Utz Brands, Inc. (UTZ) Q1 2022 Earnings Report, Transcript and Summary

Good morning. My name is Joseph, and I will be your conference operator this morning. At this time, I would like to welcome everyone to the Utz Brands First Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. Thank you. Kevin Powers, Head of Investor Relations, you may now begin your conference.

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 our live Q&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. Before I turn the call over to Dylan, I just have 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 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 to Dylan.

Thank you, Kevin, and good morning, everyone. I'm pleased to report that we had a very strong start to the year from a top line perspective, with record first quarter net sales of nearly $341 million. Our organic net sales increased 20.7%, with a healthy balance of net price realization of 9.4% and volume gains of approximately 11.3%. Consumer demand for our advantaged portfolio of snacking brands remains robust and price elasticity is better than we anticipated. We are fortunate to participate in a resilient and stable salty snacks category that has proven throughout our history to perform well during both inflationary and recessionary times. In addition, it's great to see our 100-year plus portfolio of brands continue to thrive as our snack foods provide a simple pleasure at a modest cost. Looking at IRI retail sales in the quarter, we gained share in the salty snacks category for the 13-week period ended April 3, 2022, which again, was done through a balance of both price and volume gains as our loyal Utz consumers, combined with our very strong brand equities are driving our top line momentum. And as we anticipated and is somewhat unique to salty snacks, the private label threat within our subcategory has remained minimum as private label dollar share in the salty snacks category has per IRI, declined for the last 16 12-week periods. Importantly for us, we continue to have large white space growth opportunities across our portfolio as we are under distributed across the United States relative to our large salty snack peers, and we are continuing to make the right long-term investment decisions to drive continued above-market growth in our expansion and emerging geographies. For perspective on our distribution, even though we are now per IRI, the third largest salty snack brand platform in the United States, with retail sales over the last 52 weeks of $1.45 billion, our household penetration is still only just below 50%, and we have tremendous runway for our brands to travel and grow across the country. Turning to margins. Consistent with what we've heard around the entire food industry, our costs continue to rise across many of our commodities. Since we last reported, the ongoing Russia and Ukraine conflict is impacting certain input costs meaningfully. And as a result, we now expect mid-to high teens percentage gross input cost inflation in fiscal 2022. However, it's very important to note that as inflation continues to rise, we continue to take pricing actions and drive our productivity initiatives to fully offset these increased costs, all while making the necessary investments to support the strong growth of our brands. Enhancing our margins is a key value driver for both the near term and the long term, and we are well positioned to capitalize on our recent investments in both infrastructure and technology that we believe will support more profitable growth in the future. On that note, as you can see in our reported results, our pricing is building significant benefit with ongoing momentum, not only from the pricing and price pack architecture initiatives from 2021, but also from our 2022 pricing actions. Our pricing actions in 2022 include our most recently implemented round of pricing taken in mid-February as well as an additional round of pricing that we have already announced that is happening in late May of 2022. With this continued momentum, we believe that our Q2 pricing will be greater than the 9.4% pricing we achieved in Q1. In addition to this, we have incremental pricing actions under evaluation for the second half of the year to help offset any new inflation impact beyond our current expectations. It is important to note that both our pricing technology and our revenue management capabilities have dramatically improved over the last 12 months as a result of new talent and improved analytics. Also, as a reminder, it was only February of last year when we installed a new ERP system and we have built significant capabilities since then, which will continue to add incremental value into 2022 and beyond. So while we closely monitor our input cost trends and take inflation-justified pricing actions, we will continue to drive our strategic price pack architecture programs, leverage our new trade management software and better optimize our product mix, which will enhance our margins over time. From a productivity standpoint, our programs remain on track, and we continue to expect to deliver approximately 3% productivity in fiscal 2022. In addition, as you may have read in our press release on April 28, our recent Kings Mountain transaction is an important step forward to enhancing our productivity. The facility will enable us to in-source manufacturing across several product types that we currently outsource to some degree, increase our operational flexibility and will contribute to higher long-term margins over time based on identifiable multifaceted cost synergies. We plan to begin production at Kings Mountain in the second half of this year, and the facility will play a key role in supporting the strong growth of our brands across our rapidly growing markets in the Southeast, the Northeast and the Mid-South. So wrapping up our key messages, I'll touch on our updated outlook for fiscal 2022. Our Power Brand sales growth continues to be robust, led by both our flagship Utz and ON THE BORDER brands. And given our strong first quarter top line results and trends through the month of April, we are raising our net sales outlook for the year. We now expect total net sales to increase 10% to 13% and organic net sales to increase 8% to 10%. In addition, as the benefits of our pricing actions and productivity programs continue to build, we continue to expect to offset the previously noted higher inflation in fiscal 2022. As a result, our adjusted EBITDA outlook is unchanged and we continue to expect fiscal 2022 adjusted EBITDA to grow modestly versus fiscal 2021. Briefly touching on our first quarter financial results. Total net sales grew approximately 27%, which reflects our strong organic growth of nearly 21% as well as the contribution benefit from our acquisitions. Adjusted gross profit grew 11% and adjusted EBITDA declined 4% as margins were impacted by the supply chain cost increases that I described earlier, partially offset by our building pricing of 9.4% in the quarter and our productivity momentum. Diving deeper into our retail top line sales trends, I'm pleased to report that our sales growth continues to accelerate. After lapping the tremendous growth we saw during the COVID-19 pandemic, our year-over-year sales momentum in early 2022 continues to build as net price realization improves and volumes continue to increase. To that end, our total spread sales growth accelerated to just over 19% for the latest 12-week period ended April 17. Furthermore, when stepping back to an even broader look at our historical IRI retail sales levels, on a pro forma basis for all of the acquisitions we've made over the past few years, you can see that we started January 2019 with a 12-week period retail sales of approximately $260 million. As we enter the second quarter of 2022, our 12-week trailing retail sales through April 17, have grown to nearly $350 million as we've now added an astonishing 5 million more buyers since 2019, with 70% of those making repeat purchases. It's very clear that as expected, we are successfully lapping the impact of the pandemic on our retail sales results and due to the strength of the Utz platform and our 100-year history of consistent growth and industry know-how that we are winning share, and we are building for a much higher sales baseline for continued future growth. And importantly, our salty snack category trends remain strong and resilient as we are accelerating our power brand sales, expanding distribution in underpenetrated channels, growing the core and driving geographic growth and our expansion in emerging geographies. Our future is incredibly bright as we are now the number 3 salty snack platform in the United States and we see a clear path to continued momentum for years to come. Turning to our retail sales results in more detail for the 13-week period ended April 3, our power brand sales increased 20.1% versus the category of 13.4%. I'm also pleased to point out that our two largest brands, Utz and ON THE BORDER, which combined represent about 70% of our retail sales, grew an amazing 22% and 35%, respectively. Turning to our growth drivers in the quarter. We drove share gains in our top three sales subcategories of potato chips, tortilla chips and pretzels, representing approximately 73% of sales. I will note that both our pork lines and cheese snacks performance was primarily impacted by supply chain challenges, and our team is actively working to address these opportunities to unlock their full potential. Potato chip and pretzel growth were both led by our Utz brand with potato chip growth of nearly 2 times the category growth and tortilla chip growth was led by our ON THE BORDER brand with sales growing nearly 3 times the category growth. And since ON THE BORDER was the largest acquisition in our company's history, I also want to point out how we are leveraging the Utz platform to drive ON THE BORDER to new heights. We are not only driving incredible growth from our now merged sales force, but we are also increasing the supply of product to meet the ever-increasing demand for ON THE BORDER via both new production capabilities that have been installed in our legacy plants as well as the benefits from our plant acquisitions in 2021 that have unlocked even more supply. This is truly allowing us to grow this brand to new heights, which will continue to add value to our platform. In the quarter, we continued to make great progress driving geographic expansion while also improving our execution in our core markets. To that end, we gained share across all 3 of our geographies in the first quarter. In our core, total sales registered nearly 18% growth versus the category of 14%. Our recent strong performance is largely due to several key factors: a stronger focus on our power brands led by performance across Utz and ON THE BORDER, brands on both base and incremental; ON THE BORDER continues to outperform as a result of the conversion to the Utz DSD route network and expanded distribution of retailer support, especially in the grocery channel. And as noted in previous quarters, the conversion to independent operator routes can create some minor short-term disruption, but now that the Mid-Atlantic is substantially transitioned, that disruption is behind us. And we are intent on continuing to drive improved results. Beyond the core, which has been the case for some time now, we continued our momentum in expansion and emerging geographies. We grew 17.4% in expansion, and we grew 20% in our emerging geography, outpacing the category growth of 12.2% and 13.5%, respectively. There is no doubt that our brands travel well beyond our core, and it is exciting to see our continued success as we outpace the market consistently in these whitespace geographies. Looking ahead to the remainder of the year, our key themes for fiscal 2022 remain the same. We are well positioned for strong organic net sales growth and market share gains in the attractive salty snack category, and we are off to a tremendous start with retail sales growth of over 19% through April 17. We are delivering significant customer wins beyond our core geographies to include one of the 10 largest volume supermarket chains in the U.S. based in the Southeast. As inflation continues to increase, we continue to take the appropriate pricing to protect our ability to reinvest in our future. In addition, we are focused on leveraging our improved technology and enhanced team to accelerate our price pack architecture initiatives. While we are very pleased with the results so far, we do believe that this is an area that is still in the early stages of delivering to its full potential. In addition to higher net pricing, we expect to deliver approximately 3% productivity in 2022. And this is driven by carryover benefits from 2021, continuous improvement initiatives, strong ROI CapEx projects, product sourcing and in-sourcing improvements and network and logistics optimization. Further, although not included in the 3%, but an integral part of our value creation program, are our efforts around cost avoidance and capacity enhancement, the latter of which has helped us support our strong volume growth to date. And lastly, we remain intently focused on acquisition integration and delivering upon our cost synergy targets. With that, I'd now like to turn things over to Ajay Kataria, our CFO. Ajay?

Thank you, Dylan, and good morning, everyone. I would like to start by congratulating the Utz team for delivering record sales this quarter by working together as one team to supply and service our customers while ramping up pricing, optimizing our brand portfolio and delivering volume growth through high-quality customer wins that will help deliver the company's long-term top line and bottom line growth strategies. Thank you, Team Utz. I will review a very high-level summary of our first quarter financial performance, and then we will dive deeper into our net sales and margin drivers. Before I begin, I would like to call out a few housekeeping items. As we continue to evolve as a public company, we are evaluating our reporting practices to simplify analysis and align with our peers. To that end, our fiscal 2022 financial reporting reflects the following changes. First, we are eliminating all pro forma non-GAAP metrics. This includes removal of further adjusted EBITDA. Note that we will continue to use normalized adjusted EBITDA for net leverage calculation. This was previously named normalized further adjusted EBITDA, but the calculation has remained the same, and you can continue to find the non-GAAP reconciliation in our supplemental tables. Next, you will find more prominent reporting of organic net sales growth. The definition has changed slightly since our previous reporting. In addition to excluding the impact of acquisitions, we now exclude the impact of higher conversions to create a more apples-to-apples organic net sales growth comparison to our peers. Lastly, selling, general and administrative expense has been renamed selling distribution and administrative expense. Given our distribution costs are booked as an expense and not in cost of goods sold, we thought it would be helpful to bring more transparency to the description of this line item on our income statement. For context, distribution expense is about 25% of our total SG&A expense. I hope you will appreciate these changes as we continue to mature as a public company and adopt best practices. With that, let's discuss our first quarter results. Our first quarter 2022 net sales increased 26.6% to $340.8 million. We delivered organic net sales growth of 20.7%, which excludes the impact of acquisitions, and 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 selling, distribution and administrative expenses and reducing net sales and gross profit. Adjusted gross margins contracted to 33.9%, largely due to higher input costs and an approximate 130 basis point impact from our IO conversions. In addition, adjusted SG&A improved by 180 basis points to 23.2% of sales primarily due to expense leverage from strong sales growth, synergy benefits from our recent acquisitions, and IO route conversions. Our adjusted EBITDA decreased by 3.7% to $36.5 million or 10.7% of sales and adjusted net income declined to $15.4 million. Adjusted EPS was $0.11 based on fully diluted shares on an as-converted basis of $139.9 million. Now turning to cash flow and the balance sheet. Cash flow used in operations was $36 million. Our cash flow from operations performance was primarily impacted by two factors: First, as expected and in line with our typical seasonality, working capital was a use of cash in the first quarter. We expect working capital performance to improve as we move throughout the year. In addition, as we noted in our earnings press release this morning, the $23 million of buyouts of multiple third-party DSD rights in the first quarter were treated as contract terminations and booked as an expense in adherence to GAAP. As such, these acquisitions were not treated as investing activities and therefore, impacted cash flow from operations. Had they been treated as investing activities, cash flow used in operations would have been $13 million. At the end of the quarter, our cash and cash equivalents were approximately $15 million and we had $81 million available on our revolving credit facility, providing close to $96 million in liquidity. Liquidity was primarily impacted by the aforementioned drivers that impacted cash flow from operations in the quarter. Moving down the balance sheet. Net debt at quarter end was $870.8 million or 5.1 times normalized adjusted EBITDA of $172.1 million. As a reminder, through the course of fiscal 2021 and fiscal 2022 year-to-date, we have funded from our balance sheet over $160 million of acquisitions, which include Vitner's, Festida, RW Gracia and buyout of various third-party distribution rights, including Clem snacks and J&D snacks. All of these acquisitions have been critical to building a stronger foundation to support the incredible demand of our brands and to drive sustainable higher-margin growth. While leverage is above our long-term target of 3 to 4 times, we are committed to generating stronger EBITDA, improving free cash flow conversion and paying down debt. Our goal is to approach the upper end of our targeted range by the end of fiscal 2023. We are focused on operating the business, integrating acquisitions and delivering synergy targets, all of which will improve adjusted EBITDA performance. Also, just a reminder, we have a well-priced credit structure with covenant light debt instruments, which provides significant EBITDA headroom while we work on reducing leverage. In addition, more than 60% of our long-term debt has a nominal interest rate swap through September 2026 at a rate of 1.39%. Wrapping up the balance sheet. As Dylan mentioned earlier, on April 28, we announced and closed the transaction of our Kings Mountain facility. The total purchase price of the transaction was approximately $38.4 million plus assumed liabilities of $1.3 million and was funded with approximately $10.4 million of cash and $28 million of proceeds from the issuance and sale of 2.1 million shares of Class A common stock to the affiliates of Benestar brands in a private placement. We are very excited to add this facility to our manufacturing footprint as it will play a critical role in supporting growing demand for our brands in the Southeast, Northeast and Mid-South regions. Moving back to the P&L for some additional details, starting with net sales. Our net sales growth in the quarter was 26.6%, driven by organic growth of 20.7%, acquisitions of 7.2% and negatively impacted by the conversion of RSP routes to IOs, which reduced the net sales growth by 1.3%. Our organic net sales growth of 20.7% was driven by price/mix of 9.4% and volume growth of 11.3%. Our pricing actions continue to gain strong momentum and price elasticities have been better than expected. As expected, in the first quarter, adjusted EBITDA margins contracted to 10.7% of sales. Decomposing the decrease in the adjusted EBITDA margin for the quarter, positive drivers include price/mix of 940 basis points as we continue to take pricing actions to offset inflation. Productivity improvement of 130 basis points and selling and administrative expense, which excludes distribution expense of 20 basis points. Offsetting these positive drivers was higher inflation, including transportation costs, of 14.2%. Our inflation impact versus last year was comprised of elevated labor and transportation costs as well as higher commodity input costs. As a reminder, in the first quarter of fiscal 2021, inflation was muted and had a minimal impact on our EBITDA results. Inflation began to build significantly in the second quarter of last year and continue to climb higher throughout the year. As a result, the first quarter is our most difficult comparison from a margin perspective. Looking ahead to the rest of the year, as you'll recall, our expectation for total input cost inflation for fiscal 2022 was low double-digit percentages versus comparable costs in the prior year. We are raising our expectation for gross input cost inflation, inclusive of raw materials, labor, fuel and freight from the low double digits to the mid- to high teens as key input costs have increased significantly, largely due to geopolitical events. In response to these rising costs, we continue to implement pricing actions and you have been seeing these build in our sales results as price mix contribution to net sales was 6% in Q4 2021 and increased to 9.4% in Q1 2022 as we implemented new actions in mid-February. Q1 pricing results were especially encouraging as we saw them build from approximately 7% in January to 10% in February to 11.5% in March, which gives us confidence that Q2 results will show better pricing than Q1. And as Dylan noted earlier, we have another set of pricing actions being executed this month, and we were able to pull forward a few of our second half actions into this month's implementation to go deeper and wider across our product portfolio. This was in response to new inflation trends, and we now expect to deliver about 10% price in fiscal 2022 to cover our updated inflation expectations. That being said, we continue to closely monitor inflationary trends, and we have incremental second half pricing actions being evaluated based on how inflation trends over the coming months. In addition, we continue to expect to deliver productivity of approximately 3% in fiscal 2022, which will also help to offset gross inflation. While our primary areas of focus this year are our manufacturing efficiencies, logistics and packaging and product design, we are truly transforming how we approach our demand and supply planning, which is critical to support our growth and become more efficient. To enable this transformation, we have added best-in-class talent from across the industry, and we are deploying new tools and processes. As an example, one of the recent process changes we have made is to increase the lead times and require full pallet ordering on internal orders from our frontline DSD distribution centers, which provides our manufacturing plants more visibility to demand so they can plan better and make longer, more efficient production runs. Better demand signal and lead times have also driven higher order fill rates, which in turn improves availability on the shelf to support volume growth and improve customer satisfaction. This has a cascading effect in our supply chain, driving efficiencies in logistics by allowing the transportation team to secure lower-cost carriers and optimize loads and warehouse labor to reduce overall cost per case. In summary, we are making great progress in our productivity programs and I'm confident in achieving our 3% target this year. More importantly, similar to pricing, these productivity actions are making structural improvements that will drive meaningful long-term margin benefit to the company. Now turning to our full year outlook for fiscal 2022. Given the continued strong consumer demand and higher pricing related to increased input costs, we are raising our total net sales growth to approximately 10% to 13%, and our organic net sales growth to approximately 8% to 10%. However, with inflation expected to continue as we support and invest in our significant new customer growth, we continue to expect to modestly grow adjusted EBITDA versus last year. Consistent with our approach in setting our initial guidance for fiscal 2022, we continue to believe that it is important to be prudent in our earnings outlook. Our outlook continues to assume that we will invest in critical infrastructure to support significant top line growth anticipated this year. It also assumes continued incremental and strategic SKU rationalization as we optimize our portfolio with an enhanced focus on our power brands, including prioritizing production of branded products versus private label, to unlock additional capacity for growing brands such as ON THE BORDER. In addition, we are also anticipating that price elasticities may moderate to more historical levels. While we are not seeing this today and our assumptions may prove conservative, these are unprecedented times, and we remain pragmatic in our approach. Wrapping up our outlook we now expect capital expenditures of approximately $50 million. This is at the low end of our previous range, primarily due to the timing of spend related to large capital projects. Of note, our CapEx guidance excludes the purchase price of the Kings Mountain facility. In accordance with GAAP, the transaction may be treated as a purchase of property and equipment and not as an acquisition. That determination will be reflected in our cash flow results in the second quarter of fiscal 2022. In addition, we continue to expect an effective tax rate of approximately 20% and net leverage at year-end to be consistent with year-end 2021. Finally, on our quarterly cadence assumed in our guidance, as the benefits of our pricing actions and productivity continue to ramp up, we continue to expect adjusted EBITDA margins to improve throughout the year, but with fourth quarter margins below the third quarter, in line with our typical seasonality. We continue to expect adjusted EBITDA dollar growth with better margins in the second half of this year. From a sales perspective, we continue to expect that our first quarter sales growth will be the highest quarterly year-over-year growth of fiscal 2022. In addition, we expect net sales dollars to be slightly more first half weighted given our strong Q1 sales performance and the expected impact from strategic SKU rationalization and price elasticity in the second half of the year. Before I turn the call over to Dylan, I would like to revisit our long-term margin opportunity and our confidence in returning to margin expansion and mid-teens margins over time. These drivers have remained consistent. Our actions around pricing and productivity have stickiness and significant momentum and will drive margin enhancements when inflation stabilizes. Our supply chain is improving as we accelerate productivity programs and optimize manufacturing and logistics processes to increase throughput and unlock efficiencies. Our recent acquisitions are allowing us to scale our manufacturing capabilities to efficiently support strong demand for our power brand portfolio. Our recent investments in technology are helping unlock insights that enable several margin-enhancing work streams. Finally, we continue to enhance an already strong management team with new talent. With that, I'll now turn the call back over to Dylan.

Thank you, Ajay. Before we open up the call to questions, I just wanted to say how incredibly proud I am of the dedicated efforts of the entire Utz team who continues to navigate our company through an ever-changing and dynamic operating environment. Going forward, our team will continue to be focused on executing against our value creation strategies to grow top line sales, but equally and as important to continue to build on the earlier momentum from our margin enhancement programs that we believe will drive more profitable growth. We are dedicated to our growth process and building a company that delivers stockholder value while we delight more and more consumers across the U.S. with our portfolio of brands. We're excited about the challenges, the opportunities and the rewards that are on the road ahead of us, and we will continue to seek every opportunity to build a stronger Utz. 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 questions.

[Operator Instructions] And your first question comes from the line of Michael Lavery.

Thank you. Good morning. I just wanted to unpack the guidance a little bit more. You raising organic revenue growth from 4% to 6% to 8% to 10%, which seems like a pretty big jump this early in the year, but you've also called out the 10-ish percent full year pricing that you're expecting and you're just a hair away from that already in the first quarter. And so that would put you at the high end alone even with the 11% volume lift you've already had in the first quarter. I guess just trying to understand for between elasticities and conservatism, how you're thinking about the rest of the year because I think the math alone might suggest that's about a 4%, 4.5% volume decline you're assuming, which is 15-, 16-point deceleration from the first quarter. I know the comps get a little bit tougher, but how are you thinking about some of that? I am just trying to be extra careful on how the elasticities may go? Or what are some of the building blocks there?

I'll take that. This is Ajay. Michael, thank you for the question. And I think you sort of answered it. And the math is right. We are taking our guidance up Q1 was really strong from a top line perspective. We were very encouraged to see us ramp up pricing as we have been talking about. And on top of that, our team was able to deliver very strong volume high-quality distribution gains, key national customers, and we really hit the ground running in the first quarter. Now for the rest of the year, we believe that pricing is ramping up we have found ourselves facing new inflation. So we'll cover all of that inflation that we are now seeing with new pricing, and we are expecting about 10 points of pricing in the year, which means as you did the math, we are anticipating lower volumes for the rest of the year. I would say most of that will be second half. You should see us Q1 will be our highest sales growth quarter followed by Q2 and so on. And then we'll see some volume take backs in the second half due to a couple of things. One bucket to think about is we are doing some SKU rationalization, which is strategic in nature. We want to replace lower-margin SKUs, private label SKUs with power brand, free up capacity for our power brands. We are also lapping some distribution gains that we had in second half last year. And then the market, we believe, is going to present some price elasticities at some point. We don't know what the nature of that is COVID lockdown and supply chain challenges related to that, they're still around. So there is a lot of uncertainty right now. So we want to just be prudent and see where this goes for other quarter before we put a pin on the volumes.

Okay. Great. That's really helpful. And maybe just a quick follow-up on the geographical balance. It's -- you're growing very strong. Your growth is very strong in core expansion and emerging. I guess just can you touch on some of the dynamics there and if that might start to tip more with the launch in the Southeast retailer. It's certainly got the momentum from on the border that's one of the factors that's a little bit outsized versus the rest? How do we think about the mix as it evolves and what some of the drivers are in each of the regions?

Well, I mean, thanks, Mike. This is Dylan. And yes, I mean, we were very pleased by the results of the first quarter where we saw the core, really progress into positive year-over-year sales momentum versus the category. A lot of that has to do with a lot of the work that we indicated we were going to put into the core to grow that the RSP to IO transition that occurred in the Mid-Atlantic is substantially done. Sometimes there's noise in that transformation of that route to market to independent operator. We've had strong pricing results in the core, about 150 basis points better than emerging and expansion. So somewhere in the 10% range where we saw maybe on average 8.5% between those two other geographies. So a little stronger on the pricing in the core. Obviously, that makes sense. That's where we have a higher ACV and market share presence. But as we look forward, I mean, we -- a lot of this is our ability to supply on top of great brand strength. And we've done a lot of work over the last 18, 24 months to increase supply. You mentioned OTV and on the border and our ability to grow that was supply constrained in the past, and we put a lot of effort into building out the infrastructure for that with the Festa the RW Garcia acquisitions last year that have really opened up capacity and ability to supply that demand. So as we just sort of think about core versus emerging and expansion. Yes, we have some great growth on the horizon for the Southeast, as we've mentioned, with the largest grocery food retailer in the Southeast, expanding our presence. That is really kicking off as we speak, literally as we speak, in May. So it's not really in our Q1 results, but it's something we can look forward to as we grow. So we will continue to see that area grow. But more importantly, I think our core is really geared up to grow just as fast. And so I think the balancing of core versus emerging and expansion as we look forward into the future, we'll be relatively balanced from a sales results perspective.

Okay, great. Thank you so much.

Your next question comes from the line of Rupesh Parikh.

Good morning. Thanks for taking my question. So I just want to go back just to the performance on the ON THE BORDER brand, 35% growth during the quarter. Is there any way to frame what is being driven by distribution velocity, pricing, et cetera? And then do you expect that strong double-digit growth to continue throughout the year?

Yes. Rupesh, this is Dylan. Yes, I mean, we've really been highlighting the growth of ON THE BORDER. I mean it's our largest transaction from late 2020 that we closed, and we were literally 0% of the tortilla subcategory, and we acquired that brand. We've added and invested a lot into it just mentioned from a supply chain perspective, the growth is really incredible. It's a combination of ACV growth. I think we had about 5% ACV growth. The split between pricing and velocity on OTB was about 50-50, a little bit more weighted towards volume and -- but very strong price appreciation in the quarter was about 14.5% with sales gains of about 35%. As you'll note on the slide in the deck, which has been continuing, it's a balancing act between our core and our emerging and our expansion, but you can really see where in the core, right, if you remember back to last year, we took over the DSD in August of 2021 from a third-party distributor. Our team has embraced it. It has become our second largest power brand. We've continued to expand that into all of the different channels that we have access to. And from a supply chain from a sales leadership and from an innovation and marketing perspective, we've done a lot to support that. So really to answer the last part of your question, we anticipate that, that double-digit growth will continue, and it's really backed by the ability for us to that and the strength of our route to market, our DSD team, our sales teams that are now merged and working together. So we're really bullish on the growth of that brand as we look forward into the rest of 2022 and beyond.

Great. And then maybe one quick question just for Ajay. I know you gave some brief commentary and just how to think about EBITDA margins for the year. So if maybe you could just give any more granularity on the cadence for EBITDA margins, what we just saw in Q1.

Yes. That's a good question, Rupesh. In March, when we came out, we thought the year is going to look 50-50 on sales and about 45-55 on EBITDA, first half, second half. I think based on Q1 performance, it's probably going to more like 51-49 on sales and 47-53 on EBITDA, first half, second half, and that's a little more balanced on EBITDA. From a cadence standpoint, we are still expecting EBITDA to ramp throughout the year as we move sequentially through the quarters from a margin standpoint. And Q4 will be a tick down versus Q3. That's just the seasonality of our P&L. So that's what we're expecting. And I mentioned about volume. I will point out, we are expecting price elasticities and SKU rationalization, market dynamics to suppress volumes in the second half. And we said this in our prepared remarks, I hope I'm wrong, we don't know how to think about it. The economics theory will tell us that at some point, consumer is going to react to the multiple rounds of pricing and inflation, but we really hope that we're wrong about that, and we are just being prudent and frankly, conservative on that.

Great. Thank you for all the color.

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

Hey guys, good morning. Thank you for taking the question. Dylan, I just wanted to start with your comments around private label and understanding that it's a relatively small exposure in a lot of your categories. But one of the things that we've been hearing is private label is obviously suffered just from a lack of availability, capacity constraint. And so just if that private label capacity does unlock a bit, you have better availability on shelf while you guys are raising price, how are you thinking about that? How is that being contemplated into your outlook? And then separately, are there certain categories, whether it's potato chips or pretzels that are more exposed to private label or less so that would be helpful from our standpoint.

Absolutely, Peter. Yes. I mean one of the most interesting aspects of our category is private label is relatively small to start, right, compared to many other CPG categories. I believe the exact number is it is 4.6% share. I've noted in my remarks that it has also been losing share over 16 of the last 12-week periods. Much of that, I think, is the strength of branded products like ours, the strength of the Utz brand, the strength of the OTB, the Zapp's brands, our power brands. relative to the strength of private label in a market that is really historically not oriented towards private label and there are significant route-to-market advantages that branded players like ourselves have in the salty snack category, meaning our DSD sales force. We have a DSD sales force that is almost 2,100 DSD routes today across the country that every day go in and service and sell customers' products. The typical private label in our industry does not do that. So this gives us a great opportunity to have that competitive advantage in this category. In terms of subcategories, pretzels have a higher percentage private label than the entire salty category, a little bit more heavily weighted there. But I don't foresee that as something that is a risk to us as look forward into our ability to price our ability to overcome inflation. As Ajay mentioned in his remarks and I mentioned in my remarks, the pricing engine that we have put into place that is significantly better and more talented than a year ago, not just in people but in technology, where we stand today versus where we stood 12 months ago with the installation of the new ERP and our abilities really does give us a lot of room where we think that we're in the early innings of our ability to take price and trade in all of the aspects of their price like architecture that can really benefit us as we look forward to the rest of '22, but also into like '23 and beyond.

Thanks. Very helpful. And then Ajay, just one for you. I was hoping you could actually help us with some of the cadence or just help us with a little bit more detail around free cash flow for the year. Obviously, there's some lumpiness in the first quarter. But anything you can do to kind of help us the leverage, obviously, is picking up and you're talking about a similar level. So how you're thinking about generating cash over the remainder of the year.

Yes. So I think the way we are thinking about it is the transactions that happened in Q1, we are thinking about them as acquisitions. They were buyouts of distribution rights from some of our master distributors. And if you'd back those out, the cash flow, the free cash flow outlook for the year hasn't really changed. We're still expecting to generate $30 million to $40 million. And we are also -- you noticed in our guidance, we are now expecting to spend about $50 million on CapEx, which is lower than our previous guidance, about $50 million to $60 million. So that will help with the free cash flow generation as well. And Q1 results were really encouraging. The EBITDA guidance is still modest. And all of that, I think, translates to the same place that we were a couple of months ago that we're going to get to $30 million to $40 million free cash flow.

And Ajay, sorry, just to clarify, that $30 million to $40 million excludes the buyout of the $23 million from the buyout as well as Kings Mountain?

That's correct.

Okay. Thank you.

Your next question comes from the line of Ben Bienvenu. Your line is open.

Hi, guys. Jim Salera [ph] on for Ben. I wanted to shift gears and ask a little bit on the input cost inflation side of things. If you guys can give you a little detail on the commodity edge position you have for the remainder of the year and then maybe some detail on just which inputs you're seeing the most meaningful step-up in inflation, specifically what drove you guys to take the overall step up your inflation expectations from that low double digits to the mid- to high teens.

Yes. Thanks for the question. So the step-up -- I'll answer the second part first. The step-up that we are seeing is significant on cooking oils, all the different oils that we use in our products. And then there is a step-up on wheat flour as well as packaging, some of our packaging costs are really tied to what happens with crude oil prices. So we're seeing those areas stepping up, of course, fuel which we use with our freight, you know, that has stepped up as well. Transportation rates, freight rates, they stepped up. So, both of those and we are expecting that in the second half, the rates will start to come down and transportation but fuel will still be up. And you know, if you put it all together inbound freight for our commodities across the board that went up as well. So, that's the basket that we are looking at. Now, from a coverage standpoint, that is that is we have covered at different rates in different buckets. And I would say, on average, we are about 80% covered for the remainder of 2022. And we have really covered everything that the markets will allow us. These are very volatile markets. Sometimes it actually does not make sense to cover a position at 4-year highs. So we are being careful in watching the market and there are nuances in contracts where we have the supply covered, but the price is locked within the range, but we don't have a final price yet. So there is a lot of volatility, but we feel that we have captured the inflation that we do see in the mid- to high teens that we are calling.

And then as that relates to sales, and I know you guys touched on this a little bit before, the organic growth saw a pretty reasonable balance between the price mix and the volume. What do you think the price umbrella is for you guys to take pricing actions before you start to see any elasticity, I mean, do you think that there's like a 2% or 3% increase there that doesn't have any impact on volumes? Do you don't have any insight on that would be great.

So yes, so the new guidance that we have, we are expecting about 10% price, which covers all of the inflation that we are expecting mid- to high teens. So the price increase expectation from where we were a couple of months back to where we are now has gone up about 300 basis points. And to your question about -- Dylan mentioned this in prepared remarks as well as just now that our capabilities around technology, our tools, our ability to see the data and execute pricing has gone up significantly. So -- and proof is in the pudding, Q1 really demonstrated that. When we started to see new inflation, we started to ramp up pricing, we went wider and deeper in the actions that we took in February and the actions that we are taking this month. So we were able to ramp up and cover all of the inflation with new price. And I'll say that we are evaluating scenarios that if we were to find more inflation in Q4 in the 20%-ish commodities that we have not covered yet, we'll be able to execute more pricing to go after that inflation as well. And productivity is another lever. We have really ramped up there, and the team is working well together, and we have some best-in-class talent, as we talked about that is really humming on our productivity programs.

Yes. Just to layer on, on top of that. I mean, I think Ajay indicated in his prepared remarks as well, the number that we delivered in the first quarter of 9.4% was really built on -- you can see he laid out the January, February and March momentum building. We're seeing that already when we noted that in our remarks, we're seeing already in April in the second quarter, that momentum continue. So we think that we are -- I said it before, we think that we are very much in the early innings of our ability there. And I think because of the brand strength and our route-to-market strength, we're in a very unique position that we will be able to continue to expand that without really having a detrimental effect on elasticities beyond what we're sort of assuming from a prudent standpoint as we go forward.

Thanks guys. I’ll pass it on.

Your next question comes from the line of Bill Chappell.

Thanks, good morning. Just want to go back to the SKU rationalization commentary and maybe a little more color there. I guess -- I assume that's SKU rationalization where you're taking out weaker brands and putting in your power brands in the same space as kind of normal business practice. So I'm trying to understand why it's being called out as kind of a contra revenue item. And also since you putting in power brands in that space, will it have that big of an impact on sales? Or just help me understand that. And then with that, is this a longer-term plan? Or is this just kind of some tweaking of certain areas?

Thanks, Bill. This is Dylan. I'll take that. I think we've probably been talking about SKU rationalization for years before we ever went public, and we've been talking about it since we went public. It's an ongoing initiative probably for any CPG company that's doing the right thing, right, is to always evaluate -- we're calling it out: one, I think, is just to be somewhat prudent; two is a matter of timing; and three, it's a matter of the fact that -- and we've indicated this before, is that in the process of acquiring some of the companies that we have acquired. Our standard operating procedures are to evaluate sort of the tail of each company's SKU list and to rationalize that down. So if we purchased a company last year, the number 1 thing we're going to do is go in and say if they have 100 SKUs, maybe they should only have 50 or 60, it makes it much more efficient. We take the impact, the negative impact of that at the forefront of it, right. From a timing perspective, sometimes you terminate a customer who may be X million dollars of sales and then we replaced that, in the case of an example, with the acquisition of Festida or an RW Garcia, which is really more about creating supply for our OTB, there's a timing issue there, some where you are eliminating the customer. You're opening up the capacity. Then you're on-boarding the capacity, then you're getting the benefits of that capacity. And I think you'll see that through like our OTB results in the quarter, we unlocked that capacity in the first quarter. We would have loved to have unlocked more of that capacity last year, but we had to churn through the efforts of SKU rationalization. So I think: a, we're trying to be prudent; b, this is not something where we're going to come and say, we're eliminating tens of millions of dollars of net sales, and we have this big hole or this big gap. That's not how we do it. We really do it in a much more prudent way to ensure that we are maximizing the reduction as soon as possible, turning it into net sales gains for our power brands specifically.

Okay. So I didn't catch it. Is it the quantifiable amount that's impacting the second half sales? Or is it just one of the many factors?

So I think it is quantifiable. We believe SKU rationalization with the things that Dylan talked about taking some SKUs off the table so we can make room for OTB SKUs, for example, and other power brand, maintain supply simplified. It's probably 200 to 300 basis points of sales impact to the year. And as Dylan said, we intend to replace that sales with higher-margin power brand sales, but it's a timing, and we expect that it's going to pressure second half a little bit.

But to be clear -- to be clear, we're being prudent on our approach there just to sort of be conservative of how we attack that in the -- we believe strongly in our ability to replace those sales. So we're just being prudent.

No, absolutely. No, that makes sense. I just wanted a little help there. And then looking at gross margin, I understand you're not giving quarterly guidance per se, but if I recall, last year and for lack of better terms, the wheels were kind of coming off in terms of cost and freight and everything and not being able to price kind of in a timely fashion. And so it really had an acute impact on 2Q and to some extent, 3Q. So should I expect the biggest amount of recovery on gross margin to come in 2Q and 3Q? Or is it not that straightforward?

So I think, first of all, you are correct. Last year, we came off of a new ERP implementation. We were building the team, et cetera. So we needed the 3 or 4 months to build all that out to start catching up to inflation. So we are there now. You're seeing that in our Q1 results. The team technology, everything we have talked about, we really figured this out. So from here on out, you will see us ramp margins and you're going to see us sort of be in lockstep with inflation, with price and productivity offsetting and the biggest recovery for your over margins will really come towards the end of Q2 when the May price increases that we are taking, they start to develop, and we start to lap some of the inflation from last year, some of the pricing or lack of pricing from last year and deliver all that.

Okay great. Thank you.

Your next question comes from the line of Robert Moskow. Your line is open.

Maybe just a quick one on SG&A, up 18% in the quarter. I'm just wondering what are the levers for that going higher. You have some acquisitions, but is there also a reduction in cost from the conversion of IO routes? Like would -- would that number have been higher excluding that conversion impact?

For sure. We did benefit from higher conversions. The way we think about it is point-for-point match. You see us call IO conversions worth 130 basis points hurt to net sales. So it was a corresponding 130 basis points help to SG&A. So SG&A as a percent of net sales was 180 basis points favorable. So $130 million of that is higher conversions. The rest of that is volume leverage and spend.

Okay. So what's driving the number higher? Is it just the cost of delivery and can I correlate that with volume growth maybe?

Yes. So the dollar amount did go higher because of our distribution costs being up versus prior year. Also acquisition, SD&A as we are calling it now is also in there. So those two things and the investments we are making to support new customer wins. Those are the things driving the dollar amount higher, but the [indiscernible] net sales is in a good place.

Great. Thanks.

Your next question comes from Mitch Pinheiro. Your line is open.

Just a couple of quick ones. Just in terms of channel growth, which were the -- can you talk about which channels performed really well or which ones were below average?

Yes. I mean -- this is Dylan. Our food grocery channel performed fantastic. That's where most of our really over performance against the category came from. The customers inside of there, really just looking down through them 400 or 500 basis points better than the category in many cases. Our convenience was slightly under the category, but we have very strong East Coast growth with our premier convenience channel retailers that is higher than the category and performing quite well. We also are starting to enroll our power brands into a large convenience channel customer that literally just started about four weeks ago that will build throughout the rest of this year. So we're very positive on that. Our mass is very strong against the category. Club would be one where we have an opportunity. It's very cyclical where that goes up and down depending on items because club is very item specific. But that is some place that we have opportunity as well. So it's really pushed across the entire different subset of channels.

Okay. And then I was curious about the composition of your price increases. Like what percent would be sort of the price pack architecture changes? Is there -- is some of your price increases, promotional reduction or promotional cadence changes. And I was curious, like where that's been. And of the 10% you called out, how that looks -- how these factors affect the 10% anticipated pricing growth?

Yes. This is Ajay. So yes, we haven't broken it out that way, but I will say that price pack architecture, maintaining a healthy gap with within the subcategories that we play in, those are some big changes that we are making. And we are really deploying all levers and it's not a single answer across the portfolio. It really depends on are you talking about pretzels or tortillas which customer are you talking about. So we are really deploying less price increases, price pack architecture work in a big way. And then we are tweaking promotions as well as much as we need to, to stay competitive within the subcategories and channels that we play in.

Yes. Again, just jumping in. I mean it's really a testament to where we are today versus where we were a year ago in February, March of 2021. We were literally standing up our technology -- sorry, I'm getting feedback. But we are literally standing up our technology around our trade management, our pricing systems at the exact same time that we were installing an ERP and where we stand today, our ability to take that. The weight out in terms of price pack architecture, that's probably a rough number, maybe only about 20% of the total. Most of it is in either pricing or a combination of pricing plus sort of velocity and timing and depth and quantity of promotion. But it's primarily pricing and trade as opposed to weight outs or significant changes to the architecture of the units themselves.

Not to sort of jump and done because we're still in full-fledged inflation mode. But as inflation comes down and maybe even some of the input costs come down to, say, more normal levels, some of the they still, they’ll probably remain elevated, but just more normal. Then what happens? Are we talking -- we're going to see a period of increased promotional activity to lower price. I mean you don't go -- we're not going to start seeing weigh-ins. So how's that -- how do you feel about that? Like what's going to -- is that going to be a difficult time to manage as pricing comes down or -- excuse me, inflation comes down, maybe even goes, I don't say negative, but how do you think about that kind of time period? What do you do?

Yes. Mitch, somewhat the benefit of being at this for somewhere between 26 and 27 years and having gone through these cycles in the past. Everything takes a big 10-year loop essentially. But the point is we're in a very rational category. This is not one in which there is a chase to the bottom in terms of pricing. We offer a great product at a moderate price that gives people immediate pleasure for not a lot of an -- outlay of a lot of money to have that pleasure of a bag of snacks and our brands are very strong. We're surrounded by great brands and competitors and everybody is working very hard to produce fantastic products. But what we have not seen historically is where just because inflation abates a little bit that there's a chase to the bottom. So I think as inflation moderates, as it potentially comes down a little bit, whatever that is and whatever the duration of time that is over the next 6, 12, 18 months, we will have the benefit of new price pack architecture, better trade and promotional systems and people and talent. You'll have a lot more stickiness to the pricing, and you'll have an abatement of inflation, which will ultimately lead towards increased margins the way that we're looking at it. So we're very excited for when that opportunity comes to us because, obviously, going into 2022, I'm not sure anybody was really ready for the increased inflation that came because of sort of geopolitical events, but that too will pass, and we will work very hard on rewarding our customers as we always have.

That’s all for me. Thank you very much.

There are no further questions at this time. Dylan Lissette, I turn the call back over to you.

Okay. Great. Thank you all for joining us today. We are extremely excited about the momentum we have in so many facets of our business, in regards to growing the top line and the bottom line, and on behalf of our entire team, we thank you all for your continued support.

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