Thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Utz Brands Incorporated Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to turn today's call over to Mr. Kevin Powers, Head of Investor Relations. Please, go ahead.

Good morning and thank you for joining us today. On the call today are Dylan Lissette, Chief Executive Officer; Ajay Kataria, Chief Financial Officer; and Cary Devore, Chief Operating Officer. Dylan and Ajay will make prepared comments this morning and all three will be available to answer questions during a live Q&A session. During this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to the Risk Factors in Utz Brands' most recent quarterly report filed with the Securities and Exchange Commission, as well as the risks highlighted in the company's press release issued yesterday for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, management's remarks today will highlight certain non-GAAP financial measures. Our earnings release also presents the comparable GAAP numbers to the non-GAAP numbers provided and reconciliations of the non-GAAP results to the GAAP financial measures. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on Utz's Investor Relations website. You may want to refer to these slides during today's call. This call is being webcast and an archive of the call will also be available on the website. And now, I'd like to turn the call over to Dylan. Dylan?

Thanks, Kevin. Good morning, everyone, and welcome to our third quarter earnings call. First off, I'd like to give a special welcome or recently promoted CFO, Ajay Kataria. Ajay joined us in 2017 with a strong public company financial background and a great amount of experience with several CPG companies. He worked directly for our Chief Operating Officer, Cary Devore over the last few years and I'm excited to have him fully into the CFO role now. Thank you to both Ajay and Cary for such a well-planned out transition. So let's get started this morning with a few key messages. Demand for our brands remain strong and our two-year sales growth is accelerating, as we continue to lap the elevated consumption impact from COVID-19 pantry loading in 2020, with improved strength in our core and significant growth in our emerging and expansion geographies. Our IRI retail sales outpaced the salty snack category on a two-year basis, with our Power Brands significantly outpacing the category, with strong performance across all retail channels. On a longer-term basis, I'm also happy to report that our national expansion continues both ACV growth of around 600 basis points over the last two years and total points of distribution gains of approximately 22% over that same time period. We expect that these trends will continue into the future, as our team consistently builds out our national presence. Like most of the industry, gross margins in the quarter were impacted by rising inflation, but our pricing actions and productivity initiatives are underway and on track and continue to build, as we exit the year with a carry forward benefit expected into fiscal 2022. s I'm sure you can imagine, after 26 years of being at Utz and as CEO for almost a decade, I'm very proud…

Thank you Dylan and good morning everyone. I would like to begin by thanking Dylan, Cary and the entire Utz team for helping me transition smoothly into this new role. I am excited about the opportunity ahead of us at Utz and humbled to participate in the next century of growth of our incredible brand portfolio. I'll start with a very high-level summary of our third quarter financial performance. And then we will dig deeper into our net sales and margin drivers. Third quarter net sales increased 26.1% to $312.7 million, primarily due to the impact of our acquisitions over the past year. We delivered organic net sales growth of 1%, which would be 2% excluding the impact of converting company-owned DSD routes to independent operators. As a reminder, when we convert routes to IOs, certain selling expenses moved to sales discounts, thereby benefiting SG&A and reducing net sales and gross profit. Adjusted gross margin contracted to 35.8% largely due to the higher input costs and the aforementioned impact from our IO conversions. In addition, adjusted SG&A improved to 21.1% of sales versus 24.6% of sales. The SG&A improvement in the quarter was primarily driven by lower corporate G&A, synergy benefits from our recent acquisitions, higher route conversions and optimized marketing spend given the continued strong demand environment. Adjusted EBITDA increased 17.3% to $44.8 million or 14.3% of sales, which was a nice sequential improvement from our second quarter margins of 12%. Finally, adjusted net income increased nearly 40.7% to $25.6 million and adjusted EPS was $0.18 based on fully diluted shares on an as-converted basis of $142 million. I will note that we benefited from a lower-than-expected tax rate in the quarter. Briefly turning to our balance sheet and other key points. At the end of the quarter, our…

Thank you, Ajay. In closing I want to reiterate that I truly believe that we are doing all the right things to grow our business for the long term that in return will drive great results. As a company we have seen inflationary periods in the past and we've weathered supply chain challenges many times over our 100-year history and we are committed to building an even stronger more resilient infrastructure for continued growth as we begin to move towards the new year and I'm very thankful to our incredible associates to make all of this happen. We are excited about our future and we look forward to continuing to create value for all of our stakeholders. Thank you again very much for joining us today on our earnings call. And I'd now like to ask the operator to open up the call for questions.

[Operator Instructions] Your first question comes from Andrew Lazar with Barclays. Your line is open.

Great. Thanks so much. Good morning, everybody.

Good morning.

I guess I'd like to start out. I understand it's obviously early to go into too much detail on 2022 at this stage but I guess, when that sort of de-stacked I know gross margin was expected to expand significantly in 2022 due to productivity ramping up and optimizing revenue and trade and improving the margin mix. I guess, my question is would those levers still be expected to be in play which along with pricing that you've talked about be enough to keep gross margin stable in 2022, or should we now anticipate some year-over-year compression? And I ask I guess because consensus still has sort of gross margin expanding for next year. So any even just directional thoughts on that would be really helpful.

Hi, Andrew. This is Ajay. Thank you for the question. I'll take that. Listen, before I answer that, I do want to note that we are not providing guidance for 2022 today. Now having said that, the environment remains incredibly dynamic. And as a company, we are focused on a couple of things. First, demand is strong and we are doing everything possible to maintain supply to our customers and consumers. We have done that throughout last year and this year through COVID and through the dynamics here. And secondly, our pricing program is ramping up. As I noted in my prepared remarks, that's working. And third, Dylan outlined, in his remarks that we are executing on our long-term strategies. And to answer your gross margin question, specifically if I look at these focus areas they are all delivering for us pricing, trade optimization, productivity everything that we talked about when we went public they're all coming through for us. So based on what we know today, about inflation, about the environment and all of these things delivering for us I do believe that we will cover inflation and gross margins in 2022 should not contract. I'll remind you that transportation costs are fluid and they are in SG&A for us. So again we are talking about gross margins and we are not providing guidance for next year at this point, but I do believe that they won't contract.

Very helpful. Really appreciate that. And then I guess just a follow-up would be, I saw that you brought on a new supply head of supply chain. And obviously in light of just all the challenges that the entire industry is facing at this point. I guess I'm trying to get a sense of what would be the roadblocks if any to moving even faster on productivity maybe than you had initially planned? Thanks so much.

Yes, great question, Andrew. This is Cary. I'll take that. Look I think we feel really good about productivity. You referenced Chad White, we recently hired to run logistics for us. We're super excited about that. He ran logistics for Pinnacle Foods and some other companies. He's consulting with us right now and have been since 2020 on value creation initiatives. So we're thrilled to bring him on. He's got a great depth of experience and a network of relationships that will benefit us. With that we're able to put Brian Greth, our Senior Vice President, currently in charge of logistics into an enterprise integration role to help with M&A integration. He's been here for 30 years and has basically held every position in supply chain you could think of. So we're really excited about the move from a roadblock perspective. Look I don't see any roadblocks per se. We've given guidance that will be 3% to 4% of COGS and productivity by 2023 that's still a good number. We feel great about that, we're going to put more emphasis on continuous improvement and get that program up and running more robustly. So we feel good. I mean, I think we're on track to hit our targets and we've got the liquidity and the capital and I think the team to drive it.

Thanks so much.

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

Good morning, guys. This is actually Erica Eiler on for Rupesh. Thanks for taking our question. So I'm going to just start with sales. So as you look at the sales acceleration here in Q3 and your expectations for Q4 has anything surprised you in terms of what you're seeing. And then your team has also called out supply disruptions. And I apologize if I missed this, but is there any way to quantify the impact on the top line during the quarter. And if maybe you could just dive a little bit deeper kind of on what you're seeing here and your expectations on these going forward. Just curious on when you think these could potentially get resolved?

Yes. Erica this is Dylan. And I'll just maybe take the first part of the question on demand and what we're seeing in sales and then Ajay can quantify perhaps some of what we're seeing is from a supply challenge standpoint and try to quantify that, if it's even quantifiable. As you can see from our IRI consumption data across both our core and our emerging and expansion markets, we're actually really seeing a nice pickup in two-year CAGR rates and one-year CAGR rates in many of our subcategories in many of our channels. So I think from a sales demand perspective, we're very excited about what we're seeing. We're seeing it continue into October, which I noted in my remarks, we see demand there. I mean the consumer is buying. They're buying our brands. You can see it across the channels, across the geographies and across the subcategories. So I won't go into too much repetitive detail. But as you know, there are supply challenges. Our ability to meet that increased demand. We're leaning in. At the end of the day, the last thing that we want to do is not supply a customer we believe in the long-term benefit supplying our customers the demand that they are asking for. And so we're spending a lot of time investing in that. And really at the end of the day putting our dollars against that in terms of just making sure that we're securing the inputs and the supply chain that we need to meet that demand. In terms of quantifying what we may have missed out on in terms of sales. I don't think we really have a number for that. We may know that every single week, if it's some part of our component that's not there, right? It could be film, it could be seasoning. It could be other oil supply, it could be the ability to move freight. There's always going to be that, especially in today's environment, I'll say luckily, I believe we have a fantastic team and we have a 100-year platform that's been dealing with supply chain issues in the past and commodity issues past and we're very good at that. So I don't really have a number to quantify it. But the good thing is that I'd say demand is outstripping our ability to supply. And as we look forward and solve some of that in the industry itself solves some of that as we go forward then that portends for good things for us as we look into the future.

Okay. That's helpful. And then just on the core, I mean you made nice progress this quarter in closing the performance gap on the core versus the category. Can you maybe just remind us of the key efforts that have helped you achieve this? What we should be thinking about going forward? And then just any new insight on when the core could potentially be back to being at least in line with the category?

Yes. I mean we made – we're really happy. I mean we've been saying this in last few earnings calls about the fact that we have a little bit heavier Foundation Brands waiting in our core that we have to go against. We've also noted in the past that as part of our M&A strategy in some cases we're buying Foundation Brands that were risky rationalizing and we're executing on, making sure that they have the right pricing, the right display and the right items and the right innovation. And we're doing a lot of work around Foundation Brands. And you'll see in the data that we supply to that has improved at our core. We've really put a lot of effort on focus, right? We have a lot of transition from route salespeople, the independent operators that occurred in the core. And once we get through that transition period, we really start to ramp up in our productivity for that. So there's a lot of effort a lot of work by our sales team that's gone into the core on execution. And lastly, included in there is ON THE BORDER, right? The TruCo acquisition, opening up ON THE BORDER to our core. That was one of the core tenants of that purchase back in December 2020, where we talked about only 14% of their sales was in our core and we thought that our DSD network can really support and grow that exponentially. And I think you'll see that data as well in the deck, where we can really see that start to expand the core. So if you think about a few of those happening the core is about 50% of our business, roughly speaking in terms of IRI retail sales. So as we continue to move forward, I think we'll compress much more closely the difference between our overall Utz platform sales but also our Power Brands are right on the cusp of breaking into being share gainers as well in the core. So we're really looking forward to seeing that continue and expect it to.

Great, great. Thank you so much.

Sure.

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

Thank you. Good morning.

Good morning.

Good morning.

Just wanted to stay with On The Border for a second and you have a nice slide on to showing its momentum and some of the geographic split, but maybe just talking to the acceleration that's broad based, how much of that is moving into DSD. I guess I'm just trying to understand some of the drivers and how sustainable it is and what to expect looking ahead a little bit?

Sure. Great question, I mean, yeah, the -- as you can see on the chart page 11, in our deck the exponential growth on a two-year CAGR basis that's occurring for the border is in our Core. That really is helped and driven by our DSD, right? You'll note that back in August of 2021, we converted our third-party distributor to the Utz distribution system for a number of states. And most of those states were in our Core. And if you think about the fact that we not only made the conversion to our DSD, but we also are looking and making great strides in vertically integrating the production. So when you produce something and you vertically move it directly into the DSD stream and it's available, and it's in stock, and it's on time. It really helps your DSD to expand. And we have a much larger sales team not just the sales team but a much larger sales team that's out selling the brand to the customers at the end of the day. So you couple the two of them together and we're really seeing that exponential growth in the core. However if you look at expansion and emerging we're seeing double-digit growth there too on a two-year CAGR basis. So, it's across the board. We have some great retail partners that continue to do fantastic at it. We're doing a lot of work on the supply side as noted in the acquisition of Festida that we announced back in June of 2021 or closed in June 21 as well as the recently announced RW Garcia. We have opportunities here to really increase the supply of the products which has been an issue where demand has supply. And as we build that supply I think we'll continue to unlock the ability to grow ON THE BORDER. And somewhat on a side note you'll see even the Salsa and Queso ON THE BORDER branded Salsa and Queso. Combined that's actually a $69 million IRI retail on an annual basis and it's growing exponentially as well. So we're unlocking opportunities on the chip side or ON THE BORDER but really also unlocking on the Salsa and Queso side which is sort of icing on the cake for that brand and our growth prospects for that brand continue.

That's great color. Thank you. You also touched a little bit on the second question. I just wanted to cover with RW Garcia. And I think it's clear you're getting -- you're interested in that for the capacity and the capabilities there. But can you just help us understand a little bit how much it's needed to keep up with demand or support growing demand or if it also can support a margin lift from repatriating production that's co-manufactured today?

Yeah, I'll take that, great question. So we're thrilled about the RW Garcia acquisition. So that is really first and foremost a supply chain enhancement acquisition. They have the ability to start making some of our brands today right away. They've got the excess capacity. So we don't have to wait and order a new line or anything like that. So it's a very immediate increase to our capacity and that allows us to in-source some things that we can make more margins on. And then, from a -- currently they don't really do any co-man for us. So it's different than Festida whereas Festida was for instance ON THE BORDER they currently don't do any manufacturing for us but they have the ability to do it in a short period of time. So we're thrilled about what it can do for our supply chain well-placed plants in the West and East of the United States which helps us focus on minimizing land and cost. It helps with logistics as well as manufacturing costs. And then it's got a great I think a nice BFY brand right? It's all organic for the most part corn-based crackers. And so we look forward to adding that to our portfolio and certainly takes us over $100 million in retail sales on the BFY side as well.

Great. Thanks so much.

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

Hey folks. Thanks for spotting me in. A couple of quick questions. First on M&A, I heard you mention you leverage now 4.5. You want to get back down to that three to 4x range in the next year or two. Are you implicitly suggesting that you may be out of the game of M&A for a while until you get that leverage back in there?

Hey, Jason this is Cary. Good to hear from you. I wouldn't say we're out of the game though. I mean, I think we're going to continue to do smart acquisitions that make sense for us. Obviously, we're committed to that three to four range long-term. But it hasn't prevented us from doing things like an RW Garcia. I wouldn't say capital structure in and of itself is a limiter for us. But look we are focused on making sure we have the right long-term leverage profile and we're very disciplined about how we approach acquisitions. We want to make sure we pay the right price for things and that they drive -- they deliver the strategic value for the price we pay. So I don't think it takes us out of the game. I think our set of opportunities in front of us is very unique in terms of what we're able to do and how we're able to create value. So I think we continue to do some smart things while at the same time making sure that we stay disciplined.

Got it. Make sense. Thank you. And the price growth you guys realized this quarter, certainly surprised me to the upside and congrats on achieving it. It's better than I expected. Can you unpack a little bit of it? How much of it was list price? How much is coming from perhaps lower trade et cetera. As we think about the forward, how should those components progress?

Hey, Jason thanks for the question. This is Ajay. I'll take that. So I think the way to think about that is we are effectively touching our entire portfolio of brands and product categories that we play in across all our customers. So the pricing levers that we have, you talk about rate outs list price increases, trade optimization we are pulling all of them. So it will be tough for me to pick one over the other. It's all being deployed. We have already taken two or three rounds of pricing this year and a couple more are coming in the next three months. So by the time we get to February of next year, we would have touched our entire portfolio and activated all the levers we have.

Make sense. Thanks for detail. I’ll pass it one.

Thank you.

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

Thanks. Good morning.

Good morning.

Good morning Bill.

Just want to get a more housekeeping. As you look forward on the IO conversion, how much pressure is I guess left, or do you expect on gross margins from that over the next 12 to 18 months, or are we largely done with that? I'm just trying to understand how much that comes into play?

Yes. Thanks for the question. So I'll say, we are going to convert about 200 routes this year and we have another 200 to go. So the pressure to your question that we should expect is about the same as what we would get in 2021.

Is there any way to quantify the basis points? So as we're looking into next year of, obviously, commodities and pricing will have a downdraft but I'm just trying to understand if that's much bigger or similar?

Yes. Yes, absolutely. So far this year we have been looking at 80 to 100 basis points of pressure on gross margins and net sales. And then there is an offset to that in SG&A and we should expect about the same next year.

Okay, great. Thank you. And then on the freight side, I mean, obviously it's a widespread issue and not unique to your company. But how do you see this playing out over the next six months. I mean, are more drivers going to be available? Do you think prices will come down or go even higher? Just trying to -- I mean, you're obviously dealing with this day in day out. I'm just trying to understand if you see any light at the end of the tunnel on that side?

Yeah, I'll take that again. This is Ajay. So I think if I had a crystal ball, it would be nice. But our assumption going into this thing is first half of next year is going to look very much like what it looks now. So we are not expecting things to improve meaningfully. Now that said, there could be changes to this environment in either direction positive or negative. And let's see what shakes out.

Got you. But you aren't seeing things accelerate in the past month or two?

In terms of positive...

Freight costs. Negative I guess it's not getting meaningfully recently.

Well, no, freight costs have gone up and we have -- transportation is the big variable in our inflation costs that we called up in our conversation this morning and transportation is going up. We have seen it gone up.

Got it. Yeah, I was hoping if you had seen a ceiling, but I guess not yet. But thanks for the color.

Yeah. Thank you.

[Operator Instructions] Your next question comes from Ben Bienvenu with Stephens. Your line is open.

Hey, thanks. Good morning, everybody.

Good morning.

I want to ask about the price mix versus volume balance. As we see the pricing action contribution build, as we go through the fourth quarter and presumably into the first half of next year, is sustaining volume on call it a two-year stack level reasonable? Do you think that gets harder to sustain? Where do you think we are with demand elasticity that you see? And how does share gains factor into that and channel mix as well factor into that equation?

Well, I take it from a high level and then maybe Ajay can layer in afterwards. Ben thanks for the question. I mean, what we are seeing I've been into the snacking industry for 26 years and in my role almost for 10 years. And I think that it's partially something that Utz has the benefit of which is great brands, but other people have great brands as well. And the other part of it is that we're in a fantastic industry of snacking where the elasticities are relatively low. It's a simple pleasure for the most part. It's an impulse item in many cases. And we've had at least from what we can see elasticities are pretty low. We have room to increase because of our great brands. We have price-back architecture that we are executing on. I think Jason referred to it in the previous question about the price mix and the benefits that we're getting there. And I think that as the industry is relatively rational from a pricing perspective then we'll have opportunities to continue to look at ways to take more price, if it's warranted. And I think long-term obviously we want to provide a good that consumers want to buy and that's what we're in the business of doing and we will take our knowledge and history of being in this industry and apply it across our price-back architecture, but I think from a high-level elasticities have shown to be pretty resilient to the increases. And they're not -- these aren't 20% or 30% increases. I mean, we're talking about 4%, 5%, 6% increases. So we feel really good about that.

Okay. Perfect. And then Ajay revisiting your comments on kind of expectations around gross margins as we head into next year. And combining that with what you said around freight, could you talk about, when you look through the components of your costs, the various buckets, the level of visibility you feel like you have into next year at this point? And then if you could, rank order the buckets of cost pressure as you see it now that would be helpful.

Sure. So, let me -- when I look at 2022 again, we are not guiding to 2022 today. We have more work to do and we'll come back to it in March. But what we know today about 2022 is that, all of our pricing actions, productivity, et cetera these things are working. We'll have a meaningful carryover benefit going into 2022. And secondly, first half is going to look a lot like the second half of 2021 in terms of inflation, in the environment we are in and the volatility and the dynamic nature of transportation. So those are two things that we know. What we don't know is what's going to happen in the second half. So to your question, the visibility that we have is probably the lightest on the second half of 2022. And it is very light on transportation specifically. And the impact that we have in our P&L in terms of inflation, I would say is about half commodity, half labor and transportation. And within that commodity, we have good visibility into, even though we're not liking what we are seeing. Resin prices are at all-time highs, consumer price index is the highest it has been in 30 years. So, we don't like that, but we at least see it. Transportation, on the other hand, very dynamic. We find new information on a weekly basis that we are working through.

Thank you, so much. Very, very helpful and best of luck for the rest of the year.

Thank you.

Thank you.

There are no further questions at this time. I will now turn the call back over to the Chief Executive Officer, Mr. Dylan Lissette.

Great. Thank you all very much for joining us today on our third quarter earnings call. We truly appreciate your support of Utz Brands, and are as excited about our future and hope that you are as excited about our future as we are. So, thank you very much.

Ladies and gentlemen, this concludes today's conference.