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spk00: Ladies and gentlemen and welcome to OCS Brands Inc first quarter of 2022 earnings conference call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require assistance during the conference please press star on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Amit Sharma, VP of Investor Relations.
spk04: Good afternoon and welcome to Hostess Brand's first quarter 2022 earnings conference call. Joining me today on the call is Andy Callahan, Hostess Brand's President and CEO, and Mike Jernigan, Chief Accounting Officer and Interim CFO. By now, everyone should have access to the earnings release for the period ending March 31st. 2022 that was published at approximately 4 p.m. Eastern time. The press release and investor presentation are available on Hostess' 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 obligation 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 our 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 reconsideration of these non-GAAP measures to the most comparable gap measures is included in the earnings release. With that, I'll turn it over to Andy Callahan, our President and CEO.
spk12: Thanks, Amit. I would like to begin by offering a few highlights from our first quarter, which we delivered exceptional top line and bottom line results. I will then offer a few comments on the long-term health of our business before handing it to Mike for a detailed review of our quarterly financial results. We will wrap up with a discussion of our raised guidance for the full year before opening it up to your questions. We laid out a compelling vision at our March Investor Day of Hostess Brands as a differentiated snack company with an advanced business model to deliver sustained, profitable growth. We are off to a strong start on delivering that vision. Our outstanding first quarter results highlight many of the key factors that make us confident in our ability to catapult into the next phase of growth, even as we continue to navigate an environment of heightened inflationary headwinds and supply chain volatility. Now, to some of the key quarterly highlights. Adjusted net revenues grew 25.1% in the quarter. the ninth consecutive quarter of at least 9% sales growth, and the highest quarterly sales growth in our history, as we delivered strong volume growth and benefited from higher prices and favorable mix. Higher volumes accounted for nearly 15 percentage points of our quarterly sales growth, reflecting strong innovation and consumer demand, as well as the continued excellence of our supply chain as we execute well in a dynamic environment. Price mix contributed 10 points to our quarterly growth as we benefited from planned pricing actions in response to rapidly escalating input costs. Sweet baked goods and cookies both posted impressive broad-based growth in the quarter. Our sweet baked goods point of sale, led by the Hostess brand, posted its second consecutive quarter of more than 20% growth. Our focus on large, growing snacking occasions and investments in innovation and marketing continue to drive the category and enable us to capture greater market share. Our share of the sweet baked goods category increased 135 basis points to 22 percent during the first quarter, the sixth consecutive quarter of market share expansion in the sweet baked goods category as we continue to drive overall category growth as we have consistently done over the past three years. Turning to the Bortman brand and its continued growth momentum, Bortman grew point of sale 29 percent in the quarter, well above the 9.5 percent growth of the overall cookie category. Expanding distribution continues to be the key driver of Vortman, fueled by increasing brand awareness and the positive impact of innovation, particularly focused on the fast-growing sugar-free subsegment, where Vortman grew its share by eight points in the quarter. Our portfolio continues to be very well positioned for evolving snacking behaviors as consumers adjust to the post-COVID world. Hostess brand single-serve and multi-pack point of sale each increased by more than 20% during the quarter, with two-year stacked growth of 32% and 34% respectively. Additionally, we grew across all channels, demonstrating the strength of our broad-based distribution and agile model. At the same time, our successful and differentiated innovation remains a key driver of our impressive top-line trends. We are leveraging our deeper understanding of key snacking occasions to create more impactful breakthrough innovation that brings incremental households into the franchise. Our systematic approach has enabled us to create a robust multi-year pipeline of new products to continue to refresh our portfolio and target profitable, high-priority retail customers and channels. For instance, baby buns targeted at the sweet start occasion continue to be a standout innovation in the sweet baked goods category, as lemon and cinnamon baby buns are the number one and number three SKUs across all multi-pack in terms of innovation sales over the last 52 weeks. Recently launched Boost, Our jumbo donut innovation with the caffeine equivalent of what cup of coffee in each donut has garnered over 1 billion consumer impressions in just a few weeks, enabling it to gain rapid penetration with on-the-go consumers. Continuing the momentum, we are launching our next big innovation, Bouncers. Bouncers will hit the market in late summer and provides consumers with a smaller, single-serving, poppable version of our iconic Twinkies, Ding Dong, and Donets brands. Bouncers is designed specifically to bring incremental consumers to our brands, particularly millennial parents, by targeting the lunchbox occasion and making it easier for kids to enjoy our iconic snacks. As we outlined at our Investor Day, We continue to invest in innovation and growth initiatives, particularly advertising and marketing, to support mid-single-digit top-line growth over the long term. Our brand activation initiatives are increasing top-of-mind awareness while driving greater engagement with consumers. which is an important measure for long-term success as 61% of the consumers that do not buy us report the top reason is because they do not think about us. We are changing that. In the second quarter, we are launching our first national digital video advertisement and plan to ramp up additional A&M investments over the course of the year. This will support our core portfolio and the launch of bouncers in the second half. As we continue to increase our advertising investments, we will be highly disciplined in our ROI-focused approach. And our 100% focus on digital will enable us to be more efficient and nimble compared to larger peers with a higher mix in traditional media. While the strong awareness of the Hostess brands, our innovation, advertising, and in-store execution are driving strong trial and increase in household penetration, Our investments in product quality are bringing consumers back. Post-its repeat consumers have grown at a faster rate than the category, leading to increased loyalty and sustained growth. As proud as I am of our top-line momentum, I am equally proud of our dedicated workforce, which has enabled our supply chain to execute at high levels even during a period of unprecedented volatility. The CPG industry, like many, continues to face a dynamic commodities, labor, and freight environment, and the recent macro events are leading to additional and rapidly increased cost pressures and supply constraints. We are not immune to many of these challenges also faced by our peers in the industry. We're revising our inflation outlook, which is now expected to be in the high teens for the full year versus our previous double-digit outlook as we experience broad-based cost increases. We continue to execute on our revenue growth management toolkit, productivity initiatives, and multiple inflation-driven pricing actions to manage inflationary pressures. As we face additional cost increases, We are planning to take an additional price increase later this year across most of our portfolio. We continue to work closely with our retail partners on these pricing actions to ensure that we maintain Hostess and the overall category momentum. We have built a long track record of delivering excellent results in challenging operating environments. And we remain confident in our ability to successfully manage through this latest iteration of escalating headwinds in a timely, responsible manner while protecting the long-term health and profitability of our business. Additionally, we will continue to drive sustainable, profitable growth the right way as we make great progress on our ESG initiatives. As I outlined at our investor day, we have added achievement of ESG goals into the strategic objectives of our executive team and created a formal structure for the board to provide oversight of our ESG programs. We look forward to sharing more on our progress in our next corporate responsibility report to be published in a few weeks. Another milestone in our journey to building strong, sustainable corporate culture that values nimbleness, integrity, tenacity, inclusivity, and a commitment to quality. In summary, we had a very strong start to 2022. Our structural advantages and excellent execution is enabling us to manage a very dynamic and challenging operating environment and raise our full year guidance. More importantly, we remain highly confident in the new and exciting long-term growth algorithm that we laid out in March. Over the next few years, we expect to deliver mid-single-digit organic revenue growth 5% to 7% EBITDA growth, and 7% to 9% EPS growth that we believe will establish us as a best-in-class snacking company that generates top-tier total shareholder returns. Now, I'll turn it over to Mike to go through the quarterly financial results and our revised outlook in greater detail.
spk14: Thank you, Andy. It's an honor to be a part of the Hostess success story and to speak to another quarter of outstanding performance. Organic net revenue for the quarter increased 25.1% to $332.1 million, a record for both quarterly sales growth and total net revenue for Hostess brands. Our top line was driven by continued strength in our consumption trends as higher volumes accounted for 15 percentage points of the quarterly growth, with the rest attributed to price mix as we continued to benefit from our planned pricing actions and favorable product mix. Our sweet baked goods portfolio, nearly 90% of our total revenue, grew 24.7% during the quarter, while our cookie portfolio grew 28.9%. demonstrating growth across our entire portfolio. Our Nielsen measured point of sale trends continue to accelerate. For the 13-week period ending April 2nd, our sweet baked goods sales increased by 24.7%. This growth drove 135 basis point increase in our market share up to 22% of the category with continued broad-based momentum. Vortman POS increased by 29% in the period, three times faster than the 9.5% growth for the overall cookie category, driven by strong growth in the sugar-free subsegment. Vortman's share of the cookie category increased by 34 basis points to 2.3%. Andy touched on the solid growth of both our single-serve and the multi-pack offerings. Our breakfast portfolio also continues to significantly outperform the subsegment with 33.9% growth in the quarter, nearly twice that of the total breakfast subsegment. Our strong momentum in breakfast is driven in part by our impactful innovation, particularly baby bumps, which continues to be the top new product in the sweet baked goods category. Adjusted gross profit of $115.8 million increased by 21.3% for the quarter, driven by strong volumes and higher prices. Adjusted gross margin for the quarter declined by 113 basis points to 34.9% as the benefit from higher prices and our productivity initiatives was more than offset by 16% inflation due to higher input, transportation, and labor costs. Adjusted EBITDA increased by 24% to $77.4 million, up from $62.5 million in the year-ago quarter. Our strong quarterly EBITDA was driven primarily by higher gross profit. Our SG&A spend increased with planned investments in our people and our capabilities. While A&M was largely flat during the quarter, as Andy mentioned, it is expected to increase over the remainder of the year. Adjusted EBITDA margins were largely flat at 23.3%. Our effective tax rate excluding discrete items was 27.1% compared to 27.2% in the prior year quarter and in line with our 27% outlook for the full year. Adjusted net income of $38 million for the quarter increased 41.3% from prior year period. Adjusted earnings per share of 27 cents increased 35% as current quarter EPS reflects average fully diluted shares outstanding of $139.6 million versus $137.2 million in the year-ago period. At the end of the quarter, we had cash and cash equivalents of $238.4 million and net debt of $850.4 million, with a net debt leverage ratio of three times at the bottom end of our targeted range of three to four. During the quarter, we repurchased $10 million worth of shares under our previously announced $150 million repurchase program. Turning to our outlook for the year. Given the strong start, we are raising our full-year guidance. We now expect full-year net revenue growth of at least 12%, up from previous guidance of 5% to 8%. Our updated revenue guidance assumes low- to mid-single-digit volume growth relative to our previous flat-ish outlook. Full-year adjusted EBITDA is now expected to be towards the higher end of the initial $280 million to $290 million range, while EPS guidance remains unchanged at $0.93 to $0.98 per share. We expect full-year CapEx in the $120 to $140 million range, including spend for the new Arcadelphia facility, and a tax rate of 27%, both unchanged from our original guidance, with average shares outstanding of $139 to $140 million, updated from previous guidance of $137 to $138 million. Additionally, we now expect our full-year COGS inflation rate to be in the high teens, as we continue to invest in our workforce and absorb inflation across commodities, packaging, and transportation, which also includes the impact of our stronger than previously expected volume growth. We are fully hedged for recoverable commodities in the second quarter, and now nearly 90% for the full year. As Andy described earlier, we plan to take additional inflation-driven price increases across most of our portfolio later this year. However, given the rapid increase in inflation above our initial forecast and the timing of our pricing actions and realization of productivity initiatives, we now expect our full-year gross margins to be down approximately 150 basis points from last year, with the largest decline expected in the second quarter. Over time, we expect our Revenue Growth Management Toolkit, including pricing, and our productivity initiatives to fully cover higher costs from inflation. Consistent with our message at Investor Day, we will continue to invest to drive growth and manage our gross margins over the long run. It was a very strong quarter of top and bottom line as we continue to drive sustained profitable growth. With that, I will turn it back to Andy for closing comments.
spk12: Thanks, Mike. I want to take this opportunity to thank Mike for his very strong partnership to me. and contributions to Hostess over the past six months as he took on the additional responsibilities of Chief Financial Officer. At the same time, we are all very excited to welcome Travis Leonard to the team, who will formally join Hostess on May 11th. I will close by reiterating our Investor Day message. The foundation of Hostess Brands has never been stronger, and I've never been more excited of our capabilities to catapult to our next phase of growth. We are operating in a very dynamic environment, but our strong start and increased outlook for the full year clearly highlights the strength of our portfolio and our advantage business model, driving our ability to deliver our attractive long-term growth algorithm and leading shareholder returns. And with that, we are open for your questions.
spk00: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation turn will indicate that Lan is in the question queue. You may press star 2 if you would like to leave the question queue. For participants using the speaker equipment, It might be necessary for you to pick up your handset before pressing the start keys. First question comes from Ben Benevenu of Stevens.
spk09: Hi, guys. Jim Solera on for Ben. Congrats on the great quarter. I wanted to ask you on pricing power. How do you guys feel you're positioned if the inflationary trends we're seeing now continue into the back half of the year than potentially even into 2023 relative to consumer capacity to take more price increases.
spk12: Yeah. Hey, thanks for the question and appreciate it. You know, let me start with this pricing environment at a macro level. First of all, for hostess brands, us within the whole snacking complex, we're a relatively good value snack, even with the pricing and the contemplated pricing we're putting in the marketplace. You know, we're in a category with low private label. We compete in a broader occasion-based snacking market. You know, that's demonstrated by the fact that our brand at regular prices has good distribution, good sales across all channels, whether it's a value channel, whether it's a high-end retail or grocery store. So we're well positioned as a value snack in an occasion that's growing and growing very well. With that being said, I also feel we're in a good place, relatively speaking, to continue to put our pricing into the marketplace. Now, pricing is a last resort for us, but we're committed to maintaining our margins over time, and we're going to grow by attracting new consumers within growing occasions. But I believe we're in a good position relative to the whole marketplace. Last point on the consumer. The consumers experience a lot as we move forward into the back half of the year. They're continuing to see inflation. Their support level relative to other government subsidies are moving down. So there is a lot of change. So it's a difficult market to predict. But with that being said, what I do continue to see as what's really doing our growth both on the volumes, mostly on the volume side, is that the macro trends that the consumers are having, being at their home more, snacking more, being more mobile, they are really driving our business and our ability to increase our penetration and then our investment in quality. So we're getting repeat. Our consumers are repeating at a greater rate than the category, which is really driving the sustainability of that growth, is really going to carry us through. So that's a long answer, but I believe we're in a really good position relative to the entire snacking complex and are in good occasions that are growing.
spk09: No, no, that's great. I appreciate the additional color. If I can sneak in one more. Given the success you guys have had with recent acquisitions, especially Boardman's outperforming far and above what the category does, do you have any thoughts on acquisitions right now given the environment? I mean obviously you're at the low end of your leverage range, and you've just – you kind of hit a home run with Boardman's, anything like that on the horizon?
spk12: You're right, Boardman's a home run and it's a testament to the team, their ability to be able to execute it, integrate it, but then also invest and grow it. And we've grown it. It was margin accretive right away. We're going to hit our targets and it continues to grow at a great rate. We feel really great about it and the runway is long. I don't comment on specific M&A targets, but it continues to be our capital allocation priorities continue to be the same. as we invest in our core that we're doing, because we have a great runway on our core growth, which includes both our Hostess brand and Bortman, and scaling our platform for M&A, which could be even a greater amplifier above our long-term algorithm value creation model that we talked about at Investor Day. The great news about that is we're in a really good position. We can create this differentiating total shareholder return given our position in the marketplace and the categories we're in to be able to grow, so we can be disciplined and find the right target at the right time that's going to create value like we did at Bortman. So without commenting on specific targets, we continue to be focused on it. We believe it's an amplifier above shareholder return, and when we do it, we've demonstrated our ability to be able to execute it with excellence.
spk07: Perfect. Appreciate that, guys. I'll pass it along. Thanks, Sam.
spk00: Thank you. The next question comes from Pamela Kaufman of Morgan Stanley. Hi, good evening, good afternoon.
spk06: So on the top-line guidance, I know that you increased the outlook to be at least 12% growth, but given the strong top-line performance in Q1 with sales up 25%, what's driving the outlook for moderating growth over the course of the year? And you mentioned that guidance assumes mid-single-digit volume growth, but given price mix was up 10% in Q1 and you're planning to take more pricing, is the implication that your top line outlook is notably higher than 12% for the year?
spk12: So I'll take that. We put the guide of 12% out there, which we believe – responsible representation of where we see the business. All of the factors you said were true. You know, it's a great number to have out there. Obviously, we had a very strong Q1. But as we move forward in the year, there's a lot that the consumer is going to witness. We're going to be lapping continued strong growth. And certainly, there's a wide range of variability on what the consumers would see. And I think our guide is acknowledges that. And that's why we said at least 12 percent. The factors that the consumer will see will be, you know, more pricing, you know, reduction in some of the support they had. However, the employment is very high, as I said in the previous question. You know, I believe we're positioned very well given the macro trends of the consumer in the environment and our ability to execute with the customers. But there's just a large variability, a change that the consumers are going to see over the back half, and our guide acknowledges that high level of variability.
spk06: Great. And how much additional pricing do you anticipate taking? What are you observing from the competitive landscape on pricing? And then, I guess, related to that, how are you thinking about the sustainability of your market share performance over the course of the year?
spk12: Yeah, you know, when you look at dollar shares, one of the things that we've done extremely well is balancing, as we got pricing through, continue to drive unit share growth. And a lot of that has to do with our investment in quality, so we're getting repeat consumers when they try us at a greater rate than the category, our fundamentals and our execution with our customers, and obviously our innovation. and our brand quality. So that will sustain us over time and why we will consistently grow greater than the category because we're accessing consumers outside the categories as we focus on occasion. So all that's being true. We don't overly manage quarter to quarter on this. So there is a timing of when maybe dollars or price increase can come through the quarter. But fundamentally to your question, I believe we'll continue to price to value in the marketplace, be competitive, and be the best value for consumers. And as a result, behind our innovation, our brand, and our execution, we will drive share consistently over time.
spk06: Thanks. And any color on the price, the additional price increase?
spk12: Oh, I'm sorry. The price increase, the majority of, we are having an additional price increase that will go through beginning in the back half. The majority of the pricing that we'll see recognized in 22 is already in the marketplace, but there is additional in the back half. We don't break out this specific amount, but you do see it flowing through in the Nielsen data now, and it'll flow through now for mostly through the remainder of the year, probably through Q3, and then start moderating in Q4.
spk06: Great.
spk00: Thank you. Thank you. The next question comes from Inori Norton of JP Morgan. Hi, Inori.
spk05: Hi, good afternoon. I had a quick clarification. The incremental pricing you're going to pass during the second half, is that embedded in your guidance?
spk12: Yes, it is.
spk05: Okay, great. So, my question is, do you believe that the strength that Hostess is enjoying in the convenience channel is sustainable at these levels if gas prices stay where they are at these elevated levels and kind of what are you assuming for the channel in your guidance?
spk12: Yeah, so obviously we execute extremely well in the convenience channel. We have great relationships with our distributors and customers. We innovate for that consumer and that need as demonstrated by our boost donut that's moving through the marketplace right now. We invested in data. So that's a headline of saying our share growth and our sustainability of the growth within that channel, and more importantly, from the consumer that's on the go, immediate consumption, the front end of grocery stores, including that channel, is sustainable and we expect to continue to grow share within that channel. More acutely, we do look at the purchases within as consumers go to fill up their tanks for gas. We do have, not proprietary to us, but look at some of the data related to the industry. And we have yet to see a meaningful softness in the behavior of their purchases within the store. And when they do reduce those purchases, they're not always their snacks first. We do also have seen through the data historically that there may be more of either the higher price items or maybe drinks or something beforehand, before the snack. So we have yet to see a softness in that area. We look at it very closely. I think there may be, you know, we'll just continue to monitor it. But at the macro level, we feel well-positioned versus the alternatives for those consumers within that space, and we'll continue to grow it over time. And in the short term, we have yet to see a meaningful softness with the higher prices.
spk07: Great, thank you. Thank you, Ann Marie. The next question comes from Robert Moscow of Credit Suisse.
spk13: Hey, thanks. Getting back to Pamela's question about how you came up with the guidance for sales, Andy, mathematically I think it comes back to high single digit for the next three quarters. And you said it has to do with possible responses and elasticity from consumers. I think that was the biggest driver for that, but you haven't seen any of it so far. So I guess my question then is, let's say I take the view that consumer demand is going to remain strong. They can absorb the higher prices. If that happens, is there, what's the gross profit flow through from that incremental sales in your model? Like, is it, Does it all drop to the bottom line, or does it come at a higher cost? Because I think in your guide you said all the raw materials are costing more, too, and that's part of the reason for the higher volumes leading to higher inflation, too. So what could be the flow-through of incremental sales if it comes in better than you think?
spk12: Yeah, so, you know, there's obviously when inflation goes up, a lot of that inflation is a variable cost. So, and then we recover that over time. So, obviously, there's part of that that's a fixed cost with our overhead, and we're not going to increase our advertising or add folks to it. So, you know, I don't know if we're going to break that out, but the headline on that would be, you know, we're seeing, Mike called out a 16% inflation in Q1, and we're seeing, you know, that much higher as a year to go. That's going to, that variable, those variable costs are going to flow through, but the fixed costs, obviously, we'd get leverage on and it would be an improvement.
spk13: So, there would be leverage on incremental sales if elasticity continues to remain benign.
spk14: Hey, Rob, this is Mike. Yeah, I think that's true. The other thing to consider, we talked about in the prepared remarks, our coverage levels, right? And Andy talked about our guide as we see the business today. And when we look at our coverage levels and plan around that, that also contemplates how we see that guide as well. So I think you've got to keep that in mind when you think about the possible variability of cost in there as well.
spk12: Sometimes when we go over the volume levels, then we're buying at whatever the market is at that time on some of the variable things. You would need to go on spot, you mean? Yeah. Yeah. So we'd be at the little bit on that, the market, if it was meaningfully different.
spk13: Okay. Last question. Speaking of spot, spot markets in freight seem to be falling now. I can't remember if you are exposed to that or not. Is there any good news in that front, or is it not really –
spk12: impacting it? I'm looking at a similar chart on the market. We don't buy 100% on the spot, nor do anybody, because you have relationships with carriers and We have, you know, agreements with them, and that's what keeps the whole system working, and that's true for everybody. So there is a component that if you go onto the spot that that would be a variable, a component to it. So there is some upside, but relatively speaking, it's not as meaningful until you really get through it over time. It's not an immediate favorability or unfavorability as, say, more so that diesel or some other things would be. Okay. Thank you. Yep, thanks, Rob.
spk00: The next question comes from David Palmer of Evercall ISI. Hey, David.
spk02: Hey, Andy. Just to follow up on that, what are the biggest reasons for the increase in your input? You said double-digit before. I had assumed it was low double-digit. Now we're talking high teens, and it sounds like it's even ramping up from the 16% in the first quarter. So what are the biggest variables that are causing that to go higher?
spk12: I'll let Mike take this.
spk14: Yeah, thanks. So it's across our COGS basket. It's in all of our core commodities. It's in our packaging. It's in our transportations. It's in our transportation costs, including diesel, right, which is at high today. In addition to that, we continue to invest in our workforce in this dynamic environment. And so it's across labor, packaging, all core commodities, and transportation costs.
spk12: Yeah, so we have obviously covered commodities, but our volume was above some of the covered as we talked about before. And so in some of those areas like wheat and eggs, you know, we did see the increase. And then also corrugate was large as well, which is not covered. So we did see it across commodities. you know, a lot of places. We feel like we're in a pretty good spot calling it now, given as we move through the year and we're executing our model, but that's probably where we saw it.
spk02: And then just a couple quick follow-ups. I wonder if you would give a comment about bouncers, if you could talk about the retail acceptance for that or how you're thinking about maybe the magnitude of that versus some past other, you know, platforms like Baby Bunts or Crispy Minis or How does that compare? And then I missed your channel slide. Any sort of insights about how you're maintaining the mass share gains that you were starting to get, or the rebound there, and how are things going in the convenience channel in terms of share as well? Thanks.
spk12: Yeah, I'm looking at on the channels. Everything's good. We're growing share across... All channels were basically just on a dollar flat in one. Grocery share is up 1.5 points. Mass channels up.
spk00: Convenience is up. Club is up. Drug is up. We're good.
spk12: We just communicate what we think is most representative of our business, which is more within our occasions and our forms. And then the bouncers. I have nothing but great news to say about that. Innovation is obviously an uncertain science on the hit rate. We've been really successful track record recently, and I expect bouncers to continue that momentum. We're really excited about it. It hits really an occasion we feel great about. And to get to the heart of your question, our retail customers are equally highly enthused about it. And the acceptance has been really good. I expect as we get to the end of the summer to see a lot of good support. We're going to be putting consumer support behind it as well. Our retailers are enthusiastic to get behind it equally. So I'm optimistic about it. We researched it. Tina and Dan and that team do a great job. They are establishing a very good track record. And I expect really good results from it. You know the consumer response on Boost, you know, just let's not forget Wortmann sugar-free mini cookies are rolling out now. There's a lot of acceptance on that. Our peanut butter relaunch is going extremely well. And obviously our bunts are now moving into the convenience channel. So we have a lot of really good things to be optimistic for within the innovation space.
spk02: That's great. Thank you. Thank you, Dave. Thanks, David.
spk00: Thank you. The next question comes from Ryan Bell of Consumer Age Research.
spk08: Hey, Ryan. Hi. Just looking at some of the private label trends that we're seeing in scanner, it would appear from what we can see is that private label continues to lose share on a year-over-year basis. Would you be able to touch on why you think that branded players are doing so well within your core categories, despite some of the pricing and expectations about how that would play out over the balance of the year?
spk12: You know, there's one thing. I'll speculate. First of all, private label is relatively low when you look at our category. Depending on what you look at, Ryan, just a heads up, if you look at some of the syndicated data, it would include some of the bakery stuff from the fresh bakery and the retail stores, which sometimes throws off the product label number, but one of the things that goes a little bit under the radar that I bring up every once in a while and I brought up on the call, our team has invested a lot of energy both from our manufacturing side as well as our R&D side with our marketing team to make sure that we give consumers the best experience and invest in that quality. And the quality of the goods that we're putting out, whether it's an iconic Twinkie or a brand new Baby Buns and everything in between, I feel really proud about. And I think it's showing in the consumer repeat rate. And that's hard to duplicate at scale. It's hard to do where you go through. And then as we mentioned earlier, I believe we're a terrific value within the broader snacking space when you get that quality for the price that we give them. So I think there's a lot of factors going on. We're supporting our customers, not just with great products, but also with great innovation. We're investing in the categories that drive category growth. We've been responsible for a lot of the category growth over the last three years, the majority of it last year. So we feel all of those factors really put us in a good position to to make private label not as needed within our category because we're delivering a lot of those category needs with the value proposition we give and the focus on innovation and growth within the category.
spk08: Thanks. And I think you've talked a bit about the overall opportunity from the sugar-free cookies for Bortman's. Is there anything you could talk about about how that could broaden potentially the demographics for your brand and, you know, the opportunity potentially within Hostess trademark or how you think about that kind of opportunity within the more dietary side of that spectrum.
spk12: Yeah. Well, that's a strategy for the Vortman brand. Now, you bring up two good questions. I just want to bring it up. We're really doing a nice job with some of our innovations. Crispy Minis comes to the line. I think our balancers is also that. We're really going to attract younger consumers to refresh the franchise. And when they come in, I've mentioned now for the third or fourth time, our consumers repeat at a greater rate than the category in total. So I feel good about that. Related to Vortmans, our sugar-free business is growing. At more than twice the rate of the total category, we continue to expand the consumers. They're not just diabetics, but also we're attracting other consumers into that franchise. When you try them, they taste extremely good, and there's not as big of a tradeoff for sugar. Sugar is one of the primary, for that consumer, primary needs. So we have two brands that do what they are intended to do, very well. One in an indulgent snack without a compromise, but a moment of joy that we do responsibly. And our Bortman sugar-free business specifically, which is also doing extremely well.
spk08: Thanks. And the last one for me really quickly, in terms of the innovation, where do you see from an occasion standpoint the largest opportunity in the near term?
spk12: Well, we outlined five occasions during Investor Day. And so each of those occasions are, once again, the morning sweet start, lunch box, afternoon reward, immediate consumption, and afternoon sharing. They're all target opportunities for us. We don't highlight one or the other, but it gives us a $50 billion addressable market that's growing at a greater rate than total food. So that's where we focus our innovation. We map our consumers to that. We therefore attract them from other alternatives they have in the marketplace. And we believe the composite of those five occasions that give us a really great focus on where we can grow our core, which is why we're so enthusiastic about our ability to continue to grow over time.
spk07: Great. Thanks for the context. Thank you.
spk00: Thank you. The next question comes from Rob Dickinson of Jefferies.
spk10: Great, thanks. Try to keep this quick. I guess just first question on the gross margin. I think you said you expect gross margin to be down 150 basis points per year and the worst in Q2. Maybe just providing color as to maybe how you're thinking about the back half or just as some of the incremental pricing flows through, could we potentially, you know, hope at least that gross margin could be like flattish or, you know, better as we reach year end such that the pricing is, you know, hopefully sufficient enough to start to offset some of the incremental cost inflation.
spk14: Yeah, I'll let Mike take this, Rob. Yeah, Rob. No, thanks for the question. You know, right now, you know, Andy talked about the rapid acceleration or the rapid increase in inflation, a lot of what's driving the what we called for Q2 and then and then the balance of the year at Q2 being the harshest. But the balance here being down 150 has a lot to do with the timing of our pricing and productivity initiative. So our pricing actually is going to place hitting in the back half, you know, catching back up with that inflation as we look to those things. Obviously, we target managing that margin and sustaining that over time. As we see the business today, I don't think we would call the potential for flattish margins based on where the inflation outlook is today. A lot of that difference between Q2 and the balance of the year is driven by the timing of our pricing and productivity initiatives, our pricing actions and our productivity initiatives.
spk10: Fair enough, fair enough. And then just secondly, very simplistically, you know, look, in the quarter, and I believe this played out too in Q4, you know, your reported results in the top line are coming in fairly closely, you know, relative to what we're all seeing in the track channel data. You know, is there anything that we should be aware of as we go forward that could create a delta? Or is the expectation here going forward is that, you know, that you should just essentially be shipping to consumption. And as you pointed to, we should see kind of the price delta year over year as we move forward. So that's it.
spk12: Yeah, it's a little bit. We do track that, Rob, because we want to help you out, I know, with your models. We did have a little bit of the non-track that's usually a couple hundred basis points delta over time. You know, let us go. We did look at that. We didn't make it a huge science this year. We'll try to take it offline, maybe give you a little bit of help. But I think I would, instead of trying to take an exception for just this quarter, I would probably look at the historicals as probably the best guide over time so that anyone, like a new customer shipment or something, may mess up a quarter. But the headline is it's usually going to be a little bit lagging of it where it has over time.
spk10: Okay, great. Good work. Thank you.
spk00: Thank you. The next question comes from Bill Chappell of Trust.
spk03: Hey, guys. This is Stephen Langon for Bill Chappell. Hey, Stephen. How's it going? Thanks for the additional color on the sales results. Would you guys be able to parse out some of the growth that you saw in the quarter and to date coming from the breakfast category as well as how much is coming from innovation? And then to that, could you guys also talk about any major competitors that you may have started to see? Move into the breakfast category.
spk12: Thank you Yeah, so Let me take let me just make sure I get the let me get to the breakfast first real quick But that we continue to do extremely well in breakfast as we've identified You know back in my year one back in 2016 or 17 That was a real priority for us. We now call it sweet start for the day and And back then, we were underdeveloped in share, and now our share position within the breakfast segment is kind of on par and continue to grow. With that being said, we're always cognizant of competition, so I'm just looking at a chart right here. So within the last quarter, in Q1, we grew our share within the breakfast. The way we look at it, three points. And we're up to a 23 share position. So we're in a pretty good position related to breakfast. We'll continue to innovate within that space. Competition is always going to be trying to get in there, but it's one of our priority sweet start occasions, and we feel really good about that. You had another question. I'm sorry. Oh, innovation. We don't break out specifically our innovation. What I will give you a couple facts. Our innovation contribution to the category continues to be above our total share of the category. It's one of the reasons why we drive category growth. We contribute more absolute revenue to the category than anybody else in innovation. As we mentioned on Investor Day, our vitality target continues to be very good. We target that over time at 15% to 17%. And I believe our pipeline going forward, as we talked about earlier, is as good, if not better, than the innovation slate we launched last year. And that's saying something because we had a very healthy innovation slate that we're getting dividends as we continue to drive growth today.
spk03: Great. Thank you so much for the call, guys. Thank you.
spk00: Thanks to you. Thank you. The next question comes from Steve Parvis of Deutsche Bank.
spk11: Yes. Hey, everybody. Good evening. Hey. Just a follow-up on Rob's question around gross margin. So the incremental pressure that you're feeling and are embedding in the down 150 call, as you look to rebuild that, I guess, is there a way you can frame for us, number one, How much of that rebuild comes from the pricing initiatives versus incremental productivity? Number two, on that productivity front, what are the sort of the main buckets of where you see the opportunity to go after? And then number three, is the call that that build back of the overall margin can happen over the course of between now and the end of 23? Or is the the timeline to rebuild gross margins more elongated from where we are today. Thanks.
spk12: Yeah. So, you know, obviously we'll come into just on that last piece and then I'll get into the other. we're going to maintain our gross margins and slightly expand them over time, as we mentioned at Investor Day. I'm not going to get speculated into 23. We're calling what 22 is, and we'll come back with the 23 guy at the right time. But, you know, we're aggressive about that. What we're not aggressive about is compromising our long-term sustainable growth model at those margins. So we'll continue to invest in innovation. We'll continue to invest in growth. We're not going to pull back short-term growth, given our confidence and conviction on our core and ability to be able to grow at the margins because of a short-term ramp up in the cost. So that's a choice we've made, and we feel really good about that choice because of the conviction we have in our ability to be able to capture that growth. Related to recapturing the margin, given the magnitude of the inflation price up, the majority of our recovery is really in the price mix because of in the short term. And that's why when it ramps up quickly, there's a squeeze on our ability to be able to capture it quickly. Over time in normal times, what we'll do is our productivity initiatives over time and our management of mix and our ability to bring new innovation into the marketplace And just efficiency allows us to operate the model more consistently over time. We're in a little bit unchartered territory given the magnitude of the inflation over sustained two periods of time. But that's why, in the short term, and that's why you just can't get it through as fast. Now, with that being said, relative to our productivity, Fueling growth, we've outlined that investor day for really big areas of that. We're reducing complexity within our network. We've already done a real good job, by the way, and our agile model when we COVID hit, we were really aggressive about our SKU mix. The team, our supply chain team did a great job of aligning some of our manufacturing networks.
spk01: So we've done a nice job about that, but we continue to do that, whether it's harmonizing formulas and others.
spk12: The other is network and distribution, just simplifying our scheduling, planning optimization within our transportation system. Our team does a great job at that. We're moving to more of a strategic sourcing. And then we're also putting in a more complex continuous improvement, not complex, but a more focused continuous improvement in digitization of our facilities. All of those Our key work streams, as we look at our futures of the savings, we have a team dedicated to making sure that execute with excellence. I feel great about that. We also have some automation that's going in. Some of those timelines are being impacted by the supply chain, but those are really, really good savings projects that I feel great about. But those are some of the. of the programs, and then Aris Masterides and his team do a great job on our continuous revenue growth management. So we are, one of our focuses, we're not just focused on growth, we're focused on our flywheel of sustained growth, and we have a very good focus on not taking quality out, or not just taking costs out, but driving efficiencies into the way we operate every day. And then investing in innovation that's consumer-centric and guidance. That's a long answer, but it allowed me to get some key points out from it yesterday, so I appreciate it.
spk11: That was great. It was a long question with three parts, so you did a good job. Appreciate it. Thank you. Thank you.
spk12: Thank you, Steve.
spk00: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would now turn the floor over to Mr. Andy Callahan for closing comments. Thank you.
spk12: Awesome. Well, we got off to a great start of the year. I want to start by just apologizing for a little bit of the technical difficulties when we started. So thanks for sticking with us for the Q&A. We're off to a great start of the year. We really like our position in the marketplace as we outline in Investor Day of our ability to be able to continue sustainable, profitable growth. And that'll turn into... differentiating total shareholder return the team's executing very well we love what we do we love bringing joy to consumers every day q1 is off to a rough chart a terrific start and we're moving into a dynamic environment that our agile model will be able to execute extremely well in as we historically have so appreciate your interest and we'll see you next quarter thank you thank you
spk00: This concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.
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