Utz – Strategic Update & M&A Value Creation
Opportunities – 24 March 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Thomas Flocco (TF)
Former President & COO at Utz Quality Foods LLC
Agenda:
1. Update on Utz's (NYSE: UTZ) acquisitions of On the Border and Vitner and the company's potential
inorganic growth strategy
2. Utz's competitive positioning
3. Salty snacking industry update and better-for-you opportunities
4. Retail sales growth outlook
Contents
Q: Could you give an overview of the snack industry, including its main categories and drivers? Who are the
industry’s key players?
3
Q: Can you outline 2-3 pre-coronavirus trends in the savoury snack industry?
4
Q: How have industry trends been impacted by coronavirus? How might consumer behaviour have changed?4
Q: Could you give an overview of Utz’s businesses, highlighting the categories it operates in?
Q: You referenced the better-for-you snacking category and how it’s not necessarily a healthier option,
despite being branded as such. To what extent do consumers buy into that? Is changing 1-2 ingredients and
rebranding a product as a healthier option comparable to greenwashing?
Q: In which of Utz’s underpenetrated channels has the company expanded distribution? How successfully
has it increased penetration in those channels?
Q: How do you expect the away-from-home market to recover, considering the growth explosion in grocery
retail and the traffic decline in convenience? How would you describe profitability between the grocery and
convenience/on-the-go retail channels?
5
6
6
7
Q: How do you assess management’s acquisition strategy? Utz has been increasingly reliant on acquisitions
for growth, which adds integration risk and higher costs.
Q: Does Utz’s M&A strategy make sense if consumers return to traditional consumption habits? Do you
think this strategy is sustainable, given snacking’s recent uptick due to indulgence and people staying at
home and snacking more?
Q: Do you think Utz should continue pursuing salty snack acquisitions? Are there other opportunities it
could consider?
8
8
9
Q: How would you describe innovation at Utz? How could the company drive organic growth, which you
suggested was the best expansion strategy?
10
Q: What is your outlook for Utz’s brands over the next six months? What do you imagine as the company’s
best- and worst-case scenarios? How do you assess its ability to execute on priorities and fulfil its goals as a
public company? Is it susceptible to the lacking quality and innovation you mentioned?
11
Utz – Strategic Update & M&A Value Creation
Opportunities
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Utz – Strategic Update & M&A Value Creation
Opportunities. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Thomas Flocco, former
President and COO at Utz Quality Foods LLC.
Thomas, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
TF: I agree.
NH: Thank you, Thomas. Could you give a brief overview of your background?
TF: I’ve been in the consumer products space for over 30 years. I started in the mid-1980s with Procter &
Gamble, first in sales and sales management for a few years, and then in brand management. Went to business
school, came out and worked for McKinsey for about eight years as a Partner in their consumer practice,
consumer retail in Chicago. Served a range of clients from traditional manufacturers to retailers, ranging from
grocery to mass merch to convenience store, also did some wholesaler work, and then moved upstream into
supply chain. Left there in 2000 to join a conglomerate called Fortune Brands, which has been broken up
since then, but, in its day, it had a range of businesses from faucets to bourbon to golf balls to padlocks. I did
strategy and M&A for two-and-a-half years there, and then moved in to run a liquor business in 2003, which
was Jim Beam. Ran that for about six years and then left in 2009.
I did private equity work then for a number of firms as an independent contractor. After then I went on some
private equity company boards, and then bought a boat company in 2015 called Everglades, which I ran for a
year as CEO Interim while we found a permanent, and I still share that business. At the end of 2016 I was
contacted by Dean Metropoulos, who had a made a minority investment in Utz and he wanted to bring me on
board to help the team with a range of performance improvement initiatives that he had teed up, and so I went
in to support Dylan Lissette, who was the CEO and son-in-law, his team, and supported Dean as well in that
first year. In that period of time I was moved into a permanent role as President in the late winter of 2017.
Dean moved on in about a year, well actually later in 2017 about October, and I stayed around for three years
and had full P&L responsibility for the business, reporting in to the CEO, but having all the other direct
reports for the rest of the business system. Then left there at the end of 2019 and then pursued my own SPAC.
The company was put into a SPAC, or merged with a SPAC I guess is the right term, in early 2020 and then de-
SPAC’d a little later on in 2020 and it’s now currently trading publicly, and, over the three-year period, we got
it ready to do that, to play that role, and then I’m now pursuing my own SPAC independent of that.
[00:04:03]
Q: Could you give an overview of the snack industry, including its main categories and drivers? Who are the
industry’s key players?
TF: The industry itself, I’ll guess I’ll start with the back end of the question first, because you really can’t do it
any other way. It’s a very unique industry in that it’s really dominated by Frito. Frito is a 63-share player, the
last time I checked, in salty snacks, and the definition here of salty does not include things like nuts. It does
Private and confidential 3
include meat snacks, but there are some broader elements that aren’t included, crackers are not in there as
well, they’re a separate category. Salty snack categories, traditional ones are everything from potato chips to
corn chips to pretzels, extruded cheese we’ll call it, so anything from a cheese ball to a Cheeto, and popcorn.
Those are the main categories and mainstream categories. Within corn chips you have the traditional tortilla
vs heavily flavoured, like a Dorito or a Frito. Then on the other side I’ll say there’s kind of a separate break
between, call it, better-for-you and traditional, and the better-for-yous are using less traditional substrates,
everything from cauliflower to, it could be, a pea-based product or soybean as a better substrate.
They’re still pretty heavily salted, most of them are fried in something, but you can also see better-for-you oils,
like olive or avocado, to help reduce some of the risk around some of the more traditional oils. That said,
they’re still in the category and Utz is one of those players that still does a traditional large-based product
called Grandma Utz, so there still are hardcore snackers that use that product. Another sub-category, which I
neglected, was pork rinds, which is a fairly big, or actually I shouldn’t say it’s big, it’s growing fairly quickly in
the space and it has a keto appeal to it. Those are the main categories and the main players in the space, so
there’s Frito with 63 share, then you go to Snyder’s-Lance, which is about a 7-8 share player, and then Utz now
has moved from fourth into third with roughly, I haven’t checked the shares since they acquired On The
Border, but they’re probably north of a four-share player now nationally, maybe four-and-a-half, and then you
get to, I think Pringles would be the next player, which is owned by Kellogg’s, so those are your top four
players.
[00:07:26]
Q: Can you outline 2-3 pre-coronavirus trends in the savoury snack industry?
TF: I’d say probably the biggest trend, which is going to apply to any category in the food and beverage space,
or even beyond food and beverage today, is the growth of the millennial consumer and a bit of the decline of
the boomer. That was important, because it drove some other trends around just snacking in general.
Snacking has been on the uptick for quite a while and I think that generation is probably more prone to
snacking vs sit-down meals, so that’s a trend within a trend. I forget the fully accurate statistics, but something
on the order of 94% of the population snacks at least once a day, and I think it’s something around 50-60%
snack greater than two-and-a-half to three times a day, so that is an ongoing trend that was going on before
COVID. The second is just as a result of the growth of the convenience and accessibility of snacking, so really
the growth of the convenience channel and the morphing of the convenience channel, which was affected
negatively by COVID, but pre-COVID you had the convenience store was turning into really a super
convenience place with the Wawas and the Sheetz of the world out there just really reinventing the whole
space and what was available.
That was a second trend. The third, not surprisingly, is just the growth of e-commerce in the space and how
people were using e-commerce, both in terms of delivery as well as, call it, click-and-collect. It’s a fairly bulky
product, it doesn’t necessarily shift well, but there was a lot of growth in the getting online, ordering it and
picking it up at store. In the category Frito was leading the charge on that. I’d say the other players were just
catching up. Then I think the fourth major trend is just the trend around better-for-you and better-for-you
snacking and people trying to have it both ways, so they want their snackability but they don’t necessarily want
all their snacks to be traditional mainstream, higher sodium, higher fat. Truth be told, it’s tough to have it both
ways, so even if you take a cauliflower product that you think is better for you, or a vegetable straw, it’s still
fried, it’s still heavily salted or just not going to taste good and so people were kidding themselves a little bit
that it was a healthy snack. It’s just basically a little bit more healthier than the other one, but it’s not
equivalent to a piece of fruit.
[00:10:58]
Q: How have industry trends been impacted by coronavirus? How might consumer behaviour have changed?
Private and confidential 4
TF: I think prior to COVID I think millennials were driving a big push towards early-stage brands which
fragmented the market, and they were looking for real authenticity or for authenticity, and again, that was
hurting the bigger, more established brands, and I say that, Frito just continued to drive growth with Doritos
and Cheetos, completely non-craft brands in the space, but I think as consumers went into COVID and people
reverted back across categories. There’s not just a salty snack trend, but across categories people reverted back
to the bigger brands, brands that they trusted and knew vs more of the non-mainstream brands or craft
brands, so that, I think, actually, hurt some of the craft players in that period of time. The second thing is, this
was something that was specific to more called DSD vs warehouse channel supported categories, but,
obviously, when the on-premise or restaurant or takeout, until takeout came back online, evaporated and
people were forced to eat at home, there was a real drive to anybody that had a big presence in the grocery or
mass channels did well.
They over-indexed during the period of time. If you had DSD you did even better, because DSD could be in
store everyday replenishing shelves where there was clearly a choke on the warehouse supply chain for a while
that just couldn’t keep up with demand, which, when you go into a Walmart, certain categories still look like
their shelves are bare. The DSD categories were not that way, because the DSD delivery and sales people could
be in the stores everyday, so those benefited massively through COVID, and that’s coming up on a one year
anniversary of that, so they really started to benefit in late March, April. All those players are going to start to
lap that. I’ll say unrelated or partially related to this, I just saw something this morning in the beverage alcohol
space, where I spend a fair amount in my private life, so I still come up with it, where they’re showing the first
declines YoY for beverage alcohol in total, off premise plus on premise. On premise was always bad, but off
premise was up 20%-plus, until it starts to lap itself, which is clearly going to be a challenge for anybody who
benefited from the COVID bump, they’re now going up to have to cycle those numbers, and so that’s just going
to be interesting to see how the companies do with that.
[00:14:44]
Q: Could you give an overview of Utz’s businesses, highlighting the categories it operates in?
TF: Utz, if you look to the market shares you could figure it out pretty quickly that about 50% of their business
is still potato chips, and potato chips come in two main forms. It’s called the continuous chip, which is the
lighter chip, your traditional chip, and then the kettle chip. That’s a big chunk of Utz’s business and I think will
be forever. It’s what they built the business on. Probably the second biggest category for them is pretzel,
although cheese is coming up on pretzels. Pretzels are anything from their sourdough hearts to their more
traditional, what they call specials. The third category is going to be extruded cheese and primarily cheese
balls, but also cheese curls. Then in that mix I’ve got to believe now, with the size of On The Border, it might be
their number three now. I don’t know. I haven’t looked at the numbers to see where it stacks up, but clearly
Utz had two big traditional category holes, one was corn chip and one is popcorn. There is Utz-branded
popcorn and there were Utz-branded corn chips, tortilla chips, but they never were able to really break
through the way the other categories have. On The Border solves that problem for Utz, so that was a good
acquisition for them.
It does give them a little bit of channel concentration and customer concentration with Walmart and Sam’s,
but hopefully over time they will diffuse that by selling in proper channels, not by reducing their business with
those two. Another reasonably big category, certainly a big growth category, which I mentioned earlier, is pork
rinds, and that’s mostly under Golden Flake but there are Utz Pork Rinds as well, and then there is the better-
for-you business, which I think is, again, a bit of just how you want to define it. A big piece of that is the Good
Health brand, and a big piece of Good Health are what are called vegetable straws and vegetable chips, which
are basically potato-based pellets that are imported from Italy, and then they’re fried and bagged, seasoned
and bagged in the Utz facilities. Then Boulder Canyon is the other big better-for-you brand for the business.
The other big differentiation point for Utz, two other big differentiation points for Utz and how it differentiates
itself vs, say, a Frito, one is their packaging. They have a fairly big, rigid, call it plastic, container packaged
business, so call it barrels. Cheese balls, pretzels are the biggest participants there, but also their snack mixes,
like Pub Mix and Poker Mix, most of which is sourced and then just mixed in their facility and put into either
bags or barrels. Frito has not invested in that, and that really does differentiate Utz. The other is the
Private and confidential 5
investment or the commitment that Utz has made to the seasonal business, mostly around Halloween, but also
Christmas and Easter, where they do offer a lot of their traditional products, so it could be a pretzel or it could
be a cheese ball, but it’s offered in different packages that can either be given away from treats for Halloween
or, say, Cotton Tails for Easter, which is a white cheese ball, etc, chocolate-covered pretzels and the like, so
those are some ways that they differentiate themselves in the business.
[00:19:19]
Q: You referenced the better-for-you snacking category and how it’s not necessarily a healthier option, despite
being branded as such. To what extent do consumers buy into that? Is changing 1-2 ingredients and
rebranding a product as a healthier option comparable to greenwashing?
TF: I think this is an Utz issue, and it’s not even a salty snack issue. This has been going on. Carbonated soft
drinks, Diet Coke, Diet Pepsi will tell you that there are fewer calories. There are fewer calories, but there are
also questions around the long-term health impacts of artificial sweeteners vs a traditional sweetener, so I
think the better-for-you, it’s a reasonable moniker because if you take the same potato and the same amount
of salt and you fry it in avocado oil, as opposed to cotton seed or sunflower or vegetable oil, the chip is better-
for-you. It’s just not good for you. It’s still 150 calories in a serving, or it could be more, Zapp’s is, I think, 230
or 280 calories in a serving, a one ounce serving, that’s fried in peanut oil. If you use a sweet potato as opposed
to a white potato there are arguably some benefits for that, health benefits, I shouldn’t say health benefits. It’s
just not as detrimental as just a starchy white potato, but still not good for you.
Consumers, what you find, and if our household is any indication pre my time with Utz, my wife, she’s what we
call a repertoire snacker where they’ll have everything from a full-flavour, full-fat product to a bag of popcorn
that might be seasoned with Himalayan salt, that might be perceived as better for you, to a Good Health
product that’s a vegetable straw that really is no better for you than a potato chip, but it’s perceived as better.
It’s been going on for a long time. I think where the ESG piece comes in is I think there’s more around clear
labelling. There’s much around clean labelling as there is around the ingredients. When you turn over a bag of
traditional potato chips for Utz, I think there are three items on the back of the labels, potatoes, oil and salt,
that’s it. That’s a pretty clean label. That’s what consumers care as much about as anything else. They don’t
want to see a bunch of stuff on there that they can’t pronounce.
[00:22:53]
Q: In which of Utz’s underpenetrated channels has the company expanded distribution? How successfully has
it increased penetration in those channels?
TF: I think Utz, and this stuff was all included in their investor decks in terms of their mix of business, so their
skew is much more to grocery than I think the industry. They were probably underpenetrated in convenience
store, which has been a real focus, and, to a degree, underpenetrated in mass and club, and so those have all
been areas of focus for the business, those being convenience, mass and club, and they have done a good job. I
think you can’t really make that analysis, a good analysis without actually adding geography to it. What I mean
by that is when they order their business and say it’s underpenetrated in mass, well a lot of the mass business
is west of the Mississippi, and Utz is pretty underpenetrated west of the Mississippi. They’re better now for
three reasons. (1) Is just a concerted effort to continue to push westward with the core brands, but (2) is a
couple of acquisitions that have helped them west of the Mississippi. One was the Conagra DSD snacking
business, which included Tim’s up in the pacific northwest and Washington State, but then also On The
Border, that helps them there as well. Then the third is, as they continue to penetrate the Walmart chain, and
there are, I don’t know, 2,300 Walmarts I think nationally, maybe it’s more than that, I can’t remember the
actual number, I may be confusing it with Safeway-Albertsons, but there are several thousand Walmarts and
Utz is only in them in a meaningful way in the eastern part of the US. As they continue to grow with that
channel and can provide distribution into those divisions that are west of the Mississippi, same goes for Costco
or Sam’s, they will grow into those channels. I think those continue to be strategic growth initiatives for the
Private and confidential 6
business, so that penetration of those channels will continue over time.
[00:25:58]
Q: How do you expect the away-from-home market to recover, considering the growth explosion in grocery
retail and the traffic decline in convenience? How would you describe profitability between the grocery and
convenience/on-the-go retail channels?
TF: Let me try to anticipate another question you might answer later with that one. First of all, I would think
about as the world starts to open up again and people start to return more to, I’ll just call it their old habits, I
wouldn’t even call it normal, but their old habits, people, they’re going to start to go out to restaurants more,
they’re going to start to eat away from home more, and that is going to impact some of the behaviour that has
been going on for the last year. The good news is, for us, a lot more people were exposed to the brand over the
course of the past year just because maybe they couldn’t find their favourite Frito or Cape Cod Chip in the
store, and so they reached for Utz and they tried it and they liked it and it’s a great product, and so you pick up
some converts, which is great, so you’ll keep some of that growth. Some of that growth will either revert back
to their competitors or it’ll go back to, call it, the traditional hospitality channels of restaurants and fast-serve,
and the like, and maybe their potato chip consumption gets replaced back by French fries with their burger,
because they’re now out and about, so that’ll have an affect. How big an affect I can’t tell you. We’re going to
need fact based. The second part of your question about profitability across channels, the convenience channel
should be the most profitable channel for anybody in this space for two reasons. One is just there price per
ounce is going to higher. In a convenience-sized package you’re just going to pay more. You might pay USD
1.89 for an ounce-and-a-half of chips vs in the grocery store you’re going to be buying nine ounce bags, nine-
and-a-half ounce bags and they might be normally priced at USD 4.29, but their everyday price is USD 3.49
and they might be on sale for two for USD 5 or something, two for USD 6, so the price per ounce is just going
to be higher and that’s a more profitable package for the manufacturer, the supplier.
The second though is that over time, and you can see this if you dig into some of the IRI and Nielsen data, you
really don’t want to promote in the convenience channel, because if somebody is in a convenience store it’s
usually because they’re looking for something quick and convenient, whether it’s a cold bottle of soda or it’s an
ounce-and-a-half bag of chips and it’s mobile, and so you don’t need to promote. One of the big initiatives that
Utz has undertaken over the past few years that we initiated back in, probably, 2018 was a lot of work around
price-pack architecture is what we called it, and that was to be smarter about which sizes you sold in which
channels and then how often you promoted in those channels, if at all. Over time what’s happened is Utz has
really improved its profitability in the convenience channel and become a lot more precise in terms of where it
applies its promotional dollars. I will tell you, you can figure this out if you just walk down the aisle, they’re
still not as advanced as Frito, but they’re a whole lot better, which improves the amount of money you spend
on promotion, which helps improve your profitability over time, which is contributing to some higher margins
for Utz over time. They’ve improved quite a bit. They should improve more as they continue to get better and
better at that surgical promotion.
The other big driver though of profitability across the channels is how you actually support the channels, so
whether it’s DSD or warehouse direct. Warehouse direct is always going to be more profitable. It’s a much
lower cost for the supplier to go to use the retailer’s supply chain vs their own. The problem is, if you’re just
relying on the retailer, if you’re going direct in an account and either Frito or Snyder’s is going DSD, you’re not
going to do as well. You’re going to get creamed, and it’s one of the things that hurts the smaller brands in the
space. If they can’t afford DSD, if they don’t have DSD as an option it’ll hurt their business, because Frito and
Snyder’s people are in the store everyday. If you want to see a level playing field you look at something like a
Costco. Costco doesn’t allow DSD people in their stores, so everybody is at the mercy, if you want to say, of the
stock people in the store to make sure the shelves are stocked across the board, across categories, across
boards, there’s no preferential performance, but in other channels sometimes that’s not the case and you will
differ over time, but it costs you more money. It might cost you anywhere from 10-15 percentage points more
to distribute via DSD than it does direct to warehouse.
Private and confidential 7
[00:33:21]
Q: How do you assess management’s acquisition strategy? Utz has been increasingly reliant on acquisitions
for growth, which adds integration risk and higher costs.
TF: I think Utz, they do like to acquire. Dylan, he likes to buy companies and integrate them, and if you just
look at the shape of the business since 2012, or 2011 when they made their first acquisition, which I believe
was Zapp’s and Dirty, there’s been an increasing pace, but they’ve done a good job. If you look at why they
bought what they’ve bought it’s usually for one of three reasons, and it could be for a couple of these reasons,
but one reason is for capacity in a certain either category or a certain part of the country. The second is to
enter a new category, like better-for-you, which would explain the Good Health acquisition, or the On The
Border, which has really bolstered their corn chip or tortilla chip business. Then the third is for some sort of
route-to-market advantage, meaning buying a DSD, like the Conagra business. When they bought that
business it came with 180 DSD routes in the pacific northwest, and so they were able to really make a big leap
forward in penetrating that part of the country. Those are the big three reasons, so when you look at
everything from buying Wachusetts in Massachusetts, they bought that business because they had a fairly big
factory in western Mass that allowed Utz to move its production of its traditional potato chips and some other
products up to Massachusetts and stop shipping truck loads of potato chips from Pennsylvania to Boston, and
they bought it at a really good price, so that worked for them.
They bought a company called Bachman, which had a facility in Ephrata, Pennsylvania, which was too close to
the other facilities, and so they bought that brand and that moved that production into their facilities and
closed Ephrata and got a huge synergy bump from doing that. Same thing, we bought Boulder Canyon, had a
facility in Goodyear, Arizona, outside of Phoenix. That allowed us to actually close the Denver facility when we
did that. It’s actually a much better plant for Utz to be able to penetrate California and then still service west of
the Rockies. Those are the reasons that acquisitions get done. One of the things that was set up, when I was
there I set up a programme management office to drive integration execution and make sure that the synergies
were being captured, so every one of the acquisitions that had been made since Golden Flake in 2016 has gone
through the programme management office. Everything from Good Health to Boulder Canyon to Conagra to
On The Board, who is going through it right now, Truco, as is Vitner’s, Kitchen Cooked, those all have synergy
opportunities that are identified that range from purchasing and procurement. We found in every acquisition
that Utz has looked at they have a really good buying group there. They know what they’re doing, they know
how to leverage their suppliers, everything from film for your packaging to seasonings to corrugated, even
transportation.
As they get bigger and bigger they’ll extract more and more savings from their suppliers. That all gets through.
A value capture curve is set up for it for each initiative. There are a set of steps that required to capture that
value. There’s an owner, there’s a monthly meeting set up to track how they’re doing against the target, etc, so
when I look and I evaluate the company’s acquisition strategy, for me you really have to answer three
questions. (1) Is are they making smart acquisitions to help grow the platform of the business, and then the
answer to that, I believe, for Utz is yes. (2) Is are they doing what they said they were doing to do in terms of
capturing the synergies, and my answer is yes, because of the PMO, and then (3), are they building in a
disciplined way, meaning are they overpaying or not, and I think if you look at the traditional multiples that
Utz has been paying in the space, they’ve been, on balance, pretty good. Has everything worked out? No, not
everything works out, not everything has worked out, everything doesn’t always work out. There have been
some areas where they could certainly improve, but you could say that about any company.
[00:39:50]
Q: Does Utz’s M&A strategy make sense if consumers return to traditional consumption habits? Do you think
this strategy is sustainable, given snacking’s recent uptick due to indulgence and people staying at home and
snacking more?
Private and confidential 8
TF: Yes, I do. First of all I’ll start with your question around M&A strategy. I continue to believe that the best
growth that you can generate is organic. There’s no doubt that that’s the highest return growth. It’s going to
give your shareholders the best return, so they need to drive the organic growth of these acquisitions as they
come on board, as well as the base business. That said, as they continue to try to march westward who knows?
They already have a little bit international, because there’s Costco, I think Korea ships cheese balls over there
and once in a while some stuff goes over the border to Mexico and up to Canada, but it’s not a concerted effort,
but as they do, maybe down the road, after they’ve fully penetrated the US and they start to look overseas or
over borders to grow, acquisitions can help there, but they have to focus on that organic piece and make sure
they’re driving like-for-like growth, but when acquisitions can help them do that they should do that. The two
acquisitions that they made in Illinois, first Kitchen Cooked, which was right after I left, and then Vitner’s,
they did them for two different reasons, but, if you look at the pattern, they were pretty similar. Kitchen
Cooked, southern or down state Illinois, which is where Kitchen Cooked is, I don’t know, I think there are 40
routes or something that they picked up, but it’s a very different part of Illinois than Chicago, and the Indiana
border north up until Illinois.
Buying Kitchen Cooked gave them a way to increase their penetration. The objective is to go from Minnesota
down to Texas. That would be the new western front, aside from what they’ve done with Tim’s out in
Washington State. That gives them an opportunity. They’ve already started building up Chicago, that started
when it got there, with a distributor that decided to build up a network to penetrate that part of the country.
Kitchen Cooked then augmented it and they’ll move ops now down into the down state of Illinois, which now
also brings you into northern Missouri. so you’re getting closer to Texas. They’re building out Texas with their
relationships with ATB and on the backs of their relationships or the business with the Zapp’s routes that they
acquired back in 2011, and then Vitner’s gave them, actually, their own trucks, their own distribution in
Chicago and up state that they will then migrate. I don’t know how they’re going to deal with their current
distributor who’s in that market and how they reconcile that with whatever routes they got from Vitner’s, but
buying that business from Snak King gives them density and scale in a lot of those accounts that will allow
them to then grow the rest of the Utz portfolio into those accounts. Over time Vitner’s will go away, just like
the Wachusett brand has gone away and was almost exclusively in New England. They are still half a dozen or
so flavours that are still on the shelves, but Utz has replaced the Wachusett brand with its own brand over
time. It’s a good strategy and there is still a lot of the country left where they don’t have the presence that
they’d like to have, and, as a result, they’ll look for acquisitions if they can get them.
There’s a company, for example, called Old Vienna, which is down south of where they are in down state
Illinois, that’s in St Louis, and they have a brand called Riplets, I think, it’s Red Hot, or something like that.
That would be a logical place for them to go. It’s a small acquisition, it’s a tuck under, but that would allow
them to continue to build that western from from Minnesota down to Texas. The problem is after you’re done
with that then you’re a lot of fairly unpopulated states, the Dakotas, Kansas to a degree, Nebraska, Oklahoma
and there’s just not a lot of population density there, except for the major metros, so you have a big gulf to go
over until you get to the Rocky Mountains and then you’ve got Arizona and California to go tackle. California
has its own set of issues, which I can get into if you want, but it’s a fairly wonky set of reasons why California
will be a little challenge for them to penetrate over time.
[00:46:04]
Q: Do you think Utz should continue pursuing salty snack acquisitions? Are there other opportunities it could
consider?
TF: They’re good operators, good manufacturers, and so I think they could figure out just about any
manufacturing process. To me there’s still so much growth left in their core categories in new geographies that
I’d rather see them focus there. That said, if you look at something like crackers, and not many people often
lump cookies and crackers together, Nabisco lumps them together, but I’m not sure I would lump them
together, but, say, Shearer’s, for example, they have a cookie and cracker business, as well as their traditional
salty snack business. That’s a product adjacency that they could bridge out into if they could make an
acquisition. I wouldn’t suggest that they ever go try to build that up, build that from the ground up, because
they’ll get rolled. In that space you’re going to have to go in, you’re going to have to fight Lance, which is
Private and confidential 9
Snyder’s cracker business, you’ve got to fight Nabisco, which has DSD, you’re going to have to go in and fight
Shearer’s, which is doing private label for a lot of players, so it’s not an easy place to go, but they can go there.
They have made several attempts to get into meat snacks, the most recent being with Boulder Canyon. That
hasn’t gone very well, so could they go make a big acquisition in meat snacks? Could they go buy Oberto, or
could they buy Trapper, or could they buy even Jack Link’s? That could be an area that they could get into, but
again, I think the best chance they have is to do what they did with On The Border.
This is my opinion, I haven’t heard anybody there talk about this, but they could go buy a big player and be
done with it. That’s going to cost them a lot of money and they’re currently at the top end of their leverage
range, so they probably would have to do some sort of a stock swap or merger, or something like that, because
I don’t think they can lever up to go do that. The other area they’ve only done contract distribution on, they’ve
never owned it, is nuts, and nuts are tough. Nuts, it’s pretty much a pure commodity. Diamond has done a nice
job on almonds and the like, but again, that’s owned by Snyder’s-Lance, but there’s a company, basically the
company that owns Fisher, which is Sanfilippo, that would be an interesting piece, but again, (1) you’re going
to have to take a huge commodity risk, so you have to have somebody who knows what they’re doing, but (2)
you better come in there with some scale. I saw that Kraft recently sold their Planters business, and so that was
a big one to move. That, obviously, these guys know, was a multi-billion dollar transaction so it would have
been too big for them. There are categories adjacencies they’d get into, but I would suggest that they, or I
wouldn’t suggest, I would guess that they would probably do it more through acquisition or merger than do it
through organically building it up from the ground up.
[00:50:08]
Q: How would you describe innovation at Utz? How could the company drive organic growth, which you
suggested was the best expansion strategy?
TF: You know what? Back to one of the questions earlier. You’d asked about how things changed, or what
were the trends going into COVID and then how did COVID change things. I would say that going into COVID,
from an innovation standpoint, I’d argue that the company, then again, you can just go back and look at the
number of new products and just go check Nielsen or IRI to see how these products did, does not have a great
track record on innovation. You could say cheese balls, which is a huge business for the company right now
and very profitable, that was an innovation. That was somebody who thought of making a cheese curl into a
ball, I don’t know how many years ago, late 1990s I think, and look at where they are now, so there’s absolutely
a role for innovation, but the company has, I think, done not a great job of executing disciplined innovation.
What COVID did was, so I’m going back to one of the impacts of COVID and want to see how they do going
forward, but what COVID did was force them to actually get away from some of the weird flavours and goofy
innovation. The problem with DSD is it actually encourages you to be less disciplined on innovation, because
you, quote, unquote, own 12 or 16 or 20 feet or more in a store, and if your salesperson elects to put a new item
in the store, in a lot of cases they just can go do it. They have to swap out something else and find the space for
it, but they can go do that. That’s much different than if you actually have to sell into a buyer’s headquarters
and then gain distribution through the warehouse channel, because you have to get a slot in the warehouse
and there’s only a limited number of slots in the warehouse, so you’re forced to bring stuff that is going to turn,
or your buyer is not going to let you bring the next one in. I think over time the company got a little bit sloppy
with just throwing lots of innovation out there to see what worked, and as a result, their hit rate and stick rate
wasn’t very good.
When COVID happened they had to go back to, fall back on their fast movers. They had to cut innovation and
smaller volume items. It just requires more changeover, it requires more just disruption in the supply chain,
and so they had to fall back on their fast movers and fast-moving flavours. Now the company finds itself under
there’s new ownership, there are new disciplines, I should say, with the SPAC having taken the company out
public. You are a public company you have to answer public company questions about how did these new
items work. For example, they put out a deck, a Powerpoint deck that showed what some of their innovation
was going to be, I think, for 2021. I’m just looking at the page now. The only thing they bought was the filled
pretzel capacity from Conagra as well, so we’re going to do a barrel of peanut butter-filled pretzel bites. There
are these twisted pretzels, there are some pourables, which is an on-the-go convenience thing, some different
Private and confidential 10
coated things, but I would not call that exciting innovation. I don’t know how they came up with those ideas. I
haven’t been around for over a year so I don’t know what they’re basing those insights on, but you’ve got to
base it on some sort of consumer insight testing and stage-gate process. I just don’t know how those new
things, new products are going to fare. Only time will tell.
[00:55:22]
Q: What is your outlook for Utz’s brands over the next six months? What do you imagine as the company’s
best- and worst-case scenarios? How do you assess its ability to execute on priorities and fulfil its goals as a
public company? Is it susceptible to the lacking quality and innovation you mentioned?
TF: The thing is their ability to grow organically, as I mentioned earlier, I don’t think it’s tied to innovation.
There’s a lot of execution around geographic expansion and penetration. There are big customers out there
where they really don’t have meaningful positions in a lot of the divisions of big grocery, customers mass.
They’re in Walmart, they’re in Target, you don’t have to much more in mass. They can continue to penetrate
club, although at the cost of margin, but from a traditional grocery standpoint, there’s a lot of growth they can
execute there in both their core and their new markets. They can do that without any of this innovation
catching on. If some of the innovation catches on too then that’s great. There are a number of different ways
they can do that. We didn’t spend a whole lot of time talking about productivity initiatives and the like. Can
they deliver on? They’ve made some fairly big claims. As I mentioned earlier, they’re good operators already,
so they’ve made some fairly big claims about improving productivity to keep up with inflation. They have to
execute on that, so I think their challenges are more around execution in their base business than around
innovation, but now this is when the going gets tough.
A really nice way for them to enter the public markets was having a huge COVID tailwind, because they came
in on a growth tear, had a couple of good acquisitions, and did all that stuff in the first six months, and the
stock has rewarded them. It’s gone from, what, 12, when it was first announced, to 25, it’s doubled, so that’s all
been great. Now they have to go through a year where they have to last that COVID bump, they have to operate
as a publicly traded entity and make all these changes in the light of the public market, which is pretty
unforgiving, and you have a team there, a leadership team, with the exception of Deromedi, as the chairman,
who hasn’t done it before, they’re not public company seasoned people, so it’s anybody’s case. I’m not going to
make a prediction, a number prediction on earnings growth or anything like that. I will just say that those are
the qualitative challenges that the team is facing and we’ll have to see. I also know though that they’re just a
conservative group, they’re not going to go out there and put numbers out that they don’t have a way of
hitting. It doesn’t mean they’re guaranteed to hit the numbers that they put out there, but they’re not going to
go out there and put out big stretchy numbers that are going to be a real challenge.
[00:59:26]
NH: Thomas, I think that is a great place to conclude the Interview. Let me close by saying thank you for your
input, and thank you, clients, for joining Third Bridge Forum’s Interview today. If anyone would like to speak
with Thomas in a private call or meeting, please let your relationship manager know. Thomas, thanks again.
TF: Thank you.
Transcription ends at 00:59:44 of the recorded material
Private and confidential 11