Utz Brands Inc Class A Common Stock

Ladies and gentlemen, 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 UsBrand first quarter 2023 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, again, press star one. Thank you. 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 Howard Friedman, Chief Executive Officer, Ajay Kataria, Chief Financial Officer, and Kerry DeVore, Chief Operating Officer. Howard and Ajay will make prepared comments this morning, and all three will be available to answer questions during our live Q&A session. Please note that some of our comments today will contain forward-looking statements based on our current view of our business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Howard, 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 Howard.

Thank you, Kevin, and good morning, everyone. It's great to be talking to you today in my second earnings call as CEO of UTZ. I've been in the role now for about six months, and it's been a great experience with a lot of learning that makes me increasingly confident about the future growth. In addition, I'd like to thank Dylan Lissette once again for his help during the transition, and I want to take a moment to congratulate Dylan on his official appointment to chairman of the board last week during our annual shareholder meeting. He did a phenomenal job building us into what it is today, and the transition couldn't have come at a better time as we position for our next leg of growth. Our first quarter results are a testament to this, as our momentum is building as we execute against the long-term strategies that have made this great company successful. Organic net sales increased 4%, even as we lapped 21% comparable growth in the prior year. We expanded adjusted gross margins and drove double-digit adjusted EBITDA growth, all while continuing to make the necessary investments required to fuel sustainable, above-category long-term growth. Our power brand consumption increased nearly 10%, on top of 20% growth last year, as we further penetrate our expansion geographies and intentionally rationalize other areas of portfolio. As expected, net sales volumes declined about 6% in the quarter, as we lapped a strong prior year and aggressively optimized our product mix and trimmed non-core private label and partner brands. These actions proactively reduced sales volumes by about 4%, but we believe that over time, these strategic actions will improve our margin mix and unlock key manufacturing, selling, and distribution capacity to support higher growth of our power brands. In addition, as we previously mentioned, this year we are focused on extending the reach of our power brands, and we are shifting our legacy marketing spend and our investment in marketing capabilities. We plan to increase our working media to drive more consumer pull to unlock growth, increase our connection to our consumers via digital marketing, and launch new products to address near-end trends. I'm particularly happy about our innovations selling to date. The ability to increase our brand investments is fueled by our gross margin expansion, and in Q1, we delivered our fourth consecutive quarter of year-over-year adjusted gross margin increases. Our strong pricing execution, higher levels of productivity, and portfolio optimization strategies are supporting our margin recovery and building the foundation for a more advantaged margin structure and above-category growth in the years to come. And finally, we are making tangible progress against our network optimization strategies to support more profitable growth and a better balanced capacity across our network. After consideration, we've made the difficult decision to close our manufacturing operations in Birmingham, Alabama, and we are actively insourcing production where we have capacity. As always, closing any one of our facilities is a difficult decision, and we are committed to assisting our team through this transition. Ajay will provide more financial details about Birmingham closure in his prepared remarks. Briefly touching on our first quarter financial results, organic net sales increased 4% year-over-year, adjusted gross margins expanded 50 basis points, or 140 basis points when accounting for our IO route conversion impact. Adjusted EBITDA increased nearly 11%, and adjusted EPS of 11 cents was flat year-over-year. Looking at our retail consumption trends in the quarter, retail sales increased 9.4% versus the salty snack category growth of 14.8%. We expected this relative performance, given we allowed very strong growth in the prior year, as our first quarter 2022 retail sales increased 18.6% versus category growth of 13.6%. Extending our performance out to a two-year basis to account for the lab, our total retail sales increased 30%, and our power brands increased 32%, and we effectively maintained our market share over that time period. Turning back to our year-over-year results, in the first quarter, our three largest brands, Utz, On the Border, and Zapps, which combined represent about 75% of our retail sales. The collective growth of these brands was again in the double digits. Our flagship Utz brand grew 11%, driven by potato chip growth of 18.5%. The first quarter marked the seventh consecutive quarter of double-digit growth for both Utz potato chips and the Utz brand. Our Utz potato chips are gaining share with expansion into new geographies, and we are attracting and retaining more households, as our Utz potato chip buyers increased 9% in a quarter. In addition, we introduced innovation behind the brand, and we are excited about the recent launch of Utz and Mike's Hot Honey potato chips. This is a fun and exciting collaboration with a great brand and an on-trend flavor. On-the-border tortilla chip retail sales increased 4% as we lapped 35% growth in the prior year, primarily due to increased merchandising support and large distribution gains in the Mass Channel. This year, we are driving a number of brand-building activities, including new pack sizes and flavors, the launch of our first-ever variety pack box that will be featured in the Club Channel, and a new take-home bag flavor, Creamy Salsa Verde. From a consumer activation standpoint, in connection with the upcoming summer holidays, We are featuring new patriotic-themed packaging supported by increased shopper activation programming throughout the second and third quarters. Finally, on-the-border salsa and queso are significantly exceeding category growth. Our Zapp's brand retail sales remained robust and increased nearly 60% in the quarter, driven by our new flavored pretzel innovation and potato chip growth of 19.5%. While still in early months of the launch, our seasoned pretzels repeat rate is exceeding the category benchmark, and we expect sustained momentum driven by further geographic expansion and channel growth across primarily mass and club. Looking ahead to the second half of the year and consistent with our strategy to accelerate our working media spend, we are ramping up our consumer media activities to build more awareness of this unique brand. As a reminder, our Zaps brand ACV currently stands at around 40% and we have a huge opportunity in front of us to bring Zaps into more households across the country. Wrapping up brand highlights, I'd like to take a moment to touch on Boulder Canyon, a chip brand in our portfolio that gives our customers healthier options using better-for-you oils like olive oil or avocado oil. Boulder Canyon has delivered nearly 20 consecutive periods of double-digit growth and spins and is the number two potato chip brand in the natural channel. In the natural channel, which makes up approximately 50% of the business, Boulder Canyon is growing 23.5% in the last 12 weeks, which is nearly 2.5 times the category growth rate. Finally, from an IRI perspective, consumption of Boulder Canyon products increased 35%, led by expansion in new customers in the grocery channel. Moving to our key salty subcategories, we gained share across both potato chips and pretzels, which combined represent about 55% of our retail sales. Potato chips increased 16.5%, and pretzels grew 19.1%, as we saw broad base strength across most channels and geographies, led by Utz and Zapp's brands. For tortilla chips, as I mentioned earlier, we are lapping strong activity in the mass channel, where on-the-border sales are more heavily weighted. For perspective, on this year-over-year comparison, on-the-border tortilla chip sales grew 35% in the first quarter of 2022. On a two-year basis, our tortilla chips increased 37.6% versus subcategory growth of 32%. And as we progress through the year, we expect our tortilla chip year-over-year performance to improve. From a geography perspective, we are making progress penetrating our white space opportunities while improving execution in our core. In our core, we are lapping significant outperformance, and on a two-year basis, our power brand retail sales increased 29%, which was essentially in line with the category. Our share performance versus a year ago was primarily impacted by lapping strong UTS brand share gains and declines in Golden Flake Pork, Good Health, and Tortillas. Looking ahead, we do expect our share performance to improve as we move through tough laps and we drive space gains in key food and mass accounts. In expansion, our power brand sales increased 13.5% versus last year and 36.6% versus two years ago, which was well ahead of the category. As we previously mentioned, our expansion markets are more heavily weighted towards mass, and the distribution overlaps impacted the year-over-year comparisons. Importantly, we are lapping our public's introduction at about this time last year with plenty of support, a chain-wide ad, and display coverage. We are looking for opportunities to expand our penetration led by large national grocers throughout 2023 and beyond. Shifting gears to innovation this year, we are delivering consumer-centric innovation to create on-trend and exciting offerings in high-growth segments, flavored pretzels, variety packs, seasonally relevant items, and hot and spicy flavors. Taking the Zapp's brand known for distinct and desired flavors into flavored pretzels category is proving to be successful and it's off to a great start. Our peanut butter filled pretzels is the number one branded SKU in the segment and is extending its price pack offerings to reach more consumers and channels. Multipacks and variety packs remain a high growth segment and we are expanding our assortment to more power brands, leveraging our portfolio to improve brand and item assortment across channels and improving our packaging solutions to have more impact at the shelf and in the home. We are innovating in key seasonal windows to have relevant, fun, and turnkey solutions as consumers host gatherings in their homes. We are extending our successful Utz Party Mix in the fall with Utz Tailgate Mix that features football-shaped pretzels in merchandising-ready solutions. We are also adding on-trend flavors like hot and spicy to our portfolio, and we are thrilled with our collaboration and partnership with Mike's Hot Honey to heat up the summer with a limited time offer and 360 degrees consumer support. Before I turn the call over to Ajay, I think it's important to highlight that over the past year and a half, we have been building our capabilities to deliver sustained results in a dynamic environment. While the opportunities remain significant, our initial efforts are exceeding our expectations. Our momentum is building, and this year we expect to drive organic net sales growth supported by our resilient salty snack category, expand the reach of our power brands, improve our margins through productivity and revenue management initiatives to improve our mix to fund our growth activities, and through the course of the year, we will generate stronger cash flow to reduce balance sheet leverage. Finally, as I mentioned on the last earnings call, I do not expect meaningful changes to our strategies or focus areas. As we sit here kicking off our second quarter, I remain confident in the foundation of this business and both our near and long-term opportunities for accelerated growth and margin expansion. Ajay?

Thank you, Howard, and good morning, everyone. Our first quarter results reflect the strength of our salty snack categories. Despite lapping significant growth in the prior year, we delivered organic growth of 4% while proactively optimizing our portfolio. In addition, we drove double-digit adjusted EBITDA growth as we are executing our margin-enhancing programs. I would like to thank the entire arts team for their contributions to our growth, and we remain well positioned for a strong 2023. Turning to our first quarter results in more detail, net sales were in line with our expectations and increased 3.1% to $351.4 million. Adjusted gross margin expanded 48 basis points to 34.4%, and this includes an approximate 90 basis points of negative impact from our I-O conversions. Excluding this impact, our adjusted gross margins expanded approximately 140 basis points versus last year. And this was our fourth consecutive quarter of year-over-year adjusted gross margin expansion. Our adjusted EBITDA increased by 10.7% to $40.4 million, or 11.5% as a percent of net sales. Adjusted net income of $15 million and adjusted EPS of 11 cents per share were both in line with last year, largely due to higher interest expense. Moving to the P&L for some additional detail, starting with net sales. Of note, this quarter we have refined our net sales reporting, and we have separated mix from price to be grouped with volume. This was done as part of our effort to continually confirm our reporting to be more in line with our peers, and is consistent with the way we evaluate our business performance. Our net sales growth in the quarter was 3.1% driven by organic growth of 4%. In addition, total net sales were impacted from the conversion of company-owned RRSP routes to independent operators, which reduced the net sales growth by 0.9%. Our organic net sales growth was led by price of 9.7%, offset by lower volume mix of 5.7%, as we expected. As Howard noted earlier, In the first quarter, we faced our most difficult comparison of the year as we lapped our first quarter 2022 organic net sales growth of 20.7%, which was led by strong volume growth of 11.3% that included strong activity in the mass channel. In addition, our skew rationalization initiatives are ongoing as we aggressively optimize mix to improve portfolio margins. and we unlock manufacturing capacity to help better enable our network optimization. This program began late into the first quarter of 2022 and through a wraparound impact from last year's actions combined with new actions this year, our volume was proactively impacted by approximately 400 basis points. In the first quarter, adjusted EBITDA increased 10.7% and margins increased nearly 80 basis points to 11.5% of sales. Decomposing the change in the adjusted EBITDA margin for the quarter, positive drivers include price benefit of 9.7%, volume mix of 1.9%, and productivity improvement of 2.1%. Offsetting these positive drivers were the unfavorable margin impact of 11.6% driven by higher inflation, and selling and administrative expense impact of 1.3%. Our inflation impact versus last year was comprised primarily of higher commodity input costs as well as elevated labor costs. Selling and administrative expense reflects increasing investments in our people, brands, selling infrastructure, and supply chain capabilities to support our growth. Our first quarter market performance reflects good execution across the company as we are building momentum across our margin-enhancing initiatives. The actions will help drive our bottom-line performance while also providing the fuel for our future growth. For example, we are managing our input cost inflation with our 2022 pricing execution, and we are further developing our price pack architecture program and optimizing our trade spend, leveraging improved talent, technology, and analytical capabilities. We are improving our revenue mix and rationalizing less productive and lower margin private labor and partner brand SKUs. And these actions are freeing up capacity in our plants and distribution network, which is helping us in servicing higher margin power brand business. We are executing our productivity programs, and we now expect to deliver productivity of approximately 4% in 2023 as a percent of cost of goods. which is at a higher end of our original expectations. And we are progressing our manufacturing network optimization program. This includes insourcing volume where we have capacity. And as we announced a few weeks ago, the closing of our manufacturing operation in Birmingham, Alabama on July 3rd. Given the age and condition of the plant, it would have been challenging and costly to retrofit the facility. And as a result, we plan to shift production to our facility in Kings Mountain, North Carolina and Hanover, Pennsylvania. In connection with the closure, in fiscal 2023, we expect to incur pre-tax cash charges of between $3 million to $5 million, which is expected to include $1.5 million in severance costs and $1.5 million to $3.5 million in closing and transfer of production costs. We also expect to incur non-cash charges of approximately $8 million to $11 million in asset impairments. Also, given that the manufacturing operations don't close until early July and we are incurring costs to shift production across the network, we don't expect our in-year fiscal 2023 savings to be material. Now turning to cash flow and the balance sheet. Beginning with cash flow consistent with normal seasonality, Cash flow used in operations in the first quarter was $8.4 million. Keep in mind that historically our first quarter is a heavier use of working capital, and we expect progress on our net leverage reduction to be greater in the back half of the fiscal year. In addition, driving stronger free cash flow conversion remains a major priority and a cross-functional effort across the company. We have made organizational changes and we are driving process and technology improvements, including enhanced analytics to drive benefits across the cash conversion cycle. We expect the benefits to build throughout fiscal 2023 and beyond. Capital expenditures were $13.9 million in the first quarter as compared to $8.2 million in Q1 of the prior year. The increase in spend was primarily related to supporting our productivity programs and our manufacturing expansion in Kings Mountain. Finishing with the balance sheet, net debt at quarter end was $891.8 million, or 5.1 times trailing 12 months normalized adjusted EBITDA of $174.4 million. As I stated earlier, our first quarter is a heavier use of cash, and we would expect progress on our net leverage reduction to be greater in the back half of the fiscal year. Now turning to our full year outlook for fiscal 2023. Today, we reaffirmed our net sales growth outlook and increased our adjusted EBITDA growth outlook. As we consider our Q1 performance and look ahead to the remainder of the year, our outlook is unchanged for total net sales growth of 3% to 5% and organic net sales growth of 4% to 6%. Our shift to independent operators is expected to impact our total net sales growth by approximately 1%. Price is expected to be the largest contributor to growth, with volume mix consistent with last year. While mix will be a benefit, we now expect to produce less pounds in our facilities this year compared to last year, as we have identified additional opportunities to trim lower margin products to better optimize our product mix and accelerate our network optimization plans. From a profitability perspective, we expect to deliver gross margin expansion in 2023 and assume total gross input cost inflation of high single digits, which will be first half weighted with moderation in the second half of the year. From a cadence standpoint, given our first quarter results and expectations for the full year, we expect our first half versus second half net sales weighting to be in line with prior year at approximately 49% versus 51%, but slightly more weighted toward the second half this year given our skew rationalization action. Similar to net sales, we expect our first half versus second half adjusted EBITDA weighting to be in line with prior year at approximately 46% versus 54%, but slightly more weighted toward the second half this year given the building benefits of our productivity programs. Moving down the P&L, we expect our full year 2023 adjusted effective tax rate to be approximately 20% to 22% and interest expense of approximately $55 million and capital investments of between $50 million to $55 million, primarily to support manufacturing capacity expansion. Finally, we expect stronger free cash flow generation in fiscal 2023 from higher profits, and our working capital initiatives. Our capital priorities remain consistent and we expect to reduce leverage in fiscal 2023 by half a turn and end the year below four and a half times normalized adjusted EBITDA. In closing, we are confident in delivering another year of strong operating performance in 2023 with continued top line momentum, optimization of our cost structure, and expansion in margins while we invest in our capabilities. Now I'd like to turn the call back over to Howard for some final remarks.

Thanks, Ajay. It's been an amazing six months since I first came to us, and I couldn't be more confident in our long-term prospects. Since 2019, we have grown in excess of $600 million in net sales and over $80 million in adjusted EBITDA. Having had the benefit of my time here learning about the business and gaining greater clarity on where our opportunities are, the team and I are pleased to announce that we will be hosting an investor day on December 15th in New York City. During the event, we will go deeper into the catalysts for organic net sales growth and margin expansion, and we are looking forward to sharing more detail about our long-term plans. And now, operator, we'd like to open the call for questions.

At this time, I would like to remind everyone, in order to ask a question, Press star followed by the number one on your telephone keypad. Your first question is from the line of Peter Gelbo with Bank of America. Your line is open.

Hey guys, good morning. Thanks for taking the questions.

Good morning, Pete.

Good morning, Pete. You know, Howard, maybe if we could just start off with the strategic, just as you start to kind of get into, you know, what is seasonally a pretty important period, I know you've had a large competitor that's kind of talked about, you know, seeing a little bit of pressure from private label and maybe using some of their flanker brands as a way to compete against that. You know, we're also seeing just a lot of kind of capacity ads specifically in the pretzel space, maybe more so than other salty snack categories. So if you can just comment maybe on the strategic, you know, as how you see the environment playing out over the summer, both on salty and then maybe specifically on pretzels.

Thanks, Pete. I think the environment at the moment continues to be rational. We've been seeing, while private label has obviously been active, this sort of happens from time to time, and it's still off of a relatively small base. I think across our portfolio, we're fortunate because we have a collection of power brands that appeal to a broad base of consumers, and then we have some regional brands that can play varying roles up and down the price ladder. So we can go down and sell products that consumers want at pretty much every price point and every configuration that they desire. So I think overall the power of our portfolio and the environment remain largely as we would have expected and largely we feel comfortable with where we are. As it relates to pretzels, very happy with what's been going on with Zapp's pretzel launch. The Sinfully Seasoned Twists are performing better than our expectations. Trial has been great. Repeat has been better. than category benchmarks. And obviously, the Utz brand continues to be a very powerful item in the portfolio. So, you know, competition is a good thing for the category. I think it's healthy, and I think it's rational overall.

Great. Thanks for that, Howard. And, Jay, maybe just a couple of modeling items, if you'll indulge me. Just if you can help us think about, you know, the impact from skew rationalization kind of phasing over the rest of the year, Your inflation outlook, I don't think you changed the band, but just whether or not there's been any movement within kind of that high single-digit band on inflation. And then just third, and apologies for the three-part question, on the productivity guide, I think you're talking about 4% for this year. I think you did about 2% in the first quarter. So I just wanted to understand the ramp there or if that's like a gross to net that we should be thinking about. Thanks very much, guys.

Sure. So skew rationalization, we did about 400 basis points in Q1, and that was partly because of the late start in last year. So what you should see is delivery of about 300 basis points for the year, and it gets sequentially better or less negative as we move through the year. But we should finish the year about 300 basis points. That's one. And I will remind you, we are trimming a little more than we thought we would when we talked to you a couple of months back. That enables us to do network optimization and all of the actions that we have taken in the last month or so. And then on your second question around high single-digit inflation, we are still expecting high single-digit. You are correct that the environment is improving in certain areas, especially around freight. We'll see a little bit of benefit there, but largely, you know, not material. You know, high single-digit inflation is still the guide. We have sort of baked all that into our planning. And then third question around productivity. The 2% that you see on the Ibadah Bridge, that is a – Percent of sales, that's the EBITDA calc. So when we say 4%, that is a 4% of cost of goods. It's a different base on the map. The productivity expectation has gone up. We have said 3% to 4% previously, and now we are calling 4%. That's largely because of, and we are happy to see this, how our productivity capability is building, mostly around procurement, freight, and other areas of supply chain that Kerry and his team are really doing a great job building that program.

Awesome. Thanks, guys.

Thanks, Pete. Thanks, Pete.

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

Thank you. Good morning. Morning, Mike. Morning, Michael. I just want to understand a little bit of the opportunity, maybe specifically for Zapps even. Obviously, the skew rats and the focus on the power brands, it makes perfect sense, and that evolution in total can take a little bit of time. But I think it was two years ago we were sort of – I was at least kind of stunned by the plus 24% Zapps had then, and now it's up 57%. Clearly, there's some legs there, and it's a differentiated – brand and product. With the 40% ACV you mentioned, what's the runway from here? Does that growth drive enough of a selling story to really carry that further? Is there any supply constraints? Just help us think about how Zapps can grow and what, if any, limitations there are to that really just being a big driver of offline sales.

Hey, Mike, thanks for the question. Look, we're very excited about Zaps. I think we have a couple of growth legs for this brand, and I don't see any meaningful supply constraints beyond the obvious if it had such an explosive runway. But we are enthusiastic about the brand overall. There is an availability opportunity, which this entire portfolio has as we continue to expand our distribution broadly across Zaps. And then there's a consumer desirability aspect to the brand. The brand is attractive and appealing to a wide variety of consumers. It has a distinctive flavor and position. And it's one of those businesses where it stands for something when you see it. So it stands for New Orleans. It stands for excitement. It stands for fun. And all of those things are, from a marketer's perspective, a dream to be able to build against. So I see a lot of opportunity long-term for the business, again, trying to get consumers to opt into the brand. And I think that that will only be amplified as we continue to invest greater levels of A&C against it over time.

That's great. That's helpful, Keller. And just on the supply chain side, it's a little – unusual to pair insourcing and talk about a plant closure at the same time, but I get, I think, some of the moving parts. Can you just help us understand, maybe one, how big Kings Mountain is? That might just have a lot more capacity than I've appreciated, but is there more, do you have another runway, how big is the runway of further insourcing opportunities, and where is your split going to be as far as co-manufactured versus in-house? Are you getting to the optimal level or how does that go any further?

Hey, Michael, it's Kerry. I'll take that. Um, yeah, so no, look, we've talked about network optimization for some time. You know, one of the reasons we stood up Kings mountain was to make sure that we, you know, we had a, a, um, a longterm efficient plant, um, to, to help our business grow. Um, you know, right now Kings makes pork rinds for us, a hundred percent of our pork rinds. We moved that volume from Birmingham. a couple quarters ago. You know, the decision to close Birmingham, always a difficult one to close a plant, but, you know, that it was, you know, had an aging infrastructure, expensive to retrofit. So the volume, the remaining volume from Birmingham, which is potato chips and cheese and tortillas, that'll flow into Hanover and ultimately into Kings Mountain. So right now Kings does pork rinds for us. We will be standing up you know, potato chip capacity, cheese capacity, certainly, and potentially tortilla capacity as we move forward. So those are investments we'll make. And ultimately, King's will become a very high volume, you know, efficient plant for us over the next couple of years. With respect to insourcing, you know, I think we've, you know, we've got a good base of co-manufacturing partners that are important to us, but we also have the capability, you know, to bring things into our plant to better utilize you know, the fixed overhead inside our infrastructure. So we're doing it very, you know, prudently. You know, I think with respect to, you know, the Coman network, obviously the biggest piece is on the border. There will always be a place for, you know, Coman partners and on the border. But we've also stood up some capacity internally that we can utilize. So we're finding our way toward the right balance, and we'll continue to make progress on that.

Okay, great. Thanks so much.

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

Good morning, and thanks for taking my question.

Good morning.

Good morning. So the first area I want to cover is just elasticity. I'm just curious how elasticities are playing out versus your expectations. Are they still better than what you've historically seen? So just any more color there.

Hi, Rupesh. It's Howard. Thanks for the question. Yes, I think you said it well. What we're seeing right now is while there is some elasticity that that is showing up in the category still remains well below historical levels and is in line with what we would have expected to this point.

Great. And then maybe just one follow-up question. So as we look at adjusted EBITDA margins for this year, I know earlier in the year you guys said you expect more gross margin expansion for the year. Just curious for any updated puts and takes on both gross margin and SG&I as you think about the adjusted EBITDA margins.

I'll take that. So the expectation is still that supermajority of our EBITDA margin expansion is going to come from gross margin area. That is going to be because of the productivity ramp that we are experiencing. A lot of that is in the COGS area. There is a portion of productivity that is accelerated, which is related to delivery costs. and freight and all the work that we're doing there, which for us is an SDNA. You saw some of that benefit come through in Q1. So, you know, we'll see some full-year benefit in SDNA related to that. That said, we still intend to, as we kind of roll through the year and unstick some dollars, we intend to invest those dollars in building out capability and investing behind our brand, our consumers, our supply chain that we have talked about And most of those investments go in the SDNA area.

Great. Thank you. I'll pass it along.

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

Hey, good morning. This is Steven Lango off of Bill Chappell. Thank you for taking our question.

Hey, Steven. Good morning, Steven.

Good morning. Can you guys kind of help us understand some of the dynamics in the tortilla chips category? I know On the Border was facing some tough mass general talks, but is there kind of anything to call out to date that kind of gives you more confidence in the brand recovering through the year?

Hi, Steven Sauer. I'll take that. Listen, we feel great about On the Border. It has been a fantastic acquisition for us going all the way back in a business that has been growing quite quickly since we bought it. I think last year when we had a huge significant benefit from distribution and merchandising specifically in the mass channel, and I know we've talked about this now for a couple of calls, but that is really the story of the numbers right now. Overall, I think we have a significant amount of growth in front of us on tortilla chips broadly, led by OTB as we move forward.

Got it. Thank you. And you guys kind of mentioned some new customers you gained in the quarter. Can you guys help us with kind of driving that and how it's varying versus some of your internal expectations as they kind of come from more distribution or maybe seeing like the innovation and marketing kind of help drive that better than maybe you would have expected?

Yeah. So I think our distribution story is largely behind our power brands. We continue to push for broader availability and Obviously, we continue to expand some routes as well, which has been in line with our internal expectations and right on time for our growth story. But broadly speaking, with distribution has come consumer trial. We make a great product. Consumers love it. And once they buy it, they tend to stick. And so that's really central to everything that we're doing right now.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Jim Solera with Stevens. Your line is open.

Hi, guys. Good morning. Thanks for taking my question.

Good morning, Jim.

If I can dig in on some of the subcategory sales, you know, queso and salsa sales continue to do very well, you know, no doubt in part because they're kind of relatively new compared to the OTP chips. Do you guys find that those sauce offerings have legs beyond OTP buyers, that is to say, If somebody buys private label tortilla chips, will they still buy the OTB sauces?

The short answer is yes. We're finding that those products, both the salsa and queso items, which are growing significantly ahead of the category averages, are broadly appealing. And so it's not as if people opt into OTB and then just buy the portfolio of brand offerings. They buy into the dipping occasion, and then they look for the dips that they enjoy the most, which obviously we feel great about the fact that our items are there.

Okay, great. And maybe digging in a little bit on the Zapp's presser rollout. I know that's still kind of early days, but do you find that those customers are incremental to the Zapp's brand, or are they Zapp's potato chip buyers who just see the brand in another form and expand their buy rate?

So we find both. The pretzels launch is not only incremental to the Zapps brand, but it's actually incremental to our portfolio as well. So consumers are encountering the Zapps brand either through the potato chip offerings that they find or they may encounter them initially through pretzels. They kind of tend to be both. So it has been incremental for us. Obviously, we know that a flavor-forward and exciting brand appeals to a consumer group that we're excited about. So we'll continue to expand on both of those subcats over time because we find the enthusiasm for those items to be quite high right now.

Okay, great. Thanks, Chris. I'll pass along.

Thank you.

Thanks, Jim.

There are no further questions at this time. Ladies and gentlemen, thank you for participating. This does conclude today's conference call. You may now disconnect.