Earnings Call Transcript - UTZ Q2 2024

Operator, Operator

Hello, and welcome to the Utz Second Quarter 2024 Earnings Call. This call is being recorded and all participants are currently in a listen-only mode. Shortly, we will move into a question-and-answer session. I will now turn the call over to Kevin Powers, Senior Vice President of Investor Relations.

Kevin Powers, Senior Vice President of Investor Relations

Thank you, Jeremy. Good morning, everyone. Thank you for joining us today for our live Q&A session for our second quarter results. With me today are Howard Friedman, CEO; Ajay Kataria, CFO; and Cary Devore, COO and Chief Transformation Officer. I hope everybody had a chance to listen or read our prepared remarks that we posted this morning, and also a presentation that is available on our Investor Relations website. Before we begin today's Q&A session, just a few housekeeping items. 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. On today's call, we will discuss certain adjusted non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliation of non-GAAP financial measures and other associated disclosures are contained in our earnings materials that are posted on our website. And with that operator, we are ready to open up the line for questions.

Operator, Operator

Our first question comes from the line of Andrew Lazar from Barclays. Please go ahead.

Andrew Lazar, Analyst

Great. Thanks so much. Good morning, everybody. Howard, I guess, 3% or about, call it 3% volume-driven organic sales growth for the full year certainly requires, as you know, a healthy step-up in growth in the second half, all in the context of a more competitive salty category. What drives the confidence in this outlook? And I guess how much of the step-up is coming from sort of the white space distribution actions that are maybe a bit more in your control, or sort of locked in, if you will, versus the underlying business? And what is enabling us to sort of raise the percent of sales on promo quite a bit less than the category average and why would that be sustainable? Thanks so much.

Howard Friedman, CEO

Yes. I appreciate the question. I think the first thing I would offer you is that our results are really predicated on us continuing to execute against the strategies that we had at Investor Day. And as you know, one of the bigger ones for us is this geographic white space opportunity that we have not only in our expansion markets, but also being able to bring some of our Power Four brands into our existing core markets. And I think what you saw in the quarter and what we expect going forward is largely for that to continue to be the case. We're seeing good distribution gains in already secured retailers as we go forward. Certainly in our unmeasured channels, as we have continued to address where consumers are shifting and shopping, we have had better availability in those channels than we've historically had, which has been accommodating to our approach. And then we do have a meaningful step-up in AMC. It's still modest by almost any standard that I would apply, but you went from 40% to 60% and our innovation is starting to move into distribution. It kind of came out in the second quarter and we would expect that momentum to build as well. Certainly understand the focus on the promotional environment. And the one thing that I'm particularly proud of is our capability building over the last 12, 15 months. Our revenue growth management capabilities and our marketing capabilities really allow us to be disciplined and flexible. As the environment shifts and as the environment shifts, we can adjust with it. So certainly, the environment will continue to evolve. That's just life in our industry, and we intend to remain flexible and evolve with it.

Andrew Lazar, Analyst

Thanks so much.

Howard Friedman, CEO

Thank you.

Operator, Operator

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

Peter Galbo, Analyst

Hi, guys. Good morning. Thanks for taking the question. Howard, I just maybe wanted to pick up on the back of Andrew's question, particularly around the competitive environment. And I think your largest competitor has really called out two subcategories, unflavored potato chips and then tortilla chips, kind of as the areas where we could potentially see more promotional activity. And that obviously is a pretty large portion of your portfolio. So maybe you can just give us a bit more detail on how you're thinking about those kind of two large subcategories within the broader portfolio.

Howard Friedman, CEO

Thank you, Peter, for the question. There are several unique aspects of our business that I believe will continue to stand out. We discussed some of these points at our Investor Day. The geographic opportunities we have to further penetrate markets with our brands give us confidence in our competitiveness within the industry. Additionally, while we often focus on geography, it’s important to also highlight our portfolio of consumer brands. For instance, if a consumer is looking for an unflavored potato chip, we offer that option. Likewise, consumers seeking healthier choices can find them in our Boulder Canyon brand, while those interested in flavored options can turn to Zapp’s. Our diverse brand portfolio caters to various consumer preferences and price points. For those who prioritize value, we also provide products that meet their budget needs. Overall, we are very pleased with the range of choices available to consumers. Each quarter, our revenue management capabilities are improving, allowing us to better understand price gaps and our positioning across different pricing tiers and channels. Lastly, we're committed to ensuring our products are available where consumers shop, whether in grocery stores, club outlets, or online. This means we’re expanding our offerings beyond just unflavored or tortilla chips, as we have a wider range of products to compete in the market.

Peter Galbo, Analyst

Great. Thanks for that. And maybe just a very quick follow-up, a couple of questions this morning just on kind of the raise on EPS guidance, but not on EBITDA, particularly given kind of the 2Q over-delivery. So just curious kind of how you're thinking about leaving flex or any sort of upside to be reinvested either into price or SG&A in the second half and just how you think about that setting you up for '25. Thanks very much.

Howard Friedman, CEO

Yes. I think first, just a reminder in our current P&L, a lot of the SG&A growth that you saw was really being driven by marketing investments year-over-year. So again, I think we're executing our strategy well. I think, look, we've been paying attention to the competitive environment as well. We're aware of what that environment may look like in the back half, but we want to make sure that we can remain flexible. And so, it's important to us that we have the tools we need to address the competition in a targeted way as required. And if we don't wind up using those resources, great. But we have plenty of places where we can still invest. As far as the EPS, I'll turn it to Ajay.

Ajay Kataria, CFO

Yes. So the EPS guide is really raised because of the revised assumptions on effective tax rate that you saw, also a step down on core D&A, which was slightly higher than what we expected from the transactions.

Operator, Operator

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

Michael Lavery, Analyst

Thank you. Good morning. Just recognized from Investor Day and how you've laid it all out how much savings opportunity there is and we're seeing that. I guess just given that it seems to be tracking ahead of schedule, can you also give us a sense if savings are not only faster but bigger than you had first assessed? And I know you don't want to probably change any targets now or you would have, but is there more that you have a line of sight on, even since just a few months ago? And is that part of what's helping it come in so much more quickly?

Howard Friedman, CEO

Yes. I appreciate the question, Mike. There's no question that from a supply chain optimization perspective, we are coming in quicker. Obviously, we were able to execute the plant dispositions and we went from 13 plants at Investor Day to eight at this point, while maintaining our supply base and being secure that we can continue to service our business the way retailers and obviously our independent operators and consumers would expect. But the upside for us is it also has allowed us to really narrow our focus down to those eight plants, integrated work systems, and some other places. So productivity is coming in ahead of where we expected. We've always talked a little bit about the opportunity for us to expand gross margins and then decide how to deploy them in marketing, distribution gains, as well as in capability building. And I think we have confidence through the year. And as Ajay mentioned in the prepared remarks, we would expect that sets us up nicely for 2025 as well.

Michael Lavery, Analyst

That's great. And just to follow up on some of the top line color that you just gave, you touched on the differentiated brands like Boulder Canyon and Zapp's. Boulder Canyon, of course, is on fire right now, but Zapp's had been, certainly has slowed. Can you just give a sense of what's ahead there? How much of it is just comp-driven? What should we expect for how that brand plays out going forward?

Howard Friedman, CEO

I definitely agree that those two businesses are a little bit of a tale of two cities. Boulder Canyon is growing quite nicely. It's got a great position in the marketplace and high perceived value for both the consumer as well as for retailers, really driven by avocado oil and the non-seed oil folks. We also have Boulder Canyon Poppers that is launching now, which is kind of, if you think about our company overall, a cheese ball is something we know a lot about and we're very proud of and being able to bring that into another subcategory under that brand just kind of shows the elasticity of that brand and what we can do with it as we go forward. So that is a lot about distribution gains and a lot about high velocity. So, we're getting in and consumers are buying more of it. So a great story there. Yes, I think on Zapp's, we talked about this last quarter, the opportunities we have in the price pack architecture and down the street in C-Store and making sure that we address those areas as we move forward. And Zapp's is coming in a little bit slower than we would have expected. Potato chips specifically is an area of continued emphasis for us. And then the pretzel lap of the new item from a year ago, which we now have our two new items out at this point, our spicy Cajun and our brown sugar, which are now in market and picking up. So we would expect that trend to normalize. Potato chips is the area we need to continue to work.

Michael Lavery, Analyst

Okay. Thanks so much.

Howard Friedman, CEO

Thank you.

Operator, Operator

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

Rob Dickerson, Analyst

Thank you. Following up on the last question, I'm interested in any new insights you've gained as you expand into new regions. Have you noticed which products or brands are performing better? I'm asking because I remember there was a focus on Zapp's and Canyon, but it seems like Utz is also doing quite well as you move further west. That's my first question.

Howard Friedman, CEO

Yes. I think overall, we feel really good about all four of our Power Four brands, right? I think they all travel reasonably well at this point. I think the two things we have learned as we go is how repeatable our model seems to be, right? So, we had a theory of the case. We had great success expanding into Florida, and we continue to make great strides of continuing to grow our business there. But I think we have a formula down of what the right number of items are across which subcategories and the brands, as well as a support model that I think we're showing is significantly incremental to the retailer and our brand. And there's a great deal of interest from consumers to opt into our products as well. So again, I think that the power of the portfolio, the catering to different consumers and making sure that our assortment reflects that and then investing some of our advertising and consumer to drive consumer pull as our sales organization and retailers are giving us the space is working for us, is working for the category, and we're being rewarded with incremental support as we go.

Rob Dickerson, Analyst

All right. Super. And then I guess just secondly, what are your updated thoughts on potential category growth for the first year? And also, there's clearly acceleration included in the guidance that you expect for the second half. It seems like you have strong confidence in that acceleration. So, I'm assuming that's all related to distribution gains. Could you comment on why you have that confidence as well? Thanks.

Howard Friedman, CEO

Yes, look, I think we have always maintained from the beginning of the year that we expected the category to call it around 2%, but our growth was going to be volume-led; we weren't going to see any price. And obviously, the category has been a little bit softer than even we had thought it would be. I think we would say, right now, we would assume it's kind of relatively flat as we go forward. Sorry, I lost your second question. I apologize.

Rob Dickerson, Analyst

The second question is just what gives you conviction on the back half acceleration. Clearly, that does imply a fair amount of share gain.

Howard Friedman, CEO

Yes, thank you. Look, I think as we look at our back half plans, there are a couple of things that are going on. First of all, we have secured distribution gains that we are aware of, that we are executing as we speak, and we'll continue to expect that to support our top line as we go forward on a relative basis to the first half. I think second, our marketing steps up as does our innovation. And then the third, although I don't always love this as an answer, we do have easier comps in the back half of the year versus prior year. So kind of the year we can execute similarly as we are. And actually, the percentage growth will be more significant. So, we do have high conviction. The wildcards, I think, are well-known to everybody, but we feel pretty good that we're executing the way we need to right now.

Rob Dickerson, Analyst

All right. Super. Thank you.

Howard Friedman, CEO

Thank you.

Operator, Operator

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

Robert Moskow, Analyst

Hi. Thanks. I just wanted to ask in the context of your longer-term outlook for sales growth is 3% to 4%. Clearly, this is a volume-driven year. But you could see a scenario where pricing is kind of flattish for the next couple of years, three years, given all the backdrops. So does the long-term algo still hold up in a zero pricing environment? Is there enough distribution gains out there in '25 and '26 to keep that three to four going? Thanks.

Howard Friedman, CEO

Yes. The short answer is yes. We have considerable geographic opportunities to explore over the next few years. Remember, we still have about 60% of the total U.S. salty snack market, which represents areas where we see strong potential for growth. Therefore, we are confident in our ability to continue increasing our volumes. Reflecting on our Investor Day, we mentioned that our focus has always been on growing volume share, and this strategy remains essential to us. We can successfully integrate our core brands into regions where they are currently less established as we progress. Additionally, since we are still in the early phases of our advertising and consumer investments, we believe that as we gain more insights, these efforts will further support significant volume growth over the next three years.

Robert Moskow, Analyst

Got it. Okay. Thank you very much.

Howard Friedman, CEO

Thanks, Rob.

Operator, Operator

Our next question comes from the line of Matt McGinley from Needham. Please go ahead.

Matt McGinley, Analyst

Thank you. To deliver the full-year EBITDA guide, you need to have a step-up in margin rate in the back half. Do you expect the sales growth to drive more operating leverage and offset that increase in marketing? Or do you expect to have more productivity gains that will ramp up in the back half?

Ajay Kataria, CFO

Yes, I would say both. So the leverage from distribution gains led sales growth or volume growth definitely helps. And our productivity program has been pretty strong throughout the first half. You should see that strength and that delivery continue. Our supply chain team is doing a great job accelerating the program as well as investing where we need to in our network to get ready for 2025 as well.

Matt McGinley, Analyst

A key part of your long-term plan is to sustain market share in your core markets. You've been pretty consistently gaining share in those expansion markets, but maybe not so consistent in the core. Are there any issues or changes you need to make in the core markets, or are you pretty happy with the market performance and how it's playing out in core versus expansion?

Howard Friedman, CEO

I believe that was a generous assessment of our core. If you look at our progress, we're quite pleased with our expansion markets. Part of our core market strategy involves focusing on Boulder Canyon, Zapp's, and On The Border. We are seeing good results from these efforts, but it is clear that typical category dynamics influence some of our business, particularly with our foundational brands as we evolve our portfolio. We have a history of brands we are moving away from, and the core will reflect these trends more significantly in the short term. We believe that over the long term, these trends will normalize and diminish in significance, which is why we have confidence moving forward. We are focusing on four key initiatives: enhancing our capabilities, increasing our marketing investment in innovation to benefit the core, improving our DSD route infrastructure, and driving distribution. While we have some work to do in our core markets, I feel quite optimistic about our progress and believe we need to continue to meet our metrics by maintaining our market share.

Matt McGinley, Analyst

Okay. Got it. Thank you.

Howard Friedman, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Rupesh Parikh from Oppenheimer. Please go ahead.

Rupesh Parikh, Analyst

Good morning, and thanks for taking my questions. So I had two questions just on the promotional backdrop. So I was curious what your team's assuming for the back half of the year on the promotion front versus what we saw in Q2. And then as you look at some of your value initiatives so far, how are consumers responding to some of the promotional efforts?

Howard Friedman, CEO

Yes. We plan to maintain our price gaps and stay disciplined moving forward. We're confident about our current price gaps, and if the market changes, we'll be adaptable and focused in our response. Overall, we're encouraged because our expansion geographies and untracked channels are performing well, which alleviates some pressure from competing solely on promotion. We have numerous growth drivers as we proceed. We're also aware of the difference in our promotional spending compared to the category year-over-year. We anticipate that the category will increase in promotions, and we are ready to compete in that space. If changes exceed our expectations, we will adjust accordingly.

Rupesh Parikh, Analyst

Great. And then maybe just one follow-up question. Just on the cost side, what do you guys see in the cost backdrop and on the inflation front at this point?

Ajay Kataria, CFO

Yes. We still expect the overall inflation measurement that we track to remain flat. While commodities are experiencing slight deflation, we are facing inflation in transportation and labor that is included in that measurement.

Rupesh Parikh, Analyst

Great. Thank you.

Howard Friedman, CEO

Thanks, Rupesh.

Ajay Kataria, CFO

Thank you.

Operator, Operator

Our next question comes from the line of Mitchell Pinheiro from Sturdivant. Please go ahead.

Mitchell Pinheiro, Analyst

Hi. Good morning. I'm curious about your foundation brands and how important holding them somewhat steady is to achieving your gross margin expansion. Is that a risk at all if you continue to see above average leakage in the foundation brands?

Howard Friedman, CEO

I appreciate the question. Look, I think for us, our foundation brands in general play a very specific role of being able to build out some route infrastructure and making sure that certainly in some geographies where they are important to the shopper and consumer that they are available. We'll continue to deemphasize them as sort of contemplated in our original assumptions and thesis as we go forward is that as those businesses deemphasize, our higher margin and higher consumer value products actually offset those declines. But we love our foundation brands. We'll maintain them and make sure that they're available. But ultimately, I don't suspect that it will be a meaningful impact to the overall P&L, given the growth opportunities we have for our Power Four and our Targeted Power brands.

Mitchell Pinheiro, Analyst

Could you discuss the current effectiveness of your promotions? Is one type performing better than others, or are they tracking at historical levels of effectiveness and efficiency?

Howard Friedman, CEO

I think as we've been enhancing our revenue management capabilities, we've been focusing on several key areas. One important aspect is understanding our optimal price gaps to compete responsibly within the category while also promoting affordability for consumers, which contributes to unit growth and volume in a healthy and expanding market. We've observed that promotional activities have decreased over the first half of the year and the previous year. We're experimenting with various promotional strategies, and while none stand out as significantly better, it's clear that consumers are making informed choices, shopping across different price points and channels, which is influencing promotions. For us, while we're willing to compete strategically on price, the distribution growth and marketing support we're generating are also positively impacting our business. Overall, we are pleased with how our marketing strategy is functioning, and we are prepared to make necessary trade-offs as needed.

Mitchell Pinheiro, Analyst

Thank you. Very helpful. That's all for me.

Howard Friedman, CEO

Thanks, Mitch.

Operator, Operator

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

Jim Salera, Analyst

Hi, guys. Good morning. Thanks for taking our question.

Howard Friedman, CEO

Hi, Jim.

Jim Salera, Analyst

Howard, I wanted to drill down, if you look at the household penetration, the buyers and the repeat trends, obviously all going in the right direction, I would imagine driven in the expansion territories. Can you just talk through maybe what's bringing the incremental households to the Utz brand? And then it seems like obviously, you're retaining them with the repeat rate. What does it take to retain them if they're maybe new to the brand moving forward such that we can have a more stable and ideally higher repeat rate from these new customers?

Howard Friedman, CEO

Yes, thank you for the question. We are quite pleased with the consumer metrics we're seeing. While entering new markets or trade categories is important, the key is that once customers are in the store, they need to be interested in buying our products repeatedly. We are making substantial progress in this area. There are a few reasons for this success. First, we offer an excellent product that is distinct and appealing, meeting consumer expectations for various chip types across our subcategories. We take pride in what we provide. Second, we are effectively increasing awareness of our products through point-of-sale displays and enhanced distribution, as well as marketing efforts to boost consumer recognition. Third, we have strong support from retailers who are providing us with space in prominent areas, allowing customers to access our products easily. Our inventory operators are also ensuring that shelves are stocked with our offerings, giving consumers the chance to choose our brand. Overall, our system is functioning well, although we have areas to improve, and we recognize that we are not perfect. However, we are optimistic about our current execution across the business.

Jim Salera, Analyst

That's great. And then if I can drill down on Boulder, if my notes served me correctly, in the Investor Day, you guys said it would be targeting $100 million retail sales in three years. And here we are, six months and some change later, and it's approaching $100 million in retail sales now. So I would anticipate that you'll probably be well ahead of that three-year time horizon. What does it take to get Boulder really increased shelf availability at traditional retail? I mean, I see it in club, in natural, and in my area, but I feel like it has brought enough appeal to really be a mainstay in traditional retail as well. So, what does it take to really expand your on-shelf presence in the Krogers and Albertsons of the world?

Howard Friedman, CEO

Yes, we are very pleased with the performance of our Boulder Canyon business over the past 18 months. Since I started here, we’ve been emphasizing Boulder Canyon as a power brand, and it has continued to grow rapidly in both availability and sales velocity. To your point, consumers are opting in, retailers are placing it on the shelves, and consumers are purchasing it repeatedly. Its positioning is strong, and the product is excellent. From our perspective, there’s nothing preventing us from further increasing availability where both retailers and consumers want it. We have the resources and manufacturing capabilities to continue building this business. We are already outpacing what we initially projected as a bold statement of reaching $100 million in sales within three years. We expect to surpass that by 2026. We will keep pushing for greater availability and continuing our innovation. You’ve seen Boulder Canyon Poppers appear, and we believe there is much more potential for that brand.

Jim Salera, Analyst

Okay, great. And maybe just one last question, just to tie off that train of thought. Do you have any capacity constraints for Boulder? If you get big orders from retailers, are you able to meet that right away, or is there like a ramp-up period we would anticipate?

Howard Friedman, CEO

No. We feel really good about our capacity right now. Obviously, given all the supply chain optimization work that we are doing and the capital that we are investing, as well as the increase in our capabilities around integrated business planning, we have much better visibility for both the demand and supply of that item. And so, we feel good about where we are. We feel really good about the ability to support that runway as we go forward.

Jim Salera, Analyst

Okay, great. Thanks for the color, guys. I'll hop back into the queue.

Howard Friedman, CEO

Thank you.

Operator, Operator

All right. And our next question comes from the line of John Baumgartner from Mizuho. Please go ahead.

John Baumgartner, Analyst

Hi, good morning. Thanks for the question.

Howard Friedman, CEO

Hi, John.

John Baumgartner, Analyst

Maybe first off, Howard, how are you thinking about category mix in a weakening consumer environment? Is it fair to expect any sort of shifting, for example, some popcorn, potato chips? Or are there any broader shifts that could occur within salty snacks that could prove net favorable for you?

Howard Friedman, CEO

It's an interesting question. We expect that consumers tend to first choose subcategories and then navigate the brand and price variations within that category rather than switching from one subcategory to another, such as from potato chips to pretzels. While some shoppers do explore different subcategories, they generally settle into one and remain there. In cases where consumers are buying for their entire family, you might notice some pressure in terms of quantity—perhaps opting for one bag instead of two. However, that's just my speculation. What we're seeing in our results reflects the advantages of our portfolio strategy and the efforts we've made over the past 18 months to two and a half years to optimize our portfolio mix and transition towards more profitable businesses while reducing focus on others.

John Baumgartner, Analyst

Okay. And then my follow-up, can you discuss some of the back half merchandising plans? I think last year, you began to ramp activity with some products for tailgating season. I think Halloween has been a focal point for you as well. So relative to last year and the improvements you made in manufacturing and supply chain, how does that set you up for the seasons this year in terms of display and feature?

Howard Friedman, CEO

Yes. I think there are a couple of key points to mention. First, our quality merchandising continues to improve, allowing us to enhance our promotional activities. Our perimeter displays have increased significantly over the past 18 months, and we believe we are justifying our presence in that area. Our independent operators are effectively competing for space, and we anticipate this trend will continue. We are optimistic about our distribution and merchandising plans for the second half of the year. We feel confident in our performance across untracked channels. While we will be repeating our regular Halloween pretzel lineup, we are also introducing a Zapp's Halloween rotation that will add to our offerings compared to last year. Overall, we believe that these initiatives will positively impact our business. The distribution gains we have already achieved will create more merchandising opportunities in our expanding locations, and the support we have from consumers will further enhance our efforts. We feel positive about our position and are committed to competing effectively and responsibly while remaining adaptable.

John Baumgartner, Analyst

Thanks, Howard.

Howard Friedman, CEO

Thank you.

Operator, Operator

All right. Thank you, everyone. That does conclude today's Utz's second quarter 2024 earnings call. Have a pleasant day.