Earnings Call Transcript - UTZ Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Utz Brands Inc. Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator instructions were provided. Now I'd like to hand the conference over to Mr. Kevin Powers, Senior Vice President of Investor Relations. Sir, please go ahead.

Kevin Powers, Senior Vice President, Investor Relations

Good morning and thank you for joining us today. On the call today are Dylan Lissette, Chief Executive Officer; and Cary Devore, Chief Financial Officer. During this call management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to the risk factors in Utz Brands' most recent quarterly report filed with the Securities and Exchange Commission, as well as risks highlighted in the company's press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, management's remarks today will highlight certain non-GAAP financial measures. Our earnings release also presents the comparable GAAP numbers to the non-GAAP numbers provided and reconciliations of the non-GAAP results to the GAAP financial measures. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on Utz's Investor Relations website. You may want to refer to these slides during today's call. This call is being webcast and an archive of it will also be available on our website. And now, I'd like to turn the call over to Dylan. Dylan?

Dylan Lissette, Chief Executive Officer

Thanks Kevin. Good morning, everyone and welcome to our second quarter earnings call. Let's begin with a few key messages on the quarter. In the second quarter, our net sales on a two year basis continue to gain momentum as we lap the impact from COVID-19 in the prior year. Our net sales increased 6.1% on a two-year CAGR basis, which was an increase from 4.3% in the first quarter. From an IRI retail sales perspective, growth accelerated to 6.5% versus 5.9% in Q1 and we are also beginning to see our sales strengthen in channels that were most negatively impacted by COVID-19 in 2020. For example, our food service sales increased nearly 60% versus last year with other areas like discount and specialty seeing strong double-digit growth. While we expect our sales momentum to continue into the second half of the year, the strong recovery of the US economy is having a broad-based impact on supply chains. Consistent with what you've heard around the food industry, the cost to serve our customers is increasing and our key input costs are higher than we originally expected. This is largely due to higher commodity, transportation and labor inflation. As a result, we are currently reducing our full year adjusted EBITDA outlook for fiscal 2021. On that note, please be aware that we are aggressively taking the steps necessary to mitigate these cost pressures and our pricing actions and productivity initiatives are well underway. To be clear, we have been increasing pricing across our network, and we are leaning into our productivity initiatives to offset these inflation headwinds, but the benefits of these actions will lag the costs and as noted previously, we will see the benefit of these initiatives in the second half of 2021 with meaningful carry-over benefit into 2022. As we manage through this environment, we remain focused on the long-term health of our brands, and we continue to prioritize investments to capitalize on our significant, continued and future growth opportunities. Among these growth opportunities is our strategic M&A as our scalable platform has proven to generate both meaningful cost and revenue synergies. We believe our pure play snacking focus makes us the logical consolidator in the salty snack category and there is inherent optionality in our platform as we can consider small tuck-ins, medium-sized acquisitions or potentially larger transformative opportunities. We continue to focus our M&A efforts on businesses that will either facilitate geographic expansion, increase our presence in key subcategories or channels and, of course, those that deliver strong synergies. Our acquisition pipeline remains very robust and we will continue to prioritize opportunities that are accretive and strategic to our long-term goals. Lastly, on July 26, we announced promotions to our executive leadership team that will accelerate our ability to grow and strengthen our organization. These changes will provide us with the optimal organizational structure to best position us to drive continued top and bottom line growth. Among these changes, Cary Devore is being promoted to Chief Operating Officer and Ajay Kataria, our current EVP of Finance and Accounting is being promoted to Chief Financial Officer. Both changes are effective this October 4. In addition, we welcome Theresa Shea as our General Counsel, right after July 4th, promoted Shane Chambers to Chief Growth Officer and promoted Jim Sponaugle to Chief People Officer. Turning to the numbers in the second quarter, net sales grew over 23% in the quarter, which reflects the positive contribution from our acquisitions and from price mix. This growth was partially offset by lapping the impact of the peak prior year COVID-19 sales increases, which were most pronounced in the second quarter of 2020. In addition, adjusted gross profit was 17% and adjusted EBITDA grew 10% as margins were impacted by the key input cost increases I described earlier. In addition, I'll note that our adjusted EBITDA performance reflects the higher marketing spend in the quarter as we invest more in our Power Brands for long-term growth, as well as public company costs in 2021 that didn't exist in the prior year period, given that Utz was a private company. Now let's turn to our recent IRI retail sales trends and results. Consistent with the first quarter, given the significant outperformance of both brands versus the Salty Snack category in the early months of the COVID-19 pandemic last year, we believe that evaluating our results on a two year basis is the best indicator of overall performance. As we lap the peak COVID-19 pantry stocking period of 2020, we are driving strong two year growth rates that continue to accelerate as we move throughout the year. Momentum for our Power Brands is growing with sales on a two year CAGR basis, accelerating to 8.8% for the 12-week period ended July 11 versus 7.7% for the 12-week period ended April 18, 2021, both of which outpaced the broader Salty Snack category by over 100 basis points. Importantly, during the same time periods, our foundation brand declines have slowed to minus 1.8% versus minus 3% even as we continue to reduce our emphasis on these brands. As mentioned in previous calls, the move towards Power Brands and away from Foundation Brands is many times driven by working through the transition that occurs when we acquire Foundation Brands as part of an acquisition, including those acquired in the Conagra DSD snacks and Vitner's acquisitions, for example, and actively work to rationalize and right-size the portfolio by inserting key Power Brands into the market. This strategy is to amplify our focus on the Power Brands, which we believe can scale nationally, which helps us to capitalize on the significant white space opportunities that exist. To that end, our investments in marketing and innovation are focused on these faster growing brands and we are increasing spend in digital and e-commerce and have launched or will be launching key innovation introductions. Turning to our growth drivers in the quarter, we continue to grow sales on a two year CAGR basis in all five of our key Southeast subcategories and in Salsa and Queso. We also gained overall share during the period across potato chips, tortilla chips and pork rinds, which comprised about 70% of our retail sales. In addition, as we evaluate our emphasis on our Power Brands, we delivered two-year market share gains in our Power Brands across four of our five major subcategories, as well as greater-than-category growth in several of our brands. During the quarter, we also made significant progress driving geographic expansion. We continue to focus on large population areas and our expansion in emerging geographies and we continue to drive our Power Brands' growth across the U.S. platform. For the 13-week period ended July 4 in the expansion and emerging geographies, we drove double-digit growth on a two year CAGR basis for both the total Utz portfolio and for our Power Brands, which outpaced the category by approximately 400 to 500 basis points in each area. As noted previously, we believe the revenue opportunities in our expansion in emerging markets are significant with every one percentage point of share gains in these geographies representing approximately $200 million of incremental retail sales opportunities. Looking at our core performance over the last two years, our total portfolio growth trends are behind the category. And as noted in Q1, this is primarily due to declines in our Good Health brand and the impact of our Foundation Brands, both of which are more heavily weighted to our core. These two factors combined accounted for about two thirds of our performance gap to the category. In our core, that being said, we continue to be focused on the core and have a targeted set of actions that we are executing to drive improvement as we move throughout the year. We remain focused on this area of opportunity and improvement; in our analysis of near term IRI data, we do see our results beginning to improve and the gap to the category is starting to close signaling that our actions are beginning to take root. In addition, we are seeing significant growth of the On the Border brand in the core with very solid growth rates on a two year CAGR basis. You can see the On the Border results on Slide 13 later in the deck. Wrapping up our retail sales insights with a look at our channel growth, we continue to drive two year positive sales growth across every major channel with brand share gains in grocery and C-store as well as double-digit sales growth in club. The grocery channel, which is approximately 50% of our retail sales, for Power Brands grew 8.3% outpacing the category growth of 6.7% and our most underpenetrated channels, namely mass and convenience, both remained a continued opportunity for future growth. And we are excited about the progress we are making in these important channels. In mass, while it underperformed the overall category on a two year basis, our growth accelerated to 6.8% versus 3.7% in Q1 and our gap to the category was nearly reduced in half. We are very excited about our growth opportunities in this dynamic channel and look forward to sharing more with you on this later. And as travel continues to resume around the country, our convenience store trends are improving and sales grew year over year nearly 15% and nearly 7% on a two year CAGR basis. We are expanding distribution and strengthening distributor relationships. And the Western United States remains a key white space opportunity for us. Looking ahead to the second half of the year, our sales momentum is truly building and we are excited about the progress that we're making across several areas. Here are just a few highlights. We are lapping the extraordinary consumer demand during the peak COVID-19 pantry loading period in second quarter of 2020, and we are beginning to enter a more normalized comparison period to the prior year. We have positive space and facing gains coming in Q4 with a critical mass retailer, as we leverage the strength of our now broader On the Border portfolio. Our C-store and food service channels are rebounding quickly and C-store remains a large channel opportunity for us with only a current 3.4% share. We are accelerating Power Brand sales through key innovation like Let's Twisters and Zap Spins and introducing new on-trend flavors for the On the Border chips like Southwestern Bean and Jalapeño Ranch, as well as On the Border queso tortilla chips among other innovation ideas. And finally, we expect to deliver a strong holiday season with holiday sales expected to grow versus last year as the traditionally strong holiday season for us was muted by COVID-19 in 2020. Finishing our review of our retail sales data, you can see by the recent four-week IRI NULO CPG trends that sales momentum is building with our Power Brands and the Foundation Brand performance is improving as well. And finally, before I turn the call over to Cary, I'll make just a few final remarks on our On the Border acquisition progress. As a reminder, Truco, also known as On the Border, was our largest acquisition in the history of Utz. We closed on this on December 14, 2020. From an integration standpoint, many of our milestones on the On the Border acquisition are being hit and the teams continue to work well together. We are six plus months into bringing these two organizations together and we see opportunities abound for the On the Border brand within our sales platform. This is amplified with the recent transition from the third party DSD distributor to the DSD distribution system for a number of states effective about a week and a half ago on August 1. We believe that this will drive even more feature gains for the brand as we both vertically manufacture and distribute this strong brand. And we believe this will help to unlock even more revenue opportunities. It's important to note that On the Border tortilla chips have only a 50% ACV across the U.S., and we are leveraging the salesforce and route-to-market system to drive increased growth and unlocked revenue synergies. We are seeing new distribution for On the Border across multiple channels, such as grocery, drug, convenience and dollar in our core geographies and emerging geographies remain a big revenue opportunity for this brand. As you will note on the accompanying chart, the two year CAGR four-week numbers show continued progress and growth with recent trends climbing into the 15% to 20% plus range on a two year basis in our core, as well as very strong results in both emerging and expansion geographies. Finally, we're having factoring efficiencies within our vertical integration initiatives. We recently insourced some On the Border production into our Hanover plant with future plans to bring even more production into both Birmingham in the second half of 2021 and Hanover in Q1 of 2022 to support this elevated demand and complement our current manufacturing network. Finally, we're also excited about the test introduction of On the Border Sabor to US, which will be tested in a subset of national retailer stores, as we believe On the Border brand equity can expand into the growing $1.9 billion Sabor tortilla market. And we look forward to seeing the results. In short, we are very excited about the opportunities On the Border brings to our portfolio across all of our geographies. And now I'd like to turn the call over to Cary Devore, our Chief Financial Officer. Cary?

Cary Devore, Chief Financial Officer

Thank you, Dylan and good morning, everyone. In the second quarter, net sales increased 23% to $297.9 million. Adjusted gross margin contracted to 35.4%. Adjusted SG&A was consistent at 24.3% of sales. Adjusted EBITDA increased 9.5% to $35.7 million or 12% of sales. As Dylan mentioned earlier, our adjusted EBITDA performance reflects significantly higher inflation than we originally expected as well as higher marketing spend as we invest more in our Power Brands and higher public company costs in 2021 that didn't exist in the prior year, given Utz was a private company. Finally, adjusted net income increased 39.7% to $19 million and adjusted EPS was $0.13 per share based on fully diluted shares on an as-converted basis of 142 million. As a reminder, our non-GAAP share count reflects the combination of total outstanding shares and the net settlement of private placement warrants resulting from our business combination with Collier Creek Holdings. Turning to our balance sheet and other key points: at the end of the quarter, our liquidity remained good with cash and cash equivalents of $26.7 million and an undrawn revolving credit facility providing liquidity of more than $130 million combined. In the first half of 2021, we realized approximately $13 million in cash proceeds from asset sales, primarily related to independent operator routes. In addition, we executed a sale leaseback transaction to recoup $13 million in cash from prior capital expenditures, locking in favorable fixed rate capital lease financing. Moving down the balance sheet, net debt quarter end was $787.2 million or 4.4 times normalized, further adjusted EBITDA of $179.5 million. In addition, we completed a term loan tack on of $75 million and used the proceeds primarily to pay down our revolving credit facility; pricing on the term loan is consistent with the term loan financing we executed in January 2021, which was pricing of Libor plus 300 with no floor. And just as a reminder, we previously used cash and the ABL to close the Vitner's and the Steeda Foods acquisitions. Finally, capital expenditures were $10.8 million in the first half of the year. And we expect this to accelerate in the second half of 2021 to support our productivity initiatives. Moving back to the P&L for some additional detail, our net sales growth in the quarter was driven by price mix of 2.3% and acquisitions of 24.2% partially offset by volume declines of 3% and the impact of our IO route conversions, which reduced the net sales growth rate by 40 basis points. The volume decline was primarily due to lapping significant growth in the early weeks of the COVID-19 pandemic. Our pro forma net sales growth rate on a two year CAGR basis was 6.1%, which was an acceleration from the first quarter rate of 4.3%. Moving down the P&L, in the second quarter, adjusted EBITDA margins contracted by 150 basis points to 12%. Decomposing, the decrease in adjusted EBITDA margin for the quarter: positive drivers include acquisitions of 180 basis points, largely driven by Truco; price mix of 160 basis points; productivity improvement of 50 basis points; and SG&A excluding transportation costs of 10 basis points. Offsetting these positive drivers were headwinds related to volume of 130 basis points as we lapped COVID-19 pantry loading from the prior year and inflation of 420 basis points, which includes commodities, transportation, and labor. Within commodities, inflation was most pronounced at cooking oils and packaging. And the higher transportation cost increases were largely due to higher spot market rates and contract freight costs. As a reminder, transportation costs, which are largely freight-out, are included in SG&A expense on our income statement and not in cost of goods sold. While our margin pressure in the second quarter was worse than we expected, it was largely due to a rapid rise in costs that cannot be hedged. Our pricing and productivity actions are taking hold in the second half of the year and we are confident our margin performance will improve. To that end, we expect margins to improve in the second half of the year, relative to the first half, through the combination of higher sales volumes, improved net price realization benefits from our productivity initiatives and additional cost actions. We expect margins to increase from 13% in the first half to between 14.5% and 16% in the second half. Looking at the quarters, we continue to expect third quarter sales to be the highest of the year and fourth quarter sales to be lower than the third quarter, which is in line with typical seasonality. From a profitability perspective, we expect third quarter margins to be at the low end of the second half margin range and fourth quarter margins to be at the high end of the range. This reflects the building benefits of our pricing and productivity cost actions that we believe will carry forward to fiscal 2022. Our acquisition pipeline remains robust and we will continue to prioritize opportunities that are accretive and multiple enhancing. From a financial policy perspective we are consistent with our long-term target net leverage ratio. Now turning to our full year outlook and expectations for the second half of the year, while demand remains strong and we are on track to deliver our sales targets, we are adjusting our full year adjusted EBITDA outlook to reflect higher than planned inflation in a very challenging environment. Our teams across our manufacturing plants and logistics network are doing an incredible job delivering for our customers, but unfortunately, it's coming at a higher cost than we anticipated. This is primarily due to higher inflation in certain commodities, as well as transportation and labor. Our original expectation for commodity inflation was 4% to start the year, but given rising costs we now expect approximately 6% commodity inflation for the year. In addition, we now expect higher outbound transportation costs and labor costs given the challenging industry-wide supply chain dynamics. That being said, we are aggressively taking steps to manage our higher input costs. As Dylan mentioned, all our pricing and productivity initiatives are well underway and on track, though the benefits are lagging the near-term cost pressures. As a result, we are lowering our full year EBITDA outlook to reflect this incremental inflation. To put those into further context, in the second half of fiscal 2021, we expect higher year-over-year inflation of between $30 million to $35 million when we compare our second half 2020 further adjusted EBITDA of $92 million, pro forma for recent 10 acquisitions, to our second half 2021 implied guidance range of $86 million to $96 million. We are nearly entirely offsetting this bucket of higher inflation. We are doing this through a combination of higher sales volumes. This will have a meaningful carry-over benefit to 2022, and will provide a strong baseline upon which to layer incremental pricing and productivity to drive margin performance in fiscal 2022, bringing it all together. Excluding one-time items, 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 on a 52-week comparison basis assumes we owned HK Anderson and Truco on the first day of fiscal 2020. As a result of Vitner's acquisition, we also expect about $20 million of net sales contribution to align with expectations for fiscal 2021. For fiscal 2021, we continue to expect modest organic sales growth year over year even as we lapped fiscal 2020 organic growth of over 8% and pro forma sales to grow about 6% on a two year CAGR basis, which is above our long-term growth outlook of 3% to 4%. Moving to adjusted EBITDA, we now expect a range of $160 million to $170 million versus our prior expectation of $180 million to $190 million and adjusted EPS of $0.55 to $0.60 versus $0.70 to $0.75 previously. General assumptions on slide 22 of our earnings presentation include a detailed list that supports our 2021 outlook. Notable assumptions that have changed include raising our commodity inflation to approximately 6%, increasing capital expenditures to $40 million to $50 million to accelerate higher return on capital projects to drive our productivity efforts, lowering our effective cash tax rate to 17% to 19% due to tax amortization and bonus depreciation from the vendors of the Steeda acquisition that was an asset deal for tax purposes and provided a tax benefit. Finally, we are raising our net leverage ratio range to approximately 4 to 4.5 times to account for acquiring the Steeda with debt and the reduced adjusted EBITDA outlook. And now I'd like to turn the call back over to Dylan for some final thoughts.

Dylan Lissette, Chief Executive Officer

Thank you, Cary. As we wrap up our presentation, I'd like to conclude my remarks with a few high-level summary perspectives to share. First off, as always thank you to the 3,000 plus associates for the incredible efforts put forth to deliver for customers and our consumers in such a challenging environment. Second, we are encouraged by the fact that our Power Brands continue to drive strong two year CAGR sales growth, and that they're becoming a larger percent of our total retail sales each period, and momentum is building. Third, while we continue to manage through a challenging input cost environment, we are doing so with a long-term mindset and we remain laser focused on enhancing our customer relationships, driving distribution, and building our brand equity. We know that an important leg of our value creation strategy is M&A and our pipeline remains robust with many actionable and creative opportunities. And finally, our long-term organic outlook remains intact for both top line and bottom line growth, and we remain well positioned to deliver value for our shareholders. Thank you. And now I'd like to ask the operator to open the call for questions.

Operator, Operator

Thank you. Operator instructions were provided. Your first question is from the line of Rupesh Parikh from Oppenheimer. Your line is now open.

Rupesh Parikh, Analyst, Oppenheimer

Good morning. Thanks for taking my questions. So starting out with cost pressures, I wanted to get a sense of whether you think you've maybe captured more of a worst case scenario on the cost front for the balance of the year. And then if you look at your key commodity and transportation cost pressures, any signs of them starting to level off at this point?

Cary Devore, Chief Financial Officer

Hey, Rupesh it's Cary, thanks for the question. Yeah, I think we've been prudent in our outlook for the year in terms of capturing what we're seeing in commodity and transportation and then labor. From that perspective we've tried to be conservative. If you don't mind repeating the second part of your question?

Rupesh Parikh, Analyst, Oppenheimer

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

Cary Devore, Chief Financial Officer

Yeah, I think it's still very fluid. From a transportation perspective there certainly is a demand and supply issue in terms of drivers and trucks relative to how strong the overall economy is. So I think that remains a fluid situation. And then from a commodity perspective, the levels right now are still elevated relative to historical standards. We're doing the best we can to make sure we have enough commodities to supply our demand, and our demand remains strong. So the team is working hard and making sure that we're protected as well as we can be from a larger perspective.

Rupesh Parikh, Analyst, Oppenheimer

Okay, great. And maybe just a second question, just in terms of EBITDA, you guys saw a 16% EBITDA margin would be the baseline for the business. Now it seems like you're probably ending closer to, I think, around 14% for the full year. If the expectation is that now you'll grow off of this lower base, is there potential for a sharper rebound next year as you start to see more benefits from pricing flow through?

Cary Devore, Chief Financial Officer

Yeah, look, I think it's too early to call 2022. Right now, what I will say is, from a long-term perspective, the margin upside story is still very much intact here. We expect to grow next year. We expect significant benefit from the pricing and productivity that we're putting in place this year, which we're only capturing a partial year on. There'll be a meaningful carry-over benefit that will be higher next year. And then we'll layer on incremental pricing and productivity next year. So 2022 from that perspective will be much higher than 2021. And from a synergy capture perspective, there's at least $7 million of acquisition synergy that will drop in 2022 relative to this year. So from a demand, pricing and synergy perspective, we're in a very good position. The variable is commodities and we just need more data points on where those come in as we get closer to the end of the year, but long-term the margin story is still very strong.

Rupesh Parikh, Analyst, Oppenheimer

Okay, great. Thank you. I'll pass it along.

Operator, Operator

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

Michael Lavery, Analyst, Piper Sandler

First question, just wanted to understand how you think about the portfolio a little bit, and I guess it's sort of got two parts. First, just when you think about we're seeing emerging and expansion outpace your core geographies that you called out the foundation brands, part of that and Good Health. On the foundation versus Power Brands piece, would it be right to assume that that's precisely what you're aiming for and comfortable with? And then second, can you just give us a sense of the trajectory you expect there, how much you can stabilize or improve that and what that funding might look like?

Dylan Lissette, Chief Executive Officer

Sure. Hey, thanks for the question. This is Dylan. I'll take that. Yeah, I think you're exactly right. From a very broad perspective, our strategic direction is to grow our Power Brands, right? Those are the national brands like On the Border, like Zapp's — the national brands that we can take on a national basis. You duly noted the growth in expansion and emerging versus the category of four to 500 basis points. And that's a lot of the white space opportunity that we see that we're capturing as we go across the country into different geographic areas. These aren't just new areas that we entered in the last few months; these are areas we've been in for a couple of years, but it takes a while to kind of get the engine going. Some of those initiatives involve introducing new brands and part of that process, while we are acquiring in many cases brands for their infrastructure, for their routes, for their operations, a lot of the strategic process there is to convert that over time from Foundation to Power, but it doesn't happen overnight. So we're very long-term oriented in our thinking. Good Health is an area of opportunity for us. We've noted it before we bought it in the 2020 timeframe. It had a pause as people were prioritizing other brands during COVID; it took a hit and we're rebuilding it. If we look at a 52-week versus a 12-week or 13-week and compare that to the four weeks, we're seeing progress. We're doing a lot of work to renovate that brand to really get into the insights behind what makes it what it is today as a brand and how we can build on that and innovate around it. So there's a lot of work happening there, which is positive and will play out very long term. In the core, we know that Foundation is a drag and the core — there are a lot of brands that we've acquired and we're taking the long view on trying to convert those. We're doing a lot of infrastructure change in our core markets. We're investing in distribution centers and people and the fundamental foundation of those operations very much for the long-term. Part of that is converting from route salespeople to independent operators; that's well underway. So there's a lot of things that are happening that are improving that core. Of course, as you noted, expansion and emerging are growing as well. We're starting to see trends improve. The Truco/On the Border brand, which is a Power Brand, is exploding in our core. That will also contribute to the overall long-term benefit of our brands in the core.

Michael Lavery, Analyst, Piper Sandler

Okay. That's great. Really helpful color and just one more on inflation — sorry if it's just some of this math, I haven't gotten a chance to play with enough, but you call out on, on slide 18, the 420 basis points headwind in 2Q, but then on Slide 19, call out a 100 basis point headwind in the 2H and it looks like that's net of price. I'm curious what headwinds have moderated it, am I reading that the right way or is there some other way to reconcile those?

Dylan Lissette, Chief Executive Officer

Yeah, we're comparing two different things, Mike. On page 18, we're comparing Q2 of 2020 to Q2 of 2021. And then on page 19, we're comparing the first half of 2021 to the second half of 2021. So it's apples and oranges in terms of the periods we're comparing.

Michael Lavery, Analyst, Piper Sandler

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

Operator, Operator

Your next question is from the line of Andrew Lazar from Barclays. Your line is now open.

Unidentified Analyst (Max on for Andrew), Analyst, Barclays (substitute)

This is Max on for Andrew. On a two year CAGR basis, while your Power Brands continue to outpace the salty snack category, they did lag the category again in core markets. Last quarter you called out that the Good Health brand was a contributor to this gap, and you've addressed your progress on that front, but could you walk us through any other key drivers of the gap and provide a bit more color on the targeted set of actions to improve core market performance?

Dylan Lissette, Chief Executive Officer

Yeah, sure. Max, this is Dylan again. It's very similar to the explanation behind Michael's question around the core. Two-thirds of the gap between category growth and our growth in the core is attributable to Foundation and Good Health. That story existed in the first quarter and still exists in the second quarter. It doesn't happen overnight. We're taking a long-term view to build the best infrastructure for sales growth. So part of that, as we described, is renovating Good Health — we have seen 4-week and 12-week numbers in Good Health that are much better than the 52-week numbers. We're seeing that improve as we invest behind it from a marketing, branding and innovation perspective, but those things take time. For Foundation Brands, as we migrate from Foundation to Power, as we make that transformation from an acquired brand that may be discontinued and replaced on shelf with a Power Brand, it is heavily weighted to the core where those Foundation Brands are more prevalent. One of the metrics to consider is that 100 basis points in the core for the quarter is about $1.5 million to $2 million of retail sales for the quarter, so it's not immaterial and it's an area we are concentrating on. It is not necessarily a very large percentage of our overall revenue in any given quarter, but we are focused on improvement and expecting gradual progress.

Operator, Operator

Our next question is from the line of an analyst. Your line is now open.

Unidentified Analyst, Analyst

Just want to talk a little bit more about, I know you're not giving guidance on '22, but you made a strong statement about the recovery on margin in '22, and just maybe help us understand it. Is that just because you'll have favorable comps and the pricing will have fully caught up, do you expect commodities to ease or input costs to ease where you could actually have a cushion on 2019 levels? How should we be looking at, especially that first half, is it just more of a recovery as things catch up or where you really have some tailwinds?

Cary Devore, Chief Financial Officer

So, I think it's too early to call '22 right now. What I was speaking to was the things that are within our control and that we're putting in place to really drive long-term margin growth. As we grow this business, margins grow because we're leveraging fixed overhead. So we expect to grow next year. The volume trends and the customer wins and top line momentum are strong, so we have a good view to 2022 revenue growth. On top of that, the pricing and productivity we're putting in this year we're not capturing 100% of this year, so there's a big carry-over benefit next year. And then we'll layer on incremental pricing and productivity. So next year from a pricing and productivity perspective we'll be much higher than this year. And then we expect good pull-through on synergies. The variable is commodities; we have to see where commodity, delivery and labor inflation come in. It's too early to call, but the top line and the things we can control from a productivity and pricing perspective will be strong next year. Long-term the margin story is still very, very strong because at some point commodities and inflation will correct and at that point all the levers we're pulling — top line, pricing, productivity — are sticky and margins will benefit.

Dylan Lissette, Chief Executive Officer

And especially as the environment improves. Based on my experience in the snack food industry over decades, we've been here before with huge increases in underlying commodity prices. We then kick into gear with price increases, pack architecture changes, trade rationalization, marketing adjustments — we use our full set of levers to offset that, but there is a lag. It was hard to see something like corn oil going up 50% to 80%, but once we implement the levers, there's a long-term sticky benefit that transcends a single year, as inflation normalizes over time.

Unidentified Analyst, Analyst

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

Dylan Lissette, Chief Executive Officer

Yeah, just the lag.

Unidentified Analyst, Analyst

Okay, perfect. Second, maybe you can help me a little bit on geographic expansion: where are you seeing the biggest gains right now — the Midwest, Southeast, etc. — and why is that happening? What gives you such confidence that once you reach a certain share, it takes off?

Dylan Lissette, Chief Executive Officer

You nailed it. The Southeast has been strong, including central Florida where we integrated a third-party master distributor. That area has seen tremendous growth. Migration of people into the Southeast — the Carolinas, Atlanta — are high growth areas for us. We're also seeing growth in Texas and expansion in the Midwest, for example entering Chicago and other large metropolitan areas. We focus on large metropolitan areas because of consumer population density. Power Brands like Zapp's and On the Border are resonating with consumers and we're backing that up with incremental marketing spend. We have been increasing our spend compared to last year and thinking long-term about brand equity. There's an abundance of geographic areas we can grow into.

Unidentified Analyst, Analyst

Great color. Thanks so much.

Operator, Operator

Your next question is from the line of Abigail Lake on for Wendy Nicholson from Citi. Your line is now open.

Abigail Lake, Analyst, Citi (on behalf of Wendy Nicholson)

Yeah. Abigail Lake on for Wendy. My first question is just on integration. Can you comment on how the integration of your recent acquisitions is going so far? And then how does this impact when you'll have the operational bandwidth to take on another acquisition?

Dylan Lissette, Chief Executive Officer

Yeah, let me start and then Cary can jump in on the second half. We acquired HK Anderson in November 2020, On the Border (Truco) in December 2020, and Vitner's in February and June of 2021. We've done a lot of acquiring and our team is very good at integrating acquisitions. On HK Anderson, while you often see a dip initially as you rationalize portfolio and SKUs, we're starting to see momentum pick up and recent four and 12 week data shows strong growth. For On the Border, we are doing everything we can — it's growing tremendously in core and expansion, we're vertically integrating production to take cost out. We bought Steeda which will allow us to unlock more future demand by increasing capacity. We insourced some On the Border production into our Hanover plant and plan to bring more production into Birmingham in the second half of 2021 and Hanover in Q1 2022. Vitner's was acquired in February and we've integrated the backend IT side later; we're continuing to see expansion of sales and share there. Overall, the team's really good at integrations and we continue to look at opportunities.

Cary Devore, Chief Financial Officer

Yeah, thanks Dylan. From an execution perspective, integration plans are laid out with 30, 60, and 100-day plans that funnel through our PMO and we meet regularly to ensure consistency and execution. The acquired teams are still running the business day-to-day while we integrate, so we avoid execution risk. From a go-forward perspective, I'm as pleased with our M&A pipeline today as I have ever been. There's a tremendous opportunity set of acquisitions for us and as I move into a COO role in October, I'll have even more bandwidth to help shape and drive that M&A and ensure strong integration. The moves in management structure help enable that capacity.

Abigail Lake, Analyst, Citi (on behalf of Wendy Nicholson)

That sounds great. Thank you.

Operator, Operator

Your next question is from the line of Robert Moskow from Credit Suisse. Your line is now open.

Robert Moskow, Analyst, Credit Suisse

Thanks for the question. My perception is that big snack companies have not had to cut their guidance as meaningfully as you have — Kellogg, Mondelez, Frito-Lay and the like — and you're not alone in terms of having commodity cost inflation. Do you think that the size of the business in relation to the big ones is part of the reason you faced a larger adjustment? Is it more expensive for you to access freight routes or are there scale and purchasing disadvantages that lead to a bigger cut? Or might the other companies still be on their way to doing the same thing?

Dylan Lissette, Chief Executive Officer

Good question. It's hard for us to comment on what other companies do or don't do. Certainly scale matters in snacking, so it's possible there's a scale benefit for the largest players. That said, the Q2 supply chain is a different animal than Q1: as COVID cases dropped and the economy opened up, there was a huge spike in demand across inputs — transportation, labor, commodities spiked. We're paying more to get ingredients and finished goods moved. The pressures we're seeing are unprecedented and we're executing as best we can; it's tough for me to compare ourselves directly to others.

Robert Moskow, Analyst, Credit Suisse

Okay. And I know it's too early to look at 2022, but two questions: are the pricing actions you've taken now fully covering the inflation you've seen so far, and therefore could you get back to prior margins in the first half of next year? Or will you still be catching up into the first half of 2022?

Dylan Lissette, Chief Executive Officer

It depends on the inflationary environment. The pricing run rate exiting this year will be higher than what we hit in our P&L this year, so the carry-over benefit is material. We'll add productivity and pricing next year as well, so the total dollars flowing to the P&L in pricing and productivity will be meaningfully higher in 2022 than in 2021. The variable then is what inflation does; we need to see where that lands.

Cary Devore, Chief Financial Officer

I would say our margins are in the mid-teens based on the most recent guide, but long-term the margin story is unchanged because of revenue growth, pricing and productivity. We're in an unprecedented inflationary environment and we do see it as transitory long-term, but timing is hard to gauge.

Operator, Operator

Last question is from an analyst at Stephens. Your line is now open.

Unidentified Analyst, Analyst

First on pricing and piggybacking on Robert, you're taking pricing in the back half of this year and potentially early next year. Your ability to grow your brands long-term I suspect is not impaired because it's a relative dynamic and other players are raising price as well, but how do you think about demand loss that you expect to encounter as you enter this higher pricing environment?

Dylan Lissette, Chief Executive Officer

The snacking category is a great category to be in; it continues to grow year over year. It is a rational category and not a race to be the lowest price. We have to be very cognizant of pricing, think long-term, and not take actions that give a one-quarter benefit at the expense of longer term brand equity. We've touched 70% to 80% of SKUs in our portfolio with package architecture changes. In a rational category, price changes are long-term and sticky and typically don't reverse in a year or two. Based on history, when commodity pressures normalize, the pricing and productivity moves we make become permanent benefits to margins.

Unidentified Analyst, Analyst

Okay. Makes sense. My second question: appreciating it's too early to make a call on fiscal 2022 cost outlook, if we think about the back half guidance you've provided, how much certainty versus uncertainty is embedded in that new outlook? If we get material moves higher in, say, corn oil in the back half, how exposed would you be? Maybe discuss the buckets of costs where you are more or less exposed.

Dylan Lissette, Chief Executive Officer

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

Operator, Operator

That's all the questions that we had. And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.