net sales, with positions in frozen and shelf-stable vegetables behind the Green Giant and LeSueur brands. Initially, this unit's focus will be on improving the economic model through supply consolidation, for example, the grower's acquisition, productivity savings and enhancements, and better innovation design. Longer term, our aspirations are to grow this unit at a low to mid-single digits consistent with the frozen category. This unit will be led by Kristen Thompson, formerly the marketing director on Green Giant, who has extensive experience in the frozen category on other brands. Specialty, representing approximately 33% of B&G's net sales with a portfolio of shelf-stable, center-of-store brands, including a strong baking category position behind Crisco, Collabor Girl, Baker's Joy, etc. Our expectations for this unit are to maintain cash flow, margin, and reasonably stable sales trends, with heavy focus on sales and operating costs. This unit will be led by Ellen Shum, formerly our Chief Customer Officer, who has had additional experience in operations and finance roles earlier in her career. I'm personally excited to strengthen B&G's food performance and portfolio through the business unit structure. We are underway, working in the new organization and going through transition and startup in the next couple months. But already in the first days and weeks, I can see sharper focus, faster decisions, and bigger and better actions. Much more to come. Thank you, and I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the remainder of the year.

Thank you, Casey. Good afternoon, everyone. As Casey just discussed, our second quarter was challenging. And much like the first quarter, it was heavily impacted by extreme input cost increases across large portions of our portfolio. Our supply chain has showed continued signs of improvement, but it still has not fully recovered to pre-pandemic levels of efficiency and thus limited some of the upside demand opportunities that we are still seeing in certain categories. We've executed large price increases that are yielding benefit, particularly late in the second quarter, but due to the timing of those price increases relative to the cost increases we have faced, our margins have continued to be compressed. We are seeing some elasticity drag, but so far these elasticity effects have been modest and are largely in line with our forecasts. Based on our June monthly performance, the execution of our pricing initiatives and some moderation in the level of commodity costs, we believe that we have seen the trough in terms of the margin compression in overall financial performance. We are cautiously optimistic with regards to the rest of the year. During the second quarter of 2022, we generated net sales of $479 million and adjusted EBITDA of $54.1 million. Net sales for the second quarter of 2022 increased $14.6 million, or 3.1%. Price increases coupled with product mix accounted for $20.5 million of the net sales increase. Volume declines negatively impacted net sales by $5 million, and FX had a negligible impact. Volume declines were primarily driven by supply chain challenges lower than normal fill rates, and modest elasticity. We will continue to monitor our brands to measure the negative impact of elasticity resulting from our pricing initiatives. But so far, we remain encouraged that elasticities remain modest relative to our historical models and current expectations. In fact, our two largest brands, Green Giant and Crisco, benefited from increased volumes during the quarter despite sizable cost-driven price increases. Net sales of Crisco increased by $13.4 million, or 22.9%. Net pricing, which we implemented to help offset extreme levels of input cost increases, particularly for soybean oil and canola oil, contributed to the majority of the net sales increase for Crisco. However, as mentioned, we also had significant increases in Crisco volumes during the quarter. Cream of wheat also benefited from price and volume. driven in part by continued strong demand across the brand's portfolio. Net sales of Cream of Wheat increased by $3.1 million, or 21.5%. Clobber Girl had another strong quarter for net sales. Net sales of Clobber Girl increased by $1.5 million, or 8.7% during the quarter, driven by price increases. Green Giant also had modest growth, with net sales increasing by $6.2 million, or 5.9% in the quarter. Net sales of Green Giant frozen products were up $7.6 million or 10.4%. Green Giant shelf-stable products, on the other hand, were down $1.4 million or 4.6%. Net sales of Ortega decreased versus the year-ago quarter and were down $5.1 million or 12.3%. The decline in net sales of Ortega was largely driven by our exit of a low-margin and unprofitable private-label taco shell business that we exited last fall. However, Ortega continues to have elevated sales relative to pre-pandemic levels and is up 1.8 million or 5.2% compared to Q2 2019 net sales. Maple Grove Farms had another strong quarter with net sales increasing $1.2 million or 6.1%. Net sales of our spices and seasonings were off in the second quarter and Similar to the first quarter, performance was primarily driven by two factors. First, lapping last year's second quarter performance was challenging, as it was one of the peak performance quarters for the spices category. Separately, supply chain constraints, which have progressively improved throughout the year, had a significant impact on our ability to produce and keep up with demand levels that, while lower than last year, still remain quite elevated. spices and seasonings were down by $4.2 million, or 4.2% compared to 2021 levels, but were up $13.9 million, or 17.1% compared to pre-pandemic 2019 levels. Gross profit was $76.5 million for the second quarter of 2022, or 16% of net sales. Gross profit was $111.6 million in the second quarter of 2021, or 24% of net sales. During the second quarter of 2022, adjusted gross profit was negatively impacted by extreme input cost inflation, which was in many cases higher in the second quarter of 2022 than it was in the first quarter of 2022. Our expectation is that input cost inflation will continue to have significant industry-wide impact during the remainder of fiscal 2022, although we are beginning to see some signs of moderation in several of the categories that had seen the highest levels of inflation. As discussed on previous calls, we have also been able to mitigate a portion of the impact of inflation by locking in prices through short-term supply contracts and advanced commodities purchase agreements and by implementing cost savings measures. We are also executing various pricing initiatives including list price increases when justified, trade optimization where possible, and product weigh-outs for certain SKUs. However, these pricing initiatives generally lag behind the rising input costs. As such, we were unable to fully offset all of the incremental costs that we faced in the second quarter of 2022. We did begin to see improvement in the month of June and expect to see margin recovery in the third and fourth quarters of this year. Selling general and administrative expenses decreased by $2.9 million, or 6.1%, to $44.2 million in the second quarter of 2022, compared to $47.1 million in the second quarter of last year. The decrease was composed of decreases in warehousing expenses of $2.2 million, consumer marketing expenses of $.8 million, and general and administrative expenses of $.4 million. and acquisition divestiture related and non-recurring expenses of $0.4 million, partially offset by increases in selling expenses of $0.9 million. Expressed as a percentage of net sales, selling general and administrative expenses improved by 0.9 percentage points to 9.2% for the second quarter of 2022 as compared to 10.1% for the second quarter of 2021. We generated $54.1 million in adjusted EBITDA in the second quarter of 2022 compared to $83.8 million in the second quarter of 2021. The decrease in adjusted EBITDA was primarily attributable to industry-wide input cost inflation, increases in freight and fuel costs, and supply chain disruptions. These cost challenges were partially offset by list price increases. Adjusted EBITDA as a percentage of net sales was 11.3%, for the second quarter of 2022 compared to 18% in fiscal 2021. As we discussed on the last call, performance was going to be challenging in the second quarter and was slightly worse than expected. The primary drivers were freight, fuel, and other energy costs that spiked industry-wide during the quarter and impacted our transportation and factory costs. Crisco also had a challenging quarter with increased input costs coupled with a delay in the implementation of our planned downsizing initiatives that had to be completed prior to the June price increases taking effect. And although we achieved tremendous list price increase benefits during the quarter across our portfolio, we also had some promotional programs that we needed to protect with higher trade spending, which led to delayed gratification in some of our pricing efforts. Interest expense was $29.9 million for the second quarter of 2022, compared to $26.7 million in the second quarter of 2021. The primary driver for the increase in interest expense was a $1.6 million one-time payment for the amendment to our credit facility. Interest expense was also modestly affected by increased borrowing during the quarter relative to last year, coupled with a slight increase in borrowing costs on our revolver and term loans. Depreciation and amortization was $20.5 million in the second quarter of 2022 compared to $20.2 million in the second quarter of last year. We generated $0.07 in adjusted diluted earnings per share in the second quarter of 2022 compared to $0.41 in the prior year. Net cash from operations was $21.1 million for the six months ended July 2, 2022, compared to $66 million for the six months ended July 3, 2021. One of the primary drivers for the decrease in net cash from operations was a $56.6 million increase in inventory compared to $38.7 million in the prior year. The increase in inventory was driven by the combination of the beginning of our annual PAC plan, coupled with increased input cost inflation, including increased costs that are carried in our inventory until it is sold during the normal business cycle. Inventory, as of the end of the second quarter 2022, was $667.7 million, compared to $609.8 million at the end of the fourth quarter 2021, and $533.6 million at the end of the second quarter 2021. While we are encouraged by what currently appears to be a peaking in the level of inflationary pressures in recent weeks and what could very well be beginnings of a reversion in the mean with regards to some of these costs, we were disappointed to see that many of these costs ratcheted up to levels that we did not anticipate earlier this year and will thus have a greater than expected impact on our performance this year. Some examples include soybean oil, which hit a peak level of $0.88 per pound in April 2022, compared to 56 cents per pound at the start of the year. Wheat reached a peak level of $13.70 per bushel in March, compared to $7.71 at the beginning of the year. Corn hit a peak of $8.43 in April, compared to $5.95 at the start of the year. And diesel fuel hit a peak level of $5.81 per gallon in June, compared to $3.62 per gallon at the start of the year. Through six months, we have generated a net benefit from pricing of approximately $56.7 million and remain on track to generate the more than $200 million in net benefit that we discussed at our last earnings call. Unfortunately, as we highlighted earlier today, the cost side has gotten worse, particularly with regards to certain commodity inputs, freight, and factory costs. As a result, we are revising our guidance for the year to reflect what we know today. which will include a reaffirmation of our net sales guidance of $2.1 to $2.14 billion and a reduction to our adjusted EBITDA guidance to a range of $300 to $320 million. The primary drivers for the reduction in guidance include an incremental $25 million in anticipated freight, fuel costs, energy, factory costs, and an incremental $10 to $15 million in anticipated material cost inflation versus our prior estimates. When looking at the back half of the year as compared to the back half of last year, we expect adjusted EBITDA to be down in the third quarter and then flat up in the fourth quarter. We expect the fourth quarter to be an inflection point as pricing finally catches up to costs and absent any changes, we expect that to be the case through 2023. In fiscal 2023, we expect improved adjusted EBITDA performance in the first half of the year and full year adjusted EBITDA that better reflect levels that we saw in 2021. Key factors that could lend to either upside or downside to our guidance include the level of elasticity that we face given the price increases that we have already executed, as well as the additional price increases that we are in the process of executing. So far, we have seen relatively modest levels of elasticity drag. Additionally, we are hoping for at least a pause in the levels of inflationary pressures that we are seeing in certain input costs. Obviously, any input cost relief would be favorable to plan, and an additional wave of inflation would have a negative effect, although many of our costs for the year are largely locked in at this point. Our supply chain situation and customer fill rates are also improving. and are expected to be a tailwind for the remainder of the year, but we still operate in a volatile world that is seeing stresses and may continue to see stresses on the global supply chain. Additionally, we expect interest expense of $117.5 to $122.5 million, including cash interest expense of $112.5 to $117.5 million. Depreciation expense of $57.5 million to $62.5 million. Amortization expense of $20.5 million to $22.5 million. An effective tax rate of 26% to 27% and capex of $40 million. Now, I will turn the call back over to Casey for further remarks.

Thank you, Bruce. In summary, the second quarter showed some pricing recovery but not sufficient to offset the gross margin impact of rising inflationary input and operating costs. We have fielded and or implemented pricing actions that are sufficient to recover projected cost positions, which are now flowing through in the back half of 2022. Finally, we are up and running with the business unit structure and organization and making rapid progress towards driving stronger focus, greater speed, and improved performance on the business. This concludes our remarks, and now we would like to begin the Q&A portion of our call. Operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like 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. One moment, please, while we poll for questions. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Great, thanks so much. I guess to start off, maybe Bruce, are you able to break out in the second quarter what the benefit from price versus mix was? Because if we just look at overall price mix, I think it was up like 4.5%, and obviously that decelerated quite a bit from where price mix was in the first quarter. which is surprising or confusing just given obviously you've been putting more pricing into place. So I don't know whether that's because of mix or maybe some of the trade promotions you talked about that you had to protect, but trying to get a better handle on that just to see that pricing is actually accelerating.

Yeah, we don't have a perfect split between the price and the mix part, but that is some of it as well as some of the promotional trade to protect price points and the price increases.

It's a pricing mix number. One of the things that happens is when spices and seasonings goes down, then we have a mix effect going on.

If we look in the back half of the year, if we look at that price mix line, I'm assuming that accelerates fairly dramatically. I think maybe as of last quarter, you were expecting it maybe to get even into the double digits. Is that still the right way to think about the back half in terms of the price mix equation?

From a price standpoint, yeah, there's going to be a lot more pricing benefit in the back half of the year. And, you know, even as we talked about on the last call, a lot of our price increases this year that were sizable were June, July, and back half of the year implementation.

And I think, you know, Andrew, we disclosed that we're expecting, you know, kind of close to $200 million in total pricing for the year. And so year-to-date, we've gotten $56, $57 million. So... We expect acceleration in the back behind all of the actions that have been taken.

Got it. And then last one would be, and I think you said it, but I just want to make sure I heard it right. Did you suggest that 23 EBITDA could be similar to 21, or was it the back half of 23? I just want to make sure I heard.

Yeah, that is correct. We expect, based on what we're seeing today, continued normalization in EBITDA, And that would imply a stronger first half of 2023 and 2023 EBITDA levels that would be closer to what we saw in 2021. Got it. Okay.

Thanks very much.

Thank you. Ladies and gentlemen, we do ask that in the interest of time, you limit yourself to one question and one follow-up. Our next question comes from the line of Carew Martinson with Jefferies. Please proceed with your question.

Good afternoon. When you look at the price gap between your product and private label, where does that stand now? And post the price increases, where do you think that will go? And that kind of dovetails into questions on the sustainability of the positive trends you've seen so far on elasticity.

Yeah, this is Casey. I'll answer that. I mean, this is going to vary dramatically between brands and product lines, but let's just take the big one, Crisco, which obviously has had the most pricing going on. So we measure elasticity pretty carefully and we look at our gap to private label. So we know that prior to probably the last increase, which was in June, we were seeing a last 50s probably in the 0.2 to 0.3 range. And now I think since this last increase, we're seeing it more in the 0.5, 0.55, 0.6 range. And, you know, in that period with our last price increase, the gap to private label increased a little bit. But, you know, now I've noticed that in the last couple of weeks, private labels began to come up again. So, you know, our Our assumption is that prices go higher, that there will be a little bit more elasticity effect. We've modeled that in the back half, and that we do expect that some consumers may make the decision to trade down to private label, but we just haven't seen it in large impact yet. I mean, we think that So 0.5 to 0.6 is where Crisco will stay relative to elasticity in the back half of the year.

Okay. And then when you look at the recovery of EBIT that you guys are looking for in 2023, I was trying to kind of square that with the credit amendment that will maintain the eight times leverage ratio through September of 23. Is that just... being overly cautious on that front, or what's the thinking there?

Yeah, being overly cautious. And we want to give ourselves time to de-lever just through the combination of the natural EBITDA growth part of the equation, the cash flows that you generate for that, and as well as potentially select assets investors.

Thank you very much, guys. Appreciate it.

Thank you. Our next question comes from the line of William Ruder with Bank of America. Please proceed with your question.

Hi. My first question on the dividend, I guess, is given that your leverage is elevated, is this something that you would consider reducing for a period of time in order to bring down leverage, or are you pretty committed to staying at this level?

At the current time, there's no change in dividend policy.

Okay. And then, you know, given that you have seen some declines in some of these input costs from their from their peaks. When you think about your cost outlook for next year. Do you anticipate that those are going to be lower on a year over year basis if they were to remain at current levels or will they be higher year over year next year.

If we look at – this is Casey. So if we look at total inflation expectations next year, right now we're currently modeling something in the 3% to 5% range versus we talked about over 20% this year. And our expectation is that the big commodity inputs that have been so volatile and rapidly rising in the first six months of this year kind of stabilize. That's what we're seeing the markets maybe even go down a little bit. which would allow us maybe to have in some periods of next year some lower costs year over year and those big inputs. But overall, we are seeing that we will have inflation in certain components. Think about glass, paper, board, tomatoes, et cetera. So 3% to 5%, which we would intend to price and drive cost savings against to make that neutral. Got it. That makes sense. Thank you.

Thank you. Our next question comes from the line of Carla Costola with J.P. Morgan. Please proceed with your question.

Hi. One of the supply chains, can you just talk about kind of where you're seeing the biggest supply chain issues and when you expect them to resolve?

Yeah, I think the big picture is that we've improved dramatically in the last three to six months on our service levels and our supply positions. And I feel pretty confident that we'll continue to make progress. You know, we said, I think we were at the end of the first quarter, we were below 90% service levels. We're now approaching 93% service levels on the business. And we think that by the end of the year, we'll be even closer to 95% service levels. So, you know, we had a lot at the beginning of the year, we had some significant disruptions. We had a few material problems. We had some labor shortages in some of our key facilities like the Spice and Seeding facility in Ankeny, some of those driven by the Omicron variant and other things, but so far we've been operating pretty smoothly. We've been able to now recover in terms of our labor shortages and we're running all the factories the way we want to. We'll probably have, you know, material shortages here and there, but so far it's become more manageable. And as I said, we're kind of getting back to full production staffing, um, you know, right, you know, versus where we were, I'd say six to 12 months ago.

Okay, great. And then, um, did you say where you, I mean, you raised the covenant level on your debt. Um, When do you expect leverage to peak? It sounds like you feel like you're near trough. Should we be near the leverage peak or what quarter?

Yeah, you probably see leverage peak in the third quarter as our normal seasonal pattern. And that's due to the pack coming in for Green Giant. So no difference this year.

Okay, great. And then I don't know if you can give us an update on, if you look at your costs, can you give us any ballpark figures, how much of it is the raw material versus labor versus packaging and transport?

Not a number we disclose, but obviously when you're talking about soybean, soybean oil is part of Crisco and, you know, corn and wheat is part of a lot of our products. You know, I would say it's commodity, commodity input is the biggest driver of our inflation, but clearly packaging material and, you know, paperboard and other things are up. But I would say the lion's share of it is the input cost, the commodity input cost.

With also a significant challenge on the freight and fuel side. Right. Exactly.

Okay. And then just one more. Retailers are starting to talk about, you know, the consumer and elasticities. Are you getting any more pressure to promote or are you seeing any pickup in any particular category where you're seeing more of a promotional environment?

I think what we see right now is, you know, less around kind of the inflation impact on promotion or maybe potentially deflation. What we see is a resumption of kind of more normal promotional patterns from the, you know, in the post-pandemic period. So, you know, think about 21 and 20, you know, promotions were kind of scaled back by a lot of retailers or focusing on some of the core SKUs, not doing as much. you know, feature and display activity, we're seeing a resumption of that normal pattern. So, I mean, promotion activity has increased this year, but frankly, that's because I think we're just coming back to normal.

Okay, great.

Thanks so much.

Thank you.

Thank you. Our next question comes from the line of Eric Larson with Seaport Research Partners. Please proceed with your question.

Eric, your line is live.

Our next question is from the line of Robert Moscow with Credit Suisse. Please proceed with your question.

Thank you. I think you said that some of your pricing initiatives didn't occur like you thought they would in 2Q. Did I catch that right? And if so, was it a delay or what caused that? And also, the cost that you're talking about, like the increase versus your prior estimate, it's a lot more than what other food companies are reporting in 2Q. Most companies reporting so far seem to have talked about stabilizing costs 2Q came out pretty well. What do you think happened here that was materially different regarding your cost profile, which is, I guess, a lot more than you thought it would be?

So on the pricing implementation, the real driver there that we're referring to is for Crisco. We had a downside, and it just took longer for some of that inventory to flow through the system. Okay. which was kind of a delay there.

And we also had a price increase attached to that flowing through. But largely, we got pretty close to the pricing that we expected for the first half.

Right. And then on the cost side, we've also seen a stabilization. I mean, that's where we think we're near the trough, certainly. Comparing us to other companies, I guess it depends on what company and what their portfolio is. Certainly for us, some of the real challenges that we saw in the quarter was just the disconnect or the rapid increase in the cost side from Crisco relative to when we were able to implement the price. We knew a lot of that was coming, but that was the challenge of the quarter at that inflection point.

Yeah, I mean, the way I would answer it is we have a portfolio with the addition of Crisco. And let's be honest, Crisco is driving probably 40% of this. We have a portfolio now that is very sensitive to the dramatic increases in certain commodities over the last six months, you know, soybean oil, corn, wheat. So, unfortunately, these were some of the largest, you know, The largest increases, and we have a portfolio now that's extremely sensitive to those. So Crisco, to me, is something we've got to think about longer term in terms of the commodity sensitivity of that product. But we're at a historic level. So with a little bit of luck, we'll start to see that come off in the future months with a decent crop this year.

And the positive on that is really Crisco is – that was an issue for us April, May, and then June was actually – I wouldn't say normal, but much closer to normal. But April, May were challenging, and so we were encouraged to see the June performance.

Yeah, Bruce, you mentioned 80-cent soybean oil, but soybean oil is much lower now. So does that mean that you get an immediate benefit from that in third quarter and fourth, or do you kind of live with 80 cents for a little while?

Well, we're not quite at 80 cents through the whole period, but we're covered through the whole year now. And we can't, just the way oil works is, you know, once we agree to buy it, we probably have between 10 to 15 weeks before we can actually, you know, sell it as a bottle. So because you've got to refine the oil, you've got to deodorize it, you've got to process it. So we're largely covered for the rest of the year. So any benefit that, you know, happens in the soybean oil market, we'll get in GFM, you know, kind of the first quarter of next year. But right now, you know, we had to cover the cost because of the lead times in the product. And also, you know, we were able to go in when it dipped down in kind of the low to mid 60s and cover a little bit of our fourth quarter needs. But largely, we're set for the rest of the year at, you know, more in the 70 to 80 cents range. Okay, I got you now.

Thanks for the clarity.

Thank you. Our next question comes from the line of David Palmer with Evercore. Please proceed with your question.

Thanks. Just a question for those of us tracking you with scanner data. It looks like now in IRI, for example, you've gotten up to double-digit pricing increases per unit portfolio-wide. Is that the type of price realization you expect? that that's the kind of run rate of pricing that you would actually see in your organic results going forward?

Yes. I mean, it varies by obviously by brand and product category, but yes. And you would see that, you know, you'd see that showing up. Yeah. Go ahead. You'd see that showing up probably with some of the latest increases that really hit kind of in June and July.

Right. Right. Yeah. You know, one of the things that I've been wrestling with is just, just the fact that it seemed to take tracking it in the data, it finally did accelerate, as you said, but it took a while to get through. And I wonder to what degree it's a mistake for us to, uh, commingle the pace of your price realization with pricing power. And, you know, in other words, some of your competitors out there were, were getting pricing in faster. And is there a reason for that? Is there something of a category dynamic that, that, plays out in some of your major categories. Any thoughts on that?

No, I think what, you know, what we face is, you know, as we're in, you know, kind of categories with promotion, you know, we have, you know, kind of contracts with retailers that we have to protect promoted price points. So sometimes that mutes a little bit of how fast the total pricing effect comes in. I would say, you know, I would say we do have to get better on pricing. This is Casey talking, having been here a year. We have to get better and faster on projecting future cost increases as well as pricing against them. That is something that we're going to get better at in the business unit structure, and we're designing that capability to do that. I would say overall on Crisco, which again is driving a lot of this, what we're talking about, we have to probably treat that more like a commodity and try and negotiate with our retailers to move pricing more quickly because the normal lead times in a commodity, as Bruce said, went from $0.56 to $0.88. We just can't operate with these kind of lead times. It's not a normal – when so much of the cost of product is in that commodity, we're going to have to think about it more like coffee.

Yeah, and then one last question I have is just on spices. You noted that you have a tough comparison there. That seems to be an inventoryable perhaps like the ultimate COVID type category where people were perhaps grilling at home more and they stocked up on the stuff. Do you feel like you have decent visibility into that getting better the year, getting back to its historic growth rates sometime in this year?

What we're seeing is, you know, contraction the first half of the year in the category. Frankly, some of their spice and seasonings problems was our own issues where we had supply problems and production problems in the first quarter, which kind of caused some temporary distribution losses, which we're now getting back. But we think that, you know, the trends will, you know, kind of improve, you know, in the back half. We're already seeing that, you know, trend improve in July. So, you know, we don't expect to see big growth in spices and seasonings, you know, either our business or the category this year, but we expect to see it kind of like steadily kind of recover and stabilize. And then, you know, we know that from a lot of consumer research that people are now planning, given, you know, the possibility of recession, are now planning to maybe continue to make more meals at home, use more spices, and that's kind of the research we're seeing. So, you know, I'm encouraged that we'll be able to deliver some growth on the spices and seasoning portfolio, you know, as we go forward and in the long term. And what I said was the low single digits. I think there's good growth there, and it's, you know, obviously, you know, good margin, and I think we have good capabilities in that category.

And, Dave, the other thing you've got to keep in mind, I think, on spices and seasonings as a category is it was almost a different pattern from the COVID response than something like canned vegetables or canned meat, you know, for us. You know, we look back at the financials and you actually see the spike in sales in some of those products even before we thought we had, you know, a COVID issue back in 2020. And then spices was more of a delayed reaction. And so we're lapping in the first and second quarter of this year some of the strongest performance in the spice category. You know, that contributes a little bit to it.

Thank you very much. Thank you.

Thank you. Our next question is from the line of Connor Radigan with Consumer Edge. Please proceed with your question.

Good afternoon. Thanks for the question. So I know it's a bit premature given the current environment, but just I guess as far as the pricing strategy goes going forward, you know, if we begin to see a commodity pullback like we've seen in some of the commodities, I mean, I guess especially in soybean oil like we've seen, you know, in the last couple weeks, you you know, later in the year when you're closer to full coverage, would that really impact your strategy around pricing or maybe make those conversations with retailers tougher?

Well, I mean, we don't – you know, we've largely kind of fielded all the pricing against the big commodity increases. So that's already, you know, kind of been fielded and sold through. So, you know, I think the discussions with retailers will be around – you know, if the commodity, you know, comes down, you know, much below, you know, where it is now, you know, we will start to have the conversations about, you know, when would we, you know, when would we take possibly on Crisco prices down? But honestly, even, you know, if the spot market prices today, they're not far off where our real costs are, you know, so you got to add basis and other things to it. But, I think if the commodity comes down, we're going to get benefit in probably the first quarter of next year. And we'll have those discussions with retailers predominantly on Crisco and oil about what does that mean in terms of when we can reflect pricing. But those will be conversations that we'll have over the next several months, depending on where the soybean market actually goes. It's not down to the point where it's really that way far off from where we are from a cost basis.

All right. Thank you so much. That was very helpful. That's all.

If there are no further questions at this time, I'd like to turn the floor over to Casey Keller for closing comments.

Thank you all for joining us. As I said, this was a difficult quarter, but we feel pretty confident that we have the pricing actions in place to recover against the kind of unusual inflation environment that we're dealing with. I appreciate all the questions, and we'll talk to you next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.