Hostess Brands Inc (TWNK) 2021 Q1 法說會逐字稿

Greetings. Welcome to Hostess Brands' First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Chris Mandeville with ICR. Thank you. You may begin.

Good morning, and welcome to Hostess Brands' First Quarter 2021 Earnings Conference Call. Joining me on today's call are Andy Callahan, Hostess Brands' President and CEO; and Brian Purcell, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ended March 31, 2021, that went out this morning at approximately 7:05 a.m. Eastern Time. The press release and an updated investor presentation are available on Hostess' website at www.hostessbrands.com. This call is being webcast, and a replay will be available on the company's website.

Hostess would like to remind you that today's discussion will include a number of forward-looking statements. If you will refer to Hostess' earnings release as well as the company's most recent SEC filings, you'll see a discussion of factors that could cause the company's actual results to materially differ from these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements. The company will make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business, and has included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.

And now I will turn the call over to Mr. Andy Callahan.

Thank you, Chris, and good morning. We appreciate you joining us today. I'd like to begin by offering a few highlights from our first quarter performance to emphasize and reinforce the strength of our business. I will then turn it over to Brian to discuss our financial results in greater detail, and we'll wrap it up with a discussion of our outlook before opening it up to you for questions.

In short, Hostess continues our strong profitable growth with our 13th consecutive quarter of revenue growth in the first quarter and very strong momentum leading into the second quarter. I am extremely proud of our entire team of Hostess heroes' execution in a fluid environment. Our results are a testament to the strength of the Hostess and Voortman brands, our leading position in consumer snacking occasions, the impact of our insight and data investments, our latest marketing and merchandising efforts and the remarkable talent who execute against our proven playbook on a daily basis.

Underpinning these very strong results and building momentum is the outstanding execution of the Hostess supply chain who are executing today to service our consumers and customers while building the foundation for continued profitable growth tomorrow. We are consistently and profitably growing, and our solid foundation is getting stronger. A few takeaways to highlight our quality results before I provide greater color on the quarter.

Net revenue grew 9% with our Sweet Baked Goods sales contributing 5 points and our Voortman sales contributing 4 points to total growth. Sweet Baked Goods point-of-sale was very strong, up 8.7%, once again, led by our Hostess-branded growth of 10.6%. The growth resulted in a 163 basis points of market share gains across multiple channels, demonstrating our strength in growing consumer occasions and the benefit of our broad-based distribution model.

On a 2-year stack basis, we had point-of-sale growth of 13.7% versus the category of 5.8%, exemplifying our continued strong consumer demand and successful execution both before and during COVID. Consumer mobility is increasing and in-home snacking occasions remain elevated, providing a solid foundation for continued strong growth.

Voortman continues to deliver strong growth as well, with net revenue up over 60% year-over-year as we lap transition from the direct store distribution model in the prior year and drive increased distribution and velocity. Total Voortman point of sale achieved 18.3% 2-year stack growth as compared to 7.8% growth for the cookie category, demonstrating again the strong performance in faster-growing snacking subsegments.

Insights and quality innovation are driving improved contribution of new products versus a year ago. LTOs are also contributing nicely to overall results. Additionally, Q2 has 2 big launches with Baby Bundts and Crispy Minis, which are both off to good starts to help continue their momentum.

Our small format success in the quarter was simply remarkable. We touched new highs in market share for C-store, dollar and drug with year-on-year share gains of 327, 786 and 570 basis points, respectively. The strategic decision to drive shelf and customer expansion, our consumer and focused innovation created for the needs of the channel and our advantage warehouse distribution model helped drive these impressive results. We are positioned for continued growth as mobility increases, consumers are vaccinated and communities lift restrictions.

Now on to innovation. Our very strong 3-year innovation pipeline, which leverages key consumer insights and is tethered to fast-growing consumer usage occasions, is performing very well to start 2021 and has been a strong contributor to our performance of the Sweet Baked Goods category, while Voortman's innovation is realizing steady distribution gains. These offerings are more incremental and more profitable than previous years, and we expect them to drive us towards our 15% vitality target rate by year-end.

Shifting to occasions. Hostess breakfast products continue to perform tremendously well with point-of-sale growth of 17.6%, growing our share of breakfast in Sweet Baked Goods by 290 basis points to 20.5%. Strong growth of Hostess coffee cakes, including our new cream cheese labor, updated packaging for a multipack Danish as well as our early introduction in the market of our Baby Bundts at select retailers, are all resonating with consumers. These initiatives build off previous successful launches like Donettes snack packs and base breakfast item core growth across Donettes, Honey Buns and Danishes.

Grounded in our consumer insights and strategic investments in the on-the-go consumer, innovation specifically curated for convenience has proven critical to our success. During the quarter, we launched Pecan Spins and Muff'n Stix with positive early consumer reception. C-store retail partners are showing good interest in our Voortman mega wafers. And in recent weeks, we launched our Crispy Minis with a key national chain.

Again, heading into the all-important summer driving season, we are confident that our core business strength and new products position us well to capitalize on increased mobility as the economy continues to reopen. Longer term, we believe we have best-in-class innovation pipeline tailored to both on-the-go and eat-at-home snacking occasions. We are focused on 4 key strategic growth priorities for innovation that will help deliver sustainable growth, invigorating our icons, growing household penetration with young families, continuing C-store consumer growth and establishing Voortman's distinct positioning to optimize growth potential.

Underpinning the remarkable results this quarter is the success of our marketing and merchandising efforts. We continue to drive incremental growth through our strong Hostess partnership program in the convenience channel as we are able to leverage the data and insights we have mined to maximize our sales and profit for our retailers. These strong partnerships have been instrumental in managing through the evolving consumer demands over the last year and helped steadily increase our leading market share in the convenience channel. We are seeing the benefits of these partnerships pay off and expect this to continue.

Our dollar channel performance is impressive. Our dollar channel point-of-sale grew 36.5% in the quarter as we grew share 786 basis points, driven by revitalized shelf set, expansion of our breakfast platform and continued strong partnerships and customer service. We continue to work with our partners in the mass channel to develop programs that are mutually beneficial and have seen sequential improvements this quarter as we implement new changes to our product assortment and merchandising programs. We have iconic brands that consumers love. As we look forward, we are committed to building on our great foundation through targeted, proven marketing investments that we are confident will deliver incremental growth.

To that end, we executed a handful of e-commerce advertising trials during the quarter with very encouraging results. We were pleased that each of our trials delivered return on advertising spend and response rates well above benchmarks, providing us the confidence that future programs can drive growth and unlock another lever in our already formidable growth toolbox.

Our merchandising efforts for Voortman are also beginning to pay off as total Voortman point-of-sale grew 8.7% in the quarter, fueled by accelerated growth of sugar-free, which grew 18% year-over-year.

Contributing to the strong point-of-sale growth is the increase in our total Voortman ACV, which we have grown by 6 points since the acquisition with good improvement across all channels, particularly within the grocery channel, which expanded by 9 points. We expect to continue to drive growth in Voortman as we introduce more innovation and drive awareness with targeted marketing programs.

We also continue to make great strides on our ESG initiatives. We have embedded ESG goals into our operating model, including the continued focus on retention and diversity. We were also thrilled to add 2 new Board members to our Board of Directors, Olu Beck and Hugh Dineen, who bring with them a wealth of experience and knowledge that will be very valuable to our organization as we move forward in our journey.

We also continued to build our management team and last week announced the addition of Dan O'Leary as our Chief Growth Officer. Dan brings valuable experience of having profitably grow iconic brands at Kraft, Mizkan and Tyson Foods, where he was most recently the Senior Vice President and General Manager for Tyson Prepared Foods. We are excited to have Dan on board to help drive our important growth initiatives.

Hostess once again delivered industry-leading revenue growth at leading margins. We closed Q1 strong and are headed into Q2 with momentum. Although early in the year in this dynamic market, we are very well positioned to deliver on our full year guidance. We will continue to prioritize the safety of our dedicated loyal employees while we execute with agility and efficiency to continue catering to consumer needs in a highly profitable manner.

And with that, I'll turn it over to Brian to go through the quarter's financial results in greater detail.

Thanks, Andy. It's a privilege to speak to another quarter of strong results. As Andy mentioned, this represents another quarter of robust growth, underscoring the power of our brands and strength of our business model.

Net revenue for the quarter was $265.4 million, an increase of 9%. This increase in net revenue was fairly balanced between continued strength in Sweet Baked Goods, with 5 points of growth, and Voortman contributing the remaining 4 points of growth. The Voortman growth is primarily due to a favorable lap on timing of shipments as we transition from DSD to the warehouse model in 2020.

We saw POS growth in Sweet Baked Goods across both single-serve and multipack sizes. Our single-serve POS growth accelerated to 10%, driven by our strong performance and convenience where we saw share gains of approximately 330 basis points. Our multi-pack and bagged-donette business grew 7.6%, despite our lapping of last year's COVID bump at the end of the quarter, driven by continued growth in the grocery and dollar channels. Importantly, point-of-sale growth is driven by share gains across the business.

Gross profit was $95.5 million for the quarter, while gross margin came in at 36%, 140 basis points higher than the prior year period. Approximately half of the realized margin expansion was driven by favorable mix in our core Hostess business, and the remainder was the result of the achievement of Voortman synergies and productivity efficiencies.

As we anticipated, operating costs were notably lower in the first quarter, down 24.5% to $48.5 million due to prior year expenses incurred for the integration and conversion of Voortman's operations and the realization of synergies. Our effective tax rate, excluding discrete items, was 27.3% compared to 23.6% in the prior year quarter. The effective tax rate for the prior year period was impacted by the write-off of deferred taxes related to Voortman and the allocation to the noncontrolling interests, which was eliminated in the fourth quarter of 2020.

Net income was $26.7 million and diluted EPS was $0.19. Adjusted net income and EPS were $26.9 million and $0.20 per share, an increase of over 40% versus the prior year period as a result of higher volume and operating efficiencies, including accretion from Voortman.

Adjusted EBITDA for the quarter was $62.5 million or 23.5% of net revenue compared to $51 million or 20.9% of net revenue in the prior year. The increase was driven by strong Hostess-branded volume and favorable mix as well as $8 million higher Voortman adjusted EBITDA as a result of higher revenue and operating efficiencies from the integration and transition to the warehouse model during 2020.

At the end of the quarter, we had cash and cash equivalents of $197.8 million and net debt of $925.8 million with a leverage ratio of 3.6x, down from 3.9x at Q4 2020, driven by our strong operating cash flow growth.

Turning to our outlook. Given the strength of how we started the year, we are increasingly confident in our ability to achieve our full year guide. We continue to expect to drive net revenue growth of 3% to 4.5% and expect adjusted EBITDA between -- to be between $255 million and $265 million with adjusted EPS of $0.80 to $0.85 per share. Looking forward, we feel confident in our ability to manage margins as we move through the remainder of the year. We have good visibility to balance costs with pricing and productivity. Additionally, we are seeing strong consumption across our portfolio, namely in the convenience channel, which is benefiting our single-serve mix.

From a balance sheet perspective, given healthy cash on hand, strong fundamentals and increased operating cash flow as we lap transition costs related to Voortman, we feel confident that our leverage will approach 3x by year-end, absent M&A or any material buyback.

As we delever almost a full turn in 2021, we continue to make strategic investments in the business to help support future growth, such as the investment in our new cake line, which remains on track for a ramp-up in the back half of the year. Longer term, we remain committed to investing for growth and generating shareholder value. We are excited by the opportunities ahead of us and confident in our team's ability to deliver.

With that, I will turn the call back to Andy for closing comments.

Terrific. Thanks, Brian. Hostess is well positioned to deliver sustained strong growth throughout 2021 and beyond. Hostess has leading positions in snack occasions and need states that are growing ahead of overall snacking, propelling our growth and providing a solid foundation for sustained growth.

In 2021, we expect in-home snacking with indulgent and well-known brands will continue at elevated levels as consumers simultaneously increase their mobility, increasing the demand for Hostess on-the-go occasions. The strength of our brands, breadth of our availability across channels and agile business model positions Hostess to realize this opportunity. Our track record of consistent execution, clear ability to innovate and grow through successful acquisitions like Voortman, in addition to the strong consumer affinity for Hostess brand, is foundational to capturing this industry-leading growth. We will continue to work to build on our consumer and customer foundations going forward. We are deeply committed to shareholder value creation and sustainable, profitable long-term growth.

As we move forward, our strong and growing cash flow positions us well to unlock shareholder value. We will continue to reduce our leverage, reinvest in the business to support industry-leading growth at industry-leading margins while maintaining the flexibility to opportunistically pursue strategic acquisitions as well as enhanced shareholder returns. We remain stewards of capital, and we'll always strive to optimize shareholder value.

And with that, Brian and I are available for your questions.

(Operator Instructions) Our first question is from David Palmer with Evercore ISI.

First question would be on the reinvestment levels that you're making and the nature of those reinvestments. I think you mentioned data and analytics. I don't know about the marketing and advertising part of that, but if you could give us a sense of how much you reinvested in the quarter and generally what your expectations in your guidance entails or includes in terms of reinvestment this year? And I have a follow-up.

Yes, David, I'll take that. Thanks for the question. We've been investing and building that foundation for years, and it starts with really understanding the way we build our businesses, understanding the consumer. So we've invested in understanding occasions, drivers of occasions, quantifying those occasions. We started by just understanding our customer shelf set early.

If you remember one of my first calls, one of the first decisions I made was an investment in more data around convenience store shoppers and how they shop, how it flows through, what are the incrementality of the convenience channel, and that's paid off well. We've done similar across the board in shopper, then we moved up to consumer. And then we have even greater insights over the last -- last year around consumers.

We've also taken that and then invested a lot under Tina, our Head of Innovation and growth, and now with Dan coming in and the great team that we built around that, of understanding our consumer investment. This quarter, we've invested in the e-commerce marketing as well as test in both Voortman and Hostess. And we're taking a build as we go. We're now -- as we go forward, there are some modest investments. You'll see them come through on the SG&A line as we move out. I'll let Brian kind of talk about that. But we do it concurrent with our growth. And we do it in a way that when we validate that it's very successful. Then when we look forward, when that happens, we'll continue to build it.

But the good news for us is we don't have -- I've lived in large businesses that had a deep heavy spending that was inefficient, and it was a lot and you had to build off it. We have all that growth in front of us. So we're really excited about validating and then investing in our customers and in our consumers to continue to drive growth. So that's mostly where it is. It's around foundational on consumers and then testing it in the market with some modest increase. And when we get to the point where we really believe that it's going to continue to drive our growth, that's another lever we have. Brian, anything to build on that?

Yes. Just a couple of quick numbers. I mean if you look at our advertising and marketing expense, we were up about $1.5 million to $2 million versus prior year. Last year, we kind of ramped up A&M spend. So it was largely in line with Q4, just kind of year-on-year. So there's some incremental investments we're making there. There's a little bit that hits G&A as well, just to complement what Andy's talking about.

Great. And then just some color on gross margins. I mean, you can see that a lot of companies in the first quarter had headwinds with regard to supply chain headwinds of weather and whatnot mid-quarter. Could you maybe talk about whether you had those? And then thinking through the year on the gross margin line, we could see a tailwind from your mix with the on-the-go growing, but also perhaps some gathering headwinds in terms of input costs. So any thoughts about how we should think about gross margin cadence versus this quarter would be helpful.

Sure, David, I'll take that. So yes, if you look at Q1, we expanded margins both in the base business and also with Voortman. Voortman was largely a function of the timing lap when we transitioned from the warehouse -- or the DSD model to the warehouse. So we expanded margins roughly 140 basis points.

And if you look at our mix is driving a chunk of that in our business. The volume that we're seeing, we're seeing absorption, and we're getting some productivity. So those items, we are seeing inflation. But those items are offsetting inflation to the point where we're actually expanding margins.

I would say, as we look forward to the year, I would expect sort of neutral-ish to maybe a little bit of favorability from a margin standpoint based on the visibility we have with pricing and productivity to offset inflation. We are seeing inflation. We are seeing certain areas tick up a little bit more than we thought at the beginning of the year, but we're pretty confident that we can offset that with pricing, productivity and mix.

One call out, just to remind everybody, is we did have very elevated margins in Q2 of last year, driven by Voortman when we did the transition to the warehouse model in April. We had a big pipeline filling a lot of production efficiencies. So I would actually expect Q2, driven by Voortman and the lap on margins there, to potentially be a headwind in Q2 and then the balance year, as I said, I think that we can offset inflation with pricing, productivity and mix.

Our next question is from Ken Goldman with JPMorgan.

Two for me, if I may. Obviously, your total share is doing great. It's also good to see that your share losses in the mass channel are sequentially diminishing. Andy, you do have some fairly easy comps in those share or the share story in the mass channel ahead. Is it fair to assume that as the year progresses, you'll start to regain share with these customers? Or how do we think about that? Is it just going to be share losses at a lower level? Just trying to get a sense of what we should be looking for in some of the measured data that we get.

Yes. So just across the board, maybe a comment, we've talked about this. One of our strengths is our broad-based distribution in our agile model. So we expect overall to continue to grow our business. And one of the reasons why we grow share isn't just because of channels. It's because we continued to innovate across a broader snacking spectrum. We're committed to investing in category growth. We're doing it with innovation. We do it with insights. We do it by investing in capacity. We do it by investing in consumer. So we're continuing to invest in growing capacity, and we're continuing to invest in sustainable, long-lasting partnerships with all of our customers. I expect that true in the mass channel, expect it in convenience and food across the board. So over time, I would expect us to grow share.

Now at any given 1 channel at any one time, we make. The headline is, yes, I expect to continue to see improvement. COVID impacted every channel and every model differently. So we're investing and we're committed to investing and making sure that we continue to grow and solve our consumers' problems and do that in great long-term partnerships with all of our customers. And over time, yes, I would expect us with that model and our brands and our team to continue to grow share. And I would expect that to happen in every channel. And maybe not 1 quarter or 1 month, but over time, absolutely, we would expect us to continue to see grow share because we're committed to investing in the category growing. And that's what customers expect from us. And we're making really great progress across the board in this channel you brought up. Thanks, Ken. Yes.

Okay. Yes. And then, Brian, I think last quarter, if I'm not incorrect, you mentioned that all in, your cost inflation will be somewhere in that 2.5%, 3.5% range. You talked about some inflation having picked up. What's the range you're looking for now? Is there an update on that number?

Yes. So I think in total, we're -- our guide overall, we're maintaining our guide. We do see certain areas of inflation a little higher than kind of what we saw at the beginning of the year. So for instance, transport's up a little bit. We're looking at a pretty dynamic labor situation, which a lot of companies in the space are looking at as well. So we're monitoring that. But we also feel great about -- so we do think inflation is ticking up a little bit versus what we saw originally at the beginning of the year.

But again, I think we also get better visibility on pricing, the price increases we've been selling in. We've got a good visibility of our productivity pipeline, and our mix is working for us as we talked about in the upfront comments. So collectively, we feel good about the ability to manage that in line with where we guided the implied EBITDA guide that we give.

Our next question is from Rob Dickerson with Jefferies.

I guess just a follow-up on the pricing question. It sounds like you do have this good visibility. Maybe you are even already starting to sell in some. But just with respect to, I guess, any color around magnitude and timing, we've heard a lot of companies kind of speak more to the Q3 time period. So one, I just kind of want to get an idea how you -- or how think about the phasing of this pricing as we go through the year? And then obviously, I don't understand for competitive reasons, you're likely not going to tell us exactly what that pricing is, but just trying to gauge, when you talk about pricing, is this similar to what we've seen in the past? Maybe a little bit more, a little bit less? Anything you can provide would be really helpful.

Yes. So from a...

[Take].

I'll take that -- yes. From a timing standpoint, and then Andy can just add color on the selling process and the like, we're expecting to see the pricing take hold in the back half of the year. So really kind of starting in the Q3 time frame, the beginning of Q3. So we're still in the process in different channels of the sell-in. So we can't give you kind of the exact number. But we're -- from a timing standpoint, we expect at the beginning of Q3 to -- for the pricing to take hold.

Got it. Okay. Fair enough. And then I guess, Andy, just curious, you had a number of comments around driving shelf, right, especially in the smaller format stores. And I think you mentioned maybe a couple of LTOs coming in Q2. Would you say there's anything mildly different kind of with the go-to-market strategy as you try to drive revenues, not only in mass, but also in smaller format stores, just given the shift in mobility? Like do you view this as this is a core opportunity for you to make sure you're taking share of stomach and share of market?

Yes. Just a couple of things. Thanks. I appreciate the comment, Rob. As I mentioned earlier with David's question, I believe our insights and our understanding of consumers' occasions are sharper. They continue to build. And taking that, we're able to tailor innovation much more specifically to a need of an on-the-go consumer versus maybe a multipack purchase that brings home for a snacking occasion, either brought from home or in-home. All of those occasions are increasing.

And the occasions in which our business is more highly developed and where we have assets that consumers are looking for are also growing at a greater rate than total snacking, which is why when we execute our playbook very well, we grow the category and are able to grow share.

So going forward, one of the things that we've done that is different is we have more tailored innovation like Pecan Spins and other things that are the flavors curated or the actual ideas more on-the-go consumer. And then we have Baby Bundts, obviously, Crispy Minis, which are off to great starts; mega wafers, which is expanding Voortman into that on-the-go occasions. And they're all designed for this -- or more tailored for the specific need state.

And then we're taking -- as Brian mentioned, we're taking early steps to finding that consumer who's looking for, talking to them and advertising, either through our customer channels or via some other consumer methods. And we're testing that. So we're getting feedback on that. So we're trying to put together, and we've successfully put in together, an ecosystem that very efficiently be able to find the consumers we want in the occasion they want and then be able to invest in that consumer to grow it. That's a flywheel of growth and that's what we're building.

Our next question is from Ryan Bell with Consumer Edge Research.

Could you talk a little bit about your expectations for the future of indulgent practice? It's clear there's been a benefit to the at-home breakfast category given the pandemic. How do you think about it going forward? And then maybe as we start to get into a bit more of a normalized environment, what some incremental work from home could mean about that occasion going forward?

Big fan of in-home breakfast. Consumers love Hostess during the breakfast occasion. We call it AM snacking. So there's different occasions and need state around breakfast.

If you remember about -- I guess it was about 2.5, 3 years ago, we made a commitment to the occasion, and our research has continued to demonstrate that breakfast is going to grow at a greater pace. We were underdeveloped in that occasion. We're now fair shared and continue to grow our breakfast share. We were up in breakfast, above 15% in the quarter, driven by a lot of those initiatives that we took.

As we come out of this COVID environment, we do expect obviously mobility to increase. We do not expect in-home occasions of snacking to go down to pre-pandemic levels. We expect them to maintain -- continue to be elevated at some level. And as a result, the investments we've made in that breakfast occasion in-home, we expect to -- our position to be very well. We'll continue to innovate around there, and we expect to continue to have that occasion specifically that be a meaningful contributor of growth, both because of our core items and because of the innovation that we will bring to the occasion.

Our next question is from Bill Newby with D.A. Davidson.

Congrats on a great start to the year.

Thanks, Bill.

I just -- maybe, Andy, you touched on it a little bit at the end there, but wanted to ask another follow-up on just the category growth. I mean, if I look at multipack this quarter, I mean still very strong growth there, especially off the difficult comp. And I guess, a lot of talk about where the Sweet Baked Goods category is going to go post-COVID and whether it will kind of fall back into that low single-digit range or not. I guess is this growth that we're seeing in multipack kind of an indicator that maybe we can sustain above that range a little bit longer? And I guess, I appreciate any further thoughts there.

Yes, I believe that there is a -- there's an immersion visibility. I'm not going to say all the models that we look at are perfect because we're coming out of an unchartered territory here related to COVID. But I think all of the consensus, and myself included, is that there's going to be behavioral changes that are going to stay. And I would expect, specifically for Hostess, and specifically for -- I'll talk more broadly into consumer occasions and need states that an in-home breakfast occasion is going to stay meaningfully elevated versus where it was. And therefore, that's good for overall growth projections going forward for Hostess and likely for the category.

But for sure, for where we compete relative to morning snacking, sweet snacking occasions in the morning, I expect that to grow. I would expect that to grow at a greater rate than overall food. I would expect it to grow at a greater rate than overall breakfast because historically it has. And I would expect Hostess to continue to grow share in it. So all of that positions us well to continue to grow, which is why we've invested in our insights and our innovation and our marketing in that area. And it's paying off, and I expect that to continue to happen going forward.

Great. Super helpful. And then I guess just one quickly on what you're seeing promotional environment here as we start to lap COVID. And I assume providers start to roll out whatever strategy they've developed to try and retain much of the trial that happened last year. I guess, any thoughts on how that's developing and how -- maybe relative to what you guys would have expected 3 months ago?

Yes. So what we're seeing is, as you know, what we didn't -- it's kind of funny. We -- there was a reduction in promotion spending a year ago. That is true. We had plans to drive more efficient growth prior to even COVID happened, which was really good timing. We were taking out and adjusting our models to drive efficiency, leveraging promotion. Promotion is coming back at a level, but it's being put back. I can only speak for ourselves. Our intent is to continue to support our consumers and our customers and do it at the most efficient growth for the category and for the brand. So we are bringing -- we do have promotions coming back. We believe that they're more efficient than they were before. You need to manage the entire revenue management model with both promotion and base pricing. And as we mentioned earlier, we're bringing pricing into the marketplace that's going to come in the back half. So I do believe it's going to come back to the normal model, but not at the level, and I would expect that it was pre-pandemic. And that's more efficient for everybody. It's more efficient for our customers and for Hostess.

Our next question is from Andrew Olsen with UBS.

Andy, just to build on your comments just there. Just talking a little bit more on the pricing that you guys are slated to take it in the back half. Just from a high level, how do you think about pricing levels -- levers that you can pull through the revenue growth management, whether it's like list price versus price-pack architecture? And then how do you think about that based on channel? Like how do those levers vary by channel as you think through pricing of the different channels? And then I'll pass it on.

Yes. So Andrew, sorry for the foundational work, but I remember we talked about this a lot. We haven't done -- we try not to do pricing until it's a natural progression of input costs and inflation and other things, which is why in my 3 years, we've done like a base price on part of the portfolio 3 years ago. And there's some parts of our portfolio we haven't done pricing in 6 or 7 years since we relaunched.

And the reason we've been able to do that is because of all of our productivity initiatives to offset the efficiencies of our supply chain and other things that you mentioned that we do, price-pack architecture, changing prices, getting efficiency on lanes, all of these multifaceted elements of our pricing, managing the everyday price versus the trade efficiency, we've been able to manage that over time. And that's our goal. Our goal, that's good for our ability to be able to drive growth. So we are doing pricing now on prices or parts of the portfolio because it's the efficient thing and the right thing to do relative to the category. It's now healthy for the category to manage our input prices.

So -- but your point is well taken. We look at all of those in a -- every day. I mean, every day, we have a pipeline, what we call multifaceted efficiency programs at the revenue line down that looks at mix, looks at price-pack architecture sizes, productivity out of packaging and product formulations are running the way we run our plants. All of those things are efficiency initiatives that the team looks at and does very well every day.

When it comes to the data, we have elasticities by channel, by form. That all goes into our model so that we can be very predictive on what we think the impact of our pricing is going to be on elasticity going forward. So that's all built into our forward forecast related to pricing, assuming that what gets reflected in the marketplace is correcting our models. We believe we have a pretty -- we have a very good visibility to the impact going forward, both on the growth side as well as the profitability side. Anything to build on that, Brian?

No, other than I think -- and you asked us, Andrew, the -- by channel, it does play out differently. We look at, obviously, what pricing is across different channels. And our ability to manage that across different channels and certain channels lend themselves to perhaps managing trade versus list price versus price pack -- the price-pack changes. So we do look at it kind of on a channel-by-channel basis and do what we think is appropriate in that particular channel, which also kind of over time, I think, gives us a little bit of runway as well.

Our next question is from Pamela Kaufman with Morgan Stanley.

I would -- do you have any insight into how much the -- how much of the growth over the last year has been driven by an increase in household penetration during the pandemic versus increased consumption among existing households? And I guess how you're thinking about the retention of new households as things normalize?

Yes. So the retention of our new households has actually been extremely well. Household penetration is more of a broader long-term metric. We have been able to -- early in the pandemic, we were increasing our households. And based on some of the merchandising flows, it's kind of gone flat, and then it goes back up again just because of access to consumers. But early in the pandemic, we're increasing our households. We were then converting those households into more frequent multi buyers at a greater rate than the overall category. So we're increasing that penetration.

We also find that our advertising, when we look at our growth consumer, we're acquiring those consumers very well via our advertising, so our ability to be able to get the long lifetime value consumers very well. So we feel really good about the tools that we have to access consumers. And that continue to drive long-term growth, both overall and with our -- it's not just the overall number, it's with our strategically important growth consumers that we have identified as well. So feel good about that.

And also, can you talk about how you're thinking about Voortman performance over the course of the year, given the various growth initiatives that you're executing on? Just looking at the absolute level of Voortman sales, they have been somewhat stable over the last couple of quarters. So should we expect to start to see those sales ramp up? Or I guess, maybe some color on the cadence as you execute on the growth strategy there.

Can you -- what are you looking at on when you're mentioning that Voortman's sales are stable?

I guess, sequentially, looking at the absolute level of sales. Over the last couple of quarters, they've been relatively stable.

Yes. So there is a little seasonality in the business, Q1, Q4. I do expect the -- as we're looking to build our run rate with Voortman, probably more as we move throughout the year for sales on an absolute basis to increase.

Yes. Our plans are for Voortman to grow headline. And I guess sequentially on the seasonality, you'd see it different. So I agree with Brian.

Our next question is from Rebecca Scheuneman.

So thanks for sharing some of the color on your data-driven innovation. I'd love to also hear like what are the systems that you're sourcing that data from? And also, you talked about how you're doing a lot to study and really understand usage occasions. Are there other types of data that you're digging into, such as traits that consumers are seeking?

Yes. We don't -- we use a lot of the tools that are very common in our industry. And then we -- either internally or sometimes with partners, we then take it and we mine it through proprietary tools to really understand as deep as we can at the consumer level of how they're behaving, who they're behaving that way. We look at different segmentations to it. So we'll take data from our partners, our Nielsen partners. We'll take other sources of data. We'll take third-parties. Sometimes we buy in a lot. We'll take a media consumer with our partners who we work with.

So what we're doing is not necessarily proprietary or reinventing an approach in the industry, but we do it in a way that leverages our own insights. And we tailor it specifically to our business to be able to work on the segmentations and then drive the consumer motivations of the why once we get that.

So we do a lot of -- I'm not going to claim that we're doing it -- we're reinventing how to do the segmentations or the analysis, but having spent a lot of time cutting my teeth at Kraft and with Hillshire and Tyson and now with Hostess and having a great marketing team and partners, we're trying to apply what we collectively learned with really talented people and apply it to a terrific brand, and we think we're doing it very well. And it's probably as good as a lot of other much larger companies out there. So I feel really good about that, but that's our approach.

Yes. Okay. Great. And secondly, I know you talked a lot about the great opportunities expanding Voortman from their 61% ACV towards the Hostess Brands' 91%. I'm just wondering how much can you close that gap? Does Voortman have the same ACV potential that the Hostess Brands does? Or should we expect it to lag that?

You would expect it to lag it over time. But we're in the Voortman -- we're in the growth mode with both Hostess and Voortman. Hostess has nearly ubiquitous awareness. Voortman does not. So both, when we advertise with consumers and build the brand, we do it in different approaches. So Voortman, to a lot about building the awareness and then having the ACV follow.

So what you should think about on the -- getting to 91%, we'll eventually get there. We're not going to get there next year. We're not going to get there probably in 2 years. But it's going to continue to grow year after year. And that gives us a long runway for growth as we simultaneously invest in the consumer and innovation. And then that consumer is going to drive the awareness. It's going to continue to grow.

And then also importantly, I talked about Hostess being in snacking occasions, Voortman, when we do the segmentation of Voortman, Voortman both with the sugar-free business, which is growing extremely well, we're the leading share within sugar-free. And sugar-free is growing at greater than 2x the overall cookie category. We're the #1 need. And then also our real benefits. Those areas with Voortman competes are also growing fast on overall cookies. So as we build availability and build awareness, we expect that to be a long runway for growth.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Andy for closing remarks.

Great. Thanks, everyone, for your participation and interest in Hostess. As you can see from the results, and hopefully, you've heard from our tone today, we are increasingly confident that we're emerging from the pandemic in a stronger position than when we went in it. And we believe we have the talent, the proven playbook to continue to deliver profitable growth over the long term, both in the back half of this year and for many years to come. So thanks again for dialing in. I appreciate it, and we will see you next quarter. We'll continue to work hard for you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.