Yahoo Finance Utz Brands, Inc. (NYSE:UTZ) Q1 2024 Earnings Call Transcript
Utz Brands, Inc. (NYSE:UTZ) Q1 2024 Earnings Call Transcript May 2, 2024
Utz Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 Ajay will make prepared comments this morning and all 3 will be available to answer questions during our 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 their 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 Power Four brands to include us on the border and Boulder Canyon. In addition, productivity programs across our organization continued 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 2 additional manufacturing plants to our home.
These follow the 3 dispositions to our home announced back in February. Importantly, our former associates at those plans 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 4 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 3 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 Carcano 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 sauces 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 5 plant 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 2 of our Power Four 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 5 manufacturing plants and 2 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 rank 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 4x the category growth of 1.4%. From a salty snack subcategory perspective, our growth was led by significant outperformance into our tortilla chips and cheese snacks. Tortilla chips 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 cheese balls with strong growth in mass and the club channels. Within potato chips, our consumption was basically in line with the subcategory driven by share gains for us and Boulder Canyon brands, led by continued distribution gains.
Our Zapp's trends remained 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 trends were below category given we are lapping our Zapp's flavored pretzel 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 Power Four 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 US brand as well.
Moving to our better-for-you portfolio of salty snacks, our consumption in the natural channel continues to grow and dollar 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 3/4 of our sales in the channel and the largest driver of growth, up 31.3%, which is 8x the rate of total salty snacks growth. Boulder Canyon has now delivered 31 consecutive periods of double-digit growth in spins and is the #2 potato-chip brand in the natural channel with our avocado oil chip now ranked #1 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, Zapp'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 this summer. Hot & Spicy is the #1 flavor in salty snacks at $7.5 billion and growing nearly 2x the category rate. In addition, we launched our Ads mix Minis in 3 flavors in the strong flavored pretzel segment, which makes up half the crestal subcategory and is posting 12% growth, which is 4x 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 Zapp's Voodoo Halloween multipack.
And as consumers continue to look for no compromise snacks with gold flavors in our flagship Better-For-You brand Boulder Canyon, we are moving our Spicy Green Chile from a limited time offer to an everyday flavor. I In addition, we have moved beyond potato chips and launched our Boulder Canyon Poppers, which is a better-for-you cheese snacks made in avocado oil. We launched in White Cheddar and Halain Ranch flavors, and the early consumer feedback has been great. Finally, we have begun to invest behind marketing after a year of capability building. We started with increased investments behind e-commerce and retail media. And next quarter, we will be introducing campaigns for Zapp's 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, and 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 all 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 programs 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 brands. Finally, our total net sales growth was impacted by the conversion of company-owned RSP routes to independent operators, which reduced growth by 40 basis points and the divestiture of the RW Garcia 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 SG&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 transfer 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.
The 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 adding expenses, and 40 basis points from higher market 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 plants. 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 3.8x trailing 12 months normalized adjusted EBITDA of $190.1 million. Just to note, this represents an improvement of 1.3 turns versus the end of the first quarter last year. As a reminder, on February 5, we closed the disposition transactions of the Good Health and RW Garcia brands, and 3 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. In addition, after the quarter ended, we closed their dispositions of 2 additional manufacturing facilities 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 2 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 time frame to achieving our target of 3x 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 geographies and pricing about 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 program, 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 margins more than the 200 basis points that was previously assumed in our guidance.
That said, we will step up investments in our growth as gross margin expansion come through to find 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 3.6x at fiscal year-end 2024, which I'll 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 3-year goals. More importantly, I'm excited to see the entire Utz team working together to deliver on our 4 fundamental strategies. Operator, we would now like to open up the call for questions.
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