Utz Brands manufactures a wide range of branded salty snacks. UTZ’s financials have shown strong net sales figures and strong profitability margins. In 1Q24, its power brands, especially its top four brands, exhibited strong retail sales and volume growth.
Power brands constitute 83% of its net sales. The company has strategically used the net proceeds from its recent disposal of R.W. Garcia, Good Health, and five manufacturing facilities to pay down debt.
This, combined with the repricing of a term loan, is expected to lower UTZ’s net leverage ratio and interest expense, accelerating its 3x net leverage target by a year.
Historical Financial Analysis
In 2022, UTZ reported net sales of approximately $1.408 billion, a 19.3% increase from 2021’s $1.180 billion. On an organic basis, net sales growth was 15.5%, driven primarily by favorable pricing actions taken in response to inflation, organic volume increases, distribution gains, and acquisitions (R.W. Garcia, Vitner’s, and Festida Foods).
In 2023, net sales continued to grow, reaching $1.438 billion, driven by pricing actions and offset by volume mix declines due to SKU rationalization.
Regarding profitability margins:
- Adjusted gross profit margin: 35.70% in 2023, consistent with 35.80% in 2022.
- Adjusted EBITDA margin: Increased from 12.10% in 2022 to 13% in 2023.
- Adjusted net income margin: Rose from 5.50% in 2022 to 5.70% in 2023.
The net leverage ratio improved from 5x in 2022 to 4.6x in 2023, with gross debt reduced from $933.2 million to $918.7 million.
First Quarter Earnings Analysis
For 1Q24, UTZ reported net sales of $346.5 million, a 1.4% YoY decrease due to recent disposals but offset by favorable volume mix and pricing. On an organic basis, net sales grew by 1.5% YoY.
- Power brands: Constituting 83% of net sales, showed 4.9% retail sales growth, with the top four power brands growing by 6%.
- Adjusted gross profit margin: Expanded from 34.40% to 37.20%, driven by favorable sales mix, pricing, and productivity.
- Adjusted EBITDA margin: Increased from 11.50% to 12.50%.
- Adjusted net income margin: Rose from 4.27% to 6%, with adjusted EPS growing by 27.3% from $0.11 to $0.14.
Disposals and Network Optimization Strategy
In February 2024, UTZ announced the disposal of three manufacturing facilities and two brands (R.W. Garcia and Good Health) as part of its network optimization strategy.
This generated a total consideration of $182.5 million ($150 million after tax), used to pay down long-term debt.
- Impact on debt: Reduction in long-term debt is expected to lower interest expense by around $12 million in FY2024.
- Net leverage target: Expected to achieve a 3x net leverage ratio by FY2025, one year ahead of the original target.
In the most recent quarter, UTZ disposed of two more manufacturing facilities, generating after-tax net proceeds of approximately $14 million, with $9 million used to pay down long-term debt and $5 million added to the balance sheet.
Relative Valuation Model
Compared to its peers, UTZ underperforms in growth outlook and profitability margins:
- Forward revenue growth rate: 1.96% vs. peers’ median of 3.02%.
- EBITDA margin TTM: 8.62% vs. peers’ median of 11.79%.
- Net income margin TTM: -1.38% vs. peers’ median of 5.45%.
Currently, UTZ’s forward P/E ratio is above its peers’ median of 24.18x. Given its underperformance, UTZ’s P/E should be lower than its peers’ median.
Risk and Conclusion
The primary risks include the ongoing efforts to reduce net leverage and the network optimization strategy. If these strategies exceed expectations, they could lead to better-than-expected margin expansion, potentially justifying the current valuation.
In 1Q24, UTZ’s power brands, which make up 83% of total net sales, showed strong growth. Proceeds from recent disposals have been used to pay down debt, reducing the net leverage ratio from 4.6x in FY2023 to a forecasted 3.6x in FY2024, with a target of 3x by FY2025.
While UTZ’s strategic initiatives are expected to drive growth and margin expansion, the current share price may lack a sufficient margin of safety.
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