Earnings Call Transcript - UTZ Q4 2021

Operator, Operator

Good morning and welcome to the Utz Brands Inc Fourth Quarter 2021 Earnings Conference Call. Kevin Powers, Head of Investor Relations, you may begin your conference.

Kevin Powers, Head of Investor Relations

Good morning and thank you for joining us today. On the call today are Dylan Lissette, Chief Executive Officer; Ajay Kataria, Chief Financial Officer; and Cary Devore, Chief Operating Officer. 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 Dylan, I 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 Dylan. Dylan?

Dylan Lissette, Chief Executive Officer

Thanks, Kevin, and good morning everyone. 2021 marked our first full year as a public company, and I'm incredibly proud of our team. We faced a dynamic environment marked by unprecedented industry-wide challenges and disruptions, and we worked hard to keep pace with robust demand for our advantaged snacking portfolio. Given this backdrop, we made strategic decisions throughout the year to continue to grow our sales and service our customers to the best of our ability. We did this by prioritizing the needs of our customers while absorbing certain higher costs to manufacture, distribute and sell our products. These decisions impacted our short-term profits, but I'm confident that these are the right decisions for the long-term health of our growing company and brands. Our full year results reflect these trade-offs as organic net sales growth accelerated meaningfully throughout the year, and we delivered a strong finish to 2021. While our top-line performance is strong, our earnings reflect higher-than-anticipated supply chain costs as we prioritized customer service to ensure we met growing demand. Servicing our customers to the best of our abilities has always been a hallmark of our commitment to our partners. To offset these higher supply chain costs, we took significant pricing actions throughout 2021, with an additional round of pricing already taken in February of 2022, and with two more rounds of pricing actions planned in the late second and third quarters of 2022. Besides these planned pricing actions, we will continue to take further actions, if and when necessary. In addition, we are driving our productivity and our cost reduction programs to help offset continued high input cost inflation and to enhance margins over the long term. I'm confident that we are taking the right approach to position us to create shareholder value over the short and long term as we continue to build pricing and productivity to overcome continued inflationary pressures. Throughout Utz's history, and during various economic cycles, we have always been steadfast in our approach and stayed very focused on thinking long term to create a strong organization. We know that we have an organic growth and distribution opportunity that is unique in salted snacking. In 2021, we continued to deploy our long-term value creation strategies. On that note, let's check in on how we're performing against our core strategies for long-term value creation. As a reminder, our foundational core value creation strategies are: one, reduce costs and expand margins; two, reinvest those savings to accelerate revenue growth; and three, continue to leverage our platform and our core abilities to make strategic acquisitions that add value to our company. Let's begin with number one, reducing costs and expanding margins. While in 2021 we faced unprecedented inflation that impacted our margins more than we had originally anticipated, we continue to make good progress building the foundation for a more advantaged margin structure in the long term. In 2021, we delivered on a productivity target of 2% and we completed a new company-wide state-of-the-art ERP implementation in February 2021 with minimal business disruption. The successful installation of a new ERP is a major milestone for the company that we believe will unlock significant future benefit for us, allowing us to run our business with a higher level of data and insights. We are already seeing the benefits of this as we are just now annualizing its implementation from last year at this time. We also executed multiple rounds of inflation-justified pricing actions in 2021, and the contribution of pricing to net sales increased to 6% in the fourth quarter, with momentum and carryover benefits building into fiscal 2022. Our conversion from company-owned DSD routes to independently operated DSD routes is nearing completion. In 2021, we converted approximately 200 DSD routes and we remain on track to substantially complete this conversion in the first half of 2022. In conjunction with this, we're also excited that with our recent purchases of Clem Snacks and J&D Snacks in the New York City Metro area, we now have approximately 2,000 DSD routes across the United States, selling and distributing our snack foods every single day. This is very exciting and a unique benefit of Utz's platform and is positive for both long-term sales and margin growth. Finally, as our sales mix shifts more to Power Brands, this will further help improve our margins. Power Brands improved to 87% of our retail sales this quarter, up approximately 200 basis points from this time two years ago. This percentage will continue to build as we go forward, and we continue to rationalize both our SKUs and our brands to focus on our larger Power Brands that we know are able to travel and will be successful anywhere in the United States. In addition, 2021 consisted of continued reductions in Foundation Brand sales, driven by reductions in both lower-margin private label sales as well as reductions in lower-margin partner brand sales that will continue to occur throughout 2022. The second part of our strategy is reinvesting to accelerate revenue growth. In 2021, our sales growth continued and for retail scanner data in 2022 we were happy to claim that we became the third largest salty snack brand platform in the United States with our latest retail sales totaling over $1.4 billion for the last 52 weeks ending February 20, 2022. For the 52 weeks ended January 2nd, our total Utz portfolio grew 8.3% on a two-year CAGR basis versus category growth of 8.1%. More impressively, our Power Brands grew nearly 10%, outpacing the category even more. We also delivered two-year share gains across both the grocery and C-store channels as well as tremendous sales growth in our expansion in emerging geographies, and we delivered two-year share gains across potato chips, tortilla chips and pork rinds. As we continue to position the company for sustainable long-term growth, we increased investment in our logistics and manufacturing infrastructure to support geographic expansion, new customer wins and core geography growth that are forthcoming in 2022. These new customer wins are very exciting for us as we look forward to a great 2022 for the growth and expansion of our brands. Finally, we continue to execute on the third leg of our value creation strategies which is making and effectively integrating strategic acquisitions. Last year, we closed three additional value-enhancing acquisitions, which include Vitner’s, Festida Foods and RW Garcia. Each were important and foundational to building a more efficient and growing platform for our sales growth long term. Importantly, we are delivering on our expected cost and revenue synergies of all six of the acquisitions that we have made since we went public in 2020, and these integrations remain on track. In addition to integration work and the revenue and cost synergies of these acquisitions, Festida and RW Garcia are focused on building more supply to meet the extremely robust demand for ON THE BORDER tortilla chips. We are doing this by rapidly insourcing production in our new plants across the U.S. in Michigan, North Carolina and Nevada. To put this in better perspective, one year ago today, 100% of our ON THE BORDER tortilla chips were produced by third-party co-manufacturers. However, by the beginning of 2022, due to the incredible efforts of our team, we are manufacturing approximately 40% of our ON THE BORDER volume in-house, and we expect this to increase to over 60% in-house by year-end 2022, which, in collaboration with our very important third-party co-manufacturing partners, will not only significantly improve our ability to service this rapidly growing brand but also deliver long-term margin enhancement via this insourcing of production. In fact, ON THE BORDER tortilla chips grew over 34% at retail on a year-over-year basis for the first eight weeks of 2022 through February 20, much of which is attributable to the supply dynamics that we put in place in 2021 via Festida and RW Garcia as well as production capabilities installed in both Hanover and Birmingham that have reaped more benefit for us in 2022 and beyond. Finally, last month we announced the acquisitions of Clem Snacks and J&D Snacks, which will better enable us to expand and grow our expansive portfolio of brands in the New York City Metro and the Long Island markets, both of which are core markets where we believe we can enhance sales growth in 2022 and beyond. We are excited about the benefits that all of these acquisitions will bring to us on both the top line and bottom line into the future. Turning briefly to our fourth quarter results: organic net sales accelerated significantly and increased 7.4% in the quarter, or 8.9% when you adjust for the impact of our IO route conversions. Total net sales grew approximately 22%, which reflects our strong organic growth plus the contribution benefit from our acquisitions throughout the year. In addition, adjusted gross profit grew 14% and adjusted EBITDA grew 11% as margins were impacted by the supply chain cost increases that I described earlier, partially offset by our building pricing and productivity momentum. In 2021 our pricing actions lagged inflation, but be very clear the benefits of both pricing and productivity are building momentum and we expect to offset anticipated inflation in 2022. Before we discuss our IRI retail sales in detail for the period ended January 2, I'll provide an update on our long-term trending retail sales results for 2022 through February 20. As you can see, our two-year CAGR growth rates continue to accelerate to new heights, driven by our Power Brands with two-year CAGR growth approximately 360 basis points better than the category over the last 12-week period and our overall portfolio of all brands approximately 160 basis points better than the category. We have been growing Utz Brands better than the category for seven of the last 12-week cycles of data. On a one-year basis, our Power Brands grew 13.5% versus the category of 12.7% with a continued focus on power brands versus foundation brands. We believe that all of these great sales results prove that the Utz brands can and will continue to grow as we execute on our multiple strategies for continued success. Turning to our growth drivers in the quarter: for the 13-week period ending January 2, 2022, our Power Brands portfolio on a two-year CAGR basis gained share across four of the five major subcategories that we track and gained share in salsa and queso as well. We continue to increase our presence in key salty snack subcategories, with share gains on a year-over-year basis in both tortilla chips and pretzels as well as salsa and queso. On a two-year CAGR basis, we grew share in both potato chips and tortilla chips and our Power Brands grew share in pretzels and cheese. It is great to see our largest subcategories in dollar sales growing and taking share over this two-year basis. As noted previously, our growth in tortillas continues to be robust across all metrics. To that end, we are leveraging the Utz platform to drive the ON THE BORDER brand to new heights. We are not only driving incredible growth from our DSD sales team, but we are also increasing the supply of product to meet this ever-increasing demand via both new production capabilities as well as the benefits of acquisitions in 2021 that have unlocked even more supply. With these new assets, we know that we can continue to support even more growth in 2022 and beyond. At a very high level, I couldn't be more pleased with the long-term value that we are creating for our company with the ON THE BORDER brand. It's exciting to see that retail sales for ON THE BORDER tortilla chips are up on a two-year CAGR basis 17% for the last 52 weeks, totaling $256 million, and retail sales for the ON THE BORDER Salsa and ON THE BORDER Queso are up 16.5% and 42.3%, respectively, on a two-year CAGR basis, now totaling $66 million in that same time frame. Together, this brand is delivering almost $325 million in annual retail sales and continues to grow dramatically, with the first eight weeks of February IRI retail results registering positive growth of 33% year-over-year. I can't say enough thanks to our team for all of the efforts put forth in 2021 that will reap rewards in 2022 and beyond. In the quarter, we continued to make great progress in geographic expansion while also executing to improve performance in our core. We grew 14.5% in expansion and 14.3% in our emerging geographies, outpacing the category on a two-year CAGR basis by about 340 basis points for both. There is no doubt that our brands travel well beyond our core and it's exciting to see our continued successes as we outpace the market consistently in these whitespace geographies. I'm also happy to report that in our core, our two-year CAGR continues to accelerate and it increased from 5.7% in Q3 to 7.7% in the current quarter ending January 2, 2022. For the first eight weeks, using one-year, eight-week data ending February 20, our core total sales registered 14.6% versus the category of 12.7% and our emerging and expansion grew 500 to 700 basis points better than the category, showing share gains in all geographies in the start to 2022. From a channel perspective, in the quarter we gained share in our largest and most important grocery channel while we drove strong two-year and one-year growth rates across all channels. As we've signaled before, this year we are excited to shift a lot of our existing marketing spend for multiyear sports sponsorships to a much more dynamic and nimble marketing plan. This shift will result in an increase of approximately 40% in consumer pull marketing spend versus 2021. Note that our overall marketing spend is expected to be consistent with last year. So this shift will allow us to be much more focused on digital and social, with much more targeted awareness-building media than in previous years. In addition, it will include continued investments into insights and brand investments to create even stronger consumer pull of Utz's Power Brands with a focus on our three top Power Brands: Utz, ON THE BORDER and Zapp's. Judging by our brand and sales results in 2021 and in 2022 to date, we believe our messaging is working as we continue to build momentum and excitement across our Power Brands, our geographies and our channels. We are also happy to report that many of you will begin seeing on-shelf that we have launched a refreshed visual identity on our flagship Utz potato chips brand that will elevate our brand assets and our at-shelf appeal. Looking ahead to 2022, we are well positioned for solid organic net sales growth and market share gains in the attractive salty snack category. We have a very strong start to the year, with robust demand leading to one-year growth of 16.9% in IRI retail sales growth for the first eight weeks through February 20 for the entire Utz brand platform as well as approximately 200 basis points of price-volume momentum versus what we delivered in the fourth quarter of 2021. It's truly exciting to see that after 100 years, so much continued momentum for our brands exists with the legacy Utz brand showing one-year growth of 20% in the first eight weeks and ON THE BORDER growth of 34% in that same period. In addition, beyond our first eight weeks of 2022, our sales team is delivering multiple grocery and C-store expansion wins in 2022, including an exciting expansion with one of the largest grocery chain partners in the Southeast that will unlock significant sales and share gains for our Power Brands. The planned wins in grocery and C-store that we are actively planning for will support growth beyond our core markets to areas like Florida, Georgia, Michigan, Missouri, Kansas and Texas. I'll be excited to share more about these wins in subsequent quarters. As we are always intent on investing for the future, preparation for these significant key customer expansions began in late 2021 as we began standing up additional warehouses, 3PLs, staffing and manufacturing capabilities to prepare for this new store and customer growth that will begin to roll out in May and June of 2022. In addition to the pricing momentum from Q4 2021 that we delivered on, please note that we have already taken pricing actions in early 2022 in response to anticipated inflationary pressures, and we have more pricing actions planned in the second and third quarters. These increases will protect our ability to invest in growth, offset expected inflation and we are hyper-focused on leveraging better technology put in place in 2021 to continue to monitor and improve our trade spend which will accelerate our price-pack architecture initiatives. In addition to improved and increased pricing, we are targeting an increase of productivity from approximately 2% in 2021 to approximately 3% in 2022 driven by carryover benefit from 2021 actions, continuous improvement, strong ROI CapEx projects, product sourcing and insourcing improvements and logistics optimization. Our supply chain organization is focused on maximizing output and increasing efficiency in a continued challenging environment so that we can meet our elevated demand with the depth and breadth in our talent base and improved analytics from our ERP. All of this focus will better enable us to identify and take action on opportunities to drive efficiency. These efforts are sticky and provide a long runway of benefits for the company as we work through 2022 and begin to prepare for 2023 and beyond. Furthermore, we continue to be focused on supporting and optimizing our core Power Brand portfolio, and we'll maintain a disciplined approach to innovation, including continued brand rationalization to simplify our supply chain as much as possible. As noted previously, we are shifting marketing spend dollars toward working media and social digital dollars to drive customer pull and brand awareness and excitement. Finally, in 2022 we will be focused on operating the business and integrating and reaping the benefits of our six acquisitions since going public in August 2020. To that end, each acquisition that we have closed on over the last year is meeting our goals and objectives. One quick example is Vitner's, which we acquired in February of 2021 and which continues to unlock growth opportunities for our Power Brands in the Chicago area, with 12-week sales in Chicago through February 20 on a two-year CAGR doubling year-over-year since the acquisition to plus 33% growth in that market. In addition, we have merged our DSD operations in Chicago to create an almost 90-plus strong DSD route system that didn't exist for us in January of 2021. Kudos to our entire team on the ground in that market that's creating even more value for our brands into the future. In closing, I hope you can feel the excitement I have for 2022 and for our long-term future as we continue to build a snacking platform that delivers long-term shareholder value and continues to delight more and more consumers across the U.S. With that, I'd now like to turn things over to Ajay Kataria, our CFO. Ajay?

Ajay Kataria, Chief Financial Officer

Thank you, Dylan, and good morning, everyone. I would like to begin by recognizing the amazing efforts of all associates in fiscal 2021. We finished the year strong in several areas, including implementing a new ERP, strengthening public company processes and infrastructure, completing and integrating acquisitions and ramping up data-driven decision-making that has sequentially improved our response to a dynamic industry environment throughout the year. I am confident that we are better prepared to succeed now more than ever before. I'll start with a very high-level summary of our fourth quarter financial performance, and then we will dig deeper into our net sales and margin drivers. Please note that when comparing our 2021 results to our 2020 results, fiscal 2020 was a 53-week year. We estimate this extra week contributed $15.9 million in net sales and $3 million in adjusted EBITDA. That being said, our fourth quarter 2021 net sales increased 22.2% to $300.9 million. We delivered organic net sales growth of 7.4%, which would be 8.9% excluding the impact of converting company-owned DSD routes to independent operators. As a reminder, when we convert routes to independent operators certain selling expenses move to sales discounts, thereby benefiting SG&A and reducing net sales and gross profit. Adjusted gross margins contracted to 34.3%, largely due to higher input costs and an approximate 150-basis-point impact from our IO conversions. In addition, adjusted SG&A improved to 22% of sales versus 23.1% of sales. The SG&A improvement in the quarter was primarily driven by lower corporate G&A, synergy benefits from our recent acquisitions and IO route conversions. Adjusted EBITDA increased 10.9% to $37.7 million or 12.5% of sales and adjusted net income declined to $16 million. Adjusted EPS was $0.11 based on fully diluted shares on an as-converted basis of 142 million. Briefly touching on our full year results: total net sales increased 22.4% and organic net sales increased 0.6%. Adjusted gross profit increased to $429.9 million or 36% of sales. Adjusted EBITDA increased 16.7% to $156.2 million or 13.2% of sales. We delivered adjusted net income of $77.5 million and adjusted EPS of $0.54. Now turning to our balance sheet and additional items. At the end of the quarter, our liquidity remains strong with cash and cash equivalents of approximately $42 million and $97 million available on our revolving credit facility, providing close to $140 million in liquidity. Moving down the balance sheet, net debt at quarter end was $817.8 million or 4.7x normalized further adjusted EBITDA of $175.5 million. As a reminder, through the course of fiscal 2021, we funded from our balance sheet approximately $130 million of acquisitions, which include Vitner's, Festida, RW Garcia and various third-party distribution rights. In addition, we spent $31.7 million on capital expenditures, which I'll note was below our revised outlook of approximately $40 million due to the timing of certain projects. Those projects will now conclude in fiscal 2022 and are factored into our CapEx guidance. From a cash flow perspective, I'll note that in line with our typical seasonality, working capital was a strong source of cash in the fourth quarter of 2021. Wrapping up on the balance sheet, our net debt and normalized further adjusted EBITDA now both reflect the impact of our RW Garcia acquisition. Our long-term net leverage target ratio remains between three times and four times. We are focused on operating the business, integrating acquisitions and delivering synergy targets, all of which will drive long-term EBITDA growth. I will also note that we have a well-priced credit structure with covenant-light debt instruments, which provides significant EBITDA headroom while we work on reducing leverage. More than 60% of our long-term debt has a nominal interest rate swap through September 2026 at a rate of 1.39%. Moving back to the P&L for some additional details, starting with net sales: our net sales growth in the quarter was 22.2%, driven by acquisitions of 23.2%, organic growth of 7.4% offset by an extra week of sales in the fourth quarter of 2020. As noted earlier, fiscal 2020 was a 53-week year with the extra week falling in the fourth quarter. We estimate this extra week impacted net sales growth in the quarter by 8.4%. Our organic net sales growth of 7.4% was driven by price/mix of 6% and volume growth of 2.9% and the impact of converting routes to independent operators, which reduced the net sales growth by 1.5%. Moving down the P&L to adjusted EBITDA: in the fourth quarter, adjusted EBITDA margins contracted by 130 basis points to 12.5% of sales. Excluding the impact of the extra week in fiscal 2020, adjusted EBITDA margins would have declined by 80 basis points. Decomposing the decrease in the adjusted EBITDA margin for the quarter, positive drivers include price/mix of 370 basis points as we took pricing actions to offset inflation, SG&A excluding transportation costs of 20 basis points, acquisitions of 60 basis points, productivity improvement of 120 basis points and volume of 30 basis points. Partially offsetting these positive drivers was higher inflation, including transportation costs of 680 basis points. Consistent with industry trends, our inflation impact versus last year was comprised of elevated labor and transportation costs as well as higher commodity input costs. These include continued pressure on all varieties of edible oil, wheat flour, corn-based items and warehousing-related items. As with our agricultural goods, our packaging components such as film, resin and corrugate continue to see meaningful cost increases. To that end, as you recall, our expectation for total input cost inflation for the second half of the year was low double-digit percentages versus comparable costs in the prior year. As our fourth quarter progressed, we made decisions to ensure strong levels of service to our customers to meet the robust demand from our consumers while absorbing higher-than-expected costs to manufacture, distribute and sell our products. This resulted in gross input cost inflation in the second half of the year in the range of mid-teen percentages. As Dylan mentioned earlier, these decisions impacted our short-term profits, but we believe these were the right decisions for the long-term health of our growing company. In response to these rising costs, we continue to implement pricing actions and you have been seeing these build in our sales results as price/mix contribution to net sales was a 1.9% benefit in Q1, 2.3% in Q2, 4.2% in Q3 and 6% in Q4. In addition, we recently took further pricing actions in mid-February, and we have additional pricing actions planned throughout the year. If costs continue to rise beyond what we are seeing in the market today, we will continue to take pricing actions accordingly. Note that the benefits from productivity are also helping to offset gross inflation. Now turning to our full year outlook for fiscal 2022: this year we expect continued strong top-line momentum with total net sales growth of approximately 7% to 10% versus fiscal 2021 net sales of $1.18 billion, and organic net sales growth of approximately 4% to 6%, which I'll note is above our long-term growth outlook of 3% to 4%. However, with inflation expected to continue and as we support our significant new customer growth, we expect to modestly grow adjusted EBITDA versus fiscal 2021 adjusted EBITDA of $156.2 million. While our adjusted EBITDA growth guidance is below our long-term growth outlook of 6% to 8%, given the way fiscal 2021 unfolded and as inflation and the cost to serve our customers continues to move higher, we felt it was important to take a prudent approach to our earnings outlook. In addition, our outlook assumes that we continue to invest in critical infrastructure to support significant top-line growth anticipated this year. It also assumes incremental SKU rationalization, as we optimize our portfolio with an enhanced focus on our Power Brands, including prioritizing production of branded products to unlock additional capacity for growing brands such as ON THE BORDER. Wrapping up our outlook, we expect capital expenditures in the range of $50 million to $60 million. This expected increase in CapEx compared to last year is primarily driven by higher-return productivity projects such as the expansion of our national warehouse in Hanover, Pennsylvania, which is expected to drive improved inventory management and lower costs. Our outlook also assumes the completion of carryover projects from last year. In addition, we expect a tax rate of approximately 20% and net leverage at year-end to be consistent with year-end 2021. Within this outlook, we are also assuming gross input cost inflation of low double-digit percent for the combined commodities, labor and transportation cost basis. I thought it would be helpful to provide some color on the expected quarterly cadence assumed in our guidance. As the benefits of our pricing actions and productivity continue to ramp up, we expect adjusted EBITDA dollar growth with better margins in the second half of this year. We expect adjusted EBITDA to decline in the first quarter and then return to modest year-over-year growth thereafter. From a sales perspective, we expect our strongest year-over-year growth to occur in the first quarter followed by the second quarter. As a reminder, we are lapping 200 to 300 basis points of negative impact in the first quarter of 2021 due to snowstorms. Furthermore, distribution gains and organic sales growth in the second half of last year will provide a benefit to sales in the first half of 2022. Before I turn the call over to Dylan, I would like to revisit our long-term margin opportunity. We believe that our ability to expand margins remains strong for several reasons. First, our actions around pricing and productivity have stickiness to them. While they address margin gaps in the near term, they will drive margin enhancement when inflation stabilizes. Second, our supply chain capabilities are improving as we accelerate productivity programs and optimize manufacturing and logistics processes to increase throughput and unlock efficiencies. Third, recent acquisitions are allowing us to scale our manufacturing capability to efficiently support strong demand for our Power Brands portfolio. In addition, buyouts of distribution rights and infrastructure from third-party distributors are positioning us to better serve our customers as we grow nationally. Fourth, recent investments in technology are helping unlock insights that enable several margin-enhancing work streams. In addition, we are now able to integrate acquisitions faster to drive synergies. Finally, we are enhancing an already strong management team with new talent. I am excited to see this team working together to drive this business forward. With that, I will now turn the call back over to Dylan.

Dylan Lissette, Chief Executive Officer

Thank you, Ajay. In closing, I want to reiterate that I truly believe that we are doing the right things to grow our business for both the short term and the long term, which in turn will drive great results in 2022, 2023 and beyond. Over our 100-year history, we have seen inflationary and challenging periods, and we are committed to using this dynamic environment to build an even stronger, more resilient infrastructure for continued growth. As we begin a new year, I'm very thankful to all of our incredible associates that make this all happen. Please know that we are confident in our long-term margin opportunity as a company. We have grown into the third largest platform in salty snacks because of a continued and disciplined belief in growing both our top-line sales and our bottom line. To that end, we have put in place many of the building blocks for tackling both pricing and productivity in 2022 to drive bottom-line results with continued top-line growth. We have invested in the people, the technology and the infrastructure to unlock this growth, and we will aggressively pursue the actions that will complement our bottom line, not just for 2022, but 2023 and beyond. We are excited about our future, and we look forward to continuing to create value for all of our stakeholders. Thank you very much for joining us today on our earnings call, and I'd now like to ask the operator to open up the call for any questions.

Operator, Operator

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

Andrew Lazar, Analyst, Barclays

I wanted to start off maybe you provided some thoughts on the direction of EBITDA through the year. I was wondering if there was anything more you could add on how you see the weighting of EBITDA first half versus second half as the year obviously is a bit more challenging to model given the volatility? And with respect to your full year guidance, how would you term it at this point, given there's so much fluid nature to what we're seeing around a lot of the things that you've got to forecast, do you feel like you're building in some level of prudence and/or flexibility versus what we saw in 2021?

Ajay Kataria, Chief Financial Officer

Andrew, thank you for the question. I'll take that. So to your first question on EBITDA cadence, we did comment on EBITDA being second-half weighted. I would say about a 45-55 split in terms of adjusted EBITDA dollars between the two halves. I say that because we think margins will be pressured in the first half— inflation is going to be as high as it was in the second half last year. As we get into the second half, we are anticipating inflation to continue, but we start to lap last year's inflation and pricing will continue to build. We have a couple more rounds of pricing coming, and we'll see increasing benefits from productivity. So that's the EBITDA cadence. It's also important to understand revenue. In terms of absolute dollars between the two halves, it will be pretty balanced. We have some strong top-line results coming in in the first half. To your second question around full-year guidance, we have carefully considered everything we know about the marketplace, and we have been very prudent in our planning this year. The environment is very dynamic. That said, if things start to move in terms of new information or inflation, we are prepared now more than ever to take more price, tackle inflation, drive pricing and manage supply chain disruptions. I think we talked about this in our prepared remarks: the team, our tools and our processes are all coming together very nicely, and I think we'll be able to proactively manage any new information.

Andrew Lazar, Analyst, Barclays

Can you talk a little bit more about what you see as a contribution from price and volume for the full year? And what sort of elasticity assumption you're building in? Because in fourth quarter, price and volume were both positive. Based on the 4% to 6% organic outlook and the fact that pricing was already at 6% in Q4 and will continue to build suggests maybe some volume decline for the year. So I'm trying to get a sense of how that plays into elasticity assumptions and perhaps whether that could ultimately prove conservative?

Ajay Kataria, Chief Financial Officer

You are correct, and we are very excited about the results that we delivered from a top-line and pricing standpoint in the fourth quarter and what we are seeing in the first eight weeks of the year. As you have seen, we sequentially improved pricing. We exited Q4 at 6%, and that pricing is building into Q1. It will build further as we execute a couple more rounds in parts of our portfolio, and we have also seen some nice volume increases so far this year. As we thought about the sales outlook in that context for the year, we considered a few things. First, while pricing is ramping up, we are also going to start to lap last year's pricing at some point as we look at the quarterly flow. Second, we are making choices this year to simplify the business and focus on the right things. A few of those choices will suppress volume—things like SKU optimization, evaluating our brand portfolio and prioritizing Power Brand production in our plants, including the RW Garcia plant we acquired, to free up capacity for ON THE BORDER. Third, we consider elasticities in the second half. We are not seeing any elasticity right now—demand is outweighing supply—but we think elasticity will come into play at some point, and we baked a bit of that into our outlook. Also, we still have about 200 routes to convert to independent operators, and that will suppress our sales growth by roughly 100 basis points. When you put it all together, we think volume will grow very modestly this year, and we'll have a first-half-weighted sales profile.

Operator, Operator

Your next question comes from Peter Galbo from Bank of America. Please go ahead.

Peter Galbo, Analyst, Bank of America

Ajay, maybe just a quick clarification for my actual questions. But the 4% to 6% organic top-line, does that incorporate the planned price increases in the second and third rounds you're planning for later this year?

Ajay Kataria, Chief Financial Officer

Yes, Peter, that does incorporate those planned price increases.

Peter Galbo, Analyst, Bank of America

Okay. And then maybe just to start on the inflation commentary, low double-digit outlook for 2022. I'm assuming the cadence of that looks like first half is in that mid-teen range similar to what you saw in 2H 2021? And then is the assumption that you're lapping higher inflation, but also that things come down in the second half to like a high single-digit rate? Just help us understand that a little bit more.

Ajay Kataria, Chief Financial Officer

I think inflation is going to be, as you pointed out, low double digits for the year. First-half inflation is going to look a lot like second-half last year in terms of percent inflation. If you back into it, the second half is going to be probably high single-digit inflation, and you have to look at those changes in terms of lapping last year's numbers. We have provided the last year's numbers in our commentary to help with that comparison.

Peter Galbo, Analyst, Bank of America

Okay, that's helpful. And maybe, I guess, the other surprising comment out of the prepared remarks was that leverage actually isn't really expected to change very much this year. That seems like a change in terms of philosophy — is this year any more about debt paydown? How are you thinking about that and whether it constrains your ability to do M&A in 2022?

Ajay Kataria, Chief Financial Officer

Leverage is high, and we think year-end 2022 leverage will be consistent with where we finished last year. We believe the best path to reducing leverage is to meaningfully grow EBITDA. As we noted in our remarks, we'll focus on operating the business, integrating acquisitions and delivering synergies. Those activities, combined with pricing and productivity and our supply chain improvements, will drive EBITDA in the long run. That said, free cash flow will be better this year, but we are going to invest in CapEx. If there is an opportunity to pay down a little bit of debt, we'll do that, but our primary focus is on driving EBITDA growth to sustainably reduce leverage.

Operator, Operator

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

Michael Lavery, Analyst, Piper Sandler

Could you just elaborate a little bit on your New York City and Long Island deals? On the surface, the optics may seem a little counterintuitive given that you're transitioning to independent operators. But I think there's some more nuance there — these seem consistent in ways that aren't as obvious. Can you reconcile how you're thinking about that and what drives the benefits that you're expecting?

Dylan Lissette, Chief Executive Officer

Sure. The third-party distributors that we purchased in the New York City Metro and Long Island areas were independent operators before we acquired them and remain independent operators after acquisition. What that gives us is ownership of one of the largest snacking markets in the country. We've worked with the third-party distributor we acquired from for many years and they have an immense network throughout the five boroughs of New York City. They service bodegas, grocery stores and mass channels across that market. By acquiring them and integrating them vertically, we have essentially captured the profit stream that previously flowed to a third party. With our decades of experience building DSD route systems, servicing customers and growing brands, we believe that once we integrate these routes into our system we'll achieve increased sales, improved service and better results in that market. We believe we can grow sales in that market and further enhance our core geography results.

Michael Lavery, Analyst, Piper Sandler

On marketing spending, you gave details on the moving parts. At a higher level, I think in the fourth quarter you said SG&A favorability was an offset to pressures. Looking ahead into 2022 against your plan, how much is marketing a source of flexibility if there is greater-than-expected inflation or cost pressures? Or is that a set number that would simply drive potential upside or downside if other costs move around it?

Ajay Kataria, Chief Financial Officer

We are not reducing marketing spend. In fact, we are reallocating dollars to be more productive—shifting more toward social, digital and working media to drive better ROI. There isn't a meaningful pool of marketing dollars that we can flex materially to make or break EBITDA in the near term. The way we think about marketing is that we will continue to invest to build our brands and support our Power Brands, and we will do so in a more targeted, measurable way.

Dylan Lissette, Chief Executive Officer

What's exciting about 2022 is that we won't have a significant portion of our marketing funds going into legacy multiyear sports sponsorships. Instead we will be more nimble—geotargeting and focusing spend on specific geographies and brands where we can get better long-term results. You'll note from our fourth quarter sales and year-to-date results that the Utz and ON THE BORDER brands are showing strong momentum with relatively modest media spend. We're getting a lot of bang for our buck because the brands are performing well.

Operator, Operator

Your next question comes from Ben Bienvenu from Stephens. Please go ahead.

Ben Bienvenu, Analyst, Stephens

Following up on the inflation outlook, given how rapidly things are evolving in the last few weeks, as you think about the pricing increases you have forthcoming, were those decisions made in anticipation of tightening beyond what you've seen year-to-date, including recent geopolitical events? And if inflation continues to worsen, how able are you to take incremental pricing beyond what you have planned?

Ajay Kataria, Chief Financial Officer

The rounds of pricing we have discussed are built into our outlook and were based on the inflation we saw leading into the year rather than reactions to events in the last two weeks. We are looking at known inflation and reacting accordingly. That said, we are well prepared with the team and tools in place to proactively take additional pricing if needed. We are watching competitive actions in the market and working across the portfolio on pricing levers and SKU optimization to enhance margins. From a supply standpoint, we are covered on our commodities for about half the year and are monitoring volatility closely. So far, we have not seen a direct material hit to our operations from recent geopolitical events, but we remain prepared to take action as conditions evolve.

Ben Bienvenu, Analyst, Stephens

On the C-store channel: mobility and convenience trends are strong to start the year. How does that dynamic play into your ability to drive continued growth in that channel, and what are you doing to gain relative share there?

Dylan Lissette, Chief Executive Officer

Across our channels, C-stores represent significant opportunity. We expect to speak more broadly about developments with key customers in future calls, including expansions that will drive meaningful incremental distribution. We are the number two C-store snack platform on the East Coast and have substantial white space on the West Coast. Brands like Utz and Zapp's perform well in C-store, and as that channel rebounds and expands, it will provide increased sales and share for us. We are gaining distribution and working with customers to increase penetration, and I look forward to updating you on concrete wins in subsequent quarters.

Operator, Operator

Your next question comes from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow, Analyst, Credit Suisse

Your comments about pricing for inflation seem focused on expectations for this year, but you had a lag in 2021 that you never fully caught up to. Can I assume that the pricing you have in the market now is expected to cover both current inflation and the lag from 2021, or are you expecting some benefit to extend into 2023?

Ajay Kataria, Chief Financial Officer

Think about it on a rolling basis: some benefits of pricing taken now will flow into 2023. We believe when inflation stabilizes, margins will improve because pricing and productivity gains have stickiness and will overlap with lower inflation periods. So part of the pricing we are taking now will help address the lag from last year and protect margins going forward.

Robert Moskow, Analyst, Credit Suisse

One follow-up: you showed a 6% contribution from pricing to net sales in Q4, and some peers are splitting inflation into commodity-driven and supply-chain disruption costs. Those disruptions may be viewed as more transitory. Are you lumping all of that together, and how feasible is it to go to retailers and ask for pricing that covers both structural and transitory costs?

Ajay Kataria, Chief Financial Officer

We are currently presenting the impacts lumped together. In normal course, commodity inflation and supply chain disruption costs are distinct conversations with retailers. The category has been rational so far; conversations with retailers and competitive actions have been measured. If the dialogue shifts to distinguishing commodity versus transitory disruption costs, we are prepared to handle that. Our preparation includes productivity initiatives, optimizing our footprint and logistics to cover parts of inflation through operational improvements, not just pricing alone.

Operator, Operator

And the last question for today comes from Bill Chappell from Truist Securities. Please go ahead.

Stephen Lang (on behalf of Bill Chappell), Analyst, Truist Securities

This is Stephen Lang on for Bill Chappell. On ON THE BORDER chips and salsa, could you dig a little deeper into the distribution gains and velocities you're seeing so far with the brand?

Dylan Lissette, Chief Executive Officer

We're really proud of how the ON THE BORDER brand is performing. Much of the growth is from existing customers whom we are servicing better due to improved supply, and much is also from new ACV and distribution growth attributable to our DSD network. In 2021, supply constraints limited upside, so we proactively acquired Festida and RW Garcia to increase production capacity. As we bring more production in-house and continue to partner with co-manufacturers, we expect to support even more growth in 2022. ON THE BORDER is a higher-margin product from a manufacturing standpoint, and with more supply we believe it will drive significant growth. You can see from year-to-date results not just the tortilla chips but also salsa and queso—these categories are expanding and together are approaching roughly $70 million in retail sales, making ON THE BORDER a major growth engine for our core and emerging geographies.

Operator, Operator

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Dylan Lissette, Chief Executive Officer

Yes. In closing, I do want to thank everybody for joining us today. 2021 was an absolutely challenging year for the industry and for our company. Our associates are fantastic and very committed to continued growth and long-term thinking. We believe that 2022 will be an excellent year and that we have a lot of positive initiatives that will contribute to the top line and bottom line. I appreciate your support in allowing us to achieve these results.

Operator, Operator

This concludes today's conference call. You may now disconnect.