Item 1. Business
Item 1. Business
Unless the context otherwise requires, all references in this subsection to the “Company,” “we,” “us” or "our” refer to Utz Brands, Inc. and its consolidated subsidiaries following the Business Combination, other than certain historical information which refers to the business of UBH and its consolidated subsidiaries prior to the consummation of the Business Combination. Our core geographies consist of Alabama, Connecticut, Delaware, Louisiana, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia, West Virginia, Washington, and Washington D.C. (our “Core Geographies”). Our Expansion geographies consist of Arkansas, Colorado, Georgia, Illinois, Mississippi, North Carolina, Ohio, South Carolina, Tennessee, and Vermont (our “Expansion Geographies”). Our Emerging geographies consist of Alaska, Arizona, California, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Wisconsin, and Wyoming (our "Emerging Geographies”).
Overview
We are a leading United States manufacturer of branded salty snacks. We produce a broad offering of salty snacks, including potato chips, tortilla chips, pretzels, cheese snacks, pork skins, veggie snacks, pub/party mixes, and other snacks. Our iconic portfolio of authentic, craft, and “better-for-you” (“BFY”) brands, which includes Utz, Zapp’s, On The Border, Golden Flake, Good Health and Boulder Canyon , among others, enjoys strong household penetration in the United States, where our products can be found in approximately half of U.S. households as of January 1, 2023. We are the second-largest producer of branded salty snacks in our Core Geographies as of January 1, 2023, based on retail sales and we have historically expanded our geographic/distribution reach and product portfolio organically and through acquisitions. Our company was founded in 1921 in Hanover, Pennsylvania, and benefits from more than 100 years of brand awareness and heritage in the salty snacks industry.
As of January 1, 2023, we operate 16 manufacturing facilities with a broad range of capabilities, and our products are distributed nationally to grocery, mass, club, convenience, drug and other retailers through direct shipments, distributors, and approximately 2,100 direct store delivery (“DSD”) routes.
Our business benefits from multiple opportunities to deliver attractive long-term profitable growth. Our value creation strategies are focused on driving productivity to enhance margins, reinvesting in marketing and innovation to accelerate revenue growth and continuing to make strategic acquisitions. We believe we are well-positioned for long-term growth as we (a) gained a significant amount of new buyers during 2020 and have continued to add even more buyers through 2022, (b) have significant opportunity in our Emerging and Expansion Geographies and under-penetrated channels, (c) continue to execute productivity efforts that will help to fuel incremental marketing and innovation to accelerate growth in sales, (d) continue to make infrastructure improvements to enable us to continue to scale to greater heights, and (e) continue to make strategic acquisitions that deliver strong synergies and that enhance our competitive positioning. We believe each of these growth avenues represents a sizeable opportunity to expand our Net Sales. In addition, we further anticipate expanding our margins over the long term through supply chain productivity, revenue management, a higher-margin product mix, and higher margins on incremental sales as we leverage our scalable existing platform.
Recent Developments
Chief Executive Officer and Board Leadership Transition. Effective December 15, 2022, our Board of Directors (the “Company Board”) appointed Howard A. Friedman as Chief Executive Officer of the Company and appointed Mr. Friedman as a Class I director on the Company Board (the “CEO Commencement Date”). Prior to joining the Company, Mr. Friedman served as Executive Vice President and Chief Operations Officer of Post Holdings, Inc., a consumer packaged goods holding company, from September 2021 to December 2022. Previously, Mr. Friedman served as President and Chief Executive Officer, Post Consumer Brands from July 2018 to September 2021. Prior to joining Post, Mr. Friedman served as the Executive Vice President and President of the refrigerated meat and dairy business at The Kraft Heinz Company, a global food and beverage company, where he spent the majority of his more than twenty-year career. Mr. Friedman received a Bachelor of Arts in economics from Dickinson College and a Master of Business Administration from the Stern School of Business at New York University.
In connection with the appointment of Mr. Friedman to the office of Chief Executive Officer, Dylan B. Lissette, transitioned from his role as Chief Executive Officer of the Company to the role of Executive Chairman. Mr. Lissette will serve in the role of Executive Chairman until the second quarter of 2023, when he will transition to the role of non-executive Chairman of the Board. On the CEO Commencement Date, Roger K. Deromedi retired as Chairman of the Board and was elected Lead Director.
7
Effects of COVID-19. The novel coronavirus (“COVID-19”), outbreak began impacting consumption, distribution and production of our products in March 2020. After initial increases in demand in fiscal year 2020, we experienced more modest growth in fiscal year 2021, as reflected by a compound annual growth rate (“CAGR”) for the 52-week period ended December 27, 2020 and January 2, 2022 of 15.1% and 1.7%, respectively, based on U.S. retail sales for salty snacks based on data from Information Resources, Inc. (“IRI”). As restrictions imposed in response eased in fiscal year 2022, our 52-week CAGR was 16.6% for the 52-week period ended January 1, 2023, based on U.S. retail sales for salty snacks based on IRI data driven by pricing actions and new distribution.
During period in which restrictions imposed in response to COVID-19 have been in place, generally, producers of food products, including salty snacks, have been deemed “essential industries” by federal, state, and local governments and are exempt from certain COVID-19-related restrictions on business operations. Notwithstanding that our operations are exempt from certain restrictions, we have taken preventive actions and implemented additional measures to protect our associates that work on site. Our strategic manufacturing capabilities and DSD distribution network have allowed us to effectively service increases in demand and be responsive to evolving market dynamics driven by changes in consumer behavior.
We continue to monitor customer and consumer demands, and intend to adapt our plans as needed to continue to meet these demands.
Recent Acquisitions and Vertical Integrations
On February 8, 2021, the Company closed on a definitive agreement with Snak-King Corp. to acquire certain assets of the C.J. Vitner's business, a leading brand of salty snacks in the Chicago, Illinois area. The acquisition increases our distribution in the Chicago area and Midwest Region and expands our product offering. The Company paid the aggregate cash purchase price of approximately $25.2 million which was funded from current cash-on-hand.
On May 11, 2021, the Company announced that its subsidiary, Utz Quality Foods, LLC ("UQF”) entered into a definitive agreement with Great Lakes Festida Holdings, Inc. to acquire all assets including real estate located in Grand Rapids, Michigan related to the operations of Festida Foods ("Festida Foods acquisition" or "acquisition of Festida Foods"), a manufacturer of tortilla chips, corn chips, and pellet snacks, and the largest manufacturer of tortilla chips for the Company's ON THE BORDER® brand. The Company closed this transaction on June 7, 2021 and the purchase price of approximately $40.3 million was funded in part from incremental financing on an existing term loan.
On November 2, 2021, the Company announced that its subsidiaries, entered into a definitive agreement to acquire R.W. Garcia Holdings, LLC and its' wholly-owned subsidiary R.W. Garcia Co., Inc. ("RW Garcia"), an artisan maker of high-quality organic tortilla chips, crackers, and corn chips ("RW Garcia acquisition"). At the closing of the RW Garcia acquisition on December 6, 2021, the Company paid the purchase price of approximately $57.9 million which was funded in part from a draw on the Company's line of credit and cash on hand. In addition to the RW Garcia acquisition on December 6, 2021, the Company closed on an acquisition of a manufacturing facility of which RW Garcia was a tenant. The cost of the manufacturing facility was approximately $6.0 million.
During fiscal year 2022 the Company focused on increasing manufacturing and streamlining distribution. In April 2022, the Company purchased a brand new, recently completed snack food manufacturing facility in Kings Mountain, North Carolina from Evans Food Group Ltd. d/b/a Benestar Brands and related affiliates. The Company paid the full cash purchase price of $38.4 million at the closing and concurrently with the facility purchase, the Company sold 2.1 million shares of the Company’s Class A Common Stock for $28.0 million, to affiliates of Benestar in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933. During fiscal year 2022, the Company bought out and terminated the contracts of multiple distributors who had previously been providing services to the Company. These transactions were accounted for as contract terminations and asset purchases and resulted in expense of $23.0 million for the 52 weeks ended January 1, 2023.
Brands
Our business is managed and reported in one operating segment. However, we actively manage our portfolio of brands by strategically segregating our sole operating segment into Power Brands and Foundation Brands. Power Brands, in aggregate, enjoy a combination of higher growth and margins, greater potential for value-added innovation, and enhanced responsiveness to consumer marketing as compared to Foundation Brands. As a result, we focus our investment spending and brand-building activities on Power Brands while managing Foundation Brands for cash flow generation to support investment in Power Brands and fund other corporate priorities.
Our Power Brands are comprised of our iconic heritage Utz brand and iconic On The Border® brand; craft brands such as Zapp’s ®, Golden Flake ® Pork Skins, TORTIYAHS!, and Hawaiian ®; BFY brands such as Good Health ® and Boulder Canyon ®; and selected licensed brands such as TGI Fridays ®.
8
Our flagship Utz brand generated retail sales in excess of $807 million in 2022, representing an approximate 10.3% CAGR (during 2019 through 2022) and making it one of the 10 largest salty snack brands in the United States by retail sales as of January 1, 2023. Recognized for its iconic logo featuring the “Little Utz Girl” since the 1920s, the Utz brand currently use the slogan "Family Crafted Flavor Since 1921”. We sell a variety of salty snacks under the Utz brand, including potato chips, pretzels, cheese snacks, pub/party mixes, and others.
Our On The Border brand ("OTB"), which was acquired in December 2020, is a national brand of tortilla chips, salsa and queso. OTB is the #2 unflavored tortilla chip brand as of January 1, 2023. Additionally, the acquisition of OTB strengthens our national geographic footprint in our Expansion Geographies and Emerging Geographies and enhances our presence in the Mass and Club retail channels.
Our Good Health and Boulder Canyon Power Brands anchor our position in the BFY category of salty snacking, which has been a high-growth category in recent years. Good Health , which we acquired in 2014, is positioned well with fun forms and flavors that appeal to the whole family. Boulder Canyon offers a line of premium BFY potato chips, including those made with olive or avocado oils. In the Natural channel as defined by SPINS, LLC, Boulder Canyon is the #2 potato chip brand, growing 23% within the channel in 2022 and its “Canyon Cut” rippled avocado oil-based chip is the #1 selling potato chip item as of January 1, 2023.
Our Power Brands also include a number of our authentic craft brands including Zapp’s, Hawaiian , and Golden Flake pork skins. For example, Zapp’s , which we acquired in 2011, offers a line of premium kettle-cooked potato chips with bold, authentic flavors steeped in its New Orleans roots, including “Voodoo,” “Hotter ‘N’ Hot Jalapeño,” “Spicy Cajun Crawtators,” and "Cajun Dill Gator-tators,” among others. Hawaiian is a premium kettle chip brand that evokes the feel of the Pacific islands, with exotic flavors like “Sweet Maui Onion,” "Luau BBQ,” "Mango Habanero,” and "Hulapeño.” Our Golden Flake brand, a part of Southern culture since 1923, has a full line of Southern-style pork skins with flavors like “Louisiana Hot Sauce” and "Sweet Heat Barbecue,” which offer great taste and crunch with low carbohydrates.
Our Foundation Brands include strong regional snacking brands, such as Bachman ®, Golden Flake ® Chips and Cheese, Tim’s Cascade ® Snacks , Snyder of Berlin ®, " Dirty" Potato Chips®, and R.W. Garcia®, as well as other partner and private label brands. We have historically utilized the strong regional positions and relevance of our Foundation Brands to drive increased distribution for our Power Brands.
Products
We produce a broad range of salty snack foods, including potato chips, tortilla chips, pretzels, cheese snacks, veggie snacks, pub/party mixes, pork skins, ready-to-eat popcorn, and other snacks. Our products are packaged in a variety of different sizes and configurations, ranging from individual packages to shareable bulk containers. We also sell certain third-party branded products through our distribution network.
We believe our ability to produce a wide range of products differentiates us from some of our competitors whose businesses focus on a particular product type because our broad product assortment enables us to gain greater distribution and shelf space with our customers. Our in-house production capabilities across a range of products also enable us to rapidly respond to evolving consumer needs and preferences and to better create new innovative products to delight consumers. We also believe that our diversified product portfolio results in more predictable and stable financial performance as we are not overly exposed to only one product sub-category.
9
Product Innovation
New product innovation is critical in the salty snacks category because consumers both enjoy long-time favorites and like to experiment with new forms, flavors, textures, and ingredients. In particular, our brands have strong competitive positions across an assortment of popular salty snacks, including potato chips, tortilla chips, pretzels, cheese snacks, pub/party mixes, veggie snacks, and pork skins. Over the past several years, we have focused on strengthening our presence in certain salty snack sub-categories that we believe are highly synergistic to our existing business. In particular, Utz Peanut Butter Filled Pretzel Bites is proving to be a large and sustaining offering, with strong velocities and repeat rates. Utz Peanut Butter Filled Pretzel Bites is the #1 branded peanut butter filled pretzel item at retail as of January 1, 2023, based on IRI Data. The Utz brand also delivered flavor innovation on its core potato chips line with a very successful partnership with Grillo’s Pickles. Joining the two brands created a delicious limited time offering that is having success in all channels, including Club. On The Border Chips and Dips extended their famous Café Style tortilla chip into the seasoned tortilla chip category. The On The Border Flavored Chips line is rooted in Mexican culinary flavor profiles including salsa, queso and jalapeno ranch, with limited time only flavors expected to launch in the Club channel in 2023. Zapp’s recently commenced its offering of flavored pretzels with the launch of Zapp’s Sinfully Seasoned pretzels in two flavors; Voodoo and Jazzy Honey Mustard. Seeing category leading repeat purchase rates in the 16 and 20 week launch data implies that they have been well received by customers and consumers as of January 1, 2023, based on IRI Data. Utz also added a new flavor to its iconic Cheese Balls business with "Red Hot Cheddar”. In the BFY space Utz continues to innovate. “Good Health ABC Bites” is a fun new letter-shaped snack that we expanded into multipack and seasonal offerings for a fun and educational treat for every occasion. Boulder Canyon known for BFY oils, such as avocado oil, partnered with Yellowbird Hot Sauce for its second flavor limited-time offering under the Boulder Batch line, bringing spice to a new level.
Given our long-standing customer relationships, broad production capabilities, and scalable distribution platform, we plan to continue expanding our presence in certain salty snack sub-categories that we believe are highly synergistic to our existing business. We intend to expand our presence in key salty snack sub-categories through a combination of line extensions of our existing brands, new brand introductions, licensing partnerships with established brands, and/or acquisitions. We believe our expanded presence across key salty snack sub-categories would enhance our competitive position with customers and would be highly synergistic given our ability to leverage our existing manufacturing and distribution infrastructure.
As such, the level of new product innovation and the speed to market with these innovations are critical components of our business. Our innovation process begins with our marketing team, which understands our brands and consumers, and works collaboratively with our research & development and innovation leaders to identify new product opportunities that best suit our brand positions. We develop insights about unsatisfied consumer needs using our market research capabilities, and we track competitive product introductions to ensure appropriate responses. We also collaborate with third-party seasoning and flavor houses to understand the latest trends in consumer flavors and emerging consumer flavor preferences. Going forward, we intend to increase our investments in market research and other resources to generate more consumer insights and new product innovations.
We also utilize our flexible manufacturing and distribution platform to streamline the new product innovation process from idea conception through development and commercialization to market. The strategic location of our primary corporate office adjacent to our largest manufacturing plants facilitates strong coordination between our marketing, sales, research & development, and manufacturing professionals, leveraging the innovation experience of senior management and our in-house innovation leaders. Our broad in-house manufacturing capabilities across different product forms and packaging allow us to develop and commercialize new products quickly, and we have the manufacturing flexibility to handle many types of ingredients, including on-trend BFY oils such as avocado and olive. Our DSD distribution system allows us to efficiently experiment with new products at retail stores driven by the ability to quickly place new items and collect immediate feedback on sell-through trends. Finally, given the importance of in-store presence, we have a dedicated graphics team that is able to quickly develop and implement new packaging designs, impactful point-of-sale materials, and retail-ready displays.
10
Marketing, Advertising, and Consumer Engagement
Our marketing strategy is focused on driving stronger consumer pull for, and building brand equity of, our Power Brands. We conduct marketing efforts through three principal sets of activities: (i) consumer marketing and advertising, including digital and eCommerce, social media, sponsorships, and other consumer promotions; (ii) consumer sales incentives including coupons and rebates; and (iii) trade promotions to support features, displays and other merchandising of our products by our customers. Historically we have relied more heavily on sponsorships, trade promotions, and in-store merchandising for consumer engagement; however, we are making shifts of spending into more consumer awareness and brand-building advertising. In fiscal year 2022, we spent approximately $9.9 million related to consumer marketing and advertising expenses. Consistent with our value creation strategies, we intend to continue to increase our investments in digital and social consumer marketing and advertising focused on our Power Brands as well as continue to allocate our current mix of media spending toward activities with the highest return on investment. We will continue to expand our investments in digital and social media, including as part of our strategy to grow our eCommerce and retailer marketing investments. We believe these marketing strategies will drive long term Net Sales growth by increasing brand equity, supporting geographic expansion.
Customers
In fiscal year 2022, our top 10 customers, all of which are retailers, represented approximately 40% of our invoiced sales, and no customer accounted for more than 15% of our invoiced sales in fiscal year 2022. Although orders are processed through purchase orders, as opposed to volume commitments, we have historically benefited from long-term relationships with our key customers, having a sales relationship for more than 20 years on average across our top 15 retail customers.
International
Substantially all of our invoiced sales occurred in the United States in fiscal year 2022, and we are focused on growing our business in the United States. Since substantially all of our business is in the United States, we believe we have more limited exposure to global economic conditions and foreign exchange fluctuations than companies with more substantial international sales and operations.
Competition
Our products primarily compete with other salty snacks but also compete more broadly for certain eating occasions with other snack foods. We believe that the principal competitive factors in the salty snacks industry include taste, convenience, product variety, product quality, price, nutrition, consumer brand awareness, media and promotional activities, in-store merchandising execution, customer service, cost-efficient distribution, and access to retailer shelf space. We believe we compete effectively with respect to each of these factors.
The salty snacking industry is competitive and includes a number of diverse participants. Our identified competitors include PepsiCo (Frito Lay), Campbell’s (Snyder’s-Lance), Kellogg’s (Pringles), General Mills, Grupo Bimbo, Hershey’s, Hain Celestial, and Arca Continental (Wise), among others. Our products also compete with private label or retailer-branded salty snacks. However, private label represented only approximately 4.5% of category retail sales for the 52 weeks ended January 1, 2023, which has been about flat compared to its share of retail sales since 2016.
Historically, the salty snacks category has benefited from favorable competitive dynamics, including low private label penetration and category leaders who compete primarily via marketing and innovation.
Importantly, as of January 1, 2023, we are the #2 brand platform in our Core Geographies, representing nearly 8% of total salty snacks category retail sales based on IRI data. As of January 1, 2023, in our Core Geographies, we have the #2 position in pork skins and in pretzels with 18% and 16% of sub-category retail sales, respectively. We have the #3 position in potato chips, cheese snacks and tortilla chips with 12%, 7% and 4% of sub-category retail sales, respectively. As of January 1, 2023, we hold the #3 company position with in tortilla chips, with a 4% share, primarily driven by sales of our OTB-branded tortilla chips. We believe we have a strong and defensible position in our Core Geographies with a significant opportunity to enhance our national position by expanding sales in Expansion Geographies (where we represent 3.6% of category retail sales) and Emerging Geographies (where we represent 2.3% of category retail sales).
Notably, in 2022, approximately $2.6 billion of salty snack retail sales were generated by approximately 1,300 smaller competitors, each with retail sales of less than $200 million. We believe this fragmented group of smaller brands provides an attractive opportunity for us to expand our retail sales by either acquiring or displacing smaller regional or product-specific competitors.
11
Supply Chain
Sourcing. The principal ingredients used to manufacture our products include potatoes, oil, flour, wheat, corn, cheese, spices, and seasonings. Our primary packaging materials include flexible films and rigid containers, such as barrels, lids, cartons, and trays. All of our core ingredients are purchased according to rigorous standards to assure food quality and safety. Our principal ingredients are generally available from multiple suppliers, but became more difficult to source beginning in 2021 and continuing into 2022 due to ongoing supply chain constraints. We do not source any of our top 10 inputs under any single-source arrangements. As such, we have been able to make satisfactory alternative arrangements in the event of this interruption of supply from our vendors. No single category of raw material purchases represented more than 15% of our Cost of Goods Sold in fiscal year 2022. In addition to raw materials, we source energy and liquid fuels for our manufacturing facilities and in-house distribution assets.
We utilize various buying strategies to mitigate the impact of changes in input prices, including fixed-price forward purchases as well as commodity hedging arrangements with third parties (particularly for energy, vegetable oils, wheat, and corn). A number of external factors such as weather, commodity markets, and governmental or agricultural programs can affect the cost of raw materials used in our products. To provide greater visibility, we typically look to enter into pricing arrangements covering a meaningful portion of our forecast purchases over the next 3 to 18 months. As of February 1, 2023, we believe we have entered into pricing arrangements covering over 45% of our budgeted raw material needs in fiscal year 2023.
Manufacturing. We manufacture our products primarily through 16 company-operated manufacturing facilities across the United States. These include four legacy Utz facilities and twelve facilities that were added over the last ten years from acquisitions (for more details see Item 2 “Properties” in this Annual Report on Form 10-K for more details). Our facilities had the capacity to produce approximately 500 million pounds of salty snacks annually in 2022 based on management’s estimate of available capacity, excluding weekly sanitation, over a seven-day work schedule, providing us with significant available capacity to accommodate increased sales. We believe this available capacity across our manufacturing footprint will enable us to leverage existing fixed costs to generate higher margins on incremental organic sales or acquired brands as well as generate potential future cost savings through consolidating our manufacturing footprint. Our manufacturing facilities are well-maintained, and we have a program to ensure appropriate maintenance capital expenditures are undertaken. We also utilize several co-manufacturers for certain products, with the most significant being our OTB branded tortilla chips as well as branded salsa and queso. During fiscal 2022, we began investing in talent and process improvements, associated with standing up our Integrated Business Management ("IBM") process, which uses supply and demand planning to optimize manufacturing and other supply chain and logistics processes.
Distribution. We offer national distribution of our products through our flexible, hard-to-replicate distribution system that combines direct-to-warehouse, direct-to-store, distributor, and direct-to-consumer capabilities. We believe this hybrid system, which we have built and enhanced over nearly a century, offers us flexibility to cost-effectively distribute our products to a wide range of retail locations where salty snacks are sold. Additionally, we believe our distribution system is highly scalable, resulting in the ability to drive higher margins on incremental revenues and enabling us to realize significant cost savings when integrating acquired brands onto our established platform.
We have historically expanded the geographic reach of our distribution network from our Core Geographies, where we benefit from strong brand awareness and heritage to our Expansion and Emerging Geographies, where we have expanded both organically and through acquisitions. During the 52 weeks ended January 2, 2022, we were able to expand our market share in our Core Geographies and our Emerging Geographies, led by significant market share gains in our grocery channel according to IRI data of U.S. retail sales in the salty snacks category. We plan to continue to expand our distribution and sales of Power Brands in these geographies, supported by our increased brand investments, expansion of our direct-to-customer and DSD distribution capabilities, and potentially through strategic acquisitions.
Direct-to-Warehouse : For a number of our customers, we either ship products directly from our facilities to their distribution centers or allow them to pick-up products directly from our facilities. These customers are then responsible for fulfilling shipments to their own retail stores. The DTW model is often preferred by some of our national mass, club, and grocery customers that have sufficient scale and capabilities to efficiently manage distribution and replenishment for their own retail stores.
12
Direct-Store-Delivery: We believe we are one of only four scale U.S. salty snack providers with extensive DSD capabilities. Within our DSD system, either independent operators (“IOs”) or Utz-employed route sales professionals (“RSPs”) pick up products from our manufacturing facilities, distribution centers, storage facilities, or small bins and distribute and sell these products to retail stores within a geographic territory. Our DSD system is utilized by both large and small customers, and we believe it provides us a competitive advantage in expanding distribution, increasing shelf space, executing in-store merchandising activities, and ensuring products are fresh and available wherever consumers shop. Our DSD network included approximately 2,100 individual routes reaching over 83,500 retail stores in 2022. Our DSD routes are managed by a combination of approximately 2,000 IOs, covering approximately 93% of our routes, and approximately 140 RSPs, covering approximately 7% of our routes as of January 1, 2023. Over the last several years, we have converted from a predominately company-owned RSP model toward the use of third-party IOs. We believe this transition benefits us by creating motivated independent owner-operators and a more variable cost structure for our company. We expect to continue working on our ongoing transition from RSPs toward IOs in 2023 (See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Utz Brands Holdings — Recent Developments and Significant Items Affecting Comparability — Independent Operator Conversions ” for more details).
Third Party Distributors: We also use third-party distributors in certain regions where their capabilities enhance the cost effectiveness and reach of our overall distribution system. For third-party distributors, we either ship products directly from our facilities to their distribution centers or allow them to pick up products directly from our facilities. The distributors are then responsible for selling our products to our customers and ensuring optimal retail presence within the stores they serve, utilizing both DTW and DSD capabilities. Our third-party distributors operated an additional approximately 623 DSD-style routes, reaching over 16,000 retail stores.
Direct-to-Consumer: We also distribute our products directly to consumers. Our direct-to-consumer shipments primarily originate from orders received via our company website (www.utzsnacks.com) or select third party retailer sites, including Amazon and Sam’s Club, which extend our reach to virtually every household in America. Our direct-to-consumer shipments are delivered from our central warehouse facility to consumers using FedEx, U.S. Postal Service, or other third-party carriers. E-Commerce represented approximately 6.6% of our retail sales in fiscal year 2022 and is an accelerating part of our business, with the channel having grown significantly since 2019.
Food Safety and Quality. Food safety and quality are top priorities and we dedicate substantial resources to ensure that consumers receive consistently safe and high-quality food products. Our products are manufactured in facilities that have programs and controls in place regarding consistent quality and food safety. These comprehensive programs include Safe Quality Food (SQF) certifications and Good Manufacturing Practices (GMPs) that are designed to produce a safe, wholesome product. Our suppliers are required to have similarly robust processes in place and confirm their compliance for shipments of all ingredients to be used in our products. Finally, in addition to real-time product testing during production, we frequently monitor product attributes including taste, aroma, texture, and appearance, and random samples of finished goods are regularly sent to third-party laboratories for testing and verification.
Human Capital
Supporting our people is a foundational value for Utz. We believe our success depends on our ability to attract, develop, and retain key personnel whose skills, experience and industry knowledge benefit our operations and performance. Our Board, Board committees, and management oversee various associate initiatives including compensation and benefits programs, succession planning, leadership development, diversity and inclusion.
Utz aims to both attract and retain a qualified workforce through an inclusive and accessible recruiting process and online platform, as well as by offering competitive wages, benefits, and training opportunities. We also support and develop our associates through company-wide training and development programs intended to build and strengthen associates’ leadership and professional skills.
Diversity, Equity and Inclusion
Utz recognizes that it is vital for our performance as a world-class company to demonstrate dignity and respect in the workplace for all associates. By embracing the diverse perspectives and backgrounds of our associates, we strive to ensure that we have a workplace where every associate feels that they are valued and that they can contribute not only to our success, but their success, as well.
To foster a work environment that values all people, Utz partnered with a nationally recognized consulting firm to help develop a comprehensive diversity, equity, and inclusion strategy, which includes various aspects of human capital management, including recruiting, training, and leadership development.
13
As of our latest ESG report, our associate demographics in the U.S. (based on self-reported data from our associates) were:
Health and Safety
The safety of our team members is a top priority. We strive to provide a safe working environment by having policies, procedures, and training programs in place to ensure that our associates understand and meet safety guidelines. Utz and our associates are dedicated to providing a safe environment by continuously improving our Safety Culture and Performance through commitment, investment, and training.
• Associate engagement: Leading indicators are used to both encourage and measure regular safety related activities throughout the organization;
• Training: Safety training relevant to each work group’s operation is distributed throughout the organization monthly, quarterly and/or annually;
• Compliance: Regular audits in various formats are used to review and ensure compliance with applicable agency regulations; and
• Performance metrics: Traditional OSHA metrics are maintained on a quarterly and annual basis to measure actual performance and help identify continuous improvement opportunities.
14
Total Rewards
We have a demonstrated history of investing in our workforce by providing competitive wages and benefits. Our benefits package includes:
• Comprehensive health insurance coverage to associates working 30 hours or more each week;
• Parental leave to all new parents for birth, adoption or foster placement;
• Short term disability to provide partial wage protection for up to 13 weeks;
• Employee Stock Purchase Plan;
• Wellness and disease management programs, health advocacy partner, and associates assistance programs;
• Health & Wellness Center – free to all Hanover-based associates and dependents covered under the health plan; and
• 401(k) plan with generous company match and profit sharing.
Employee Headcount
As of January 1, 2023, we employed approximately 3,550 full-time associates and 250 part-time associates.
Over the last several years, we have meaningfully reduced our number of full-time associates and our selling, distribution and administrative expenses through our business transformation initiatives, particularly our DSD shift from RSPs to IOs and the associated restructuring of our sales management and corporate organization structure (see “— Supply Chain — Distribution” and "Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of Utz Brands Holdings — Recent Developments and Significant Items Affecting Comparability —Independent Operator Conversions ” for more information). We expect to continue working on our ongoing transition from RSPs toward IOs in 2023. Additionally, we historically have reduced associate count and operating expenses in relation to integration initiatives associated with our acquisitions.
Sustainability
We recognize the importance of Environmental, Social and Governance ("ESG") issues for all stakeholders. As a newly public company, we are in the early stages of building our ESG strategy and are using leading ESG and sustainability frameworks and guiding principles, such as the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD) and the U.N. Sustainable Development Goals (SDGs), as well as stakeholder engagement to inform our ESG program. We recognize our responsibility to uphold the Company’s founding values, which for more than 100 years, have centered on working ethically, responsibly, and with integrity to benefit all of our stakeholders. We consistently look for ways to make a positive difference for our associates, customers and in the communities in which we operate. By collaborating with stakeholders, including associates, consumers, business partners, suppliers, stockholders and customers, we are taking the necessary steps to become a more sustainable company. We believe that in our stakeholders’ best interests, we place safety-focused, sustainability-minded, and transparent best practices at the heart of our operations. With this stakeholder framework, in 2020 we formed Utz’s inaugural ESG Committee, composed of subject matter experts from across our operations, including facilities management, packaging innovation, human resources, corporate governance, legal affairs, and communications.
We released our inaugural 2021 Environment, Social, and Governance (ESG) Report in July 2022, which outlines Utz’s strategic priorities for ESG matters and the continued growth of our sustainability program. To learn more about our sustainability goals, progress and initiatives, access the ESG Report by clicking “ESG” on our Investor Relations website at www.investors.utzsnacks.com. See “Available Information” below for additional information regarding our website.
Intellectual Property
We own numerous domestic and foreign trademarks and other proprietary rights that are important to our business. These include the U.S. trademark registrations, which protect certain rights in the following brands: Utz, ON THE BORDER, Zapp’s, Golden Flake, Good Health, Boulder Canyon, Hawaiian, TORTIYAHS!, Tim’s Cascade, Snyder of Berlin, “Dirty”, Kitchen Cooked, Bachman , Jax , and R.W. Garcia , among others. Depending upon the jurisdiction, trademarks are valid as long as they are used in the regular course of trade and/or their registrations are properly maintained.
We also maintain rights to the domain names www.utzsnacks.com and www.getutz.com, among others.
15
We believe the protection of our intellectual property, particularly our trademarks, trade dress, trade secrets, copyrights and domain names, is important to our success. We aggressively protect our intellectual property rights by, among other methods, relying on a combination of watch services and enforcement under intellectual property laws and/or through the domain name dispute resolution system.
In addition, from time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We take proactive measures in attempts to avoid infringement of third party marks by conducting trademark clearance searches and taking other industry standard measures. However, this does not prevent third parties from asserting claims against us. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. The results of any current or future litigation cannot be predicted with certainty and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. See “ Risk Factors — Potential liabilities and costs from litigation, claims, legal or regulatory proceedings, inquiries or investigations can have an adverse impact on our business, financial condition or results of operations. ” Moreover, future litigation may be necessary to defend ourselves, our partners, and our customers by determining the scope, enforceability, and validity of third-party proprietary rights or to establish our proprietary rights.
We also license certain third-party brand names for use on our products, including the TGI Friday’s, HeluvaGood, Grillo’s Pickles, Yellowbird, and Mike's Hot Honey. We use these trademarks in connection with production and distribution of snack products to be sold under the trademarked labels. Under some of the agreements governing our use of such trademarks, we are required to make guaranteed annual royalty payments. Sales under our trademark licensing agreements represent approximately 2.3% of our 2022 invoice sales.
In addition, we license certain of our owned brands, including Utz, for use by third parties in certain food categories (such as frozen foods), however these arrangements do not materially impact our financial position. Finally, we have historically engaged in certain cross-marketing and/or promotional activities with third parties, thereby increasing the visibility of our brands.
Seasonality
Although the demand for our products is relatively stable throughout the year as compared to other consumer goods, we have experienced in the past, and expect to continue to experience, seasonal fluctuations in our retail sales as a result of consumer and customer spending patterns. Historically, the months of April to September, as well as December have resulted in higher retail sales than average due to increased consumer demand during the spring and summer months and holiday season, as well as significant retailer merchandising and promotions around those times. Additionally, we have historically generated seasonal cash flow from decreases in working capital levels in the fourth quarter and invested cash flow in working capital increases in the first quarter. We expect these historical trends to continue in the future.
Government Regulation and Compliance
We are subject to various laws and regulations in the United States by federal, state and local government authorities. In the United States, the federal agencies governing the manufacture, distribution and advertising of our products include, among others, the Federal Trade Commission (“FTC”); the U.S. Food and Drug Administration (“FDA”); the United States Department of Agriculture (“USDA”); the U.S. Environmental Protection Agency ("EPA"); and the Occupational Safety and Health Administration ("OSHA") and similar state and local agencies. Under various statutes, these agencies, among other things, prescribe the requirements and establish the standards for quality and safety and regulate marketing and advertising to consumers.
We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our distributors and suppliers, also are subject to various laws and regulations relating to environmental protection and worker health and safety matters. We monitor these regulatory requirements and our compliance on a regular basis.
16
Available Information
Our website is www.utzsnacks.com . The information found on, or that can be accessed from or that is hyperlinked to, our website is not part of this Annual Report on Form 10-K. We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may obtain a copy of any of these reports, free of charge, from the Investors Relations section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that also contains these reports at: www.sec.gov. In addition, copies of the Company's annual report will be made available, free of charge, on written request to the Company.