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spk05: Greetings and welcome to Hostess Brands Incorporated's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Amit Sharma.
spk04: Thank you. You may begin.
spk07: Good afternoon, and welcome to Hostess Brands' second quarter 2023 earnings conference call. 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 30, 2023, that was published at approximately 4 p.m. Eastern time. The press release and investor presentation are available on Hostess' website, at hostessbrands.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. A detailed list of these risks and uncertainties can be found in today's earnings release and in our SEC filing. Management will make a number of references to non-GAAP financial measures that we believe will provide useful information to the investors. A full reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in the earnings release. With that, I will turn the call over to Andy Callahan, our President and CEO.
spk10: Good afternoon, everyone, and thank you for joining us today. Let me start by thanking our dedicated and hardworking 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. Now, to a few highlights for the quarter. Net revenue increased by 3.5% as we lapped 16.8% growth in the year-ago quarter. Net revenue for the second quarter was driven by higher price mix, offset by expected volume decline 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 of 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 2.9% during the quarter and up by 18.5% on a two-year stack basis. Turning to the Wortmann brand, Wortmann POS increased 7.2% in the quarter, including 13.1% growth for the recently rebranded Wortmann Zero Sugar Cookies and Wafers. On a two-year stacked basis, Bortman's POS increased by 32.2% as we continue to capitalize on our leading position in the faster growing zero sugar cookies subsegment 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 retail 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 refinanced 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 testament to 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 to $325 million range and adjusted EPS towards the higher end of our $1.08 to $1.13 per share range, delivering above our long-term algorithm 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 built a premier pure place 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 executional capabilities. I continue to believe the 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, top-line 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 to snack on, from savory to sweet, from nutritional to rewarding, and from mindful to indulgent. We have a deep understanding of these occasions and continue to refine our strategy to focus on five of the fastest growing occasions 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 the number one innovator in sweet baked goods category, both 21 and 22, and with over 1.5 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 CASBARs, which started shipping in late Q1. Initial performance continues to be highly encouraging, with both distribution and velocities trending in line with our high expectations. CASBARS also is receiving high praise from consumers with initial positive feedback at some of the highest levels among all of our recently launched innovations, such as baby buds and other highly successful and category expanding launches. CASBARS is the standout innovation in sweet baked goods category of 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 CASBARs, we introduced old-fashioned donuts and chocolate baby buns under the Hostess brand and rebranded our Wortmann sugar-free cookie and wafer product lines to zero sugar, expanding its appeal to a wider consumer demographic and increasing taste perceptions. Initial results are terrific. Hostess brand family packs are generating high velocities, repeat purchases, and incrementality as we profitably deliver value to customers. With strong support from our retail customers, we are extending family packs to our other iconic brands, including coffee cakes and baby buns. 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 CASBARs. In late June, we launched a national digital campaign for CASBARs focused on driving awareness through digital video, social media, e-commerce, and retail media. We continue to believe that A&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 when additional permanent and temporary displays is beginning to pay off. We are getting additional merchandising opportunities and gaining TDPs at a faster rate than the overall category. Recent shelf space resets and many of our large customers are leading to favorable planogram 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 and 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 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 RGM 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 in 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 Friends, 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 summary, I am pleased with our first half performance. While the consumer environment remains dynamic, we are confident of strong second half growth enabling us to raise our full year adjusted EBITDA and EPS guidance. Our strong execution of growth fundamentals and customer partnerships supports 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 to go through the quarterly financial results and our reaffirmed outlook in greater detail.
spk02: Thanks, Andy. I will start with a review of our top-line results. Organic net revenue for the second quarter increased 3.5% 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 6.9% decline from lower volume. Our net revenue growth was driven by 4.6% growth in the sweet baked goods portfolio, which accounts for nearly 90% of our total net revenue. while our cookie portfolio declined by 5.9% after lapping 27.6% growth a year ago. Switching to retail sales trends, our Nielsen measured sweet baked goods point of sale increased by 2.9% for the 13-week period ending July 1st, while our U.S. cookie point of sale increased by 7.2% 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 Vortman growth was even stronger at 32.2%, driven by our continued momentum in the zero sugar subsegment. In the 13 weeks ended July 1st, 2023, our share of the sweet baked goods category dollar sales declined by 93 basis points to 20.8%, while Vortman's share of the cookie category was relatively flat at 2.1%. We have a strong foundation with the right capabilities to drive our category growth strategy, which provided the 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-track channels, as well as timing of shipments, which expect to normalize over time. Our single-serve POS increased by 3.7% during the quarter, while our multi-pack offerings grew by 2.2% 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 benefits, which 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. Adjusted EBITDA margin increased by 247 basis points to 22.7% for the quarter. Our adjusted operating expenses increased by 20.1% 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 $20.2 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 cents 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 2.9 times. Our capital deployment strategy continues to include returning capital to shareholders through opportunistic share repurchases. Year to date, we repurchase shares for an aggregate purchase price of $19.4 million. Additionally, as Andy mentioned, during the second quarter, we refinanced 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 and customer initiatives, which had a lower than expected impact in 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, the deployment of our brand building A&M 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 to $325 million range and adjusted EPS towards the higher end of our $1.08 to $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, of which approximately 5 million are expected to be one time. We continue to expect high single digit inflation for the full year with moderating headwinds in the second half. Consistent with our forward 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 to 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 $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 peer-played snacking company. With that, I will turn it back to Andy for closing comments.
spk10: 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.
spk05: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. We ask that you please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk04: One moment, please, while we poll for questions. Our first question comes from Jim
spk05: Solara with Stevens. Please proceed with your question.
spk01: Hey, good afternoon. This is Jonathan on for Jim. Hey, Donovan, can you speak up a little bit? Yeah, is that better?
spk11: Yeah.
spk01: Perfect, thanks. Yeah, on the CASBARs rollout, could you maybe talk a little bit more about what the response has been from retailers? Any color you could provide on indoor displays, that would be great. Thanks.
spk10: Yeah, we feel really good. You know, in general, we feel good about our back hip in-store displays stepping up both in convenience and in all of our channels. So we feel good about that as we move into the back hip 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. CASBAR is another iteration of that. The enthusiasm behind our customer base was extremely strong. So the 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 that's, you know, that's just one of them. You know, we rebranded our Wortman Zero Sugar line and velocities are performing extremely well there. We had old-fashioned donuts. We had chocolate baby buns. So the portfolio of our business is performing extremely well. And CASBAR is another iteration of that. You know, 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 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 into baked goods in totals. And baking's performing extremely well in snacking. That's going to continue. Our strategies are designed to capture that market, and Casbar's is a very good example of that that strategy could work and is working well.
spk01: Great. Thank you so much. And then for the follow-up, could you maybe discuss some of the headwinds that are impacting the cookie part of the portfolio? You know, is it primarily demand elasticity from pricing, or are there other dynamics at play? Thanks.
spk10: Yeah, well, the cookie category, our cookie category continues to perform you know, our cookie business performs well in the overall category. You know, it's an $8 billion category. We're about a 2.1 share. We have a very strong position in the a reduced sugar, zero sugar subsegment of that, which has growing at a greater rate. You know, on a two-year stack basis, our Wortman business is nearly 32% growth. And in this quarter, we grew at 7%. So we feel really good about our position within Wortman. We continue to drive awareness. We continue to partner with customers to drive what's important within the category. That is enhancing and is very strong. And so I feel good about Bortman. Now, we have moved through some pricing. There are some other things that we've obviously actively managed the portfolio, but the underlying health of the Bortman business is extremely strong as we continue to grow into a large $8 billion total cookie category.
spk01: Great. Thank you so much. I'll pass it along.
spk11: Thanks, Jonathan.
spk05: Our next question is from Ken Goldman with J.P. Morgan. Please proceed with your question.
spk12: 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 into July, and I guess that's really what matters. But just in terms of on shelf, you know, market share, I think, you know, perhaps you might have, I'm not trying to put words in your mouth, hope that you'd be retaking share, or at least that your main competitor wouldn't still be taking share by now. At least that's the sense I got. So just want to make sure I'm thinking about that correctly in the scheme of things in terms of end demand.
spk10: Yeah. Hey, Ken, good to hear from you. There's two parts to that. One's the share and the other is how do we feel about how we're working at the shelf. So I'll take each of them up, both of them separately. Maybe I'll put them together a little bit. You know, at a macro level, we're coming through, you know, our customer resets with most of our program and 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 is the permanent shelf, has increased as we come out of there. As we mentioned in the prepared remarks, we did expect the timing of some of those impacts to be greater. We see some customers that are actually performing very well and were executed early. Some of them have lagged. But overall, our partnerships with our customers, their support and enthusiasm around our innovation, the support and enthusiasm around the insights that we bring them, our continued support of category growth via increasing in our advertising, our investments in quality. So our partnerships, I think, with our customers, 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 more pertinent 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 you always want to see it positive, and you don't like to see it negative. But we compete in indulgent snacking in a $65 billion 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 in a sharper period of time than a lot of the category, and grow overall a percentage of dollars in that pie is really a testament to the strength of baking, and therefore the baking's ability to get shared dollars within that total category. So, you know, it is important, but it's not important in this category. We don't like to see it negative, but it doesn't undermine 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 continue to be number one in innovation. We're going to invest in our quality, and we're going to invest in higher ROI advertising and underlying the partnerships with our customers. We believe that will play well over time. So, yes, we want share to grow, but we believe we're in a good position to deliver our back half as we communicate it. And over time, we expect if we continue to do that, which we think we're positioned to do well, share will take care of itself.
spk12: I'll pass it on. Thank you.
spk11: Thanks, Ken.
spk12: Thanks, Ken.
spk05: Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.
spk08: Great. Thanks so much. I guess I just have a question around the back half in terms of, you know, price makes relative volume. I mean, clearly, you know, you're stating pretty explicitly shipments are very, you know, strong. 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 were a little bit weaker in the second quarter maybe pricing was slightly higher than you originally expected so you know if we kind of think through the back half of the year is this kind of like if you're willing to provide some incremental color is this you know kind of two quarters where we think on average you know we're getting kind of price mix maybe around flattish maybe slightly up but You know, volumes, does it still get to that guy? It sounds like volume should really accelerate, like nicely, positively accelerate. So I'm just trying to kind of get some definition on what meaningful means. That's it.
spk10: Yeah. Hmm. 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's when the customer resets were happening, the TDP executions were happening. We were coming off a large part of the category disruptions on supply chain, not hostess, but the category that we benefited from. So that was difficult to forecast. But as we move into July, we are seeing disruptions. strong positive shipments, and we feel good about our partnerships with our customers on the back to school, we will see, we do expect to see very good support by the back to school, which as you know, Rob, is very important to this category. So the indications are well that a lot of the impacts of those which Q2 was a dynamic time, and we didn't get exactly forecasted right, but it was going to be difficult and always a transition quarter. We believe a lot of that as we look at the July shipments are behind us. Feel good about the lineup we have for August back to school, which given the shipments our customers do as well, and therefore that's the spirit of which of the comments. Related to price mix, you know, we did do our last pricing in August, It was announced in July, but that filtered through in different ways through Q3, depending on it. So we will see some price mix benefit in Q3, but it should be passed when we get to Q4, and we'll be relying on the incremental merchandising that we're putting in, the enhanced programs we're putting in, the benefit from the share of the TDPs, the continued growth of the innovation that we're doing, and the stuff up in advertising. All of those are lined up as we move through into the back half. Did that help with the color?
spk08: Yeah, good enough. And then I guess just to follow up, just on gross margin, you know, the guy to 40, 50 basis points, I think it implies, you know, essentially, you know, 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 pre-opening costs of Arcadelphia, maybe that's more Q4. And then kind of the core of the question is, like, if we think forward, you know, a year, excuse me, I mean, those are just one-time costs, right? This isn't a, you know, 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?
spk02: Yeah, yeah, that's right. So let me take this one, and Andy can chime in as well. So, you know, a couple 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 are really pleased to see their benefits coming through. And the benefits that we received in the first half is 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 Arcadelphia Bakery. So that again, it's on track, it's on time to come online in Q4. So that expense is out there in the back half. And as I said in my prepared remarks, $5 million is one time in nature. I'll turn it to Andy.
spk10: That's it. We're excited about getting Ark Adelphi. It's coming right on time. We're working to utilize that additional capacity right away.
spk04: Perfect. Thank you. Our next question is from Pamela Kaufman with Morgan Stanley.
spk05: Please proceed with your question.
spk00: Hi. Good evening. I just have a follow-up to Rob's question. I wanted to clarify on your expectations for volumes to be down slightly this year, does that assume that volumes are still down in the second half?
spk11: No, it does not.
spk10: Matter of fact, for the most part, we believe that this second half, given what we've learned as we've gone through Q2, we did see some, you know, with the consumer, the transition timing of what we do, lapping out of a lot of the distortion that 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, we've made in the back half, for the most part, keeps the back half close to where we originally expected during our guide. So that's the way we're looking at it.
spk00: Okay, that's helpful. And then, you know, this quarter there's obviously very strong gross margin performance that seems to be driving some of your confidence in getting to the higher end of your full-year guidance. How are you thinking about reinvestment into the business and stepping up either marketing or promotional support behind top-line growth?
spk10: Yeah, well, we stay on that, you know, as we've been very consistent and I have over five plus years. you know, the sustainable long-term growth of the business and our ability to continue. And we've done a nice job. If you take back, if you take a step back and look at our two-year, you know, growth, our CAGR on the revenue side is 8%, you know, which is in line with top indulgence stacking. So, the distortion we're seeing is real. 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, a 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? We're balancing long-term, but we are taking some of that. We've enhanced some of the programming in the back half versus a year ago, we have incremental frequency on our promotions. We've invested in data so that we can sharpen, including RGM, so we can sharpen on our offers to customers. We're looking at digital overlays that enhance those programs and increase the effectiveness. We partner where they want and increasing our display activity in the back half. So all those are helping to give us fuel as we come off the distortion driven by the customer and the high pricing that we're going to be bleeding off of in Q3. All of those are part of the equation. that are incorporated into our guide.
spk00: Thank you. That's helpful. And just one more question. I think, you know, in the last couple of quarters, your reported sales growth has been further ahead of what we've seen in the scanner data. And I think there was a benefit from inventory movement or easier compares. Also some benefit from untracked channels. This quarter, it was a narrower gap. So just wondering if there's anything influencing that and if you're seeing any differences in the performance in untracked versus tracked channels.
spk10: I think generally it does. I know you track this and we talk about this on a lot of the calls and it does vary on sweet bait goods from quarter to quarter. Most of the time, it normalizes. We do have a good non-track channel. There are some little things this year, like, you know, we see Ben coming back a little bit higher, and there is some benefits of some of our programming within non-track channels. You know, and over time, we expect the breadth of, you know, our availability, including in some of the non-tracks, to be a strength of the business. But I wouldn't read too much into the variation from quarter to quarter.
spk00: Got it. Thank you. Thanks, Pam.
spk05: Our next question is from Cody Ross with UBS. Please proceed with your question.
spk03: Good afternoon. Thank you. Hey, how are you? Thanks for taking our question. I want 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 and you have seen some share losses, albeit you're above where you were two years ago. At what point 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?
spk10: Yeah, certainly it was, you know, it was difficult when someone's, when we have such a large disruption due to supply chain services and coming back into the business, it's difficult to forecast. That was certainly true in Q2. The competition, I would say, in our category, yeah, I would say, you know, I think rational is a fine, but very competitive. We take the competition, you know, serious. What we want to do is continue to compete aggressively relative to value for the consumer. And we believe over time that when we do that, when we give them the innovation they want, the quality they want, at the price value they want, and we look at other ways to do that, we're in a position we're gonna win. That's true for our single serve business, that's true for our bagged donuts, it's true for our multi-packs, and it's also true for our family packs, which are doing very well, and we introduced about a year ago, and we're continuing, as we said, on the prepared call to expand on that. You know, with 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, you know, the sharpening of the price points and making sure we have them right in the back half, the add in the frequency, the increase in the display for a reminder for everybody out there, we're one of the highest impulse categories. So we expect Our shipper, at least, enthusiasm for our customers and our program is up versus a 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 going to drive the long-term success of the business. But we do, similar to what Pam asked, 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.
spk11: And I think we've done that for the back half.
spk03: 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 upstream players. What are you seeing from a retail inventory perspective? Are you seeing any retailers decide to lower their inventory levels in an effort to manage their working capital? Can you just discuss that in a little bit? Thank you.
spk10: The largest part, let me talk about sweet baked goods. The largest part of our category, sweet baked goods, has relatively short shelf life. So, for the most part, it doesn't impact us as much because by the time we get it and we manage the shelf inventory for the terms, there's not a lot of room for them to manage large days of supply. So, you know, our boardroom business has a little bit bigger thing. The majority of our business, it's not really a major factor for our business. What I meant to say was Vortman has a larger shelf life. But for the most part, for our business, inventory is not a large part of our business.
spk04: Thank you. I'll pass it on. Our next question is from Steve Powers with Deutsche Bank. Please proceed with your question.
spk05: Hey, great. Thanks.
spk09: Thanks, everybody. Hey, so, um, you know, just on the promotion discussion picking that up. I think you use the word historical frequency or historical cadence in your prepared remarks returning to that historical frequency in the backup. Love little perspective on on historical, you know, depth or historical levels and how you expect the promotional environment in the back half and going forward to compare not just on a cadence basis, but on a depth of promotion. Is that also going to return to historical levels, or do we think we normalize a slightly less deep, if equal, breadth of promotion, if that makes sense?
spk10: Yeah, so there's a couple of things going on here. It's a terrific question. 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 LTOs, with our partnership with customers on displays, et cetera. So we do have multiple tools related to making sure we have successful merchandising programs. Related to the frequency, there's a longer-term frequency that I referred to in my prepared remarks, and that's the amount of times that we promote during a season. Last year, we reduced the frequency in the back half, mostly in Q4. We took out an entire event, and we raised the promoted price points to a higher level. That, frankly, was we believed was too high. We've already adjusted some of that in the front half, but we're going to get the benefit of that in the back half where it raised. Additionally, by adding the frequency, we're getting back to more historical. Now, put this in all context. In a year ago when we were in our Q4, when we were experiencing the category disruption due to a competitor, The merchandising wasn't going to give any, it wasn't going to add as much because we were already up there. We were getting all the support. We were running the service, our customers. We did that extremely well. They remember that in partner-ness. So our merchandising cadence, you know, wasn't as required and needed, right? And so we're coming back and adding additional on top of that at more sharper price points that we believe is sustainable. It's not going back to the price points at the depth that we were pre the inflation times. So we're not spending that back. We're just getting them to what we believe is the sustainable level.
spk09: Okay. Okay. Yep. That's, that's, that's helpful. Maybe for, maybe for Travis, you know, you talked about the, the, the positive gross margin drivers principally being the productivity momentum and revenue growth management. I guess I'm curious is sort of what's in the guidance, what you've, what you were able to achieve in the second quarter extrapolated forward, or do you see incremental room for further productivity or further RGM benefits as time goes on? Are you kind of guiding to what you already achieved carried forward, or is there a layer on top of that incremental benefits that you're expecting?
spk02: Yeah, think about this year as a pull force or an acceleration of these initiatives is a way to think about it. But I will tell you, as you think about our margins longer term, really productivity or our fuel program and revenue growth management are going to be the key linchpins into driving our continued investment into our business, as well as modest margin expansion over time.
spk10: The only thing I'd add to that is, you know, let's put this in context for the maturity of our company. We're in the early stages of this, and I'm very proud of the progress the team has made. But that's a good position for our investors because my experience in this industry, there's a long runway for us to continue to drive a pipeline of continuous improvement, efficiency programs, and industry-accepted margins that will drive 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 I think there's a good runway for that, both in RGM as well as in our productivity initiatives.
spk11: Very good. Thanks again. Thank you, Steve.
spk05: Our next question is from Robert Moscow with TD Callen. Please proceed with your question.
spk11: Hi. Rob, welcome back.
spk13: Yeah. Feels pretty good. Good. Thank you. But I guess my question here, you know, on one hand, today you 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 the patterns are moving just really quickly, and consumer sentiment is changing really rapidly. You can't really look at that historical data and think, you know, probably find the right price point that you need for these promotions. So, you know, how do you continually adapt to that? Like, are you able to move faster because of the data analytics that you have? And, you know, how do you know with confidence that you've got the right price points right now for the back half of the year?
spk10: 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 get sharper and better. I will tell you specifically that this year, if I implied we looked at too far of a history, that would be a bad takeaway. Because even with the agility we have, we've adjusted and enhanced some of our back end program just based on what we're seeing in the first half with both the consumer sensitivity to pricing as we moved in, our 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 drive us both sustainably and providing value to the consumer. So we're, I'm not going to say we're probably any better than anybody else, but we use those tools with everybody else. What we may be better is 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 the, I think a consumer perspective, that is maybe even more price sensitive than 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 and make sure they're at the right level and we're coming off the pricing, we're adding a frequency. I think that's all, you know, 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.
spk13: 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?
spk10: Yeah, well, as I said, you know, we need to, you know, we expect both quarters to be close to, you know, positive and then positive before, so, and we expect a strong back-to-school programming, and the enthusiasm of our customers as we see shipments early in July are a good future to that. Great.
spk05: Thank you. Our next question is from David Palmer with Evercore ISI. Please proceed with your question.
spk14: Good evening. Hi, Dave. I have a 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 going to chase volume and sacrifice pricing? profitability too much for that volume?
spk10: Well, in the second quarter, there was a lot of dynamics going around. Some of those are forecasting. Some of those 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 of We didn't over adjust those programs to, as you talked, David, we're going to balance, making sure we continue to have the margins we protected very well, invest back for the sustainable growth and continue to manage through because we believe the whole portfolio of, 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 expected for those factors. And we believe we're set up for the back half.
spk14: Yeah, I'm almost in need of an education about how things might work in the sweet baked goods category. In some categories like chocolate candy, for example, there's a lot of the programming that's really set. Maybe you might even know a full third or 40% of your volume, what's going to happen with the programs that are in place. Maybe not even for almost the whole year, but Is it possible that this category, because you have a mixture of small and large, DSD and non-DSD, that there's a little bit more unknown here? Or do you feel like maybe you're getting a handle around what's coming up, yourselves and your competitors, such that maybe you're going to learn how to not be surprised by what's happening by competitors? I'd love your thoughts on that.
spk10: Well, this is a unique situation relative to having a competitor that's with a large disruption in the category. Related to your customer comment on do different categories work differently or the same, I'd say they're generally the same, but given the dynamics we're seeing within the consumer, our customers are always looking for ideas that how do we, and they go to us increasingly. I think we have a great partnership and the leadership partners with our customers. So if we have the framework of a full year plan, which you're referring to, which every category does and every brand does, we certainly do, but they are certainly agile as the year goes on as you continue to enhance them, drive better merchandising, buy better displays. So any implication in any category that I've been in is that as you start the year, everything with the customer is set in stone. That's not the categories I've lived in. It's certainly not the agility that we respond to with Hostess when we see something that can enhance programming for our business and for our customer.
spk14: Got it. Thank you. Thank you, Dave.
spk05: 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 comments.
spk10: Thanks, everyone. I appreciate your confidence that you've placed in our team to execute on our plan and drive sustainable, profitable growth over time. So thanks for joining the call. And we look forward to seeing you next quarter where we continue to work hard for everybody on the call and all of our investors and our team.
spk05: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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