Good morning and welcome to the Utz Brands Inc Fourth Quarter 2021 Earnings Conference Call. Kevin Powers, Head of Investor Relations, you may begin your conference.

Good morning and thank you for joining us today. On the call today are Dylan Lissette, CEO; Ajay Kataria, CFO; and Cary Devore, COO. Please note that some of our comments today will contain forward-looking statements based on our current view of our business and actual feature results may differ materially. Please see our recent SEC fillings which identified the principal risk and uncertainties that could affect feature performance. Before I turn the call over to Dylan, I just have a few housekeeping guidance 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 disclosures are contained in our earnings materials and posted on our website. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on our Investor Relations website. And now, I'd like to turn the call over Dylan. Dylan?

Thanks, Kevin, and good morning everyone. 2021 marked our first full year as a public company. And I'm incredibly proud of our team. We face a dynamic environment marked by unprecedented industry-wide challenges and disruptions and we worked hard to keep pace with a robust demand for our advantage snacking portfolio. Given this backdrop, we made strategic decisions throughout the year to continue to grow our sales and service our customers to the best of our ability. We did this by prioritizing the needs of our customers while absorbing certain higher costs to manufacture, distribute and sell our products. These decisions impacted our short-term profits, but I'm confident that these are the right decisions for the long-term health of our growing company and brands. Our full year results reflect these trade-offs as organic net sales growth accelerated meaningfully throughout the year, and we delivered a strong finish to 2021. While our top-line performance is strong, our earnings reflect higher than anticipated supply chain costs. As we prioritize customer service to ensure we met growing demand. Servicing our customers to the best of our abilities has always been a hallmark of purchase commitment to our partners. To offset these higher supply chain costs, we took significant pricing actions throughout 2021, with an additional round of pressing already taken in February of 2020, with two more rounds of pricing actions planned in the late second and third quarter of 2022. Besides these plan pricing actions, we will continue to take further actions, if and when necessary. In addition, we are driving our productivity and our cost reduction programs to help offset continued high input cost inflation and to enhance margins over the long-term. I'm confident that we are taking the right approach to position us to create shareholder value over the short…

Thank you, Dylan, and good morning, everyone. I would like to begin by recognizing the amazing efforts of all associates in fiscal 2021. We finished the year strong in several areas, including implementing a new ERP, strengthening public company processes and infrastructure, completing and integrating acquisitions and ramping up data-driven decision-making that has sequentially improved our response to a dynamic industry environment throughout the year. I am confident that we are better prepared to succeed now more than ever before. I'll start with a very high-level summary of our fourth quarter financial performance, and then we will dig deeper into our net sales and margin drivers. Please note that when comparing our 2021 results to our 2020 results, fiscal 2020 was a 53-week year. We estimate this extra week contributed $15.9 million in net sales and $3 million in adjusted EBITDA. That being said, our fourth quarter 2021 net sales increased 22.2% to $300.9 million. We delivered organic net sales growth of 7.4%, which would be 8.9%, 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 margins contracted to 34.3%, largely due to higher input costs and an approximate 150 basis points impact from our IO conversions. In addition, adjusted SG&A improved to 22% of sales versus 23.1% of sales. The SG&A improvement in the quarter was primarily driven by lower corporate G&A, synergy benefits from our recent acquisitions and IO route conversions. Adjusted EBITDA increased 10.9% to $37.7 million or 12.5% of sales and adjusted net income declined to $16 million. Adjusted EPS was $0.11 based on fully diluted shares on an as-converted basis of $142 million. Briefly touching…

Thank you, Ajay. In closing, I want to reiterate that I truly believe that we are doing the right things to grow our business for both the short term and the long term. That in return, will drive great results in '22, '23 and beyond. As a company, over our 100-year history, we have definitely seen inflationary and challenging periods, and we are committed to use this dynamic environment to build an even stronger, more resilient infrastructure for continued growth, and as we begin a new year, I'm very thankful to all of our incredible associates that make this all happen. Please know that we are confident in our long-term margin opportunity as a company. We have grown into the third largest platform in salty snacks because of a continued and disciplined belief in growing both our top line sales and our bottom line. To that end, we have put in place many of the building blocks for tackling both pricing and productivity in 2022 to drive bottom line results with continued top line growth. We have invested in the people, the technology and the infrastructure to unlock this growth, and we will aggressively pursue the actions that will complement our bottom line, not just for 2022, but 2023 and beyond. We are excited about our future, and we look forward to continuing to create value for all of our stakeholders. Thank you 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 any questions.

[Operator Instructions] Your first question comes from Andrew Lazar from Barclays. Please go ahead.

I wanted to start off maybe you provided some thoughts on the direction of EBITDA through the year. I was wondering if there was anything more you could add on how you see the weighting of EBITDA first half versus second half as the year obviously is a bit more challenging to model given the volatility? And with respect to your full year guidance, I mean, how would you term it at this point, given there's so much fluid nature, right, to what we're seeing around a lot of the things that you've got to forecast, do you feel like you're building in some level of -- or some additional level of prudence and/or flexibility, let's say, versus what we saw in 2021?

Andrew, thank you for the question. This is Ajay, I'll take that. So to your first question, EBITDA cadence, you're right, we can -- we did comment on EBITDA being second half weighted. So I would say about a 45-55 split in terms of adjusted EBITDA dollars between the 2 halves. And I say that because we think margins will be pressured in the first half, inflation is going to be as high as it was in the second half last year. And as we get into the second half, we are anticipating inflation to continue. But we start to lap last year's inflation and pricing will continue to build. We have a couple more rounds of pricing coming, and we'll see increasing benefits from productivity. So that's the EBITDA cadence. It's also important to understand revenue. I think that will be in terms of absolute dollars between the 2 halves, it will be pretty balanced. We have some strong top line results coming in, in the first half. So to your second question around full year guidance, I'll say we have carefully considered everything we know about the marketplace, and we have been very prudent in our planning this year. The environment is very dynamic. And that said, if things start to move in terms of new information or inflation, we are prepared now more than ever to take more price, tackle inflation, drive pricing, manage supply chain disruptions. I think we talked about this in our prepared remarks, the team, our tools, our processes, they're all coming together very nicely, and I think we'll be able to proactively manage any new information.

And then can you talk a little bit more about what you see as a contribution from price and volume for the full year? And what sort of elasticity assumption you're building in? Because in fourth quarter, we actually saw a price and volume were both positive. Yes, based on the 4% to 6% organic outlook and the fact that pricing is -- was already at 6% in 4Q and will continue to build suggests maybe some volume decline for the year this year. So I'm trying to get a sense of how that plays into elasticity assumptions and perhaps whether that could ultimately prove conservative?

Yes. I'll take that. So you are correct. And we are very excited about the results that we delivered from a top line standpoint, pricing standpoint in the fourth quarter and what we are seeing in the first 8 weeks of the year, so as you have seen, as you mentioned, we sequentially improved pricing. We exited Q4 at 6%. And that pricing is building into Q1. It will build further as we execute a couple more rounds in parts of our portfolio. And we have also seen some really nice volume increases so far this year. So that's the backdrop. Now as we thought about sales outlook in that context for the year, we considered a few things. First, while pricing is ramping up, we are also going to start to lap last year's pricing at some point as we look at the quarterly flow. And secondly, we are making quite a few choices this year to simplify the business, focus on the right things. And a few of those choices will suppress volume. I'm talking about SKU optimization, looking at our brand portfolio, prioritizing power brand production in our plants, including the RW Garcia plant that we acquired recently, so we can free up capacity for on the border brand. And third, we consider elasticities in the second half. So we are not seeing any elasticity right now. Demand is outweighing supply. But we think at some point, elasticity will come into play. So we baked a little bit that into our outlook as well. And also, let me remind you, we still have about 200 routes to convert to independent operator. And that will suppress our sales growth by, I want to say, about 100 basis points. So when you put it all together, we think volume will grow very modestly this year, and we'll have a first half weighted sales.

Your next question comes from Peter Galbo from Bank of America. Please go ahead.

Aj1ay, maybe just a quick clarification for my actual questions. But the 4% to 6% organic top line, does that incorporate the planned price increases that the second and third round, I think, that you're planning for later this year?

Yes, Peter, they did.

Okay. And then maybe just to start on the inflation commentary, low double-digit outlook for '22. I'm assuming the cadence of that looks like first half is in that -- still in that mid-teens range that you saw 2H '21? And then is the assumption that you're lapping higher inflation, but also just maybe things kind of come down in the second half to like a high single-digit rate? Just help us understand that a little bit more?

Yes. I think inflation is going to be, as you pointed out, low double digits for the year. I think first half inflation is going to look a lot like second half last year in terms of percent inflation. And if you back into it, to your point, it will be second half is going to be probably high single-digit inflation. And you have to look at those advantages in terms of lapse to last year. And we have provided those last year numbers in our commentary.

Okay. No, that's helpful. And maybe, I guess, the other more surprising comment out of the prepared remarks was that leverage actually isn't really expected to change very much this year. That kind of seems like a wholesale change in terms of philosophy, in terms of this year being any more about debt pay down and just how you're thinking about that and whether or not it constrains your ability to do M&A in '22?

So listen, leverage is high, and we think year-end 2022 leverage will be consistent with where we finished last year. We believe the best path to reducing leverage is to sort of meaningly grow EBITDA. And as we have noted in our remarks, we'll focus on operating the business. We'll integrate acquisitions, deliver synergies in all of those activities, they're going to combined with pricing productivity, everything we are doing around our supply chain, they will drive EBITDA in the long run. That said, free cash flow will be better this year, but we are going to invest in CapEx. And if there is an opportunity to pay down a little bit of debt, we'll do that.

Your next question comes from Michael Lavery from Piper Sandler. Please go ahead.

Could you just elaborate a little bit on your New York City and Long Island deals. On the surface, the optics may seem a little counterintuitive, given that you're transitioning to independent operators. But I think there's some more nuance there that these are consistent in ways that aren't as obvious. Can you maybe just reconcile how you're thinking about that? And what drives the benefits that you're expecting?

Sure. This is Michael. This is Dylan. Thanks for the question. Actually, the third-party distributors that we purchased in New York City, Metro and Long Island, New York, our independent operators to start. So they are independent operators before we acquired them. They are independent operators today after acquisition. Really, what that gives us from a benefit standpoint is it's 1 of the largest snacking markets in the country. We've been involved with the third-party distributor that we acquired those routes in that system from for longer than I've been at Utz, so 25-plus years. They have an immense network throughout the 5 boroughs of New York City. They service Bodegas to grocery stores to the mass channel all throughout that market are acquiring them vertically integrating, taking the profit stream that was before given to a third-party, we've now essentially acquired that profit stream as well. And we hope that after our decades and decades of knowledge in building DSD route system, servicing customers, growing our sales, growing our brands that once we vertically integrate them into our system, we'll actually get increased sales, increased service and increased results out of that market to our customers that are fantastic customers in that market that we just think we can grow, which will better enhance our core geography sales and results as well.

And on the marketing spending, you gave some details on some of the moving parts there. At a higher level, can you just help us understand, I think it was in the fourth quarter, you said that SG&A favorability was a little bit of an offset to pressures. I don't know if that was marketing related or not, But looking ahead into 2022 against your plan, how much is marketing a source of flexibility if there is greater-than-expected inflation or cost pressures? Or is that a set number that would simply drive potentially upside or downside if the other costs move around it?

Thanks. This is Ajay. I'll take that. So we don't -- we are not reducing marketing spend. In fact, what we are doing is we are taking the dollars that we do spend on marketing and we are shifting more of that spend towards social media, digital, what you might call productive working media from a plan standpoint, that's what's built in. And that's going to help shore up our brand strength. There isn't a meaningful pool of dollars available for us to work with in order to make or break EBITDA using marketing dollars. And the way we think about it is, we are very focused on building these brands, supporting them and growing our power brands, and we're going to continue to do that.

I think -- this is Dylan. I think what's really exciting about 2022, it will be the very first year in a couple of years here that we don't have a significant portion of our existing marketing funds, our media funds going into sort of legacy sports sponsorship things. They are going to be more directed towards social and digital, much more able to be nimble in how we approach it, where we geotarget those dollars, we can focus in on specific geographies, focusing on specific brands, where we think that we might want to use that marketing dollars to get better long-term results. I think you'll note from our fourth quarter sales last year, our year-to-date sales this year, the success of the Utz brand, the success of the ON THE BORDER brand in the first 8 weeks of this year on a very relatively minimal dollar spend. I think we're getting a lot of bang for our buck that we're putting into marketing because the brands are doing so well.

Your next question comes from Ben Bienvenu from Stephens. Please go ahead.

So I want to ask, following up around the inflation outlook, just given how rapidly things are evolving here just in the last few weeks, as you think about the pricing increases that you have forthcoming, was that -- were those decisions made in anticipation of kind of some of the tightening that we're seeing now in addition to the tightening in the market that we've seen year-to-date prior to this Ukrainian/Russian conflict? And then if we see continuation of inflationary headwinds, what do you think your ability is to take incremental pricing beyond what you have planned?

So I'll take that. So there are a couple of questions in there. So first, the couple of rounds of pricing we have talked about, they are built into our outlook, and they're not based on what's happening in the last 2 weeks. What we are doing is really looking at the inflation that's in front of us. Anything that's known to us and reacting that way. From the situation constantly evolving the environment being dynamic. To your other question, we are very prepared now with the team, the tools, everything coming together and being in place to proactively go out and take pricing. We are watching what the competition is doing, and we are working our entire portfolio, not just on the typical pricing levers but also looking at optimization and our SKU portfolio, et cetera, to enhance margins. So that's what we're doing. And from a supply chain standpoint, we are covered on our commodities for 50% of the year roughly. And so far, there is a lot of volatility in the marketplace. So far, we are not seeing any meaningful heard directly to ours with what's going on.

And then I want to ask about the opportunities you touched on in the C-store channel. We've seen very strong mobility numbers to start the year, in some cases, even in excess of what we saw pre-pandemic. How do you think that dynamic plays into your ability to drive continued growth in that category? And then as you think about gaining relative share in that channel, can you talk about some of the things that you have underway to drive those improvements?

Yes. This is Dylan, Ben. Yes, I mean across a lot of our channels, C-stores being one of them, we have a lot of opportunities, specifically with the C-store channel, we should be able to speak more broadly about some developments with some good customers at the next quarterly call, similar to giving more guidance on the Southeastern grocery chain that we referred to in our script and in our slides that we provided to you all as well. But we are the number two C-store provider brand platform on the East Coast. We are lowering the rankings on the West Coast just because we have so much white space opportunity. And so I hope to be talking more about that at the next quarterly call, where we're gaining sales and share in C-store. The brands that we have, specifically Utz and Zapp's do very well in C-store and continue to build. So that channel for us as it rebounds, it continues to rebound, we'll continue to provide increased sales for us as well as the grocery channel that we referred to in the slides as well.

Your next question comes from Robert Moskow with Credit Suisse. Please go ahead.

A few questions. I wanted to know your comments about pricing for inflation are -- seem to be very focused on inflation expectations for this year. But you did have a lag in 2021 that you never quite caught up to. So can I assume that the -- that all this pricing that you have in the market now is the expectation that it's covering all of it, it's also covering the lag in 2021? And then I have a quick follow-up.

So the way to think about that is look at it from a rolling time period, and there will be some of the benefit of pricing that we are taking now going into 2023. And as we think about it, we talked about this in our prepared remarks that we have very strong reasons to believe that when inflation stabilizes, things are going to start to improve in terms of margins. And part of that is because that once inflation stabilizes, there will be some overlapping pricing benefit going forward. So we are -- that's how we are thinking about this.

I see. And the follow-up is, you have that chart showing that there's a 6% margin hit for inflation. But some of your food peers are now splitting that up between rate inflation and then supply chain disruption costs and it might be easier or it might be tougher to raise pricing to cover those disruptive costs because they might be perceived as transitory. Are you lumping them all together and do you find that that's feasible to go to a retailer and lump it together because at the end of the day, it's going to be more structural than transitory?

We are lumping them together right now. And you're right that in a normal course of business, you price for commodity inflation and supply chain disruption costs are always a conversation. I'll tell you that the category that we are in is very rational. And so far, conversations with retailers, what the competition is doing in the marketplace, they've been very rational. And we haven't seen the conversation at commodity versus supply chain disruption yet. But as and when it starts to happen, we are prepared to tackle it. And the way we are preparing for it is by putting all the building blocks in place right now that we talked about the productivity with optimizing our footprint, our net logistics footprint so that we can cover that portion of inflation meaningfully going forward.

And the last question for today comes from Bill Chappell from Truist Securities. Please go ahead.

This is Stephen Lang on for Bill Chappell. I guess first one just on the color out -- thank you for the color on production and retail sales for the -- ON THE BORDER chips and salsa brand would you guys kind of mind digging a little bit further in terms of the distribution gains and velocities you're seeing so far with the brands?

Yes. Thanks, Steve. Great question. We're really proud of that acquisition and how well that brand is doing. Much of it is organic growth in the sense that it's existing customers with you are servicing better through better supply. Much of it is also new ACV and distribution growth that is attributable to, like I noted, the almost 2,000 DSD routes that we have across the country that are bringing that brand to market. In 2021, I think we would have significantly higher and better results in terms of sales and it is a high-margin brand, by the way, from a manufacturing gross margin standpoint, if we had more supply. And so we proactively went out in 2021, we acquired Festida, we acquired RW Garcia, both of them with the peer intent to utilize them to increase supply, right, because it has been growing so dramatically and supply chain issues and supply of goods is just an industry-wide issue, especially for a brand that's growing as fast. So as we look forward into the future, as we solidify more supply as we bring more of that supply in-house but also count on our co-man network. Our third-party co-man network is a big important part of our success in 2022 as we grow this brand to new heights. And you can see by the year-to-date results, not just tortillas, but also its salsa and queso business, which is nearing almost $70 million of retail sales. That's a brand that will drive a lot of growth for us in our core as well as our emerging with existing customers as we increase supply, but also as we gain new customers for that brand and take it even more across the U.S. and really create a powerhouse tortilla, salsa and queso brand there.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Yes. In closing, I do just want to thank everybody for joining us today. 2021 was an absolutely very challenging time for the industry and for our company. Our associates are fantastic. They are all very committed to continued growth and long-term thinking. And we really do believe that 2022 will be an excellent year and that we have a lot of positive things that we are working on that will contribute to the top line and the bottom line to make it a fantastic year. I appreciate your support and everyone's helping allowing us to achieve these heights.

This concludes today's conference call. You may now disconnect.