Lenexa, Kan. Freshly baked foods, including snack cakes, do not have the extended shelf life of many other food products, which exacerbates the challenges posed by supply chain disruptions, Andrew P. Callahan, President and Chief Executive Officer of Hostess Brands, Inc.
In a conference call with analysts on Aug. 3, Mr. Callahan said Hostess has largely overcome these challenges and remains on track to achieve the company’s full-year earnings targets halfway through 2022.
Mr. Callahan and Travis E. Leonard, Hostess’ new chief financial officer, addressed questions about the supply chain during the call in response to analyst questions.
Hostess had net income of $30.48 million in the second quarter ended June 30, or 22¢ per share of common stock, compared with $29.85 million, or 23¢ per share, in last year’s second quarter. Net sales were $340.47 million, up 17% from $291.49 million.
In early trading on Nasdaq Aug. 4, Hostess shares traded as low as $21.17, down 8% from the Aug. 3 close.
Supply chain issues were discussed in the context of margin pressure, which intensified in the second quarter. Adjusted gross profit during the quarter was $112.8 million, up 7% from last year
“Adjusted gross margin for the quarter decreased by 299 basis points to 33.1% compared to the prior-year quarter as gains from higher pricing and productivity initiatives were more than offset by 20% inflation and inefficiencies due to supply chain weakness,” Mr. Leonard said.
He described tight margins as in line with expectations and said overall gross margins in 2022 would be 200 points lower than in 2021.
“So when we think about the second half from a year-over-year perspective, we will see that moderate in the second half,” Mr. Leonard said.
Keeping customers well supplied is a challenge for baking companies, Mr. Callahan said.
“We have a relatively short shelf life product,” he said. “We’re baked goods. We make high-quality products at the scale that consumers demand high quality, so fresh bakeries are still very much in vogue. That’s one of our secret sauces. But the effect of that is we have relatively low inventory. So we catch inventory.” -are not one of those categories that do up. So we ship real-time. As far as supply chain fragility is concerned, we still have some hurdles.”
Baked foods in many instances contain numerous ingredients, and ensuring ingredients, packaging and transportation are aligned is a challenge, Mr. Leonard said.
“Unfortunately, you can’t make (a product) with only 95% of the ingredients,” he said. “So when the ingredients aren’t there, you experience production scheduling challenges as well as inefficiencies in transportation. We continue to work very closely with our suppliers and value the strategic relationships we’ve built with them, which gives us confidence that these issues will certainly get better over time.” will happen.”
Although Hostess executives acknowledged growing challenges in efforts to preserve profit margins, they were very upbeat about sales trends.
“We’re growing revenue quarter after quarter, year after year,” Mr. Callahan said. “The second quarter marks the tenth consecutive quarter of at least 9% growth and the fifth quarter of double-digit growth. In this increasingly dynamic environment, we benefited from our profitable business model and the strength of our brands with alignment in pricing, mix and volume.
The company benefits from both the on-the-go and in-home eating trends, with over 15% growth for both single-serve products and multipoint.
The company’s Voortman cookie line, which currently accounts for about 10% of sales, is growing even faster than the snack cake business, driven by expansion of distribution, “boosted by our investment in advertising to increase brand awareness as well as the positive impact of innovation. and a continued focus on improving the SKU mix,” Mr. Callahan said. Wortman gained five-digit share in the fast-growing sugar-free subsegment during the quarter, he added.
More broadly, Mr. Callahan said the underlying trends in the company’s core categories “continue to hold up better than overall food, even in the current economic environment.”
Mr. Leonard said sales of sweet baked goods rose 16% in the quarter and cookies rose 28%. The company’s dollar share in the sweet baked goods category was unchanged at about 21.7%, but the company grew about 70 basis points in volume share, he said.
“Our breakfast portfolio also led the subsegment significantly with 22.1% growth in the quarter compared to 16.1% for the total breakfast subsegment driven by our effective innovation including Baby Bonds,” he said.
Hostess has increased its advertising spending with specific and ambitious marketing objectives, Mr. Callahan said.
“Our high ROI marketing investments include the recent expansion of our first national advertising campaign in over a decade and the upcoming support for the launch of our latest innovation platform, Bouncers,” he said. “As we noted at March Investor Day, our iconic brands enjoy brand awareness of over 90% or more than many of the largest snack brands. However, hostess is not top of mind for 60% of consumers. Our increased advertising and marketing investments are designed to create a high level of awareness for Hostess Snacks to create a powerful flywheel of growth.
Discussing innovation at Hostess, Mr. Callahan said the company is building a multi-year pipeline of new products and cited Baby Bonds as an example of success. Hostess bouncers, a new product first announced in March, are on deck.
“Bouncers reimagines our iconic Twinkies, Ding Dong and Single-Serve Pop-enabled offerings, ideal for the lunchbox occasion and designed to bring incremental consumer appeal to our brands, particularly millennial parents,” said Mr. Callahan. “Bouncers are receiving strong support and endorsement from our retail partners and are expected to hit the market in early fall.”
A Hostess spokesperson said the bouncers will be available on a limited basis this month, with an official rollout at the end of September.
Although the company enjoyed rapid growth quarter after quarter, Mr. Callahan described the consumer environment as increasingly challenging.
“We are watching closely for signs of a change in consumer behavior as the consumer basket continues to show greater impact from overall higher inflation,” he said.
Hostess executives declined to quantify the elasticity of demand in the market, but Mr. Callahan said the snack foods category appears to be well-positioned to weather waves of inflation.
“Despite double-digit price increases, absolute price points for Hostess products remain relatively low on a per-serving basis, making them an accessible snacking option in the snacking opportunities we compete against,” he said.
For the full year, Hostess raised its sales growth guidance to at least 15%, up from at least 12%. The company’s outlook for the year is otherwise unchanged with adjusted EBITDA toward the high end of $280 million to $290 million and earnings per share in the range of 93¢ to 98¢. The company still estimates capital expenditures of between $120 million and $140 million during the year.
In his comments, Mr. Leonard said Hostess continues to expect high-teen inflation for the full year and that the company has booked 90% of market-traded items for the rest of the year.
Asked whether supply chain issues were adversely affecting the company’s plans to establish a “bakery of the future” at a recently acquired facility in Arkadelphia, Ark., Mr. Callahan said the project was on track.
“The Arkdelphia ramp-up is still on schedule for the second half of ’23,” he said. “There’s a ramp-up schedule. We haven’t communicated that. That takes time. You’ve got to hire people, you’ve got to train people, you’ve got to set up a facility. But that’s the second half of ’23. That happens in time.”
Annual net income was $65.03 million, or 47¢ a share, up 15% from $56.58 million, or 43¢, in January-June 2021. Sales were $672.52 million, up 21% from $556.91 million.