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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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar: Howard, you talked about and Ajay, you talked about your expectation for pricing to be flattish in FY’24. Price was a slight headwind on a year-over-year basis in the fourth quarter. And Howard, I think you mentioned some price back architecture activities that you took to sort of be better positioned in the market. So I guess my question is, Utz is clearly outperforming, but the salty snack category volume is still running down year-over-year, which I guess could bring about some concerns over just a category competitive environment in terms of pricing as we go forward. So I’d love to get a sense of how you’re sort of taking all that into account as you think through your guidance for 2024?

Howard Friedman: Yes. Thank you for the question, Andrew. Look, I think a couple of things. One is, I’ll offer you that I look at our business overall in a couple of ways. Obviously, as we are looking at our core and our core geography, while we often talk about making sure that we hold it, we do have a significant amount of distribution opportunity there, which layers on top of the distribution opportunities we have in expansion markets. So, as we think about the year, we think more about volume because a lot of that is untapped white space that we are able to make sure that we’re delivering our guide. Clearly, the environment right now remains dynamic and so we would expect as we’ve talked previously about building into our overall algorithm through the course of the year.

But overall, I think we’re feeling pretty comfortable with where we are. I think it’s also fair to say that when you look at pricing and promotion in the category right now, while it is obviously higher than it has been, it is still significantly below 2019 levels. And so, even now, while promotions are increasing, I think, in context, it’s not an extraordinary change to where we’ve been. So, I think we feel pretty comfortable with where we are. Obviously, we will maintain our price gaps and do what we’re supposed to do using our revenue management capabilities. But overall, I think where we sit today, we’re pretty comfortable with where we sit.

Andrew Lazar: And then, Ajay, anything to keep in mind when it comes to the cadence of expected volume growth through the year? Do you expect it to be fairly even keeled or anything discrete in a given quarter just to keep in mind as we think about the volume expectations? Thanks so much.

Ajay Kataria: Yes. Thanks, Andrew. We do expect to ramp up as we move through the year. And as my comments in the call were slightly more second half weighted than you saw last year, we should be about 49, 51 split for the year.

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

Rob Dickerson: I just want to ask you a question, I guess, around the recent divestments of Good Health and R.W. Garcia. Clearly, you’ve stated, this should –it seems like help accelerate your supply chain optimization efforts. And then also, you’re speaking to the pull forward by year of the deleverage component. But maybe if you could just kind of unpack your thoughts a little bit with respect to any incremental positive benefits on the margin side as we think about what was discussed at the Investor Day, and then also ability to think about that 16% or higher EBITDA margin target a few years out? And that’s all. Thanks so much.

Howard Friedman: Hey, Rob, it’s Howard. I appreciate the question. I think the way I would think about the divestiture and the impact that it’s going to have on the business is really largely in line with kind of some of the conversations and themes we’ve hit before. I think the first is, it was an opportunity for us to divest a couple of brands that are best owned by somebody else. We’re able to monetize those assets and sort of simplify our growth expectation in line with our portfolio strategy. They were in the Foundation Brand portfolio. And as we talk about our big power four brands, the focus that we want to apply there, these were brands that we’re probably not going to get the type of affection and love that they will being owned by somebody else.

I think second, as we talked about our plant network disposition and talked over time of how we’re going to try and optimize, the complexity that, that creates is obviously not small and we were fully prepared to execute it with excellence. But this obviously simplifies a lot of that work as we go forward. And then, frankly, financially, the opportunity to immediately pay down and delever and get to try and start working our way to the 3% by 2025, a year earlier, was a big consideration for us. You hit it right on the capital. Obviously, we’re going to accelerate some capital because we didn’t initially contemplate doing this transaction as quickly as we were able to do it. And so there will be capital to be able to improve and support the business going forward as we in source volume into our existing network as we transition out over the next 12 months.

Rob Dickerson: And maybe just a quick follow-up. I know in your prepared remarks, you made a comment around normalized snacking trends in ’24 and then Andrew’s question, you answered a little incremental detail. But when you speak, do you view kind of normalize snacking trend, I guess within your internal forecasting tools, like how do you view kind of category growth, right? Because if you talk about normalized, right, there have been different stages of what could be normalized clearly over a longer period of time. So are you thinking like 1% to 2% category growth on salty or are we back of 3% to 4% or just trying to gauge kind of what you think the category could actually grow the share? Thanks.

Howard Friedman: Yes. So, Rob, I think one of the things we mentioned at Investor Day was how we want to take a conservative approach to how we thought about our compound annual growth rates to get to that 4% to 5% over time. And that was specifically because of our expansion market opportunity not necessarily being so wedded to where the category was. I think where the category was. I think if you were to look right now, our position really hasn’t changed. I think we believe the category is going to be, call it, around 2% this year. Historically, we’re more like 3% to 4%, but also build over time. And that the composition of that growth certainly for us will be more volume led than price led, again, given just the nature of all of the distribution opportunities we have. So, category maybe a little muted versus history, but building over time and that’s highly consistent with our position of what we said in December.

Operator: Next question comes from the line of Peter Galbo with Bank of America.

Peter Galbo: Ajay, I may have missed it in your comments, but did you give an outlook for ’24 just on your expected kind of COGS inflation and maybe how you’re thinking about gross margin for the year?

Ajay Kataria: Not specifically, but we can talk about it. So the input cost inflation outlook that we are looking at is relatively flat for the year. We do get benefits on the commodities, but then we have some inflation that’s offsetting in labor and transportation. And within commodities, there are pluses and minuses, cooking oils are doing well and potatoes are seasonal as they are. And then we have some cost inflation in other areas. But that’s the outlook on commodities and then we can talk gross margin as well. We expect gross margins to be a net benefit. We have productivity program, as we have talked about, ramping. Price net of inflation is going to be about flat as we talked about. And net of all that, we should see about a couple of hundred basis points of gross margin expansion, and then we invest some in SD&A and cost as well and then net out EBITDA.

Peter Galbo: Great. Got it. Okay. Very helpful. And then maybe just on the marketing piece. I want to make sure I heard you correctly. I think you said 40% increase for ’24. Just what’s the base? I think there’s a couple of numbers in the 10-K. So I just want to make sure that we have the right base of kind of total marketing spend for ’23 to work off of?

Ajay Kataria: Yes, it’s a little less than 1% in ’23.

Operator: Next question comes from the line of Michael Lavery with Piper Sandler.

Michael Lavery: Just wanted to come back to distribution opportunities and maybe see if you could give us a sense, you’ve had things 1.5 years or so ago, like Publix where you brought in a pretty full range of products and brands against little or anything to start with. And in the West or Midwest, it would seem like you could have some more opportunities like that. But then you also have plenty of instances where a brand like On The Border, for example, may live without much else in the portfolio and vice versa. So how much of your upside is from kind of more geographical white space? Or — and how much is from sort of depth of broadening the portfolio where you exist already? And how do we think about how that might play out over the course of the year or even a little beyond?

Howard Friedman: Yes. I’ll take that, Mike. Look, I think for us, distribution remains a significant part of our story both in the expansion of geographies as well as in the core. So the short-ish answer to your question is, I think both are important as we go forward. Within our core, we’re focused on making sure that we’re bringing brands like Zapp’s and Boulder Canyon into our core markets where we have heavy share presence and that will progress as we go through the course of the year. And then as you start to think about the expansion geographies, a couple of things. One, I think we have an opportunity to continue to solidify Florida as a fast-growing, high contributor to our overall growth rate as we continue to move that business from what has been an expansion market into our core over the next couple of years are still only about 3.5% market share in Florida.

So we have some significant opportunities there. And then really starting to look west, places like Michigan and the upper Midwest, where we’re entering into bringing our assortment in. And then I think the last thing is within — in Texas, we did buy back the rights to OTB for us to be able to distribute. Just as a reminder, Texas is the largest OTB market. So there’s significant opportunity there. We have no lack of opportunities on distribution. What we need to make sure is like everywhere else, and we continue to execute with excellence that we contribute to the customer and category performance and that we drive our playbook and do what we know how to do. I think all those things together are giving us confidence in our top line algorithm.

Michael Lavery: That’s great color. And just a follow-up on Zapp’s. It’s one of your most differentiated brands, but still seems to have a bit of a more regional SKU. We’ve seen it in foodservice, at least like a Potbelly’s, I think it was, for example, how much can that type of — is there more of a food service opportunity, I guess, is part of the question? And the other part is how much can that help lead to retail distribution just from something build awareness or trial and kind of spread its wings around the country a little more?

Howard Friedman: Yes. So I agree with you. I think Zapp’s is probably one of the clearer brands that we have in our portfolio. And when you think about the brand, what it really stands for is flavor, right, and sort of interesting and high flavor for our consumer. And so that’s why in some cases, foodservice works so well because foodservice is a place where consumers are willing to experiment and choose what they want to eat. And so Zapp’s is a nice complement to it. I think from my perspective, Zapp’s can be a national brand, it will build over time. That’s why we put it sort of in our Power four brands and really continue to stand for high flavor impact eating. So, if you look at spicy Cajun as a product that we’re launching in flavored pretzels this year, we’ll have more items along that vein of flavor and exploration rooted obviously in the New Orleans food culture, which is where Zapp’s started.

So my intermarketing guy comes out a little bit when we talk about this brand, but I agree with you principally that it’s got a lot of runway.

Operator: Next question comes from the line of Robert Moskow with TD Cowen.

Robert Moskow: So a couple of questions one is the core geographies lost market share in fourth quarter. I think you probably covered it in the Investor Day. But is there anything about the performance there that you can call out that’s causing the share losses that you want to address? And then second, I think a big competitor of yours said that the value-seeking behavior by consumers is playing out in a shift towards smaller bags. Are you seeing a similar dynamic? And if so, have you accelerated your supply chain mix to meet the consumer in that direction?

Howard Friedman: Yes. So, thank you for the question. Let me, I’ll answer the core question first. I think the biggest issue for us in the core was really our foundation brands, which frankly kind of validates the portfolio strategy and some of the activities we just did on the divestment of couple of our brands. If you were to look at our Power Brands, we were actually net share takers. So, as we continue to simplify some of the foundation brand portfolio roles, we would expect more of our power brands to shine through with results. So, I think that’s the biggest opportunity for us, continues to be. It’s kind of why we have tried to narrow our focus a little bit and make sure that we’re putting our shoulder into the brands that are obviously the vast majority of our sales and should be the ones that are spending the vast majority of our time and let their performance kind of come through.

With respect to smaller sizes, look, there’s no question that we are seeing consumers moving around the price ladder and it’s really a couple of different issues. They are looking for absolute price points, they’re shopping smaller sizes for sure. We also, in some of the price pack architecture works we did, also made some changes at the top end of our ladder on things like pork and cheese, which also came through in our results. So, we are responding to where consumers want and need us to be. But — and while I definitely agree that there’s an index towards smaller sizes, I think we need to be mindful of the entire ladder and make sure we’re covering the price points that whatever any shopper wherever they are can hit and get the products that they want.

Robert Moscow: Okay. I hate to cut it this finely, but in the core markets, if you axed out the foundation brands that you’ve divested now, do you think you would be growing with your category or is it tough math to do?

Howard Friedman: Well, in the fourth quarter, I don’t believe we would have grown share within the market if you ex those out. The math is pretty relatively straightforward, but I do expect that, that will be a positive for us over the course of the year, especially as we address some of the work we talked about in Investor Day around DSD route splits, making sure that we’re driving our distribution gains of our core brands. Again, I think we’ve got a lot of support from our core market retailers to execute our growth playbook, which should come through as we go.

Operator: Next question comes from the line of Rupesh Parikh with Oppenheimer.

Rupesh Parikh: Two quick ones. So first, just want to understand what your free cash flow guidance is for this year? And then as you look at the longer term algorithm, clearly with that accretive asset disposition, you guys are — it seems to be above the double-digit EPS growth, at least for this year. So as we look out to the out years, does that at all take away from your ability to do double-digit EPS growth in ’25 and ’26?

Ajay Kataria: Yes. So I’ll take those, Rupesh. First, free cash flow. We expect about $20 million to $30 million free cash flow in 2024, and that is primarily because we are stepping up our investments in capital. Then the other question that you had around double-digit EPS growth, we are maintaining what we said at Investor Day. We should see double-digit EPS growth moving forward as our earnings grow and we do some more work around supply chain optimization.

Operator: Next question comes from the line of Nik Modi with RBC Capital Markets.

Nik Modi: I just wanted to probe on the 2024 guidance and just the shape, right? Because one of the key themes that I think we’ve seen this earning season broadly is kind of softer first half but much better second half. And I just — Howard, Ajay, I just wanted to get your commentary on outside of asymmetric like easier comparisons or lapping pricing and things like that, I mean, do you just expect that the consumer is going to improve as we get deeper into the year? Just would love kind of if you could just tie in your thoughts on the general consumer and what’s going on in the consumer environment that would be really helpful.

Howard Friedman: Yes, I’ll take that, Nik. Look, I think, a couple of things. I think, one, as you think about our guide what we would expect consistent with our Investor Day is that we will build over time and into our long-term algorithm as we go through the course of the year. And that’s really driven by a couple of things for us. First is our distribution gains that we anticipate will build over the course of the year. So, that obviously, as they build so too will our volume. Second, we have incremental innovation. This year, we’re launching a mixed minis pretzel. We have a wave of Zapp’s flavored pretzels. We’re expanding Boulder Canyon into poppers. We have some innovation in cheese on Jack’s Mac’s. Those things naturally build toward the tail end of first quarter as we get them into the market and then build through the course of the year.

And then lastly, our marketing spend will ramp up to by 40% this year as we break campaigns for Zapp’s and Utz largely in the second quarter. In terms of your question, is there anything peculiar going on? The one place that I would offer you is last year we had some opportunities on Golden Flake and Cheese that impacted us. We had a Birmingham transition not to pick at old wounds, but we had a Birmingham transition that didn’t necessarily go as well as we would have liked. And those things as we lap them will also be supportive of a guide that basically our volumes build through the course of the year.

Nik Modi: And just kind of off the wall question, totally random, but, as I get into the market and just kind of see what’s going on there or some of the emerging brands, emerging concepts, new substrates are obviously a big area of growth within the snacking category, cauliflower, chickpea, et cetera. Obviously, you have plenty of upside within your existing portfolio. But I just wanted to kind of pick your brain on how you think about some of those substrates? And is that something that you think could be a potential growth driver at some point in the future?

Howard Friedman: Yes. I mean, look, I think that, over time, consumer trends and preferences, are things that we should always be watching. And so as you think about things like high flavor and spice and heat, those things have really been building over really the course of 20 years to kind of where they are right now. So what we will — as you can imagine, we will try and sample all of those types of products from different formats that I think are interesting. I think we can make a great product. The question is, to your point, we want to focus in the near-term. But over the long-term, I’d like to be on that trend when it’s time for us to start to help to mainstream it if it comes. And if it doesn’t, I think we let the entrepreneurs continue to do what they know how to do to build and develop these markets. But the short answer is, yes, we track and pay attention to all of those things. And if the opportunity becomes attractive for us, we’ll pursue it.

Operator: Next question comes from the line of Mitch Pinheiro with Sturdivant and Company.

Mitch Pinheiro: Just a couple of quick questions. So sort of with the organic sales growth of 3% or better, does that include the $45 million of the sales impact from divestiture? Is that, it’s 3% and that includes $45 million that’s taken off the top?

Ajay Kataria: It has been taken out of the 3% number.

Mitch Pinheiro: And then of the 3%, how do you look at that versus flat pricing, is the rest evenly split between expansion markets and core? How should we think about that?

Howard Friedman: Yes. Look, I would tell you that our overall opportunity is especially as you think about volume is our expectation is to grow expansion markets through distribution overall. And distribution is going to be one of the larger drivers and contributors to our overall growth this year, which is kind of why the shape of the curve happens the way that it does. Within our core, while we do obviously have opportunities to move distribution, it’s a bigger portion of our business and that will largely be impacted likely more by the innovation and marketing support that we’re getting. But if you were to prioritize it, it will be expansion geographies and distribution that will drive the majority of the growth this year.

Mitch Pinheiro: But you do expect core to have, I know you’re part of the longer term strategy is hold to core, but you do expect core to grow in 2024?

Howard Friedman: Yes. Our expectation would be that we should be able to grow the core in the near-term as well. But our expectations are also that that growth will likely be a little bit more muted just given the maturity of the category for us. So, because distribution overwhelms the category opportunity, that’s kind of why we talk about we need to hold our share and grow in the core at customer comp or a little bit better, but really expansion markets is where we would expect the numbers to grow.

Mitch Pinheiro: And then in terms of for 2024, sort of the channel mix, can you just talk about how — is there going to be a particular strength in mass? I know it was or C store. Can you talk a little bit about how we should think about that?

Howard Friedman: Yes. I mean, look, traditionally, the place where we are at, our strongest has been traditional grocery, right? And so grocery has been our historic strength. What you’ve seen more recently in our growth is we’ve sort of been growing — we’ve been growing across the majority of channels and we would expect that mass national retailers club will all be positive contributors to our growth. We have a little bit of work to do in C store, which is clear to us. But ultimately, I think, we’d expect that we will be able to grow across channels and as consumers shift, we’ll do that. I think the one underappreciated piece of our growth has also been in e-commerce where we have put our shoulder in this year and really started to develop that capability and we continue to see very strong growth in the e-commerce side, although it’s obviously a smaller channel overall at this point, but a place where we have some evidence that we can grow much faster.

Mitch Pinheiro: And then I guess just last question. You talk a lot about getting your leverage down, which is certainly a positive, but in the same breath, we also talk about M&A. Is 2024 going to be just a year of debt pay down and M&A is more of a ’25, ’26 thought?

Howard Friedman: I think the thing about M&A is M&A comes when M&A comes, right? And so I think what we wanted to do this year with our leverage was to get into a position where we could objectively start looking again and make sure that it was something that we could execute with excellence. But I think that, as we continue to push forward, we will look across whatever is in the best interest of Utz overall. So, I think M&A could come, but we’ll have to wait and find out whether or not there’s a deal to be done at a price that we find attractive.