Hostess Brands, Inc. (NASDAQ:TWNK) Q2 2023 Earnings Call Transcript

Hostess Brands, Inc. (NASDAQ:TWNK) Q2 2023 Earnings Call Transcript August 8, 2023

Hostess Brands, Inc. beats earnings expectations. Reported EPS is $0.28, expectations were $0.27.

Operator: Greetings, and welcome to Hostess Brands Incorporated Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to turn the conference over to your host, Amit Sharma. Thank you. You may begin.

Amit Sharma: Good afternoon, and welcome to Hostess Brands’ second 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 June 30, 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, everyone, and thank you for joining us today. Let me start by thanking our dedicated and hardworking team members across the Hostess Brands organization for delivering a good first half and positioning us well for the second half of the year. I’ll begin with a few highlights of our second quarter performance, discuss key drivers of our attractive growth outlook and then Travis will provide a more detailed review of our quarterly financial results. We will close with a discussion of our higher full year outlook before opening up to your questions. We delivered another quarter of strong operating results with double-digit profit growth and higher margins, enabling us to raise our adjusted EBITDA and EPS expectations, which are both well-above our long-term growth targets while maintaining our full year top line outlook.

Now to a few highlights for the quarter. Net revenue increased by 3.5% as we lap 16.8% growth in the year ago quarter. Net revenue for the second quarter was driven by higher price/mix offset by expected volume decline due to the impact of carryover pricing and the lapping of the year ago growth. That said, our volume trends improved in the quarter. This positive trend accelerated in July where we are seeing a meaningful step-up in shipments versus the prior year behind customer support of favorable shelf resets and a strong merchandising for back-to-school programming, providing additional confidence in our second half volume expectations. Our Sweet Baked Goods point-of-sale dollars were up 2.9% during the quarter and up by 18.5% on a two-year stack basis.

Turning to the Voortman brand. Voortman POS increased 7.2% in the quarter including 13.1% growth for the recently rebranded Voortman Zero Sugar cookie and wafers. On a two-year stacked basis, Voortman POS increased by 32.2%, as we continue to capitalize on our leading position in the faster-growing Zero Sugar cookies subsegment with strong innovation and our ongoing and increasing investment to drive brand awareness and penetration. Second quarter profit trends highlighted the strength of our business and our continued focus on retail and operational execution as both EBITDA and EPS grew by strong double-digits along with a meaningful year-over-year increase in our quarterly gross margin. In addition, we successfully refinanced our term loan and revolving credit facility during the quarter and are very proud of our team’s ability to achieve very attractive rates in the current markets.

The ability to extend our debt maturity with minimal impact to our future interest expense, while gaining additional liquidity through the new revolver is a testament to investors’ confidence in the underlying strength of our business and our strong operating performance. We believe the successful refinancing provides us significant financial flexibility to execute on our strategic objectives and continue to drive strong shareholder returns. Given the strong first half results, we now expect adjusted EBITDA towards the higher end of our $315 million to $325 million range and adjusted EPS towards the higher end of our $1.08 to $1.13 per share range delivering above our long-term algorithm profit growth. We now expect full year gross margins to be 40 to 50 basis points higher than last year while our top line guidance remains unchanged at 4% to 6% growth.

I am proud of the sustainability of our growth, as we built a premier pure-play snacking company on the foundation of favorable positioning in growing snacking categories with expandable consumption occasions, category-leading innovation, focused investments and strong and growing executional capabilities. I continue to believe the foundation of Hostess Brands has never been stronger. Let me talk about a few of the key growth drivers in more detail, which provide me confidence in our ability to deliver another year of strong sustainable top line growth and above algorithm profit growth in 2023. Consumer preferences for snacking including sweet snacks remains resilient even as they adjust to the current economic environment. The number of snacking occasions throughout the day continues to increase and consumers are seeking out a wide range of options as they increasingly adopt a balance sheet approach when making decisions on what to snack on from savory to sweet, from the traditional to rewarding and from mindful to indulgent.

We have a deep understanding of these occasions and continue to refine our strategy focus on five of the fastest-growing indications with an addressable market of more than $65 billion in retail sales and more important, where we believe our portfolio has a strong right to win. Our prolific innovation continues to be a key enabler of our strategy to access these attractive occasions. Hostess was the number one innovator in sweet baked goods category in both 2021 and 2022 and with over 1.5 times share of innovation dollars relative to our overall market share. We continue to overindex on innovation in the second quarter, driven by the launch of Hostess Kazbars, which started shipping in late Q1. Initial performance continues to be highly encouraging with both distribution and velocities trending in line with our high expectations.

Kazbars also is receiving high praise from consumers with initial positive feedback at some of the highest levels among all of our recently launched innovations such as Baby Bundts and other highly successful and category-expanding launches. Kazbars is the standout innovation in Sweet Baked Goods category in 2023 and is getting strong support from our retailer partners as we continue to build on our track record of bringing excitement and news to the category. In the first half, along with Kazbars, we introduced Old Fashioned-Donettes and Chocolate Baby Bundts under the Hostess Brand and rebranded our Voortman sugar-free, cookie and wafer product lines to zero sugar, expanding its appeal to a wider consumer demographic and increasing taste perceptions.

Initial results are terrific. Hostess Brands family packs are generating high velocities, repeat purchases and incrementality as we profitably deliver value to customers. With strong support from our retail customers, we are extending family packs to our other iconic brands including coffee cakes and Baby Bundts. We continue to support our innovation as well as core portfolio through high ROI marketing and advertising. Second quarter A&M was up nearly 30% as we shifted some of our planned spend to the second quarter behind Kazbars. In late June, we launched a national digital campaign for Kazbars focused on driving awareness through digital video, social media, e-commerce and retail media. We continue to believe that A&M investments are a key component of our growth strategy and critical to attract millennial parents to the Hostess brand and increase share of overall snacking.

As we continue to bring growth, innovation and excitement to the category, I believe our growth partnerships with key retail customers, has never been stronger. Our multi-tiered approach to drive greater availability throughout the store and win additional permanent and temporary displays is beginning to pay off. We are getting additional merchandising opportunities and gaining TDPs at a faster rate than the overall category. Recent shelf space resets and many of our large customers are leading to favorable planogram changes and additional front-end distribution for us, which is very attractive for our impulse-driven snacking portfolio. During the second quarter, the timing of the impact of our growth and customer initiatives varied across retailers.

We expect these initiatives to have a bigger impact on our sales in the second half. Our shipments are up meaningfully in July, reinforcing our confidence in our second half volume expectations. Though the timing and flow-through of competitor pricing and merchandising is creating some short-term noise, I am confident that our year-to-go promotion and merchandising activity will drive growth. As a reminder, promotion levels in the back half of last year were below historical levels. As planned, our activities include a stronger back-to-school program and a return to more historical frequency in the second half. We continue to monitor the competitive landscape and we’ll adjust our programming and events as needed in this dynamic environment.

We continue to refine and optimize our RGM toolkit to make our overall trade spending more efficient and further strengthen our attractive value proposition for our consumers and seeing good initial evidence these programs are working. As I look to the second half, we are executing at a high level. I am very confident in our team’s ability to deliver strong volume-driven growth as our innovation, higher advertising support, and strong retail execution becomes more evident as we fully lap the volume impact from last year’s multiple pricing actions and the distortion caused by strong execution in last year’s dynamic competitive environment. In addition, our dedicated and talented workforce is driving significant improvements across the supply chain and advancing our productivity agenda to enable us to raise our EBITDA and EPS guidance.

At Hostess Brands we remain focused on growing the right way over the long-term. We are making good progress on our corporate responsibility initiatives and released our most recent corporate responsibility report in late June, which reaffirms our tangible commitments to our stakeholders including communities in which we live and work. Attaining our key corporate responsibility goals is an important component of the strategic objectives of our executive team with direct oversight from our Board of Directors. In summary I am pleased with our first half performance. While the consumer environment remains dynamic we are confident of strong second half growth, enabling us to raise our full year adjusted EBITDA and EPS guidance. Our strong execution of growth fundamentals and customer partnerships supports our second half volume expectations and enable us to reaffirm our full year topline guidance.

We continue to execute on our strategic priorities and are well-positioned 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 will start with a review of our topline results. Organic net revenue for the second quarter increased 3.5% to $352.4 million, driven primarily by price mix as we benefited from favorable net price realization. Price/mix contributed 10.4% to the quarterly net revenue growth, partially offset by a 6.9% decline from lower volume. Our net revenue growth was driven by 4.6% growth in the Sweet Baked Goods portfolio, which accounts for nearly 90% of our total net revenue, while our cookie portfolio declined by 5.9% after lapping 27.6% growth a year ago. Switching to retail sales trends. Our Nielsen measured Sweet Baked Goods point of sale increased by 2.9% for the 13-week period ending July 1st, while our US cookie point of sale increased by 7.2% in the period both lapping last year’s strong growth.

On a two-year stack basis our Sweet Baked Goods retail sales were up 18.5% in the quarter and Voortman growth was even stronger at 32.2%, driven by our continued momentum in the Zero Sugar subsegment. In the 13 weeks ended July 1st, 2023 our share of the Sweet Baked Goods category dollar sales declined by 93 basis points to 20.8%. While Voortman’s share of the cookie category was relatively flat at 2.1%. We have a strong foundation with the right capabilities to drive our category growth strategy which provide us the confidence we can continue to grow market share over time. Our net revenue growth was ahead of our retail takeaway growth this quarter due to growth in our non-track channels as well as timing of shipments which we expect to normalize over time.

Our single-serve POS increased by 3.7% during the quarter, while our multipack offerings grew by 2.2% as both lapped high-teens growth in the year ago period. Moving to the rest of the P&L. Adjusted gross profit of $126.4 million increased by 12.1% driven by favorable net price realization, normalizing supply chain versus the fragility we experienced last year and productivity benefits which more than offset high single-digit inflation and lower volume. Adjusted gross margin of 35.9% improved by 275 basis points from the year ago period. Adjusted EBITDA increased by 16.1% to $80.0 million in the quarter primarily driven by higher gross profit. Adjusted EBITDA margin increased by 247 basis points to 22.7% for the quarter. Our adjusted operating expenses increased by 20.1% to $62.1 million due to the planned increase in advertising and marketing investments partially offset by lower G&A costs.

Advertising and marketing spend increased by 29.5% to $20.2 million in the quarter to support both our innovation and our core portfolio. Our effective tax rate excluding discrete items was 27.3% consistent with the prior year quarter and largely in line with our 27% outlook for the full year. Adjusted net income of $37.7 million for the quarter increased 23.6% as compared to the prior year period driven by higher EBITDA. Adjusted earnings per share of $0.28 increased 27.3% driven by higher profitability in the current quarter and lower average shares outstanding. At the end of the quarter, we had cash and cash equivalents of $99.4 million and net debt of $885.6 million with a net debt leverage ratio of 2.9 times. Our capital deployment strategy continues to include returning capital to shareholders through opportunistic share repurchases.

Year-to-date we repurchased shares for an aggregate purchase price of $19.4 million. Additionally, as Andy mentioned during the second quarter we refinanced our first lien credit agreement. The new agreement extends the maturity of our term loan which represents one of the most favorably priced loans recently issued for our ratings category and increased the capacity of our revolving credit facility. We have also maintained our existing interest rate swaps. As a result, there is minimal impact to our expected effective interest rate following the refinancing. We believe this was a critical step and continue the disciplined management of our capital structure and provides balance sheet stability as we continue to drive growth in the business.

Turning to our outlook for the year. Given our first half results and visibility to the second half, we are reaffirming our full year top-line guidance and raising our EBITDA and EPS guidance towards the higher end of our previous guidance ranges. Our full year net revenue growth outlook of 4% to 6% remains unchanged. However, we now expect full year volume to be down slightly relative to previous expectations of relatively flat, which is expected to be offset by stronger net price realization. As Andy mentioned our second half volume expectations remain largely unchanged. Our growth and customer initiatives which had a lower-than-expected impact in some retailers in the second quarter are expected to have a sequentially bigger impact on our second half volume as evidenced by a meaningful step-up in our July shipment trends ahead of the key back-to-school event.

In addition, we expect continued contributions from our category-leading innovation, the deployment of our brand-building A&M investments, and benefit of lapping significant prior year pricing in the back half of the year. We now expect adjusted EBITDA towards the higher end of our $315 million to $325 million range and adjusted EPS towards the higher end of our $1.08 to $1.13 per share range delivering above our long-term algorithm profit growth. Given the strong contribution of revenue growth management and productivity initiatives in the first half we now expect our full year gross margin to improve by 40 to 50 basis points over prior year, including the anticipated headwinds from the Arkadelphia bakery startup, of which approximately $5 million are expected to be onetime.

We continue to expect high single-digit inflation for the full year with moderating headwinds in the second half. Consistent with our forward-buying strategy our market-traded commodities are fully covered for the year. Our productivity initiatives which we refer to as fuel continue to be a key driver of our margin recovery. We have a pipeline of initiatives to drive efficiencies to provide “fuel” for our top line growth while supporting margin expansion to drive stronger profit growth. 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. We expect our full year G&A cost to be lower in 2023, driving positive operating leverage.

2023 capital expenditures are still expected to be 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 as our CapEx begins to normalize in 2024 combined with continued profit growth. Given our strong operating cash flow and absent any M&A, we continue to anticipate our leverage ratio to be below three times 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. We are well positioned to deliver another year of strong results with above algorithm profits and continue our track record of generating sustained profitable growth and leading shareholder value. With that, we are ready for your questions.

Q&A Session

Operator: Thank you. AT this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jim Salera with Stephens. Pleaes proceed with your question.

Unidentified Analyst: Hey, good afternoon. This is Jonathan on for Jim.

Andy Callahan: Hey, Jonathan can you speak up a little bit?

Unidentified Analyst: Yeah. Is that better?

Andy Callahan: Yes.

Unidentified Analyst: Perfect. Thanks. Yes on the Kazbar rollout, could you maybe talk a little bit more about what the response has been from retailers? Any color you could provide on in-store displays that would be great? Thanks.

Andy Callahan: Yeah. We feel really good. In general, we feel good about our back half in-store display stepping up both in convenience and in all of our channels. So we feel good about that as we move into the back half program. Innovation is the strength of this business as we activate our long-term growth strategy. We’ve never stopped with that through the time. Kazbars is another iteration of that. The enthusiasm behind our customer base was extremely strong. So the support was good distribution and velocities are as I mentioned in my prepared remarks are at our very high expectations as we went in. And that’s just one of them. We rebranded our Voortman Zero Sugar line and velocities are performing extremely well there. We had Old Fashioned Donettes.

We had Chocolate Baby Bundts. The portfolio of our business is performing extremely well and Kazbars is another iteration of that. As you think about the $65 billion addressable market in which we compete, innovation is a big part of that because understanding the attributes consumers are looking for in a broader snacking universe is very important for our ability to be able to innovate, give them those attributes and therefore expand the consideration sets of consumers into baked goods in total. And baking is performing extremely well in snacking. That’s going to continue. Our strategies are designed to capture that market and Kazbars is a very good example of that that strategy could work and is working well.

Unidentified Analyst: Great. Thank you so much. And then for the follow-up, could you maybe discuss some of the headwinds that are impacting the cookie part of the portfolio? Is it primarily demand elasticity from pricing, or are there other dynamics at play? Thanks.

Andy Callahan: Well, the Cookie category — our Cookie category continues to perform — our Cookie business performs well in the overall category. It’s an $8 billion category. We’re about a 2.1 share. We’re in we have a very strong position in the reduced sugar Zero Sugar subsegment of that which has growing at a greater rate on a two-year stack basis our Voortman business is nearly 32% growth. And in this quarter, we grew at 7%. So we feel really good about our position within Voortman. We continue to drive awareness. We continue to partner with customers to drive. It’s important within the category that is enhancing and is very strong. And so I feel good about Voortman. Now we have moved through some pricing. There are some other things that we’ve obviously actively managed the portfolio, but the underlying health of the Voortman business is extremely strong as we continue to grow into a large billion total Cookie category.

Unidentified Analyst: Great. Thank you so much. I’ll pass it on.

Andy Callahan: Thanks, Jonathan.

Operator: Our next question is from Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman: Hi. Thanks so much. Just curious, how you are looking at your consumption trends on shelf versus your expectations. You mentioned that shipments are doing great into July. And I guess that’s really what matters. But just in terms of on-shelf market share, I think perhaps you might have — I’m not trying to put words in your mouth hope that you’d be retaking share or at least your main competitor wouldn’t still be taking share by now at least that’s the sense I got. So I just want to make sure I’m thinking about that correctly in the scheme of things in terms of end demand?

Andy Callahan: Yeah. Ken, good to hear from you. Let me — there’s two parts to that. One is the share and the others how do we feel about how we’re working at the shelf. So I’ll take each of them up both of them separately maybe I’ll put them together a little bit. At a macro level, we’re coming through our customer resets with most of our program and partnership for the year in our category in Sweet Baked Goods mostly happens in the spring. If you look at the data there we feel really good about coming out of there. Our share of the shelf this is a permanent shelf has increased as we come out of there. As we mentioned in the prepared remarks, we did expect the timing of some of those impacts to be greater. We see some customers that are actually performing very well and they’ve executed early.

Some of them have lagged. But overall our partnerships with our customers, their support and enthusiasm around our innovation, the support and enthusiasm around the insights that we bring them our continued support of category growth via increasing in our advertising our investments in quality. So our partnerships I think with our customers’ broad-based across channels is the strength of this business and has never been stronger. And we see that from their support of increasing our share of the merchandising. So the timing of that we believe would be more impactful in the back half but it’s very strong. Now related to your comment on share, absolutely. As you know and I’ve mentioned before and I understand the spirit of bringing up share because I grew up in categories share was more important than potentially it is here.

But I always — you always want to see it positive and you don’t like to see it negative. But we compete in indulgent snacking and a $65 billion user base, which is interchangeable and we can grow the pie. And the fact that we’re able to see Sweet Baked Goods experience really high pricing in a sharper period of time than a lot of the category and grow overall a percentage of dollars in that pie is really a testament to the strength of baking and, therefore, the bakings ability to get share of dollars within that total category. So it’s not — it is important, but it’s not important in this category. We don’t like to see it negative, but it doesn’t undermine our strategies and our ability to be able to continue to grow, which we’re staying on top of.

We’re growing the share of TBs [ph]. We’re going to be continue to be number one in innovation. We’re going to invest in our quality and we’re going to invest in high ROI advertising and underlying the partnerships with our customers, we believe that will play well over time. So yes we want share to grow, but we believe we’re in a good position to deliver our back half as we communicate it. And over time, we expect if we continue to do that, which we think we’re positioned to do well share will take care of itself.

Ken Goldman: I’ll pass it on. Thank you.

Andy Callahan: Thanks Ken.

Travis Leonard: Thanks Ken.

Operator: Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.

Rob Dickerson: Great. Thanks so much. I guess, I just have a question around the back half in terms of price/mix relative to volume. I mean, clearly you’re staying pretty explicitly. Shipments are very strong. In July, you really expect a material. I think you said that a couple of times improvement in the back half. But then I also thought, I heard you say maybe volumes were a little bit weaker in the second quarter maybe pricing was slightly higher than you had originally expected. So if we think through the back half of the year is this like if you’re willing to provide some incremental color, is this two quarters where we think on average, we’re getting price/mix maybe around flattish maybe slightly up but volumes to still get to that guy? Like it sounds like volume should really accelerate, nicely positively accelerate. So just trying to get some definition on what meaningful means. That’s it.

Andy Callahan: Yeah. So as you know we held on to the back half. Just a couple of things — clarity on the second quarter. There was a lot happening in the second quarter related to — that’s when the customer resets were happening in the TDP executions were happening. We were coming off a large part of the category disruptions on supply chain at Hostess, but the category that we benefited from. So that was difficult to forecast. But as we move into July, we are seeing strong positive shipments and we feel good about our partnerships, with our customers in the back back-to-school. We will see — we do expect to see very good support by the back-to-school, which as you know Rob, is very important to this category. So the indications are well that a lot of the impacts of those, which Q2 was a dynamic time and we didn’t get exactly forecast it, right, but it was going to be difficult and always a transition quarter.

We believe a lot of that as we look at the July shipments are behind us, feel good about the lineup we have in August back-to-school, which given the shipments our customers do as well. And therefore, that’s the spirit of leads to the comments. Related to price/mix, we did do our last pricing in — was announced in July. But that filtered through in different ways through Q3, depending on it. So we will see some price/mix benefit in Q3, but it should be passed when we get to Q4. And we’ll be relying on the incremental merchandising that we’re putting in, the enhanced programs we’re putting in, the benefit from the share of the TDPs, the continued growth of the innovation that we’re doing and the step up in advertising. All of those are lined up, as we move through into the back half.

Did that help with the color?

Rob Dickerson: Yes. Good enough. And then, I guess just to follow up, just on gross margin, the guide of 40 50 basis points I think it implies essentially kind of clearly flat to down in the back half, not sure of kind of cadence of which quarter might see a little bit more pressure year-over-year. I mean it sounds like that’s because of preopening costs of Arkadelphia maybe that’s more Q4. And then kind of the core of the question is, like if we think forward one year, excuse me, I mean those are just onetime costs, right? This isn’t a kind of margin compression dynamic in the back half because of higher promotional expenses, it sounds like it’s mostly driven by the new facility. Is that, right?

Travis Leonard: Yes. Yes, that’s right. So let me take this one and Andy, can chime in as well. So a couple of things. So we are really pleased, with our productivity that we’ve seen in the first half particularly from our fuel program, that I outlined and also from our revenue growth management. So as a reminder, these are capabilities that we’ve been building and are really pleased to see there are benefits coming through. And the benefit that we received in the first half, it’s truly what’s driving our confidence in increasing our margin expectation for the full year to that 40 to 50 basis points. And as you alluded to in the back half, we do have our Arkadelphia bakery. So that again, is — it’s on track. It’s on time to come online in Q4. So that expense is out there in the back half. And as I said in my prepared remarks, $5 million is onetime in nature. I’ll turn it to Andy to…

Andy Callahan: That’s it. And we’re excited about getting Arkadelphia coming right on time. We’re working to utilize additional capacity right away.

Rob Dickerson: Perfect. Thank you.

Operator: Our next question is from Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Pamela Kaufman: Hi, good evening.

Andy Callahan: Hi, Pam.

Travis Leonard: Hi, Pam

Pamela Kaufman: I just have a follow-up to Rob’s question. I wanted to clarify on your expectations for volumes to be down slightly this year, does that assume that volumes are still down in the second half?

Andy Callahan: No, it does not. Matter of fact, for the most part, we believe that the second half given the — what we’ve learned as we’ve gone through Q2 we did see some – with the consumer, the transition timing of what we do lapping out of a lot of the distortion that we saw, we saw the majority of that volume impacted the change was really in Q2. And that the enhancements that we’ve made and the changes that we’ve made in our program, we made in the back half for the most part keeps – the back half close to where we originally expected during our guide. So that’s the way we’re looking at it.

Pamela Kaufman: Okay. That’s helpful. And then this quarter there’s obviously very strong gross margin performance that seems to be driving some of your confidence in getting to the higher end of your full year guidance. How are you thinking about reinvestment into the business and stepping up either marketing or promotional support behind top line growth?

Andy Callahan: Yes. Well we stay on that. As we’ve been very consistent and I have over five-plus years the sustainable long-term growth of the business and our ability to continue. And we’ve done a nice job. If you take a step back and look at our two-year growth. Our CAGR on the revenue side is 8%, which is in line with top indulgent snacking. So the distortion we’re seeing is real. That’s right in line and stock with them. I think I saw that on your report as well Pam. And so we protected margins very well in this last year as inflation went up probably at a more – a shorter timeframe for our category versus others. So we’re in a good spot for that. You bring up a good point though, so how are we thinking and we’re balancing the long-term but we are taking some of that.

We’ve enhanced some of the program in the back half versus one year ago we have incremental frequency on our promotions, where we’ve invested in data so that we can sharper – including RGM so we can sharpen on our offers to customers. We’re looking at digital overlays that enhance those programs to increase the effectiveness, we partner where they want and increasing our display activity in the back half. So all of those are helping to give us fuel as we come off the distortion driven by the customer and the high pricing that we’re going to be bleeding off of in Q3. All of those are part of the equation that are incorporated into our guide.

Pamela Kaufman: Thank you. That’s helpful. And just one more question. I think in the last couple of quarters your reported sales growth has been ahead of what we’ve seen in the scanner data. And I think there was a benefit from inventory movement or easier compares also some benefit from untracked channels. This quarter it was a narrower gap. So just wondering if there’s anything influencing that and if you’re seeing any differences in the performance and untracked versus tracked channels.

Andy Callahan: No. I think generally it does – I know you track this and we talked about this on a lot of the calls and it does vary from on Sweet Baked Goods from quarter-to-quarter. Most of the time it normalizes. We do have a good non-track channel. There are some little things this year like we see Ben coming back a little bit higher and there is some benefits of some of our program within non-tracked channels. And over time we expect the breadth of our availability including some of the non-track to be a strength of the business. But I wouldn’t read too much into the variation from quarter-to-quarter.

Pamela Kaufman: Got it. Thank you.

Andy Callahan: Thanks, Pam.

Operator: Our next question is from Cody Ross with UBS. Please proceed with your question.

Cody Ross: Hey, how are you. Thanks for taking our question. I want to go back to Ken Goldman’s question, just around the competitive environment. You talked about this a little on the call that some of your competitors are getting more promotional and you have seen some share losses, albeit or above, where you were two years ago. At what point, would you guys consider ratcheting up your promotional stance to protect market share and how are you looking at the competitive environment? Do you think, most of your competitors are acting rational? And do you expect them to in the back half of the year?

Andy Callahan: Yes. Certainly is difficult and some — when we have such a large disruption due to the supply chain services and coming back into the business, it’s difficult to forecast. That was certainly true in Q2. The competition I would say in our category, yes, I would say — I think rationales are fine, but very competitive. We take the competition serious. What we want to do is continue to compete aggressively relative to value for the consumer. And we believe over time that when we do that, when we give them the innovation they want, the quality they want at the price value they want and we look at other ways to do that we’re in the position we’re going to win. That’s true for our single-serve business. That’s true for our bag Donettes.

It’s true for our multipacks. And it’s also true for our family packs which are doing very well and we introduced about a year ago and we’ll continue as we said on the prepared call to expand on that. So, with that being said, we do acknowledge the short term, the consumers appear to becoming more price sensitive in the back half of the year. So we do see that’s good that we’re kind of lapping the base price where we are. But based on that price sensitivity the sharpening of the price points and making sure we have them right in the back half, the add in the frequency, the increase in the display for a reminder for everybody out there we’re one of the highest impulse categories. So we expect our shipper at least enthusiasm for our customers and our program is up versus a year ago.

We expect to be all benefit. So we have a lot in our toolbox to compete, both in the short term, but more importantly continuing to keep our strategies that are going to drive the long-term success of the business. But we do — similar to what Pam asked, we do take the short term and making sure we’re delivering for our customers and our consumers meeting them where they are today in the current environment. And I think we’ve done that for the back half.

Cody Ross: Got you. And then one last question. Broadly speaking in the industry we’ve heard this from some packaged food peers, as well as some upstream players. What are you seeing from a retail inventory perspective? Are you seeing any retailers decide to lower their inventory levels in an effort to manage the working capital? Can you just discuss that in a little bit for us? Thank you.

Andy Callahan: Yes. The largest part — let me talk about Sweet Baked Goods, the largest part of our category Sweet Baked Goods has relatively short shelf life. So, for the most part, it doesn’t impact us as much because when by the time we get it and we manage the shelf inventory for the turns there’s not a lot of room for them to manage large days of supply. So our Voortman business has a little bit bigger thing. But the majority of our business it’s not really a major factor for our business. When I meant to say was that Voortman has a larger shelf life. But for the most part for our business inventory is a part — it’s not a large part of our business.

Cody Ross: Thank you. I’ll pass it on.

Operator: Our next question is from Steve Powers with Deutsche Bank. Please proceed with your question.

Steve Powers: Thanks everybody. So just on the promotion discussion picking that up. I think you used the word historical frequency or historical cadence in your prepared remarks or returning to that historical frequency in the back half. I guess, I’d love a little perspective on historical depth for historical levels and how you expect the promotional environment in the back half and going forward to compare not just on a cadence basis, but on a depth of promotion. Is that also going to return to historical levels, or do we think we normalize a slightly less kind of less deep if equally — equal breadth of promotion if that makes sense?

Andy Callahan: Yes. So there’s a couple of things going on here. It’s a terrific question. There’s — when we think about merchandising we’re very focused on price point but also driving display from that price point. So both of them matter. We have tools to be able to do that with LTOs with our partnership with customers on displays et cetera. So, we do have multiple tools related to making sure we have successful merchandising programs. Related to the frequency, there’s a longer-term frequency that I referred to in my prepared remarks and that’s the amount of times that we promote during a season. Last year, we reduced the frequency in the back half mostly in Q4. We took out an entire event and we raised the promoted price points the higher — to a higher level that frankly was we believe was too high.

We’ve already adjusted some of that in the front half, but we’re going to get the benefit of that where — in the back half where it raised. Additionally, by adding the frequency we’re getting back to more historical. Now put this in all context. In a year ago, when we were in our Q4, when we were experienced the customer — the category disruption due to a competitor the merchandising wasn’t going to give any — it wasn’t going to add as much because we were already up there. We were getting all the support. We were running the service our customers. We did that extremely well. They remember that in partneredness. So our merchandising cadence wasn’t as required and needed right? And so we’re coming back and adding additional on top of that at more sharper price points that we believe is sustainable.

It’s not going back to the price points at the depth that we were pre the inflation times. So we’re not spending that back. We’re just getting them to what we believe is the sustainable level.

Steve Powers : Okay. Yes. That’s helpful. And then maybe for Travis. You talked about the positive gross margin drivers principally being the productivity momentum and revenue growth management. I guess, I’m curious sort of what’s in the guidance what you were able to achieve in the second quarter extrapolated forward, or do you see incremental room for further productivity or further RGM benefits as time goes on? Is it — are we — are you kind of guiding to what you already achieved carried forward, or is there layer on top of that incremental benefits that you’re expecting?

Travis Leonard: Yes. Think about this year as a pull force with an acceleration of these initiatives is the way to think about it. And — but I will tell you as you think about our margins longer term, really productivity of our fuel program and revenue growth management are going to be the key linchpins into driving our continued investment into our business as well as modest margin expansion over time.

Andy Callahan: The only thing, I’d add to that is, let’s put this in context for the maturity of our company. We’re in the early stages of this and I’m very proud of the progress the team has made. But that’s a good position for our investors, because my experience in this industry there’s a long runway for us to continue to drive a pipeline of continuous improvement efficiency programs at industry accepted margins that will drive fuel as we call it to invest into our proven growth strategies. That history has proven will work. And so we’re at the early stages of that. So I think there’s a good runway for that both in RGM as well as in our productivity initiatives.

Steve Powers: Very clear. Thanks again.

Andy Callahan: Thanks Steve

Operator: Our next question is from Robert Maffeo with TD Cowen. Please proceed with your question.

Andy Callahan: Hi Rob. Welcome back.

Unidentified Analyst: Yeah, feels pretty good.

Andy Callahan: Good.

Unidentified Analyst: I guess my question here, on one hand today your marketers have more data than ever to make the right decisions on how deep your promos should go, but that data is still based on historical patterns and the patterns are moving just really quickly and consumer sentiment is changing really rapidly. You can’t really look at that historical data and probably find the right price point that you need for these promotions. So how do you continually adapt to that? Like, are you able to move faster because of the data analytics that you have? And how do you know with confidence that you’ve got the right price points right now for the back half of the year?

Andy Callahan: Well, you aren’t certainly right. I’ve been doing this for 28 years. And certainly, as we sit here today we have more data than we certainly did. And every year the tools get sharper and better. I will tell you specifically that this year if I implied, we looked at too far in the history that would be a bad takeaway. Because even with the agility, we have we’ve adjusted or enhanced some of our back at program just based on what we’re seeing in the first half with both the consumer sensitivity to pricing as we moved in our response to what the customer needed. So we’re looking at that all of the time and trying to make sure that we get to the right price for our business. That is going to drive us both sustainably and providing value to the consumer.

So we’re — I’m not going to say we’re probably any better than anybody else, but we use those tools with everybody else. What we may be better is being more agile and having the strength of our customer partnerships. But we’re looking at that all the time, Rob. What we’re seeing right now as I look to the back half of the — I think a consumer that is maybe even more price sensitive they were maybe even a year ago. I think that puts us the position well, as I said, as we sharpen the price points to make sure they’re at the right level and we’re coming off the pricing. We’re adding a frequency. I think that’s all. Family packs are doing well. There’s, a lot of things that can address that sensitivity to the consumer. So it’s a real-time process.

Unidentified Analyst: Okay. And just for forecasting, can I assume that fourth quarter is when the volume turns positive, or do you think both quarters you could be positive for volume growth?

Andy Callahan: Well, as I said, we need to — we expect both quarters to be close to positive and then positive in Q4. So — and we expect a strong back-to-school programming and the enthusiasm of our customers as we see shipments early in July or a good future to that.

Unidentified Analyst: Great. Thank you.

Operator: Our next question is from David Palmer with Evercore ISI. Please proceed with your question.

David Palmer: Hi. Good evening. I have a question…

Andy Callahan: Hi David.

David Palmer: Hey, hey. …With regard to the volume guidance change, is that related to that competitive pricing and promotional activity that — and the fact that Hostess was just not going to chase volume and sacrifice profitability too much for that volume?

Andy Callahan: Well, yes, in the second quarter there was a lot of dynamics going around. Some of those are forecasting. Some of it was our timing of the competitor coming back. Some of it was the consumer component and the retailer execution of some of the changes in the GDP. So it was a difficult time for us to forecast. It came out the way it was when we saw it real time we adjusted into the back half. We didn’t over adjust those programs as you talk David. We’re going to balance making sure we continue to have the margins. We protect it very well invest back for the sustainable growth and continue to manage through because we believe the whole portfolio of — I won’t go through it again that are driving growth both long-term and short-term are important to keep in balance. So we’ve adjusted to real-time Q2 which was a little bit below where we expected for those factors and we believe we’re set up for the back half.

David Palmer: Yes. I’m almost in need of an education about how things might work in the Sweet Baked Goods category in some categories like chocolate candy for example there’s a lot of the programming that’s really set maybe you might even know a full one-third or 40% of your volume what’s going to happen with the programs that are in place maybe not even for almost the whole year. But is it possible that this category because you have a mixture of small and large DSD and non-DSD that there’s a little bit more unknown here, or do you feel like maybe you’re getting a handle around the — what’s coming up yourselves and your competitors such that maybe you’re going to learn how to not be surprised by what’s happening by competitors. I’d love your thoughts on that.

Andy Callahan: Well there’s — this is a unique situation relative to having a competitor that’s with a large disruption in the category. Related to your customer comment on do different categories work differently or the same? I’d say they’re generally the same. But given the dynamics we’re seeing within the consumer our customers are always looking for ideas that how do we — and they go to us increasingly I think we have a great partnership and the leadership partner with our customers. So if we have the framework of a full year plan which you’re referring to which every category does and every brand does, we certainly do but they are certainly agile as the year goes on as you continue to enhance and drive better merchandising by better displays.

So any implication in any category that I’ve been in is that as you start the year everything with the customer is set in stone that’s not the categories I’ve lived in. It’s certainly not the agility that we respond to with Hostess when we see something that can enhance programming for our business and for our customer.

David Palmer: Got it. Thank you.

Andy Callahan: Thank you, Dave.

Operator: We’ve reached the end of the question-and-answer session. I’d now like to turn the call back over to Andy Callahan for closing comments.

Andy Callahan: Thanks everyone. I appreciate your confidence that you place in our team to execute on our plan and drive sustainable profitable growth over time. So thanks for joining the call. And we look forward to seeing you next quarter where we continue to work hard for everybody on the call and all of our investors and our team.

Operator: This concludes today’s conference. You may disconnect your lines at this time. And we thank you for your participation.