Whole Earth Brands, Inc. (NASDAQ:FREE) Q2 2022 Earnings Conference Call August 9, 2022 8:30 AM ET
Company Participants
Jeff Sonnek – IR, ICR
Albert Manzone – CEO
Duane Portwood – CFO
Irwin Simon – Executive Chairman
Conference Call Participants
Brian Holland – Cowen and Company
Rob Dickerson – Jefferies
Scott Mushkin – R5 Capital
Ryan Meyers – Lake Street Capital Markets
George Kelly – ROTH Capital Partners
Arthur Arnold – Odeon Capital
Operator
Good morning, and welcome to Whole Earth Brands Second Quarter 2022 Results Conference Call. [Operator Instructions]. Please note today’s conference is being recorded.
At this time, I would like to turn the conference over to Jeff Sonnek, Investor Relations at ICR. Sir, Please go ahead.
Jeff Sonnek
Thank you, and good morning. Today’s presentation will be hosted by: Albert Manzone, Chief Executive Officer; and Duane Portwood, Chief Financial Officer. Executive Chairman, Irwin Simon, is also participating on the call today, and will be available for Q&A. Comments during today’s call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts are considered forward-looking statements.
Statements are based on management’s current expectations and beliefs, as well as a number of assumptions concerning future events. The forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company’s filings with the SEC. We’ll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on our Investor Relations website, investor.wholeearthbrands.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures.
Additionally, we’ve provided a supplemental earnings presentation on the Investor Relations website that may be useful in your analysis of the company’s performance. With that, I’d now like to turn the call over to Albert Manzone, CEO.
Albert Manzone
Thank you, Jeff, and thanks to everyone for joining the call today.
I’m pleased to report the business delivered the consolidated product revenues of $133.5 million, an increase of 8.5% on that constant currency basis 5.5% on a reported basis, generated $19.7 million of adjusted EBITDA. These results were consistent with our plan, and made possible by our team hard work amid this challenging operating environment.
North American Supply Chain Reinvention Project allowed us to improve customer service levels and meet demand, which reported 8.1% constant currency revenue growth for the Branded CPG segment during the second quarter. Our Wholesome Sweetener business continues to perform strongly, which helps drive an approximate 2% increase in volumes at our Branded CPG segment, excluding the impact of our SKU rationalization initiatives.
Emerging international market sales comprised of Asia Pacific in the Middle East and Africa, and Latin America, which represent approximately 15% of our Branded CPG segment. All increased at a double-digit growth rate during the second quarter, confirming the strong secular demand trends for our categories and products.
Additionally, segment revenue growth was further supported by price actions that were instituted in response to inflationary forces. Flavors & Ingredient segment continues to carry momentum with above trend growth rates and positive constant currency revenue growth of 10%, driven by both volume and price. Concerted effort to drive use in new markets and categories, has been central to these results.
While we navigate the ongoing market disruptions and macroeconomic headwinds, we remain undeterred in our mission and core strategy. Despite the temporary shifts in consumer behavior, the underlying long-term trends remain more relevant today than ever, and our mission to help consumers achieve healthier lifestyle remains at the heart of our growth strategy. Health and wellness forces at play, are powerful. In fact, 73% of U.S. consumers are trying to leave or avoid sugars, which speaks to the increased focus on personal health.
Globally, our premium and baking oriented brands such as Wholesome, Swerve, and Whole Earth, are successfully addressing the expected shift to at-home indulgence and healthier lifestyle. Our mainstream brands such as Canderel, Equal and Pure Via, continue to address shopper needs for accessibility, affordability and quality.
As we look ahead to the oversight of this macroeconomic cycle, we believe our portfolio will be even stronger. Slate of innovations is especially exciting, as we head into the second half of this year. We have several launches planned this fall around the holidays and the ramp up of the baking season.
The new innovations are tapping into high growth segments of sugar substitute with Monk Fruit, which is seeing consumption growth of more than 30%, and Allulose, which is growing at more than 40% versus a year ago. We are reinvigorating Swerve, which is a leading natural by-product used by 2 million loyal households, by launching exciting new innovations to tap into new products and adjacency cross purchases.
We will launch Swerve products with natural Monk Fruit and Allulose sweeteners. You will also see us in the market with blends, such as Monk Fruit and cane sugar, to help consumers transition toward a sugar-free lifestyle. Novel innovation we’re especially excited about is Swerves within chocolate chips in the baking adjacency.
Chocolate baking chips have a strong natural link to existing Swerve baking behaviors, and is a segment of interest for sugar reducing consumers. Our innovation efforts have also driven our share growth across our international markets, where today the Whole Earth Brands’ portfolio holds number one position for year-to-date 2022 period.
For example, take our work in Australia where we now have almost 23% share of the natural segment, which increased to nearly 16 points of the past two years, following the introduction of our Baker’s Secret product and Monk Fruit’s raw sugar innovations under the Whole Earth Brands. Additionally, our focus on availability remains at the forefront of our Power of One sales strategy. We saw our team gaining 1,700 additional doors in North America across our brands for the first half of ’22 versus a year ago.
This door expansion was driven primarily by the mass channel and by Whole Earth and the Swerve brands continue to see success in our global expansion strategy as well. For the first half of 2022, we gain 8,400 additional doors in aggregate across all of our international markets. Now, shifting to operational matters.
While the environment has been unrelenting in its variability, we continue to be fortunate given our ongoing execution of our North America Supply Chain Reinvention Project. With respect to our new Alabama facility that services our legacy North American Branded CPG business, our second quarter manufacturing was significantly more consistent in terms of total production, which reflects the hard work we have done to stabilize production.
We are now producing to demand, customer service and field rates are significantly improved, and this is immediately visible in the step-up of our Branded CPG segment’s constant currency revenue growth of 8.1% versus the 3.3% growth we reported in the first quarter. Beyond the supply chain, we’re also combating inflationary forces through a combination of tools including price, gross net optimization, productivity, and prudent expense management.
We are committed to defending our margins, and we will be using this tool to ensure that we continue to deliver on our commitments to the markets. We are also focused on maximizing investment in areas of trade promotion effectiveness, and reallocating resources to strategic growth areas. For instance, take e-commerce, which today already represents low double-digits of our Branded CPG sales.
Between dot com and omnichannel, we see a tremendous growth roadmap ahead of us and globally. We have expanded our e-commerce teams to accelerate growth and build channel infrastructure. We have reallocated and optimized these resources to ensure we’re investing adequately in talent across e-commerce, advertising and operations, and in capabilities and tools.
With respect to our pricing actions, we instituted a mid-single-digit price increase during the first quarter, which, as expected, helped drive revenue growth in our branded CPG portfolio in the second quarter. Cost inflation has not abated, and in some areas, has accelerated.
As a result, we have taken additional pricing actions that will be effective in the third quarter. While not as large as the earlier price increases, we continue to take action to protect margin dollars. Next, productivity.
The SKU rationalization we executed at the beginning of the year, which was a year-over-year headwind of 1.6% in the second quarter, was largely focused on underperforming SKUs and reallocating those resources toward innovation. This is an excellent complement to our pricing strategy, and something that we can control in response to external forces.
Finally, expense management. The strategy we put in place during first quarter, had us well-positioned during the second quarter to deliver our plan, and we feel good about the levers it provides, as we look to the second half of the year.
We continue to be vigilant about expenses in this environment, are being smarter about our marketing cadence, and are laser-focused on revenue-generative activities such as innovation. Shifting to our Flavors & Ingredients segment. We continued to generate above-trend revenue growth, achieving 10% at constant currency rates in the second quarter.
This growth was driven primarily through volume, along with some pricing actions. This marks the third consecutive quarter of strong growth for the segment, following the implementation of new leadership who have developed assets of commercial initiatives and maintained the driving adoption of natural, non-GMO, flavor-enhancing licorice-related ingredients in our end markets across food and beverage, cosmetics, health care and industrial.
Together with a significantly improved cost structure following our footprint optimization project, we also have an ability to drive more competitive pricing. Taken together, the team has the tools necessary to drive growth, and we’re very excited about the results they are generating for the business. Flavors & Ingredients is a strong free cash flow generator, with high barriers of entry and a global leadership position that will support our broader growth initiatives, as we further diversify and grow Whole Earth Brands.
This diversification in both revenue and cash flow, is valued in a fluid environment such as this, allowing us to deliver greater consistency in our operating results. In summary, our proactive efforts across Whole Earth Brands, are creating a stronger floatation that we will build upon. We are pleased with our progress to meet our goals for 2022. Whole Earth Brands is the global leader in the better-for-use sweetener and reduced sugar categories. Our team continues to pursue four priorities.
First, disrupt the massive $100 billion total addressable refined sugar market which is being displaced by fast-growing sweeteners; second, drive category leadership through best-in-class innovation and brand building, expand our global distribution, and leverage our strong supply chain capabilities; third, continue to build out our ESG credentials and evolve our brands and products toward becoming a large organic, natural plant-based foods company; and 4, work on enhancing our cash flow management and reducing balance sheet leverage.
With that, I will pass the call over to Duane for his financial review.
Duane Portwood
Thank you, Albert, and good morning to everyone.
As a reminder, please refer to our non-GAAP reconciliations at the end of the press release for additional detail, and I encourage you to view the supplemental earnings presentation on our Investor Relations website.
For the second quarter ended June 30th, 2022, consolidated product revenues grew 5.5% to $133.5 million versus the prior year quarter. On a constant currency basis, product revenue increased 8.5% versus the prior year second quarter. The increase was driven by a combination of increased volume and pricing actions.
Reported gross profit was $37.3 million compared to $41.4 million in the prior year second quarter. The decrease was largely driven by cost inflation and costs associated with the Supply Chain Reinvention Project, partially offset by pricing actions and a $1.0 million favorable change in noncash purchase accounting adjustments related to inventory revaluations.
Adjusted gross profit of $42.6 million was essentially flat with the prior year period. Reported gross profit margin was 27.9% in the second quarter of 2022 compared to 32.7% in the prior year period. Adjusted gross profit margin was 31.9%, down from 34.0% in the prior year.
The majority of this decline was a function of largely offsetting higher cost of goods sold due to cost inflation on a dollar-for-dollar basis through increased prices. This resulted in higher sales to protect year-over-year gross profit, which, on a percentage basis, lowers gross profit margins. Consolidated operating income was $7.7 million compared to operating income of $6.0 million in the prior year second quarter, and consolidated net income was $1.3 million compared to net income of $3.7 million in the prior year period.
Consolidated adjusted EBITDA was $19.7 million compared to $22.0 million in the prior year second quarter. The decrease was primarily due to an unfavorable foreign currency impact of $1.2 million and $0.5 million of higher bonus expense, as a portion of the prior year bonus program was settled in stock compared to an all-cash bonus program in the current year.
Now shifting to the segment results for Q2. Branded CPG segment product revenues increased $5.0 million or 5.0% to $104.1 million for the second quarter of 2022 compared to $99.1 million for the same period in the prior year.
On a constant currency basis, segment product revenues increased 8.1% to the prior year, driven primarily by pricing actions implemented during the quarter. Overall, volume was flat due to the discontinuance of certain private label SKUs at the beginning of the year. Excluding the impact of the SKU rationalization, Branded CPG volume increased 1.6% versus the prior year quarter.
Operating income for the Branded CPG segment was $5.6 million in the second quarter of 2022 compared to operating income of $10.3 million for the same period in the prior year. The decrease was driven by costs associated with the company’s Supply Chain Reinvention Project, the impact of cost inflation, and an unfavorable impact from a stronger U.S. dollar, partially offset by revenue growth.
The company’s Supply Chain Reinvention Project is expected to improve efficiencies, help offset inflationary pressures, and improve competitiveness in the marketplace over the longer term. Our Flavors & Ingredients segment product revenues increased 7.4% to $29.4 million for the second quarter of 2022 compared to $27.4 million for the same period in the prior year.
On a constant currency basis, segment product revenues increased 9.9%, primarily due to strong volume growth of 6%, driven by growth in licorice extracts and pure derivatives, resulting from the company’s commercial expansion and innovation efforts. In addition, higher pricing contributed approximately 4% to the overall segment growth.
Operating income for the Flavors & Ingredients segment was $9.0 million in the second quarter of 2022 compared to operating income of $3.7 million in the prior year period, primarily due to revenue growth, improved efficiencies following the footprint optimization initiative completed in the first half of 2021, and a $2.8 million decrease in restructuring and other expenses included in prior year results that did not reoccur in 2022.
Operating expenses for corporate for the second quarter of 2022 were $6.9 million compared to $8.0 million of operating expenses in the prior year period. The decrease is primarily due to lower M&A transaction and public company readiness costs.
Now, I will briefly cover our June year-to-date results. As a reminder, we acquired Wholesome on February 5th, 2021. I will speak to reported results, which include Wholesome for the full first quarter of 2022.
Additionally, we will provide some select pro forma results as if we owned Wholesome for the entirety of 2021 year-to-date period, to assist in your analysis of the organic growth of the combined portfolio. For the 6-month period ended June 30th, 2022, consolidated product revenues grew 13.7% on a reported basis to $264.1 million versus the prior year’s 6-month period.
On a pro forma basis, organic constant currency product revenue increased 6.7% compared to the prior year. Consolidated operating income was $14.8 million compared to $2.9 million for the prior year period, and consolidated adjusted EBITDA decreased 5.1% to $37.5 million, which included $1.7 million of unfavorable foreign currency. Now I’ll move to the cash flow and the balance sheet.
Cash flow used by operating activities for June year-to-date was $12.0 million, driven principally by increased inventory levels due to both timing of purchases and a strategic build in certain inventories to improve service levels. Capital expenditures for the six months ended June 30th, 2022, were $4.4 million.
Free cash flow for the first half of 2022 was negative $16.4 million. Excluding nonrecurring or unusual items, first half 2022 free cash flow was negative $8.2 million. We do expect to generate positive free cash flow during the second half of the year, and for the year in total.
As of June 30th, 2022, we had cash and cash equivalents of $27.6 million and $432.3 million of long-term debt, net of unamortized debt issuance costs. During the quarter, we amended our credit agreement to increase the size of our revolving credit facility by $50 million, from $75 million to $125 million.
Combining available capacity under the revolver, along with our cash balance, we ended the quarter with approximately $76 million of total available liquidity. Note that our long-term debt increased from year-end 2021 by approximately $49 million, primarily due to $50 million of draws on the revolving credit facility to fund a portion of the Wholesome earn-out payment in the first quarter and to fund increased inventory levels associated with the seasonal nature of the Wholesale business as well as strategic purchases to protect against price increases and shortages and improved customer service.
Reducing balance sheet leverage continues to be a corporate priority. While we seek to reduce the leverage this fiscal year, our latest expectation is for our net debt leverage ratio at the end of 2022, to be approximately flat as compared to 2021, in large part due to the strong performance of Wholesome and our need to support that business with higher inventory investment. Now shifting to our full year outlook.
We are reaffirming our 2022 guidance, which includes the full year impact of Wholesome acquisition. As a reminder, our outlook represents our expectations for growth on a pro forma organic basis. We define pro forma organic growth to be as if the company old Wholesome for the full year of 2021.
For 2022, we continue to expect consolidated product revenues to be in the range of $530 million to $545 million, with a bias towards the high end of the range, given year-to-date performance and planned price actions in the second half. We continue to expect consolidated adjusted EBITDA in the range of $84 million to $87 million with a bias towards the low end of the range due to our expectation for some ongoing pressure from cost inflation, and the stronger U.S.
dollar. And we continue to expect, total capital expenditures will be approximately $10 million. That concludes our prepared remarks. Operator, now back to you. Please open the call for questions and answers.
Question-and-Answer Session
Operator
[Operator Instructions] The first question we have is from Brian Holland from Cowen and Company.
Brian Holland
Yes. Thanks. Good morning. I guess first question – I didn’t see it in the deck this quarter. I know you’ve spoken to it in prior quarters. There’s been some share erosion in the U.S. I’m just curious, any update on the progress that you’re making there in the second quarter? And then maybe just more broadly across your global footprint, if the share gains that you have reported in past quarters still tracking up?
Albert Manzone
Sure. Good morning, Brian. This is Albert. Thank you for the question. So let me maybe start by saying that obviously, a lot of the share in North America is linked to our Supply Chain Reinvention. And this is why, as in our prepared remarks we talked about our servicing of our legacy Branded CPG, which is now producing to demand with customer service levels the last four weeks of June at 90%, as very positive because that allows us to bring all the products back at retail on the shelf, and that will go a long way to the share recovery. And I would say that at this point, we have really hit a stabilization point. So that’s point number 1.
Point number 2, as I have highlighted, you will have in the second half, significant innovation coming with the baking season and coming to the shelves. You have a Swerve reinvigoration plan with innovation and new products that we are launching.
So all this bodes very well for the second half of the year, which, of course, Brian, when you are able to have all the products back, you are also able to promote those products, which we didn’t do year-over-year comparison in the first half of the year. So that’s with regard to the U.S. And one thing that I will point to you is that, our Nielsen measured channel is about 23% of our U.S.
mix. So as I talked, we’re doing very well and growing double digit in foodservice, in e-commerce, in our club business. So when you look at the full picture, what you see, which I think is very important in the current economic cycle, and I continue to talk about the U.S. – is really about a very well-balanced portfolio. And that portfolio is balanced in terms of premium brands.
And as we’re going to see with the economic crisis, people starting to spend again more time home. We see opportunities here for home indulgence and personal health. We have, at the same time, mainstream brands which provide accessibility, affordability and quality, and those are the Equal that you know, the Pure Via in the U.S. and Canderel in International. And finally, I would say a very well-balanced channel split in between e-commerce, food service and retail, in North America.
In international, we play from strength. We have significant market share leads everywhere, and we’re able to really continue to build our presence and dominance in our international market. The last thing I will say, Brian, in addition to the brand building and innovation, is also the distribution in the first half of the year. I’m very pleased to report that in North America, we were able to gain 1,700 doors. That’s about 3%, 4% of our total universe in North America.
So again, I think that with supply chain reinvention coming upstream and the progress we are making in our Alabama plant, we feel comfortable from a share standpoint in the second half in the U.S., and we will continue to drive leadership in our international markets.
Brian Holland
I appreciate all the color. And if I could just shift to gross margin. So – and please – if you addressed this in your prepared remarks and I missed it. But Q2 gross margin is obviously lower than Q4, which I think we were hoping was sort of the trough there. So I guess, I’m looking at potential drivers here. One, I call that cost inflation, was there a killer pressure point that moved counting what you were anticipating maybe going into the quarter? And two, was mix a factor at all? Because I’m thinking about that in the context of trade down. I know you called out the strength of Wholesome and carrying some more inventory around that, that I think that generally holds lower margins. I’m just trying to make sure I understand the moving parts on growth margin, as we think through the second half of the year. Thank you.
Duane Portwood
Yes, Brian. From a gross margin perspective, I think it’s easiest to think about it from an adjusted perspective, and our adjusted gross profit margin was down around 210 basis points from 34.0% to 31.9%. The – almost all of that is explained through the price increases that essentially dollar-for-dollar offset the cost inflation that we saw.
So essentially, what you have is the same margin dollars on a higher revenue base. From an inflation perspective, I think we’re seeing inflation across the spectrum of our cost structure, whether that’s transportation, whether that’s raw material costs, whether that’s wages, packaging, the like.
There are – some are more acute possibly than we had anticipated. And I would maybe point to – and it’s really – incrementally, it’s not moving – it’s not the one reason for movement, but labor is – continues to be a pressure. Transportation continues to be a pressure as we saw gas prices for the quarter, which were a little bit more than we had thought. And that’s – as we go forward, that’s one of the reasons that Albert alluded to another price increase that we’ve implemented and will be effective this quarter Q3, to offset some of that. From a mix perspective, there’s some goes ins and goes outs.
Wholesome continues to perform very well, which from a gross margin perspective is a little bit of a negative mix, but we’re seeing a rebound in North America anyway with Equal and Whole Earth, which is a bit of an offset. And then as Albert alluded to, our international markets growing very well, which is also good from a gross margin perspective. So some offsetting things. And at the end of the day, mix is kind of muted for the quarter.
Brian Holland
Appreciate the color Duane. I’ll leave it there. best of luck everyone,
Duane Portwood
Thank you.
Albert Manzone
Thanks, Brian.
Operator
The next question we have from Rob Dickerson from Jefferies.
Rob Dickerson
Great. Thanks so much. I just had a question, maybe for you, Albert, on consumer behavior. And I think in some of the prepared remarks you mentioned there could, I guess, be some shift in behavior, but at the same time in Q2, kind of ex the SKU rationalization piece, the volumes on the CPG side were actually up a little bit, regardless of the pricing. So just trying to get some feel, as we get through the year, would seem like there would be some increased elasticity risk on those volumes. But at the same time, you’re also speaking to the supply chain getting a little bit better just given the North American effort. So just, I guess, simplistically, how do you think about that volume trend in the back half given the pricing? And then I have a follow-up.
Albert Manzone
Yes. Good morning, Rob. And thanks for the question. I would say that, again, on the net-net, I look at the net positive. And this is because you have – as you said, obviously, you need to keep a balance, but I think we have, first of all, a very positive health and wellness forces at play. And as I’ve always said, that those are way fast for decades to come. And the increased focus on personal health in a huge addressable market, is very significant, and will continue to play out positively for us.
I mean, again, just think about the fact that our household penetration in developed markets is about 26% to 77% of sugar, and think about how many people are really taking health seriously, both in our core sweetener but also adjacencies, which are all the categories where we have ability to play. So I see that as a net-net. The macroeconomic cycle is positive for the long-term. That being said, you have obviously some pricing elasticity which we are going to see. I think all of us are learning it and seeing as we go through.
But what is important with the pricing, we’re taking – as Duane said, for Q3, what is important is really having a balanced portfolio. And I think that what you are seeing, if you go back to the previous crisis or economic crisis, what you see is that there is space for premium. And when you think about people shifting more at home for restaurants – from restaurants, and there you have indulgence and personal health. And we have great brands like Swerve, like Wholesale, playing there.
And then what is important is that, we have also mainstream brands, which is Canderel International, Equal in the U.S., Pure Via in North America, and those are providing affordability. So all in all, the best we can do is to balance across our brands, balance across the channels, cloud, e-commerce, food service and retail. And we feel net-net, we’re going to be on a net positive as we look at the second half.
Rob Dickerson
Okay. Super. Thank you. And then just secondly, SG&A was somewhat benign in the quarter, I guess, relative to history and obviously relative to Q1. So although gross profit came a little lower, SG&A is fairly attractive. And I’m just curious, is the majority of that coming from this optimization plan within North American? Is that run rate that we should be thinking about going forward, which offset some of the incremental inflationary aspects flowing through in the gross profit line? That’s it for now. Thanks.
Duane Portwood
Thanks Rob. I think you’re looking at that correctly. I mean, I guess, kind of benign, although some may have other points of view. But, as Albert said in his script, we are very vigilant on costs, and we’re very much focused on making sure what cost we have is as productive as it possibly can be towards revenue-generative efforts. So that will continue to be a focus. We’ll address increases in costs with the lack of a better way to put in productivity from an SG&A perspective.
I wouldn’t say it’s necessarily related to optimization – like a formal project that’s optimization. It’s just our ongoing mantra of making sure that we don’t have a bloated cost structure and keeping that as lean as we possibly can.
Rob Dickerson
Okay. Got it. Thank you.
Duane Portwood
Thank you.
Operator
Thank you. The next question we have from Scott Mushkin from R5 Capital.
Scott Mushkin
So I kind of had three avenues I want to explore here. One is going back to the U.S. market. And I think in the prepared remarks, you talked about the mass channel that you’re gaining traction there. One of the challenges with that channel is, sometimes you can get in there, but then you can get kicked out pretty quickly depending on what’s going on with velocities. So I was hoping you could give us some granularity on how you’re doing there? And is it the velocities where you think they are – should be, or maybe even higher? So just a little granularity there.
Albert Manzone
Yes. So Scott, good morning. The simplest way I can answer to you is that we just went through the reviews with the mass. And so looking at what has been decided for the 12 months ahead of us is positive with net gains, which is driving our distribution growth that I talked about. This is coming on the shelf Q3 and is – we’re back. So I will talk to the fact that as – one of the things that we have done, Scott, as we were ramping up our Alabama facility for brands like Equal and Whole Earth is, what you want to do is to be extremely targeted, right?
And so even for now, we’re very excited to have an average 90% service level. One of the things that we have done is, obviously, to be very clear on who are our key customers, and making sure that we do everything right for Zane. So I will say that with regard to mass, we’re in a good place. That played out. And what I did talk about this morning is essentially what’s ahead of us.
Irwin Simon
And Albert, can I just add something to that? I think if you come back and look at the portfolio, with Whole Earth, with the new products in Equal, with Wholesome and Swerve, the portfolio we have – and going through – we’ve been a 2-year old public company. And now as you bring all this together, the distribution opportunities, the white space out there for us, is tremendous. And we had to consolidate sales organizations, had to consolidate brands. Swerve did not have the innovation.
But the team now feels real good about where we are and the products we have. So we have supply, we have products, we have the Whole together. We have seen single burden affect these. We have infrastructure in North America, Europe and Middle East. So the team is in a good place now to drive that volume and growth, and drive cash flow, drive margins and reduce staff.
Scott Mushkin
That’s perfect. Actually, it’s a good – and guides into my second question around what’s going on with Europe. We had another CPG company which you guys are familiar with, especially Irwin, that had a big preannouncement this morning based on what’s going on over in Europe. You guys have a pretty big operation over there, and I noticed it didn’t seem to impact you all that much. And so what I was – the question is that is, the other parts of the business growing faster, the other international parts of the business than expected, and you were facing headwinds there? And then secondarily on the U.S. dollar, were there some surprises there with the strength?
Irwin Simon
Maybe we got people in place that know how to run just our European business. We do not have the complexity there in Europe. And Albert spends a lot of time there. I mean, we got some strong brands in Europe with – again lots of opportunities to grow, whether it’s the Middle East or India or throughout Europe. Yes, higher power costs, higher input costs and where the currency is. But I think where we are in Europe today with our product line, the demand for our product line – and we’ve been in Europe a long time – there’s still lots of opportunities in the European market. And we’ve been able to get pricing. Albert, do you want to add to that?
Albert Manzone
No, I think you said it very well, Irwin. Our European business is – I usually call this a fortress. We do have a very strong position. We source our manufacturing needs from our plant in Czech which is best-in-class, gets awards after awards, very competitively priced. We just have a fantastic team, very strong position, very strong brands.
And essentially, we’re – nothing is easy today, but I will give big kudos to the team for the fantastic job that they are – In International, outside in developing markets, as I said this morning, of course, we’re growing like with – we are entering India. As I said, we’re entering new geographies where we have added, as I said, this morning, just in the first half, 8,500 doors, so – what is great, and what I just said before to Rob is, this continues to give confidence that this health and wellness trends are true around the world, and it’s up to us to really raise to the challenge. Irwin, do you want to comment – Duane, on the second piece of the Scott question?
Duane Portwood
Yes, Scott. You had asked about currency. And I think, generally speaking, Europe has come in as we had anticipated, excluding the currency impact. Currency is a bigger headwind than we were anticipating certainly at the beginning of the year. So – and that may continue based on what we’re seeing in July and then going into August.
But there’s areas of other parts of the business that are making up for that currency piece, and we’ll strive to continue to make that particular circumstance happen.
Irwin Simon
But the good news is, Scott, Europe is not a major part of our business today. It’s North America where our growth – and what we expect that to come from. I mean – so I think that’s the good news from the standpoint. And we see tremendous opportunities in Europe. And Albert knows Europe well. So I’m really excited what the team can do there. But a big opportunity for us absolutely is North America.
Scott Mushkin
Thanks for the color. I’ll leave. I have one more question, but I’ll take that offline. Thanks again.
Duane Portwood
Thank you.
Operator
Thank you. The next question we have is from Ryan Meyers from Lake Street Capital Markets.
Ryan Meyers
Hi, guys. Thanks for taking my question. First one for me. Just wondering if you can highlight kind of how you’re thinking about new product launches in the second half, maybe as we head into the baking season. And then also, what was the sales mix during the quarter from new products?
Albert Manzone
Yes. So on the – good morning. On the second piece of your question, we essentially strive to continue to perform at about – in – between 15% and 17% of our net sales come from innovation on a 3-year CAGR basis. And as I – that’s essentially the trend we have been on for the last three years, that’s best-in-class in consumer products. And we are investing in R&D, in marketing, in insights, and managing our stage gate to deliver that consistently. So we’re very happy about that remark, and that is true for this year.
As you look at the second half, I talked earlier to the question about mass, and the fact that we have gained distribution this year, and that’s obviously driven by innovation. And so this innovation, what you do have, as you say, is you have a bunch of things playing, and I will focus on the U.S. number one, is you have new ingredients. So we talked about the growth at Allulose. We talked about the growth of Monk Fruit, and we’re bringing those ingredients across some of our brands’ different price points and different benefits.
You do have a significant Swerve reinvigoration that is going on as we speak. You would see a lot of those products through our e-commerce and then retail as the month goes by, and that is geared to: one, capturing those ingredients that consumers are now excited about and looking for that bake or taste like sugar; number two, gearing gap to the baking season. Number – the last thing I would say – and then happy to follow up in any way, shape or form you want – is the fact that we are also seeing success increasingly into our adjacencies.
And if you take the 2 million loyal households of Swerve consumers, they are giving us permissions and looking forward to us expanding into the adjacency. I talked about the chocolate chip cookies, which is nonsugar added – which is nonsugar, which is a very natural space, and we are also seeing good successes in those adjacency areas.
Ryan Meyers
Got it. That makes sense. And then last one for me. When you think about the Supply Chain Reinvention Project, what sort of inning of that are you guys in? And when do you think that things are going to be kind of running at max capacity or running optimally?
Albert Manzone
So Mark, not being a foreign experts of baseball in the U.S., I will let the inning to – the inning piece to Duane. But what I would tell you is that we’re happy with the progress we have made. Obviously, taking over the plans – what we saw from the beginning was labor disruption, and we are now stabilizing the workforce. We have – we’re happy with where we’re at. So we are – we have done a lot of training for this. We have put in place a lot of processes. And I would say that you can expect a little bit more in the months ahead in terms of hitting our stride, but we’re getting closer to being in a very good place. Duane, any reference to the innings?
Duane Portwood
Yes, I’d say we’re in the seventh inning stretch. So we’re – I would – for the back half, you’re going to see less dollars going that way than you saw in the first half, and the majority of those dollars will be in the third quarter. So there may be some of the dribbles into the fourth quarter, but again, I think the inning analogy is probably a nice one, and I’d characterize it as a seventh inning stretch.
Ryan Meyers
Great. That’s super helpful. Thanks guys.
Duane Portwood
Thanks.
Operator
Thank you. The next question we have is from George Kelly from ROTH Capital Partners.
George Kelly
Hi, everybody. Thanks for taking my questions. So just a couple for you. The first one, the Flavors Ingredients – & Ingredients business performed really well again. So that segment has been strong. The question for you is, it seems like, since you fixed up the facility or changed facilities, I guess the savings expected or the amount that you’ve realized, has exceeded the amount that you talked about going in, I believe. So I guess, correct me if that’s the case, but – if that’s not the case. But is this 30% operating margin that you just reported, is that a good place to model going forward? Or was there anything kind of unique in the quarter that impacted that number?
Duane Portwood
I would say, given the current complement of customers, which isn’t necessarily unique, I would think that’s a fairly decent way to model it going forward. As it relates to kind of quarter dynamics, the team continues to do a great job in terms of how they set themselves up for success in the prior year, and that coming to fruition in terms of a more diversified portfolio of customers, whether that’s confectionery or industrial or otherwise.
But, I think from a margin perspective, we’re probably about where we’re going to be. As we get into the back half of the year, obviously, it compares – start to get very difficult. So we had great growth in the back half of last year, particularly in Q4. But from a margin rate perspective, nothing unusual really going on in Q2.
George Kelly
And then last question has to do with your commentary in the prepared remarks about leverage expectations at year-end. It seems like you changed the expectation a little bit. I think you said flat year-over-year, and on recent calls, I think you were planning for it to decline slightly. So just curious what the – I’m guessing it’s Supply Chain Reinvention Cost, but is there any kind of cash flow stuff you can talk about that’s different than it was prior?
Irwin Simon
The real thing that we’re – as we navigate through this environment of supply chain challenges external to us, there’s kind of three things to consider. One is just protecting supply, both in Wholesome and our legacy business, in terms of making sure that we can sustain our fill rates, making sure that we’re maximizing our quota as it relates to Wholesome. So that’s one thing. We just – we don’t want to be caught shorthanded. And so it’s an environment where we want to not be too risky from what we’re holding and what we’re planning.
Obviously, increased costs have an impact on overall inventory balances. And then finally, there’s a little bit of timing going on, on this quarter, but – and I do expect some of that to reverse. But at the end of the day, inventory levels are going to be a little bit higher than what I anticipated at the beginning of the year, and that’s strictly to make sure that we can service the customers, making sure that we’re protecting our supply and making sure that we’re optimizing quota and other things.
George Kelly
Okay. Understand. Thank you.
Irwin Simon
Thanks George.
Operator
Thank you. The last question we have is from Arthur Arnold from Odeon Capital.
Arthur Arnold
Hi, guys. Two quick ones. one, when you think about the timing of price action or taking price relative to the cost shifts in the backdrop, do you think you’re – and think about margins coming into this next quarter, are you a step ahead or keeping pace or a step behind slightly with regard to the timing of the price action?
Duane Portwood
I don’t – we’re not ahead. It would be great to be ahead, but it’s hard to react to that quickly. That said, I think the team has done a great job of reacting to what we’re experiencing. So I would say there’s – we – full transparency, probably a step behind, but that’s to be expected, but not terribly behind. Kind of goldilocked, if you will.
Arthur Arnold
Got it. Okay, and the other one is just with regard to the consumer and what’s going on in terms of wallet squeeze. Can you sort of characterize the demand shifts across channels as well as the substitution effect that’s taking place kind of net of distribution gains? What are you seeing in terms of channel shift and substitution or trade down?
Albert Manzone
Yes. I would say that, what we have seen in the first half is obviously a very nice comeback of foodservice in general across the world. That’s about now back to ’20. We’re – if you take food service, for example, we’re ahead of 2019 now. So we’re back pre-COVID, and we’re doing better than where we were in 2019.
That’s obviously also driven by the fact that Wholesale and Swerve had small presence or no presence in foodservice, and we were able to leverage the Power of One, of which I talk often. So I would say that is doing well. I would say e-commerce, as you know, continues to be a great opportunity. This is now double-digit – mid – high double-digit. In terms of our e-commerce business, we are 14%, 15% of our mix.
We continue to invest because we have opportunities there, not only with pure play, but also with e-tailers, as you know. And so we talked earlier about mass, but with the walmart.com or tesco.com or woodworth.com in Australia, there is a lot of avenues, and we continue to invest in our organization to continue to build competencies there.
And so I would say that then on the retail, I think the next – for the first six months of the year, we have seen growth in – e-commerce growth in foodservice remains to be seen in the second half, how that’s going to play out, but I would say that we’re well-balanced. In terms of where consumers are going, as I say, in uncertain time, I think the premium is going to work out fine.
And I think that the value side – and we have also good presence in private label, as you know, we are extremely well-positioned on our branded and private label business to essentially continue to deliver to the consumer the health journey they are on, according to the different price points. And I think that is one of our strengths, both in the U.S. as well as in International.
Arthur Arnold
Okay. Thanks guys.
Operator
Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. Now I would like to turn the call back to Albert Manzone for closing remarks. Sir?
Albert Manzone
Yes. Thank you very much, and thank you, everybody, for joining this. And Irwin, please add anything you want. But what I think is important to say is, this quarter, we executed our plan. And I talked a lot about – on this call about the strength of the macro trends, the strength of our portfolio, SCR coming back, the innovation on the back out, the distribution gains and the Power of One.
But one of the things important that I want to really put forward is the team which has been at this, and passionate about this journey for many years. So the team knows each other well. And what you want in uncertain time is people that can go from vision to strategy to execution. And this is what we have, whether you look in any region with our region heads, which drive fantastic commercial work together with our functions, be the fines, be the supply chain, and we talked a lot about supply chain. So I just want to congratulate and salute the team who is doing all – and hitting all the strides in what is uncertain time that we have not seen before, and I think they are doing a fantastic job.
Irwin, anything you want to add?
Irwin Simon
Albert, I echo what you say. I am very proud of what the team has accomplished in this short period of being a public company, and dealing with becoming a public company, integrating the four businesses, setting up the infrastructure, building out global brands and – for where we are today. Thank you very much for joining our call today. Sorry, that was having some technical problems here.
Operator
Thank you, sir. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.
Be the first to comment