Inflation headwinds reset Q2 bar (UTZ)
Utz Brands reported Q2 EPS of $.13, a penny lower than consensus expectations. Net sales grew 23%, above consensus expectations. Acquisitions added 24.2% to the top line while price/mix added 2.3% while volumes contracted 3%. Gross margins contracted 200bps due to inflationary cost pressures. Adjusted EBITDA margins contracted 150bps with acquisitions adding 180bps, price/mix added 160bps, productivity adding 50bps, and SG&A excluding transportation adding 10bps while lower volumes subtracted 130bps, and inflation subtracted 420bps.
The company now expects commodity inflation to be +6%, up from 4% previously. EBITDA margins are expected to improve in the 2H with the benefit of price increases. Margins are expected to be between 14.5-15% in the 2H, expanding from 13% in the 1H. While the inflationary headwinds have increased in a short time span, the salty snack category is better positioned to pass on higher prices for a couple of reasons. First, the private label penetration in the category has been persistently low. Second, salty snack package sizes can be modified relatively easy since there is no uniform serving size in the category. EPS is now expected to be $.55-.60, down from $.70-.75 previously and consensus of $.66. EBITDA is now expected to be between $160-170M from $180-190M previously and consensus of $175M.
Last month, we added Utz Brands to the bottom of our long list to position ourselves for the Q2 bar reset. We believe management can create value for shareholders with the flywheel effect of organic growth funding future acquisitions. In addition, the market’s current concerns over inflationary pressures and lapping pandemic comparisons provide an opportunity to invest in a long-term mid-teens growth compounder.
Oatly announces a new Texas plant (OTLY)
Oatly announced that it had chosen Fort Worth, Texas, as its next production facility for North America. In the U.S., Oatly currently produces out of two plants in New Jersey and Utah. Oatly and SunOpta will both be building a new plant-based milk production capacity in the Dallas area. Oatly’s facility will be 280,000 square feet, 5,000 square feet larger than SunOpta’s new facility. Oatly said its new facility would produce 150 million liters of oat milk annually. Oatly’s facility is expected to be open by 2023, similar to SunOpta’s plans. Oat milk continues to outpace the plant-based and dairy categories despite difficult comparisons in 2020 when it more than doubled. Oatly’s newest facility in Ogden, Utah, continues to produce below its target, which has led to some product shortages. SunOpta announced on Wednesday that Starbucks added it as a secondary supplier of oat milk due to shortages of Oatly in certain regions.
July PPI (SJM)
In July, the wholesale price growth hit another rate of change big at 7.8% YOY, up 1.0% MOM. The PPI for food manufacturing increased 10.5% YOY in July but decelerated from 11.8% in June. June’s increase was the largest in over a decade, as seen in the chart below.
Food manufacturers are under tremendous pressure to raise prices with rising commodity costs, packaging costs, energy costs, and transportation costs. As a result, most management teams have been vocal about price increases benefiting their second half of the year results.
