Hostess Brands earnings: ‘We continue to see a resilient consumer,’ CEO says

Hostess Brands CEO Andy Callahan joins Yahoo Finance Live to discuss company earnings, the impact of inflation on pricing, growth, and the outlook for Hostess Brands.

Video Transcript

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JULIE HYMAN: It's a sweet start to the year for Hostess Brands. The bakery giant reported strong earnings for the fourth quarter, celebrating a third straight year of double digit growth. And joining us now, Hostess Brands CEO Andy Callahan. Soz is going to stick around for this conversation as well.

Andy, talk to me about what you're seeing. With so many brands, consumer brands-- we've even talked to a door company earlier today. They are seeing maybe lower volumes but making up for that with higher pricing How's the dynamic working at Hostess right now?

ANDY CALLAHAN: Well, certainly in the short term, we're seeing our price mix. And obviously good to see you, and good to be back with you, Brian. We are seeing price mix driving a little bit more the revenue growth. As you mentioned, we just came off our third straight year of double digit growth. And we guided to mid-single-- 4% to 5%-- 4% to 6% growth next year with above-algo profitability.

But we continue to see a resilient consumer. But we're sensitive to that. So price mix is driving it. But for the year, our volume was still positive. And we expect volumes to be about positive to flat in the following year.

So it's more price mix, but a very resilient consumer, especially in the space we're at. We're a very accessible snack. And snacking is growing faster than food. And indulgent snacking is growing faster than snacking overall. So we're in a good position to continue to service consumers.

BRIAN SOZZI: Andy, a really interesting quarter from Walmart this week. Of course, you go to your local Walmart. You find hostess products, but they called attention to a higher-income shopper now trading down to Walmart. Are you seeing high-income consumers? Do you have that data? Are they now reaching for an affordable Hostess snack? Is it that inflationary out there, that this is now a trusted, or more trusted, go-to?

ANDY CALLAHAN: Yeah, there's a couple of things at play for Hostess Brands, one the availability of Hostess where consumers shop is almost ubiquitous. And we have terrific relationships with all of our customers, including some you mentioned right now.

We are seeing resilience of all income levels. And one of the strengths of our business is Millennial parents, who are certainly cash-strapped. It's one of the drivers of our innovation. It's how our marketing goes. We're accessible in that. They're looking for new snacks. 84% of Millennials are looking for new options to snack. So as they come into stores that you mentioned, we're very accessible to them.

The other thing is, we're still expecting high single-digit inflation next year. We do not anticipate passing through any more pricing in the marketplace next year. We're very sensitive to partnering with our customers and driving sustainable, profitable growth over time. So we think we're positioned. We are seeing that resilience, especially within snacking, and partnering with all of our customers to help make that work and drive that category growth.

JULIE HYMAN: Hey, Andy, that's really interesting to hear you say that about inflation. So that implies you don't see the disinflation that the Fed has talked about. High single digits or-- unless you were seeing high double digits before-- is that a slowdown from what you've been seeing?

ANDY CALLAHAN: It's absolutely a slowdown. We saw high teens to 20% inflation in some quarters last year. We're now seeing-- anticipating high single digits this year.

Now, in our market trade commodities, we have a forward-- we take contracts that are six to nine months out. We need reliability of supply and predictability of cost. So we have a process to do that as we take-- we can manage our business.

But with that being said, we also have productivity initiatives, revenue growth management initiatives so that we can continue to make sure we're at a great value for our customers, continue to drive growth not just through partnerships with our customers and enhanced merchandising but also through our innovation pipeline which continues to be a huge engine of ours.

We're launching Kazbars this year off the heels of Bouncers last year. Baby Bumps was one of the greatest inventions here. We're also doing it with Voortman's. So all of those need to work with our productivity to give consumers a great value for sustainable growth over time.

JULIE HYMAN: And Andy, those Kazbars sound good. It's like a candy bar-snack cake hybrid. We'll get to that in a second. But I want to still follow up on the inflation point for just a minute because you're still seeing that high single digit inflation. But you're not raising prices. What's going to happen to your margins?

ANDY CALLAHAN: We expect margins flattish this year. Over time, we'll recover them fully. But for us it's a balance. It's a balance of driving our productivity initiatives, our revenue growth management initiatives, starting with the consumer and the customer back. We're not quarter-to-quarter. We're sustainable, profitable growth over time.

And we believe we have the right balance this year, as we continue to invest in the consumer, continue to drive category growth with innovation and marketing and product quality investments like I talked about. And we believe that's the best model over time.

We've created sustainable business results year after year. It's because we take the long view and take a sustainable approach to that. And I believe we're doing the right thing this year as well.

BRIAN SOZZI: Andy, you probably won't say this, but I'll say it for you. You really turned-- you and your team really turned this company around. The stock is doing well. The top and bottom lines are doing well. What's next for Hostess? Does Hostess want to make another acquisition? Do you want to be in a protein bar category? What else are you going to do to further set this brand up for the next decade?

ANDY CALLAHAN: We were just at an industry event. We talk a lot about the-- how we're positioned. We are building. And I use building very thoughtfully because we're a continuous improvement mindset. But we want to be the premier snacking food business on the planet. And we're well positioned to do that.

We're not the biggest, but we want to be the premier. We have-- 97% of our portfolio is branded. We have a Voortman brand, which has a leading position in reduced sugar in the $8 billion cookie segment. We're within the sweet baked goods business. But you get to a point, Brian.

So our organic growth is-- really has a long runway for growth. But our cash position is very good too. We're in the short window here for two years where we're opening up new capacity in our cake and Donettes line. And after that, we have a lot of flexibility on our balance sheet to pursue M&A within the snacking space.

And we can do it within the broader $65 billion snacking universe, which is important to us, and where we think we have the capabilities and assets to grow. And we can align the sustainable growth model we have with our capabilities. Synergies happen, and we've proved we can do that with Voortman. And that can be an amplifier to our already very strong long-term algorithm.

JULIE HYMAN: We'll be watching, Andy. And we'll catch up with you again soon. Hostess Brands CEO Andy Callahan, thank you so much. Appreciate it. And thanks to Soz.

ANDY CALLAHAN: And get the Kazbars. We never got to the Kazbars, but they are terrific. No one can do baking quality in a multilayered bar like Hostess can.

BRIAN SOZZI: Hey, Julie's tough on snacks. If you have a fan with Julie, you might have a winner.

JULIE HYMAN: That does look pretty-- that looks pretty good.

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ANDY CALLAHAN: All right.

JULIE HYMAN: Thanks, Andy. Really appreciate it. Take care of yourself.