Hostess Brands, Inc.

Greetings and welcome to Hostess Brands Incorporated fourth quarter and fiscal 2020 earnings conference call. At this time, all participants are on 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 Manville. Thank you. You may begin.

Good afternoon and welcome to Hostess Brand's fourth quarter and fiscal 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 December 31st, 2020, that went out this afternoon at approximately 4 or 5 p.m. Eastern time. 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 filing, 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, as 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.

Thank you, Chris, and good afternoon. We appreciate you joining us today. Before reviewing our strong fourth quarter 20 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 well-being 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. Hostess is well positioned to continue this strong momentum and 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 Bortman 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 Hostas is a platform well-suited for complimentary acquisitions. We drove a 5.8% 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 velocities. Behind sharper behavior-based insights and capabilities, our 2021 innovation slate is even better. We're focused on growing consumer snacking subsegments 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 Vortman acquisition contributing $28.7 million to this growth. Sweet baked goods revenue increased 4.9% or $10.6 million, driven by strong Hostess branded revenue growth. This was partially offset by planned lower value brand and private label sales. Hostess manufacturer point of sale grew 4.9% ahead of the category, driven by 7.1% growth of the Hostess brand. Our successful Hostess Partner Program and Advantage 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% and a quarter versus the channel declines due to COVID. These share gains puts us in an advantage 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 accrete abortment acquisition and strong growth of our hostess brand. We remain very positive about our new slate of innovation coming to market in 2021. which leverages key consumer insights and trends and penetrates faster-growing consumer usage occasions. This continues to expand Hostess' footprint in the growing indulgent snacking segment, where Hostess has a strong relative position and consumer affinity. Our development in high-growth subsegments 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 retail response to our 2021 innovation slate. We have several items that entered the market at the beginning of Q1, including Hostess muffin sticks, Bortman super grain cookies, and Bortman mega wafers for convenience stores, all of which are building distribution wealth. In addition, this spring, we will expand our Hostess brand with two fantastic new sub-brands with our crispy mini 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%. Best of all, this growth was very balanced across several product forms with meaningful gains in donuts, coffee cakes, honey buns, 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 order to achieve this growth, we are focused on four key strategic growth priorities 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 Bortman'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 Valentine's program. As we begin 2021, we are also executing against various initiatives, including enhancing our hostess 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 donut displays in large format grocery and mass retailers to enable improved inventory flow into and out of our retailer DCs that have been stressed from excess demand during COVID. These changes are already driving greater impulse purchase opportunities. Regarding e-commerce, we continue to make targeted investments in our e-commerce platforms to support this growing business, mainly the click and collect or retail grocery delivery. We are conducting market tests to support our new Hostess innovation and Bortman brand awareness. We're also planning to increase our investment in working advertising for our Hostess brand in 2021 as we continue to learn and scale up our marketing investments to drive top-of-mind awareness and growth. Looking to Vortman, results for the quarter continue to be strong, contributing 66 basis points of EBITDA margin expansion to our consolidated results and the full-year EBITDA contribution of approximately $28 million, well above our original 2020 forecast of $20 million. The Vortman integration and related conversion to a warehouse distribution model could not have gone better. We are eager to strengthen the brand as we move into 2021 and transition into Vortman's 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 Vortman will continue to meaningfully contribute to the company's future revenue growth and margin expansion in 2021. Over the past several years, we have been executing against various ESG initiatives and expect to issue our first ESG 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 removes 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 trainings and career development opportunities 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 or 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, and increasing focus on material risks and opportunities for our business. They have demonstrated their commitment by increasing the diversity and independence of the board, supporting eliminating the super majority voting requirement, 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 well positioned for the momentum to continue into 2021 and beyond. Our 2020 results and operational improvements reinforce our confidence in 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 brand, 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 trying 2020. The 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 occasions and have the right people, the right processes, the right products, and the right capabilities. 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 to go through the details of the quarter's results.