Utz Brands Inc Class A Common Stock

Ladies and gentlemen, thank you for standing by and welcome to the Utz Brands, Inc. Second Quarter 2023 Earnings Call. I would now like to turn the call over to Kevin Powers, Senior Vice President, Investor Relations.

Please go ahead. Good morning, and thank you for joining us today.

On the call today are Howard Friedman, Chief Executive Officer, Ajay Kataria, Chief Financial Officer, and Carrie DeVore, Chief Operating Officer. Howard and Ajay will make prepared comments this morning, and all three will be available to answer questions during our live Q&A session. Please note that some of our comments today will contain forward-looking statements based on our current view of our business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Howard, I just have a few housekeeping items to review. Today, we will review certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on our investor relations website. And now I'd like to turn the call over to Howard.

Thank you, Kevin, and good morning, everyone. It's great to be here today. I'll begin our discussion this morning with an overview of our second quarter results and consumption trends, and then Ajay will discuss our financial performance in more detail. Following our prepared remarks, we will open the call for questions. Starting with our second quarter results, we delivered another quarter of strong organic net sales growth as we execute against our growth strategies and as our salty snack category trends remain resilient. In addition, our margins continue to recover through our pricing actions and productivity programs, which enable us to again raise our full-year adjusted EBITDA outlook. In the quarter, our organic net sales increased 4.3%, even as we lapped 13.6% comparable growth in the prior year. As we expected, our sales growth was led by pricing, with our volume trends improving relative to the first quarter, led by our branded volumes, which increased in the second quarter. As a reminder, our non-branded volumes this year are being proactively impacted by our aggressive actions to better optimize our product mix and trim non-core and lower margin private label and partner brands. As we move throughout the second half of the year, through a combination of distribution gains, new product innovation, increased marketing spending, and lapping prior year SKU rationalization, we expect our total sales volume momentum to build each quarter. From a consumption perspective, in the quarter, our power brand momentum continued and increased 10% on top of 18% growth last year, which was our seventh consecutive quarter of double-digit growth, leading to share gains for Boulder Canyon, Zafs, and On the Border. Our adjusted EBITDA margin recovery continued with our second consecutive quarter of year-over-year expansion, led by prior year pricing execution, higher levels of productivity, and portfolio optimization. In addition, during the quarter we made progress against our network optimization program to support more profitable growth and better balance capacity across our network as we closed our manufacturing operations in Birmingham, Alabama, and we continued to in-source production into our UTZ plans from co-manufacturers. Briefly touching on our second quarter financial results, total net sales increased 3.6%, adjusted gross profit increased 1%, and adjusted EBITDA increased 7%. While adjusted EBITDA margins expanded, led by accelerating productivity benefits across logistics and lower delivery costs, our adjusted gross margins declined more than we expected. This was largely due to transitory higher inbound freight and potato costs to support growth in the West and a transitory volume deleverage due to our network optimization program. These headwinds are behind us, and we can continue to expect for gross margins to improve in the second half of the year, and Ajay will provide more color during his comments. Looking at our retail consumption trends in the quarter, our retail sales increased 9% versus the salty snack category growth of 12%. Our three largest brands, Utz, On the Border, and Zapps, which combined represent about three-quarters of our retail sales, again delivered double-digit growth. Our flagship Utz brand grew 7%, even as we left 25% growth in the prior year, driven by potato chip growth of 15%, marking the eighth consecutive quarter of double-digit growth for Utz potato chips. On the Border tortilla chip consumption rebounded nicely, increasing 16% as we lost the prior year increased merchandising support and large distribution gains in the mass channel. In addition, on the border was particularly strong within the grocery channel in our core markets, with growth of over 40%. Zapp's consumption remained robust and increased 35% in the quarter, primarily driven by sustained momentum of our new flavored pretzel innovation. Our seasoned pretzels continue to drive the overall pretzel subcategory, And we recently won the Best Pretzel Award in People Magazine's Food Awards 2023 edition, earning a rare perfect rating from testers. This follows our Self Magazine Pantry Award as the winner for Best Pretzel Sticks, which was announced on the NBC Today show. When you look across our consumption trends during the quarter, consistent with what I mentioned earlier, our volume trends continue to improve with each successive month as we work through our lapse from last year. As a reminder, we were still lapping significant activity in the mass channel through April due to promotional activity that did not repeat in 2023. In addition, we secured new distribution gains, primarily in the grocery and mass channels, that began in May, which helped drive volume momentum in the quarter, and we expect for these trends to continue in the second half of the year. Moving to our key salty subcategories, we gained share across potato chips and pretzels, and our tortilla chip growth improved significantly relative to our first quarter performance, driven by On the Border. Potato chip growth was led by Utz, with growth across all major channels and over 50% growth for Boulder Canyon, led by distribution gains at key strategic retailers in the grocery channel. Pork rinds and cheese remain focus areas. and while they are not a big portion of our sales, we are intent on turning these businesses back to growth. For pork rinds, our performance is improving as we make price pack architecture changes and introduce new packaging. In cheese snacks, our sales growth was primarily impacted by lapping incremental programming in the mass channel last year that did not repeat. From a geography perspective, we are making progress penetrating our white space opportunities as our double-digit consumption momentum continued in our expansion regions, driven by the Utz brand, Zapps, and Boulder Canyon, all supported by distribution gains. Our performance in the core was mixed, largely due to lapping very strong Utz brand growth in the prior year, Golden Flake softness, particularly in potato chips, and portfolio optimization actions within our R.W. Garcia brand. That said, we delivered growth across On the Border, Zapps, and Boulder Canyon, and we expect our core performance relative to the category to improve in the second half of the year. Shifting to our Better for You segment of salty snacks, our consumption of the Natural Channel increased by nearly 20% in the second quarter, significantly outpacing category growth of 10%. Our primary Better for You brand in the Natural Channel is Boulder Canyon. and we maintain the number three ranking in the salty snack category as measured by spins, growing 28% in the quarter, which was triple the category growth rate. Boulder Canyon has now delivered 22 consecutive periods of double-digit growth in spins and is the number two potato chip brand in the natural channel, with our avocado oil chip now ranked number one in terms of dollar sales. Consistent with our growth strategies as we sustain strength across our power brands, in the second half of the year, We remain committed to thoughtfully increasing our brand marketing investments. Our initial primary areas of focus will be on enhancing our package design with strategic design partners first focused on us, Zapps, and on the border. Elevating our omnichannel and e-commerce strategy by investing in new capabilities, integrating deeper into the business, and increasing retail media advertising. and expanding our marketing capabilities with incremental investment and agency support to build brand awareness on our power brands. In addition, we are capitalizing on trend right innovation. As I mentioned earlier, we've had great success with our Zapp's flavored pretzel launch, and this year we've added more on-trend flavors to our Utz brand portfolio. I'm especially pleased with the introduction of Utz Mike's hot honey chips. Hot and spicy is now the number one flavor in salty snacks, and is growing nearly twice the rate of the category. And our Utz Mike's Hot Honey sales are already four times higher than our previously best Utz limited time offer. Our weekly velocities are well ahead of expectations and are already approaching one of our top selling items, honey barbecue chips. As we've been supporting this launch with retail activation and marketing support, driving nearly 75 million earned media impressions. Given the success of the launch, I'm pleased to announce that Mike's Hot Honey Chips has secured placement in our long-term assortment and reflects the strength in our innovation approach. Wrapping up, I'm pleased with our progress this year as we've been building our capabilities, delivering sustained results in a dynamic environment, and are well positioned for a strong second half of 2023. I'm confident that we will drive continued organic net sales growth with sales volume momentum building throughout the year. and will be supported by increased brand investment focused on our power brands. Critically, these investments will be funded by our productivity and revenue management initiatives, which remain on track, and will also help to expand gross and adjusted EBITDA margins in the second half of the year. Finally, we expect to deliver on our commitments and generate stronger cash flow to reduce balance sheet leverage to unlock further financial flexibility down the road. Now, I'd like to turn the call over to Ajay. Thanks, Jay.

Thank you, Howard, and good morning, everyone. Our second quarter results reflect the resilience of our salty snack category. Despite again lapping significant growth in the prior year, we delivered organic growth of 4.3% while proactively optimizing our portfolio. In addition, we expanded adjusted EBITDA margin as we are executing our margin enhancing programs. I would like to thank the entire arts team for their contributions, and we remain well positioned for a strong 2023. Turning to our second quarter results in more detail, net sales was in line with our expectations and increased 3.6% to $362.9 million. Adjusted gross margin declined 100 basis points to 35%, and this includes an approximate 70 basis points of negative impact from our IO conversions. Excluding this impact, our adjusted gross margins contracted about 30 basis points versus last year. As Howard mentioned earlier, the gross margin decline in the quarter was larger than we expected primarily for two reasons. First, last year's potato crop yields were lower than normal in the western part of the country that supply our Washington and Arizona plants. Given the growth we are seeing in this region, we decided to source more potatoes from the Midwest to support production in these plants. This drove both inbound freight costs and potato costs higher, but was temporary in nature as we have now transitioned into a new crop harvest out west and are fully sourced. During the second quarter, we experienced larger-than-expected transitory volume deleverage associated with our network optimization program. As a reminder, we announced the closure of our Birmingham plant in April. We ramped down production in the facility quicker than we originally anticipated to shift production to more efficient plants in our network. As a result, we experienced higher-than-expected stranded costs. The transition is now complete. Importantly, these transitory impacts are behind us and our network optimization efforts combined with the insourcing of production from co-manufacturers and stepped up productivity benefit and sales volumes will drive gross margin expansion in the second half of the year. For context, the month of April was the lowest gross margin month in the quarter and our margins improved across each successive month in the quarter. Pulling this all together, our gross margin expectations in the second half of the year remain unchanged, and we continue to expect year-over-year expansion. Adjusted SD&A expense declined 2.6% to $81.7 million, and improved by 144 basis points as a percent of sales. As a reminder, our outbound freight, which is the vast majority of our freight expense given our DST operations, resides within SDN expense and not cost of goods sold. As a result, the benefits from improved freight market conditions combined with our productivity initiatives focused on logistics helped to drive strong expense leverage in the quarter. Finally, our adjusted EBITDA increased by 7.1% to $45.2 million, or 12.5% as a percent of net sales. Adjusted net income of $18.8 million and adjusted EPS of 13 cents per share were both in line with last year, largely due to higher interest expense. Moving to the P&L for some additional details starting with net sales. Our net sales growth in the quarter was 3.6%, driven by organic growth of 4.3%. In addition, Total net sales were impacted from the conversion of company-owned RSP routes to independent operators, which reduced the net sales growth by 0.7%. Our organic net sales growth was led by price realization of 6%, partially offset by lower volume mix of 1.7%, as we expected. In addition, Our SKU rationalization initiatives are ongoing as we aggressively optimize low-margin SKUs to improve portfolio mix, and we unlock manufacturing capacity to focus on producing our branded business. This program began late into the first quarter of 2022, and through a wraparound impact from last year's actions combined with the new actions this year, our volume was proactively impacted by approximately 350 basis points in the second quarter. When we adjust for proactive skew rationalization actions, we estimate that our volume mix grew 1.8% in the quarter led by our power brands. In the second quarter, adjusted EBITDA increased 7.1% and margins expanded 40 basis points to 12.5% of sales. which, as Howard mentioned, was our second consecutive quarter of margin expansion. Decomposing the change in the adjusted EBITDA margin for the quarter, positive drivers include a price benefit of 6%, productivity improvements of 2.7%, and volume mix benefit of 70 basis points, largely driven by favorable sales mix from our SKU rationalization actions. Partially offsetting these positive drivers were the unfavorable margin impact of 7.8%, driven by commodity and labor inflation and selling and administrative expense impact of 1%, due to our continued investments in marketing, people, selling infrastructure, and supply chain capabilities to support our growth. Our second quarter adjusted EBITDA margin performance reflects good execution against our primary margin enhancing initiatives. Our pricing actions last year are countering inflation while we continue to enhance our price pack architecture program and optimize our trade spend leveraging improved capabilities. Our aggressive skew rationalization actions are providing a mixed benefit to margins while we free up capacity in our plans and distribution network to help us service our higher margin power brand business. Our productivity programs are on track and we continue to expect to deliver productivity of approximately 4% in 2023 as a percent of COGS. For example, our integrated business management capabilities are starting to deliver a more balanced demand and supply plan, which is helping to drive higher levels of productivity. Lastly, we are progressing our manufacturing network optimization program while also insourcing volume where we have capacity. As we first announced in April, we completed the closure of our manufacturing operation in Birmingham, Alabama, and we have been shifting production to our facilities in Kings Mountain, North Carolina and Hanover, Pennsylvania. In connection with the closure, we recorded an expense of $8.9 million in the second quarter, which includes $1.3 million in severance and related costs, and $7.6 million of fixed asset impairments. Now turning to cash flow and balance sheet. Beginning with cash flow consistent with normal seasonality, Cash flow used in operations in the first half of the year was $4.3 million. The second quarter improvement reflects our cross-functional efforts to improve our cash conversion cycle as we have made foundational improvements across our operations. We continue to expect progress on our net leverage reduction in the back half of the fiscal year as we drive stronger free cash flow conversion, which remains a major priority for the company. Capital expenditures stepped up in the second quarter and were $30.2 million in the first half of fiscal 2023, primarily related to supporting our productivity programs and our manufacturing expansion in Kings Mountain. Finishing with the balance sheet, net debt at quarter end was $913.3 million, or 5.1 times trailing 12 months normalized adjusted EBITDA of $177.4 million. As I stated earlier, our first half is a heavier use of cash, and we would expect progress on our net leverage reduction in the back half of the fiscal year. Now turning to our full-year outlook for fiscal 2023. Today, we reaffirmed our net sales growth outlook and increased our adjusted EBITDA growth outlook. As we consider our first half performance and look ahead to the remainder of the year, our outlook is unchanged for total net sales growth of 3% to 5% and organic net sales growth of 4% to 6%. Our shift to independent operators is expected to impact our total net sales growth by approximately 1%, and price is expected to be the largest contributor to growth, with volume mix consistent with last year assuming a 3% impact to growth from our skew rationalization actions. From a profitability perspective, we continue to expect to deliver gross margin expansion in 2023, although less than our previous expectations given the transitory impacts in the second quarter. Higher potato sourcing costs were offset by favorability in the outbound freight rates, which is recorded in SD&A expense. While this shifts P&L geography for inflation, our total gross input cost inflation outlook of high single digits is unchanged. Pulling it all together, we continue to expect adjusted EBITDA margin expansion this year, but the majority of it will now come from SD&A expense leverage. And given stronger than expected SD&A expense leverage and better productivity benefits in our delivery costs, we are raising our adjusted EBITDA growth outlook from 7% to 10% to 8% to 11%. Moving down the P&L, we continue to expect our full-year 2023 adjusted effective tax rate to be approximately 20% to 22% and interest expense of approximately $55 million and capital investments of between $50 to $55 million, primarily to support manufacturing capacity expansion. Finally, we expect stronger free cash flow generation in the second half of the year from higher profits, normal seasonality, and our working capital initiatives. Our capital priorities remain consistent, and we expect to reduce leverage in fiscal 2023 by half a turn and end the year below 4.5 times normalized adjusted EBITDA. In closing, We are confident in delivering another year of strong operating performance in 2023 with continued top line momentum, optimization of our cost structure, and expansion in margins while we invest in our capabilities. And now, operator, we would like to open the call for questions.

The floor is now open for your questions. To ask a question this time, please press star one on your telephone keypad. If at any point you'd like to withdraw from the queue, please press star one again. We'll now take a moment to compile our roster. Our first question comes from the line of Andrew Lazar from Barclays. Please go ahead.

Great. Thanks. Good morning, Howard and Ajay. Good morning, Andrew. First off, you mentioned that you're still looking for flat volumes on a year-over-year basis for the full year. And I guess this would suggest a pivot to a year-over-year volume growth in the back half. Just want to make sure I have that right. And if so, what are the key drivers, I guess, to delivering volume growth in the second half? And I guess what gives you that confidence also in light of you know, a little bit of, I guess, a broader food industry malaise when it comes to sort of volume recovery.

Hey, Andrew. It's Howard. I appreciate the question. You know, first of all, I would point out that one of the nice things that we've been seeing across our second quarter is a sequential improvement in our volumes overall, which is largely what we had expected as we were building through the quarter. I think if you turn to the back half, there are a couple of areas where I think that give us confidence. First, our drags actually become less impactful. We're seeing that in the second quarter and we'll see that continue. Drags like our SKU rationalization gets less of a net taker on our trend as we go into Q3 and Q4. We are seeing some of our brands like Golden Flake that are actually, the trends are improving and we're seeing better momentum both in our mass channel, which we talked a lot about last year as being a challenge, and our club business also as we move through some of our prior year laps. Second, we are experiencing incremental distribution gains specifically in mass and grocery. They really kind of started in May of this year and we're starting to see the benefits of those drives. You know, third is one of the areas that we're continuing to work on is the multi-pack variety pack segment of the, of the category, which is a port, a piece where the consumer interest is high as is the retailer opportunity. We've improved our packaging structure. We've added incremental assortment and we've got our price points in a place where we would have expected them to remain competitive the rest of the year. And then the last thing is incremental sales activity, but also we'll start to step up our marketing investment. I talked earlier in our journey together that being thoughtful about how we start to increase marketing year on year really starts to step up as we build confidence in both our capability to actually deliver the message, but also the partnerships with some of our customers. So all those things together, I think, roll up to a positive back half volume trend. Great.

Can you talk a bit about what you're seeing, I guess, in the competitive environment in salty snacks at the moment? I guess some players have finally sort of solved some of their own capacity constraints from a year ago and maybe are back to more normal levels of sort of merchandising and in-market activity. So I'm just trying to get a sense for that and sort of where your merchandising levels stand currently and where you think they either need to be if that's different from where they are sort of right now.

Yeah, and I would say overall, really not a lot of surprises. One of the great things about our category, obviously, is the consumer's resilience. The customer likes to sell it. And our competitors are all typically very rational, even as they have cycled back into better supply chains. So, you know, from our perspective, it's largely what we would have expected to see. You're right that year on year, it is the promotional environments higher. But I would just point to, if you went back to 2019, overall promotional activity in terms of both frequency and depth, so how often and how deep do we go on pricing, we're still as a category well below those levels as we turn both currently and we would expect into the future. Obviously, the biggest issue for us will always be around maintaining our price gaps where we expect them to be. across all of our key PPGs. And as of right now, we only make adjustments if we need to. But right now, we feel pretty comfortable with where we are. Thanks so much. Thank you.

Our next question comes from the line of Rupesh Parikh from Oppenheimer. Please go ahead.

Good morning, and thanks for taking my question. So I just want to dive deeper into gross margins. So I just want to get a sense of your confidence in the second half gross margin expansion. And if there's anything to think about from a cadence perspective between Q3 and Q4.

Hey, Rupesh, I'll take that. This is Ajay. So really, second half gross margins, if you look at second quarter, what we are expecting is headwinds of second quarter, which were temporary in nature, are behind us. And the tailwinds we experienced in the second quarter will get stronger into the second half. To elaborate on that a little bit, We experienced some crop issues and our demand went up for Boulder Canyon out west and we shipped potatoes from the Midwest. So that was temporary. We are into the new crop in the second half. That's behind us. And we talked about in our prepared remarks about Birmingham plant closure a little sooner than we expected as well. So all that is behind us from a headwind standpoint. And then from a tailwind standpoint, our volumes are trending up, and we show those trends, and you can see that in the retail data. And our margin mix is improving as we work through SKU rationalization program. That's been coming through. It's gonna continue into the second half. And our productivity program has really ramped up. We are close to 4% of COGS. That's our new baseline. And our actions around network optimization, insourcing of production from co-manufacturers where we have capacity. All of those things are driving cost out in our plants and our logistics network. And finally, as these volumes ramp up, plants are seeing better leverage on fixed costs as well. So all that will continue and actually step up. We'll continue to make investments in the business. We did so in the second quarter. We'll do some investments in the second half as well. But these positive drivers and the lack of negatives gives me a lot of confidence we'll step up margins.

Great. Thank you. And then maybe one follow-up question. So one of your competitors called out some channel shifting out there. Just curious if you're seeing consumer shift to dollar or anything else of note during the quarter.

Hey, Ramesh. It's Howard. I'll take that. Look, I think... We remain very fortunate in our category. The consumer's overall price outlay for the products that they buy from us tends to be relatively small. So we're an affordable indulgence. That said, one of the things we always see in this cycle is consumers will start to value shop. So for some consumers, that's an absolute price point. And they may go to more EDLP classes of trade. And in some cases, they're looking for lowest price based on volume, and they'll move up the price ladder. So we do see consumers doing a little bit more shopping and spending a little bit more time on both ends of the price ladder, which, again, not terribly surprising in any given market. I call it relatively normal. Our assortment meets all of the demands from the consumer, and we feel pretty good that we will continue to have the offerings that they are going to find wherever they shop. Great. Thank you. Thank you. Thank you.

Our next question comes from the line of Michael Lavery from Piper Sandler. Please go ahead.

Thank you. Good morning. Hey, Mike. So, Howard, you're around nine months in and came in with good momentum, so there wasn't a broken business to fix. But as you have settled in now, what, if any, changes do you see as appropriate? And maybe specifically any shifts in marketing approach as well?

Thanks for the question, Mike. So, yes, and I think I am probably the most grateful that the business was on a good footing when I got here and that it remains so today. You know, look, I think there are a couple of areas that I continue to look at and observe and believe that we can accelerate on the foundation that was established in the previous basically century of growth. The first is increasing our marketing spending thoughtfully, and that is largely from where I sit, building brands both in where consumers want to shop, whether it be retail media or where they want to receive the message, which is primarily more in digital and performance-based. So we will start to increase in those two domains over time. The second thing is in order to do that, you need to really understand your consumer and You need to understand the analytic rationale of what they're doing and making sure what you're doing is working. And probably the biggest change that I've made was the introduction of Jen Benz to the company in innovation insights analytics. She brings a tremendous amount of capability in building that perspective for this company so that we can continue to invest where we want to be. And then the third area is I think that we are getting to the point where As we think about expansion, as we think about the role we play with consumers, you know, we have businesses that consumers are very excited about in Zaps and Boulder Canyon and Utz, and making sure that those businesses get the appropriate level of attention while we manage the rest of our portfolio over time. I'd be remiss to not mention Boulder Canyon as well. But making sure that we're driving our drivers and being thoughtful about where we focus our time and energy. I think those are the big themes I would offer. No, that's great.

And the marketing spend especially segues perfectly into the other question I had on just the cost savings opportunity. I think you've mentioned in the past that it looked like there was even a little bit more of an opportunity than you might have first imagined. You've got the accelerating productivity over the last few years at now this near 4% of COGS run rate in 2023. Could there even be more upside to that? Is that kind of the right baseline to think about as an ordinary year? Maybe what's ahead in terms of if productivity can step up any further to help fund some of the marketing initiatives as well?

Yeah, hey, I'll take that. This is Ajay. So you're correct. I think we are very pleased that our productivity program has stepped up and it's running at about 4% of COGS right now. I think that's our new baseline for at least a few more quarters, definitely for 2024. And with 4%, it should generate higher dollars in the next year. What gives us comfort that this program is going to stay elevated is the type of opportunity that we are seeing in several areas. So you've seen us do some network optimization work in sourcing there is more to do there. Procurement is an area which we are just starting to explore, you know, huge opportunity for us, and we are doing some more work in that area. The team has built out the capabilities now there. They're just, you know, getting started with the work stream itself. And logistics, plants, you know, all the opportunities within the boxes and within that network, that will continue. So, you know, Huge, huge amount of work going on in that area. Lots of cost out opportunities. I will shamelessly do a plug. We'll talk a lot more about it on December 15th when we meet for our investor day. So, you know, more to discuss on that.

Okay, great. Thanks so much.

Our next question comes from the line of Peter Galbo from Bank of America. Please go ahead.

Hey, good morning, guys. Good morning. Jay, maybe just a quick clarification. You talked about improving free cash flow in the back half, but did you give an actual updated target on free cash flow for the year?

We did not. We are still at the same target. I think we spent about $50 million for the year.

Okay, cool, cool. And then, Howard, just kind of going back to Andrew's question around – maybe less so around branded competitors, but more so focused on potato chips. We've seen a pretty meaningful uptick in the private label penetration on potato chips in particular. Understanding that you have volume growth baked in, just how are you thinking about that dynamic? Again, it's off of a low base, but it has been a notable uptick here over the past couple of quarters. So just the interplay you're seeing between branded and private label maybe in that subcategory.

Yeah, so I appreciate the question, Pete. Look, I think it's very normal in this environment that we start to see private label come back into the conversation. They play an important role for retailers. We are fortunate that they're still only about 5% of the overall category, so a relatively lower base to build off of, but again, not terribly surprised to see them perform, to be in the market. I think for us, it actually highlights the need for us to continue to do brand building and innovation. When we launch something like a Mike's Hot Honey, there isn't an obvious corresponding competitive item, so you're competing on value as opposed to price. And so that's where I think we tend to stand out. I feel good about where our potato chip portfolio is overall. Us is doing, continues to perform. We obviously had a very heavy lap to do versus prior year in our core. But overall, you know, we continue to be pretty comfortable with where we are, and I think ultimately our path to success in that subcat and all of the others is brand building, driving consumer demand and value beyond just price.

Great. Thanks very much, guys. Thank you. Our next question comes from Jim Solera from Stephen Think.

Please go ahead.

Hi, guys. Thanks for taking my question. If I look at the geographic distribution, it looks like Powell Brands did particularly well across your expansion geography. What would it take to lift the performance in the core market so that we see that kind of more in line with expansion?

Yeah, Jim, I appreciate the question. It's a conversation that we continue to have to make sure that we are growing our core, we're holding in our core, and then obviously let expansion be our net growth driver for market share. And so when The core does not perform quite the way we would have expected it to. It's an area that we spend quite a bit of time. I'd offer you a couple of things. First, part of the challenges we've had in the core more recently are really around our foundation brands versus our power brands. And so as those brands fulfill their role in the portfolio, we obviously have a little bit of a drag there that can become a little bit more challenging. And those are things like we've got to get Golden Flake right-footed. We're seeing good progress in the activities that we have. But as Golden Flake trends improve, that should naturally start to help the core. More importantly, the core is the place where our marketing and innovation should be the most impactful because we're not introducing the brand and we're not trying to build brand awareness. We're trying to drive ultimately interest and consumption. So as we continue to invest in the brands, we would expect that our power brands would naturally lift even more than they even would in our expansion geographies. Second is our hybrid DSD, DTW model. We are continuing to work those two businesses together, and we are very happy with how that has been unfolding, but doing more collaboration between those two pieces of our route to market I think will also help And then the last thing, you know, ultimately for us is as we do start to lap SKU rationalization, some other things, we do have greater time and energy to focus to make sure that our power brands fulfill their role while our foundation brands fulfill theirs.

Great. That's helpful. And then maybe to follow up on that, you guys talked about Mike Todd Honey, and I know the Zaps Flavin' Pretzels as well have been very well received. Can you just talk about... the runway for innovation, um, using those to kind of help springboard the portfolio, uh, in whether it's new distribution wins or, or helping, uh, propel, you know, the core market with those additive skews.

Yeah. So look, I'm very happy with what Mike's hot honey and zaps both have in common. It has been being on having on-trend flavors and being trend, right. You know, spicy is a, an area of the category at the moment that is growing quite quickly. And I think for us, an area where I think we can do, we can continue to innovate, finding on-trend flavors, partnering with them. We know we make a great tasting chip and we know consumers like the product we deliver. And so driving some interest there is one place in our innovation strategy that I think you'll see more of us, more from us as we go forward. You know, second is, to be honest, I think at times we need to be a little bit more focused on some of the innovation that we do and really putting our shoulder forward into a couple of bigger ideas. And that I think is a good example of what made Mike's Hot successful. We had better points of disruption, we had better display activity, we had better execution, and we were therefore able to support it with marketing. And that formula works for us. So we'll continue to drive more of that as we go forward. And then ultimately rotating those items into our permanent assortment should be a place where if we have an item, we're excited about it, the consumer loves it, making sure that it stays in our fleet of SKUs to be able to keep consumer interest and repeat is an area where we also, I think, are going to get better at. And I think Mike's is a good example of we started out, put our toe in the water, on-trend flavor, worked really, really well, incremental for us and the consumer. And so now we're going to bring it in and we're going to continue to offer it every day.

Great. Thanks, guys. Thank you.

Thank you.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.