Q2 2023 Hostess Brands Inc Earnings Call
Greetings and welcome to hostess Brands' incorporated second quarter 2023 earnings conference call.
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It is now my pleasure to turn the conference over to your host MIT Sharma. Thank you you may begin.
Good afternoon, and welcome to hostess Brands' second quarter 2023 earnings conference call Joy.
Joining me on today's call is Andy Callahan, hostess, Brands', President and CEO , and Travis Leonard Chief Financial Officer.
By now everyone should have access to the earnings release for the period ended June 32023.
Published at approximately four P M eastern time.
The press release and Investor presentation are available on wholesale peptide at wholesale 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 risk and uncertainties can be found in today's earnings release, and the United SEC filing.
Management will make a number of references to non-GAAP financial measures that we believe will provide useful information to the investors.
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 .
Good afternoon, everyone and thank you for joining US today, let me start by thanking our dedicated and hard working team members across the hostess brands organization for delivering a good first half and positioning us well for the second half of the year.
I'll begin with a few highlights of our second quarter performance discuss key drivers of our attractive growth outlook and then Travis will provide a more detailed review of our quarterly financial results, we will close with a discussion of our higher full year outlook before opening up to your questions.
We delivered another quarter of strong operating results with double digit profit growth and higher margins, enabling us to raise our adjusted EBITDA and EPS expectations, which are both well above our long term growth targets, while maintaining our full year top line outlook.
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Now to a few highlights for the quarter net revenue increased by three 5% as we lap 16, 8% growth in the year ago quarter net revenue for the second quarter was driven by higher price mix offset by expected volume declined due to the impact of carryover pricing.
And the lapping of year ago growth that said, our volume trends improved in the quarter. This positive trend accelerated in July where we are seeing a meaningful step up in shipments versus the prior year behind customer support a favorable shelf resets and a strong merchandising.
For back to school programming, providing additional confidence in our second half volume expectations, our sweet baked goods point of sale dollars were up two 9% during the quarter and up by 18, 5% on a two year stack basis.
Turning to the Boardman brand Mortmain P. O S increased seven 2% in the quarter, including $13, 1% growth for the recently rebranded Borkman zero sugar cookies and wafers on a two year stacked basis Boardman Pos increased by 32, 2%.
As we continue to capitalize on our leading position in the faster growing zero sugar Cookie sub segment with strong innovation, and our ongoing and increasing investment to drive brand awareness and penetration.
Second quarter profit trends highlighted the strength of our business and our continued focus on detail and operational execution as both EBITDA and EPS grew by strong double digits, along with a meaningful year over year increase in our quarterly gross margin. In addition, we successfully re.
Finance, our term loan and revolving credit facility during the quarter and are very proud of our team's ability to achieve very attractive rates in the current markets the ability to extend our debt maturity with minimal impact to our future interest expense, while gaining additional liquidity through the new revolver is a test.
Two investors confidence in the underlying strength of our business and our strong operating performance. We believe the successful refinancing provides us significant financial flexibility to execute on our strategic objectives and continue to drive strong shareholder returns.
Given the strong first half results.
We now expect adjusted EBITDA towards the higher end of our $315 million to $325 million range and adjusted EPS towards the higher end of our $1 <unk> to $1.13 per share range delivering above our long term al.
<unk> profit growth.
We now expect full year gross margins to be 40 to 50 basis points.
Higher than last year, while our top line guidance remains unchanged at 4% to 6% growth.
I am proud of the sustainability of our growth as we build a premier pure play Snacking company on the foundation of favorable positioning and growing snacking categories with expandable consumption occasions category, leading innovation focused investments and strong and growing execution capabilities.
I continue to believe that foundation of hostess brands has never been stronger.
Let me talk about a few of the key growth drivers in more detail, which provide me confidence in our ability to deliver another year of strong sustainable topline growth and above algorithm profit growth in 2023.
Consumer preferences for snacking, including Sweet snacks remains resilient, even as they adjust to the current economic environment. The number of snacking occasions throughout the day continues to increase and consumers are seeking out a wide range of options as they increasingly adopt a balance sheet approach when making decisions on what.
Snack on from Savory Sweet.
From the intuitional to rewarding and from mindful to indulge it we have a deep understanding of these occasions and continue to refine our strategy to focus on five of the fastest growing indications with an addressable market of more than $65 billion in retail sales and more important where we believe.
Our portfolio has a strong right to win.
Our prolific innovation continues to be a key enabler of our strategy to access these attractive occasions hostess was a number one innovator in sweet baked goods category in both 'twenty, one 'twenty two and with over one five times share of innovation dollars relative to our overall market share we continue to over index on.
Innovation in the second quarter, driven by the launch of hostess Kaz bars, which started shipping in late Q1 initial performance continues to be highly encouraging with both distribution and velocity is trending in line with our high expectations.
<unk> also is receiving high praise from consumers with initial positive feedback that some of the highest levels. Among all of our recently launched innovations such as baby bonds and other highly successful and category expanding launches.
<unk> is the standout innovation in sweet baked goods category in 2023 and is getting strong support from our retailer partners as we continue to build on our track record of bringing excitement and news to the category in the first half along with cash bars, we introduce old fashion Donuts and chocolate baby bonds under the host.
This brand and rebranded our Workman sugar free cookie and wafer product lines to zero sugar expanding its appeal to a wider consumer demographic and increasing taste perceptions and initial results are terrific.
Hostess brands family packs are generating high velocities repeat purchases and instrumentality as we profitably deliver value to customers with strong support from our retail customers. We are extending patently packs to our other iconic brands, including coffee cakes and baby products.
We continue to support our innovation as well as core portfolio through high ROI marketing and advertising second quarter A&M was up nearly 30% as we shifted some of our planned spend to the second quarter behind <unk> in late June we launched our national digital campaign for <unk>.
Focused on driving awareness through digital video social media E Commerce and retail media. We continue to believe that a N M investments are a key component of our growth strategy and critical to attract millennial parents to the hostess brand and increased share of overall snacking.
As we continue to bring growth innovation and excitement to the category I believe our growth partnerships with key retail customers has never been stronger.
Our multi tiered approach to drive greater availability throughout the store and win additional permanent and temporary temporary displays is beginning to pay off we are getting additional merchandising opportunities and gaining tdp's at a faster rate than the overall category.
Recent shelf space resets and many of our large customers are leading to favorable planet Gram changes and additional front end distribution for us, which is very attractive for our impulse driven snacking portfolio.
During the second quarter, the timing of the impact of our growth in customer initiatives varied across retailers.
We expect these initiatives to have a bigger impact on our sales in the second half our shipments are up meaningfully in July reinforcing our confidence in our second half volume expectations.
Though the timing and flow through of competitor pricing and merchandising is creating some short term noise I am confident that our year to go promotion and merchant merchandising activity will drive growth as a reminder, promotion levels in the back half of last year were below historical levels.
As planned our activities include a stronger back to school program and a return to more historical frequency in the second half we continue to monitor the competitive landscape and will adjust our programming and events as needed in this dynamic environment.
We continue to refine and optimize our rgs toolkit to make our overall trade spending more efficient and further strengthen our attractive value proposition for our consumers and seeing good initial evidence. These programs are working.
As I look to the second half we are executing at a high level I am very confident in our team's ability to deliver strong volume driven growth as our innovation higher advertising support and strong retail execution becomes more evident as we fully lap the volume impact from last year's multiple pricing actions.
And the distortion caused by strong execution and last year's dynamic competitive environment.
In addition, our dedicated and talented workforce is driving significant improvements across the supply chain and advancing our productivity agenda to enable us to raise our EBITDA and EPS guidance.
At hostess brands, we remain focused on growing the right way over the long term, we are making good progress on our corporate responsibility initiatives and released our most recent corporate responsibility report in late June , which reaffirms, our tangible commitments to our stakeholders, including communities in which we live and work.
Attaining our key corporate responsibility goals is an important component of the strategic objectives of our executive team with direct oversight from our board of directors in.
In summary, I am pleased with our first half performance, while the consumer environment remains dynamic we are confident of strong second half growth enabled enabling us to raise our full year adjusted EBITDA and EPS guidance, our strong execution of growth fundamentals and customer partnerships support.
Our second half volume expectations and enable us to reaffirm our full year top line guidance.
We continue to execute on our strategic priorities and are well positioned to deliver long term sustainable growth and shareholder value with that let me turn it over to Travis that goes through the quarterly financial results and our reaffirmed outlook in greater detail.
Thanks, Andy I'll start with a review of our top line results.
Organic net revenue for the second quarter increased three 5% to $352 4 million driven primarily by price mix as we benefited from favorable net price realization.
Price mix contributed 10, 4% to the quarterly net revenue growth, partially offset by six 9% decline from lower volume.
Our net revenue growth was driven by four 6% growth in the sweet baked goods portfolio, which accounts for nearly 90% of our total net revenue, while our cookie portfolio declined by five 9% after lapping 27, 6% growth a year ago.
Switching to retail sales trends, our Nielsen measured sweet baked goods point of sale increased by two 9% for the 13 week period ending July one.
While our U S. Cookie point of sale increased by seven 2% in the period, both lapping last year's strong growth.
On a two year stack basis, our sweet baked good retail sales were up 18, 5% in the quarter and Borkman growth was even stronger at 32, 2% driven by our continued momentum and the zero sugar subsegment.
In the 13 weeks ended July one 2023, our share of the sweet baked goods category dollar sales declined by 93 basis points to 28%.
<unk> share of the Cookie category was relatively flat at two 1%.
We have a strong foundation with the right capabilities to drive our category growth strategy, which provide us with confidence we can continue to grow market share over time.
Our net revenue growth was ahead of our retail takeaway growth this quarter due to growth in our non tracked channels as well as timing of shipments, which expect to normalize over time.
Our single serve Pos increased by three 7% during the quarter, while our multipack offerings grew by two 2% as both lapped high teens growth in the year ago period.
Moving to the rest of the P&L.
Adjusted gross profit of $126 4 million increased by 12, 1% driven by favorable net price realization.
Normalizing supply chain versus the fragility, we experienced last year and productivity benefit was more than offset high single digit inflation and lower volume.
Adjusted gross margin of 35, 9% improved by 275 basis points from the year ago period.
Adjusted EBITDA increased by 16, 1% to $80.0 million in the quarter, primarily driven by higher gross profit adjust.
Adjusted EBITDA margin increased by 247 basis points to 22, 7% for the quarter.
Our adjusted operating expenses increased by 21% to $62 1 million due to the planned increase in advertising and marketing investments, partially offset by lower G&A costs.
Advertising and marketing spend increased by 29, 5% to $22 million in the quarter to support both our innovation and our core portfolio.
Our effective tax rate, excluding discrete items was 27, 3% consistent with the prior year quarter and largely in line with our 27% outlook for the full year.
Adjusted net income of $37 7 million for the quarter increased 23, 6% as compared to the prior year period, driven by higher EBITDA.
Adjusted earnings per share of 28 increased 27, 3% driven by higher profitability in the current quarter and lower average shares outstanding.
At the end of the quarter, we had cash and cash equivalents of $99 4 million and net debt of $885 6 million with a net debt leverage ratio of two nine times.
Our capital deployment strategy continues to include returning capital to shareholders through opportunistic share repurchases year to date, we repurchased shares for an aggregate purchase price of $19 4 million. Additionally.
Additionally, as Andy mentioned during the second quarter, we refinance our first lien credit agreement.
The new agreement extends the maturity of our term loan which represents one of the most favorably priced loans recently issued for our ratings category and increases the capacity of our revolving credit facility.
We have also maintained our existing interest rate swaps as a result, there is minimal impact to our expected effective interest rate following the refinancing.
We believe this was a critical step in continuing the disciplined management of our capital structure and provides balance sheet stability as we continue to drive growth in the business.
Turning to our outlook for the year, given our first half results and visibility to the second half we are reaffirming our full year top line guidance and raising our EBITDA and EPS guidance towards the higher end of our previous guidance ranges.
Our full year net revenue growth outlook of 4% to 6% remains unchanged. However, we now expect full year volume to be down slightly relative to previous expectations of relatively flat, which is expected to be offset by stronger net price realization.
As Andy mentioned, our second half volume expectations remain largely unchanged.
Our growth in customer initiatives, which had a lower than expected impact and some retailers in the second quarter are expected to have a sequentially bigger impact on our second half volume as evidenced by meaningful step up in our July shipment trends ahead of the key back to school event.
In addition, we expect continued contributions from our category leading innovation that.
The deployment of our brand building and <unk> investments and benefit of lapping significant prior year pricing in the back half of the year.
We now expect adjusted EBITDA towards the higher end of our $315 million to $325 million range and adjusted EPS towards the higher end of our $1 eight.
Two $1 13 per share range delivering above our long term algorithm profit growth.
Given the strong contribution of revenue growth management and productivity initiatives in the first half we now expect our full year gross margin to improve by 40 to 50 basis points over prior year, including the anticipated headwinds from the Arkadelphia bakery startup.
Which approximately $5 million expected to be one time.
We continue to expect high single digit inflation for the full year was moderating headwinds in the second half.
<unk> with our four buying strategy our market traded commodities are fully covered for the year.
Our productivity initiatives, which we refer to as fuel continue to be a key driver of our margin recovery, we have a pipeline of initiatives to drive efficiencies provide quote fuel for our top line growth, while supporting margin expansion to drive stronger profit growth.
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. We expect our full year G&A cost to be lower in 2023 driving positive operating leverage.
2023 capital expenditures are still expected to be in the range of 150 million to <unk> $170 million, including the investments in 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 as our Capex begins to normalize in 2024 combined with continued profit growth.
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.
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.
We are well positioned to deliver another year of strong results with above algorithm profits and continue our track record of generating sustained profitable growth and leading shareholder value with that we are ready for your questions.
Thank you at this time, we'll be conducting a question and answer session.
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Our first question comes from Jim Fowler.
Sarah with Stephens. Please proceed with your question.
Afternoon. This is Jonathan on for Jim.
On the cat is probably down a bit.
Hey, David can you speak up a little bit.
Is that better.
Yeah perfect. Thanks.
Yeah on the task force rollout could you maybe talk a little bit more about what the response has been from retailers.
Any color you can provide on indoors.
Store displays that would be great. Thanks.
Yeah, we feel really good in general we feel good about our back half in store display stepping up both in convenience and in.
Gross all of our channels. So we feel good about that as we move into the back half program. You know innovation is a strength of this business as we activate our long term growth strategy, we've never stopped with that through the time CAD as far as another iteration of that the enthusiasm behind our customer base was extremely strong.
So to support was good distribution and velocities are as I mentioned in my prepared remarks are.
At our very high expectations as we went in and Thats.
One of them, we rebranded our Boardman zero sugar lying and velocities are performing.
Performing extremely well there we had old fashion Donuts weird chocolate baby bonds. So the portfolio of our business is performing extremely well and <unk> is another iteration of that as you think about the $65 billion addressable market in which we compete innovation is a big part of that because understanding the attributes consumers are looking for.
For in a broader snacking universe is very important for our ability to be able to innovate give them those attributes and therefore expand the consideration sets of consumers in the baked goods in total and baking is performing extremely well and snacking that's going to continue our strategies are designed to capture that market and <unk> is a very good example of that that <unk>.
<unk>, she could work and it's working well.
Great. Thank you so much and then for the follow up could you maybe discuss some of the headwinds that are impacting that could keep part of the portfolio.
Is it primarily demand elasticity from pricing or are there other dynamics at play.
Well the cookie category, our cookie category continues to perform.
Our cookie business performed well in the overall category, it's an $8 billion category were about a $2 one share we're in.
Have a very strong position in the of reduced sugar zero sugar sub segment of that which is growing at a greater rate on a two year stack basis, our <unk> business is nearly 30%.
Is 32%.
Growth and in this quarter, we grew at 7%. So we feel really good about our position within bornemann. We continue to drive awareness, we continue to partner with customers to drive its important within the category that is.
It is enhancing and is very strong and so I feel good about borkman now we have moved through some pricing there are some other things.
Obviously actively managed the portfolio, but the underlying health of the <unk> business is extremely strong as we continue to grow into a large eight.
$8 billion total cookie category.
Great. Thank you so much I'll pass it along.
Thanks, Jonathan.
Our next question is from Ken Goldman with J P. Morgan. Please proceed with your question.
Hi, Thanks, so much.
Just curious how you are looking at your consumption trends on shelf versus your expectations. You mentioned that shipments are doing great in June to July and I guess, that's really what matters, but just in terms of on shelf.
Market share I think.
Perhaps you might have.
I'm not trying to put words in your mouth hope you'd be retaking share at least that your main competitor wouldn't still be taking share by now or at least thats. The sense I got so just wanted to make sure im thinking about that correctly in the scheme of things in terms of end demand.
Yeah, Hey, Ken good to hear from you. Let me there is two parts of that once the share and the others. How do we feel about how we're working at the shelf. So I'll take each of them both of them separately, maybe I'll put them together a little bit.
At a macro level, we're coming through our customer resets.
Most of our program a partnership for the year in our category in Sweet baked goods, mostly happens in the spring. If you look at the data there we feel really good about coming out of there our share of the shelf. This the permanent shelf has increased as we come out of there as we mentioned in the prepared remarks, we did expect that.
Timing of some of those impacts should be greater we see some customers that are actually performing very well executed early some of them had lag, but overall, our partnerships with our customers their support and enthusiasm around our innovation.
<unk> support.
And finish CASM Remy insights that we bring them our continued support of category growth via increasing in our advertising and our investments in quality. So our partnerships I think with our customer is broad based across channels is a strength of this business and has never been stronger and we see that from their support of increasing our share.
Of the merchandising so the timing of that we believe will be it would be more impactful in the back half, but it's very strong now related to your comment on share absolutely as you know and I've mentioned before and I understand the spirit of bringing up share because I grew up in categories, where share was more important than potentially it is here, but I.
You always want to see a positive and you don't like to see it negative, but we compete in indulgent snacking and a $65 billion.
Huge user base, which is interchangeable and we can grow the pie and the fact that we're able to see sweet baked goods, who experience really high pricing and a sharper period of time that a lot of the category and grow overall, our percentage of dollars and that is really a testament to the strength of baking.
And therefore, the <unk> ability to get share of dollars within that total category. So it is important but it's not important in this category, we don't like to see it negative, but it doesn't undermined our strategies and our ability to be able to continue to grow which we're staying on top of we're growing the share of Tvs, we're going to be continue to be number one in innovation.
Invest in our quality and we're going to invest in high ROI advertising and underlying the partnerships with our customers. We believe that will play well over time. So yes, we won't share to grow but we believe we're in a good position to deliver our back half as we communicated and overtime. We expect if we continue to do that which we think we're positioned to do well sure will.
Care of itself.
I'll pass it on thank you.
Thanks, Ken.
Yes.
Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.
Oh, great. Thanks, so much.
I guess I just have a question.
Around the back half in terms of price mix relative to volume I mean, clearly you're stating pretty explicitly.
Shipments were very strong in.
In July you really expect a material I think you said that a couple of times improvement in the back half.
But then I also thought I heard you say maybe volumes for a little bit weaker in the second quarter, maybe pricing was slightly higher than you'd originally expected. So.
No.
If we kind of think through that.
The back half of the year is this kind of like if youre willing to provide some incremental color is this kind of two quarters, where we think on average we're getting kind of price mix, maybe around flattish, maybe slightly up but volumes, there's still get to that guy like it sounds like volume should should really accelerate like like nicely.
Positively accelerate so I'm, just trying to kind of get some definition on what meaningful means.
Yep.
Hum.
So as you know we held on to the back half just a couple of things clarity on the second quarter. There was a lot happening in the second quarter related to that is when the customer resets what happened in the TPP executions were happening we were coming off a large part of the category.
Lori disruptions on supply chain that hostess, but the category that we benefited from so that was difficult to forecast, but as we move into into July we are seeing strong positive shipments and we feel good about our partnerships with our customers on the back back to school, we will see we do expect to see Barry.
Guide of 40, 50 basis points I figured implies essentially.
Kind of you know clearly flat to down in the back half I'm not sure of kind of cadence of you know, which which which quarter might see a little bit more pressure year over year I mean, it sounds like that's because of preopening costs of Arkadelphia, maybe that's more Q4, and then kind of the core of the question is like if we.
Think forward to you know.
A year excuse me [noise].
Those are just one time costs right. This isn't a you know kind.
Kind of margin compression dynamic in the back half because of higher promotional expenses. It sounds like it's mostly driven by the new facility.
Is that right.
Yeah, Yeah, that's right. So so let me let me take this one and and any any.
As well so you know a couple of things. So we are really pleased with our productivity that we've seen in the first half, particularly from our fuel program that I outlined and also our revenue growth management. So as a reminder, these are capabilities that we've been building and I'm really pleased to see their benefits coming through.
And the benefits that we received in the first half it's truly what's driving our confidence and increasing our margin expectation for the full year to that 40 to 50 basis points and as you alluded to in the back half we do have our arkadelphia bakery. So that again is it it's on track is.
On time to be to come online in queue for so that expense is is out there in the back half and as I said in my prepared remarks 5 million is one time in nature.
<unk>, that's it and we're excited about getting arkadelphia coming right on time, we're going we're working to.
You know.
Additional capacity right away.
Perfect. Thank you.
Our next question is from Pamela Kaufman with Morgan Stanley . Please proceed with your question.
Hi, good evening.
Hey, Pam Hi, ma'am.
I just have a follow up to Rob's question I wanted to clarify on your expectations for volumes.
Slightly this year does that assume that volumes are still down in the second half.
No. It does not matter of fact, most for the most part we believe that the second half given the what we've learned as we've gone through Q2, we did see some yeah with the consumer the transition timing of what we do lapping out of a lot of the distortion.
We saw we saw the majority of that volume impacted a change was really in Q2 and that the enhancements that we've made and the changes that we've made in our program. If we made in the back half for the most part keeps cute the back half close to where we originally expected during our guy. So that's the way we're looking at it.
Okay. That's helpful.
You know this.
Very strong gross margin.
That seems to be driving to measure of confidence in getting to the higher end of your full year guidance.
How old are you thinking about reinvestment into the business and stepping up uhm, either marketing or promotional support behind top like rose.
Yeah, well, we we stay on that you know we've been very consistent and I have over five plus years, you know the sustainable long term growth of the business in our ability to continue and we've done a nice job. If you would take back if you take a step back and look at our two year.
Growth or tag or on the revenue sides, 8%.
Which is in line with top indulgence sack and said the distortion, we're seeing Israel, that's right in line and stacked with them I think I saw that on your report as well Pam and so we protected margins very well in this last year as inflation went up probably at a more.
Shorter timeframe for our category versus others. So we're in a good spot for that you bring up a good point, though so how are we thinking that we're bouncing longterm, but we are taking some of that we've enhanced some of the program and the back half versus year ago, we have incremental frequency on our promotions.
We've invested in data so that we can sharper and including our G. M. So we can sharpen on our offers to our customers. We are looking at digital overlays that enhance those programs to increase the effectiveness, we partner, where they want and and increasing our display activity in the back half. So all of those are hoping to give us.
As we come off the distortion driven about the customer and the high pricing that we're gonna be bleeding all sorts in Q3 all of those are part of the equation that are incorporated into our guide.
Thank you that's helpful.
One more question I think you know in the last couple of quarters.
Reported council. It has been further ahead of what.
What we've seen and the scanner data.
There's a benefit from inventory movement or easier compares also some benefit from untracked channels.
It's S. A narrower gap. So just wondering after to anything influencing that and if you were seeing any.
Isn't that performance and on track versus track channels.
No I think generally it does.
I know you track this when we talk about this all out of the calls and it does vary from you know in sweet baked goods from quarter to quarter. Most of the time. It normalizes, we do have a good nontracked channel. There are some little things. This year like we see Ben coming back a little bit higher and there is some benefits from some of our program.
We've been non track channels.
And over time, we expect the breath of our availability, including in some of the non tracts it'd be a strength of the business, but I wouldn't read too much into the variation from quarter to quarter.
Got it thank you.
Thanks Pam.
Our next question is from Cody Ross with UBS. Please proceed with your question.
I got it. Thank you for <unk> Hey, how are you. Thanks for taking my question I wanted to go back to Ken Goldman's question, just around the competitive environment you talked about this a little on the call that you know some of your competitors are getting more promotional when you have seen some share losses, albeit you're above where you were two years ago at what.
<unk> would you guys consider ratcheting up your promotional stance to protect market share and how are you looking at the competitive environment. Do you think most of your competitors are acting rational and do you expect them to you know in the back half of the year.
Yep certainly is you know when it's difficult when someone's when we have such a large disruption due to supply chain services and coming back into the business. It's it's difficult to forecast that was certainly true in queue to the competition I would say in our category, Yeah, I would say <unk>.
Rational so fine, but very competitive and we'd take the competition you know here's what we what we Wanna do is continue to compete aggressively relative to value for the consumer and we believe overtime that when we do that when we give them. The innovation. They wanted the quality they want at the vet price value they want and we look at other ways.
To do that we're in position we're gonna win that's true for a single serve business is true for a bag donuts, it's true for a multipacks and it's also true for our family packs, which are doing very well and we introduced you know.
A year ago and were continue as we said on the prepared call to expand on that so.
That being said, we do acknowledge the short term the consumers appears to becoming more price sensitive in the back half of the year. So we do see that's good that we're kind of lapping the base price, where we are but based on that price sensitivity. The sharpening of the price points and making sure we have them right in the back half the AD in the frequency.
The increase in the display for a reminder, for everybody out there where one of the highest impulse category. So we expect our <unk>, our ship or at least enthusiasm for our customers and our program is up versus year ago, we expect to be all benefits. So we have a lot in our toolbox to compete both in the short term, but more importantly, continuing to keep.
Our strategies that are gonna drive the long term success of the business, but we do.
Similar to what <unk>, we do take the short term and making sure we're delivering for our customers and our consumers meeting them, where they are today in the current environment I think we've done that for the back half.
Gotcha and then one last question broadly speaking in the industry. We've heard this from you know some packaged food peers as well as some up there upstream players what are you seeing from a retail inventory perspective are you seeing any you know retailers decided to lower their <unk>.
Tori levels in an effort to manage to working capital can you just discuss that in a little bit threats. Thank you yeah. The largest part let me talk about sleep Baker's the largest part of our category Sweet baked goods has relatively short shelf life.
So for the most part it doesn't it doesn't impact us as much because went by the time, we get it we manage the shelf inventory for the terms, there's not a lot of room for them to manage large days of supply so.
Bored with business has a little bit bigger thing, but you know.
The majority of our business, it's it's not a it's not a it's not really a <unk> a major factor for our business, but I meant to say it was Bourbon has a larger shelf life, but for the most part drive business inventories not a large part of our but it's not a large part of our business.
Thank you I'll pass it on.
Our next question is from Steve powers with Deutsche Bank. Please proceed with your question.
Okay great.
Thanks, everybody Hey, so.
Just on the promotion discussion picking that up I think you use the word.
Circle frequency or historical cadence and your prepared remarks, returning to that historical frequency and Rebecca.
Love a little perspective on on historical.
Depth or historical levels, and how you expect the promotional environment in the back half and going forward to compare not just on a on a cadence basis, but on a on a on a depth a promotion does that does that also gonna return to circle levels or do we think we normalize a slightly less.
Less less deep if equally if equal breath, a promotion if that makes sense. Yeah. So there's a couple of things going on here. It's a terrific question. There's when we think about merchandising, we're very focused on price point, but also drive and display from that price point. So both of them matter, we have tools to be able to do that with L. T OS with our partnership with customers.
<unk> displays et cetera.
So we do have multiple tools related to making sure. We are successful merchandising programs related to the frequency. There's a there's a <unk> a longer term frequency that I've referred to my prepared remarks, and that's the amount of times that we promote during a season last year, we reduce the <unk>.
Frequency in the back have mostly in queue for we took out an entire event and we raised the promoted price points the higher to a higher level that.
Frankly was.
We believed was too hot we've already adjusted some of that in the front half, but we're gonna get the benefit of that where it in the in the back half where it raised additionally by adding the frequency we're getting back to more historical now put this in all contexts in a year ago. When we were in our queue for when we.
Where we were experienced the customer the category disruption due to a competitor.
The merchant.
Merchandising wasn't going to give any it wasn't going to add as much because we were already up there were getting all the support we were running the service our customers, we did that extremely well they remember that and partner so our merchandise and cadence.
Wasn't as required need it.
Right and so we're coming back and adding additional on top of that at more sharper price points are we believe the sustainable it's not going back to the price points.
At the desk that we were pre the inflation types. So we're not spending that back with just getting them to what we believe is the sustainable level.
Okay. Okay. Yeah. That's that's that's helpful. Maybe maybe you can try this you know you talked about the the the positive gross margin drivers principally being the the productivity momentum and revenue growth management I guess I'm curious is sort of what's in the guidance what you've.
You know what you were able to even the second quarter extrapolated forward or do you see incremental room for further for the productivity or further our gym benefits as time goes on is it <unk>.
Kind of guiding to what you already have cheese carried forward or is there later on top of that incremental benefits that you were expecting.
Yeah, I think I think about this year as a as a full force on acceleration of a visa initiatives.
Is the way to think about it and but I will tell you as you think about our margins longer term you know really productivity our fuel program and revenue growth management are gonna be the key linchpins and to driving or continued investment into our business as well as modest modest margin expansion over to.
<unk>.
The only thing I would add to that is you know what let's put this in context for the for the majority of our company where in the early stages of this and I'm very proud of the progress of the team is made but that's a good position for our investors because my experience in this industry. There is a long one way for us to continue to drive a pipeline of continuous improvement and efficiency programs and in.
<unk> accepted margins that will drive the fuel as we call it to invest into our proven growth strategies that history has proven will work and so we're at the early stages of that so uhm I think there's a good runway for that puts in our G M as well as in our productivity initiatives.
Very good thanks again.
Thank you Sir.
Our next question is from Robert Moscow with T. D talent. Please proceed with your question.
Hi, Rob welcome back.
Yeah.
Feels pretty good good I, but.
But I guess it my my question here.
On one hand, it's.
Today, you you you're marketers have more data than ever to make the right decisions on how deep your promos should go.
But that data is still based on historical patterns and a patterns are moving just really quickly and consumer sentiment is changing really rapidly yet I can't really look at that historical data and and.
Probably find the right price point that you need for these promotions so.
How do you continually adapt to that like it are you able to move faster because of the data analytics that you have and you know how how do you know with confidence that you've got the right price points right now for the back half of the year.
Well you are certainly right I've been doing this for 28 years and certainly as we sit here today, we have more data than we certainly did and every year. The tools gets sharper and better I will tell you specifically there this year if I implied we looked at too far with a history that would be a bad take away because even with the agility we.
Have we've adjusted or enhance some of our back up program just based on what we're seeing in the first half with both the consumer sensitivity to pricing as we moved in response to what the customer needed. So we're looking at that all of the time and trying to make sure that we get to the right price for our business that is going to draw.
<unk>, the both sustainably and providing value to the consumer so work.
We're <unk> I'm not gonna say, we're probably any better than anybody else, but we use those tools with everybody else, what we may be better as being more agile and having the strength of our customer partnerships, but we're looking at that all the time, Rob what we're seeing right now is I look to the back half of that I think a consumer that is may be even more price sensitive.
They were maybe even a year ago, I think that puts us in a position well as I said as we sharpen the price points. It make sure there at the right level and we're coming off the pricing, we're adding a frequency I think that's all you know cause it's a family packs are doing well, there's a lot of things that can address that sensitivity to the consumer so it's a real time.
Process.
Okay, and just for forecasting can I assume that fourth quarter is when the volume turns.
Positive or do you think both quarters, you could be positive for volume growth.
Well as I said, we need the <unk>.
We expected both quarters to be close to positive and positive for so and we expect a strong back to school programming and the enthusiasm of our customers as we see shipments early in July are are are good future to that.
Great. Thank you.
Our next question is from David Palmer was Evercore ISI. Please proceed with your question.
Good evening I.
Hi, Dave question.
With regard to the volume guidance change is that related to that competitive pricing and promotional activity.
And the fact that hostess was just not gonna chase volume and sacrifice.
Profitability too much for that volume.
Well yeah in the second quarter, there was a lot of dynamics going around some of those are forecasting some of us are timing of the competitor coming back some of it was the consumer component.
And the retailer execution of some of the changes in the TDP. So it was a difficult time for us to forecast. It came out the way. It was when we saw it real time, we adjusted into the back half we didn't over just those programs to as you've talked David We're gonna, we're gonna balance, making sure. We continue to have the margins, we protect it very well invest.
Back for the sustainable growth and continue to manage through <unk>, because we believe the whole portfolio I won't go through it again of that are driving growth. Both long term and short term are important to keep in balance. So we've adjusted to real time, Q2, which was a little bit below where we expect it for those factors and we believe we're set up for the back half.
Yeah, I was I'm almost need a an education about how things might work in sweet baked goods category you know.
Some categories like chocolate.
<unk>.
Candy for example, there's a lot of the programming that's really set maybe you you might even know full third or 40% of your of your volume what's gonna happen with the programs that are in place maybe not even you know.
For almost the whole year, but is it possible that this category because you have a mixture of small and large D. S D and non DSD that there's a little bit more unknown here, where do you feel like maybe you're getting a handle around.
The what's coming up yourselves and your competitors.
Such that maybe you're gonna learn how to not be.
<unk> surprised by what's happening by competitors would love your thoughts on that.
Well. There's this is a unique situation relative to having a a competitor.
Competitor, that's with a large disruption in the category related to your customer comment on two different categories work differently or the same I'd say they are generally the same but given the dynamics foresee in within the consumer our customers are always looking for ideas that how do we and they.
Go go to us increasingly I think we have a great partnership in the leadership partnered with the with our customers. So if we have the framework of a full year plan, which are you referring to whichever you a cat category does in every branch does we certainly do but they are they're certainly agile as the year goes on as you continue to enhance then.
Drive better merchandising by Brett better displays so any application and any category knife and is that as you start to your everything with the customer is set in stone that's not the categories I've lived and it's certainly not the agility that we respond to with hostess when we'd see something that can enhance programming for our business and for our customer.
Got it thank you.
Dave.
We've reached the end of the question and answer session I'd now like to turn the call back over to Andy Callahan for closing time.
Thanks, everyone I appreciate your confidence that you place in our team to execute on our plan and drive sustainable profitable growth overtime. So thanks for joining the call and we look forward to seeing you in next quarter, where we continue to work hard for everybody on the call and all of our investors in our team.
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