Utz Brands, Inc. (NYSE:UTZ) Q4 2023 Earnings Call Transcript
Utz Brands, Inc. (NYSE:UTZ) Q4 2023 Earnings Call Transcript February 29, 2024
Utz Brands, Inc. misses on earnings expectations. Reported EPS is $0.16 EPS, expectations were $0.17. Utz Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Cary Devore - Chief Operating and Transformation Officer:
Operator: Ladies and gentlemen, thank you for standing by, my name is Desiree, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Utz Brands Fourth Quarter and Full-Year 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Kevin Powers, Head of Investor Relations. Please go ahead.
Kevin Powers: Good morning, and thank you for joining us today. On the call today are Howard Friedman, CEO; Ajay Kataria, CFO; and Cary Devore, COO. 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 have just 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.
Howard Friedman: Thank you, Kevin, and good morning, everyone. I'm pleased to be speaking with you today. For those of you on the call that attended our Investor Day in December, I'd like to thank you again for joining us and I look forward to seeing many of you at investor events throughout the year. Given we recently spent a good amount of time talking about our detailed progress in 2023, I'll keep my comments brief reflecting on the year and our fourth quarter results, and then hand it off to Ajay for a detailed financial review and outlook. I'll finish our prepared remarks discussing our priorities for 2024, which align to our key fundamental strategies and then we will open the call up for your questions. As we wrap our 102nd year of Utz, 2023 was a critical year.
We evolved our business through capacity, distribution and capability investments that better position us to capture our full potential. And we are making tangible progress in building Utz into a pure play U.S. snacking company of scale with an advantage brand portfolio in the attractive salty snacks category. To ready ourselves for our next stage of growth, in 2023, we developed a clearly defined brand portfolio strategy to further penetrate our expansion geographies with our customers, while we work to maintain our market share in the core. This strategy positions us well to hit our goal of 4% to 5% organic net sales CAGR over the next three years. Additionally, we developed our integrated supply chain strategy that is targeting $135 million in cost savings by 2026 through our base productivity programs, optimizing our network and strengthening our capabilities.
Last year, we made good steps to begin to optimize our supply chain network and we've hit the ground running in 2024 with the closing of our recently announced transaction for the disposition of three plants. This transaction will accelerate some of our targeted network optimization cost strategies, while also simplifying execution and helps enable us to reach our stated net leverage goal of 3x by year-end 2025, which is a full year earlier than planned. Turning to how we finished the year, we continued to make positive strides in the fourth quarter. While fourth quarter shipments were towards the lower end of our expectations, our consumption results were strong and we delivered double-digit adjusted EBITDA growth and our fourth consecutive quarter of adjusted EBITDA margin expansion.
Our retail sales increased 4% led by Power Brand growth of 5% and we gained dollar, pound and unit share in the fourth quarter. Utz was the only snacking company of scale to accomplish this and in the quarter, we finished as the number three branded company in the salty category. In addition, our investments in digital marketing capabilities delivered results as Utz was the fastest growing salty snack company of scale in e-commerce sales. Our growth was driven by continued momentum for Utz Potato Chips, On the Border, Boulder Canyon, Zapp's Pretzel Sticks and a strong rebound in our Utz Cheese and Golden Flake Pork Businesses. Power brand growth was most pronounced in our expansion geographies with growth of 9% fueled by continued distribution gains, which easily exceeded category growth of 3%.
In addition, our Power brand growth in the core of 3%, outpaced category growth of 2%, led by strong performance of On the Border and Boulder Canyon. With Boulder Canyon still only less than 20% distributed in our core, this better for you snacking brand has plenty of room to roll ahead. Before I turn it over to Ajay, I'd like to thank our 3,500 Utz associates for their dedication and hard work as we are building a portfolio of consumer loved brands coast to coast. This was an important year for our company as we strengthened our foundation and better positioned Utz to deliver our full potential. Our mission is to become the fastest growing pure play U.S. snacking company of scale and I'm confident in our journey ahead. Now, I'd like to turn the call over to Ajay.
Ajay?
Ajay Kataria: Thank you, Howard, and good morning, everyone. In 2023, we delivered organic net sales growth of nearly 3%, which included a 3.2% volume headwind from SKU rationalization, increased adjusted EBITDA by 10% to $187 million and expanded adjusted EBITDA margins 90 basis points to 13%. I'm proud of our team's efforts during a dynamic consumer environment to deliver these results. In the fourth quarter, organic net sales slightly declined 30 basis points and adjusted EBITDA increased 12% as our productivity programs and actions to optimize our network and portfolio are delivering stronger profitability. Importantly, our organic net sales growth combined with these actions resulted in our fourth consecutive quarter of adjusted EBITDA margin expansion, as we delivered 14% adjusted EBITDA margins in the quarter.
During the quarter, our organic net sales performance was led by volume mix growth of 50 basis points. Volume was impacted as expected by 2.5% due to SKU reductions. When we adjust for SKU rationalization, we estimate that our volume mix grew 3% in the quarter, which is an acceleration from 2.7% last quarter. Our broad based SKU rationalization actions are now complete and in 2024, we don't expect this program to be a material impact to our results. Additionally, as we discussed last quarter, our fourth quarter net sales were negatively impacted by some earlier holiday shipments that were originally forecasted to occur in the fourth quarter, but shipped in the third quarter. Offsetting the volume increase in the quarter was a pricing decline of 80 basis points as we lapped 17% price realization in the prior year.
Also, we made certain price pack architecture adjustments to be better positioned in the market. Finally, our total net sales growth was impacted by the conversion of company-owned RSP routes to independent operators, which reduced growth by 40 basis points. Similar to SKU rationalization, this program is now complete and will have a small impact of 30 basis points in the first half fiscal 2024 sales growth as we lap out of last year's conversion. Moving down the P&L, adjusted gross margin expanded 52 basis points in the fourth quarter, which I'll note included a 40 basis points headwind from our conversion to IO routes. Excluding this impact, adjusted gross margins expanded year-over-year by over 90 basis points led by our productivity programs, which more than offset commodity and labor inflation.
In addition, our SKU rationalization programs improved our margin mix as we reduced lower margin private label and partner brand SKUs. Adjusted SG&A expense declined 5.1%, an improvement of 110 basis points as a percent of sales, as a result of our productivity initiatives focused on logistics and lower administrative spend. As our sales growth normalizes, we have been able to manage spend through cost control measures in addition to driving productivity within our selling and logistics costs. Partially offsetting these factors were continued investments in e-commerce, people, selling infrastructure and supply chain capabilities to support our growth. Bringing it together, adjusted EBITDA increased by 12% to $49.4 million and margins expanded 160 basis points to 14% of sales.
The margin expansion was driven by 350 basis points of productivity, 70 basis points from selling and admin expenses and 20 basis points of volume mix. These benefits were partially offset by 200 basis points of inflation and 80 basis points of pricing. In addition, adjusted net income increased 6.5% and adjusted EPS increased by 6.7% to $0.16 per share. Stronger operating earnings were partially offset by a less favorable tax rate and higher interest expense, primarily due to higher rates on our floating rate debt. Turning to cash flow and the balance sheet. Consistent with normal seasonality and from our cross functional efforts to improve our cash conversion cycle, we generated strong cash in the second half of the year of over $80 million.
I'm happy to report that our transformation efforts in this important area are working and we are now seeing the benefits in our results. This resulted in cash flow from operations in the full year of $76.6 million. We also remain committed to our capital priorities and capital expenditures were $55.7 million, primarily related to supporting our productivity programs and our investments in our Kings Mountain manufacturing plant. In addition, we have paid $32.1 million in dividends and distribution to shareholders. Finishing with the balance sheet, cash on hand was $52 million and our liquidity remains strong at over $210 million giving us ample financial flexibility. Net debt at quarter end was $866.7 million or 4.6x trailing 12 months normalized adjusted EBITDA of $187.2 million.
This was slightly higher than our expectations. That said, on February 5, we closed the previously announced disposition transaction of the Good Health and R.W. Garcia brands and three manufacturing facilities. The transaction included a total consideration of $182.5 million with approximately $150 million in after tax proceeds, which we immediately used to pay down long-term debt of which more than 90% apply to our floating rate term loan. This single debt repayment resulted in about $12 million in lower interest expense for 2024 and notably, our fixed rate debt now comprises approximately 80% of our total debt, up from 70% at year-end. Importantly and consistent with our strategy, this accelerates our timeframe to achieving our target of 3x net leverage ratio to year-end 2025, a year ahead from year-end 2026 target that set at Investor Day in December.
Now turning to our full year outlook for fiscal 2024. I believe our 2024 outlook positions us well to deliver our 2026 financial targets that we set out at our Investor Day. We expect organic net sales to increase approximately 3% or better, which reflects our outlook for normalizing salty snack category growth. Our growth is expected to be led by volume with outsized strength in our expansion geographies and pricing about flat for the year. Turning to total net sales. Our growth in 2024 is estimated to be impacted by about $45 million due to the disposition of the Good Health and R.W. Garcia brands. You will recall that the total combined sales for these brands for the full-year 2023 was approximately $65 million. Given we have a DST agreement with the new owner, Our Home, to continue to distribute Good Health.
This results in a lower impact to our total sales in 2024. From a weighting standpoint, we expect about a 49% to 51% first half versus second half split for our net sales. Moving to adjusted EBITDA, we expect growth of 5% to 8%, fueled by gross margin expansion as our base productivity programs and network optimization cost savings build. In addition, our 2024 outlook assumes a roughly 40% increase in market expense, which is consistent with what we laid out during our Investor Day. Our outlook includes an estimated impact of foregone contribution to adjusted EBITDA from our brand disposition, which I'll note is mostly offset by cost savings and also our transition services agreement. We expect first half versus second half weighting of adjusted EBITDA to be similar to last year.
Adjusted earnings per share is expected to increase 16% to 21%, led by stronger operating earnings and lower interest expense due to the recent debt pay down from the disposition net cash proceeds. Additionally, we expect our adjusted effective tax rate to be between 19% to 21%, interest expense of approximately $50 million and capital investments of between $80 million and $90 million. As we outlined at our Investor Day, we expect CapEx over the next three years to be about 5% of total net sales. This outlook is unchanged, but the pacing has been accelerated, increasing our 2024 spend given our recent plant dispositions and the need to more quickly invest in our key facilities where production will be transitioned. For example, incremental CapEx this year will be focused on installing a new Tortilla chip line in Hanover and automation projects such as palletizers and case erectors.
These actions will accelerate network optimization savings to help fully offset the adjusted EBITDA sold by 2025. Finally, we expect net leverage of approximately 3.6x in 2024, a full term improvement from 2023. Our 2024 outlook and improved capital structure position us well to deliver our 3-year goals. More importantly, the entire Utz team is working together to deliver our category leading opportunity ahead of us. Now, I would like to turn the call back over to Howard, who will talk more about the year ahead. Howard?
Howard Friedman : Thanks, Ajay. As we look ahead to 2024, our outlook begins our runway to deliver the 3-year targets that we set at our Investor Day in December. And our priorities this year will be consistent with our fundamental strategies. Focus our portfolio to further penetrate our expansion geographies while holding the core. Transform our supply chain to fund growth and margin improvement. Develop leading capabilities to build a best-in-class organization and improve the balance sheet flexibility and pursue opportunistic M&A. From a portfolio standpoint, our focus will remain on driving outsized investment and focus on our power four brands, Utz, On the Border, Zapp's and Boulder Canyon. This will be seen in terms of advertising and consumer spend, innovation and overall marketing capabilities.
These brands will be the focal point as we aim to further penetrate expansion geographies in the Midwest with a focus on mass, larger national grocers and the club channel. Our key drivers to holding the share in our core this year will be gaining distribution, improving DSD execution and increasing our AMC investments. As we execute our portfolio strategy, we remain mindful of the dynamic environment as consumers continue to adjust. As we sit today, we recognize the rise in value seeking behavior, be it moving up or down the price ladder, channel shifting and promotion seeking. While these behaviors are not new, they are best addressed by focusing on how consumers define value, driving brand desirability and agile response as consumers make their preferences clear.
Today, consumers can find Utz across all classes of trade and we are focused on how we can deliver more value and accessibility across our brands in partnership with our retailers. This includes being laser focused on our price pack architecture strategies, increasing availability of smaller pack sizes at key pricing thresholds, introducing more value options and better leveraging the breadth of our product and brand assortment. Turning to the supply chain, our focus remains on driving our base productivity programs, expanding our Southeast Logistics Center, building out our new Northeast Logistics Center and production in Kings Mountain. What has changed this year is the pivot and priorities given the recent brand and plant dispositions. Capital investments planned for 2025 and 2026 have been accelerated, given a more rapid reduction in network size and we will work to transition volume from our disposed plants to our existing facilities.
Importantly, the transition services agreement with Our Home will be in place for 12 months to ensure a seamless production transition over time. Our portfolio strategy and supply chain transformation efforts will both be underpinned by developing leading capabilities. In 2024, we are focused on fully implementing our integrated business planning, building out our consumer and sales analytics platform and investments in IT infrastructure to include improved account management tools for our independent operators. As we do this, we will continue our DE&I journey and seek to make Utz a place where our people can fulfill their full potential. Finally, from a balance sheet and M&A point of view, our recent transactions immediately provided more flexibility and accelerated our path to deleveraging.
That said, we will remain committed to cash management improved opportunities as we look to improve our free cash flow conversion. These collective efforts will give us more flexibility to fund future opportunistic M&A, but we will maintain a disciplined capital allocation approach focused on first, funding organic growth; second, debt reduction; and third, dividend growth. These four key strategies are planned to deliver our strong 3-year financial targets we introduced at our 2023 Investor Day. As a reminder, these are organic net sales CAGR of 4% to 5%, adjusted EBITDA margin of 16% by 2026, annual double-digit adjusted EPS growth and leverage of 3x by 2025, a year ahead of our previous target. I could not be more excited about our future and our confidence in hitting these goals.
And I'd like to thank everyone on this call today for their continued support. And now operator, we'd like to open the call for questions.
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