Utz Brands, Inc. (UTZ) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Utz Brands Inc. Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Now I'd like to hand the conference 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 Cary 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 and in Utz Brands' most recent quarterly report filed with the Securities and Exchange Commission, as well as risks highlighted in the company's press release issued this morning for a detailed discussion of the risks 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 and reconciliations of the non-GAAP results to the GAAP financial measures. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on Utz'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 and 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 US economy is having a broad based impact on supply chains. Consistent with what you've heard around the food industry, the cost 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 costs, 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 carry-over 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 sub categories 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 accreative and strategic to our long-term goals. Lastly, on July 26, 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 grow. Among these changes, Cary 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 4. In addition, we welcome Theresa Shea as our General Counsel, right after July 4th, promoted Shane Chambers to Chief Growth Officer and promoted Jim Sponaugle 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 was 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 the higher marketing spend in the quarter as we invest more in our Power Brands for long-term growth, as well as public company costs in 2021, that didn't exist in the prior year period, given that us 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 both 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 locked 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 Brands, momentum is growing with sales on a two year CAGR basis, accelerating to 8.8% for the 12 week period, and then July 11 versus 7.7% for the 12-week period ended April 18, 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 D.S.D snacks and Vitner's acquisitions, for example, and actively worked to rationalize and right-size the portfolio by inserting key 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 have launched or will be launching key innovation introductions. Turning to our drug drivers in the quarter, we continue to grow sales in a two year CAGR in all five of our key Southeast sub categories 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 and ourselves in case of brands. During the quarter, we also made significant progress driving geographic expansion. We continue to focus on large population areas and our expansion in emerging geographies and we continue to drive our Power Brands' growth across the US VR platform. For the 13-week period ended July 4 and the expansion and emerging geographies, we drove double-digit growth on a two year CAGR basis for both the total Utz portfolio and for our Power Brands, which outpace the category by approximately 400 basis points to 500 basis points in each area. As noted previously, we believe the revenue opportunities and our expansion in emerging markets insignificant 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 remained 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 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 Tyler brand share gains and grocery, and C-store as well as double-digit sales growth in club and the grocery channel, which is approximately 50% of our retail sales are power brands through 8.3% outpacing the, to the category growth of 6.7% and our most underpenetrated channels, namely mass and convenience both remained a continued opportunity for future growth. And we are excited about the progress we are making in these important channels in mass while the underperformed, the overall category, the 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're making across several areas. Here are just a few highlights. We are lapping the extraordinary surgeon demand during the peak COVID-19 pantry loading period in 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 strike of our now broader 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 let's twisters and zap spins and introducing new on-trend flavors for the onboarder discs like Southwestern bean and jalapeno ranch, as well as on the border CAISO tortilla chips amongst other innovation ideas. And finally, we expect to deliver a strong holiday season with holiday. I didn't say I was 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 Nulo see 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 Cary, I'll make just a few final remarks on our trickle acquisition progress. As a reminder, Truco also known on the border was our largest acquisition in the history of us. And we closed on this on December 14, 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 and to bring 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 the third party DSD distributor to the DSD distribution system for a number of states effective about a week and a half ago on August 1, we believe that this will drive even more feature 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 board of tortilla chips have only a 50% ACV across the us, and we are leveraging the Salesforce and route to market system to drive increase in growth and unlocked revenue synergies. And we are seeing new distribution for on the border across multiple channels, such as grocery drug, convenience and dollar in our correlates 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 range on a two year basis in our core, as well as very strong results in both emerging and expanding. Finally, we're having the factoring efficiencies within our vertical integration initiatives. And we recently insourced some on the border production into our handover plant with future plans to bring even more production into both Birmingham and the second half of 2021 and Hanover in Q1 of 2022 to support this elevated demand and compliment our current command network. Finally, we're also excited about the test introduction of on the border software to use, which would they be testing in a subset of a national retailer stores, as we believe beyond the border brand equity can expand into the growing $1.9 billion software Tia market. And we look forward to seeing the results in short, we are very excited about the opportunities beyond the border brand. We'll continue to bring to our portfolio across all of our geographies. And now I'd like to turn the call over to Cary Devore, our Chief Financial Officer. Cary?

Thank you, Dylan and good morning, everyone. In the second quarter, net sales increased 23% to 297.9 million adjusted gross margin contract at the 35.4% adjusted SG&A was consistent at 24.3% of sales 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 with a private company, finally adjusted net income increased 39.7% to 19 million and adjusted EPS was $0.13 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 as soon as 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 blocking and 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 a $75 million and use the proceeds primarily to pay down our revolving credit facility pricing in terms are consistent with the term loan financing we executed in January, 2021, which was pricing of Lightboard plus 300 with no floor. And just as a reminder, we previously used cash and the ABL to close the vitners and the Steeda foods acquisitions. Finally, capital expenditures are $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 point offsetting. These positive drivers are headwinds related to volume of 130 basis points. As we left 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 the higher transportation cost increases were largely due to higher spot market rates and contract freight costs. As a reminder, transportation costs, which are largely frayed 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 accidents 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, improve 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 and a half 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 four 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 cost actions that we believe will carry forward to fiscal 2022. And fiscal '22 will also benefit our acquisition pipeline remains during my tenure at us, we will continue to prioritize opportunities that are creative 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, certain commodities, as well as trends. Original expectation for commodity inflation was 4% to start the year, but given rising, plus 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, all 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 look to reflect this incremental inflation, to put those into further context in the second half of fiscal 2021, we expect higher year over year inflation of between 30 to 35 million. When we compare our second half 2020 further adjusted EBITDA of $92 million, but it's pro-forma for recent 10 acquisitions to our second half 2021 implied guidance range of $86 million to $96 million. We are nearly four entirely offsetting this bucket of higher inflation. We are doing this through a combination of higher sales volumes. Gov will have a meaningful carry over benefit to 2022, and we'll provide a strong baseline upon which to layer incremental pricing and productivity to drive margin performance in fiscal 2022, bringing it all together, excluding [indiscernible]. We continue to expect full year of 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 own HK Anderson and Truco on the first day of fiscal 2020. And as soon as 20 million of net for vitners to align with expectations for fiscal 2021, we continue to expect modest organic sales growth year over year, even as we left 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 three to 4% moving to adjusted EBITDA. We now expect a range of 160 to 170 million versus our prior expectation of $180 million to 190 million and adjusted EPS of $0.55 to $0.60 versus $0.70 to $0.75. Previous general 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% increase in capital expenditures to $40 million to $50 million to accelerate higher 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 vendors of the Steeda acquisitions that were asset deals for tax purposes and the tax benefit. Finally, we are raising our net leverage ratio range to approximately four to 4.5 times to account for acquiring the Steeda with debt and the reduced adjusted EBITDA outlook. And now I'd like to turn the call back over to Dylan for some final thoughts.

Thank you, Cary. As we wrap up our presentation, I'd like to conclude my remarks with the few high-level summary perspectives to share first off as always thank you to the 3000 plus associates for the incredible efforts put forth to deliver for 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're 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 importantly, we're doing so with a long-term mindset and we remain laser focused on enhancing our customer relationships, driving distribution, and building our brand equity for, we know that an important leg of our value creation strategy is M&A in our pipeline remains robust with many actionable in a 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. [Operator instructions] Your first question is from the line of Rupesh Parikh from Oppenheimer. Your line is now open.

Good morning. Thanks for taking my questions. So starting out with cost pressures, I wanted to get a sense of whether you think you've maybe captured more for 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 Cary, thanks for the question. Yeah, I think we've been prudent in our outlook for the year in terms of capturing what we're seeing in commodity and transportation and then labor. I think from that perspective look and then the second part of your question, if you don't mind repeating it?

Have you started to see any relief on the commodity or transportation cost front at this point, we have a peak and starting to come in or is it, what type of environment are you seeing right now?

Yeah, I think it's still very fluid. I think from a transportation perspective 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, the levels right now are, are still elevated to relative to historical standards. So, we're doing the best we can to make sure we have enough commodities to supply or demand, and our demand remains strong. So, the team is working hard and making sure that we're protected as well as we can be from a larger perspective.

Okay, great. And, maybe just a second question, just in terms of EBIT, you guys saw 16% EBITDA margins would be the baseline for the business. Now it seems like, you're probably end closer to, I think, around 14% for the full year. If the expectation that now you'll grow off of this lower 40% base, or is there a potential for maybe you our 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 carry-over benefit that will be higher next year here. And then we'll layer on incremental pricing and productivity next year. So 2022 from that perspective will be much higher than 2021. And, 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 synergy perspective, we're in a very good position. I think the situation -- 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 margin story is still, 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.

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 that 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 one, is that right? And then two to the another piece of it, can you just give us a sense of the trajectory you expect there, how much you can stabilize improve that and what that funding might look like?

Sure. Hey, thanks for the question. This is Dylan. I'll take that. Yeah, I think you're exactly right. From a very broad perspective, our strategic direction is to grow our power brands, right? Those are the national brands like it's like on the border, like zaps, there's the national brands that we can take on a national basis. You duly noted the growth and expansion and emerging versus the category four 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 the -- 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 and some of those discussions are introducing new brands and part of that process, 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 every night. So we're very long-term oriented in our thinking the good health that you decided is an area of opportunity for us. We've noted it before we bought it in 2000 brain group. 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 where rebuilding it. If we look at like a 52 week and we compare it to a 12 week or 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 a positive and will play out very long term. And as we look at our core and we know that foundation is a drag and 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 rod 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 and the core.

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 that chance to play with enough, but you call out on, on slide 18, the 420 basis points headwind in 2Q, but then on Slide 19, call out the a hundred basis point headwind in, in, in two H and it looks like that's growth of price. And so I guess I'm just curious what headwinds have moderated it, and am I reading that the right way or is there some other way to reconcile those?

Yeah, we're comparing so 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 nine, and we're comparing the first half of 21 to the second half of 21, right? So it's, it's apples and oranges in terms of the periods we're comparing.

Yeah. Sorry. I missed that. Okay. Thanks so much.

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 again, core markets. So summary, the last quarter you called out that the good health brand was a contributor to this gap, and you've addressed your progress in that front, but could you walk us through any other key drivers of the gap, maybe provide a bit more color in the targeted set of actions to improve core market performance?

Yeah, sure. Max, this is Dylan again. It's very similar to the answer or the explanation behind Michael's question around the core two-thirds of the gap between category growth and our growth in the core is attributable to a foundation and good F that's a, that's a story that existed in the first quarter is 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 taking 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, as renovating good health I think we have seen where the 4 week and 12 week numbers in good health are much better than the 52 week numbers work. 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 the power of brand, and then we need 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 it's an effort that's in place. And if you think about the independent operators and we were moving from RSP to independent operator, our core markets, the infrastructure that we have to invest in our core markets to have very similar positive systems in place to get, products for manufacturing to, to the stores, a lot of that's happening in the cord. One of the metrics that, I do know that we speak a lot about the core, but I think a 100 basis points in the core for the quarter is relatively about one and a half 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, that it is not necessarily a very large percentage of our overall revenue that occurs in any given quarter.

Our next question is from the line of [indiscernible] Your line is now open.

Just want to talk a little bit more about, I know you're not giving guidance on '22, but you made a strong statement about the recovery on margin in 22, and just maybe getting to help us understand it. 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, ease where you could actually have a cushion on 2019 levels, or to try to understand how we should be looking at, especially that first half, if it's just more of recovery, if things are finally catching up or where you really have some tailwinds.

So, I think it's too early to call '22 right now. What I was speaking to was though the things that, 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 six fixed overhead. So, we expect to grow next year, right? The volume trends 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 a hundred percent of it this year. So there's a big carry over benefit next year. And then we always layer on incremental pricing and productivity. So next year from a pricing and productivity perspective we'll be won't be much higher than this year. And then we expect good pull through on synergy. So the variable that I noted earlier on a non-question was really commodities, right? So we have to see where, commodities and delivery and labor inflation comes in and 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, 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, we're pulling right now in terms of driving the top line, driving pricing, driving productivity those are sticky. And so, margins will benefit from that.

And especially as the environment improves and this is Dylan, was set just coming a little bit over the top on that. Thanks for the question. Based on 25 years of being in the snack food industry and seeing commodities over the decades, we've been here before we've seen huge increases in underlying commodity prices. We then, kick into gear with price increases with price back architecture, Wade out rationalization of the marketing of the spends, the trade, 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, something like a corn oil would be up 50%, 60%, 70%, 80%, it was very hard to see that coming for many of us, but we had the weapons in place. Once we put those weapons in place, once we take the weight out and we take the pricing, it does have a long-term sticky benefit that transcends, not even just one year, but it transcends for a long time, as hopefully the inflation debates itself over time as it normally has in the past.

Got it. So just to be clear, you see it completely a lag, not a price ceiling you have versus the peers.

Yeah, just the lag.

Okay, perfect. Second and Dylan, maybe you can help me a little bit. So I get this question a lot on the geographic expansion, the core fundamental story is that you're not a national brand. There's so much opportunity obviously on the border helps well, I'm the national footprint, but so maybe can you help us understand where you're seeing, geographically, some of the biggest gains right now, is it the Midwest? Is it the Southeast stuff like that, and then why that's happening? I mean, what gives you such confidence? Is it Hey, after we get to a certain share of 10% share in the 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, it's a big, big opportunity, just how you, how you kind of map it out. Yeah.

And you nailed it. Thank you. The areas of the Southeast I think we talked a little bit about earlier in the year where we purchased a third-party master distributor back in central Florida, we took that over that area has been seeing tremendous growth for us long-term right. If you just think about the, the migration of people from the Mid-Atlantic of the east coast and Northeast that moved into the Southeast, to the Carolinas, through Atlanta all of those Southeast areas, these are really high growth areas for us, where the brand transcends the brand is known. And like you said, it doesn't happen every night, but it is once the flywheel has started begins to occur and build upon itself, we're seeing a tremendous growth in Texas. We're seeing tremendous growth in the Midwest or expansion there. As just a starting point for us entering one of the largest Salter snack, mark it's 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'd see tremendous growth in. So if we were to pull up the, the IRI and the, and the retail share data in Chicago, in 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 Lux brands, like zaps are seeing tremendous growth there. So as we look across the portfolio of our brands that, that very large let's brand is seeing a nice, mid, single digit growth. We're seeing zaps grow at like 20% plus 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 span, right? Spend more on marketing in QT than, that we did last year. And, we're trying to think long-term about brand equity. And we know that that white space where IRI, retail share perspective, and we're trying to invest behind that with a very long-term lens on, on growth and opportunity, because we really do think that there's just a abundance of geographic areas that we can grow into

Great color. Thanks so much, sorry for the long question.

Your next question is from the line of Wendy Nicholson from Citigroup. Your line is now open.

Yeah. 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 and then like Carrie jump in on the second half because he's intimately involved in our M&A, and we'll be even more so in his new rule, a postdoctoral, but fired HK Anderson in November of 2020, We acquired on the border in December of 2020. We acquired vitners in February, 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 skews. 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, kind of 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 and expansion. We're vertically integrating some of the production to take cost out. As I mentioned, we bought the Steeda, which will allow us to unlock even more future demands because that's a big that's a big issue, right? We have more demand for that brand. And actually we could produce, and we're fixing that through vertical integration, as we mentioned with two lines coming on the handover in the next six months, one already in place with a new opportunities in Birmingham to make that brand and as well as the 50 to -- and what we're unlocking there in terms of new capacity. So that's going along quite well on the vendors. We're seeing great results. We acquired that in February. We've integrated the backend of the it side of that business a few months later. We're continuing to see expansion of, 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, our sales operations that are 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 Cary 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 that the 30, 60 a hundred day plans already laid out and all that funnel through our PMO. And then we meet on a regular basis. Every month teams experience the PMO office, the process here to make sure there's consistency and execution, right. The true co 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, from a sales and cost perspective. And then as from a go-forward perspective, I'm as pleased with our M&A pipeline today as I have ever been. I think there's a tremendous opportunity set 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, in the best possible way. 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.

Yeah, this is Dylan. I'll take that. Thank About the changes that we've announced and, he kind of go back in the history of time slowly as we've built out our executive leadership team, we took on Kevin Powers and our investor relations doing a fantastic job there. We recently hired Theresa Shea is our general counsel onboarding and inboarding those functions so that they're, very closely connected to the team. We promoted Jim Sponaugle into a Chief People Officer role, and more importantly in more near term coming up in October with Carrie and I have worked together since 2016. literally every, 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 sacks in 2019, we acquired Truco. And so, I mean, we've done a lot of things together to build value for the company. And he is a fantastic individual was a nice amount of knowledge, especially in value creation in project management in 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 we are going to be. So also very excited that 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 really of all of those acquisitions since he joined integrating them standing up our ERP overseeing and running our it department as well. So Jay is a fantastic lead in for that. That's really all sort of, part of the an orderly natural progression. And so, as I sort of looked forward into October into the latter half of 2021 and prepared for 2022, it's just, it 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 Moskow 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 mandolins 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, the size of the business in relation to the big ones is part of the reason is a little more expensive for you to get access to freight routes and are there lacks of scale and purchasing because it, this is visit a big cut and maybe the other ones, the other companies are, are on their way to doing the same thing, but I'm just wondering if, if scale makes a difference here.

Yeah. Good question. It's hard for, it's hard for us to comment on, what other companies do or don't do. Certainly scale we've always said scale is tremendously important in snacking. So it's possible there's a scale benefit there, but 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 the inputs, right? So transportation and delivery spiked, you've got labor spike, so we're having to pay more people, more money to support the demand we're having to pay more for, for freight end and freight out, right. And freight in as part of the pressure and commodities. We have to pay more for delivery and fuel and in order to get the ingredients to make, make sure we can support the man. So, the pressures we're seeing, I think are unprecedented. I think we're doing a good job executing, but tough, 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 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 we also have you taken, so does that mean you're also, are you still trying to catch up in the first half of the 2022?

Well, it depends on obviously dependent on the inflationary environment. We see next year, the pricing, the run rate exiting this year obviously is going to be higher than what we'll actually hit our P&L this year. Right. So, the cure over benefit is material. And then we will put the thing on top of that and productivity is part of it too, as our products increased meaningfully next year as well. So the total dollars popping to the P and L next year in pricing and productivity will be meaningfully higher in 20, 22 than they are in 21. And, obviously the only variable then is what inflation is doing kind of way of helping us know whether you're still on track with your original, like core business profitability, EBITDA outlook that you presented back.

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

Last question is from the line of [indiscernible] from Stephens. Your line is now open.

First on pricing and kind of piggybacking on Ralph, you're taking pricing in the back half of this year. I think actions early next year, your ability to grow your brands. Long term I suspect not because it's, it's a relative dynamic and other players are raising price as well, but how do you think about demand the less the cities that you expect to encounter as you entered this higher pricing environment?

Yeah, it does. Thank you. Ben. The snacking category is a fantastic category to be in, right. It continues to grow as, year in a 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 where the large percentage share of the category. It is not the path to the lowest price. It is a rational category with rational pricing. And as we take -- 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. We are able to make the changes to our portfolio as well this year. I think we've touched to 70 to 80% of the skews in our portfolio with placing a place pack architecture. And what we've seen is that being in a rational category, that that's a long-term benefit. It does not go backwards a year or two from now and what we have seen. And I mentioned it earlier in 2008, 2009 is as the commodity pressures update and normalize of a long-term trends. We have a lot of stickiness in our pricing that helps us in carries us through. So, fuel petroleum-based products, like some that existed out there, but we've got a hundred year history of working through this. We have a great team who was very in the best of even challenged in situations. And we're going to continue to try to drive long-term value for the brand via pricing, via price, dive architecture in continuing to invest in the brand. So long term, I think it'll be beneficial to us plus 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've provided an update for this morning, how much certainty versus uncertainty is embedded in that new outlook, meaning if we get material moves higher and say corn oil on the back half of the year, how to that, would you be and maybe to the extent you can talk about the buckets of costs where you are more or less exposed, that would be helpful.

Yeah. I think the guidance we've given is prudent and, and we're, we're mostly covered on commodities for the year. So, I think from that perspective we're protected.

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.