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Edited Transcript of TWNK earnings conference call or presentation 8-May-20 12:30pm GMT

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Q1 2020 Hostess Brands Inc Earnings Call KANSAS CITY May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Hostess Brands Inc earnings conference call or presentation Friday, May 8, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew P. Callahan Hostess Brands, Inc. - President, CEO & Director * Brian T. Purcell Hostess Brands, Inc. - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Brian Patrick Holland D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst * David Sterling Palmer Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst * Kenneth B. Goldman JP Morgan Chase & Co, Research Division - Senior Analyst * Pamela Kaufman Morgan Stanley, Research Division - Senior Analyst * Robert Frederick Dickerson Jefferies LLC, Research Division - MD & Senior Research Analyst * Steven A. Strycula UBS Investment Bank, Research Division - Director and Equity Research Analyst * William Bates Chappell SunTrust Robinson Humphrey, Inc., Research Division - MD * Katie M. Turner ICR, LLC - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to Hostess Brands First Quarter 2020 Earnings Conference Call. I would now like to turn the conference over to Katie Turner for opening remarks. -------------------------------------------------------------------------------- Katie M. Turner, ICR, LLC - MD [2] -------------------------------------------------------------------------------- Thank you. Good morning, and welcome to Hostess Brands First Quarter 2020 Earnings Conference call. Joining me on today's call are Andy Callahan, Hostess Brands President and CEO; and Brian Purcell, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ending March 31, 2020, that went out this morning at approximately 7:00 a.m. Eastern Time. The press release and an updated investor presentation are available on Hostess' 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'll refer to Hostess' earnings release as well as the company's most recent SEC filings, you will see a discussion of the factors that could cause the company's actual results to differ materially from these forward-looking statements. Please remember that the company undertakes no obligation to update or revise these forward-looking statements. The company will also make a number of references to non-GAAP financial measures. The company believes these measures provide investors with a useful perspective on the underlying growth trends of the business and has included in this earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. And now I'd like to turn the call over to Andy Callahan. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Katie, and good morning. We appreciate you joining us today. Before I get into our first quarter 2020 results, I would like to comment on the COVID-19 global health crises. First and foremost, our thoughts go out to all of those affected by the COVID-19 virus. On behalf of the Hostess Brands Board of Directors and leadership team, I would like to offer our support for a safe recovery of everyone impacted. Additionally, I would like to extend my sincerest thank you to everyone on the front lines in this battle against COVID-19, including those in the health care community, helping those affected as well as the many people that are working tirelessly to keep essential business going and keeping us all safe and nourished physically and emotionally. I have witnessed this truly remarkable dedication and commitment from the incredible, talented Hostess team and partners. This includes our devoted employees working in our manufacturing and distribution facilities and our retail and supply chain partners on the roads and in the stores with our valued customers. We appreciate the sacrifices and dedication of so many who are helping to serve our consumers and the communities in which we live. In mid-February, we charted the COVID-19 task force, headed by me, meeting daily, with a goal of staying nimble and informed as we navigated this pandemic. One of our first tasks was to reinforce our values and priorities to guide decision-making. Our #1 priority has been ensuring the health and safety of our employees, their families and the communities we serve. Our second priority is to continue serving our customers and consumers; and third, positioning Hostess to emerge a stronger and more resilient company. We have a tremendous responsibility at Hostess to our employees, their families and the communities we operate in. This is a responsibility we do not take lightly. Over the past 12 weeks, we have been steered by the CDC guidelines and industry best practices and have consistently implemented procedures and work practices in line or before these recommendations are released. Our manufacturing and distribution facilities have remained operational to serve our customers and bring consumers the comfort and joy of Hostess during this difficult and uncertain time. The changes we made across our network are significant. We continue to actively monitor and develop action plans to ensure we are appropriately adapting to the current environment. We have implemented additional safety protocols and procedures to support the health and wellbeing of our employees, including incremental sanitation breaks and COVID-19 cleaning protocols above our already robust traditional food sanitation protocols. Installed additional sanitation stations within the bakeries, provided temperature and health surveys screenings at every facility in our network, provided face coverings for all employees, installed safety glass, plexiglass and dividers at critical locations on the line and break facilities and modified production schedules to support distancing and eliminate density. We are also supporting our team by paying for COVID-19 tests, providing supplemental pay and benefits to support our workers during this time and extending leave of absence job protection for 30 days. Each of our facilities has been impacted differently based on the mix of demand, local variations in policies and the degree of COVID-19 impact in the community. For example, our Chicago facilities' lines are physically closer together and require more people as compared to our highly automated Emporia bakery, resulting in more impactful changes to our operating procedures and modifications to the facility to ensure the safety of our employees. We are continuing to modify our manufacturing, supply chain and merchandising priorities to respond to the changing market dynamics. We have prioritized key SKUs and worked with retail partners to minimize out of stock, while also adjusting the timing and nature of trade programs. We're also making adjustments to our marketing programs to increase our e-commerce footprint, capture consumers digitally, doing planning and best target anticipated consumer changes. The changes we have made to this point are meaningful and we implemented quickly to appropriately address the changing needs of our business, the timing and magnitude of change for the next phase is uncertain. We are continuing to stay on top of consumer and customer changes coming out of this pandemic and will adapt to meet those future needs. This situation continues to evolve so rapidly that it's difficult to predict in the future with reasonable certainty. And there are many factors at play. However, we are nimble and informed as the situation progresses to ensure we are appropriately positioned to protect our employees and service our customers. As we look ahead, we are confident that we can leverage our category-leading distribution and availability in our warehouse model to address the changing consumer behaviors to drive accelerated growth as we emerge from the stay-at-home phase. Despite the dynamics that developed from COVID-19 outbreak, our team made impressive progress against our stated objectives, and I am confident we will emerge an unmistakably stronger and better Hostess. We discussed 3 focus areas during our February call, and despite the disruption, we are at or ahead of all 3. These include executing on the continued growth of core Hostess, completing significant integration activities for the recently acquired Voortman business and implementing operational improvements. The progress made against these objectives has enabled us to exceed our financial targets for the first quarter. The initiatives we advance have strengthened our foundation and will continue to fuel up our sustained profitable growth. A few of the key accomplishments achieved include: net revenue growth of 14.4%, excluding the In-Store Bakery or ISB business sold in August. While the Voortman acquisition contributed 8.1% of this growth, our Hostess branded products drove the majority of the 6.3% Sweet Baked Goods net revenue growth in the quarter. And this represents the fifth consecutive quarter of 5% or more growth, further demonstrating the strong health of our iconic Hostess brand. Hostess' growth was driven by strong base growth, innovation expansion and COVID-19-related growth during the last 2 weeks of the quarter. Point-of-sale increased 5.1%, and market share was at 18.5%, up 17 basis points, representing continued growth ahead of the Sweet Baked Goods category. Adjusted EBITDA increased 6.4% for the quarter, excluding ISB. Keep in mind, we expected Q1 adjusted EBITDA would be down mid-single digits from prior year. Q1 performance was primarily due to the strength of our Sweet Baked Goods revenue growth and strong Voortman results where they were both performing ahead of plan before the end benefit of the COVID-19 stock up in March. The Voortman integration is going very well. We executed key integration activities, including transitioning Voortman's distribution model, which remains on track, as U.S. shipments under the warehouse model were successfully executed in April. Importantly, Voortman is accretive to adjusted EBITDA in Q1 and generated solid point-of-sale growth, up 9.4% during the quarter, further solidifying our optimism for the future profitable growth potential of Voortman when fully integrated. We have an experienced team that has proven they are up to the task of successfully accomplishing this complex transition like they did during the relaunch of Hostess. We also have successfully executed against key operational initiatives during the quarter, driving incremental efficiencies and increased capacity across the network. The transition of our new, larger primary distribution center has proven instrumental in supporting the increased volume from both the Voortman acquisition and increasing consumer demand for Hostess' products. Throughout the first quarter, the team worked tirelessly to implement system of process enhancements to improve productivity and accuracy at our new distribution center, while also adding in the complexities of Voortman and the unexpected marked spike in demand from COVID-19. There are substantial efforts and weekly improvements are paying off as we had very good warehouse efficiencies in April. Focusing on the recently acquired Voortman business in a little more detail. We are increasingly excited about the opportunities it provides to drive meaningful, profitable growth. During the [current] quarter, we completed key customer sell-in activities, reaching agreements for item distribution, self set -- shelf sets, pricing terms and much more. We established our go-forward team that is successfully executing our transition from DSD to warehouse delivery model. This effort included reengineering primary product cases, specifications, pallet patterns for warehouse distribution as well as an ERP transition. We have completed this significant shift to the warehouse model in April for the U.S. customers and began shipping through the warehouse last week in Canada. Our transition costs are now estimated to be $25 million to $30 million, better than the initial estimates of $30 million to $35 million. And we have made meaningful progress against achievement of the planned cost synergies, giving me confidence that we will secure at least, if not more, of our $15 million synergy target. We continue to believe that there is significant opportunity for growth in Voortman business and are excited by the progress we are making as we leverage Hostess' broad-based distribution model, focused and tailored customer approach, innovation and promotion expertise and our scaled merchandising capabilities. As we reflect on the last 4 months, we executed against key milestones supporting our strategic initiatives, including the Voortman integration and operational changes that are foundational to supporting the profitable volume growth we are achieving. True to Hostess, we remain nimble and agile as we reacted to the swiftly change in market dynamics, delivering results ahead of expectations. Our Q1 results represent another strong quarter of consumer-driven demand, broad-based channel growth and enhancements to our capabilities that we will continue to leverage growing categories. We have a tested and proven playbook, which has driven sustained growth over the last 5 years and are continuing to grow the consumer and customer as we strategically invest in a business to more deeply fuel future profitable growth. Today and into the future, our team remains grounded in 5 pillars: grow the core, grow through innovation, improve through agility and efficiency, cultivate talent and capabilities and leverage our strong cash flow. Although the current impact of COVID-19 is meaningful, it is also temporary. And I am confident that the progress we have made will result in a much stronger Hostess with continued industry-leading revenue growth and industry-leading margins. Now I'll turn it over to Brian to go through the details of the quarter's results. -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thanks, Andy. I would like to echo Andy's sentiment and thank all of our employees for their perseverance in keeping our essential manufacturing facilities operational during this pandemic. We could not have achieved our first quarter results nor continue to execute our strategic initiatives without their consistent efforts. I also hope all of you listening today are saying safe and healthy. Today, I will review our first quarter 2020 financials, including key commentary on our results from the impact of COVID-19 and other data from today's release as we think about our business moving forward. Net revenue for the quarter was $243.5 million, a 14.4% increase, excluding the impact of the sale of the ISB business in August 2019. The acquisition of Voortman contributed net revenue of $17.1 million for the quarter. Excluding the impacts of Voortman and ISB, the net revenue increase was driven by higher sales of core Hostess branded multipack products as a result of strong demand, particularly in the grocery and dollar channels, aided in part from increased store traffic in response to COVID-19 and in C-store prior to the to COVID-19 impact. Gross profit was $79.3 million for the first quarter of 2020, and gross margin was 32.6%. Excluding ISB, gross profit increased 8.5% from the first quarter of 2019. Adjusted gross profit was $84.3 million or an increase of 12.8%, excluding ISB, representing an adjusted gross margin of 34.6%. Adjusted gross profit improved year-over-year due to higher revenue, partially offset by increased distribution and labor costs. As expected, operating costs were higher in the first quarter primarily due to transition costs incurred to transition Voortman distribution from the DSD to the warehouse model. This resulted in operating cost of $64.2 million or 26.4% of net revenues. Net income was $2.6 million, and diluted EPS was $0.02 primarily due to the higher operating cost, I just mentioned, associated with Voortman. Adjusted EPS was $0.14, consistent with the prior year quarter, reflecting increased depreciation, amortization and interest expense as a result of the Voortman acquisition, in addition to less income due to the sale of ISB. Adjusted EBITDA for the quarter increased 6.4% to $51 million or 20.9% of net revenue, excluding a $1.5 million decline due to the sale of ISB. The increase was primarily driven by higher volume and the addition of Voortman, which was slightly accretive for the quarter, partially offset by increased distribution and labor costs. Our effective tax rate was 8.6% compared to a benefit of 4.6% in the prior quarter. The current year effective tax rate was impacted by the write-off of deferred taxes related to Voortman, which resulted in a discrete tax benefit of $0.5 million. We had cash and cash equivalents of $96.2 million and net debt of $1 billion as of March 31, with a pro forma leverage ratio of 4.5x factoring in the expected 2020 EBITDA contribution from Voortman and reduction of ISB. We are committed to effectively reducing this ratio over the course of the year and have a proven history of successfully reducing this leverage following acquisitions while continuing to make disciplined investments for growth. We remain focused on achieving our long-term leverage ratio in the range of 3x to 4x we believe we have sufficient financial flexibility to support our expected future cash needs, utilizing our cash on hand and operating cash flows. Now moving on to our outlook. As we stated in our press release this morning, due to the rapidly evolving operating environment and a high degree of uncertainty caused by the COVID-19 pandemic, we are suspending our 2020 annual guidance. However, given the recent volatility and results beginning in mid-March associated with COVID-19, we wanted to provide some additional details on our performance for Q1 and our start for Q2. First, through January and February, our consolidated business results were tracking slightly ahead of our stated expectations provided during our Q4 earnings call, including both core Hostess and Voortman. Our Q1 point-of-sale for the quarter was up 5%, with March up 12%; and April, up 4%. This demonstrates that point-of-sale key takeaways spiked in March with consumer pantry-loading and subsequently declined, albeit still growing during the stay-at-home orders. We estimate this surge in consumer demand will add approximately 2 to 3 points to our net revenue growth in Q1. In March, with the higher rate of consumer purchases, we began to see a product mix shift towards our multipack business. Our higher-margin single-serve products have historically represented approximately 30% of our revenue mix. While recent week-to-week sales trends have been volatile, over the last few weeks on average, this portion of our business has been down 10% to 15%, while multipacks have increased 10% to 15%. We believe a large portion of this shift in product mix reflects the temporary change in consumer shopping habits during stay-at-home orders, which has resulted in less store traffic in our highly developed C-store channel and increased pantry stocking with other channels. We are optimistic that this shift will begin to reverse as stay-at-home orders lift, and there is an increase in convenience store traffic this summer as more people may drive versus fly. We expect the impact from the shift in mix as well as the rising COVID-19 cost to be more pronounced in Q2 than we experienced in Q1. However, the timing and extent of the COVID-19 impacts on consumer behaviors in the near term is uncertain, and we are continuing to work to mitigate the impacts to the extent possible. In addition to these impacts on margin due to mix, we also anticipate step-up our costs in Q2 as we implement additional safety measures in our facilities, as Andy mentioned. Given the changes we are seeing in our business, Voortman has less risk of significant negative impacts from consumer-driven changes due to COVID-19, given they are predominantly sold in multipacks than the grocery channel. As you may recall from our last call, Q1 Voortman revenue and profit was impacted by the transition and integration activities taking place, which included a temporary pullback of sales, as distributors cleared out their inventory supporting 2 sales models temporarily. Voortman EBITDA contribution is expected to improve meaningfully in the second half of the year as we begin to realize synergies and drive incremental revenue with our proven Hostess model. Despite the temporary uncertainty created by COVID-19, we remain confident in our underlying business fundamentals which support our ability to achieve our long-term financial objectives, including organic revenue growth, adjusted EBITDA margins 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. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Brian. We are pleased with our strong start to the year in light of the tremendous challenges and uncertainty created by COVID-19 pandemic. We believe our ability to execute and manage the controllable aspects of our business in this environment will create a stronger Hostess. As the economy reopens, we are well positioned for growth and success long term. Across the team, we are working together to further advance our high performance-based culture to consistently win with all stakeholders. The resiliency of our people, the strong consumer awareness and loyalty to Hostess brand as well as our agile, efficient distribution model will continue to be key competitive advantages in the marketplace to drive strong long-term financial performance in the top quartile of our peers as we create value for our shareholders for many years to come. And with that, Brian and I are available for questions, and I'll turn it back over to the operator. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Rob Dickerson with Jefferies. -------------------------------------------------------------------------------- Robert Frederick Dickerson, Jefferies LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- So I guess I just wanted to touch on kind of top line relative to cost and margin. Some companies pull guidance, some companies haven't. You pulled guidance understandable, obviously. But it sounds like it's a little bit potentially more kind of cost to margin driven on the uncertainty of the mix that sells. And I just say that because I think you had a comment in the prepared remarks, you said that mix had -- March basically saw more of a mix shift towards the multipack, that was up about 10% or 15%, whereas the single-serve will be down 10% to 15%. So it sounds like on the revenue -- on a revenue basis, the top line seems to be somewhat balanced there. And the category pre-COVID seem to be doing well. But then obviously, there's a little bit of a margin shift, and you don't know what the COVID-related costs would be. So if you could just kind of maybe give a little bit extra color and perspective around kind of that revenue piece relative to cost to margin, that would be helpful. And then I have a follow-up. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. So Brian, why don't you take this and fill in. -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- But Rob, I think you have it right. So on the consumption side, you're right. Prior to COVID, we were at or ahead of where we expected to be. Hostess was up, think about in the 4% range. C-store is growing share. We're also growing meaningful share in the C-store channel, with single-serve up, I think, 4% range. When COVID hit, we had an immediate spike in those channels where stock up activity was more prevalent. We did not see as big of an impact on our single-serve business initially because we continue to shift growth. As we look at April, we continued to grow meaningful share in our C-store channel, but our single-serve across the board has been down in the 10% range on our impulse shares -- our impulse sales. Now C-store, in total, we continue to do well. And matter of fact, some of the other items we have within C-store, our donuts are doing particularly well. Our bread and our bun business are also doing particularly well. Our other channels are growing very well. Our single-serve business is more profitable than our multipack business. So that mix has an impact on our margins as we look at it in April. Now we have started to see some of that come back in traffic. The faster comes back, I think the better -- the more we're getting consumers back out, but we do see a temporary impact on mix. -------------------------------------------------------------------------------- Robert Frederick Dickerson, Jefferies LLC, Research Division - MD & Senior Research Analyst [5] -------------------------------------------------------------------------------- Okay. Good. Very helpful. And then I guess kind of potentially more broadly, if I think about some of that single-serve product not being sold. How would you say what's occurred over the past month or so, 2 months would change any near-term distribution strategy, marketing strategy, what have you for just Hostess and Voortman as a total company? I guess, basically, is there a way for you to react to try to place more align or shift into other channels, potentially you promote more versus less, just anything on a shifting strategy? And that's all I have. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- Yes. We are looking at that. We've seen our e-commerce sales, which is typically -- think about in the 2%, maybe slightly ahead of 2% of our sales. We've seen that spike more at some retailers than others. We've seen it quadruple. Think about it double. We're looking at reinforcing and some of the marketing efforts around their intercepting consumers, around the planning timing of where they shop. So that's going very well. We realigned some of our lines of production, so our channels can multipacks. Andy Jacobs and his team are working with our customers related to merchandising strategies. We're looking at things like Halloween merchandising, which is right up Hostess a sweet spot, of entertaining at home versus going out there and figure out how we can turn this into a positive. Also, we're not missing the opportunity as we're stronger in C-stores. There's some positives here as well. Some of our C-store customers are doing less around fresh bakery and more packaged. So the areas that used to be fresh donuts and pick and mix are now prepackaged. We're expanding our shelf sets during the time because we're there -- where maybe some other suppliers are not there. And so coming out of it, we're going to be stronger where consumers are driving more, maybe flying less. So there's a lot of opportunities we're taking. We're taking advantage of where we're doing really well. Our penetration is up 2 percentage points. We expect to keep those consumers because [we went through the bar with Hostess]. And then we're reestablishing a very strong base within our single-serve business. So there's a lot we're thinking about as we go forward that I fully expect to come out even stronger despite the temporary short-term mix. -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [7] -------------------------------------------------------------------------------- If I can make one more comment, I know we have other questions. You mentioned Voortman as well, Rob. Voortman, I believe, not as -- is not exposed to single-serve or impulse purchase. The majority of it is in grocery, and the majority is in full packaging. And we've seen that as a positive bump. We do not see any offset. We see it just as a really great tailwind coming out of our [deck]. It's a very well-executed distribution change. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from the line of Steve Strycula with UBS. -------------------------------------------------------------------------------- Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [9] -------------------------------------------------------------------------------- So I have a quick follow-up question to Rob's. And Andy, if I'm hearing you correctly, without getting into the nuances of pack size or channel. But if we just take a step back and just look at total volumes across the system. Should we think with all the impact from COVID in like late March and in April from what you see is total volume just net growing? Again, forget about what's happening underneath in the currents, but just like at the high level, are we just seeing net consumption still remain positive and encouraging? And maybe the reason for pulling guidance is more of like, call it, below the top line dynamics. I'll get into that in a moment with a follow-up. I just want to make sure I understand the holistic revenue piece first. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Holistic? Yes. No, thanks. There's a couple of things that impacted. Not all of our impact on some of our sales were related to -- there's some uncertainty in supply chain. There's uncertainty on the timing related to the mix. There's certainly uncertainty related costs. So hidden underneath here, Steve, for example, some of our customers' distribution centers have shutdown, disruption supply chain. We've had some distribution centers that have prioritized other products versus normal flow causing some out of stocks. It only takes one of our customers' distribution centers. So there's a lot of uncertainty on the supply chain. So that's one related to get product to the stores. The other is, we expect -- as the economy opens up, we expect a very quick rebound and maybe even more positive, I said, on the single-serve mix coming back. I can't predict the timing with the magnitude of when that will happen. The shorter it is, the better for us, and we will then come back stronger than when we went into it. But if it gets delayed longer where there's an opening and then maybe a pullback then it will impact us more. The level of those uncertainties related to mix, and that also impacts our manufacturing facility. We continue to work to keep our employees safe. We're doing a really good job about that. That's our #1 priority, but it still comes with uncertainty. So the combination of certainty of the timing and the cost and the timing of the mix impact is just too difficult for us to predict right now. Brian, you want to add to that? -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [11] -------------------------------------------------------------------------------- Yes. I would just say to kind of follow-up on that. We're seeing to kind of address the revenue in total. I think we are seeing growth. And I do think that from a price per case, where we'd sell single-serve relative to multipack mix shift, there may be a little bit of a headwind depending on how that shakes out week to week. And it's changing by the week as we look out in the future. But I think to your point, it's a little bit more below the revenue line on the mix side and on the cost side, what Andrew was just talking about. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes. We have greater than 91% consumer availability related to our distribution, greater than 10 points better than anybody in our category. We do very well. Our Dollar stores are going very well. Our food distribution is going very well. So we expect to continue to grow, come out stronger, but the mix is uncertain. Availability of our supply chains with uncertainty, cost is uncertain. All positive over the long term, uncertain in the short-term related to COVID-19. -------------------------------------------------------------------------------- Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [13] -------------------------------------------------------------------------------- Understood. And Andy, just to follow-on that. Are you trying to say, though, when you referenced the supply chain, clearly, consumptions are, at least, going well through April? So what I'm trying to understand, is there a disconnect between the shipments and what we're seeing at retail sale? Are you trying to say that supplier or retailers out there have some of their DCs closed? And so there might be some gap between shipments and sell-out. I'm not talking on a week-to-week basis. Just trying to look out as you think through the next few months. And then separately related to the integration for Voortman, how do we think of -- it seems like you're hitting a lot of key milestones. At what point will we be able to say that we've cleared the hurdles? And you've secured the warehouse and slotting space that you were seeking? And then investors can kind of rest assured that this integration has been executed well and is behind them. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- As U.S. transition is complete, knocked it out of the park. Canada transition is happening right now. We've secured the warehouse space with the majority of our customers, even some distribution that wasn't available via the DSD route. Canada is happening now. So we have been coming out. We're now establishing shelves for [vehicle]. We're fully operational through the warehouse in the United States. So Voortman, think about that within the U.S. We're now in the process of driving forward some of the additional synergies and get into the growth phase of Voortman. Related to the shipments, we did see -- as you know, the majority of our C-store goes through our distributor partners. So some of the impact of the decline in consumption lagged in the shipments in Q1. We'll see it more in Q2 than we did in Q1 just because there's a slight -- a couple of weeks lag given the fact that there's a distributor partner versus a direct to our customer warehouse. But as Brian mentioned, we're seeing that mix around down 10%, plus 10% on the multipack. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from the line of David Palmer with Evercore ICI (sic) [ISI]. -------------------------------------------------------------------------------- David Sterling Palmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [16] -------------------------------------------------------------------------------- Just wanted to follow up, and thank you for your comments on Voortman and on your mix shifts lately. For our own tracking purposes, is your business do you think in this next quarter, going to roughly track with what we're seeing in our tracked IRI channels? Obviously, there can be differences in terms of channel mix, what we don't see, but also the shipments. But how useful do you think IRI or Nielsen is going to be for this next quarter? And then I have a follow-up. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [17] -------------------------------------------------------------------------------- Yes. David, thank you. The tracking within the food channel is traditionally a little bit more accurate. We have a large distribution phase in independent. We're very good at it in the nontrack channels within C-stores, which is less accurate. We do see with all of that being said, directionally, what we look at some of the pluses and minuses. And look at our shipments to customers, not just the distributors and also look at our distributor, we do believe it's directionally correct. And that 10% to 15% range currently in April of single-serve range of being down over the long term is pretty -- is fairly close. So it's difficult for you to track is our distributor inventory. It's on a declining thing it can go up and down depending on the timing of things going down and coming back up. So that's a little bit more uncertainty. The 10% to 15% is a good range. I believe, C-stores 5 points off. Our food channels is probably close. -------------------------------------------------------------------------------- David Sterling Palmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [18] -------------------------------------------------------------------------------- Got it. And you made a comment about how you think things will get better as markets reopen. We have seen some reopening in places like Georgia, Texas, Tennessee, Oklahoma and more recently, Florida. Are you seeing improvement in these markets or even stories of improvement that would validate your hunch that reopening will help this summer? -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- To be honest with you, I don't have the precise answer on the mapping. It's a good question. What I have seen is over the last week or so, some improvements in single-serve and some of that channel specifically. I don't have 1 week does not make a trend, but we have seen some recent improvements. -------------------------------------------------------------------------------- David Sterling Palmer, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [20] -------------------------------------------------------------------------------- And then lastly, so the $20 million of -- we, at least, were thinking $20 million of synergies of -- well, profit -- incremental profit from Voortman's inclusive of synergies, I should say it that way, by next year. As you were thinking about all the puts and takes, you mentioned some of the costs associated with the Voortman's integration. But in terms of the timing and the synergies of that, is there any changes that we should be thinking about with regard to that Voortman's acquisition? -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [21] -------------------------------------------------------------------------------- Yes, I can take that one. So overall, we're pulling our guidance. So we're not commenting specifically on forward looking. But with respect to Voortman and kind of echo Andy's comments, we feel great about how the acquisition is going. The synergy number that we committed to -- so previously, we stated $20 million in EBITDA from Voortman. And previously, we stated $15 million of synergies between 12 and 18 months. We feel great about our progress on synergy initiatives. The transaction costs that Andy mentioned, obviously, those are really -- show adjusted EBITDA, those are added back. But we will see a cash flow save with those this year, so -- which is good. And -- but overall, I think the progress on the synergies, the line of sight to the synergies and the integration overall has been going very well. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Yes. We gave the guidance on '20 in February. I do agree with Brian. And I think Voortman relative to the risk equation, we're talking about single-serve. It's not exposed to that, and everything is positive. So I'm very comfortable that there's more -- less risk and more potential positives related to Voortman than the rest of our portfolio. As given the uncertainty of the DSD to warehouse transition in the U.S., which is 80% of that business. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from the line of Pamela Kaufman with Morgan Stanley. -------------------------------------------------------------------------------- Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [24] -------------------------------------------------------------------------------- I was wondering if you can elaborate on how the channel mix shift is impacting your marketing and innovation plans for the year. And is there any anticipated change to the timing of promotional events? -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- Yes. Specifically -- let me take the last 1 first. We have modified some of our promotional events. We pulled back some on the merchandising where we -- where we did need it. We're still looking at heavy displays. We're looking at reestablishing some of the merchandising activity of what we do very well related to LTOs and events to take advantage of the change in consumer behavior. We think we had some focus on consumers around the specific strategy. We're now reshifting that around potential e-commerce, the potential change of eating at home and entertainment at home. So we feel really good about that. Related to innovation. We're keeping the innovation going. The majority of our -- some of our customers are suspended relative to resets and innovation times. But some of us are -- some of them are full for ahead. We are looking at some of the activities that required some more in-plant engineering activity that we haven't been in, that we've minimized anybody in the plant other than -- and there are bakeries any -- other than essential. So there are some things relative to projects that would have required more capital or more engineering work within our facilities. We pulled back and delayed, but we replaced that with some other innovations. So I feel that when we go talk to our customers towards the end of the summer about our reset, I believe we're going to have a very good innovation slate, but it's going to be -- we're going to be focused more on the core and some line expenses here in the short term. -------------------------------------------------------------------------------- Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [26] -------------------------------------------------------------------------------- And then can you comment on whether you're seeing any impact from changes in consumer behavior on demand across various pieces of the portfolio like breakfast versus snacking versus Voortman? And then I guess as a follow-up, aside from the impact to margins from channel mix shift. Is there any impact to profitability due to a shift in the product mix across those categories? -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Yes. So a couple of things. So the consumer shopping across different breakfast versus snacking. So -- and then it's been more multipack versus -- it's been more impulse buy driven versus breakfast versus snack. We've seen our breakfast and snacking multipack business benefit and also Voortman benefit. Voortman business was up 9%, continues to drive strong takeaway as we move into it. So Voortman very positive. Sweet goods and also comfort foods, we see not slowing down and continue to elevate it. The impact is more related to impulse purchase and single-serve. So as a matter of fact, even though the channel in C-store is down, we still see relatively strong and growing performance in our bread business, for example, and our bun business as well as our donut business in that channel. Now it's not a -- so that's down. So it's more the impulse purchases of single-serve versus breakfast and snacking, which, in our multipack form are both doing very well. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from the line of Bill Chappell with SunTrust. -------------------------------------------------------------------------------- William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [29] -------------------------------------------------------------------------------- A couple of quick questions on back on Voortman. Did you quantify or can you quantify what the kind of COVID impact was on that business? Certainly, since it's more of a -- less of C-store store business, I imagine it had some stockpiling. And then as we look at this year, also with the change to the dollar versus even other currencies, is there any change to expectations, just I've forgotten how much of that business is it already in Canada. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Yes, Bill. We saw a -- the takeaway of the Voortman business in Q1, we saw a benefit of about 4 to 5 points just in takeaway. It was tracking at, I think, about plus 5 or so, plus 5.5 and ended the quarter at right about plus 9 in the back. So we saw a real big spike. And that was just before the COVID impact. And ironically, I know a lot of you were -- and myself included, we're thinking, boy, supply chain disruption happening just during the transition. Could that be a risk? It was actually a benefit because we accelerated the inventory out of our DSD partners onto the shelf because the takeaway was strong. And then we're able to come right back in with our warehouse shipments and fill the shelf. I think the reality is we probably lost. The out-of-stocks were a little bit greater than we had planned, but we're quickly catching that up in April. But that was the -- so the Voortman impact was positive. We see continued strong takeaway as we're getting out into the stores and expanding distribution. Now remember, we cut 40% of the SKUs in that business to go through the warehouse and now are moving forward with the strongest SKUs and expect strong transparent, strong focus, strong efficiencies down the plans from doing that and then accelerating through the growth as we get into the back half. I'll let Brian deal with the exchange rate. The U.S. is about 80% of the takeaway on that. -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [31] -------------------------------------------------------------------------------- Yes. So the U.S. business for Voortman is roughly 80% of the sales. So the Canadian sales the remaining 20%. Broadly, just kind of looking at the puts and takes, the cost base that sits in Canada roughly offsets that. So the currency exchange rate impact is not meaningful. -------------------------------------------------------------------------------- William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [32] -------------------------------------------------------------------------------- Okay. And then just following up, again, on your kind of comment on the recovery of the C-store channel. I understand more people staycations or not flying, but I mean, is that really is families and stuff like that, really the core C-store customer? Or do we really need more kind of pull -- people getting back to work and traveling for work purposes to get that business back to normal? -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- No, we need people getting back to work, Bill. That's -- the fewer cars, lower gas prices over the long-term in normal situations, static comparative situations. Those are positive benefits for Hostess, which also, by the way, does well in boom economies and [the brand] Hostess is a very accessible price point. Low private label penetration. We've seen private label move up in some categories, not in this category, so we're well positioned regardless of the speed of the economy pullback, but that was on top of -- we need to get the economy back at the core of the C-store. So I didn't need to say that would offset it. We need to get the economy back for those impulse C-store purchases. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Our next question comes from the line of Ken Goldman with JPMorgan. -------------------------------------------------------------------------------- Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [35] -------------------------------------------------------------------------------- You mentioned that you pulled back on merchandising. We're getting some mixed signals on where the promo environment goes from here. We can see in the data feedbacks across the industry are lower than they were a year ago, right? Grocers are saying there's no need to discount in this environment. But we're also starting to hear about some grocers, maybe who have their act together a little bit more getting frustrated as vendors rescinded events that maybe that didn't -- that weren't supposed to happen. So I'm asking, I guess, what are you seeing today in that promo environment at large? And is there any appetite from your customers to build sort of that whole structure, whether it's discounting or features or displays back again? -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [36] -------------------------------------------------------------------------------- I think you -- I think the mix signals that you're commenting on, Ken, are related to -- our customers are all different. And as we go forward, I think one of our strengths at Hostess and Andy Jacobs' teams is our collaborative relationship with all of our customers. So we're reevaluating all of the programming to make sure that we do it as efficient as to profitably grow for all of our customers. We have some programming that it place didn't make sense. We're realigning. And we have some programming that we're calling back. So we're not 100% full. We are now going through a dramatic change. We're talking to each customer and figuring out how to best profitably grow. If you remember, our -- just in general, our -- we had planned as we had gone through the transition to -- we weren't as strong merchandising in the -- had planned in the first quarter as we come out. So I think each of our customer relationships is a different discussion. I think that's the way -- the best way to say it. -------------------------------------------------------------------------------- Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [37] -------------------------------------------------------------------------------- Okay. No, that's helpful. And for my follow-up, I can only imagine how hard it is to run a business, let alone give guidance in this environment. But you do seem to have a good grip on a number of items, right? You know what your margins are on a per product basis. You know what your sales are right now for multipacks and single-serve. The Voortman's integration has gone well. So as we think about modeling the second quarter, I know you're not giving guidance, but I'm going to poke around this area anyway. Can you give us any sense of where you think your margins might be, even if just broadly? I mean, I think you're making it very apparent that they need to come down versus expectations for this quarter, thanks to mix and costs. But you're also excluding your direct COVID costs from your EBITDA. So I'm not quite sure even that's a big swing factor. Just any help on that line and the EBITDA margin line would be, I think, very helpful to avoid some uncertainty as we think about the second quarter. -------------------------------------------------------------------------------- Brian T. Purcell, Hostess Brands, Inc. - Executive VP & CFO [38] -------------------------------------------------------------------------------- Yes. As it pertains to the second quarter, I think we are seeing -- we have visibility in those items some of those items that you mentioned. But there's a lot of things that are moving kind of week to week on the cost side, even some of the channel mix is moving week to week. So it's too difficult to kind of pin down and give you an accurate range for Q2. But I do think that with respect to Voortman, in particular, that Andy highlighted, I think that's going great. We -- in terms of the benefit of Voortman, they're really going to hit the stride in the second half, but we do -- we will see a better impact from them on the bottom line as we move into Q2 as well. So just overall, in terms of visibility, it's too difficult to quantify right now. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question comes from the line of Brian Holland with D.A. Davidson. -------------------------------------------------------------------------------- Brian Patrick Holland, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40] -------------------------------------------------------------------------------- Most of my questions have been answered. So I'll just ask, do you have any insight into what kind of the household penetration trends were because if maybe you're losing some high-touch customers in the C-store channel, but you're still kind of consumption growing. Maybe that means more trial, more households, just buying a little less frequently. I'm just curious -- and obviously, there's positive implications that if you're growing household penetration for ability to retain customers, et cetera. So that would be my first question. And then just kind of a separate one, I'll ask and you can tackle this. To what extent have you seen benefit from kind of the In-Store Bakery, more or less being shut down certainly in grocery stores? And maybe to some extent, C-stores, I understand that there's some traffic pressures there weighing on that. So I'm wondering to what extent that may have given you a lift in the quarter. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- Brian, thanks for the questions. The household penetration is up nearly 2 percentage over the last 4 weeks, which I feel great about. We all know how difficult it is to get household penetration products that consumers love high-brand awareness, get an opportunity to be reintroduced. We have high loyalty. I feel great about that over the long term. And how do we continue to engage that. This -- so related to In-Store Bakery. In-Store Bakery within the grocery stores, they have other alternatives related to ISB. We've also seen within the C-store, our -- Andy Jacobs, Scott Ward, that team to the best C-store team in the business. They've been sending me tons of photos related to having packaged bakery potentially sitting in donut sections that used to be fresh because consumers don't want to come in and mix and match or they don't want the customers to be handling it. Now how that changes over the long term, that could be one of those structural changes that would benefit our business if there's less of a trend around fresh baking within stores. I think that's potentially more of a convenience and smaller store opportunity. We're very strong, by the way versus the potentially grocery, which already has established In-Store Bakery business. So that's why I'm thinking about it. Now obviously, we're getting our hands around a fast change, but it does look like a potential positive of prepackaged baked goods versus the historical fresh out exposed high-handle bakeries. But there's a lot of opportunity to understand and learn more from that. And our team is all over it looking the way we can better serve those customers in in the current and post-COVID environment. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Mr. Callahan, I'll now turn the call back to you for closing remarks. -------------------------------------------------------------------------------- Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [43] -------------------------------------------------------------------------------- Good. Thank you so much, and I appreciate everybody's interest in Hostess. We are proud of the dedication and resilience of our team as they react quickly and efficiently to the changing environment we are all facing. Hostess' capabilities, agility and performance culture give us confidence that Hostess will emerge from this time stronger and better positioned for the long term, sustained, profitable growth. Thanks for your interest in Hostess, and stay safe and healthy. Have a great day and great weekend. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.