Utz Brands Inc Class A Common Stock

Good morning, and welcome to the Utz Brands, Inc. Fourth Quarter 2021 Earnings Conference Call.

Kevin Powers, Head of Investor Relations, you may begin your conference. Good morning, and thank you for joining us today.

On the call today are Dylan Lissette, CEO, and Jay Kataria, CFO, and Kerry DeVore, COO. Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual 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. Dylan?

Thanks, Kevin, and good morning, everyone. 2021 marked our first full year as a public company, and I'm incredibly proud of our team. We faced a dynamic environment marked by unprecedented industry-wide challenges and disruptions, and we worked hard to keep pace with a robust demand for our Advantage Snacking portfolio. Given this backdrop, we made strategic decisions throughout the year to continue to grow our sales, and service our customers to the best of our ability. We did this by prioritizing the needs of our customers while absorbing certain higher costs to manufacture, distribute, and sell our products. These decisions impacted our short-term profits, but I'm confident that these are the right decisions for the long-term health of our growing company and brands. Our full-year results reflect these trade-offs as organic net sales growth accelerated meaningfully throughout the year and we delivered a strong finish to 2021. While our top line performance was strong, our earnings reflect higher than anticipated supply chain costs as we prioritize customer service to ensure we met growing demand. Servicing our customers to the best of our abilities has always been a hallmark of Luts' commitment to our partners. To offset these higher supply chain costs, we took significant pricing actions throughout 2021 with an additional round of pricing already taken in February of 2022, with two more rounds of pricing actions planned in the late second and third quarter of 2022. Besides these planned pricing actions, we will continue to take further actions if and when necessary. In addition, we are driving our productivity and our cost reduction programs to help offset continued high input cost inflation and to enhance margins over the long term. I'm confident that we are taking the right approach to position us to create shareholder value over the short and long term as we continue to build pricing and productivity to overcome continued inflationary pressures. Throughout UTS's history and during various economic cycles, we have always been steadfast in our approach and stayed very focused on thinking long term to create a strong organization. We know that we have an organic growth and distribution opportunity that is unique in salty snacking, and in 2021, we continue to deploy our long-term value creation strategies. So, on that note, let's check in on how we are performing against our core strategies for long-term value creation. As a reminder, our foundational core value creation strategies are, one, to reduce costs and expand margins, two, to reinvest those savings to accelerate revenue growth, and three, to continue to leverage our platform and our core abilities to make strategic acquisitions that add value to our company. Let's begin with number one, reducing costs and expanding margins. While in 2021, we faced unprecedented inflation that impacted our margins more than we had originally anticipated, we continue to make good progress in building a foundation for a more advantaged margin structure in the long term. In 2021, we delivered on a productivity target of 2% and we completed a new company-wide state-of-the-art ERP implementation in February of 2021 with minimal business disruption. The successful installation of a new ERP is a major milestone for the company. that we believe will unlock significant future benefit for us, allowing us to run our business with a higher level of data and insights. We are already seeing the benefits of this as we are just now annualizing its implementation last year at this time. We also executed multiple rounds of inflation justified pricing actions in 2021, and the contribution of pricing to net sales increased to 6% in the fourth quarter. with momentum and carryover benefits building into fiscal 2022. Our conversion from company-owned DSD routes to independent-operated DSD routes is nearing its completion, and in 2021, we converted approximately 200 DSD routes, and we remain on track to substantially complete this conversion in the first half of 2022. In conjunction with this, we're also excited that with our recent purchase of Clem's Snacks, and J&D snacks in New York City, we now have approximately 2,000 DSD routes across the United States selling and distributing our snack foods every single day. This is very exciting and a unique benefit of UTSA's platform and is positive for both long-term sales and margin growth. Finally, as our sales mix shifts more to power brands, this will further help in improving our margins. power brands improved to 87% of our retail sales this quarter, up approximately 200 basis points from this time two years ago. As for our plans, this will continue to build to an even higher percentage of sales as we go forward. And we continue to rationalize both our SKUs and our brands to focus on our larger power brands that we know are able to travel and will be successful anywhere in the United States. In addition, 2021 consisted of continued reductions in foundation brand sales, driven by reductions in both lower margin private label sales, as well as reductions in lower margin partner brand sales that will continue to occur throughout 2022. The second part of our strategy is reinvesting to accelerate revenue growth. In 2021, our sales growth continued and For retail scanner data, in 2022, we are happy to claim that we became the third largest salty snack brand platform in the United States, with our latest retail sales totaling over $1.4 billion in sales for the last 52 weeks, ending February 20, 2022. For the 52 weeks ended January 2, our Total Oats portfolio grew 8.3% on a two-year CAGR basis, versus category growth of 8.1%. And more impressively, our power brands grew nearly 10%, outpacing the category even more. We also delivered two-year share gains across both the grocery and C-store channels, as well as tremendous sales growth in our expansion and emerging geographies. And we delivered two-year share gains across potato chips, tortilla chips, and pork rinds. In addition, as we continue to position the company for sustainable long-term growth, we increased investments in our logistics and manufacturing infrastructure to support geographic expansion, new customer wins, and core geography growth that are forthcoming in 2022. These new customer wins are very exciting for us as we look forward to a great 2022 for the growth and expansion of our brands. Finally, We continue to execute on a third leg of our value creation strategies, which is making and effectively integrating strategic acquisitions. Last year, we closed three additional value-enhancing acquisitions, which include Vintners, Fastuda Foods, and R.W. Garcia. Each were important and foundational to building a more efficient and growing platform for our sales growth long-term. Importantly, we are delivering on our expected cost and revenue synergies of all six of the acquisitions that we have made since we went public in 2020, and these integrations remain on track. In addition to the integration work and the revenue and cost synergies of these acquisitions, Festida and R.W. Garcia are focused on building more supply to meet the extremely robust demand for our on-the-border tortilla chips. We are doing this by rapidly insourcing production in our new plants across the US in Michigan, North Carolina, and Nevada. To put this in better perspective, one year ago today, 100% of our on-the-border tortilla chips were produced by third-party co-manufacturers. However, by the beginning of 2022, due to the incredible efforts of our team, we are manufacturing approximately 40% of our on-the-border volume in-house, and we expect for this to increase to over 60% in-house by year-end 2022, which, in collaboration with our very important third-party co-manufacturing partners, will not only significantly improve our ability to service this rapidly growing brand, but also deliver long-term margin enhancement via this insourcing of production. In fact, On the border, tortilla chips grew over 34% at retail on a year-over-year basis for the first eight weeks of 2022 through February 20th, much of which is attributable to the supply dynamics that we put in place in 2021 via Festida and R.W. Garcia, as well as production capabilities installed in both Hanover and Birmingham, which only reap more benefit for us in 2022 and beyond. Finally, last month we announced the acquisitions of Clem Snacks and J&B Snacks, which will better enable us to expand and grow our expansive portfolio of brands in the New York City metro and the Long Island markets, both of which are in our core market, and both of which we believe we can enhance sales growth in 2022 and beyond. We are excited about the benefits that all of these acquisitions will bring to us, on both the top line and the bottom line into the future. Turning briefly to our fourth quarter results, organic net sales accelerated significantly and increased 7.4% in the quarter, or 8.9% when you adjust for the impact of our I-O route conversions. Total net sales grew approximately 22%, which reflects our strong organic growth, plus the contribution benefit from our acquisitions throughout the year. In addition, adjusted gross profit grew 14% and adjusted EBITDA grew 11% as margins were impacted by the supply chain cost increases that I described earlier, partially offset by our building pricing and productivity momentum. In 2021, our pricing actions lagged inflation, but let's be very clear, The benefits of both pricing and productivity are building momentum, and we expect to offset anticipated inflation in 2022. Before we discuss our IRI retail sales in detail for the period ended January 2nd, I'll provide an update on our long-term trending retail sales results for 2022 through February 20th. As you can see, our two-year CAGR growth rates continue to accelerate to new heights. driven by our power brands with two-year CAGR growth of approximately 360 basis points better than the category over the last 12-week period, and our overall portfolio of all brands grew approximately 160 basis points better than the category, and we have been growing Utz brands better than the category for seven of the last 12-week cycles of data. In addition, on a one-year basis, our power brands grew 13.5% versus the category of 12.7% with a continued focus on power brands versus foundation brands. We believe that all of these great sales results are proving that the Utz brands can and will continue to grow as we continue to execute on our multiple strategies for continued success. Turning to our growth drivers in the quarter, For the 13-week period ending January 2nd, 2022, our Power Brands portfolio, on a two-year CAGR basis, 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 snack subcategories with share gains on a year-over-year basis in both tortilla chips and pretzels, as well as salsa queso. And on a two-year Tager basis, we grew share in both potato chips and tortilla chips, and our power brands grew share in pretzels and cheese. It is great to see our largest subcategories in dollar sales growing and taking share over this two-year basis. It is noted previously, our growth in tortillas continues to be robust across all metrics. To that end, we are leveraging the OOTS platform to drive the on-the-border brand to new heights. We are not only driving incredible growth from our DSD sales team, but we are also increasing the supply of product to meet this ever-increasing demand via both new production capabilities as well as the benefits from our acquisitions in 2021 that have unlocked even more supply. With these new assets, we know that we can continue to support even more growth in 2022 and beyond. At a very high level, I couldn't be more pleased with the long-term value that we are creating for our company with the On the Border brand. It's exciting to see that retail sales for On the Border tortilla chips are up on a two-year CAGR basis 17% for the last 52 weeks, totaling $256 million. And retail sales for the On the Border salsa and the On the Border queso are up 16.5% and 42.3% respectively. on a two-year CAGR basis, now totaling $66 million in that same timeframe. Together, this brand is delivering almost $325 million in annual retail sales and continues to grow dramatically, with our first eight weeks of February IRI retail results registering a positive growth of 33% year over year. I can't say enough thanks to our team for all of the efforts put forth in 2021 that will reap rewards in 22 and beyond. In the quarter, we continued to make great progress driving geographic expansion while also executing to improve the performance in our core. We grew 14.5% in expansion and 14.3% in our emerging geographies, outpacing the category on a two-year CAGR basis by about 340 bps for both. There's no doubt that our brands travel 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 continues to accelerate and it increased from 5.7% in Q3 to 7.7% in the current quarter ending January 2nd, 2022. I'm also happy to report that for the first eight weeks, using one-year, eight-week data ending February 20th, our core total sales registered 14.6% versus the category of 12.7%, and our emerging and expansion grew 500 to 700 basis points better than the category, showing share gains in all geographies in the start to 2022. And finally, from a channel perspective, In the quarter, we gained share in our largest and most important grocery channel, while we drove strong two-year and one-year growth rates across all channels. Finally, as we've signaled before, this year we are excited to shift a lot of our existing marketing spend from multi-year sports sponsorships to a much more dynamic and nimble marketing plan. And this shift will result in an increase of approximately 40% in consumer pull marketing spend versus 2021. I'll note that our overall marketing spend is expected to be consistent with last year. So this shift will allow us to be much more focused on digital and social with much more targeted awareness-building media than in previous years. In addition, it will include continued investments into insights and brand investments to create even stronger consumer pull of Utz's power brands with a focus on our three top power brands, Utz, On the Border, and Zaps. Judging by our brand and sales results in 2021 and in 2022 today, we believe our messaging is working as we continue to build momentum and excitement across our power brands, our geographies, and our channels. We are also happy to report that many of you will begin seeing on shelf that we have also launched a refreshed visual identity on our flagship UTS brand potato chip line that will elevate our brand assets and our at-shelf appeal. Looking ahead to 2022, we are well positioned for solid organic net sales growth and market share gains in the attractive salty snack category. We have a very strong start to the year with robust demand leading to one-year growth of 16.9% in IRI retail sales growth for the first eight weeks through February 20th for the entire Oats brand platform, as well as approximately 200 basis points of price volume momentum versus what we delivered in the fourth quarter of 2021. It's truly exciting to see that after 100 years, so much continued momentum for our brands exists with the legacy Oots brands, one year growth of 20% in the first eight weeks and on the border growth of 34% in that same period. In addition, beyond our first eight weeks of 2022, our sales team is delivering multiple grocery and C-store expansion wins in 2022 to include an exciting expansion with one of the largest grocery chain partners in the Southeast that will unlock significant sales and share gains for our power brands. The wins in grocery and C-Store that we are actively planning for will support growth beyond our core markets to areas like Florida, Georgia, Michigan, Missouri, Kansas, and Texas. I'll be excited to share more about these wins in subsequent quarters. As we are always intent on investing for the future, preparation for these significant key customer expansions began in late 2021 as we began standing up additional warehouses, 3PLs, staffing, and manufacturing capabilities to prepare for this new store and customer growth that would begin to roll out in May and June of 2022. And in addition to the pricing momentum from Q4 2021 that we delivered on, please know that we have already taken pricing actions in early 2022 in response to anticipated inflationary pressures, and we have more pricing actions planned in the second and third quarters. These increases will protect our ability to invest in growth, offset expected inflation, and we are hyper-focused on leveraging better technology put in place in 2021 to continue to monitor and improve our trade spend, and which will accelerate our price pack architecture initiatives. In addition to improved and increased pricing, we are targeting an increase in productivity from approximately 2% in 2021 to approximately 3% in 2022, driven by carryover benefit from 2021 actions, continuous improvement, strong ROI CapEx projects, product sourcing and insourcing improvements, and logistics optimization. Our supply chain organization is focused on maximizing output and increasing efficiency in a continued challenging environment so that we can meet our elevated demand with added depth and breadth in our talent base and improved analytics from our ERP. All of this focus will better enable us to identify and take action on opportunities to drive efficiency, and all of these efforts are sticky, and that they provide a long runway of benefits for the company as we work through 2022 and begin to prepare for 2023 and beyond. Furthermore, we continue to be focused on supporting and optimizing our core power brand portfolio and will maintain a disciplined approach to innovation, including continued and aggressive skew and brand rationalization to simplify our supply chain as much as possible. As noted previously, we are shifting marketing spend dollars towards working media and social digital dollars to drive customer pull and brand awareness and excitement. Finally, in 2022, we will be focused on operating the business and integrating and reaping the benefits of our six acquisitions since going public in August of 2020. To that end, each of the acquisitions that we have closed on over the last year are meeting our goals and our objectives. One quick example of this would be Vintners, which we acquired in February of 2021 and which continues to unlock growth opportunities for our power brands in the Chicago area with 12 week sales in Chicago through February 20th on a two year CAGR doubling year over year since the acquisition to plus 33% growth in that market. In addition, we have merged our DSD operations in Chicago to create an almost 90 plus strong DSD route system that didn't exist for us in January of 2021. Kudos to our entire team on the ground of that market that's creating even more value for our brands into the future. So in closing, I hope you can feel the excitement I have for 2022 and for our long-term future as we continue to build a snacking platform that delivers long-term shareholder value and continues to delight more and more consumers across the U.S. With that, I'd now like to turn things over to Ajay Kataria, our CFO. Ajay?

Thank you, Dylan, and good morning, everyone. I would like to begin by recognizing the amazing efforts of all its associates in fiscal 2021. We finished the year strong in several areas, including implementing a new ERP, strengthening public company processes and infrastructure, completing and integrating acquisitions, and ramping up data-driven decision-making that has sequentially improved our response to a dynamic industry environment throughout the year. I am confident that we are better prepared to succeed now more than ever before. I'll start with a very high-level summary of our fourth quarter financial performance, and then we will dig deeper into our next sales and margin drivers. Please note that when comparing our 2021 results to our 2020 results, fiscal 2020 was a 53-week year. We estimate this extra week contributed $15.9 million in net sales and $3 million in adjusted EBITDA. That being said, our fourth quarter 2021 net sales increased 22.2% to $300.9 million. We delivered organic net sales growth of 7.4%, which would be 8.9% excluding the impact of converting company-owned DST routes to independent operators. As a reminder, when we convert routes to IELTS, certain selling expenses move to sales discounts, thereby benefiting SG&A and reducing net sales and gross profit. Adjusted gross margins contracted to 34.3% largely due to higher input costs and an approximate 150 basis points impact from our IO conversions. In addition, adjusted SG&A improved to 22% of sales versus 23.1% of sales. The SG&A improvement in the quarter was primarily driven by lower corporate G&A, synergy benefits from our recent acquisitions, and IO route conversions. Adjusted EBITDA increased 10.9% to $37.7 million or 12.5% of sales and adjusted net income declined to $16 million. Adjusted EPS was 11 cents based on fully diluted shares on an as converted basis of 142 million. Briefly touching on our full year results, Total net sales increased 22.4%, and organic net sales increased 0.6%. Adjusted gross profit increased to $429.9 million, or 36% of sales. And adjusted EBITDA increased 16.7% to $156.2 million, or 13.2% of sales. We delivered adjusted net income of $77.5 million and adjusted EPS of 54 cents. Now turning to our balance sheet and additional items. At the end of the quarter, our liquidity remains strong with cash and cash equivalents of approximately $42 million and $97 million available on our revolving credit facility, providing close to $140 million in liquidity. Moving down the balance sheet, net debt at quarter end was $817.8 million, or 4.7 times normalized further adjusted EBITDA of $175.5 million. As a reminder, through the course of fiscal 2021, we funded from our balance sheet approximately $130 million of acquisitions, which include Witness, Festida, R.W. Garcia, and various third party distribution rights. In addition, we spent $31.7 million on capital expenditures, which I'll note was below our revised outlook of approximately $40 million due to the timing of certain projects. Those projects will now conclude in fiscal 2022 and are factored into our CapEx guidance. In addition, from a cash flow perspective, I'll note that in line with our typical seasonality, working capital was a strong source of cash in the fourth quarter of 2021. Wrapping up on the balance sheet, our net debt and normalized further adjusted EBITDA now both reflect the impact of our R.W. Garcia acquisition. Our long-term net leverage target ratio remains between three and four times, and as Dylan mentioned earlier, we are focused on operating the business, integrating acquisitions, and delivering synergy targets, all of which will drive long-term EBITDA growth. I will also note that we have a well-priced credit structure with covenant-like debt instruments, which provides significant EBITDA headroom while you work on reducing leverage. More than 60% of our long-term debt has a nominal interest rate swap through September 2026 at a rate of 1.39%. Moving back to the P&L for some additional details starting with net sales. Our net sales growth in the quarter was 22.2% driven by acquisitions of 23.2%, organic growth of 7.4%, offset by an extra week of sales in the fourth quarter of 2020. As noted earlier, fiscal 2020 was a 53-week year with the extra week falling in the fourth quarter. we estimate this extra week impacted net sales growth in the quarter by 8.4%. Our organic net sales growth of 7.4% was driven by price mix of 6%, volume growth of 2.9%, and the impact of converting routes to IOs, which reduced the net sales growth by 1.5%. Moving down the P&L to adjusted EBITDA. In the fourth quarter, adjusted EBITDA margins contracted by 130 basis points to 12.5% of sales. Excluding the impact of the extra week in fiscal 2020, adjusted EBITDA margins would have declined by 80 basis points. Decomposing the decrease in the adjusted EBITDA margin for the quarter, positive drivers include price mix of 370 basis points as we took pricing actions to offset inflation, SG&A excluding transportation costs of 20 basis points, acquisitions of 60 basis points, productivity improvement of 120 basis points, and volume of 30 basis points. Partially offsetting these positive drivers was higher inflation, including transportation costs of 680 basis points. Consistent with industry trends, Our inflation impact versus last year was comprised of elevated labor and transportation costs, as well as higher commodity input costs. These include continued pressure on all varieties of edible oil, wheat flour, corn-based items, and pork-related items. As with our agricultural goods, our packaging components such as film, resin, and corrugate continue to see meaningful cost increases. To that end, as you recall, our expectation for total input cost inflation for the second half of the year was low double-digit percentages versus comparable costs in the prior year. As our fourth quarter progressed, we made decisions to ensure strong levels of service to our customers to meet the robust demand from our consumers while absorbing higher than expected costs to manufacture, distribute, and sell our products. This resulted in gross input cost inflation in the second half of the year in the range of mid-teen percentages. As Dylan mentioned earlier, these decisions impacted our short-term profits, but we believe these were the right decisions for the long-term health of our growing company. In response to these rising costs, we continue to implement pricing actions And you have been seeing these build in our sales results as price mix contribution to net sales was a 1.9% benefit in Q1, 2.3% in Q2, 4.2% in Q3, and 6% in Q4. In addition, we recently took further pricing actions in mid-February, and we have additional pricing actions planned throughout the year. If costs continue to rise beyond what we are seeing in the market today, we will continue to take pricing actions accordingly. Note that the benefits from productivity are also helping to offset gross inflation. Now turning to our full year outlook for fiscal 2022. This year, we expect continued strong top line momentum with total net sales growth of approximately 7 to 10% versus fiscal 2021 net sales of $1.18 billion. and organic net sales growth of approximately 4% to 6%, which I'll note is above our long-term growth outlook of 3% to 4%. However, with inflation expected to continue and as we support our significant new customer growth, we expect to modestly grow adjusted EBITDA versus fiscal 2021 adjusted EBITDA of $156.2 million. While our adjusted EBITDA growth guidance is below our long-term growth outlook of 6% to 8%, given the way fiscal 2021 unfolded and as inflation and the costs to serve our customers continues to move higher, we felt it was important to take a prudent approach to our earnings outlook. In addition, our outlook assumes that we continue to invest in critical infrastructure to support significant top line growth anticipated this year. It also assumes incremental skew rationalization as we optimize our portfolio with an enhanced focus on our power brands, including prioritizing production of branded products to unlock additional capacity for growing brands such as on the border. Wrapping up our outlook, we expect capital expenditures in the range of $50 to $60 million This expected increase in capex compared to last year is primarily driven by higher return productivity projects, such as the expansion of our national warehouse in Hanover, Pennsylvania, which is expected to drive improved inventory management and lower costs. Our outlook also assumes the completion of carryover projects from last year. In addition, we expect a tax rate of approximately 20% and net leverage at ERN to be consistent with ERN 2021. Within this outlook, we are also assuming gross input cost inflation of low double-digit percent for a combined commodity, labor, and transportation cost basis. I thought it would be helpful to provide some color on the expected quarterly cadence assumed in our guidance. As the benefits of our pricing actions and productivity continue to ramp up, We expect adjusted EBITDA dollar growth with better margins in the second half of this year. We expect adjusted EBITDA to decline in the first quarter and then return to modest year-over-year growth thereafter. From a sales perspective, we expect our strongest year-over-year growth to occur in the first quarter followed by the second quarter. As a reminder, we are lapping 200 to 300 basis points of negative impact in the first quarter of 2021 due to snowstorms. Furthermore, distribution gains and organic sales growth in the second half of last year will provide a benefit to sales in the first half of 2022. Before I turn the call over to Dylan, I would like to revisit our long-term margin opportunity. We believe that our ability to expand margins remains strong for several reasons. First, Our actions around pricing and productivity have stickiness to them. While they address margin gaps in the near term, they will drive margin enhancement when inflation stabilizes. Second, our supply chain capabilities are improving as we accelerate productivity programs and optimize manufacturing and logistics processes to increase throughput and unlock efficiencies. Third, Recent acquisitions are allowing us to scale our manufacturing capability to efficiently support strong demand for our power branch portfolio. In addition, buyouts of distribution rights and infrastructure from our third-party distributors are positioning us to better serve our customers as we grow nationally. Recent investments in technology are helping unlock insights that enable several margin-enhancing work streams. In addition, we are now able to integrate acquisitions faster to derive synergies. Finally, we are enhancing an already strong management team with new talent. I am excited to see this team working together to drive this business forward. With that, I will now turn the call back over to Dhillon.

Thank you, Ajay. In closing, I want to reiterate that I truly believe that we are doing the right things to grow our business for both the short term and the long term, that in return will drive great results in 22, 23, and beyond. As a company, over our 1,800-year history, we have definitely seen inflationary and challenging periods, and we are committed to use this dynamic environment to build an even stronger, more resilient infrastructure for continued growth. And as we begin a new year, I'm very thankful to all of our incredible associates that make this all happen. Please know that we are confident in our long-term margin opportunity as a company. We have grown into the third largest platform in salty snacks because of a continued and disciplined belief in growing both our top-line sales and our bottom line. To that end, we have put in place many of the building blocks for tackling both pricing and productivity in 2022 to drive bottom line results with continued top line growth. We have invested in the people, the technology, and the infrastructure to unlock this growth, and we will aggressively pursue the actions that will complement our bottom line, not just for 2022, but 2023 and beyond. We are excited about our future, and we look forward to continuing to create value for all of our stakeholders. Thank you very much for joining us today on our earnings call, and I'd now like to ask the operator to open up the call for any questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from Andrew Lazar from Barclays. Please go ahead.

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

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

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

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

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

Hey, guys. Good morning. Thank you for taking the question. Jay, maybe just a quick clarification for my actual questions, but the 4% to 6% organic top line, does that incorporate the planned price increases that the second and third round, I think, that you're planning for later this year?

Yes, Peter, they did.

Okay. And then maybe just to start on the inflation commentary, low double-digit outlook for 422, I'm assuming the cadence of that you know, looks like first half is in that, still in that mid-teens range that you saw, you know, 2H21, and then is the assumption that, you know, you're lapping higher inflation, but also just maybe things kind of come down in the second half to like a high single-digit rate? Just help us understand that a little bit more.

Yeah, I think inflation is going to be, as you pointed out, you know, low double digits for the year. I think first half inflation is going to look a lot like second half last year in terms of percent inflation. And if you back into it to your point, second half is going to be probably high single-digit inflation. And you have to look at those percentages in terms of lapse to last year. And we have provided those last year numbers in our commentary. Okay, no, that's helpful.

And maybe I guess the other more surprising comment out of the prepared remarks was that leverage actually isn't really expected to change very much this year. That kind of seemed like a wholesale change in terms of philosophy, in terms of this year being maybe more about debt pay down and just how you're thinking about that and whether or not it constrains your ability to do M&A in 2022. Thanks very much.

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

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

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

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

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

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

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

Your next question comes from Ben from Stevens. Please go ahead.

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

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

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

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

Okay, great. Thanks so much.

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

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

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

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

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

And the last question for today comes from Bill Chappelle from Trift Securities. Please go ahead.

Hey, good morning, guys. This is Steven Langel on for Bill Chappell. Thank you for taking our question. I guess the first one is just on the color production. Thank you for the color on production and retail sales for the On the Border Chips and Salsa brand. Would you guys kind of mind digging a little bit further in terms of the distribution gains and velocities you're seeing so far with the brand?

Yeah, thanks, Steve. Great question. We're really, really proud of that acquisition and how well that brand is doing. Much of it is organic growth in the sense that it's existing customers of which we are servicing better through better supply. Much of it is also new ACV and distribution growth that is attributable to you know, like I noted, the almost 2,000 DSD routes that we have across the country that are bringing that brand to market. In 2021, I think we would have had significantly higher and better results in terms of sales. And it is a high margin brand, by the way, from a, you know, manufacturing gross margin standpoint, if we had more supply. And so we proactively went out in 2021 We acquired 15 and we acquired RW Garcia, both of them with the pure intent to utilize them to increase supply, right? Because it has been growing so dramatically and supply chain issues and supply of goods is just an industry-wide issue, especially for a brand that's growing as fast. So as we look forward into the future, as we solidify more supply, as we bring more of that supply in-house, but also count on our command network, our third-party command network is is a big important part of our success in 2022 as we grow this brand to new heights. And you can see by the year-to-date results, not just tortillas, but also it's salsa and queso business, which is nearing almost 70 million in retail sales. That's a brand that will drive a lot of growth for us in our core, as well as our emerging with existing customers as we increase supply, but also as we gain new customers for that brand and take it even more across the U.S. and really create a powerhouse tortilla salsa queso brand there.

Awesome. Thanks very much for the call, guys. I appreciate it.

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

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

This concludes this conference call. You may now disconnect.