Hostess Brands, Inc. (NASDAQ:TWNK) Q4 2022 Earnings Call Transcript

Hostess Brands, Inc. (NASDAQ:TWNK) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Greetings. Welcome to the Hostess Brands, Inc. Year-End 2022 Earnings Q&A. I will now turn the conference over to your host, Andy Callahan. You may begin.

Andrew Callahan: Terrific. Thanks, and good afternoon, and welcome, everybody, to the Q&A portion of Hostess Brands’ fourth quarter 2022 earnings conference call. I’m Andy Callahan, Hostess Brands’ President and CEO, and I’m joined by Travis Leonard, our Chief Financial Officer. Hopefully, you’ve all had a chance to review the earnings release for the period ending December 31, 2022, along with the investor presentation, which was published today at 4:00 p.m. Eastern Time. That is available still and will be on the Hostess website at www.hostessbrands.com. A replay of the webcast and our subsequent Q&A will also be available on the Investor Relations section of our website. During the course of the call, we may 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 provide useful information to investors. A full reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in the earnings release. So with that out of the way, with that, we’re available for the Q&A.

Q&A Session

Operator: Our first question comes from the line of Ben Bienvenu with Stephens Inc. Please proceed with your question.

James Salera: Hi, guys. Jim Salera on for Ben. Thanks for taking my questions. I just wanted to get an idea as we look into 2023, could you maybe give us a little detail on kind of the composition of sales? Should we think of that primarily as kind of flat volume and then price through there? Or was there some of the innovation from bouncers built into that? Any color on that I think would be helpful.

Andrew Callahan: Yes, like on there. So as far as the full year ’23, actually, we feel good about it. As you can see, it gets back to algorithm and profit above algorithm for the year. Volume is flattish for the full year and then price mix drives to the — gets us to the total guide. But you can also, as we mentioned in our prepared remarks, if you’ve had a chance to see it, we’re focused on the consumer customer sustainable profitable growth. As you look at the composition of the full year FY ’23, the volume and the revenue is coming in at a gating perspective, more in line with historical, if you look back at like history. The comparisons, especially in Q1, are distorted because of some of disruptions in the marketplace in comparison to last year.

So we feel good about the full year when you really look at our models and you compare gating to historicals, if you take out a little bit of the disruption and distortion. As a matter of fact, further makes us — encourages us Q4, what we just reported, our two year stacked growth was 33%. We’ll have a good stack two year growth in Q1 of FY ’23, albeit not at the same level as Q4, but very good and at the top of food peers. So we’re really getting back to more of a normal pacing in the quarters of FY ’23. Now Bouncers, we’re really encouraged with Bouncers. Our customers and what we hear from consumers through the initial trial phase, makes us feel nothing but encouraged, and I feel really good about the visibility we have with both our customers and what we’re hearing from consumers look at the plans we have in FY ’23.

And as we mentioned in the prepared remarks later this week, we were about our next innovation, which we’re really excited this year.

James Salera: Great. And Andy, since you brought it up with Bouncers. Can you maybe talk about — you guys have laid out in the past kind of these five targeted snacking occasions. Is there any occasion that you feel that Bouncers or maybe any innovation that you have kind of coming in the pipeline helps you attack and kind of expand your reach with consumers in?

Andrew Callahan: Yes. So Bouncers is — once again, we get great feedback. For those who have tried it, they’ve told us the product that fits what they need. We’re also able to attract their millennial parents in a disproportionate way. So it’s all cranking the way we expect. And we have designed that for a skew towards the lunchbox occasion. So — and that seems to be working. It’s a reimagination of our — some of our icons, Twinkies, Ding Dong, Stone Nets and 2-bite Poppable version. That’s all resonating with these consumers. It’s reimagining what our Hostess brand could be with the whole new generation, putting it in a form that they can do and really achieving part of our — a lot of our strategy and core to our strategy, which is taking these iconic baked goods and putting them in a more relevant form for a $65 billion snacking universe.

So we’re really excited about our early indications of its ability to do that. But it does over skew to the lunchbox. With that being said, once it gets in the household, we do see our products consumed at multiple occasions, but that one over-indexes to the lunchbox.

James Salera: Great. Thanks for the color guys. I’ll pass it on.

Andrew Callahan: Thank you.

Operator: Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman: Hi, thank you. I wanted to ask about what you’re seeing in the promotional environment right now. Clearly, there are some indications that one of your larger competitors maybe step on the pedal a little bit toward the end of the year. Just curious what you’re seeing in the first quarter? And I guess, more importantly, what you’re modeling in promotional intensity from you and your consent as the year goes on? Thank you.

Andrew Callahan: So we feel really good about our ability — and the line of sight we have both with the consumer response to our plans and our customer engagement. As a matter of fact, I don’t think our customer relationships have never been stronger. It’s all contemplated in our guide as a headline. Certainly, we’ve seen related to the marketplace in our category in which we compete, the category in total continues to perform really well. even during times of some of these things coming back, we continue to grow extremely well with our two year stack numbers. And I really like what we’re doing. You’re seeing the distortion you’re talking — we’re talking about because we continue to consistently manage through a supply chain in a very positive rate.

So I feel really good about the playbook we’re running, the ability to drive the growth, which is included in our plan as we benefit from our consistent execution partnership with our customers, focus on our consumers and driving our algorithm over time.

Ken Goldman: And then — thank you for that. Quick follow-up. You talked about how one of your expectations for this coming year is that, ultimately consumers as they have in the past, right, more — grow more accustomed to higher prices. Can you talk a little bit about just what’s baked in, in terms of overall elasticity? Are you still assuming that there is a higher level of elasticity? I know it’s tough to kind of model and given that you’re not taking as much pricing going forward. But just trying to get a sense for, if you’re at least assuming that consumers will be somewhat more sensitive or less sensitive than it historically has been put to higher prices?

Andrew Callahan: Yes. As a reminder, you mentioned that Ken, we believe — now, we’ll always response to an agile to changes in the marketplace, but we believe all of the pricing that we have in, is all the pricing we need to deliver the guide that we just established and deliver the growth that we just established. So we feel really good about that, and therefore as the year goes on, what we’ll see is the benefit of lapping out of the pricing and more into the back half we get to the volume driving the algorithm and that’s more of our sustainable long-term. That’s what we see today. Relative to the consumer response to elasticity, we break that out. We think we have a — well, we do have a good beat on what the elasticity impacts and what we see is our investment in innovation, our investment in marketing, our execution, our work on driving our partnership and enhanced merchandise with our customers, which includes not even just the displays — type of displays, timing of it, that’s all offsetting any short-term impact that we’ll see on elasticity and we’ll start seeing that come through the back half.

We have not necessarily changed those assumptions from what we’ve seen in Q4, which actually gives me a good feel for as we move forward. You published some reports, that’s have a lot of the peers and we’ve seen with our economists in different banks. Certainly the consumer is still undergoing changes in the marketplace as they absorb kind of the new economies. We’ve done some research as I’ve said in my proprietary remarks that the resiliency of our category and accessibility of our price points performs very well in multiple conditions and the breadth of our availability across channels also help support that. So, all of those factor up to my confidence around our guide and our ability to continue to drive sustainable profitable growth over time.

Ken Goldman: Thanks, Andy.

Andrew Callahan: Yes, thanks. Ken.

Travis Leonard: Thanks, Ken.

Operator: Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Andrew Callahan: Hi, Rob.

Rob Dickerson: Hi, Andy. How are you going? Thanks. I guess a couple of questions. First question is, I think the EBITDA guide implies a little bit higher than kind of long-term algo the ’23. Apologies if I didn’t have time to go through all the prepared remarks. Maybe if you could just explain, kind of what is driving that growth relative to kind of longer-term expectations?

Andrew Callahan: Hi, Rob. Just to make sure we heard it. You were a little bit garbled there for a second, I think you said explain why the profitability is slightly higher than the long-term algo and the guide?

Rob Dickerson: Yes, that’s it.

Andrew Callahan: Yes. Sorry about that. You are little bit garbled. Travis, I’ll let you take that one.

Travis Leonard: Yes. Hi, thanks for the question. So first off, we feel really good about our guide. We’re really proud of the results that we delivered in 2022. And, as you mentioned, we expect to deliver strong growth going forward. So, as we think about our growth from an EBITDA perspective, it’s driven by the flywheel that we’ve talked about — since Investor Day you’ve heard me talk. So, it’s good top-line growth and we’re targeting — and we’re expecting and guiding to 4% to 6% top-line growth and as Andy mentioned, a lot of that is volume. It’s our continued focus — I’m sorry, price mix rather. Sorry, I misspoke. It’s our continued focus on productivity. So this is productivity across our entire business system. This is revenue growth management and you’ve heard me talk about that as well.

We’ve got good leverage across our operating expenses. So our operating costs as a percent of net revenue is going to be relatively flat in 2022. So all of our flywheel is common and it’s kicking starting from the top-line. Our key focus on margins and getting leverage, particularly in our operating costs where we see that.

Rob Dickerson: Okay, great. And then maybe just two quick follow ups. In terms of gross margin cadence for the year and then volume on a year-over-year, cadence for the year. Andy, it sounds like you sort of implied that maybe in the back half, the top-line albeit little bit more volume driven, which would suggest maybe positive volume in the back half. I’m not sure if that’s kind of what the message is and then also just on the gross margin, is there anything we should be thinking about as we get through the year in terms of accelerated ability, not yet. Thanks so much.

Andrew Callahan: Let me reiterate the top-line and then Travis come on top on the gross margin, so. Rob, your takeaway is correct. As you look at price-mix more of a driver early as we lap the multiple pricing actions that we executed in 2022 as that flows out through the year. You’ll start seeing our growth drivers around marketing and innovation and other things becoming more and then you’ll see that at above algo as we move through the year. So that’s it. And if you want to look at the cadence of our ’23, you’ll see that it follows more historical. If you take an average of historical benchmarks and take away the distortion of last year where you see a lot of timing of pricing and supply chain disruptions distorting some things, you’ll see that’ll be a good way to get that. So that all adds up and aligns with our model. So that’s the way to look at it. I’ll turn it over to Travis for the gross margin discussion.

Travis Leonard: Hi, great question. Let me talk a little bit about gross margins and frame this up a bit. So, our gross margins are essentially flat. Adjusted gross margin is essentially flat versus FY ’22. Now keep in mind, we expect to deliver strong EBITDA growth. We’ve got flat gross margins, but we are absorbing high single-digit inflation and Arkadelphia start-up costs, of which $5 million is essentially onetime in nature. Now, our gross margin still remain better than peers. We are committed to recovering those gross margins over time. So as we think about FY ’23, this is around — the choices around timing. We’re not prioritizing margin recovery of long-term profitable growth. But we’ll continue to leverage our gross margin tool which we feel really good about those capabilities around revenue growth management and productivity to recover our margins and fuel our investments for growth.

As you think about the cadence, one of the things that you’ll probably see on a cadence, we did have a tough Q2. So I talked about that. It was actually my first earnings call. So there was a lot around — obviously, inflation was high. There were supply chain fragility. So we do expect a better result in Q2, as we begin to lap some of that.

Andrew Callahan: Yes. And just related to it. I feel we’ve — what’s paid off really well for Hostess Brands is our continued focus on our consumer — customer first and sustainable profitable growth over time and that’s going to serve us well and as Travis mentioned, we’re committed to recovering gross margins over time and we’ll do that until we’ll do that within the context of continuing to deliver consistent sustainable profitable growth. Thanks, Rob.

Rob Dickerson: Super. Thank you.

Operator: Our next question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Bill Chappell: Thanks, good afternoon.

Andrew Callahan: Hi, Bill.

Travis Leonard: Hi, Bill.

Bill Chappell: Can you say a little bit about the competitive landscape. I know it’s just for the three big goods. You held share, I guess for the year after a couple of years of kind of gaining some share. And I know it’s a little bit different from an innovation standpoint, but it gets one, what are kind of your expectations for the category growth this year? And then two, do you expect promotions? I know it wouldn’t be it on the single-serve side but kind of the grocery level to come back as costs start to ease as we move through the second half?

Andrew Callahan: Yes, a couple of things. I feel really good about our models, about our ability to be able to run our play and really feel great about our guide. It’s a little bit harder to predict share, mostly because we’re in a category that’s highly expandable for one. So it’s not a complete set. We’re in $65 billion snacking occasion map of which we’re in a $7 billion Sweet Baked Goods category that meets and that can access growth across it, and there’s a lot of interest in baked goods right now. So that — I take that as a complement that we’re in a real good category. And in the short term and a lot of disruptions and of course, share to kind go up and down over time, I really believe that our playbook will execute that share better of time.

So a long way of saying, we don’t really model share. But that doesn’t give us — that doesn’t undermine our confidence and our ability to drive the number that we believe is in our guide. We have a lot of confidence in that. The timing of pricing was all different in our category, was it flowed through including now, we have everything we need. The timing of our execution on supply chain, they all have helped or contributed to little bit of the distortions I’ve talked about in the marketplace. All that being said, our two-year stack growth continues to be good and my confidence in our model continues to be good. Related to promotions, we have — I’ll reiterate this. I do think ’23 similar to the gating of the top-line, the pacing of the promotions is all contemplated in our guide, similar probably to historical patterns.

And I feel really good about the partnerships that we have with our customers, with a partnership to drive consumer satisfaction and overall growth. And it’s never been better. It’s fully in there. When you get a chance to listen prepared remarks if you haven’t already, Travis talked about our enhanced merchandising which is multi-tiered related to our focus on availability across the store, displays, merchandising, we’re activating our access to consumers through customers tools and really good about — I feel really good about the visibility we have in the partnerships performing.

Bill Chappell: Got it. And so — I’m sorry, I missed, category growth you expect for this year.

Andrew Callahan: I did not model that. So I’m not forecasting that in forecasting ours. I wouldn’t have a reliable number to give it to you but I believe over time, that will drive — continue to drive share. In the short term, predicting a share number. It’s difficult for me to do given the fact that how great Sweet Baked Goods has been performing over time and the distortion that I talked about that we communicated in the category in the short term.

Bill Chappell: Great. Thanks so much.

Andrew Callahan: You got it, Bill.

Operator: And our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

David Palmer: Thanks. Question for you about productivity and how much do you think the supply chain costs with these overtime and what the net effect, those two things would have this year and perhaps even into next year in terms of gross margin improvement?

Travis Leonard: Hi, this is Travis. Thanks for the question. So let me maybe separate these things a bit. So productivity, I think I alluded to it a little bit earlier in the call. We feel really good about our productivity and our ability to really keep the pipeline of initiatives full. We’ve accelerated our investments and you’ve heard me talk about this in fiscal year ’22. We’ve accelerating our investments to build this capability, to develop scalable and repeatable processes to keep this pipeline of productivity the full and we feel very good about that, and that’s again part of our flywheel of growth and then allow us to continue to invest in growth and obviously recover our margins. As we think about the supply chain, as we sit here today, the way we see it is that, it’s improving and in FY ’22, we are alone in this.

This is not unique to us. There were a lot of supply chain challenges. You might have heard us talk about in the context of supply chain fragility. But what came out of that was, we strengthened our relationships with our key suppliers. So we feel really good going forward with that — those strategic relationships, the partnership, our ability to strengthen it during tough situations in 2022 and feel good, if we have to — if there are some shocks in the system as we move forward.

Andrew Callahan: So building on that, we’ve committed to recovering our gross margins over time. So we’re communicating flat this year. Now if you ladder up from that, certainly we have a couple of things. We’ve talked on our prepared remarks and Travis mentioned earlier in this Q&A section related to a onetime $5 million cost, obviously, some of our inflation is going to be double-digits. Obviously, we probably skew a little bit more tags, so as we balance all of that with our focus on sustainable growth, we know we have that balance right. So we will eventually get it. With all of that, we’re still in really high profit growth. We will recover them over time. But this year we have it and we’ve really — under Travis’s leadership, we’ve been doing great on building our pipeline of productivity and I believe as we settle out there, that’s going to be a real driver of fuel as we invest in — continue to invest in growth.

David Palmer: So your belief is that, your productivity will be a bigger benefit this year and that there will be some easing of those supply chain costs. But price net of commodities and any other, including promotion, you’re bringing it back to neutral, is that what you mentioned about gross margin?

Andrew Callahan: Certainly all of that matters — as the neutral because that’s what we’re doing is, we absorb some of the onetime costs of Arkadelphia and manage the balance of a consumer growth model to the timing of gross margin recovery. That’s the conclusion you have to make.

David Palmer: And then one, my final question about the innovation pace, will this and then the cadence it, how will new product news and merchandising benefit the first quarter versus the rest of the year. Thank you.

Andrew Callahan: So, as you know, David, covering a lot of companies, we do have — we launched Bouncers back in the fall. We’re now — we will announce another innovation here later this week, which I know you will really like and some industry attendees will have a chance to sample. So I look forward to that feedback. As we looked at 2022, we drove 44% of the total revenue from innovation. So that’s well above what the category and the index was. The pacing of the innovation and the trial phase, it takes about 12 months. So we expect our innovation contribution to be another really strong year. As we continue to get the benefit of the innovations, we’ve launched previously, Buns continues to grow. We also have — Voortman innovation is coming out with new packaging and Zero Sugar.

We have another one on Hostess we’re announcing and Bouncers is still in the trial phase as well as the new ones. So I’ve actually feel as better — as good as I’ve ever felt related to our innovation pipeline and ability to drive growth. We’ll continue to — expect us to continue to be at a two times index maybe of the category, our vitality of delivering at the high end of — moving up to the high end of our 15% to 17%. I’m very optimistic about. So it will be really good, but the first half of the 2023, we’re still in that trial phase related to Bouncers, the new products we’re launching, our initial feedback from our consumers is really encouraging and our customers continue to be really excited about it. And for how excited they were about Bouncers, obviously, they have a sneak peek under the innovation since they’re selling it in and it’s launching here later in March.

They are even more excited about the next one we are launching.

David Palmer: Thank you.

Operator: Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Pamela Kaufman: Hi, good evening. I just wanted to ask about, what you’re observing in consumer behavior across channels? I guess, are you seeing any differences in shopping habits across convenience versus mass and grocery stores? And then what are you seeing in terms of demand for single serve versus multi-packs?

Andrew Callahan: So, related to, let me take the last part first and then I’ll talk about that cross channel. Our single-serve business does very well and it continues to do very well. And matter of fact, it’s not only is our convenience channel continue to have strong consumption and we do very well, where as you know we over index a single serve, we also have an initiative of expanding our single-serve business across more broader channels, leveraging the strength and the business model we really spent convenience. And the expansion of that availability with like planogram front ends at some really large grocery retailers is going well and I see that those numbers regularly and expanding much. So the partnership we have with our customers to build that program on single serves is really doing well now and I expect it continue to drive growth and do well in the future.

Related to the channels, as — just as a headline, one of the strength of our business is the breadth of our availability, which has really enabled by our operating model and powered by our investment in quality products throughout the entire shelf life, adding to the availability. So we strive to have the exact same quality at the end of our shelf life as day one, which really neutralizes and it really empowers our ability to be able to enact that. But you asked about the channels. We’ve seen obviously some minor shifts, but not like a major shift across our channels, but we’re positioned if that does happen. We have seen trips, which were originally really high, but they have moderated slightly recently. We continue to see strong resilience within the convenience channel.

We’re moving into a high season, related to that and those trends are normal. So related to consumer behavior and shopping trends, in our business anyway, we haven’t seen a major move across. They’ve been minor with continued strength within convenience and the breadth of our availability and access to consumer really booing our business as the consumer moves. By the way related to already Pam, we continue to see really strong addition of two times buyer to our franchise, which is the increase in loyalty over time at a rate that’s almost two times greater than two times the total category. So I continue to track that because that’s really a testament to our investment in our product quality.

Pamela Kaufman: Great. And then just on Voortman, so continue to have very strong growth in the fourth quarter. Can you just give an update on what’s driving the growth? How much — where is distribution now and what are you targeting for distribution expansion over the next year?

Andrew Callahan: Yes. One of the great things about Voortman is, when we originally bought it, three — we just passed the three-year anniversary and it has been margin accretive, growth accretive. It’s added a new category to us. We have a leading position within a reduced sugar segment, within $8 billion cookie category that’s growing at more than twice the rate. We immediately moved it to the warehouse to unlock the margin profile of it. And then we focused on really driving the growth. The distributor — what’s driving the growth now is not really the distribution. Although our distribution is not going down. It continues to be positive. What’s really driving growth of Voortman has been a velocity. And velocity is mostly related to our ability to be able to provide more compelling and high product quality versus competition, velocity driven by our execution of our merchandising model that we learned from Hostess, velocity driven by the macro trends behind reduced sugar, within a cookie category now preferred position and our innovation launches.

When I look and dissect our model, that shows us that that’s what’s driving growth despite the fact that we’ve been aggressive with our price mix on this to protect the margins over time. So once again, very similar to Hostess, I expect these macro trends of velocity continue on Voortman as we continue to build this sub-segment of the cookie category into a larger piece of it. And we lap the elasticity impacts of the pricing. There’s nothing but good stuff ahead of Voortman, but it’s mostly — almost completely due to the velocity drivers of the business.

Pamela Kaufman: Thanks.

Andrew Callahan: Yes.

Operator: Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Robert Moskow: Hi, thanks. I am at the CAGNY conference right next to a big display of Jack Daniel’s. So if I become incoherent in the middle of this question, just let me know.

Andrew Callahan: Rob. That’s what you get for having our conference call at 5 O’clock, but we’ll see it tomorrow and you’ll be able to take some of our next innovation.

Robert Moskow: Okay. Well, if it’s Jack Daniel’s, let me know. But I want to know about shaping of the year, like first quarter you have this really tough comp because of the distribution that you picked up from a competitor and now it’s reversing. So first quarter, how should we think about volume and top-line growth?

Andrew Callahan: Yes, I’m trying to explain this concept the best way I can. So if you look at the pacing of our volumes — revenue pacing throughout the quarters, Q1, Q2, Q3 and Q4, the pacing of that revenue is in line with, if you take out the year ago, which was mostly in Q4 of ’21 and Q1 of ’20. It follows those historical patterns. And so that’s why we feel good. And then that is supported when we cross tab that through our internal models, rising innovation, et cetera. We aligned with that approach. Now what’s really distorting that as looking like it may be up or down is the comparison to the year ago, which was — really the outlier was the growth. Now — and we also still feel good about that, when you normalize that, it’s not like we’re declining because in Q4, here’s a stat for you, Rob.

In Q4, two year stack are as high in Q1 of it’s not going to be as high, but it will be a really strong two year stacked in Q1 and will be off to the races following that. So that’s the best way to think through kind of fit in the year.

Robert Moskow: Okay. So…

Andrew Callahan: That benchmark versus historicals gating.

Robert Moskow: So, does that mean we should look at things on a three year stack when we’re forecasting 1Q? Is that the best way to look at it?

Andrew Callahan: You can look at that for the pace — for the — yes, compare the absolute number to the Q2 ’22 growth and then gated based on the historical gating of a three year history. Okay. Both. And it will take out the distortions.

Robert Moskow: Okay. And, is there anything more you can tell us about whether the degree of the market share declines in 4Q was a surprise to you? Like, it was a surprise to me. We all knew this competitor is going to regain capacity, but the degree to which it came back was a surprise. I just wanted to know how you thought about it when you looked at the numbers actually came out for retail?

Andrew Callahan: Yes. So the share number is different than our total. Now our — where we came in in Q4 was within our guide. So the share number is impacted by way the total baking category, Sweet Baked Goods category does specifically of which you can look at it two ways and one of the ways we look at it is clearly we’re in a priory expandable categories. We got a lot of news and interest from a lot of competitors, interested in baking, and frankly, I think we do it very well. So, the share number, we do not forecast as precisely as we do our own number. Our own number within our guide and the category performed better than we would have anticipated, which is driving the share, but still our models fit in our ability to be able to access. New millennial consumers continue to drive penetration in households, continue to increase the growth rate of our two times buyers, all is intact and we feel good about our growth going forward.

Robert Moskow: Okay, makes sense. Thank you.

Andrew Callahan: Yes. Thank you.

Travis Leonard: Thanks, Rob.

Operator: Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Steve Powers: Yes. Hi, good evening. Just a follow-up on the capacity investments you called out for ’23. Maybe if you could just provide a little bit more color around exactly what parts of the business are getting those capacity increases? And then, based on expected growth as we go forward, just help us frame do you see more capacity needs in ’24 and beyond? Or is this really a big step-up in ’23 and then you build capacity for the foreseeable future?

Travis Leonard: Hi, this is Travis. I’ll start this — the answers. Great question. Thank you for that. So what we were referring to is our new bakery and Arkadelphia. This will provide 20% incremental capacity to our Donettes and cake lines and it will come online in Q4 of 2023. So we feel really good about this bakery. It’s got a kind of a sustainability first concept lands feel to it, which we feel really good about. And definitely, it’s going to really help us with the Donettes and cake platform. So I would say, as we think about investments in capacity, this is the big one. The way to think about — let me talk a little bit about CapEx here, the way to think about this in the context of our capital, you will see that our guide is $150 million to $170 million.

That reflects the investment into this bakery. And as we talked about in Investor Day in 2024 and 2025 and beyond, we will ramp that down. So just to give you a little bit of more color here, in 2022, we had CapEx spending of $130.5 million, which is about 10% of our revenue and that’s kind of how we talked about it in the context of Investor Day. That will remain elevated at low-double digits in 2023 given the guide. And then we will be consistent with what we talked about at Investor Day, as you think about our CapEx as a percent of revenue.

Andrew Callahan: Yes, Steve, let me build on that. So I was talking about the financials, industry first feels really good about it. We’re adding a new bakery footprint and at the way we — and it’s going to add 20% capacity to Donettes and our cake business exactly where Travis said which are strategically important to us and they’re growing. And we’ve — obviously, you have to make these decisions two years in advance. We need this capacity and what we’re going to do when we unlock it, we’re able to drive efficiencies within it. As we sit here today, as we’ve driven our growth over time, we talked about our total volume growth, our stacked growth, when we get back into the algorithm, we need the growth and there’s not a time now that there’s not a human or online either producing cake product, sanitizing our lines, we’re up upgrading them with either equipment or preventive maintenance.

So we’re 24/7 pretty much on these lines and if it’s over time or whenever say, anything. When COVID hit, we run a complex network and we did a real nice job of optimizing the network to drive efficiencies throughout. We will do that when we unlock this new bakery. We’ll be able to reset our network. We will be able to optimize the line runs. We will be able to then manage to a way that’s less burdensome on our employees, more planful, part of our pipeline, the productivity, includes our ability to be able to do that. So first we need the capacity. And second, we’re going to optimize it in a way that really drive successful sustainable profitable growth that we talk about in the first time. And we’re so confident in those long-term growth algorithm which is mostly volume driven.

As we get out of this period of hyperinflation, it will really drive great success for us. So feel really good about that. I feel really fortunate that the team made the decision to really get it online in the back half of the year when we did, because we’ll need it.

Steve Powers: Yes, that’s great. And you sort of anticipated part of my follow-up, but as you get that flex in the overall production footprint, on the lines that you’ve been kind of running all out now for a while, is there investments you’ve made in those older lines as you had a little bit more freedom to upgrade them, to automate them, you’re going to full modernity or is that — is it more — just gets us new plan online, optimize in the new footprint and carry forward?

Andrew Callahan: Well, I think it’s, yes, yes. I think it would be that maybe not — trying not to be the flippant answer but the honest answer. We do a lot of things in our line. We have — in part of our productivity, we invest in automation, for example, which is part of our lines. We need to take down lines to be able to do that. And then that unlocks really high ROI savings as we go forward. We’ve also — when we’re launching Arkadelphia, we have some forward digital IT technology that we’re able to implement right away. We’re able to train our team and our supervisors at different facilities and then bring back those learnings with IT investments back. So it’s not only, yes, it gives us the freedom to be able to then without as impact to capacity to be able to update the lines.

It also provides us a really a foot-forward test bed for some of the IT and other digitization technologies that we plan to bring throughout the network. They’re all contemplated in some of the pipeline that we talked about related to productivity. And don’t forget, our quality investment. So not only do that, but those digital technologies, which we already implement. They really allow us to focus on our quality and support our innovation.

Steve Powers: Okay. Thank you very much.

Operator: Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Ken Goldman: Hi, thanks. Two quick follow-ups, if I can, in the name of clarification. I think there’s a little bit of confusion about exactly what number you would sort of soft guide us to for the first quarter’s top line. I think some people are getting a little bit closer to that $340 million number. I’m curious if that’s reasonable for people to model. Again, with the context, you’re not actually giving the number. I just want to make sure that we’re not way off in modeling that. And then the second question is you’re guiding to — around at the midpoint 5% organic top line growth for this year. You’re guiding to a few percentage points above that for EBITDA, but you’re also seeing gross margin percentage will be flat and your operating expense as a percent of sales will be flat.

So I guess, mathematically, the difference is D&A. I assume that’s the Arkadelphia plant coming online, but I wanted to make sure I’m just thinking about that correctly. So thanks for your help there.

Andrew Callahan: So we can follow up on the Q1 number, but it does imply that once you get out of Q1 with the 5%, you’re higher than that. The benchmark across the full year at a 5% growth versus the quarter. So we can follow up offline on that, Ken. But I think your math on Q1 — what did you say? Was — I think that was slightly high.

Ken Goldman: Thinking roughly slightly high. Okay. thanks for that.

Andrew Callahan: I don’t know.

Travis Leonard: Ken, let’s talk about this in the follow-up call.

Andrew Callahan: Yes. So we don’t guide the specific quarters on that. Related to the profitability that you talked about, we do get some leverage throughout clearly throughout the P&L from the top line to the EBITDA to the EPS. And if you go to the margin bridge, we talked about that related to – mostly related to some of our fuel initiatives, some of our pricing flowing through in the first half and then our growth and price/mix throughout the year. So that’s where we feel about that.

Ken Goldman: We’ll follow up on that one, too. Thanks guys.

Operator: And we have reached the end of the question-and-answer session. I’ll turn the call back over to management for any closing remarks.

Andrew Callahan: That’s it. I feel I’d like to thank the Hostess Brands’ team for what they do every day to deliver the results that we have sustainably shown that we can deliver year after year after year. We look forward to continue to take a long-term sustainable profitable growth to this business, and I’m confident that our position to drive industry-leading growth will continue. So thanks for your interest, and we will see you next quarter.

Operator: This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.