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spk07: 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.
spk01: 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.
spk12: 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.
spk02: Thanks, Andy. As I step back and look at my first year with Hostess, I'm amazed at the strength and resiliency of our team and the outstanding results they achieved amidst a very challenging environment. I'm more confident than ever in the ability of this team to continue to drive profitable growth and create shareholder value heading into 21 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, an 18.1% increase. This increase was primarily driven by the acquisition of Wortman, which contributed $28.7 million in net revenue for the quarter. Sweet baked goods net revenue increased $10.6 million, or 4.9%, driven by strong Hostess branded revenue growth, partially offset from lower value brand 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 Vortman. On an adjusted basis, fourth quarter operating costs increased primarily due to the timing of accruals versus prior year and the addition of the Vortman business. Our effective tax rate was 25.6%, compared to 20.2% in the prior year quarter. The increase in the effective tax rate is primarily due to the Class A for Class B share exchanges that occurred throughout 2020. Net income was 24.4 million and diluted EPS was 18 cents. Adjusted EPS was 21 cents per share, an increase compared to 16 cents per share in Q4 last year as a result of the Wartman accretion and the higher EBITDA contribution from Core Hostess. Adjusted EBITDA for the quarter was 63.7 million, or 24.9% of net revenue. The 11.3 million increase was primarily driven by the addition of Gortman, which contributed 8.6 million of adjusted EBITDA accretion for the quarter, with the balance coming from strong Hostess branded performance. As of December 31st, we had cash and cash equivalents of 173 million and net debt of 929.7 million, with a leverage ratio of 3.9 times, which was ahead of our target heading into 2020. 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 brand, our market share gains in C-Store and other key channels, and the successful integration of the Vortman business. We expect to drive top-line net revenue growth of 3% to 4.5%, and expect adjusted EBITDA to be between 255 and 265 million with adjusted EPS of 80 to 85 cents per share. Our growth outlook includes continued strong growth from the Vortman 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 to 50 million for the Bortman business. Absent the benefit of the lap of Q1 Bortman 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 commodities through the end of the year and are actively managing to minimize future cost headwinds. We have 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 cents per share. Our estimated effective tax rate in 2021 is approximately 27%, which reflects an increase as a result of the elimination of the non-controlling interest with a final exchange of the Class B shares in the fourth quarter and higher state 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 Bortman 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 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 a full term 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 of 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.
spk12: 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, one, growing the core, two, growing through innovation, three, improving through agility and efficiency, four, cultivating talent and capability, 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 our strong cash flows, we have many available levers to activate growth and generate value for shareholders. With that, Brian and I are available for your questions.
spk07: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 JP Morgan. Please proceed with your question.
spk10: 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. Doesn't look like it was a particularly tough comparison. Can you just remind us what's happening with this channel and your products and what's in your forecast for a recovery there?
spk12: Yeah. Hey, Ken, thanks for the question. You did see, just let me take it broader. COVID impacted every channel, every business in its own unique way. uh, one of the, the issues, uh, that we had across different ones, realigning our merchandising model, our, uh, supply chain mix and how we went through the supply chain to be able to adapt to changes within customer. Um, that definitely was true in the mass channel. And, uh, we have really, really good line of sight across all of our businesses that the changes we've made are going to help and grow our business, uh, longterm. And actually one of your assumptions is, uh, is true related to Q4, but if you look at the consumption over the last several weeks, there's a meaningful and steady improvement in that based on our realigning our approach to merchandising and how we go to market. It's mostly related to supply chain, as I mentioned, going through the warehouse, making things more automated. Over time, it's going to become much more frictionless. and it's going to be more profitable and continue to drive growth. So I feel really good about it going forward and feel good about it improving from the Q4 as we move forward. And then also related to that, despite that, if you look at the last several weeks, 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 chains across all channels.
spk10: Okay, so that is helpful. Just wrapping that all up in a bow then, should we expect starting, I don't know, first quarter, whenever you start regaining share in that channel, or is it sort of losing less share?
spk12: I just wanted to get a sense of what we should be building into our models. We can take any details that you want 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.
spk07: Thanks, Ken. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
spk11: Great. Thanks so much. I said a question kind of around the implied EBITDA margin for 21, which seems like, you know, kind of at the midpoint, maybe expands still by, let's call it 100 basis points. But then you had some commentary saying kind of, you know, you expect that margin to be somewhat flattish kind of once you got past Q1. So it sounds like Q1 has like a nice little jump, you know, basically tied to Bortman's. But then it also sounds like maybe you can hold that margin as you go forward. And then you said, oh, we could have a higher cost basket, but there are ways to offset that, you know, partially. That would be the single-server, the next effect, and then also pricing. So I just want to kind of get some general color on how we should be thinking about about the year in terms of cadence of that margin progression, number one, and then number two, as you do mention pricing to potentially offset some of the additional cost inflation. I don't know what your visibility is on that pricing and how good you feel about that pricing. Sounds like pretty good. Thanks.
spk02: Yeah, sure. I'll start, Rob, and Andy can chime in as well. So overall, if you look at our guide, right, your question on margins, I think you're right. If you look at Q1 overlap, particularly because of Vortman, we should see some margin expansion. And the best way to think about that is probably take a Q3, Q4 run rate with Vortman and carry that forward. Relative to what we're lapping, you'll see Q1, there's definitely a benefit there. And if I think about margins in total, we'll see a little bit of accretion from Vortman. And when we were talking about holding margins relatively flat, I think that was sort of excluding the Vortman accretion piece. If we think about the first half of the year, we'll have the Vortman accretion. We'll also have, particularly in Q2, we'll have the single-serve mixed favorability that, you know, 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, 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 Vortman component was included in mix, and we've got productivity. And that's kind of the multi-basket approach that we have to offsetting inflation. And that's kind of the first half and second half cadence of how we should think about it.
spk11: Okay, great. And then just quickly, you know, in terms of the new innovation, you say coming in the spring, it sounds like obviously that's still forthcoming. While at the same time, in your prepared remarks, you said, you know, the initial sell-in of the innovation has done well. So as we think through that top line, you know, again, it seems like the ongoing sell-in of the innovation should continue to do well. But then as we kind of get into the spring, you know, mainly 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 and trying to also get some sense and feel of, you know, 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. And that's it. Thank you.
spk12: Hey, thanks, Rob. Appreciate it. Yeah, and I agree with Brian's assessment on margins. The headline is we looked at a lot of them, and there's a lot of opportunities, but I think we have it pretty well planned. And then on the innovation side, depending on the channel, it sells in at different rates. So, for example, a lot of our C-Store channel on innovation, first of all, I agree. I feel terrific about the innovation slate 21, by the way. It gets better every year. It's behavior-based with consumers. We're in platforms that are growing. I made these in our prepared remarks. I would think about flowing it through, you know, some of the other platform ideas like Crispy Minis are flowing through later. That's based on timings of the resets. Some of the things within the C-Store channel are already going out. The Wortmann Megapack is already flowing through the C-Store channel. But some of the ones within Sweet Baker, like Baby Buns, which is just tremendous consumer scores. And very huge retailer reception. They're very excited about it. Crispy Minis, 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 ones, mostly in C-Store, are already going in early. So think through the spring Q2 and back half impact on some of the ones within the more traditional channels. And C-Store is coming in early. All right, great. Thank you so much.
spk07: Yeah, thanks, Rob. Our next question comes from Brian Holland with DA Davidson. Please proceed with your question.
spk10: Yeah, thanks. Good evening, everyone. So maybe first question on the top line guide. So this is more specificity than you've provided. Maybe the past one, certainly last year and maybe I think even past couple years where maybe it's just been the language has been above category and now you sort of quantified 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 Bortman, you know, a percent and a half to 3% growth, which would be below your algorithm the past few years, which certainly has been very strong. And when I pair that with the innovation slate, maybe some easier compares in the convenience channel, maybe some improvement in math, if you could just kind of walk through the thought process there. And maybe some of the takes that I'm not considering here.
spk12: Yeah. Hey, Brian, Andy, 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 us to, which is kind of – which is expected to – you know, the category or better than the category. And most people have, you know, the category at somewhere in the warm one and a half percent. 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.
spk10: This year's
spk12: You know, in my over 26 years of doing this, this is certainly potentially one of the more difficult areas to plan with as we, you know, come out of COVID. All indications that we have when we look at these 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'll continue to perform better because we're in segments that are growing faster. We've attracted new consumers in-home. Those rituals are going to stay. They're younger consumers. They're learning how to celebrate with indulgent snacks around specific occasions, like Valentine's Day, which is up. C-Store is coming back. Our platform innovation is scoring better and more incremental than it's ever been. But we felt we needed to move forward. people thinking about us more, 100 basis points, and it could be higher, above where they were thinking about historically. And that was our thought process.
spk10: I appreciate all the color, Andy. That's great. And then just thinking about breakfast, you know, obviously there were, you know, we talk about single serve, think about C-stores, some 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 us understand the puts and takes there with what you're comping up against? And, you know, maybe another way to ask this question, forgive me, is, You know, this was a huge opportunity at the time of the Cloverhill acquisition, and you've obviously executed against it. Where do you kind of – how do you index where the hostess brand is in breakfast versus where it is in some of its other core categories? I'm just wondering where we are in the runway. Maybe that's a better way to frame the question than just ask a pre- and post-COVID question, if that makes sense.
spk12: Hey, Brian. there's this meaningful runway for continued growth. I mean, the breakfast subsegment, the 3.6 billion subsegment, it's growing faster. Sweet breakfast, sweet Starks and sweet indulgent AM 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 cut capabilities. And I expect that to continue. I do not view it as us even close to the maturity curve and our ability to continue to innovate and grow within our morning and a.m. indulgent snacking case. We have mega brands in that case. Our Donet brand is very well received. We can innovate beyond even where we are right now. Our Donet snack pack innovation continues to be on fire as one of our leading innovators. So your thought around, boy, are we at the maturity piece? We don't view it that way. We view as we're just getting started, not approaching maturity.
spk10: Yeah, no, I appreciate that. And if I could just clarify, I think, you know, if I'm looking here in your deck, you've got like a 19 share for the overall hostess brand. I mean, is there something we can cop that against for the breakfast item or for your breakfast, like where your share is there today?
spk12: Oh, you mean is that more mature than the rest of your portfolio?
spk10: Yeah, yeah. Like if you've got a 19 share overall of broader sweet baked goods, you know, do you have a 5% share today of breakfast, 10, 15?
spk12: Oh, well, our breakfast share of the sweet baked goods segment of last quarter is about the share of our total portfolio. So if you remember when I first started on this three years ago, we said, boy, we're underdeveloped at breakfast. We've done such a good job fueling with new innovation around Donetsk, fueling our – we're pretty close to the overall share. But 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. So it's going to continue to grow beyond 19, in my opinion.
spk10: Yeah, thank you. I appreciate all the color. Kudos on the great work here. Continued success.
spk12: Yeah, and I don't have a share. I know it's a 3.6 billion subsegment, so I wasn't trying to follow through. We can look at the relative addressable market where I can do that as a follow up, I think, because I know you're hunting for that a little bit as well.
spk10: Yeah, of course.
spk12: Appreciate it. Thank you. Yeah, thanks. I appreciate it.
spk07: Our next question comes from Ryan Bell with Consumer Edge Research. Please proceed with your question.
spk05: Hey, everyone. Would you be able to talk a little bit more about the opportunity for Vortman within the convenience channel? Maybe something, you know, with respect to some of the cadence of the expansion, and is there something that we could compare it against in terms of a benchmark for the growth over the next few years, kind of where you see the ACV going for the product, and then maybe just the overall sort of size of the opportunities?
spk12: Yeah, so, hey, Ryan, appreciate the question. Headlines here, you know, Sweet Baked Goods is a very mature category within C-Store. Our hostess partner program is world-class, best in class in C-Store. We've brought our Bortman Mega Wafer underneath that program. It's being very well-received early, but it still needs to test the consumer and the velocity propositions. Uh, so we have, uh, we have in that channel, we have, uh, multiple avenues to grow. Vortman gives us an opportunity to do that. Um, I'm trying to look at the page, but we're, um, we're still well below the, uh, over, um, the distribution, um, opportunities long-term within, um, within the C-Store channel. Overall our Vortman, you know, distribution started at zero. It'll get up to, you know, even with mega wafers, it'll get up to, you know, the first 25% as we get into the first half of this year. So there's still meaningful upside on that. But I want you to just think more broadly, if you would come along with me. The growth of the Vortman franchise, it's all consumer. First of all, it's consumer-based. It has a really distinct and unique wholesome positioning. in segments, whether it's sugar-free or the wholesomeness, that are growing at two to three times the rate of total cookies. And, you know, we've done the warehouse distribution. We also have distribution opportunities within food. You know, we're 15 points below in the food sector. We're just talking about C-stores. You know, we're moving into dollar. And then we have opportunities within the merchandising and then the innovation. So it's multifaceted, the breadth. And so although I know you focus on MegaWafer and it is a big opportunity, it's just one component of a broader opportunity for Boardman over the years.
spk05: Thanks. That's helpful. And I think you had a slide that was talking about some of what you saw as demographic wins among young transitionals. Would you be able to maybe talk a little bit about some of the household penetration trends and your thoughts about, you know, how to retain some of the consumers across or rather as we exit COVID environments?
spk12: Yeah, this is one of the most exciting things about our entire portfolio, the segments in which we compete and the affinity of our brand, is our ability to be able to attract and penetrate new consumers. You know, as we went into COVID, you know, there was a lot of uncertainty a year ago. But what we're really seeing, and I know some of my peers talked about this, we're seeing consumer behavior around a reassociation with in-home rituals, attractiveness to brands, When the economy opens up, snacking is not one that's going to go mobile. In-home snacking or morning snacking is going to continue. The rituals and the reassociations they have, whether it was bring Halloween home, our Valentine program is high, our natural snacking and affinity to snacking across our broad-based portfolio is really high, and it's increased with younger consumers as well. And I'm very confident that that behavior that they're doing now, the best predictor of future behavior is current behavior. And the indulgent snacking has been consistently growing higher than overall food consumption. It's going faster than BFY snacking. And then the reintroduction of new behaviors to a 101-year-old brand is very encouraging. I expect that to stick and continue, and that's why we have it in it. in the presentation because that revitalizes and regenerates the brand. That's it for me. Thanks, Ryan.
spk07: Our next question comes from David Palmer with Evercore. Please proceed with your question.
spk08: Thanks. I wanted just to dig into gross margins, gross profit outlook for 21. You mentioned in the release, looking back on your fourth quarter, that promotions were down. Mix was actually a positive. You have the Vortman synergies and perhaps some productivity. I wonder if you could maybe think about that as a framework for 21, you know, promotions, mix, Vortman's productivity, and then, of course, net of commodities, which I guess would be a little bit more of a headwind there. at this point in your view. Could you just comment on those things and how they generally lead you to think about your gross margin outlook for 21?
spk02: Sure. Yeah, David Hayes, this is Brian. I guess the first piece is if we think about inflation. And from an inflation standpoint, we're seeing probably in line with other companies 2.5 to 3.5 points of inflation roughly for 21 in our guidance. We've got a lot of our commodities locked in through the year. But there is some inflation. We're seeing it in transport markets and elsewhere. So you start with the inflation piece. And as I mentioned earlier, I think there's a couple things working for us, particularly in the front half. We're going to have the accretion of Vortman as we lap the Q1 performance. We're going to have a single-serve mixed favorability. And we're going to have some pricing carryover from this year. The back half is going to be more weighted towards 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 maybe some margin accretion based from a Bortman 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.
spk08: And just to follow up on that, I would imagine you mentioned that mix was a positive for the fourth quarter. I was a little surprised to see that because you would expect single serve to be trailing your bulk packaged, which I would presume to be different margin profiles and for Mix to be more of a positive in 21. Is that your thinking going into 21?
spk02: Yeah. So there's actually, there's 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, you know, there is, our multi-pack was up almost 20% in Q2. Our single serve was down about five. But in Q3, we grew single-serve 2.6%. Q4, we grew up 2.9%. And we also saw multipack start coming back down. So if you look at just the multipack up 6.6% in Q4, single-serve was up 3%. And single-serve is a pretty powerful margin driver. You've got those two. What we don't list on the page here, you've also got some declines in our private label and value brands. And that net gives us a little bit of mixed favorability. Not material. for Q4, but it's trending relative to the prior quarters where we were seeing a mixed detriment. It leveled out for us, and we got a little bit of expansion in Q4.
spk08: Great. Thanks.
spk07: Our next question comes from Bill Chappell with True Securities. Please proceed with your question.
spk06: Thanks. Good afternoon. Andy, just to kind of talk a little bit more about I mean, the COVID impact and COVID outlook. I mean, what's your thought of if we open up this summer, if schools are fully back in, you know, 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?
spk12: Yeah. 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. I'm optimistic. We ran scenarios a lot of different ways. And we came to a revenue, and I should have mentioned this when the earlier question about the revenue seems to be left. The mix, the lapping of multi-pack, it may have a, you know, slight revenue offset to some of the single-serve bouncing. So, you know, there's numbers here, and then you've got pricing. There's a lot of moving parts. We've ran multiple scenarios on the opening of the COVID economy, 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 me, and we're still down versus the January benchmark. The traffic in C-Store is still down 13% in January. We got a little bit of improvement in the summer, but it's still 13%. Any way we look at it, there's a positive for Hostess. So we assumed, we absolutely assumed the positive. It's difficult to forecast. I believe that the, 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 gonna stay and we're advantaged in C-Store, especially with single serve when the mobility increases. So I feel earlier has potential. It's hard for 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.
spk06: Got it. No, that's helpful. It's certainly hard for 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 was the mixed benefit. Is there an opportunity to exit more and more of that business? I mean, I know some of that's contract manufacturing that you kind of inherited, but if the breakfast business is doing so well of your branded side, is there a way to permanently make the change?
spk12: Yeah, so the way we look at it, is uh and we've been uh if you look at what's driving our growth and driving our profitability we're significantly improved from where we were um you know two and a half three years ago at the headline now with that being said there is some there 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 or that business isn't paying off for our return where it's disproportional, we'll either price it till it does, and if that doesn't work, we'll exit it. So 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, we have some businesses that have very good product label, but it also serves a consumer base. So it may continue to be flat to declining, but if not, we will price to it and make sure that we're They drive efficiency and then realize the revenue. There may be some opportunity for it to continue to 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.
spk06: Thanks for the color.
spk07: Our next question comes from Fazawa with Deutsche Bank. Please proceed with your question.
spk00: Yes. Hi. Thank you. So, Andy, I just wanted to go back to your comments around the category and just want to, you know, see if I'm understanding it correctly. It seems like the indulgent snacking category got a lift in 2020 from, you know, COVID and people spending more time at home. Are you effectively saying that as we look out to 2021 and post-COVID, the category growth rates have accelerated? Or are you saying that, you know, this is now a more normalized level and we kind of go back to that one, one and a half percent category growth going forward?
spk12: Let me just go to a couple places on that. 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 been more in the 3% growth range versus the one, the one and a half. That's just the actual performance of the category. During COVID, that has moved up about 100 basis points. So even if it goes back to pre-pandemic levels, it's still higher than what some of the perceptions around sweet snacking are. We hear a lot of that. We hear sweet snacks off-trend. It absolutely, the consumer behavior and the way consumers behave, not just in our category, but across others, 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 products, is continuing to be higher than, you know, more in the 3% range. And the subsegments of which we compete, I believe, are very positive and very good. Now, when we look at 21, it's difficult because we have 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 to our revenue forecast in 21. But overall, we believe that the consumers are going to continue to look in a very responsible way for these sweet moments of joy that we can bring them in sweet snacks.
spk00: Okay, great. Understood. And then just a quick question on, you know, capital allocation. You're saying that you're 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've also mentioned acquisitions. Can you talk about how you're approaching that? Sort of what comes first? It sounds like it's acquisitions. And if so, could you maybe put some parameters around that? Sort of what types of things you might be looking at? Is there a certain size that, you know, we should be thinking about? Would you lever up beyond four times, for example? Just more color around capital allocation would be helpful.
spk02: Sure. Yeah. So as you kind of heard in the script and we talked about, our guide implies, right, absent any acquisitions or buybacks, that we'll delever close to a full turn. So first of all, I think we feel great about that because, you know, 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. That's kind of 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 up front. So it's a $25 million investment. It's going to be great for growth over time 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, it will probably be more 22 and beyond. But investing in the business, we invested in our Our Donet line also increased our capacity there this past year. Those are two good examples. Edgerton's another one where we moved our warehouse last year, which has put us in a great position. So invest in our business. De-leverage I talked about. Acquisitions, absolutely. Strategic acquisitions like Wortman. Wortman's been a great acquisition. If we could do another acquisition like Wortman, we absolutely would. We love the business. The integration's gone fantastic, and the growth trajectory of that business also we feel very good about. And then lastly, we talked about return of capital through shareholder, through security repurchases rather. So on the buybacks piece, that's also, you know, another tool that we announced to be able to return capital to the shareholders. But in terms of priorities, I think, you know, we talked about investing in the business. K-Kline's an example of that. De-levering and, you know, like I said, if we could execute another Bortman, we would.
spk00: Thank you so much.
spk12: Yeah, and just on the M&A side, so as Brian mentioned, we are maniacally focused on unlocking shareholder value, and we believe we have a very high cash flow to be able to give us the flexibility to be able to do that. With the Boardman acquisition, we certainly believe that we've demonstrated that we have a platform to be able 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 assets 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. Is it branded? Does it fit in our portfolio? Can we drive the right synergies in the shareholder return? We believe there's assets out there, and that's what we're focused on doing.
spk00: Thank you.
spk07: Our next question comes from Andrew Wilson with UBS. Please proceed with your question.
spk09: Yeah. Hi, guys. Good evening. I just wanted to zero back in 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 as that channel opens back up? And maybe touch on how you've leveraged the differentiated hostess partnership program to drive those gains.
spk12: Yeah. Hey, Andrew, thanks for the question. We have a terrific C-Store business. We have highly loyal consumers within C-Store. And we have a world-class consumer insights and 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-SER despite 13% traffic decline. We've been able to do it because, and this is true across the board, during the pandemic. We never stayed focused. We took care of our Our team and our consumers and customers have never lost focus of the long term. We continue to innovate. We continue to invest in insights and we continue to service our customers. And that's true on C-Store as well. I believe coming out of the pandemic, the share gains we've had will provide a great platform that as the overall channel increases, we're going to do that from a higher water long. 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, pecan spins. Those are great innovations. Mega wafers are going in. 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. You know, we didn't model a huge amount of upside. We more modeled growth. You know, to Bill's question, a lot of scenarios, but more modeled of return to the overall traffic and our higher water line of share, which is great upside for us, both on mixed as well as long-term growth.
spk09: Great. Thank you.
spk07: Our next question comes from Rebecca Schooneman with Morningstar. Please proceed with your question.
spk03: Good afternoon, and thanks for putting me in. So the Hostess brand has been gaining share of the sweet baked goods category for 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 to the extent that some of the gains are driven by distribution, at what point do you think the Hostess brand will reach its full distribution potential. I see it's already 91% ACV. Thanks.
spk12: Yeah, so I appreciate the question. 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 a valid one. And we're pretty much at full distribution. We've been doing a lot of smart things underneath that distribution to fix the mix, to prune SKUs that weren't driving, increase the velocities of our existing ones, bring in innovation that's more platform-driven and incremental. That gets better every year. 21 is by far our best. And we're continuing to test and learn on 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, a good investment but modest in 21, and as we continue to prove that model out, we'll continue to grow. The reason why I'm optimistic about that is that growth that we've been able to do within that distribution has come with increased penetration with the younger consumers, higher repeat of the consumers that we do have, and insights of areas combined with innovation that continue to give me confidence that we're going to grow going forward. So, you know, we haven't been growing that much from absolute innovation. We've been growing a lot through understanding how we can optimize the space we have and bring in better innovations, improving our consistency of 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, as someone asked earlier, that's a huge platform for us to be able to grow into. in a trend that continues to grow.
spk03: Okay, great. Thanks. And as a follow-up, I'd just love to hear some of your insights and your expectations for club stores. As a newer channel, I had expected that that growth would be maintained as the hostess brand expanded some distribution into it. But the point of sales have been declining the last couple quarters. I'd just love to hear your outlook for that channel. Thanks.
spk12: Yeah, one of the reasons why you're seeing the – optically, it doesn't look as strong as it really is. If you look at the hostess brand sales in club, they're up double digits, meaningfully double digits. The sales, what you're seeing that's offsetting that is some of our value brand, the lower value brand. That is more for the business consumer brand. that was disproportionately impacted by COVID or that we had intentionally pruned coming into the year. 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 we expect that to continue as we're in 2021.
spk03: Okay, great. Thank you so much.
spk12: Yeah, you're welcome.
spk07: 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.
spk12: Thank you. And thanks, everyone, for your participation and interest in Hostess. We're excited to continue the strong execution against our priorities as we drive growth and increase shareholder value in 21 and many years to come. We're a better Hostess, and we look forward to increasing your shareholder value and working hard for our investors. Thanks again.
spk07: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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