Good morning. My name is Joseph, and I will be your conference operator this morning. At this time, I would like to welcome everyone to the Utz Brands First Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. Thank you. Kevin Powers, Head of Investor Relations, you may now begin your conference.

Good morning, and thank you for joining us today. On the call today are Dylan Lissette, Chief Executive Officer; Ajay Kataria, Chief Financial Officer; and Cary Devore, Chief Operating Officer. Dylan 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 Dylan, I just have 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 Dylan.

Thank you, Kevin, and good morning, everyone. I'm pleased to report that we had a very strong start to the year from a top line perspective, with record first quarter net sales of nearly $341 million. Our organic net sales increased 20.7%, with a healthy balance of net price realization of 9.4% and volume gains of approximately 11.3%. Consumer demand for our advantaged portfolio of snacking brands remains robust and price elasticity is better than we anticipated. We are fortunate to participate in a resilient and stable salty snacks category that has proven throughout our history to perform well during both inflationary and recessionary times. In addition, it's great to see our 100-year plus portfolio of brands continue to thrive as our snack foods provide a simple pleasure at a modest cost. Looking at IRI retail sales in the quarter, we gained share in the salty snacks category for the 13-week period ended April 3, 2022, which again, was done through a balance of both price and volume gains as our loyal Utz consumers, combined with our very strong brand equities are driving our top line momentum. And as we anticipated and is somewhat unique to salty snacks, the private label threat within our subcategory has remained minimal as private label dollar share in the salty snacks category has per IRI, declined for the last 16 12-week periods. Importantly for us, we continue to have large white space growth opportunities across our portfolio as we are under distributed across the United States relative to our large salty snack peers, and we are continuing to make the right long-term investment decisions to drive continued above-market growth in our expansion and emerging geographies. For perspective on our distribution, even though we are now per IRI, the third largest salty snack brand platform in the United States, with retail sales over the last 52 weeks of $1.45 billion, our household penetration is still only just below 50%, and we have tremendous runway for our brands to travel and grow across the country. Turning to margins. Consistent with what we've heard around the entire food industry, our costs continue to rise across many of our commodities. Since we last reported, the ongoing Russia and Ukraine conflict is impacting certain input costs meaningfully. And as a result, we now expect mid-to-high teens percentage gross input cost inflation in fiscal 2022. However, it's very important to note that as inflation continues to rise, we continue to take pricing actions and drive our productivity initiatives to fully offset these increased costs, all while making the necessary investments to support the strong growth of our brands. Enhancing our margins is a key value driver for both the near term and the long term, and we are well positioned to capitalize on our recent investments in both infrastructure and technology that we believe will support more profitable growth in the future. On that note, as you can see in our reported results, our pricing is building significant benefit with ongoing momentum, not only from the pricing and price pack architecture initiatives from 2021 but also from our 2022 pricing actions. Our pricing actions in 2022 include our most recently implemented round of pricing taken in mid-February as well as an additional round of pricing that we have already announced that is happening in late May of 2022. With this continued momentum, we believe that our Q2 pricing will be greater than the 9.4% pricing we achieved in Q1. In addition to this, we have incremental pricing actions under evaluation for the second half of the year to help offset any new inflation impact beyond our current expectations. It is important to note that both our pricing technology and our revenue management capabilities have dramatically improved over the last 12 months as a result of new talent and improved analytics. Also, as a reminder, it was only February of last year when we installed a new ERP system and we have built significant capabilities since then, which will continue to add incremental value into 2022 and beyond. So while we closely monitor our input cost trends and take inflation-justified pricing actions, we will continue to drive our strategic price pack architecture programs, leverage our new trade management software and better optimize our product mix, which will enhance our margins over time. From a productivity standpoint, our programs remain on track, and we continue to expect to deliver approximately 3% productivity in fiscal 2022. In addition, as you may have read in our press release on April 28, our recent Kings Mountain transaction is an important step forward to enhancing our productivity. The facility will enable us to in-source manufacturing across several product types that we currently outsource to some degree, increase our operational flexibility and will contribute to higher long-term margins over time based on identifiable multifaceted cost synergies. We plan to begin production at Kings Mountain in the second half of this year, and the facility will play a key role in supporting the strong growth of our brands across our rapidly growing markets in the Southeast, the Northeast and the Mid-South. So wrapping up our key messages, I'll touch on our updated outlook for fiscal 2022. Our Power Brand sales growth continues to be robust, led by both our flagship Utz and ON THE BORDER brands. And given our strong first quarter top line results and trends through the month of April, we are raising our net sales outlook for the year. We now expect total net sales to increase 10% to 13% and organic net sales to increase 8% to 10%. In addition, as the benefits of our pricing actions and productivity programs continue to build, we continue to expect to offset the previously noted higher inflation in fiscal 2022. As a result, our adjusted EBITDA outlook is unchanged and we continue to expect fiscal 2022 adjusted EBITDA to grow modestly versus fiscal 2021.

Thank you, Dylan, and good morning, everyone. I would like to start by congratulating the Utz team for delivering record sales this quarter by working together as one team to supply and service our customers while ramping up pricing, optimizing our brand portfolio and delivering volume growth through high-quality customer wins that will help deliver the company's long-term top line and bottom line growth strategies. Thank you, Team Utz. I will review a very high-level summary of our first quarter financial performance, and then we will dive deeper into our net sales and margin drivers. Before I begin, I would like to call out a few housekeeping items. As we continue to evolve as a public company, we are evaluating our reporting practices to simplify analysis and align with our peers. To that end, our fiscal 2022 financial reporting reflects the following changes. First, we are eliminating all pro forma non-GAAP metrics. This includes removal of further adjusted EBITDA. Note that we will continue to use normalized adjusted EBITDA for net leverage calculation. This was previously named normalized further adjusted EBITDA, but the calculation has remained the same, and you can continue to find the non-GAAP reconciliation in our supplemental tables. Next, you will find more prominent reporting of organic net sales growth. The definition has changed slightly since our previous reporting. In addition to excluding the impact of acquisitions, we now exclude the impact of higher conversions to create a more apples-to-apples organic net sales growth comparison to our peers. Lastly, selling, general and administrative expense has been renamed selling distribution and administrative expense. Given our distribution costs are booked as an expense and not in cost of goods sold, we thought it would be helpful to bring more transparency to the description of this line item on our income statement. For context, distribution expense is about 25% of our total SG&A expense. I hope you will appreciate these changes as we continue to mature as a public company and adopt best practices. With that, let's discuss our first quarter results. Our first quarter 2022 net sales increased 26.6% to $340.8 million. We delivered organic net sales growth of 20.7%, which excludes the impact of acquisitions, and the impact of converting company-owned DSD routes to independent operators. As a reminder, when we convert routes to IOs, certain selling expenses moved to sales discounts, thereby benefiting selling, distribution and administrative expenses and reducing net sales and gross profit. Adjusted gross margins contracted to 33.9%, largely due to higher input costs and an approximate 130 basis point impact from our IO conversions. In addition, adjusted SG&A improved by 180 basis points to 23.2% of sales primarily due to expense leverage from strong sales growth, synergy benefits from our recent acquisitions, and IO route conversions. Our adjusted EBITDA decreased by 3.7% to $36.5 million or 10.7% of sales and adjusted net income declined to $15.4 million. Adjusted EPS was $0.11 based on fully diluted shares on an as-converted basis of $139.9 million. Now turning to cash flow and the balance sheet. Cash flow used in operations was $36 million. Our cash flow from operations performance was primarily impacted by two factors: First, as expected and in line with our typical seasonality, working capital was a use of cash in the first quarter. We expect working capital performance to improve as we move throughout the year. In addition, as we noted in our earnings press release this morning, the $23 million of buyouts of multiple third-party DSD rights in the first quarter were treated as contract terminations and booked as an expense in adherence to GAAP. As such, these acquisitions were not treated as investing activities and therefore, impacted cash flow from operations. Had they been treated as investing activities, cash flow used in operations would have been $13 million. At the end of the quarter, our cash and cash equivalents were approximately $15 million and we had $81 million available on our revolving credit facility, providing close to $96 million in liquidity. Liquidity was primarily impacted by the aforementioned drivers that impacted cash flow from operations in the quarter. Moving down the balance sheet. Net debt at quarter end was $870.8 million or 5.1 times normalized adjusted EBITDA of $172.1 million. As a reminder, through the course of fiscal 2021 and fiscal 2022 year-to-date, we have funded from our balance sheet over $160 million of acquisitions, which include Vitner's, Festida, RW Gracia and buyout of various third-party distribution rights, including Clem snacks and J&D snacks. All of these acquisitions have been critical to building a stronger foundation to support the incredible demand of our brands and to drive sustainable higher-margin growth. While leverage is above our long-term target of 3 to 4 times, we are committed to generating stronger EBITDA, improving free cash flow conversion and paying down debt. Our goal is to approach the upper end of our targeted range by the end of fiscal 2023. We are focused on operating the business, integrating acquisitions and delivering synergy targets, all of which will improve adjusted EBITDA performance. Also, just a reminder, we have a well-priced credit structure with covenant light debt instruments, which provides significant EBITDA headroom while we work on reducing leverage. In addition, more than 60% of our long-term debt has a nominal interest rate swap through September 2026 at a rate of 1.39%. Wrapping up the balance sheet. As Dylan mentioned earlier, on April 28, we announced and closed the transaction of our Kings Mountain facility. The total purchase price of the transaction was approximately $38.4 million plus assumed liabilities of $1.3 million and was funded with approximately $10.4 million of cash and $28 million of proceeds from the issuance and sale of 2.1 million shares of Class A common stock to the affiliates of Benestar brands in a private placement. We are very excited to add this facility to our manufacturing footprint as it will play a critical role in supporting growing demand for our brands in the Southeast, Northeast and Mid-South regions.

Moving back to the P&L for some additional details, starting with net sales. Our net sales growth in the quarter was 26.6%, driven by organic growth of 20.7%, acquisitions of 7.2% and negatively impacted by the conversion of RSP routes to IOs, which reduced the net sales growth by 1.3%. Our organic net sales growth of 20.7% was driven by price/mix of 9.4% and volume growth of 11.3%. Our pricing actions continue to gain strong momentum and price elasticities have been better than expected. As expected, in the first quarter, adjusted EBITDA margins contracted to 10.7% of sales. Decomposing the decrease in the adjusted EBITDA margin for the quarter, positive drivers include price/mix of 940 basis points as we continue to take pricing actions to offset inflation. Productivity improvement of 130 basis points and selling and administrative expense, which excludes distribution expense of 20 basis points. Offsetting these positive drivers was higher inflation, including transportation costs, of 14.2%. Our inflation impact versus last year was comprised of elevated labor and transportation costs as well as higher commodity input costs. As a reminder, in the first quarter of fiscal 2021, inflation was muted and had a minimal impact on our EBITDA results. Inflation began to build significantly in the second quarter of last year and continues to climb higher throughout the year. As a result, the first quarter is our most difficult comparison from a margin perspective. Looking ahead to the rest of the year, as you'll recall, our expectation for total input cost inflation for fiscal 2022 was low double-digit percentages versus comparable costs in the prior year. We are raising our expectation for gross input cost inflation, inclusive of raw materials, labor, fuel and freight from the low double digits to the mid- to high teens as key input costs have increased significantly, largely due to geopolitical events. In response to these rising costs, we continue to implement pricing actions and you have been seeing these build in our sales results as price mix contribution to net sales was 6% in Q4 2021 and increased to 9.4% in Q1 2022 as we implemented new actions in mid-February. Q1 pricing results were especially encouraging as we saw them build from approximately 7% in January to 10% in February to 11.5% in March, which gives us confidence that Q2 results will show better pricing than Q1. And as Dylan noted earlier, we have another set of pricing actions being executed this month, and we were able to pull forward a few of our second half actions into this month's implementation to go deeper and wider across our product portfolio. This was in response to new inflation trends, and we now expect to deliver about 10% price in fiscal 2022 to cover our updated inflation expectations. That being said, we continue to closely monitor inflationary trends, and we have incremental second half pricing actions being evaluated based on how inflation trends over the coming months. In addition, we continue to expect to deliver productivity of approximately 3% in fiscal 2022, which will also help to offset gross inflation. While our primary areas of focus this year are our manufacturing efficiencies, logistics and packaging and product design, we are truly transforming how we approach our demand and supply planning, which is critical to support our growth and become more efficient. To enable this transformation, we have added best-in-class talent from across the industry, and we are deploying new tools and processes. As an example, one of the recent process changes we have made is to increase the lead times and require full pallet ordering on internal orders from our frontline DSD distribution centers, which provides our manufacturing plants more visibility to demand so they can plan better and make longer, more efficient production runs. Better demand signal and lead times have also driven higher order fill rates, which in turn improves availability on the shelf to support volume growth and improve customer satisfaction. This has a cascading effect in our supply chain, driving efficiencies in logistics by allowing the transportation team to secure lower-cost carriers and optimize loads and warehouse labor to reduce overall cost per case. In summary, we are making great progress in our productivity programs and I'm confident in achieving our 3% target this year. More importantly, similar to pricing, these productivity actions are making structural improvements that will drive meaningful long-term margin benefit to the company. Now turning to our full year outlook for fiscal 2022. Given the continued strong consumer demand and higher pricing related to increased input costs, we are raising our total net sales growth to approximately 10% to 13%, and our organic net sales growth to approximately 8% to 10%. However, with inflation expected to continue as we support and invest in our significant new customer growth, we continue to expect to modestly grow adjusted EBITDA versus last year. Consistent with our approach in setting our initial guidance for fiscal 2022, we continue to believe that it is important to be prudent in our earnings outlook. Our outlook continues to assume that we will invest in critical infrastructure to support significant top line growth anticipated this year. It also assumes continued incremental and strategic SKU rationalization as we optimize our portfolio with an enhanced focus on our power brands, including prioritizing production of branded products versus private label, to unlock additional capacity for growing brands such as ON THE BORDER. In addition, we are also anticipating that price elasticities may moderate to more historical levels. While we are not seeing this today and our assumptions may prove conservative, these are unprecedented times, and we remain pragmatic in our approach. Wrapping up our outlook we now expect capital expenditures of approximately $50 million. This is at the low end of our previous range, primarily due to the timing of spend related to large capital projects. Of note, our CapEx guidance excludes the purchase price of the Kings Mountain facility. In accordance with GAAP, the transaction may be treated as a purchase of property and equipment and not as an acquisition. That determination will be reflected in our cash flow results in the second quarter of fiscal 2022. In addition, we continue to expect an effective tax rate of approximately 20% and net leverage at year-end to be consistent with year-end 2021. Finally, on our quarterly cadence assumed in our guidance, as the benefits of our pricing actions and productivity continue to ramp up, we continue to expect adjusted EBITDA margins to improve throughout the year, but with fourth quarter margins below the third quarter, in line with our typical seasonality. We continue to expect adjusted EBITDA dollar growth with better margins in the second half of this year. From a sales perspective, we continue to expect that our first quarter sales growth will be the highest quarterly year-over-year growth of fiscal 2022. In addition, we expect net sales dollars to be slightly more first half weighted given our strong Q1 sales performance and the expected impact from strategic SKU rationalization and price elasticity in the second half of the year. Before I turn the call over to Dylan, I would like to revisit our long-term margin opportunity and our confidence in returning to margin expansion and mid-teens margins over time. These drivers have remained consistent. Our actions around pricing and productivity have stickiness and significant momentum and will drive margin enhancements when inflation stabilizes. Our supply chain is improving as we accelerate productivity programs and optimize manufacturing and logistics processes to increase throughput and unlock efficiencies. Our recent acquisitions are allowing us to scale our manufacturing capabilities to efficiently support strong demand for our power brand portfolio. Our recent investments in technology are helping unlock insights that enable several margin-enhancing work streams. Finally, we continue to enhance an already strong management team with new talent. Thank you, Ajay. Before we open up the call to questions, I just wanted to say how incredibly proud I am of the dedicated efforts of the entire Utz team who continues to navigate our company through an ever-changing and dynamic operating environment. Going forward, our team will continue to be focused on executing against our value creation strategies to grow top line sales, but equally and as important to continue to build on the earlier momentum from our margin enhancement programs that we believe will drive more profitable growth. We are dedicated to our growth process and building a company that delivers stockholder value while we delight more and more consumers across the U.S. with our portfolio of brands. We're excited about the challenges, the opportunities and the rewards that are on the road ahead of us, and we will continue to seek every opportunity to build a stronger Utz. Thank you very much for joining us today on our earnings call. And I'd now like to ask the operator to open up the call for questions.

And your first question comes from the line of Michael Lavery.

Thank you. Good morning. I just wanted to unpack the guidance a little bit more. You raising organic revenue growth from 4% to 6% to 8% to 10%, which seems like a pretty big jump this early in the year, but you've also called out the 10-ish percent full year pricing that you're expecting and you're just a hair away from that already in the first quarter. And so that would put you at the high end alone even with the 11% volume lift you've already had in the first quarter. I guess just trying to understand for between elasticities and conservatism, how you're thinking about the rest of the year because I think the math alone might suggest that's about a 4%, 4.5% volume decline you're assuming, which is 15-, 16-point deceleration from the first quarter. I know the comps get a little bit tougher, but how are you thinking about some of that? I am just trying to be extra careful on how the elasticities may go? Or what are some of the building blocks there?

I'll take that. This is Ajay. Michael, thank you for the question. I think you sort of answered it. And the math is right. We are taking our guidance up Q1 was really strong from a top line perspective. We were very encouraged to see us ramp up pricing as we have been talking about. And on top of that, our team was able to deliver very strong volume high-quality distribution gains, key national customers, and we really hit the ground running in the first quarter. Now for the rest of the year, we believe that pricing is ramping up we have found ourselves facing new inflation. So we'll cover all of that inflation that we are now seeing with new pricing, and we are expecting about 10 points of pricing in the year, which means as you did the math, we are anticipating lower volumes for the rest of the year. I would say most of that will be second half. You should see us Q1 will be our highest sales growth quarter followed by Q2 and so on. And then we'll see some volume take backs in the second half due to a couple of things. One bucket to think about is we are doing some SKU rationalization, which is strategic in nature. We want to replace lower-margin SKUs, private label SKUs with power brand, free up capacity for our power brands. We are also lapping some distribution gains that we had in second half last year. And the market, we believe, is going to present some price elasticities at some point. We don't know what the nature of that is COVID lockdown and supply chain challenges related to that, they're still around. So there is a lot of uncertainty right now. So we want to just be prudent and see where this goes for other quarter before we put a pin on the volumes.

That's very helpful. I wanted to follow up on the geographical balance. Your growth is quite strong in both core expansion and emerging markets. Can you discuss some of the dynamics at play, especially with the upcoming launch in the Southeast retailer? It seems to be gaining momentum compared to other areas. How should we consider the mix as it changes and what are the key drivers in each region?

Thank you, Mike. This is Dylan. We are very pleased with the first quarter results, where our core showed significant year-over-year growth compared to the category. This progress is largely due to our efforts in enhancing the core, particularly the transition from RSP to IO in the Mid-Atlantic, which is nearly complete. While there can be some fluctuations during this transformation to independent operators, we have achieved strong pricing results in the core, about 150 basis points better than in emerging and expansion markets, achieving around 10% compared to an average of 8.5% in those other areas. Looking ahead, our potential for growth relies not only on our strong brand but also on our improved supply capabilities. Over the past 18 to 24 months, we have focused on increasing our supply, particularly for OTV and On The Border, which were previously supply constrained. Our acquisitions of Festa and RW Garcia last year have significantly expanded our capacity to meet this demand. As we consider the balance between core and emerging markets, we are excited about the growth opportunities in the Southeast, particularly with our partnership with the largest grocery food retailer in that region, which is starting now in May. This may not yet reflect in our Q1 results, but it sets a promising direction for growth. We anticipate both our core and emerging markets will continue to grow at a strong pace, maintaining a balanced sales perspective as we move forward.

Good morning. Thanks for taking my question. So I just want to go back just to the performance on the ON THE BORDER brand, 35% growth during the quarter. Is there any way to frame what is being driven by distribution velocity, pricing, etc.? And then do you expect that strong double-digit growth to continue throughout the year?

Yes, this is Dylan. We've really been emphasizing the growth of ON THE BORDER. It was our largest acquisition in late 2020, and we started with virtually no presence in the tortilla subcategory before we acquired the brand. We have invested significantly in it, and the growth has been remarkable. We're seeing about 5% growth in ACV, with a nearly equal split between pricing and volume, although there was a slightly stronger performance in volume. The price appreciation over the quarter reached about 14.5%, alongside sales growth of roughly 35%. As indicated in our presentation, we're carefully balancing our core brands with our emerging and expanding ones. Since we took over the direct store delivery in August 2021 from a third-party distributor, our team has fully engaged with it, making it our second largest power brand. We have broadened its reach across various channels and have made substantial efforts in supply chain management, sales leadership, innovation, and marketing to support its growth. To address your question about ongoing growth, we do expect that double-digit growth to persist, supported by the strength of our distribution network and the collaboration of our sales teams. We're very optimistic about the future growth of this brand as we move further into 2022 and beyond.

Yes. That's a good question, Rupesh. In March, when we came out, we thought the year is going to look 50-50 on sales and about 45-55 on EBITDA, first half, second half. I think based on Q1 performance, it's probably going to more like 51-49 on sales and 47-53 on EBITDA, first half, second half, and that's a little more balanced on EBITDA. From a cadence standpoint, we are still expecting EBITDA to ramp throughout the year as we move sequentially through the quarters from a margin standpoint. And Q4 will be a tick down versus Q3. That's just the seasonality of our P&L. So that's what we're expecting. And I mentioned about volume. I will point out, we are expecting price elasticities and SKU rationalization, market dynamics to suppress volumes in the second half. And we said this in our prepared remarks, I hope I'm wrong, we don't know how to think about it. The economics theory will tell us that at some point, consumer is going to react to the multiple rounds of pricing and inflation, but we really hope that we're wrong about that, and we are just being prudent and frankly, conservative on that.

Hey guys, good morning. Thank you for taking the question. Dylan, I just wanted to start with your comments around private label and understanding that it's a relatively small exposure in a lot of your categories. But one of the things that we've been hearing is private label is obviously suffered just from a lack of availability, capacity constraint. And so just if that private label capacity does unlock a bit, you have better availability on shelf while you guys are raising price, how are you thinking about that? How is that being contemplated into your outlook? And then separately, are there certain categories, whether it's potato chips or pretzels that are more exposed to private label or less so that would be helpful from our standpoint.

Absolutely, Peter. Yes. I mean one of the most interesting aspects of our category is private label is relatively small to start, right, compared to many other CPG categories. I believe the exact number is it is 4.6% share. I've noted in my remarks that it has also been losing share over 16 of the last 12-week periods. Much of that, I think, is the strength of branded products like ours, the strength of the Utz brand, the strength of the OTB, the Zapp's brands, our power brands relative to the strength of private label in a market that is really historically not oriented towards private label and there are significant route-to-market advantages that branded players like ourselves have in the salty snack category, meaning our DSD sales force. We have a DSD sales force that is almost 2,100 DSD routes today across the country that every day go in and service and sell customers' products. The typical private label in our industry does not do that. So this gives us a great opportunity to have that competitive advantage in this category. In terms of subcategories, pretzels have a higher percentage private label than the entire salty category, a little bit more heavily weighted there. But I don't foresee that as something that is a risk to us as we look forward into our ability to price our ability to overcome inflation. As Ajay mentioned in his remarks and I mentioned in my remarks, the pricing engine that we have put into place that is significantly better and more talented than a year ago, not just in people but in technology, where we stand today versus where we stood 12 months ago with the installation of the new ERP and our abilities really does give us a lot of room where we think that we're in the early innings of our ability to take price and trade in all of the aspects of their price architecture that can really benefit us as we look forward to the rest of '22, but also into like '23 and beyond.

Yes. We view the transactions in Q1 as acquisitions involving buyouts of distribution rights from some of our master distributors. If we exclude those, our cash flow outlook for the year remains unchanged, and we still expect to generate between $30 million and $40 million. Additionally, we've adjusted our guidance to anticipate approximately $50 million in CapEx, which is lower than our previous estimate of $50 million to $60 million. This should also contribute to our free cash flow generation. The Q1 results were promising, and our EBITDA guidance remains modest. Overall, this leads us to the same conclusion we had a few months ago that we expect to achieve $30 million to $40 million in free cash flow.

Yes. So just to clarify, that $30 million to $40 million excludes the buyout of the $23 million from the buyout as well as Kings Mountain?

That's correct.

Thanks, good morning. I would like to revisit the discussion on SKU rationalization and get some additional insights. I understand that SKU rationalization involves removing weaker brands and replacing them with stronger ones in the same category as part of standard business practice. I'm curious why this is being referred to as a contra revenue item. Additionally, since you are introducing stronger brands, will this significantly affect sales? I would like to understand that better. Also, is this strategy meant to be a long-term plan, or is it simply a minor adjustment in certain areas?

Thanks, Bill. This is Dylan. I'll take that. We've been discussing SKU rationalization for years, even before we went public, and it has continued since. This is a standard initiative for any consumer packaged goods company that aims to evaluate their product lines continuously. We highlight this for a few reasons: first, to be prudent; second, due to timing; and third, because as we've mentioned before, when we acquire new companies, our standard operating procedures involve assessing their SKU lists and streamlining them. For instance, if we acquire a company with 100 SKUs, we often determine that they should only retain 50 or 60, which enhances efficiency. While this may initially have a negative impact on our sales, we manage the timing carefully. Sometimes, we might terminate a customer contributing significant revenue, but this is offset by acquisitions like Festida or RW Garcia, which improve our supply for our on-the-books inventory. Timing is crucial; we eliminate certain customers, create capacity, onboard that capacity, and then realize the benefits. You'll see this reflected in our on-the-books inventory results this quarter. We would have liked to unlock more capacity last year, but we had to work through SKU rationalization first. So, to summarize, we aim to be prudent, and we're not looking to eliminate large amounts of net sales or create significant gaps. Instead, we handle it thoughtfully to maximize reductions quickly and convert them into net sales gains for our key brands.

So I think it is quantifiable. We believe SKU rationalization with the things that Dylan talked about taking some SKUs off the table so we can make room for OTB SKUs, for example, and other power brands, maintain supply simplified. It's probably a 200 to 300 basis point of sales impact to the year. And as Dylan said, we intend to replace that sales with higher-margin power brand sales, but it's a timing, and we expect that it's going to pressure second half a little bit.

But to be clear, we're being cautious in our approach to ensure we handle this conservatively. We have strong confidence in our ability to replace those sales, so we're just being careful.

So I think first of all, you are correct. Last year, we came off of a new ERP implementation. We were building the team, etc. So we needed the 3 or 4 months to build all that out to start catching up to inflation. So we are there now. You're seeing that in our Q1 results. The team technology, everything we have talked about, we really figured this out. So from here on out, you will see us ramp margins, and you're going to see us sort of be in lockstep with inflation, with price and productivity offsetting and the biggest recovery for over margins will really come towards the end of Q2 when the May price increases that we are taking start to develop, and we start to lap some of the inflation from last year, some of the pricing or lack of pricing from last year and deliver all that.

I have a quick question about SG&A, which increased by 18% in the quarter. I'm curious about what factors are contributing to that rise. You mentioned some acquisitions, but is there also a reduction in costs due to the conversion of IO routes? Would that number have been higher if we excluded the impact of that conversion?

For sure. We did benefit from higher conversions. The way we think about it is point-for-point match. You see us call IO conversions worth 130 basis points hurt to net sales. So it was a corresponding 130 basis point help to SG&A. So SG&A as a percent of net sales was 180 basis points favorable. So $130 million of that is higher conversions. The rest of that is volume leverage and spend.

Okay. So what's driving the number higher? Is it just the cost of delivery and can I correlate that with volume growth maybe?

Yes. So the dollar amount did go higher because of our distribution costs being up versus prior year. Also acquisition, SD&A as we are calling it now is also in there. So those two things and the investments we are making to support new customer wins. Those are the things driving the dollar amount higher, but the net sales is in a good place.

Can you talk about which channels performed really well or which ones were below average in terms of channel growth?

Yes, this is Dylan. Our food grocery channel performed exceptionally well, contributing significantly to our strong performance relative to the category. Customers within that channel are outperforming the category by around 400 to 500 basis points in many instances. While our convenience channel was slightly below the category, we are seeing robust growth on the East Coast with our premier convenience retailers, which is outperforming the category. Additionally, we have begun enrolling our power brands with a major convenience channel customer just four weeks ago, and we anticipate growth throughout the rest of this year, which we view positively. Our mass channel is performing very strongly against the category. In terms of the club channel, we see it as an area of opportunity; it's quite cyclical and can fluctuate based on specific items, but we believe there's potential for improvement there as well. Overall, our performance is solid across various channels.

I wanted to ask about the breakdown of your price increases. What percentage is related to changes in price pack architecture? Are some of these increases due to reductions in promotions or changes in your promotional strategy? Additionally, I’m interested in how these elements contribute to the 10% pricing growth you mentioned.

Yes. This is Ajay. So yes, we haven't broken it out that way, but I will say that price pack architecture, maintaining a healthy gap with within the subcategories that we play in, those are some big changes that we are making. And we are really deploying all levers and it's not a single answer across the portfolio. It really depends on are you talking about pretzels or tortillas which customer are you talking about. So we are really deploying less price increases, price pack architecture work in a big way. And then we are tweaking promotions as well as much as we need to, to stay competitive within the subcategories and channels that we play in.

Yes, just to jump in, it really shows how far we've come since a year ago in February and March of 2021. At that time, we were establishing our technology for trade management and pricing systems while also implementing an ERP system. Today, our ability to manage price pack architecture has improved, but the total impact is likely around 20%. The majority is related to pricing, or a mix of pricing along with the timing, depth, and quantity of promotions. It's mainly focused on pricing and trade rather than significant changes to the product architecture itself.

Yes. Mitch, I have the advantage of nearly 27 years of experience and have seen these market cycles before. Everything tends to follow a long-term pattern. The key takeaway is that we operate in a rational market. There's no urge to dramatically lower prices. We provide a high-quality product at a reasonable cost that offers instant gratification without requiring a significant financial commitment. Our brands are robust, and we are in good company with strong competitors who are all striving to create excellent products. Historically, we've not experienced a situation where lower inflation leads to a price war. As inflation slows, we're optimistic that we'll benefit from improved pricing strategies, enhanced trade promotions, and skilled personnel, resulting in more stable pricing. A reduction in inflation should also contribute to higher profit margins. We look forward to this upcoming opportunity because, going into 2022, the unexpected rise in inflation due to geopolitical factors caught us all off guard. Nevertheless, this will eventually stabilize, and we will continue to work hard to reward our customers as we always have.

Okay. Great. Thank you all for joining us today. We are extremely excited about the momentum we have in so many facets of our business, in regards to growing the top line and the bottom line, and on behalf of our entire team, we thank you all for your continued support.

This concludes today's conference call. You may now disconnect.