Utz Brands, Inc.

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?