Collier Creek Holdings (UTZ) Earnings Call Transcript
August 1, 2024
Earnings Call Speaker Segments
Hello, and welcome to the Utz Second Quarter 2024 Earnings Call. This call is being recorded [Operator Instructions] I will now turn the call over to Kevin Powers, Senior Vice President of Investor Relations.
Thank you, Jeremy. Good morning, everyone. Thank you for joining us today for our live Q&A session for our second quarter results. With me today are Howard Freeman, CEO; Ajay Kataria, CFO; and Cary Devore, COO and Chief Transformation Officer. I hope everybody had a chance to listen or read our prepared remarks that we posted this morning and also a presentation that is available on our Investor Relations website. Before we begin today's Q&A session, just a few housekeeping items. 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. On today's call, we will discuss certain adjusted non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliation of non-GAAP financial measures and other associated disclosures are contained in our earnings materials that are posted on our website. And with that, operator, we are ready to open up the line for questions.
[Operator Instructions] Our first question comes from the line of Andrew Lazar from Barclays.
Thanks again for shifting around your sort of reporting schedule. It's really helpful on a busy morning. Howard, I guess, 3% or about, call it, 3% volume-driven organic sales growth for the full year, certainly requires, as you know, a healthy step-up in growth in the second half -- all in the context of a more competitive salty category. What drives the confidence in this outlook? And I guess, how much of the step-up is coming from sort of the white space distribution actions that are maybe a bit more in your control or sort of locked in, if you will, versus the underlying business? And what is enabling us to sort of raise the percent of sales on promo quite a bit less than the category average and why would that be sustainable?
Yes. I appreciate the question. I think the first thing I would offer you is that our results are really predicated on us continuing to execute against the strategies that we had at Investor Day. And as you know, one of the bigger ones for us is this geographic white space opportunities that we have, not only in our expansion markets, but also being able to bring some of our Power 4 brands into our existing core markets. And I think what you saw in the quarter and what we expect going forward is largely for that to continue to be the case. We're seeing good distribution gains already secured retailers as we go forward. Certainly, in our unmeasured channels, as we have continued to address where consumers are shifting and shopping, we have better availability in those channels than we've historically had, which has been sort of accommodating to our approach. And then we do have a meaningful step-up in AMC. It's still modest by almost any standard that I would apply, but it went from 40% to 60%, and our innovation is breaking -- starting to move into check into distribution it kind of came out in the second quarter, and we would expect that momentum to build as well. Certainly, understand the focus on the promotional environment and -- the one thing that I'm I think particularly proud of is our capability building over the last 12, 15 months. Our revenue growth management capabilities and our marketing capabilities really allow us to be disciplined and flexible as the environment shifts. And as the environment shifts, we can shift with it. So certainly, the environment is it will continue to evolve. That's just life in our industry, and we intend to remain flexible and evolve with it.
Our next question comes from the line of Peter Galbo from Bank of America.
Howard, I just maybe wanted to pick up on the back of Andrew's question, particularly around the competitive environment. And I think -- your largest competitor has really called out 2 subcategories -- unflavored potato chips and then tortilla chips kind of as the areas where we could potentially see more promotional activity, and that obviously is a pretty large portion of your portfolio. So maybe you can just give us a bit more detail on how you're thinking about those kind of 2 large -- subcategories within the broader portfolio.
Yes. Thanks, Peter. I appreciate the question. I think -- there are a couple of things that are unique to our business. And I suspect we'll continue to be, and again, we hit some of these themes at Investor Day. Obviously, the geographic white space and the opportunity for us to continue to further penetrate those spaces with our brands gives us some confidence that we are able to compete across the industry, right? And second is we are and we've talked a little bit about being a house of brands that kind of feels sometimes like we talk a lot about geography and we talk a little bit less about brand building and kind of our portfolio of consumer brands. And if you are a consumer who's looking for an unflavored potato chip, we certainly obviously have that. But we also have opportunities if you are a consumer looking for positive choices in our Boulder Canyon business or flavors and Zaps, our flavor business in Zap. So we do have a fairly broad portfolio of brands that consumers can opt into up and down the price ladder as well for a more value-conscious consumer who's looking for an absolute price point, we have items that work there as well. So I think, overall, we feel really good about the portfolio that consumers can opt into. Our revenue management skills are getting much sharper every quarter, and we're able to now show we have clarity around price gaps and where we need to be across the price ladder and across channels. And the last thing is, again, I think on the availability side, probably the thing that we're -- we continue to focus on is making sure that we're available across where consumers shop, whether it is in traditional groceries or club stores or in e-commerce and mass. And so in all of those places right now, we are making sure we have the right assortment. And so it's not just an unflavored potato chip or tortia chip environment for us. It's a far broader playing field that I think we can compete on.
Great. Thanks for that. And maybe just a very quick follow-up. A couple of questions this morning just on kind of the raise on EPS guidance, but not on EBITDA, particularly given kind of the 2Q over delivery. So just curious kind of how you're thinking about -- leaving Flex or any sort of upside to be reinvested, either in the price or SG&A in the second half? And just how you think about that setting you up for 25. Thank you very much.
Yes. I think first, just a reminder, in our core, a lot of the SG&A growth that you saw was really being driven by marketing investments year-over-year. So again, I think we're executing our strategy well. I think, look, we've been paying attention to the competitive environment as well. We're aware of what that environment may look like in the back half, but we want to make sure that we can remain flexible. And so it's important to us that we have the tools we need to address the competition in a targeted way as required. And if we don't wind up using those resources, great, but we have plenty of places where we can still invest. As far as the EPS, I'll turn it to it, Ajay.
Yes. So the EPS guide is really raised because of the revised assumption on effective tax rate that you saw also a step down on core D&A, which was a little slightly higher than what we expected from the transactions.
Our next question comes from the line of Michael Lavery from Piper Sandler.
Just recognized from Investor Day and how you've laid it all out, how much savings opportunity there is, and we're seeing that. I guess, just given that it seems to be tracking ahead of schedule. Can you also give us a sense if savings are not only faster but bigger than you had kind of first assessed and it's not -- I know you don't want to probably change any targets now or you would have. But is there more that you have a line of sight on even since just a few months ago? And is that part of what's helping you to come in so just more quickly?
Yes, I appreciate the question, Mike. There's no question that from a supply chain optimization perspective, where you're coming in quicker Obviously, we did -- we were able to execute the planned dispositions, and we went from 13 plants at Investor Day to 8 at this point, while maintaining our supply base and being secure that we can continue to service our business the way retailers and obviously, our independent operators and consumers would expect. But the upside for us is it also has allowed us to really narrow our focus down to those 8 plants, integrated work systems and some other places. So productivity is coming in ahead of where we expected. We've always talked a little bit about the opportunity for us to expand gross margins and then decide how to deploy them in marketing distribution gains as well as in capability building. And I think we have confidence through the year. And as Ajay mentioned in the prepared remarks, we would expect that sets us up nicely for 2025 as well.
That's great. And just a follow-up on some of the top line color that you just gave. You touched on the differentiated brands like Boulder Canyon and Zaps, Boulder Canyon, of course, is on fire right now. But that has been -- certainly has slowed. Can you just give a sense of what's ahead there? How much of it is just comp driven? What should we expect for how that brand plays out going forward?
Yes. I definitely agree that those 2 businesses are a little bit of a tale of 2 cities. Boulder Canyon is growing quite nicely. It's got a great position in the marketplace and high perceived value for both the consumer as well as for retailers, really driven by Avocado oil and the non-seat oil books. We also have older Canyon poppers that is launching now is just kind of -- if you think about our company overall, a cheese ball is something we know a lot about, and we're very proud of and being able to bring that into another subcategory under that brand just kind of shows the elasticity of that brand and what we can do with as we go forward. So that is a lot about distribution gains and a lot about high velocity. So we're getting in and consumers are buying more of it. So a great story there. I think on Zaps, we talked about this last quarter, the opportunities we have in price bank architecture and down the Cstore and we are making sure that we address those areas as we move forward. And apsis coming in a little bit slower than we would have expected. Potato chips specifically is an area of continued emphasis for us and then the pretzel lap of the new item from a year ago, which we now have our 2 new items out at this point, or Spicy Cage and our Brown Sugar which are now in market and picking up. So we would expect that trend to normalize potato chips is the area we need to continue to work.
Our next question comes from the line of Rob Dickerson from Jefferies.
Maybe just on the heels of that last question. I'm just curious, as you have started to expand a bit in your expansion geographies, are there any -- have there been any incremental learnings with respect to kind of which products, which brands are maybe traveling a bit better? I just kind of asked because I know -- I think you previously the idea as well there definitely can push a definitely can push in Canyon, but it also seems like FOX is doing kind of very well as you kind of move west. So that's just the first question.
Yes. I think overall, we feel really good about all 4 of our Power 4 brands, right? I think they all travel reasonably well at this point. I think the 2 things we have learned as we go is how repeatable our model seems to be, right? So we had a theory of the case. We had great success expanding into Florida, and we continue to make great strides of continuing to grow our business there. But I think we have a formula down of what the right number of items are across which subcategories and the brands as well as a support model that I think we're showing is significantly incremental to the retailer and our brand -- and there's a great deal of interest from consumers to opt into our products as well. So again, I think that the power of the portfolio, the catering to different consumers and making sure that our assortment reflects that, and then investing some of our advertising and consumer to drive consumer pull as our sales organization and retailers are giving us the space is working for us, it's working for the category, and we're being rewarded with incremental support as we go.
All right, super. And then I guess, just secondly, kind of what's your updated thought on potential category growth for the year one? And then 2, clearly, there's acceleration baked into the guide that you expect in the back half. It seems like you have fairly high conviction on that acceleration. So I'm kind of assuming that's all of distribution gains. Maybe just kind of comment on why the conviction is there, too.
Yes. Look, I think we have always maintained from the beginning of the year and that we expected a category to call it, call it around 2%, but our growth was going to be volume led. We weren't going to see any price. And obviously, the category has been a little bit softer than even we had thought it would be. I think we would say right now, we would assume it's kind of relatively flat as we go forward. Sorry, I lost your second question. I apologize.
The second question is just what gives you conviction on the back half acceleration clearly, that does imply a farmer share gain.
Yes, thank you. Look, I think as we look at our back half plans, there are a couple of things that are going on. First of all, we have secured distribution gains that we are aware of that we are executing as we speak, and we'll continue to expect that, that will support our top line as we go forward on a relative basis to the first half. I think second, our marketing steps up as does our innovation. And then the third, although I don't always love this as an answer, we have -- we do have easier comps in the back half of the year versus prior year. So kind of the year -- we can execute similarly as we are and actually the percentage growth will be more significant. So we do have high conviction, the wildcards, I think, are well known to everybody. But we feel pretty good that we're executing the way we need to right now.
Our next question comes from the line of Robert Moskow from TD Cowen.
I just wanted to ask in the context of your longer-term outlook for sales growth is 3% to 4%. Clearly, this is a volume-driven year. But you could see a scenario where pricing is kind of flattish for the next couple of years, 3 years, given all the backdrops. So does the long-term algo still hold up in a zero-pricing environment? Is there enough distribution gains out there in '25 and '26 to keep that 3% to 4% going?
Yes. I think the short answer is yes. We have a significant amount of geographic white space to go over the next couple of years. Remember, we're still -- we still have about 60% of the total U.S., where Soffe is over-indexes from a category perspective are the areas that we're moving toward. So I think the short answer is we can -- we absolutely have confidence that we can continue to grow our volumes. If you think back to Investor Day, what we had said was that we would be growing volume share that it has always been, for us, a volume-based program, and it's really because we're able to bring our core brands and sort of mix them into the geographies that they are less penetrated in as we go forward. And I think the other thing is given we are still in the earliest stages of our advertising and consumer investments, I think we also have confidence that as we learn more, those should also be supportive to continue to drive volume growth over the next 3 years.
Our next question comes from the line of Matt McGinley from Needham.
To look at the full year EBITDA guide, you need to have a step-up in margin rate in the back half. Do you expect the sales growth to drive more operating leverage and offset that increase in marketing? Or do you expect to have more productivity gains that will ramp up in the back half?
Yes. I would say both. So the leverage from distribution gains led sales growth or volume growth definitely helps. And our productivity program has been pretty strong throughout the first half. You should see that strength in that delivery continue. Our supply chain team is doing a great job accelerating programs as well as investing where we need to in our network to get ready for 2025 as well.
And a key part of your long-term plan is to sustain market share in your core markets, you've been pretty consistently gaining share in those expansion markets, but maybe not so consistent in the core. Are there any issues or changes you need to make in the core markets? Or are you pretty happy with the market performance and how it's playing out in core versus expansion?
Well, I think that was a general statement about our core. I think, look, if you look across where we've been -- we're very happy with our expansion markets. And a part of our core market strategy is to do some similar things specifically around Boulder Canyon Zapp's on the border. I think we are having good results in doing those things, but we are more -- it is clearly a geography where sort of more normal category dynamics tend to impact some of our business, specifically around our foundation brands, sort of the areas as we're evolving our portfolio. we have a long tail -- we have a tail of brands that we have been shifting away from and the core disproportionately will reflect those trends in the near term. We think longer term, those trends, I think, normalize and become very small, and that's why we have confidence as we go forward. But really, there are 4 things we're doing there. We're going to continue to drive our capabilities. We're going to continue -- we're increasing our marketing investment and innovation, which should benefit the core disproportionately. We have -- we're building our DSD route infrastructure continuing to improve it and strengthen it as our sales teams are there, and then we're driving that distribution we talked about. So I think we have a little bit of work to do in our core for sure, but we feel -- I feel very good about our progress there, and we just needed to continue to come through a metric by holding our share.
Our next question comes from the line of Rupesh Parikh from Oppenheimer.
So I had 2 questions just on the promotional backdrop. So I was curious what your team is assuming for the back half of the year on the promotion front versus what we saw in Q2. And then as you look at some of your value initiatives so far, how are consumers responding to some of the promotional efforts?
Yes. So I think we look at our -- we'll maintain our price gaps and remain disciplined as we go forward. I think we feel pretty good about where our price gaps are and if the market shifts, then we'll be flexible and targeted to address them. I think from an overall perspective, one of the things that makes us feel even better is because expansion geographies and our untracked channels, continue to perform. Obviously, that actually takes a little bit of pressure off of just competing on a promotional calendar. We have a lot of growth drivers for us as we go forward. And so I think we feel pretty good. Obviously, we showed you our difference in our promotional spending versus the category year-over-year. We do expect that the category will be more promotional, and we're prepared to compete there if it changes more than we planned will be flexible.
Great. And then maybe just one follow-up question. Just on the cost side. What are you guys seeing in the cost backdrop and on the inflation front at this point?
Yes. So we are still expecting the inflation -- overall inflation bucket that we track to be flat. Commodities are slightly deflationary, but we have transportation and labor inflation that's baked into that bucket.
Our next question comes from the line of Mitchell Pinheiro from Sturdivant.
I'm curious about your foundation brands and how important sort of holding them somewhat steady is to sort of achieving your gross margin expansion. Is that a risk at all if you continue to see above average leakage in the foundation brands?
Yes, I appreciate the question. Look, I think for us, our foundation brands, in general, play a very specific role of being able to build out some route infrastructure and making sure that certainly in some geographies where they are important to the shopper and consumer that they are available. We will continue to deemphasize them and sort of contemplated in our original assumptions and thesis as we go forward is that as those businesses deemphasize our higher margin and higher consumer value products actually offset those declines. But we love our foundation brands, we'll maintain them and make sure that they're available. But ultimately, I don't suspect that it will be a meaningful impact to the overall P&L, given the growth opportunities we have for our power for and our targeted power grounds.
Okay. And then just one last question is, can you speak to the effectiveness of your promotions right now? Are they -- is there one type of doing better than another? And -- or are they tracking with normal effectiveness and efficiencies from historical levels?
Look, I think we are -- one of the things that as we've been building out our revenue management capabilities, there are kind of a few things that we've been doing. One is making sure that we understand what our optimal price gaps are so that we can compete responsibly in the category and be able to drive, obviously, the affordability consumers' desire with the unit growth and the volume that I think everybody would like in a healthy and growing category. We know that through the course of the first half of the year, and obviously, all of last year, that promotional lifts have been lower. And we've been experimenting with different promotional tactics, and we continue to do that. I wouldn't necessarily say that there's one that's working better than others. But it is -- but clearly, you can see the consumer making choices, shopping the ladder and shopping across channels, which is obviously having some effect promotionally. I think for us, while we will compete where we need to in a targeted way on price, the distribution gains and the marketing support that we are able to generate is also having very positive effects to our business. And so we feel really good that the entire marketing mix is working the way we would expect it to, and there will always be some trade-offs, which we'll be flexible about.
[Operator Instructions] Our next question comes from the line of James Salera from Stephens.
Howard, I wanted to drill down, if you look at the household penetration, the buyers and the repeat trends, obviously, all going in the right direction, I would imagine driven in the expansion territories. Can you just talk through maybe what's bringing the incremental households to the Utz brand? And then it seems like, obviously, you're retaining them with the repeat rate. What does it take to retain them if there may be new to the brand moving forward such that we can have a more stable and ideally higher repeat rate from these new customers?
Yes, I appreciate the question. Look, I think we're very happy with the underlying consumer metrics, right? It's one thing to be able to enter into a new geography or enter into a new class of trade, which, again, I think, for us, the power of our portfolio is that we're able to bring very brands to vary geographies, some of them in the core and elsewhere. But then the reality is that once you get into the store, the consumer has to want to buy the product and repeat it to your point, which we're seeing great progress across all of those things. I think there's a couple of reasons why. Number one, we do have a great product like we are -- we have a meaningfully different product that eats well. I think it meets the consumer expectations, whether you want a plane chip or a Wavy chip or Tortilla across all of our sub-cats. So the first thing I just think we're very proud of the products that we put out. I think the second thing is that we are now actually being able to drive awareness of those items, both in terms of point-of-sale displays and being able to drive our distribution, but also in using the marketing tactics to get consumer awareness up. And then third, we have great retailer and IO support. So the retailers are giving us the space out on the perimeter, which allows the consumer to be there and then our IOs are keeping stock stores shelves and giving consumers the opportunity to opt in. So I think what you see right now is an entire system is working reasonably well for us. Obviously, we have plenty to do, and we are clear far from perfect. But across our business right now, we feel pretty good about how we're executing.
That's great. And then if I can drill down on Boulder. If my notes served me correctly, in the Investor Day, you guys said it would be targeting $100 million retail sales in 3 years. And we are 6 months is some change later, and it's approaching $100 million in retail sales now. So I would anticipate that you'll probably be well ahead of that 3-year time horizon. What does it take to get Boulder really increased shelf availability at traditional retail? I mean I see it in club and in natural in my area, but I feel like it has brought enough appeal to really be a mainstay in a traditional retail as well. So what does it take to really expand your on-shelf presence in the Krogers and Albertsons in the world?
Yes. We are very pleased, obviously, with the performance of our Boulder Canyon business over the last really, frankly, 18 months, we started probably when I first got here, we started talking more about Boulder Canyon as a power brand, and it has -- continues to grow quickly, both in terms of availability as well as velocity. So we're getting -- to your point, we're getting consumers to opt in and retailers are putting it on the shelves, but then consumers are coming and buying it and then repeating. So its positioning is great. The product is great. I think from our point of view, there's really nothing stopping us from continuing to drive the availability where retailers and consumers want it. We have the firepower and manufacturing capabilities to continue to build that business -- and you're right, we're well ahead of the -- what we thought at the time was a pretty bold statement of $100 million within 3 years, and we will be well ahead of that probably by 2026. We'll certainly be exceeding that expectation that we set out. So we'll continue to drive availability. We will innovate. You've seen Canyon Poppers showing up. And we think there's a lot left to do with that brand.
Okay. Great. And maybe just one last question. Just to tie off that train of thought -- do you have any capacity constraints for Boulder if you get big orders from retailers, are you able to meet that right away? Or is there like a ramp-up period anybody would anticipate?
No. We are -- we feel really good about our capacity right now. Obviously, given all the supply chain optimization work that we are doing and the capital that we are investing as well as the increase in our capabilities around integrated business planning, we have much better visibility for both the demand and supply of that item. And so we are -- we feel good about where we are, and we feel really good about the ability to support that runway as we go forward.
And our next question comes from the line of John Baumgartner from Mizuho Health.
Maybe first of all, Howard, how are you thinking about category mix in a weakening consumer environment? Is it fair to expect any sort of shifting, for example, from top cord in potato chips? Or are there any broader shifts that could occur within salty snacks that could prove net favorable for you?
It's an interesting question. I think we would expect because there are consumers who -- if you look at the consumer decision tree, consumers do tend to opt into subcategories first. And then they kind of move up and down the brand and price ladder within that category more so than they do, say, jump from potato chips to pretzels. So while there is obviously -- people will shop across the sub-cats people do tend to -- consumers do tend to opt into one subcategory and kind of live there. And then there are -- I think where there are items that they are buying for the entire family to eat. You might see a little bit more pressure just in terms of absolute, maybe you don't opt into 2 bags you buy 1. But I think that, that is pure speculation on my part. I think what you are seeing in our results is the benefit of the portfolio strategy that we have and a lot of the efforts we've undertaken over the last call it, 18 months, 2.5 years to optimize our portfolio mix and be able to shift it to more profitable businesses as we've deemphasized some others.
Okay. And then my follow-up, can you discuss some of the back half merchandising plans? I think last year, you began to ramp activity with some products for tailgating season. I think Halloween has been a focal point for you as well. So relative to last year and the improvements you've made in manufacturing and supply chain, how does that set you up for the season this year in terms of display in future?
Yes. So look, I think a couple of things. One thing we certainly see is that our quality merchandising has -- continues to get stronger. So we have been fortunate to be driving more feature and display activity. Our perimeter displays have been higher through really the course of the last, call it, 18 months. And I think that we -- our expectation is that we are justifying our space on the perimeter and our IOs do a great job of continuing to compete for that space, and we expect that to continue. One thing -- a couple of things that we are certainly optimistic about is kind of where we are in distribution and merchandising in the back half of the year. Untracked channels, I think, across, we feel good about where we are. We're bringing back while we're repeating our normal Pretzel Halloween rotation, we'll actually have a SaaS Halloween rotation as well, which will be incremental to the prior year and feel very good about what we're doing on the holiday as we go forward. So I think we think all of those things will support our business, the already achieved distribution gains that we have are also going to obviously introduce more merchandising opportunities for us in some of our expansion geographies and the consumer support we have as well will be in support as well. So we feel pretty good about where we are, and we're here to compete and do it responsibly and remain flexible. All right.
Thank you, everyone. That does conclude today's Foods Second Quarter 2024 Earnings Call. Have a pleasant day.
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