Q2 2022 Hostess Brands Inc Earnings Call
Greetings and welcome to the hostess Brands' second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now.
My pleasure to introduce your host Amit Sharma, Vice President Investor Relations. Thank you Aman you may begin.
Hi, good afternoon, and welcome to hostess Brands' second quarter 2022 earnings Conference call.
Joining me on today's call is Andy Callahan, hostess, brands', President and CEO and <unk> Chief Financial Officer.
By now everyone should have access to the earnings release for the period ended June 32022.
Publish at approximately four P M eastern time.
The press release and Investor presentation are available on hosted upside that hostess brands Dot 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.
Detailed list of these risks and uncertainties can be found in today's earnings release and in our SEC filings and we 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 .
Thank you Amit.
First off I would like to publicly welcome Travis could the hostess brands' family. We are excited to have his leadership talent and experience as we continue on our journey as a leading snacking powerhouse.
Moving on to our results we delivered another quarter of strong top line performance highlighting hostess brands position as a differentiated snack company with iconic brands and an advantage business model consumption trends in our core categories remain resilient and we continue to drive category.
Both.
Our strong first half results and the strength of our business gives us the confidence to raise our full year revenue guidance to at least 15% growth.
On top of last years 11, 6% growth.
The strength of our revenue performance is meaningfully offsetting high inflation and supply chain inefficiencies due to heightened levels of volatility in the global markets are.
Our full year, EBITDA and EPS outlook remains unchanged, even as we continue our increased investments behind our brands.
Innovation and people to support our sustained profitable long term growth strategy.
First a few highlights from our solid second quarter results and then a few comments on why I feel confident that hostess brands is well positioned to successfully navigate the current operating environment.
I will then turn it over to Travis to provide a more detailed review of our quarterly financial results and our revised outlook for the full year before taking questions.
Now for the quarterly highlights.
Net revenue grew 16, 8% in the quarter, we are growing revenue quarter after quarter year after year.
Second quarter marks the 10th consecutive quarter of at least 9% growth and fifth consecutive quarter of double digit growth.
In this increasingly dynamic environment, we benefited from our advantage business model and strength of our brands with favorability and pricing mix.
<unk> and volume.
The retail sales level, both our sweet baked goods and cookies posted impressive broad based growth in the quarter.
We baked goods point of sale led by the hostess brand grew 15, 6% in the quarter.
Our focus on large growing snacking occasions.
Site, driven innovation and increasing advertising and marketing investments continue to drive the category and enable us to capture greater share of category volume.
Highlighting our unique access to both on the go and at home consumer who.
It's just brain single serve and multi pack point of sale each increased more than 15% during the quarter.
With two year stacked growth of 35, 9%.
And 26% respectively.
Both well ahead of the underlying category trend.
We believe our continued investment in product quality amplifies, our ability to retain more consumers, which is reflected in higher repeat rates that are significantly above others in the sweet baked goods category.
Turning to the Bornemann brand and its ongoing growth.
<unk> growth continues to be driven by expanded distribution fueled by our investments in advertising to increase brand awareness as well as the positive impact of innovation and a continued focus on improving SKU mix.
These actions resulted in borkman, gaining five points of share in the fast growing sugar free sub segment during the quarter.
I am proud of our top line momentum and our long track record of strong organic growth.
Underlying volume trends in our core snacking categories continue to hold up better than overall food even in the current economic environment, highlighting the impact from our focus investments supporting our attractive growth potential over the long term.
To fully realize our growth potential we will continue to make targeted investments across the organization, including investments in our people capabilities products.
And brands.
As planned we are investing in higher advertising and marketing support behind both our core portfolio and new product innovation.
Our high ROI marketing investments include the recent expansion of our first national advertising campaign in over a decade and the upcoming support for the launch of bouncers, our latest innovation platform.
As we mentioned at our March Investor Day, our iconic brands enjoyed more than 90% brand awareness at par or even higher than many of the largest snack right.
However, hostess is not top of mind for 60% of consumers.
A rising advertising and marketing investments are designed to build top of mind awareness for hostess snacks in order to create a powerful flywheel of growth.
Our compelling and differentiated innovation remains a key element of our growth strategy.
Snacking occasions based framework and strong consumer insights are supported by our marketing and innovation capability.
I believe this is why we are now and continue to be positioned to consistently launch more impactful breakthrough innovation that brings incremental households into the franchise.
Innovation is a core competency at hostess we are.
We're building a multiyear pipeline of new products to continue our innovation momentum.
Baby bonds, our highest revenue innovation over the past 12 months is a vivid example of our capabilities.
We have high confidence that bouncers, our next big innovation launch will be another great example of how we can contemporize our iconic brands for the next generation.
Bouncers re imagines our iconic twinkies Ding Dong Endo nets offerings in a single serve palpable version.
Ideal for the lunchbox occasion, and designed to bring incremental consumers to our brands.
Particularly millennial parents.
Answers is receiving strong endorsement and support from our retail partners and is expected to hit the market in early fall.
At the macro level the consumer environment is becoming more challenging we are watching closely for signs of changing consumer behavior as consumer baskets show greater impact from overall higher inflation.
However, we believe that our strong brands and innovation in our targeted snacking occasions positions us well to deliver leading growth.
For the remainder of 'twenty two.
And beyond.
A few points to amplify this point.
<unk>.
We grew retail dollar sales across all channels during the quarter, demonstrating the strength and reach of our broad based multi channel distribution strategy as we continue to operate effectively across all channels.
A key advantage as consumer spending shifts across channel.
Even with double digit price increases absolute price points for hostess products remain relatively low on a per serving basis, making them an accessible snacking option within the snacking occasions in which we compete.
Third.
Similar to many snacking categories, the sweet baked goods category has low private label penetration of less than 3%.
Our strong innovation and excellent retail execution Insulates us against the threat of consumer trade down in the current environment. We are pleased with our strong quarterly growth, which is helping us excel in a challenging operating environment as we face higher heightened inflation and continued supply chain for agility.
I'm proud of our dedicated and talented workforce for continuing to execute at high levels through these challenges, enabling us to maintain our previously communicated EBITDA guidance at the upper end of our $280 million to $290 million range for the full year.
To demonstrate our appreciation earlier this week, we rewarded the relentless efforts and hard work of all of our hourly bakery and distribution center employees with a thank you bonus as we continue to invest in our workforce.
Our frontline team members are the backbone of our wholesale business and we cannot thank them enough.
We also continued to make great progress on all of our corporate responsibility initiatives.
Outlined in our second corporate responsibility report, which we published in June .
We recently announced the appointment of Darrow Riley as our first Chief Sustainability Officer, Daryl will be instrumental in supporting the organization to drive accountability and transparency of our corporate responsibility initiatives as we continue to build a strong sustainable corporate culture.
<unk> net values nimbleness.
Integrity.
Naturally <unk>.
<unk> and a commitment to quality.
In summary.
Our strong quarterly and year to date results position us well to successfully navigate through this near term volatility and deliver our revised full year guidance.
We have built a long track record of delivering excellent results to various operating environment and continue to be excited about the growth opportunities ahead of us.
We are executing on our strategic priorities and remain highly confident in our ability to deliver our attractive long term growth algorithm.
With that let.
Let me turn it over to Travis to go through the quarterly financial results and our revised outlook in greater detail.
Thanks, Andy it's an honor to be part of the hostess success story and speak about another quarter of outstanding performance I will start with a review of our topline organic net revenue for the second quarter increased 16, 8% to $340 5 million a record sales quarter for hostess brands.
Our topline was driven primarily by price mix, which accounted for nearly 14 percentage points of the quarterly growth as we benefited from planned pricing actions and favorable product mix higher volume accounted for the rest of the quarterly sales growth.
Our sweet baked goods portfolio nearly 90% of total sales grew 15, 6% during the quarter, while our cookie portfolio grew 27, 6% demonstrating growth across our entire portfolio.
Switching to retail sales trends, our Nielsen measured sweet baked goods point of sale increased by 15, 6% for the 13 week period ending July 2nd.
With broad based growth across all key channels, our share of the sweet baked goods category dollar sales remained relatively flat at 21, 7%, while our volume share increased by nearly 70 basis point.
<unk> increased by 25% and appeared nearly double the 13% growth for the overall cookie category driven by pricing innovation and distribution gains with strong growth in the sugar free subsegment.
<unk> share of the Cookie category increased by nearly 20 basis points.
As Andy mentioned, both our single serve and multi pack offerings grew by double digits during the quarter.
Our breakfast portfolio also continued to significantly outperform the sub segment with 22, 1% growth in the quarter compared to 16, 1% for the total breakfast subsegment driven in part by our impactful innovation, including baby bonds.
Moving to the P&L adjusted gross profit of $112 8 million increased by seven 1% in the quarter driven by pricing actions and higher volume.
As expected second quarter gross margins were challenging adjusted gross margins for the quarter declined by 299 basis points from the year ago quarter to 33, 1% as the benefit from higher pricing and productivity initiatives were more than offset by 20% inflation as well as inefficiency.
He has caused by supply chain agility.
Adjusted EBITDA increased by 7% to $68 9 million in the quarter as higher gross profit was partially offset by higher SG&A expenses.
Our adjusted SG&A increased by 19, 8%.
$61 2 million driven primarily by planned investments in our people and capabilities and a step up in brand building activities as well as higher variable selling expenses.
Adjusted EBITDA margins declined by 323 basis points to 22% primarily due to the decline in gross margin as previously discussed.
Our effective tax rate, excluding discrete items was 27, 2% as compared to 27, 3% in the prior year quarter and was in line with our 27% outlook for the full year.
Adjusted net income of $30 5 million for the quarter decreased five 3% from the prior year period adjusted.
Earnings per share of <unk> 22 decreased 4% both declined as EBITDA growth was offset by higher depreciation and share based compensation expense.
At the end of the quarter, we had cash and cash equivalents of $206 8 million short term investments of $20 9 million.
And net debt of $858 3 million with a net debt leverage ratio of three times, which is at the bottom of our targeted 3% to four times range.
During the quarter, we repurchased $38 8 million worth of shares under our previously announced $150 million repurchase program.
Turning to the outlook for the year, given our strong year to date results. We are raising our full year net revenue guidance to at least 15% growth up from our previous guidance of at least 12% growth.
We continue to expect full year volume to increase by low to mid single digits are stronger topline outlook is it enabling us to maintain our full year EBITDA guidance towards the high end of the 280 million to $290 million range and EPS guidance and the 93 to 98 per share range.
<unk>.
We continue to expect full year capex in the $120 million to $140 million range and a tax rate of 27%.
Both unchanged from our original guidance.
We now expect average shares outstanding of $138 five to $139 $5 million down modestly from our previous guidance of $139 million to $140 million we.
We continue to expect high teens inflation for the full year and we have forward purchase contracts in place for over 90% of our market traded commodities for the remainder of the year.
Given the incremental supply chain headwinds experienced in Q2, we expect full year gross margins to be down approximately 200 basis points from last year as.
As we look to the back half of the year, we expect incremental margin benefits from previously announced pricing actions.
Along with higher contribution from productivity initiatives.
As Andy mentioned, we will also continue to make targeted investments across the organization, including investments in our people.
Capabilities.
Products and brands as an example, advertising and marketing expense increased by double digits during the quarter and is expected to remain elevated over the remainder of the year to support both core and new product innovation.
We expect to continue to drive productivity initiatives as well as leverage our revenue growth management toolkit, including positive mix and more efficient trade spending to manage our industry leading margins over the long run.
I am proud of our team's ability to deliver another quarter of strong growth and I'm excited to continue our journey of driving sustained profitable growth with that I will turn it back to Andy for closing comments.
Awesome. Thanks, Travis hostess continues to grow due to the resiliency of our portfolio.
Our business model and our strategies supported by our talented team as we execute at a high level in a very dynamic environment.
We remain confident of continuing our revenue growth through the remainder of 'twenty two and beyond at.
As highlighted by our revised outlook.
And our ability to deliver attractive long term growth and leading shareholder returns over time.
With that we are ready for your questions.
Thank you we will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue you.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment that may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Okay.
Thanks, Paul and we are open to the University.
Yes every line of life.
Our first question comes from Pamela Kaufman with Morgan Stanley . Please proceed with your question.
Hi, good evening.
Hi, Pam.
Hi, Jack.
Hi can you discuss the outlook for the second half and what's driving your top line guidance I think you previously expected mid single digit volume growth for the year.
Our volumes are up 3% in the second quarter. So are you still expecting mid single digit volume growth and can you talk about.
What's driving the guidance for <unk>.
Revenue up around 10% in the back half which is slowing.
Less than half of the rate in the first half.
In the first half of the year.
Hey, Thanks, Pam I appreciate the question and coverage, we don't specifically quantify the forward revenue as Travis mentioned.
Youre exactly right, we do expect the full year.
To be you know.
Flat to the mid tier and the mid point.
So the point here is it's exactly really the way we had call. We expected. If you look at the charts. We've been we're lapping really high growth numbers, but we expect that the consumer to be absorbing a lot as we move into the back.
The back half.
In the second quarter, we had 13 eight points of growth was from price mix.
Helping offset our 20% inflation in the second half.
Do expect obviously that trend of more price mix weighted to be in the back half and the full year volumes to be that so it is a deceleration.
Growth.
But still growth.
Leading in.
Other food companies and I think thats really because of our business proposition.
Innovation, our continued investment in the consumer.
And the categories in which we compete in the snacking occasions, which are traditionally resilient. So.
<unk> bin.
It's actually unfolding the way we see it at this point, but we're going to continue to monitor closely we are always focused on the consumer making sure that we have the sustainable profitable growth over time and I feel confident we have the right strategies to do that.
Okay.
Thanks, That's helpful. And then can you just talk about your expectations around gross margin for the year. So you lowered your outlook for gross margin.
During the second quarter, what gives you confidence around that.
Updated gross margin outlook.
What kind of visibility do you have into the back half gross margin.
Great. Thank you for the question I'll take that so as we as we stated in our call. We expect full year gross margins to be down 200 basis points versus prior year, we do anticipate Q2 to be the highest year over year decline.
So as we think about the second half.
From a year over year perspective, we will see that moderate a bit in the second half.
And just to give you a little bit of perspective, we've talked about supply chain for agility and let me give you a little bit of impact of what we were specifically talking about one example of this is around volatility in the timing of certain ingredients. So Unfortunately, you can't make a twinkie with only 95% of ingredient so within <unk>.
<unk> arent there you do experience production scheduling challenges as well as inefficiencies and transportation. We continue to work very closely with our suppliers and value of the strategic relationship we built with them, which provides us confidence that these issues will definitely get better over time.
Yes, I agree with everything <unk> said, we have a good track record of executing in volatile environments from the beginning of Covid to now so we work hard appreciate our suppliers.
Suppliers into a difficult situation.
Good line of sight exactly the way Trevor said.
Great. Thank you.
Thank you Pam.
Thank you. Our next question comes from Ken Goldman with Jpmorgan. Please proceed with your question.
Hi, good afternoon.
Hi, Ken.
Primary and good afternoon.
Hi, I wanted to.
Dive into those production challenges you had in the quarter a little bit more so I'm curious if you could help us understand how much of the deceleration in volume that we saw in the second quarter was the result of supply chain versus.
Just what you were expecting in terms of elasticity.
<unk> have been better if you were able to produce oftenly are there any catch up that way.
Keep in mind as we move into the back.
Yeah.
Yes, I'll take that.
Couple of things first of all we are relatively short shelf life product, where baked goods, we do it actually very well, we do high quality products at scale.
Consumers demand high quality, which is why fresh bakery are still around that such prevalent it's one of our secret sauces, but.
The impact of that is that we have relatively low inventory. So it's not we're not one of those categories that have Kate catch up inventories. So we shipped real time.
As far as the supply chain agility is concerned I would think of it more now we still have some disruptions the costs that <unk> talked about were not bring in.
Not everything is happening as efficient as we're accustomed to or the standards. We have I would think of it more of a cost issue at this point versus a real.
Meaning flee.
Sure.
Growth issue, although we certainly didn't do to everything you do.
Some of those disruptions, but I think in the Q2, it's more related to the.
Two the inefficiencies that it would be good.
Of course.
The volumes.
Okay.
Okay got it that's helpful.
And then my follow up would be your optimism on bouncer at this node and so how should we think about the <unk>.
Incremental to your first your innovation, there and how much.
Contribution.
How should we think about the contribution and how much is embedded in your outlook.
Yeah.
Yes, it's embedded in the outlook, we typically do not break out.
The specific contributions of innovations.
Our team our innovation team with Dan O'leary.
Tina Lambert.
Working in concert with Arris Master Ids, our chief customer officer, really and their talented team it's insight driven.
Focus on our five occasions this was focused on.
The lunch box, which we talked about at Investor day, which is one of our really strategic areas targeted to our <unk>.
Millennial parents, who are searching for these options.
So.
Our customers and our consumers when we test it to them are really excited about the answers and we are too so we're not going to forecast it.
Innovation is an art as much as it is a science our track record over the last several years has been as good or better than most and I'm equally excited about this when you think about.
The lunchbox, new innovation that re imagined some of the icon but.
Some of us and our parents had in a really new and contemporary form for usage that they really need the consumer that has a high awareness of the hostess brands and sub brands and looking for options that are more contemporary.
That's one of the reasons why our customers are excited about it and certainly why we are in the data so that so.
When you move into new occasions, and attract new consumers as well, which we anticipate this to this does.
We do that research we look at what are more platform are both scalable how much is incremental versus the line extension.
Pipeline.
It takes into account all of that.
Very excited about it and enthusiastic about it.
Thank you.
Thank you Eric.
Thank you. Our next question comes from David Palmer with Evercore ISI. Please proceed with your question.
Thanks, Good evening.
We wanted you to maybe tell the story of the quarter a little bit on I know you were expecting.
<unk> shipments to be trailing consumption because of some of the supply chain constraints and maybe surprised yourselves because it looks like your.
Units that you shipped were equal to the measured channel units that we see.
Is that true that where maybe there is some dynamics around Balancers. For example, you have some shipment timing there that that represents the catch up and you still have some lower inventory levels and some other areas I'd love to hear.
Here the story of the quarter in terms of shipments.
Yes, David Let me, let me think through your question here.
A couple of things Youre asking.
Similar to a norm.
Is there some customer related.
Inventory, that's still in front of us to fill up.
There might be.
Little bit of that but I don't think that's really a.
Really meaningfully at play here I think we're we're pretty much aligned when looking at the second quarter in a row, where we had shipments in.
Uh huh.
And then.
Pos that werent meaningfully off.
It is not a it is not a.
It's not a bouncers issue by the way we're in the early we're in some early <unk>.
Shipments of bouncers, but really our national expansion around the answers is happening through September so in the quarter, we do not have a bouncers issue.
I just feel that we have a good consumption model our team does a nice job.
Were really having to execute.
And demonstrate our agility and customer partnerships and other things too.
On some of the supply chain things, we talked about that I think will work through that.
Really through the back half will get back to the efficiencies that we're really.
And predictability that we're accustomed to so.
Don't think that's the issue I don't know if Travis if you have anything to build on that.
No I think you got it handy.
Yes, well we continue to.
To see volume growth.
In the quarter. So we're one of the few that are.
Delivering nearly 14% of price mix and <unk>.
Unit growth on top grown unit share.
Despite some of the disruptions and inefficiencies.
So this was it was really the story of the quarter was you were scrambling for ingredients at times elevated cost in food.
And that was a bit of a surprise.
That was really the story of the supply chain rather than it ultimately leading to a shortfall in what you can ship.
For the most part.
The.
I guess from here you would expect measured channel.
Sales for shipments to be somewhat more.
Even.
I would imagine.
I guess when you are when you are consistent.
Consistent with your guidance.
Are you contemplating any additional pricing actions in the second half you mentioned, 20% inflation I'm wondering if that.
You would see that have the right to be raising price a little bit more than you have.
So yes.
The headline the headwind on that would be.
Everything that's in our guide, we've communicated and it's flowing through the marketplace.
Firms too.
Just in general we looked at our full market basket of things pricing is.
<unk> is one of them.
But we have all of the pricing that were contemplated in the marketplace.
The inflation is coming up as Travis has talked about it for the full year about the high teens. So it was a little higher here in Q2 as you are you noticed.
But thats build in our guide and also obviously a long term algorithm of mid single digit growth EBITDA growth.
Top line growth.
Five to seven and all of that contemplate of EBITDA, all that contemplates us too obviously.
Managing our gross margins over time, and we have a.
Full toolbox of that revenue growth management productivity initiatives actively managing mix to commit to that overtime.
So that's the way we see it obviously very dynamic environment close to that we bought them.
So where we're at.
Yes.
Great. Thank you very much thanks.
Thanks, David.
Thank you. Our next question comes from Ben Bienvenu with Stephens. Please proceed with your question.
Hi, guys, Jim solar on for Ben.
A two part question on the topline performance part one.
Talk a little bit about the volume growth impressive to have 3% volume growth given how much. The price has gone up is that coming from new customers entering the category, whether it's trade down or just return of mobility in C store channel or is that increased buying rates among exist.
Great.
Customers.
Yes, Chris.
Take the question from the consumer point of view.
So we are we do continue to grow units, we expect the full year to come.
Come out of this year with growth in units are greater than 15%.
Growth of at least 50% revenue growth and price mix.
So.
We think the consumer purchases.
We've grown penetration, we're getting more consumers into the franchise.
And the consumers.
When we attract new consumers.
Re P E turned into two time consumers at a greater rate.
Then the category in total.
Most of the two times rates in the category in total.
So a lot of these investments, we're making in growth by bringing them new ideas.
Bringing innovations that are compelling and that they want.
By partnering with our customers actively manage mix and build into distribution and.
And what you don't see as our investment and the great job our supply chain does <unk>.
Quality team and the quality of our products.
B bonds was just really re imagined what quality baked goods happened at scale, but that's happening across all of our portfolio. So when you put those together when we make those investments in growth they become sticky and that's sustainable.
And we're really focused on making sure we get the right price value and do that as efficiently as possible, which is what the magic of our model is and the fact that we are in these five occasions I expect that to continue to repeat overtime. So with any within any one quarter, there's timing of pricing and some other things a lot of things happened maybe execution lapping up things.
But over time that model is going to grow continue to have us grow above food, we're going to continue to grow share in their category because I think were executing the right strategy at the brands and the people and the ideas to be able to do that.
And I think we're seeing that play through in the short term.
We're in categories with snacking with an accessible price points that I believe have proven over time to be resilient and different types of economic environments and our the breadth of our availability to consumers across channels helps insulate that as consumers move across channels looking for value.
I feel like we're in a good position, but long term relative to some of those consumers dynamics and the investments, we're making as well as the short term.
Great and you actually touched on at the beginning of part two there at the end.
The single serve point of sales growth is really incredible given the strength last year.
Is that again, you mentioned more accessible is that just consumers buying it because it's a lower dollar priced than maybe some other indulgent snack or is that again were turned on mobility and.
Maybe new entrants into the category went up by single serve before they go up into the multibank.
There's a couple of things going on here one thing I would just be very clear. This single serves a little bit different occasion than the multi pack. So the single serve is really you need to have distribution at a point of interruption is typically a more of an impulse sale. It is a relatively good price point.
Versus other options accessible accessible price point versus other options as well multi packs.
Of.
By an inventory in your home for in home Snacking on the go so they are distinct occasions on our single serve specifically we have done really well we have we have.
Distribution thats good we executed very well, we have our hostess partnership program with a lot of our distributors and retail customers that allows them to benefit from growth collectively and provide investment. Our teams also given our success and given the innovation. We're doing we're also working with customers to make sure and we talked about this at Investor day.
David O'leary did about our investments and other.
Locations and points of distribution. So you may have distribution of hostess, let's say in a in a grocery box or retail box, but you could get single serve still either more more scheduled or more present in other stores, which adds another opportunity for sale. So we still have opportunity for points of interruption within stores, which.
The team is doing a real nice job at so there's both the repeat that I talked about before as well as some of the breadth of distribution of single serve within.
Different opportunities for the consumer to.
Enjoy our products.
Great. Thanks, guys I'll pass along yes, thank you Tim.
Thank you. Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.
Great. Thanks, so much trying to get this correct.
I guess just first question I had.
What kind of visibility currently on the convenience store channel.
And our understanding.
What you said about concern baskets, showing some impact, but you are still doing well or another company. This morning, saying.
<unk> actually seen diesel traffic from purchase rates in the C store channel at the time being.
I know you've also spoken to the channel before.
So I'm just curious.
What you're seeing in that specific channel.
And if you have any perspective.
Regarding elasticity differential potential on a channel basis as you get through the year.
Yes.
Hey, Rob Thanks for the question.
We have talking about talks about convenience before we look at external data we tried to collaborate at a collaborator credits cross tab to our internal data data.
And what we've seen historically I would just say what I.
Say, what I said last quarter is as <unk>.
Gas prices gone up in mobility was up what we saw was actually the opposite we saw.
Gas prices, particularly decline.
But frequency increase in.
Inside state.
I'll still say the same or benefit from the increased frequency.
Snacks of which we compete be very resilient consumers would cut let's say beverages before they'd cut snacks.
When we looked at it through this quarter and continue to monitor it we did see.
Some of that traffic declined temporarily for a period of time, but then bounce back as we saw fuel prices kind of drop a little bit so the headline on the traffic in the C store has been resilient and thats been helpful for our business as well as the fact that we have.
Yeah.
Sure.
Good distribution good presence good partnership with our customers as well as.
A really good value price point.
Versus some other options they have if theyre looking for a quick snack. So we have seen good resilience I like our position related to elasticity, we typically.
We don't disclose exactly but what we have said before is we certainly see impulse sales.
Modestly less elastic than some other categories and that certainly helps we're the leading share within the single serve within sweet baked goods.
Helpful.
Alright Super.
And then just.
Question, a couple of lines within SG&A.
Advertising and marketing was up double digits.
Quarter.
And then I know you had.
Making the comment on kind of got of course ever or at least first in a long time campaign that's forthcoming.
While at the same time from your Investor day kind of speaking to that by saying that we are going to continue to lean in should we be expecting.
Let's say.
Up tick in the back half of the year like relative to what we're seeing in Q2 or <unk>.
My impression was maybe some of that.
Uptick in kind of spend on the go forward it may be a little bit more heavily weighted in the next year the following year, but maybe I'm wrong.
Yes, well, let me set traffic yeah, I'll start I think in here. So what we said in our in our in our comments is we had a step up in Q2 and.
And we expect that to remain elevated so similar to those levels throughout the remainder of the back half.
Okay, Okay fair enough okay perfect.
And we are supporting bouncers by the way.
We'll expand in September as we said too so that's both the base business and innovation.
Okay perfect.
And then just on the admin side.
Little bit higher.
In the quarter than expected, but I know you have the commentary around the employee bonus piece I'm not sure. If that was included within the quarter or.
Cause that's coming later because I'm just curious if there is a kind of like a one time and then that kind of rolls off a little bit and I'll leave at that.
Yes, just let me get more specific on on G&A as we said in our comments, we expect it to have investments in our people process and capabilities to drive growth and we have accelerated quite honestly our investments in these areas around consumer insights data analytics productivity initiatives.
Again, which is we will continue to support our long term growth both from a top and bottom line. Additionally, we're investing in our workforce.
We've got a new chief customer officer, we've got a new chief sustainability officer, and hired a new R&D head and obviously.
I'm excited to be here as well.
I think overall, we've made some investments we have accelerated those a bit in Q2, which is a little bit of that step up in Q2.
Alright got it think about think about year to go but just think about year to go.
Kind of consistent on a run rate basis.
So Raj central revenue.
Perfect all right. Thanks, Scott.
Thank you Rob.
Thank you. Our next question comes from Bill Chappell with <unk> Securities. Please proceed with your question.
Hi, Good evening this is Steve and Lyne go on for Bill Chappell.
Thanks, Dave sort of piggyback has it gone sort of piggy backing off some of the prior questions about the supply chain.
I mean is there anything to note in terms of like the construction build out cost with the Arkadelphia plant overall Capex guide was unchanged, but is it still on track for the mid.
Second half of 'twenty, three and how quickly do you expect it to ramp.
Once it kind of gets you into that range.
Yeah, Hey, thanks for the question.
The the headline answer is that's that's not related to the supply will talk about the fragility of the supply chain.
Arkadelphia ramp up.
Is still on schedule for the second half.
23.
There is a ramp up schedule, we haven't communicated that that that does take time you have to.
Higher people yet.
Train the people.
Set up the facility, so but that second half of 'twenty three that's on time <unk> talked about the capital budget. So basically think of that is on budget on time at this point.
The supply chain for agility that we're talking about it's more the daily operations of making sure that a very complicated system that runs like a.
Like an orchestra normal times is being disrupted and therefore really challenge our agility, sometimes are efficiencies to be able to service our customers and our consumers at the standard that we have and that's causing us not with an ability not to be able to do that and that the efficiencies that we want so we think we're towards the backend of that but.
We're still in a dynamic and fragile environment, but that's what that comment is more related to that flows through that's Travis explained into some of these costs. So as we move forward and it becomes more stable, we would get more to the efficiencies.
And build from there that our standards expect.
Great. Thank you very much.
Yes.
Okay.
Thank you. Our next question comes from Connor <unk> with consumer Edge Research. Please proceed with your question.
Hi, good evening, thanks for the question.
So great to hear that Boardman is doing so well on the sugar free or better for your segment.
I'm not sure if I missed this but can you quantify maybe what percentage of your portfolio consists of that sugar free or healthier snacking segment and also too just thinking from a mix standpoint is there anything like sizable pricing differential between the healthier options versus the traditional offerings.
Yes, so just the headlines on boardman, so boardman, it's about 10%.
Of our overall portfolio.
In revenue as you saw in this quarter, it's growing of course, our whole portfolio as is.
Is growing a lot.
Boardman is growing a lot we are by far the leading share.
Within our sugar free portfolio.
So that's.
That's a really important.
To think through.
And that that subsegment of sugar free is growing at a consistently growing at two times the rate.
Total sugar our products taste terrific. So we're working.
Obviously hard that's really important for for us to make sure that we have a good portfolio of that.
So.
As far as.
As a percentage of our portfolio sugar free is a meaningful part of our total.
Portfolio.
Relative to total cookies.
And.
But we also have a meaningful share within our regular wafer category and sugar free encompasses both the wafers as well as cookies.
So it's an important part of our portfolio.
Growing at twice the rate.
It's a profitable it's accretive.
Gross margins as well.
Within our portfolio so we feel.
Really like we're in a good.
A good spot relative to.
Sugar free.
Kind of sugar prices about two third of the volkmann business.
Okay. Thank you that was that was really helpful.
I'll pass it on.
Thank you Carl.
Thank you. Our next question comes from Robert Moskow with Credit Suisse. Please proceed with your question.
Hey, thanks.
Andy It's early to think about cost inflation heading into 2023, but.
From our perspective, we just see all these commodities kind of leveling off and even kind of falling falling down a little bit, especially gasoline.
But from your perspective, I'm sure you're seeing your costs only go higher because of our upstream disruptions and lack of availability. So.
So this is maybe this is a hypothetical question, but if the commodity you start kind of leveling off or even falling could we still see a lot of inflation next year, just because I don't know theres, just not enough labor to get.
Your.
Your raws to you when they need to be there I don't know if that's the right way to ask the question, but as disruption still could it be significant enough that we still see inflation, even though the commodities are not so inflationary.
Maybe I'll start here and then Andy will chime in you're right. It's too early to talk about 2023, given the volatility in the global market and we think about volatility there there's weather.
<unk> are uncertain and volatile this deal geopolitical uncertainty out there to your point Theres labor challenges and just the overall supply chain disruption so.
At this point, it's too early to talk about it.
As we said for this year, we've got 90% of our market traded we've got future purchase contracts on 90% of our market traded commodities, but there are some costs that are actually exposed and we buy on the spot as we've discussed such as packaging corrugate labor and be on those will remain open to it.
Spot market so.
Lot of uncertainty volatility and a bit too early to talk about and maybe Andy can talk a little bit about how we think about coverage and our approach in this space.
Yeah, Rob I think you nailed it as far as.
Two forward contracts.
Look at predictability of cost reliability of supply.
And so when you're in a really volatile.
Market, we look at those so we certainly extend out so in that case, just like on the way up there's not an immediate close or theirs.
A little bit the other way.
Who am I to predict inflation.
And I think that's true for everybody else.
Obviously, we can be hopeful we haven't seen it yet so we tried to prepare for multiple scenarios and leveraged our competency of agility and responsiveness and strong.
Our relationships with our customers suppliers.
To kind of manage through it thats proven.
Pretty successful for us so far.
I am hopeful our category I feel like will be resilient through a rocky times for our consumers and I am optimistic, but it's difficult to predict.
Do you expect like when we started this journey I guess, if we can say that COVID-19 was beginning of the journey. There was a it was more of a blunt instrument on the supply chain that was really all clogs and now.
1000 points of light with there, where you're not sure where the disruption is going to come through it's a little bit more like that so.
Agility, certainly better than a terrific tool I would I would guess that.
I would be hopeful that we would see some relief in some stability in the back half but.
I'm not going to sit here and try to predict that.
Okay, well here, here's an easier follow up maybe.
Have you ever said, what the incremental volume from Arkadelphia will provide just on a percentage basis and is it all incremental or is it going to pull some volume from your other facility, which is probably being overworked.
There is a combination of both that we said that it adds 20% capacity to our cake donuts.
Yeah.
And don't up business.
It does have a little bit of a back end benefit of flexibility and some of them remain the bakery.
So if there is a little bit of a combination of both.
The team by the way the team has done a great job because we added lines all over the last three or four years of our industry, leading growth journey, we've added lines and increase efficiency cut skus to get it really get as much out of our fixed assets as we could.
But then we're at the point with our projections on box. So it's a really a good time confidence in our growth.
It does have a little bit of a dual effect.
In that regard.
Thanks.
Yes.
Thank you Rob.
Thank you. Our next question comes from Rebecca Schueneman with Morningstar. Please proceed with your question.
Great. Thanks for squeezing me in so just one quick question I was wondering if you could give me an update on <unk>.
The cities.
How they've been trending since the beginning of the year and how that compares with what your expectations were and then finally, if you'd be willing to quantify that that would be very helpful. Thank you.
Yes.
I'll take that one we do not quantify our elasticity.
So what I would look at it.
The way I'd think about it.
<unk> team has a consumption model that's that's proprietary.
Terry to us and the consumption model says what are all the drivers that are that you see in the Nielsen data or the IRI data what are all the drivers that ultimately resulted in that.
We have elasticity in the model we have.
Distributions.
We have.
Support what's the consumer environment, some macro things in there.
Our advertising support our renovation.
Our team has done a pretty good job with that and what we've seen is.
In the short term we've seen.
Where we hear a lot of the resilience. Despite the pricing a lot of these macro factors around consumer behavior change of behavior are really offsetting what we typically see in the pricing.
Also seeing some of the support so one of the reasons why last quarter, where we saw this impact on the consumer come into play which it appears like its playing out is because of this model. So.
We think we have a pretty good understanding of.
The consumer and the drivers of that team.
<unk> has done a nice job of keeping us educated on that.
There's still some uncertainty out there.
But the analyst vicinity does obviously get a lot of play, but what really happened to some of those support things either we're lapping the change in the consumer behavior changes being at home more and others other things.
We're support for the consumer.
We actually see those drivers not as strong and therefore, you're starting to see a little bit of slowdown.
I'll, just close but with that being said.
I'm very confident in our long term algorithm our growth our model and our ability to grow over time, that's a mid single digits.
Okay, great. Thank you.
Paul we have time for one more please.
Thank you our last question comes from Jay I'm checking in with Citigroup. Please proceed with your question.
Hi, Thanks for squeezing me in here you touched on this earlier, but I wanted to ask on <unk>.
<unk> M.
That higher level as you've looked at the top of mind.
How are you thinking about balancing core product innovation or single serve versus multi pack.
Going into the launch of bouncers and then beyond that.
Thank you.
Yeah. So our team does a nice job, we actively manage a pipeline.
So our pipeline is really grounded in our five occasions with the $50 billion addressable market morning, Sweet start lunchbox afternoon reward immediate consumption afternoon Sharon.
Courage you to look at our Tina Labor did an excellent job at Investor Day.
Click on the link you'll be able to see it I think it's about 10 minutes long and it really explains it but we look at we manage that pipeline, we manage short term news and long term platform innovation that attract new consumers to the franchise Leverages our brand leverages, our insights to be able to bring thats, what bouncers as bouncers looks at that we also look at it.
Convenience channel or immediate consumption innovation as well and that's what boosted.
<unk> looked at the immediate consumption this year, we've launched.
A bagged sugar free cookies under the <unk> brand. So we look at the we look we were grounded in the consumer we look at the occasions. We then build a pipeline in a process of that we're already looking at 'twenty four early 'twenty five ideas and then put it into our business realities, what's going to take to invest what health.
Big can it be et cetera, a lot of that.
That then becomes business judgment, but it all starts with the consumer.
And certainly it's important for us too.
Bring innovation to all of our important consumers, who really we try to.
Inspired moments of joy to everyday.
Great. Thank you very much.
Yes.
Thanks, Jim.
Thank you there are no further questions at this time.
I would like to return I would like to turn the floor back over to Andy Callahan for any closing comments.
Yeah real quickly at close we greatly appreciate your interest in hostess will continue to work hard for all of our all of you a great. Thanks out to the hostess team.
They work hard passionately they bring their heart and soul into everything.
They do so it's greatly appreciate it will we're just getting started and we believe in our long term algorithm that I appreciate it and we'll see you next quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.