Utz Brands, Inc.

Thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Utzbrand Incorporated third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. It is now my pleasure to turn today's call over to Mr. Kevin Powers, Head of Investor Relations. Please go ahead.

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

Thanks, Kevin. Good morning, everyone, and welcome to our third quarter earnings call. First off, I'd like to give a special welcome to our recently promoted CFO, Ajay Kataria. Ajay joined us in 2017 with a strong public company financial background and a great amount of experience with several CPG companies. He worked directly for our Chief Operating Officer, Carrie DeVore, over the last few years, and I'm excited to have him fully into the CFO role now. Thank you to both Ajay and Carrie for such a well-planned out transition. So let's get started this morning with a few key messages. Demand for our brands remains strong and our two-year sales growth is accelerating as we continue to lap the elevated consumption impact from COVID-19 pantry loading in 2020 with improved strength in our core and significant growth in our emerging and expansion geographies. Our IRI retail sales outpaced the selfie snack category on a two-year basis, with our power brand significantly outpacing the category with strong performance across all retail channels. On a longer-term basis, I'm also happy to report that our national expansion continues with both ACV growth of around 600 basis points over the last two years and total points of distribution gains of approximately 22% over that same time period. We expect that these trends will continue into the future as our team consistently builds out our national presence. Like most of the industry, gross margins in the quarter were impacted by rising inflation, but our pricing actions and productivity initiatives are underway and on track and continue to build as we exit the year with a carry-forward benefit expected into fiscal 2022. As I'm sure you can imagine, after 26 years of being at UTS, and as CEO for almost a decade. I'm very proud of our incredible Utz associates as we celebrate both our 100 year anniversary as well as our first year as a public company. We remain very focused on continuing to think long term and we continue to deploy the value creation strategies that have enabled us to succeed for so many decades. To that end, I'd like to take a minute to reflect on our progress this quarter against these strategies. We took this incredible company public with the goal of building a fast-growing, profitable national snack food platform, and we know that delivering on our long-term value creation strategies is the path to achieving that vision. If we are successful in this, we will deliver long-term results for all of our stakeholders, our Oats associates, our customers, our loyal consumers, and our shareholders. It will lead to better opportunities for our team as we continue to grow, better terms on the shelf and traffic for our retail customers, as well as continue to deliver the absolute best tasting snacks to our consumers. If we can do all of this, we will create significant long-term value for our shareholders. So on that note, let's check in on how we are performing against our core objectives. As a reminder, our foundational core value creation strategies are to reduce costs and expand margins, to reinvest some of these savings to accelerate revenue growth, and to continue to leverage our platform and core abilities to make strategic acquisitions that add value to our company. Let's start first with reducing costs and expanding margins. We made good strides in the quarter to help build the foundation for a more advantaged margin profile in the future. We are fishing hard on our productivity programs which are focused this year on continuous improvement and automation across key manufacturing processes, and we remain on track to deliver about 2% productivity this year. Productivity will continue to increase as we ramp up investments in higher ROI projects. In addition to deploying capital for these initiatives, we have several continuous improvement in process-related projects that will drive productivity that don't require significant capital, And we are hiring even more talent in engineering and productivity as we enhance and invest in our capabilities across our entire supply chain optimization efforts. In addition, moving from company-owned routes to independent operators is a continued strategic initiative for us as well. We want that entrepreneurial mindset to be pervasive across our entire DSD network, and we continue to make progress every single quarter. To that end, we converted approximately 42 routes in the quarter, and we remain on track to convert approximately 200 routes this year, with our continued long-term goals to be 100 percent converted to independent operators around the middle of 2022. I'm also happy to report that for the first time, we have grown our DSD route base to over 1,800 routes, which includes approximately 60 new routes this year. which we continue to believe is a very important part of our competitive advantage in the industry. The path to higher margins is also underpinned by our price pack architecture initiatives, which includes better trade management and higher net price realization. Trade management will benefit from improvements we've made in people, process, and technology, including standing up a new trade management system as part of our new ERP. On net price realization, We have been taking pricing actions throughout the year in response to the higher inflation across our entire supply base. And while there is a natural lag, the pricing benefits are starting to really build as we expected, and price mix improved to a 4.2% contribution to year-over-year net sales growth in the quarter. That will continue to move even higher in the fourth quarter, but it's still lagging the continued cost increases that we are seeing. Next year, as the carry-forward benefits of pricing actions build, we will be better positioned to offset inflation increases. We have more pricing already lined up for Q1 of 2022, and if costs continue to rise, we will take even more price. Luckily, we believe in the strength and the quality of our brands, which allows us to continue to price accordingly into the future. Finally, as our sales mix shifts more to power brands, This will further help in improving our margins. Power brands today improved to 87% of our retail sales, up approximately 200 basis points from this time two years ago. As per our plans, this will continue to build to an even higher percentage as we go forward. Our next strategy is reinvesting to accelerate revenue growth. The key objectives remain in place and are accelerating our power brands, expanding our distribution and under-penetrated channels, continuing our geographic expansion, and increasing our presence in key salty snack subcategories. We have made tremendous progress across each of these objectives in the quarter as our sales growth continues to accelerate, and we delivered two-year gains across both the mass and C-Store channels, as well as our expansion in emerging geographies, and we increased our presence and share in certain subcategories, most notably tortilla chips. I'll expand on these areas a bit later in my remarks. Finally, we continue to execute on our goal of making and effectively integrating strategic acquisitions. Two weeks ago, we announced our latest acquisition of RW Garcia, a family-owned and operated artisan maker of high-quality organic tortilla chips, crackers, and corn chips. RW Garcia has significant production capacity to support the growth of our brands, which will position us better to serve more demand and be more efficient in doing so. R.W. Garcia products are non-GMO verified, certified gluten-free, low sodium, and free of artificial additives or preservatives, which we believe long-term will bolster our Better For You portfolio and will, upon closing, bring our platform-wide sales in the Better For You category to around $100 million on an annual retail sales basis. From a financial standpoint, this is a highly accretive transaction where we will pay 5.7 times adjusted EBITDA assuming run rate cost synergies that we have a clear line of sight into. We look forward to closing in December of 2021 and welcoming the RW Garcia team and their capabilities into the family. Beyond the RW Garcia signing of definitive documents announcement, we completed four acquisitions since going public in late August of last year. Our team is incredible at this, and I'm happy to report that all of the integrations are going smoothly. and we are on track to deliver against our top line and bottom line targets. Our team has a proven M&A playbook that's been actively deployed over the last decade, and I'm happy with our progress year to date and in the third quarter. Turning to the financial results in the third quarter, net sales grew over 26%, which reflects the positive contribution from our acquisitions, as well as organic growth of 1%. or 2% when you adjust to the impact of our IL route conversions. I'll note that this quarter we returned to year-over-year organic growth as we expected, and this was on top of our 10% organic growth in the third quarter of 2020. Importantly, our net sales momentum is building, and our pro forma two-year CAGR of 6.4% is an improvement from 6.1% in Q2 and 4.3% in Q1. And based on what we are seeing in October, we expect this trend to continue in the fourth quarter. In addition, adjusted gross profit grew 13% and adjusted EBITDA grew 17% as margins were impacted by the key input cost increases that I described earlier. Shifting to our IRI MULOC retail sales results for the period ending October 3rd, we are happy to report the two-year CAGR share gains have happened for both our power brands and the entire platform. Our two-year CAGR share and growth rates continue to accelerate driven by our power brands. This is part of our long-term strategy, as described previously, as we move our portfolio into a tighter, more responsive brand portfolio over time. Our power brands' gains are up in the category on almost all metrics, and our foundation brand performance is getting better. but it still reflects our emphasis to focus on our power brands, as well as some of the negative impact on foundation brands when we execute our M&A strategy. Additionally, our ongoing skew rationalization focus is mainly on our foundation brands, which is consistent with our long-term strategy, but is obviously heightened in this environment as we look to simplify our portfolio. We believe that these great Retail sales results are proving that the S brands can and will continue to grow off of the higher level of sales from the COVID-19-driven consumption trends of 2020. Turning to our growth drivers in the quarter, our total OOPS portfolio gained share across four of the five major subcategories that we track, and we gained share in salsa and queso as well. We continue to increase our presence in key salty stuff snack subcategories with share gains on a year-over-year basis in tortilla chips, pretzels, cheese, and salsa queso. And on a two-year CAGR basis, we grew 8% in potato chips versus a subcategory of 5.1 and 17% growth in tortilla chips versus a subcategory of 7.6%. It is truly great to see our two largest subcategories in dollar sales are growing and are taking share. As a reminder, at this time last year, our presence was nearly nonexistent in tortillas, and today we have a 4.3% share, and we are the number three brand in tortillas due to our acquisition of On the Border in December of 2020, as well as the continued growth of our tortillas brand. In the quarter, we continue to make great progress driving geographic expansion while also executing to improve the performance in our core. We grew 13.3% in expansion and 14% in emerging geographies, outpacing the category by about 400 bps and 500 bps, respectively. There is no doubt that our brands travel very well beyond our core, and it's exciting to see our continued successes as we outpace the market consistently in these white space geographies. In addition, I'm happy to report that in our core, our two-year CAGR doubled from 2.9% in Q2 to 5.7% in the current quarter. Our foundation brands, as expected, had less of a negative impact on our growth, and our Oats brand strength continues to improve. Moreover, on-the-border growth remains robust, with a two-year CAGR of over 26% in our core, with broad-based strength across every channel. To that end, as we mentioned last quarter, we transitioned our primary DSD distributor for on the border in certain key geographies to us in August, and we are seeing very positive results. Congratulations are due to our team and to our distributor partners for really embracing this wonderful brand and driving such great growth, display, space, and sales. We are also leveraging the US platform to not only drive increasing sales growth, but also to increase the supply of product to meet this ever-increasing demand for On the Border with new production capabilities that have been installed, as well as the benefits from our acquisition of FISDETA in June of 2021 that has unlocked even more supply. Seeing as we acquired On the Border less than a year ago in December of 2020, I couldn't be more pleased with the long-term value we are creating for the platform with the On the Border brand. And finally, from a channel perspective, in the quarter, we gained share in almost every channel. Importantly, we had been lagging the mass category throughout the year, and we committed to you that the gap would narrow and that performance would improve. In the quarter, we returned to strong share gains and significantly outperformed the category due to space gains and phenomenal execution by our team in this channel. On a two-year CAGR basis, we grew 15% in the mass channel versus the category at 12%, and equally and perhaps as important, the entire C-Store channel is rebounding positively as mobility across the U.S. improves. We are currently underweight in this channel, and we gained share in the quarter on both a one-year and two-year CAGR basis, and we look to see continued share growth in this channel into the future, especially in the West. I'd now like to turn things over to Ajay Kateria, our CFO.