Hostess Brands, Inc.

Good day and welcome to the Hostess Brands, Inc. Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to your host, Amit Sharma. Please go ahead.

Thank you, Sarah, and good afternoon, everyone, and welcome to the Hostess Brands Third Quarter 2021 Earnings Conference Call. Joining me on today's call is Andy Callahan, Hostess Brands President and CEO. By now, everyone should have access to the earning release for the period ended September 30, 2021, that was published at approximately 4 p.m. Eastern Time. The press release and an updated investor presentation are available on Hostess Brands' website at www.hostessbrands.com. This call is being webcast, and the replay will be available on the company's 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. The company's actual results may differ materially from these forward-looking statements, and the company undertakes no obligations to update or revise these forward-looking statements. A detailed list of these risks and uncertainties can be found in today's earnings release and in companies' SEC filings. The company 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'll turn the call over to Andy Callahan, our president and CEO.

Thanks, Amit. Good afternoon, everyone. As you saw in the press release and the 8K filed this afternoon, Brian Purcell has announced his resignation as CFO and will be pursuing other opportunities. We appreciate Brian's contributions to Hostess and wish him well in his future endeavors. We are fortunate to have a very strong finance and accounting group and to have Mike Jernigan on the team who has been appointed as Chief Accounting Officer and will serve as interim CFO as we conduct an internal and external search for a new CFO. I will not be addressing any questions related to this transition on the open call, and as a policy, do not discuss personnel matters. I would like to address the tremendous execution of the team, strong financial results, and in-market momentum in Q3 and into Q4 as we close out the year. Turning to the Q3 results, I'd like to begin by offering a few highlights from our third quarter performance to underscore the ongoing momentum in our business, followed by a discussion of our financial results and updated outlook for the rest of the year before opening it up to your questions. We had an excellent third quarter. Hostess high-quality branded snack portfolio, Broad-based and agile distribution model and executional excellence is propelling us to consistent share gains within the large, sweet, indulgent snack category. At the same time, we are successfully navigating the operating environment to sustain our attractive margin structure while investing in our branded portfolio to deliver top-tier shareholder returns. Consolidated net revenue grew 10.4% in the quarter, continuing the streak of at least 9% growth in every quarter since the onset of the COVID pandemic. That is seven straight quarters of above 9% sales growth. Turning to point of sale trends, our sweep eight goods point of sale trends accelerated sequentially with 13.7% growth led by Hostess branded growth of 14.3% as we continue to strategically pivot our portfolio to the higher margin, faster growing Hostess brand. Snacking categories continue to grow faster than overall food and our portfolio is clearly in the consumer sweet spot as we posted 179 basis points of market share gains in measured channels during the quarter. demonstrating Hostess' advanced branded portfolio, outstanding execution, and increasing advertising and marketing investments. Vortman posted another strong quarter of POS growth. Quarterly POS sales increased 20.5%, well ahead of the cookie category, with most of the growth coming from increased distribution, improved retail execution, and strong consumer demand. We continue to make progress on the key building blocks of Bortman growth, including deeper and broader distribution, activating Hostas' proven merchandising model, building brand awareness, and impactful innovation. Bortman distribution expansion in the C-Store channel is progressing as planned, and Bortman trip frequency, basket size, dollar per trip are all up as shown in the latest 52-week panel data. Our hosted single-serve and multi-pack subsegments both posted solid double-digit POS growth in the third quarter, highlighting that our portfolio and broad-based distribution model is uniquely positioned to take advantage of the evolving consumer snacking trends both at home and away from home. With 40% of our retail sales coming from this C-Store channel, our single-serve offerings are well-placed to benefit from improved mobility with increase in vaccination rates. In fact, our single-serve POS sales increased 15.4% during the quarter and 18.2% on a two-year stacked basis, as we leveraged our superior execution capabilities to post a 290 basis point share gain in the convenience channel during the quarter. At the same time, some pandemic-driven changes in consumer behavior appear to be sticky. For instance, work from home remains elevated and is leading to incremental at-home snacking occasions. Our multi-pack and bagged donut business grew 12.4% during the quarter and 22.5% on a two-year stack basis. Similar to the C-Store channel, we are capturing disproportionately larger share of this growth, evidenced by our over 200 basis points of market share gains in the grocery, dollar, drug, and club channels. Notably, unlike many of our food peers, our two-year sales trends are accelerating. signaling sustained top-line momentum from strong consumer demand and higher repeat rates, as opposed to a pandemic-driven spike. Two-year stack consolidated net sales increased by 25% during the quarter, our best two-year comp since the beginning of the pandemic. This strong momentum is driven in large part by our strong innovation, as we are benefiting from a deeper understanding of our key consumers and their purchasing behaviors. Additionally, Our LTO programs, or limited time offerings, around back to school and fall performed well during the quarter. Our vitality rate, a measure of the success of our new product innovation, is trending towards the higher end of our targeted range, reflecting solid contributions from baby bunts, crispy minis, and muffin sticks. For instance, baby bunts, One of our key innovation launches continues to build on a strong start. Lemon Baby Buns and Cinnamon Baby Buns were the number one and four top-growing SKUs in the sweet baked goods category during the quarter. In fact, Lemon Baby Buns is already up to number four amongst Hostess branded multi-pack SKUs in terms of velocity, with trial and repeat rates ahead of expectations. We expect this momentum to strengthen even more with the recent introduction of single-serve baby buns in the convenience channel. Crispy Minis, our multi-textured offering geared towards millennial and Gen Z consumers, is attracting new and incremental consumers to the Hostess brand. Crispy Minis distribution is building steadily and will get a boost with the introduction of the single-serve four-ounce packaging to be sold at the front end of the store. Muffin Stix has been a key innovation for our on-the-go consumer, achieving solid distribution build in the convenience store channel with repeat rates exceeding expectations again. Across Bortman, we continue to build distribution for super grains while distribution and velocity for mega wafers are trending in line with initial expectations. We are supporting our innovation through incremental advertising and marketing support. Our Live Your Most campaign launched last quarter is driving greater engagement across digital platforms, positioning us to win within both consumers and retail partners. With our maniacal ROI mindset, we continue to invest in capabilities and data analytics to further strengthen our new product innovation and sharpen our retail execution, leading to better performance at the shelf and more sustainable share gains. Switching gears, our executional excellence extends to our supply chain, which has enabled us to hold our margins relatively stable despite labor challenges and very high inflation. We are taking pricing actions across our portfolio and customer base. These pricing actions began to flow through our P&L during the quarter and will provide increasing benefit in Q4 and into 2022. We are actively monitoring the operating environment and are prepared to take additional pricing as necessary. We are continuing to experience strong consumer demand for our brands despite higher retail prices, although it's still early and retail shelf price resets by our customers continue to increase to fully reflect the new prices. As expected, we are facing greater inflationary headwinds in the second half, driven by higher input, logistics, and labor costs, as well as stronger than expected volume growth as we made incremental commodity purchases above our existing hedges. Like our peers, we continue to face a challenging labor environment, leading to higher overtime costs and elevated hiring and training expenses. Our team has performed exceedingly well through the current labor environment, and we are taking additional steps to mitigate these challenges by investing in our workforce and employment experience, which we expect will have a positive impact on our cost structure and production capacity over the long term. I am extremely proud of our agile supply chain, which has continued to execute at high levels in the face of our strong volume growth and tough labor markets. While labor availability and supply chain constraints have indeed pressured some parts of our portfolio, our flexible manufacturing footprint and lower cost distribution platform have been the key enablers of our ability to mitigate unprecedented cost pressures, maintain high service levels, and continue to generate strong operating performance. We are confident in our ability to mitigate these headwinds over time through a combination of higher prices, revenue management actions, and productivity initiatives. Now, I'll turn to the quarterly financial results and I'll revise outlook in greater detail. Third quarter net sales increased 10.4% to $288 million. The increase was primarily due to continued strength in sweet baked goods, which increased by 10.6% during the quarter. in addition to a 9% increase in cookies. Year-to-date consolidated adjusted net revenues increased by 10.1%, showcasing a remarkably consistent top-line momentum, reflecting year-to-date growth of 9.5% in sweet baked goods and 15.6% in cookies. Adjusted gross profit of $99.3 million increased by 8.9% for the quarter as higher volume, favorable product mix, pricing, and productivity more than offset transportation and input cost inflation. As expected, adjusted gross margin declined approximately 45 basis points to 34.5% as higher sweep aid goods gross margins were modestly offset by Bortman due to the timing of pricing actions. On a year-to-date basis, adjusted gross margins were essentially flat at 35.5%. Adjusted EBITDA for the quarter was $64.8 million, up from $60.2 million in the year-ago quarter. The increase was driven by higher gross profit, partially offset by higher advertising and marketing spending to support our top-line momentum. Year-to-date adjusted EBITDA increased by 10.9% to $195.6 million for the first three quarters. Our effective tax rate, excluding discrete items, was 26.7%, compared to 24.3% in the prior year quarter. The effective tax rate for the prior year period benefited from the allocation to the non-controlling interest, which was eliminated in the fourth quarter of 2020. Adjusted net income of $28.9 million for the quarter increased 14.2%, from prior year, while adjusted EPS of 21 cents per share increased 10.5% as the third quarter adjusted diluted EPS reflects average fully diluted shares outstanding of 138.1 million versus 127.6 million in the year-ago period. At the end of the quarter, we had cash and cash equivalents of $228.1 million and net debt of $866.3 million with a leverage ratio of 3.3 times, down from 3.9 times at Q4 2020, driven by our strong operating cash flows. During the quarter, we successfully completed the amendment for the cashless exchange of our outstanding warrants. The settlement of these warrants, which expired on November 4th, resulted in the issuance of a total of approximately 10.7 million shares. Separately, we repurchased an additional $25 million worth of shares since our last update for a total of $50 million spent. through the end of the third quarter. We are very pleased with our third quarter performance, and given our strong year-to-date top-line performance, we are raising our full-year net revenue growth guidance from 7.5% to 9% to 9% to 10%. Our full-year adjusted EBITDA and EPS guidance remain unchanged at 260 to $268 million and 83 to 87 cents per share. We now expect full-year inflation to be towards the higher end of our mid-single-digit range, with inflation approaching 10% in the back half due to higher freight, labor, commodity, and energy-related costs. That being said, we believe higher realized prices and additional productivity initiatives will offset rising costs leading to relatively flat gross margins. Our EPS guidance assumes an effective tax rate of 27.5% and average shares outstanding of $139 million, consistent with our previous outlook and includes dilution from the completion of the successful cashless settlement of our outstanding warrants. Our 2021 CapEx guidance remains unchanged at $60 to $65 million, and given our solid year-to-date cash flows, we expect our net debt leverage to be approximately three times by year-end. As we delever almost a full turn in 2021, we remain committed to executing against our key capital allocation priorities, including investing for growth, deleveraging, making strategic acquisitions, and returning cash to shareholders. So to conclude, we remain confident of achieving sustained top-tier growth through the remainder of 2021 and beyond, highlighted by our updated outlook in an increasingly challenging operating environment. Our brands have strong consumer tailwinds. We have good visibility on pricing and competitive dynamics in the category. We are driving cost savings throughout the supply chain and sharpening our revenue management toolkit to offset higher inflation while continuing to invest in growth. With that, I'm available for your questions.