Thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Utsbrand Incorporated 3rd Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. It is now my pleasure to turn today's call over to Mr. Kevin Powers, Head of Investor Relations. Please go ahead.

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 Kerry 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. During this call, management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to the risk factors in Usbrand's most recent quarterly report filed with the Securities and Exchange Commission, as well as the risk highlighted in the company's press release issued yesterday for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, the interest 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 the call will also be available on the And now, I'd like to turn the call over to Dylan.

Thanks, Kevin. Good morning, everyone, and welcome to our third quarter earnings call. First off, I'd like to give a special welcome to our recently promoted CFO, Ajay Kataria. Ajay joined us in 2017 with a strong public company financial background and a great amount of experience with several CPG companies. He worked directly for our Chief Operating Officer, Cary DeVore, over the last few years, and I'm excited to have him fully into the CFO role now. Thank you to both Ajay and Keri for such a well-planned out transition. So let's get started this morning with a few key messages. Demand for our brands remains strong, and our two-year sales growth is accelerating as we continue to lap the elevated consumption impact from COVID-19 pantry loading in 2020, with improved strength in our core and significant growth in our emerging and expansion geographies. Our IRI retail sales outpaced the Salty Snack category on a two-year basis, with our power brand significantly outpacing the category with strong performance across all retail channels. On a longer-term basis, I'm also happy to report that our national expansion continues with both ACB growth of around 600 basis points over the last two years and total points of distribution gains of approximately 22% over that same time period. We expect that these trends will continue into the future as our team consistently builds out our national presence. Like most of the industry, gross margins in the quarter were impacted by rising inflation, but our pricing actions and productivity initiatives are underway and on track and continue to build as we exit the year with the carry-forward benefit expected into fiscal 2022. As I'm sure you can imagine, after 26 years of being at UTS, and as CEO for almost a decade. I'm very proud of our incredible UTS Associates as we celebrate both our 100-year anniversary as well as our first year as a public company. We remain very focused on continuing to think long-term and we continue to deploy the value creation strategies that have enabled us to succeed for so many decades. To that end, I'd like to take a minute to reflect on our progress this quarter against these strategies. We took this incredible company public with the goal of building a fast-growing, profitable national snack food platform, and we know that delivering on our long-term value creation strategies is the path to achieving that vision. If we are successful in this, we will deliver long-term results for all of our stakeholders, our associates, our customers, our loyal consumers, and our shareholders. It will lead to better opportunities for our team as we continue to grow, better turns on the shelf and traffic for our retail customers, as well as continuing to deliver the absolute best tasting snacks to our consumers. If we can do all of this, we will create significant long-term value for our shareholders. So on that note, let's check in on how we are performing against our core objectives. As a reminder, our foundational core value creation strategies are to reduce costs and expand margins, to reinvest some of these savings to accelerate revenue growth, and and to continue to leverage our platform and core abilities to make strategic acquisitions that add value to our company. Let's start first with reducing costs and expanding margins. We made good strides in the quarter to help build the foundation for a more advantaged margin profile in the future. We are fishing hard on our productivity programs, which are focused this year on continuous improvement in automation across key manufacturing processes, and we remain on track to deliver about 2% productivity this year. Productivity will continue to increase as we ramp up investments in higher ROI projects. In addition to deploying capital for these initiatives, we have several continuous improvement in process-related projects that will drive productivity that don't require significant capital, and we are hiring even more talent in engineering and productivity as we enhance and invest our capabilities across our entire supply chain optimization efforts. In addition, moving from company-owned routes to independent operators is a continued strategic initiative for us as well. We want that entrepreneurial mindset to be pervasive across our entire DSD network, and we continue to make progress every single quarter. to that end we converted approximately 42 routes in the quarter and we remain on track to convert approximately 200 routes this year where there continued long-term goals to be 100 percent converted to independent operators around the middle of 2022. i'm also happy to report that for the first time we have grown our dsd route base to over 1800 routes which includes approximately 60 new routes this year which we continue to believe is a very important part of our competitive advantage in the industry the path to higher margins is also underpinned by our price pack architecture initiatives which includes better trade management and higher net price realization trade management will benefit from improvements we've made in people process and technology including standing up a new trade management system as part of our new ERP On net price realization, we have been taking pricing actions throughout the year in response to the higher inflation across our entire supply base. And while there is a natural lag, the pricing benefits are starting to really build as we expected, and price mix improved to a 4.2% contribution to year-over-year net sales growth in the quarter. That will continue to move even higher in the fourth quarter, but it's still lagging the continued cost increases that we are seeing. Next year, as the carry-forward benefits of pricing actions build, we will be better positioned to offset inflation increases. We have more pricing already lined up for Q1 of 2022, and if costs continue to rise, we will take even more price. Luckily, we believe in the strength and the quality of our brands, which allows us to continue to price accordingly into the future. Finally, as our sales mix shifts more to power brands, this will further help in improving our margins. Power brands today improved to 87% of our retail sales, up approximately 200 basis points from this time two years ago. As per our plans, this will continue to build to an even higher percentage as we go forward. Our next strategy is reinvesting to accelerate revenue growth. The key objectives remain in place and are accelerating our power brands, expanding our distribution in underpenetrated channels, continuing our geographic expansion, and increasing our presence in key salty snack subcategories. We have made tremendous progress across each of these objectives in the quarter as our sales growth continues to accelerate, and we deliver two-year gains across both the mass and C-Store channels as well as our expansion in emerging geographies, and we increased our presence and share in certain subcategories, most notably tortilla chips. I'll expand on these areas a bit later in my remarks. Finally, we continue to execute on our goal of making and effectively integrating strategic acquisitions. Two weeks ago, we announced our latest acquisition of RW Garcia, a family-owned

and operated artist and maker of high-quality organic tortilla chips, crackers, and corn chips.

RW Garcia has significant production capacity to support the growth of our brands, which will position us better to serve more demand and be more efficient in doing so. Further, R.W. Garcia products are non-GMO verified, certified gluten-free, low-sodium, and free of artificial additives or preservatives, which we believe long-term will boaster our Better For You portfolio and will, upon closing, bring our platform-wide sales in the Better For You category to around $100 million on an annual retail sales basis. From a financial standpoint, this is a highly accretive transaction where we will pay 5.7 times adjusted EBITDA, assuming run rate cost synergies that we have a clear line of sight into. We look forward to closing in December of 2021 and welcoming the RW Garcia team and their capabilities into the family. Beyond the RW Garcia signing of Definitive Documents announcement, we completed four acquisitions since going public in late August of last year. Our team is incredible at this and I'm happy to report that all of the integrations are going smoothly and we are on track to deliver against our top line and bottom line targets. Our team has a proven M&A playbook that's been actively deployed over the last decade and I'm happy with our progress year-to-date and in the third quarter. Turning to the financial results in the third quarter, net sales grew over 26%, which reflects the positive contribution from our acquisitions as well as organic growth of 1% or 2% when you adjust to the impact of our I.O. route conversions. I'll note that this quarter we returned to year-over-year organic growth as we expected, and this was on top of our 10% organic growth in the third quarter of 2020. Importantly, our net sales momentum is building and our pro-former two-year CAGR of 6.4% is an improvement from 6.1% in Q2 and 4.3% in Q1. And based on what we are seeing in October, we expect this trend to continue in the fourth quarter. In addition, adjusted gross profit grew 13% and adjusted EBITDA grew 17% as margins were impacted by the key input cost increases that I described earlier. Shifting to our IRI MULOC retail sales results for the period ending October 3rd, we are happy to report the two-year CAGR share gains have happened for both our power brands and the entire UTS platform. Our two-year CAGR share and growth rates continue to accelerate, driven by our power brands.

This is part of our long-term strategy, as described previously, as we move our portfolio

into a tighter, more responsive brand portfolio over time. Our power brands' gains are up-paced in the category on almost all metrics, and our foundation brand performance is getting better. but it still reflects our emphasis to focus on our power brands as well as some of the negative impact on foundation brands when we execute our M&A strategy. Additionally, our ongoing skew rationalization focus is mainly on our foundation brands, which is consistent with a long-term strategy but is obviously heightened in this environment as we look to simplify our portfolio. We believe that these great retail sales results are proving that the S-brands can and will continue to grow off of the higher level of sales from the COVID-19-driven consumption trends of 2020.

Turning to our growth drivers in the quarter,

our total UTS portfolio gained share across four of the five major subcategories that we track, and we gained share in salsa and queso as well. We continue to increase our presence in key salty snack subcategories with share gains on a year-over-year basis in tortilla chips, pretzels, cheese, and salsa queso, and on a two-year CAGR basis, we grew 8% in potato chips versus a subcategory of 5.1, and 17% growth in tortilla chips versus a subcategory of 7.6%. It is truly great to see our two largest subcategories in dollar sales are growing and are taking As a reminder, at this time last year, our presence was nearly non-existent in tortillas, And today, we have a 4.3% share, and we are the number three brand in tortillas due to our acquisition of On the Border in December of 2020, as well as the continued growth of our tortillas brand. In the quarter, we continued to make great progress driving geographic expansion while also executing to improve the performance in our core. We grew 13.3% in expansion and 14% in emerging geographies, outpacing the category by about 400 BIFs and 500 BIFs, respectively. There is no doubt that our brands travel very well beyond our core, and it's exciting to see our continued successes as we outpace the market consistently in these white space geographies. In addition, I'm happy to report that in our core, our two-year CAGR doubled from 2.9% in Q2 to 5.7% in the current quarter. Our foundation brands, as expected, had less of a negative impact on our growth, and our UTS brand strength continues to improve. moreover on the border growth remains robust with a two-year CAGR of over 26% in our core with broad base strength across every channel to that end as we mentioned last quarter we transitioned our primary DSD distributor for on the border in certain key geographies to us in August and we are seeing very positive results congratulations are due to our team and to our distributor of partners for really embracing this wonderful brand and driving such great growth, display, space, and sales. We are also leveraging the U.S. platform to not only drive increasing sales growth, but also to increase the supply of product to meet this ever-increasing demand for on the border with new production capabilities that have been installed, as well as the benefits from our acquisition of Fistida in June of 2021 that has unlocked even more supply. seeing as we acquired on the border less than a year ago in December of 2020 I couldn't be more pleased with a long-term value we are creating for the platform with the on-the-border brand and finally from a channel perspective in the quarter we gained share in almost every channel importantly we had been lagging the mass category throughout the year and we committed to you that the gap would narrow and that performance would improve in the quarter we returned to strong share gains and significantly outperformed the category due to space gains and phenomenal execution by our team in this channel. On a two-year CAGR basis, we grew 15% in the mass channel versus the category at 12%, and equally and perhaps as important, the entire C-Store channel is rebounding positively as mobility across the U.S. improves. We are currently underweight in this channel and we gain share in the quarter on both a one-year and two-year CAGR basis and we look to see continued share growth in this channel into the future especially in the West I now like to turn things over to Ajay Kateria our CFO Ajay thank you Dylan and good morning everyone I would

like to begin by thanking Dylan Kerry and the entire UTS team for helping me transition smoothly into this new role. I am excited about the opportunity ahead of us at UTS and humbled to participate in the next century of growth of our incredible brand portfolio. I'll start with a very high-level summary of our third-quarter financial performance, and then we will dig deeper into our net sales and margin drivers. Third quarter net sales increased 26.1% to $312.7 million, primarily due to the impact of our acquisitions over the past year. We delivered organic net sales growth of 1%, which would be 2% excluding the impact of converting company-owned DST routes to independent operators. As a reminder, when we convert routes to IOs, certain selling expenses moved to sales discounts, thereby benefiting SG&A and reducing net sales and gross profit. Adjusted gross margins contracted to 35.8%, largely due to the higher input costs and the aforementioned impact from our I.O. conversions. In addition, adjusted SG&A improved to 21.1% of sales versus 24.6% of sales. The SG&A improvement in the quarter was primarily driven by lower corporate G&A, synergy benefits from our recent acquisitions, higher route conversions, and optimized marketing spend given the continued strong demand environment. Adjusted EBITDA increased 17.3% to $44.8 million or 14.3% of sales, which was a nice sequential improvement from our second quarter margins of 12%. Finally, adjusted net income increased nearly 40.7% to $25.6 million, and adjusted EPS was $0.18, based on fully diluted shares on an as-converted basis of $142 million. I will note that we benefited from a lower-than-expected tax rate in the quarter. Briefly turning to our balance sheet and other key points, At the end of the quarter, our liquidity remained strong with cash and cash equivalents of $26 million and $133 million available on our revolving credit facility, providing close to $160 million in liquidity. Moving down the balance sheet, net debt at quarter end was $796.4 million, or 4.7 times normalized further adjusted EBITDA of $170.2 million. Additionally, as we indicated in the acquisition announcement, we intend to use balance sheet cash and our revolving credit facility to fund the $56 million purchase price of R.W. Garcia. Excluding the impact of R.W. Garcia acquisition and based on our expectation of full year 21 normalized EBITDA, we now expect to end this year with a net leverage ratio of approximately 4.5 times. Our target net leverage ratio remains between three and four times, and we expect to return to this level within one to two years. Moving to cash flow, capital expenditures were $17.8 million through the first three quarters, and we continue to expect this to accelerate further in the fourth quarter to support our ongoing and increasing productivity initiatives. Moving back to the P&L for some additional details, starting with net sales. Our net sales growth in the quarter was 26.1%, driven by acquisitions of 25.1% and organic growth of 1%. Our organic net sales growth was driven by price mix of 4.2%, partially offset by volume declines of 2.2%, and the impact of I-O route conversions, which reduced the net sales growth by 1%. Like the rest of the industry, we faced several supply chain disruptions during the quarter. Despite a challenging environment, our frontline procurement, manufacturing, logistics, and selling teams have done an incredible job in meeting the continued elevated demand for our growing banks. The team was able to deliver top-line growth and execute pricing actions. Wrapping up on sales, given the significant impact of several acquisitions over the past two years, we provide pro-forma-net sales growth as another indicator of our performance. Our pro-forma-net sales growth on a two-year CAGR basis was 6.4%, and this was an acceleration from the second quarter rate of 6.1% and first quarter rate of 4.3%. Moving down the P&L to adjusted EBITDA. In the third quarter, adjusted EBITDA margins contracted by 110 basis points to 14.3%. I'll note that we are lapping very strong performance last year when our adjusted EBITDA margins expanded by about 170 basis points. Decomposing the decrease in adjusted EBITDA margin for the quarter, positive drivers include price mix of 360 basis points as we take pricing actions to offset inflation, SG&A, excluding transportation, of 70 basis points, acquisitions of 100 basis points, and productivity improvement of 100 basis points. Partially offsetting these positive drivers were headwinds related to volume of 80 basis points as we lap COVID-19-related growth from last year and supply disruptions noted earlier, and inflation, including transportation costs, of 650 basis points. Consistent with industry trends, our inflation impact versus last year was comprised of elevated labor and transportation costs as well as higher commodity input costs. These include continued pressure on all varieties of edible oil, wheat flour, corn-based items, and pork-related items. As with our agricultural goods, our packaging components, such as film, resin, and corrugate, continue to see meaningful cost increases. To that end, as you will recall, at the beginning of the year, our expectation for commodity inflation was 4% of cost of goods. That expectation increased throughout the year as the industry conditions began to worsen, and we now expect commodity inflation of about 7% of cost of goods for the fiscal year. While we have most of our raw material supply under contract, several disruptions at our suppliers have resulted in higher costs as we work to secure supply from alternate sources.

Similar supply chain pressures at our co-manufacturers are driving costs higher

in areas where we do not have covered positions. When we layer on incremental labor and transportation costs due to higher-than-expected supply chain pressures, we now have total input cost inflation of low double digits in the second half of the year versus comparable costs in the prior year. As we learned more about rising input costs, we reacted quickly early in the year and began planning pricing actions to help offset these costs. We have been implementing these pricing moves throughout 2021, and you're seeing these building in our sales results as price mix contribution to net sales was at 1.9% benefit in Q1, 2.3% in Q2, and 4.2% in Q3. As we continue to implement new actions, this contribution will increase in the fourth quarter and will build into fiscal 2022. too. And to reiterate what Dylan mentioned earlier, if costs continue to rise next year, we will continue to take pricing actions accordingly. Now turning to our outlook for the remainder of the year. We continue to expect full year 2021 net sales to be consistent with 2020 pro forma net sales. As a reminder, our 2020 pro forma net sales is on a 52-week comparison basis, assumes we owned HK Anderson and Truco on the first day of fiscal 2020, and assumes $20 million of net sales for WITNERS to align with expectations for fiscal 2021. We continue to expect modest organic sales growth year over year, even as we lack fiscal 2020 organic growth of over 8%. Moving to adjusted EBITDA, reflecting our updated assumption for incremental pricing flow-through, offset by higher-than-expected supply chain inflation, we now expect to be towards the lower end of our previous range of $160 to $170 million. For adjusted EPS, we are reaffirming our previous range of $0.55 to $0.60. This reflects lower-than-expected interest expense and a lower-than-expected tax rate. Turning to our additional assumptions, On slide 20 of our earnings presentation, you will find a detailed list that supports our 2021 outlook. Notable assumptions that have changed include raising our commodity inflation to approximately 7% versus 6% previously, higher than expected transportation costs, cash interest expense of approximately $30 million versus $33 million previously, an effective cash tax rate of 15% to 17% versus the prior expectation of 17% to 19%. And finally, our net leverage is expected to be at the high end of our previous range, and we now expect it to be approximately 4.5 times. This excludes the impact from the RW Garcia acquisition. With that, I'll now turn the call back over to Dylan.

thank you Jay in closing I want to reiterate that I truly believe that we are doing all the right things to grow our business for the long term that in return will drive great results as a company we have seen inflationary periods in the past and we've weathered supply chain challenges many times over our 100 year history and we are committed to building an even stronger more resilient infrastructure for continued growth as we begin to move towards a new year and I'm very thankful to our incredible associates that make all of this happen we are excited about our future and we look forward to continuing to create value for all of our stakeholders thank you again 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 this time I'd like to remind

everyone in order to ask a question press star followed by the number one on your telephone keypad. Your first question comes from Andrew Lazar with Barclays. Your line

is open. Great. Thanks so much. Good morning, everybody. Good morning. I guess I'd like to start out. I understand it's obviously early to go into too much detail on 2022 at this stage, but I guess when I sort of de-SPAC, I know gross margin was expected to expand significantly in 2022 due to productivity ramping up and optimizing revenue and trade and improving the margin I guess my question is, would those levers still be expected to be in play, which along with pricing that you've talked about, be enough to keep gross margins stable in 2022 or should we now anticipate some year-over-year compression? And I ask, I guess, because consensus still has sort of gross margin expanding for next So any even just directional thoughts on that would be really helpful.

Hey, Andrew, this is Ajay. Thank you for the question. I'll take that. Listen, before I answer that, I do want to note that we are not providing guidance for 2022 today. Now, having said that, the environment remains incredibly dynamic. And as a company, we are focused on a couple of things. First, demand is strong and we are doing everything possible to maintain supply to our customers and consumers. We have done that throughout last year and this year through COVID and through the dynamics Secondly, our pricing program is ramping up. As I noted in my prepared remarks, that's working. And third, you know, Dylan outlined in his remarks that we are executing on our long-term strategies. And to answer your gross margin question specifically, you know, if I look at these focus areas, they're all delivering for us. You know, pricing, trade optimization, productivity, everything that we talked about when we went public, you know, they're all coming through for us. So based on what we know today about inflation, about the environment and all of these things delivering for us, I do believe that we will cover inflation and gross margins in 22 should not contract. You know, I'll remind you that transportation costs are fluid and they are in SG&A for us. So again, we are talking about gross margins and we are not providing guidance for next year at this point, but I do believe that they won't contract.

Very helpful. Really appreciate that. And then I guess just a follow-up would be I saw that you brought on a new head of supply chain, and obviously in light of just all the challenges that the entire industry is facing at this point, I guess I'm trying to get a sense of what would be the roadblocks, if any, to moving even faster on productivity maybe than you had initially planned. Thanks so much.

Yeah, great question, Andrew. This is Kerry. Look, I think we feel really good about productivity. You referenced Chad White, who we recently hired to run logistics for us. We're super excited about that. He ran logistics for Pinnacle Foods and some other companies. He's consulting with us right now and has been since 2020 on value creation initiatives. So we're thrilled to bring him on. He's got a great depth of experience and a network of relationships that will benefit us. With that, we're able to put Brian Gretz, our senior vice president, currently in charge of logistics, into an enterprise integration role to help with M&A integration. He's been here for 30 years and has basically held every position in supply chain you could think of. So we're really excited about the move from a roadblock perspective. You know, look, I don't see any roadblocks per se. We've given guidance that we'll be 3% to 4% of COGS in productivity by 2023. That's still a good number. We feel great about that. We're going to put more emphasis on continuous improvement and get that program up and running more robustly. So we feel good. I mean, I think we're on track to hit our targets, and, you know, we've got the liquidity and the capital, and I think the team to drive it.

Thanks so much.

The question comes from Rupesh Perik with Oppenheimer. Your line is open.

Good morning, guys. This is actually Erica Ilan from Rupesh. Thanks for taking our question. So I'm going to just start with sales. So, you know, as you look at the sales acceleration here in Q3 and your expectations for Q4, has anything surprised you in terms of what you're seeing? And then, you know, your art team has also called out supply disruptions. And I apologize if I missed this, but is there any way to quantify the impact on the top line during the quarter? And if maybe you could just dive a little bit deeper kind of in what you're seeing here and your expectations on these going forward. You know, just curious on, you know, when you think these could potentially get resolved.

Yeah, so, hey, Erica, this is Dylan, and I'll just maybe take the first part of the question on, you know, demand and what we're seeing in sales. And then Jay can quantify perhaps some of what we're seeing just from a supply challenge, you know, standpoint and try to quantify that if it's even quantifiable. You know, as you can see from our IRI consumption data across both our core and our emerging and expansion markets, we're actually really seeing a nice pickup in two-year CAGR rates and one-year CAGR rates in many of our subcategories and many of our channels. So I think from a sales demand perspective, we're very excited about what we're seeing. We're seeing it continue into Octobers, which I noted in my remarks. We see demand there. I mean, the consumer is buying. They're buying our brands. You can see it across the channels, across the geographies, and across the subcategories. So I won't go into too much repetitive detail. But as you know, there are supply challenges. And, you know, our ability to meet that increased demand, you know, we're leaning in. And at the end of the day, the last thing that we want to do is not supply a customer. We believe in the long-term benefit of supplying our customers the demand that they are asking for. And so we're spending a lot of time investing in that and really at the end of the day putting dollars against that in terms of just making sure that we're securing the inputs in the supply chain that we need to meet that demand. And in terms of quantifying what we may have missed out on in terms of sales, I don't think we really have a number for that. We do know that every single week, if it's some part of our component that's not there, right, it could be film, it could be seasoning, it could be other oil supply, it could be the ability to move freight. There's always going to be that, especially in today's environment. I'll say luckily, I believe we have a fantastic team and we have a 100-year platform that's been dealing with supply chain issues in the past and commodity issues in the past, and we're very good at that. So I don't really have a number to quantify it, but the good thing is that I'd say demand is outstripping our ability to supply, and as we look forward and solve some of that, and the industry itself solves some of that as we go forward, then that portends for good things for us as we look into the future.

Okay, that's helpful. And then just on the core, I mean, you made nice progress this quarter, you know, in closing the performance gap on the core versus the category. Can you maybe just remind us of, you know, the key efforts, you know, that have helped you achieve this, you know, what we should be thinking about going forward, and then just any new insight on when the core could potentially be back to being at least in line with the category?

Yeah, I mean, you know, we made, you know, we're really happy. I mean, we've been saying this in the last few earnings calls about the fact that we have a little bit heavier foundation brand weighting in our core that we have to go against. We've also noted in the past that as part of our M&A strategy, you know, in some cases we're buying foundation brands that we're, you know, making sure that they have the right pricing the right display and the right items the right innovation and you know we're doing a lot of work around foundation brands and you'll see in the the data that we supplied to you that you know that has improved in our core we've really put a lot of effort on focus right we have a lot of transition from route salespeople to independent operators that occurred in the core and once we get through that transition period we really start to ramp up in our productivity for that. So there's a lot of effort, a lot of work by our sales team that's gone into the core on execution. And lastly, you know, included in there is the, is on the border, right? The Truco acquisition opening up on the border to our core. That was one of the core tenants of that purchase back in December of 2020, where we talked about only 14% of their sales was in our core. And we thought that our DSD network could really support and grow that exponentially. And I think you'll see that data as well in the deck where we can really see that start to expand the core. So if you think about a few of those things happening, you know, the core is about 50% of our business, roughly speaking, in terms of IRI retail sales. So, you know, as we continue to move forward, I think we'll compress much more closely the difference between our overall UTS platform sales, but also our power brands are right on the cusp of breaking you know into being share gainers as well in the course so we're really looking forward to seeing that continue and expect it to take great

thank you so much your next question comes from the line of Michael Lavery with paper Sandler your line is open thank you good morning morning morning

just wanted to stay with on the border for a second and you have a nice slide obviously showing its momentum and and some of the geographic splits um but maybe just talking to the acceleration that's broad base um how much of that is moving into dsd i guess i'm just trying to understand some of the drivers and how sustainable it is and what to expect looking

ahead a little bit uh sure great question i mean yeah the as you can see on the chart page 11 in our deck, you know, the exponential growth on a two-year CAGR basis that's occurring for on the border is in our core. That really is helped and driven by our DSD, right? You'll note that back in August of 2021, we converted our third-party distributor to the UTS distribution system for a number of states, and most of those states were in our core. And if you think about the fact that we not only made the conversion to our DSD, but we also are looking and making great strides in vertically integrating the production. So when you produce something and you vertically move it directly into the DSD stream and it's available and it's in stock and it's on time, it really helps your DSD to expand. And we have a much larger sales team, not just the DSD sales team, but a much larger sales team that's outselling the brand to the customers at the end of the day. So you couple the two of them together, and we're really seeing that exponential growth in the core. However, if you look at expansion and emerging, we're seeing double-digit growth there, too, on a two-year CAGR basis. So it's across the board. We have some great retail partners that continue to do fantastic at it. we're doing a lot of work on the supply side as noted in the acquisition of Vestida that we announced back in June of 2021 or closed in June of 2021 as well as the recently announced RW Garcia you know we have opportunities here to really increase the supply of the products which has been an issue where demand has outstripped supply and as we build that supply I think we'll continue to unlock the ability to grow on the border. And somewhat on a side note, you'll see even the salsa and the queso on the border branded salsa and queso, you know, combined, that's actually a $69 million IRI retail on an annual basis. And it's growing exponentially as well. So we're unlocking opportunities on the chip side for on the border, but really also unlocking it on the salsa and queso side, which is sort of icing on the cake for that brand and our growth prospects for that brand continue.

That's a great caller. You also touched a little bit on the second question I just wanted to cover with R.W. Garcia, and I think it's clear you're interested in that for the capacity and the capabilities there, but can you just help us understand a little bit how much it's needed to keep up with demand or to support growing demand, or if it also can support a margin lift from repatriating production that's co-manufactured today?

Yeah, I'll take that. Great question. So we're thrilled about the RW Garcia acquisition. So that is really, you know, first and foremost, a supply chain enhancement acquisition. and they have the ability to start making some of our brands today right away. They've got the excess capacity, so, you know, we don't have to wait and order a new line or anything like that. So, you know, it's a very immediate, you know, increase to our capacity, and that allows us to insource some things that, you know, we can make more margin on. You know, and then from a, you know, currently they don't really do any command for us, So, you know, it's different than Festida, whereas Festida was, you know, for instance, on the border's largest co-man. They currently don't do any manufacturing for us, but they have the ability to do it, you know, in a short period of time. So we're thrilled about what it can do for our supply chain. They're strategically well-placed plants, you know, in the west and east of the United States, which helps us focus on, you know, minimizing landed cost. It helps with logistics as well as manufacturing costs. And then, you know, it's got a great, you know, I think a nice BFY brand, right? It's all organic for the most part, corn-based crackers. And so, you know, we look forward to adding that to our portfolio and certainly takes us over $100 million in retail sales on the BFY side as well.

Great. Thanks so much. This question comes from the line of Jason English with Goldman Sachs. Your line is open.

Hey, folks. Thanks for slotting me in. A couple quick questions. First on M&A, I heard you mention you leverage now four and a half. You want to get back down to that three to four X range in the next year or two. Are you kind of implicitly suggesting that you may be out of the game with M&A for a while until you get that leverage back in there?

Hey, Jason. This is Kerry. Good to hear from you. I wouldn't say we're out of the game, no. I mean, I think, you know, we're going to continue to do, you know, smart acquisitions. That makes sense for us. You know, obviously we're committed to that three to four range long term. but it you know it hasn't prevented us from doing things like an RW Garcia you know I wouldn't say capital structure in and of itself is a limiter for us but look we are focused on making sure we have the the right leverage long-term leverage profile and we're very disciplined about how we approach acquisitions you know we want to make sure we pay the right price for things and that they drive you know they deliver the strategic value for the price we pay so I don't think it takes us out of the game I think our set of opportunities in front of us is very unique in terms of what we're able to do and how we're able to create value. So I think we can continue to do some smart things while at the same time making sure that we stay disciplined. Got it. Makes sense. Thank you. And the price growth,

you guys realize this quarter, certainly surprised me to the upside and congrats on achieving it. It's better than I expected. Can you unpack a little bit of it? How much of it was list price? how much is coming from perhaps lower trade, et cetera. As we think about the forward, how should those components progress?

Hey, Jason. Thanks for the question. This is Ajay. I'll take that. So I think the way to think about that is we are effectively touching our entire portfolio of brands and product categories that we play in across all our customers. So the pricing levers that we have, you know, you talk about waitouts, list price increases, trade optimization. We are pulling all of them. So it will be tough for me to pick one over the other. You know, it's all being deployed. We have already taken two or three rounds of pricing this year, and a couple more are coming in the next three months. So by the time we get to February of next year, we would have touched our entire portfolio and activated all the levers we have.

Makes sense. Thanks a lot. Thanks for the detail. I'll pass it on.

Thank you.

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

Thanks. Good morning.

Good morning, Bill.

Just one kind of more housekeeping. As you look forward on the I.O. conversion, how much pressure is, I guess, left or do you expect on gross margins from that over the next 12 to 18 months? Or are we largely done with that? Just trying to understand how much that comes into play.

Yeah, thanks for the question. So I'll say we are going to convert about 200 routes this year, and we have another 200 to go. So the pressure to your question that we should expect is about the same as what we would get in 2021.

Is there any way to kind of quantify the basis points? So as we're looking into next year of obviously commodities and pricing, we'll have a downdraft, but I'm just trying to understand if that's much bigger or similar.

Yep, yep, absolutely. So, so far this year we have been looking at 80 to 100 basis points of pressure on gross margins and net sales, and then there is an offset to that in SG&A, and we should expect about the same next year. Okay, great.

And then on the freight side, I mean, obviously it's a widespread issue and not unique to your company, but how do you see this playing out over the next? six months i mean are more drivers going to be available do you think prices will come down or go even higher just trying to i mean you're you're obviously dealing with this day in day out and just trying to understand if if you see any light at the end of the tunnel on that side yeah i'll

take that again this is a jay so so i think you know if i had a crystal ball it would be nice but Our assumption going into this thing is first half of next year is going to look very much like what it looks now. So we are not expecting things to improve meaningfully. Now, that said, there could be changes to this environment in either direction, positive or negative. And let's see what shakes out.

Gotcha, but you aren't seeing things accelerate in the past month or two?

In terms of?

A free cost? Negative, I guess. It's not getting meaningfully worse recently.

Well, freight costs have gone up and transportation is the big variable in our inflation costs that we called up in our conversation this morning, and transportation is going up. We have seen it gone up. Got it.

I was hoping if you had seen a ceiling, but I guess not yet. But thanks for the color.

Yes, thank you. Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from Ben. Bienvenue with Stevens. Your line is open.

Hey, thanks. Good morning, everybody. I want to ask about the price mix versus volume balance. As we see the pricing action contribution build as we go through the fourth quarter and presumably into the first half of next year, is sustaining volume on, call it a two-year stack level, reasonable? Do you think that gets harder to sustain? Where do you think we are with demand elasticity that you see? And how does share gains factor into that and channel mix as well, factoring to that equation.

Yeah, I'll take it from a high level, and then maybe Jay can layer in afterwards. Ben, thanks for the question. Yeah, I mean, what we are seeing, you know, I've been in the snacking industry for 26 years and in my role almost for 10 years, and I think that it's, you know, partially something that, you know, Butts has the benefit of, which is great brands, but other people have great brands as well. And the other part of it is that we're in a fantastic industry of snacking where the elasticities are relatively low. It's a simple pleasure for the most part. It's an impulse item in many cases. And we've had, at least from what we can see, elasticities are pretty low. We have room to increase because of our great brands. We have price-back architecture that we are executing on. I think Jason referred to it in the previous question about the price mix and the benefits that we're getting there. And I think that as the industry is relatively rational from a pricing perspective, then we'll have opportunities to continue to look at ways to take more price if it's warranted. And I think, you know, long-term, obviously, we want to provide a good that consumers want to buy. And that's what we're in the business of doing. And we will take our knowledge and history of being in this industry and apply it across our price-back architecture. But, you know, I think from a high level, the elasticities have shown to be pretty resilient to, you know, to the increases. And they're not – these aren't 20% or 30% increases. I mean, we're talking about 4% or 5%, 6% increases. So we feel really good about that.

Okay, perfect. And then, Ajay, revisiting your comments on kind of expectations around gross margins as we head into next year, and combining that with what you said around freight, could you talk about when you look through the components of your costs, the various buckets, the level of visibility you feel like you have into next year at this point, and then if you could rank order the buckets of cost pressure as you see it now, that would be helpful.

Sure. So, let me, you know, when I look at 2022, again, we're not guiding to 2022 today. We have more work to do, and we'll come back to it in March. But, you know, what we know today about 2022 is that all of our pricing actions, productivity, etc., you know, these things are working. We'll have a meaningful carryover benefit going into 2022. And secondly, first half is going to look a lot like the second half of 2021 in terms of inflation, the environment we are in, and the volatility and the dynamic nature of transportation. So those are two things that we know. What we don't know is what's going to happen in the second half. So to your question, you know, the visibility that we have is probably the lightest on the second half of 2022, and it is very light on transportation specifically, and the impact that we have in our P&L in terms of inflation, I would say is about half commodity, half labor and transportation. And, you know, within that commodity we have good visibility into, even though you're not liking what we're seeing, you know, as in prices are at all-time highs. Consumer price index is the highest it has been in 30 years. So, you know, we don't like that, but we at least see it. Transportation, on the other hand, you know, very dynamic. You know, we find new information on a weekly basis that we are working through.

Thank you so much. Very, very helpful, and best of luck with the rest of the year.

Thank you.

There are no further questions at this time. I will now turn the call back over to the Chief Executive Officer, Mr. Dylan Lissette.

Thank you all very much for joining us today on our third quarter earnings call. We truly appreciate your support of Liss Brands and are as excited about our future and hope that you are as excited about our future as we are. So thank you very much.