Q1 2023 Utz Brands Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at this time I would like to welcome everyone to the U S brands first quarter 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I'd like to ask a question at that time simply press star followed by the number one on your telephone keypad if.
If you would like to withdraw your question again press Star one thank you.
Now my pleasure to turn today's call over to Mr. Kevin powers head of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today on the <unk>.
Call today are Howard Friedman, Chief Executive Officer, a J Qatari Chief Financial Officer, and carried of our Chief operating officer.
Jay will make prepared comments this morning, and all three will be available to answer questions. During a live Q&A session. Please note that some of our comments today will contain forward looking statements based on our current view of our business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over to Howard I, just have a few housekeeping items to review.
Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. Finally, the company has also prepared presentation slides and additional supplemental financial information, which.
Posted on our Investor Relations website.
Now I'd like to turn the call over to Howard.
Thank you Kevin and good morning, everyone. It's great to be talking to you today in my second earnings call as CEO of Hearts.
And in the role now for about six months and it's been a great experience with a lot of learning that makes me increasingly confident about the future growth.
In addition, I'd like to thank you you're almost at once again for his help during the transition and I want to take a moment to congratulate John on his official appointment as chairman of the board last week during our annual shareholder meeting he did a phenomenal job building us into what it is today and the transition Couldnt have come at a better time as we positioned for our next leg of growth are.
First quarter results are a testament to this as our momentum is building as we execute against our long term strategies that have made this great company successful.
Organic net sales increased 4%, even as we lapsed, 21% comparable growth in the prior year, we expanded adjusted gross margins and drove double digit adjusted EBITDA growth.
All while continuing to make the necessary investments required to fuel sustainable above category long term growth.
Our power brand consumption increased nearly 10% on top of 20% growth last year as we further penetrate our expansion geographies and intentionally rationalized other areas of portfolio.
As expected net sales volumes declined about 6% in the quarter as we lapped strong prior year and aggressively optimized our product mix and trimmed non core private label and partner brands. These actions proactively reduced sales volumes by about 4%, but we believe that over time. These strategic actions will improve our margin mix and unlock.
Key manufacturing selling and distribution capacity to support higher growth of our power brands. In addition, as we previously mentioned this year, we are focused on extending the reach of our power brands.
Shifting our legacy marketing spend and our investment in marketing capabilities, we plan to increase our working media to drive more consumer pull to unlock growth increase our connection to our consumers via digital marketing and launch new products to address near end trends I'm, particularly happy about our innovation selling to date.
The ability to increase our brand investments is fueled by our gross margin expansion and in Q1, we delivered our fourth consecutive quarter of year over year. Adjusted gross margin increases are strong pricing execution higher levels of productivity and portfolio optimization strategies are supporting our margin recovery and building the foundation for a more advantage.
Margin structure and above category growth in the years to come.
And finally, we are making tangible progress against our network optimization strategies to support more profitable growth and a better balanced capacity across our network.
After consideration we've made the difficult decision to close our manufacturing operations in Birmingham, Alabama, and we are actively in sourcing production, where we get the capacity.
As always closing any one of our facilities is a difficult decision and we are committed to assisting our team through this transition.
Jay will provide more financial details about bermingham closure in his prepared remarks.
Briefly touching on our first quarter financial results organic net sales increased 4% year over year adjusted gross margins expanded 50 basis points or 140 basis points when accounting for our Io route conversion impact.
Adjusted EBITDA increased nearly 11% and adjusted EPS of <unk> 11 was flat year over year.
Looking at our retail consumption trends in the quarter retail sales increased nine 4% versus the salty snack category growth of 14, 8% we.
We expected this relative performance given we lapped very strong growth in the prior year as our first quarter 2022 retail sales increased 18, 6% versus category growth of 13, 6%.
Extending our performance out to a two year basis to account for the lap our total retail sales increased 30% and our power brands increased 32% and we effectively maintained our market share over that time period.
Turning back to our year over year results in the first quarter, our three largest brands us on the border ends apps, which combined represent about 75% of our retail sales. The collective growth of these brands was again in the double digits.
Our flagship <unk> brand grew 11% driven by potato chip growth of 18, 5%.
First quarter marked the seventh consecutive quarter of double digit growth for both utz potato chips and the <unk> brands or.
<unk> chips are gaining share with expansion into new geographies, and we are attracting and retaining more households.
Our odds potato chip buyers increased 9% in the quarter.
In addition, we introduced innovation behind the brand and we are excited about the recent launch of <unk> and Mike's Hot Honey potato chips. This is a fun and exciting collaboration with a great brand and an on trend flavor.
On the border Tortilla chip retail sales increased 4% as we lapped 35% growth in the prior year, primarily due to increased merchandising support and large distribution gains in the mass channel.
This year, we are driving a number of brand building activities, including new pack sizes and flavors. The launch of our first ever variety pack box that will be featured in the club channel and a new take home bags flavor creamy saw severity.
From a consumer activation standpoint in connection with the upcoming summer holidays, we are featuring new patriotic themes packaging supported by increased shopper activation programming throughout the second and third quarters.
Finally on the border salsa and queso are significantly exceeding category growth.
Our <unk> brand retail sales remained robust and increased nearly 60% in the quarter driven by our new flavored pretzel innovation and potato chip growth of 19, 5%.
While still in early months of the launch our seasoned pretzels repeat rate is exceeding the category benchmark and we expect sustained momentum driven by further geographic expansion and channel growth across primarily mass and club.
Looking ahead to the second half of the year and consistent with our strategy to accelerate our working media spend we are ramping up our consumer media activities to build more awareness of this unique brand.
As a reminder, our <unk> brand ACD currently stands at around 40%.
We have a huge opportunity in front of us to bring <unk> into more households across the country.
Wrapping up brand highlights I'd like to take a moment to touch on Boulder Canyon, the chip brand in our portfolio that gives our customers healthier options using better for you oils like olive oil or avocado oil Boulder Canyon has delivered nearly 20 consecutive periods of double digit growth and spins and as the number two potato chip brand in the natural channel in the <unk>.
Natural channel, which makes up approximately 50% of the business Boulder Canyon is growing 23, 5% in the last 12 weeks, which is nearly two five times the category growth rate.
Finally from an IRI perspective consumption of Boulder Canyon products increased 35% led by expansion in new customers in the grocery channel.
Moving to our key southeast sub categories, we gained share across both potato chips, and pretzels, which combined represent about 55% of our retail sales potato chips increased 16, 5% and pretzels grew 19, 1% as we saw broad based strength across most channels and geographies led by <unk> and <unk> brands.
Switching to your chips as I mentioned earlier, we are lapping strong activity in the mass channel where on the border sales are more heavily weighted or perspective on this year over year comparison on the border Tortilla chip sales grew 35% in the first quarter of 2022.
On a two year basis, our tortilla chips increased 37, 6% versus subcategory growth of 32% and as we progress through the year, we expect our tortilla chip year over year performance to improve.
From a geography perspective, we are making progress penetrating our white space opportunities, while improving execution in our core.
In our core we are lapping significant outperformance and on a two year basis, our power brand retail sales increased 29%, which was essentially in line with the category our share performance versus a year ago was primarily impacted by lapping strong <unk> brand share gains and declines in Golden Flakeboard, Good health and tortillas.
Looking ahead, we do expect our share performance to improve as we move through tough laps and we drive space gains in key food and mass accounts in.
And expansion our power brands sales increased 13, 5% versus last year, and 36, 6% versus two years ago, which was well ahead of the category as.
As we previously mentioned our expansion markets are more heavily weighted towards mass and the distribution overlaps impacted the year over year comparison.
Importantly, we are lapping our publics introduction at about this time last year with plenty of support a chain wide AD and display coverage.
We are looking for opportunities to expand our penetration led by large national grocers throughout 2023 and beyond.
Shifting gears to innovation. This year, we are delivering consumer centric innovation to create on trend and exciting offering and high growth segments flavored pretzels variety packs seasonally relevant items and hot and spicy flavors.
Taking these apps brand known for distinct and desired flavors into flavored pretzels category is proving to be successful and it's off to a great start.
Our <unk> peanut butter filled pretzels is the number one branded SKU in the segment and is extending its price pack offerings to reach more consumers and channels.
Multi packs and variety packs remain a high growth segment, and we are expanding our assortment to more power brands leveraging our portfolio to improve brand an item assortment across channels and improving our packaging solutions that are more impacted shelf and in the home.
We are innovating in key seasonal windows to have relevant fund and turnkey solutions as consumers host gatherings in their homes, we are extending our successful <unk> party mix in the fall with <unk> tailgate mix that features football shaped pretzels in merchandising ready solutions.
We are also adding on trend flavors like hot and spicy to our portfolio and we are thrilled with our collaboration and partnership with Mike's Hot Honey to heat up the summer with a limited time offer and 360 degree consumer support.
Before I turn the call over to a J I think it's important to highlight that over the past year and a half we have been building our capabilities to deliver sustained results in a dynamic environment.
While the opportunities remain significant our initial efforts are exceeding our expectations. Our momentum is building and this year, we expect to drive organic net sales growth supported by our resilient salty snack category.
Spanned the reach of our power brands improve our margins through productivity and revenue management initiatives to improve our mix to fund our growth activities and through the course of the year, we will generate stronger cash flow to reduce balance sheet leverage.
Finally, as I mentioned on the last earnings call I do not expect meaningful changes to our strategies or focus areas as we sit here kicking off our second quarter I remain confident in the foundation of this business and both our near and long term opportunities for accelerated growth and margin expansion.
Hey, Jay.
Thank you Howard and good morning, everyone.
Our first quarter results reflect the strength of our salty snack category. Despite lapping significant growth in the prior year, we delivered organic growth of 4%, while proactively optimizing our portfolio.
In addition, we drove double digit adjusted EBITDA growth as we are executing our margin enhancing programs.
I would like to thank the entire <unk> team for their contributions to <unk> growth and we remain well positioned for a strong 2023.
Turning to our first quarter results in more detail net.
Net sales were in line with our expectations and increased three 1% to $351 4 million.
Adjusted gross margin expanded 48 basis points to 34, 4%.
And this includes an approximate 90 basis points of negative impact from the Io conversions.
Excluding this impact our adjusted gross margins expanded approximately 140 basis points versus last year.
And this was our fourth consecutive quarter of year over year adjusted gross margin expansion.
Our adjusted EBITDA increased by 10, 7% to $40 4 million or 11, 5% as a percent of net sales.
Adjusted net income of $15 million and adjusted EPS of <unk> 11 per share were both in line with last year, largely due to higher interest expense.
Moving to the P&L for some additional detail starting with net sales.
Of note this quarter, we have refined our met sales supporting and.
And we have separated mix from price will be group with volume.
This was done as part of our effort to continually confirm our reporting to be more in line with our peers and is consistent with the way we evaluate our business performance. Our net sales growth in the quarter was three 1% driven by organic growth of 4%.
In addition, total net sales were impacted from the conversion of company owned us beat outs to independent operators.
<unk> reduced the net sales growth by <unk>, 9%.
Our organic net sales growth was led by price up nine 7% offset by lower volume mix of five 7% as we expected.
As Howard noted earlier in the first quarter, we faced our most difficult comparison of the year as we lap our first quarter 2022 organic net sales growth of 27%.
Which was led by strong volume growth of 11, 3% that included strong activity in the mass channel.
In addition.
Our SKU rationalization initiatives are ongoing.
As we aggressively optimized mix to improve portfolio margin.
And we unlock manufacturing capacity to help better enable our network optimization.
This program began late into the first quarter of 2022.
And through a wraparound impact from last year's actions combined with new actions this year.
Our volume was proactively impacted by approximately 400 basis points.
In the first quarter adjusted EBITDA increased 10, 7% and margins increased nearly 80 basis points to 11, 5% of sales.
Decomposing the change in the adjusted EBITDA margin for the quarter.
Positive drivers include.
Price benefit.
Of nine 7%.
Volume mix of one, 9% and productivity improvement of two 1%.
Offsetting these positive drivers were the unfavorable margin impact of 11, 6% driven by higher inflation.
And selling and administrative expense impact of one 3%.
Our inflation impact versus last year was comprised primarily of higher commodity input costs as well as elevated labor costs.
Selling and administrative expense reflects increasing investments in our people.
Selling infrastructure.
And supply chain capabilities to support our growth.
Our first quarter margin performance reflects good execution across the company as we are building momentum across our margin enhancing initiatives.
The actions will help drive our bottom line performance, while also providing the fuel for our future growth.
For example, we are managing our input cost inflation with our 2022 pricing execution.
And we are further developing our price pack architecture program and optimizing our trade spend less.
Leveraging improved talent technology and analytical capabilities, we are improving our revenue mix and rationalizing less productive and lower margins direct labor and our partner brand Skus.
And these actions are bringing up capacity in our plant and distribution network switching.
Switching which is helping us and servicing higher margin solid ran business.
We are executing our productivity programs and we now expect to deliver the productivity of approximately 4% in 2023.
As a percent of cost of goods.
Which is at a higher end of our original expectations.
And we are progressing our manufacturing network optimization program.
This includes insourcing volume, where we have capacity and as we announced a few weeks ago. The closing off auto manufacturing operation in Birmingham, Alabama on July 30 <unk>.
Given the age and condition of the plant it would have been challenging and costly to retrofit a facility.
And as a result, we plan to shift production to our facility in Kings Mountain, North Carolina and handle with Pennsylvania.
In connection with the closure in fiscal 2023.
We expect to incur pretax cash charges of between 3 million to $5 million, which is expected to include $1 5 million in severance costs and $1 5 million to $3 5 million in closing and transfer our production costs.
We also expect to incur noncash charges of approximately $8 million and $11 million and asset impairments.
Also given that the manufacturing operations don't close until early July .
And we are incurring costs to shift production across the network, we don't expect our India fiscal 2023 savings to be material.
Now turning to cash flow and the balance sheet.
Beginning with cash flow consistent with normal seasonality.
Cash flow used in operations in the first quarter was $8 4 million.
Keep in mind that historically, our first quarter is a heavier use of working capital and.
And we expect progress on our net leverage reduction to be greater in the back half of the fiscal year.
In addition, driving stronger free cash flow conversion remains a major priority and a cross functional effort across the company.
We have made organizational changes.
And we are driving process and technology improvements, including enhanced analytics to drive benefits across the cash conversion cycle.
We expect the benefits to build throughout fiscal 2023 and beyond.
Capital expenditures were $13 9 million in the first quarter as compared to $8 2 million in Q1 of the prior year.
The increase in spend was primarily related to supporting our productivity programs and our manufacturing expansion in Kings Mountain.
Finishing with the balance sheet net.
Net debt at quarter end was $891 8 million or five one times trailing 12 months normalized adjusted EBITDA.
$174 4 million.
As I stated earlier, our first quarter is a heavier use of cash.
And we would expect progress on our net leverage reduction to be greater in the back half of the fiscal year.
Now turning to our full year outlook for fiscal 2020.
Today, we reaffirmed our net sales growth outlook.
And increased our adjusted EBITDA growth outlook.
As we consider our Q1 performance.
And look ahead to the remainder of the year.
Our outlook is unchanged for total net sales growth of 3% to 5%.
And organic net sales growth of 4% to 6%.
Our shift to independent operators is expected to impact our total net sales growth by approximately 1%.
Price is expected to be the largest contributor to growth.
With volume mix consistent with last year.
While mix will be a benefit.
We now expect to produce less pounds in our facilities this year compared to last year.
As we have identified additional opportunities to trim lower margin products to better optimize our product mix.
And accelerating our network optimization plan.
From a profitability perspective.
We expect to deliver gross margin expansion in 2023.
<unk> total gross input cost inflation of high single digits, which will be first half weighted with moderation in the second half of the year.
From a cadence standpoint <unk>.
Given our first quarter results and expectations for the full year.
We expect our first half versus second half net sales waiting to be in line with prior year at approximately 49% versus 51%.
But slightly more weighted towards the second half this year, given our SKU rationalization actions.
Similar to net sales, we expect first half versus second half adjusted EBITDA waiting to be in line with prior year at approximately 46% versus 54%.
But slightly more weighted towards the second half this year, given the building benefits of our productivity programs.
Moving down the P&L.
We expect our full year 2023, adjusted effective tax rate to be approximately 20% to 22%.
Net interest expense of approximately $55 million and capital investments of between 50 million to $55 million.
Finally to support manufacturing capacity expansion.
Finally, we expect stronger free cash flow generation in fiscal 2023.
From higher profits.
And our working capital initiatives.
Our capital priorities remain consistent.
And we expect to reduce leverage in fiscal 2023 by half a ton and end the year below four five times normalized adjusted EBITDA.
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 margins, while we invest in our capabilities.
Now I would like to turn the call back over to Howard for some final remarks.
Thanks, a J, it's been an amazing six months since I first came to odds and I couldnt be more confident in our long term prospects.
Since 2019, we have grown in excess of $600 million in net sales and AUM.
$80 million in adjusted EBITDA.
Having had the benefit of my time here learning about the business and gaining greater clarity on where our opportunities are the team and I are pleased to announce that we will be hosting an investor day on December 15th in New York City.
During the event, we will go deeper into the catalysts for organic net sales growth and margin expansion and we're looking forward to sharing more detail about our long term plans and now operator, we'd like to open the call for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question is from the line of Peter Galbo with Bank of America. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions.
Good morning.
Howard maybe if we could just start off with the strategic.
Just as you start to kind of get into what is seasonally a pretty important period.
I know <unk> had a large competitor that's kind of talked about.
Seeing a little bit of pressure from private label and maybe using some of their their flanker brand as a way to compete against that we're also seeing just a lot of kind of capacity ads specifically in the pretzel space, maybe more so than other salty snack category. So.
If you can just comment maybe on the strategic.
How you see the environment playing out over the summer.
On <unk> and then maybe specifically on pretzels.
Yes, Thanks Pete.
I think the environment at the moment continues to be rational.
Been seeing what private label is obviously.
<unk> been active this sort of happens from time to time and it's still off of a relatively small base I think across our portfolio. We're fortunate because we have a collection of power brands that appeal to a broad base of consumers and then we have some regional brands that can play can play very enrolls up and down the price ladder. So we can we can go down and.
Cell products that consumers want at pretty much every price point and every configuration that they would that they desire. So I think overall the power of our portfolio and the environment remain largely as we would've expected and largely.
We feel comfortable with where we are as it relates to pretzels very happy with what's been going on with zaps Pretzel launch that the sinfully season twists are performing.
Better than our expectations trial has been great repeat has been better than category benchmarks and obviously the <unk> brand continues to be a very powerful item in the portfolio.
So competition is a good thing for the category I think it is healthy and I think it's rational overall.
Great. Thanks for that Howard.
Jay maybe just a couple of modeling items, if you'll indulge me.
Just if you can help us think about the impact from SKU rationalization kind of phasing over the rest of the year your inflation outlook I don't think you changed the band.
But just whether or not there's been any movement within kind of that high single digit band on inflation and then and then just third and apologies for the three part question on the productivity Guide I think you are talking about 4% for this year I think you did about 2% in the first quarter.
Wanted to understand the ramp there or if that's like a gross to net we should be thinking about thanks very much guys.
Sure.
So SKU rationalization, we did about.
400 basis points from Q1 and that was partly because of the late start in last year. So what you should see is.
Deliver delivery of about 300 basis points for the year and it gets sequentially.
Better or less negative as we as we move through the year, but we should finish the year at about 300 basis points.
That's one.
I will remind you we are trimming.
A little more than we've talked reward and we talked to you in a couple of months couple of months back that.
That enables us to do network optimization and all of the actions that.
We have taken in the last.
A month or so.
And then on your second question around high single digit inflation, we are still expecting high single digit.
You are correct that the environment is improving in certain areas, especially around freight.
We will see a little bit of benefit there, but largely not material and a high single digit inflation is still <unk>.
The guide, we have sort of baked that all of that into our planning.
And then third question around productivity, the 2% that you see on the EBITDA bridge that is that is a.
Percent of.
A percent of sales that's the EBITDA calc. So when we say, 4% that is a 4% of cost of goods so different base on the map.
B.
The productivity expectation has gone up we have we have said, 3% to 4% previously and now we're calling 4% that's largely because of.
And we are happy to see this how our productivity capabilities building mostly around procurement.
<unk> and other areas of supply chain that.
Kelly and his team are really doing a great job, bringing that program.
Awesome. Thanks, guys.
Thanks, Great. Thanks Pete.
Your next question is from the line of Michael Lavery with Piper Sandler Your line is open.
Okay.
Thank you and good morning.
Good morning, Mike wondering if Michael.
Just wanted to.
Understand a little bit of the opportunity, maybe specifically for zapped, even obviously, the SKU rat and the focus on the power brands that makes perfect sense and that evolution in total can take a little bit of time, but I think it was two years ago, we were.
Sort of <unk>.
Stunned by the plus 24% then and now it's up 57 clearly there is some.
There and its a differentiated brand and product with.
With the 40% ATV you mentioned.
<unk> from here does that growth drive enough of our selling story to really.
Gary that further because it needs is there any supply constraints.
Help us think about how that can grow and what if any limitations. There are without really just being a big driver.
Hey, Mike Thanks for your thanks for the question.
We're very excited about the apps I think we have a couple of growth legs for this brand and I don't see any meaningful supply constraints beyond the obvious if it if it had a such an explosive runway.
But we are enthusiastic about the brand overall, yes, there is an availability opportunity, which this entire portfolio has as we continue to expand our distribution broadly across and then there is a consumer desirability aspects to the brand the brand is attractive and appealing to a wide variety of consumers it.
As a distinctive flavour in position and it's one of those businesses, where it stands for something when you see it.
It stands for New Orleans, it stands for excitement.
Stands for fun and all of those things are from a marketers perspective, a dream to be able to build against so I see a lot of opportunity long term.
For the business.
Again trying to get consumers to opt into the brand.
And I think that that will only be amplified as we continue to invest great greater levels of agency against it over time.
Alright.
That's great that's helpful color.
Just on the supply chain side.
It's.
A little unusual to pair in sourcing and talk about a plant closure at the same time, but I can't I think some of the moving parts can you just help us understand.
Maybe one how big Kings mountain as that might just have more capacity than I appreciate it.
Is there more do you have another runway how big is the runway of further in sourcing opportunities and whereas your split is going to be.
Or is.
Yes.
Co manufactured versus in house.
Getting to the kind of the optimal level or how does that go any further.
Michael It's Terry I'll take that.
Yes, So look we've talked about network optimization for some time one of the reasons, we stood up Kings mountain was to make sure that we.
Hey.
Long term efficient plants.
Help our business grow.
Right now Kings makes pork rinds, four is 100% of our pork rinds move that volume from Birmingham.
A couple of quarters ago.
Decision to close Birmingham always a difficult one to close the plant, but that it was had an aging infrastructure.
<unk> have to retrofit so the volume.
The remaining volume from Bermingham, which is potato chips, and cheese and tortillas that'll flow into and to Hanover, and ultimately into Kings Mountain. So right now kings does pork rinds for us we will be standing up.
Potato chips potato chip capacity cheese.
<unk> capacity, certainly and potentially tortilla capacity as we move forward. So those are investments we're making.
Ultimately kings will become very high volume.
Efficient plant for us over the next couple of years.
With respect to in sourcing and I think we've got a good base of co manufacturing partners that are important to us, but we also have the capability.
To bring things into our plan to better utilize.
The fixed overhead inside our infrastructure. So we're doing a very prudently.
Prudently.
I think with respect to.
The co man network, obviously, the biggest piece is on the border there will always be a place for.
Co man partners and on the border.
But we've also stood up some capacity internally that we can utilize so we're fine are finding our way towards the right balance.
And we'll continue to make progress on that.
Okay, great. Thanks, so much.
Your next question is from the line of <unk> Parikh.
<unk> with Oppenheimer. Your line is open.
Good morning, and thanks for taking my question.
Good morning.
So the first thing I wanted to I was just <unk> just curious how <unk> are playing out versus your expectation or are they still better than what you've historically seen so just any more color there.
Hi, refresh its Howard Thanks for the question, Yes, I think you said it well what we're seeing right now is while there is some elasticity that.
That is showing up in the category still remains well below historical levels and is in line with what we would've expected to this point.
Great and then maybe just one follow up question. So as we look at adjusted EBITDA margins for this year.
I don't really think that you guys said you expect more gross margin expansion for the year just curious for any updated puts and takes on both gross margin and SG&A as you think about further adjusted EBITDA margins.
Pedro patient I'll take that.
So the expectation is still that Super majority of EBITDA margin expansion is going to come from gross margin area.
That is going to be.
Because of the productivity ramp that.
We are experiencing.
A lot of that is in the Cogs area. There is there is a portion of productivity that has accelerated which is related to delivery costs.
And freight and all the work that we're doing there which for US is in SG&A you saw some of that benefit come through in Q1. So we will see some full year benefit in SG&A related to that.
That said, we still intend to as.
We kind of roll through the year and Unstick. Some some dollars we intend to invest those dollars in building out capability and investing behind our brand up in few months.
Supply chain that we have talked about and most of those investments go in the SG&A area.
Great. Thank you I'll pass it along.
Your next question comes from the line of Bill Chappell with <unk> Securities. Your line is open.
Hey, good morning.
This is Steven Langill off the Bill Chappell. Thank you for taking my question Hi, Stephen Good morning, Stephen.
Good morning.
Can you guys kind of help us understand some of the dynamics in the tortilla chip category I know on the border was facing some tough.
Mass channel, but is there kind of anything to call out.
To date in that kind of gives me more confidence in the brand recovering through the year.
Hi, Stephen It's Howard I'll take that listen we feel great about on the border it has been a.
Fantastic acquisition for us going all the way back in our business that has been growing.
Quite quickly since since we bought it.
I think last year, when we had a huge significant benefit from distribution and merchandising specifically in the mass channel and I know we've talked about this now for a couple of calls but that is really.
The story of the numbers right now overall I think we have a significant amount of growth in front of us on tortilla chips broadly led by OTB as we move forward.
Got it. Thank you and you guys kind of mentioned some new customers again in the quarter can you guys help us what's kind of driving that and how it's bearing versus some of your internal expectations is it kind of come from more distribution.
Maybe it seemed like the innovation and marketing kind of.
<unk> helped drive that better than maybe you would have expected.
Yes, So I think our distribution story is largely behind our power brands, we continue to push for broader availability. Obviously, we continue to expand some routes as well which has been in line with our internal expectations and right on time for our growth story, but but broadly speaking with distribution is key.
Consumer trial, we make a great product consumers love it and once they buy it they tend to stick and so thats really.
Central to everything that we're doing right now.
Alright, Thank you very much thank you.
Your next question comes from the line of Jim <unk> with Stephens. Your line is open.
Hey, guys. Good morning, Thanks for taking my question.
All right, Jim if I can dig in on some of the sub category sales queso and salsa sales continue to do very well.
So relatively new compared to the OTB chips.
Find that those source offerings have legs beyond OTV buyers that to say if somebody buys private label tortilla chips will they still buy the OTB sources.
So the short answer is yes, we are finding that those products, both the salsa and queso items, which are growing significantly ahead of the category averages are broadly appealing and so it's not as if people opt into OTB and then just by the portfolio of brand offerings.
By into the dipping occasion, and then they look for the depth that they enjoy the most which obviously we feel great about the fact that that our items are there.
Okay great.
Maybe digging in a little bit on the zaps rollout I know that's still kind of early days, but do you find that those customers are incremental to the <unk> brand or they <unk> potato chip buyers can you just see the brand in another form and expand their buy rate.
So we find both does that pretzels launch is not only incremental to these apps brand, but it's actually incremental to our portfolio as well. So consumers are encountering the zaps brand either through through the potato chip offerings that they find where they may encounter them initially through pretzels, they kind of tend to be.
To be both so it has been incremental for US is obviously, we know that a flavor forward and exciting brand appeals to.
Consumer group that we're excited about so we will continue to expand on both of those sub cats over time, because we find the enthusiasm for those items to be to be quite high right now.
Okay, great. Thanks, that's helpful. Thank.
Thank you.
Thanks, Jim.
There are no further questions at this time, ladies and gentlemen, thank you for participating. This does conclude today's conference call you may now disconnect.
Okay.
Yeah.