Collier Creek Holdings (UTZ) Earnings Call Transcript
March 11, 2025
Earnings Call Speaker Segments
So good afternoon. We're excited to have the team from Utz Brands here today, CEO, Howard Friedman; CFO, Ajay Kataria; Head of IR, Kevin Powers. Thank you, guys, for being here. We appreciate it, as always, and supporting the conference.
Yes. Thanks for having us.
So Howard, maybe we can just kick off kind of with a state of the union. You guys reported fiscal 4Q about 3 weeks ago, gave a fiscal '25 outlook. Maybe just give us a recap what you've kind of had the feedback from investors you've been speaking with since that time.
Yes. Look, I think we had a pretty good year last year, and obviously, a lot of conversation on the share growth that we saw and kind of had the state of our core market as well as our expansion geographies as we've gone. And I think the feedback was pretty good. Obviously, the top line was more muted than we would have both expected and what it prefers. The category was a little bit softer, and we have some opportunities ourselves. But I think that the consistent comment was clearly around what we were able to do with margins and be able to deliver the EBITDA and the profitability and productivity that we were able to generate. Questions that we got, a lot of questions, obviously, I suspect some of them we may discuss today, state of the category, kind of the environment which we're operating in, whether it's consumer trends around GLP-1 or make America healthy questions that came through as well as kind of what to expect from us as we go forward in our expectations for the environment ahead.
So maybe we can start there. You guys have talked about maybe a more muted year in '25 for the category as a whole and your sales guidance is kind of for flattish to up low single digits. Maybe you can talk about, first, just your dynamics you're seeing within the category at current in salty in particular, and then kind of where the Utz-specific growth drivers are?
Yes. So I mean -- look, I think we've seen a more muted category last year. If you went back to what we had called the previous year, we thought that the category would be in the low single-digit growth and obviously came in below that. So we continue to take a little bit more of a cautious approach. And I think that's reflected in both what the consumer is doing as they're seeking value and trade and selling -- or buying up and down the price ladder as well as just kind of adjusting to what has happened in terms of inflation over the last couple of years. So we put all of that into our perspective. And we do think that the category will stay a little bit more promotional in the first half as we kind of lap through the back half where I think it will start to normalize. For us specifically, it's going to be a lot more of the same. We continue to push ahead into our expansion geographies, which allow us to be a little bit less dependent on the category overall. We have a lot of geographic white space to go get, both in traditional grocery as well as in different classes of trade. We feel pretty good about the innovation that we've been bringing forward. Boulder Canyon, obviously, continues to be on fire for us. And so we would expect to continue to see that type of growth continue into this year. So we put it all together and felt like we were trying to be pretty balanced in what we see, but continue to execute our playbook.
And Ajay, I know speaking to Howard's comments around kind of a more promotional environment in the first half. I know there's some dynamic specific to Q1 as it relates kind of to pricing that you wanted to expand upon a little bit.
Yes. So as you know, we launched bonus bags in Q1, and you will see that in OTB brand as well as Utz. So the dynamics you will see come through in the data is from a price per unit standpoint, it's not pricing. But from a price per point -- a pound standpoint, mathematically, it will look like a price invest, but it's really not.
So a bit more of that price pressure on a reported basis in the first quarter which is the rest of the year and even maybe versus the first half?
That's right.
Yes. And look, I would -- just 2 things to remind everyone. One is that the first quarter of this year is lapping what was the most -- the largest lap prior year, right? So last year, Q1 was the strongest quarter overall. And I think we would -- you'll start to see some of that normalize as we go.
And Howard, before we get into the brand, and you made a mention of Boulder Canyon, which I want to spend -- definitely spend some time on. A little bit about performance by channel. Just kind of maybe remind us your exposure to C-Store channels, what you're seeing in C-Store. There's been other C-Store categories that I think have seen a bit of recovery. Salty has been behind, and then maybe we can move through mass and club as well.
Yes. So I think, look, if you look at the category sort of by each of the channels, grocery, call it, down about 1.6%. Mass is down about 1.3%. Club is relatively flat. And then C-Store to the point is really down 3%. And when you look at that together, we're -- about 15% of our business comes out of C-Store, and it's particularly indexed really to our Zapp's business first. But obviously, we're fairly represented. And so C-Store has been a little bit of a challenge for us for multiple quarters now. It started -- it was a price pack architecture issue and continues to be something that we're just not getting corrected as quickly as we would like to. Conversely, as you look at sort of grocery or food and club and mass, we continue to enjoy gains in both in terms of distribution and our business continues to grow in those channels. So it's a smaller piece of our business, but it's obviously something that kind of prevents some of the work that we have been doing to come fully through at least at this point. As you go through the rest of the year, we would expect that convenience store will start to normalize for us as well. We expect low growth -- flattish to low growth on the year, but that is still work to be done.
And that's an Utz specific?
That would be total Utz Brands.
So Utz Brands [ in ] convenience stores [indiscernible]. Got it. And maybe we can dive into each of the brands kind of giving of the core brands, state of health across Utz, Zapp's, Boulder Canyon and OTB.
Sure. So look, I think we feel really good about our Power Four Brands and our branded portfolio in general. We continue to focus on the brands that actually have the most opportunity to be responsive to marketing and innovation, which is obviously to your point, those four brands. I'll start with Boulder Canyon because it's kind of the easiest one. Obviously, it basically nearly doubled in size over the last period. And it's one of those businesses where it's got a lot of consumer interest. So the non-seed oil opportunity is there. We get a lot of support from the natural channel. And we continue to see the business grow. It's also been a brand that we've entered into cheese. We've actually expanded across the potato chip portfolio. So we're now in a wavy as well as flat chips. And then obviously, the tortilla chips that we brought in. So that's a business that -- at Investor Day, we thought we could get -- we could get -- we could grow that business pretty quickly. We hit $100 million in retail sales last year and that business continues to be highly engaged with the consumer that is interested in the product. As you look at Utz, Utz is doing well. Obviously, expansion geographies is one of the places where it continues to be a highlight. Our core geography, it was a little bit softer potato chips in the core, specifically in the fourth quarter was a little bit softer than we would have liked, but it remains healthy and that we continue to see high levels of incrementality when we enter into new geographies with that brand. On the Border, as you recall, our strategy was to bring On The Border into our core markets and the expansion geographies that we would normally talk about are a little bit more of its core. And what you saw last year was expansion -- or distribution growth into our core markets. You saw outperformance. It was up around 4% for the year overall and largely led by the expansion geographies. That's a place where we continue to see a lot of upside and consumer interest in the brand. And then Zapp's has been the business that has been probably the most challenging for us. We talked a little bit about C-Store earlier. But on the bright side, it's really a potato chip opportunity because if you look at our pretzel business, it's really performing quite strongly, and so we continue to have great confidence in that brand going forward once we resolve the C-Store opportunity.
And I know as it pertains to Zapp's, we were having a conversation earlier about, it's been a number of quarters now. Maybe you can talk through some of other kind of non -- less core or non-core that has some challenges in the fourth quarter, where you see those abating, whether that's dips and spreads business. You had a conversation about Golden Flake potato chips had been a value price point, I think, issue over the summer. Some of that's been resolved, but maybe you can talk through those.
Yes. So I mean, when you look at the rest of our -- the remaining branded piece of our portfolio, obviously, Golden Flake Pork is an area where that subcategory is important to us, and Golden Flake Pork is growing -- is performing well. Golden Flake potato chips and some of the rest of the portfolio, to your point, over the summer required some attention, which is -- which it received. And I think those businesses are now performing in line with the expectations that we had. And then you get into some of the other businesses like TGI Fridays and others where they play specific roles, and the brands play specific roles in our business and are largely meeting what we would have expected. The dips and salsa business really was a prior year, call it, May, June time frame. We had a large retailer where we had dual placement, one in the Hispanic set and one in the conventional salty snack aisle. And the retailer made the choice to bring it all into the conventional set. And so we'll lap that really, call it, June -- May, June time period, and that was a significant drag on the fourth quarter, which we would then begin -- we will lap. The important thing is the underlying performance of the dips and salsa business more broadly is actually -- is doing well. It's just getting masked a little bit as we just deal with the distribution changes.
And before we go to Boulder Canyon, where I spend a little bit more time, a couple of questions on OTB, On The Border. First was I believe there's -- you had some planned time where TORTIYAHS!, the other brand that you have were kind of going to be coming off shelf as part of a rotation to open up shelf space. Are we through that period now? Or are we still going to be experiencing that through the first half?
Yes. Look, I think for the most part -- I think there will always be some assortment change. There was a more meaningful step to your point, step down on yahs and an introduction of On The Border. We still have a little bit more to do, but it's not nearly as pronounced as it was, say, call it, 12, 18 months ago. For the retailers that TORTIYAHS! is very important to, we obviously want to make sure that we're selling the products that our shoppers want to buy. But OTB will remain the priority. And we have found pretty consistently when we've made that trade, it winds up being a good thing for the shopper on the category.
Right. And so on OTB, look, since you acquired the brand, it's a really strong runway in terms of distribution. Maybe where we are today? I know again, there's maybe some assortment changes that still have to go on, but kind of where are you in terms of channel opportunity, shelf-space gains in the core geographies, kind of how much more runway do you think we have on OTB?
Yes. I'm always leery of baseball analogies because it's always a dangerous thing, but I would probably -- which may be setting up for a long year. We're going to avoid that for now. But I would probably tell you we're probably in the sixth, seventh inning on OTB in terms of getting there. It's a business that has grown quite nicely. And I think it is going to continue to have opportunities for us to expand as we're bringing -- as we're entering into new geographies. Because if you think about kind of the core set, you want that first 18 to 20 items that you bring in, OTB has got an important role to play there. So I think within our core, there's still more opportunity and then an expansion as well. It's a great brand and one that we're going to continue to invest behind to make sure that we keep growing it.
In terms of moving to Boulder Canyon and kind of better for you and maybe more broadly across the portfolio, I think one of the advantages that you all have is that you have relatively clean ingredient labels. So maybe you can just remind us kind of what percentage of sales come with, I don't know, 4 ingredients or less. I think there's a quote that you typically have on that.
Yes. Look, if you look at our -- at the breadth of our portfolio, so look at core potato chips, pretzels and tortilla chips, you're talking about very simple ingredient lines. You're talking about oil, salt, corn, potato or wheat. The majority -- so that's the majority of our business. When you start to look at longer ingredient decks, it's really around our flavors. And so that's really a function of having to declare what everything is and obviously then something like cheese balls as well where the ingredient decks are a little bit more -- a little bit longer. But the vast majority of our portfolio is basically a clean -- is a simple ingredient line. When you look at Boulder, and we talk about Boulder's flavors as well, we do know how to make those ingredients as the consumer is interested in whatever the profile is, we're able to do that and do it pretty effectively. More broadly, whether you're looking at salt or you're looking at gluten or you're looking at other things that you might want to avoid, we have Better For You items and then we have items that are both reduced sodium as well as gluten-free to offer to the shopper based on what they want. And then obviously, Boulder is a non-seed oil, so that is a trend that is obviously growing quickly. And as that trend continues, we will obviously make sure that our portfolio is tailored to make sure that we are selling products the consumer wants to buy.
So this bag of Boulder, I looked on the back while Howard [indiscernible] has 3 ingredients.
Yes.
That's it. So it is, I mean, relatively clean label.
For sure. And that's going to be true about all of our unflavored items are very clean -- very simple ingredient lines. And that's a function of what the product is and the function of how it is made. When you get into more complicated products, that tends to be where the ingredient lines follow.
Has there been in your analysis or your demand analysis -- has even just the [indiscernible] being in the headlines? Has it driven incremental activity do you think to the subset of the category? I mean, even in the past few months as people become just maybe that much more aware and as seed oil becomes more of a troubling issue for people.
Yes. So I don't know is the short answer. I don't think we've seen a -- I mean, Boulder has been growing both distribution and has had very high velocities for at least the last couple of years. And certainly, we have seen an acceleration in that business over the last couple of quarters. I don't know that I would -- I could correlate a change in the -- sort of the external environment and what people are talking about. But what I do know is that there are -- there is a subsection of consumers who are focused on seed oil -- avoiding seed oils. And what is really nice -- and we talked about this earlier, what's nice about the Boulder products is that there is no taste trade-off. So if you want to eat a potato chip and you want to eat something that is fried in a non-seed oil, when you eat it, you don't feel like there's any sort of a sacrifice that you're making, which I'm not sure that every product in every category can say that. And so as people are opting into these segments, we just believe that there's a tremendous amount of runway for this business over the next couple of years, and we're really excited about making sure that we're leaning into that trend.
I want to come back to the promotional environment and just what we've been having discussions now for, I guess, about a year in terms of what's kind of transferred in the space. Is the effectiveness of promotions in salty, is it lower than it used to be? And is that the expectation going forward? Are we -- what should we expect, I guess, from a category perspective? Because it's -- the category, again, is not doing, I think, what we all think it should be.
Yes. And we -- so a couple of things on the category. I mean, first -- the first thing I look at in the category is the household penetration. And what we are seeing is household penetration is actually growing in salty. And so that would say to me at a minimum that the consumer and the shopper actually do want these products in their pantry and in their house. And then the question that you're asking, which is really so how do you think about pricing in the promotional environment. We see a couple of things. We do see the consumer shopping up and down the ladder and defining value the way they want to, whether it's a price and quality equation, right? And so for shoppers who are looking for a premium product like Boulder, and Boulder is one of the highest price items that we have, and yet it's growing really quickly. And then on the other side of the barbell is if you're looking for an absolute price point, you maybe shop -- you'll either be promotionally in deal shopping where you may go into classes of trade like dollar and discount to go find it. So we see all of those things kind of jumbling together as we look at the environment. To your question on promotional lifts, I think there are 2 things going on. One is there are these multi-buys that we that we will engage in. And when they are around a holiday where there's peak consumption, we can see them respond very well, and the consumer stays in the category, they consume the product and then they go and then they'll come back again. When it is a non-peak consumption window, sometimes what happens is pantries load and they may be out of the category for a little while. And that does translate into a lower lift relatively speaking, and -- which we certainly saw in the fourth quarter. So I think you're going to see the promotional environment continue to kind of stabilize as we get through the first half. You'll recall the summer is really where it stepped up last year and then it kind of stayed higher through the rest of the year. But we think that as long as we can stay disciplined and focused on what we're doing, then we can make sure that we deliver against our objectives.
Ajay, I want to turn to you, give Howard a break. One of the things that's been really impressive about the story, and I think from last year was just the level of gross margin expansion that you saw whereas a lot of other peers in the packaged food industry are -- maybe don't have that opportunity as much in front of them. So maybe if we go back to Investor Day that you had, I guess, 15 months ago now, where we are in terms of your productivity programs whether there's been kind of any update and kind of how you see the path on both kind of a gross margin perspective expansion going forward and also EBITDA margins. And then I'm going to come back to Howard on our deal that we made about his margin target.
I look forward to that.
Yes. So the short answer is we are in a very good place. 15 months ago, when we went out in front of our investors, we said we were going to deliver about $135 million of productivity over 3 years. That's about $45 million a year, roughly. And we would invest back about $30 million every year to net about $15 million of EBITDA expansion. That's 300 basis points, minus 200, net of 100. We delivered more than that. In year 1, we delivered $60 million of productivity, $15 million ahead of pace, and we are sort of baking that into our target. We have increased our target to [ 150 ] or more for the 3-year time period. The program sort of really accelerated and simplified in many ways because there were roughly 2 parts of the program. One, we needed to do a lot of work in our supply chain -- base supply chain in terms of manufacturing automation, lean continuous improvement, logistics, procurement and so forth. We are doing that work. The other body of work was optimizing our network. That became simplified and accelerated as we did 2 transactions and divested a total of 5 manufacturing facilities, and we're able to accelerate CapEx investment to consolidate investments and production and scale the existing 8 facilities that we do have. So that program is solid. It's working well. We also turned on rice distribution center in December last year, which is a facility that consolidates 6-plus warehouses into a single warehouse, 600,000-plus square feet of warehouse space. It's automated. It's state-of-the-art. I think you visited us more than 2 years ago. And the Hanover campus, as we call it, is very different today compared to when you visited us. So you should come back out, and we'll do that. And I'll say one last thing, segue into your comment. The entire Howard Friedman team is working to make sure you are right, and he gets to consume cheese balls on the stage in a couple of years.
Let's just be clear that no one would be happier to eat an entire barrel of cheese balls than I would, both in the context of just a normal Saturday night, but also in terms of -- EBITDA margin targets. I think Ajay's point is right. Like our supply chain -- our entire supply chain team and the effort that has been put in has happened, obviously, much quicker than we would have thought. Normally, Pete, you'll recall, we would always say, if you want to see the margin opportunity, just come visit us in Hanover. And I would tell you that if you want to see the progress on the margin opportunity, come visit us in Hanover.
Yes. Yes. Yes. I mean I remember the automated sorter that didn't function but now clearly is working.
For sure, lots of automation all around.
Yes. So maybe sticking with Ajay. Just remind us kind of on capital needs and your leverage. You really brought the balance sheet into a much better place than it was 18 months ago. But just kind of where we sit from a capital allocation standpoint and the leverage targets also kind of that you had outlined at Investor Day.
Yes. At Investor Day, we wanted to -- our goal was to get to 3x by the end of '26. Our new goal is to get approach 3x by the end of '25, which is this year. We improved a full churn from 4.6x levered to 3.6x levered within a year in 2024. So that was a good year of execution on leverage front. Capital allocation is still, for us, we will invest in growth followed by debt paydown, followed by dividends and stock buyback. That sequence is still the same, and we are looking to get to our targets as we outlined for this year and then go from there.
And Ajay, it came up in one of the prior meetings, but relatively limited -- as we're thinking about supply chain and margin, relatively limited kind of tariff exposure, but maybe you can kind of outline for us whereas folks are thinking about potential pockets just what might exist.
Yes. So substantially, all of our finished goods sales in our raw material procurement is within the U.S. We do very limited across the border. So limited direct exposure on tariffs pluses and minuses, what have you, for the company. That said, there are a little bit of -- we buy some plastic racks and a few other items from across the borders, and we'll see what that means. It's not material. There might be indirect impact. Our suppliers are impacted for whatever reason, and they're passing along costs. We just don't have a way to quantify that right now. And we're watching the news as everybody else, and we'll react accordingly.
Yes. As I'm sure you can imagine, we do have a team in place to make sure that we're responsive to the external environment. And if we need to be -- we'll continue to be flexible and can respond as quickly as you would think a company our size with our level of complexity can respond. But to Ajay's point, I think there's some blessings right now in terms of kind of what our footprint looks like.
Two maybe other kind of more points that came up since the call, just that I want to hit on. One was kind of the shift in terms of how you'll be presenting the company going forward in terms of branded salty versus non-branded and non-salty. Just what kind of drove the decision to make that change in terms of reporting? I know we're going to get kind of more detail at some point here in the future, but just trying to understand what drove the reorganization decision.
Yes. So over the last several years, as we did a bunch of acquisitions and grew organically, we put a portfolio of brands together. And that's -- we have been shaping that portfolio over several years either through rationalization or otherwise harvesting brands here and there. We feel now we are focused enough in our portfolio in terms of every brand that we have has a role to play, either for our customers or our consumers, our independent operator networks because we are leveraging certain brands to scale that up or our manufacturing network where we are kind of using that for scale. So the brands are at the right size and margin profile that we can now look at our portfolio as branded and non-branded, non-salty. And within the branded portfolio, we are focused around investing and scaling nationally our Power Four Brands. So that's the way we are looking at our business, so it made sense to make that change now. The added benefit is having a branded, non-branded cut allows us to directly compare -- more directly compare our branded portfolio performance with syndicated data that we all look at.
And Howard, I think in that non-branded piece in the fourth quarter, we spoke already a little bit about the dips business and kind of the impact that had, but there were some other factors that played in, in the quarter as well that kind of dragged down again the non-branded, non...
That's right. So I mean, look, if you look at the performance, we have greater levels of control over the branded business because we obviously own it as well as on the non-salty side, which is really dips and salsa, again, businesses that we control. Their margins are also closer in line, although dips and salsa obviously not as much. But the rest is partner brands and private label. And those are businesses that obviously we distribute, which is not unusual in the industry. But we obviously have less control over the performance of those businesses than we do the rest of the portfolio. So if you look at the gap to plan, the dips and salsa was about 1/3 of it and then that partner brands and private label was a significant portion as well.
It's the remainder. Helpful. Last question just before I open it up to any Q&A in the room. The subject of M&A, like Utz went through a very acquisitive period. Some of it for brands, some of it for routes, some of it for capacity. I think maybe the last one was Kings Mountain. Was that the last...
Yes, it would have been for Kings Mountain and the RW Garcia.
And I believe at the time, we kind of had a discussion that, okay, you'd have enough capacity for the next 18 to 24 months. We're kind of at that window at this point. So just maybe an update in terms of how you're viewing M&A, whether you're happy with the portfolio as it currently stands. There's been some divestitures in there as well. But just kind of how you're thinking about it.
Yes, I think the -- one of the things I hope you get from this conversation is there's really not a lot of change from what we talked about 12 months ago. We're kind of focused on executing and delivering against the goals that we've set out. And similarly, within M&A, there's really not a lot of change to what our thinking is around it. Obviously, at a leverage at 3.6, approaching 3.0 by the end of the year gives us a little bit more perspective, but I'd still tell you that the leverage is still an area where we know we have additional work to go do. If they were -- and so that's number one. We will continue to acquire routes and do that sort of standard work as we enter into new geographies. It's not a meaningful number to -- and typically, that's a cash expense, right, Ajay, that kind of then flows through fairly quickly. But we like where -- but the most important thing, at least to me is our organic opportunity remains very significant. And we have no shortage of opportunities to continue to drive our expansion geographies and build our marketing muscle to be able to drive organic growth where we'd like it to be. If I got to have an asset that's out there, we'll look at everything, and we obviously will pay attention to assets that come to market. but the bar has been high and will remain high for the foreseeable future.
I wanted to just pause here and see if there's any questions in the room. That's hard for me to see because...
You can see I'm impressed.
We got one in the front. One right up here.
Yes. I guess the combination of -- I know you touched on RFK briefly, but I guess, combination of RFK, GLP-1, not even just you guys, but just kind of how you think the category is adapting to those trends? And then maybe just like how long do you envision this? Where are we on kind of that curve? I think probably the greater curiosity is more RFK than GLP-1 and just kind of navigating that day to day.
Yes. I mean, look, I think the first thing I would say is that the conversations that are coming out of really anywhere, whether it is out of the government or it's coming from consumers, where consumers' interests lie is what we're going to -- we'll address. That's -- we're a branded food company. And so the good news is we've never had anything. We didn't have Red 40 in our food already. So that was really not an event for us. But depending on what comes out of Washington, we'll respond to it and will comply with the law. But most importantly, we want to make sure that we're meeting and delivering against the consumer experience and what they're expecting, right? So I think it's really early for us to tell. We'll pay attention to it all the way through. I think lots of folks have talked about GLP-1, and I think you'll get the same sort of perspective I have. We don't see it necessarily in our data at this point propensity for smaller pack sizes, perhaps. And obviously, we continue to look at substantial snacking as an opportunity for us. Seed oil is an opportunity for us. But it's -- I think the question will be what does the consumer behavior change into and then how do we best meet and deliver against that behavior change? So our portfolio, again, is pretty simple. We always are looking at innovation and ways to bring new products to market like we've done with Boulder Canyon, and you'll continue to see us look at the portfolio and how to shape it best through innovation over the coming, call it, year, 2 years depending. But I think that's kind of standard work for people in our shoes.
Great. Any other questions? Okay. Guys, thank you very much.
Thank you.
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