Utz Brands, Inc. (NYSE:UTZ) Q1 2024 Earnings Call Transcript

Utz Brands, Inc. (NYSE:UTZ) Q1 2024 Earnings Call Transcript May 2, 2024

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).

Operator: Thank you for standing by. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Utz Brands First Quarter 2024 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Kevin Powers, Head of Investor Relations. You may begin.

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 and Chief Transformation Officer. Howard and Ajay will make prepared comments this morning and all 3 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 their principal risks and uncertainties that could affect future performance. Before I turn the call over to Howard, I just have 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 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. Starting off with a few key takeaways. I’m pleased with our good start to the year. And for the second straight quarter, we gained dollar, pound, and unit share in the salty snacks category led by several of our consumer-loved Power Four brands to include us on the border and Boulder Canyon. In addition, productivity programs across our organization continued to build momentum, and we delivered our fifth consecutive quarter of adjusted EBITDA margin expansion as well as 27% adjusted earnings per share growth. To continue building our momentum in April, we opportunistically accelerated our network optimization strategy by disposing of 2 additional manufacturing plants to our home.

These follow the 3 dispositions to our home announced back in February. Importantly, our former associates at those plans are being offered full employment, and we thank them for their hard work and dedication over the years, and wish them the best moving ahead. Bringing it all together, given our first quarter results and confidence in the remainder of the year, this morning, we reaffirmed our organic net sales and adjusted EBITDA outlook and raised our adjusted EPS outlook. We are on track to deliver a strong 2024 as well as the 2026 targets introduced at our Investor Day back in December. Our 4 fundamental strategies underpin our efforts, and we’ve made good progress across each of these strategies this year, positioning us well to hit our goals and build momentum for the next 3 years.

To quickly review our progress, our first fundamental strategy is focusing our portfolio to further penetrate our expansion geographies while holding the core. In the quarter, we gained Carcano retail sales market share for the 13-week period ended March 31 that includes share gains in both our core and expansion geographies led by continued distribution gains and increases in household penetration. While our salty snack measured channel performance was strong in the quarter, our sales trends in unmeasured areas of the portfolio did not keep the same pace. Part of this is intentional as we optimize our sales mix and investment to focus on our more profitable Power brands, while other areas require better execution. These include improving the performance of dips and sauces and our small format channel, where we have the opportunity to strengthen our price pack architecture in a couple of key brands as consumers remain value-seeking in this environment.

Moreover, we continue to do portfolio shaping in our foundation brands that impact these channels, and we expect that these areas will collectively improve throughout the year. Our second fundamental strategy is transforming our supply chain to fund growth and margin improvement. We are making good progress on our productivity programs, which is reflected in our adjusted gross margin expansion in the quarter of nearly 300 basis points, and our 5 plant dispositions are accelerating our network optimization strategy, which is enabling us to increase investment in our more scale plants. Our third fundamental strategy is developing leading capabilities to build a best-in-class organization. We are in the process of fully implementing our integrated business planning system and building out our consumer and sales analytics, as well as continuing to make progress on our marketing and innovation capabilities.

I’m excited to see the impact we can make in market as we increase our investments behind both our new product lineup and 2 of our Power Four brands in the second quarter. Our fourth fundamental strategy is improving balance sheet flexibility and pursuing opportunistic M&A. As I mentioned earlier, we have disposed of 5 manufacturing plants and 2 brands with the proceeds going to reduce debt and accelerate our leverage reduction time line. In addition, our transformation efforts across the company are collectively improving our cash conversion cycle. Before turning the call over to Ajay to discuss our financials in more detail, I’ll take a few minutes to review our consumption trends in the quarter. Our retail consumption increased 4.1%, fueled by strong branded volume growth of 4.6%, which rank first among our branded salty snack peers.

Our consumption growth was again led by Power brand growth of 4.9%. And within our Power brand portfolio, our Power Four brands increased 6%, which was nearly 4x the category growth of 1.4%. From a salty snack subcategory perspective, our growth was led by significant outperformance into our tortilla chips and cheese snacks. Tortilla chips growth was led by on the border consumption growth of 15%, resulting in a 0.5-point share gain, fueled by strong growth in both traditional grocery and mass channels. Our rebound in cheese snacks continued in the quarter, led by share gains for iconic cheese balls with strong growth in mass and the club channels. Within potato chips, our consumption was basically in line with the subcategory driven by share gains for us and Boulder Canyon brands, led by continued distribution gains.

Our Zapp’s trends remained below the category given softness in the C-store channel, but we are actively making price pack architecture improvements and regaining distribution. Finally, consistent with our expectations, our pretzels trends were below category given we are lapping our Zapp’s flavored pretzel sell-in in the previous year. These trends will begin to normalize as we get into the latter part of the year. From a geography standpoint, we gained share in both our core and expansion geographies for our total portfolio, our Power brands and our Power Four brands. Growth was most pronounced in our expansion geographies with growth of 8%, fueled by continued distribution gains, which easily exceeded category growth of 1.7%. Share gains across geographies were led by on the border and Boulder Canyon with continued share gains and expansion for our US 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 21.9% compared to 3.9% for the salty snack category over the last 12 weeks ending March 24. Our leading Better-For-You brand in the natural channel continues to be Boulder Canyon, accounting for 3/4 of our sales in the channel and the largest driver of growth, up 31.3%, which is 8x the rate of total salty snacks growth. Boulder Canyon has now delivered 31 consecutive periods of double-digit growth in spins and is the #2 potato-chip brand in the natural channel with our avocado oil chip now ranked #1 in terms of dollar sales. Looking ahead to the rest of the year, from a portfolio standpoint, our focus will remain on driving outsized investment and focus on our Power Four brands, on the border, Zapp’s and Boulder Canyon.

This will be seen in terms of advertising and consumer spend, innovation and overall marketing capabilities. This year, we are amplifying our innovation to focus on bigger launches. We are focused on delivering craveable flavors, and we’re introducing a new limited time offering of Mike’s Hot Honey extra hot potato chips this summer. Hot & Spicy is the #1 flavor in salty snacks at $7.5 billion and growing nearly 2x the category rate. In addition, we launched our Ads mix Minis in 3 flavors in the strong flavored pretzel segment, which makes up half the crestal subcategory and is posting 12% growth, which is 4x the unflavored segment. In addition, our innovation this year will center around capturing occasions and expanding positive choices. As consumers continue to snack across occasions, we plan to be there with a proven strategy around seasonal and multipack innovation to include our new on the border Red White and Blue cafe style tortilla chips and our news Zapp’s Voodoo Halloween multipack.

And as consumers continue to look for no compromise snacks with gold flavors in our flagship Better-For-You brand Boulder Canyon, we are moving our Spicy Green Chile from a limited time offer to an everyday flavor. I In addition, we have moved beyond potato chips and launched our Boulder Canyon Poppers, which is a better-for-you cheese snacks made in avocado oil. We launched in White Cheddar and Halain Ranch flavors, and the early consumer feedback has been great. Finally, we have begun to invest behind marketing after a year of capability building. We started with increased investments behind e-commerce and retail media. And next quarter, we will be introducing campaigns for Zapp’s and Utz. While it is still early in the year, the increased confidence we have in our gross margin delivery, our early marketing returns, both financially and from a consumer response, and our ample investment opportunities, we are now planning to increase investment behind our brands this year beyond the 40% that was originally assumed in our outlook.

This is consistent with our belief that we make money before we spend money, and we build our businesses overnight and our brands over time. I’m very optimistic we will be able to do both. Now, I’d like to turn the call over to Ajay. Ajay?

Ajay Kataria: Thank you, Howard, and good morning, everyone. I will start by congratulating all our associates for delivering a strong start to the year. As Howard mentioned in his remarks, thanks to our team’s efforts in the first quarter, we are well on our way to delivering our 2024 commitments, as well as our 2026 targets introduced at our Investor Day back in December. In the first quarter, our organic net sales increased 1.5%. Adjusted EBITDA increased 7.4%, and adjusted earnings per share increased 27.3% 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 fifth consecutive quarter of adjusted EBITDA margin expansion as we delivered 12.5% adjusted EBITDA margin in the quarter.

During the quarter, our organic net sales performance was led by volume mix growth of 1.1%, driven by our Power Four brands. Pricing increased 40 basis points due to certain price pack architecture adjustments to be better positioned in the marketplace, as well as price realization in our partner brands. 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 and the divestiture of the RW Garcia and Good Health plans, which reduced net sales growth by 2.5%. Moving down the P&L. Adjusted gross margin expanded 280 basis points in the first quarter. I will note that our first quarter margin expansion was better than we had originally anticipated with our productivity programs, driven by manufacturing plant and procurement savings, delivering stronger results, which more than offset inflation and supply chain investments to support our growth.

Adjusted SG&A expense increased 6% as productivity within selling and logistics was offset as expected by continued investments in e-commerce, as well as selling capabilities that support our expansion into new geographies. To that end, in the quarter, we had higher-than-expected delivery costs given unplanned Boulder Canyon transfer shipments to support significant volume growth in the East. That said, we are now producing Boulder Canyon potato chips in Hanover to support more profitable growth in this area of the country. Finally, our marketing expense increased 40 basis points as a percent of sales, consistent with our strategy as we invest in capabilities and spend to grow our share of voice in the marketplace. Bringing it together, adjusted EBITDA increased 7.4% to $43.4 million, and margins expanded 100 basis points to 12.5% of sales.

The margin expansion was driven by 400 basis points of productivity and 40 basis points of price, partially offset by 220 basis points of supply chain costs, 80 basis points from selling and adding expenses, and 40 basis points from higher market expense. In addition, adjusted net income increased 38.7% and adjusted EPS increased by 27.3% to $0.14 per share. Stronger operating earnings were aided by lower core D&A and lower interest expense. Turning to cash flow and the balance sheet. Consistent with normal seasonality, cash flow used in operations was $9.1 million, and capital expenditures were $13.6 million, primarily related to investments in our manufacturing plants. In addition, we paid $8 million in dividends and distributions to shareholders.

Finishing with the balance sheet, cash on hand was $47 million, and our liquidity remained strong at nearly $200 million, giving us ample financial flexibility. Net debt at quarter end was $728 million or 3.8x trailing 12 months normalized adjusted EBITDA of $190.1 million. Just to note, this represents an improvement of 1.3 turns versus the end of the first 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, after the quarter ended, we closed their dispositions of 2 additional manufacturing facilities and used $9 million in net proceeds to pay down long-term debt and put $5 million on the balance sheet.

We have 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 $40 million in lower interest expense for 2024. Notably, our fixed rate debt now comprises approximately 80% of our total debt. 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 year-end 2026 target set at Investor Day in December. Now, turning to our full year outlook for fiscal 2024. Our 2024 outlook continues to position us well to deliver our 2026 financial targets.

We are maintaining our organic net sales outlook for growth of approximately 3% or better, which reflects our outlook for normalizing salty snack category growth and our growth rate accelerating largely led by distribution gains. Our growth is expected to be led by volume with outsized strength in our expansion geographies and pricing about flat for the year. In terms of phasing, we continue to expect about a 49-51 first half, 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 program, partially offset by investments in growth. Our first quarter productivity benefit was higher than expected, which gives us confidence in our ability to deliver on our cost savings commitments this year and now expand adjusted gross margins more than the 200 basis points that was previously assumed in our guidance.

That said, we will step up investments in our growth as gross margin expansion come through to find investments to support distribution gains, particularly in our expansion geographies, as well as investments in marketing and capability. Our 2024 adjusted EBITDA outlook continues to maintain a balance between productivity savings and investments. Finally, we are raising our adjusted earnings per share growth to 23% to 28%, given our revised expectation for a more favorable effective tax rate, and also lower interest expense after factoring in the use of net proceeds to pay down long-term debt from our April 2024 manufacturing plant disposition, and the favorable repricing of our term loan. We now expect our adjusted effective tax rate to be between 18% to 20%, and interest expense of approximately $47 million.

Our outlook for capital investments of between $80 million to $90 million is unchanged, as is our net leverage outlook of approximately 3.6x at fiscal year-end 2024, which I’ll note is a full turn improvement from year-end 2023. Our 2024 outlook and improved capital structure and building momentum in our productivity program, as well as capabilities that allow us to invest in growth, position us well to deliver our 3-year goals. More importantly, I’m excited to see the entire Utz team working together to deliver on our 4 fundamental strategies. Operator, we would now like to open up the call for questions.

See also Top 20 States Where the US Military Spends the Most Money and 15 Biggest Aircraft Carriers in the World.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar: Howard, you mentioned a couple of times, weakness in small format stores and adjustments that need to be made on sort of price pack architecture. I’m trying to get a sense if your value equation in these areas are either out of line with competitors in this specific channel or if it’s the overall category that needs some adjustments there. And I guess, given the timing of making these adjustments, is it such that we should continue to expect a gap between scanner data and what you report on an organic sales basis for a couple more quarters, very much like what we saw in the first quarter.

Howard Friedman: I appreciate the question. I think one of the things that I would kind of point to is we’ve been talking a lot about the consumer and moving up and down the price ladder. And I think over the last couple of quarters, we’ve done a really good job of not only getting our revenue management capabilities, correct, but getting our assortment to where it needs to be. And you’ve seen that on cheese balls. You’ve seen that in pretzels, and we’ve seen that in a lot of the classes of trade. With respect to small format, it really is actually a very specific couple of items that we have — what we did was we actually increased the pack size, and that obviously was not given where the consumer is today, where we want to be.

So, we’ll be adjusting back to a lower absolute price point and making sure that the value-seeking consumer can hit the price point we need to. This is not a systemic issue nor a category-wide issue. And so, look, we would continue to believe and are confident in kind of how our results are coming through that you’ll continue to see the spread narrow as we move into the second quarter and beyond.

Andrew Lazar: Got it. Okay. And then with a number of key salty snack players mentioning the need to maybe focus a little bit more on value moving forward. Have you seen any, I guess, significant shift in sort of category competitiveness or merchandising activity that maybe you would characterize as either unexpected or irrational? Or I guess that pose any additional risk to your full year outlook? And I guess I’m trying to get a sense of what your full year outlook sort of contemplates with respect to category sort of competitiveness. And I think you mentioned in your prepared remarks, there’s an assumption there that the salty snack category sort of growth normalizes. And I didn’t know how either reasonable or aggressive that type of assumption might be in the context of your full year guidance.

Howard Friedman: Yes. I appreciate the question. Look, I think, the first thing I would say is we feel very good about how we started the year. And as you look at kind of where — how we thought our organic net sales would come in — has come in slightly better than we would have expected. We had a little bit of a benefit on price. And so, there were some trade-offs. But the category that we were sort of expecting that we were entering into in the beginning of the year has largely materialized the way we would have expected it to. We also realized the category is getting a little bit more promotional. I mean, there’s no question about it. It has continued quarter-over-quarter, and we’ve all sort of been seeing this. But the nice thing about our competition, and I think the category overall is it still remains very rational, obviously, given partially the price point, it’s still an innovation and brand-building led category overall, and so price while important and will continue to be important to address the consumer who is shopping those price points.

Largely speaking, we’re pretty comfortable with where we are and expect that it will continue. We are keeping a close eye on price gaps. And obviously, we will because we will remain competitive. But the last thing for our growth, what you’re also seeing is the power of our distribution story coming through both in our core and expansion geographies as we’re seeing consistent and significant growth in our distribution points across our business, which obviously blunt some of the potential impacts that could be sort of transitory in nature.

Operator: Your next question comes from the line of Nik Modi from RBC Capital.

Nick Modi: Just 2 quick questions. Just Howard, maybe you can provide some context on Snap, obviously, a year ago, getting — taken away from the consumer, at least the emergency allotment. And you have some states that kind of went off it earlier. So, I was wondering if you had any perspective on some of those leading indicator’s states in terms of are you seeing the category trend rate improved to some degree? And then I guess the broader question is retailers are obviously, seeking suppliers who can grow volume right now. And obviously, you have that, and it’s very unique in the industry. So, I’m curious in terms of the narration, the narrative you have with retailers, are you getting even more traction just because they’re looking for suppliers that to actually grow volume? And how are you managing that with your capacity plans?

Howard Friedman: Yes. So first, with respect to Snap, what I think what we would — what I would tell you is, at least from what — where we’re seeing is it’s still a little early to tell. A lot of the Snap lap is really starting to happen, I think, now as you go as it progresses through the middle part of the year. And I think that’s part of why I think many of us believe that volumes will continue to inflect and the consumer will become a little bit more normalized as we get into the Q2, 3 and 4. So, I think a little bit early. We’re pretty comfortable and pleased with our overall performance with consumers across the classes of trade with the places where we’ve talked about. But overall, I think it’s still a little bit early.

I think with respect to our retailer partners, we have been very fortunate over the last couple of years that we have been able to gain distribution, demonstrate the value that we can create to the category, and show that we can actually add something incremental to the overall assortment that retailers have. And I think even before this quarter or last quarter, those conversations are ongoing. We have great use cases and we have great incrementality, and I think retailers are recognizing that. So as a result, not surprisingly, you are seeing distribution gains that we’re getting in the core, specifically around Boulder Canyon and on the border being places where we’re bringing that into us as traditional core, as well as into some of our expansion geographies, we are seeing space gains, and we’ll continue to expect to see that as we get through towards the end of Q2 and into the back half of the year.

So, retailers are looking for partners that can grow across multiple years in multiple contexts, and I think we’re proving that.

Operator: Your next question comes from the line of Peter Galbo of Bank of America.

Peter Galbo: Just 2 quick clarifications. One, going back to Andrew Lazar’s question about kind of the gap between reported and scanner. So just so I understand it, we should start to see in 2Q and maybe even more so in the back half, a pretty meaningful narrowing of that gap, right, just to be able to hit kind of the 3% organic sales number. I just want to make sure I have that clear. And then the second clarification, and I have a follow-up as well. Ajay, did you give a split on EBITDA for the first half, second half of the year?

Ajay Kataria: Yes, I can clarify that really quickly. We are maintaining what we said in February. So, first half, second half EBITDA should look like last year in terms of split. Yes.

Howard Friedman: And then Peter, it’s Howard. The short answer is yes. You should continue to see a meaningful narrowing between the 2 sales numbers. And actually, Q4 to Q1, you did see a narrowing as well. So, this is, by and large, playing out as we expected it to. We hit the organic net sales we’d expected, as I mentioned to Andrew. Composition was slightly different. But the couple of areas where we have some work that caused that to be a little bit wider. Dips in salsa is a contributor as we’ve discussed, I know when Nielsen comes out. And we have the IO conversion, which obviously starts to go away, and then there’s a small format opportunities on price back architecture. I think those are the 3 biggest drivers to the Delta, and all of those we would expect to improve as we progress through the year.

Peter Galbo: Okay. And then maybe for Cary or Howard, just you’ve gone through a lot of this plant rationalization and selling off. Maybe you can just give us a sense of where after all of the moves like capacity utilization across your network will stand relative to maybe where it was prior to all of the transactions, I think, would be helpful.

Howard Friedman: Yes. So, to the point, obviously, we have now announced a disposition of 5 plants. I think we’re very comfortable with where our asset utilization is. Historically, we talked about — it’s about $100 million of sales on average, and the benchmark was $180 million in sales being supported. And I think right now, we are moving towards that $180 million range with the right level of capacity and redundancy that we need. We’re still, call it, low 70s, I think, in capacity utilization overall. It obviously depends on by subcategory, but we have the firepower we need. But really, the benefit of the dispositions was really driven on 2 things: one, the opportunity to meaningfully deliver. And then two, was the opportunity for us to now focus our energies and attention on in-sourcing that product and protecting our supply, while we invest in automation and some of the capital improvements that we want that will drive our productivity as we go through the next couple of years consistent with what we said at Investor Day.

Cary Devore: Yes, Peter, and just to add on to what Howard said, that 70% number will improve, obviously, as we in-source things over the next 12 months. So, you’ll see that climb and kind of march towards that 80 percentile.

Operator: Your next question comes from the line of Rob Dickerson of Jefferies.

Rob Dickerson: Great. Howard, just a kind of quick question for you. Given the current, let’s say, outperformance of your 4 kind of core brands, and then also great performance in the new geographies. I’m just curious, is it essentially kind of the more the strategy works, right, the easier, hopefully, it becomes for kind of increased retailer acceptance on the brand as you essentially try to move a little bit further West, right? I just think about — if you walk into a retailer a year ago and say, “Hey, we want to do this.” They’re like, okay, maybe that will work, you can walk in now and say, “Look, where we’ve done this. It’s clearly working, and we’re clearly doing where we’re clearly outperforming the category, but would seem like that would just increase the probability of the go-forward strategy playing out.”

Howard Friedman: Yes. I think the short answer is it’s much easier to be able to sell it facts and evidence specifically in a market, but even more powerfully in a retailer, other geographies, right? So, we are now at the point with a lot of the national retailers where we can actually point to geographies where we’ve been added and the benefits that we’ve had, which makes them obviously much more positive to expanding and broadening their relationship with us. So, the short answer is yes, the more the strategy works, the easier the distribution gains and the selling opportunities are. But equally important, I think the easier it is for us to talk to our independent operators about making the investments that they need to be able to build routes and build the infrastructure because they really own a lot of the final leg. And so, the whole puzzle comes into place as we continue to have greater success with our Power Four brands.

Rob Dickerson: And then just quickly, we spoke to somebody recently who essentially made it sound like as we kind of move through the pandemic, right? Supply chains for a little bit, let’s say, distant franchise, so to me. And some of the regional brands, some of the smaller brands were able to kind of infill, right? They essentially get on shelf and try to sell more — kind of give more demand wise. But at the same time, retailers clearly prefer the larger brands and more scale, and better profitability. And actually, alluded to you, it said, well, this will probably provide a great opportunity for some of the non-leading big brands such as Utz. So, I’m just curious, like as you again speak with these retailers, is there kind of just like a general excitement to bring in, let’s say, our Boulder or what have you, and still basically take share maybe from some smaller brands? That’s all.

Howard Friedman: Yes. So obviously, as we got to the pandemic, one of the things that allowed us to stand out was that we had both capacity and great products and great brands that we could bring to consumers that maybe hasn’t gotten as much of an opportunity to see it. So, for us, the opportunity became greater to prove that we were more than just a regional brand, but that we could compete more broadly, both for retailers’ confidence and I think in some cases, for ourselves. And I think the premise that we have been talking to retailers about is, unlike some of the smaller guys, we actually compete in all of the subcategories that a retailer would want. So, we can compete from containership support grinds from pretzels to variety packs and multipacks.

So we can actually have a more complete thought with some of these retailers. And what we’ve been able to prove year-on-year is that as we are investing in the category, and as consumers are getting exposure, our trial and repeat rate is great, our household penetration is expanding. And as a result, the retailer’s category grows. So, we’re a little bit more of a one-stop shop. We can definitely do more today than we were able to do so, I don’t know, go all the way back to 2010 before we started on our acquisition journey. And I think as we go forward, we are building a case for confidence across the retail network industry that we can actually do more with them. And I think that’s what you’re seeing with our distribution.

Operator: The next question comes from Oppenheimer.

Rupesh Parikh: Rupesh Parikh from Oppenheimer. I guess, on the cost side, just curious the latest on the input cost inflation you’re seeing in just some of the other cost pressures in the business.

Ajay Kataria: Yes, Rupesh, thanks for the question. So, as we talked about during our guidance in February, we are seeing very consistent with our plans. We are seeing costs in labor and some in freight as well as you would expect. And then there is offset in commodities. So, as we said, commodities get better as we move through the year, especially around potatoes, we are still paying for the higher potato costs that are contracted through Q1, and then we get into a new potato crop later this year, and that should get better. So overall, still expecting inflation to be flat for the year, higher on conversion costs offset by commodities.

Rupesh Parikh: Great. And then maybe just one follow-up question. Just given concerns out there on the consumer backdrop. Just curious, as you look at your business, are you seeing any signs of increased channel shifting or really any changes in consumer behavior versus your last update?

Howard Friedman: Rupesh, it’s Howard. Look, I definitely similar to, I think, what you’re hearing across the industry is there are — that consumers are value seeking, and there is a subsegment of the low-end consumer — low-income consumer, who is now more specifically price shopping than potentially they had been historically. So, we’re seeing the same things. I think what tends to — and that is obviously driving some of the price pack architecture changes that we referenced in our prepared comments. I think what is still a little different about us, however, is the distribution and expansion opportunities and the opportunity for our portfolio to continue to expand. And by bringing our Power Four brands across the markets, it sort of offsets some of the noise we may be seeing, but we’re going to address our pricing and our price pack to make sure that every shopper in every channel can get our products at the price point and the product that they want.

Operator: Your next question comes from Matt McGinley from Needham.

Matt McGinley: In your EBITDA bridge, you noted that 4-point benefit from productivity savings, but also that 2.2% drag from the supply chain costs. How much of that supply chain impact was inflation versus the Boulder Canyon transport issue that you mentioned? And if that was primarily Boulder Canyon related, does that headwind primarily dissolve over the course of, I guess, into this quarter, second quarter?

Ajay Kataria: Yes. So, I would say a little less than half was inflation, as I talked about just now. We are seeing conversion cost inflation that we were expecting. And then we definitely saw delivery costs, which was — I would think of it as a good investment that we made, as we talked about in the prepared remarks. There were some other investments that we made to drive productivity around capabilities, et cetera. So, those are in there as well. So, you are correct. The delivery cost investments will taper off, but then we start to make some other investments to continue to drive productivity.

Matt McGinley: Got it. And your guide for the full year implies about a point of EBITDA growth, and you did that this quarter as well. It sounded like you’re getting more from productivity, but then you’re going to reinvest that back into marketing. But I guess my question is, do you get any leverage on G&A on the higher volume in the back half? Or does that G&A continue to be a headwind? And I said G&A exclusive of the advertising and marketing that you’re going to spend more on.

Ajay Kataria: Yes. We’ll get some leverage on G&A. So, I will say that we are very excited to see the results in the first quarter. Productivity is definitely flowing through, a little more than we expected. So, to your point, as gross margins expand higher than expectation, we’ll continue to make high ROI investments. And you called out marketing, I’ll say there are really 3 areas that we invest in around our brands, which is marketing and distribution and selling capabilities, as well as building out our team, our capabilities, such as in the area of analytics, marketing, driving productivity, revenue management, integrated business planning, so on and so forth. So, you will see us invest in all 3 areas. But yes, behind the brands is a primary area of investment this year.

Operator: Your next question comes from John Baumgartner of Mizuho Securities.

John Baumgartner: Thanks for the question. First off, in measured channels, your volume lifts on promo across your main categories, potato chips, tortious pretzels, those lifts have been above the categories for quite some time now. Can you speak, Howard, can you speak to that outperformance? What do you think drives that gap? Is it more outsized trial in growth markets? Is it more your consumers in core geographies, expanding consumption? Is there something in the execution in general that stands out? I’m curious what you’re seeing there?

Howard Friedman: Yes. So, I appreciate the question, John. Obviously, my rev man people want me to call out the fact that I have great revenue management folks. So I needed to get that built in. Look, I think a couple of things. One of the things I think you’re seeing right now with our promotional is twofold. First, it’s sort of the maturation of our revenue management capabilities, where we have historically been a lot more about getting our price gaps right and maintaining them. Over the last year or so, we have been acquiring new talent and capabilities from other places, which is actually allowing us to experiment with different promotional constructs as well. So, it’s not necessarily just a straight lift. It can be a must-buy program.

We’re playing with different price points as well to try an experiment. So, I think part of what you’re seeing there are the benefits of that construct. The second is we are doing a better job of making sure that our promotional ROIs are working. So, you’re getting a promotional benefit of just getting sharper and more effective across the retailer universe as well. Obviously, we’re very pleased with that progress. And then the last thing I would just offer you is our customer mix. As we continue to mature, we’re getting different customers with different levels of expectations in terms of how to execute consumer trial and promotional activity. So, all of those things together kind of are rolling up to a better-quality merchandising lift than potentially you’re seeing with others.

John Baumgartner: Okay. And building on that, as it ties into the decision to increase marketing more than the 40% this year, that incremental spend as it pertains to the brands, will that also fund more in-store display? Is there more of an event or a seasonal time we should be thinking about — just how are you thinking about the allocation at the margin?

Howard Friedman: Yes. And Ajay kind of referenced to this in the last question as well. When we think about investing in growth, we sort of think about it not only in terms of investing in the brand, which is more consumer pull, but also retailer push, right? So, that means more displays, more end cap space that we are able to get as well. So, that’s a piece of it. You’ll see greater expansion to show up in distribution, and obviously, greater space as we progress through the year. I think the second area is you see a lot more effort from us on innovation behind craveable flavors. We’ve addressed our multipack and variety pack, and occasions there. We’re excited about the Voodoo Halloween variety pack that we’re going to push through.

So, there’s some investment there as well. And then the last is really is, as we are building out our capabilities, Zapp’s and Utz will have marketing campaigns as we go into the back half of the year, starting this quarter in Q2 and then building in support, not only of the distribution, but also in support of building those brands. So, there will be a lot more concerted effort to making sure that consumers can come and understand who we are and what we offer as we go forward. And then last is really, if you look at e-com and our e-com business. That business is growing really nicely, and that’s because we’re getting much more effective with both retailer.com, and some of the digital places where we can invest and get high ROI, high trial activity.

So, you put it all together, it will be kind of across all 3 distributions, innovation, communication, and then retailer specific execution to support our growth.

Operator: Your next question comes from Robert Moskow of TD Cowen.

Robert Moskow: I just want to make sure I fully understand the gap between your net sales and the IRI reported numbers. You mentioned it’s mostly unmeasured channels and dips and salsa. And just to be clear, the unmeasured channels, is it club stores, or is it small format stores that you don’t think are really covered in the IRI?