Utz Brands Inc Class A Common Stock

Ladies and gentlemen, thank you for standing by. And welcome to the Utes Brands Incorporated Second Quarter 2021 Earnings Conference Call. At this time, all attendees are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. And to ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 2. Thank you. Now, I would like to hand it over to Mr. Kevin Powers, Senior Vice President of Investor Relations. Sir, please go ahead.

Good morning, and thank you for joining us today. On the call today are Dylan Lissette, Chief Executive Officer, and Kerry DeVore, Chief Financial Officer. During this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to the risk factors in Uxbrand's most recent quarterly report, Fine with the Securities and Exchange Commission, as well as the risks highlighted in the company's press release issued this morning, for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, management's remarks today will highlight certain non-GAAP financial measures. Our earnings release also presents the comparable GAAP numbers to the non-GAAP numbers provided in reconciliations of the non-GAAP results to the GAAP financial measures. Finally, the company is also preparing presentation slides and additional supplemental financial information, which are posted at us's investor relations website. You may want to refer to these slides during today's call. This call is being webcast, and an archive of it will be also available on our website. And now, I'd like to turn the call over to Dylan. Dylan?

Thanks, Kevin. Good morning, everyone, and welcome to our second quarter earnings call. Let's begin with a few key messages on the quarter. In the second quarter, our net sales on a two-year basis continue to gain momentum as we lap the impact from COVID-19 in the prior year. Our net sales increased 6.1% on a two-year CAGR basis, which was an increase from 4.3% in the first quarter. From an IRI retail sales perspective, growth accelerated to 6.5% versus 5.9% in Q1, and we are also beginning to see our sales strengthen in channels that were most negatively impacted by COVID-19 in 2020. For example, our food service sales increased nearly 60% versus last year, with other areas like discount and specialty seeing strong double-digit growth. While we expect our sales momentum to continue into the second half of the year, the strong recovery of the U.S. economy is having a broad-based impact on supply chains. Consistent with what you've heard around the food industry, the costs to serve our customers are increasing, and our key input costs are higher than we originally expected. This is largely due to higher commodity, transportation, and labor inflation. As a result, we are currently reducing our full year adjusted EBITDA outlook for fiscal 2021. On that note, please be aware that we are aggressively taking the steps necessary to mitigate these cost pressures and our pricing actions and productivity initiatives are well underway. To be clear, we have been increasing pricing across our network and we are leaning into our productivity initiatives to offset these inflation headwinds. but the benefits of these actions will lag the costs. And as noted previously, we will see the benefit of these initiatives in the second half of 2021 with meaningful carryover benefit into 2022. As we manage through this environment, we remain focused on the long-term health of our brands, and we continue to prioritize investments to capitalize on our significant continued and future growth opportunities. Among these growth opportunities is our strategic M&A, as our scalable platform has proven to generate both meaningful cost and revenue synergies. We believe our pure play snacking focus makes us the logical consolidator in the salty snack category, and there is inherent optionality in our platform, as we can consider small tuck-ins, medium-sized acquisitions, or potentially larger transformative opportunities. We continue to focus our M&A efforts on businesses that will either facilitate geographic expansion, increase our presence in key subcategories or channels, and of course, those that deliver strong synergies. Our acquisition pipeline remains very robust, and we will continue to prioritize opportunities that are creative and strategic to our long-term goals. Lastly, on July 26th, we announced promotions to our executive leadership team that will accelerate our ability to grow and strengthen our organization. These changes will provide us with the optimal organizational structure to best position us to drive continued top and bottom line growth. Among these changes, Carrie DeVore is being promoted to Chief Operating Officer, and Ajay Kataria, our current EVP of Finance and Accounting, is being promoted to Chief Financial Officer. Both changes are effective this October 4th. In addition, we welcomed Teresa Shea as our general counsel right after July 4th, promoted Shane Chambers to chief growth officer, and promoted Jim Spanagle to chief people officer. Turning to the numbers in the second quarter, net sales grew over 23% in the quarter, which reflects the positive contribution from our acquisitions and from price mix. This growth was partially offset by lapping the impact of the peak prior year COVID-19 sales increases, which were most pronounced in the second quarter of 2020. In addition, adjusted gross profit grew 17% and adjusted EBITDA grew 10% as margins were impacted by the key input cost increases I described earlier. In addition, I'll note that our adjusted EBITDA performance reflects a higher marketing spend in the quarter as we invest more in our prior brands for long-term growth, as well as public company costs in 2021 that didn't exist in the prior year period, given that it was a private company. Now, let's turn to our recent IRI retail sales trends and results. Consistent with the first quarter, given the significant outperformance of its brands versus the salty snack category in the early months of COVID-19 pandemic last year, we believe that evaluating our results on a two-year basis is the best indicator of overall performance. As we lock the peak COVID-19 pantry stocking period of 2020, we are driving strong two-year growth rates that continue to accelerate as we move throughout the year. Our power brand's momentum is growing, with sales on a two-year CAGR basis accelerating to 8.8% for the 12-week period ending July 11th, versus 7.7% for the 12-week period ended April 18th of 2021, both of which outpaced the broader salty snack category by over 100 basis points. Importantly, during the same time periods, our foundation brand declines have slowed to minus 1.8% versus minus 3%, even as we continue to reduce our emphasis on these brands. As mentioned in previous calls, the move towards power brands and away from foundation brands is many times driven by working through the transition that occurs when we acquire foundation brands as part of an acquisition, including those acquired in the ConAgra DSD snacks and Vintners acquisitions, for example, and actively work to rationalize and right-size the portfolio by inserting key UTS power brands into the market. This strategy is to amplify our focus on the power brands, which we believe can scale nationally, which helps us to capitalize on the significant white space opportunities that exist. To that end, our investments in marketing and innovation are focused on these faster-growing brands, and we are increasing spend in digital and e-commerce, and Uplonster will be launching key innovation introductions. Turning to our growth drivers in the quarter, we continue to grow sales in a two-year CAGR in all five of our key salty subcategories and in salsa and queso. We also gained overall share during the period across potato chips, tortilla chips, and pork rinds, which comprised about 70% of our retail sales. In addition, as we evaluate our emphasis on our power brands, we delivered two-year market share gains in our power brands across four of our five major subcategories, as well as greater than category growth in our salsa and queso brands. During the quarter, we also made significant progress driving geographic expansion. We continue to focus on large population areas in our expansion and emerging geographies, and we continue to drive our Power Brands growth across the U.S. VR platform. For the 13-week period ended July 4th in the expansion and emerging geographies, we drove double-digit growth on a two-year CAGR basis for both the total UTS portfolio and for our power brands, which outpace the category by approximately 400 to 500 basis points in each area. As noted previously, we believe the revenue opportunities in our expansion and emerging markets is significant with every one percentage point of share gains in these geographies representing approximately 200 million of incremental retail sales opportunities. Looking at our core performance over the last two years, Our total portfolio growth trends are behind the category, and as noted in Q1, this is primarily due to declines in our good health brand and the impact of our foundation brands, both of which are more heavily weighted to our core. These two factors combined accounted for about two-thirds of our performance gap to the category in our core. That being said, we continue to be focused on the core and have a targeted set of actions that we are executing to drive improvement as we move throughout the year, and we remain focused on this area of opportunity and improvement. In our analysis of near-term IRI data, we do see our results beginning to improve, and the gap to the category is starting to close, signaling that our actions are beginning to take root. In addition, we are seeing significant growth of the On the Border brand in the core with very solid growth rates on a two-year CAGR basis over six of the last seven four-week quads. You can see the On the Border results I'm speaking of on slide 13 later in the deck. Wrapping up our retail sales insights with a look at our channel growth, we continue to drive two-year positive sales growth across every major channel with power brand share gains in grocery and C-store, as well as double-digit sales growth in club. In the grocery channel, which is approximately 50% of our retail sales, our power brands grew 8.3%, outpacing the two-year category growth of 6.7%. In our most underpenetrated channels, namely mass and convenience, both remain a continued opportunity for future growth, and we are excited about the progress we are making in these important channels. In mass, while we underperformed the overall category in a two-year basis, our growth accelerated to 6.8% versus 3.7% in Q1, and our gap to the category was nearly reduced in half. We are very excited about our growth opportunities in this dynamic channel and look forward to sharing more with you on this later. And as travel continues to resume around the country, our convenience store trends are improving, and sales grew year over year, nearly 15% and nearly 7% on a two-year CAGR basis. We are expanding distribution and strengthening distributor relationships, and the Western United States remains a key white space opportunity for us. Looking ahead to the second half of the year, our sales momentum is truly building. And we are excited about the progress that we are making across several areas. Here are just a few highlights. We are lapping the extraordinary surge in demand during the peak COVID-19 pantry loading period in the second quarter of 2020. And we are beginning to enter a more normalized comparison period to the prior year. We have positive space and facing gains coming in Q4 with a critical mass retailer as we leverage the strength of our now broader UTS and on-the-border portfolio. Our C-Store and food service channels are rebounding quickly, and C-Store remains a large channel opportunity for us with only a current 3.4% share. We are accelerating power brand sales through key innovation like UTS Twisters and Zapp Thins. and introducing new on-trend flavors for the on-the-border gifts, like Southwestern bean and jalapeno ranch, as well as on-the-border queso tortilla chips, amongst other innovation ideas. And finally, we expect to deliver a strong holiday season, with holiday item sales expected to grow versus last year, as the traditionally strong holiday season for us was muted by COVID-19 in 2020. Finishing our review of our retail sales data, you can see by the recent four-week IRI and ULO C-trends that sales momentum is building with our power brands, and the foundation brand performance is improving as well. And finally, before I turn the call over to Carrie, I'll make just a few final remarks on our Truco acquisition progress. As a reminder, Truco, also known as On the Border, was our largest acquisition in the history of us and we closed on this on December 14th of 2020. From an integration standpoint, many of our milestones on the on-the-border acquisition are being hit, and the teams continue to work well together. We are six-plus months into bringing these two organizations together, and we see opportunities abound for the on-the-border brand within our sales platform, and this is amplified with the recent transition from a third-party DSD distributor to the UPS DSD distribution system for a number of states, effective about a week and a half ago on August 1st. We believe that this will drive even more future gains for the brand as we both vertically manufacture and distribute this strong brand, and we believe this will help to unlock even more revenue opportunities. It's important to note that on-the-border tortilla chips have only a 50% ACV across the U.S., And we are leveraging the OOTS sales force and the route to market system to drive increasing growth and unlock revenue synergies. And we are seeing new distribution for on the border across multiple channels, such as grocery, drug, convenience, and dollar. And our core OOTS geographies remain a big revenue opportunity for this brand. As you will note on the accompanying chart, the two-year CAGR four-week numbers show continued progress and growth, with recent trends climbing into the 15 to 20-plus percent range on a two-year basis in our core, as well as very strong results in both emerging and expanding. Finally, we are driving manufacturing efficiencies within our vertical integration initiatives, and we recently insourced some on-the-board production into our Hanover plant, with future plans to bring even more production into both Birmingham in the second half of 2021 and Hanover in Q1 of 2022 to support this elevated demand and complement our current command network. Finally, we're also excited about the test introduction of on-the-border soft tortillas, which we will be testing in a subset of the national retailer stores as we believe the on-the-border brand equity can expand into the growing $1.9 billion soft tortilla market, and we look forward to seeing the results. In short, we are very excited about the opportunities the on-the-border brand will continue to bring to our portfolio across all of our geographies. And now, I'd like to turn the call over to Kerry DeVore, our Chief Financial Officer. Kerry?

Thank you, Dylan, and good morning, everyone. In the second quarter, net sales increased 23% to $297.9 million. Adjusted gross margin contracted to 35.4%. Adjusted SG&A was consistent at 24.3% of sales. And adjusted EBITDA increased 9.5% to 35.7 million, or 12% of sales. As Dylan mentioned earlier, our adjusted EBITDA performance reflects significantly higher inflation than we originally expected. as well as higher marketing spend as we invest more in our power brands and higher public company costs in 2021 that didn't exist in the prior year given us was a private company. Finally adjusted net income increased 39.7% to 19 million and adjusted EPS was 13 cents per share based on fully diluted shares on an as converted basis of 142 million. As a reminder, our non-GAAP share count reflects the combination of total outstanding shares and assumes the net settlement of private placement warrants resulting from our business combination with Collier Creek Holdings. Turning to our balance sheet and other key points, at the end of the quarter, our liquidity remained good with cash and cash equivalents of $26.7 million and an undrawn revolving credit facility providing liquidity of more than $130 million combined. Of note, In the first half of 2021, we realized approximately $13 million in cash proceeds from asset sales, primarily related to independent operator routes. In addition, we executed a sale-leaseback transaction to recoup $13 million in cash from prior capital expenditures, locking in favorable fixed-rate capital lease financing. Moving down the balance sheet, net debt quarter end was $787.2 million, or 4.4 times normalized further adjusted EBITDA of $179.5 million. In addition, we completed a term loan tack-on of $75 million and used the proceeds primarily to pay down our revolving credit facility. Pricing and terms are consistent with the term loan financing we executed in January 2021, which was pricing of LIBOR plus $300 with no floor. And just as a reminder, we previously used cash and the ABL to close the Vintners and Fastida Foods acquisitions. Finally, capital expenditures were $10.8 million in the first half of the year, and we expect this to accelerate in the second half of 2021 to support our productivity initiatives. Moving back to the P&L for some additional detail, our net sales growth in the quarter was driven by price mix of 2.3% and acquisitions of 24.2%, partially offset by volume declines of 3%, and the impact of our IO route conversions, which reduced the net sales growth rate by 40 basis points. The volume decline was primarily due to lapping significant growth in the early weeks of the COVID-19 pandemic. Our pro forma net sales growth rate on a two-year CAGR basis was 6.1%, which was an acceleration from the first quarter rate of 4.3%. Moving down the P&L in the second quarter, adjusted EBITDA margins contracted by 150 basis points to 12%. Decomposing the decrease in adjusted EBITDA margin for the quarter, positive drivers include acquisitions of 180 basis points, largely driven by Truco, price mix of 160 basis points, productivity improvement of 50 basis points, and SG&A excluding transportation costs of 10 basis points, Offsetting these positive drivers are headwinds related to volume of 130 basis points as we lap COVID-19 pantry loading from prior year, and inflation of 420 basis points, which includes commodities, transportation, and labor. Within commodities, inflation was most pronounced at cooking oils and packaging, and higher transportation cost increases were largely due to higher spot market rates and contract freight costs. As a reminder, transportation costs, which are largely freight out, are included in SG&A expense on our income statement and not in cost of goods sold. While our margin pressure in the second quarter was worse than we expected, largely due to a rapid rise in costs that cannot be hedged, our pricing and productivity actions are taking hold in the second half of the year, and we are confident our margin performance will improve. To that end, we expect for margins to improve in the second half of the year relative to the first half. Through the combination of higher sales volumes, improved net price realization, benefits from our productivity initiatives, and additional cost actions, we expect margins to increase from 13% in the first half to between 14.5% and 16% in the second half. Looking at the quarters, we continue to expect third quarter sales to be the highest of the year and for fourth quarter sales to be lower than the third quarter, which is in line with typical seasonality. From a profitability perspective, we expect third quarter margins to be at the low end of the second half margin range and fourth quarter margins to be at the high end of the range. This reflects the building benefits of our pricing, productivity, and cost actions that we believe will carry forward to fiscal 2022. And I'll note that fiscal 22 will also benefit from $7 million in unrealized cost synergies from our recent acquisitions. Furthermore, our acquisition pipeline remains as active and robust as I can remember during my tenure at UPS. We will continue to prioritize opportunities that are accretive and multiple enhancing, and from a financial policy perspective, are consistent with our long-term target net leverage ratio. Now turning to our full-year outlook and expectations for the second half of the year. While demand remains strong and we are on track to deliver our sales targets, we are adjusting our full-year adjusted EBITDA outlook to reflect higher than planned inflation. In a very challenging environment, our teams across our manufacturing plants and logistics network are doing an incredible job delivering for our customers, but unfortunately, it's coming at a higher cost than we anticipated. This is primarily due to higher inflation and unhedged costs, which include certain commodities, as well as transportation and labor. Our original expectation for commodity inflation was 4% to start the year, but given rising prices for the 20% of our unhedged commodity positions, and higher inbound transportation costs, we now expect 6% commodity inflation for the year. In addition, we now expect higher outbound transportation costs and labor costs, given the challenging industry-wide supply chain dynamics. That being said, we are aggressively taking steps to manage our higher input costs. As Dylan mentioned, while our pricing and productivity initiatives are well underway and on track, the benefits are lagging the near-term cost pressures, and as a result, we are lowering our full-year EBITDA outlook to reflect this incremental inflation. To put this into further context, in the second half of fiscal 2021, we expect higher year-over-year inflation of between $30 million to $35 million. When we compare our second half 2020 further adjusted EBITDA of $92 million, that is pro forma for recent acquisitions, to our second half 2021 implied guidance range of $86 million to $96 million, we are nearly or entirely offsetting this bucket of higher inflation. We are doing this through a combination of higher sales volumes, improved price and mix, our productivity initiatives, and lower SG&A. We expect this pricing and productivity will have a meaningful carryover benefit to 2022 and will provide a strong baseline upon which to layer incremental pricing and productivity to drive margin performance in fiscal 2022. Bringing it all together, excluding FACETA, we continue to expect full year 2021 net sales to be consistent with 2020 pro forma net sales. As a reminder, our 2020 pro forma net sales is on a 52-week comparison basis, assumes we owned HK Anderson and Truco on the first day of fiscal 2020, and assumes $20 million of net sales for Vintners to align with expectations for fiscal 2021. We continue to expect modest organic sales growth year over year, even as we lap fiscal 2020 organic growth of over 8%, and pro forma sales to grow about 6% on a two-year CAGR basis, which is above our long-term growth outlook of 3% to 4%. Moving to adjusted EBITDA, we now expect a range of $160 to $170 million versus our prior expectation of $180 to $190 million, and adjusted EPS of $0.55 to $0.60 versus $0.70 to $0.75 previously. Turning to our additional assumptions, on slide 22 of our earnings presentation, you'll find a detailed list that supports our 2021 outlook. Notable assumptions that have changed include raising our commodity inflation to approximately 6%, increasing capital expenditures to 40 to 50 million to accelerate high return on capital projects to drive our productivity efforts, lowering our effective cash tax rate to 17 to 19% due to tax amortization and bonus depreciation, from the Vintners and Fastida acquisitions that were asset deals for tax purposes and the tax benefit from equity awards in 2021. Finally, we are raising our net leverage ratio range to approximately four to 4.5 times by the end of 2021 to account for acquiring Fastida with debt and the reduced adjusted EBITDA outlook. I'd now like to turn the call back over to Dylan for some final comments.

Thank you, Kerry. As we wrap up our presentation, I'd like to conclude my remarks with a few high-level summary perspectives to share. First off, as always, thank you to the 3,000-plus Utz Associates for the incredible efforts put forth to deliver for our customers and our consumers in such a challenging environment. Second, we are encouraged by the fact that our power brands continue to drive strong two-year CAGR sales growth and that they are becoming a larger percent of our total retail sales each period and momentum is building. Third, while we continue to manage through a challenging input cost environment, we are pulling as many levers as possible to offset these costs. Importantly, we are doing so with a long-term mindset, and we remain laser focused on enhancing our customer relationships, driving distribution, and building our brand equity. Fourth, we know that an important leg of our value creation strategy is M&A. and our pipeline remains robust with many actionable and creative opportunities. And finally, our long-term organic outlook remains intact for both top-line and bottom-line growth, and we remain well-positioned to deliver value for our shareholders. Thank you, and now I'd like to ask the operator to open the call for questions.

Thank you, and as a reminder, If you wish to ask a question, simply press star, then the number one on your telephone keypad. Once again, that is star one on your telephone keypad. Your first question is from the lineup, Rupesh Parikh from Lockenheimer. Your line is now open.

Good morning. Thanks for taking my questions. So starting out with cost pressures, I want to get a sense of whether you think you've maybe captured more of a worst-case scenario on the cost front for the balance of the year. And then if you look at your key commodity and transportation cost pressures, any signs of them starting to level off at this point?

Hey, Rupesh. It's Kerry. Thanks for the question. Yeah, I think we've been prudent in our outlook for the year, you know, in terms of capturing what we're seeing in commodity and transportation and labor. You know, I think from that perspective, it's a prudent outlook. And then the second part of your question, if you don't mind repeating it.

Yeah. Have you started to see any relief on the commodity or transportation cost front at this point? Like, have they peaked and started to come in, or is it, you know, what type of environment are you seeing right now?

Yeah. I think it's still very fluid. I mean, I think from a transportation perspective, you know, there certainly is a demand and supply issue in terms of drivers and trucks relative to how strong the overall economy is. So I think that remains a fluid situation. And then from a commodity perspective, you know, the levels right now are still elevated relative to historical standards. So You know, we're doing the best we can to make sure we have enough commodities to supply our demand, and our demand remains strong. So, you know, the team's working hard and making sure that we're protected as well as we can be from a margin perspective.

Okay, great. And then maybe just a second question. Just in terms of EBITDA margins, so I know earlier this year you guys thought, you know, 16% EBITDA margins would be the baseline for the business. Now it seems like this year you'll probably end closer to, I think, around 14% for the full year. Is the expectation that now you'll grow off of this lower 14% base, or is there a potential for maybe a sharper rebound next year as you start to see more benefits from pricing flow through?

Yeah, look, I think it's too early to call 2022 right now. What I will say is, from a long-term perspective, the margin upside story is still very much intact here. We expect to grow next year. We expect significant benefit from the pricing and productivity that we're putting in place this year, which we're only capturing a partial year on. There'll be a meaningful carryover benefit that will be higher next year, and then we'll layer on incremental pricing and productivity next year. So 2022, from that perspective, will be much higher than 2021. And, you know, from a synergy capture perspective, There's at least $7 million of acquisition synergy that will drop in 2022 relative to this year. So from a demand and pricing and productivity and synergy perspective, we're in a very good position. I think the situation, you know, the variable is commodities, and we just need more data points on where those come in at as we get closer to the end of the year. But long term, the market story is still very strong.

Okay, great. Thank you. I'll pass it along.

Your next question is from the line of Michael Lavery from Piper Sandler. Your line is now open.

Thank you. Good morning. Good morning, Michael. First question, just wanted to understand how you think about the portfolio a little bit. And I guess it's sort of got two parts. First, just when you think about we're seeing emerging and expansion outpace your core geographies. You called out the foundation brands, part of that, and good health. On the just foundation versus power brands piece, I guess the first question is, would it be right to assume that that's precisely what you're aiming for and comfortable with in terms of how it evolves? You want these power brands to get more national, and if some of the foundation declines in the core are part of that, that That's a little bit all by design. So I guess one, is that right? And then two, to the extent that good health is another piece of it, can you just give us a sense of the trajectory you expect there, you know, how much you can stabilize or improve that and what that timing might look like?

Sure. Hey, thanks for the question. This is Dylan. I'll take that. Yeah, I think you're exactly right. You know, from a very broad perspective, our strategic direction is to grow our power brands, right? Those are the national brands, like Oats, like on the border, like Zaps. Those are the national brands that we can take on a national basis. You, you know, duly noted the growth and expansion and emerging of First of the category, 400 to 500 basis points, and that's a lot of the white space opportunity that we see that we're gaining as we go across the country into different geographic areas. And these aren't just new areas that we went into in the last two or three months or the last six or nine months. These are areas we've been in for a couple of years, but it takes a while to kind of get the engine going in some of those, especially as you're introducing new brands. And part of that process and part of our strategic process is While we are acquiring, in many cases, brands for their infrastructure, for their routes, for their operations, a lot of the strategic process there is to convert that over time from foundation to power, but it doesn't happen overnight. So we're very long-term oriented in our thinking. The good health that you cited is an area of opportunity for us. We've noted it before. We bought it in 2014. We did a lot of renovation. The brand grew. extraordinarily for at least four or five years. Last year during COVID, it kind of got a pause as people were prioritizing other brands. It took a hit. We're rebuilding it. If we look at like a 52-week and we compare it to a 12-week or a 13-week and then we compare it to the four weeks, we're seeing progress. We're doing a lot of work to renovate that brand. to really get into the insights behind what makes it what it is today as a brand and how we can build on that and how we can innovate around that. So there's a lot of work happening there, which is positive and will play out very long term. And as we look at our core And we know that foundation is a drag on the core. There are a lot of brands that we've acquired. And we're just taking the long view on trying to convert those. We're doing a lot of infrastructure change in our core markets. We're investing in distribution centers and people. And the bones, basically, the foundation of those operations, very much for the long term. And Part of that is converting from route salespeople to independent operator. That's well underway. So there's a lot of things that are happening that are improving that core. Of course, as you noted, the emerging expansion is growing as well. So we're starting to see trends improve. We're looking forward to it. As you'll note there, the Truco brand, which is a power brand, is exploding in our core. And so that will also contribute to sort of the overall long-term benefit of our brands in the core, too.

Okay, that's great. Really helpful color. And just one more on inflation. And sorry if it's just some of this math I haven't gotten a chance to play with enough, but you call out on slide 18 the 420 basis point headwind in 2Q, but then on slide 19 call out the 100 basis point headwind in 2H. And it looks like that's gross of price. And so I guess I'm just curious what headwinds have moderated, and am I reading that the right way, or is there some other way to reconcile those?

Yeah, we're comparing two different things, Mike. So on page 18, we're comparing Q2 of 2020 to Q2 of 2021, and then on page 19, we're comparing the first half of 21 to the second half of 21, right? So it's apples and oranges in terms of the periods we're comparing.

Yeah, sorry.

I missed that.

Okay. Thanks so much. Yep.

Your next question is from the line of Andrew Lazar from Barclays. Your line is now open.

This is Max on for Andrew. On a two-year CAGR basis, while your power brands continue to outpace the salty snack category, they did lag the category in corn markets. So somewhere in the last quarter, you called out that the good health brand was the contributor to this gap, and you've addressed your progress on that front. But could you walk us through any other key drivers of the gap, maybe provide a bit more color on the targeted set of actions to improve core market performance? You noted on the call earlier.

Yeah, sure.

Timeline for the recovery.

Sure, Max. This is Dylan again. And it's very similar to the answer or the explanation behind Michael's question around, you know, the core. Two-thirds of the gap between category growth and our growth in the core is attributable to foundation and good effort. That's a story that existed in the first quarter and still exists in the second quarter. And I think what we had indicated before is that it doesn't happen overnight, right? So we're really thinking what we want to do is we want to create the long-term view of what builds the best infrastructure for sales growth for the long term. So part of that, as we described, is renovating good health. I think we have where the 4- and 12-week numbers in good health are much better than the 52-week numbers were. So we start seeing that improve as we go through the year, and that will improve as we invest behind it from a marketing and a branding and an innovation perspective. But those things don't happen overnight, but we are definitely working on them. The foundation, as we migrate from foundation to power, right, as we make that transformation from taking something which may have been an acquired brand and we need to discontinue it and then we need to replace it on the shelf with a power brand and then we need to make the power brand take hold, a lot of that is heavily weighted to the core with those foundation brands, a little bit heavier than on a national basis. So that's, you know, it's an effort that's in place. And if we think about the independent operators, and we were moving from RSP to independent operator in our core markets, the infrastructure that we have to invest in in our core markets to have very similar positive systems in place to get products for manufacturing to the stores, a lot of that's happening in the core. One of the metrics that, I mean, I do know that we speak a lot about the core, but I think I think 100 basis points in the core for the quarter is relatively about $1.5 to $2 million of retail sales for the quarter. So it's not immaterial, and it's not something that we are not concentrating on, but it is not necessarily a very large percentage of our overall revenue that occurs in any given quarter.

Great. Thanks very much for the color. That's it for me.

Your next question is from the line of Bill Chappelle from Cooley Securities. Your line is now open. Good morning. Good morning.

Just want to talk a little bit more about, I know you're not giving guidance on 22, but you made strong statements about the recovery on margin in 22. And just maybe can you help us understand, is that just because you're going to have favorable comps and the pricing will have fully caught up? Do you expect commodities to ease or input costs to ease where you could actually have a cushion on 2019 levels? Or just try to understand how we should be looking at, especially that first half, if it's just more recovery, if things are finally catching up, or where you really have some tailwinds?

Yeah. Thanks for the question, Bill. So, you know, I think it's too early to call 22 right now. What I was speaking to was, though, the things that are within our control and that we're putting in place to really drive long-term margin growth. So, obviously, as we grow this business, we grow margins because we're leveraging fixed overhead. So, you know, we expect to grow next year, right, the volume trends. you know, and the customer wins and the top-line momentum is strong. So we have a good view to 2022 revenue growth. And then on top of that, the pricing and productivity we're putting in this year, we're not capturing 100% of it this year, so there's a big carryover benefit next year. And then we always layer on incremental pricing and productivity. So next year, from a pricing and productivity perspective, will be much higher than this year. And then we expect good pull through on synergy. So the variable that I noted earlier on the question was really commodities, right? So we have to see where commodities and delivery and labor inflation comes in at. It's too early to call, but The top line and the things we can control from a productivity and pricing perspective will be, I think, strong next year. And, you know, I think long-term the margin story is still very, very strong because at some point commodities and inflation will correct, right? And at that point in time, all the levers we're pulling right now in terms of driving a top line, driving pricing, driving productivity, those are sticky. And so, you know, margins will benefit from that. and especially as the commodity environment improves.

And, hey, Bill, this is Dylan Lissette, just coming a little bit over the top on that. Thanks for the question. You know, based on 25 years of being in the snack food industry and seeing commodities over the decades, I mean, we've been here before. We've seen, you know, huge increases in underlying commodity prices. We then, you know, kick into gear with price increases, with price-back architecture increases, waitouts, you know, rationalization of, you know, the marketing of the spends, the trade. You know, we come in with a whole bunch of our weapons to basically offset that. But there is a lag behind that. I think if anybody sat here and thought that, you know, something like, you know, a corn oil would be up 50%, 60%, 70%, 80%, it was very hard to see that, you know, coming for many of us. But we had the weapons in place. Once we put those weapons in place, once we take the waitouts and we take the pricing, You know, it does have a long-term sticky benefit that transcends, you know, not even just one year, but it transcends for a long time as, you know, as hopefully the inflation debates itself over time as it normally, you know, has in the past. Got it. Just to be clear, you see it completely a lag, not a price ceiling you have versus the peers.

Yeah, it's a lag.

Okay, perfect. Second, and Dylan, maybe you can help me a little bit. I get this question a lot on the geographic expansion. The core fundamental story is you're not a national brand. There's so much opportunity, obviously, on the border helps on the national footprint. So maybe can you help us understand where you're seeing You know, geographically, some of the biggest gains right now, you know, is it the Midwest? Is it the Southeast? You know, stuff like that. And then why that's happening and what gives you such confidence? Is it after we get to a certain share of 10% share in a market, then it just takes off? Or after we've been in three or four years, it really expands? Like, you've seen this. So I'm just trying to understand, you know, it's a big, big opportunity just how you kind of map it out. Yeah, and you nailed it. Thank you. You know, the areas of the southeast, I think we talked a little bit about earlier in the year where we, you know, purchased a third-party master distributor back in central Florida. We took that over. That area has been, you know, seen tremendous growth for us, you know, long-term. If you just think about the migration of people from the mid-Atlantic, the east coast, the northeast, that move into the southeast, you know, through the Carolinas, through Atlanta, you know, all of those southeast areas are really high growth areas for us where the brand transcends and the brand is known. And like you said, it doesn't happen overnight, but once the flywheel has started, it begins to occur and build upon itself. We're seeing tremendous growth in Texas. We're seeing tremendous growth in the Midwest, our expansion there into Chicago with the acquisition of the Vintners as just a starting point for us entering one of the largest salty snack markets in the country. And we spoke about going after large metropolitan areas with a lot of individuals, a lot of consumers for us to go after, that is an area that we see tremendous growth in. So if we were to pull up the IRI and the retail share data in Chicago and the Midwest, we would see significant growth there. And really into the West, like our C-store business that we've been really building into the West where there's just a tremendous amount of white space. Brands like us, brands like Zapps are seeing tremendous growth there. So As we look across the portfolio of our brands, that very large brand is seeing nice mid-single-digit growth. We're seeing Zaps grow at like 20-plus percent. We're seeing On the Border grow tremendously. So a lot of those power brands are just resonating with consumers, and we're backing up with the marketing spend, right? more on marketing in Q2 than, you know, that we did last year. And, you know, we're trying to think long-term about brand equity. And we know that that white space, we're very close to being the second largest platform of salty snacks in the United States from an IRI retail share perspective. And we're trying to invest behind that with a very long-term lens on growth and opportunity because we, you know, really do think that there's just an abundance of geographic areas that we can grow into. No, that's great, Keller. Thanks so much. Sorry for the long questions.

No, thank you. Your next question is from the line of Wendy Nicholson from CT Group. Your line is now open.

Abigail Lake on for Wendy. My first question is just on integration. So can you comment on how the integration of your recent acquisitions is going so far? And then how does this kind of impact when we'll have the operational bandwidth to take on another acquisition?

Yeah, let me start with the first half and then let Kerry jump in on the second half because he's intimately involved in our M&A and will be even more so in his new role post-October. But from an integration standpoint, if you really think about it, we acquired HK Anderson in November of 2020. We acquired On the Border in December of 2020. We acquired Bittner's in February of 2021. and we acquired Festida in June of 2021. So we've done a lot of acquiring, and we're very good as a team at integrating these acquisitions into our company. I'll start really quickly on HK. While you always have sort of a little bit of a dip in the beginning as you rationalize the portfolio, you rationalize the SKUs, now we are really starting to see that momentum pick up. And if you look at recent four- and 12-week data on that brand, it's growing tremendously as we sort of have cleaned up some of the legacy things that needed to be done there for long-term growth. On the border, we put a whole page on page 13. I think you can see a lot of the highlights there. We're doing everything right in our minds there. It's growing tremendously. It's growing in our core. It's growing in expansion. We're vertically integrating some of the production to take costs out. As I mentioned, we bought Testida, which will allow us to unlock even more future demand because that's a big issue, right? we have more demand for that brand than actually we could produce, and we're fixing that through vertical integration, as we mentioned with two lines coming on to Hanover in the next six months, one already in place. with the new opportunities in Birmingham to make that brand, and as well as the Fistita and what we're unlocking there in terms of new capacity. So that's going along quite well. On the Vintners, we're seeing great results. We acquired that in February. We've integrated the back end of the IT side of that business a few months later. We're continuing to see expansion of sales and share there. And we're continuing to look at ways that we can invest into that market even more to expand our sales operations there, just because I think that's a tremendous market for us. We're seeing really good results for our brands there. So I think overall our team's really good at it, and we continue to look at it. And I'll let Kerry speak maybe just a little bit about the future M&A and the bandwidth that exists there from the team too. Yeah, thanks, Dylan.

Yeah, look, I think the organization... position, the integration plans already laid out, the 30-, 60-, 100-day plans already laid out, and all that funnels through our PMO. And then we meet on a regular basis, you know, every month to make sure that we're on track and we're doing what we said we would do. So we've got the teams experience, the PMO office, the process. And I think we take great care to make sure there's consistency in execution, right? You know, the Truecro team that's running the business, that ran the business before acquisition is still running the business today, right? So we make sure that we don't do anything to miss execution from a sales and cost perspective. And then as I, you know, from a go-forward perspective, I mean, you know, I'm as pleased with our M&A pipeline today as I have ever been. I think there's a tremendous opportunity set there. of acquisitions for us down the line. And as I move into a COO role in October, I'll have even more bandwidth to help shape and drive that M&A opportunity. And when things do happen, make sure we're integrating those in the best possible way.

Yeah, that's great. And you kind of segwayed into my one follow-up question. We were just wondering what kind of prompted the changes in the management structure and if there are any other organizational changes that you think you need to make to kind of maximize the new changes.

Yeah, Abigail, this is Dylan. I'll take that. Thank you. First of all, I'd say we're really excited about the changes that we've announced. And, you know, if you kind of go back in the the history of time slowly as we've built out our executive leadership team. We took on Kevin Powers in our investor relations, doing a fantastic job there. We recently hired Teresa Shea as our general counsel, onboarding and inboarding those functions so that they're very closely connected to the team. We promoted Jim Spanagle into a chief people officer role. And more importantly, and more near term coming up in October, You know, Kerry and I have worked together since 2016, you know, literally every single day on so many aspects of our business, right? We acquired Golden Flake in 2016. We acquired Invention in 2017. We acquired the ConAgra DSD Sachs in 2019. We acquired Truco. I mean, we've done a lot of things together to build value for the company, and he is a fantastic entrepreneur. individual with an immense amount of knowledge, especially in value creation and project management and M&A and treasury activities. So we're very excited to just unlock his focus on those areas of our business as we go forward, which are going to be very important and always are. So also very excited that Ajay, who's been here for four years, since 2017, again, has a fantastic background, public company background, accounting background, finance background, Chobani, PepsiCo, and has been learning and has been an integral part, really, of all of those acquisitions since he joined, integrating them, standing up our ERP, overseeing and running our IT department as well. So Ajay is a fantastic lead-in for that. It's really all sort of part of a an orderly, natural progression. And so, you know, as I sort of look forward into October, into the latter half of 2021 and preparing for 2022, it just feels like we've got a really good team in place that's putting people in the right places with the best outcomes, and we really look forward to what that means for the business going forward.

That sounds great. Thank you.

Your next question is from the line of Robert Muskell from Credit Suisse. Your line is now open.

Thanks for the question. My perception is that big snack companies have not had to cut their guidance as meaningfully as you have. Kellogg, Mondelez, Frito-Lay and the like. And you're not alone in terms of having commodity cost inflation. So I guess my question is, like, do you think that your, you know, the size of the business in relation to the big ones is part of the reason for that difference? Is it, is it a little more expensive for you to get access to freight routes and, and are there, are there lacks of, of scale and purchasing? Because it, this is, this is a big cut and, um, Maybe the other companies are on their way to doing the same thing, but I'm just wondering if scale makes a difference here.

Yeah, Rob, good question. It's hard for us to comment on what other companies do or don't do. I mean, certainly scale, we've always said scale is tremendously important in snacking. So it's possible there's a scale benefit there. But, you know, I think we're executing well. I think what we've seen in terms of, I mean, the Q2 supply chain, honestly, is a different animal than the Q1 supply chain. As COVID cases dropped and the economy opened up, there was a huge spike in demand across all inputs, right? So, you know, transportation and delivery, you know, spiked. You've got labor spikes. So we're having to pay people more money to support the demand. We're having to pay more for freight in and freight out, right? And freight in is part of the pressure on commodities. We have to pay more for delivery and fuel in order to get the ingredients to make sure we can support demand. So, you know, the pressures we're seeing I think are unprecedented. I think we're doing a good job executing, but tough for me to compare ourselves to other people. Okay.

And I know it's too early to look at 2022, but I guess two questions there. Are you saying that the pricing actions that you've taken now are fully cover the inflation that you've seen so far and therefore you have a chance to get back to your prior margins in the first half of next year because i think you also there's more pricing that needs to be taken so does that mean you're also are you still trying to catch up in the first half of 2022 uh well depends on it obviously depends on the inflationary environment we see next year i the pricing

The simple carryover benefit, the run rate exiting this year obviously is going to be higher than what will actually hit our P&L this year. So the carryover benefit is material, and then we will put incremental steps of pricing on top of that. And productivity is part of it, too. as you know, our productivity is going from 1% to 2%, and that'll increase meaningfully next year as well. So the total dollars dropping to the P&L next year in pricing and productivity will be meaningfully higher in 2022 than they are in 2021. And, you know, obviously the variable then is what inflation is doing.

Okay. And do you have any kind of – way of helping us know whether you're still on track with your original core business profitability, EBITDA outlook that you presented pre-SPAC?

I would say, you know, obviously the, you know, you can see our margins, you know, are in the 14% area based on the most recent guide. But long-term, the margin story is unchanged, in my opinion, right? Because of all the things I mentioned before, you know, from a revenue growth, pricing, productivity, and then, you know, we're just in an unprecedented inflationary environment. Commodities and inflation will correct, right? We saw a correct, you know, back in, you know, 08, 09. And when that happens, you know, the top line usually continues to grow and you have a, you know, you have a really nice benefit on a margin basis in terms of a jump. So long-term, you know, we're still as bullish as we ever were on the future margin opportunity. It's just, you know, we're experiencing unprecedented inflation and, you know, we do see it as transitory long-term, but it's hard to gauge the timing.

Okay. Thank you.

Your last question is from the line of Ben Bienvenu from Stephens. Your line is now open.

Thanks for me. The first on pricing and kind of piggybacking on Rob's question, you know, you're taking pricing back after this year. It sounds like there'll be some more pricing actions early next year. Does anything about that impede your ability to grow your brands long term? I suspect not because it's a relative dynamic and others are raising price as well. But how do you think about demand elasticities that you expect to encounter as you enter this higher pricing environment?

Yeah, thank you, Ben. You know, the snacking category is a fantastic category to be in, right? It continues to grow, as you know, year in and year out, and it just has for such a long time. The ability to take pricing, we are in a very rational category. There is a leader in the category with a large percentage share of the category. It is not a path to the lowest price. It is a rational category with rational pricing. And as we take the pricing, we have to be very cognizant of what that pricing is. We have to think long-term. We don't want to do things that are only short-term in nature that give us a one-quarter benefit, right? So we're very cognizant of what the changes are amongst our competition and We are able to quickly follow in most cases and make the changes to our portfolio as well. This year, I think we've touched 70% to 80% of the SKUs in our portfolio with pricing and price-back architecture. And what we've seen is that being in a rational category, that that's a long-term, you know, benefit. It does not go backwards, you know, a year or two from now. And what we have seen, and I mentioned it earlier in, you know, 2008, 2009, is As the commodity pressures update and normalize over long-term trends, we have a lot of stickiness in our pricing that helps us and carries us through. I don't think anybody could have predicted the amount of inflation that exists from corn oils to fuel, supply issues around petroleum-based products like film that existed out there. But we've got a 100-year history of working through this. We have a great team who is very dedicated. adept at making the best of even challenging situations, and we're going to continue to try to drive long-term value for the brand via pricing, via price-back architecture, and continue to invest in the brand. So long-term, I think it'll be beneficial to us long-term and sticky in nature for our overall brand equity.

Okay, makes sense. My second question is appreciating the fact that it's too early to make a call on fiscal 22 around the the cost outlook. If we think about the back half guidance that you provided an update for this morning, how much certainty versus uncertainty is embedded in that new outlook? Meaning if we get, you know, material moves higher and say corn oil in the back half of the year, how exposed to that would you be? And maybe to the extent you can talk about the buckets of cost where you are more or less exposed, that would be helpful.

yeah i i think the guidance we've given is prudent and and we're mostly covered on commodities for the year so um you know i think from that perspective um you know we're protected okay great thanks that's all the questions that we had and with that this concludes today's conference call thank you for attending you may now disconnect