Good morning and welcome to the Utz Brands Incorporated Second Quarter 2022 Earnings Conference Call. Please note, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I will turn the conference over to Kevin Powers, Senior Vice President, Investor Relations. Mr. Powers, you may 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 am pleased to report that our very strong start to the year continued in the second quarter, with record net sales of over $350 million and our organic net sales increased 13.6% as demand from a combination of both our loyal and new consumers remains robust. While we continue to closely monitor consumer behavior and the impact high inflation is having on shopping and purchasing patterns, both continues to execute against our core strategy of reinvesting to accelerate revenue growth, including accelerating our Power Brand sales, expanding distribution, and under penetrated channels and customers continuing our national expansion and increasing our presence in key salty snack subcategories and adjacencies. Looking at IRI retail sales in the period, for the second consecutive quarter, we gained share in the salty snacks category. For the 13-week period ended July 3rd, our retail sales increased 16% versus category growth of 14.8%. And as we expected, our sales growth was led by higher effective net pricing, following pricing actions beginning in 2021 in response to historically high cost of goods inflation. On that note, we continue to see minimal elasticity or trade-down in our sales due to price sensitivity and private label, once again, lost share in our category, the latest quarter. Private label, which represents only about 4.6% of the IRI salty snack category, lost share in the most recent 12, 26 and 52-week periods. Turning to our bottom line results in the quarter. Our gross margins improved versus last year and adjusted EBITDA increased 18%. We are pleased to see our margins begin to stabilize as the combination of our pricing actions and productivity improvements began to catch up with the current and ongoing inflation in ingredients, packaging, freight, and labor. As costs continue to…

Thank you, Dylan and good morning, everyone. I want to build on Dylan's comments and say how proud I am of our team's ability to continue to navigate a dynamic operating environment to deliver another quarter of record net sales performance, while our margins begin to stabilize, and we return to year-over-year profit growth. Our strong management and support teams and our incredible frontline sales, manufacturing and supply chain teams are working well together to execute our playbook. Thank you to all our associates. Now, I will review a very high level summary of our second quarter financial performance, and then we will discuss our net sales and margin drivers. Our second quarter 2022 net sales increased 17.5% to $350.1 million. We delivered organic net sales growth of 13.6%, 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 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 expanded 63 basis points to 36%, and this includes an approximate 120 basis points of negative impact from our IO conversions. In addition, adjusted SD&A expenses improved by 30 basis points to 24% of sales. I will note that in the second quarter last year, there were certain miscellaneous non-operating income and expenses that are now factored into COGS and SD&A this year. This is consistent with our reporting change that began in the first quarter of fiscal 2022. A more apples-to-apples comparison would show adjusted gross margin to be 47 basis points better in the second quarter of this year versus last year, and adjusted SD&A expenses as a percent of net sales to be 40 basis points higher in the…

[Operator Instructions] Your first question comes from the line of Andrew Lazar with Barclays.

Good morning. This is Josh Peter [ph] on for Andrew.

Good morning, Josh.

So, even with the upwardly revised full year guidance range, organic sales are expected to decelerate from about 17% in the first half to around 5% or so in the back half, which is actually even a little bit lower than the street is currently looking for. So, we were just hoping you could discuss the drivers of this deceleration. And if the company's expectations for the second half have changed at all? Or if this is more just a flow-through of the 2Q beat. And as part of that, as mentioned on the call, that price is expected to be about 10% for the year, which is actually a little bit lower than what it delivered in the first half, but also discussed implementing some strategic pricing actions in the second half. So, I was just trying to get an understanding of the slowdown, if that's just lapping some of the prior actions, or what's happening there? Thank you.

Hey, Josh. Thanks for the question. So, yes, we are very pleased with our second quarter performance, and I'll touch on pricing a little bit first before talking about volume. So, pricing is expected to build from where we are now into the second half, but we are also going to start to lap second half of last year pricing. So, we are modeling that in when we say we're going to deliver about 10% price for the year. And then as far as volume is concerned, we have already seen the impact of SKU rationalization and some prior year lapse in our second quarter results. Price elasticity in the second quarter was negligible. So, really, the change in second half versus second quarter, is around price elasticity assumptions. So, what we are modeling is the fact that consumer pullback in the second half due to the economic environment is going to be slightly greater than what we saw in the second quarter. And that's what you see in our outlook. Now, I will say that we are being prudent and we have not seen an environment like this before, this level of inflation. That said, this could prove to be conservative. And the category that we are in is pretty resilient to recession. And we are growing our distribution with national customers. So, we are optimistic, but we have to be cautious and we have to be prudent.

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

Hey, good morning folks.

Good morning.

Good morning. Congrats on solid results here. Two quick questions. First, you mentioned SKU rationalization as a headwind to volume. Approximately how much of a headwind was it in the second quarter? And how much are you expecting in the back half of the year?

So, second quarter, just for the quarter, it was about 300, 400 basis points of sales growth. And we are expecting similar levels in the second half. It should be -- it should translate to our 200 to 300 basis points for the year with the three quarters, we had 300 to 400.

Got it. That's helpful. And your results in your core market are really stellar. So, this is -- it's a bit of a high quality problem. But I was somewhat surprised to see that emerging and expansion markets are actually lagging core, especially given that Florida's big stay, Publix is a big account, and it's entirely incremental year-over-year. So, why is it lagging? And what does the growth look like if we were to strip Florida out?

Yeah. Hey, Jason. Thanks for the question. As you know, we agree. The core is very strong. The category itself is the strongest in the core as well, which is beneficial to us since most of our sales are current actually in the core. If you think about the core plus the emerging markets together, that actually represents about 85% of our sales. And both of those, I mean, that's a fantastic category results to show 15% and 14.5% category growth and we outstripped both of those with the Utz brands and with the Utz power brands. If you think about Florida and Publix, which is in the emerging, as I'm sure you can see from the index in the appendix where we have the state map. If you strip that out, we really didn't enter into the Publix until mid-May to late May. So, we had a little bit of benefit in the second quarter from that. But as we look into the future, those 850 to 1,300 new stores that we're expanding into for space we'll really start to resonate in our numbers as we see that continuing to grow into the future. So, we're pretty bullish that. The areas of the states that are most important to us. Again, core emerging 85% of our sales that's really where our focus is today on growing sales.

Got it. Good stuff. Thanks a lot, guys. I will pass it on.

Thanks Jason.

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

Good morning. Thank you.

Good morning.

Good morning, Michael.

I just wanted to touch on, ON THE BORDER. It's a case where the revenue synergies are pretty real with complementary geographies and channels. Obviously, we're seeing some of that momentum come through. But can you just give us a sense maybe of the state of the union there, sort of what the -- maybe what inning we're in, in that trajectory? I know it takes a little while for that to play out. But how should we think about some of the trajectory of the momentum for those revenue synergies there?

Yeah. Sure. Hey, Michael. This is Dylan again. As we said in our script, we're very bullish on the ON THE BORDER brand. If you think about TORTIYAHS! as well as the dips and sauces, we went into a little bit more detail on dips and sauces, which were up 51% in the quarter on a $22 million retail sales for the quarter base. We're very bullish on it. It's now a $350 million retail brand. That's up sequentially from when we acquired the brand a little less than two years ago in late 2020. The core markets are growing off the charts in terms of, I think, 30%-plus gains for the brand in our core market. We're expanding the brand into food and grocery and convenience and drug, and all of these different avenues. We're expanding the ACV for the brand significantly across the U.S. So, we're very bullish on it. In terms of the inning, not a really big baseball fan, but maybe we're in the second or third or fourth inning. I think we can easily grow this brand over the next couple of years to $430 million, $450 million in a couple of years. That's just a relatively moderate compounded growth for this brand. And because of all that whitespace that we have, I think this is going to be a very strong brand as part of our portfolio as we look forward into the future.

Okay. Great. That's helpful. And just on the cost side, can you give a sense of maybe how covered you are for the rest of the year, cooking oils, for example, have come in from peak levels. If those continue to moderate, how much benefit or favorability might there be in the back half?

Hey, Michael. This is Cary. Great question. We're pretty much covered on cooking oils for the year. So, we're about 95% covered. So, it might benefit a little bit if the Board has continued to come down, but supplier basis is still relatively robust. So, not much benefit will be felt this year. But we would expect to see, obviously, a benefit next year if costs continue to come down.

And sorry if I missed this, but coverage just broadly kind of across all commodities, would it be similar to that nearly completely covered level?

It's about 90% when you blend everything together.

Okay. Great. Thanks a lot.

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

Thanks. Good morning.

Good morning, Bill.

If I go back to kind of last year, I think on the comparison, it was the costs were picking up, but it was really supply chain. It was getting freight. It was kind of renewing contracts is force majeure, all type of issues. How much of that -- where are we versus a year ago in terms of -- are we 80% back to normal? Are we 90% back to normal in terms of those type of costs that really were kind of unforeseen, but also ones you couldn't really hedge, or do anything about?

Hey. So, I think the way -- I'll repeat the question back to you the way I understood it. I think you're talking about supply chain disruptions and the environment we were in last year. I think things are getting better there. We are not out of the woods, but things have stabilized. And we have built a lot of muscle around how to tackle that. In our supply chain, manufacturing, logistics, distribution, we made people investments. And we are also optimizing enhancing our manufacturing footprint. So, all of those things, all the actions that we have taken have really helped us from a cost and financial standpoint. The second quarter results really show that we delivered pricing and productivity to offset inflation. And those two things are working now in tandem. And from here on out, we should expect sequential growth in our margins in the next couple of quarters.

Okay. And then -- and I guess in line with that, I mean, it seems for some companies, certainly, diesel spiked intraquarter, freight spiked and it started to come down intraquarter. So, is that another way of saying those things hopefully have passed us and that's part of your guidance in the back half?

Yeah. We have modeled all that in. We have good visibility into our cost structure. So, we are able to model in. In fact, we did that back in Q1 earnings, and we call mid to high-teens inflation back in Q1. And I think we are still there with pluses and minuses, freight and fuel being a benefit, and then there are other offsets there.

Got it. And then, one kind of maybe random -- not random, but a question on elasticity. I mean, I understand that snacks in general are fairly inelastic and Europe, even though you're taking a kind of conservative stance going to the back half. But as you look within potato chips, to all others, do you find that there are some areas that are more elastic or less elastic just because there are other brands or private label offerings, or are they all fairly similar?

Yeah. Hey, Bill. I mean, I think we haven't really dug into subcategory by subcategory, it's more elastic in pretzels versus TORTIYAHS! or something like that. I mean, it's so sort of inelastic to some extent from what we've seen in the private label, as we detailed in the script in our presentation is such a small percentage of it. And the route-to-market that most of the snack manufacturers take to get to the stores to service the customers and put product on the shelf is kind of unique in our industry as well. So, I don't think it's going to be where we're overweight to certain subcategory, and it's going to affect us any differently than just the overall trends.

Got it. Thanks so much.

Thank you.

Your next question comes from the line of Peter Galbo with Bank of America.

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

Good morning.

Good morning.

Ajay, I just wanted to ask a clarification. You mentioned in terms of quarterly cadence in the back half, I think 3Q EBITDA margins up sequentially and then 4Q down kind of seasonally. Is that the same case on the gross margin line as well? Just you saw a nice expansion in 2Q. I would think from here, you would continue to kind of see that sequential improvement. But just wanted to ask on the quarterly gross margin cadence?

Yeah. I believe that gross margin should be -- should follow a similar trajectory.

Similar trajectory to the EBITDA margin?

Correct.

Correct. Okay.

Sequential improvement into Q3 and then a step down, slight step down in Q4.

Got it. Thank you. And then, Dylan, maybe just stepping back, kind of a broader strategy question. It's nice to see the slides included on innovation and on marketing spend ramping up. And just -- it seems like this would be very different from when you were operating as a private company and knowing you haven't been in the public markets that long, who just frame for us, how much different is how you're attacking marketing and innovation today versus even a few years ago when you were still operating as a private company? Thanks very much.

Yeah. Sure. Hey, Peter. Great question. I honestly would say that I don't think that we're operating much differently today as a public company than we would have been two plus years ago as a private company. What I will say is that we have a higher drive to create productivity. That productivity and sort of the virtuous cycle of how we operate the company will drive earnings at which we can reinvest and then our target is to reinvest more into areas like marketing and innovation, and that's a sort of virtuous cycle. So, I'd say that as a public company, we are more driven towards the productivity, And we're utilizing that productivity to fund more innovation, because we historically and have done amazingly well as a 100-year plus company. We have historically spent very little in terms of marketing and media to drive our brands. And we want to look for ways that we can increase that over time. So, not much difference between public and private, but we're definitely looking forward to being able to spend more on innovation, on pull marketing, branding and all of the things that will drive top line results long-term.

Thanks very much, guys. We are looking forward to try [indiscernible].

Yeah. Great. Thank you.

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

Hi. I was just curious if -- in the years that you've been operating the business, have you had moments where you've had to lower list prices because of commodity deflation or competitive intensity in the category? It's a question I get a lot not just your category, but a lot of categories. And I was wondering just a history lesson, if that's something that occurs?

Yeah. Hey, Robert. Great question. The -- I've been at it for 25 years. So, I've been through many different economic cycle and I've basically been involved in sales and marketing, my entire life, and at one point, that was my job to do all of the pricing. So, I've got a real history in this. Typically, I would say that there is a very long evolution of pricing. You do not see a reduction in list price per se, meaning we don't take something that was $1 move it to $1.10 and then a year or two later, move it to $1. What you do see is a movement in the migration in the depth and the frequency of your promotional activity over time. And on a very longer timeframe, you then see sort of the reintroduction of different PPGs, or price pack groups, where something may sort of go down in size over a couple of years and then the commodity seeing changes and companies are competitive and then five or six years out, there's a new size introduction of a value pack or something else. And that's been going on much longer than I've been at us at least in the salty snack category. It's very competitive. We all want to be competitive. We want to reward our customers. We want to work with our retail partners to drive their category growth, as well as our growth. And so, it's a very long-term process that typically does not -- to answer your question succinctly, does not create a list price reduction that is more of a change in sort of the promotional schematics of how you go to market.

Not succinctly, but you did answer the question. So, thank you for that. Maybe a follow-up here. You're pushing for more distribution with these big national customers, is part of the sale that you are providing lower priced alternatives for consumers in certain subcategories. And how is that resonating with retailers, if true?

Yeah. Not at all. We've never positioned ourselves as a lower price alternative to any of the more national brands. So, we are in a very -- what we consider to be a fantastic category, salty snacks, grows 3%, 4%. I mean the fact that we're looking at markets. And I think one of the earlier gentleman asked me, Jason asked me about salty snack sales. I mean, we're looking at markets that are up 15% salty snacks. And it's a fantastic category. We are offering to a retailer an alternative in terms of a unique brand and a unique quality. So, if you look at those, it is top-notch quality, it's been around for 25 years. It's grown significantly. It's an alternative to the national brands that we're offering. Zapp is a fantastic frame we bought in 2011 and have only grown every single year since we acquired it and brought it to a much more national size. The Utz brand itself, 100 years into it, producing double-digit, 20%, 30% growth, where an alternative -- because of the uniqueness of the quality and uniqueness of the brand. And I think just like there is 10 different major car manufacturers and brands, there's room in our category for brands like ours that have a unique route-to-market, a unique legacy and unique history to really continue to take that whitespace that we talked about in our summary page about geographic channel growth, subcategory growth, et cetera.

Got it. All right. Thank you very much.

Thank you.

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

Good morning. Thanks for taking the question. So, I just wanted to touch on performance by channel. So, just given some of the changes out there in the consumer dynamics, I was just curious if you guys are seeing any shifts of note by channel?

No, not really. I mean, our food channel is very fantastic. It'd be interesting to see what happens in the second half of the year where the consumer goes to, will they move more towards mass and club for value or size pack or larger size packs. Right now, our convenience is really doing well. We continue to see great results in convenience. So, across the different channels, we are seeing a good result and the category itself is, of course, strong almost across every single channel as well.

Okay. Great. And then maybe just one follow-up question. I know there's been a number of questions on the call to sign cost pressures. But just based on your current visibility, as you guys look towards 2023, would you expect relief on the cost side? Or just any thoughts at this point where your forward outlook could look like next year?

Hey, Rupesh. This is Ajay. That's a good question. And I think, the simple thing to note here is costs have stepped down in the last couple of months from all-time highs, but they're still pretty elevated. So, we do expect that inflation is going to continue into 2023. It's going to take some time for costs to come back down to pre-COVID levels, which is when this cycle started. So, let's see what 2023 looks like, but there will be inflation there.

Okay. Great. And then maybe just one housekeeping question. On the interest expense line, would you expect to step-up for the next few quarters just on your variable rate debt?

We don't, because two-thirds of our debt is locked at 1.9% LIBOR. So, I think, we are at a good level that we saw in second quarter for interest.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Mitch Pinheiro with Sturdivant & Co.

Hey. Good morning. Most of my questions have been asked. I do have just two -- just a quickie, for the back half here. So, it looks like we're looking for say, 7% type of sales growth in the back half. You have about -- if you have double-digit pricing, obviously that implies a 3% or 4% volume decline. Is that math -- is my math correct there?

Yes. I think that's good math.

Okay. And does the volume decline have any impact on your fixed cost efficiencies in your plants? I mean, are we going to -- is it a margin pressure? Or is it offset by your SKU rationalization and some of the inefficiencies of some of these SKUs being rationalized out will offset that fixed cost leverage issue?

So, we -- yeah, so, we have modeled all that in. But the way I would describe that is, we are doing -- we are working both sides of that equation as volume comes out, private label, et cetera, that we start produce deleverage. But then we start producing power brands. So, there is -- the mix is optimized and margin is optimized. Those two things offset each other. So, we have sort of modeled that out. We are in-sourcing ON THE BORDER, that is a higher margin product than private label, et cetera.

Okay. And then one last question, just sort of on the back-to-school season. Anything different this year versus last year?

Yeah. I don't really -- I mean, we obviously have -- 2022 is different than 2020, 2021. We were still dealing a little bit in late 2021 with some of the sort of ancillary effects of COVID and different dynamics. We referred to it in our script and our notes as well about really seeing a holiday resurgence of -- especially Halloween and some of the more quality-oriented products that we're putting out there. A lot of that is because our -- A, our supply chain is better this year than it was last year. In some of just those ancillary dynamics around things like Halloween and COVID in late 2021, the buyers from our customers have really rebounded and put in advanced orders for higher quantities. So, we look for back-to-school holidays, Halloween to all be more robust than last year.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Ben Bienvenu with Stephens.

Hey, guys. Jim Salera on for Ben. Are you able to hear me?

Yes.

Perfect. I had a little difficulty before. I wanted to ask a two-part question on sales. First of all, if you look at -- you guys talked about volume decline in the back half. But we would look at salty snacks as already being kind of a trade-down indulgent category. Where does the consumer have to go below you guys, given that salty snacks are already in indulgent and you've already mentioned there's very low private label penetration? What does that look like from the consumer perspective? Where do they go?

Sorry about. Interesting question. So, we do think that we are very recession-resistant as a category, salty snacks. To your point, we have very low private label penetration. It is probably one of the least expensive high reward products that you can buy in terms of a salty snack, a bag of chips or a bag of TORTIYAHS! or something. I think as people make their decisions around what they're going to buy. That is probably -- salty snacks is probably one of the least affected. I think I read recently something where household cleaning, household goods are one of the areas at which people don't buy as much of when they're making their decision in salty snacks and food, in general, and beverage are areas that they go to. So, I think we are in a pretty good spot as an industry as we've seen over at least the decades I've been here.

Okay. Great. And then, second part on that, obviously, you guys have a big win with Publix. In terms of just your available capacity, if you were to get -- I know there's not many Publix out there, but if you were able to get a bigger regional chain like an HEB in Texas or something like that, how long would it take for you guys to be able to ramp up on that? Or what's your available capacity to support getting another big distribution gain?

Yeah. We have the capacity -- this is Cary. Great question. We have capacity to take on additional distribution. It's a key part of growth opportunity that we're executing on. Kings Mountain is a big part of that and -- which is why we did that plant acquisition. That will be our -- when it's done, the highest volume, most efficient plant we have. So, Kings will bring on a significant amount of capacity. We have flexibility between the different plants we have today to make many different things in many different places. And we can use [indiscernible] partners to the extent we need to supplement demand in specific product subcategories. So, it all depends on what product subcat you're talking about. But we don't see any issues and being able to bring on new distribution and support it.

Okay. Thanks guys.

And at this time, there are no further questions. I'll now turn the call over to Dylan Lissette, CEO, for any closing remarks.

Thank you again for joining us today on our second quarter earnings call. I'm extremely proud of all of our associates with the collective actions that have helped to deliver such continued positive momentum for the company. We appreciate your continued support as we approach the second anniversary of going public later this month, and I thank you again for your time.

This concludes today's conference. You may disconnect at this time.