Utz Brands, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Utz Brands, Inc. Fourth Quarter 2020 Earnings Call. At this time, all participant lines are on mute. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Kevin Powers, Senior Vice President of Investor Relations. 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. 2020 was a transformational year for us. We began our new chapter as a public company through our successful business combination with Collier Creek Holdings in August. And during this transition, our business didn't skip the beat. The strength of our brands are incredible dedicated associates in our unique action-oriented culture enabled us to successfully navigate a challenging environment and deliver for our loyal customers and our retail customers. We kept our teams safe, gained market share and delivered on the financial commitments that we made to our shareholders when we went public. Reflecting on our performance in 2020, we stayed true to our commitment of executing against our long-term strategies that we believe will enhance shareholder value. These include, driving productivity to enhance margins, reinvesting in marketing and innovation to accelerate revenue growth and continuing to make strategic acquisitions. I'm proud to say that we have made significant progress across all three.

[Cary Devore:]

Thank you, Dylan and good morning everyone. As Dylan mentioned earlier, in the quarter, we delivered strong topline and bottom-line growth that was in line with our expectations. Net sales increased 22.1% to $246.3 million. Gross profit increased 27.4% to $90.5 million and adjusted EBITDA more than doubled to $34 million.

[Dylan Lissette:]

Thanks, Cary. Looking ahead to 2021, we are focused on actively deploying our long-term value creation strategies of generating productivity gains, and reducing costs to enhance margins, reinvesting these gains to accelerate our revenue growth and continuing to make strategic acquisitions. Our goal remains to be the fastest growing pure-play branded snack platform of scale in the U.S. And we believe that our long-term sales and earnings growth outlook remains firmly intact. As Cary mentioned earlier, our longer-term annual growth outlook is for 3% to 4% organic growth. We delivered growth significantly above this in 2020, as COVID-19 changed habits and elevated at-home consumption. Through the combination of the strength of our brands, our dedicated associate base, and our world-class distribution system, we capitalize on this opportunity and delivered for our customers. In 2021, we will look to maintain this momentum as we remain extremely well positioned for long-term growth. And I'll touch briefly on just a few of the key factors that support this. First, we gained a significant amount of new buyers in the salt and snack category, and our repeat rates are increasing. This year we are focused on retaining and recruiting these new buyers, and will elevate our digital and social-oriented marketing spend, to continue to raise customer awareness of our power brands to leverage these new customer relationships. Of note, On The Border was the number one tortilla chip brand, in terms of buyer retention in 2020. And we expect these buyers to remain loyal customers, in 2021 and beyond. Second, we have significant opportunity in terms of geographic white space, and underpenetrated channels. As I noted earlier, our share in emerging and expansion geographies is below 5%, which is significantly below our share in core geographies of nearly 9%. We have a tried and true strategy of building strong relations and relationships with national retailers that have both regional influence and relevance. And we will leverage these relationships with our higher brand marketing support. Mass and C-store channels remain large opportunities for us. And the acquisition of the On The Border brand for example, will help further Utz's growth in these key channels. Third, our productivity efforts, via a virtuous cycle of value creation will help to fuel incremental marketing and innovation to accelerate revenue growth. We plan to invest more in our brands, in a more targeted way. And these higher marketing dollars will support geographic expansion and brand building tactics. Fourth, our infrastructure improvements will enable the Utz platform to continue to scale to greater heights. As Cary mentioned earlier, we are implementing a new ERP system, and we continue to convert to our DSD routes to independent operators. And additionally, our new low-cost debt structure will provide increased financial flexibility; lastly, we will continue to make strategic acquisitions that deliver strong synergies and that enhance our competitive positioning. Our strategy remains consistent, as we are focused on branded snacking in the US at attractive valuations that are accretive. On that note, our pipeline remains very active. And important to note, we are very excited to recognize the fact that Utz is officially 100 years old as a company this fall. Almost a century ago in November of 1921, Bill and Salie Utz started making and selling potato chips in Hanover, Pennsylvania. I'm extremely proud of the generations of families and Utz associates, who have put decades of effort into making Utz a successful thriving company with a strong roadmap for future growth. I see no limit to our future success and I thank our associates, our customers, and our consumers for your continued support of Utz in our entire brand portfolio. Again, thank you very much for joining us today. We are excited about everyone who has become a shareholder of Utz, and we look forward to continuing to create value for all of our stakeholders. I'd now like to ask the operator to open the call for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Your first question comes from the line of Andrew Lazar with Barclays. Andrew, your line is open.

[Andrew Lazar:]

Hi, good morning, everyone.

[Dylan Lissette:]

Good morning.

[Andrew Lazar:]

Hi, there. Dylan you talked about how in Utz's core markets the company gained share for the full year. It looked like in 4Q specifically though in those core markets share took a bit of a – it looks like you lost a little bit of share in 4Q. So, a little bit of an inflection. Trying to get a sense of what drove that shift? And maybe more importantly, how you see core market share sort of moving forward?

[Dylan Lissette:]

Yeah. Hey, Andrew, thanks very much. And you're right, on a full year basis, the core did extremely well, right? The Utz Brands platform did about 12% against a market of approximately 9%, but as to your point for sure in Q4 we had a little bit of a slowdown there relative to the market. We came in about 5.7% compared to 6.7%. So in our core markets, if you look at the PowerPoint presentation we have online sort of jumps around from the PAC Northwest to New Orleans to the mid-Atlantic to New England. So it's a vary geography, and you can really dial into specific geographies and see where on a year-over-year basis, we have opportunity for improvement. It's a big part of our focus. We're laser-focused on it. We know that the core is as important as any of the growth that we have in emerging and expansion markets. There's a little bit of noise in the Q4 just from some holiday overlaps, some channel exposure, heavier exposure to C-store under penetration in mass in some of those core markets, so it's a hotchpotch of different reasons, but it still grew almost 6%. So we're excited about 2021. I think as we look forward into the future 2021 is just an area for us to get laser-focused on what markets, what accounts within those markets, what channels, what accounts within those channels that we need to focus on. And so we're putting a laser focus on that. And just very importantly, our overarching objectives are that we want to gain share in our core. So if share is going to go up 2% or 3%, or sales is going to go 2% or 3%, we need to beat that in our course. So that's where we're laser-focused going into 2021.

[Andrew Lazar:]

Okay. Thank you for that. And then, I guess, lastly, I know the company has previously spoken of a mid-teen EBITDA margin target for I think it was discussed as sort of the medium term. And with now looking like Utz will hit this target in 2021, due partly to the acquisition of the higher-margin Truco business. I guess, does the company have an updated view on its medium-term margin potential? Thank you.

[Cary Devore:]

Hey, Andrew, this is Cary. Great question. We're not updating the target per se. I mean, I think, it's safe to say that 16% EBITDA margin is the new baseline, from which to grow from, I think with our price pack initiatives with our productivity with our IO conversions coming to a completion here in the next 18 months, plus with long-term profitable branded volume growth. All that is margin-accretive, and then you layer in synergies we pull through in acquisitions. That is a lot of ammunition to kind of march it forward from a baseline of 16%.

[Andrew Lazar:]

Got it. Thank you.

[Cary Devore:]

Thank you.

[Operator:]

Your next question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh, your line is open.

[Rupesh Parikh:]

Good morning. Thanks for taking my question. So, Dylan, I wanted to go to your slide just showing the sub-category sales growth rate in the tortilla chips category, you guys significantly outgrew the category. I was curious in terms of what the drivers there were in terms of the outperformance, and then do you expect this outperformance to continue into 2021?

[Dylan Lissette:]

Yes. Thanks for the question. That's the slide on the presentation 6, yes, tortilla chips did fantastic as you can tell. Most of that, Rupesh, is driven by the ON THE BORDER brand but also importantly is our Tortiyahs! Brand, which is a legacy brand that is up well over 100% as well. So Truco, ON THE BORDER, which we acquired back in December of 2020 had phenomenal growth in 2020. It's continued its growth trends in 2021. It's coming off a phenomenal year. Tortiyahs! continues to grow and continues to gain expansion. So I think when I look at that sub-category of tortillas going into the future into 2021, I think, it's going to be where it used to be a big weakness. If you remember back in June of 2020, we talked about how we were underpenetrated in the tortilla subcategory. Now I think that's a future and continued strength of Utz's, because we've really grown to like the third largest position in tortillas as a subcategory.

[Rupesh Parikh:]

Okay. Great. And then maybe just one follow-up question for Cary. So in regards to your adjusted EBITDA margin guidance, is there any granularity you can give us in terms of both gross margins and SG&A how to think about it year-over-year?

[Cary Devore:]

Yes. I think gross margins, I think, will be consistent with kind of the pro forma gross margin from 2020. So call it 38% area and that applies kind of an adjusted SG&A margin of about 22%.

[Rupesh Parikh:]

Okay. Great. Thank you. I’ll pass it on.

[Operator:]

Your next question comes from the line of Brian Holland with D.A. Davidson. Brian, your line is open.

[Brian Holland:]

Yes. Thanks. Good morning. So I wanted to just maybe piggyback on Andrew's question about the core market performance. Have we seen any change in promotional cadence or intensity in the competitive landscape? I'm just curious whether that had any impact on what you're seeing?

[Dylan Lissette:]

I think we've seen a little bit of that Brian. Obviously, we did really well throughout 2020 as a brand. It doesn't matter if you're looking at it in any particular geography between core emerging or expansion, we did really well. We did really well in almost all of the channels that we operated in 2020. And I think from a competitive standpoint, obviously, we also went public and we also got on a larger scale and perhaps picked up some more notice from competition. I think in general terms, I've been at this for 25 years. And I wouldn't say that there's any major shift in promotional strategies across the salted snack category. I think people are looking where they stand in the stack of their share in particular sub-categories. If they're underweight in a certain subcategory, if they're underweight in certain shares looking at ways to perhaps drive share gains, but I haven't seen any dramatic shifts in pricing relative to that. And as we look forward into 2021, I think, there's opportunity for everyone in the industry to continue to look at price pack architecture and ways to promote and sell and it all comes down to depth and frequency and a multitude of ways to affect ultimate price points.

[Brian Holland:]

I appreciate the color Dylan. And then just moving this forward to 2021, the revenue guide a fairly precise number in what's going to be a very volatile year one would think just compares, et cetera, and then you obviously have a lot of internal initiatives. So maybe a little more color on how we arrive, where we did? And so maybe just to help guide that question along. Can Truco for instance or On The Border specifically grow in 2021? And are we thinking about those core markets just being pressured by the COVID comp and that's just fully offset by expansion in emerging market share? Because it seems like there's a lot of white space that you'll be attacking over the next 12 months?

[Cary Devore:]

Yes. Great question Brian, this is Cary. Yes, I would say just a little more color on the revenue guidance. I think we expect modest organic growth and that effectively means Utz. We expect distribution gains which are meaningful as we've been building over time and going to your point about emerging and expansion that will continue to grow and outpace the category and we expect the core to do well as well. But I think distribution by and large will drive modest organic growth for us. And Truco has a great playbook going forward. They've got a lot of new distribution in the food and grocery channel. So, there's a lot of runway there but they have a more meaningful COVID lap than Utz does in terms of percentage of total business. So, I think the expectation it lets Utz to grow modestly and we're seeing consistent growth for the year. Truco might be flat to down a little bit, but that's still very acceptable. It's a great business. There's a lot of long-term growth ahead of it. We bought it for a really good price. So, we're very happy with it.

[Brian Holland:]

Got it. Thanks. Congrats on a great year gentlemen.

[Cary Devore:]

Thank you.

[Dylan Lissette:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Lavery with Piper Sandler. Michael, your line is open.

[Michael Lavery:]

Good morning. Thank you. You mentioned the favorable contracts you had in 2020. There were a benefit and now, of course, are part of your comp. You're guiding the 4% inflation that obviously, I'm assuming would capture all of that, but can you just give a sense of where you sit now in terms of how much is hedged or locked in or kind of what sort of volatility there could be potentially to that 4%?

[Dylan Lissette:]

Yes. Great question Michael. We're about 80% covered for 2021. If you asked me before the Texas freeze what inflation would be for the year, we would have probably said less than 4%, but that definitely had an impact on the markets and resin prices and that's kind of flowing through to packaging. And so I think we think we got a really good supply chain team on purchasing. They bought oils really well and we're still seeing the benefit of that in 2021. So, as you think about inflation this year, it's primarily in packaging. I'd say about half of that's in packaging, about 40% is in the cooking oil area because spot prices of cooking oil have gone up, but we are largely covered for the year, and then 10% in other categories.

[Michael Lavery:]

Okay, great. That's really helpful. And then just a quick follow-up on productivity. You've talked about the momentum there and how that should progress can you just give a little more sense of how much might be reinvested or versus dropping to the bottom-line and how you think about taking those benefits?

[Dylan Lissette:]

Yes. So, a meaningful increase this year. We're effectively doubling the percentage of COGS from 1% to 2% and that's on the US base by the way. And we'll be run rating higher than 2% as we exit the year but we're going to take some of that savings and certainly reinvest in marketing. We're going to spend more this year. We're leaning into digital and social. And the digital and e-comm piece of marketing should grow close to 60% this year. So, we will take some of that and reinvest in marketing like we said we would, but some of it's also going to help offset some of the inflationary pressures we're seeing this year.

[Michael Lavery:]

Okay, great. Thanks so much.

[Operator:]

Your next question comes from the line of Tim Perz with Stephens Inc. Tim, your line is open.

[Tim Perz:]

Thanks for the question guys. So, I just want to start with a bigger-picture question. I think the key opportunity for us longer-term is growing your number four and five share positions and the expansion in emerging categories. Do you think you have the brands in place today to do that and is the answer really just adding distribution assets in those regions or can you just walk me through how you're thinking about growing your business outside of your core markets?

[Dylan Lissette:]

Yes sure. Great question. So, I mean if you think about it we've been growing continuously and contiguously across the United States for 100 years, more so in the last 10 years where we have been utilizing the M&A strategy to grow geographically in many cases right Golden Flake in 2016, the Tim's Cascade assets that we acquired in late 2019 in the PAC Northwest, great example with Kitchen Cooked in Illinois and Vitner’s in Illinois. And as we take over and acquire these companies and expand our geographic base, we have the opportunity to really push our branding into our Power Brands, which is really where we want to focus, right? We know that we're going to have some negative drag from Foundation Brands, because it's not where we're putting our focus, right? In the last year or so, we've eliminated two or three of those Foundation Brands and they become a negative drag on your retail sales in some cases, but you're converting that space into your Power Brands, so that when we focus on marketing behind those Power Brands, we get the benefit from that. So, as we expand into the southeast, as we expand into Florida, as we expand into Texas, as we're currently expanding into Arizona, as we're increasing our sales and our share in the PAC Northwest, as we're going into the Midwest. The Midwest is a huge opportunity for us and showing great results, especially with the just consummated acquisition of Vitner’s that we closed on February 8 of 2021, we are already putting Utz branded products onto that network and pushing those into the Chicago market. So, it's really a combination of just using sort of organic sort of zip code-by-zip code continuous growth across the US, but also some of that leapfrogging that we're able to do when we do some of our acquisition strategies to deliver an opportunity. And again, I think to Andrew's first question, without ignoring the fact that we want our core to also gain share over time, not just rely, of course, on emerging or expansion markets.

[Tim Perz:]

Thanks. That was helpful. And I just wanted to pivot over to marketing. So you started your relationship with the Sasha Group in October, how is that relationship progressing and what have your early learnings been from your recent marketing investment spend?

[Dylan Lissette:]

Yes. I mean, it's going very well. I mean what a great dynamic group. And if you remember back to past calls and past conversations, what we're really trying to do is, a, spend more money on marketing, right, than we had historically spent. And when I say spend more money on marketing, I mean spend more on traditional, digital, social type of marketing, pulling away from what we have been spending some money on the past, which is sponsorships and putting more spend into traditional, social, digital type of media. Sasha, which is a VaynerX company, the Sasha Group is just fantastic at that. And so, we have our team that does digital, social is fantastic. And I think it sort of shows in some of the e-commerce stuff that we put into our presentation where we've really grown our e-commerce business, which is comprised of sort of, this is IRI, retail e-commerce as it's defined by IRI, which includes some of this click-and-collect and some of the other methods of getting product to people through e-commerce, has really grown over 120-plus percent and we expect to continue into 2021 and beyond. So, we're really focusing to make sure that we're dynamic spending more money, significantly more money on social, on digital, on our brands, focusing in on Power Brands, making that 360 loop into e-commerce and really driving awareness. And I think through our new households that we picked up and our repeat rates and the things that we've detailed in that presentation as well. I think you could say that we're happy so far. I always say never happy, but pleased, but not satisfied. We're very pleased, but we always think that we can improve, and so we'll spend 2021 trying to improve that even more, which is the beauty of the marketing that we're doing is that we can literally change day-to-day on a dime if we have to spend that money effectively.

[Tim Perz:]

Thanks guys. I’ll pass it along.

[Operator:]

Your next question comes from the line of Robert Moskow with Credit Suisse. Robert, your line is open.

[Robert Moskow:]

Hi, thanks. A couple of follow-ups. Could you give us a couple more specifics on how you're going to implement pricing this year? You mentioned price pack architecture and also depth and frequency of promo, to what extent will list prices -- list price increases also be in that formula? And secondly, I wanted a little more depth on, ON THE BORDER. And it seems like there's significant revenue synergy opportunities with your Utz distribution platform. Are your Utz salespeople marketing that brand to their customers currently and has that yielded more distribution, or is ON THE BORDER’s stand-alone business -- is it still, kind of, operating stand-alone and it has its own distribution plan? Thanks.

[Dylan Lissette:]

Yeah. Robert, I'm going to tackle both of those. This is Dylan. I could probably give you 30 minutes on either one of those topics, but I'll try to do it in succinct way. In terms of pricing, in the snacking industry it's a little bit different. It's not just your typical list pricing initiatives. However, we have a very robust price pack architecture team that constantly analyzes the opportunities like I mentioned earlier about frequency, about depth. We did just do some pricing on March 8th, which kicked in. Of course, it takes a little while for some of that to flow through the system with contracts and all the specifics of the thousands of accounts that we basically deal with on a daily basis. So we do have some list and then we also have some weighed-out opportunities that we're enacting and some different things around that to really try to tackle offsetting some of the inflation concerns. So on that we have a lot of different levers. We're pulling all the levers and we're going to continue to lean into those levers on pricing. Flipping to your commentary about ON THE BORDER and the integration of sales and how that works. As we said at the very beginning, we did not look at ON THE BORDER as a cost synergy play from an M&A perspective. We looked at it as a revenue synergy play from an M&A perspective. So that team continues to sell day-in and day-out to their major customers on a DTW, direct-to-warehouse basis. That's impact that's going very well, they have great leadership, they have a great team. If you think about it, we're months into it right now. We're coalescing very well on all fronts. Our sales folks it's a little bit -- you have to unwind in some cases existing distribution and there's some complications there that you just have to unwind with any integration of M&A. But, for example, in Chicago like within weeks of the acquisition being consummated, we were taking it through our route system, through our third-party distributor route system in Chicago into June . For example, in Central Pennsylvania, we've already turned over OTB distribution to the Utz DSD sales system. In Connecticut, we've already turned it over to the Utz DSD sales system. And so as we look forward, those opportunities are going to I think be very positive and very accretive to us because the brand sells and it's doing really well in the places that we've been able to convert it. And when it is distributed, when it is sold, if you think about the sales team at OTB, I would garner to say there's, roughly eight people in sales. When you think about the sales team at Utz, I would garner to say, if you disregard the DSD sales force we still have over 200-plus people that sell. So all of them are looking at OTB, and it's not just tortillas, its sauces, its dips, its cases. It's all of the, product line-up that they have, that we can integrate into our almost 1,700 DSD routes, overtime, right? And I always think of things in a very long-term perspective, that overtime we're going to get those wins. And it's a great brand and selling well.

[Robert Moskow:]

Great. Thanks.

[Operator:]

Your final question comes from the line of Jason English with Goldman Sachs. Jason, your line is open.

[Jason English:]

Hi. Good morning, folks. A couple of quick housekeeping questions, first, you mentioned contracts and the step-up to 4% inflation from modestly deflationary. Is that going to be a gradual ease in sort of giving you time to adjust if the productivity ramping, or are your rollover a cliff it had a little bit of friction on margins, as we enter the year?

[Dylan Lissette:]

I think, it will be more second half-weighted. But I think we will see some pressure in the first half of the year. But we have the pricing starting to take effect. And productivity will layer in as well, to help offset that and that will be more back half-weighted as well.

[Jason English:]

That's helpful. Thank you. And coming back to the marketing question, Dylan, in your prepared remarks, my interpretation, what you were saying was you have a pretty big heavy-up of retail media, on e-com platforms coming next year. Question one is, is that right? And second, assuming that's the case, which I think it is how much of that if any can be funded from trade budgets, or is all that investment could be incremental?

[Dylan Lissette:]

Yeah. So in the digital and social area, we are spending approximately 60% more in 2021, than 2020. Part of that is incremental dollars for sure, part of that is also pulling out of sponsorship and moving the mix, into more digital and social. So it's a significant increase that we are going to layer into that digital social, in pure dollars.

[Jason English:]

I'm really just trying to isolate for the retail media component, and not the social component. Is there any color you can give? Like, it seems like your investments against right now, or Walmart Connect or Amazon, media services which to my ear it sounds like that's where allowance is going to support e-com?

[Dylan Lissette:]

Yeah. Well, I mean, yes and no. It is digital and social. I'll honestly say, Jason that I think all of that is interconnected. E-commerce is not just Amazon. E-commerce is the click-and-collect at Walmart. It's the -- pulling up to a Kroger and ordering online. And how do you make your products appear, by the time you type the words P-R-E looking for a pretzel, how do you make your products appear, on the top of that shoppers' list and create that stickiness. So it is all interconnected. I think it's a great question. It's something we could probably follow up on more definitively. But the way that I look at it is, it's not traditional -- we're not talking about television advertising. And we're not talking about a lot of radio advertising. We're talking about, a lot of digital and social-oriented advertising, and spending, and marketing to promote the brands.

[Jason English:]

No. I hear you. Obviously, paid placement, paid search those are quite different in social. So that's just why I'm trying to wrap my head around it. And sounds like a good opportunity to follow up offline.

[Dylan Lissette:]

Sure, sure thing, of course.

[Operator:]

This concludes our question-and-answer session. I will now turn the call back over to Dylan Lissette, for closing remarks.

[Dylan Lissette:]

Thank you very much all for joining us today on this year-end and Q4 2020 call. We are very excited about the future. We're very excited about everyone who has become a shareholder of Utz. We look forward to continue to create tremendous value for all of our stakeholders. We're very excited about our 100-year anniversary. And all of the things that we'll have going on around that. It's a testament to the company, and into our folks, and to our people, our customers, and our consumers. And thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.