Q3 2020 Hostess Brands Inc Earnings Call

Our new baby bond tap into a growing form in a great tasting and first to the retail market execution, and our new nothing sticks bring a familiar sweet taste in a more appealing on the go snacking form ill.

I will say our single serve to jumbo net are on fire up over 45%. We are now bringing consumers a classic lease option.

Building on our bags, so thats momentum, we're introducing strawberry cheesecake and Carmel chocolate flavors and we continue to build our don't Thats on the go franchise, which extends our iconic and leading brand into new usage occasions.

Additionally, the Boardman innovation engine has started.

While we continue to meet consumers' increasing share of snacking occasions. We are also expanding our better for you portfolio under the important and brands.

We have developed a delicious and wholesome cookie line, but leverage is on trend and helpful ingredients to satisfy that need with our new super grain cookies.

They are packed with real ingredients like real fruit and fiber rich whole grain oats, right and buckwheat.

The target subsegment for Super grains is expected to grow at 30% CAGR more than six times. The total cookie category. This underserved category Subsegment appeals to younger consumers with nearly half seeking grain based cookies.

Our 2021 lineup also includes exciting new pack size formats to penetrate new channels and usage occasions.

Wirtanen Mega wafers is a large size version of our delicious wirtanen wafers, that's a perfect on the go option for consumers in the convenience channel.

Based on strong consumer testing and the seamless integration with our highly successful hostess partnership program. This new product form is gaining early strong reception within the convenience channel.

We are excited about the profitable growth potential that lies ahead.

As I mentioned above our LTL program is performing well and we will continue to keep fresh and consumer relevant.

2021 includes new flavors like key lime and small cars as well as new cotton Candy Twinkie. We're also excited about expanding the historical wortman LTL offerings to provide consumers additional opportunities to try new fund seasonal flavors, which are a great way to entice new consumers into the brand.

We are thrilled with the expanded capabilities of our new innovation lab, which has served as a critical launching pad for the development of many of these great new consumer insight driven innovation items and enables fast and efficient product prototypes.

Related to Boardman more specifically, we remain confident about the future growth opportunities. It provides for years to come with the transition to the warehouse distribution model and key integration activities largely behind US. We are confident that we will achieve our targeted EBITDA contribution in 2020 of $27 million to $30 million with accretive.

Margins over 30% in Q4.

We are pleased that we have been able to achieve year over year Boardman Pos growth of 2.4% overcoming a 50% reduction we made in SK you count.

We are now transitioning into the next phase important integration as we drive expanded depth of distribution and increasing merchandise.

Relatively small gains in ACB can have a very meaningful impact and there is ample opportunity for growth with our efficient distribution model and great sales team.

Net revenue for the quarter was $260.9 million in 18.5% increase excluding the impact of the sale of the highest fee business in August 2019.

The increase in net revenue was primarily driven by the acquisition of Workmens, which contributed net revenue of $26.8 million for the quarter as well as strong hostess branded revenue growth, which was partially offset by lower value brand and private label revenue.

We have seen a continued upward trend in the demand for our single serve products with the third quarter, Pos up 2.6%, while continuing to achieve strong double digit growth in our multi pack products.

Gross profit was $91.2 million for the third quarter of 2020 and gross margin was 35%.

Excluding ISP gross profit increased 32.6% from the third quarter of 2019.

As of September 30th with a pro forma leverage ratio of four times factoring in the expected full year 2020, EBITDA contribution for Boardman.

We have made meaningful progress, reducing our leverage from four five times. Following the acquisition at the end of Q1, while continuing to make strategic investments in the business to drive growth, including the investments and are doing that line, our strategic innovation lab and the key integration activities in alien Abortin transitions.

While continuing to make discipline investments for growth, we remain committed to a longterm targeted leverage range of three to four times enabled by or cash on hand, and strong operating cash flows.

Our leverage around four times at the end of 2020.

We remain confident in our underlying business fundamentals, which support our ability to achieve our long term financial objectives, including organic revenue growth adjusted EBITDA margins and free cash flow conversion in the top quartile of our peers.

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

Thanks, Brian.

We have consistently executed at tested and proven playbook, which has driven sustained growth and our year to date year to date performance has proven no different.

I am very proud of hostess perseverance and nimbleness in this dynamic operating environment.

About how Halloween would turn out both in terms of sell in and sell through.

During the quarter I was just wondering.

How that holiday went for you.

How you generally think it went I know its not the biggest deal for hostess, but just.

Just curious any insight you can provide would be helpful.

Yes, thanks for the Jack.

Question, Ken I was confident and am confident and I'm actually.

I'm pleased with the results we talked a lot.

Last quarter about smoothing out our merchandising and what we're seeing is a stronger every day at home or consumer base and our theme around Halloween and credit off to our marketing and sales team, who write away and the pandemic shifted some of the messaging too.

Bring hostess Halloween home.

Around usage at home and around parties and that served really well our limited time offerings around Halloween are scary cakes and others globals. The the enrollment on those were up mid single digits, 15% and as you can see from the numbers to take away I continued to be strong.

So very pleased with that are multi pack the percentage of consumers for a multi pack business are up 5% that's households, and the repeat of all of those are up.

You know even higher up twice the category. So I feel really good about the quality of our consumer and then the enrollment of them as everyday consumers. The network certainly worked around Halloween as well.

Okay. Thank you and then my follow up.

Yeah, I think it's.

No not a very big secret or not a very it's a well understood secret I guess that one of the things holding the stock back.

Is that there's a pretty large shareholder who has been selling and there's some concern that this individual will continue to sell.

Is this is the share repo program in part designed to allow you to purchase shares from particular large holders or is it really more design for Oh, Hey.

Hey, if there's just an opportunity to stock may be cheap there's.

There is not an M&A.

Opportunity on the table right now seems to be a little bit more a tactical.

Tactical about that I'm, just trying to get a better sense of sort of what's in what inspired at this point to the board to go in that direction.

Hi, Bill.

Brian mentioned in his remarks.

We believe our de lever it there how fast we're delevering delevering.

What's driving this what's driving you home okay.

Yeah. So go forward. So just have a foundation, we're primarily have distribution and groceries since we've integrated we've expanded distribution in dollar. We currently do not have distribution inconvenience channel, we're launching and the selling I might add is going extremely well for our mega wafer which is more on the go.

Single, serving fits in that format with that being said, Rob we have a breath of growth and innovation.

I think vectors for Borkman that I feel really really good about.

The number one sugar-free brand within cookies that is growing extremely well, we believe there's opportunity to continue to extend that and grow it and sugar freeze growing very well, there's some recent industry reports coming out.

We are generating when all the transition cost behind us right. It's.

And we're just kind of looking forward and roughly if you look forward out to next year, we could de lever almost a full turn.

And.

In terms of use of cash as I mentioned, you know you still have.

M&A is to viable opportunity for us as we de lever investing in the business as a viable opportunity.

Permanent changes to the way that you manage your product lineup.

Yeah, Thanks, a lot.

Thanks for the question Pam. So we have a couple of we have a couple of things we've that we've done we've taken some of the tail end of our portfolio.

And we've simplified some of the flavor assortment in the back end, so that we could produce some of the highest demand.

Front of Us and I would also expect the behavior that we're driving with consumers in home. Although we're eventually going to open up the economy I think there's a lot there that's going to stay in the in home occasion, and the new consumers that we've been able to gain for hostess.

So we've we've certainly smoothed out the merchandise and simplified the portfolio maximize the output and I think it's paying dividends now will going forward.

Thanks, that's helpful and as my follow up is on.

I was hoping you can give an update on how you think about the opportunity to grow and Brexit is how do you define the breakfast category, what do you see as your addressable market.

Relative to other categories that are within breakfast.

And how are you targeting Chris Daypart.

Yes innovation.

What did the hostess brand and meet what consumers are looking for within breakfast, where what we define as that am snacking occasion, which as I mentioned before is growing greater than total snacking and suites is growing faster than all other forms within that occasion.

Thank you Paul.

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