Q4 2022 UTZ Brands Inc Earnings Call

Yeah.

Speaker 1: The.

Speaker 2: Good morning, my name is Zadra and I will be your conference operator today. At this time I would like to welcome everyone to the UTS Brands Inc. 4th quarter 2022 earnings call. Today's conference is being recorded.

Speaker 2: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.

Speaker 2: At this time, I would like to end the conference over to Kevin Powers, Senior Vice President and Investor Relations. Please go ahead.

Speaker 3: Good morning and thank you for joining us today. All in the call today are Howard Freeman, Chief Executive Officer, Ajay Kataria, Chief Financial Officer, and Keri Divore, Chief Operating Officer.

Speaker 3: Howard and AJ will make prepared comments this morning and all three will be available to answer questions during our live Q&A session. Please know that some of our comments today will contain forward-looking statements based in our current view of our business and actual feature results made different from a moe t? t cheeia-o-ng hd t?? bum relie denominator

Speaker 3: We see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.

Speaker 3: Before I turn the call over to Howard, I just have a few housekeeping items to review. Today we will discuss certain adjusted or non-GAAP financial measures which are described in more detail in this morning's earnings materials.

Speaker 3: Reconciliation of non- GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.

Speaker 3: Finally, the company has also prepared presentation slides and additional supplemental financial information which are posted on our Investor Relations website. And now I'd like to turn the call over to Howard.

Speaker 4: Thank you, Kevin. Good morning, everyone. It's great to be here with you today, and I'm excited and thankful to have joined us. It's a company I have known and a brand I have enjoyed for over 30 years. I'm great to all the Dylan and my fellow board members for my appointment and for the warm welcome. Us is a long crowd heritage and together with the more than 3,000 associates across the country, and confident we can do great things to build upon the strong foundation Dylan established. Thank you.

Speaker 4: play in the success of our company. This kind of work ethic has built us into what it is today, and we'll continue to reward our customers, consumers, associates, and shareholders. In addition, our associates did a great job improving the company's foundation since going public, and it's remarkable what's been executed nearly two and a half years. Examples include upgrading talent, implementing a new ERP.

Speaker 4: Strategic M&A to address subcategory gaps and capacity, expanding distribution, and investments in supply chain capabilities and technology. All of these efforts are in the early stages and have well-positioned us for future growth. From a capability standpoint, while I've been in the food industry for over 25 years, and my background is in direct-to-warehouse,

Speaker 4: It's become very apparent that our hybrid distribution model is a real strategic asset. My focus is simply to help better leverage this model to unlock further growth opportunities. From a marketing standpoint, today we spend just a modest 1% of sales that has been more focused historically on sponsorships. We've made good strides to shift that mix over the last year and a half. We have a real opportunity to increase our marketing investments over time and shift more capabilities from consumer push.

Speaker 4: to consumer pull activities. And finally, while our margins have been impacted by historically high inflation, the company did a good job executing rounds of pricing actions. It's encouraging that we are now offsetting cost inflation. And as our margin-hansing activities begin to drop more to the bottom line, I am very confident in our short-term, medium, and long-term margin opportunities.

Speaker 4: Before I turn to our fourth quarter results, I think it's important to take a moment to reflect on what the organization accomplished in 2022. 2022 was a year of gradual recovery and one where we exceeded our original financial expectations while also building for the future. Next sales of over $1.4 billion increased 19% over the prior-

Speaker 4: category to pay the ships. Implemented pricing initiatives and delivered on our productivity goal of 3% of cost of good sold to enhance margins, manage costs, and provide the required fuel for reinvestment. Significantly increased our market penetration with our expansion into more than 1300 public stores.

Speaker 4: and this is an exciting partnership that we will look to expand. Implemented network optimization projects to unlock capacity and lower costs.

Speaker 4: I'd like to highlight the purchase of our new manufacturing location in King's Mountain North Carolina, which we are converting into a flexible, fully operational snack food production facility, which will contribute to higher margins and capacity over time. And finally, we complete the process of bringing all of us facilities onto the same ERP system. This platform is already yielding and handling the system. And finally, we complete the process of bringing all of us facilities onto the same ERP system.

Speaker 4: Our momentum continues in the quarter as we again delivered results that were ahead of our expectations.

Speaker 4: Net sales increased 18%, adjusted gross margins expanded 220 basis points, and adjusted EBITDA increased 17%. Our performance was led by continued strong consumer demand as our category remains resilient, combined with our revenue management actions.

Speaker 4: and our productivity initiatives that are now fully offsetting inflation. Critically, these actions are providing the necessary benefits for continued investments in our people, brands, selling infrastructure, and supply chain capabilities. Looking at our IRI retail consumption trends in the quarter, we increased sales by over 14%, which is our fourth consecutive quarter of double-digit growth. And as we expected, our growth slightly lagged the overall salty snack category as certain subcategories have been impacted by lapping strong activity in the mass channel.

Speaker 4: As we expected, some of these dynamics impacted the fourth quarter and are expected to continue into the first half of 2023. Even as we last saw on growth in the prior year, our power brands continued their momentum with growth over 15%. Our top three largest brands grew double digits as our flagship UTS brand grew 16%, on the border grew 10%, and ZAPS grew 70% behind innovation and improved supply.

Speaker 4: From a subcategory perspective, we gain share and delivered over 20% growth across both potato chips and pretzels, which combined represent about 60% of our retail sales. For both subcategories, we saw broad-based strength across most channels and geography led by UTS and ZAPS brands. For our THS, as I mentioned earlier, we are lapping very strong activity in NASS channel. We're on the board of sales, our more heavily weighted.

Speaker 4: perspective on this year over year comparison on the border to T HIF sales green nearly 20% in NAS in the fourth quarter of 2021 and nearly 30% in the first quarter of 2022 as we move further along in 2023 we expect our T HIF performance to improve with respect to

Speaker 4: this year.

Speaker 4: From a geography perspective, we continue to make progress penetrating our white space opportunities while improving execution in our core. In the core, which represents over 60% of our sales, we grew over 14% with our flagship us brand up 13% and on the border to THFs up nearly 25%. That sales increased about 85% again led by innovation and better supply. The on the core, we continue to our momentum.

Speaker 4: performance giving the lapping of strong activity. Of note, as we continue to refine our retail sales reporting, next quarter we plan to collapse our emerging and expansion geographies into one single expansion geography. Now I'd like to turn the call over to a J for our financial discussion and then I'll make some concluding remarks before we open it up for questions.

Speaker 5: as we look ahead leading this company to even greater success.

Speaker 5: I would also like to thank all of our Arts Associates for executing our plan in 2022 with courage and conviction and continuing to elevate our service levels to our customers and consumers in the face of several market challenges.

Speaker 5: I would also like to thank all of our Arts Associates for executing our plan in 2022 with courage and conviction and continuing to elevate our service levels to our customers and consumers in the face of several market challenges. Thank you, team.

Speaker 5: Now, I will review our full-year results and fourth quarter financial performance and then we will discuss our fiscal 2023 outlook. For the full year of fiscal 2022, we are pleased to record that we are ahead of our original March 2022 expectations on both top line and bottom line results. The total let's say has increased 19.3% to over 1.4 billion dollars with organic growth of 15.5%. It just a growth profit dollars increased 18.6% and it just a debit dollar increased 9.2% to 170.5 million. Our results improved throughout the year.

Speaker 5: points to 36.6% and this includes and approximate 100 basis points of negative impact from our I-O conversions. Our adjusted EBITDA increased by 17% to $44.1 million, or 12.4% of sales, which was lower than our third quarter results and in line with our expectations due to

Speaker 5: additional details starting with net sales.

Speaker 5: Our next sales growth in the quarter was 17.9% driven by organic growth of 15.9% acquisition related growth of 3% and an impact from conversion of company-owned RSP routes to independent operators which reduced the next sales growth by 1%.

Speaker 5: Our organic net sales growth was driven by price mix of 17.9 percent offset by lower volumes of 2 percent. Our net sales performance was better than our expectations as we continue to execute our planned pricing actions.

Speaker 5: to offset inflation and experienced lower than anticipated price elasticity. Importantly, as we had anticipated, volume was proactively impacted by approximately 300-400 basis points due to our strategic skeurationalization activities. There are meant to simplify our portfolio, optimize mix.

Speaker 5: to offset inflation and experience lower than anticipated price elasticity. Importantly, as we had anticipated, volume was proactively impacted by approximately 300 to 400 basis points due to our strategic skeurationalization activities. There are meant to simplify our portfolio, optimize mix, and increase focus on our power brands.

Speaker 5: In addition, as we expected, and referenced in our third quarter earnings discussion, we are also lapping strong activity in the mass channel in the prior year that temporarily impacted volume growth. In the fourth quarter, adjusted EBITDA increased 17% and margins were 12.4% of sales. Decomposing the change in the adjusted EBITDA margin for the quarter. Positive drivers include price mix benefit of 17.9% as we continue to take pricing actions to offset inflation and productivity improvement of 180 basis points.

Speaker 5: offsetting these positive drivers where the unfavorable margin impact of 17.6% driven by higher inflation, including transportation costs and selling an administrative expense impact of 220 basis points. Our inflation impact versus last year was comprised primarily of higher commodity input costs as well as elevated labor and transportation costs.

Speaker 5: Selling an administrative expense which excludes distribution expense increased primarily due to higher accruals for incentive compensation. In addition, as Howard described earlier, we continued to increase our investments in our people, grants and selling infrastructure and supply chain capabilities to support our growth.

Speaker 5: Importantly, our fourth quarter margin performance was consistent with our value creation strategy and reflects the execution of our playbook. Consistent with what we shared last quarter, just to highlight a few.

Speaker 5: We are proactively optimizing our revenue mix and rationalizing less productive and lower margin skills and we have eliminated more than 350 skills with a primary focus on private label and certain power partner brands. These actions be of capacity in our plans and distribution network which is helping us in servicing higher margin power brand business.

Speaker 5: We are further developing our price back architecture program and optimizing our trade spend, leveraging improved talent, technology and analytical capabilities. We are executing our productivity program focused on manufacturing efficiencies, logistics and network optimization, packaging design work and product formulations. We delivered productivity of approximately 3% in 2022 as a percent of COBS, which is helping to offset growth inflation.

Speaker 5: Our integrated business management or IBM, talent and capabilities have improved significantly in 2022, which has improved customer service and order fill rates as cross-functional processes are driving better supply and demand management. Finally,

Speaker 5: We are delivering our expected M&A cost synergies from our recent acquisitions since going public. And importantly, all of these acquisitions are now fully integrated to our new ERP systems. This is an important building block in our ability to operate our business using a common platform, which gives us better visibility to drive portfolio synergies and scale. I am incredibly proud of our team's execution this year in a dynamic environment.

Speaker 5: As we have previously discussed, our cash flow this year has been impacted by the $23 million of buy-arts of multiple third-party DST distribution rights.

Speaker 5: in the first quarter of the year that were treated as contractor donations and booked as an expense in adherence to gaps. Pullier capital expenditures were $88 million as a reminder, in April we announced...

Speaker 5: and closed the transaction of our King's Mountain facility. In accordance with GAP, the $38.4 million purchase cost of this facility was recorded on our statement of cash flows as a capital expenditure and not as an acquisition. Moving to the balance sheet, NetDest at quarter n was $860.3 million or five times normalized adjusted EBITDA of $170.7 million. Up note, this quarter we decided to revise our definition of normalized adjusted EBITDA. In prior reporting periods, this profitability metric used in our leverage calculation included identified unrealized.

Speaker 5: integration related cost savings that are expected to be realized from recent acquisitions. In an effort to continually conform our non-gab definitions to be more in line with peers, these expected synergies have now been excluded. For fiscal 2022, these expected synergies totaled $7.9 million, and the inclusion of these cost savings was originally assumed in our fiscal 2022 leverage outlook. Moving to liquidity and our debt maturities, as a reminder, during the fourth quarter, we entered a new real estate senior secured term loan of $88 million, maturing in 2032.

Speaker 5: Importantly, this loan has an effective fixed rate of 6% via an interest rate swap. In a rising interest rate environment, this real estate term loan puts in place a low fixed rate instrument that increases our financial flexibility as we continue to expand distribution and generate strong organic growth. Proceeds from this strategic financing were used to pay down, in full, the outstanding amount under our revolving credit facility with excess cash going to the balance sheet. Importantly, as of year-end, our liquidity increased to approximately $236 million as compared to $138 million as of fiscal third quarter ending up to the second 2022. In addition,

Speaker 5: A reminder that about 70% of our long term debt is fixed at approximately 4.6%, we are interest rates wafts. We have no significant maturities until 2028.

Speaker 5: And our credit structure is comprised of covenant-like debt instruments. We have no maintenance covenants on our Tomlone B which provides significant EBITDA headroom while we work on reducing leverage.

Speaker 5: Now, turning to our full year outlook for fiscal 2023. As we look forward to this year, we expect continued strength in net sales growth with total sales projected to grow 3% to 5%.

Speaker 5: an organic net sales growth of 4% to 6% Our continued shift to independent operators is expected to impact our total net sales growth by 1%. Price mix is expected to be the largest contributor of growth with volumes consistent with last year.

Speaker 5: Our sales volume will be supported by distribution games in our expansion geographies to include continued benefits from our public expansion along with additional opportunities led by National grocery customers. They will also be supported by higher levels of advertising and marketing spend in particular working media spend, a new innovation like our ZAP, Simple E-season, Special Sticks.

Speaker 5: Our outlook assumes that we will experience greater price elasticity in fiscal 2023 compared to what we saw in fiscal 2022. We are also lapping strong volume growth from our first half 2022 performance, including strong activity in the mass channel.

Speaker 5: In addition, our skewer rationalization program will continue into 2023 as we further optimize MIX to improve portfolio margins. This program began late into the first quarter of last year and threw a wrap-down impact from last year's actions.

Speaker 5: Combined with new actions this year, we expect approximately 400 basis points impact from skeurationalization in the first quarter of 2023. We subsequently expect volume performance to improve throughout the year.

Speaker 5: and for volumes to grow in the second half of 2023, ending the year consistent with 2022. I would also note that the wraparound benefits of 2022 pricing actions will be highest in the first quarter of 23, and will then sequentially taper off throughout the year.

Speaker 5: Overall, we expect sales to be second half weighted, with a 49% versus 51% split between the two halves. For a profitability perspective, we expect to deliver growth margin expansion in 2023. As net price realization and higher levels of productivity,

Speaker 5: are expected to offset higher growth input cost inflation with varying impacts across our basket of raw materials, labor, fuel and freight costs. All in, we expect total growth input cost inflation of high single digits in 2023.

which will be first half-weighted with moderation in the second half of the year. Strong growth profit growth will help to fund the rest of our PNL, beginning with reinvesting in our brands. Advertising and related consumer spend is expected to increase double digits versus prior year as we increase consumer investments around our power brands. Strong sales and margin performance also enable investment in supply chain and selling capabilities, technology, infrastructure and our associates.

first half waited with moderation in the second half of the year. Strong growth profit growth will help to fund the rest of our PNL, beginning with reinvesting in our brands. Advertising and related consumer spend is expected to increase double digits versus prior year as we increase consumer investments around our power brands. Strong sales and margin performance also enable investment in supply chain and selling capabilities, technology, infrastructure and our associates. For example,

We added close to 250 DSD routes in fiscal 2022 and will continue to invest in growing our selling organization this year, which includes new people and distribution centers to support our long-term growth. We will also continue to ramp up our spend behind key capabilities in an effort to provide a stronger foundation for future growth and efficiencies. Moving down the P&L, we expect our full year 2023 adjusted effective tax rate to be approximately 20 to 22 percent and interest expense of approximately $55 million, which reflects the higher interest rate provider.

Reinvesting in our core business is one of the best ways we can deploy a capital and is a key growth enabler for us. Capital investment this year is expected to be between 50 to 55 million. Primarily to support manufacturing capacity expansion. Finally, we continue to expect stronger free cash flow generation in fiscal 2043 from higher profits and our working capital initiatives. Additionally, we are investing in capabilities to improve our cash flow conversion to include better inventory management and more efficient cash operations. Our capital priorities remain consistent and taking all this together, we continue to expect to reduce leverage in fiscal 2043 by half a term and end the year below 4.5 times normalized adjusted with that.

In closing, we are confident in delivering another year of strong operating performance in 2023.

With continued top line momentum, optimization of our cost structure, and expansion in margin, while we continue to invest in our capabilities. With that, I will turn it back over to Howard. Thanks, Jay. Building on a Jay's remarks, I'm really excited about our consumer activation plans as we look ahead to another year of growth in 2023. Consistent with the strategy we outlined when we went public. And building on the shift that began in the second half of last year. In 2023, we are significantly shifting our legacy marketing spend. We plan to increase work.

In 2023, we will continue to support the launch of our ZApps simply season pretzel sticks, which has hired an expected repeat, while also introducing an exciting slate of new products across key power brands and subcategories. In 2023, we will scale ZApps season pretzels.

and extend our peanut butter filled pretzels into additional pack sizes, launch new seasonal offerings and increase multi pack assortment, which is a huge growth category and big opportunity for us. And consumers continue to love our hot and spicy offerings so we will introduce new limiting time offers and lion extensions like Mike's hot honey chips and our new red hot ripples both very entrant. So before we open the call up for Q&A, I'll wrap up with a few summary comments for what's on tap for the remainder of the year as we look to build on our momentum with focused execution.

when supported by increased marketing and enhanced innovation. There are also opportunities to continue to strengthen our hybrid distribution model by investing in critical supply chain and selling infrastructure to support our geographic expansion nationally as well as our ongoing customer base. We will also be focused on greater efficiencies and decrease in costs.

as we continue to strategize where we can take this company and how we innovate to bring new products to market and to more consumers. We will enhance our margins through productivity gains across our supply chain, improving our promotional spend efficiency, enhancing our revenue management programs, and optimizing our product mix throughout our brand portfolio. And finally, as Jay mentioned earlier, we are focused on improving cash flow and reducing leverage to unlock future organic and inorganic opportunities for the business. In closing, I'd like to first wish we're still in good luck in his new role as executive chairman.

and thank him for the seamless transition and for his partnership throughout the process of me joining the company. I'm thrilled to be leading us at this time, and I'm grateful to our team for the exceptional performance in 2022, and I'm very optimistic about our future. And now, operator, we'd like to open the call for questions. Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll take our first question from Andrew Lazare at Barclays.

Great, morning, everybody, and welcome, Howard. Thank you, Andrew. Hello, I'm Howard. You start off, obviously, you've talked a lot this morning about increasing marketing and advertising, spending, and working media, and reach, and such. And I know this is an area of expertise for you and a skill set that you certainly bring, you know, added weight to for the organization. Obviously, UTS has been more of a DSD sort of lead sort of push model from much of its history, and that's worked really well. How do you assess the right balance of a push and pull model going forward, and how do we think about that in terms of the right level of upspend going forward, whether that's, you know, as a percent of sales, or however you want to define it?

Thanks for your question Andrew. A couple of things first I'll remind you that we spend a very modest 1% of our spending today on marketing. So I think no matter how we look at it there's some room to run. You're right the company historically has been a push model. Our hybrid distribution model is a towering strength for us and will always be a significant focus. But over time I think our goal is to bring it a little bit more into some balance. Probably a little over-weighted to push and a little under-weighted to pull. But I think a good target for us is kind of call it in line with what our competitors do. Call it 3-4% over time.

I'm realistic that that won't happen overnight and we've got a lot of work to do to get to the point where we can spend that kind of money, but that would be the expectation. That's helpful. Thank you. And then, Jay, at the midpoint of 23 guidance, you're looking, I think, for about 50 basis points of EBITDA margin improvement, how should we think about the contribution from both Gross Margin and SDNA when we think about that EBITDA margin expansion? Thanks so much.

Sure. I think the super majority of that margin expansion is going to come from Gross margin. As you heard us talk about in our prepared remarks we are investing in a lot of capabilities this year as we did last year. So those investments primarily go into S T NA and then productivity and price net of inflation helps Gross margin. So expansion is going to come from Gross margin. Thank you.

Sure, I think the super majority of that margin expansion is going to come from gross margin as you heard us talk about in our prepare to marks. We are investing in a lot of capabilities this year as we did last year. So those investments primarily go into S T NA and then productivity and price net of inflation helps gross margin. So expansion is going to come from gross margin. Thank you. Thanks, sir. Thanks, sir. Thanks, sir.

We'll move next to Michael Lavary at Piper Samler. Thank you, good morning. Good morning, Mike. Howard, welcome and congratulations. We would just love to see if you could tell us some of your first impressions so far and maybe couched in the context of this question of just, you know, how much we expect things to change, how much stays the same and how much I do have a sense of that already and just some of the way through thinking about how that looks. Yeah, thanks for the question, Mike. I am, I just want to reiterate how excited I am to be here. Look, I think if you look at us today, a lot of things are going right and the businesses are performing, the strategies are sound, the culture is strong. So a lot of the things that I see are really about how do we continue to extend that those really strong things as we continue to get bigger and our complexity continues to enhance. So I don't suspect you're going to see significant changes. I think what you're going to see is us building on the capabilities that we've been investing in and bringing them to maturity.

as the business demands it. Okay, that's helpful. And I just wanted to follow up on some of the thinking on brands and marketing. This may be a little nitpicky, but you had pointed out the on the border and zap brands as more flagship within the power brands and gave some detail specifically around those. Is that a little kind of nudge in a different direction to really have sort of a smaller core that you really focus on and push behind, obviously all the power brands versus the core distinction still seems to make perfect sense. But is that maybe even stepped up level of focus we should expect on those brands going forward. I think you can count on a stepped up level of focus on those brands, but not on not at the expense of our portfolio. But the way that I think about marketing and I think about the businesses overall is.

Number one, do our brands have something to say that our consumers want to hear? And then two, are they investments big enough to move to the enterprise in a direction that we are trying to go? We have some smaller brands that have, that sort of meet the first two criteria and we'll figure, we'll address them over time, but right now I think those three brands are the biggest, most impactful and probably have the most to say, but haven't said it yet. Okay, great, thanks so much. Thank you. Our next question comes from Rupesh Parik at Oppenheimer.

Good morning and thanks for taking my question. So the first area I wanted to start with is just cost pressures. Just curious if you can get more color in the outlook for the year and then what remains the biggest pressure points in your business today? Hey, Rufesh. I'll take that. So the way to think about our cost pressures, we have guided to high single digit inflation in the basket that we track, raw materials, labor fuel and freight. We expect that we are going to see more inflation in the first half and then it tapers off in the second half. And part of the reason why that would happen is our contract has have us paying prices on a two quarter, three quarter delay. So we are going to be paying in first half prices that you saw in the market in the second half of last year. And they go again. And so we are going to be paying for the next half of this year. So we are going to be paying for the next half of the year.

favorable prices that were in our P&L in the first half of last year. So from a lap perspective, we should see more cost pressure in the first half and it's in the same typical baskets of oil and potatoes and corn that moved significantly on us last year. Great. Maybe just one follow-up question. So elastic use for you guys have been pretty negligible to date. But just curious what you've built into guidance on the elasticity front for the year. That's correct. So so far, you know, really modest or negligible elasticities. We did not experience any in Q4. But as you have seen in the marketplace, we are expecting that consumer pressure starts to grow. So we have modeled elasticities in our guidance for fiscal 2023. We are certainly expecting that

they will increase versus last year. And I will add that we are in a sort of snack category, which will see less of an impact from elasticity compared to some of the other food categories. We have very rational competitive dynamics in the category, very low private label share. And we continue to watch the consumer and competition very closely. We'll execute our top nine. We have good visibility into all the drivers of volume.

We talked about some of those in our prepared remarks and we are confident about the year. Thank you, I'll pass it along. Thank you. And we'll go next to Peter Galbo at Bank of America. Hey guys, good morning and welcome Howard. Morning. Morning. Morning. Just a couple of numbers questions, Jay. Maybe just to put a finer point on the inflation guide. So high single digit, right? So should we think about that as double digit in the first half and like mid single digit in the second half and that kind of averages you to high single for the year. And maybe the point to on that question is, I think you gave a sales split first half second half if there's something similar you can do on EBITDA as well.

So first question on the flow of inflation. I think you have it right. I would just say on the high side of double digit and low side of a mid single digit or what have you. First half was the second half. And then on free cash flow. I'm sorry. What was your question? On your EBITDA flow. We guided or we talked about now prepared remarks that we expect sales to be about a 49.51 split. First half second half. EBITDA should be about second half weighted as well. But from a seasonality standpoint, we are a we see Q3 to be our highest margin quarter and first quarter. First quarter to be a lowest margin.

quarter. So from a seasonality standpoint, you should see a slightly more weightage in the second half on EBITDA than revenue. Got it. Okay, that's helpful. And then maybe just as a follow up, I think you were going there on free cash flow. You gave a CAPEX guide for the year just around operating cash flow. I think you've talked about better free cash flow generation for this year, but anything you can do just to quantify the free cash flow piece a bit more and how that's playing into how you're thinking about leverage. Thanks very much.

Yeah, so we expect to about generate about 50 million this year and we are expecting higher flow through from EBITDA as well as better working capital management so those two should drive a significant improvement versus 2022 on free cash flow. We'll go to that to Jason English, Eglman, Fax. Hey, glory folks. Welcome Howard, look forward to meeting you in person. Thank you for spot me on the question. So a number a number of questions but I guess I'm going to focus on some of the margin commentary so far. You finished strong back half margins, gross margins, obviously nice sequential uptick for you started.

of our EBITDA margin expansion is going to come from gross margin. And then we are investing in various capabilities as we talked about IBM, revenue management, marketing, innovation, productivity, these words in some ways hit S-GNA. And then...

As we work through it from an inflation standpoint, we have transportation costs in SDA, the Alpan transportation cost. The rate should be about flat for the years, so not a whole lot of impact from an inflation standpoint in SDA, so it's really focused on our investments.

and that's how we're to talk about your grand question. Thanks, Jay. Jay, the way I would look at our brands, there are a couple of places that we need to invest. Obviously, our big three on the border, since apps are all opportunities for us to invest more, to increase the pressure with our consumer. As you look at ZAPS specifically, we have had a very successful, essentially seasoned pretzel stick launch that I think is still very much in the early innings and we have a story to tell on building not only the brand, but the product story. And then in our core,

We have an opportunity to be able to test drive some of the marketing capabilities that we need to build Amongst a consumer cohort that actually knows the brand has affinity for it and would allow us to be able to build confidence as we were then to roll that into Into other markets Okay, okay in in preparing marks you also mentioned that the DSC routes you added 250 throughout the course of this past year how much of those were organic sort of new routes that you opened up versus routes that you've acquired? About half and a half so we acquired routes to your point.

when we acquired the Klam and J&D master distributors in the New York area. And then from an organic standpoint, we opened up quite a few routes in the southeast as we started doing the public's business. Yeah, yeah. Okay, cool. Thank you. I'll pass it on.

And we acquired the Klem and J&D master distributors in the New York area. And then from an organic standpoint, we opened up quite a few outs in the southeast as we started doing the public's business. Yeah. Okay. Cool. Thank you. I'll pass it on. Thank you. Thanks. Thanks. Please.

We'll go next to Robert Mosquit Credit's lease. Hi, thanks, and good talk to you, Howard. For 2023, could you maybe outline a few of the major productivity initiatives that you're planning? Are there any big ones that will push that productivity number higher? And then a similar question on distribution gains. You know, you had a big chunky one with Publix in 2022.

Is there anything on the horizon that could be similar to that in 23? Hey Rob, it's Carrie. I'll jump in and take the first one on productivity. So yeah, we expect good growth in productivity next year and increase as a percentage of our cogs and further progression of the program. I'd say next year logistics and this year logistics and manufacturing will lead the way across a variety initiatives. You know, order efficiency, you know, better efficiency with our in-house fleet, RFPs for...

logistics providers, continuous improvement, black belts, things of that nature. So good progress this year. We're still early innings on things like ingredients and procurement and getting efficiency and productivity there, and that'll layer on as the years progress. So we feel good about our progress, but there's still a lot of upside. And then with respect to your question around distribution, and how are we thinking about as we go forward? I think Robert that are. Florida prototype is a really good example. We're very pleased with the performance.

with respect to publics, obviously, but also the lessons that we learned about how to repeat that model as we go across the country. And I think what you'll see us looking for is a similar dynamic, a larger national retailer where we have existing relationships with that maybe we haven't entered into the geography yet, or maybe there is an opportunity for us to materially change by investing infrastructure. And as you can imagine, there are significant opportunities for us over time to continue to expand as we continue to move west.

So I think that's the probably the best way to think about our distribution over time. Okay, so Western onward. And last question, are there any new pricing initiatives in first quarter? I can't remember, AJ, if you mentioned new things that flowed through, and are there any plans for anything going forward? No plans to take any new broad-based pricing actions. As you remember, we talked about, we took a couple of rounds of broad-based pricing actions last year.

I believe February as well as August . So the program this year is built around wrap around benefits with pricing actions that we took last year, primarily. And our revenue management capability allows us to continue to work on our portfolio, optimize what makes optimize for margins.

and sort of invest and pull out where we need to keep working that portfolio. Okay, thank you.

sort of invest and pull out where we need to keep working that portfolio. Okay, thank you. Thank you.

We'll take our next question from Bill Chappell at Truth Securities. Good morning. Good morning. I know we keep going back to the marketing question because it's a kind of a change. But I guess the simple one is I understand you want to get from kind of 1% to eventually 3% of sales like your peers. But you know one of your peers has a marketing budget probably 50 times the size of yours. So 3% the lot more money than your 3%. So does that really?

make a whole lot of sense to try to keep up or try to be a peer average versus just putting more and kind of trade promotions and a way to kind of drive local velocity. Yeah, so I actually would offer you, I don't think that that's a binary choice. I think over time it does make sense for us to shoot for call it that 3 to 4 percent range. A lot of our marketing today was and will continue as due to the nature of our hybrid distribution model to be.

local, whether it is in-store activity or with retail or e-commerce platforms or as we're entering into new geographies. All of those things cost money and obviously all of those things are areas where we will continue to invest. What I would like to see us do over time is to balance also the consumer poll because I think what will happen is as the white space.

as we continue to advance in our push, we will eventually need a healthy and robust top line driven by consumers wanting the products. And that I think helps the next sort of chapter of our story. But again, I would look at this as a longer term expectation. I certainly take your point about scale. And we obviously wouldn't spend money if we didn't believe that there is a reasonable expectation of return.

Got it. And then in terms of, and I appreciate that, the in terms of the kind of the competitive landscape, what's your expectation for as cost ease and we move, especially into the summer, promotions from competitors or yourself, you know, stepping back up to the levels they were probably pre pandemic, or you think people will go to total line until we were really awfully or for a while on the call. So I would not, um,

Attempts to tell you what I think my competitors will do What I what I would say is that we certainly understand that our competitions supply chains are in much better shape than they were a year ago and so some of the competitive intensity that I think we will see is just frankly people returning back to the marketplace to try and drive Their own demand I think we feel comfortable about our promotional plan and our promotional strategy that that

that we're executing, but obviously if we find that we need to adjust it, we'll adjust it as we go into the back half. But as of right now, I would suspect that rational competitors in a rational category will behave rationally. Thanks so much. Thank you. And we'll take our final question this morning from Mitch Pinero at Sturderville and the end company. Hey, good morning. Morning. Most of my questions have been asked and answered, but I had a question on the first on leverage. You get your leverage down a half a turn next year. It implies that, you know,

Obviously, if we find that we need to adjust it, we'll adjust it as we go under the back half. But as of right now, I would suspect that rational competitors in a rational category will behave rationally. Thanks so much. Thank you. And we'll take our final question this morning from Mitch Pinero at Sturderville and Company. Hey, good morning. Morning. Most of my questions have been asked and answered. But I had a question on the first one, leverage. To get your leverage down a half a turn next year, it implies that you know, be the dog.

will be at the high end of the range as you laid out. And with some doing my math wrong. But is there any other issues? I mean, you're increasing cat backs year over year. Well, maybe excluding the King's Mountain acquisition. But it looks like they're working capital benefits that you're going to get to help lower the leverage turn. Yeah, hey, I'll I'll turn that. So I think, you know, mathematically at the midpoint of our Ibadah guide, we should we will need to improve our net debt or reduce our net debt by about 30 million dollars to get to below 4.5x.

And we believe that with the stronger fee cash flow generation, both from EBITDA as well as working capital improvements, while CAPEX is going to be actually slightly lower as for our guidance and interest is going to be slightly higher. So those two kind of net each other out, we should be able to get to reducing net debt by about $30 million.

And we believe that with the stronger fee cash flow generation, both from EBITDA, as well as working capital improvements, while CAPEX is going to be actually slightly lower as per our guidance. And interest is going to be slightly higher. So those two kind of net each other out, we should be able to get to reducing that debt by about $30 million. Or more.

Okay, and does that, so it is 2023 going to be a year of steady as she goes from an acquisition coin of you. I know you have increased flexibility, but I was just wondering your appetite for acquisitions in the coming 12 months. So we are, I'll say that we are, we are always in the market looking, looking at, you know, good opportunities. From a acquisition standpoint that, you know, acquisitions we did in the last 18 months, 24 months, to help with our manufacturing and distribution capacity. I would say that we had enough in terms of manufacturing capacity now.

It's more about optimizing that network at this point. So we don't need to do more in the near term. But from a distribution capacity standpoint, we continue to look at master distributors, probably not to the extent that we did in 2022, to a smaller extent. But we are being opportunistic to make sure that we are continuing to expand our BSD network by either opening up new routes organically or acquiring a route network that we can then plug into our RDSD network.

Dislesting, just clarification, there's going to be continued SKU rationalization drag in 2023. Is that correct? That is correct. That is a program that we, sorry, go ahead. Why, did you quantify that? I may have missed it. We have not enough prepared remarks. We reference that we are expecting about 400 basis points of impact in the first quarter. And that is coming from the wraparound effect of 2022 SKU rationalization program that started in late Q1 last year.

So we're going to see a lap impact of that and then an impact from the new 2023 SQ rationalizations that we are working on right now We are expecting about 200 basis points of impact for the year in 2023 from this program But like I said, you know Q1 will see a See an additional impact from wrap around of 2022 as well

And in a fair to say, when you get to 2024, this ski rack will be pretty much complete. So the program is a normal workstream for any Tanzuma company. It wasn't so for us.

and we started working on it in earnest last year. And I'll say that, as we came into 2023, started executing, we saw a lot of opportunity for us to make improvements in our portfolio and free up capacity, in-source production, optimize our network. And that's why you see us doing a little bit more than-

of Conclude today's Q&A session and today's conference call. Thank you for your participation. You may now disconnect. Thank you.