LENEXA, KAN. — Fresh baked foods, including snack cakes, do not have the extended shelf life of many other food products, heightening the challenges posed by supply chain disruptions, said Andrew P. Callahan, president and chief executive officer of Hostess Brands, Inc.
In a conference call with analysts Aug. 3, Mr. Callahan said Hostess largely has overcome these challenges and, halfway through 2022 remains on track to achieve the company’s full-year earnings targets.
Mr. Callahan and Travis E. Leonard, the new chief financial officer at Hostess, addressed questions about supply chain during the call in response to analyst questions.
Hostess net income in the second quarter ended June 30 was $30.48 million, equal to 22¢ per share on the common stock, up 2.1% from $29.85 million, or 23¢ per share, in the second quarter last year. 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 margins for the quarter declined by 299 basis points from the year-ago quarter to 33.1% as the benefit from higher prices and productivity initiatives were more than offset by 20% inflation as well as inefficiencies caused by supply chain fragility,” Mr. Leonard said.
He described the tighter margins as in line with expectations and said overall gross margins in 2022 will be 200 points narrower than in 2021.
“So as we think about the second half from a year-over-year perspective, we will see that moderate a bit in the second half,” Mr. Leonard said.
Keeping customers well supplied is a challenge for baking companies, Mr. Callahan said.
“We are a relatively short shelf life product,” he said. “We’re baked goods. We do high-quality products at scale that consumers demand high quality, which is why fresh bakeries are still around in such prevalence. It’s one of our secret sauces. But the impact of that is that we have relatively low inventory. So we’re not one of those categories that have catch-up in inventory. So we ship real time. As far as the supply chain fragility is concerned, we still have some disruptions.”
Baked foods have numerous ingredients in many instances, and ensuring ingredients, packaging and transportation are lined up poses a challenge, Mr. Leonard said.
“Unfortunately, you can’t make (product) with only 95% of the ingredients,” he said. “So when ingredients aren’t there, you do experience production scheduling challenges as well as inefficiencies in transportation. We continue to work very closely with our suppliers and value the strategic relationship we’ve built with them, which provides us confidence that these issues will definitely get better over time.”
Even as Hostess executives acknowledged heightened challenges in efforts to protect profit margins, they were far more upbeat about sales trends.
“We are 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 fifth consecutive quarter of double-digit growth. In this increasingly dynamic environment, we benefited from our advantaged business model and strength of our brands with favorability in pricing, mix and volume.”
The company benefits from trends both in on-the-go and in-home eating, with growth of more than 15% both for 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 expanding distribution, “fueled by our investments in advertising to increase brand awareness as well as the positive impact of innovation and a continued focus on improving SKU mix,” Mr. Callahan said. Voortman gained five points of share in the fast-growing sugar-free subsegment during the quarter, he added.
More broadly, Mr. Callahan said 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 sweet baked goods sales grew 16% during the quarter and cookies grew 28%. The company’s dollar share in the sweet baked goods category was about unchanged at 21.7%, but the company gained almost 70 basis points of volume share, he said.
“Our breakfast portfolio also continued to significantly outperform the subsegment with 22.1% growth in the quarter compared to 16.1% for the total breakfast subsegment, driven in part by our impactful innovation, including Baby Bundts,” he said.
Hostess has stepped up 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 Bouncers, our latest innovation platform,” he said. “As we mentioned at our March Investor Day, our iconic brands enjoy more than 90% brand awareness at par or even higher than many of the largest snack brands. However, Hostess is not top of mind for 60% of consumers. Our rising advertising and marketing investments are designed to build top-of-mind awareness for Hostess snacks in order to create powerful flywheel of growth.”
Discussing innovation at Hostess, Mr. Callahan said the company is building a multiyear pipeline of new products and cited Baby Bundts as a model of success. Hostess Bouncers, a new product first announced in March, are on deck.
“Bouncers reimagine our iconic Twinkies, Ding Dong and offerings in a single-serve pop-able version, ideal for the lunchbox occasion and designed to bring incremental consumers to our brands, particularly millennial parents,” Mr. Callahan said. “Bouncers is receiving strong endorsement and support from our retail partners and is expected to hit the market in early fall.”
A spokesperson for Hostess said Bouncers will be available on a limited basis this month with an official rollout expected in late September.
Even as the company has enjoyed rapid growth quarter after quarter, Mr. Callahan described the consumer environment as increasingly challenging.
“We are watching closely for signs of changing consumer behavior as consumer baskets show greater impact from overall higher inflation,” he said.
The Hostess executives declined to quantify demand elasticity in the marketplace, but Mr. Callahan said the snack foods category appears well positioned to weather the inflationary wave.
“Even with double-digit price increases, absolute price points for Hostess products remain relatively low on a per-serving basis, making them an accessible snacking option within the snacking occasions in which we compete,” he said.
For the full year, Hostess has raised its sales growth guidance to at least 15%, up from at least 12% in its earlier guidance. The company’s outlook for the year otherwise is 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 anticipates capital spending during the year between $120 million and $140 million.
In his remarks, Mr. Leonard said Hostess continues to expect high teens inflation for the full year and said the company has booked 90% of its market-traded commodities for the remainder of the year.
Asked whether supply chain problems are adversely affecting the company’s plans to install a “bakery of the future” in a newly acquired facility in Arkadelphia, Ark., Mr. Callahan said the project was on track.
“The Arkadelphia ramp-up is still on schedule for the second half of ‘23,” he said. “There is a ramp-up schedule. We haven’t communicated that. That does take time. You have to hire people, you have to train the people, you have to set up the facility. But that’s second half of ’23. That’s on time.”
Year-to-date net income was $65.03 million, or 47¢ per share, up 15% from $56.58 million, or 43¢, in January-June 2021. Sales were $672.52 million, up 21% from $556.91 million.