Hostess Brands, Inc.

Greetings and welcome to the Hostess Brands, Inc. 3rd Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 is being recorded. It is now my pleasure to introduce your host, Mr. Chris Mandeville, Managing Director of Investor Relations at ICR. Thank you, sir. You may begin.

Good afternoon, and welcome to Hostess Brand's third quarter 2020 earnings conference call. Joining me on today's call are Andy Callahan, Hostess Brand's president and CEO, and Brian Purcell, chief financial officer. By now, everyone should have access to the earnings release for the period ended September 30th, 2020, that went out this afternoon at approximately 4.05 p.m. Eastern Standard Time. The press release and an updated investor presentation are available on Hostess's 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's 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 has made 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. Now, I will turn the call over to Andy Callahan.

Thanks, Chris, and good afternoon. We appreciate you joining us today. Before we get started, I wanted to continue to send my thoughts to all those impacted by the pandemic. Special thanks to the incredible hostess heroes for their remarkable dedication and commitment on the front lines every day in our facilities, in transportation, grocery stores, and beyond, ensuring our communities are supported. As we continue to deliver strong results, the health and well-being of our entire team their families, and the communities we serve remains our top priority. Hostess is executing very well. I am very pleased with the quality of our results that demonstrate the strength of the Hostess brand with consumers, the strong execution and agility of the team, and the benefit of a transformed portfolio with Wortman. More exciting, we are well positioned to sustain profitable growth moving forward. A couple of points to emphasize the quality of the results that I will talk about more in a minute. Hostess new and one-time consumers are increasingly becoming more frequent buyers at a rate twice the category. Despite overall consumer trips to the store being down, consumers' purchases of hostess trips are up. Additionally, these consumers are younger and have longer potential for growth overall for the brand. We do not see a change in the strong at-home consumption in the short term, but do see an improvement opportunity in immediate consumption for our single-serve business as consumers gradually become more mobile and retailers adapt front-end checkouts to the new normal. Lastly, we have a terrific innovation slate across Hostess and Vortman as we build the Hostess brand in both breakfast and all-day snacking and extend Vortman into single-serve form. expanding the usage occasion into the convenience channel, and entering into an ancient grain-based platform. In summary, we are performing well now and have a high degree of conviction for continued strong results ahead as we remain actively focused on our five foundational pillars. Grow the core, grow through innovation, improve through agility and efficiency, cultivate talent and capabilities, and leverage our strong cash flow. Now let's discuss some of the numbers. Net revenue grew 18.5%, excluding the in-store bakery or ISB business. The Bortman acquisition contributed $26.8 million to this growth ahead of our acquisition economics. Core Host's branded revenue led our growth versus low-margin value brands, which was disproportionately impacted by bending and independent C-store decline. Multi-pack sales continue to lead the growth for single-serve, given the increase of at-home eating. However... Single-serve revenue did grow this quarter as consumers were on the road over the summer, all while we continued to see elevated demand due to more people eating at home. And as stated previously, we do not see this subsiding anytime soon. As I mentioned before, Kosas has been very successful at gaining new consumers this year, and we are increasing our repeat buyers twice the category rate, with repeat buyers of our multi-packs up 11%. and bagged donuts up over 15% versus a year ago, building an even larger high-quality consumer base. Even better, some of our strongest household penetration and repeat buyer growth is coming from younger consumers. This gives us confidence in our future growth potential as consumers young and old are continuing to demonstrate their preference and loyalty for Hostess products. These trends are supported by our point of sale, which increased 6.7% with a market share of 19.7%. Hostess branded point of sale was up 8.5%, and market share was up 20 basis points, representing continued growth ahead of the sweet baked goods category and demonstrating the strong consumer demand for the well-known and trusted Hostess brand during this time. During the third quarter, we were able to achieve 7.8% point of sale growth in the convenience channel despite continued, albeit less challenging conditions versus prior quarters. This was well ahead of the 1% category growth. This drove the highest share position in the history of Hostess and C-Store with an increase of 1.7 points this quarter. Based on our recent market data, the convenience channel trends are showing continued improvement through October. And given our increased share position, we are well positioned to disproportionately grow in Hostess' most developed channel as traffic fully recovers. Turning to our merchandising efforts, the adjustments we made to our programs to address changing consumer behaviors, including the smoothing of our historic back-to-school programs and our Bring Hostess Home for Halloween promotion are working. The growth of our limited-time offers for fall and Halloween alone was up almost 18% this year on top of our strong summer program, which was up 32% versus a year ago. These programs have resulted in strong year-over-year growth, and we are excited to continue to tailor our programming to best maximize our growth potential as we move forward. In addition, our marketing efforts are increasing in key areas to accelerate growth, including developing new digital programs, which will continue to support our next phase of growth. We are also pleased that our mix initiatives launched at the beginning of the year and the strategic emphasis to prioritize more profitable hostess-branded SKUs during this period of unprecedented demand have continued to help our industry-leading margin and support our profitability in the quarter. We believe the diversification we have across sales channels, value tiers, and now categories with cookies will continue to provide us multiple avenues for growth as we are able to address changing consumer behaviors with our broad-based agile network. As a result of the strategic actions the team has successfully executed during the quarter, adjusted EBITDA significantly outpaced our adjusted net revenue growth with an increase of 29.2% compared to Q3 last year, excluding ISB. Our adjusted EBITDA growth was primarily due to accretive margin expansion generated from the successful integration of Bortman and strong core hostess revenue growth. We are very excited to bring a great new slate of innovation to the market in 21, which leverages key consumer insights and trends and is tailored to address our broad channel distribution and capture new consumer usage occasions to drive incremental growth. Keenly aware of the consistent and growing trends in snacking, we embarked upon a robust meat state study. We captured the data from thousands of eating occasions and generated insights that give us precise understanding of the sweet snacking landscape. In addition to understanding the who, where, when, and why consumers choose the snacks they do, our insights have covered the unique product and packaging attributes consumers expect from various occasions. With this foundation and knowledge of our category, we have developed new Crispy Minis to tap into the mindless munch and need state, which significantly over-indexes with Gen Z consumers and no other brand in SBG is currently addressing. New Crispy Minis are bite-sized layer wafers filled with cream and topped with icing, line priced with the balance of our snacking portfolio to leverage our merchandising scale, and back with outstanding pre- and post-use feedback from consumers. We're confident that this needs state and format expansion will drive growth for Hostess and the category. Our innovation slate for breakfast will accelerate our already growing share of this day part. Over the past 13 weeks, Hostess' branded breakfast sales grew 14.3%, bringing our share of the breakfast day part in SBG up 80 basis points to 17.5%. This is behind the strength of our iconic Donets brand, which is up 14.5% and the growth of coffee cakes up 29.3% led by our new cream cheese coffee cake innovation. We define this space as morning snacking and our insights into the occasion and its relationship to our brand is sharp. Consumers want to joyfully start their day and are increasingly snacking in the morning AM snacking is driving snacking occasions, with early morning snacking in particular up four points since 15. Additionally, the share of morning snacks that are sweet is up 130 basis points. Our new baby buns tap into a growing form in a great tasting and first to the retail market execution, and our new muffin sticks bring a familiar sweet taste in a more appealing on-the-go snacking form. Our single-serve jumbo donuts are on fire, up over 45%, and we are now bringing consumers a classic glazed option. Building on our bagged donuts momentum, we're introducing strawberry cheesecake and caramel chocolate flavors, and we continue to build our Donuts On-The-Go franchise, which extends our iconic and leading brand into new usage occasions. Additionally, the Bortman 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 Vortman brand. We have developed a delicious and wholesome cookie line that leverages on-trend and healthful ingredients to satisfy that need with our new super grain cookie. They are packed with real ingredients like real fruit and fiber-rich whole grain oats, rye, 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-sized formats to penetrate new channels and usage occasions. Wortmann Mega Wafers is a large-size version of our delicious Wortmann 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 LTO program is performing well, and we will continue to keep fresh and consumer relevant. 2021 includes new flavors like key lime and s'mores, as well as new cotton candy Twinkies. We are also excited about expanding the historical Bortman LTO offerings to provide consumers additional opportunities to try new, fun, 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 prototyping. Related to Bortman 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 to $30 million, with accretive margins over 30% in Q4. We are pleased that we have been able to achieve year-over-year Bortman POS growth of 2.4%, overcoming a 50% reduction we made in SKU count. We are now transitioning into the next phase of Bortman's integration as we drive expanded depth of distribution and increasing merchandising. Relatively small gains in ACV can have a very meaningful impact, and there is ample opportunity for growth with our efficient distribution model and great sales team. The Bortman integration has driven significant value for Hostess as it diversified our portfolio, enabled new innovation platforms, and added incremental revenue at a creative margin. We remain very pleased with the performance of the team as they have executed the integration and transition with excellence. and we look forward to the future profitable growth we can achieve as we leverage the Bortman brand, its great products, team members, and complementary asset base that this acquisition has provided to the Hostess family. During the quarter, I am proud of our dedicated and talented team who successfully executed an aggressive agenda, including key operational improvements while keeping our manufacturing distribution facilities operational in this challenging environment. Our team demonstrated their agility as we made strategic adjustments to our portfolio and merchandising in response to changing consumer behavior. The continued strong consumer demand and successful execution of our operational objectives enabled us to achieve our 11th consecutive quarter of revenue growth. I am confident in the value creation we have ahead, supported by strong organic and inorganic growth potential at sustained industry-leading margins and strong in building capability. Now, I will turn it over to Brian to go through the details of the quarter's results.