Q1 2024 UTZ Brands Inc Earnings Call

Participants

Kevin Powers; Investor Relations; UTZ Brands Inc

Howard Friedman; Chief Executive Officer, Director; UTZ Brands Inc

Ajay Kataria; Chief Financial Officer, Executive Vice President; UTZ Brands Inc

Cary Devore; Executive Vice President, Chief Operating and Transformation Officer; UTZ Brands Inc

Andrew Lazar; Analyst; Barclays Capital Inc.

Nik Modi; Analyst; RBC Capital Markets

Peter Galbo; Analyst; BofA Global Research

Rob Dickerson; Analyst; Jefferies

Rupesh Parikh; Analyst; Oppenheimer Co., Inc.

Matt McGinley; Analyst; Needham & Company Inc.

John Baumgartner; Analyst; Mizuho Securities USA, LLC.

Robert Moskow; Analyst; TD Cowen

Jim Salera; Analyst; Stephens Inc.

Presentation

Operator

Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the UTZ Brands first-quarter 2024 earnings call. (Operator Instructions)
I would now like to turn the conference over to Kevin Powers, Head of Investor Relations. You may begin.

Kevin Powers

Good morning, and thank you for joining us today. On the call today are Howard Friedman, CEO; Ajay Kataria , CFO; and Cary Devore, COO and Chief Transformation Officer. Howard and Jay will make prepared comments this morning and all three will be available to answer questions during a live Q&A session.
Please note that some of our comments today will contain forward-looking statements based on our current view of our business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over to Howard, I just have a few housekeeping items to review. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials posted on our website.
Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on our Investor Relations website.
And now I'd like to turn the call over to Howard.

Howard Friedman

Thank you, Kevin, and good morning, everyone. Starting off with a few key takeaways, I'm pleased with our good start to the year. And for the second straight quarter, we gained dollar, pound, and unit share in the salty snacks category, led by several of our consumer loved powerful brands to include us on the border and Boulder Canyon.
In addition, productivity programs across our organization continue to build momentum, and we delivered our fifth consecutive quarter of adjusted EBITDA margin expansion as well as 27% adjusted earnings per share growth.
To continue building our momentum in April, we opportunistically accelerated our network optimization strategy by disposing of two additional manufacturing plants to our home. These follow the three dispositions from our home announced back in February.
Importantly, our former UTZ associates at those plants are being offered full employment, and we thank them for their hard work and dedication over the years and wish them the best moving ahead. Bringing it all together, given our first quarter results and confidence in the remainder of the year, this morning, we reaffirmed our organic net sales and adjusted EBITDA outlook and raised our adjusted EPS outlook.
We are on track to deliver a strong 2024 as well as the 2026 targets introduced at our Investor Day back in December. Our four fundamental strategies underpin our efforts, and we've made good progress across each of these strategies this year, positioning us well to hit our goals and build momentum for the next three years.
To quickly review our progress, our first fundamental strategy is focusing our portfolio to further penetrate our expansion geographies while holding the core. In the quarter, we gained Cercon retail sales market share for the 13-week period ended March 31, that includes share gains in both our core and expansion geographies, led by continued distribution gains and increases in household penetration.
While our salty snack measured channel performance was strong in the quarter, our sales trends in unmeasured areas of the portfolio did not keep the same pace. Part of this is intentional as we optimize our sales mix and investment to focus on our more profitable power brands while other areas require better execution.
These include improving the performance of dips and salsas and our small-format channel, where we have the opportunity to strengthen our price pack architecture in a couple of key brands as consumers remain value seeking in this environment. Moreover, we continue to do portfolio shaping in our foundation brands that impact these channels, and we expect that these areas will collectively improve throughout the year.
Our second fundamental strategy is transforming our supply chain to fund growth and margin improvement. We are making good progress on our productivity programs, which is reflected in our adjusted gross margin expansion in the quarter of nearly 300 basis points. And our five planned dispositions are accelerating our network optimization strategy, which is enabling us to increase investment in our more scale plants.
Our third fundamental strategy is developing leading capabilities to build a best-in-class organization. We are in the process of fully implementing our integrated business planning system and building out our consumer and sales analytics as well as continuing to make progress on our marketing and innovation capabilities. I'm excited to see the impact we can make in market as we increase our investments behind both our new product lineup and two of our powerful brands in the second quarter.
Our fourth fundamental strategy is improving balance sheet flexibility and pursuing opportunistic M&A. As I mentioned earlier, we have disposed of five manufacturing plants and two brands with the proceeds going to reduce debt and accelerate our leverage reduction time line In addition, our transformation efforts across the company are collectively improving our cash conversion cycle.
Before turning the call over to Ajay to discuss our financials in more detail, I'll take a few minutes to review our consumption trends in the quarter. Our retail consumption increased 4.1%, fueled by strong branded volume growth of 4.6%, which ranked first among our branded salty snack peers.
Our consumption growth was again led by power brand growth of 4.9%. And within our power brand portfolio, our power four brands increased 6%, which was nearly 4 times the category growth of 1.4%. From a salty snack subcategory perspective, our growth was led by significant outperformance in tortilla chips and cheese snacks.
Tortilla chip growth was led by On The Border consumption growth of 15%, resulting in a 0.5 point share gain, fueled by strong growth in both traditional grocery and mass channels. Our rebound in cheese snacks continued in the quarter led by share gains for iconic UTZ Cheese balls, with strong growth in mass and club channels.
Within potato chips, our consumption was basically in line with the subcategory driven by share gains for utz and Boulder Canyon brands led by continued distribution gains are as apps trends remain below the category given softness in the C-store channel, but we are actively making price pack architecture improvements and regaining distribution.
Finally, consistent with our expectations, our pretzels trend, we're below category given we are lapping our apps flavored pretzels sell-in in the previous year. These trends will begin to normalize as we get into the latter part of the year.
From a geography standpoint, we gained share in both our core and expansion geographies for our total portfolio, our power brands and our powerful brands growth was most pronounced in our expansion geographies with growth of 8%, fueled by continued distribution gains, which easily exceeded category growth of 1.7%. Share gains across geographies were led by on the border and Boulder Canyon with continued share gains and expansion for our UTZ brand as well.
Moving to our better-for-you portfolio of salty snacks, our consumption in the natural channel continues to grow and sales were up 21.9% compared to 3.9% for the salty snack category over the last 12 weeks ending March '24.
Our leading better-for-you brand in the natural channel continues to be Boulder Canyon accounting for three-quarters of our sales in the channel and the largest driver of growth, up 31.3%, which is 8 times the rate of total salty snacks growth.
Boulder Canyon has now delivered 31 consecutive periods of double digit growth in spends and is the number two potato chip brand in the natural channel with our avocado oil chip now ranked number one in terms of dollar sales.
Looking ahead to the rest of the year. From a portfolio standpoint, our focus will remain on driving outsized investment and focus on our power four brands on the border that's and Boulder Canyon. This will be seen in terms of advertising and consumer spend, innovation and overall marketing capabilities.
This year we are amplifying our innovation to focus on bigger launches. We are focused on delivering craveable flavors, and we're introducing a new limited-time offering of Mike's hot honey extra hot potato chips the summer. Hot and spicy is the number-one flavor and salty snacks at $7.5 billion and growing nearly 2 times the category rate.
In addition, we launched our US mix Minis in three flavors into strong flavored pretzels segment, which makes up half the pretzel subcategory and is posting 12% growth, which is 4 times the unflavored segment.
In addition, our innovation this year will center around capturing occasions and expanding positive choices as consumers continue to snack across occasions, we plan to be there with a proven strategy around seasonal and multipack innovation to include our new on the border, Red White and Blue cafe style tortilla chips and our news apps, Voodoo hollow in multipacks.
And as consumers continue to look for no compromise snacks with bold flavors in our flagship better-for-you brand, Boulder Canyon, we are moving our spicy green chili from a limited time offer to an everyday flavor. In addition, we have moved beyond potato chips and launched our Boulder Canyon Poppers, which is a better for you cheese snacks made an avocado oil.
We launched and white cheddar and how opinion Ranch flavors and the early consumer feedback has been great. Finally, we have begun to invest behind marketing. After a year of capability build. We started with increased investments behind e-commerce and retail media and next quarter, we will be introducing campaigns for zapps and UTZ.
While it is still early in the year, the increased confidence we have in our gross margin delivery, our early marketing returns, both financially and from a consumer response and our ample investment opportunities.
We are now planning to increase investment behind our brands this year beyond the 40% that was originally assumed in our outlook. This is consistent with our belief that we make money before we spend money when we build our businesses overnight and our brands over time, I'm very optimistic we will be able to do both.
Now I'd like to turn the call over to Ajay. Ajay?

Ajay Kataria

Thank you, Howard, and good morning, everyone. I will start by congratulating on our associates for delivering a strong start to the year. As Howard mentioned in his remarks, thanks to our team's efforts in the first quarter, we are well on our way to delivering our 2024 commitments as well as our 2026 targets introduced at our Investor Day back in December.
In the first quarter, our organic net sales increased 1.5%. Adjusted EBITDA increased 7.4% and adjusted earnings per share increased 27.3% as our productivity program and actions to optimize our network and portfolio are delivering stronger profitability.
Importantly, our organic net sales growth combined with these actions resulted in our fifth consecutive quarter of adjusted EBITDA margin expansion as we delivered 12.5% adjusted EBITDA margin in the quarter. During the quarter, our organic net sales performance was led by volume mix growth of 1.1%, driven by our power four brands. Pricing increased 40 basis points due to certain price pack architecture adjustments to be better positioned in the marketplace as well as price realization in our partner brand.
Finally, our total net sales growth was impacted by the conversion of company-owned RSB routes to independent operators, which reduced growth by 40 basis points and the divestiture of the R&D this year and good health plans, which reduced net sales growth by 2.5%.
Moving down the P&L, adjusted gross margin expanded 280 basis points in the first quarter. I will note that our first quarter margin expansion was better than we had originally anticipated with our productivity programs driven by manufacturing, plant and procurement savings, delivering stronger results, which more than offset inflation and supply chain investments to support our growth.
Adjusted SD&A expense increased 6% as productivity within selling and logistics was offset as expected by continued investments in e-commerce as well as selling capabilities that support our expansion into new geographies.
To that end, in the quarter, we had higher than expected delivery costs given unplanned Boulder Canyon transport shipments to support significant volume growth in the East. That said, we are now producing Boulder Canyon potato chips in Hanover to support more profitable growth in this area of the country.
Finally, our marketing expense increased 40 basis points as a percent of sales, consistent with our strategy as we invest in capabilities and spend to grow our share of voice in the marketplace. Bringing it together adjusted EBITDA increased 7.4% to $43.4 million and margins expanded 100 basis points to 12.5% of sales.
Margin expansion was driven by 400 basis points of productivity and 40 basis points of price, partially offset by 220 basis points of supply chain costs, 80 basis points from selling and admin expenses, and 40 basis points from higher marketing expense.
In addition, adjusted net income increased 38.7% and adjusted EPS increased by 27.3% to $0.14 per share. Stronger operating earnings were aided by lower core D&A and lower interest expense.
Turning to cash flow and the balance sheet. Consistent with normal seasonality, cash flow used in operations was $9.1 million and capital expenditures were $13.6 million, primarily related to investments in our manufacturing plant.
In addition, we paid $8 million in dividends and distributions to shareholders. Finishing with the balance sheet, cash on hand was $47 million and our liquidity remained strong at nearly $200 million, giving us ample financial flexibility.
Net debt at quarter end was $728 million or 3.8 times trailing 12 months normalized adjusted EBITDA of $190.1 million. Just to note this represents an improvement of 1.3 times was that the end of the first quarter last year. As a reminder, on February 5, we closed the disposition transactions of the good health and art of legacy brands and three manufacturing facility. The transaction included a total consideration of $182.5 million with approximately $150 million in after-tax proceeds, which we immediately used to pay down long-term debt.
In addition, after the quarter ended, we closed the dispositions of two additional manufacturing facility and used $9 million in net proceeds to pay down long-term debt and put $5 million on the balance sheet. We have also successfully completed a repricing of our $630 million term loan due in January 2028, which reduced the applicable interest rate by 36 basis points.
These two debt repayments plus the lower interest rate on our term loan will result in approximately $40 million in lower interest expense for 2024. Notably, our fixed rate debt now comprises approximately 80% of our total debt.
Consistent with our strategy, these actions accelerate our timeframe to achieving our target of 3 times net leverage ratio to year end 2025, which as you know, is a year ahead from year-end 2026 target set at Investor Day in December.
Now turning to our full-year outlook for fiscal 2024. Our 2024 outlook continues to position us well to deliver our 2026 financial targets. We are maintaining our organic net sales outlook for growth of approximately 3% or better, which reflects our outlook for normalizing salty snack category growth and our growth rate accelerating largely led by distribution gains.
Our growth is expected to be led by volume with outsized strength in our expansion, geography and pricing of our flat for the year. In terms of phasing, we continue to expect about a 49%, 51% first half second half split for our net sales.
Moving to adjusted EBITDA, we continue to expect growth of 5% to 8%, fueled by gross margin expansion from our productivity programs, partially offset by investments in growth. Our first quarter productivity benefit was higher than expected which gives us confidence in our ability to deliver on our cost savings commitments this year, and now expand adjusted gross margin more than the 200 basis points that was previously assumed in our guide.
That said, we will step up investments in our growth as gross margin expansion come through to fund investments to support distribution gains, particularly in our expansion geographies. As well as investments in marketing and capability.
Our 2024 adjusted EBITDA outlook continues to maintain a balance between productivity savings and investments. Finally, we are raising our adjusted earnings per share growth to 23% to 28%, given our revised expectation for a more favorable effective tax rate and also lower interest expense after factoring in the use of net proceeds to pay down long-term debt from our April 2024 manufacturing plant disposition and the favorable repricing of our term loan.
We now expect our adjusted effective tax rate to be between 18% to 20% and interest expense of approximately $47 million. Our outlook for capital investments of between $80 million to $90 million is unchanged, as is our net leverage outlook of approximately 3.6 times at fiscal year-end 2024, which I note is a full turn improvement from year-end 2023.
Our 2024 outlook and improved capital structure and building momentum in our productivity program as well as capabilities that allow us to invest in growth position us well to deliver our three year goals. More importantly, I'm excited to see the entire UTZ team working together to deliver on our four fundamental strategy operators. We would now like to open up the call for question thank you.

Question and Answer Session

Operator

(Operator Instructions) Andrew Lazar, Barclays.

Andrew Lazar

Morning Howard and Ajay.

Howard Friedman

Morning. How are you? Good.

Andrew Lazar

Howard, you mentioned couple of times of weakness in small format stores and adjustments that need to be made on sort of price pack architecture. I'm trying to get a sense if your value equation in these areas are either out of line with competitors in this specific channel or if it's the overall category that needs some adjustments there?
And I guess given the timing of making these adjustments, is it such that we should continue to expect a gap between scanner data and what you report on an organic sales basis for a couple of more quarters, like very much like what we saw in the first quarter.

Howard Friedman

And I appreciate the question, but I think one of the things that I would kind of point is we've been talking a lot about the consumer and moving up and down the price ladder. And I think over the last couple of quarters, we've done a really good job of not only getting our revenue management capabilities, correct but getting our assortment as to where it needs to be. And you've seen that on cheese balls, you've seen that in pretzels, and we've seen that in a lot of the classes of trade.
With respect to small format, it really is actually a very specific couple of items that we have that what we did was we'd actually increased the pack size and that obviously was not given where the consumer is today, where we should where we want to be.
So we'll be adjusting back to a lower absolute price point and making sure that the value seeking consumer can hit the price point we need to. This is not a systemic issue nor a category-wide issue. And so we would continue to believe and are confident in kind of how our results are coming through that you'll continue to see the spread narrow as we move into the second quarter and beyond.

Andrew Lazar

Got it. Okay. Thanks. With a number of key salty snack players mentioning the need to maybe focus a little bit more on value moving forward. Have you seen any, I guess, significant shift in sort of category competitiveness or merchandising activity that maybe you would characterizes either unexpected or irrational or I guess that pose or any additional risks to your full year outlook?
I'm trying to get a sense of what your full-year outlook sort of contemplates with respect to category sort of competitiveness. And I think you mentioned in your prepared remarks, and there's an assumption there that the salty snack category sort of growth normalizes and I didn't know how either reasonable or aggressive that type of assumption might be in the context of your full year guidance. Thanks so much.

Howard Friedman

Yes, I appreciate the question. And look, I think one of the first thing I would say is we feel very good about how we started the year and as you look at kind of where how we thought our organic net sales would come in has come in slightly better than we would have expected. We had a little bit of a benefit on price.
And so there were some trade-offs, but the category that we were sort of expecting that we were entering into in the beginning of the year has largely materialized the way we would have expected it to. We also realized the category is getting a little bit more promotional. I mean, there's no question about it. It's continued quarter over quarter, and we've all sort of been seeing this.
But the nice thing about our competition and I think the category overall is it still remains very rational. Obviously, given partially the price point. It's still a innovation and brand-building led category overall and some price while important and will continue to be important to address the consumer who is shopping those price points.
Largely speaking, we are pretty comfortable with where we are and expect that on that it will continue. We are keeping a close eye on price gaps and obviously we will because we will remain competitive. But the other the last thing for our growth, what you're also seeing is the power of our distribution story coming through both in our core and expansion geographies as we're seeing consistent and significant growth in our distribution points across our business, which obviously blunts some of the potential impacts on that could be sort of transitory in nature.

Andrew Lazar

Right. Thanks so much.

Howard Friedman

Thank you.

Operator

Nik Modi, RBC Capital.

Nik Modi

Thank you. Good morning, everyone. Just to pay at two quick questions. Just how maybe you can provide some context on Snap. Obviously a year ago getting taken away from the consumer at least the emergency allotment and we have some states that kind of went off that earlier. So I was wondering if you had any perspective on some of those leading indicator states in terms of are you seeing the category, a trend rate improved to some degree.
And then I guess the broader question is, retailers are obviously, you know, seeking suppliers who can grow volume right now. And obviously, you have you have that and it's very unique in the industry. So I'm curious in terms of the narration, the narrative you have with retailers, are you getting even more traction? Just because they're looking for suppliers that can actually grow volume. And how are you managing that with your with your capacity plans? Thank you.

Howard Friedman

And so first, with respect to Snapple, what I think what we would what I would tell you is, at least from what we're seeing is it's a little still a little early to tell a lot of the Snap lap is really starting to happen. I think now as you go as it progresses through the middle part of the year, and I think that's part of why I think many of us believe that the that volumes will continue to inflect and the consumer will become a little bit more normalized as we get into the Q2, Q3 and Q4.
So I think a little bit early. We're pretty comfortable and pleased with our overall performance with consumers across the classes of trade with the places where we've talked about. But overall, I think it's still a little bit early. I think with respect to our retailer partners, we are we have been very fortunate over the last couple of years that we have been able to gain distribution, demonstrate the value that we can create to the category and show that we can actually add something incremental to the overall assortment that retailers have.
And I think even before this quarter or last quarter that convert those conversations are ongoing. We have great use cases and we have great incrementality and I think retailers our recognizing that. So as a result. Not surprisingly, you are seeing distribution gains that we're getting in the core and specifically around Boulder Canyon and On the Border being places where we're bringing that into us as traditional core as well as into some of our expansion geographies.
We are seeing space gains, and we'll continue to expect to see that as we get through for the end of Q2 and into the back half of the year. So retailers are looking for partners that can grow across multiple years and multiple contacts. And I think we're proving that.

Nik Modi

Excellent. I'll pass it on.

Howard Friedman

Thank you.

Operator

Peter Galbo, Bank of America.

Peter Galbo

Hey, guys, good morning. Thanks for taking the questions.

Howard Friedman

Morning.

Ajay Kataria

Hey Pete.

Peter Galbo

Just two quick clarifications. One, going back to Andrew's question about kind of the gap between reported and scanner. So just so I understand it. We should start to see in 2Q and maybe even more so in the back half a pretty meaningful narrowing of that gap, right? Just to be able to hit kind of 3% organic sales number I just want to make sure I have that clear.
And then the second on clarification and I have a follow-up as well. Ajay, did you give a split on EBITDA for first half second half of the year.

Ajay Kataria

Yeah. I can clarify that really quickly. We are maintaining what we said in February. So first half second half EBITDA should look like last year the spend.

Howard Friedman

Yes. And Peter, it's Howard. At the short answer is yes, you should continue to see a meaningful narrowing between our between the two sales numbers and actually Q4 to Q1, you did see a narrowing as well. So this is by and large playing out gone as we expected it to hit the organic net sales.
We'd expected, as I mentioned to Andrew competition was slightly different, but the couple of areas where we had some work that cause that to be a little bit wider diffs and salsa is a contributor as we've discussed, I know is when Nielsen comes out and done, yes, we have the IO conversion, which obviously starts to go away.
And then there's a small format opportunities on price pack architecture. I think those are the three biggest drivers to the to the delta. And all of those we would expect to improve as we progress through the year.

Peter Galbo

Okay. Thanks for that. And then maybe for Cary or Howard, just you've gone through a lot of this plant rationalization and selling off. Maybe you could just give us a sense of where and after all of the moves, likely capacity utilization across your network will stand relative to maybe where it was prior to all of the transactions I think would be helpful. Thanks very much.

Howard Friedman

Yes. So to the point, obviously, we have just we have now announced the disposition of five plants. I think we're very comfortable with where our asset utilization is historically we've talked about, it's about $100 million of sales on average and the benchmark was $180 million in sales being supported
And I think right now, we are moving it toward that $180 million range with the right level of capacity and redundancy that we need. We're still call it low 70s. I think in capacity utilization overall, it obviously depends on by subcategory, but we have the firepower we need.
But really the benefit of the and the at the dispositions was really driven on two things, one, the opportunity to meaningfully delever. And then two was the opportunity for us to now focus our energies and attention on in sourcing that product and protecting our supply while we invest in automation and some of the capital improvements that we want, that will drive our productivity as we go through the next couple of years, consistent with what we said at Investor Day.

Cary Devore

Yes, Pete. And just to add on to what Howard said, um, with the 70s number will improve, obviously, as we in-source things over the next 12 months so you'll see that climb and kind of march towards that 80 percentile.

Peter Galbo

Got it. Thanks guys.

Howard Friedman

Thank you.

Cary Devore

Thank you.

Operator

Rob Dickerson, Jefferies.

Rob Dickerson

Great. Thanks so much. Howard, just to kind of quick question for you, given the current, it's the outperformance of your four kind of core brands and then also a great performance in the new geographies. I'm just curious, is it is it essentially kind of the more the strategy works, right?
The easier, hopefully it becomes for it kind of increased retailer acceptance on the brands that you're essentially trying to move a little bit further west strategies think about if you walk into a retailer a year ago to, hey, we want to do that.
So like, okay, maybe that'll work you can walk in now and say, look, where we've done this. It's clearly working and we're clearly doing well, where we're clearly outperforming the category, but it would seem like that would just increase the probability of the go forward strategy playing out?

Howard Friedman

Yes, right. Yes, I think the short answer is it's much easier to be able to sell with facts and evidence specifically in a market, but even more powerfully in a retailer on other geographies, right? So we are now at the point with a lot of the national retailers where we can actually point to geographies where we are and where we've been added and the benefits that we've had, which makes them obviously much more positive to expanding and broadening their relationship with us.
And so the short answer is yes, the more the strategy works, the easier the district, the distribution gains and the selling opportunities are. But equally important, I think the easier it is for us to talk to our independent operators about making the investments that they need to be able to build routes and build the infrastructure because they really own a lot of the final leg. And so the whole puzzle comes into place as we continue to have greater success with our power four brands.

Rob Dickerson

Super. And then just quickly, we spoke to somebody recently to essentially made it sound like as we kind of move through the pandemic, right, as supply chains were a little bit, let's say, disenfranchised, so to speak. And some of the regional brands, some of the smaller brands were able to kind of infill, frankly, potentially get on shelf for trying to sell more kind of given where demand was.
At the same time, retailers will clearly prefer the larger brands have more scale and better profitability and actually alluded to it. So will this will probably provide a great opportunity for some of the non-leading big brands such as ours.
So I'm just curious, like, as you again speak with these retailers is there kind of just like you do a general excitement to bring in, but Save-A-Lot's or Boulder, what have you and still basically take share maybe from some smaller brands and that's all? Thanks.

Howard Friedman

Yes. So you'll obviously, as we got through the pandemic, one of the things that allowed us to stand out was that we had both capacity and great products and great brands that we could bring to consumers that maybe hadn't gotten as much of an opportunity to see it. So the for us, the opportunity because it became greater to prove that we were more than just a regional brand, but that we could compete more broadly, both for retailers' confidence.
And I think in some cases for ourselves. And I think the premise that we have been talking to retailers about is unlike some of the smaller guys, we actually compete in every in all of the subcategories that a retailer wants. So we can compete from potato chips support grinds on from pretzels to variety packs and multipacks.
So we can actually have a more complete thought with some of these retailers and what we've been able to improve year on year is that as we are investing in the category and as consumers are getting exposure, our trial and repeat rate is great. Our household penetration is expanding and as a result, the retailers category grows. So we're a little bit more of a one-stop shop.
We can definitely do more today than we were able to do say, I don't have all the way back to 2010 before we started on our acquisition journey. And I think as we go forward, we are building a case for competence across and across the retail network industry that we can, we can actually do more with them. And I think that's what you're seeing with our distribution.

Rob Dickerson

All right. Super. Thank you so much.

Howard Friedman

Thank you.

Operator

Oppenheimer.

Rupesh Parikh

Thank you. Rupesh Parikh, Oppenheimer, and thanks for taking my question, sir, as I just on I guess on the cost side, just curious the latest on the input cost inflation you're seeing and just some of the other cost pressures in the business.

Ajay Kataria

Yes, Rupesh, thanks, for the question. So as we as we talked about during our guidance in February, we are seeing very consistent with our plans. We are seeing costs in labor and some in freight as well as you would expect. And then there is offset in commodities.
So as we said, commodities get better as we move through the year, especially around potatoes, we are still paying for the higher material costs that are contracted through Q1, and then we get into a new produce crop later this year and that should get better. So overall, still expecting inflation to be flat for the year, a higher on conversion costs offset by commodities.

Rupesh Parikh

Great. And then maybe just one follow-up question. Just given concerns out there on the consumer backdrop. Just curious, as you look at your business, are you seeing any signs of increased channel shifting or really any changes in consumer behavior versus your last update?

Howard Friedman

Hey Rupesh, Howard, a look, I definitely similar to I think what you're hearing across the industry is there are that consumers are value seeking and there are there's a subsegment of the low end consumer low income consumer who is now more specifically price shopping than potentially they had been historically.
So we're seeing the same things. I think what is what tends and that is obviously driving some of the price pack architecture changes that we referenced in our prepared comments. I think what is still a little different about us, however, is the distribution and expansion opportunities and the opportunity for our portfolio to continue to expand.
And by bringing our powerful brands across the and the markets, it sort of offsets some of the some of the noise we may be seeing, but we're going to address that. We're going to address our pricing and our price pack to make sure that every shopper in every channel can get our products at the price point and the that they want.

Rupesh Parikh

Great. Thank you. I'll pass it along.

Howard Friedman

Thank you.

Operator

Matt McGinley, Needham.

Matt McGinley

And in your EBITDA bridge, you noted that 4 point benefit from productivity savings, but also that 2.2% drag from the supply chain costs. How much of that supply chain impact was inflation versus the Boulder Canyon transport issue that you mentioned. And if that was primarily Boulder Canyon related, does that headwind primarily dissolve over the course of, I guess, into this quarter, second quarter?

Ajay Kataria

Yes. So I would say a little less than half was inflation. As I as I talked about just now, we are seeing conversion cost inflation that we were expecting. And then we definitely saw delivery costs, which was, I would think of it as a good investment that we made as we talked about in the prepared remarks.
There were some other investments that we made to drive productivity around capabilities, et cetera. So those are in there as well. So you are correct. The delivery cost investments will taper off, but then we will start to make some of some other investments to continue to drive productivity.

Matt McGinley

And in your guide for the full year implies about a point of EBITDA growth. You did that this quarter as well. It sounds like you're getting more from productivity, but then you're going to reinvest that back into marketing. But I guess my question is, do you get any leverage on G&A on the higher volume in the back half? Or does SG&A continue to be a headwind and impacts SG&A exclusive of the advertising and marketing that you're that you're going to spend more?

Ajay Kataria

Yes, we'll get some leverage on G&A. So I will say that we are very excited to see the results in the first quarter. Productivity is definitely flowing through a little more than we expected. So to your point, as gross margins expand higher than expectation, we'll keep it will continue to make up at a high ROI investments.
And you call out marketing, I'll say, you know, there are really three areas that we invest in around our brands, which is marketing and distribution and selling capabilities as well as building out our team, our capabilities such as in the area of analytics, marketing, driving productivity, revenue management, integrated business planning.
So on and so forth. So you will see us invest in all three areas. But yes, you know, behind the brands, it's a primary area of investment this year.

Matt McGinley

And thanks for the great work and all the progress we've made this year.

Ajay Kataria

Thank you.

Operator

John Baumgartner, Mizuho Securities.

John Baumgartner

Good morning, thanks for the question.

Howard Friedman

Hey John.

John Baumgartner

Good morning. First of all, in measured channels, your volume lift on promo across your main categories, potato chips, tortilla pretzels. Those lifts have been above the categories for quite some time now. Can you speak, Howard, can you speak to that outperformance?
What do you think drives that gap? Is it is it more outsized trial in growth market, is it more your consumers in core geographies, expanding consumption? Is there something in execution in general that stands out? I'm curious what you're seeing there.

Howard Friedman

Yes. So I appreciate the question, John. Obviously, my Red Man people want me to call out the fact that I have great revenue management folks. So I needed to get that built in. But look I think a couple of things. One of the things I think you're seeing right now and with our promotional efforts is twofold.
First, it's sort of the maturation of our revenue management capabilities where we have historically been a lot more about getting our price gaps right and maintaining them. And over the last year or so, we have been acquiring new talent and capabilities from other places, which is actually allowing us to experiment with different promotional constructs as well.
So it's not necessarily just a straight lift. It can be a must buy program, Ron, we're playing with different price points as well. The trial trying to experiment. So I think it's part of what you're seeing. There are the benefits of that of that construct.
The second is that we are doing a better job of making sure that our promotional ROIs are working. So you're getting a promotional benefit of just getting sharper and more effective across the retailer universe as well. Obviously, we're very pleased with that. Would that progress.
And the last thing I would just offer you is our customer mix as we continue to mature. We're getting different customers with different levels of expectations in terms of how to execute consumer trial and promotional activities. So all of those things together kind of are rolling up to a better quality merchandising lift than potentially you're seeing with others.

John Baumgartner

Okay. And building on that, as it ties into the decision to increase marketing more than the 40% this year that that incremental spend as it pertains to the brands, will that also fund more in-store display? Is there more of an event or a seasonal time? We should be thinking about just your how are you thinking about the allocation at the margin?

Howard Friedman

Yes. Ajay, kind of reference to this in the last question as well, when we think about investing in growth. We sort of think about it not only in terms of investing in the brand, which is more consumer pull, but also retailer push, right? So that means more displays, more end cap space that we are able to get as well. So that's a piece of it. You'll see greater expansion of shelf and distribution and obviously greater spaces progress through the year.
I think the second area is you see a lot more effort from us on innovation. We are buying craveable flavors. We've addressed our multipack and variety pack and occasions there. We're excited about the Voodoo Holloway in variety pack that we're going to push through. So there are some investments there as well.
And then the last is really is as we are building out our capabilities, it's absent and us will have marketing campaigns as we go into the back half of the year starting this quarter in Q2, and then building in support not only of the distribution but also in support of building those brands. So there will be a lot more concerted effort to making sure that consumers can come and understand to who we are and what we offer as we go forward.
And then last is really if you look at e-com and our e-comm business, that business is real is growing really nicely, and that's because we're getting much more effective with both retailer.com and some of the digital on places where we can invest and get high power, high ROI, high trial activity. So you put it all altogether, it will be kind of all across all three distribution, innovation, communication and then retailer specific execution to support our growth.

John Baumgartner

Thanks, Howard.

Howard Friedman

Thank you.

Operator

Robert Moskow, TD Cowen.

Robert Moskow

Thanks for the question. I just want to make sure I fully understand the gap between your net sales and the IRI of reported numbers. You mentioned it's mostly unmeasured channels and dips and salsas. Just to be clear in the unmeasured channels is it club stores? Or is it small format stores that you don't think are really covered in the in the in the IRI?

Howard Friedman

Yes, thanks for the question a lot. I think there are three pieces to it, and let me answer your question first, which is we feel great about how our club store and our discounter and for the most part the dollar channel is doing. I think if you look at where we are, where we are executing and we feel very strongly, we're getting very good results and we're continuing to see on the growth that we would expect.
It's really driven by a little bit of the untracked channels, small format, and it's really pretty much pretty well isolated to we have some price pack architecture issues that we kind of talked about that I think it would be and a fairly significant portion of the issue.
The second is really around chips and salsa, and you see that the spread there between if you look at just the pure solve the pull of the data versus total lots, you can sort of see in the measured channels that difference.
And then the last of the IO conversion, which kind of wanes over time, which is another about 40 basis points. So we'll solve the small format issue as we progress through the year we're making we've made the changes that we need to. We've got to get the assortment in the right place. But with respect to discount dollar value channel and club, we feel very good about our performance.

Robert Moskow

Okay? So these are small formats that are not picked up in the IRI because IRI throws convenience stores, but not what you're not the small format.

Howard Friedman

Yes, that's correct.

Robert Moskow

Okay. And then the last question, fourth quarter, do you feel that you have an easy comparison to your performance a year ago coming up in fourth quarter, optically, it looks like that from when I when I look at fourth quarter sales, but there's all kinds of factors. So how do you view it?

Howard Friedman

Yes. We think that what we what we would say is if you look at the progression through the year on as you think about Q1, Q1 had there was a lot of a lot of noise of early. We get through our first quarter. Our second quarter really are and it gets progressively a little bit. It's progressively easier once you get through the second quarter as you get into Q3 and Q4. But Q4 is the is the quarter where we think the lap is the most straightforward.

Robert Moskow

Mostly administrative, like if we say going forward, you mean apples to apples already. I mean, like I remember, there was some disruption in fourth quarter a year ago.

Howard Friedman

(inaudible) in Q4.

Robert Moskow

Okay, great. All right. Thank you very much.

Howard Friedman

Thank you. Thank you.

Operator

Jim Salera, Stephens.

Jim Salera

I guess thanks for squeezing me in. Yes, on the on Boulder, just given the continued strength of the natural channel there, how much of the assortment of Boulder in natural, do you think it's transferable to traditional grocery?
And I believe, Ajay, you said that now that you're making bolder in Hanover, does that improve your ability to go after new distribution on the East Coast because correct me if I'm wrong, but I think Boulder is actually one of your few brands that has better market share out west versus your core markets in the East?

Howard Friedman

Yes. So I appreciate the question. We've been talking about our aspirations for Boulder for a while. And I think it's one of the one of the brands that we're particularly excited about not only because it is a clear point of difference around healthier oils.
But to your point about where it's geography of Origin comes from. So to answer the question, yes, we believe it is transferable. We believe that the consumer interest in healthier oils will be true across the country, and we are seeing really good distribution gains as we're moving east.
And we're also seeing good distribution opportunities as we think about places like club. So that to Ajay's point, we put this we put in the capital to be able to make the product in the East specifically to address the higher levels of demand that we're starting to see.
And if you certainly look at the core performance in the first quarter, you're seeing that transferable demand. So we're excited about Boulder. I think it is a brand that is growing nicely and growing quickly and consistently. And as we build over time, we are staging our supply chain to be able to meet that demand.

Jim Salera

Great. And if I could maybe ask one more on just retailer engagement on the recent innovation launches. I know in my local grocery store, I've seen Microsoft funny mix Minis on endcaps along with some of the other Zap innovation.
Do you have a sense for how many incremental households that brings to the brand? And if you can offer any color on maybe conversion from, let's say, like the mix Minis back to the traditional core potato chip offerings?

Howard Friedman

Yes, I think it's still early. We're sort of at, I think, the second purchase cycle. So we won't really have a good read for a few more months to be able to see the trial and repeat data. What I what I can tell you and I'm pleased that your local retailer actually has the product is that we are seeing good retailer acceptance across our innovation so far because of both the need states that we're identifying and frankly, some of the subcategories that we are that we're entering into where the growth is really the most attractive.
So it makes me nice case. Obviously, the flavored pretzels segment is growing fast and we need we want we were there earlier was apps to be able to bring our flagship U.S. brand in as well was important. And then in the case of Mike's hot Honey, and that's season pretzels, bringing in hot spicy, which is also a fast-growing segment of the category. So retailers have been very positive. Early sales are good. It's still early to understand what the trial and repeat data is, but we'll be happy to share it as soon as we add it.

Jim Salera

Great. Thanks guys. I'll pass on.

Howard Friedman

Thank you.

Ajay Kataria

Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.