Morning, everybody.
Morning.
Galbo from the food and beverage team here at BofA. We're delighted to be joined at the conference this year for the first time by Utz, pure-p lay U.S. salty snack company. Potato chips, pretzels, cheese snacks, tortilla chips. My personal favorite is the Pub Mix, the one with those little wasabi peas.
Yeah, I appreciate that.
Of course, the giant tub of cheese balls is also great. Please join me in welcoming CEO Howard Friedman, CFO Ajay Kataria, and Kevin Powers, VP of Investor Relations. Thanks, guys, for being here.
Thanks for having me.
Howard, maybe just to start, there's been a lot of, I think, discussion around some of the trends, broader trends in snacking, particularly in salty snacking. We've seen kind of some of the volume declines. Just give us your lay of the land in terms of what you're seeing currently and kind of how you think it progresses here over the next 6-12 months.
Yeah, I mean, first of all, I appreciate the opportunity to be here. Look, I think the way we've been thinking about the category is a lot of what we built out in our Investor Day. We expected that the category this year may be a little bit more muted. We took a conservative approach around 2%-3%. And over the last several years, it's been and historically has been a combination of price and volume. Obviously, our expectation this year is more in that range, 2%-3%. And from our perspective, we do realize that the category is becoming a little bit more promotional than it had been historic, that it had been in the last couple of years, still substantially below where it was in 2019.
And that we expect that the consumer will continue to evolve over the course of the year and kind of build back up. Obviously, in the beginning of the year, it's been a little bit lower than that. But we're pretty confident that the category will continue to improve. The only other thing I would say is, for us specifically, we have a lot less to do with our growth algorithm and kind of what we're expecting to happen is a lot about distribution, expansion, and white space, the improvement in our core. We have an A& C step up this year. We're finally going to start investing after a year of building capabilities. So our growth is going to be a little bit more skewed toward things that we control versus sort of just what the categories do.
So maybe we can take that in two parts. I'll kick it to Ajay. You've kind of outlined guidance for the year. Just kind of the phasing, I think, is more that you hit that kind of higher, more algorithm-type number of 4%-5% in the back half of the year. Maybe you can talk about some of the dynamics kind of ramping through the year. Then Howard, maybe we can just touch on what you mentioned. How much of the getting to 4%-5% is kind of category-driven versus what's in your control from a distribution, pushing velocities, ACV perspective?
Yep. Yep. So I'll talk about 2024. So as Howard mentioned, we want to grow into the Investor Day guidance that we provided, 4%-5%. So you will see that ramp up throughout the year for the singular reason that a lot of our growth is predicated on distribution. And as we go through the year, we're going to build that distribution into the second half. And that's the exit rate you will see. And then I'll let Howard comment on the next part.
Yeah. And I think for us, really, the biggest drivers of our growth this year really break down to a couple of pieces. One is we do expect to see distribution build through the course of the year, as Ajay was talking about. Two is several of our lags that we had last year. We talked a lot about pork rinds and cheese balls last year, which were perennially struggling. And actually, as you've seen over the last basically quarter and a half, they've actually begun from headwinds to tailwinds. That growth is clearly improved. And the last piece is the A and C. We expect that we will invest about 40% this year, which is in line with the Investor Day. We said 40% annually for the next three years. That will start to flow in in the first quarter.
We're going to build through the rest of the year. But that 40% will obviously optically look a little different because of the base. But generally, it'll be quarter on quarter on quarter on quarter. It'll be similar. So we feel pretty good that the majority of our growth is going to be driven by that distribution gains and less dependent on the category this year, just given the sheer size of the white space that we have in expansion markets and frankly, the assortment opportunities we have in our core. If you were to look at Boulder Canyon or Zapp's or On The Border, while we've been getting good distribution in our core, we still are only on average about three items carried for those items in places that they exist versus, for example, in UTZ where it's more like 23.
There's headspace in our core still to go. Then there's quite a bit left to do in our expansion.
So in terms of maybe let's use that example on items. I mean, could Boulder get to 23? Does it only need to get to half of that number? I mean, kind of how do you see it building out?
Yeah. I don't think it has to get anywhere close to the 23 or even half of that. I mean, we would be happy with an item or two, more on average. If you go back to the Investor Day, what we've said is in expansion, we need to basically grow our volume share basically 0.2 to hit that 4%-5% that we're talking about over the compound annual our CAGR over three years. So hold our core and grow about 0.2 share points in volume. The algorithm kind of holds. So it's not a huge reach by any stretch of the imagination. It's a lot of the things that we know how to do. Boulder's been a great business for us. Zapp's has been a very good business for us recently. We've been working in our C-store channel.
On the Border has been a wonderful acquisition for us over the last couple of years.
So maybe we can talk a little bit about the geographic expansion, just kind of where you're pushing more heavily into this year. Obviously, you had the Pub Mix rollout last year. Where you're seeing that. And is there any just difference by channel? Are we going to see more club store opportunities, more just traditional grocers? Kind of how you're thinking about that.
Yeah. So I mean, Pub Mix has been wonderful. And the state of Florida has been great. We're actually now at about a 3.5% share. And so if you do the line of demarcation, we would classify a core market for us at about a 4.5% share. So we still have some opportunity to continue to grow in Florida. And we will do that through the course of the year. We've been very fortunate. The entire retailer geography has been very supportive. But we are also gaining distribution in Pub Mix specifically year over year, which for us is the complement that the retailer really values us. I think as you start to look at geographically where else we go, we will continue to progress westward. We talked a little bit recently about buying back the On the Border business in Texas.
We've talked a little bit about distribution networks in Michigan as well. Both of those are areas for us that we're pushing. And so I think that's where we're really focused, again, continuing to move westward. We have more distribution opportunities that we're working with retailers to figure out how we can exploit them. And then in terms of channel, look, if you look at how the shopper is shopping today, we are very good historically in food and in club. And we want to be we want to be represented there. But national retailers, some channel opportunities for sure as we go forward. So we intend to be everywhere as quickly as we can.
Maybe we can turn a little bit to the increase in marketing spend that you talked about. So the 40% increase, Ajay, I would imagine a lot of that's going to be funded by gross margin. But just kind of your expectations around kind of continued gross margin ramp to fund kind of the step up in A and C and how you're thinking about that, not only this year but maybe over the next couple of years.
Yeah. I think the concept that we are working with is we got to make money before we spend money. And what we laid out at Investor Day, we are going to we have plans to generate $135 million of productivity over the next three years. And that is pretty evenly spread. We should do $45 million this year, which is 4.5% of cost of goods and about 300 basis points in terms of margin expansion. It is both in cost of goods and distribution, which is an SD&A for us. So as we see those productivity dollars come through, which we will see every quarter, those dollars come through, we are going to make the necessary investments.
So in terms of a ramp in the P&L, I feel very confident that every quarter we are going to consistently see productivity flow through and the investments netting down to EBITDA growth. It is not a choppy ramp story in terms of margins. It's pretty even in terms of margin growth year-over-year.
Howard, I think one of the questions we got after the Investor Day was the 16% EBITDA margin target. Seems like a low bar to clear. Just how do you think about the path to getting there maybe either faster than you initially thought or just upside opportunities?
Yeah. Well, I mean, I appreciate that we got the feedback that it's a low bar to clear. But I'll just point out to you that it's a bar that we haven't cleared yet. So we are very confident in our productivity program. It's been building over time. We feel really good about our supply chain optimization. The transaction that we obviously just concluded certainly helps. So what I would tell you is, why don't you give us a shot at hitting 16? And then we'll talk about what more could look like as we go. But the biggest swing item, I think, is as the marketing kicks in, can we continue to drive our power for brands to higher heights? And if we can, then things will follow.
Maybe to turn a little bit to kind of the other recent announcement that you had, the sale of RW Garcia, some of those brands and the plants that went with it. Maybe you can just give a recap for the folks in the room. And then also the planned proceeds. I think you've already kind of put those to work. But would love to kind of get the update.
Yep. So this was a very good transaction for us and the counterparty, Our Home. It's really a win-win. RW Garcia, Good Health Brands, the two brands that we sold, and the three plants along with those, those two brands are better suited for Our Home portfolio based on what their strategies are and what they want to do with these two brands. We got a fair value for the brands. And we were able to package them up with three facilities that represented about 5% of our pounds produced. So really a transaction that helps us accelerate network optimization plans. It helps us pull forward some CapEx investments so we can drive productivity faster to offset the EBITDA sold. And really in a clean manner, helps us divest three facilities and fold that capacity into our existing plants. We did not have to do any employee actions.
Or the employees are in a good place. And the brands are in a good place. And then everybody wins. Great transaction. The thing that excites me even more is that generated about $150 million of net proceeds after tax and fees, etc., that you have already seen us pay down the debt with. And that drives our leverage goals that we laid out at Investor Day, which was 3x by 2026 year-end, a full year forward. So we should be 3x by 2025 year-end and a full-term improvement in 2024.
Great. My other favorite topics for Ajay are talking about I/O conversions and also SKU rationalization. So are we through them both? Are we done? How much more do I have to ask you about it?
We are done with both of those topics. I/O conversions are done. We will always have 50, 60 I/Os in flux that we are buying back and selling back, splitting routes, etc. But I/O conversions are done. You will see an impact from a lap perspective in the first half from I/O conversions on our top line. But it's just a lap impact. We are not taking any new actions. SKU rationalization, the hard scrub, is firmly behind us. From here on out, it's a normal portfolio management.
That's what he promised me too.
Yeah. And Howard, maybe we were speaking with one of your peers earlier. One of the things that's come up is within salty, there's so many different subcategories that are behaving very differently at the moment. So maybe you could talk a little bit about pretzels versus potato chips versus cheese and interaction with private label, just kind of what you're seeing kind of from a subcategory perspective.
Yeah. I mean, one of the things I think we would obviously say is that how goes potato chips? So tends to go salty, right? And what I would tell you is, generally speaking, we're relatively happy with how our businesses are performing. Again, we talked a little bit about cheese earlier. We've entered cheese with some innovation as well behind the Jax brand because we actually believe that cheese as a subcategory actually travels really quite nicely as a flavor as opposed to even just a form. Other than that, I think we look at pretzels. And we look at potato chips, the price pack architecture, and sort of trading up and down the ladder as being a little bit of a dynamic. But overall, I think we're in a pretty good place.
Happy to take any questions in the audience at this time. I think Brian probably has several.
It's a hard questioner.
Yeah. Thanks, guys. Maybe the first question gets back to the discussion on productivity that you were just having and the distinction between there's cost savings you've laid out that are going to contribute. But also at the same time, right, the ambition is to have more of a national footprint, right, be a bigger business. And I was wondering if that also creates some scale. And without putting a number on margin, just how we should think about how you balance those two things, right, because you could overfocus on productivity and a margin target but then not make some decisions that sort of that would make decisions that would cause you to not hit the ambitions you have in terms of the national footprint. So just how we kind of think about those two things, large at scale versus productivity.
You want to?
Go ahead. It's all right.
I can start. And then Howard can layer in. I think the productivity program that we have going, think of it in two parts. One is the base productivity that we are driving within the boxes that we have. It's a manufacturing plant or a logistics warehouse, continuous improvement work that we are doing within those boxes, automation, etc. The second part of the productivity program is optimizing our network and making sure we have the right boxes in the right place on the map. That's the productivity program. The distribution side of it is an investment that, as we have opportunities to go west and grow our business like we are doing in Michigan and Texas, those are investments that we are making. And those dollars are coming from this productivity program that we are so confident about. And those two are related. You're right.
One generates dollars that then allows us to invest on the other side.
Yeah. Brian, the only thing I would add is at least when I think about our business, the first thing that we need to do is be able to expand our gross margins, right? I mean, the path to 16 can take many winding ways. But really, gross margin expansion is the number one arbiter of our success because then it's discretion on how you invest it, right? And so I think in order for us to have the resources that we need to invest in to be a national brand at scale, you need to attack the gross margin line first and get that expansion done, which is why we started the way that we did. I think any CPG company that I know of anyway, a 3% base productivity, right, is not something that's going to blow your mind.
And the way that we think about it is we hit 4% last year. We've said 4.5 this year. So 3% of that, I think, is something that you should expect from us as we continue to grow and scale. And there's no reason we shouldn't be able to get there. The rest of it is really where that goes to margin expansion there for fuel for growth, right?
And then maybe just tying the margin discussion, the gross margin discussion especially to just pricing and the category. And we talked a little bit about this before you went up on stage. Frito-Lay as the leader in the category has led pricing. They've been very committed to protecting margins. And now finally, we're beginning to see some changes in consumer behavior in the category. It's been really strong through COVID and afterwards. And now we're beginning to see some trading. So just does it create some opportunities for your brands as consumers now step back and think, "Gee, if I'm going to spend $5 or whatever the price point is, I start thinking about different choices?" And just how you think about maybe the opportunity that creates, not thinking necessarily about a trade down but just simply consumers going to stop and think about that price point?
Do they think about a Boulder Canyon or another brand?
Yeah. Look, I think one of the things that attracted me to this job in the first place is what a great category salty has been, right? While it has been able to get priced generally as a category every year, certainly led by the leader, it has not been as much a price-driven as much as it's been an innovation and consumer demand-creating category, right? So it's a brand-led category. Consumer pressure is clear. Pricing comes in as part of the equation. But it's not the penultimate piece of the equation. What we've done over the last couple of years is get our price gap understanding right and getting our price ladder understanding right and making sure that we are at an appropriate gap to the segment leader depending on what the segment is. And I think that that's where we sit today, right?
We feel pretty good about where we are in terms of pricing and our price gaps in general. If there are opportunities while we have opportunities to lower our prices on things like pork and cheese, we have opportunities to be able to narrow our price gaps in other segments as well. Will consumers consider us because of cross-price? It depends, I think, on the segment. But I think that what our job right now is to be able to drive the distribution and fill the category role that we have and make sure that we're doing our role to support the consumer and the customer as they go.
Ajay, I wanted to touch on something you mentioned on automation. If I'm remembering back to when we came to Hanover.
Have you been to Hanover?
Did the plant tour. God, it was three years ago now. There's a lot of manual labor still in the plant. You were very early in the automation journey. I think that was the first week with the automated sorting machine up. Where are we in the automation journey? How do we think about that? I mean, over the next, again, 12-24 months, what more kind of tangible results could we see there?
Yep. So I'll use baseball reference. And Howard will use cricket reference.
Yeah. It should be good.
Next thing's up. I think we are probably in the third innings. There is a long way ahead of us. We are still what you saw three years ago. We have improved. But I wouldn't say much improved. We have a lot of investment that we can make still to do basic things the right way.
Yeah. I mean, palletization, case erection, and filling, all of those things are still very much in front of us. And one of the things that Mitch Arens has done a nice job of coming in is sort of to think about platforms. And so don't buy one palletizer and build it out and create complexity across the entire line. Solve palletization and do that first. And then think about as you're building out Kings Mountain, what is the perfect facility? And so what it does is it allows us to get the cost savings that we need to be able to fund our growth. But also, it allows us to continue to run the operation the way we need it to, to feed the volume that actually delivers the actual growth.
So there's not a lot of disruption to the existing lines, which again, I think to Ajay's point, gives us a lot of conviction. So I would agree in the third inning. I have no idea what to say about a cricket reference, but maybe the first 15 in soccer.
Is that starting in Hanover and then pushing out to the other plants? Or are you piloting it in Kings Mountain because it's a newer facility? How do we?
Yeah. So it'll go—I mean, obviously, if you go to Hanover, you're talking about 60% of the volume, right? So we will go into Hanover because that is where the businesses are. And it's also where the cost opportunities are. The other very practical thing is we need those humans doing higher value-added things. So as we're investing in automation, it gives us an opportunity to take the people or associates who are working here and whom we have longstanding and great relationships with and put them to higher value-added work that allows us to continue our growth as well. So some of this is also a cost savings. But a lot of it is also that capability and upskilling we've been talking about to be able to invest back in our people and our brands.
Ajay, I'm going to move to a different topic. I know we touched on the debt paydown already. But I guess the benefit of all that too is that the cash flow conversion, which has been, I think, the biggest knock on the business for a long time, should, I would think, improve. So maybe you can give us an update on kind of how you're thinking about cash flow for this year. And then as we think about over the next three years, priorities, you seemingly have enough capacity today. But how we should think about kind of more debt paydown, M&A, dividend.
So I'll touch on the capital priorities first. So they have not changed. As we talked about it investor day, we want to invest in our growth first and then pay down debt followed by dividends and stock buybacks. You are seeing us make those investments this year. We paid down debt, of course, with the transaction. But we are putting the money back into the business with marketing investments and elevated CapEx. So as far as free cash flow is concerned, we are thinking about we should do about $20 million-$30 million this year. We do have benefit from interest, lower interest. But we are investing back into CapEx to pull forward some of the productivity, build additional capacity in Hanover, do the automation project so we can bring the volume in-house.
Long term, the way we are working on free cash flow is pulling the levers that we can pull and should pull. One is interest. You saw us do that. We are doing a lot of work on working capital. Our cash conversion cycle has improved significantly in 2023. That work will continue into 2024. We laid that out at investor day. We should hit those targets as well. Then as we free up cash on those two, it's going to go back into CapEx, part of it. As we deploy CapEx and work on supply chain optimization and productivity, we do incur some cash costs to drive that work. We are starting to taper that down as the investments ramp down from 2024 into 2026. We'll start to taper down the cash costs of those projects as well.
All right, Howard. I'd be remiss if I didn't ask you about GLP-1 and the impact on salty snacks. And it's a big topic in the fall. Wegovy came back last week, obviously, with some news flow out. Just kind of what you've observed, what you're seeing internally.
Yeah. I mean, I think it's, again, still early days on GLP-1. Obviously, we went through the summer and then came back again. I think from my, I'll give you the, we still don't know. What we're doing is we're watching it. We do see some preferences for some smaller sizes. We can see a little bit of preference for some satiating snacks as well. But from my perspective, it comes down to, I've been in this business for more years than I care to remember. And there are enough trends that I have watched from when spicy and hot was sort of a curiosity in the late 1990s. And then low carb, no carb happened in the early 2000s. The one thing I think branded people need to do is listen to the consumer, right? And so we have a tracker that we're watching.
We actually have some data that we continue to watch as people are exhibiting whatever preferences they are to include GLP-1. Our job is to adjust based on their behaviors. If they want a more satiating snack or they want a smaller pack size or they want to do something differently, it's our job to tailor our offerings to meet those needs so that we can continue to grow our business. All that said, and I'm sure this part won't surprise you, our near-term growth is really driven much more by the distribution and white space that we have. We are less dependent on just existing geographies to be the things that actually drive our growth.
If we do the right thing around master distributor, customer relationships, and expansion out west, while it certainly could be a challenge for the category, it should not be as much of an impact to us in the near term.
Then maybe just the last one that I had. We talk about white space opportunities in particular. Is there any products where you're not within salty that you could be in? I say this. I'm looking at Kevin because I go back to the slide deck which has RMT hidden on a slide in there somewhere. Is there opportunities out there for broader expansion into meat snacks or just some product category you're not in today?
Yeah. Look, if you look historically at what we've done, one of the things that the company has done a great job is trying to build a fully diversified pure play salty, which means you need to be represented in all of the categories that you can. And you saw that with the acquisition of Truco, right? And so I think as you think about where are the categories in which we don't fully compete today and that there is meaningful opportunity, popcorn is obviously one that we've talked about historically. And then clearly, meat would be another. So if those opportunities came up, I think that they would be things that we'd be curious and take a hard look at. We're good acquirers. We tend to buy at fair prices. And we tend to synergize and create value for our shareholders when we acquire.
So if those things came up, we would obviously be interested. The only other thing is geographically, right? So we have entered category we've entered in our existing categories into new geographies. Have there been opportunities? Golden Flake was a good example of a category that we were already in, business that we were already in. We acquired the company. And that opened up some of the Alabama, Georgia geographies. So those opportunities would be the other place we would look at.
Brian's got another question.
A couple of questions. First one is just can you remind us if we look at your DSD network today, just geographically, what percentage of the U.S. does it cover?
I'd have to do the percentages. But basically, I mean, think about us as we are obviously all the way down the Atlantic Seaboard. We go west as well, upper Midwest. We are Illinois, Indiana geographies. But we still have a fair bit of space to go in terms of our DSD network.
Right. So we're still east of the Mississippi, basically.
Predominantly, yeah. And Brian, what we said at investor day was, on average, we sell 40% of the category is sold in the geographies where we generate 60% of our sales. So there's quite a bit left to go as we head west.
Right. Then the second question is getting back to the category and the pricing. I guess as velocity has slowed, we watched this with confections, right? With all the pricing there, velocity slowed. There's been some retailers pulling back, right, on some of the display and some of the out-of-aisle space. Salty is such an important category for retailers because it's fast-moving. It turns really quickly. It's a great cash flow generator. So what's your perception of what retailers are observing, right, as the category begins to slow a little bit? Is there a heightened level of sensitivity there to drive more velocity, how they're thinking about again, it's a highly promoted category. They're thinking differently about lifts on promotion or promoting, just retailer perspective.
Yeah. I mean, so we have not experienced a resistance to placing perimeter aisle display or creating incremental space. So what we have seen with retailers is that if you have a product at a fair price that the consumer is buying, they want to put our items either on the perimeter or on the shelf. So that's been, I think, largely in line with our expectations and largely why we're fairly bullish on the distribution opportunity we have in front of us this year. I think the promotional environment obviously has gotten more significant this year. You can see the category is more promotional than it has been but still, again, comfortably below 2019 levels. So there's not been a rush to try and promote our way through this with retailers.
What retailers, I think, want from us and what we've experienced is are we making the investments to get shoppers to continue to buy the product at the relative rate? Are you investing in innovation? Are you investing in A and C? Or are you just trying to occupy space on our shelf? And we have a good story of we are investing in innovation. We are investing in A and C. And our DSD I/O partners do a great job of making sure the perimeter is appropriately represented. They don't take advantage of it. It's not an excessive thing. And that the regular gondola home placement is actually stocked and in place. That, I think, is the preconditions to our success of gaining more distribution.
Any other questions in the room? Everybody wants to go to lunch.
I understand. It's either lunch or happy hour, right? Those are the two.
Those are the two driving factors. Well, Howard and Ajay, thanks very much. Thanks for being here. And thanks, everybody, who's in the room. I think the lunch is going to be in the room next door. We'll have the B of A Institute views on the consumer there. So we'll look forward to seeing everybody at 12:00 P.M.
Awesome. Thank you.
Thanks, Pete.