Collier Creek Holdings (UTZ) Earnings Call Transcript

Perfect. Welcome back, day 3. Good morning, everybody. Excited to have you back for our fireside chat with Utz Brands. Today with us, we are excited to start off the day with CEO Howard Friedman, CFO Ajay Kataria. Welcome to you both. Good morning.

Thank you, Andrew.

Thanks.

A lot to get through today. Maybe one where to start, though, Howard, is I think the new growth algorithm that you laid out at your Capital Markets Day this past December. Let's lay it out. It's expectation for organic sales to grow to 4% to 5% CAGR for the next 3 years, the company to reach an EBITDA margin of 16% by '26 versus 13% last year. Just to sort of level set us all, can you briefly remind us of the key drivers of this outlook? And then we can dig into each of the components a bit more over the course of this session.

Yes, happy to do so. I'll take you through the top line. And then I think Ajay will help kind of illustrate where we are on the bottom line as well. I think the first thing to -- when you think about our company is that we are a distribution and margin story. We have a lot of opportunities across the business to be able to continue to grow and improve, starting, frankly, with the category, all right? The category continues to be a vibrant category largely driven by marketing and innovation. And it has been historically growing, call it, 2% to 3%. And our -- as we think about going forward, we still assume that the category will grow. And I'm sure we'll talk about a little bit of the near term in a little bit. So we expect the category to grow, call it, 0 to 1% on -- in volume and 2-ish in price over the next couple of years. That's after about 4.7%, you can call it, '16 to '19. The second thing is, over the last 2 years, we've taken some time to clearly define our portfolio. And we talk about our Power Four brands Utz, On The Border, Zapp's and Boulder Canyon as being the primary focus for those businesses going forward as we expand the availability nationwide and continue to also bring some of those businesses into our core geographies as well. We both have an opportunity to expand nationally and get to a larger footprint; as well as be able to bring those 3 Power Brands, On The Border, Zapp's and Boulder Canyon, into our core geographies and expand their availability. Obviously you can get the availability, but then you need to drive consumer awareness. And it is our expectation that we'll drive our advertising and consumer spending up over the next 3 years, about 40% year-on-year-on-year. We're ahead of that this year but continue to expect that to be a big part of it. And then the last thing is we've been working on driving our innovation engine. So really looking at where are the consumer today and where are they going in the future; and trying to bring out bigger innovations to more consumers really around flavor, occasions and [ presence positives ].

All right...

And from a bottom line standpoint, we are going to get to -- we are targeting 16% EBITDA margin by 2026. That is about a 100 basis point margin expansion every year on average. That is coming from productivity. We have laid out a plan to deliver $135 million of productivity in the next 3 years, of which the -- $90 million is coming from base productivity continuous improvement work that we are doing in our facilities. And $45 million is coming from network optimization, which is reducing the number of plants, consolidating warehouses, et cetera. So that $45 million a year or $135 million over 3 years is about 300 basis points of margin expansion. We invest 200 basis points of that back into the business to drive top line and growth, as Howard described, and net about 100 basis points every year.

Great, okay. So maybe it makes sense just to pivot a little bit. You put out a release this morning reiterating adjusted EBITDA, adjusted EPS and leverage targets. The shift was looking for full year organic sales growth in a 2% to 2.5% range versus about 3% previously. And the discussion in the release talked about the more promotional salty snack category environment. We've certainly all seen that in the data of late, but perhaps you can give us a little bit more detail on what drove that shift, sort of where you expect the category maybe to be this year from a growth perspective and if that's changed at all. And then initially, I think, in the 3% expectation, you were looking for sort of flattish sort of pricing for the full year. How does that change in the sort of context of this morning's release?

Yes. So I'll start. I think a couple of things that we should probably remember about the business and where we've been through the course of the year to date. If you were to go back to January through really the end of the second quarter: We had been consistently growing our volumes and units and were taking share across the category, so coming into the summer, we are feeling pretty good about where we were; and kind of our investment profile overall, that it was delivering the results that we expected. We also had obviously experienced a more promotional environment in that period of time. You sort of saw the category moving in that direction. Some of our -- and a lot of that for us was driven by the fact that we had not taken price. Our last major price advance was really in 2023. And we did have some competitors who obviously had continued to price into the year. And what we saw in July, although we anticipated some of it, was a much more promotional environment than I think even we had expected in terms of breadth of competition, the depth of the pricing that they went into. And sort of the channels, C-store, which is an area where we continue to need to do work on our own, as well as mass became significantly more promotional. And you can see that in the data over, call it, that 6-week period. We had a very solid Fourth of July. And we felt really good about our internal data, through our earnings release in -- toward the end of July or early August, but what we then started to see was the consumption trends over that period of time as well. And so we do anticipate that the environment will be more promotional as we go forward. And we -- as we've said consistently -- it is my opinion from past experience in commodity-based businesses that deflation is something that we need to be -- you need to make sense of; and make sure that -- as you invest in price, that you're driving some of the returns. And so we've taken a disciplined and focused view of the world. And we will respond where we need to in that same manner, but overall we believe that this category remains an innovation- and marketing-driven category. And I think it is going to continue to overall be a relatively healthy category. And the last thing I would say is if you look at household penetration. Household penetration in the category continues to be good, so this is not something -- this is something that we're watching. And that's kind of what reflected in our thinking.

Okay. Do -- are -- some of the price points that you're seeing, do they strike you as maybe unsustainably low by some competitors, where it's hard to see that being in sort of a sustainable place? Or not yet.

Yes. I -- what I would say -- and obviously I don't want to speak for my competitors. What I would say is that, a, the price ladder should be healthy, all right? And as you think about kind of where the entry point in the marketplace is to where the premium point in the price ladder, at the moment, it's a little bit more compressed than we would normally expect it to be. And I would expect that, over time, it will normalize back to a healthier place.

And just a follow-up on that. Have you started to see the return from -- even from a category perspective, as some of these price points have sort of nudged the consumer along a little bit, are you seeing the category volume respond in kind? Or is the category still not seeing the type of lift that you might expect with these types of deeper price points?

Yes, I think what we have certainly seen is the category has gotten a little bit better, but I still think it would be early to say that it is responding to the level of price investment that we've seen. The category is getting better through the month of August, as are our trends, which gives us obviously a lot of confidence in kind of where we're going, but I think it's still a little bit early, especially given the breadth of the amount of pricing that occurred, because I think obviously the lift really comes when both elasticity and cross-elasticity all work together.

All right, all right, okay. Even with the revised top line outlook for the year, I think it still reflects an acceleration and an inflection, particularly I think as you go into the fourth quarter, around organic top line growth. Maybe you can get into a little bit what drives that and where the visibility is to the type of sort of pivot that you need moving into the fourth quarter.

Yes. I think one of the things I would say is the -- our original assumptions on the year and our assumptions still are the things that we have been executing against are working for us. We have secured distribution. Our unmeasured channels continued to grow. Our distribution is coming through the way we expected. And the retailer and consumer response has been positive in those areas, so I think that we expect that to continue through the rest of the year. And it really started to become more obvious in the third quarter and building through the rest of the year. So distribution obviously continues to be a significant driver for us. Our A&C year-on-year is up. We had originally planned 40%. A lot of the advertising and consumer will now really -- we expect to be more like 60% before the end of the year. And our innovation and the investment that we are making in innovation also continues to build through the end of the year. So the original premise of our growth was -- I think, is intact. I think the biggest opportunity for us is to continue to make sure that we are executing on our plans and controlling what we can control and then responding where we need to in a focused and targeted manner.

And just one more on the category. Salty snacks is -- and it's funny. I hear the word among investors. It's typically been this kind of like bulletproof category, all right, one that's been rational. You've got a -- sort of a dominant sort of industry leader that's typically been rational. Elasticities are typically very modest. And I think I'm getting questions of has something maybe changed in this category structurally. Or is it just that price points probably across the board perhaps got a little bit out of whack with where consumers' sort of value perception was? That needs to be adjusted. That takes a little bit of time; and once that happens, no reason to think this category is not the advantaged category that it's been historically. I don't want to lead the witness here, but I -- that's the question I'm getting...

Yes. I was going to say that I think the end of your question is well stated. Look. I -- we believe and, I think, the history would show that this category continues to grow, year-on-year-on-year, volume and price; and really being driven by the innovation and marketing and execution of its participants. As you look at as we go forward, there's no reason to believe that won't be the case. And I think, as you see the household penetration trends continuing to grow, it would suggest that consumers still are interested in participating in the category. And I think, at times, the rest of the environment does affect your choices a little bit, so I do think that pricing is something that consumers are being more thoughtful about. We definitely see value-seeking behavior and channel shopping and deal shopping over -- which I think is a response to their total basket. And you've heard people say a better job than I will on some of why that is, but I think the future is bright in this category long term. And I think that, when you see somebody like our company, we are incremental to that category and add something a bit more to it. And that's why retailers and consumers like us.

Yes. It's been a few years since Utz launch the -- in the Southeast with a key retail partner, which is really the largest step yet in the strategy to sort of access expansion markets. Now that you've lapped the sort of initial distribution, how have you been performing in this region? And what does that suggest as to the speed and magnitude of other potential expansion market efforts? And where do you see the biggest opportunity next in terms of expansion markets?

Yes. I think -- so we continue to feel great about the Southeast and the participation not only of the retailer that we started with but actually the development of that entire market. I mean the experience, I think, was very positive and formative for our company. And the first thing is that we -- if you look at where we are, if you went back to Q4 of 2022 to today, we're up about 58% as a total company in terms of our business. And our -- and that's really being led by our Power Four Brands, which were up about 72%. And ultimately the major driver of that was actually expanding availability. So we talk about the ideal retailer being about 18 -- or retail footprint to be about 18 to 24 SKUs, to start. And what we found is we've actually expanded our distribution breadth. We've gained about 6 average items carried in that geography, and our share has grown about 120 basis points. So Florida, for us, has been a great place to start and actually allowed us to understand how to enter with a anchor retailer. It also sort of shows us the relative power of a push-and-pull model. So you can -- we can drive availability and get shoppers to encounter our product but also being able to invest in A&C and making sure that we're driving consumer interest. And that's kind of where -- we continue to be in that phase. We still have room to grow before it actually hits what we would consider a core market for us. A couple of -- there's about another 2 share points for us to go, but we feel really good there. I think, as you look at our expansion: We talked about our distribution gains this year coming in line with what we expected. I'll point again to Michigan, where we have bought a master distributor and converting it into our independent operator system; Texas, where we bought back rights to On The Border, which we're also building out. And so sort of think about the West. The Center of the country and the West is kind of the next 2 geographies, anchored by national retailers as well as some of the regional powerhouses that are there.

I should have mentioned this at the outset also. Thank you for all the wonderful Utz products out in the resource room there...

Yes. We -- well, we hope to see [ it chopped down ] by the end. That's -- will be the best -- if you can't feed a bunch of hungry investors, you'll definitely have a different set of problems.

Your sort of Power Brands in your core markets, all right, have continued to do really well. Where there's been some share weakness, partly by design, is just the drag on core market share from some of the Foundation Brands. Maybe you can talk a bit about the role those play. And sort of when do we get to a point where the decline in -- or the managed decline in Foundation Brands stops being sort of this drag on core market share?

Yes. So a couple of things. I think you're right. The Foundation Brands have historically been a little bit more of a drag on our business, and -- but they're important to us and they're -- because they're important to both retailers, consumers and our independent operators in certain geographies. So as we think about those businesses, they are things that actually drive consumer interest for a certain subset of consumers. And we will continue to carry them in the future. The trick was to be able to rightsize them relative to our Power Brands so that our Power Brands grow. So what I'd tell you is, in the current period, part of our core issue has been really in C-store with some of our businesses where we're just not getting the turn that we need -- we haven't executed as well as, I think, we can. And so it's happening a little bit slower than we anticipated in the near term, but I think our Foundation Brands are getting to the point where they are now not going to be the thing that really dwarf the growth of our Power Brands because they are just that much smaller than they used to be.

Okay. And even in your core markets, you've talked about there's still a lot of distribution white space even in the core.

For sure.

Maybe specifically, where are those opportunities most pronounced as you see it?

Yes. So we talk a lot about On The Border, Zapp's and Boulder Canyon and obviously Utz. The opportunity is really -- we feel very good about what we've done with On The Border over time. When we bought that business and have scaled it up, we brought it into our core, but I think we view, we continue to view all 3 of those brands as having significant headspace going forward as we grow. And so our -- we are focused on making sure that we're expanding. I mean if you look at Boulder Canyon in the near term. Distribution gains have been growing. And unmeasured channels is a business that is growing quickly, driven by the opportunity around avocado oil and [ non seed ].

Great. Productivity obviously plays a key role in both margin expansion target as well as creating the fuel for reinvestment. Recently it looks like productivity as a percent of cost of goods has been greater than 5% versus maybe 1% historically.

Yes.

Much of that is driven by some of the recent asset optimization moves you've made. Maybe, can you take us through that journey a bit? Give us a sense of how much room is left to go, where your system utilization is currently and where you think it can kind of get to. And obviously you've reaffirmed, all right, the profitability piece of the year even with, all right, a less-robust top line, so is that gap being made up by the better-than-expected productivity?

Yes. So we are very pleased with the productivity program that's been running, so far, this year. At Investor Day, we called for 4.5% of cost of goods or $45 million of productivity. We are pacing ahead, to your point, above 5% this year; and that strength should continue. To give you a little bit of context: We started out this journey with 17 manufacturing plants a couple of years ago. At the end of last year, we had 13 manufacturing plants. We had a couple of actions that we took. For example, we closed the Birmingham facility. And we sold the Bluffton, Indiana facility as well last year. At the end of last year, with 13 facilities, we were at about 70% plant utilization. First half of this year, we did 2 transactions with the same party and divested 5 manufacturing plants and 2 brands as well. And now we are at 8 facilities. In these 8 facilities today, we are in mid-80s, mid-80% utilization because some of our product are still being produced by Our Home, which now owns those 5 plants. Our goal is to invest in these 8 facilities, which is ongoing right now; build capacity; insource some of that volume; and stabilize at about 80% utilization. Overall, we want to be able to produce about average $200 million of revenue in each of these facilities that we own now. I think the network is in a good place. We are building out a warehouse, a Northeast logistics center, as we call it, in Hanover which will consolidate 6 warehouses in the area. So that work is continuing as well. That's the journey. And that journey is pacing faster than we thought it would. We are delivering higher than 5% of COGS in productivity. And we should continue that pace through the year, which then provides us the flexibility that we have been talking about all year to invest back in the business and flow through to the margins. And we are using some of that flexibility now to hold our EBITDA guide for the year even though we have stepped down top line slightly.

Got it. Have the 3-year targets for productivity changed? Or could they change? Or is it just that some of the savings are coming through sooner or faster than you would have anticipated?

We have not revised the targets, but it certainly is pacing ahead of those targets. This isn't a pull forward. This is actually productivity coming in higher than what we thought, which gives us a lot of confidence for us to deliver 2026 goals. What I will say is we want to maintain that flexibility, that balance, that how much of that goes back into the business to drive top line, so we'll talk about targets when it's time.