CFO Of Hostess Brands On The Emergence From Bankruptcy And Competitive Advantage

CFO Of Hostess Brands On The Emergence From Bankruptcy And Competitive Advantage
By Evan-Amos (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Hostess Brands (TWNK) is the iconic baker of Twinkies, Ho Hos, Zingers, and many other American classics.  The predecessor, Interstate Brands, went bankrupt a few years ago and the Hostess brand and certain strategic assets were acquired out of the bankruptcy liquidation by Executive Chairman Dean Metropoulos and Apollo in 2013 and the succeeding company began trading publicly in 2016. Hostess is being led by management that has extensive experience in the food and beverage world.   We sat down with CFO Tom Peterson to learn more about the company.

Hostess Brands essentially started back over from scratch as it purchased assets out of bankruptcy, transformed its business model, and invested in the business.  About $1 billion of the old company, Interstate Brands, was sold out of bankruptcy.  Flower Foods bought Wonder Bread and Apollo and Dean Metropoulos purchased the Hostess and Dolly Madison Brands.  Metropoulos has made a name for himself as a turn-around artist with involvement in in Pabst Beer and several other similar deals.  He is very active in management of Hostess and his sons offer ideas too Metropolous and his holding companies own about 24% of the company.

2016 sales were $727.6 million and guidance for 2017 is $781 million.  If this target is achieved, that’s pretty good growth.  Ebitda margins are about 29% and are expected to stay there.  Management has an eye for controlling costs.

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I asked Peterson what the company planned to do with its free cash flow.  The first priority is M&A—purchasing new businesses.  He said that Hostess didn’t need to build out more bakeries as the company has invested heavily in state of the art manufacturing technology and automated packaging for its three existing facilities.  The second priority is to pay down debt of which there is close to $1 billion.  The debt was to fund the purchase of the business and fund a dividend to equity owners in 2015.  There is no guidance to pay a dividend nor do I think the company will pay one anytime soon.

There are three growth channels Hostess focuses on.  The first is distribution—getting its products into stores and increasing its shelf space.  Hostess is in Wal-Mart, Costco, Dollar General, and hundreds of other grocers.  It’s even in Amazon.  According to Tom Peterson, it is the only national sweet baked good on Amazon.  I verified that Twinkies are on Amazon here.  The second is innovation like the White Fudge Covered Ding Dongs and Peanut Butter Ho Hos.   The third is white space which is new distribution channels like in-store bakeries which we’ll discuss later in the article and innovation into other parts of the grocery store, such as Deep Fried Frozen Twinkies.

There are two series of stock—an A share and B share.  Both have equal voting rights.  The B shares are held by the founders of the new company and are convertible into A shares.  There are 37.5 million public warrants and 19 million private warrants outstanding.  There are 99.3 million A shares, 31.1 million B shares, and 7.5 million shares that may be issued if certain guidelines are met.  So there are 137.9 million fully diluted shares.  I know it’s a little confusing so I’ll use the company’s number of 137.9 million fully diluted.

Of the $160 million in capital expenditures spent to upgrade the bakeries, much has gone into capital and cost efficiency, such as additional lines and automation.  It only takes 10 employees to run the Twinkie line in Emporia, Kansas.  Hostess’s Emporia location produces approximately 60% of Hostess’s total products.  The company’s other Hostess bakeries are in Indiana and Georgia.

What gives the company a competitive advantage?  According to Tom Peterson, Hostess is investing in innovation to fuel growth opportunities while competitors are not investing enough in new ideas and only keeping up with population growth.  Tom Peterson was kind enough to give me a sample of the company’s chocolate, peanut butter Twinkie.  The peanut butter concept is new and is being manufactured at its Indiana bakery.  Just to remind you, some of Hostess’s brands include:  Ding Dongs, Ho Hos, Twinkies, CupCakes, Suzy Q’s, Zingers, and SnoBalls.

In 2016, Hostess acquired Superior on Main, a bakery located in Massachusetts.  The line opens the in-store bakery channel.  These are freshly baked items, such as eclairs, brownies and cream puffs, that are usually close to the deli in a grocery store.  What you think is store baked is often times baked by a vendor like Superior.  Superior is in Whole Foods, among many other stores, primarily in the Northeast and the company is rolling out the line across the country in conjunction with the launch of Hostess Bake Shop.  The bakery has a gluten free for people watching their wheat intake.  Management at Hostess is not aloof to the fact that this is high calorie food and has come out with some “better for you” items like whole grain muffins.

We offered the idea of producing protein bars, which seems like a hot item these days.  Tom Peterson opined that if Hostess ever wanted to get into the space, it would have to buy a brand that’s already in operations.  Starting from scratch would require a whole team to develop and produce.  The current team of salespeople focuses on sweet baked goods and in-store bakery, not health food.  It makes sense.

Dean Metropoulos is an interesting guy to follow.  He’s bought and turned around Pabst Beer, Bumblebee Tuna, Ghirardelli Chocolate, and several other brands.  His sons are involved too.  You can look them up—one of the sons bought the Playboy Mansion  Metropoulos is not quite like 3G in Brazil where he cuts costs because he’s coming in and buying many of these brands when they are declining or failied3G is buying great companies and making them more profitable, but less focused on growth.

The stock trades for $16.15 and the listed market cap is $1.603 billion.  When you look at the diluted market cap, it is $2.227 billion.  So you are paying 2.85 times this year’s projected revenues.  I like the company and like what management is doing.  Management has a lot of experience working at blue chip food and beverage companies and are incentivized to make a profit.  Hostess is a stock to follow.

Article by Holmes Osborne CFA

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