Hello and welcome to the Utz Third Quarter 2024 Earnings Call. As a reminder, this call is being recorded. I will now turn the call over to Kevin Powers, Head of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us today for our live Q&A session on our third quarter results. With me on today's call are Howard Friedman, CEO; Ajay Kataria, CFO; and Cary Devore, COO and Chief Transformation Officer. I hope everyone had a chance to listen to or read our prepared remarks this morning and also view our presentation, all of which are available on our investor relations website. Before we begin our Q&A session, just a few housekeeping items to review. Please note that some of our comments today will contain forward-looking statements based on our current view of our business and that the actual future results may differ materially. Please see our recent SEC filings which identify the principal risks and uncertainties that could affect future performance. 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. Now, Operator, we are ready to open up the line for questions.

Thank you. Your first question comes from Andrew Lazar from Barclays. Please go ahead.

Great, thanks. Good morning, Howard, Ajay, and Cary. Maybe to start off, you reaffirmed your full year organic growth outlook of 2% to 2.5%, which suggests a pretty significant sequential acceleration in 4Q to at least about 3.5% from the 1.9% you reported in 3Q. And that's just to get to sort of the low end of the full year. So, I guess how much visibility do you have to this acceleration and how do we square that expectation with consumption data that, at least through the first couple of weeks of October, at least based on our data, seems to be running more flattish or so, and particularly in light of the fact that, as we know, shipments were ahead of takeaway in 3Q?

Yeah, thanks for the question, Andrew. Look, I think there are a couple of things. The first thing I’d point out is we've always anticipated that the entire year that we were going to continue to see momentum build. And that's really driven by a couple of things that you know that are under our control. First is that the marketing step-up continues as we go through the rest of the year; we have innovation that is also building. You mentioned seasonal shipments, and there is a little bit of that in the third quarter, but we do see incremental execution on seasonal through the rest of the year. Our distribution has been gaining, and you saw that in the third quarter, especially in our expansion geographies and bringing our On the Border brand into our core. You saw the distribution gains, and then the last thing I'd point out is our laps do get significantly easier in the fourth quarter. So, we have pretty good visibility to all the things that are under our control that would suggest to us that we should see momentum continue to build over time. The last thing I’d offer you is you see the widening between measured and unmeasured in this quarter. You saw a little bit of that in the second quarter, and you see a little bit more of it in the third quarter, and we would anticipate a somewhat similar gap between measured and unmeasured channels in the fourth quarter.

Got it. That's helpful. And it sounds like outside of potato chips, which had its own sort of idiosyncratic competitive issues during the quarter, the other subsegments held up reasonably well in 3Q. A key competitor recently made some comments about stepping up competitive activity on tortilla chips going forward as well. I'm just curious how you're sort of taking that into consideration in your outlook?

Yeah, so certainly we saw a much more heightened competitive environment in the third quarter, which obviously impacted potato chips. I think the rest of our portfolio, to your point, continued to perform well and reflects the strength of our portfolio strategy and becoming more focused on our power brands as we go forward. Tortilla chips is a little bit of a different animal than potato chips for us. First of all, we already made decisions throughout the course of the year and have historically had a wider price gap between On the Border and some other competitors. We would anticipate that while the gaps may narrow some, we like where we are competitively. Secondly, the distribution gains that we're getting in our core, which has always been part of our thesis, was that we could bring On the Border into our Utz core and drive distribution gains have been working. And then the third is, as you look at some of the merchandising that we are implementing for the rest of the year and as you turn into next year, On the Border benefits from some of that support. Obviously, we’ll evaluate price gaps as we go along, and if we need to be more competitive or sharpen our positioning, we'll make that decision when necessary. But we feel pretty comfortable with where we are on tortilla chips right now.

Thanks very much. Appreciate it.

Our next question comes from the line of Peter Galbo with Bank of America. Please go ahead.

Hey guys, good morning. Maybe just to start, if I could follow up on Andrew's question. As we think about the 4Q exit rate in that 4% type range, at least at the midpoint, that kind of sets you up for exiting an algorithm or at least the low end of algorithm into '25. I'm sure you don't want to give any kind of formal commentary there, but I just want to understand if that's how we should be thinking about it at a high level. And then in addition to that you had some commentary and there's some nuances as we get into '25 that I was hoping you could remind us of. I think you mentioned, you know, kettle production is going to start up in 1Q. Maybe you have some laps on Golden Flake. But anything else we should be aware of as we start to think about '25. Thanks.

Yeah, thanks Pete. You're right, we're not going to provide '25 guidance at this point. But I'd offer you a couple of things. First of all, if you look at what we said at our 2023 Investor Day, the conversation was that we laid out our volume share expectations for both our core and for our expansion geographies. The moment what's been true, and you can see year-to-date, we are delivering a hold on the core volume share and an expansion market volume share around that 0.2% points. So, I think we feel pretty good that our distribution gain strategy and our hold on the core strategy are yielding the expected results. What's been a little bit different year-to-date is the translation from volume to value, and certainly with competitive pricing being a near-term conversion question that remains the challenge we're working our way through. The other thing I would offer is, we are feeling very good about our non-measured channels. They continue to grow and gain momentum, and we expect that the category and category participants will remain rational, which is great for everybody. So, I think we will continue to see our controlled results come through, and the translation is the wild card. But I think we feel pretty good about where we are for the fourth quarter of this year, and we'll address '25 as we start to lap the year.

Yeah. Any other nuances we should be aware of in '25? Kings Mountain? I think you're going to have some laps on Golden Flake. Anything else we should take note of?

Yeah. To your point, our productivity program and our automation and capital installation is going on as planned. We expect for Kings Mountain to start up, adding incremental capacity to support our kettle business, which encompasses a lot of Boulder Canyon growth and on-trend performance there. But there’s not a lot of laps to discuss. I think probably the two biggest ones are our C-store laps, which improve. Remember, we saw a step down in C-store business in the back half of last year, particularly in 4Q. So, while we're not expecting for C-store to become significantly positive, it shouldn't be as negative as in the previous year. The second is mainly around Zaps and some of the challenges we’ve faced with that business. I think those are the two biggest material drivers that might change next year.

Great, thanks very much.

Your next question comes from the line of Michael Lavery from Piper Sandler. Please go ahead.

Thank you. Good morning. Just was wondering if you could talk about the promotional environment a little bit more. You gained volume share in the stepped-up promotional environment but lost a bit of dollar share. How do you think about the optimal balance between price and volume, and maybe specifically by portfolio segment? It looks like you promoted foundation brands quite a bit more, even though the volume lift was there. What’s some of your thinking on that role in the portfolio, especially in the current environment?

Yeah, I appreciate the question, Mike. During the quarter, we saw a much more promotional environment and really saw overall promotions kind of coming back in line with what we used to witness in 2019. So, where we had lagged promotionally across the category up until then, Q3 of this year was the first time we kind of saw that uptick. For us specifically, we stepped up a little further, driven by the different customer mix we have which was fundamentally different versus 2019. Remember that predates a lot of the public schemes and some of the other expansion geographies where we have a little bit more high-low than we had. Therefore, the promotional environment has certainly become more competitive. Obviously, potato chips were the big story this quarter as various competitors and channels became more promotional. Going forward, I believe the category will continue to be rational, and we should start to see some stabilization. I think household penetration remains strong, indicating that consumers engage when we bring promotions and marketing and innovation forward. Regarding our foundation brands, just a couple of notes: last year, we spent significant time discussing Vintners, Kitchencook, and HK Anderson, which struggled more. In the quarter, as we worked through price pack architecture, those brands were some of the businesses where we also applied pricing to improve absolute price points. That’s a little bit of what you’re seeing. Additionally, we had a promotional shift into the third quarter from the second quarter at one of our retailers for HK Anderson. Therefore, we’ll maintain a volume-value story, with expansion driving volume. Pricing will be something we’ll continue to evaluate, as other category participants do.

Okay, thanks for that. Just was wondering how much you could give an update on distribution progress. You've had some smaller wins recently that, you know, I think we're just ramping up in the second half of this year. But how do we think about maybe how that continues to go? Is there capacity in place for bigger wins, especially in the West or Midwest? And how does DSD play a role in that?

Yeah, so to your point, look, we felt very good about what our expansion geographies have been doing, and you certainly saw that in the quarter as we continue to gain distribution with both larger national retailers that have local banners, and also we start thinking about some of our alternative channels like club. We expect to continue to gain distribution there. We're already in ongoing conversations for next year and expect that will continue. Regarding capacity, we feel very good about our overall capacity utilization, along with the investments we’ve made to create a resilient, responsive, and efficient supply chain as we achieve these gains. So, we don’t foresee any issues with capacity moving forward. Even if we see a larger than average distribution gain, we have the visibility. In terms of DSD, we're a hybrid model, so we will service customers however they prefer. If you want DSD, we have the routes. If you want direct to warehouse, we can do that as well.

Okay, great. Thanks so much.

Your next question comes from the line of Rob Dickerson from Jefferies. Please go ahead.

Great, thanks so much. First question is on competitive activity and just the geographic expansion plan. I'm just curious and I'm not sure if you kind of touched on this a little bit earlier, but is there a component of kind of the close-in competitive activity impacting the distribution gains you've seen or do you expect that, or is it more of a post-distribution velocity translation dynamic that you have to keep your eyes on? Basically, what I'm asking is if anything has changed in your ability to expand in new geographies if there is more competitive activity within the category?

Yeah, I think the short answer is no. We don’t anticipate a change in our geographic expansion strategy in discussions with retailers. Retailers value us because we tend to be incremental to the category; we are not supplemental. The data shows clearly and compellingly that when we enter, there are more buyers in the category, and obviously some investment comes with that. For us, we remain incremental. Secondly, we support retailers’ individual strategies because if you appeal to different consumer segments, having a portfolio of brands allows retailers to curate their assortment. The breadth of our portfolio supports this. Lastly, we are rational actors. We have data to share with retailers, and we are pushing forward to ensure we support a healthy and growing category that consumers want. In terms of the promotional environment, it’s really a question of how that impacts overall volume and value translation. Those are the significant drivers.

All right, super. And then maybe just quickly, you mentioned in the prepared remarks that there’s a shipment benefit in the quarter ahead of some holiday merchandising plans you have. I’m curious, so far, have you seen good customer or consumer reactions to some of the merchandising plans you already have in place, even over the past few weeks?

Yeah, we had always planned seasonal shipments in. I think all were seeing holidays getting earlier, and we certainly planned that. The impact beyond that was very small. In terms of consumer and customer response to the merchandising, we feel good about where we are; our promotional lifts are improving and our elasticities are consistent with what we would have anticipated. So, we think that our business is exactly where we would have anticipated it right now.

All right, super. Thank you.

Your next question comes from the line of Nik Modi from RBC Capital Markets. Please go ahead.

Yeah, thank you. Good morning, everyone. Hey, I wanted to go back to the promotional lift question. I mean, you know, you're talking about feeling good about that, but broadly speaking, in the channel, it seems like it's not matching kind of what the lift has been historically. I'm not talking about us specifically, I'm just discussing broadly based grocery promotional lifts. I don’t know if that’s a function of consumers feeling so much inflation that maybe $0.50 off on a bag of chips isn’t as effective as it used to be. Or maybe it’s that people aren’t shopping in-store as much because they are doing more online shopping. I wanted to get your reaction to that.

Yeah, I think your observation is fair that consumers have certainly been responding differently and seeking value, whether they’re shopping on promotion or channel shifting to find either absolute price points or value as they define it. We always talk about the latter being up and down. So, if you can afford pantry inventory, you might lean into a larger pack size. If you prefer an absolute price point, you can do that as well. Some of that muddles the math a bit. I do think in the Food Channel, where promotions play a bigger role, we have seen some improvement in overall promotional price elasticity versus the second quarter. I think that's reflected by the incremental buyers that are coming in. You can see the category also testing different price constructs; therefore, you see various promotions and absolute prices in attempts to engage with consumers and shoppers. I would assert that we remain an affordable indulgence and accessible price point, and this category has historically been about innovation, marketing, and price promotion. I expect that to normalize. It may be early to declare victory, but we are cautiously optimistic that we're beginning to see positive results.

Great. And then just a longer-range question. I’m curious about your thoughts on new substrates within the snacking category. One of your bigger competitors announced a deal for a different substrate, cassava. Do you have the capacity to make some of these alternate substrates like cauliflower and edamame? I wanted to get your future strategy thoughts on that.

Yes, we certainly have the capability to produce grain-free alternatives, other powders, and products. The bigger question often surrounds allergens, which might require a different capital strategy. I’ve had opportunities to introduce peanut butter into manufacturing facilities, which is not a small decision. So, the answer is yes, we can make those products. The bigger question revolves around consumer insight and the addressable market for those products. For instance, our Boulder Canyon business is a great example, showcasing growth with new offerings. We listen to consumer needs, and as trends evolve, we will adapt. Investing in our supply chain and production assets significantly increases our flexibility to address consumer trends.

Great. Thanks so much. I'll pass it on.

Your next question comes from the line of Robert Moskow from TD Cowen. Please go ahead.

Hi, Howard. Thanks for the question. I wanted to know if you've noticed the tactics for the promotional activities in the salty snacks category shifting. A few months ago on potato chips, it was more like just traditional price discounting, but I think it’s moving more towards bonus bags going forward. Is that right? Is it happening in a phased approach, or are discounts on potato chips still out there and aggressive?

Yeah, I’ll address the second part first. The promotional environment in potato chips is normalizing. We’re not seeing the deep discounting necessarily that occurred over the summer across the category. What you’re starting to see is different constructs showing up: buy two, get three, or buy two, get something different, or absolute price points reflecting multiples. Bonus packs provide a different way to give consumers the value they seek at those pricing points. We’ve recently heard competitors say they would introduce bonus packs, and we see those products emerging in the market. Potato chips is one segment where we are seeing that occur. I would expect competitors to continue to try various ways to maintain consumer engagement in the beloved snack category.

So, I guess my follow-up is, do you feel that you need to change your tactics in response to that, or do you believe your plans remain solid?

We feel confident about our plans and clear on our execution strategies for marketing and innovation in the fourth quarter. Additionally, distribution gains are central to our growth. However, we operate in a competitive environment and always evaluate our tactics. We're constantly looking to improve. Thus, if a better strategy emerges to meet consumer demand, we will adapt accordingly as speed is paramount. We are in a good position, but we can always improve.

Great. Thank you.

Your next question comes from the line of Brian Holland from DA Davidson. Please go ahead.

Yeah, thanks. Good morning. I wanted to ask the '25 question from a theoretical standpoint. Category dynamics are outside your control, as you referenced earlier. Given how your long-term algorithm includes some contribution from price, do you believe you can deliver an on-algorithm year if there’s no price contribution and it relies solely on volume?

That’s a big question. Let me share our historical perspective on this. At our Investor Day, we emphasized a conservative approach, suggesting volume would be around 1% and price around 2%, reflecting a step down from the previous 4% to 5% category growth rates. We entered this year with moderated expectations, as this year’s category has been a little softer than anticipated and is now showing a positive uptick. I don't believe we will rapidly revert to historical forecasts. However, the things we control remain effective. We are not solely dependent on category assumptions for growth, given our white space distribution opportunities. Bringing products from expansion geographies into our core and vice versa has performed as expected. Consequently, I believe the actions we control should reflect in the results we promise.

Great, thanks. I also wanted to revisit the convenience channel pressures, which we’ve seen for a while now. Recently you mentioned gas prices have come down. Are you noticing any lift in pulse purchases in the convenience channel with lower fuel prices?

I'm not sure that we’ve observed that correlation. Convenience channels have challenged the category overall, and us in particular. We've been working to address those issues, and our efforts show improvement in trends where we’ve corrected fixes. However, I’m uncertain about establishing a unique correlation to gas prices. So, I don't think we have a distinctive view on that.

Fair enough. Thanks.

Your next question comes from the line of John Baumgartner from Mizuho. Please go ahead.

Good morning. Thanks for the question. Howard, I wanted to ask just on the volume pressure in salty snacks. Sweet snacks volumes are also down in confectionery, baked goods, so it's not just salty. There’s the elasticity impact. Reflecting on the inflation period and the return to normal, how much of this volume softness in salty do you attribute to just an elevated base and overconsumption post-Covid? Did frequency become overstretched? How do you view base demand relative to trend, and does this present a natural diminishing effect on promo-centric strategies that cultivates price discipline going forward?

There’s value in referencing the last few years to realize the category has run strong and significantly above its long-term algorithm. Therefore, the pause we’re witnessing isn’t particularly surprising. I believe there is normalization occurring in growth rates. Observing category household penetration, buy rates, and buyers, we still see increased buyer activity indicating ongoing consumer interest in the category. Consumers engage when innovation and marketing initiatives are introduced, reflecting positively in our business metrics. Our household penetration growth and buyer acquisition resonate with our strategy as we have gained distribution efficiently. Thus, I don’t believe there are long-term concerns regarding consumer enthusiasm for the category; I think a bit of normalization is in play.

Thanks, Howard.

Your next question comes from the line of Mitch Pinheiro from Sturdivant and Company. Please go ahead.

Yeah. Hey, just two quick questions. One is about private label; is that impacting the potato chip category? Anecdotally, we're seeing a pickup in stores where the quality of private label potato chips and other salty snacks has improved considerably. I’d love to hear your take.

This category has historically had a relatively low private label presence. The usual actors that utilize private label have maintained that segment. Notably, when examining prices in Q3, branded players reduced their pricing to private label levels, resulting in some challenges for private label products during that quarter. This supports the notion that brands remain valuable. Ensuring a rational pricing environment for the category, including defining a private label entry point, contributes to our future plans. In Q3, private label faced significant struggles as prices dropped.

Okay, thank you. Last question on gross margin; very strong performance in Q3. Will the improvement rate continue due to your fixed cost leverage, or does the promotional environment present some risks to that strong gain?

Yes, the short answer is yes, the gross margin performance you’re witnessing will continue. We have achieved about 270 basis points of margin expansion year-to-date. We anticipate finishing with approximately 250 basis points for the year. Our productivity programs are performing strongly. We’re delivering more than 4% in EBITDA between 5.5% and 6% in cost of goods productivity this year, which is helping to offset any price-mix investment seen on the top line. To be candid, our P&L shows that our price investment is slightly negative, around 50 basis points this quarter, so it’s not much.

All right, thank you. That’s all I had.

Your next question comes from the line of Jim Salera from Stephens. Please go ahead.

Good morning. Thanks for taking that question. Hey, Howard, I believe in your prepared remarks you talked about household penetration up by 180 basis points. Could you share insight into which brands are driving those new households to you, and provide any details on characteristics that appeal to various U.S. brands? Is it primarily value-driven due to price gaps, unique flavors, or something else?

Yes, it's not surprising that we’re witnessing household penetration gains across our portfolio in tandem with our distribution gains in expansion markets due to our power brands becoming available there. The two standout brands are On the Border, thanks to increased distribution in our core, and Boulder Canyon, which is growing significantly faster than the market and class of trade. It’s approaching $100 million in sales. We’re feeling solid about Boulder Canyon. Both brands are driving this growth, but it’s not limited to these as we’re observing overall household gains in expansion geographies. When it comes to insights, we take pride in the quality of our products; our unique recipes stand out in the market. Consumers often come back for repeat purchases, as we've historically enjoyed high repeat rates.

Okay, great. Could you elaborate on On the Border's growth? I’d imagine they get a boost from the football season. However, I’m noting some softness in the complementary sauces and dips alongside OTB. As OTB continues to scale, should we expect a turnaround in related products, or do you still need to focus more on getting them on shelf next to the chips?

I appreciate the question. On the Border dips and salsas are important complements to our chips, as consumers love to enjoy both while watching games. We had a contraction in distribution last year, not a discontinuation but a reduction from two locations in a retailer to one. We went from being in both salty and ethnic aisles to just the traditional salty aisle, and we are still working through that transition. The underlying health of that business remains strong, but we’re cycling through this restructuring. We're also addressing some missteps from previous innovations that underperformed, but the overall health of On the Border's non-salty products remains promising. We must keep innovating across the entire brand.

Great. Appreciate it. I'll come back in the queue.

As there are no further questions at this time, this concludes the Q&A session in Utz's third quarter 2024 earnings call. Thank you all for attending today’s meeting. You may now disconnect. Have a pleasant day, everyone.