Q1 2022 Hostess Brands Inc Earnings Call

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Greetings, ladies and gentlemen, and welcome to France, and <unk> brands, Inc. First quarter of two inch three inch Choo earnings conference call.

At this time, all participants are in listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require assistance during the conference. Please.

Based on these telephone keypad.

As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host Mr. Amit Sharma VP of Investor Relations.

Good afternoon, and welcome to hostess brands first quarter 2022 earnings conference call.

Joining me today on the call is Andy Callahan hostess, Brands', President and CEO and Mark join again, Chief Accounting Officer and interim CFO .

By now everyone should have access to the earnings release for the period ending March 31.

'twenty two.

Published at approximately four P M eastern time.

The press release and Investor presentation are available on wholesale upside at Www Dot hostess brands I'll call.

This call is being webcast and replay will be available on the company side.

During the course of this call Madison will make a number of forward looking statements, including expectations and assumptions regarding the company's future performance.

Company's actual results may differ materially from these forward looking statements and the company undertakes no obligation to update or revise these forward looking statements.

And a list of the risks and uncertainties can be found in today's earnings release and in our SEC filings.

The company will make a number of references to non-GAAP financial measures that we believe that provide useful information to investors.

For the reconciliation of these non-GAAP measures to the most comparable GAAP measure is included in the earnings release.

With that I'll turn it over to Andy Callahan, our president and CEO .

Thanks Tommy.

Like to begin by offering a few highlights from our first quarter, which we delivered exceptional top line and bottom line results. I'll then offer a few comments on the long term health of our business before handing it to Mike for a detailed review of our quarterly financial results.

We will wrap up with a discussion of our raised guidance for the full year before opening it up to your questions.

We laid out a compelling vision that our March investor day of hostess brands as a differentiated snack company with an advantaged business model to deliver sustained profitable growth. We are off to a strong start on delivering that vision.

Our outstanding first quarter results highlight many of the key factors that make us confident in our ability to catapult into the next phase of growth even as we continue to navigate an environment of heightened inflationary headwinds and supply chain volatility.

Now to some of the key quarterly highlights.

Adjusted net revenues grew 25, 1% in the quarter the ninth consecutive quarter of at least 9% sales growth and the highest quarterly sales growth in our history as we delivered strong volume growth and benefited from higher prices.

And favorable mix.

Higher volumes accounted for nearly 15 percentage points of our quarterly sales growth, reflecting strong innovation and consumer demand as well as the continued excellence of our supply chain as we execute well in a dynamic environment.

Price mix contributed 10 points to our quarterly growth as we benefited from planned pricing actions in response to rapidly escalating input costs.

Sweet baked goods and cookies, both posted impressive broad based growth in the quarter.

Our sweet baked goods point of sale led by the hostess brand posted its second consecutive quarter of more than 20% growth.

Our focus on large growing snacking occasions, and investments in innovation and marketing continue to drive the category and enable us to capture greater market share.

Our share of the sweet baked goods category increased 135 basis points to 22% during the first quarter the six consecutive quarter of market share expansion in the sweet baked goods category as we continue to drive overall category growth as we have consistently done.

Over the past three years.

Turning to the <unk> brand and its continued growth momentum.

<unk> grew point of sale, 29% in the quarter well above the nine 5% growth of the overall cookie category expanding distribution continues to be the key driver of Boardman fueled by increasing brand awareness and the positive impact of innovation, particularly focus on the fast growing <unk>.

Doug or free sub segment, where <unk> grew its share by eight points in the quarter.

Our portfolio continues to be very well positioned for evolving snacking behaviors as consumers adjust to the post Covid World hostess brand single serve and multi pack point of sale each increased by more than 20% during the quarter with two year stacked growth of 32% and 34.

Percent respectively.

Additionally, we grew across all channels, demonstrating the strength of our broad based distribution and agile model.

At the same time, our successful and differentiated innovation remains a key driver of our impressive top line trends.

We are leveraging our deeper understanding of key snacking occasions to create more impactful breakthrough innovation that brings incremental households into the franchise.

Our systematic approach has enabled us to create a robust multiyear pipeline of new products to continue to refresh our portfolio and target profitable high priority retail customers and channels.

For instance, baby bonds targeted at the Sweet start occasion continued to be a standout innovation in the sweet baked goods category as lemon and cinnamon baby bonds are the number one and number three skus across all multi pack in terms of innovation sales over the last 52 weeks.

Recently launched boost our jumbo, though net innovation with the caffeine equivalent of what cup of coffee in each Donuts has garnered over 1 billion consumer impressions in just a few weeks, enabling it to gain rapid penetration with on the go consumers.

Continuing the momentum we are launching our next big innovation downstairs.

Balancers will hit the market in late summer and provides consumers with a smaller single serving possible version of our iconic twinkies Ding Dong and <unk> brands.

<unk> is designed specifically to bring incremental consumers to our brands, particularly millennial parents by targeting the lunchbox occasion, and making it easier for kids to enjoy IRR Iconix snacks.

As we outlined at our Investor day, we continue to invest in innovation and growth initiatives, particularly advertising and marketing to support mid single.

Digit top line growth over the long term.

Our brand activation initiatives are increasing top of mind awareness, while driving greater engagement with consumers, which is an important measure for long term success as 61% of the consumers that do not buy US report. The top reason is because they do not think about US we are changing.

Yes.

In the second quarter, we are launching our first national digital video advertisement and plan to ramp up additional <unk> investments over the course of the year.

This will support our core portfolio and the launch of bouncers in the second half as.

As we continue to increase our advertising investments, we will be highly disciplined in our Aro I focused approach.

And our 100% focus on digital will enable us to be more efficient and nimble compared to larger peers with a higher mix in traditional media.

While the strong awareness of the hostess brands, our innovation advertising and in store execution are driving strong trial and increase in household penetration are.

Our investments in product quality are bringing consumers back.

Post this repeat consumers have grown at a faster rate than the category, leading to increased loyalty and sustained growth.

As proud as I am of our topline momentum I am equally proud of our dedicated workforce, which has enabled our supply chain to execute at high levels, even during a period of unprecedented volatility.

The CP in CPG industry like many continues to face a dynamics commodities labor and freight environment and the recent macro events are leading to additional and rapidly increased cost pressures and supply constraints.

We are not immune to many of these challenges also faced by our peers in the industry. We are revising our inflation outlook, which is now expected to be in the high teens for the full year versus our previous double digit outlook as we experienced broad based cost increases.

We continue to execute on our revenue growth management toolkit productivity initiatives and multiple inflation driven pricing actions to manage inflationary pressures.

As we face additional cost increases we are planning to take an additional price increase later this year across most of our portfolio.

We continue to work closely with our retail partners on these pricing actions to ensure that we maintain hostess and the overall category momentum.

We have built a long track record of delivering excellent results in challenging operating environments and we remain confident in our ability to successfully manage through this latest iteration of escalating headwinds in a timely responsible manner, while protecting the long term health and profitability.

<unk> of our business.

Additionally, we will continue to drive sustainable profitable growth the right way as we made great progress on our ESG initiatives.

As I outlined at our Investor Day, we have added achievement of ESG goals into the strategic objectives of our executive team and created a formal structure for the board to provide oversight of our ESG programs.

We look forward to sharing more on our progress in our next corporate responsibility report to be published in a few weeks another milestone in our journey to building strong sustainable corporate culture that values nimbleness integrity tenacity inclusivity.

And a commitment to quality.

In summary.

We had a very strong start to 2022.

Our structural advantages and excellent execution is enabling us to manage a very dynamic and challenging operating environment and raised our full year guidance.

More importantly, we remain highly confident in the new and exciting long term growth algorithm that we laid out in March.

Over the next few years, we expect to deliver mid single digit organic revenue growth.

5% to 7% EBITDA growth.

And 7% to 9% EPS growth that we believe will establish us as a best in class Snacking company.

That generates top tier total shareholder returns.

Now I'll turn it over to Mike to go through the quarterly financial results and our revised outlook in greater detail.

Thank you Andy it's an honor to be a part of the hosts a success story and to speak to another quarter of outstanding performance.

Organic net revenue for the quarter increased 25, 1% to $332 1 million a record for both quarterly sales growth and total net revenue for hostess brand.

Our topline was driven by continued strength in our consumption trends as higher volumes accounted for 15 percentage points of the quarterly growth with the rest attributed to price mix as we continued to benefit from our planned pricing actions and favorable product mix.

Our sweet baked goods portfolio nearly 90% of our total revenue grew 24, 7% during the quarter, while our cookie portfolio grew 28, 9% demonstrating growth across our entire portfolio.

Okay.

Our nearest our Nielsen measured point of sale trends continue to accelerate for the 13 week period, ending April 2nd our sweet baked goods sales increased by 24, 7%. This growth drove a 135 basis point increase in our market share up to 22% of the category with continued.

Broad based momentum.

Boardman Pos increased by 29% in the period three times faster than that than the nine 5% growth for the overall cookie category driven by strong growth in the sugar free sub segment.

Boardman share of the Cookie category increased by 34 basis points to two 3%.

Andy touched on the solid growth of both our single serve and multi pack offerings. Our breakfast portfolio also continues to significantly outperform the sub segment with 33, 9% growth in the quarter nearly twice that of the total breakfast sub segment.

Our strong momentum in breakfast is driven in part by our impactful innovation, particularly baby bonds, which continues to be the top new product and the sweet baked goods category.

Adjusted gross profit of $115 $8 million increased by 21, 3% for the quarter driven by strong volumes and higher prices.

Address adjusted gross margin for the quarter declined by 130 basis points to 34, 9% as the benefit from higher prices and our productivity initiatives, which more than offset by 16% inflation due to higher input transportation and labor costs.

Adjusted EBITDA increased by 24% to $77 4 million.

Up from $62 5 million in the year ago quarter, our strong quarterly EBITDA was driven primarily by higher gross profit.

Our SG&A spend increased with planned investments in our people and our capabilities.

While A&M was largely flat during the quarter.

As Andy mentioned it is expected to increase over the remainder of the year.

Adjusted EBITDA margins were largely flat at 23, 3%.

Our effective tax rate, excluding discrete items was 27, 1% compared to 27, 2% in the prior year quarter and in line with our 27% outlook for the full year.

Adjusted net income of $38 million for the quarter increased 41, 3% from prior year period adjusted earnings per share of 27 incur.

<unk> increased 35% as current quarter EPS reflects average fully diluted shares outstanding of $139 6 million versus $137 2 million in the year ago period.

At the end of the quarter, we had cash and cash equivalents of $238 4 million and net debt of $854 million with a net debt leverage ratio of three times at the bottom end of our targeted range of three 3%.

During the quarter, we repurchased $10 million worth of shares under our previously announced $150 million.

Perfect.

Turning to our outlook for the year.

Given the strong start we are raising our full year guidance. We now expect full year net revenue growth of at least 12% up from previous guidance of 5% to 8%.

Our updated revenue guidance assumes low to mid single digit volume growth relative relative to our previous flattish outlook.

Full year adjusted EBITDA is now expected to be towards the higher end of the initial 280 million to 280 $290 million range, while EPS guidance remains unchanged at 93.

To <unk> 98 per share.

We expect full year capex in the $120 billion to $140 billion range, including spend for the new Arkadelphia facility.

And a tax rate of 27% both unchanged from our original guidance with average shares outstanding of $139 million to $140 million updated from previous guidance of $137 million to $138 million.

Additionally, we now expect our full year Cogs inflation rate to be in the high teens as we continue to invest in our workforce and absorb inflation across commodities pack.

Packaging and transportation, which also includes the impact of our stronger than previously expected volume growth.

We are fully hedged for recoverable commodities in the second quarter and now nearly 90% for the full year.

As Andy described earlier, we plan to take a tissue additional inflation driven price increases across most of our portfolio. Later this year. However, given the rapid increase in inflation above our initial forecast and the timing of our pricing actions and realization of productivity initiatives. We now expect our full.

Year gross margins to be down approximately 150 basis points from last year with the largest decline expected in the second quarter.

Over time, we expect our revenue growth management toolkit, including pricing and our productivity initiatives to fully cover higher costs from inflation.

<unk> with our message at Investor Day, we will continue to invest to drive growth and manage our gross margins over the long run.

It was a very strong quarter of top and bottom line as we continue to drive sustained profitable growth.

With that I will turn it back to Andy for closing comments.

Thanks, Mike.

I want to take this opportunity to thank Mike for his very strong partnership to me and contributions to hostess over the past six months as we as he took on the additional responsibilities of Chief Financial Officer.

At the same time, we are all very excited to welcome Travis lender to the team.

Who will formally join hostess on may 11th.

Okay.

I'll close by reiterating our Investor day message <unk>.

Foundation of hostess brands has never been stronger and I've never been more excited of our capability to catapult two our next phase of growth.

We are operating in a very dynamic environment, but our strong start and increased outlook for the full year clearly highlights the strength of our portfolio.

And our advantaged business model driving our ability to deliver our attractive long term growth algorithm and leading shareholder returns.

And with that we are open for your questions.

Omar.