Q4 2023 UTZ Brands Inc Earnings Call

Participants

Kevin Powers; Head of IR; UTZ Brands Inc.

Howard Friedman; CEO; UTZ Brands Inc.

Ajay Kataria; Chief Financial Officer, Executive Vice President; UTZ Quality Foods LLC

Cary Devore; COO; UTZ Brands Inc.

Andrew Lazar; Analyst; Barclays Bank PLC

Rob Dickerson; Analyst; Jefferies

Peter Galbo; Analyst; Bank of America

Michael Lavery; Analyst; Piper Sandler & Co.

Robert Moscow; Analyst; TD Cowen

Rupesh Parikh; Analyst; Oppenheimer & Co., Inc.

Nik Modi; Analyst; RBC Capital Markets

Mitch Pinheiro; Analyst; Sturdivant & Co. Inc.

Matt McGinley; Analyst; Needham & Co.

Jim Saler; Analyst; Stephens Inc.

John Baumgartner; Analyst; Mizuho

Presentation

Operator

Ladies and gentlemen, thank you for standing by. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to the UPS brand Fourth Quarter and Full Year 2023 earnings call. (Operator Instructions)
I would now like to turn the conference over to Kevin Powers, Head of Investor Relations. Please go ahead.

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, powering a 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 and posted on our website.
Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on our Investor Relations website and now I'd like to turn the call over to Howard.

Howard Friedman

Thank you, Kevin, and good morning, everyone. I am pleased to be speaking with you today. For those of you on the call that attended our Investor Day in December. I'd like to thank you again for joining us, and I look forward to seeing many of you at investor events throughout the year.
Given we recently spent a good amount of time talking about our detailed progress in 2023. I'll keep my comments brief, reflecting on the year and our fourth quarter results and then hand it off to Jay for a detailed financial review and outlook.
I'll finish our prepared remarks discussing our priorities for 2024, which align to our key fundamental strategies, and then we will open the call up for your questions.
As we wrap our 102nd year of us, 2023 was a critical year. We evolved our business through capacity, distribution and capability investments that better position us to capture our full potential. And we are making tangible progress in building us into a pure play US snacking company of scale with an advantaged brand portfolio in the attractive salty snacks category to ready ourselves for the next stage of growth.
In 2023, we developed a clearly defined brand portfolio strategy to further penetrate our expansion geographies with our customers. While we work to maintain our market share in the core, this strategy positions us well to hit our goal of 4%-5% organic net sales stagger over the next three years.
Additionally, we developed our integrated supply chain strategy that is targeting $135 million in cost savings by 2026 through our base productivity programs, optimizing our network and strengthening our capabilities.
Last year, we made good steps to begin to optimize our supply chain network and we've hit the ground running in 2024 with the closing of our recently announced transaction for the disposition of three plants. This transaction will accelerate some of our targeted network optimization cost strategies while also simplifying execution and helps enable us to reach our stated net leverage goal of three times by year end 2025, which is a full year earlier than planned.
Turning to how we finished the year, we continued to make positive strides in the fourth quarter, while fourth quarter shipments were towards the lower end of our expectations.
Our consumption results were strong and we delivered double digit adjusted EBITDA growth and our fourth consecutive quarter of adjusted EBITDA margin expansion.
Our retail sales increased 4%, led by power brand growth of 5% and we gained dollar pound and unit share in the fourth quarter. US was the only snacking company of scale to accomplish this. And in the quarter, we finished as the number three branded company in the southeast category.
In addition, our investments in digital marketing capabilities delivered results as U.S. was the fastest growing salty snacks tech company of scale in e-commerce sales. Our growth was driven by continued momentum for U.S. potato chips on the border, Boulder Canyon SAPS pretzel sticks and a strong rebound in our U.S. Cheese and Golden flake port businesses
Power brand growth was most pronounced in our expansion geographies with growth of 9%, fueled by continued distribution gains, which easily exceeded category growth of 3%. And in addition, our power brand growth in the core of 3% outpaced category growth of 2%, led by strong performance of On the Border and Boulder Canyon with Boulder Canyon still only less than 20% distributed in our core is better for you. Snacking brand has plenty of room to roll ahead.
Before I turn it over to Jay I'd like to thank our 3,500 U.S. associates for their dedication and hard work as we are building a portfolio of consumer loved brands coast-to-coast.
This was an important year for our company as we strengthened our foundation and better positioned us to deliver our full potential. Our mission is to become the fastest-growing pure play U.S. snacking company at scale and I'm confident in our journey ahead.
Now I'd like to turn the call over to Ajay.

Ajay Kataria

Thank you, Howard, and good morning, everyone. 2023, we delivered organic net sales growth of nearly 3%, which included a 3.2% volume headwind from SKU rationalization, increased adjusted EBITDA by 10% to $187 million and expanded adjusted EBITDA margins 90 basis points to 13%.
I'm proud of our team's efforts during a dynamic consumer environment to deliver these results in the fourth quarter, organic net sales slightly declined 30 basis points and adjusted EBITDA increased 12% as our productivity programs and actions to optimize our network and portfolio are delivering stronger profitability.
And importantly, our organic net sales growth combined with these actions resulted in our fourth consecutive quarter of adjusted EBITDA margin expansion as we delivered 14% adjusted EBITDA margins in the quarter.
During the quarter, our organic net sales performance was led by volume mix growth of 50 basis points. Volume was impacted as expected by 2.5% due to SKU reductions when we adjust for SKU rationalization. We estimate that our volume mix grew 3% in the quarter, which is an acceleration from 2.7% last quarter.
Our broad-based SKU rationalization actions are now complete and in 2024, we don't expect this program. It will be a material impact to our results.
Additionally, as we discussed last quarter, our fourth quarter net sales were negatively impacted by some earlier holiday shipments that were originally forecasted to occur in the fourth quarter. What's shipped in the third quarter offsetting the volume increase in the quarter was a pricing decline of 80 basis points as we lapped 17% price realization in the prior year.
Also, we made certain price pack architecture adjustments to be better positioned in the market finally, our total net sales growth was impacted by the conversion of company on RSB routes to independent operators.
This reduced growth by 40 basis points similar to SKU rationalization. This program is now complete and will have a small impact of 30 basis points in the first half fiscal 202 4for sales growth as we lap out of last year's promotion.
Moving down the P&L. Adjusted gross margin expanded 52 basis points in the fourth quarter, which I would note included a 40 basis points headwind from our conversion to IRA. Excluding this impact. Adjusted gross margins expanded year-over-year by over 90 basis points, led by our productivity programs, which more than offset commodity and labor inflation.
In addition, our SKU rationalization programs improved our margin mix as we reduce lower margin, private label and Partner Brand skills.
Adjusted SD&A expense declined 5.1%, an improvement of 110 basis points as a percent of sales as a result of our productivity initiatives focused on logistics and lower administrative spend. As our sales growth normalizes, we have been able to manage spend through cost control measures in addition to driving productivity within our selling and logistics cost
Partially offsetting these factors with continued investments in e-commerce, people, selling infrastructure and supply chain capabilities to support our growth bringing it together. Adjusted EBITDA increased by 12% to $49.4 million and margins expanded 160 basis points to 14% of sales.
The margin expansion was driven by 350 basis points of productivity, 70 basis points from selling and admin expenses and 20 basis points of volume mix. These benefits were partially offset by 200 basis points of inflation and 80 basis points of pricing.
In addition, adjusted net income increased 6.5% and adjusted EPS increased by 6.7% to $0.16 per share. Stronger operating earnings were partially offset by a less favorable tax rate and higher interest expense, primarily due to higher rates on our floating-rate debt.
Turning to cash flow and the balance sheet, consistent with normal seasonality and from our cross-functional efforts to improve our cash conversion cycle. We generated strong cash in the second half of the year of over $80 million.
And I'm happy to report that our transformation efforts in this important area are working, and we are now seeing the benefits in our results. This resulted in cash flow from operations in the full year of $76.6 million.
We also remain committed to our capital priorities and capital expenditures were $55.7 million, primarily related to supporting our productivity programs and our investments in our Kings Mountain manufacturing plant.
In addition, we have paid $32.1 million in dividends and distributions to shareholders, finishing with the balance sheet, cash on hand was $52 million and our liquidity remained strong at over $210 million, giving us ample financial flexibility, net debt at quarter end was $866.7 million at 4.6 times trailing 12 months normalized adjusted EBITDA of $187.2 million.
This was slightly higher than our expectations. That said, on February fifth, we closed the previously announced disposition transaction of the good health and out of legacy brands and three manufacturing facilities.
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, of which more than 90% applied to our floating rate term loan.
This single debt repayment resulted in about $12 million in lower interest expense for 2024. And notably, our fixed rate debt now comprises approximately 80% of our total debt, up from 70% at year-end. Importantly, and consistent with our strategy, this accelerates our time frame to achieving our target of three times net leverage ratio to year end 2025 a year ahead from year end 2026 target at Investor Day in December Now turning to our full-year outlook for fiscal 2024.
I believe our 2024 outlook positions us well to deliver our 2026 financial targets that we set out at our Investor Day, we expect organic net sales to increase approximately 3% or better, which reflects our outlook for normalizing salty snack category growth.
Our growth is expected to be led by volume with outsized strength in our expansion geographies and pricing about flat for the year.
Turning to total net sales, our growth in 2024 is estimated to be impacted by about $45 billion due to the disposition of the good health and RW. Garcia brands. You will recall that the total combined sales for these brands for the full year 2023 was approximately $65 million.
Given you have a DSD agreement with the new owner, our home to continue to distribute could have this result in a lower impact to our total sales in 2024. From a weighting standpoint, we expect about a 49% to 51% first half versus second half split for our net sales.
Moving to adjusted EBITDA, we expect growth of 5% to 8%, fueled by gross margin expansion as our base productivity programs and network optimization cost savings big. In addition, our 2024 outlook assumes a roughly 40% increase in marketing expense, which is consistent with what we laid out during our Investor Day.
Our outlook includes an estimated impact of foregone contribution to adjusted EBITDA from our brand dispositions, which I'll note is mostly offset by cost savings and also our transition services agreement. We expect first half versus second half weighting of adjusted EBITDA.
It will be similar to last year. Adjusted earnings per share is expected to increase 16% to 21%, led by stronger operating earnings and lower interest expense due to the recent debt paydown from the disposition net cash proceeds. Additionally, we expect our adjusted effective tax rate to be between 19% to 21%, interest expense of approximately $50 million and capital investments of between $80 million and $90 million.
As we outlined at our Investor Day, we expect CapEx over the next three years to be about 5% of total net sales. This outlook is unchanged, but the pacing has been accelerated, increasing our 2024 full spend, given our recent plant dispositions and the need to more quickly invest in our key facilities where production will be transitioned.
For example, incremental CapEx this year will be focused on installing a new tortilla chip line in Hanover and automation projects such as palletized, U.S. and case directors. These actions will accelerate network optimization savings to have fully offset the adjusted EBITDA sold by 2025.
Finally, we expect net leverage of approximately 3.6 times in 2024 for a full turn improvement from 2023, our 2024 outlook and improved capital structure position us well to deliver our three year goals. Most importantly, the entire U.S. team is working together to deliver our category-leading opportunity ahead of us.
Now I would like to turn the call back over to Howard, who will talk more about the year ahead, HOWARD.

Howard Friedman

Thanks again. As we look ahead to 2024, our outlook begins our runway to deliver the three year targets that we set at our Investor Day in December. And our priorities this year will be consistent with our fundamental strategies, focus our portfolio to further penetrate our expansion geographies while holding the core transform our supply chain to fund growth and margin improvement.
Develop leading capabilities to build a best-in-class organization, an improved balance sheet flexibility and pursue opportunistic M&A from a portfolio standpoint, our focus will remain on driving outsized investment and focus on our power for brands on the border apps and Boulder Canyon.
This will be seen in terms of advertising and consumer spend, innovation and overall marketing capabilities. These brands will be the focal point as we aim to further penetrate expansion geographies in the Midwest with a focus on mass larger national grocers and the club channel.
Our key drivers to holding the share in our core this year will be gaining distribution, improving DSD execution and increasing our A&C investments as we execute our portfolio strategy. We remain mindful of the dynamic environment as consumers continue to adjust.
As we sit today, we recognize the rise in value-seeking behavior, be it moving up or down the price ladder channel shifting and promotion seeking. While these behaviors are not new, they are best addressed by focusing on how consumers define value, driving brand desirability and agile response as consumers make their preferences clear today.
Consumers can find us across all classes of trade, and we are focused on how we can deliver more value and accessibility across our brands in partnership with our retailers. This includes being laser-focused on our price pack architecture strategies, increasing availability of smaller pack sizes at key pricing thresholds, introducing more value options and better leveraging the breadth of our product and brand assortment.
Turning to the supply chain, our focus remains on driving our base productivity programs, expanding our Southeast logistics center, building out our new Northeast logistics center and production in Kings Mountain.
What has changed this year is the pivot and priorities given the recent brand and plant dispositions, capital investments planned for 2025 and 2026 have been accelerated given a more rapid reduction in network size, and we will work to transition volume from our disposed plants to our existing facilities. Importantly, the transition services agreement with our home will be in place for 12 months to ensure a seamless production transition over time.
Our portfolio strategy and supply chain transformation efforts will both be underpinned by developing leading capabilities in 2024, we are focused on fully implementing our integrated business planning, building out our consumer and sales analytics platform and investments in IT infrastructure to include improved account management tools for our independent operators.
As we do this, we will continue our DENI. journey and seek to make us a place where our people can fulfill their full potential.
Finally, from a balance sheet and M&A point of view, our recent transactions immediately provided more flexibility and accelerated our path to deleveraging. That said, we remain committed to cash management, improved opportunities as we look to improve our free cash flow conversion.
These collective efforts will give us more flexibility to fund future opportunistic M&A, but we will maintain a disciplined capital allocation approach focused on first funding organic growth, second, debt reduction and third, dividend growth.
These four key strategies our plan to deliver our strong three year financial targets we introduced at our 2023 Investor Day. As a reminder, these are organic net sales kegger of 4% to 5%, adjusted EBITDA margin of 16% by 2026 annual double digit adjusted EPS growth and leverage of three times by 2025 a year ahead of our previous target.
I could not be more excited about our future and our confidence in hitting these goals. And I'd like to thank everyone on this call today for their continued support. And now, operator, we'd like to open the call for questions.

Question and Answer Session

Operator

Thank you. The floor is now open for your questions. (Operator Instructions)
Andrew Lazar, Barclays. Your line is open.

Andrew Lazar

Great morning, everybody. Another point, Howard, you talked about And Jay, you talked about your expectation for pricing to be flattish in FY24 and price was a slight headwind on a year-over-year basis in the fourth quarter. And Howard I think you mentioned some some price pack architecture activities that you took to sort of be better positioned in the market.
So I guess my question is just clearly outperforming salty snack category volume is still running down year over year, which I guess could bring about some concerns over just the catagory competitive environment in terms of pricing as we go forward so I'd love to get a sense of how you're sort of taking all that into account as you think through your guidance for '24.

Howard Friedman

Yes, I think thank you for the question, Andrew, look, I think a couple of things. One is I'll I'll offer you that I look at our business overall in a couple of ways. Obviously, as we are looking at our core and our core geography, while while we often talk about making sure that we hold it, we do have a significant amount of distribution opportunity there, which layers on top of the distribution opportunities we have in expansion markets.
So as we think about the year, we think more about ad volumes because a lot of that is untapped whitespace that we are able to make sure that we're delivering our guide. Clearly, the environment right now remains dynamic. And so we would expect, as we've talked previously about building into our overall out through the course of the year.
But overall, I think we're feeling pretty comfortable with where we are. I think it's also fair to say that the category when you look at pricing and promotion in the category right now, while it is obviously higher than it has been, is still significantly below 2019 levels.
And so even now while promotions are increasing. I think in the in context, it's not an extraordinary change to where we've been. So I think we feel pretty comfortable where we are. Obviously, we'll we will maintain our price gaps and do what we're supposed to do using our revenue management capabilities. But overall, I think where we sit today, we're pretty comfortable where we sit.

Andrew Lazar

And then Jay anything to keep in mind when it comes to the cadence of expected volume growth through the year, do you expect it to be fairly even killed or anything discrete in a given quarter, just to keep in mind as we think about the volume expectations? Thanks so much.

Ajay Kataria

Yes, thanks, Andrew. We do expect to ramp up as we move through the year and as my comments in the call, where slightly more second-half weighted than than you saw last year, we should be about 49 51 split for the year.

Andrew Lazar

Yes. Got it.

Operator

Rob Dickerson, Jefferies. Your line is open.

Rob Dickerson

Great. Thanks so much. Doug, I just want to ask you a question. I guess around the recent divestments, just good health and RW Garcia. Clearly, you stated that should they teams like help accelerate your supply chain optimization efforts?
Um, fending off every day, you're speaking to the pull forward by year of the deleverage component. But maybe if you could just kind of unpack your thoughts a little bit with respect to any incremental positive benefits on the margin side as we think about what was discussed at the investor day in and also ability to think about that's 16% or higher our EBITDA margin target a few years out, and that's all. Thanks so much.

Howard Friedman

Yes, hey, Rob is Howard and I appreciate the question. I think the way I would think about the divestiture and the impact that it's going to have on the business is really largely in line with kind of some of the conversations and themes we hit before.
I think the first is it was an opportunity for us to divest a couple of brands that are best owned by somebody else, be able to monetize those assets and sort of simplify our growth expectation in line with our portfolio strategy. They were in the foundation brand pad portfolio.
And as we talk about our big power for brands, the focus that we want to apply there, these are these were brands that were probably not going to get the type of infection. I'd love it. They will being owned by somebody else.
I think second, as we talked about are that the plant network disposition and talked over time of how we're going to trying to optimize the complexity that that creates is obviously not small, and we were fully prepared to execute with excellence, but this obviously simplifies a lot of that work as we go forward.
And then frankly, financially, the opportunity to immediately pay down and delever it then gets trained and start working our way to the 3% by 2025 or a year earlier, is it being was a big, a big consideration for us. You hit it right on the on the capital or obviously we want to make we're going to accelerate some capital because we did initially contemplate doing this transaction as quickly as we were able to do it.
And so there will be capital to be able to improve and support the business going forward as we in-source volume into our existing network as we transition out over the next 12 months.

Rob Dickerson

Okay. And maybe just a quick follow-up. I know in your prepared remarks you made a comment around normalized snacking trends '24. And then Andrew's question you asked for a little incremental detail. But when you speak to kind of normalized snacking trends, I guess within your internal forecasting tools, like how do you view kind of category growth right because it becomes normalized.
So there have been different stages of what could be normalized clearly over a longer period of time. So are you thinking like 1% to 2% category growth on salty or every back to three to four? Or just trying to gauge of kind of what you think the category actually grow the shift. Yes.

Howard Friedman

So Rob, I'll I think one of the things we mentioned at Investor Day was how we want to take a conservative approach to how we thought about our FR compound annual growth rates to get to that 4% to 5% over time. And that was specifically because of our of our expansion market opportunity, not necessarily being so wedded to where the category was.
I think if you were to look right now, our position really hasn't changed. I think we believe the category is going to be call it around 2%. This year historically were more like three to four, but also build over time and that the composition of that growth certainly for us will be more volume led than than price-led.
Again, given just the nature of all of the distribution opportunities we have so category, maybe a little muted on versus history, but building over time. And that's highly consistent with our position that what we said in December.

Rob Dickerson

Great, thanks.

Operator

Thank you.
Peter Galbo, Bank of America. Your line is open.

Peter Galbo

Hey, guys, good morning. Correct, right. I mean, I may have missed it in your comments, but did you give an outlook for '24 just on on your expected kind of COGS inflation and maybe how you're thinking about gross margin for the year?

Ajay Kataria

Not specifically, but we can we can talk about it. So the input cost inflation outlook that we are looking at is relatively flat for the year. We do get benefits on the commodities, but that we have some inflation that's offsetting labor and transport transportation. And within commodities, there are pluses and minuses of cooking oils are doing well and they do have a seasonal as they are.
And then we have some cost inflation in other areas. But that's that's the outlook on commodities. And then we can talk gross margin as well. We expect gross margins to be a net benefit. We have productivity program as we have talked about ramping up price.
Net of inflation is going to be about flat as we talked about. And net of all that we should see about a couple of hundred basis points of gross margin expansion. And then we invest some in SG&A and costs as well and then net out to EBITDA.

Peter Galbo

Great. Got it. Okay. Very helpful. And then maybe just on the marketing piece, Tom, I want to make sure I heard you correctly, I think you said 40% increase. So '24, just what's the base?
I think there's a couple of numbers in the 10-K, so I just want to make sure that we have the right base of kind of total marketing spend for '23 to work off?

Ajay Kataria

Yes, a little less than 1% in '23 kind of.

Peter Galbo

Okay. Thanks very much.

Operator

Thank you.
Michael Lavery, Piper Sandler. Your line is open.

Michael Lavery

Thank you. Good morning. Marty, might want to just wanted to come back to distribution opportunities and maybe see if you could give us a sense you've had things a year and a half or so ago like Publix where you probably have a pretty full range of products and brands against little or anything to start with them in the West or Midwest.
It would seem like you could have some more opportunities like that. But then you also have plenty of instances where a brand like on the border, for example, and they live with without much else in the portfolio and vice versa so how much of your upside is from kind of more geographical whitespace or and how much is from sort of depth of broadening the portfolio where you exist already and how do we think about how that might play out over the course of the year or even a little beyond?

Howard Friedman

Yes. I'll take that, Mike. And I think for us, distribution remains a significant part of our story, both in the expansion geographies as well as in the core. So that so the short answer to your question is I think both are important as we go forward.
And within our core, we are focused on making sure that we're bringing brands like SAPS and Boulder Canyon into our core markets where we have heavy share presence and that will progress as we go through the course of the year.
And then as you start to start to think about it, the expansion geographies, a couple of things one. I think we have an opportunity to continue to solidify Florida as a fast-growing, highly, highly high contributor to our overall growth rate as we continue to move that business from what has been an expansion market into our core over the next couple of years are still only about 3.5% market share in Florida.
So we have some significant opportunities there. And then really starting to look west places like Michigan and then the upper Midwest where we're making we're entering into on bringing our assortment in. And then I think the last thing is we did in Texas, we did buy back the rights to OTV. as for us to be able to treat.
And just as a reminder, you know, Texas is the largest OTP market. So there's that there's significant opportunity there. We have no lack of opportunities on distribution. What we need to make sure is like everywhere else that we continue to execute it with excellence that we contribute to the customer and category performance and that we would drive it with our playbook. And we know how to do I think all those things together are giving us confidence in our top line algorithm.

Michael Lavery

No, that's great color. Thank you. And just a follow-up on apps. One of your most differentiated brands, but still seems to have put up a bit of a more regional skew. We've seen it in foodservice, at least like a Potbelly's. I think it was, for example, how much.
Can that type of I guess why is there more of a few foodservice opportunity? I guess, as part of the question and the other part is how much can that help lead to retail distribution just from helping build awareness trial and kind of spread it swings around the country a little more?

Howard Friedman

Yes. So I so I agree with you. I think SAPS is probably one of the one of the clearer and add brands that we have in our portfolio. And when you think about the brand, what it really stands for is flavor, right? And sort of interesting and high flavor up high flavor for our consumer.
And so that's why in some cases, food service works so well because foodservice is a place where consumers are willing to experiment and choose what they want to eat into those apps is a nice complement to it.
I think from my perspective on these apps can be a national brand. It will take it will build over time. That's why we put it sort of in our powerful brands and really continue to stand for high flavor impact on EdiX. So if you look at space occasion as a product that we're launching in flavored pretzels this year, we'll have we'll have more items along that vein of flavor and on it.
Exploration rooted obviously in the New Orleans food culture, which is whereas apps started. So it'll make it. Our marketing guy comes out a little bit when we talk about this brand, but I agree with you principally that it's got a lot of runway.

Michael Lavery

Okay. Thanks so much.

Howard Friedman

Thank you.

Operator

Robert Moscow, TD Cowen. Your line is open.

Robert Moscow

Either Howard and good morning. A couple of questions and one is in the core geographies lost market share in fourth quarter, I think you probably covered it in the Investor Day, but is there anything about the performance there you can call out that it's causing the share losses that you want to address?
And then second, I think a big competitor of yours said that the value-seeking behavior by consumers is playing out in a shift towards smaller bags. Are you seeing a similar dynamic? And if so, have you accelerated your supply chain mix to meet the consumer in that direction?
Yes.

Howard Friedman

Thank you for the question. Let me I'll answer the core question first. Yes, I think our big the biggest issue for us in the core was really our foundation brands, which frankly kind of validates the portfolio strategy and some of the activities we just did on a divestment of a couple of our brands. If you were to look at our power brands, we were actually net share takers.
So as we continue to simplify some of the foundation brand portfolio roles, we would expect more of the of our Powerbrands to shine through on with results. So I think that's the biggest opportunity for us continues to be is kind of why we have tried to narrow our focus a little bit and make sure that we're putting our shoulder into the brands that are obviously the vast majority of our sales and should be the ones that are spending the vast majority of our time and let their performance kind of come through with respect to smaller sizes.
Look, there's no question that we are seeing consumers moving around the price ladder. And it's really a couple of different issues. They are looking for absolute price points. They're shopping on smaller sizes, for sure. We also some of the price pack architecture or as we did also made some pages at the higher end of our at the top end of our ladder on things like work and cheese, which also came through in our results.
So we are responding to where consumers need want and need us to be. But I well, I definitely agree that there's an index towards smaller sizes. I think we need to be mindful of the entire lateral and make sure we're covering the price points that whatever any shopper wherever they are can hit and get the products and they want.
Okay.

Robert Moscow

I hate to cut this finely, but in the core markets, if you ex out the foundation brands that you've divested now, do you think you would be growing with your category or is it tough math to do well in the fourth quarter?

Howard Friedman

I don't believe we would have grown share and within the market if you ex those out. And the math is pretty relatively straightforward. But I do I do expect that that will be a positive for us over time over the course of the year, especially as we address some of the work we talked about in Investor Day around DSD route splits, making sure that we're driving our distribution gains of our core brands and again, I think we've got a lot of support from our core market retailers to execute our growth playbook, which should come through as we go.

Robert Moscow

Great. Thank you.

Howard Friedman

Thank you.

Operator

Rupesh Parikh, Oppenheimer. Your line is open.

Rupesh Parikh

Good morning. Thanks for taking my questions. Two quick ones. So first, I just wanted to understand your what your free cash flow guidance is for this year? And then as you look at the longer-term algorithm, clearly with that accretive asset disposition, I mean, you guys are seem to be above the double digit EPS growth, at least for this year. So as we look out to the outer years, that it will take away from the ability to do double digit EPS growth in '25 and '26?
Yes.

Ajay Kataria

So I'll take those fresh first. Free cash flow. We expect about $20 million to $30 million of free cash flow in 2024. And that is primarily because we are stepping up our investments in capital.
And then the other question that you had around double-digit EPS growth, we are maintaining the what we said at Investor Day, we should see double-digit EPS growth moving forward as our earnings grow and we do some more work on supply chain optimization.

Rupesh Parikh

Great. Thank you.

Operator

Nik Modi, RBC Capital Markets. Your line is open.

Nik Modi

Thank you. Good morning, everyone. I wanted to the morning. I just wanted to probe on on the 2024 guidance and just the shape, right, because one of the key themes that I think we've seen this earnings season broadly, as you know, kind of softer first half, but much better second half.
And I guess, Howard, I just wanted to get your commentary on outside of asymmetric like easier comparisons or lapping pricing and things like that I mean, do you just expect that the consumer is going to improve as we get deeper into the year?
Just would love kind of you could just tie in your thoughts on the general consumer and what's going on the consumer environment that would be really helpful?

Howard Friedman

Yes, I'll take that. What I think a couple of things. I think one, as you think about our guide. What we would expect consistent with our Investor Day is that we will build over time and into our long-term algorithm as we go through the course of the year. And that's really driven by a couple of things for us. First is our distribution game gains that that that we anticipate will build over the course of the year so that obviously as they build, so too, will our volume.
Second, we have incremental innovation. This year. We're launching a mixed Minis pretzel. We have a wave of SAP's flavored pretzels we're expanding Boulder Canyon into Poppers. We have some innovation in cheese and on Jack's max.
So those things naturally build at toward the tail end of the first quarter as we get them into the market and then build through the course of the year. And then lastly, our marketing spend will ramp up to 40% this year as we break as we break campaigns for us absent us like largely in the second quarter.
In terms of your question, is there any do you have anything peculiar going on the one place that I would offer is that last year we had some opportunities on Golden flake, cheese and cheese that that impacted us. We had a Birmingham transition not to pick at all boost believing that transition that didn't necessarily go as well as we would have liked. And those things as we lap them, will also be supportive of a guide that basically our volumes build through the course of the year. Okay.

Nik Modi

That's very helpful. And just kind of off the wall question, totally random, but I'll as I get into the market and just kind of see what's going off there from the emerging brands, emerging concepts, new substrates are obviously a big area of growth within the snacking category, cauliflower, chickpeas, et cetera.
Obviously you have plenty of upside in with your existing portfolio. But I guess I just wanted to kind of pick your brain on how you think about some of those substrates and is that something that you think could be a potential growth driver at some point in the future?

Howard Friedman

Yes. I mean, look, I think that over over time, consumer trends and preferences are things that we should always be watching. And so as you think about things like high flavor and spice and heat, those things have really been building over really the course of 20 years to kind of where they are right now.
So what we will, as you can imagine, we will trial sample all of those types of products from different formats that I think are interesting. I think we can make a great product. The question is, to your point, want to focus in the near term.
But over the long term, I'd like to be on that trend when when it's time for us to start to help to mainstream it if it comes and if it doesn't, I think we let the entrepreneurs continue to do what they know how to do to build and develop these markets. But the short answer is yes, we track and pay attention to all of those things. And then the opportunity becomes attractive for us. We'll pursue it.

Nik Modi

Excellent. Thank you. I'll pass it on. Thank you.

Howard Friedman

Thank you.

Operator

Mitch Pinheiro, Sturdivant & Company. Your line is open.

Mitch Pinheiro

Good morning. Just a couple of quick questions. So it's at a sort of with the organic sales growth of 3% or better. Does that include the $45 million asset. So the $45 million of the sales impact from divestiture is that it's 3% and that includes $45 million. That's taken off the top if?

Howard Friedman

It has been taken out of the 3% number.

Mitch Pinheiro

Okay. So it would be okay, got it. And then of the 3%, and how do you look at that versus your flat pricing? Is the rest evenly split between expansion markets and core? And how should we think about that?
Yes.

Howard Friedman

Look, what I would I would tell you that our overall opportunity is, especially as you think about volume, is it we are our expectation is to grow expansion markets through distribution on overall and distribution is going to be one of the larger drivers and contributors to our overall growth this year, which is kind of why the shape of the curve happens the way that it does within our core, while we have we do obviously have opportunities to move distribution.
It's a bigger portion of our business, and that will largely be impacted probably slightly more by the innovation and marketing support that we're getting. But if you were to if you were to prioritize, it will be expansion, geographies and distribution that will drive the majority of the growth this year.

Mitch Pinheiro

Okay. But you do expect core to have I know you're a part of the longer-term strategy is hold the core, but if you do expect core to grow in 2024?

Howard Friedman

Yes, I Our expectation would be that we should be able to growth or in the near term as well. But our expectations are also that that growth will likely be a little bit more muted just given the maturity of the category for us.
So the district because distribution overwhelms the category opportunity, that's kind of why we talk about we need to hold our share and growing the core at customer comp or a little bit better. But really expansion markets is where we would expect the numbers.

Mitch Pinheiro

Okay. And then in terms of for 2024 for sort of the channel mix? And can you just talk about how is there going to be a particular strength in mass? I know it was or C-store is there. Can you talk a little bit about how how we should think about that?

Howard Friedman

Yes. I mean, look, our traditionally the place where we are at our strongest has been traditional grocery, right. And so grocery has been our historic at strength. What you've seen more recently in our growth as we've sort of been growing, we've been growing across the majority of channels.
And we would expect that mass national retailers club, it will all be positive contributors to our to our growth. We have a little bit of work to do in C-store which is on, which is clear to us. But ultimately, I think we'd expect that we will be able to grow across channels.
And as consumers shift, we'll do that. I think the one other underappreciated piece of our growth has also been in e-commerce, where we have put our shoulder in this year and done really started to develop that capability.
And we can to continue to see very strong growth in the e-commerce side, although it's obviously a smaller channel overall this point, but a place where we have some evidence that we can we can grow much faster.

Mitch Pinheiro

And then I guess just last question. You know, you talked a lot about getting your leverage down on, which is certainly a positive. But in the same in the same breath. We also talk about M&A is that is 2024 going to be just a year of debt paydown and M&A. Is that more of a '25, '26?

Howard Friedman

But and I think the thing about M&A is M&A comes when M&A comes, right? And so I think what we wanted to do this year with our got with our leverage was to get into a position where we could objectively start looking again and make sure that it was something that we can execute with excellence. But I think that as we continue to push forward and we will or we will look across whatever's in the best interest of odds overall. So I think M&A could come on, but it will have to wait find out whether or not there's a deal to be done at a price that we find attractive.

Mitch Pinheiro

Okay. All right. Well, thank you very much.

Howard Friedman

Thank you.

Operator

Matt McGinley, Needham. Your line is open.

Matt McGinley

Thank you. You stated that pricing isn't expected to be a factor in top line growth this year, but could there be additional opportunities for price adjustments like you made in the fourth quarter that would make your portfolio more competitive and why it was that price adjustment just went into the fourth quarter.
Was that a change in promotion that was a one-time thing in the fourth quarter or was that a long term adjustment that was like a list price change that we've done, it potentially could reverberate through the third through into the next year.

Howard Friedman

And so a couple of things. One, I think we are pretty comfortable with our flat pricing assumption for the year. And I think one of the things I would offer you is price pack architecture changes actually work in both directions, not just down. I think they can go up.
But as we looked at things like pork and cheese, which had been opportunities for us on international barrel, the size of your head and you're paying quite a bit more money. We had we had an opportunity to sharpen that price point so that we could maintain consumer value and expectations.
So we made the choice. I think the other thing is practically we have customers who are interested in us, and we've been partnering really well with, and we want to make sure that we are getting opportunities to be able to drive the business and drive the distribution more broadly.
So there were a couple of those and the investments that we made at the end of the year, which were really more about testing and probing to see what we could do with them that wound up actually having greater response overall than we would have necessarily expected.
So look, I think that pricing will go up will likely not be a major contributor. We're not doing anything with list at the moment, which I think list as a on is somewhat of a more brute force idea versus a better price pack architecture discipline where we maintain our price gaps and maintain our competitiveness.

Matt McGinley

And Dennis, just just a quick one on the CapEx guide.
I just want to make sure I understand the nuance for the average over the next three years is supposed to be 5%. But this year is a little bit higher than that at $80 million to $97 million, $25 million and $26 million, you're going to be more like $70 million or so?

Ajay Kataria

Yes, it will average out to 5% as we talked about at Investor Day, we had just simply pulling forward some some dollars into 2024.

Matt McGinley

Okay. Got it.

Howard Friedman

Thank you. Exactly.

Matt McGinley

Thank you.

Operator

Jim Saler, Stephens. Your line is open for those.

Jim Saler

Good morning. We have to add on the advertising. I think we're all excited to see what the brands can do with a little bit more ad support behind them. Can you maybe just give some color on the decision to it sounds like the Midwest is the first beneficiary of that increase and support.
Just a thought around that is the market is just because it's tangent to kind of your core market right now or anything that makes you particularly excited about the Midwest?

Howard Friedman

Yes, I'm sorry. Let me let me clarify that a little bit, Jim. I think what we expect is that our distribution expansion is really focused on the Midwest in RA, our advertising and consumer will support us and as apps appropriately in across the markets and consumer bases that they are.
So we're excited about the opportunity to increase the agency and actually take these brands on to a higher level of what I would consider more pull marketing emphasis. So it will primarily start with apps and us and it will be a little bit broader and then just it won't specifically be to the Midwest.
Retail Media is obviously an important and consistent with our business over time and brands over not a business over Knight and brands over time, excuse me. And so we'll continue to invest in retail media as well with customers as we're expanding our distribution. But pure consumer will be a little we'll be a little bit broader-based than just the Midwest.

Jim Saler

Yes, Bob, can you maybe give us a little bit of some of the messaging that we're going to see in that? I mean, is it an emphasis on kind of, obviously, is apps is much more differentiated than a lot of brands? Is it kind of a value-based messaging given the consumer constraints? Any color you could offer there would be helpful.

Howard Friedman

Yes, it will not be value-based messaging of what it will actually be much more of what is central and core to the brand. And so if you think about that as a brand is a flavor forward brand where consumers who come to the brand for high impact, high flavor.
And so it will be rooted more in geography of origins. I think about the Orleans and the food scene and the flavor scene in the culture of New Orleans, of which that is a part of that will be more the emphasis. And then on U.S.,
I think US has got an incredible story to tell, and it's really around the quality and the care of what makes that brand different and special and that we're going to spend the time really trying to explain a little bit more about the types of things that we do to make that brand and experience it much differently than some others, just so more to come on it but done.
But we're very excited. It will be very much rooted in the in what is central to each of those brands, why consumers opt into it. And our goal over time is to, again give us the of these businesses a little bit of a kind of a push on marketing so that as our whole strategy over time evolves, we're ready to continue to increase the A. and C. and drive the business overall Great.

Jim Saler

That's helpful. I'll hop back in the queue.

Howard Friedman

Thanks, Duncan.

Operator

John Baumgartner, Mizuho. Your line is open for anything for the questions.

John Baumgartner

Gentlemen, have I wanted to come back to productivity savings. And could you speak to some of the larger variables there in terms of delivery in 2024 and maybe even beyond how much the delivery risk on coordination with third party from our streams and how much restaurant continued volume growth that brings the efficiency programs themselves?
I'm just trying to better understand how your degree of visibility is and capacity to deliver relative to more dependency on exogenous variables that could drive some bottlenecks or volatility along the way?

Cary Devore

Hey, John, it's Gary. I'll take that great question on. We're very confident in our ability to deliver our productivity. I mean, we've been building a program over the last several years. We've added a lot of talent and process into the to the initiative.
So I think delivery of productivity, I would say is mostly under our control rather than reliant on exogenous factors on a couple of examples of where it's going to come from.
I mean, we get it across the system. But when you kind of look at incremental this year relative to last year, procurement is an area where we've invested in talent and analytics to really drive our numbers meaningfully higher and productivity delivery, we'll see that this year.
A lot of that's been locked in in terms of of where we expect that to come from on manufacturing automation. But the incremental CapEx that Jay spoke to, you know, that will go toward automation as well. So there still remains plenty of opportunity across our supply chain to full productivity. We feel good about the delivery expect that.

John Baumgartner

Thanks, John.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. You may now disconnect, and we are now clear.