Q3 2021 Hostess Brands Inc Earnings Call
Building brand awareness and impactful innovation Boardman.
<unk> distribution expansion in the C store channel is progressing as planned and Boardman trip frequency basket size dollar per trip are all up as shown in the latest 52 week panel data.
Our hostess single serve and multi pack sub segments.
<unk> posted solid double digit Pos growth in the third quarter, highlighting that our portfolio and broad based distribution model is uniquely positioned to take advantage of the evolving consumer snacking trends, both at home and away from home.
With 40% of our retail sales coming from the C store channel. Our single serve offerings are well placed to benefit from improved mobility with increase in vaccination rates in fact, our single serve Pos sales increased 15, 4% during the quarter and 18, 2%.
<unk> on a two year stacked basis, as we leveraged our superior execution capabilities to post a 290 basis points share gain in the convenience channel during the quarter at the same time, some pandemic driven changes in consumer behavior appear to be sticky for instance work from home.
<unk> remains elevated and is leading to incremental add homes snacking occasions are multi pack and bag donut business grew 12, 4% during the quarter and 22, 5% on a two year stack basis similar to the C store channel, we're capturing disproportionately larger share of this.
Growth evidenced by our over 200 basis points of market share gains in the grocery dollar drug and club channels.
Notably unlike many of our food peers, our two year sales trends are accelerating signaling sustained top line momentum from strong consumer demand and higher repeat rates as opposed to a pandemic driven spike two year stack consolidated net sales increased by 25% during the quarter.
<unk>, our best two year comp since the beginning of the pandemic.
This strong momentum is driven in large part by our strong innovation as we are benefiting from a deeper understanding of our key consumers and their purchasing behaviors. Additionally, our <unk> programs are limited time offerings around back to school and fall performed well during the quarter.
<unk> rate a measure of the success of our new product innovation is trending towards the higher end of our targeted range, reflecting solid contributions from baby bonds.
Crispy Minis and Muffin sticks for instance, baby bonds, one of our key innovation launches continues to build on a strong start lemon baby bonds and cinnamon baby bonds with a number one and four top growing skus in the sweet baked goods category during the quarter.
In fact, lemon baby bonds is already up to number four amongst hostess branded multi pack skus in terms of velocity with trial and repeat rates ahead of expectations. We expect this momentum to strengthen even more with the recent introduction of single serve baby bonds in the <unk>.
Convenience channel.
Crispy minis are multi textured offering geared towards millennial and Gen Z consumers is attracting new and incremental consumers to the hostess brand crispy Minis distribution is building steadily and will get a boost with the introduction of the single serve four ounce packaging to be sold at the front end of the store.
Muffin sticks has been a key innovation for on the go consumer achieving solid distribution build in the convenience store channel with repeat rates exceeding expectations again.
Across Boardman, we continue to build distribution for super grains, while distribution and velocity for Mega wafers are trending in line with initial expectations.
We are supporting our innovation through incremental advertising and marketing support our live your most this campaign launched last quarter is driving greater engagement across digital platforms positioning us to win within both consumers and retail partners with our <unk>.
Nickel ROI mindset, we continue to invest in capabilities and data analytics to further strengthen our new product innovation and sharpen our retail execution.
Leading to better performance at the shelf and more sustainable share gains.
Yeah.
Okay.
Switching gears, our execution exited excellence extends to our supply chain, which has enabled us to hold our margins relatively stable despite labor challenges and very high inflation.
We are taking pricing actions across our portfolio and customer base.
These pricing actions began to flow through our P&L during the quarter and will provide increasing benefit in Q4 and into 2022.
We are actively monitoring the operating environment and are prepared to take additional pricing as necessary.
We are continuing to experience strong consumer demand for our brands despite higher retail prices, although it's still early and retail shelf price resets by our customers continued to increase to fully reflect the new prices.
As expected we are facing greater inflationary headwinds in the second half driven by higher input logistics and labor cost as well as stronger than expected volume growth as we made incremental commodity purchases above our existing hedges.
Like our peers, we continue to face a challenging labor environment, leading to higher overtime costs and elevated hiring and training expenses are.
Our team has performed exceedingly well through the current labor environment, and we're taking additional steps to mitigate these challenges by investing in our workforce and employment experience, which we expect will have a positive impact on our cost structure and production capacity over the long term.
I am extremely proud of our agile supply chain, which has continued to execute at high levels in the face of our strong volume growth and tough labor market, while labor availability and supply chain constraints have indeed pressure some parts of our portfolio, our flexible manufacturing footprint and lower cost distribution platform have been the key.
Key enablers of our ability to mitigate unprecedented cost pressures maintain high service levels and continued to generate strong operating performance.
We are confident in our ability to mitigate these headwinds over time through a combination of higher prices revenue management actions and productivity initiatives.
Now I'll turn to the quarterly financial results and our revised outlook in greater detail.
Third quarter net sales increased 10, 4% to $288 million. The inquiry increase was primarily due to continued strength in sweet baked goods, which increased by 10, 6% during the quarter in.
In addition to a 9% increase in cookies.
Year to date consolidated adjusted net revenues increased by 10, 1% showcasing a remarkably consistent topline momentum reflecting year to date growth of nine 5% in sweet baked goods and 15, 6% and cookies.
Adjusted gross profit of $99 $3 million increased by eight 9% for the quarter as higher volume favorable product mix pricing and productivity more than offset transportation and input cost inflation.
As expected adjusted gross gross margin declined approximately 45 basis points to 34, 5% as higher sweet baked goods gross margins were modest modestly offset by borkman due to the timing of pricing actions on a year to date base.
<unk> adjusted gross margins were essentially flat at 35, 5%.
Adjusted EBITDA for the quarter was $64 8 million up from $62 million in the year ago quarter. The increase was driven by higher gross profit, partially offset by higher advertising and marketing spending to support our topline momentum year to date adjust.
<unk> EBITDA increased by 10, 9% to $195 6 million for the first three quarters.
Our effective tax rate, excluding discrete items was 26, 7% compared to 24, 3% in the prior year quarter, the effective tax rate for the prior year period benefited from the allocation to the Noncontrolling interest which was eliminated.
In the fourth quarter of 2020.
Adjusted net income of $28 9 million for the quarter increased 14, 2% from prior year, while adjusted EPS of <unk> 21 cents per share increased 10, 5% as the <unk>.
Third quarter adjusted diluted EPS reflects average fully diluted shares outstanding of $138 1 million versus $127 6 million in the year ago period.
At the end of the quarter, we had cash and cash equivalents of $228 $1 million and net debt of $866 $3 million with a leverage ratio of three three times down from three nine times at Q4 2020.
Driven by our strong operating cash flows.
During the quarter, we successfully completed the amendment for the cashless exchange of our outstanding warrants. The settlement of these warrants which expired on November 4th resulted in the issuance of a total of approximately 10 7 million shares separately we.
Repurchased an additional $25 million worth of shares since our last update for a total of $50 million spent through the end of the third quarter.
We are very pleased with our third quarter performance and given our strong year to date topline performance. We are raising our full year net revenue growth guidance from seven 5% to 9%.
Two 9% to 10%.
Our full year, adjusted EBITDA and EPS guidance remains unchanged at $260 million to $268 million and 83 to 87 or 87 cents per share.
We now expect full year inflation to be towards the higher end of our mid single digit range, which with inflation approaching 10% in the back half due to higher freight labor commodity and energy related costs that being said, we believe higher realized prices and additional productivity.
<unk> will offset rising cost leading to relatively flat gross margins.
Our EPS guidance assumes an effective tax rate of 27, 5% and average shares outstanding of $139 million consistent with our previous outlook and includes dilution from the completion of the successful cashless settlement of our outstanding warrants.
Our 2021, Capex guidance remains unchanged at 60% to $65 million and given our solid year to date cash flows we expect our net debt leverage to be approximately three times by year end.
As we Delever almost a full turn in 2021.
We remain committed to executing against our key capital allocation priorities, including investing for growth deleveraging, making strategic acquisitions and returning cash to shareholders.
Okay.
So to conclude.
We remain confident of achieving sustained top tier growth through the remainder of 2021 and beyond highlighted by our updated outlook in our in an increasingly challenging operating environment.
Our brands have strong consumer tailwind.
We have good visibility on pricing and competitive dynamics in the category, we are driving cost savings throughout the supply chain and sharpening our revenue management tool kit to offset higher inflation, while continuing to invest in growth.
With that.
I'm available for your questions.
Okay.
Thank you.
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And we will take our first question from Pamela Kaufman Morgan Stanley.
Hi, good evening.
Hi, Pam.
So Andy I.
I just wanted to get your thoughts on how youre thinking about the sustainability of top line growth I guess, if you could break it down in terms of what your views are on the category growth outlook and then close this is ability to continue to gain share.
And then I guess, how youre thinking about growth across channels and.
Barry pack format.
Given that you saw strong growth in both multi pack single serve.
Okay.
New this quarter, how are you thinking about performance as nobility improve.
Yes, thanks for the question Pam.
I appreciate that and I guess, the headline is I feel really good about our ability to continue to grow sustainably over the long term and to grow in the top quartile of our peers. There are several reasons for that one is we're in sub segments of.
We are in snacking, which is snacking is growing greater than food and we're in sub segments of snacking that are also growing at a greater rate. We've done a lot of work in understanding our consumer and the need states in which they sit and therefore, we've been able to invest and tried to differentiate and innovate within those need states that are going to solve consumer problems at a greater rate than our competition.
Whats leads to greater than category growth and share growth over time.
So I feel really good about that with good building blocks of growth we've invested in our quality, we would invest in our consumer understanding we've been innovating there and we've been investing in our mixing category fundamentals.
So I feel really good about our ability to invest over time, if you break it down now into our Pac forms the way you've talked about it our immediate consumption of single serve.
We feel good about that with increased mobility of consumers.
<unk>.
During the pandemic, we invested in category fundamentals increase in shelf, increasing stores fixed in our mix, bringing innovation like muffin sticks of which I've mentioned all of those basic fundamental servicing our customers.
Have led to when consumers mobility comes back.
<unk> been coming back with hostess because of the fundamentals and the investments in those I've talked about when you look at the multi pack business, which is typically a bring it home and then using different different areas.
We believe there is a really sticky consumer shift within consumer spending more time at home equals more time snacking and therefore, they're more than within those occasions in which we have with that we've invested in both in consumer insights and within those innovations. So when you put the model together for us in quality understanding the different needs.
Rates, bringing innovation and then ramping up our advertising and marketing to be helped drive that were seeing good results. The final conclusion of that is what I said in my prepared remarks, we've been able to take advantage and get more consumers.
When they try our business what the data would suggest as they repeat on our hostess brands at a rate that's two times the category in total if I look at it over the last two years.
So our repeat rates are good and Thats a good indicator that we're doing a lot of things right and we're building our franchise not just.
Not just winning in the short term, but a win in the long term so sorry for the long answer, but there was a lot to that question. So the headline is I feel good about where we're at.
Thanks that was helpful.
And just on pricing can you talk about the magnitude.
Let's pay increases that you've taken and if you anticipate needing to take more pricing over the coming months.
Okay.
Yes, so we haven't quantified the pricing, but we have priced in the mode. If you look at the first half our pricing was a component of some of our growth, but a lot of that was really driven by volume and mix, we will see an increasing benefit of our pricing as we're moving into Q4 and that will be more balanced with pricing.
On the margin side, and a little bit more driving growth on the revenue side.
Relative to pricing and managing our margins over time, we have a full toolbox to be able to do that we look at pricing, we look at managing our productivity.
Revenue management toolbox, and we see inflation as I said approaching 10% in the back half and we'll be prepared to price as needed and we believe our.
That our brands can sustain that in the marketplace because of previous investments that we've made.
Thank you.
Okay.
Thank you next.
Next we will take Ken Goldman with Jpmorgan.
Hey, Thanks, so much two from me first.
Andy just a quick question on the M&A environment.
Hearing a little bit and that's just speculation right now, but maybe some targets are getting a little bit of potential targets across every industry and get them a little bit more eager to sell before some potential tax changes.
Are you hearing anything about that.
Any urgency here.
Going from potential targets right now or is it more kind of steady as she goes in terms of interest from their side.
We see targets and opportunities.
Continually we're always active in making sure we're monitoring the environment.
It is one of our value creation strategies and use of cash as we talked about over time.
I honestly from where I sit Ken for the rest of the cotton has seen a dramatic.
It has to happen right now although there are some that come in have different urgencies, but that's from where I sit at least thats not tremendously unusual I think the real good part about where we're at we.
We don't need M&A.
To create value, we feel great about our organic growth ability with the portfolio. We've had the way we've been able to transform it over time and our ability.
Capabilities, we've invested in and the growth model that we have so we certainly continue to look we're generating our strong cash flow and have that optionality to continue to create value, but if it doesn't happen, we'll be disciplined about it and have a good use of cash invested in their core business.
<unk>.
And deleveraging.
Thank you for that and then.
I'm going to pivot a little bit I realize youre not talking about 2022, yet, but just wanted to get a sense youre, taking a little bit of pricing.
More and more pricing will flow in rather than the first quarter.
Just trying to get a sense for as you think about heading into next year.
As some of your hedges may be rolling off but you also have more pricing how do we think about sort of when the worst is over as you think about sort of pricing and productivity net of costs again, no. One has a crystal ball, but just trying to get your sense for I think is the worst over here or is it going to get a little bit worse in the first half before it gets better in the second half.
Yes, I think the headline on that is we see elevated input cost and inflation.
At least through the first half of 2022.
We will see increasing benefit of pricing in Q4 than we saw in Q3 and that will flow through we will also see that in the first half.
Over time, we feel good about managing our margins, but we'll certainly expecting that inflation too.
No.
The elevated potentially.
Potentially even more elevated.
We're not ready to guide yet for 'twenty two as we move into the first half of 'twenty, two but we have a toolbox that we believe we will manage those over time.
Helpful. Thanks, so much.
Thank you Ken.
Okay.
Thank you and next we'll take then things <unk> with Stephens.
Hey, Ben.
Hey, how are you.
I wanted to ask just about the <unk>.
Overall share of the business you guys have made a ton of progress.
Those benefits that they're looking at within those broader categories.
So if you couple that with our availability are broad based distribution model were 91%, 92% available with this which is about 10% more than anybody in our category are agile distribution. So we're able to service consumers even during unprecedented constraints within the supply chain, we have built a model and allows.
US to understand our consumer and then bring it to them where they needed within the store, whether we're investing online so.
I don't think of limiting our ability to be able to grow as a share target is defined within sweet baked goods I believe it's going to continue to grow over time way beyond that because of the way we've defined our opportunity market.
Okay, Great and then maybe one more question as it relates to market share, but tying in the innovation investments that you're making.
Of new products, particularly on the breakfast side, and which channel do you think you're seeing the biggest benefit as it relates to market share gains are growth.
As a byproduct of innovation.
It's actually where we get the execution, it's broad base, we've been successful and.
Where it's predominantly immediate consumption.
I find that is convenience channel we have been successful with innovation on the front end at the store I mentioned are muffin sticks are doing well, we bringing out a four ounce version of our crispy minis, which have continued.
Continued to build in attracting an incremental consumer to our franchise, which obviously also expands our share because a lot of times are incremental to the category.
So we've seen our innovation successful across channels, because frankly consumers around the channel nowadays they shop multiple channels in different forms depending on what they are needed. So it's been six where we get the execution at the store level.
Our success has fallen.
Okay, great. Thanks best of luck.
Mhm.
Thank you and once again, if you would like to ask a question. Please can you saw bypassing star one on your telephone keypad.
Next we'll take Robert.
<unk> with credit Suisse.
Hi, Andy.
Well come up with a call.
I know, it's very exciting.
I wanted to know a couple of things actually so the first one is I think in the mass channel, that's where you've had some.
Some challenges this year, maybe get give us a little update on on how you are trying to address that.
And what it requires and then lastly, I know you don't want to don't want to talk about.
Circumstances for for the CFO resignation, but can you give us just kind of a summary of like the main big projects at the CFO office is responsible for right now whether it's productivity are pricing initiatives and give us a sense as to how you can maintain continuity.
And not have a disruption thanks yeah.
Alright, so that's.
Let me take the first one first I feel good about our progress.
And the mass channel, we have some building blocks and green shoots of success.
In total and that's true across our grocery channel it starts by understanding the consumer in investing in some of the things we've invested over time like quality understanding of the consumer and execution. So we have some good.
Green shoots a success for across the board Rob we are in the process of really laying out plans for 2022.
And those are always.
Kind of partnerships our goal is to create sustainable mutually beneficial relationships with all of our customers across the board and that's the way we approach.
Each of our engagement so we've done thing or innovation is.
Some of the apps within all of our channels, including masks, including grocery we're working on building front and distribution, that's expanding including across mass including across grocery.
And are worth taking.
Our investment in servicing our customers, which is some of the tops when we benchmark during very challenging supply chain and we believe by doing all of these things in investing that over time.
B b successful across all of our channels and I'm optimistic that will happen in 2022.
So related to.
This CFO I operate our management team is very collaborative we have five basic behaviors of which we operate in collaboration.
And managing outcomes is are two of them and therefore as a leadership team.
Whenever we have a leadership trains transition it is smooth because we are focused on building organizational capabilities doing it when a very collaborative environment. We meet at the leadership team every other week and go from top to bottom related to through the financials, we've created an infrastructure.
Structure of processes to be able to do that.
So obviously everything that touches the financials and the discipline of the financials go through.
CFO, obviously barnstaple for external reporting and treasury are pretty typical.
CFO group, but as I mentioned I am beyond confidence that the the strength of the team and the strength of the collaboration that we built across the organization position as well, we're not going to.
Mississippi.
Great. Thank you very much.
Thanks, Rob.
Thank you and we'll take our next question from Steve powers with Deutsche Bank.
Hey, Thanks for data.
Hey.
We just unpack when I think you said on gross margin in the quarter I think you said it was down.
With a drag from <unk> and I think <unk> 45.
Yeah Yeah.
You said that was it.
So the timing of so is that a <unk> I guess the question is should we expect it to be a drag into <unk> and beyond or does that get chewed up with pricing that rolls in and all of a sudden assortment becomes more neutral to accretive again.
Yeah, just basically it's a timing thing I feel great about workman's, we certainly had a lag on some of the recovery of costs. The Lago was price and there was a little bit too on some of the productivity just suggesting through the.
But it was mostly Q3 I would expect Q4 to come right back, it's still accretive and it will be more creative as we flow through so think of it as a timing it's really a timing issue feel great about boardman and the long term business proposition. The continued growth in our investment in that business think of it as timing.
Perfect. Thank you very much and I guess.
You alluded to pricing a couple of times before I guess I wanted to come at it from a from a volume elasticity standpoint and just.
I am assuming just given what we've seen so far that right now the last disease are holding up quite well as they are for most companies, but as you as you look out and contemplate enrolling more pricing.
Does everybody else and just puts more burden on the consumer how are you thinking about elasticities as you as you shape your planning for for fiscal 22.
Yeah, well, we continue to model every activity, we take it doesn't matter, whether it's an environment or not we tried to do our best to forecast in breakdown the drivers of our business and what we're seeing right now is the basic fundamentals around consumer behavior snacking more at home.
Even more investments are putting those dollars in us and that is offsetting any impact of the pricing. So the resiliency of our ability to be able to solve consumer needs are hitting it now you're exactly right. It. The more you put in then you use stretch the balance of that.
But the way I would think about it we're in a good position to be able to continue to do that given what we've invested in the business. It's also why we continue to invest in growth.
Want to invest and build a foundation both in the fundamentals with our customers.
Our innovation or quality in our consumer engagement to make sure you have the strongest foundation to be able to continue to build the business, including pricing over time so.
It's certainly put some more strange put in pricing, but I think.
As in as as good or better position than most.
Very good I appreciate it thank you.
And can shape.
Thank you and there are no further questions at this time I would like to turn the conference back over to your house and that's trauma for any <unk> closing remarks.
So I appreciate everyone participation and interest in hostess.
As I mentioned, where we are extremely excited to continue the strong execution against our priority as we drive growth and increase shareholder value overtime. So thanks again for joining we appreciate it and we will see you next quarter and thanks to the great hostess team out there as well who delivered these results every day.
Thank you and that does conclude our teleconference. Today. We appreciate your participation you may now disconnect.
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