Milling & Baking News - January 17, 2017 - 11

Toler maps out Hostess' unique
positioning for future success
the power and speed and rate of success," he said.
Hostess has leveraged the value of
its brands through a business model
predicated on warehouse, rather than
direct-store delivery and extended
shelf life.
"Our shelf life is 65 days from bake,
and we guarantee 45 days to our customer," Mr. Toler said. "So the first
20 days are us and the logistics team
shipping it from our manufacturing
plant to our distribution facility out to
our customers so it has the length of
time to allow it to go through a warehouse model, something our competitive D.S.D. products do not have."
Mr. Toler and Tom Peterson, executive vice-president and chief financial
officer, devoted time in the presentation to describe how the Hostess
model has generated profit margins
superior not only to other baking
companies but also consumer packaged foods companies. For example,
year-to-date Hostess EBITDA margins
of 29% eclipse snack businesses such
as The Hershey Co., 24%; Snyder'sLance, Inc., 14%; and Flowers Foods,
Inc., 12%; as well as mid-sized foods
companies such as J.M. Smucker Co.,
23%, and Post Holdings, Inc. 18%.
The executives offered considerable
detail about how Hostess is positioned
versus other snack cake businesses.
"We sell at premium per pound versus our competitor," Mr. Toler said.
"That's a great place to be because
that drives growth. So it's simple
math. Little Debbie, which is actually
the category share leader, with 28% to
29%, they are a value brand. It is fairly unique in U.S. consumer products
to have the value brand as the share
leader, but in this category we do. This
is one of the reasons our premium nature drives growth, because people
shift up to the premium price point
product. For example, in c-stores, our
products sell for $1.79 to $1.89. The retailer will make probably 75c on that
sale. That 75c is the same as the sale
price of the items for Little Debbie,
so the penny profit category margin
(margin per unit) is driven by the pricing structure we offer. We are a huge
trade up for retailers. That's part of the
reason they love us."
Mr. Peterson offered further detail
about how the Hostess business model underpins the company's superior
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profit margins. Specifically, savings
from the warehouse delivery model
extend far beyond lower transportation and associated costs.
"The old company had 12 cake
and combo bakeries, many of which
had redundantly produced the same
item," Mr. Peterson said. "That means
Twinkies were produced in six bakeries. We now have one fully automated
line that makes all of our Twinkies. It

HOSTESS BRANDS, INC.

Continued from Page 1

takes 10 people to operate compared
to a standard line of 38, and we sell
more Twinkies than the old company
did. So our margins are heavily impacted by this model."
He said Hostess is continuing to
pour significant sums into capital improvements, including $29 million in
the 12 months ended Sept. 30.
"That included substantial automation of the cake line, consolidation of
production lines and starting to enable
Indianapolis to take our peanut butter
items," he said.
EBITDA margins are fairly secure
going forward, Mr. Peterson said,
helped by price stability and customer
support of a pricing model that provides retailers with higher profits. The
efficiency of the company's production system helps sustain profitability
as well, he said.
Responding to a question of whether competitors may choose to adopt
the Hostess extended shelf life and
warehouse delivery model since it is
proving so profitable, Mr. Toler said
such a shift was highly unlikely. He
expressed confidence in this prediction even while acknowledging that
the E.S.L. technology Hostess uses
essentially would be available to anyone in the industry.
"(Our supplier) could sell other adaptations of (the E.S.L. ingredients),"
he said. "And the answer is it doesn't
fit (other bakers') business model,

Business

particularly our two largest competitors, Flowers and Bimbo. They're tied
to the bread business, and they are going to be in those stores three to four
times a week for bread. Sweet goods
are an important part of their company,
but it doesn't drive their infrastructure.
Bread drives their infrastructure."
Mr. Toler also cited a "cultural dynamic" at D.S.D. companies, saying he
was very familiar with such a mindset
from his time with Nabisco Brands.
"Culturally D.S.D. companies really love D.S.D.," he said. "That's who
they are; that's how they operate. And
that's fine, that's how they work. And
so culturally I will tell you Hostess
would have never made the D.S.D.to-warehouse switch if we hadn't
gone through something as dramatic
as Chapter 7."
Mr. Toler devoted considerable attention to the new product pipeline
at Hostess, including the launch this
year of a chocolate cake Twinkie.
"It's the first time we've done chocolate cake Twinkie with a regular creme
filling," Mr. Toler said.
Other pending new products he described as perhaps even more groundbreaking.
"We're launching white fudge covered Ding Dongs right now," he said.
"It's the first line extension for the Ding
Dongs business, and we're very excited about it. And we just announced a
couple weeks ago we are doing peanut
butter Ho Hos. You'll see other peanut
butter offerings later this year. That
also will be the first line extension of
Ho Hos. So that is some big news for
us on - our 50-year-old icons like Ho
Hos and Ding Dongs, our first line extensions on those brands ever."
Deep Fried Twinkies were introduced last summer, and Hostess is
introducing Dolly Madison Zingers in
Canada.
"So there is lots of activity," he said.
In another first, Hostess has
reached a licensing agreement with
Nestle USA, and in the coming weeks
six s.k.u.s (stock-keeping units) of
Hostess co-branded ice cream will
be introduced. In addition to a Ding
Dongs ice cream sandwich, rolling out in stores presently, Mr. Toler
said four or five other items will be
launched in the spring when retailers
"reset their ice cream set." Under the
agreement, Nestle will handle production, sales and logistics of the ice
cream business.
Additional coverage of the ICR conference presentation may be found at
www.bakingbusiness.com. MBN
Milling & Baking News XJanuary 17, 2017 / 11

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Milling & Baking News - January 17, 2017

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