UTZ Brands Inc
NYSE:UTZ
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UTZ Brands Inc
Earnings Call Analysis
Q2-2024 Analysis
UTZ Brands Inc
In the second quarter of 2024, the company reported an organic net sales growth of 1.6%, primarily driven by strong branded volume growth, particularly from their 'Power Four' brands: Utz, On The Border, Zapp's, and Boulder Canyon. This performance comes amid changing consumer behaviors, with more shoppers seeking value due to inflationary pressures in the market. Even in a slightly softened salty snacks category, the company recorded increased market share in various segments. Their ability to garner dollar, pound, and unit share gains for three consecutive quarters showcases their resilient brand strategy despite the challenges in the broader market.
The quarter saw a notable 10% increase in adjusted EBITDA, totaling $49.7 million, driven by effective productivity programs that resulted in continuous margin expansion. The adjusted EBITDA margin reached 14%, an increase of 150 basis points, reflecting a strong commitment to optimizing costs and enhancing productivity across their operations. Adjusted earnings per share rose sharply by 46% to $0.19, aided by lower depreciation and amortization expenses alongside decreased interest costs from successful debt management efforts.
The management's focus on productivity is further evidenced by their decision to divest two additional plants to optimize their operational framework while also showcasing the intention to invest in more scalable facilities. The company's capital expenditure for the year is projected between $80 million to $90 million, largely directed towards enhancing manufacturing capabilities like automation and production line expansions. Additionally, they are increasing their marketing budget by 60% to amplify brand visibility and consumer engagement.
Looking forward, the company has updated its organic net sales growth guidance for 2024 to approximately 3%, slightly down from previous expectations. However, the outlook for adjusted EBITDA growth remains solid, anticipated between 5% to 8%, hinging on gross margin improvements from productivity gains. Crucially, they have raised their adjusted earnings per share growth forecast to 28% to 32%, up from 23% to 28%, attributed to favorable tax rate adjustments and lower amortization costs. These strategic adjustments position Utz favorably as they approach the second half of the fiscal year.
Amidst the changing landscape of consumer preferences, especially in response to inflation, the company has adeptly tailored its marketing strategies. As value-seeking behaviors gain traction among consumers, Utz has focused on innovative product launches and enhanced marketing initiatives to capture market share in both core and expansion geographies. For instance, their better-for-you offerings, particularly those from the Boulder Canyon brand, have grown significantly, reflecting a strategic alignment with current consumer trends.
While the salty snacks sector faces obstructions, Utz's strategic initiatives, operational efficiencies, and a robust portfolio of trusted brands position the company well for potential success. Management's commitment to enhancing productivity, controlling costs, and strategically investing in key growth areas heralds a promising outlook as they gear up for the second half of 2024 and beyond. Stakeholders can look forward to a continued focus on delivering value through brand engagement, innovation, and operational excellence.
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Good morning, and thank you for joining us today for our prerecorded discussion of our second quarter 2024 remarks. On the call today are Howard Friedman, CEO; Ajay Kataria, CFO. In addition, later this morning at 8:00 a.m. Eastern Time, we will host a live question-and-answer session, which you can hear via webcast on our Investor Relations website. 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.
Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on our Investor Relations website.
And now I'd like to turn the call over to Howard.
Thank you, Kevin, and good morning, everyone. I'm pleased with our year-to-date operational progress and financial performance, which reflects our strong execution against the strategies we laid out at our 2023 Investor Day. We are driving branded volume growth led by our Power Four brands, gaining volume and value share in our expansion geography and volume share in our core, delivering accelerated productivity cost savings and optimizing our network, which are fueling margin expansion, developing our capabilities and building out a robust analytics platform and improving our balance sheet flexibility ahead of our original targets.
Our progress this quarter is a credible marker of success that demonstrates we are on track to deliver or in certain cases, exceed the 3-year targets we introduced at our Investor Day and continue on our mission to become the fastest-growing pure-play U.S. snack company of scale. Let's begin with a few key messages. In the second quarter, we delivered organic net sales growth of 1.6%, led by strong branded volume growth supported by increased marketing support and disciplined promotional spending adjustments to address consumer value expectations. We gained dollar, pound and unit share in the Salty Snack category for the third consecutive quarter.
Our combination of brand building, innovation, execution and distribution gains are helping to sustain our market share trends in a competitive environment. In the second quarter, we delivered our sixth consecutive quarter of year-over-year adjusted EBITDA margin expansion fueled by strong adjusted gross margin growth. In addition, we divested 2 additional plants to accelerate our network optimization plans and improve our cash flow and balance sheet, putting us further ahead of what we laid out at our Investor Day. Our strong productivity and cost performance are providing the flexibility to increase investments behind our brands, support our geographic expansion and manage our promotional activities to address consumer value expectations, which are collectively driving solid volume growth.
As you've heard from around the industry, persistent inflation and higher borrowing costs are impacting consumers and many food categories this year are being impacted, including salty snacks. We are observing a shift in consumer behavior, lagging from several years of inflation. For us, this is resulting in more value-seeking behaviors, whether it be deal shopping, channel shifting or shopping the price ladder. Given this dynamic, we are taking a pragmatic and more moderate outlook for the Salty Snack category growth in 2024.
As a result, given our revised category outlook in 2024 and based on what we expect to be a continuing dynamic operating environment, we are slightly revising our organic net sales growth guidance. Importantly, our productivity cost savings are accelerating, and we are reaffirming our adjusted EBITDA outlook. Today, we are also raising our adjusted EPS outlook. Ajay will provide more details during his presentation.
Looking ahead to the second half of 2024, we expect our organic net sales growth to accelerate driven by volume growth, fueled by increased marketing investments, innovation, already achieved distribution gains and an easier second half growth comparison. Summarizing our financial performance in the quarter, we drove organic net sales growth of 1.6%, led by branded volume growth, expanded adjusted gross margins 260 basis points, increased adjusted EBITDA by 10% and increased adjusted earnings per share by 46%.
Our second quarter results reflect strong execution against a clearly defined portfolio strategy as we direct our investments to support our Power Brands to fuel our distribution gains, geographic expansion and volume growth. To that end, our Power Brands volume increased 4% in the quarter, led by our Power Four brands. Importantly, as consumers continue to shop for value outside of traditional grocery, our trends are improving in our non-measured channels to include club, hard discount, dollar and e-commerce. In the quarter, our branded volumes increased nearly 10% in our non-measured channels.
We will continue to support this momentum with increased marketing investments and disciplined promotional spending adjustments while we address the softness in our dips and salsa business, where we experienced distribution losses as a key customer consolidated their placement in the salty snack aisle. Finally, consistent with our portfolio strategy, we are purposefully deemphasizing nonstrategic and lower-margin areas of our business to include private label, co-manufacturing and some partner brands.
Turning to our consumption results in the quarter. For the 13 weeks ended June 30, our total retail consumption as measured by Circana, MULO-C, increased 1.1%, which outpaced the salty snack category growth of 0.2%. For the third consecutive quarter, we gained dollar, pound and unit share in the salty snack category. Unlike previous quarters, our organic net sales growth outpaced retail consumption in this quarter, primarily due to strong branded volume performance in non-measured channels.
Our consumption growth was again led by Power Brand growth of 1.7%. And within our Power Brand portfolio, our Power Four brands increased 2.8% with volume growth of 4.3%. Our investments in geographic expansion, brand support and planned promotional spending helped to drive share gains. Importantly, while we adjust to the dynamic consumer spending environment and more value-seeking behavior, we remain thoughtful about the areas where we reinvest to drive demand. To put our price investment in perspective, our retail sales sold on promotion in the second quarter as a percentage of total sales only increased 100 basis points versus the prior year period, which compares to the overall category, which experienced an approximate 500 basis point increase.
Our absolute level of 44% compares favorably to the total category and is only up modestly compared to 2019 levels, which is largely a result of customer mix changes as we've gone more national and expanded space in grocery customers like Publix. We will remain disciplined and targeted in evaluating our price gaps with our competitors for the remainder of the year and will adjust as necessary to continue to drive value both for our consumers and our retail customers. From a geography standpoint, we gained volume share in both our core and expansion geographies for our total portfolio, our Power Brands and our Power Four brands. Sales growth was most pronounced in our expansion geographies with growth of 5%, fueled by continued distribution gains, which easily exceeded category performance.
Share gains across both geographies were led by On The Border and Boulder Canyon with continued share gains and expansion for our Utz brand as well. Moving to our Better-For-You portfolio of salty snacks, our consumption in the Natural channel continues to grow and dollar sales were up 17% compared to 2.1% for the salty snack category over the last 13 weeks ending June 30. Our leading Better-For-You brand in the Natural channel continues to be Boulder Canyon and is the largest driver of growth up 28.4%. From a subcategory perspective, our growth was led by significant outperformance in Tortilla Chips and Cheese Snacks and our Utz, On The Border and Boulder Canyon brands all gained share during the quarter. Our Zapp's share performance was largely impacted by potato chips softness in grocery and convenience channels as we make price-back architecture improvements and as we lap the introduction of Zapp's’ Pretzel Stix in the prior year period. Tortilla Chips growth was led by On The Border consumption growth of 8%, fueled by strong growth in our core geographies and growth in both traditional grocery and mass channels.
Our rebound in cheese snacks continued in the quarter, led by share gains for our iconic Utz cheese balls with strong growth in the grocery, mass and the club channels. Within potato chips, our share performance was impacted by the softness in Zapp's along with the softness in our Golden Flake business. Importantly, our Utz brand held share fueled by distribution gains and Boulder Canyon gained share led by strong same-store velocities.
Finally, consistent with our prior expectations, our Pretzel trends were below category given we are lapping our Zapp's flavored pretzel's’ sell-in in the previous year. These trends will begin to normalize as we get into the latter part of the year. Our flagship Utz pretzels ’ held share in the quarter, led by continued distribution gains and strong sales growth in our expansion geographies and behind our new Utz Mixed Minis Pretzels introduction.
Looking ahead to the rest of the year, from a portfolio standpoint, our focus remains driving outsized investment 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. In 2024, we are amplifying our innovation to focus on bigger launches concentrated on delivering Craveable flavors, Capturing Occasions and expanding Positive Choices.
This year, we introduced a new limited offering of Mike's Hot Honey, Extra Hot Potato Chips this summer, keeping on trend with hot and spicy which remains the #1 flavor in salty snacks. Launched our Utz Mixed Minis in 3 trending flavors in the strong flavored Pretzels segment, which makes up half the Pretzels subcategory. Introduced new seasonal and multipack innovation to include our new On The Border; red, white and blue cafe-style tortilla chips and our new Zapp's Voodoo Halloween multipack. And expanded our Positive Choices for consumers within our Boulder Canyon brand and launched Spicy Green Chili Potato Chips and our Boulder Canyon, Canyon Poppers, which is a Better-For-You cheese snack made in avocado oil.
Following a year of capability building, our growth in innovation will be supported by increased marketing support. Coming into the year, we plan to increase our marketing spend by 40%, but given productivity savings that are ahead of plan, combined with early strong returns on marketing investments, we now plan to increase our marketing spend this year by 60%. These efforts will be focused on driving awareness with increased media spend and new brand campaigns, and you'll see our new Zapp's and Utz campaigns streaming across social channels and connected TV. Finally, these collective efforts are leading to improvements in critical consumer panel metrics that reflect the power of our consumer-loved portfolio.
For the 52-week period ending June 16 versus the comparable prior year period, our household penetration has increased 140 basis points to 48.2%. Buyers have increased by 2.2 million to 61.5 million, and our total buyer repeat rates have remained consistent and increased 60 basis points to 70%. It is clear that our brands are resonating with consumers and retailers, and we are excited for continued growth as we move into the second half of the year and gear up for the holiday season.
Now I'd like to turn the call over to Ajay.
Thank you, Howard, and good morning, everyone. In the first quarter, our organic net sales increased 1.6%. Adjusted EBITDA increased 10% and adjusted earnings per share increased 46% 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 sixth consecutive quarter of adjusted EBITDA margin expansion as we delivered a 14% adjusted EBITDA margin in the quarter.
During the quarter, our organic net sales growth was led by volume mix growth of 2.3%, driven by our Power Four brands and pricing impacted growth by 0.7% due to focused promotional spending adjustments. Our total net sales growth was impacted by the conversion of company-owned RSP routes to independent operators, which impacted growth by 0.1%. I will note that this conversion is complete, and we do not expect any further impact to our net sales growth for the remainder of the year. Additionally, the divestiture of the RW Garcia and Good Health brands impacted net sales growth by 3.3%.
Moving down the P&L. Adjusted gross margin expanded 260 basis points in the second quarter. Our second quarter margin expansion reflects continued strength in our productivity programs this year as our manufacturing and procurement projects delivered stronger results, which more than offset investments in our supply chain to support our growth. Productivity savings are being fueled by integrated work systems, where we are standardizing work at all levels, focused on minimizing scrap and maximizing yield and efficiency. We have made changes to our plant staffing to support these efforts and increase ownership at all levels.
Manufacturing savings are being augmented by accelerated procurement savings, where we are driving sourcing excellence and supplier relationship management and improving our sourcing costs across key packaging film and raw material ingredients. As we look forward, our recent disposition of 5 plants is accelerating our network optimization strategy, which is enabling us to increase investments in our more scaled facilities. These include automation and new production lines across our Hanover plants and new production lines in our Kings Mountain plant. These investments in the network will set us up nicely to maintain our momentum on productivity into the next year.
Adjusted SG&A expenses increased 3.4%, primarily due to increased marketing spend as we grow our share of voice in the marketplace and also due to higher distribution expenses and investments in selling capabilities. Bringing it together, adjusted EBITDA increased by 10% to $49.7 million, and margins expanded 150 basis points to 14% of sales. The margin expansion was driven by 430 basis points of productivity, partially offset by 110 basis points of supply chain investments, 90 basis points of higher marketing spend, 70 basis points of price and 20 basis points of selling and admin expenses. In addition, adjusted net income increased 46.3% and adjusted EPS increased by 46.2% to $0.19 per share. Stronger operating earnings were aided by lower core depreciation and amortization expense and lower interest expense due to meaningful deleveraging this year.
Turning to cash flow and the balance sheet. GAAP cash used in operations year-to-date was $0.2 million. But I'll note that there are items related to our plant dispositions this year that are impacting our cash results. Specifically, our first quarter includes approximately $10 million of working capital changes related to our Transition Services Agreement with Our Home. And in the second quarter, we paid approximately $20 million in taxes, which were primarily related to the divestiture transactions. Capital expenditures year-to-date were $37.8 million and reflect an acceleration of spend in the second quarter, primarily related to investments in our manufacturing plants to support our productivity and network optimization initiatives. In addition, we paid $18.9 million in dividends and distributions to shareholders.
Finishing with the balance sheet. Cash on hand was $66.6 million, and our liquidity remains strong at nearly $200 million, giving us ample financial flexibility. Net debt at quarter end was $747.5 million or 3.8x trailing 12 months normalized adjusted EBITDA of $194.6 million. Just to note, this represents a 1.3 turn improvement versus the end of the second quarter last year. As a reminder, on February 5, we closed the disposition transactions of the Good Health and RW Garcia brands and 3 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.
In addition, in the second quarter, we closed the dispositions of 2 additional manufacturing facilities for a total consideration of $18.5 million, with approximately $14 million in after-tax proceeds, which were used to pay down $9 million of long-term debt and add $5 million to the balance sheet. We also successfully completed a repricing of our $630 million term loan due in January 2028, which reduced the applicable interest rate by 36 basis points. These 2 debt repayments plus the lower interest rate on our term loan will result in approximately $14 million in lower interest expense for 2024. Notably, our fixed rate debt now comprises approximately 80% of our total debt at a blended average rate of 4.6% via interest rate swaps. Consistent with our strategy, these actions accelerate our time frame to achieving our target of 3x net leverage ratio to year-end 2025, which, as you know, is a year ahead from the year-end 2026 target set at our Investor Day in December.
Now turning to our full year outlook for fiscal 2024. Our 2024 outlook continues to position Utz well to deliver our 2026 financial targets. As Howard mentioned earlier, we are modestly revising our growth outlook this year to reflect the salty snacks category trends. We now expect organic net sales growth of approximately 3% compared to our prior expectation of approximately 3% or better. We continue to expect our growth in the second half of the year to accelerate fueled by distribution gains in our core and expansion geographies and helped by an easier prior year comparison in the second half. We continue to expect about a 49%, 51% first half versus second half split for our net sales.
Moving to adjusted EBITDA. We continue to expect growth of 5% to 8%, fueled by gross margin expansion from our productivity programs, partially offset by investments in growth. Our strong productivity benefits in the first half of the year give us confidence in our ability to deliver on our cost savings commitments this year and expand adjusted gross margins by about 250 basis points compared to the prior year. That said, we want to remain flexible and may further step up investments in our growth as gross margin expansion comes through, enabling us to support distribution gains, particularly in our expansion geographies as well as invest in marketing and capabilities.
Our 2024 adjusted EBITDA outlook continues to maintain a balance between productivity savings, investments in growth and flexibility as conditions merit. We are again raising our adjusted earnings per share growth to 28% to 32% from 23% to 28% previously. Given our revised expectation for a more favorable effective tax rate and a lower depreciation and amortization expense. We now expect our adjusted effective tax rate to be between 17% to 19% from 18% to 20% previously. And our interest expense outlook of approximately $47 million remains unchanged. Our outlook for capital investments of between $80 million and $90 million is also unchanged as is our net leverage outlook of approximately 3.6x at fiscal year-end 2024.
Our 2024 outlook and improved capital structure and building momentum in our productivity programs as well as capabilities that allow us to invest in growth, position us well to deliver our 3-year goals. More importantly, I am excited to see the entire Utz team working together to deliver on our 4 fundamental strategies.
And now I would like to turn the call back over to Howard for some final remarks.
Thank you, Ajay. I'm really pleased with our progress against the strategies we laid out at our Investor Day, and we are right on track to deliver or in certain cases, exceed our 3-year financial targets. While the salty snack category this year is a bit softer than we expected, we are executing well against the areas within our control. And critically, the combination of our capability building and accelerated productivity savings is providing us with the fuel and flexibility to fund the incremental investment behind our brands to drive growth, and we are well positioned to drive accelerated growth in the second half of the year.
Specifically, we are activating distribution gains in both our core and expansion geographies with large regional and national customers across the grocery, natural, mass and club channels, driving significant growth and momentum of our Boulder Canyon brand, increasing our marketing support behind our Power Four brands, gaining momentum behind our innovation, investments, and we are well positioned for back-to-school and the holiday season.
And finally, while it's early, our July sales results were in line with our expectations, and we begin to lap a much easier comparison in the second half of the year.
I'd like to thank our 3,000-plus Utz associates around the country for their hard work and dedication in a dynamic environment, and I look forward to delivering a strong 2024 for all of our stakeholders.