Q2 2024 Utz Brands Inc Earnings Call - Pre-Recorded
'twenty 'twenty four remarks.
Discussion of our second quarter 2024 remarks.
Speaker Change: On the call today are Howard Friedman, CEO , and Ajay Kataria, CFO . In addition, later this morning at 8 o'clock a.m. Eastern Time, we will host a live question and answer session, which you can hear via webcast on our Investor Relations website.
Speaker Change: 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.
Speaker Change: Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
Speaker Change: Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials.
Speaker Change: Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.
Speaker Change: Finally, the company has also prepared a 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.
Howard Friedman: Thank you, Kevin, and good morning, everyone. I'm pleased with our year-to-date operational progress and financial performance, which reflects our strong execution against the strategies we laid out at our 2023 Investor Day.
Speaker Change: We are driving branded volume growth led by our Power 4 Brands.
Speaker Change: Gaining volume and value share in our expansion geography and volume share in our core.
Speaker Change: Delivering Accelerated Productivity Cost Savings and Optimizing our Network which are Fueling Margin Expansion.
Speaker Change: Developing our capabilities and building out a robust analytics platform.
Speaker Change: and Improving our Balance Sheet Flexibility Ahead of Our Original Targets.
Speaker Change: Our progress this quarter is a credible marker of success that demonstrates we are on track to deliver, or in certain cases exceed, the three-year targets we introduced at our Investor Day and continue on our mission to become the fastest-growing pure play US snack company of scale.
Speaker Change: Let's begin with a few key messages.
Speaker Change: In the second quarter, we delivered organic net sales growth of 1.6%, led by strong branded volume growth, supported by increased marketing support, and disciplined promotional spending adjustments to address consumer value expectations.
Speaker Change: We gained dollar, pound, and unit share in the salty snack category for the third consecutive quarter.
Speaker Change: Our combination of brand building, innovation, execution, and distribution gains are helping to sustain our market share trends in a competitive environment.
Speaker Change: In the second quarter, we delivered our sixth consecutive quarter of year-over-year adjusted EBITDA margin expansion, fueled by strong adjusted gross margin growth.
Speaker Change: In addition, we divested two additional plants to accelerate our network optimization plans and improve our cash flow and balance sheet, putting us further ahead of what we laid out at our investor day.
Speaker Change: Our strong productivity and cost performance are providing the flexibility to increase investments behind our brands, support our geographic expansion, and manage our promotional activities to address consumer value expectations, which are collectively driving solid volume growth.
Speaker Change: As you've heard from around the industry, persistent inflation and higher borrowing costs are impacting consumers and many food categories this year are being impacted, including salty snacks.
Speaker Change: We are observing a shift in consumer behavior lagging from several years of inflation. For us, this is resulting in more value-seeking behaviors, whether it be deal shopping, channel shifting, or shopping the price ladder.
Speaker Change: Given this dynamic, we are taking a pragmatic and more moderate outlook for the salty snack category growth in 2024.
Speaker Change: As a result, given our revised category outlook in 2024 and based on what we expect to be a continuing dynamic operating environment, we are slightly revising our organic net sales growth guidance.
Speaker Change: Importantly our productivity cost savings are accelerating and we are reaffirming our adjusted EBITDA outlook.
Speaker Change: Today, we are also raising our adjusted EPS outlook. Ajay will provide more details during his presentation.
Ajay Kataria: Looking ahead to the second half of 2024, we expect our organic net sales growth to accelerate, driven by volume growth, fueled by increased marketing investments, innovation, already achieved distribution gains, and an easier second half growth comparison.
Ajay Kataria: Summarizing our financial performance in the quarter, we drove organic net sales growth of 1.6 percent, led by branded volume growth.
Ajay Kataria: Expanded Adjusted Gross Margins 260 Basis Points
Ajay Kataria: increase adjusted EBITDA by 10% and increase adjusted earnings per share by 46%.
Ajay Kataria: Our second quarter results reflect strong execution against a clearly defined portfolio strategy as we direct our investments to support our power brands, to fuel our distribution gains, geographic expansion, and volume growth.
Ajay Kataria: To that end, our Power Brands volume increased 4% in the quarter, led by our Power 4 Brands.
Ajay Kataria: Importantly, as consumers continue to shop for value outside of traditional grocery, our trends are improving in our non-measured channels to include club, hard discount, dollar, and e-commerce. In the quarter, our branded volumes increased nearly 10% in our non-measured channels.
Ajay Kataria: We will continue to support this momentum with increased marketing investments and disciplined promotional spending adjustments while we address the softness in our dips and salsa business, where we experience distribution losses as a key customer consolidates their placement in a salty snack aisle.
Ajay Kataria: Finally, consistent with our portfolio strategy, we are purposefully de-emphasizing non-strategic and lower margin areas of our business.
Ajay Kataria: to include private label, co-manufacturing, and some partner brands.
Ajay Kataria: Turning to our consumption results in the quarter, for the 13 weeks ended June 30th, our total retail consumption as measured by Cercana MULOC increased 1.1% which outpaced the salty snack category growth of 0.2%.
Ajay Kataria: For the third consecutive quarter, we gained dollar, pound, and unit share in the salty snack category.
Ajay Kataria: Unlike previous quarters, our organic net sales growth outpaced retail consumption in this quarter, primarily due to strong branded volume performance in non-measured channels.
Ajay Kataria: Our consumption growth was again led by Power Brand growth of 1.7%, and within our Power Brand portfolio, our Power 4 Brands increased 2.8%, with volume growth of 4.3%.
Ajay Kataria: Our investments in geographic expansion, brand support, and planned promotional spending help to drive share gains.
Ajay Kataria: Importantly, while we adjust to the dynamic consumer spending environment and more value seeking behavior, we remain thoughtful about the areas where we reinvest to drive demand.
Ajay Kataria: To put our price investment in perspective, our retail sales sold on promotion in the second quarter as a percentage of total sales only increased 100 basis points versus the prior year period, which compares to the overall category, which experienced an approximate 500 basis point increase.
Ajay Kataria: Our absolute level of 44% compares favorably to the total category and is only up modestly compared to 2019 levels, which is largely a result of customer mix changes as we've gone more national and expanded space in grocery customers like Publix.
Ajay Kataria: We will remain disciplined and targeted in evaluating our price gaps with our competitors for the remainder of the year and will adjust as necessary to continue to drive value both for our consumers and our retail customers.
Ajay Kataria: From a geography standpoint, we gain volume share in both our core and expansion geographies for our total portfolio, our power brands, and our power floor brands.
Ajay Kataria: Sales growth was most pronounced in our expansion geographies with growth of 5% fueled by continued distribution gains which easily exceeded category performance.
Ajay Kataria: Share gains across both geographies were led by On the Border and Boulder Canyon with continued share gains and expansion for our UTZ Brand as well.
Ajay Kataria: Moving to our Better For You portfolio of salty snacks, our consumption in the natural channel continues to grow and dollar sales were up 17% compared to 2.1% for the salty snack category over the last 13 weeks ending June 30th.
Ajay Kataria: Our leading better for you brand in the natural channel continues to be Boulder Canyon and is the largest driver of growth up 28.4 percent.
Ajay Kataria: From a subcategory perspective, our growth was led by significant outperformance in tortilla chips and cheese snacks, and our UTZ, On the Border, and Boulder Canyon brands all gained share during the quarter.
Ajay Kataria: Our ZAPPS share performance was largely impacted by potato chip softness in grocery and convenience channels as we make price pack architecture improvements and as we lapped the introduction of ZAPPS pretzel sticks in the prior year period.
Ajay Kataria: Tortilla chip growth was led by on-the-border consumption growth at 8%, fueled by strong growth in our core geographies and growth in both traditional grocery and mass channels.
Ajay Kataria: Our rebound in cheese snacks continued in the quarter, led by share gains for our iconic UTZ cheese balls, with strong growth in the grocery, mass, and the club channels.
Ajay Kataria: Within potato chips, our share performance was impacted by the softness in Zaps along with the softness in our Golden Flake business. Importantly, our UTZ Brand held share fueled by distribution gains and Boulder Canyon gained share led by strong same-store velocities.
Ajay Kataria: Finally, consistent with our prior expectations.
Ajay Kataria: Our pretzel trends were below category given we are lapping our Zapp's flavored pretzels salad in the previous year.
Ajay Kataria: These trends will begin to normalize as we get into the latter part of the year.
Ajay Kataria: Our flagship UTZ Pretzels held share in the quarter, led by continued distribution gains and strong sales growth in our expansion geographies, and behind our new UTZ Mixed Minis Pretzels introduction.
Ajay Kataria: Looking ahead to the rest of the year from a portfolio standpoint, our focus remains driving outsized investment on our Power 4 brands, UTZ, On the Border, Zaps, and Boulder Canyon.
Ajay Kataria: This will be seen in terms of advertising and consumer spend, innovation, and overall marketing capabilities.
Ajay Kataria: In 2024, we are amplifying our innovation to focus on bigger launches concentrated on delivering craveable flavors, capturing occasions, and expanding positive choices.
Speaker Change: This year, we introduce a new limited offering of Mike's Hot Honey Extra Hot Potato Chips this summer, keeping on trend with hot and spicy, which remains the number one flavor in salty snacks.
Speaker Change: launched our UTZ Mixed Minis in three trending flavors in a strong flavored pretzel segment, which makes it half the pretzel subcategory.
Speaker Change: Introduce new seasonal and multi-pack innovation to include our new on the border red white and blue cafe style tortilla chips and our new Zapp's Voodoo Halloween multi-pack.
Speaker Change: and expanded our positive choices for consumers within our Boulder Canyon brand and launched Spicy Green Chili Potato Chips and our Boulder Canyon Canyon Poppers, which is a better-for-you cheese snack made in avocado oil.
Speaker Change: Following a year of capability building, our growth and innovation will be supported by increased marketing support.
Speaker Change: Coming into the year, we plan to increase our marketing spend by 40%, but given productivity savings that are ahead of plan, combined with early, strong returns on marketing investments, we now plan to increase our marketing spend this year by 60%.
Speaker Change: These efforts will be focused on driving awareness with increased media spend and new brand campaigns.
Speaker Change: And you'll see our new Zapps and Utz campaigns streaming across social channels and Connected TV.
Speaker Change: Finally, these collective efforts are leading to improvements in critical consumer panel metrics that reflect the power of our consumer-loved portfolio.
Speaker Change: for the 52-week period ending June 16th versus the comparable prior year period.
Speaker Change: Our household penetration has increased 140 basis points to 48.2 percent.
Speaker Change: Buyers have increased by 2.2 million to 61.5 million and our total buyer repeat rates have remained consistent and increased 60 basis points to 70%.
Speaker Change: It is clear that our brands are resonating with consumers and retailers, and we are excited for continued growth as we move into the second half of the year and gear up for the holiday season.
Speaker Change: Now, I'd like to turn the call over to Ajay.
Ajay Kataria: Thank you, Howard, and good morning, everyone.
Ajay Kataria: In the first quarter, our organic net sales increased 1.6 percent.
Ajay Kataria: Adjusted EBITDA increased 10%.
Ajay Kataria: and Adjusted Earnings Per Share increased 46%.
Speaker Change: As our productivity programs and actions to optimize our network and portfolio are delivering stronger profitability.
Speaker Change: Importantly, our organic net sales growth, combined with these actions, resulted in our sixth consecutive quarter of adjusted EBITDA margin expansion.
Speaker Change: as we delivered a 14% adjusted EBITDA margin in the quarter.
Speaker Change: Our organic net sales growth was led by a volume-mix growth of 2.3%.
Speaker Change: Driven By Our Powerful Brands
Speaker Change: And pricing impacted growth by 0.7% due to focused promotional spending adjustments.
Speaker Change: Our total net sales growth was impacted by the conversion of company-owned RSP routes to independent operators, which impacted growth by 0.1%.
Speaker Change: I will note that this conversion is complete and we do not expect any further impact to our net sales growth for the remainder of the year.
Speaker Change: Additionally, the divestiture of the R.W. Garcia and Good Health Brands impacted net sales growth by 3.3 percent.
Speaker Change: Moving down the P&L.
Speaker Change: Adjusted Gross Margin Expanded 260 basis points in the second quarter.
Speaker Change: Our second quarter margin expansion reflects continued strength in our productivity programs this year, as our manufacturing and procurement projects delivered stronger results, which more than offset investments in our supply chain to support our growth.
Speaker Change: Productivity savings are being fueled by integrated work systems.
Speaker Change: Where we are standardizing work at all levels, focused on minimizing scrap and maximizing yield and efficiency.
Speaker Change: We have made changes to our plan's staffing to support these efforts and increase ownership at all levels.
Speaker Change: Manufacturing savings are being augmented by accelerated procurement savings.
Speaker Change: where we are driving sourcing excellence and supply relationship management.
Speaker Change: and improving our sourcing costs across key packaging, film, and raw material ingredients.
Speaker Change: As we look forward, our recent disposition of five plans is accelerating our network optimization strategy.
Speaker Change: which is enabling us to increase investments in our more scaled facilities.
Speaker Change: These include automation and new production lines across our Hanover plants.
Speaker Change: and new production lines in our Kings Mountain plant.
Speaker Change: These investments in the network will set us up nicely to maintain our momentum on productivity into the next year.
Speaker Change: Adjusted ST&A expenses increased 3.4% primarily due to increased marketing spend as we grow our share of voice in the marketplace.
Speaker Change: and also due to higher distribution expenses and investments in selling capabilities.
Speaker Change: Bringing it together, Adjusted EBITDA increased by 10% to $49.7 million.
Speaker Change: and Margins expanded 150 basis points to 14% of sales.
Speaker Change: The margin expansion was driven by 430 basis points of productivity.
Speaker Change: Partially offset by 110 basis points of supply chain investments.
Speaker Change: 90 Basis Points of Higher Marketing Spend
Speaker Change: 70 basis points of price.
Speaker Change: and 20 basis points of selling and admin expenses.
Speaker Change: In addition, Adjusted Net Income increased 46.3% and Adjusted EPS increased by 46.2% to $0.19 per share.
Speaker Change: Stronger operating earnings were aided by lower core depreciation and amortization expense.
Speaker Change: and lower interest expense due to meaningful deleveraging this year.
Speaker Change: Turning to cash flow and the balance sheet.
Speaker Change: Gap cash used in operations year-to-date was $0.2 million.
Speaker Change: But I'll note that there are items related to our plant dispositions this year that are impacting our cash results.
Speaker Change: Specifically, our first quarter includes approximately $10 million of working capital changes related to our transition services agreement with Our Home.
Speaker Change: And in the second quarter, we paid approximately $20 million in taxes, which were primarily related to the divestiture transactions.
Speaker Change: Capital expenditures, year-to-date, were $37.8 million and reflect an acceleration of spend in the second quarter, primarily related to investments in our manufacturing plants to support our productivity and network optimization initiatives.
Speaker Change: In addition, we paid $18.9 million in dividends and distributions to shareholders.
Speaker Change: Finishing with the balance sheet, cash on hand was $66.6 million and our liquidity remained strong at nearly $200 million, giving us ample financial flexibility.
Speaker Change: Net debt at quarter end was $747.5 million, or 3.8 times trailing 12 months normalized adjusted EBITDA of $194.6 million.
Speaker Change: Just to note, this represents a 1.3 turn improvement versus the end of the second quarter last year.
Speaker Change: As a reminder, on February 5th, we closed the disposition transactions of the Good Health and RW Garcia brands and three manufacturing facilities.
Speaker Change: The transaction included a total consideration of $182.5 million with approximately $150 million in after-tax proceeds.
Speaker Change: which we immediately use to pay down long-term debt.
Speaker Change: In addition, in the second quarter, we closed the dispositions of two additional manufacturing facilities for a total consideration of $18.5 million.
Speaker Change: with approximately $14 million in after-tax proceeds.
Speaker Change: which were used to pay down $9 million of long-term debt.
Speaker Change: and add $5 million to the balance sheet.
Speaker Change: We also successfully completed a repricing of our $630 million term loan due in January 2028.
Speaker Change: which reduced the applicable interest rate by 36 basis points.
Speaker Change: These two debt repayments plus the lower interest rate on our term loan will result in approximately $14 million in lower interest expense for 2024.
Speaker Change: Notably,
Speaker Change: Our fixed rate debt now comprises approximately 80% of our total debt at a blended average rate of 4.6% via interest rate swaps.
Speaker Change: Consistent with our strategy.
Speaker Change: These actions accelerate our time frame to achieving our target of three times net leverage ratio to year-end 2025, which, as you know, is a year ahead from the year-end 2026 target set at our Investor Day in December .
Speaker Change: Now turning to our full year outlook for Fiscal 2024.
Speaker Change: Our 2024 outlook continues to position us well to deliver our 2026 financial targets.
Speaker Change: As Howard mentioned earlier, we are modestly revising our growth outlook this year to reflect the Salty Snacks category trends.
Howard Friedman: We now expect organic net sales growth of approximately 3% compared to our prior expectation of approximately 3% or better.
Speaker Change: We continue to expect our growth in the second half of the year to accelerate, fueled by distribution gains in our core and expansion geographies.
Speaker Change: and helped by an easier prior year comparison in the second half.
Speaker Change: We continue to expect about a 49%, 51% first half versus second half split for our net sales.
Speaker Change: Moving to Adjusted EBITDA.
Speaker Change: We continue to expect growth of 5% to 8%.
Speaker Change: Fueled by Gross Margin Expansion from our Productivity Programs
Speaker Change: Partially offset by investments and growth.
Speaker Change: Our strong productivity benefits in the first half of the year gave us confidence in our ability to deliver on our cost savings commitments this year.
Speaker Change: and expand adjusted gross margins by about 250 basis points compared to the prior year.
Speaker Change: That said, we want to remain flexible and may further step up investments in our growth as gross margin expansion comes through.
Speaker Change: enabling us to support distribution gains.
Speaker Change: Particularly in our expansion geographies, as well as invest in marketing and capabilities.
Speaker Change: Our 2024 Adjusted EBITDA Outlook continues to maintain a balance between productivity savings
Speaker Change: Investments in Growth and Flexibility as Conditions Merit.
Speaker Change: We are again raising our adjusted earnings per share growth to 28% to 32%.
Speaker Change: from 23% to 28% previously.
Speaker Change: Given our revised expectation for a more favorable effective tax rate and a lower depreciation and amortization expense.
Speaker Change: We now expect our adjusted effective tax rate to be between 17% to 19% from 18% to 20% previously.
Speaker Change: And our interest expense outlook of approximately $47 million remains unchanged. Our outlook for capital investments of between $80 and $90 million is also unchanged.
Speaker Change: As is our net leverage outlook of approximately 3.6 times at fiscal year-end 2024.
Speaker Change: Our 2024 Outlook.
Speaker Change: and Improved Capital Structure and Building Momentum in our Productivity Programs.
Speaker Change: As well as capabilities that allow us to invest in growth.
Speaker Change: Position us well to deliver our three-year goals.
Speaker Change: More importantly,
Speaker Change: I am excited to see the entire arts team working together to deliver on our four fundamental strategies.
Speaker Change: And now, I would like to turn the call back over to Howard for some final remarks.
Howard Friedman: Thank you, Ajay. I'm really pleased with our progress against the strategies we laid out at our Investor Day, and we are right on track to deliver, or in certain cases, exceed our three-year financial targets.
Howard Friedman: While the salty snack category this year is a bit softer than we'd expected, we are executing well against the areas within our control.
Howard Friedman: And critically, the combination of our capability building and accelerated productivity savings is providing us with the fuel and flexibility to fund incremental investment behind our brands to drive growth, and we are well positioned to drive accelerated growth in the second half of the year.
Howard Friedman: Specifically, we are activating distribution gains in both our core and expansion geographies with large regional and national customers across the grocery, natural, mass, and club channels.
Howard Friedman: driving significant growth and momentum of our Boulder Canyon brand.
Howard Friedman: Increasing our marketing support behind our Power 4 Brands.
Howard Friedman: Gaining momentum behind our innovation investments and we are well positioned for back-to-school and the holiday season.
Howard Friedman: And finally, while it's early, our July sales results were in line with our expectations, and we begin to lap a much easier comparison in the second half of the year.
Howard Friedman: I'd like to thank our 3,000-plus UTZ associates around the country for their hard work and dedication in a dynamic environment, and I look forward to delivering a strong 2024 for all of our stakeholders.