The food and beverage industry is witnessing trends that are impacting businesses in the sector. Utz Brands, a US snacks maker, is anticipating a recovery in gross margin in the second half of the year as several challenges begin to subside.
The Pennsylvania-based company has experienced headwinds which caused its net profit to turn negative in the second quarter, resulting in a year-to-date loss of $23m.
Utz Brands is currently undergoing a product optimization program that affected its volumes in the quarter. Additionally, the company has been adjusting its production after the closure of its Birmingham, Alabama facility and moving away from co-manufacturers.
Moreover, the lower potato crop yields in the Western part of the country have impacted the company’s supply and costs, necessitating shipments from other locations.
In the quarter ending on July 2, Utz Brands witnessed a 1.7% decline in volume/mix, but a 6% increase in pricing led to a 3.6% rise in revenue ($362.9m). However, the adjusted gross profit margin dropped by a full percentage point to 35%, resulting in a first-half margin of 34.7%.
Despite this, the adjusted EBITDA margin slightly improved to 12.5%.
CEO Howard Friedman acknowledged that while adjusted EBITDA margins expanded, the company faced higher inbound freight and potato costs as well as volume challenges. However, these headwinds have now dissipated, and Utz Brands expects gross margins to improve in the second half of the year.
Utz Brands’ finance chief, Ajay Kataria, has expressed positivity about volume trends and margin mix improvements resulting from SKU rationalization and network optimization efforts. Kataria believes the company’s investments and absence of negatives will enhance margins.
Friedman has emphasized the company’s aggressive actions to optimize its product mix in non-core and lower-margin private label and partner brands. At the same time, brands such as Boulder Canyon, Zapp’s, and On the Border are gaining market share.
Utz Brands is not losing ground to private label competitors in the potato crisps category, as the company continues to focus on brand building and innovation. Kataria highlighted the success of their own-branded product, Mike’s Hot Honey crisps, which stood out on value rather than price.
Despite SKU rationalization actions impacting volumes, Kataria estimated that adjusted volumes would have increased by around 1.8% in the second quarter.
Looking ahead, Utz Brands maintained its sales outlook for the year with reported sales growth of 3-5% and organic growth of 4-6%. However, SKU rationalization is expected to have a 3% negative impact.
The company raised its guidance for adjusted EBITDA growth to 8-11%, driven by gross margin expansion and lower delivery costs that are anticipated to offset cost inflation.
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