Q1 2023 Hostess Brands Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to the hostess Brands' first quarter of 2023 earnings Conference call.
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A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is small case you to introduce your host on the Charmer Vice President of Investor Relations you may begin Sir.
Good afternoon, and welcome to us as Brian's first quarter 'twenty to 'twenty three 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 March 31, 2023 at the established at approximately four P M Eastern time.
The press release and Investor presentation are available on host as upside at 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 obligations to update or revise these forward looking statements.
Detailed list of these risk and uncertainties can be found in today's earnings release and in our SEC filings.
Management will make a number of references to non-GAAP financial measures that we believe will provide useful information to the investors.
A 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 .
Good afternoon today I will begin with a few highlights of yet another quarter of strong performance offer a few comments on our long term growth drivers and then Travis will provide a more detailed review of our quarterly financial results.
We will close with a discussion of our full year outlook before opening up to questions.
2023 started strong as we delivered another quarter of net revenue and profit growth, while lapping very strong year ago comparisons we continue to execute at a high level and as we look towards the remainder of the year. We are confident in reaffirming our revenue and above our go profit growth guide in 2000.
23.
Now to a few highlights for the quarter.
Net revenue increased by 4% as we lapped 225% growth in the year ago quarter.
As expected quarterly net revenue was driven by higher price mix, with which offset lower volumes as we lapped strong volume growth in the year ago quarter.
As a reminder, our year ago results benefited from our extremely strong supply chain execution in a dynamic environment.
We are proud of the sustainability of our topline growth as we build a premier pure play Snacking company with a focused strategy a proven go to market model, new advanced capabilities and consistent and disciplined execution.
Our sweet baked goods point of sale dollars increased 0.5% during the quarter and up 25, 2% on a two year stacked basis as expected pricing was a large driver of hostess growth during the quarter due to the carryover impact of last year's pricing actions.
Long term snacking trends, including for Sweet Indulgent snacks continued to increase as consumption behavior remained sticky and consumers continue to adopt a balance sheet approach to their snacking choices.
Turning to the Bornemann brand Wardman, Pos increased 10% in the quarter, including 14% growth for the recently rebranded Workman zero Sugar segment.
On a two year stacked basis, <unk>, Pos increased 39% as our leading position in the faster growing zero sugar Cookie subsegment continues to be fueled by our strong innovation and ongoing investments to drive brand awareness.
Our continued focus on execution and discipline across the supply chain enabled quarterly adjusted EBITDA growth of nearly 4% during the first quarter and drove a 13, 4% tagger over the last two years adjusted EPS also increased by nearly four.
Percent in the quarter and an 18, 3% CAGR over the last two years.
The first quarter results were in line with our expectations, enabling us to reaffirm our full year top line and above algo profit guidance for the year, and we remain well positioned to deliver even stronger volume growth in the second half of 2023.
Underpinning my confidence in the second half 2023 growth are a few key points.
The volume impact of last year's multiple pricing actions combined with the distortion caused by strong year ago execution, which are muting growth this quarter will dissipate in the second half.
Second the positive impact of our strong innovation lineup increased year on year advertising support, particularly in Q2, and Q3 and strong customer execution, including shelf reset distribution and merchandising will become more.
Evident as we lap the majority of our pricing in Q3.
Let's discuss these drivers in a little more detail.
Our prolific and insight driven innovation continues to be a driver of our sustained profitable growth.
Led by Baby bonds family packs and bouncers, we drove the most absolute innovation retail sales in the sweet baked goods category in 'twenty two with over two times, our fair share contribution.
In the first quarter, we were once again the number one innovator in the category for the last 52 weeks.
We continue to advance our new product development capabilities to fully unlock the potential of our iconic brands and access to attractive snacking occasions to drive overall hostess and category growth.
Our 2023 innovation is headlined by hostess cads bars, which started shipping in late March and Wow, what a start with cash bars, we have taken more hostess does best our iconic moist cake and transformed it into a multi textured.
Layered snack bar with six layers of Dewey karma or chocolate budge and candy crunch wrapped in chocolate a truly unique product in the broader 65 billion addressable snack market.
Again, bringing what hostess does best.
High quality cake to an indulgent bar form.
Initial distribution and merchandising have been excellent with very strong customer support and while it's too early to tell the first few weeks of retail takeaway and consumer feedback has been very encouraging.
<unk> is indeed, an exciting innovation, but it is not alone in our lineup. In addition to <unk> in the first quarter, we introduced old fashioned donuts and chocolate baby bonds under the hostess brand.
Under the Boardman brand, we rebranded our sugar free Cookie and wafer products line to zero sugar as we work to broaden the appeal and interest of these great products to a wider consumer demographic.
We also launched two flavors of zero sugar, many wafers during the quarter.
Additionally, we launched packaging innovation this quarter all of our board and Cookie packaging now includes an easy open a resale feature.
This new pull tab open feature and reseal capability is sure to be a consumer delight or driving higher purchase intent and overall consumer satisfaction.
We are continuing to support our innovation as well as our core through strategic marketing and advertising our high ROI, 100% digital advertising is focused on digital video social media E Commerce, and retail media and it's highly effective and highly <unk>.
<unk> are driving top of mind awareness.
A key hurdle for consumers, who currently do not buy hostess products.
We continue to build our national advertising campaign to support our core icons as well as remind millennial parents of what they love most about hostess and what makes us distinctive our high quality baked cakes and a great tasting flavors.
And lastly, I am confident that our continued focus on growing our partnerships and servicing our customers as well as investing in our brands will drive our sustained growth over time, while expanding the category with.
With this solid foundation I continue to see us getting stronger year after year and this is certainly true now as I look at our customer plans and initiatives for the remainder of the year as.
As we look ahead, we expect a more historical cadence of merchandising activities with strong retailer support across all formats.
We are also gaining additional permanent and temporary displays to drive multiple points of availability within stores, including at the front end, which is a key driver of our impulse driven snacking portfolio.
As we grow we continue to focus on agility efficiency safety and quality, our dedicated and talented workforce continues to execute at high levels driving significant improvements across our supply chain and advancing our productivity agenda.
The build out of our new bakery in Arkadelphia, Arkansas remains on track and is expected to come online in the fourth quarter.
We remain focused on growing the right way over the long term, we are making great progress on our corporate responsibility initiatives and look forward to sharing this progress with the release of our annual corporate responsibility report in June .
In addition, we continue to work with our national nonprofit partner Nami, the National Alliance on mental illness to support mental health programming and help eliminate the stigma associated with mental health in the workplace.
In support of mental health awareness month.
Just last week, we hosted an incredible session with nomi and our employees to discuss ways to managing xiety, highlighting a number of mental health resources, both through our benefits program and our <unk> partners at hostess brands, we will continue to care about each other as we inspire moments of joy by push.
Our hearts into everything we do.
Obtaining all of our key corporate responsibility goals is an important component of the strategic objectives of our executive team and it has direct oversight from our board of directors.
In summary.
I am pleased with our solid start to the year, enabling us to reaffirm our full year net revenue EBITDA and EPS guidance, while building on our track record of delivering strong results.
We are executing on our strategic priorities to build a premier Snacking company and I believe we have the right consumer insight the right innovation pipeline the right brand building strategy and the best team to deliver long term sustainable growth and shareholder value.
With that let me turn it over to Travis to go through the quarterly financial results and our reaffirmed outlook in greater detail.
Thanks, Andy I'm proud to speak to another quarter of solid financial results delivered by the hostess brands team.
I'll start with a review of our topline results organic net.
Net revenue for the first quarter increased 4% to $345 4 million driven primarily by price mix as we benefited from the carryover impact of last year's pricing actions and favorable mix.
Price mix contributed 14, 6% to the quarterly growth while volume declined by 10, 6% as we lacked strong volume growth in the year ago quarter.
Our net revenue growth rate was consistent across the portfolio as sweet baked goods, which accounts for nearly 90% of total net revenue grew 4% during the quarter, while our cookie portfolio grew three 6%.
Switching to retail sales trends, our Nielsen measured sweet baked goods point of sale increased by <unk>, 5% for the 13 week period, ending April one while our cookies.
Increased by 10, 1% in the period, both lapping last year's strong growth.
As Andy mentioned on a two year stack basis, our sweet baked goods sales were up 25, 2% in the quarter and Borkman growth was even stronger at 39, 1% driven by our continued momentum and the zero sugar subsegment.
And the 13 weeks ended April one 2023, our dollar share of the sweet baked goods category declined by 166 basis points to 23%.
While <unk> share of the Cookie category declined by seven basis points to two 2%.
We remain committed to our sustainable growth strategies, which have enabled our ability to grow share over time.
As you can see our net revenue grew ahead of our retail takeaway this quarter due to growth in our non tracked channels as well as timing of shipments, which is expected to normalize over time.
Our single serve Pos increased by four 9% during the quarter, while our multipack offerings declined by 3% as both lapped over 20% growth in the year ago period.
Moving to the rest of the P&L.
Adjusted gross profit of $121 1 million increased by four 6% in the quarter, driven by favorable price mix and productivity benefits, which more than offset higher supply chain costs, including inflation.
While inflation moderated sequentially from the fourth quarter. It remained elevated at 13, 7% during the first quarter.
Adjusted gross margin of 35, 1% improved by 20 basis points from the year ago period.
Adjusted EBITDA increased by three 9% to $80 4 million in the quarter driven by higher gross profit at.
Adjusted EBITDA margin was essentially flat at 23, 3% for the quarter.
Our adjusted operating expenses, including SG&A increased by eight 7% to $58 6 million due to the planned increase in advertising and marketing investments.
Higher depreciation and higher share based compensation expense.
Advertising and marketing spend increased by 16, 3% in the quarter to support both our innovation and our core portfolio.
Our effective tax rate, excluding discrete items was 26, 9% consistent with the prior year quarter and largely in line with our 27% outlook for the full year.
Adjusted net income of $38 2 million for the quarter remained relatively flat as compared to the prior year period as the contribution from higher EBITDA was offset by higher depreciation and share based compensation.
Adjusted earnings per share of 28 increased by three 7% largely due to lower average shares outstanding.
At the end of the quarter, we had cash and cash equivalents of $101 7 million and net debt of $881 6 million with a net debt leverage ratio of three times.
Our capital deployment strategy continues to include Opportunistically, returning cash to shareholders through share repurchases during.
During the quarter, we repurchased $13 $7 million of shares under our previously announced $150 million share repurchase program.
Our board our board of Directors recently approved a new $150 million share repurchase authorization program.
Which replaced the existing program.
Turning to our outlook for the year, given our solid start to the year, we are reaffirming our top and bottom line guidance for the full year.
We continue to expect net revenue growth of 4% to 6% driven primarily by price mix with relatively flat volume for the full year.
As a reminder, given the seasonality of our business volume and revenue in the second and third quarters tend to be higher than the first quarter.
As the impact of 2020 two's pricing actions dissipate, we expect the benefits of our innovation and merchandising to become more pronounced during the second half of the year.
We remain confident we will deliver above algo profit growth in 2023, and we continue to expect adjusted EBITDA of $315 million to $325 million.
And adjusted EPS of $1 eight.
Two $1 13 per share.
Our full year, adjusted EBITDA, and EPS outlook implies 7% to 10% adjusted EBITDA growth and 10% to 15% adjusted EPS growth.
Both are above our long term algo.
We continue to expect high single digit inflation for the full year with greater headwinds in the first half we.
We are fully covered for our market traded commodities for the first half and nearly 85% covered for the full year.
We continue to expect relatively flat gross margin for the full year, which considers the impact of the arkadelphia bakery startup cost.
Of which approximately $5 million are one time and are primarily expected to impact the back half of the year.
We remain committed to fully recovering our gross margins over time, as we leverage our productivity and revenue growth management initiatives.
As previously discussed we are committed to supporting both our innovation and core with higher advertising and marketing investments, which we anticipate will continue to increase faster than our revenue growth.
Including these advertising and marketing investments, we continued to expect our full year operating expenses to be relatively flat in 2023 as compared to 2022.
We also continue to expect capital expenditures to remain elevated in 2023 in the range of $150 million to $170 million, including the impacts on our new Arkadelphia bakery, which remains on track to begin production in the fourth quarter.
We expect to return to our track record of strong free cash flow generation in 2024, and our capital expenditures begin to normalize to historical levels.
Given our strong operating cash flow and absent any M&A, we continue to anticipate our leverage ratio to be below three times at the end of 2023.
I am proud of our team's ability to continue to deliver attractive long term growth as we build a premier pure play Snacking company.
With that I will turn it back to Andy for closing comments.
Thanks, Travis once again, I would like to close by thanking and congratulating the talented hostess brands team, who put their hearts into everything they do and continue to execute at a high level.
Confident of our team's ability to deliver another year of strong results with above algo profits and continue our track record of generating sustained profitable growth and leading shareholder value.
With that we'll open it up to questions.
Thank you Tim.
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The first question comes from Ken Goldman of Jpmorgan.
Hi, Thank you good afternoon.
Two quick ones on innovation.
Andy I think you mentioned at Cagny that there would be an additional.
Innovation or launch of a product that you werent ready to announce at that time I've lost track a little bit of weather that has been announced or.
Whether it is still to be announced I wanted to follow up on that and then my second question was you mentioned caused bars I think you said what a great start obviously innovation is going quite well for you overall I may have missed this also but did you happen to mention bouncers and how they're performing versus your expectations right now.
Yeah, Hey, Thanks, Ken.
Let me get to your first one second and I'll talk about our lineup.
I apologize I don't remember exactly what I mentioned, but all of the innovation for the most part we have a 23 is now out there we have old fashion Donuts. We are family packs that we launched at the end of last year continued to extremely well, we've re banding rebranded Borkman zero sugar and added the easy open and re.
T cell feature on cookies, which is the largest this satisfies for Boardman brand, which we expect to really four unique product in that space really be at the lighter.
Expanding it and dissatisfied we also launched chocolate baby bonds. So feel really good about the lineup I apologize what I was referring to but feel good about the lineup now bouncers, we talked a lot about last quarter and then we've had great acceptance in distribution and we've received a great response and and good.
Trial, and what we're seeing is specific to a need with especially millennial parents and initially we're seeing trial build.
Head of the holiday season, very well, it's highly incremental to our category our customers are seeing that well and those who have tried repeat very good. So the slope of the trial curve is a little narrower than maybe some of our other products because of its targeted but we generally are very encouraged by it as our customers.
Mostly because of the incrementals in the repeat we're seeing from the initial trial now Kaz bars. So we talked about that <unk> is off to an extremely strong start and has broader and really intuitive appeal. So I think its shelf presence was very intuitive to two.
<unk> consumers and it's truly innovative when you think about bringing our cake.
Quality, which I put up against anybody and put it in a form that consumers are really used to and the indulgent snack space it's really.
Has gotten off to extremely strong start now it's too early to tell we're not in the repeat base customers are as enthusiastic as we are and what we're starting to see is also dual merchandising of <unk> bars and bouncers. So I think having them. Both out there is really good spot did mentioned bouncers in the prepared remarks, because it has mean.
<unk> contributed to our continued track record in 'twenty, two we delivered the leading innovation and it was more than twice our fair share. We expect that to continue I already talked about our pipeline and we measure vitality overtime. We're continue to be on our vitality targets I expect all of our innovation, we're not going to be perfect, but we're going to hit them.
More than the competition and more than many given our insights our brands and our capabilities.
So just very quickly that vitality target I think you said towards the high end of 15% to 17%. This year previously is that still on target.
Yes.
Great. Thanks, Andy.
Thanks, Kevin I appreciate it thank you Ken.
Thank you the next.
Question comes from Rob Dickerson of Jefferies.
Great. Thanks, so much.
I just had a quick question on the.
Topline guidance it still reiterated.
46% for the year most of the price mix.
Thank you then you had a comment.
You would expect.
Excuse me.
Volumes to be essentially flat for the year.
So just to kind of think through I guess.
The price slash mix cadence as we get into Q2, and then especially in Q4 like is there an expectation that maybe like pricing could still be.
Up double digit in Q2, and then kind of goes flat in the back half and then volumes.
Go up nicely once we kind of hit Q4, because you.
Just a quick if you do the quick math.
Not that hard to get to the high end of your guide just on pricing.
<unk> volumes.
Yes. So if you go back so feel good about our line of sight to the dry underlying drivers of growth.
And we've.
<unk> been pretty good about that with our models.
Headline and Youre right on the numbers so the headline on the pricing specifically is if you recall, we have multiple pricing that we're lapping here in 'twenty two the highest price mix will be in Q1, which we've just seen and that tapers off as we move.
Move through.
Q3, and it's all gone by Q4 and it dissipates through Q3, if you remember our last pricing action in the year.
What's flowing through the market in 'twenty two in Q3.
So the impact of the topline of price mix.
Pretty much moves away in the back half and then volume rises to the top as Youll start seeing as Travis mentioned in his prepared remarks, the benefit of our innovation, our advertising step up our merchandising plans, which I feel really good about we have line of sight to will drive.
Topline growth due to more revenue growth versus price mix Q2 is a transition period.
Admittedly given we're still looking at some of the distortion and a lot of the timing, which is sometimes uncertain. When we do this with when customers.
Plans and plan to grants and timing some of the merchandise that was always the case in Q2, but feel good about reaffirming exactly what you said and what we mentioned in our prepared remarks does that help Rob.
Yes, perfect answer thanks, so much and then just.
Quickly and broadly.
As you think about.
<unk> kind of your plans for promotional spend trade marketing it sounds like.
Clearly as you get through the back half of the year, especially kind of in the back quarter back to school period.
It sounds like there could be some kind of forthcoming incremental brand support coming I'm just curious.
Do you view that as a little bit more kind of a push in terms of marketing or.
Is there some incremental.
Promotional and trade spend kind of allocated for the back half of the year. That's it thanks a lot.
Yes, thanks, Rob.
So.
Advertising spend consumer support which is 100% digital we measure the ROI. We adapted all the time you will see elevated primarily in Q2, and Q3, which are higher category driven.
Periods.
Youll see support for Kaz bars coming in in June .
We expect to help as.
As we start really seeing us lapping some things, but also across our core business.
Related to merchandising you can expect we're not in it we expect that the higher price points that we're at we don't expect to necessarily we're not going back to historical but the cadence will go back to historical level and that includes some of those traditional holidays you mentioned.
I would expect the cadence of our merchandising to mean more with the historical they weren't always like last year.
And.
The line of sight that I see with customers.
I feel good about the support that we're getting especially given the incrementals were driving the innovation that are driving the partnerships we have with them.
So I feel good about that one last thing also within our merchandising plans, we talked about our E. Commerce continues we continue to focus on our ecommerce and we continue to focus on availability within the store a real feel really good about the.
The distribution, we're gaining especially with permanent features on our single serve business, which we talked previous on previous calls is initiative.
Arris and our really talented sales team are doing a nice job there. So all of that adds up to.
More to historical merchandising in both merchandising and advertising helped driving growth.
Alright Super Thank you so much thanks.
Thanks, Rob.
The next question comes from Pamela Kaufman of Morgan Stanley .
Hi, good evening.
Hi, Pam.
Can you talk about what you are observing across channels.
What do you attribute as well.
Our growth in multi packs versus single pill.
Highlighted in your slides and then I guess, just looking within Pls data. It seems that you've seen relatively stronger growth within the convenience store channel versus the grocery and mass.
Any color you can share on what Youre seeing would be helpful. Yes, I think the headline on that.
And now because I've put that in perspective, you also see that in the stack numbers now we have specific initiatives on single serves that doesn't always come up in the tdp's of that just mentioned on Rob's, what Rob ask so I feel good about that continued strength in C store in our ability to continue experience points of availability for a single sort of business, which is very strong.
We lead in the category and it's a high impulse category. So that's a good position to be in our two year stack of multi pack is 23.7 and last year in Q1 that was up 27%. So we're kind of lap in that so I think that's most of the answer feel good about the underlying strength of both businesses, obviously single serve.
Is a very strong point within our portfolio.
Okay. Thank you and then I guess can you just comment on what you're observing from the competitive landscape I've within the category, obviously you know.
A large competitor that has been gaining market share over recent months and that I had to yeah sure.
Sure, it's still up but has kind of come back down over the last relative to last year. So how are you thinking about the competitive landscape and where your market share I can shake out over the coming quarters.
Yeah. So you know I believe.
Related to getting out of the distortion, we expect that to happen in the back here now our models and our forecasts have been pretty good for poor kissing the hostess brands business, a little bit more difficult to forecast the category, mostly because we access consumption within the 65 billion dollar snacking business. So we can.
We can grow that availability and then it's difficult to to.
<unk> sure now with that being said you're exactly right. If you go to our prepared invest.
Investor deck that we posted you'll see if you look at 21 to 22, we gained almost to share points. We were up 1.8 share points or so and we were given some of that back because of just the timing of that.
What I'm confident in Pam as we move to the back half, we'd all forecast share because of the reasons I just mentioned, but I'm confident that given our strategies, which are basically category growing strategies.
You expect us to continue to do what we had done with the previous five years as we move up which has continued to grow.
And I would expect given our track record given our strategies and given what were invested in that would likely result in us growing share and driving a disproportionate amount of category growth overtime and I think we'll start getting back to normal cadence as we move to the back here.
Thank you and thanks.
The next question comes from Steve Palm is often shebang.
Hey, great Okay.
Hello.
Good afternoon.
Maybe this builds on what you were just talking about with some of the the year over year distortion, but but I noticed just look.
Through the queue that sales to your your largest customer appeared me down high single digits year over year and up only about 4% sequentially.
I did the math right and it's just a it's a pretty stark deviation from from the trends we had been seeing as I just wanted to see if there's any additional color you could offer about that dynamic and how that's affected the trend through the year.
Yeah, I feel great about our largest customers and all of our customers. Because you are seeing an anomaly because in certain channels. We had some businesses that was reset that's a little bit showing that if you look at our retail business across all of our largest channels are programs are really good.
And we are actually experiencing growth and I would expect to see that continue as we move forward the year I expect.
Really good support across all of our channels.
Okay. Okay.
And then.
Again, maybe building a little bit on some of that some of what you were talking about with Rob but.
I think your comments on the quarter and the comments in a year.
Both helpful and clear, but I guess I'm trying to marry the little bit against the the P. O S data that we're seeing for the total of company. That's that's that's dipped a bit negative here is we get early through the second quarter.
So it is it is it fair to think of the second quarter is it likely low point in in your your growth for the for the company with improvement in the second half or is there a reason why why reported sales will hold up you better and more balanced through the year.
Yeah, I think well.
Certainly Q2 is is kind of a transition quarter.
And I think what you're going to see is beginning a cue to maybe look a little bit more like Q1 is we get out of distortion in the pricing and the back half of Q2 little bit moving to the green shoots that we're talking about I have good confidence that that'll transition through as we go through so.
Is a really high level of pricing lap that were decelerating as we move into the back half and there's that execution on on.
Innovation and stuff, so we'll see that momentum go through the quarter.
<unk>.
Two years <unk> kind of demonstrate that as we move through.
So the exit right on to queue is kind of really the key point for Ya, whereas yeah. Okay. I think that's fair and she'd look at the at the end of the quarter, Yeah, Alright, great. Thanks, very much and that's all contemplated in our forecast.
Yeah great.
Okay.
The next question comes from Cody Ross R. P. P S.
Good afternoon. Thank you for taking our questions. Just a quick clarification question. I think you mentioned that there is a timing of shipments that was a benefit and a quarter. A is that correct and then be can you elaborate here how much of a benefit was it was it in sweet baked goods or cookies and do you expect it to come out.
Later this year and then I have a follow up.
Yes, so we did they would say.
What were referred to as you can see the tie if you've just math and some of some of you liked to map the.
Pointed pass data versus the what we communicate in our net sales data and there was a gap there. So we want to address that there's there's a couple of things going on here. We do have non track channel business that doesn't necessarily ship is programmatic as some of our other.
Programs think about we have some.
Export business, we got other things in different places. So that's a factor that is a little bit more choppy, we definitely have the timing some inventory, which isn't that is huge of a deal for our business, but sometimes it does impact that especially when we have Easter going from quarter to quarter. So we would just wanted to highlight.
Some of those factors as we.
<unk> Q1, now they're all yeah. So there may be some minor impact to some other things in early and Q2 and other things, but we feel really good about our full year.
Guide.
And just to be clear this will come out at <unk>, you said at the beginning part overtime. They all even out so for the most part that's usually the case given.
Given our shelf life and given our.
Our shelf life, and therefore, they're usually tight close to each other that's not always true for some of the non track things that could that could be a little bit longer times since you're more programmatic, they're not as programmatic.
[laughter].
Great and then I just wanted to talk a little bit about your gross margin expectations. I think part of the prepared remarks, you mentioned black gross margin for the year.
Had you were up 20 basis points in the first quarter, but there'll be a 5 million dollar headwind related to arkadelphia.
However, my back of the envelope math suggests that that's still may be conservative what did the temporary and your expectations on gross margin for the year and then more philosophically as we speak how do you think about gross margin going forward you know cause you're roughly at where you are pre COVID-19 your bucket can gross margin.
Continue to expand and do you think there's a ceiling and near future. Thank you.
Hey, let me take your <unk>. This is radical and thanks for the question. Let me take your last question first and talk a little bit philosophically don't think about our margins.
Let me set our margins and a little bit of content I think it will be helpful.
Since 2019 are gross margin compression has been one of the lowest amongst our peers and then if you look at over the last two years are gross margin compression has been less than 200 basis.
So we're growing our business and maintaining our margin in a any unprecedented inflationary environment relish.
Relative to our peers pretty darn well.
Now as we think about our margin and <unk> and and I talk about this several times, we are focused on driving long term sustainable growth and.
And we think about that as we think about kind of margin implications of some of the decisions that we make we start with the consumer first and we work back and make sure that we're given the right value proposition. So when we have 20 per cent inflation and two four and 18 and 5% in queue.
Re of last year, and 20 per cent Q2 of last year, we will absolutely price our business and we did that and we believe we've got all the price in the market places, we we've talked to earlier.
Now can we think about managing our margins and driving <unk>, we talked about and we think about it from a margin management toolkit pricing is one of them, which we do execute when we have inflation, 20%, 13.9% as you saw this quarter.
But when we think about recovering our margins over time, which by the way. We are absolutely committed to we will leverage our productivity initiatives and revenue growth management initiatives within our team will get back what's gonna drive that margin recovery over time and allow us to to fuel our computer.
Investments in A&M and innovation.
But we will not make short term margin decisions at the expense of long term sustainable world.
So that's how we think about our that's our philosophy around the margins nah, specifically as it relates to this year, we feel very we feel that our our our gross margin Guy is a is a responsible guy as I stated in my prepared remarks, they're high single digit inflation Elizabeth high single digit.
And you saw 13.7% in Q1 and by the way you know as I said as well and we are starting a new bakery. So we're starting a new bakery, which is inclusive of 5 million and one time cough that will be in the back half. So we feel that the gross margin flat as a as a bear.
Responsibly at this time.
Great. Thank you so much for the color I'll pass it on.
It's thank you Cody.
Thank you. The next question comes from Bill <unk> Trust.
Hey, guys Messed me this is Donald on for Bill.
Hi, Donald.
Alright, I just had a quick question on innovation could you give some color on the mortgage contribution can cast spells and any competition if any face in that area. Thank you.
I'm sorry, what was the first one the <unk> was that marching contribution.
Yes, nausea contributions from past policy and your new innovation.
New innovations in total so.
It's too early well first of all our philosophy on innovation I think what you are getting too is there's a little bit upfront cost to to launch then.
Because you have a little startup costs, you, sometimes you invest disproportionately in trial and some other things, but we always have of Travis and I always have a philosophy that as we drive growth through innovation. That's all of our innovation will that get to our average margin or better within our portfolio. We have line of sight for that usually not always right away.
Way, but over time, so that was the first the first part of that question and then related to <unk>, specifically you were asking.
Sorry can you ask that again, the where we are sourcing <unk> Ah yes, no I was just asking if there was any competition faced in that area, particularly pertaining to Cachepot Oh.
Competition, yes, well one of the things that is we I'm really really feel good about cats, but first of all.
Hats off the Sherry and P. That's a call out to our R&D leads and there's all team underneath them who.
Who who produce these innovations and bring them to life, we do K I, I believe and I'll put them up against anybody better than <unk>.
Anybody on you you can compare it there's a lot of people that try but we do it for a living and we spend a lotta time, making sure that the quality of it over shelf life is really good so I feel hats off to that team.
But specifically, we're bringing K to a bar form in the $65 billion addressable market that consumers are used to the form they one indulgence in great tasting and the universally love cake, and we're able to bring them together that when they try it they really like it we had it at a recent investor.
Conference and to be honest with you. The response back has been universally accepted given the layers and everything so it taps into that broader space around especially around the afternoon indulgence, where consumers are just looking for then given the fact that it's in a form that they're really used to when we're able to add cake too. It is really not unique and.
So that's what's gonna source volume from and that's why a lot of what we do when we consistently think about our business. We think of it more broadly that's why we get the share question, sometimes we live in a pool where.
Consumers are willing to they may make purchase decisions in the category, but we're really it's gonna drive it's sustainably over time is how they use it one sorts in the house or what's gonna cost them too. So we actually consumers make choices across multiple categories. When it comes to snacking, it's not like some other categories, where it's fairly binary across brands. So we feel really.
Good about our ability to take this put it in a form and an indulgent format that consumers really respond to tap into that broader market.
Okay. Thank you so much.
Thanks.
Thank you Lady.
Disentrance minutely have reached the end of the question and answer session.
<unk> tend to call back over to Andy Canada, Okay, Let me know.
Alright. Thank you so much and thanks, everyone for the confidence you've placed in our team as we continue to execute on our plan.
And we will put our hearts and souls and to inspire more moments of joy for all of our stakeholders. So thanks, a lot I. Appreciate your interest we will see you next quarter and we'll keep working hard for everybody.
Thank you, Sir ladies and gentlemen, this country's today's conference. Thank you for attending and even now disconnect.
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