Utz Brands, Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

[Company Representatives:]

Dylan Lissette - Chief Executive Officer Cary Devore - Chief Financial Officer Kevin Powers - Head of Investor Relations

[Operator:]

Good day! And thank you for standing by. Welcome to the Utz Brands, First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. . Please be advised that today’s conference is being recorded. . I would now like to hand the conference over to your speaker today, Kevin Powers, Head of Investor Relations. Thank you. Please go ahead.

[Kevin Powers:]

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

[Dylan Lissette:]

Thanks Kevin and good morning everyone. In the first quarter we continue to execute against our value creation strategies to position the company for long term success. Our net sales increased 18% and our adjusted EBITDA grew 30% and we remain on track to deliver on our full year 2021 sales and profitability targets. As we lap our significant outperformance versus the category in the early weeks of the COVID-19 pandemic last year, our retail sales increased 5.9% on a two year CAGR basis and showed continued strength across our platform. Importantly our new buyers and repeat rates showed strength and they increased versus prior year and remain consistent with where we ended fiscal 2020. We continue to further penetrate key channels like e-commerce and convenience and we are driving distribution gains in our emerging and expansion geographies. In addition, we went live on our ERP implementation that will better enable our growth platform to scale and we remain on target to increase productivity from 1% to 2% of cost of goods sold in 2021. Lastly, we continue to execute on our strategy of making accretive, strategic acquisitions focused on U.S. branded snacking and delivering strong synergies. To that end, earlier this week we announced the acquisition of Festida Foods, which is the largest manufacturer of our ON THE BORDER tortilla chip brand. We expect this acquisition to close in the second quarter of 2021 and on that note, our M&A pipeline continues to remain robust as we expect to continue to enhance our growth, capabilities and margin profile with value enhancing acquisitions.

[Cary Devore:]

Thank you, Dylan, and good morning everyone. As Dylan mentioned earlier, the year began in line with our expectations. Net sales increased 18% to $269.2 million, adjusted gross margins expanded to 38.8%, adjusted SG&A was consistent at 25% of sales, and adjusted EBITDA increased 29.8% to $37.9 million or 14.1% of sales.

[Operator:]

Our first question comes from Rupesh Parikh of Oppenheimer. Your question please.

[Rupesh Parikh:]

Good morning. Thanks for taking my questions. So I guess I wanted to start off first with the winter storms. Which geographies did you see the most impact related to the storms, and then just more color in terms of why – you know I guess what drove that 200 to 300 basis point headwind?

[A - Cary Devore:]

Hey Rupesh, this is Cary. I'll take that. So it was more of our core regions, mid-Atlantic and Northeast, logistics related mainly. We were converting our largest warehouses in Hanover and switching to a new order processing and fulfillment system as part of our ERP go-live, and as part of that we plan to put more inventory, extra inventory closer to our customers, but the February storms in these regions prevented us from doing so, which led to some out-of-stock. But it was transitory and shipments you know quickly resumed to normal and we remain on track to hit the year.

[Rupesh Parikh:]

Okay, great. And then I guess my follow-up question. So just on the core geography under performance, I know you guys gave some good color in terms of some of the drivers of the under performance. So it sounds like good health is where you plan to focus on to drive the permit. So do you think about the upper sale, I guess with you health brand and to drive that, maybe at least in line with the category. How long do you think it takes and just any more color in terms of I guess the types of efforts through the performance.

[A - Dylan Lissette:]

Hey Rupesh, thanks for the question. This is Dylan. Yeah, the core markets in general are you know good health as you noted and the foundation brands that we sell into those markets. Foundation brands are where we utilize power brands. In the entire country it’s 87% of our sales. In the core it's only 85%, so we’re over weighted for foundation and we have a heavier index to good health in that market. So when we really rip it apart and looked at like our power brands and we look at good health and we look at our power brands without good health in a couple different ways, we have really strong sales results in our core. So we're focused on fixing and turning around good health and we're also focused on making power brands a bigger part of our sales in the core and that’s happening. If you do look back two years ago, power brands were only 83% of our sales in the core. Our power brands in the core today are 85%, so making that transformation over time. Much of it is M&A driven as we acquire foundation brands and we convert them into power, but we're making good progress. So you know we feel really comfortable about the future opportunities for the core and note the good health work that has to be done to turn that around.

[Rupesh Parikh:]

Great! Thank you. I'll pass it along.

[Operator:]

Our next question comes from Michael Lavery of Piper Sandler. Your question please.

[Michael Lavery:]

Good morning, thank you.

[Dylan Lissette:]

Good morning!

[Cary Devore:]

Good morning!

[Michael Lavery:]

I just wanted to come back to the margin piece and your seasonality color is really helpful, but you know just maybe understand the progressions to the 15% full year and some of the key drivers. Obviously there's some growing inflations being called out to higher marketing costs. How significant is pricing or productivity as a default? What are the keys to getting to the 16% full year number?

[A - Cary Devore:]

Yeah Michael, this is Cary. Yeah, so look, we’ll – our pricing and productivity is really back half weighted, second half weighted. We only took about less than 10% of the productivity we have for the year hitting Q1, so it's going to ramp as we proceed throughout the year. We have some nice net price realization in Q1, but that really didn't reflect the pricing we took in March. That takes you know a couple of weeks to – a month or two to get closer to the retailers. So we expect meaningful improvement in price as we go throughout the year, as well as productivity. So when you look at kind of the first half versus the second half of the year, you know it's going to be a higher margin in the second half, in a meaningful way relative to the first half.

[Michael Lavery:]

Okay, that's helpful and maybe just sort of follow-up specifically related to that. One is, on the pricing you said that you expect about 4%. I mean it's pretty easy math, but obviously if that's for the full year and you were around the 1.9 a quarter, your back half numbers would be above that pretty nicely. Is that the right way to think about it?

[Cary Devore:]

I think we said, I think we said inflation would be 4% you know, and we’re taking pricing and productivity to offset that. But yes, pricing in general will be more back half weighted because of you know the things we did last year are benefiting the first half of this year and will benefit the second half and then the things we're putting into place you know in Q1 and Q2 and Q3 will obviously benefit the second half more than the first.

[Michael Lavery:]

Oh Sorry! Yeah, good helpful clarification. And then, I think you called out about $50 million of productivity savings. Can you give any sense of how you're tracking against that so far and how much is left there?

[Cary Devore:]

Very well. That $50 million was a three-year cumulative number. So as we talked about it, you know historically we're at 1% of cost in terms of productivity take out each year. This year we’ll deliver at least 2%. We’ll be run rating higher than 2% as we exit the year and we expect a meaningful step you know toward the 3% to 4% annual goal next year. So on track and meaningful new projects to hit 2022 as well.

[Michael Lavery:]

Okay, great. Thanks so much.

[Operator:]

Our next question comes from Robert Moskow with Credit Suisse. Your question please.

[Robert Moskow:]

Hi! A couple of questions. I just want to make sure that I understood the path of inflation costs during the year. Was Michael right, that it's under 2% in the first quarter and then it scales up as the year goes on to average out to 4% for the year, and if so is that being like – you know it gets up to something like a 6% by fourth quarter. And then you know inflation keeps rising since – even since you last were on the call in March. On a spot basis are you looking at even higher rates of inflation into 2022? When do you start evaluating where you are in these price increases?

[Cary Devore:]

Yeah, good to speak to you Rob. So yeah, the cadence for this year relative to inflation, so 4% still remains the annual target. We didn't see a ton of inflation in our P&L, we were very well covered due to how we cover commodities. So it will be more back half weighted from an inflation perspective than front half weighted. We're locked in 80% plus you know of our commodities this year, so we feel good about our coverage you know and as we look at 2022, you know obviously inflation at current rates implies inflation next year, but we're going to battle that just like we are this year. You know we’re going to battle that with pricing and productivity. So we're ahead of it, you know we're already starting obviously our plans for next year, to get incremental pricing an incremental productivity to all set what inflation may look like next year.

[Robert Moskow:]

Okay, okay. And you mentioned mass being a little weaker than the rest of your channels. I thought that that had to do with very tough comparisons that were on the border compared to last year. Is that true or is there anything else impacting execution in the mass channel?

[Cary Devore:]

Yeah mass, you know looking at retail sales data is driven by OTB. It's still a very you know – our largest mass customer for OTB is still very strong. You know the quarterly trends ebb and flow. If you look at OTB and then the rest of the business excluding OTB, the rest of the business excluding OTB was up you know 7.5% on a two year CAGR basis, so very healthy. I think you know one thing that’s driving you know that delta between you know 7.5% and where the market was, you know 9.7 is variety packs really drove a lot of growth in mass in the quarter from a retail sales perspective and you know honestly that's the best scenario of improvement for us. We could do better with variety packs, so I think that's an opportunity for us going forward.

[Robert Moskow:]

And did variety packs kind of hinge on kids going back to school or is it that more information wide speaker or other stuff?

[Dylan Lissette:]

Yeah, this is – well, this is Dylan. I wouldn’t say that variety packs or weighted on back to school activity. I think it's just sort of a trend in general in TPG and salty snacks, that variety packs are just becoming the bigger part of the category, and so we have a lot of opportunity there. You know speaking about – I think Cary hit it right on. The platform is up about 7.5% on a two year CAGR basis. OTB, that's a – you know mass is a huge channel for the OTB brand and there's sometimes just shifting sort of the cadence of events that occur in mass and you can make a decent difference on a quarterly basis. Lastly, as I think about mass in that channel, our DSD efforts that go into the thousands of mass retailers that exist across the U.S., our DSD efforts are really strong. So we had this really strong foundational platform of growth and business and volume in Mass via our DSD and so then we layer on the more DTW opportunities that occur specifically more with OTB. That gives us a lot of upside and vision into what the rest of the year will hold and we feel really confident about OTB on its DTW basis into Mass for the rest of the year as well.

[Robert Moskow:]

Okay, a lot of acronyms, but I think I got them all. Thank you.

[Dylan Lissette:]

Sorry about that. OTB, ON THE BORDER and DTW is DIRECT TO WAREHOUSE, sorry. Thank you.

[Robert Moskow:]

You know me, thank you.

[Operator:]

Our next question comes from Wendy Nicholson of Citi. Your question please.

[Abigail Lake:]

Hi! This is Abigail Lake on for Wendy Nicholson. We just had one quick question. So you highlighted strong market share performances in many of your key categories like pretzels and like potato chips and tortilla chips. But trends are looking a little weaker in pretzels and we’ve noticed an uptick in social media activity related to pretzels. So is there anything going on in that category from a competitive perspective that could be impacting your performance there.

[Dylan Lissette:]

We are slightly under on a two year basis. We have a lot of innovation that's come out recently and will be coming out, specifically starting in June of 2021 in the pretzel category. There are some brands that are in that category that are growing quite well, and so it's putting upward pressure on the category, subcategory of pretzels in general, you know growing at a more dynamic rate. We're very large in pretzels. We’ve got at least 40 years of history of making and selling pretzels. The category is strong, the sub category of pretzels is strong, we are strong in it. We have a lot of innovation coming. I can certainly look at it as upside for our brands. I think you will see a lot of the innovation that we do have coming out in the second half of 2021 is related to pretzels. So hopefully that will definitely bolster our category growth or subcategory growth in pretzels.

[Abigail Lake:]

Okay, great. Thank you.

[Operator:]

There are no further questions at this time. I would now like to turn the call over to Dylan Lissette for closing remarks.

[Dylan Lissette:]

Yeah, thank you very much. I just want to thank everybody for joining us today. I do want to thank all the wonderful associates at Utz that have enabled us to continue to execute on our long term growth strategies. We have geographic growth, channel growth, subcategory growth, we layer in our M&A, we have our productivity efforts well underway which we are reinvesting into our brands which creates a very long term value creation strategy that we're all very much aligned behind. So again, thank you very much for joining us tonight.

[Operator:]

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.