Hostess Brands, Inc. (NASDAQ:TWNK) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings, ladies and gentlemen, and welcome to the Hostess Brands First Quarter of 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is my pleasure to introduce your host, Amit Sharma, Vice President of Investor Relations. You may begin, sir.

Amit Sharma : Good afternoon, and welcome to Hostess Brands First Quarter 2023 Earnings Conference Call. Joining me on today’s call is Andy Callahan, Hostess Brands’ President and CEO; and Travis Leonard, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended March 31, 2023, that was published at approximately 4:00 p.m. Eastern Time. The press release and investor presentation are available on Hostess’ website at hostessbrands.com. This call is being webcast, and a replay will be available on our website. During the course of this call, management will make a number of forward-looking statements, including expectations and assumptions regarding the company’s future performance.

Actual results may differ materially from these forward-looking statements, and we undertake no obligation to update or revise these forward-looking statements. A detailed list of these risks and uncertainties can be found in today’s earnings release and in our SEC filings. Management will make a number of references to non-GAAP financial measures that we believe will provide useful information to the investors. A full reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in the earnings release. With that, I will turn the call over to Andy Callahan, our President and CEO.

Andy Callahan: Good afternoon. Today, I will begin with a few highlights of yet another quarter of strong performance. I will offer a few comments on our long-term growth drivers, and then Travis will provide a more detailed review of our quarterly financial results. We will close with a discussion of our full year outlook before opening up to questions. 2023 started strong as we delivered another quarter of net revenue and profit growth while lapping very strong year ago comparisons. We continue to execute at a high level. And as we look towards the remainder of the year, we are confident in reaffirming our revenue and above algo profit growth guide in 2023. Now to a few highlights for the quarter. Net revenue increased by 4% as we lapped 25% growth in the year ago quarter.

As expected, quarterly net revenue was driven by higher price mix, which offset lower volumes as we lapped strong volume growth in the year ago quarter. As a reminder, our year ago results benefited from our extremely strong supply chain execution in a dynamic environment. We are proud of the sustainability of our top line growth as we build a premier pure-play snacking company with a focused strategy, a proving go-to-market model, new advanced capabilities and consistent and disciplined execution. Our Sweet Baked point-of-sale dollars increased 0.5% during the quarter and up 25.2% on a 2-year stacked basis. As expected, pricing was a large driver of Hostess growth during the quarter due to the carryover impact of last year’s pricing actions.

Long-term snacking trends, including for sweet indulgent snacks continue to increase as consumption behavior remains sticky, and consumers continue to adopt a balance sheet approach to their snacking choices. Turning to the Voortman brand. Voortman POS increased 10% in the quarter, including 14% growth for the recently rebranded Voortman Zero Sugar segment. On a 2-year stack basis, Voortman’s POS increased 39% as our leading position in the faster-growing zero sugar cookie subsegment continues to be fueled by our strong innovation and ongoing investments to drive brand awareness. Our continued focus on execution and discipline across the supply chain enabled quarterly adjusted EBITDA growth of nearly 4% during the first quarter and drove a 13.4% CAGR over the last 2 years.

Adjusted EPS also increased by nearly 4% in the quarter and an 18.3% CAGR over the last 2 years. The first quarter results were in line with our expectations, enabling us to reaffirm our full year top line and above all profit guidance for the year, and we remain well positioned to deliver even stronger volume growth in the second half of 2023. Underpinning my confidence in the second half 2023 growth are a few key points. First, the volume impact of last year’s multiple pricing actions, combined with the distortion caused by strong year-ago execution, which are muting growth this quarter will dissipate in the second half. Second, the positive impact of our strong innovation lineup, increased year-on-year advertising support, particularly in and merchandising will become more evident as we lap the majority of our pricing in Q3.

Let’s discuss these drivers in a little more detail. Our prolific and insight-driven innovation continues to be a driver of our sustained profitable growth. Led by Baby Bundts, Family Packs, and Bouncers, , we drove the most absolute innovation retail sales in the Sweet Baked Goods category in ’22 with over 2x our fair share contribution. In the first quarter, we were once again the #1 innovator in the category for the last 52 weeks. We continue to advance our new product development capabilities to fully unlock the potential of our iconic brands and access to attractive snacking occasions to drive overall Hostess and category growth. Our 2023 innovation is headlined by Hostess Kazbars, which started shipping in late March. And wow, what a start.

With Kazbars, we have taken what Hostess does best, our iconic moist cake and transformed it into a multi-textured layered snack bar with 6 layers of gooey caramel or chocolate fudge and Candy Crunch wrapped in chocolate, a truly unique product in the broader $65 billion addressable snack market. Again, bringing what Hostess does best, high-quality cake to an indulgent bar form. Initial distribution and merchandising have been excellent with very strong customer support. And while it’s too early to tell, the first few weeks of retail takeaway and consumer feedback has been very encouraging. Kazbars is indeed an exciting innovation, but it’s not alone in our lineup. In addition to Kazbars, in the first quarter, we introduced old-fashioned Donettes and chocolate Baby Bundts under the Hostess brand.

Under the Voortman brand, we rebranded our sugar-free cookie and wafer products line to zero sugar as we work to broaden the appeal and interest of these great products to a wider consumer demographic. We also launched 2 flavors of 0 sugar mini wafers during the quarter. Additionally, we launched packaging innovation this quarter. All of our Voortman cookie packaging now includes an easy open and resale feature. This new pull-tab open feature and reseal capability is sure to be a consumer delighter driving higher purchase intent and overall consumer satisfaction. We are continuing to support our innovation as well as our core through strategic marketing and advertising. Our high ROI 100% digital advertising is focused on digital video, social media, e-commerce and retail media, and it’s highly effective and highly efficient at driving top of mind awareness, a key hurdle for consumers who currently do not buy Hostess products.

We continue to build our national advertising campaign to support our core icons as well as remind millennial parents of what they love most about Hostess and what makes us distinctive, are high-quality baked cakes and our great-tasting flavors. And lastly, I’m confident that our continued focus on growing our partnerships and servicing our customers as well as investing in our brands will drive our sustained growth over time while expanding the category. With this solid foundation, I continue to see us getting stronger year after year, and this is certainly true now as I look at our customer plans and initiatives for the remainder of the year. As we look ahead, we expect a more historical cadence of merchandising activities with strong retailer support across all formats.

We are also gaining additional permanent and temporary displays to drive multiple points of availability within stores, including at the front end, which is a key driver of our impulse-driven snacking portfolio. As we grow, we continue to focus on agility, efficiency, safety and quality. Our dedicated talented workforce continues to execute at high levels, driving significant improvements across the supply chain and advancing our productivity agenda. The build-out of our new bakery in Arkadelphia, Arkansas remains on track and is expected to come online in the fourth quarter. We remain focused on growing the right way over the long term. We are making great progress on our corporate responsibility initiatives and look forward to sharing this progresswith the release of our annual corporate responsibility report in June.

In addition, we continue to work with our national nonprofit partner NAMI, the National Alliance on Mental illness to support mental health programming and help eliminate the stigma associated with mental health in the workplace. In support of Mental Health Awareness Month, just last week, we hosted an incredible session with NAMI and our employees to discuss ways to manage anxiety, highlighting a number of mental health resources both through our benefits program and our NAMI partners. At Hostess Brands, we will continue to care about each other as we inspire moments of joy by putting our hearts into everything we do. Attaining all of our key corporate responsibility goals is an important component of the strategic objectives of our executive team, and it has direct oversight from our Board of Directors.

In summary, I am pleased with our solid start to the year, enabling us to reaffirm our full year net revenue, EBITDA and EPS guidance while building on our track record of delivering strong results. We are executing on our strategic priorities to build a premier snacking company, and I believe we have the right consumer insights, the right innovation pipeline, the right brand building strategy and the best team to deliver long-term sustainable growth and shareholder value. With that, let me turn it over to Travis to go through the quarterly financial results and our reaffirmed outlook in greater detail.

Travis Leonard: Thanks, Andy. I’m proud to speak to another quarter of solid financial results delivered by the Hostess Brands team. I will start with a review of our top line results. Organic net revenue for the first quarter increased 4% to $345.4 million, driven primarily by price mix as we benefited from the carryover impact of last year’s pricing actions and favorable mix. Price/mix contributed 14.6% to the quarterly growth, while volume declined by 10.6% as we lacked strong volume growth in the year ago quarter. Our net revenue growth rate was consistent across the portfolio as Sweet Baked goods, which accounts for nearly 90% of total net revenue, grew 4% during the quarter, while our cookie portfolio grew 3.6%. Switching to retail sales trends.

Our Nielsen measured Sweet Baked goods point of sale increased by 0.5% for the 13-week period ending April 1, while our cookies POS increased by 10.1% in the period both lapping last year’s strong growth. As Andy mentioned, on a 2-year stack basis, our Sweet Baked goods sales were up 25.2% in the quarter and Voortman growth was even stronger at 39.1%, driven by our continued momentum in the Zero Sugar subsegment. In the 13 weeks ended April 1, 2023, our dollar share of the Sweet Baked goods category declined by 166 basis points to 20.3%, while Voortman share of the cookie category declined by 7 basis points to 2.2%. We remain committed to our sustainable growth strategies, which have enabled our ability to grow share over time. As you can see, our net revenue grew ahead of our retail takeaway this quarter due to growth in our nontrack channels as well as timing of shipments, which is expected to normalize over time.

Our single-serve POS increased by 4.9% during the quarter, while our multipack offerings declined by 3%, as both lapped over 20% growth in the year ago period. Moving to the rest of the P&L. Adjusted gross profit of $121.1 million increased by 4.6% in the quarter, driven by favorable price/mix and productivity benefits, which more than offset higher supply chain costs, including inflation. While inflation moderated sequentially from the fourth quarter, it remained elevated at 13.7% during the first quarter, adjusted gross margin of 35.1% improved by 20 basis points from the year ago period. Adjusted EBITDA increased by 3.9% to $80.4 million in the quarter, driven by higher gross profit. Adjusted EBITDA margin was essentially flat at 23.3% for the quarter.

Our adjusted operating expenses, including SG&A, increased by 8.7% to $58.6 million due to the planned increase in advertising and marketing and investments, higher depreciation and higher share-based compensation expense. Advertising and marketing spend increased by 16.3% in the quarter to support both our innovation and our core portfolio. Our effective tax rate, excluding discrete items, was 26.9%, consistent with the prior year quarter and largely in line with our 27% outlook for the full year. Adjusted net income of $38.2 million for the quarter remained relatively flat as compared to the prior year period as the contribution from higher EBITDA was offset by higher depreciation and share-based compensation. Adjusted earnings per share of $0.28 increased by 3.7%, largely due to lower average shares outstanding.

At the end of the quarter, we had cash and cash equivalents of $101.7 million and net debt of $881.6 million with a net debt leverage ratio of 3x. Our capital deployment strategy continues to include opportunistically returning cash to shareholders through share repurchases. During the quarter, we repurchased $13.7 million of shares under our previously announced $150 million share repurchase program. Our Board of Directors recently approved a new $150 million share repurchase authorization program, which replaced the existing program. Turning to our outlook for the year. Given our solid start to the year, we are reaffirming our top and bottom line guidance for the full year. We continue to expect net revenue growth of 4% to 6%, driven primarily by price mix with relatively flat volume for the full year.

As a reminder, given the seasonality of our business, volume and revenue in the second and third quarters tend to be higher than the first quarter. As the impact of 2022’s pricing actions dissipate, we expect the benefits of our innovation and merchandising to become more pronounced during the second half of the year. We remain confident we will deliver above algo profit growth in 2023, and we continue to expect adjusted EBITDA of $315 million to $325 million and adjusted EPS of $1.08 to $1.13 per share. Our full year adjusted EBITDA and EPS outlook implies 7% to 10% adjusted EBITDA growth and 10% to 15% adjusted EPS growth, both above our long-term algo. We continue to expect high single-digit inflation for the full year with greater headwinds in the first half.

We are fully covered for our market-traded commodities for the first half and nearly 85% covered for the full year. We continue to expect relatively flat gross margin for the full year, which considers the impact of the Arkadelphia bakery start-up costs, of which approximately $5 million are one-time and are primarily expected to impact the back half of the year. We remain committed to fully recovering our gross margins over time as we leverage our productivity and revenue growth management initiatives. As previously discussed, we are committed to supporting both our innovation and core with higher advertising and marketing investments, which we anticipate will continue to increase faster than our revenue growth. Including these advertising and marketing investments, we continue to expect our full year operating expenses to be relatively flat in 2023 as compared to 2022.

We also continue to expect capital expenditures to remain elevated in 2023 in the range of $150 million to $170 million, including the investments in our new Arkadelphia bakery, which remains on track to begin production in the fourth quarter. We expect to return to our track record of strong free cash flow generation in 2024 as our capital expenditures begin to normalize to historical levels. Given our strong operating cash flow and absent any M&A, we continue to anticipate our leverage ratio to be below 3x at the end of 2023. I am proud of our team’s ability to continue to deliver attractive long-term growth as we build a premier pure-play snacking company. With that, I will turn it back to Andy for closing comments.

Andy Callahan: Thanks, Travis. Once again, I would like to close by thanking and congratulating the talented Hostess Brands team who put their hearts into everything they do and continue to execute at a high level. I’m confident of our team’s ability to deliver another year of strong results with above outgo profits and continue our track record of generating sustained profitable growth and leading shareholder value. With that, we’ll open it up to questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from Ken Goldman of J.P. Morgan.

Operator: The next question comes from Rob Dickerson of Jefferies.

Operator: The next question comes from Pamela Kaufman of Morgan Stanley.

Operator: The next question comes from Steve Powers of Deutsche Bank.

Operator: The next question comes from Cody Ross of UBS.

Operator: Thank you. The next question comes from Bill Chappel of Truist.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to Andy Callahan for posing remarks.

Andy Callahan: Great. Thank you so much, and thanks, everyone, for the confidence you’ve placed in our team as we continue to execute our plan, and we will put our hearts and souls and to inspire more moments of joy for all of our stakeholders. So thanks a lot. Appreciate your interest. We will see you next quarter, and we’ll keep working hard for everybody.

Operator: Thank you, sir. Ladies and gentlemen, this concludes today’s conference. Thank you for attending, and you may now disconnect your lines.