Utz Brands Inc Class A Common Stock

Thank you for standing by. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome you to the Utz Brands Incorporated third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would like to turn the call over to Kevin Powers, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today. All on the call today are Howard Friedman, CEO, Ajay Kataria, CFO, and Carrie DeVore, COO. 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 have just a few housekeeping items to review. Today, we will discuss 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. I'm pleased to be speaking with you today, and I look forward to seeing many of you at our Investor Day next month. where we will discuss our opportunities for growth and value creation over the next few years. Given that, I'm going to keep my remarks this morning focused and make sure to allow enough time for your questions. And on that point, I'd like to welcome our new covering analysts to us, and I look forward to working with you. In the third quarter, we delivered solid results on both the top and bottom line, with organic net sales growth of 3% and adjusted EBITDA and adjusted EPS growth of 9%. Retail sales increased 3%, led by power brand growth of 5%, driven by continued momentum for Utz Potato Chips, On the Border, Zapps, and Boulder Canyon. Power brand growth was most pronounced in our expansion geographies, fueled by distribution gains, with growth of 8%, which exceeded category growth of 6%. While expansion was a bright spot in the quarter, our growth in our core of 1.6% lagged the category. This was primarily due to lapping very strong prior year brand growth of 20% in the core and challenges with our foundation brands. Our foundation brands declined faster than we anticipated due to our supply chain and portfolio optimization efforts. The impact can be seen most acutely in the Golden Slate brand. That said, on a positive note, we have seen service levels steadily increasing over the past five weeks and we are in a much better position moving ahead, and these collective efforts have accelerated our productivity savings in the current year. Of note in recent quarters, our consumption growth has been tracking well ahead of shipments due to performance in non-track channels and our skew rationalization actions, which have been focused on private label and partner brands, neither of which are in our retail sales results. This quarter, shipments were in line with our consumption due to better performance in non-track channels to include dollar, discount, and natural, and also from earlier than expected holiday shipments. This timing change benefited third quarter net sales more than we originally expected and will impact our fourth quarter. In the second half of the year, a combination of timing elements, consumer demand trends, and odds-specific transactions have impacted our growth and led us to lower our near-term sales outlook. As salty snack category growth is normalizing as we lap price increases from the past couple of years, we are seeing consistent trends indicating that consumers are increasingly looking for value as wallets are being stretched by well-known macro factors. We are seeing this manifested in a few ways to include shopping for absolute price points, trading to private label, and channel shifting. Today, consumers can find odds across all classes of trade to include value channels. and we are focused on how we can deliver more value regardless of the shopper's definition. This includes being laser focused on our price pack architecture strategies up and down the ladder, evaluating smaller pack sizes at key pricing thresholds, introducing more value options, increasing usage occasions, and better leveraging the breadth of our product assortment to meet retailers' needs. Importantly, Our hybrid model and DSD capabilities enable us to implement these strategies across channels with flexibility around merchandising, product placement, and timing of events. Beyond consumer trends, as we've been discussing for the past few quarters, we have been taking aggressive actions to optimize our supply chain and portfolio to be better positioned for the future and capture our full potential. These actions include reducing our plant network size to 13 plants reducing our SKU count, insourcing volume from commands and transitioning production across the network, and most recently, moving from flex multi-pack and variety pack bags to boxes. Change like this at speed doesn't come without challenges, and these collective actions impacted our second half volumes more than we anticipated, with a disproportionate impact to our foundation brands, for which retail sales declined about 9%. The foundation brand most impacted was Golden Flake. which until June was made in our Birmingham, Alabama plan. In summary, we underappreciated the complexity of integrating Golden Flake into our Hanover facilities and deploying finished goods to local southern markets. As a result, we fell behind meeting our case flow requirements until October. As we continue to explore opportunities to optimize our supply chain network, there are several key learnings we will apply from this experience. First, Recent plant closings have provided us with insight and best practices that will inform our approach to future network optimization decisions. Second, we will be more conservative with respective inventory safety stock levels. And third, we will look to trusted co-man partners to provide redundancy. Over the years, our team has acquired and integrated several manufacturing facilities without incident, while closing a plant requires a modified approach. We are now much better prepared for future network optimization For example, I would point you to the recent sale of our Bluffton facility where our transition has gone very smoothly. While these activities impacted second half volume, the stepped up pace of supply chain and portfolio optimization has already delivered increased productivity and other cost savings which enable us to maintain our adjusted EBITDA guidance. Moreover, despite navigating dynamic consumer trends and the beginnings of our own transformation, Our consumer panel trends have been very positive on an absolute basis and relative to the category. In the quarter, we increased our household penetration ahead of the category while we maintained consumer trips despite declines for the category. As we all know, driving household penetration is a key indicator of long-term business success, and we continue to have significant white space opportunities in our expansion geographies. We look forward to discussing this more at our Investor Day in December. Now, I'd like to turn the call over to Ajay, and then I'll make a few final remarks before we open the call for questions. Ajay?

Thank you, Howard, and good morning, everyone. In the third quarter, we delivered organic net sales growth of 3.1% and adjusted EBITDA growth of 9.2% as our productivity programs and actions to optimize our network and portfolio are delivering stronger profitability. Of note, Our organic net sales growth combined with these actions resulted in our third consecutive quarter of adjusted EBITDA margin expansion. I'm proud of our team's efforts during a dynamic consumer environment to deliver these results while we continue to make structural changes to access a higher level of productivity. These collective efforts helped us deliver 14% adjusted EBITDA margins in the quarter, which I will note, was our highest level in two years. During the quarter, our organic net sales growth was led by price realization of 3.7%, partially offset by lower volume mix of 0.6%. Volume was impacted by 3.3% due to skew reductions, which was slightly more than what we expected due to earlier than planned transition of certain skews. When we adjust for skew rationalization, we estimate that our volume mix grew 2.7%, which is an acceleration from 1.8% last quarter. Our broad-based skew rationalization actions are complete. And looking ahead to 2024, we don't expect these impacts to be material to our results. Finally, our total net sales growth was impacted by two additional factors. First, our net sales continue to be impacted by the conversion of company-owned RRSP routes to independent operators, which reduce growth by 60 basis points. Similar to SKU rationalization, this will be largely complete by the end of the year and will not have a material impact on our fiscal 2024 sales growth. And second, our third quarter net sales benefited from some earlier than expected holiday shipments that were originally forecasted to occur in the fourth quarter. This timing factor, along with the strong performance in unmeasured channels, resulted in shipments that were more in line with consumption than recent quarters. Moving down the P&L, adjusted gross margin declined in the second quarter, primarily from our conversion to IR outs, which had an adverse impact of 60 basis points. Excluding this impact, adjusted gross margins expanded year over year by 40 basis points, led by our pricing and productivity programs. which more than offset commodity and labor inflation. In addition, our SKU rationalization programs are improving our margin mix as we reduce lower margin private label and partner brand SKUs. That said, the margin performance in the quarter was slightly less than our expectations, primarily due to lower fixed cost leverage from softer than expected volumes, as Howard described earlier. Adjusted SD&A expense declined 1.8%. an improvement of 97 basis points as a percent of sales, as a result of our productivity initiatives focused on logistics and lower administrative spend. As our sales growth normalizes, we have been able to manage spend through cost control measures, in addition to driving productivity within our selling and logistics costs. Partially offsetting these factors were continued investments in e-commerce, people, selling infrastructure, and supply chain capabilities to support our growth. Bringing it together, adjusted EBITDA increased by 9.2% to $52.1 million and margins expanded 87 basis points to 14% of sales. The margin expansion was driven by 370 basis points of price, 280 basis points of productivity, partially offset by 530 basis points of inflation, and 40 basis points of impact from our continued investments to support our growth. In addition, adjusted net income increased 9.5% and adjusted EPS increased by 9.2% to 17 cents per share. Stronger operating earnings and a more favorable tax rate were partially offset by higher interest expense, primarily due to higher rates on our floating rate debt. Turning to cash flow and the balance sheet. Consistent with normal seasonality and from our cross-functional efforts to improve our cash conversion cycle, we generated strong cash in the third quarter of $53.4 million. I am happy to report that our transformation efforts in this important area are working and we are now seeing the benefits in our results. This now brings cash flow from operations year-to-date to $49.1 million and we remain on track to reduce leverage below 4.5 times by the end of the year. We also remain committed to our capital priorities. and year-to-date capital expenditures were $45.7 million, primarily related to supporting our productivity programs and our investment in our Kings Mountain manufacturing plant. In addition, we have paid $24.1 million in dividend and distribution to shareholders. Finishing with the balance sheet, cash on hand was $60.1 million, and our liquidity remains strong at over $209 million, giving us ample financial flexibility. Net debt at quarter end was $875.9 million, or 4.8 times trailing 12 months normalized adjusted EBITDA of $181.8 million. While leverage remains above our targeted range, I'll remind you that roughly 70% of our long-term debt is fixed at approximately 4.7%, We have no significant maturities until 2028. And our credit structure is comprised of Covenant Lite instruments. Now turning to our full year outlook for fiscal 2023. As Howard mentioned earlier, today we revised our organic net sales outlook to 3% to 4% growth to reflect normalizing category trends and greater than expected volume impact from our aggressive supply chain and portfolio optimization actions to better position our company for the future. This results in volume mix now to be modestly lower than fiscal 2022 with modest growth in the fourth quarter. But I'll remind you that our fourth quarter assumes about a 2.5% impact to volume from skew rationalization and adjusted for that impact, we expect to grow bracket volumes by nearly 3%. That said, Our stepped-up pace of supply chain and portfolio optimization is already delivering increased productivity benefit, and these savings combined with disciplined spend management has enabled us to maintain our adjusted EBITDA outlook of 8% to 11% growth. For additional items, we now expect our full-year 2023 adjusted effective tax rate to be approximately 17% to 18% versus 20% to 22% previously, due to our state tax optimization efforts. Interest expense of approximately $55 million. Capital investments of between $50 and $55 million are both unchanged. Now I'd like to turn the call back over to Howard for some final remarks. Howard.

Thanks, Ajay. Before I open the call up for questions, I want to tell you why I'm confident about the future of our company and category over both the short and long term. First, when you look across the store, salty snacks is an attractive and growing category with relative resilience and strength versus other food categories with consumption growing nearly 6% in the latest quarter. I have few doubts as we left several years of price increases that the category will normalize and continue to grow at levels that existed prior to the unique environment we've been in over the last three years. Second, we have an advantage portfolio of brands that are resonating with retailers and consumers, highlighted by our 5% growth of our power brands with significant white space distribution opportunities. Third, while our supply chain and portfolio optimization actions this year temporarily impacted volume more than we expected, we learned important lessons that better position us for stronger execution. And in doing so, we were able to deliver productivity and other cost savings that enabled us to maintain our earnings outlook for the year, and we are building a stronger foundation that positions us for growth and margin expansion. Fourth, we continue to develop our existing talent through embracing new ways of working and continuous improvement while augmenting the team externally when appropriate. Lastly, our cash performance in the quarter was strong through cross-functional efforts to improve our cash conversion cycle and keeps us on track to hit our full-year leverage goal, which will position us well for continued improvements in fiscal 2024. And now, operator, we'd like to open the call for questions.

At this time, I'd like to remind everyone to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Johnny Shamir. Your line is open.

Great. Thanks. It's actually Andrew Lazar at Barclays. Good morning, everybody. Good morning, Andrew. Good morning, Andrew. Good morning. I guess first question, Howard, is you mentioned some of the continued weakness that you're seeing in the core markets. I realize some of this, as you mentioned, is a tough year ago comparison and some weaker foundation brand performance, but I was hoping maybe you could dig in a bit deeper on that and just go through some of the drivers and maybe more importantly how you're thinking about sort of that metric as we go forward.

Yeah, thanks for the question, Andrew. Look, I think the first thing I would say is we're certainly not pleased with losing share in our core. Because as you know, our goal is to make sure that we maintain the core and then expand share in our expansion geographies. I mean, I think over the long term, that is what we expect, and I think that's what others should expect from us. When you look at the current quarter, there are a couple of pieces. In the prior year, us brand was up about 20% in the core, and so we're lapping that, and you really see it in the consumption performance on that brand in the current period. Second, our foundation brands really are more heavily weighted to the core. And so when they tend to drag, they actually have an oversized impact and driven really by a lack of consumer and brand investment, as well as they've been a primary focus of our SKU rationalization programs over the last couple of quarters. Third, we mentioned a little bit around Golden Flake weakness. That's been about getting our pricing and packaging right in the stores. but also making sure that the supply chain recovers from our Birmingham transition, which, you know, as we talked about, really did affect our Q3 and leaked a little bit into October as well. But that said, you know, on the upside and, you know, the thing I think we're most excited about is when you look at our power brands, they continue to perform nicely, both in our core and in expansion geographies. For example, on the border grew over 30%. Zaps and Boulder Canyon are also growing really nicely. And then in our expansion markets, we actually outpaced the category, growing about 8%. So, you know, I think we roll it all up together and say we're not happy about where the core is. We're very clear and laser-focused on improving those trends and remain really optimistic that, you know, from an expansion perspective, that customers and consumers embrace and welcome these brands onto their shelves and into their pantries.

Great. And you mentioned the power brand growth that you're seeing in expansion markets, which seems to be going really well. I was hoping maybe you could put a little finer point on that, just kind of what you're seeing. Is it new distribution, new accounts in new regions? Where are you starting to see that, and is it using some of the metrics and performance from the launch in the Southeast that you're able to communicate more fully to some new accounts, I guess, in some new areas? Is that helping?

Yeah, I mean, certainly a couple of, I think it's all of those things. Certainly what we learned in the Southeast about how to enter markets with anchor consumers and how we enter markets when we look at expansion through distribution, buybacks and partnerships that we've been able to do. All those things, I think, translate into better core performance. But I think as you look at, or I'm sorry, better expansion performance. But I think when you look at our power brands, Boulder Canyon is growing very quickly and in the expansion markets, Zaps and Utz also continuing to improve. And probably the highest compliment that we get is when we enter into markets and we demonstrate that we can grow the category and that we're incremental and helping build baskets, that we tend to get expanded distribution as we lap it, which we also continue to enjoy. Great. See you in December. Look forward to it. Thanks, Andrew.

Next question comes from the line of Modi. Nick, your line is open.

Thanks. Good morning, everyone. I guess the question is, you know, given the top line guy down, you know, the implied margins for the fourth quarter are still pretty healthy. So, Howard, I was wondering if you guys could just opine and just give us more clarity, maybe a little more detail around those productivity efforts and kind of what's driving the offsets.

Yeah, thanks, Nick. First of all, welcome. We're excited to have you on the call and look forward to working with you as we go forward. Look, ultimately, I think that our story has always been about continuing to be able to fund our growth by creating fuel in our productivity line. And if you look at the progression of this company over the last couple of years, a few short years ago, we were only at about 1%. We're feeling very comfortable at 4% this year. And that's really being driven by the aggressive supply chain actions we took on the quarter. So Birmingham, obviously, was a decision that we announced in June. Really, the benefit there is still mostly in front of us, but we're starting to see some of that flow through. We took actions on our private fleet, and we're able to start to see an uptick in our productivity as we go forward there. And we also are seeing benefits from the sale of our Bluffton plants. So when you put all of those things together, a lot of those things were not necessarily contemplated earlier in the year, but we've been able to be able to pull some of those things into our guide and into our confidence level as we move forward to offset some of the call down on our volume side.

Excellent. Thank you. I'll pass it on.

Thanks, Nick. Next question comes from the line of Rob Moscow with TD Cowan. Your line is open.

Hi, how are you doing? Hi, Howard. I wanted to know, you said that you learned lessons from the Golden Flake supply chain disruption during the transition, but I get the sense that there's going to be a lot more supply chain optimization to come, probably more consolidation. There's going to be a lot of these moves coming. Can you be more specific as to what you learned and why you feel confident that you can obviate these types of issues going forward?

Yeah, thanks for the question, Rob, and welcome back. We missed your last call, but glad to have you back on and with us. Look, I think there's a couple of things as I look. You're right, when we look at our supply chain, and we understand our overall cost structure, that there are things that we're continuing to evaluate on ways of working and being able to drive greater productivity. But there were several key learnings that we had in the quarter, and some of them, as is frequently the case, seem somewhat obvious on the face, but obviously get a little bit more complicated as you get below. First, through our history, we've done a lot of plant acquisitions, and plant acquisitions tend to be the foundation of a lot of our metrics. Closings are a little bit different, and I think we've learned a bunch of things about how they vary. But number one really is around making sure that we understand the right KPI or performance indicator as we hit a gate, specifically with respect to safety stock. So we felt pretty good about what the number needed to be, but we, I think, underestimated and didn't appreciate the cycle that it took to start to build the production and make sure that the product was flowing through our network As effectively as we needed to as it moved back into the southern markets. So I think we need to be more conservative there as we go forward. You know, second is making sure that we have redundancy. We've talked about trusted command partners and making sure that we have some supply chain redundancy in the event that we need it. To make sure that if we stumble even a little bit that there's somebody behind us that we know we can that can meet or augment our demand as we transition And third really is around the dedication, having a dedicated team. While we had a dedicated team on it and they were working through the transition, making sure that that team has got the ability to make calls at speed, to understand the metrics, and are dedicated specifically to this transition until we get through and we're stable. I think we might have been a little more optimistic a little too soon. with respect to when we could rotate off and get back to speed. So all those things will be built into our future. We've learned a lot. We have a quantitative view of the lessons learned and have a team that now has more experience as we look forward.

Howard, are these moves things that you kind of have to do one at a time? Or do you have the resources to do multiple consolidations at once?

So I think we have the resources to be able to do multiple consolidations at once if the conditions dictate. Certainly from a firepower capacity production capability, we have the capability to look and understand how to meet the consumer demand. I think a lot of it is more just when does the market, the consumer market and the customers say is a good time to do it, and when we're confident that we're clear on how the project needs to affect us moving forward.

Okay, great. All right, thank you.

Your next question comes from the line of Peter Galbo at Bank of America. Your line is open.

Hey, guys. Good morning. Thanks for taking the question.

Good morning, Pete. Hey, Pete.

Howard, I just I wanted to maybe unpack a bit more your comments around the channel shift. I know you kind of gave it as rationale for maybe some of the softness in the quarter. And it's also, though, in the outlook as a reason for kind of why the sales guide has come down. So I just was hoping you could elaborate a little bit more there. Is this a channel exposure problem that's specific to us? Your relative share of, I don't know, some of the club non-measured is lower than peers, and that's why you're seeing some of the shift. Just anything more you can do to kind of help unpack that?

Yeah, thanks for the question, Pete. Look, I think in order of magnitude, the channel shifting is, relatively speaking, a much smaller impact to our go-forward look. And I think it is largely something that, depending on how you look at it, is a cause for optimism. Because really, while we are growing nicely in a lot of those unmeasured channels, they are, relatively speaking, smaller for us. So much like an expansion geography, as we're growing quickly in those channels, the ability for them to really positively impact us just takes a little bit more time. We're lucky to have a hybrid distribution model around VSD that we can flex there and make sure that our merchandising and our promotional environment is is solid, but in terms of overall impact to our business, they are still developing much like an expansion geography would. I think it's certainly an opportunity for us. We are very much focused on making sure that we're growing in those channels, that we're meeting what the shopper wants. We have a great offering to do that, but it's still more a white space opportunity for us than established business.

Okay, that's helpful. Jay, maybe just a really quick clarification. I think you gave some color on the fourth quarter volume mix. I think you said there'd be a two and a half point drag from, from skew rat. Otherwise your volume mix would be up three to, you know, so netting to like a half point positive. Do I have that right? Or did I miss something?

Yeah, I think that's right.

Okay, perfect. Thanks guys.

Thanks Pete. Thanks Pete.

Your next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open.

Good morning and thanks for taking my question. So as we look at cost pressures in your business, just curious if you have any early reads in terms of what inflation could look like next year and whether you see a need to take pricing at this juncture.

Yep. Thanks for the question, Rupesh. So as is our, you know, first, we are expecting a normalized inflation and price environment pre-2020 next year. And secondly, you know, as is our normal cycle, we are about We are in the contracting cycle for next year, and we are about 30% of the way there. The big nugget for us is potatoes. Those contracts will be signed in the next, I want to say, four to eight weeks. So we'll know more about the inflation basket as a whole for the year. So we should be able to talk more about it when we see you in December and definitely as we guide in March.

Great. And then maybe one additional question. Just on the competitive front, given the category is slowing, You know, how do you characterize the competitive arm? Is it still rational or you see any changes out there?

No, I look I think the the overall environment is rational and is what we would expect I think what we saw in the category to your point When we looked at the quarter even a few months a few weeks ago What we saw was the category is starting to was starting to slow more than we would have anticipated but in terms of competition pricing customer or a competitive behavior. They're all largely in line with what we would expect. Nothing, nothing crazy.

Great. Thank you. I'll pass it along.

Thanks.

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

Thank you. Good morning.

Good morning.

Just was wondering if you could, A touch on Boulder Canyon, its growth obviously is extraordinary. What are some of the drivers there, and how sustainable might that be?

Yeah, so look, I think we feel really good about where Boulder Canyon is, and it really is a good example of a brand that we acquired and can show the strength of our network. It's really predominantly a better-for-you story. because obviously it's the avocado oil and olive oil trends that we are obviously seeing that are driving a lot of it. But consumer acceptance of the brand has been quite strong, mostly in our natural channel, in some of the unmeasured channels, and then obviously coming into grocery. So I think we believe there's a long runway for the brand. It's got a clear point of difference. It's got a consumer cohort that is clearly interested in it. And as you see the economy continuing to move and we talk about value, you know, Boulder Canyon for a segment of the consumer base is valuable. And so it's one of the places where it's not just about pricing, but it's overall the total offering of the brand.

And is it broad distribution and velocity gains or is there a big win that have a certain, you know, timing cycle we should keep in mind as far as how that...

No, it is distribution and velocity gains and household expansion. It is not a, we gained a class of trade that we didn't have previously. Look, I think there's a lot of runway left for that brand.

Okay, great. And just on Zaps, obviously that one's been on fire and it's had a much more regional skew that you've begun to broaden pretty nicely. But Maybe can you touch on how the pretzel launch is going in that brand and what else you can do with the Zapp's brand overall?

Yeah, so look, I think the pretzel launch has been great for us and continues to perform in line with our expectations. We're obviously getting to the point now where we're lapping the initial introduction, but we think that seasoned and flavored pretzels, that segment continues to be a big opportunity and we continue to intend to address it. I think from an overall ZAPPS perspective, I think there are three things that we believe that we have opportunity on. One is about continuing to broaden its distribution, not only geographically, but within channels. It's got a significant channel opportunity. Number two is, purely from a marketing communication and brand perspective, it is a brand that I think has not had the marketing yet that it And obviously, as we expand our marketing investment over time, we will look at that as one of the supported brands as we go forward. And then, you know, last but certainly not least, at least from my perspective, I think it is a brand where we have channel opportunities and e-commerce opportunities where consumers see it in food service, see it in QSR, and then go looking for the brand. And if we're thoughtful about the distribution, placement will also continue to be an opportunity for us.

Okay, great. Thanks so much.

Thanks, Mike. Your next question comes from the line of Jason English with Goldman Sachs. Your line is open.

Hey, good morning, folks. Thanks for calling me. Good morning. I apologize. You're one of three reports in conference calls I'm juggling today, so there's a reasonably good chance that you've already answered this, and I'm asking a redundant question. If so, my apologies. But the skew rationalization drag is proving longer and larger than we expected. I know this time last year you thought it would be done by midway through this year. I know you extended it out a bit more coming into the year, but Where do we stand on that? How much longer is it expected to be a headwind? Is there a chance that we're actually going to be able to close that out this year and go in with a clean portfolio, if you will, into fiscal 24?

Jason Towerick, thanks for the question. Look, Jay assures me that my holiday New Year's present will be the elimination of discussing skew rationalization as we go into next year, and I confirm. So we will, while skew rationalization will always be something that we'll do as sort of good hygiene, the extraordinary drag that we are experiencing this year, which, you know, creates a lot of challenges for us as you kind of look at the underlying strength of this business and you see what our power brands are really doing and what we're doing with Valmix, you know, skew rationalization is a drag that we all look forward to anniversarying at the end of the year, and we will stop talking about it as we go into next.

I hope so. I'm going to hold you to that, Howard.

I'll buy you a soda at Investor Day to reaffirm my promise.

Well, let's do better than that. We'll meet up after the Investor Day with something better than a soda. So speaking of Investor Day, you foreshadowed a lot of discussion around productivity and supply chain optimization. and my question is whether or not, or why we should have confidence that you can walk and chew gum, if you will, at the same time. So differently, a lot of companies often go after big productivity initiatives, and rarely is it done without some market share in market turbulence and some top-line consequences. Should we expect the same sort of turbulence for you? And if not, what gives you confidence that we won't live through some of those bumps?

Yeah, so... I agree with your thesis of, you know, why should you believe us? You know, I think a lot of what our investor day will be about is showing you why you should believe us. But I think what makes us unique is that not only do we have the supply chain optimization opportunities that will walk you through in some level of detail, introduce you to the team that will be responsible for executing it, but we also have an outsized expansion geography opportunity as well. And so I think that as you think about our top-line growth and the headspace that we have to support that growth within our network, I think we believe that we should be able to, to your point, walk and chew gum at the same time, be able to look at and improve our network, be able to look at the investments that are required to be able to increase automation, drive capacity, and run the railroad the way we would want to, and at the same time, be able to drive greater growth in our expansion markets where You know, we are able to do that today, and, you know, we expect to do it tomorrow. But all of that will lay out at the investor day, and then I think I'm sure you will give us your verdict on whether you believe us.

Always do. All right. I look forward to learning more. Thanks a lot, guys. I'll pass it on.

Thanks, Jason. Thanks, Jason. Thank you, Jason. Your next question comes from the line of Scott Marks with Jefferies. Your line is open.

Hi, good morning, all. Thanks for taking my question. Good morning, Scott. Good morning. I wanted just to follow up on some of the skew rationalization conversation. Obviously, to Jason's point, obviously, it seems like it's been going on for a little longer and deeper than expected. Just wondering what this does in your confidence regarding kind of go forward volume growth potential. And is this skew rationalization kind of replaced one-for-one on shelf with a power brand item or some other innovation? Just trying to get a sense of that. Thanks.

Yeah, so Scott, you know, the first thing is I think it has always been our belief that this year was going to be a year of skew rationalization. If you went all the way back to Q1, we were around 400 basis points, expecting to step down basically 50 each quarter. But we've always given a sense that we would be in the 300s if range this year as a drag to our print. So, at least from our perspective, skew rationalization is consistent with what we've been saying would be this year. But I, again, look forward to the holiday gift from Ajay when we stop talking about it. Second, with respect to retail brand and partner brands, there's a couple of things. They are not one for one. replacements because in some of the cases they were rationalization actions that we took as we acquired RWG and a couple of other places where the retailer was using the brand, continues to want to, but we had alternative uses for the capacity. So being able to strengthen and build out our tortilla chip on the border brand, we needed the capacity, which is why we started to shed them. So in some cases, the retailer maintained their brand, they just went elsewhere, which makes it a little bit different from an assortment management than, say, us pruning a SKU that is a tail SKU for us and replacing it with a higher performer.

Got it. Thanks so much.

Thanks, Scott, and welcome.

Your next question comes from the line of Bill Chappell with Truist. Your line is open.

Hi, good morning. This is Davis Holcomb on for Bill Chappell. Hi. I was just wondering if you all could provide us with a little bit of an update on the partnership with Publix.

Yeah. So look, we continue to feel really good about our Publix relationship. They have been excellent partners for us. We've been enjoying not only our core distribution, but also obviously been building out. You can see that in our consumption and market share trends around them. And they've been expanding our distribution into additional SKUs and additional items broadly. So I think we feel really good about how the business is performing. I think what is equally important to us is being able to continue to prove to ourselves and to others and to all of you that when we enter into a market with an anchor retailer, that their shoppers and the consumers then stick. And so you see that in our household penetration gains, you see that in some of our buy rate improvements, and you see that in our power brands. So, so far, so good.

Excellent. And also, I was just wondering if you could talk a little bit about some of the trends you all are seeing in salty snacks, like potato chips versus pretzels versus tortilla chips.

Yeah, so, I mean, look, I think overall what we continue to see is the category remains resilient and continues to be a great place to operate. You know, if you look at the potato chip trends overall category, the segment is up, call it 6.5% in the quarter. You know, we're up a little bit less than that, which you talked about earlier. There's a lot about the lap of the UTS brand in our core category. You know, tortilla chips really was a, you know, we're now, we've been talking the first half of the year where we were lapping activity prior year and then we projected that we would go stronger in the back half. The good news is the visibility we thought we had is now translating into category or subcategory growth that we're seeing. And then pretzels is growing, but that's really a place where we continue to have opportunities as the consumer is shopping price points and moving up and down the price ladder. While we feel really good about things like our barrel business, we do over index to a higher relative price points and have some work to do on the flex side of the business to make sure that we're hitting lower price points in the ladder. And then the last two things I would say is, look, our cheese snack business and pork rind business are not where we want them to be. They're kind of two different issues. Cheese is really about a lap from prior year, which we've been experiencing for a while now, but we've said we should be getting through it now. And then pork rinds, we talked a little bit about on the supply chain side, the optimization actions that we took really disproportionately affected Golden Flake, which is really shorthand for pork rinds. But beyond that, I think everyone's talked about the consumer continues to shop for value. We've seen some channel shifting. All in our prepared remarks is kind of what we're seeing across the segments.

Excellent. Thank you. I'll go ahead and turn it over. Thank you.

Again, if you'd like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Mitch Pinero with Sturdivant. Your line is open.

Yeah. Hey, good morning. Good morning. Here at the tail end, most of my questions have been asked and answered, but I did have two. I was just curious if you could, Howard, if you could sort of prioritize the white space opportunities that you refer to, whether it's geographic or product or channel. I'm very curious about that.

Yeah, look, I think from a geography perspective, we are continuing to move westward. So we've had a lot of success with the acquisition that we had in sort of the upper Midwest, and we are continuing to build out around Chicago, Indiana, Michigan, kind of the normal areas there. We've seen great performance there, and we continue to be bullish. We've talked a lot about Publix, which has been obviously a great success for us, and we're We continue to be grateful for the partnerships we're getting from retailers, but Florida still is a geography where we have continued opportunities to do it. To your point, whether you call it geography or you call it a channel question, I think is one that we can debate a little bit. But Florida, broadly speaking, still remains an opportunity as a maturing market. And then, look, I do think that when you think about channel shifting and you think about where the shopper is, in unmeasured channels and value, dollar stores, discounters, mass merch. We have a lot of opportunities still. That's our core items being penetrated and servicing those retailers the way we need to. The relationships are there. The product is there. We need to continue to demonstrate the value that we create and continue to drive them. So I kind of gave you those two geographies, and then I would say, broadly speaking, channel expansion are places where I think we feel that there's quite a bit of upside and headspace for us, especially in an environment which remains dynamic.

Okay, thank you for that. And then just one last question. So when you get down to 13 manufacturing plants from 17, what type of, I don't know, what kind of measurement in terms of capacity utilization will you have? I mean, how significant of an improvement is it? I know you've done some expansion to your capacity, but I'm curious, just getting from 17 to 13, when you're sort of fully optimized, what kind of utilization that represents.

Yeah, so a couple of things. So I would tell you that it's really a modest improvement. If you think about some of the geographies, some of the plants that we're talking about, Birmingham was a plant that would have required a significant amount of investment in order for us to be able to be in a good place. So that volume, while it was not immaterial to our network, was absorbed fairly easily into our network with the execution opportunities that we've obviously talked about accepted. The three plants that we're talking about are relatively modest in terms of their overall size and impact. I think we have further opportunity to, not only in our ways of working, but in our physical footprint, to understand how to make sure that we have the capacity we need to grow. But we have a fair bit of head space still in our OEE measures to go as we continue to work on continuous improvement. Capital expansion, Kings Mountain is still in front of us. there's a lot of opportunity yet in our network to be able to meet and exceed the consumer demand.

Okay. Thank you for that.

Thank you. Thank you, Mitch. Thanks, Mitch. And that's all the questions we have. I'll turn the call over to management for closing remarks.

Yeah, so obviously we feel pretty good about the numbers that we delivered. We certainly understand the – that the expectations have been revised. But look, I could not be more excited or confident in the future of this business. I think we continue to be in probably the best category in the entire market, relatively in absolute. We have a lot of geographic opportunities yet to go and we have a lot of opportunities to continue to build our brands and grow our business. I look forward to seeing all of you in December at our investor day and look forward to speaking in more detail as we go. So, thanks for your time and have a great day. Ladies and gentlemen, that concludes today's call. Thank you all for joining the Announcement Disconnect.