Utz Brands Inc Class A Common Stock

Today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, press star zero. I would now like to turn the call over to your speaker today, Kevin Powers, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today. On the call today are Dylan Lissette, Chief Executive Officer, and Kerry DeVore, Chief Financial Officer. During this call, management may make forward-looking statements within the meaning of the federal security laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements.

Please refer to the

risk factors in UT's brand most recently quarterly report filed with the SEC, as well as risks highlighted in the company's press release issued this morning for detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statement that's made today. Please note, management's remarks today will highlight certain non-GAAP financial measures provided in reconciliation of the non-GAAP results to the GAAP financial measures. During today's call, management will reference IRI retail sales data and a discussion of our year-over-year performance. Please note that all year-over-year comparisons to 2019 retail sales results assume that the company owned HK Anderson and Truco Enterprises on the first day of fiscal 2019. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on us's investor relations website. You may want to refer to these slides during today's call. This call is being webcast and an archive of it will also be available on the website. And now I'd like to turn the call over to Dylan.

Thanks, Kevin, and good morning, everyone. 2020 was a transformational year for us. We began our new chapter as a public company through our successful business combination with Collier Creek Holdings in August, and during this transition, our business didn't skip a beat. The strength of our brands negate a challenging environment and deliver for our loyal customers and our retail customers. We kept our team safe, gained market share, and delivered on the financial commitments that we made to our shareholders when we went public. Reflecting on our performance in 2020, we stayed true to our commitment of executing against our long-term strategies that we believe will enhance shareholder value. These include driving productivity to enhance margins, reinvesting in marketing and innovation to accelerate revenue growth.

I'm proud to say that we have made significant progress across all three.

Retail sales 15% as a combined company to over 1.3 billion, outpacing salty snack category growth of 9%. Boots is now the number three ranked brand platform in U.S. salty snacks and one of the fastest growing salty snack platforms of scale. Our power brands, sales momentum continued with retail sales growing 17% for the year, and now representing close to 90% of our sales. Our footprint continues to extend further beyond our core geographies with nearly 20% growth in the expansion and emerging regions, more than double the growth rate of the salty snacks category.

And finally, we are one of the fastest-growing competitors of scale in salty snacks, e-commerce,

with over 120% growth in retail sales year over year. E-commerce now represents nearly 7% of our sales mix on a retail basis, and we will continue to drive meaningful growth in this important and expanding channel. Of particular importance to our long-term growth potential, during the year we added over 3 million buyers, almost two times the next closest competitor. As COVID-19 changed habits and elevated at-home consumption, we have executed extraordinarily well in capturing incremental demand and buyer attention. Importantly, these incremental buyers have been sticky, and our repeat rate or the proportion of buyers who purchased Oats products two or more times in the period grew to nearly 70% in 2020. We continue to believe that the increase in at-home food consumption that we have seen this past year will continue into 2021, and it will benefit us and our dynamic brands over the long term. To help capitalize on this retention opportunity and consistent with the strategy we've outlined since going public, in the fourth quarter, we began to accelerate our marketing investments focused primarily on digital, social, and e-commerce and targeted to drive growth and retention. We are seeing strong returns and our ability to measure the effectiveness of the spend means we believe we can adjust our strategies appropriately as we move forward. Wrapping up our 2020 highlights, we delivered positive gross margin expansion and we continue to make meaningful progress on productivity initiatives heading into 2021. Finally, we continue to execute on our strategy of making strategic acquisitions focused on U.S.-branded snacking and delivering strong synergies. And in February of this year, 2021, we closed on the acquisition of Vintners, our third acquisition since going public. Vintners is a leading regional brand of snack foods in the Chicago metropolitan geography, and it provides us with a strong DSD presence with approximately 55 DSD routes. Vintners delivered approximately $25 million in net sales and $3.4 million in pro forma adjusted EBITDA in 2020, and we expect it will be accretive to earnings in 2021 and beyond. Our acquisitions of HK Anderson, on-the-board of Tortilla Chips and Dips, and Vintners will collectively enhance our geographic footprint enable us to drive increased ability to execute future strategic acquisitions in 2021 and beyond that add long-term strategic value to our company and to the platform. Next, I'll shift my comments to the fourth quarter of 2020, and then I'll turn the call. Looking at the numbers in the fourth quarter, our financial results were very strong. with net sales growing over 22% and nearly 7% on a pro forma basis, which excludes the 53rd week in Q4, and it assumes that we own the ConAgra DSD Snacks, Kitchen Cooked, HK Anderson, and Truco for the entirety of Q4 of 2020 and the full year of 2019 and 2020. Adjusted gross profit margins increased approximately 155 basis points to 36.7 for the quarter, leading to year-over-year growth in adjusted gross profit of 27.5%. In addition, adjusted EBITDA margins increased year-over-year to 13.8% of sales. From a retail sales perspective, our strong momentum continued in the fourth quarter, Our retail sales increased 9.3% for the 13 weeks ending December 27th versus category growth of 7.1%. We outperformed the category by approximately 220 basis points overall, resulting in our fourth consecutive quarter of share gains. For the year, we grew 15.1%, materially outpacing category growth of 9.1%. Turning to the growth drivers in the quarter, We grew sales in five of our six key salty subcategories, including tortilla chips, led by the On the Border brand, where sales grew over 22%, more than tripling the subcategory growth of 7%. From a share perspective, tortilla chips and pork rinds in the quarter, which are more than 65% of our retail sales. In potato chips, We drove double-digit growth, which was nearly double the category, as we continued to increase distribution of our flagship Oats brand outside of our core regions, and Zapp's remained on its double-digit growth trajectory. Tangential to the salty subcategories, we also grew our salsa and queso subcategories by 52% and 38%, respectively, in Q4 2020, and we expect strong continued growth from these subcategories going forward. Moving to our brand portfolio groupings, retail sales for our power brands grew over 11% for the quarter, significantly outpacing the category at 7.1%. For the fiscal year, we grew power brands by 17%, almost twice the category's growth rate, and our foundation brands grew 3.2%. Foundation brands slightly declined in the quarter, as this is consistent with our strategy to continue to emphasize our power brands. To that end, in 2020, we eliminated approximately 85 foundation SKUs, totaling nearly $10 million in run rate sales. Looking ahead to 2021 and beyond, focusing on marketing and innovation efforts around our power brands remains a critical focus for our company. In the developing Better For You segment of salty snacks, our Better For You power brands of Boulder Canyon and Good Health grew retail sales in the natural channel over 16% in the quarter and 21% for the year, significantly outpacing natural channel category growth of 9% and 11% respectively. In the natural channel, our top-selling brand is Boulder Canyon, which delivered a phenomenal year, growing over 40% in 2020 delivering the number one selling potato chip skew in the natural channel, which is the Boulder Canyon avocado oil sea salt. We are leveraging Boulder's strong Better For You credentials and have early launches in place for innovation to include protein puffs, amongst others. We expect momentum to continue in 2021 as these brands continue to gain traction, and we are planning to introduce more innovation to continue to grow the base business. 2020 was a transformative year for us in many respects, but in particular, introducing our brand portfolio to new buyers. In 2020, we saw significant growth in households buying our product, with higher dollars per buyer being spent and increasing rates of repurchase. We grew buyers by more than 3 million for the 52 weeks ending December 27, 2020, versus the prior year, which is nearly two times more than any other salty snack competitor during this period. Moreover, our rates of repurchase increased year over year to 70%, suggesting stickiness from this increase in the number of households. We've seen the total number of buyers growing throughout 2020, and coupled with increasing repeat rates, we continue to gain confidence about what this means for the company's long-term growth prospects. Importantly, this growth in buyers was diversified across age and income demographics, as well as geographies. From a channel perspective, grocery, mass, and club continued to drive our retail sales growth. In addition, consistent with our strategy of expanding in under-penetrated channels, we gained share in convenience, where we are currently underweight, notwithstanding overall COVID-related softness in this channel, as well as in our largest channel, grocery, which showed strong growth throughout COVID. We grew retail sales in the grocery channel by 14% in the quarter, and growth in mass and club was strong at approximately 8% and 12%, respectively. During this quarter, we also successfully continued our strategy of geographic expansion as we experienced strong growth in our expansion and emerging regions while also performing well in our core geographies, where our retail sales grew nearly 6%. Expansion grew about 14% in the quarter versus category growth of eight, and emerging grew over 14% compared to category growth of approximately 7%. For the year, we grew core, expansion, and emerging 12%, 20%, and 19% respectively. We are number two in our core, But we are only number four and number five in expansion in emerging markets signaling continued opportunity to grow our sales. This significant growth and expansion in emerging is particularly exciting given they now only comprise 50% of our total retail sales. And that includes the impact of the on the border acquisition. We continue to benefit from the geographic expansion efforts that have been underway at us for decades. Our acquisitions have helped fuel this expansion, and our ability to leverage the footprint gained by our acquisitions to create incremental growth for our power brands has proven to be a very effective strategy. Importantly, while we have been successful in driving above category growth in both emerging and expansion regions, our sales within each represent less than 5% of the overall category sales, and this is less than the 9% in our core market. This reinforces our belief in the distribution runaway we have for the future. Turning to e-commerce, this channel continued to be an area of hyper growth for our company. We finished the year as one of the fastest growing salty snack companies of scale in e-commerce with sales growing over 120% and nearly doubling to nearly 7% of our total retail sales. We continue to expand our assortments, and we are growing across pure play e-commerce platforms, click and collect, and traditional grocery e-commerce. Looking ahead, we have recently revamped our website and have launched our D2C platform that is intended to create a more user-friendly experience and is better optimized for mobile, all enhancing our path to purchase. Supporting these efforts will be our marketing agency of record, the Sasha Group, who has significant experience in e-commerce and in digital and social platforms. Before I turn the call over to Carrie, I just want to thank our entire team for their commitment during a challenging environment and a transformational year for us. This is a testament to the passion and the tenacity of the UTS culture, and on behalf of our management team and our board of directors, I'd like to thank you again for your incredible efforts.

Carrie, Thank you, Dylan, and good morning, everyone. As Dylan mentioned earlier, in the quarter we delivered strong top-line and bottom-line growth that was in line with our expectations. Net sales increased 22.1% to $246.3 million. Gross profit increased 27.4% to $90.5 million. And adjusted EBITDA more than doubled to $34 million. As you know, calendar 2020 was a 53-week year, In adjusting for the impact of the extra week and the impact of acquisitions, pro forma net sales on a comparable 13-week basis increased 6.8% in the quarter. For the full year, pro forma net sales increased 11.9%, and adjusted EBITDA grew 54.8%, with margins expanding over 260 basis points to 13.9% of sales. These results are a reflection of the team's consistency of execution as we delivered category-leading sales growth and margin expansion amidst the challenges of COVID-19, going public, and three strategic acquisitions. This speaks to the relentless spirit and culture of the ETS organization and our wavering focus on delivering for our customers and our shareholders. Moving to the details. Our net sales growth in the quarter was driven by volume of 4.1%, price mix of 1%, the extra week of 7.9%, and acquisitions of 10.6%, partially offset by the impact of higher discounts to independent operators, which reduced the net sales growth rate by 1.5%. As a reminder, we are in the process of converting company-owned DSD routes to independent operator routes, and as we make these conversions, We no longer incur certain selling costs, such as route commission compensation, benefits, and transportation costs, but instead, we pay a sales discount to independent operators. This has the effect of decreasing net sales and gross profit, but we believe it results in higher EBITDA and margins over the long term. Moving down the P&L, we had a very strong margin performance in the quarter. Our growth in adjusted gross profit margin of approximately 155 basis points led to an increase in our adjusted EBITDA margin of approximately 555 basis points to 13.8%. As a reminder, prior year margins were impacted by the timing of certain selling expenses that we don't expect to recur and drove a portion of the expansion year over year. Dissecting the increase in adjusted EBITDA margin for the quarter a bit, Volume contributed approximately 130 basis points of margin growth as we leveraged higher volumes in our manufacturing facilities. Price mix contributed approximately 80 basis points of margin growth. Acquisitions contributed approximately 140 basis points of margin growth. Cost of goods sold contributed approximately 80 basis points of growth as we experienced lower commodity costs due to strong proactive supply chain execution which locked in favorable contracts that benefited our 2020 results. The 53rd week drove approximately 100 basis points in margin expansion. And finally, selling and admin expense was relatively margin neutral in the quarter as we had a higher incentive compensation due to strong performance and higher marketing and e-commerce spend, both offset by lower selling expenses and synergy realization. For the year, selling and admin expense was higher due to the full year impact of higher incentive compensation in marketing and e-commerce spend. Moving to our balance sheet and other key points, as of fiscal year-end, our liquidity remains strong, and we had a cash balance of $46 million in availability on our ABL credit facility of approximately $106 million. After year-end, and as we previously announced, on January 20th, we completed a term loan refinancing and placed a new 720 million term loan B. This new term loan, coupled with exercising the public warrants, which brought in approximately $180 million in cash, enabled us to repay in full the 490 million bridge credit facility used to fund the acquisition of Truco Enterprises and the On the Border brand and refinance the pre-existing 410 million term loan B due 2024. Importantly, this refinancing lowered our expected cash interest costs by over $3 million annually, lengthened our maturity profile by over three years to 2028, and provides our business with additional financial flexibility to support our continued long-term growth. Pro forma for this financing and the Truco acquisition, our net debt at fiscal year-end 2020 was approximately $692 million, or 3.7 times normalized further adjusted EBITDA, of 186 million, which assumes Truco and HK Anderson were owned the entire year, as well as including 5 million in run rate cost synergies related to Truco. Before I discuss our outlook for 2021, I'd like to provide an update on two strategic projects that will improve our infrastructure and help enable our platform to continue scaling. First is our ERP implementation. We have completed the phase deployment across our network. and our final modules were stood up in February of 2021. This has been a two year process for the business, and we are excited to begin taking advantage of the incremental analytics and efficiency that a single integrated current state ERP system can deliver. We will also benefit from key employees across functional areas of the business returning from focus on the ERP to helping drive day to day execution. Second, After a brief pause last year to accommodate the COVID-19 impact and the ERP implementation, we resumed our conversion from company-owned routes to independent operators, and we expect to finish the conversion in the first half of 2022. As we've spoken to before, we believe the IO conversion strategy is incremental to long-term organic growth, is accretive to EBITDA margins and cash flow, and helps de-risk our business overall. We look forward to completing this initiative which has been ongoing for several years now, and we'll also continue to look for opportunities to increase our IO route count by adding new organic routes over time. Turning to guidance, we are looking forward to another strong year for us with our momentum continuing into 2021. We expect full year 2021 net sales to be consistent with 2020 pro forma net sales of $1.16 billion. For clarity, our 2020 pro forma net sales is on a 52-week comparison basis, assumes we owned HK Anderson and Truco on the first day of fiscal 2020, and assumes $20 million of net sales for Vintners to align with expectations for fiscal 2021, which will have 11 months of results and be impacted by skew rationalization activity. Importantly, we expect modest organic sales growth year over year, even as we lap fiscal 20 organic growth of over 8%. As expected, due to the COVID-19 impact on at-home consumption in 2020, our 2021 pro forma net sales guidance is below our long-term growth algorithm. But importantly, on a two-year stack basis, this results in pro forma sales growth of about 6%, well above our long-term algorithm of 3% to 4%, which remains firmly intact. We began the year with good momentum, with strong retail sales growth through February, and we expect full year 2021 organic growth led by incremental distribution, innovation, and price mix, partially offset by the COVID-19 related lap and our continued DSD route conversion to independent operators. Moving to adjusted EBITDA, we expect a range of $180 to $190 million versus 2020 further adjusted EBITDA of $181 million, delivering a margin of approximately 16%. Included in our 2021 assumptions is the contribution of $48 to $52 million from our acquisitions of HK Anderson, Truco, and Vintners. Excluded from these numbers are run rate cost synergies from acquisitions of at least $5 million. We expect to accomplish the actions to pull through most of these cost synergies by the end of the second quarter of 2022, which is within the range of 12 to 18 months we typically have experienced over our acquisition history. Included in our EBITDA assumption is commodity inflation of about 4%, and we are focused on pricing to offset this cost pressure. Additionally, we expect to increase productivity from 1 percent to 2 percent of cost of goods sold, which helps to offset inflation and fund incremental marketing spend. Finally, and as I mentioned earlier, we are in the process of converting routes from company-owned to independent operator, and this conversion increases the rate of growth for sales discounts, which negatively impacts net sales and gross profit. For adjusted EPS, we expect a range of 70 to 75 cents, which assumes fully diluted shares on an as-converted basis of $142 million and excludes step-up depreciation and amortization and stock compensation expense. Lastly, a few additional assumptions for consideration. First, we funded the $25 million Bittner's acquisition in February 2021 with balance sheet cash. We are expecting 200 to 250 independent operator route conversions in 2021. We expect core DNA of $25 to $27 million and step-up DNA of $57 to $59 million, which are both comprised of approximately two-thirds cost of goods sold and one-third selling and administrative expense. We expect capital expenditures of $30 to $40 million as we look to invest behind our productivity program and lean into 2022 targets. We expect cash interest expense of approximately $30 million. We expect an effective cash tax rate of 23 to 25%, which is the percentage of pre-tax book income we expect to manifest into cash tax payments. And we expect to end the year with a net leverage ratio of approximately 3.5 times. That includes unrealized cost synergies of approximately 5 million from acquisitions. Diving into our productivity assumptions included in our outlook for 2021, Incremental productivity efforts are cornerstone of driving higher margins, and we expect meaningful progress towards our 2023 goal of 3% to 4% productivity of cost of goods sold. This year, we expect to double our productivity from 1% to 2%. In breaking down the savings, we expect 40% to come from manufacturing, 30% from product design, 20% from network optimization, and 10% from sources. A dedicated team to drive this incremental productivity has been up and running for some time. We know the projects that will drive our 2021 productivity ramp up, and we are planning for an additional ramp up in 2022. Also included in our 2021 outlook is an assumption for increased investments in marketing and innovation. In 2021, we expect a significantly higher mix of digital and e-commerce spending and a lower mix of sponsorship spending. And we expect to increase our working digital and e-commerce media spend by approximately 60% relative to 2020 levels and over 275% relative to 2019 levels. We will continue to allocate most working media to digital and e-commerce as these strategies allow us to remain nimble, measure the return on spending, and have proven to drive buyer growth and retention. From an innovation perspective, we have an exciting slate of new products in fiscal 21 across brands and subcategories. To touch on a few, first we are introducing Twister's Flavored Pretzels. This is a subcategory of U.S. salty snacks that grew approximately 30% in 2020 and represents around 35% of the total subcategory according to IRI, but is only 10% of Utz's Pretzel Mix. Our rich history in the pretzel subcategory positions us well to make this a new, permanent part of our product portfolio that should drive meaningful growth. We are also introducing on-the-go products like our cheese pourables. As you know, cheese balls are a strong product for us, but today are almost entirely sold in large barrels, mostly in mass and club. Pourables is a product that is more on-the-go and appropriate for C-Store, and impulse in grocery and other channels. And lastly, we have launched peanut butter filled pretzels under the Utz brand. This is an extension of the capabilities we acquired with HK Anderson, and we have high expectations for growth and innovation across both the HK Anderson and Utz brands. Early results are strong, and we will continue to innovate around the filled pretzel platform. In addition, we have a wide range of other innovations like protein snacks, new flavors and textures, and our 100-year anniversary special products. In summary, this year we will continue to build on our strong foundation and execute against our strategic priorities that we believe will enhance shareholder value. As we move throughout 2021, we will balance actions that strengthen our fundamentals and create stronger margins long-term, while driving strategies that advance our multifaceted growth opportunities. Now I'd like to turn the call back over to Dylan for some closing remarks.

Thanks, Gary. Looking ahead to 2021, we are focused on actively deploying our long-term value creation strategies of generating productivity gains and reducing costs to enhance margins, reinvesting these gains to accelerate our revenue growth, and continuing to make strategic acquisitions. Our goal remains to be the fastest-growing, pure-play branded snack platform of scale in the U.S., and we believe that our long-term sales and earnings growth outlook remains firmly intact. As Carrie mentioned earlier, our longer-term annual growth outlook is for 3% to 4% organic growth. We delivered growth significantly above this in 2020 as COVID-19 changed habits and elevated at-home consumption. Through the combination of the strength of our brands, our dedicated associate base, and our world-class distribution system, we capitalized on this opportunity and delivered for our customers. In 2021, we will look to maintain this momentum as we remain extremely well positioned for long-term growth, and I'll touch briefly on just a few of the key factors that support this. First, we gained a significant amount of new buyers in the salt and snack category, and our repeat rates are increasing. This year, we are focused on retaining and recruiting these new buyers, and we'll elevate our digital and social-oriented marketing spend to continue to raise customer awareness of our power brands to leverage these new customer relationships. Of note, On the Border was the number one tortilla chip brand in terms of buyer retention in 2020, and we expect these buyers to remain loyal customers in 2021 and beyond. Second, we have significant opportunity in terms of geographic white space and under-penetrated channels. As I noted earlier, our share in emerging and expansion geographies is below 5%, which is significantly below our share in core geographies of nearly 9%. We have a tried and true strategy of building strong relations. and relationships with national retailers that have both regional influence and relevance, and we will leverage these relationships with our higher brand marketing support. Mass and C-Store channels remain large opportunities for Oats, and the acquisition of the On the Border brand, for example, will help further Oats' growth in these key channels. Third are productivity efforts. VR virtuous cycle of value creation will help to fuel incremental marketing and innovation to accelerate revenue growth. We plan to invest more in our brands in a more targeted way, and these higher marketing dollars will support geographic expansion and brand building tactics. Fourth, our infrastructure improvements will enable the UTS platform to continue to scale to greater heights. As Carrie mentioned earlier, we're implementing a new ERP system and we continue to convert to our DSD routes to independent operators. And additionally, our new low-cost debt structure will provide increased financial flexibility. Lastly, we will continue to make strategic acquisitions that deliver strong synergies and that enhance our competitive positioning. Our strategy remains consistent as we are focused on branded snacking in the U.S. at attractive valuations that are accretive. On that note, our pipeline remains very active. And important to note, we are very excited to recognize the fact that Utz is officially 100 years old as a company this fall. Almost a century ago, in November of 1921, Bill and Sally Utz started making and selling potato chips in Hanover, Pennsylvania. I'm extremely proud of the generations of families and Utz associates who have put decades of effort into making Utz a successful, thriving company with a strong roadmap for future growth. I see no limit to our future success, and I thank our associates, our customers, and our consumers for your continued support of us and our entire brand portfolio. Again, thank you very much for joining us today. We are excited about everyone who has become a shareholder of us, and we look forward to continuing to create value for all of our stakeholders. I'd now like to ask the operator to open the call for questions.

Thank you. At this time, we will be conducting our question and answer session. To allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. Your first question comes from the line of Andrew Lazar with Barclays. Andrew, your line is open.

Hi. Good morning, everybody. Morning. Hi there. Dylan, you talked about how in Betts' core markets, the company gained share for the full year. It looked like in 4Q specifically, though, in those core markets, it looks like you lost a little bit of share in 4Q, so a little bit of an inflection. Try to get a sense of what drove that shift, and maybe more importantly, how you see core market share moving forward.

Yeah. Hey, Andrew, thanks very much. And you're right. On a full year basis, the core did extremely well, right? The Let's Brand platform did about 12% against a market of approximately 9%. But as to your point, for sure, in Q4, we had a little bit of a slowdown there relative to the market. We came in about 5.7%. compared to 6.7%. So in our core markets, if you look at the PowerPoint presentation we have online, sort of jumps around from the Pac Northwest to New Orleans to the Mid-Atlantic to New England. So it's a varied geography, and you can really dial into specific geographies and see where, you know, on a year-over-year basis, we have opportunity for improvement. It's a big part of our focus. We're laser focused on it. We know that the core is as important as any of the growth that we have in emerging and expansion markets. There's a little bit of noise in the Q4 just from some holiday overlaps, some channel exposure, heavier exposure to sea store, underpenetration in mass in some of those core markets. So it's a hodgepodge of different reasons, but it still grew almost 6%. So we're excited about 2021. I think as we look forward into the future, 2021 is just an area for us to get laser focused on what markets, what accounts within those markets, what channels, what accounts within those channels that we need to focus on. And so we're putting laser focus on that and just, you know, very importantly, our overarching objectives are that we want to gain share in our core. So if, you know, if share is going to go up 2% or 3% or sales are going to go 2 or 3, we need to beat that in our core. So that's where we're laser focused going into 2021. Great.

Thank you for that. And then, I guess lastly, I know the company's previously spoken of a mid-teen EBITDA margin target for, I think it was discussed as sort of a medium term. And we're now looking like, you know, UTS will hit this target in 21 due partly to the acquisition of the higher margin Truco business. I guess, does the company have an updated view on its medium term margin potential? Thank you.

Hey, Andrew, that's Kerry. Great question. We're not updating the target per se. I mean, I think it's safe to say that 16% EBITDA margin is the new baseline from which to grow from. I think with our, you know, price pack initiatives, with our productivity, with our IO conversions coming to a completion here in the next 18 months, plus, you know, with long-term profitable branded volume growth, all that is margin accretive. And then you layer in synergies we pull through and acquisitions. You know, that is a lot of ammunition to kind of march it forward from a baseline of 16. Thank you. Thank you.

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

Good morning. Thanks for taking my question. So, Dylan, I wanted to go to your slide just showing the subcategories, sales, growth, and the tortillas category. You guys significantly outgrew the category. I was curious in terms of what the drivers there were in terms of the outperformance. And then do you expect this outperformance to continue into 2021?

Yeah, thanks for the question. That's the slide on the presentation six. Yeah, tortilla chips did fantastic, as you can tell. Most of that, Rupesh, is driven by the On the Border brand, but also importantly is our Tortillas brand, which is a legacy brand that is up well over 100% as well. So Truco On the Border, which you know we acquired back in December of 2020, had phenomenal growth in 2020. It's continued its growth trends in 21. It's coming off a phenomenal year. Tortillas continues to grow and continues to gain expansion. So I think when I look at that subcategory of tortillas going into the future, into 2021, I think it's going to be where it used to be a big weakness. If you remember back in June of 2020, we talked about how we were under-penetrated in the tortilla subcategory. Now I think that's a feature and continued strength of us is because we've really grown to like the third largest position in tortillas as a subcategory.

Okay, great. And then maybe just one follow-up question for Kerry. So in regards to your adjusted EBITDA margin guidance, is there any granularity you can give us in terms of both gross margins and SG&A, how to think about it year over year?

Yeah, I think, you know, gross margins I think will be consistent with kind of the pro forma gross margin from 2020, so call it 38% area, and that applies kind of an adjusted SG&A margin of about 22.

Okay, great. Thank you. I'll pass it along.

Your next question comes from the line of Brian Holland with DA Davidson. Brian, your line is open.

Yeah, thanks. Good morning. So I wanted to just maybe piggyback on Andrew's question about the core market performance. Have we seen any change in promotional cadence or intensity in the competitive landscape? I'm just curious whether that had any impact on what you're seeing.

I think we've seen a little bit of that, Brian. Obviously, we did really well throughout 2020 as a brand. It doesn't matter if you're looking at it in any particular geography between core emerging or expansion, we did really well. We did really well in almost all of the channels that we operated in 2020. And I think from a competitive standpoint, obviously, we also went public and we also got on a larger scale and perhaps picked up some more notice from competition. I think in general terms, I've been at this for 25 years, and I wouldn't say that there's any major shift in promotional strategies across the salt and snack category. I think people are looking where they stand in the stack of their share in particular subcategories. If they're underweight and a certain subcategory, if you're underweight in a certain share, looking at ways to perhaps drive share gains. But I haven't seen any dramatic shifts in pricing relative to that. And as we look forward into 2021, I think You know, there's opportunity for everyone in the industry to continue to look at price pack architecture and ways to, you know, promote and sell. And it all comes down to depth and frequency and a multitude of ways to, you know, to affect ultimate price points.

appreciate the color dylan um and then just moving this forward to 2021 uh you know the revenue guide a fairly you know precise number um in what's going to be a very volatile year one would think just you know compares etc and then you obviously have a lot of internal initiatives So maybe a little more color on how we arrived, where we did. And so maybe just to help guide that question along, you know, can Truco, for instance, or on the border specifically grow in 2021? And, you know, are we thinking about those core markets just being pressured by the COVID cop and that's just fully offset by expansion and emerging market share? Because it seems like there's a lot of white space that you'll be attacking over the next 12 months.

Yeah, great question, Brian. This is Kerry. Yeah, I would say just a little more color on the revenue guidance. I think, you know, we expect modest organic growth, and that effectively means ups. You know, we expect distribution gains, which are meaningful as we've been building over time. And going to your point about emerging and expansion, you know, that will continue to grow and outpace the categories. And we expect the core to do well as well. But I think distribution by and large will drive, you know, modest organic growth for us. And Truco has a great, you know, playbook going forward. They've got a lot of new distribution in the food and grocery channel. So there's a lot of runway there. But they have a more meaningful COVID lap than NUTS does in terms of percentage of total total business. So, you know, I think the expectation is to grow modestly, and we're seeing consistent growth for the year. You know, Truco might be flat to down a little bit, but that's still very acceptable. You know, it's a great business. There's a lot of long-term growth ahead of it. We bought it for a really good price, so we're very happy with it.

Got it. Thanks. Congrats on the great year, gentlemen. Thank you. Thank you.

Your next question comes from the line of Michael Lavery with Piper Center. Michael, your line is open.

Good morning. Thank you. You mentioned the favorable contracts you had in 2020 that were a benefit and now, of course, are part of your comp. You're guiding the 4% inflation that I'm assuming would capture all of that. But can you just give a sense of where you sit now in terms of how much is this hedged or locked in or, you know, kind of what sort of volatility there could be potentially to that 4%.

Yeah. Great question, Michael. We're about 80% covered for 2021. You know, if you asked me before the Texas freeze, you know, what inflation would be for the year, we would have probably said less than 4%, but that definitely had an impact on the markets and resin prices. And that's kind of flown through to packaging and, And so, you know, I think we've got a really good supply chain team on purchasing. They bought oils really well, you know, and we're still seeing the benefit of that in 2021. So as you think about inflation this year, it's primarily in packaging. I'd say about half of that's in packaging, about 40% in the cooking oil area because spot prices of cooking oil have gone up. But we are largely covered for the year. And then 10% in other categories.

Okay, great. That's really helpful. And then just a quick follow-up on productivity. You've talked about the momentum there and how that should progress. Can you just give a little more sense of how much might be reinvested versus dropping to the bottom line and how you think about taking those benefits?

Yeah. So, yeah, meaningful increase this year. We're effectively doubling, you know, the percentage of costs from one to two. And that's on the U.S. base, by the way. You know, and we'll be run rating higher than 2% as we exit the year. But we're going to take some of that savings and certainly reinvest in marketing. We're going to spend more this year. We're leaning into digital and social, and, you know, the digital and e-com piece of marketing should grow, you know, close to 60% this year. So we will take some of that and reinvest in marketing like we said we would, but some of it's also going to help offset some of the inflationary pressures we're seeing this year. Okay, great. Thanks so much.

Your next question comes from the line of Tim Perth with Stephen Jenks. Tim, your line is open.

Thanks for the question, guys. So I just want to start with a bigger picture question. I think the key opportunity for us longer term is growing your number four and five share positions in the expansion and emerging categories. Do you think you have the brands in place today to do that? And is the answer really just adding distribution assets in those regions? Or can you just walk me through how you're thinking about growing your business outside of your core markets?

Yeah, sure. Great question. So, I mean, if you think about it, we've been growing continuously and contiguously across the United States for 100 years. more so in the last 10 years where we have been utilizing the M&A strategy to grow geographically in many cases, right? Golden Flake in 2016, the Tim's Cascade assets that we acquired in late 2019 in the Pac Northwest, a great example with Kitchen Cooked in Illinois and Vintners in Illinois. And as we take over and acquire these companies, and expand our geographic base, we have the opportunity to really push our branding into our power brands, which is really where we want to focus. We know that we're going to have some negative drag from foundation brands because it's not where we're putting our focus, right? In the last year or so, we've eliminated two or three of those foundation brands, and they become a negative drag on your retail sales in some cases, but you're converting that space into your power brands so that when we focus our marketing behind those power brands, we get the benefit from that. So as we expand into the southeast, as we expand into Florida, as we expand into Texas, As we're currently expanding into Arizona, as we're increasing our sales and our share in the Pac Northwest, as we're going into the Midwest, the Midwest is a huge opportunity for us in showing great results, especially with the just consummated acquisition of Vintners. that we closed on February 8th of 2021, we are already putting Boots branded products onto that network and pushing those into the Chicago market. So it's really a combination of just using sort of organic sort of you know, zip code by zip code continuous growth across the U.S., but also some of that leapfrogging that we're able to do when we do some of our acquisition strategies to deliver an opportunity. You know, and again, I think to Andrew's first question, without ignoring the fact that we want our core to also gain share over time, not just rely, of course, on emerging or expansion markets.

Thanks. That was helpful. And I just wanted to pivot over to marketing. So you started your relationship with the Sasha group in October. How's that relationship progressing? And what have your early learnings been from your recent marketing investments been?

Yeah, I mean, it's going very well. I mean, what a great dynamic group. And if you remember back to past calls and past conversations, What we're really trying to do is, A, spend more money on marketing, right, than we had historically spent. And when I say spend more money on marketing, I mean spend more on traditional digital social type of marketing, pulling away from what we have been spending some money on in the past, which is sponsorships, and putting more spend into traditional social digital type of media. Sasha, which is a VaynerX company, The Sasha Group is just, you know, fantastic at that. And so we have our team that does digital social. It's fantastic. And I think it sort of shows in some of the e-commerce stuff that we put into our presentation where we've really grown our e-commerce business, which is comprised of sort of this is, you know, IRI retail e-commerce as it's defined by IRI, which includes some of this click and collect and some of the other methods of getting product to people through e-commerce. has really grown over 120-plus percent, and we expect to continue into 2021 and beyond. So we're really focusing to make sure that we're dynamic, spending more money, significantly more money, on social, on digital, on our brands, focusing in on power brands, making that 360 loop into e-commerce, and really driving awareness. And I think through our new households that we picked up and our repeat rates and the things that we detailed in that presentation as well, I think you could say that we're happy so far. I always say never happy but pleased but not satisfied. We're very pleased, but we always think that we can improve. And so we'll spend 2021 trying to improve that even more, which is the beauty of the marketing that we're doing is we can literally change

uh day-to-day on a dime if we have to to spend that money effectively thanks guys i'll pass it along your next question comes from the line of robert mosca with credit suites robert your line is open hi thanks a couple follow-ups uh could you give us a couple more specifics on how you're going to implement pricing this year uh you mentioned price pack architecture and also depth and frequency of promo. To what extent will list price increases also be in that formula? And secondly, I wanted a little more depth on the border. And it seems like there's significant revenue synergy opportunities with your UTS distribution platform. Are your UTS salespeople marketing that brand to their customers currently? and has that yielded more distribution, or is On the Border's standalone business, is it still kind of operating standalone and has its own distribution plan? Thanks.

Yeah, hey, Robert, I'm going to tackle both of those. This is Dylan. I could probably give you 30 minutes on either one of those topics, but I'll try to do it in a succinct way. In terms of pricing, you know, in the snacking industry, you know, It's a little bit different. It's not just your sort of typical list pricing initiatives. However, we have a very robust price pack architecture team that constantly analyzes the opportunities, like I mentioned earlier, about frequency, about depth. We did just do some pricing on March 8th, which kicked in. Of course, it takes a little while for some of that to flow through the system with contracts and all the specifics of the, you know, thousands of accounts that we basically deal with on a daily basis. So we do have some lists, and then we also have some, you know, some weighed out opportunities that we're enacting and some different things around that to really try to tackle offsetting some of the inflation concerns. So on that, we have a lot of different levers. We're pulling all the levers, and we're going to continue to lean into those levers on pricing. flipping to your commentary about on the border and the integration of sales and how that works. As we said at the very beginning, you know, we did not look at on the border as a cost synergy play from an M&A perspective. We looked at that as a revenue synergy play from an M&A perspective. So that team continues to sell day in and day out to their major customers on a DTW direct-to-warehouse basis. That's intact. That's going very well. They have great leadership. They have a great team. If you think about it, we're months into it right now. We're coalescing very well on all fronts. Our sales folks, it's a little bit – you have to unwind in some cases, you know, existing distribution, and there's some complications there that you just have to sort of unwind with any integration of M&A. But, for example, in Chicago, like within weeks of – the acquisition being consummated, we were taking it through our route system, through our third-party distributor route system in Chicago, into Juul. For example, in central Pennsylvania, we've already turned over OTB distribution to the UTS DSD sales system. In Connecticut, we've already turned it over to the UTS DSD sales system. And so as we look forward, those opportunities are going to, I think, be very positive and very accretive to us because the brand sells and it's doing really well in the places that we've been able to convert it. And when it is distributed, when it is sold, you know, if you think about the sales team at OTB, I would garner to say there's roughly eight people in sales. When you think about the sales team at Utz, I would garner to say if you disregard the DSD sales force, we still have over 200, you know, plus people that sell. So all of them are looking at OTB. And it's not just tortillas. It's salsas, it's dips, it's quesos. It's all of the product lineup that they have that we can integrate into our almost 1,700 DSD routes over time, right? And I always think of things in a very long-term perspective, that over time we're going to get those wins, and it's a great brand that's selling well.

Great. Thanks.

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

Hey, good morning, folks. Let's see, a couple quick questions. First, you mentioned contracts and the step up to 4% inflation from modestly deflationary. Is that going to be a gradual ease in for the giving you time to adjust? Is it going to be rapid or are we a roll over cliff and have a little bit of friction on margins as we enter the year?

You know, I think it'll be more second-half weighted, but I think we will see some pressure in the first half of the year. But, you know, we have the pricing starting to take effect, and productivity will layer in as well to help offset that, and that'll be more back-half weighted as well.

That's helpful. Thank you. And coming back to the marketing question, Dylan, in your prepared remarks, my interpretation of what you were saying was you have a pretty big heavy up of retail media on e-com platforms coming next year. Question one is, is that right? And second, assuming that's the case, which I think it is, how much of that, if any, can be funded from trade budgets, or is all that investment going to be incremental?

Yeah, so in the digital and social area, we are spending approximately 60% more in 2021 than 2020. Part of that is incremental dollars for sure, Part of that is also pulling out of sponsorship and moving the mix into more digital and social. So it's a significant increase that we are going to layer into that digital social in pure dollars.

I'm really just trying to isolate for the retail media component and not the social component. Is there any color you can give, like things like your investments against Roundel or Walmart Connect or Amazon Media Services, which to my ears, it sounds like that's where a lot of this is going to support e-commerce.

Yes and no. It is digital and social. I will honestly say, Jason, that I think all of that is interconnected. E-commerce is not just Amazon. E-commerce is the click and collect at Walmart. It's the pulling up to a Kroger and ordering online and how do you make your products appear. By the time you type the words P-R-E, looking for a pretzel, how do you make your products appear on the top of that shopper's list and create that stickiness? So it is all interconnected. I think it's a great question. It's something we could probably follow up on more definitively. But the way that I look at it, it's not traditional. We're not talking about television advertising, and we're not talking about a lot of radio advertising. We're talking about a lot of digital and social-oriented advertising and spending and marketing to promote the brands.

No, I hear you. Obviously, paid placement, paid search, those are quite different than social. That's just why I'm trying to wrap my head around it. Sounds like a good opportunity to follow up offline.

Sure. Sure thing. Of course.

This concludes our question and answer session. I will now turn the call back over to Dylan Lissette for closing remarks.

Thank you very much all for joining us today on this year-end and Q4 2020 call. We are very excited about the future. We're very excited about everyone who has become a shareholder of books. We look forward to continue to create tremendous value for all of our stakeholders. We're very excited about our 100-year anniversary and all of the things that we'll have going on around that. It's a testament to the company and to our folks and to our people, our customers, and our consumers. And thank you very much.

Ladies and gentlemen, this concludes this conference call. Thank you for participating. You may now disconnect.