Q4 2020 Hostess Brands Inc Earnings Call
Greetings and welcome to hostess brands incorporated fourth quarter and fiscal 2020 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. Chris Mandeville. Thank you you may begin.
Good afternoon, and welcome to hostess brands fourth quarter and fiscal 2020 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 December 31, 2020 that went out this afternoon at approximately four O five P M eastern time.
The press release and an updated investor presentation are available on how is this website at www dot houses brands dotcom.
This call is being webcast and a replay will be available on the company's website.
With this we'd like to remind you that today's discussion will include a number of forward looking statements.
If you'll refer to I was just in the earnings release as well as the company's most recent SEC filings you will see a discussion of factors that could cause the company's actual results to differ materially 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 is included in its earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
And with that I will now turn the call over to Mr. Andy Callahan.
Yeah.
Thank you Chris and good afternoon, we appreciate you joining us today.
Before reviewing our strong fourth quarter, 'twenty results, which capped off a challenging yet successful year for hostess I continue to give my best to all those impacted by the pandemic.
We could not have driven such impressive performance without the extraordinary daily efforts of our team members and retail partners. The resiliency is inspiring and we will continue to prioritize the health and wellbeing of our team and partners.
In 2020, the hostess team delivered for our consumers customers and our investors rooted in our core values our team rose to the occasion and once again delivered in an uncertain and changing environment brought on by COVID-19.
<unk> is well positioned to continue this strong momentum in performance into 2021.
Before we look ahead I'd like to reflect upon some of the many notable 2020 accomplishments that will serve as foundational support to our profitable growth in 2021 and beyond.
We achieved our 12th consecutive quarter of net revenue growth driven by strong market share gains in convenience and other key channels and growth in repeat consumers, particularly in younger demographic groups, which provide a strong foundation for long term growth.
We executed the bornemann acquisition and seamless integration, including transition to the warehouse model ahead of schedule and under budget, creating a profitable platform for future innovation and market opportunities and serving as yet more proof that hostess is a platform well suited for complementary.
Sure.
We drove a five 8% increase in our rolling three year innovation revenue contribution versus 19, driven by strong performance of our 2020 innovation and a 39% increase in our 2019 innovation velocity.
Behind sharper behavior based insights and capabilities. Our 2021 innovation slate is even better we're focused on growing consumer snacking subs sub segments, where we have leading market positions and see strong opportunities for above average growth.
While these are only a few of our many accomplishments in 2020, they speak to how well we are positioned to deliver on sustained profitable long term growth and leading shareholder returns.
Now to financial highlights from the quarter.
Net revenue grew 18, 1% with the bornemann acquisition contributing $28 $7 million to this growth.
Sweet baked goods revenue increased four 9% were $10 $6 million driven by strong hostess branded revenue growth. This was partially offset by planned lower value brands and private label sales.
Hostess manufacturer with point of sale grew four 9% ahead of the category driven by seven 1% growth of the hostess brands.
Our successful hostess partner program, an advantaged distribution model helped drive distribution gains and increased our market share 220 basis points in C store.
Helping to grow our profitable single serve.
Pos by 3% in the quarter versus the channel declines due to Covid.
These share gains puts us in an advantaged position for continued growth in this channel as traffic returns to the C store.
Over the course of the year, we made strategic decisions to enhance our portfolio and focus on higher margin growth opportunities and those actions are paying off with expanded gross margins of almost 270 basis points in the quarter.
We achieved this with our focus on the margin accretive <unk> acquisition and strong growth of our hostess brands.
We remain very positive about our new slate of innovation coming to market in 2021, which leverages key consumer insights and trends and penetrate faster growing consumer usage occasions.
This continues to expand hostess is footprint in the growing indulgent snacking segment, where hostess has a strong relative position and consumer affinity.
Our development and high growth sub sub segments of snacking is one of the drivers of our consistent growth ahead of the category and why we are confident we can achieve significant growth in innovation revenue as we bring more differentiated ideas to market.
We are seeing strong retailer response to our 2021 innovation slate, we have several items from entering the market at the beginning of Q1, including hostess Muffin sticks, Morton and Super grain cookies, and Borkman Mega wafers for convenience stores, all of which are building distribution well.
In addition, this spring we will expand our hostess brands with two fantastic new sub brands with our crispy, many and bun cakes that we expect will generate incremental growth for our business.
Our strong hostess branded performance in breakfast highlights our focus and advantage in this growing occasion, our hostess branded breakfast business grew 13, 4% in the fourth quarter, bringing our share of the breakfast day part in sweet baked goods up 150 basis points to 18, 6%.
<unk>.
First of all this growth was very balanced across several product forms with meaningful gains in donuts coffee cakes, honey bonds and muffins as we look ahead, we see clear opportunities for growth, where we have a right to win in faster growing sub segments of the snacking universe.
We believe there is significant headroom for growth within key consumer groups that will continue to drive outsized revenue growth for years to come in.
In order to achieve this growth we are focused on four key strategic growth per priority as we build our innovation pipeline.
These include invigorating, our core icons.
Growing household penetration with young families continuing C store consumer growth.
And establishing workmen's distinct positioning to optimize growth potential.
Turning to our merchandising efforts, we continue to see excellent performance in our seasonal limited time offer programs with a significant year over year increase in the execution of our Ballantyne program. As we begin 2021, we are also executing against various initiatives, including enhancing our whole.
This partner program in an effort to increase our single serve sales in the small format convenience channel.
In addition, we are adapting our execution of our multi pack and bag donuts displays and large format grocery and mass retailers to enable improved inventory flow into and out of a retailer Dcs that had been stress from excess demand during COVID-19. These.
These changes are already driving greater impulse purchase opportunities.
Regarding ecommerce we continue to make targeted investments in our e-commerce platforms to support this growing business, namely the click and collect where retail grocery delivery.
We are conducting market tests to support our new hostess innovation and Boardman and brand awareness.
We're also planning to increase our investment in working advertising for our hostess brands in 2021, as we continue to learn and scale up our marketing investments to drive top of mind awareness and growth.
Looking to Boardman results for the quarter continued to be strong contributing 66 basis points of EBITDA margin expansion to our consolidated results.
Full year EBITDA contribution of approximately $28 million.
Well above our original 2020 forecast of $20 million.
The Boardman integration and related conversion to a warehouse distribution model could not have gone better.
We are eager eager to strengthen the brand as we move into 2021 and transitioned into <unk> next stage of growth, which has strong building blocks of innovation expanded depth of distribution penetration into new channels and increased merchandising.
We are confident we will continue to meaningfully contribute to the company's future revenue growth and margin expansion in 2021.
Over the past several years, we've been executing against various ESG initiatives and expect to issue our first ESG and corporate responsibility report in the coming months.
As a few examples of the advancements we have recently made.
Our transition to our new distribution center removed millions of miles and gas emissions from our distribution network.
Additionally.
This year, our newly implemented safety initiatives resulted in a decline in total recordable injury rates and lost time with rates, which are significantly better than industry benchmarks.
Our Covid task force has been instrumental in ensuring we are informed and prepared to respond to the ever changing landscape, we have been navigating over the past year due to the pandemic.
We also continue to focus on our diversity equality and inclusion initiatives, including expanding training and career development opportunities as we remain as we remain committed to providing an inclusive culture that encourages employees to bring their whole self to work.
These efforts are paying off as we have achieved meaningful improvements in our female and diverse leadership hires over the past year with over 50% of our leadership hires in 2020 being female we're diverse.
On the governance front, our board of directors has taken a strong leadership role reinforcing the continued importance of these initiatives expanding oversight of ESG generally an increasing focus on material risks and opportunities for our business day.
They have demonstrated their commitment by increasing the diversity and independence of the board supporting eliminating the supermajority voting requirements and Declassifying the board during 2020.
We are committed to advancing our ESG initiatives and further integrating our initiatives into our culture as we head into 2021 and beyond.
Over 20 months ago at Investor Day, I committed to building a sustainable growth model that consistently grew revenue in the top quartile at leading margins versus our peers. We are doing just that and are and are well positioned for the momentum to continue into 2021 and beyond our 2020 results.
And operational improvements reinforce our confidence and the tremendous opportunities ahead for hostess and how this translates into sustainable long term growth and profitability.
As Covid took hold early in the year and proved highly disruptive to the supply chain and drove changes in consumer behavior. The hostess heroes rose to the occasion, leveraging the strength of our brands the depth of our insights to drive strong performance and showcase the agility and skilled execution of our team.
The continued strong consumer demand and successful execution enabled us to achieve double digit growth across all key metrics, including net revenue gross profit EBITDA and EPS.
We accomplished this strong growth while also deleveraging to below our original target for the year.
In summary, we had a record year financially and I am very pleased with what we accomplished operationally during a trial in 2020.
First quarter of 2021 is off to a good start and we look forward to another successful year of profitable growth and delivering increased shareholder value longer term, we have strong positions in growing occasion and have the right people the right processes, the right products and the rate case.
Abilities. In addition, we continue to look for accretive acquisition opportunities to further enhance our strong value creation potential.
Now I'll turn it over to Brian the growth through the details of the quarter's results.
Thanks, Andy.
As I step back and look at my first year with hostess I'm amazed that the strength and resiliency of our team and the outstanding results. They achieved amidst a very challenging environment.
I am more confident than ever in the ability of this team to continue to drive profitable growth and create shareholder value heading into 'twenty, one and beyond.
Today, I'll review, our fourth quarter 2020 financials and other data from this afternoon's release, as we think about our business heading into 2021.
Net revenue for the quarter was 256 million and 18, 1% increase this increase was primarily driven by the acquisition of Boardman, which contributed $28 7 million in net revenue for the quarter.
Sweet baked goods net revenue increased $10 6 million or four 9% driven by strong hostess branded revenue growth, partially offset from lower value brands and private label revenue.
Gross profit was $95 8 million for the fourth quarter of 2020 and gross margin was 37, 4%.
On an adjusted basis during the quarter gross profit increased by $20 5 million and we expanded adjusted gross margins by 267 basis points, primarily due to improved price mix initiatives operating efficiencies as well as accretion from Boardman.
On an adjusted basis fourth quarter operating cost increased primarily due to the timing of accruals versus prior year and the addition of the <unk> business.
Our effective tax rate was 25, 6% compared to 22% in the prior year quarter.
The increase in the effective tax rate is primarily due to the class eight per class b share exchanges that occurred throughout 2020.
Net income was $24 4 million and diluted EPS was <unk> 18.
Adjusted EPS was <unk> 21 per share an increase compared to <unk> 16 per share in Q4 last year as a result of the <unk> accretion and the higher EBITDA contribution from core hostess.
Adjusted EBITDA for the quarter was $63 7 million or 24, 9% of net revenue.
$11 3 million increase was primarily driven by the addition of Boardman, which contributed $8 $6 million of adjusted EBITDA accretion for the quarter with the balance coming from strong hostess branded performance.
As of December 31, we.
We had cash and cash equivalents of $173 million and net debt of $929 7 billion with a leverage ratio of three nine times, which was ahead of our targets heading into 2020.
Yeah.
Turning to our outlook for 2021, we are encouraged by the strong foundation for growth, we have established with the strength of our core hostess brands our market share gains in C store and other key channels and the successful integration of the <unk> business.
We expect to drive top line net revenue growth of three to four 5% net.
We expect adjusted EBITDA to be between 255, and 265 million with adjusted EPS of <unk> 80 to 85 per share.
Our growth outlook includes continued strong growth from the bornemann business with approximately $120 million of expected net revenue and adjusted EBITDA approaching $38 million during 2021, which are both ahead of the original acquisition expectations.
Importantly, we feel confident we will achieve the original 2022, EBITDA expectation of $40 million to $50 million for the <unk> business.
Absent the benefit of the lap of Q1 Workman integration, we expect to hold our margins relatively flat as we look to cover inflation with pricing and productivity initiatives.
We are currently anticipating inflationary pressures on our cost of goods sold driven by rising commodity packaging and transportation costs. In addition to normal cost of living and benefits increases.
We have locked in a significant portion of our commodity is through the end of the year and are actively managing to minimize future cost headwinds.
We gave a multifaceted approach to offset these industry headwinds, which include targeted pricing mix improvement and productivity initiatives.
We expect 2021, adjusted EPS of $80 to 85 per share.
Our estimated effective tax rate from 2021 is approximately 27%, which reflects an increase as a result of the elimination of the Noncontrolling interest with a final exchange of the class B shares in the fourth quarter.
And higher state tax rates tax rates.
As we look ahead to 2021, we remain committed to investing for growth and generating shareholder value.
As we lap the transition costs incurred to integrate Boardman in early 2020, we expect to have increased cash flow available to invest in our strategic priorities.
We continue to believe that disciplined investments in our business to drive organic growth is the best use of our cash.
We expect 2021 capital expenditures in the range of $60 million to $65 million, which includes a $25 million investment in a new cake line to support our continued growth.
This critical investment has a strong ROI and will enable continued growth in our high margin core business for the next few years.
We also remain committed to maintaining our target long term leverage between three and four times with our strong EBITDA and cash flow expected in 2021 absent any strategic acquisitions or buybacks, we anticipate our leverage to be approximately three times by the end of 2021, which represents a reduction of almost <unk>.
We'll turn during the year.
As previously disclosed our outstanding warrants expire in November of 2021.
Our EPS and leverage guide reflects an assumed effective net share settlement.
Consistent with current methodology used for reporting of diluted EPS.
We are excited by the opportunities. We have ahead of us to generate long term shareholder value as we remain committed to delivering our long term objectives organic net revenue growth adjusted EBITDA margin 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.
2020 was truly an extraordinary year and one that will shape the consumer landscape for years to come.
Thankfully due to our outstanding team and maniacal focus on our five strategic pillars.
<unk> grow in the core to growing through innovation, three improving through agility and efficiency.
For cultivating talent and capabilities.
And five leveraging our strong cash flow.
We have come out of the year stronger than we went in.
I remain confident in our operational excellence innovation and market position as we enter the new year with.
With our strong cash flows we have many available levers to activate growth and generate value per shareholders.
With that Brian and I are available for your questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad income.
Information tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
We ask that you please limit to one question and one follow up.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Ken Goldman with Jpmorgan. Please proceed with your question.
Hi, Thank you.
I wanted to ask about the share losses in the mass channel it looks like those share losses continue to accelerate.
Down over 400 basis points in the fourth quarter. It doesn't look like it was a particularly tough comparison can you just remind us what's happening with this channel in your products and whats in your forecast for a recovery there.
Yeah, Hey, Ken Thanks for the question.
You did say just let me take a broader COVID-19 impacted every channel every business.
And its own unique way.
One of the issues that we had across different was realigning our merchandising model our supply chain mix and how we went through the supply chain to be able to adapt to changes within customer.
That's definitely was true in the mass channel and we have really really good line of sight across all of our businesses at the changes. We've made are going to help and grow our business long term and actually one of your assumptions.
Is true related to Q4, but if you look at the consumption over the last several weeks.
There is a meaningful and steady.
Improvement in that.
Based on our realigning our approach to merchandising and how we go to market mostly.
Mostly related to supply chain is as I mentioned going through the warehouse.
Making things more automated over time, it's going to become much more frictionless and we're going to be it's going to be more profitable and continuing to drive growth. So feel really good about it going forward and feel good about it improving from the Q4 is.
We move forward and then also related to that despite that if you look at the last several.
Several weeks that is and that is improving but our consumption as you can see.
Through 2013, our overall consumption dollar growth is up 11% versus the category up 6% per Nielsen So feel good about that and feel good about how we've aligned all the supply chain across all channels.
Yeah.
Okay that is helpful.
Just wrapping that all up in a bow then should we expect starting from the first quarter whenever you start regaining share in that channel or is it sort of losing less share I just wanted to get a sense of what we should be building into our models.
We can take any details that you wanted to talk about but we don't forecast share, but I would certainly anticipate continued.
Consumption improvements.
Okay I'll, let it go there thank you.
Thanks, Ken.
Our next question comes from the line of Rob Dickerson with Jefferies. Jefferies. Please proceed with your question.
Great. Thanks, so much.
Instead, a question kind of around the implied.
EBITDA margin for 'twenty one.
Which seems like.
Kind of at the midpoint, maybe expand still by let's call it 100 basis points.
But then you had some commentary.
Terry saying kind of.
You expect that margin to be somewhat flattish kind of once you got past Q1.
So it sounds like Q1 has a nice little jump.
Yeah.
Basically tied to Boardman.
But then it also sounds like maybe you can hold that margin as you go forward and then you set out we could have a higher cost basket, but there are ways to offset that partially you thought would be the single serve in the mix effect and also pricing. So I just wanted to kind of get some.
Some general color on how should we how we should be thinking about the year in terms of cadence of that margin progression number one and then number two as you do mentioned pricing to potentially offset some of the additional cost inflation.
But I don't know what your visibility is on that pricing and how good you feel about that pricing it sounds like pretty good.
Yes.
Yes, sure I'll start Rob and Andy can chime in as well. So overall if you look at our guide raise either to your question on margins I think you're right.
A look at Q1 overlap, particularly because of bornemann, we should see some margin expansion and the best way to think about that is probably take Q4 run rate Q3, Q4 run rate with Boardman and carry that forward relative to what we're lapping youll see Q1, there's definitely a benefit there.
And if I think about margins in total we will see a little bit of accretion from <unk>.
And what we were talking about holding margins relatively fat flat I think that was sort of excluding the <unk> accretion piece.
If we think about the first half of the year, we will have the assortment accretion will also have particularly in Q2, we will have the single serve mix favorability that was a little bit of a headwind last year and then if we think about the back half of the year, we're going to be enacting pricing in the back half of the year more than the front half we have some carryover pricing.
In the front half, but more pricing actions in the back half to help offset any inflationary pressures. So broadly we have pricing. We've got mix. We've got the <unk> component was included index.
And we've got productivity and that's kind of the multi basket approach that we have to offsetting inflation and thats kind of the first half and second half guidance, how we should think about it.
Okay great.
And then just quickly in terms of new innovation coming in the spring.
It sounds like obviously, that's still forthcoming while at the same time in your prepared remarks, you said the initial sell in of the innovation that has done well.
So as we think through that top line.
Again, it seems like the ongoing sell in of the innovation to continue to do well, but then as we kind of get into the spring day.
Family, Let's call it Q2 ish I guess.
The assumption here is that hopefully you would be picking up some incremental distribution versus replacing old products I'm trying to also get some sense and feel them.
How we should be thinking about the progression on the volume side not the pricing side, just given the solid innovation slate as we get through the year.
That's it thank you.
Hey, Thanks, Rob appreciate it yes, and I agree with Brian assessment on margins. The headline is we looked at a lot of them, there's a lot of opportunities.
But I think we have it.
Pretty well planned.
And then on the on the innovation side, depending on the channel it sells in at different rates. So for example, most of a lot of our C store channel and innovation first of all I agree I feel terrific about the innovation slides 21 and by the way.
It gets better every year its behavior base with consumers. We're in platforms that are growing and I made these in his prepared remarks, I wouldn't think about flowing it through some of the other platform ideas like crispy minis are flowing through later thats based on timing. So the resets some of the things within the C store channel, we're already going out.
Mega pack is already flowing through the C store channel, but some of the ones within sweet baked goods like baby bonds switches.
Just tremendous consumer scores and very huge retailer reception, but very excited about it.
Christine <unk>, which is a new extension into a platform those are flowing through a little bit more in the spring and some of the early channel one since most St. C store are already going in early.
So I think through the spring Q2 and back half impact on <unk>.
Some of the ones within the more traditional channels and C stores are coming in early.
Alright, great. Thank you so much.
Yes, thanks, Rob.
Our next question comes from Brian Holland with D. A Davidson. Please proceed with your question.
Yeah. Thanks, good evening everyone.
Maybe first question on the top line guide.
So okay.
This is this is more specificity than you provided maybe the past one it certainly last year and maybe I think <unk> been past couple of years, where maybe it's just been the language has been above category and now you sort of quantify that a little bit tighter. So I'm interested in the thought process behind that and then I'm kind of getting to like if you.
Back out board men.
For second half to 3% growth, which would be below book.
Your algorithm past few years, which certainly has been very strong and when I pair that with the innovation slate maybe some easier compares the convenience channel maybe some improvement in mass if you could just kind of walk through the thought process, there and maybe some of the takes that I'm not considering here.
Yeah, Hey, Brian it's Andy.
Yes, thanks for the question.
Here's the headline we feel great about our continued top line revenue growth, we felt we should give.
Some level of indication because consistently we've over delivered what the street has.
Pegged as to which is kind of which is honestly and what we've said, which is we expect to do.
The category or better than the category and most people have.
Category at somewhere in the war in more than 5%, we've actually done a deeper dive this quarter and looked at where we compete and even asked ourselves we're consistently doing meaningfully better than the category. We have revenue realization opportunities, we're going to do better than that and we're going to do meaningfully better than that over time this year.
By over 26 years of doing this is certainly.
Potentially one of the more difficult areas to plan with.
<unk> come.
Come out of Covid.
All indications that we had when we look at things is that it's going to continue to be positive and generate good revenue is there upside to that revenue number not sure. Our best guess given the uncertainty it's a pretty good we feel comfortable with the guide.
And we feel comfortable that we will continue to perform better because we're in segments that are growing faster.
We've attracted new consumers in home, but those rituals are going to stay there younger consumers. They are learning how to celebrate with indulgent snacks around specific occasions, like Valentine's day, which is up six stores coming back our platform innovation is scoring better and more incremental than it's ever been.
But we felt we needed to move.
People thinking about us more 100 basis points and it could be higher.
Bumped, where they were thinking about historically.
And that was our thought process.
I appreciate all the color Thats great.
And then just thinking about breakfast.
Obviously, there were we talked about single serve think about C stores.
Pressure points around Covid, but certainly one of the strong points I think industry wide has been breakfast and certainly you've done better than the categories you compete in.
But again sets up for tougher comps there. So can you help think about help us understand the puts and takes there.
With what Youre comping up against.
Maybe another way to ask this question forgive me is.
This is this was a huge opportunity.
At the time of the <unk> acquisition, and you've obviously executed against it.
Where do you kind of I don't have your index, where the hostess brand is in breakfast versus where it is and some of its other core categories. I'm, just wondering where we are in the runway maybe thats a better way to frame. The question just ask a pre and post COVID-19 question if that makes sense.
Hey, Brian.
Theres this meaningful runway for continued growth.
It's just the breakfast sub segments of $3 6 billion sub segment.
We are growing faster schweik breakfast schweik starks in sweet indulgent.
Snacking, which we've articulated last time is growing faster than overall indulgent snacking.
We've grown as you mentioned our point of sale was up 13, 6%. It has been fueled by some capabilities.
And I expect that to continue I don't not view it as us even close to the maturity curve and our ability to continue to innovate and grow within our morning, an a M.
Indulgent Snacking case, we have mega brands in that case, our DAU net brand is.
Were very well received we can innovate beyond even where we are right now our donut snack pack innovation is continues to be on fire in one of our leading innovators.
<unk> your thought around boy are we at the majority piece, we don't view it that way we view, but we're just getting started approaching maturity.
Yes.
I appreciate that and if I could just clarify I think if im looking here in your deck, you've got like a 19 share for the overall hostess brands. I mean is there or is there something we from comp that against for their breakfast items or for your breakfast like where your share is there today.
Oh, you mean is that more mature than the rest of your portfolio.
Yeah.
If you've got a 19 share overall of the cabinet or broader sweet baked goods.
Do you have a 5% share today a breakfast Ted.
While our breakfast share of the sweet baked goods segment over last quarter is about the share of our total portfolio. So if you remember when I first started almost three years ago. We said we were underdeveloped at breakfast.
Done such a good job for you along with new innovation around zone, that's fueling our we're pretty close to the overall share, but we can we're just going to continue to grow share from a consumer standpoint, we look at it broader than the category the sweet baked goods. So we access consumers usage beyond just sweet baked goods.
Yeah.
So it's going to continue to grow beyond 19 my opinion.
Yes. Thank you I appreciate all the color kudos on the great work here continued success going forward.
And I don't have a share I know, it's a $3 6 billion sub segments. So I wasn't trying to I'll follow through we can look at the relative addressable market for it I can do that it's a follow up I think.
Because I know youre hunting for that a little bit as well.
Yeah of course I appreciate it. Thank you yeah. Thanks, Brian appreciate it.
Our next question comes from Ryan Bell with consumer Edge Research. Please proceed with your question.
Hey, everyone.
But you can also talk a little bit more about the opportunity for assortment within the convenience channel, maybe something with respect to kind of a cadence of the expansion and if there's something that we keep her it again in terms of a benchmark for the growth over the next few years.
Where do you see the ACD going per product.
And then maybe just the overall size of the opportunity.
Okay.
Yes, So hey, Ryan I appreciate the question headlines here.
Sweet baked goods is a very mature category within ceased our hostess partner program is world class best in class in C store, we brought.
Our boardman Mega wafer underneath that program its being very well received early.
So, but it still needs to test.
The consumer and the velocity proposition.
So we have we have in that channel, we have multiple avenues to grow Boardman gives us an opportunity to do that.
I'm trying to look at the page, but we're we're still well below the.
Over the.
Houston opportunities long term within within the C store channel overall, our Boardman distribution started in euro it won't get up to even with Mega wafers, So it'll get up to.
The first 2025% as we get into the first half of this year. So there is still meaningful upside on that but I want you to just.
I think more broadly if you would come along with me.
The growth of the Boardman franchise, it's all consumer first of all its consumer base that hasn't really distinct and unique wholesome positioning in segments, whether it's sugar free is a wholesomeness that are growing at two to three times the rate of total cookies.
And.
We've done the warehouse distribution, we also have distribution opportunities within food.
Were 15 points below in the food segment.
Just talking about C stores.
Moving into dollar and then we have opportunities within the merchandising and then the innovation. So it's multifaceted the breath and so although I know you folks from Mega wafer and is a big opportunity. It's just one component of a broader opportunity per board met over the years.
Thanks, that's helpful and I think you had a five day was talking about.
You saw us demographic win.
Young transitional did you build from maybe talk a little bit about the household penetration trend.
And your thoughts about how to retain some of the consumers.
Cros as per rather as we exit them.
Covid environment.
Yes. This is one of the most exciting things about our entire portfolio segments in which we compete and the affinity.
Of our brands.
Our ability to be able to attract and penetrate new consumers as we went into COVID-19. There's a lot of uncertainty a year ago, but what we're really seeing and I know some of my peers talked about this.
Seeing consumer behavior around our re.
Reassociation with in home rituals.
Attractiveness the brands snacking as well when the economy opens up snacking shot one that it's going to go mobile.
In home Snacking morning, Snacking is going to continue the rituals that day and the re association's they have whether it was heart brain Halloween home our ballantyne.
Program is high our natural snacking and affinity to snacking across our broad based portfolio was really hot and it's increased with younger consumers as well and I'm very confident that that behavior that they book.
Theyre doing now the best predictor of future behavior is current behavior and the indulgent snacking, it's been consistently growing higher.
Then overall food consumption is going very well, it's growing faster than <unk> snacking.
And then the reintroducing them new new.
[noise] behaviors to 101 year old brands is very encouraging and I expect that to stick can continue and that's why we have it in the presentation because that re and vital revitalize in regenerate.
The brands.
That's it from me.
Thanks, Brian.
Our next question comes from David Palmer with Evercore. Please proceed with your question.
Thanks.
I wanted just to dig into gross margins gross profit outlook for 'twenty one.
You mentioned in their release from looking back on your fourth quarter.
That promotion were down mix was actually a positive you have the <unk> synergies.
And perhaps some productivity I'm.
I'm wondering if you could maybe think about the frame that as a framework for 'twenty one.
[noise] promotions mix worth mens productivity and then of course net of commodities, which I guess would be a little.
But more of a headwind.
And at this point in your view.
Could you just comment on on those things and how they generally lead you to think about your gross margin outlook for 'twenty one.
Sure Yes.
Hey, this is Brian.
I guess the first piece is we think about inflation.
And from an inflation standpoint, we're seeing probably in line with other companies two and a half to three five points of inflation roughly for 'twenty, one and our guidance, we've got a lot of our.
Commodities locked in through the year, but there is some inflation, we're seeing in transport markets and elsewhere.
So you start with the inflation piece and as I mentioned earlier I think there's a couple of things working for us, particularly in the front half we're going to have the accretion of our assortment as we lap the Q1 performance.
We're going to have a single serve mix favorability and we're going to have some pricing carryover from from this year.
The back half is going to be more weighted towards pricing pricing actions.
And in addition, with productivity to help offset some of the inflation.
So net net the way that we're thinking about that is may.
Maybe some margin accretion based from a weapon standpoint.
But overall not looking to expand margins in the base business materially as we're in an inflationary environment, but I think the work, we're doing to offset that with pricing productivity and mix will put us in a good spot.
And just to follow up on that I would imagine you met you mentioned that.
Mix was a positive for the fourth quarter I was a little surprised to see that because you have the same you would expect single serve to be trailing your bulk packaged.
Which I would presume to be different margin profiles.
For mix to be more of a positive in 'twenty. One is is that your thinking going.
Going into 'twenty one.
Yes. So there is actually there is a pretty good slide in our investor deck, I think it's slide 11, and it breaks out the quarterly cadence of our single serve versus multi pack.
And if you look at that you'll see there is our multi pack was up almost 20% in Q2, our single serve was down about 5%, but in Q3. We grew single serve two 6% Q4, we grew at two nine and we also saw multipack start coming back down. So if you look at just the multi.
Back up six six in Q4 single serve was up three and single serves a pretty powerful margin driving driver you got those two but we don't list on the page here. You've also got some declines in our private label and value brands and that net net gives us a little bit of mix favorability not material for Q4, but it's.
It's trending relative to the prior quarters, where we're seeing a mix detriment.
Leveled out for us and we've got a little bit of expansion in Q4.
Great. Thanks.
Our next question comes from Bill Chapell with true Securities. Please proceed with your question.
Thanks, Good afternoon.
Hey, Andy just to kind of talk a little bit more about the COVID-19 impact in Covid outlook I mean, whats your thought of.
If we open up this summer if schools are fully back in.
So is that upside to your revenue and margins or revenue and profitability or is there not that big of an impact and kind of what are you putting in your forecast for kind of a reopening.
So.
Bill Thanks for the question good to hear from you.
We ran these scenarios I'll be honest with you.
I feel very good going forward and I'm optimistic we ran scenarios a lot of different ways.
And we came to our revenue and I Should've mentioned this wind up the earlier question about the revenue seems to be the mix. The lapping of multi pack. It may have a slight revenue offset to some of the single serve bouncing. So theres numbers here and now you've got pricing Theres a lot of moving parts we've ran multiple.
On the opening of the Covid.
Enemy and regardless of how we look at it we're in a better position to drive profitable growth going forward. We believe some of the multi pack changes in home whether it's.
Parents packing.
Lunches versus in school lunches.
In home rituals and snacking.
C store traffic, which will come back and benefit us at a greater scale I just looked at some data my C store team provided make and were still down versus the January benchmark. The traffic in C stores still down 13% in January we got a little bit of improvement in some of them still 13 anyway, we look at it.
There is a positive for hostess so we assumed.
Absolutely assumed deposit it's difficult to.
The forecast I.
I believe that the is it's hard to say whether earlier is better I do think potentially there's upside if it's earlier.
But I believe a lot of the multi pack penetration due to consumer behavior is going to stay and we're advantaged in C store, especially with single served when the mobility increases so I feel earlier heads up as potential I talk from me to prognosticate. The models don't really work in the current opening the economy world, but we ran a bunch of scenarios and feel like we're in a good spot.
Sure.
Got it no that's helpful.
However, any of us to gauge at this point, but switching to kind of thinking about the Chicago bakery and you talked about.
How.
You had a decline in the private label sales, which.
It was the mixed benefit is there an opportunity to.
Exit more and more of that business I mean, I know some of it's contract manufacturing that you kind of inherited but if the breakfast business is doing so well of your branded side could you is there a way to permanently make the change.
Yes so.
The way we look at it.
Is and we've been.
You look at what's driving our growth and driving our profitability were significantly improved from where we were.
Two and a half three years ago.
At the headline now with that being said there is some there is a role for potentially lower absolute margin, but operational efficiencies, but if it's not if it's if the cost of that complexity with that business isn't paying off for a return, which disproportionately either price it till it does and if that doesn't work well ex.
So we have a we have a pathway, especially with inflation coming that it needs to contribute at a fair margin or profitability to our portfolio.
We have very good and we have some business that has very good private label, but it also serves the consumer base. So it may continue to be flat to declining but it's.
If not we will price to it and make sure that they drive efficiency and then realize some revenue there may be some opportunity for it to continue to.
The move out of mix, we will certainly not compromise our higher margin branded growth because an asset is being tied up.
For a lower margin private label business, that's absolutely true.
Got it thanks for the color.
Our next question comes from Faiza <unk> with Deutsche Bank. Please proceed with your question.
Yeah, Hi, thank you.
So Andy I just wanted to go back to your comments around the category and just Wanna.
You don't see if I'm understanding it correctly it seems like the indulgence snacking category got left in 2020 from.
Covid and people spending more time at home are you effectively saying that as we look out to 2021 and post COVID-19.
Category growth rates have accelerated or are you, saying that this is now a more normalized level, let me kind of go back to that one one and a half price.
Category growth going forward.
Let me let me just go to a couple of places.
Net.
And thanks for the question the category is indulgent snacking.
Sweet snacking.
And the sub segments of which we compete have over the last three years, it's been more in the 3% growth range versus the one to one and a half that that's just the actual performance of the category.
During COVID-19.
That has moved up about 100 basis points. So even if it goes back to pre.
The pandemic levels, it's still higher than what some of the.
Perceptions of around Sweet Snacking are we hear a lot of that that we here soon.
Sweet snacks off off trend it absolutely the consumer behavior and the way consumers behave not just in our category, but across other some of our peers.
That's not true when it comes to what's going to happen afterwards, it's difficult to predict.
But my opinion based on.
What we see in consumer behavior is indulgent snacking.
And.
Especially like our product is continuing to be higher than.
You know more in the 3% range and the sub segments of which we compete I believe are very very positive and very good now when we look at 'twenty. One it's difficult because we have been slightly a multi pack as you saw in our deck. Our Q2, our multi pack sales were up 19%. So we're lapping some things that shouldn't distract us relative.
Two our revenue forecast in 'twenty, one, but overall, we believe that the consumers continue to look in a very responsible way toward these sweep moments of joy that we can bring them in sweet snacks.
Okay, Great understood and then just a quick question on.
Capital allocation, youre, saying that youre going to be sort of at the low end of your leverage level around three times by the end of the year you do have a share repurchase authorization and you also mentioned acquisitions.
Can you talk about how you're approaching that sort of what comes first it sounds like its acquisitions.
And if so could you maybe put some parameters around that.
What types of things you might be looking at is there a certain size that we should be thinking about would you lever up beyond four times. For example, just just more color around capital allocation would be helpful.
Sure, Yes, so as you as you kind of heard in the script and we talked about our guide implies rate absent any acquisitions or buybacks that will delever close to a full turn so first of all I think we feel great about that because.
With the integration costs that we have for Boardman and the cash use of that behind us we're able to delever more quickly. So we feel great about.
Our ability to deleverage.
The first thing.
In terms of our capital allocation priorities, we talk about.
Reinvesting in the business.
We're going to invest in our cake line, which we talked about upfront. So its a $25 million investment it's going to be great for.
Growth overtime in our snacking business.
And that's going to come online more in the back half of the year. So in terms of.
Any impact of that will probably be more 'twenty two and beyond.
Investing in the business and we reinvested in our.
Our donut line also increased our capacity there. This past year. Those are two good examples <unk> and other one we removed our warehouse last year, which has put us in a great position.
So invest in our business Deleveraged I talked about acquisitions, absolutely strategic acquisitions like workman weapons, but great acquisition.
We could do another acquisition like Boardman, we absolutely would we love the business the integration is gone fantastic in the.
The growth trajectory of that business also we feel very good about and then lastly, we talked about return of capital through shareholder.
True security repurchases rather.
On the buybacks piece. That's also another tool that we announced to be able to return capital to shareholders, but in terms of priorities I think we talked about investing in the business cake line as an example of that Delevering and like.
Like I said, if we can execute another workman we would.
Got it. Thank you from yes, yes, and just on the M&A side. So as Brian mentioned, we're maniacally focused on unlocking shareholder value and we believe we have a very high.
Cash flow to be able to.
They give us the flexibility to be able to do that.
With the Bornemann acquisition, we certainly believe.
We've demonstrated that we have a platform to be able to.
To do that execute that and we also are in a position that for other snacking access that we think we can sustainably grow them profitably and there's asphalt out there what we call scalable niches. We believe we have a high opportunity to do that and that's the way we look at it as a brand it doesn't fit in our portfolio can we drive the right synergies and the shareholder.
In return, we believe Theres offsets out there and that's how we're focused on doing.
Thank you.
Our next question comes from Andrew Wilson with UBS. Please proceed with your question.
Yeah, Hi, guys.
Good evening I, just wanted to zero back in on the on the C store channel. Obviously, you saw some impressive gains there. Despite some disruptions in the middle of the year could you talk about your confidence in gaining share there as you look out to next year versus just holding those share gains is that channel opens back up and then maybe touch on how you've leveraged that differentiate.
Hostess partnership program to drive those gains.
Yeah, Hey, Yeah, Andrew Thanks for the question.
So we are we have a terrific C store business.
Highly loyal consumers within C store and we have.
A world class.
Consumer insights.
Sales team that I wouldn't trade them for anybody in the industry bar, none I don't care what size they are.
We've been able to drive share and growth in C store, despite 13% traffic decline.
Been able to do it because.
This is true across the board during.
During the pandemic, we never stay focused endeavor, we took care of our team and our consumers and customers and never lost focus on the long term. We continue to innovate we continue to invest in insights and we continue to service our customers and ex true on C store as well I believe coming out of the pandemic the share gains we've had.
Ill provide a great platform that as the overall channel increases we're going to do that from a higher water line. So that in and of itself has upside we're not really modeling tons of share growth, but I wouldn't put it past our team to be able to continue to drive share.
We have muffin sticks going in there now for <unk> is a great innovations Mega Mega.
Wafers are gone and so I feel really good.
I'm just very bullish on C store in total I think we'll continue to grow share over time as we lap some of the short term share gains we didn't model huge amount of upside we more model.
To Bill's question, a lot of scenarios, but more model of return to the overall traffic at our higher water line of share, which is great upside for us both on mix as well as our long term growth.
Yeah.
Great. Thank you.
Our next question comes from Rebecca Schueneman with Morningstar. Please proceed with your question.
Good afternoon, and thanks for fitting me in so the hostess brands has been gaining share of that baked goods category from several years now can you shed some light on how much of that is driven by distribution gains.
Expanding into new categories, and reaching new consumers and.
And to the extent that from some of the gains are driven by distribution and what point do you think the hostess brands.
Well reached its full distribution potential and I see it it's already a 91% ACB. Thanks.
Yeah. So I appreciate the question. This is I've been with hostess it'll be three years in may.
And I've been getting.
Similar to that question for three years, and it's actually a good one it's about one.
And we're pretty much at full.
Full distributions, we've been doing a lot of smart things underneath that distribution.
To fix the mix spring.
Prune skus that weren't driving increase the velocity of our existing ones, bringing innovation, that's more platform German and incremental that gets better every year 'twenty one is by far our best.
And we're continuing to test and learn and our investments on E Commerce.
So our insights are better our data analytics with customers are better and.
We're just scratching the surface. So for example, our investments on E. Commerce, we will continue to learn and then increase those investments we have relatively speaking.
Good investment, but modest in 'twenty, one and as we continue to prove that model out we will continue to grow the reason why I'm optimistic about that as that growth. That's been able we've been able to do within that distribution has come with increased penetration with young consumers higher repeat of the consumers. So we do hope and.
The insights of areas to mine with innovation that continues to give me confidence that we're going to grow it going forward. So.
We haven't been growing that much from absolute innovation, we've been growing a lot through.
Understanding how we can oh.
Optimize the space, we have and bringing better innovations.
Improving our cash.
Systems products.
And then testing and learning and then expanding our direct to consumer communication and that's what's going to really provide.
Continued and sustained growth going forward, we don't view the category just as sweet baked goods, we view it as the snacking universe and that's it that's it as someone asked earlier, that's a huge platform for us to be able to grow into in a trend that continues to grow.
Okay, great, Thanks, and as a follow up.
I'd just love to share some of your insight and your expectations for club stores.
It's a newer channel I had expected that that growth would be.
Maintains the hostess brand ex expanded some distribution into it but.
But the point of sale side sales have been declining the last couple of quarters and I just love to hear your outlook for that channel.
Yes, one of the reasons why you're seeing the Inc.
And optically it doesn't look as strong as it really is if you look at the hostess brand sales and club they were up double digits.
Meaningfully double digits.
The sales of the what you're seeing that's offsetting that is some of our <unk>.
Value brands and lower book value brands that is more for the business consumer that was disproportionately impacted by COVID-19 or that we had intentionally prune coming into the year.
Uh huh.
So that is impacting the club, but what you should take away is that our hostess brand is growing double digits within the club channel and we have some good ideas and new forms that are do you expect that to continue as we're in 'twenty one.
Okay, great. Thank you so much.
Youre welcome. Thank you.
We have reached the end of the question and answer session. At this time I'd like to turn it back to Andy Callahan for closing comments.
Thank you and thanks, everyone for your participation and interest in hostess. We're excited to continue the strong execution against our per our priorities as we drive growth and increase shareholder value in the 'twenty, one and many years to come.
Better hostess and we look forward to increasing your shareholder value and working hard for our investors. Thanks again.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
The conference call has ended please disconnect your lines. Thank you.