Last month we added Utz Brands to the bottom of our position monitor as a long to position ourselves to take advantage of weakness in the share price from concerns over inflationary pressures. From the Q2 results, we got the lowered guidance that we were looking for. The current inflationary pressures are nearly a perfect storm of higher costs. Investors are concerned that the higher costs will not abate this year. In our view Q2 represents the trough in margins as pricing initiatives take effect in the 2H.
On September 1st we will go into detail in our investment thesis:
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Stay tuned for the webcast link. |
Utz Brands owns a portfolio of salty snack brands in the potato chip, tortilla chip, pretzel, pork skin, and cheese snack categories. The salty snack category has grown at a 5.1% CAGR over the past ten years as consumers who snack and snacking occasions expand. Utz has grown organically and through adding acquisitions over the past two decades.
Organic growth drivers- Snacking is a secular growth category in food, with Americans snacking more frequently. The return to stores will be a tailwind to impulse purchases of salty snacks. Traffic growth will increase in grocery, convenience stores, and multi-outlet retailers as the COVID-19 vaccinations remove restrictions and consumer apprehensions diminish.
Creating value through acquisitions- Utz has a proven track record of adding value through acquisitions. Management has extracted synergies in the MSD% range of revenue, as seen in the following chart. In addition, through synergies, the acquisition price has averaged between 7-8x EBITDA, creating value for shareholders at the company’s current valuation.
Scale is important in the snack category as prominent shelf space drives velocity. In addition, the company’s distribution network is a competitive advantage. Expanding distribution through geographies and channels drives organic growth and revenue synergies for acquisitions.
Inflationary concerns- Utz’s primary inflationary headwinds are from cooking oils, packaging and transportation. Management expects commodity inflation of 6% this year, up from 4% previously. Price increases are easier to pass through in the snack category than other CPG categories. The category's growth is driven by effective marketing and innovation. The category faces less competitive pressure from private label. Private label's 5-6% share has been relatively flat in the past decade as consumers gravitate towards brands’ innovation, marketing, and taste profiles. Utz has 2% of COGS productivity targets largely through manufacturing efficiencies, product design, and network optimization. Productivity targets help to offset inflationary pressures.
Lapping the pandemic- Utz’s organic revenues are down YOY as it anniversaries the shift to at-home consumption during the pandemic. However, management is guiding to modest organic revenue this year against difficult comparisons. On a two-year basis, the guided growth CAGR of 6% exceeds the targeted long-term growth formula. Revenue growth is also projected to accelerate sequentially.
Growth formula flywheel- The company’s growth formula of 3-4% sales growth, EBITDA growth at double the sales growth through cost leverage and productivity initiatives, and balance sheet deleveraging for 8-10% organic EPS growth has good visibility. Acquisitions will further enhance organic growth. Utz’s organic growth drives the flywheel of a $100M war chest to utilize in acquiring targets annually through its free cash flow while keeping leverage constant. That annual sum grows as the EBITDA grows, further enhanced by past acquisitions. Acquiring targets at historical multiples can enhance the organic growth rate at M-HSD% annually.
