Utz Brands Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 13 speakers on the call.

Operator

Thank you

Speaker 1

for standing by. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome you to the UGGS Brands Incorporated Third Quarter 2023 Earnings Call. All lines

Speaker 2

have been placed on mute

Speaker 1

to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would like to turn the call over to Kevin Powers, Senior Vice President of Investor Relations. Please go ahead.

Speaker 3

Good morning and thank you for joining us today. On the call today are Howard Friedman, CEO Ajay Kataria, CFO and Cary DeVore, COO. Howard and Ajay will make prepared comments this morning and all three will be available to answer questions during our live Q and 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.

Speaker 3

Before I turn the call over to Howard, I have just 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 closures are contained in our earnings materials and posted on our website. Finally, the company has also prepared presentation slides and additional supplemental financial information, section, which are posted on our Investor Relations website. And now, I'd like to turn the call over to Howard.

Speaker 4

Thank you, Kevin, and good morning, everyone. I'm pleased to be speaking with you today and I look forward to seeing many of you at our Investor Day next month, where we will discuss our opportunities for growth and value creation over the next few years. Given that, I'm going to keep my remarks this morning focused and make sure to allow enough time for your questions. And on that point, I'd like to welcome our new covering analysts to UHTS, and I look forward to working with you. In the Q3, we delivered solid results on both the top and bottom line with organic net sales growth of 3% and adjusted EBITDA and adjusted EPS growth of 9%.

Speaker 4

Retail sales increased 3% led by Power Brand Growth of 5%, driven by continued momentum for UTT's Potato Chips, On the Border, Zaps and Boulder Canyon. Power brand growth was most pronounced in our expansion geographies fueled by distribution gains with growth of 8%, which exceeded category growth of 6%. While expansion was a bright spot in the quarter, our growth in our core of 1.6% lagged the category. This was primarily due to lapping very strong prior year UTS brand growth of 20% in the core and challenges with our foundation brands. Our foundation brands declined faster than we anticipated due to our supply chain and portfolio optimization efforts.

Speaker 4

The impact can be seen most acutely in the Golden Flake brand. That said, on a positive note, we have seen service levels steadily increasing over the past 5 weeks and we are in a much better position moving ahead and these collective efforts have accelerated our productivity savings in the current year. Of note, in recent quarters, our consumption growth has been tracking well ahead of shipments due to performance in non tracked channels and our SKU rationalization actions, which have been focused on private label and partner brands, neither of which are in our retail sales results. This quarter shipments were in line with our consumption due to better performance in non tracked channels to include dollar, discount and natural and also from earlier than expected holiday shipments. This timing change benefited 3rd quarter net sales more than we originally expected and will impact our Q4.

Speaker 4

In the second half of the year, a combination of timing elements, consumer demand trends and Utz specific transactions have impacted our growth and led us to lower our near term sales outlook. As salty snack category growth is normalizing As we lap price increases for the past couple of years, we are seeing consistent trends indicating that consumers are increasingly looking for value as wallets are being stretched by well known macro factors. We are seeing this manifested in a few ways to include shopping for absolute price points, trading to private label and channel shifting. Today, consumers can find UHZ across all classes of trade to include value channels, and we are focused on how we can deliver more value regardless of the shopper's definition. This includes being laser focused on our price strategies up and down the ladder, evaluating smaller pack sizes at key pricing thresholds, introducing more value options, increasing usage occasions and better leveraging the breadth of our product assortment to meet retailers' needs.

Speaker 4

Importantly, our hybrid model and DSD capabilities enable us to implement these strategies across channels with flexibility around merchandising, product placement and timing of events. Beyond consumer trends, as we've been discussing for the past few quarters, we have been taking aggressive actions to optimize our supply chain and portfolio to be better positioned for the future and capture our full potential. These actions include reducing our plant network size to 13 plants, reducing our SKU count, in sourcing volume from co mans and transitioning production across the network, and most recently moving from flex multipack and variety pack bags to boxes. Change like this at speed doesn't come without challenges and these collective actions impacted our second half volumes more than we anticipated, with a disproportionate impact to our foundation brands for which retail sales declined about 9%. The foundation brand most impacted was Golden Flake, which until June was made in our Birmingham, Alabama plan.

Speaker 4

In summary, we underappreciated the complexity of integrating Golden Flake into our Hanover facilities and deploying finished goods to local southern markets. As a result, we fell behind meeting our case fill requirements until October. As we continue to explore opportunities to optimize our supply chain network, there are several key learnings we will apply from this experience. First, recent plant closings have provided us with insight and best practices that will inform our approach to future network optimization decisions. 2nd, we will be more conservative with respective inventory safety stock levels.

Speaker 4

And 3rd, we will look to trusted co man partners to provide redundancy. Over the years, our team has acquired and integrated several manufacturing facilities without incident, while closing a plant requires a modified approach. We are now much better prepared for future network optimization. For example, I would point you to the recent sale of our Bluffton facility, where our transition has gone very smoothly. While these activities impacted second half volume, the stepped up pace of supply chain and portfolio optimization has already delivered increased productivity and other cost savings, which enable us to maintain our adjusted EBITDA guidance.

Speaker 4

Moreover, despite navigating dynamic consumer trends and the beginnings of our own transformation, our consumer panel trends have been very positive on an absolute basis and relative to the category. In the quarter, we increased our household penetration ahead of the category, while we maintain consumer trips despite declines for the category. As we all know, driving household penetration is a key indicator of long term business success, and we continue to have significant white space opportunities in our expansion geographies. We look forward to discussing this more at our Investor Day in December. Now I'd like to turn the call over to Ajay, and then I'll make a few final remarks before we open the call for questions.

Speaker 4

Vijay?

Speaker 2

Thank you, Howard, and good morning, everyone. In the Q3, we delivered organic net sales growth of 3.1% and adjusted EBITDA growth of 9.2% as our productivity programs and actions to optimize our network and portfolio are delivering stronger profitability. Of note, our organic net sales growth combined with these actions resulted in our 3rd consecutive quarter of adjusted EBITDA margin expansion. I'm proud of our team's efforts during a dynamic consumer environment to deliver these results, while we continue to make structural changes to access a higher level of productivity. These collective efforts helped us deliver 14% adjusted EBITDA margins in the quarter, which I will note was our highest level in 2 years.

Speaker 2

During the quarter, our organic net sales growth was led by price realization of 3.7%, partially offset by lower volume mix of 0.6%. Volume was impacted by 3.3% due to SKU reductions, which was slightly more than what we expected due to earlier than planned transition of certain SKUs. When we adjust for SKU rationalization, we estimate that our volume mix grew 2.7%, which is an acceleration from 1.8% last quarter. Our broad based SKU rationalization actions are complete. And looking ahead to 2024, we don't expect these impacts to be material to our results.

Speaker 2

Finally, our total net sales growth was impacted by 2 additional factors. First, our net sales continued to be impacted by the conversion of company owned RSP routes to independent operators, which reduced growth by 60 basis points. Similar to SKU rationalization, this will be largely complete by the end of the year and will not have a material impact on our fiscal 2024 sales growth. And second, our 3rd quarter net sales benefited from some earlier than expected holiday shipments that were originally forecasted to occur in the 4th quarter. This timing factor along with the strong performance in unmeasured channels resulted in shipments that were more in line with consumption than recent quarters.

Speaker 2

Moving down the P and L. Adjusted gross margin declined in the 2nd quarter, primarily from our conversion to IR outs, which had an adverse impact of 60 basis points. Excluding this impact, adjusted gross margins expanded year over year by 40 basis points, led by our pricing and productivity programs, which more than offset commodity and labor inflation. In addition, our SKU rationalization programs are improving our margin mix as we reduce lower margin private label and partner brand SKUs. That said, the margin performance in the quarter was slightly less than our expectations, primarily due to lower fixed cost leverage from softer than expected volumes, as Howard described earlier.

Speaker 2

Adjusted SG and A expense declined 1.8%, an improvement of 97 basis points as a percent of sales, as a result of our productivity initiatives focused on logistics and lower administrative spend. As our sales growth normalizes, we have been able to manage spend through cost control measures, in addition to driving productivity within our selling fixed costs. Partially offsetting these factors were continued investments in e commerce, people, selling infrastructure and supply chain capabilities to support our growth. Bringing it together, Adjusted EBITDA increased by 9.2 percent to $52,100,000 and margins expanded 87 basis points to 14% of sales. The margin expansion was driven by 3 70 basis points of price, 280 basis points of productivity, partially offset by 5.30 basis points of inflation and 40 basis points of impact from our continued investments to support our growth.

Speaker 2

In addition, Adjusted net income increased 9.5 percent and adjusted EPS increased by 9.2% to $0.17 per share. Stronger operating earnings and a more favorable tax rate were partially offset by higher interest expense, primarily due to higher rates on our floating rate debt. Turning to cash flow and the balance sheet. Consistent with normal seasonality and from our cross functional efforts to improve our cash conversion cycle, we generated strong cash in the Q3 of $53,400,000 I am happy to report that our transformation efforts in this important area are working, and we are now seeing the benefits in our results. This now brings cash flow from operations year to date to $49,100,000 and we remain on track to reduce leverage below 4.5 times by the end of the year.

Speaker 2

We also remain committed to our capital priorities. And year to date, capital expenditures were $45,700,000 primarily related to supporting our productivity programs and our investment in our Kings Mountain Manufacturing plant. In addition, we have paid $24,100,000 in dividend and distribution to shareholders. Finishing with the balance sheet. Cash on hand was $60,100,000 and our liquidity remains strong at over $209,000,000 giving us ample financial flexibility.

Speaker 2

Net debt at quarter end was $875,900,000 or 4.8 times trailing 12 months normalized adjusted EBITDA of $181,800,000 While leverage remains above our targeted range, I'll remind you that roughly 70% of our long term debt is fixed at approximately 4.7%. We have no significant maturities until 2028 and our credit structure is comprised of covenant light instruments. Now turning to our full year outlook for fiscal 2023. As Howard mentioned earlier, today we revised our organic net sales outlook to 3% to 4% growth to reflect normalizing category trends and greater than expected volume impact from our aggressive supply chain and portfolio optimization actions to better position our company for the future. This results in volume mix now to be modestly lower than fiscal 2022 with modest growth in the Q4.

Speaker 2

But I'll remind you that our 4th quarter assumes about a 2.5% impact to volume from SKU rationalization and adjusted for that impact, we expect to grow branded volumes by nearly 3%. That said, our stepped up pace of supply chain and portfolio optimization is already delivering increased productivity benefit. And these savings combined with disciplined spend management has enabled us to maintain our adjusted EBITDA outlook of 8% to 11% growth. For additional items, we now expect our full year 2023 adjusted effective tax rate to be approximately 17% to 18% versus 20% to 22% previously due to our state tax optimization efforts. Interest expense of approximately $55,000,000 capital investments of between $50,000,000 $55,000,000 are both unchanged.

Speaker 2

Now I'd like to turn the call back over to Howard for some final remarks. Howard?

Speaker 4

Thanks Ajay. Before I open the call up for questions, I want to tell you why I'm confident about the future of our company and category over both the short and long term. First, when you look across the store, salty snacks is an attractive and growing category with relative resilience and strength versus other food categories, with consumption growing nearly 6% in the latest quarter. I have few doubts as we lap several years of price increases that the category will normalize and continue to grow at levels that existed prior to the unique environment we've been in over the last 3 years. 2nd, we have an advantaged portfolio of brands that are resonating with retailers and consumers, highlighted by our 5% growth of our power brands with significant white space distribution opportunities.

Speaker 4

3rd, while our supply chain and portfolio optimization Actions this year temporarily impacted volume more than we expected, we learned important lessons that better position us for stronger execution. And in doing so, we were able to deliver productivity and other cost savings that enabled us to maintain our earnings outlook for the year. And we are building a stronger foundation that positions us for growth and margin expansion. 4th, we continue to develop our existing talent through embracing new ways of working and continuous improvement, while augmenting the team externally when appropriate. Lastly, our cash performance in the quarter was strong through cross functional efforts to improve our cash conversion cycle and keeps us on track to hit our full year leverage goal, which will position us well for continued improvements in fiscal 2024.

Speaker 4

And now operator, we'd like to open the call for questions.

Speaker 1

Your first question comes from the line of Johnny Shneur. Your line is open. Great.

Speaker 5

Thanks. It's actually Andrew Lazar, Barclays. I guess first question, Howard, is you mentioned some of the continued weakness that you're seeing in the core markets. I realize some of this, as you mentioned, is a tough year ago comparison and some weaker foundation brand performance. But So hoping maybe you could dig in a bit deeper on that and just go through some of the drivers and maybe more importantly how you're thinking about sort of that metric as we go forward?

Speaker 4

Yes. Thanks for the question, Andrew. Look, I think first thing I would say is we're certainly not pleased with losing share in our core. And because as you know, our goal is to make sure that we maintain the core and then expand share in our expansion geographies. I mean, I think over the long term that is what we expect And I think that's what others should expect from us.

Speaker 4

When you look at the current quarter, there are a couple of pieces. In the prior year, UHTS Brand was up about 20% in the quarter and so we're lapping that and you really see it in the share in the consumption performance on that brand in the current period. 2nd, our foundation brands really are more heavily weighted to the core. And so when they tend to drag, they actually have an oversized impact and driven really by a lack of consumer and brand investment as well as they've been a primary focus of our SKU rationalization programs over the last couple of over the last couple of quarters. 3rd, we mentioned a little bit around Golden Flake weakness.

Speaker 4

That's been about getting our pricing and packaging right in the stores, but also making sure that the supply chain recovers from our Birmingham transition, which as we talked about, Really it did affect our Q3 and a little bit into October as well. But that said, on the upside and the thing I think we're most excited about is When you look at our power brands, they continue to perform nicely, both in our core and in expansion geographies. For example, On the Border grew over 30%. Absent Boulder County, we're also growing really nicely. And then in our expansion markets, we actually outpaced the category growing about 8%.

Speaker 4

So, I think if we roll it all up together and say we're not happy about where the core is, we're very clear and laser focused on improving those trends and remain really optimistic that from an expansion perspective that customers and consumers embrace and welcome these brands onto their shelves and into their pantry.

Speaker 5

Great. And you mentioned the Power brand growth that you're seeing in expansion markets, which seems to be going really well. I was hoping maybe you could put a little finer point on that, just kind of what you're seeing? Is it new distribution, new accounts in new regions? Kind of where are you starting to see that?

Speaker 5

And is it using some of the metrics and performance from the launch in the Southeast that you're able to communicate more fully to some new accounts, I guess, in some new areas? Is that helping?

Speaker 4

Yes. I mean, certainly a couple of I think it's all of those things. Certainly, what we learned in the Southeast about how to enter markets with anchor consumers and how we enter markets when we look at expansion through distribution, buybacks and partnerships that we've been able to do. All those things I think translate into better core performance. But I think as you look at or I'm sorry, better expansion performance.

Speaker 4

But I think when you look at Our Power Brands Boulder Canyon is growing very quickly in the expansion markets. Zaps and UHTS also continuing to improve. And probably the highest compliment that we get is when we enter into markets and we demonstrate that we can grow the category and that we're incremental and helping build baskets that we tend to get expanded distribution as we lap it, which we also continue to enjoy.

Speaker 5

Great. See you in December.

Speaker 2

Look forward to it.

Speaker 3

Thanks, Andrew.

Speaker 1

Next question comes from the line of Mody Knick. Your line is open.

Operator

Thanks. Good morning, everyone. I guess the question is, given the top line guide down, the implied margins for the 4th So Howard, Ajay, I was wondering if you guys could just opine and just give us more clarity, maybe a little more detail around those productivity efforts and kind of what's driving the offset?

Speaker 4

Yes. Thanks, Nick. First of all, welcome. We're excited to have you on the call and look forward to working with you as we go forward. Look, ultimately, I think that our story has always been about continuing to be able to fund our growth by creating fuel in our productivity line.

Speaker 4

And if you look at the progression of this company over the last couple of years, a few years short years ago, we were only at about 1%. We're feeling very comfortable at 4% this year and that's really being driven by the aggressive supply chain actions we took on the quarter. So, Birmingham obviously was a decision that we announced in June. Really, the benefit there is still mostly in front of us, but we're starting to see some of that flow through. We took actions on our private fleet and we're able to start to get some see an uptick in our productivity as we go forward there.

Speaker 4

And we also are seeing benefits from the sale of our Bluffton from our Bluffton plant. So, when you put all of those things together, a lot of those things were not necessarily contemplated earlier in the year, but we've been able to be able to pull some of those things into our guide and into our confidence level as we move forward to offset some of the call down on our volume side.

Operator

Excellent. Thank you. I'll pass it on.

Speaker 2

Thanks, Derek.

Speaker 1

Next question comes from the line of Rob Moskow with TD Cowen. Your line is open.

Speaker 6

Hi. How are you doing? Hi, Howard. Hey, Rob. I wanted to know, you said that you learned Lessons from the Golden Flake supply chain disruption during the transition.

Speaker 6

But I get the sense that there's going to be a lot more supply chain optimization to come, probably more consolidation. So There's going to be a lot of these moves coming. Can you be more specific as to what you learned and why you feel confident that you can obviate these types of issues going forward?

Speaker 4

Yes. Thanks for the question, Rob, and welcome back. We missed you last call, but glad to have you back on and with us. Look, I think there's a couple of things as I look. You're right, when we look at our supply chain and we understand our overall cost structure that there is there are things that we're continuing to evaluate on ways of ways of working and being able to drive greater productivity.

Speaker 4

But there were several key learnings that we had in the quarter and some of them as is frequently the cases seem somewhat obvious on the face, but obviously get a little bit more complicated as you get below. First, through our history, we've done a lot of plant acquisitions and plant acquisitions tend to be the foundation of a lot of our metrics. Closings are a little bit different and I think we've learned a bunch of things about how they vary. But number 1 really is around making sure that we understand the right KPI or performance indicator as we hit a gate, specifically with respect to safety stock. Right, so we felt pretty good about what the number needed to be, but we I think underestimated and didn't appreciate the cycle that it took to start to build the production and make sure that the product was flowing through our network as effectively as we needed it to as it moved back into the southern markets.

Speaker 4

So I think we need to be more conservative there as we go forward. 2nd is, making sure that we have redundancy. We've talked about trusted co man partners and making sure that we have some supply chain redundancy in the event that we need it to make sure that if we stumble even a little bit that there's somebody behind us that we know we can that can meet or augment our demand as we transition. And 3rd really is around the dedication having a dedicated team. While we had a dedicated team on it And they were working through the transition, making sure that that team has got the ability to make calls at speed, to understand the metrics and are dedicated specifically to this transition until we get through and we're stable.

Speaker 4

I think we might have been a little more optimistic a little too soon with respect to when we could rotate off and get back to speed. So all those things will be built into our future. We've learned a lot. We have a quantitative view of the lessons learned and have a team that now has more experience as we forward.

Speaker 6

Howard, are these moves things that you kind of have to do one at a time? Or do you have the resources to do multiple consolidations at once?

Speaker 4

So I think we have the resources to be able to do multiple consolidations at once if the conditions dictate certainly from a Firepower capacity, production capability, we have the capability to look and understand how to meet the consumer demand. I think a lot of it is more just when does the market the consumer market and the customers say is a good time to do it and when we're Confident that we're clear on how the project needs to affect us moving forward.

Speaker 7

Okay, great.

Operator

All right. Thank you.

Speaker 1

Your next question comes from the line of Peter Galbo at Bank of America. Your line is open.

Speaker 8

Hey, guys. Good morning. Thanks for taking the question. Good morning, Pete. Good morning.

Operator

Hey, Pete. Howard, I just

Speaker 8

I wanted to maybe unpack a bit more your comments around the channel shift.

Speaker 4

I know you kind

Speaker 8

of gave it as Rational for maybe some of the softness in the quarter. And it's also though in the outlook as a reason for kind of why the sales guide has come down. So I just I was hoping you could elaborate a little bit more there. Is this a channel exposure problem that's specific to U. S.

Speaker 8

Like Your relative share of, I don't know, some of the club non measured is lower than peers, just and that's why you're seeing some of the shift. Just anything more you can do to kind of help unpack that?

Speaker 4

Yes. Thanks for the question, Pete. Look, I think in order of magnitude, the channel shifting is relatively speaking a much smaller impacts to the to our go forward look. And I think it is largely something that depending on how you look at it is either a cause for is a cause for optimism. Yes, because really channel while we are growing nicely in a lot of those unmeasured channels, they are relatively speaking smaller for us.

Speaker 4

So, much like an expansion geography as we're growing quickly in those channels, the ability for them to really positively impact us just takes a little bit more time. We're lucky to have a hybrid distribution model around DSD that we can flex there and make sure that our merchandising and our promotional environment is solid. But in terms of overall impacts to our business, they are still developing much like an expansion geography would. Yes. Do I think it's a I think it's certainly an opportunity for us.

Speaker 4

We are very much focused on making sure that we're growing in those channels that we're meeting what the shopper wants. We have a great offering to do that, but it's still more a white space opportunity for us than established business.

Speaker 8

Okay. No, that's helpful. And then, Ajay, maybe just a really quick clarification. I think you gave some color on the 4th quarter volume mix. I think you said there'd be a 2.5 point drag from SKU rat, otherwise your volume mix would be up 3%, so netting to like a half point positive.

Speaker 8

Do I have that right or did I miss something?

Speaker 2

Yes, I think that's right.

Speaker 5

Okay, perfect.

Operator

Thanks guys.

Speaker 2

Thanks Pete. Thanks Pete.

Speaker 1

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

Speaker 9

Good morning and thanks for taking my question. So as we've touched cost pressures in your business, just curious if you have any early reads in terms of what inflation could look like next year and whether you see a need to take pricing at this juncture?

Speaker 2

Yes. Thanks for the question, Rupesh. So as is our first, we are expecting a normalized inflation and price environment pre 2020 next year. And secondly, as is our normal cycle, we are about We are in the contracting cycle for next year and we are about 30% of the way there. The big nugget for us is potatoes.

Speaker 2

Those contracts Will be signed in the next, I want to say, 4 to 8 weeks. So we'll know more about the inflation basket as a whole for the year. So we should be able Talk more about it when we see you in December and definitely as we guide in March.

Speaker 9

Great. And then maybe one additional question. Just on the competitive front, given the category is slowing. How would you characterize the competitive environment? Is it still rational or are you seeing any changes out there?

Speaker 4

No, look, I think the overall environment is rational and is what we would expect. I think what we saw in the category, to your point, When we looked at the quarter even a few weeks ago, what we saw was the category is starting to was starting to slow more than we would have anticipated. But in terms of competition, pricing, customer or competitive behavior, they're all largely in line with what we would expect, Nothing crazy.

Speaker 1

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

Speaker 7

Thank you. Good morning.

Speaker 4

Good morning.

Speaker 3

Good morning.

Speaker 10

Just was wondering if you could Touch on Boulder Canyon, its growth obviously is extraordinary. What are some of the drivers there and how sustainable might that be?

Speaker 4

Yes. So, look, I think we feel really good about where Boulder Canyon is and it's really is a good example of a brand that we acquired and can show the strength of our network. It's really predominantly a better for you story, because obviously It's the avocado oil and olive oil trends that we are obviously seeing that are driving a lot of it. But consumer acceptance of the brand It has been quite strong, mostly in our natural channel, in some of the unmeasured channels and then obviously coming into grocery. So, I think we believe there's a long runway for the brand.

Speaker 4

It's got a clear point of difference. It's got a consumer cohort that is clearly interested in it. And as you see the economy continuing to move and we talk about value, Boulder Canyon for a segment of the consumer base is valuable. And so it's one of the places where it's not just About pricing, but it's overall the total offering of the brand.

Speaker 10

And is it broad distribution and velocity gains? Or is There are a big win that have a certain timing cycle we should keep in mind as far as how that

Speaker 3

goes. Yes.

Speaker 4

No, it is distribution and velocity gains and household expansion. It is not a we gained a class of trade that we didn't have previously. Look, I think there's a lot of runway left for that brand.

Speaker 10

Okay, great. And just on Zaps, obviously, that one's been on fire and it's had a much more regional skew that you've begun to broaden pretty nicely. But maybe can you touch on how the pretzel launch is going in that brand and what else you can do with the Zaps brand overall?

Speaker 4

Yes. So look, I think the pretzel launch has been great for us and continues to perform in line with our We're obviously getting to the point now where we're lapping the initial introduction, but we think that seasoned flavored pretzels, that segment continues to be a big opportunity and we continue to intend to address it. I think from an overall Zaps perspective, I think there are 3 things that we believe that we have opportunity on. 1 is about continuing to broaden its distribution, not only geographically, but within channels. It's got a significant channel opportunity.

Speaker 4

Number 2 is from a purely from a marketing communication and brand perspective, It is a brand that I think, has not had the marketing yet that it deserves. And obviously, as we expand our Marketing investment over time, we will look at that as one of the supported brands as we go forward. And then Last but certainly not least, at least from our from my perspective, I think it is a brand where It's a brand where we have channel opportunities and e commerce opportunities where consumers see it in food service, see it in QSR and then go looking for the brand. And if we're thoughtful about the distribution placement will also continue to be an opportunity for us.

Speaker 10

Okay, great. Thanks so much.

Speaker 4

Thanks, Mike.

Speaker 1

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

Speaker 7

Hey, good morning folks. Thanks for spotting me. Good morning. I apologize You're one of 3 reports in conference calls I'm juggling today. So there's a reasonably good chance that you've already answered this and I'm asking redundant questions.

Speaker 7

So My apologies. But the SKU rationalization drag is proving longer and larger than we expected. I know this time last year you thought it'd be done by midway through this year. I know you extended it out a bit more coming into the year. But where do we stand on that?

Speaker 7

And how much longer Is it expected to be a headwind? Is there a chance that we're actually going to be able to close it out this year and go in with clean a clean portfolio, if you will, into fiscal 2024?

Speaker 4

Jason, it's Howard. Thanks for the question. Look, Ajay assures me that my holiday New Year's presence will be the elimination of discussing SKU rationalization as we go into next year. And I confirm. So we will while SKU rationalization will always be something that we'll do as sort of good hygiene.

Speaker 4

The extraordinary drag that we are experiencing this year, which creates a lot of Challenges for us as you kind of look at the underlying strength of this business and you see what our power brands are really doing and what we're doing with ball mix. SKU rationalization is The drag that we all look forward to anniversarying at the end of the year and we will stop talking about it as we go into next.

Speaker 7

I hope so. I'm going to hold you to that Howard. Yes.

Speaker 4

I'll buy you a soda at Investor Day to He'll reaffirm my promise.

Speaker 7

Well, let's do better than that. We'll meet up after the Investor Day with something better than a soda. But the so speaking of Investor Day, you foreshadowed a lot of discussion around productivity and supply chain optimization. And My question is whether or not or how why we should have confidence that you can walk and chew gum, if you will, at the same time. So differently, a lot of companies often go after big productivity initiatives and rarely is it done without some market share in market turbulence and some top line consequences.

Speaker 7

Should we expect the same sort of turbulence for you? And if not, what gives you confidence that we won't live through some

Speaker 11

of those bumps?

Speaker 4

Yes. So, I agree with your thesis of why should you believe us. I think a lot of what our Investor Day will be about is showing you why you should believe us. But I think what makes us unique is that not only do we have the supply chain optimization opportunities that will walk you through in some level of detail, introduce you to the team that will be responsible for executing it, but we also have an outsized expansion geography opportunity as well. And so I think that as you think about our top line growth and the head space that we have to support That growth within our network, I think we believe that, we should be able to, to your point, walk and chew gum at the same time, be able to look at and to improve our network, be able to look at the investments that are required to be able to increase automation, drive capacity and run the railroad the way we would want to and at the same time to be able to drive greater growth in our expansion markets where we are able to do that today And we expect to do it tomorrow.

Speaker 4

But all of that will be will lay out at the Investor Day. And then I think I'm sure you will give us your verdict on whether you believe us.

Speaker 7

Always do. All right. I look forward to learning more. Thanks a lot guys. I'll pass it on.

Speaker 7

Thanks, Jason. Thank you, Jason.

Speaker 1

Your next question comes from the line of Scott Marks with Jefferies. Your line is open.

Speaker 11

Hi, good morning all. Thanks for taking my question.

Speaker 3

Good morning, Scott. Good morning.

Speaker 11

Wanted just to follow-up on some of the SKU rationalization conversation. Obviously, to Jason's point, obviously, it seems like it's been going on for a little longer and deeper than expected. Just wondering what this does in your confidence regarding kind of go forward volume growth potential? And is this SKU rationalization kind of replaced 1 for 1 on shelf with a power brand item or some other innovation? Just trying to I get a sense of that.

Speaker 11

Thanks.

Speaker 4

Yes. So Scott, the first thing is I think it has always been our belief That this year was going to be a year of SKU rationalization. If you went all the way back to Q1, we were around 400 basis points expecting to step down Basically, 50 each quarter, but we've always given a sense that we would be in the 300 ish range this year as a drag to our print. So at least from our perspective SKU rationalization is consistent with what we've been saying would be this year. But I again look forward to the holiday gift from Ajay when we stop talking about it.

Speaker 4

2nd, with respect to retail brand and partner brands, there's a couple of things. They are not one for one replacements because in some of the cases they were rationalization actions that we took as we acquired RWG and a couple of other Where the retailer was using the brand continues to want to, but we had alternative uses for the capacity. So being able to strengthen and build out our tortilla chip on the Border brand, we needed the capacity, which is why we started to shed them. So in some cases, the retailer maintained their brand, they just went elsewhere, which makes it a little bit different from assortment management than say us pruning a SKU that is a tail SKU for us and replacing it with a higher performer.

Speaker 11

Got it. Thanks so much. I'll pass it on.

Speaker 4

Thanks, Scott. And welcome.

Speaker 1

Your next question comes from the line of Bill Chappell with Truist. Your line is open.

Speaker 7

Hi, good morning. This is David Holcomb on for Bill Chappell. Hi, Dave. I was just wondering if you all could provide us with a little bit of an update on the partnership with Publix?

Speaker 4

Yes. So look, we continue to feel really good about our Publix relationship. They have been Excellent partners for us. We've been enjoying not only our core distribution, but also obviously been building out. You can see that in our consumption and market share trends around them and they've been expanding our distribution into additional SKUs and additional items broadly.

Speaker 4

So I think we feel really good about how the business is performing. I think what is equally important to us is being able to continue to prove to ourselves and to others and to all of you that when we enter into a market with an anchor retailer that their shoppers and the consumers then stick. And so you see that in our household penetration gains, you see that in some of our buy rate improvements and you see that in our power brands. So, so far, so good.

Speaker 7

Excellent. And also I was just wondering if you could Talk a little bit about some of the trends you all are seeing in salty snacks like potato chips versus pretzels versus tortilla chips?

Speaker 4

Yes. So, I mean, look, I think, overall, what we continue to see is the category remains resilient and continues to be a great place to operate. If you look at our the potato chip trends overall category, The segment is up, call it, 6.5% in the quarter. We're up a little bit less than that, which we talked about earlier. There's a lot about the lap of the UTTs brand in our core.

Speaker 4

Tortilla chips really was a we're now we've been talking the first half of the year where we were lapping activity prior year that we projected that we would go stronger in the back half. The good news is the visibility we thought we had is now translating to category or subcategory growth that we're seeing. And then pretzels is growing, but that's really a place where we continue to have Opportunities as the consumer is shopping price points and moving up and down the price ladder. While we feel really good about things like our barrel business, we do over index to a higher relative price points and have some work to do on the flex side of the business to make sure that we're hitting Lower price points in the latter. And then the last two things, I would say is, look, our cheese snack business and pork brine business are not where We wanted to be there kind of 2 different issues.

Speaker 4

Cheese is really about a lap from prior year, which we've been experiencing for a while now, but we've said We should be getting through it now. And then pork rinds, we talked a little bit about on the supply chain side. The optimization Actions that we took really disproportionately affected Golden Flake, which is really shorthand for pork rinds. But beyond that, I think everyone's talked about the consumer continues to shop for value. We've seen some channel shifting all in our prepared remarks is kind of what we're seeing across the segments.

Speaker 7

Excellent. Thank you. I'll go ahead and turn it over.

Speaker 2

Thank you.

Speaker 1

Our next question comes from the line of Mitch Pinero with Stuttgart. Your line is open.

Speaker 12

Yes. Hey, good morning.

Speaker 2

Good morning, Ash.

Speaker 12

Hey, here at the tail end, most of my questions have been asked and answered, but I did have 2. I was just curious if you could Howard, if you could sort of prioritize the white space opportunities that you refer to, whether it's geographic or product or channel? I'm very curious about that.

Speaker 4

Yes. Look, I think from A geography perspective, we are continuing to move westward, right? So we've had a lot of success with the acquisition that we had in sort of the upper Midwest And we are continuing to build out around Chicago, Indiana, Michigan, kind of the normal areas there. We've seen Great performance there and we continue to be bullish. We've talked a lot about Publix, which has been obviously a great success for us and we're We continue to be grateful for the partnerships we're getting from retailers, but Florida still is a geography where we have Continued opportunities to do it.

Speaker 4

To your point, whether you call it geography or you call it a channel question, I think is one that you can we can debate a little bit. But Florida, broadly speaking, still remains an opportunity as a maturing market. And then look, I do think that when you think Channel shifting and you think about where the shopper is, in unmeasured channels and value dollar stores, discounters, mass merch, We have a lot of hit opportunities still. That's our core items, being penetrated and servicing those retailers, the way we need to. The relationships are there.

Speaker 4

The product is there. We just will we need to continue to demonstrate the value that we create and continue to drive them. So I kind of gave you those 2 geographies. And then I would say broadly speaking, channel expansion, are places where I think we feel that there's quite a bit of upside and headspace for us especially in an environment which remains dynamic.

Speaker 12

Okay. That was thank you for that. And then just one last question. So when you get down to 13 manufacturing plants In 2017, like what type of I don't know what kind of measurement in terms of capacity utilization Well, you have I mean, how significant of an improvement is it? I know you've done some expansion to your capacity, but I'm curious, Just getting from 17 to 13, when you're sort of fully optimized, what kind of utilization that represents?

Speaker 1

Yes. So, a couple of things.

Speaker 4

So I would tell you that it's really a modest improvement. If you think about some of the geographies, Some of the plants that we're talking about, Birmingham was a plant that would have required a significant amount of investment in order for us to be able to be In a good place. So that volume, while it was not immaterial to our network, was absorbed fairly easily into our network with the execution opportunities that we've obviously talked about accepted. But the 3 plants that we're talking about are relatively modest in terms of their overall size and impact. I think we have further opportunity, to not only in our ways of working, but in our physical footprint to understand how to make sure that we have the capacity we need to grow.

Speaker 4

But we have a fair bit of headspace still in our OEE measures to go as we continue to work on continuous improvement. Capital expansion Kings Mountain is still in front of us. There's a lot of opportunity yet in our network to be able to meet and exceed the consumer demand.

Speaker 1

That's all the questions we have. I'll turn the call over to management for closing remarks.

Speaker 4

Yes. So Obviously, we feel pretty good about the numbers that we delivered. We certainly understand that the expectations have been revised. But look, I could not be more excited or confident in the future of this business. I think we continue to be in probably the best category in the entire market relatively in absolute.

Speaker 4

We have a lot of geographic opportunities yet to go and we have a lot of opportunities to build our brands and grow our business. I look forward to seeing all of you in December at our Investor Day and look forward to speaking in more detail as we go. So thanks for your time and have a great day.

Speaker 1

Ladies and gentlemen, that concludes today's call. Thank you all for joining. We now disconnect.

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Earnings Conference Call
Utz Brands Q3 2023
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