Milling & Baking News - September 12, 2017 - 10

Business X

Hostess Brands' 'race for space'
includes innovation, new channels
Continued from Page 1

average in stores, Mr. Toler said,
which compared to about 26 or 27 that
the old Hostess had.
"So, we've still got some room to
go there," he said. "But more importantly, it's not just the items, it's
the productivity of the items, it's
the velocity of the items. And we've
been able to put out new innovation,
new products, line extensions, new
brands, sub-brands that are adding
to the breadth and depth of the company and something that we're very
proud of. We now sell more Twinkies
than (the old Hostess) ever did, and
it's a product and a business that essentially is the signature of the company and a product that we believe
has enormous equity within consumers today."
The company's innovation in
2017 has included cinnamon sugar
crunch Donettes, white fudge Ding
Dongs, chocolate peanut butter
Twinkies, chocolate cake Twinkies,
Golden CupCakes and peanut butter
Ho Hos.
"In '17, it's important in (consumer
packaged goods) to innovate," Mr.
Toler explained. "It's equally important to renovate as you make sure each
of your products on the shelf represents the best offering you can make to
consumers. The Chocodile, we've replaced and upgraded the
quality of that product,
both with the coating and
the size of the cake underneath. We've moved our
pies to a one-out singleserve 100-calorie offering. We're working the
brownies. We're moving
out of the Mars relationship and moving into a relationship with Nestle on
Butterfinger and also one
with Mondelez on Oreo."
Another area of opportunity for
Hostess lies within the Suzy Q brand.
Mr. Toler said the company launched
Suzy Q with a certain baking format
that worked out "okay," but he acknowledged that Hostess probably
should have made the product the
way the old Hostess did.
"We're going back to that (old formula) in January," he said. "We should
have a great Suzy Q year next year."
As the company looks to expand
market share, it will be important
10 / September 12, 2017 XMilling & Baking News

to continue to drive penetration in
channels that have been unlocked
by Hostess' warehouse model, including food service, small format
stores and in the in-store bakery, Mr.
Toler said. The in-store bakery, especially, holds intrigue for Hostess in
part because it's about an $8 billion
category.
"It's actually growing faster than

'We're highly, highly
focused on
executing
an M.&A.
strategy.
We've looked
at two or
three deals this year. '
- William D. Toler,
Hostess Brands, Inc.

sweet baked goods is in the packaged
cake aisle," he said. "Seventy-two per
cent of that is desserts and sweets, and
opportunities for us. We've got products like the CupCake cookie, which
has the signature squiggle on essentially a black-and-white type cookie...
under the Hostess Bake Shop."
Hostess also is offering "a big
Twinkie," which is a 17oz Twinkie that's being
offered to in-store bakery
customers in a format that
Mr. Toler said the company thinks is going to
be "quite interesting" at
retail.
Another new offering
that just launched in Costco stores, primarily on the
West coast, is Donettes in
a tub.
"This category has not
had much packaging work in the last
15 years, and so I'm excited to bring
out better, more innovative upscale
packaging," he said.
In addition to innovation, Hostess
has its sights set on mergers and acquisitions. Mr. Toler said the company
is focused on potential targets that
meet the following criteria:
* leverage Hostess brand and/or
warehouse model
* expand baking capabilities, including further into in-store bakery, or

move into attractive, adjacent categories
* facilitate building Hostess' scale
as broader snacking platform
* provide cash flow and earningsper-share accretion.
During the presentation, C. Dean
Metropoulos, executive chairman of
Hostess Brands, provided more detail
on the company's M.&A. strategy.
"We're highly, highly focused on executing an M.&A. strategy," Mr. Metropoulos said. "We've looked at two
or three deals this year. Rather than get
into details, we passed on one where
we had an exclusive on and our advisers found a challenge that allowed
us to pass. We're looking at a couple
of things as we speak. We'll look at
things that are very close ... into our
existing sweet goods category.
"We made a small acquisition (Superior Cake Products) about a year
ago in the very large in-store baking section. ... That deal we bought
at around 10x, but we knew going
in that we would have some very
significant synergies. This year,
we've bet 10x with synergies within
6-month delivering those synergies.
It's averaging about 6x to 7x multiple on that deal. We're trying to understand and learn that in-store baking section more. We had to make a
management change, which we did
a few months ago. In-store baking is
highly fragmented. We learned that
a brand may not have quite the momentum that we would like to think
Hostess would have, but I think it's
a much more hearty, more organic
place to sell, and I think we're going
to see that as a growing opportunity
in our focus as we go forward. It's a
highly fragmented business, probably about 100-plus suppliers to that
category, including the in-store baking. We will continue to look at that.
We are looking at some close-in ideas
that are branded, and I think we will
be looking at something like that in a
very short period of time.
"We looked at a food service business that we passed on not too long
ago, partly because ... we thought it
would dilute the efforts of the overall
company. But we're all over the acquisitions. I can assure you when the
time is right and we have the right opportunity, we will be disciplined. We
will deliver when we speak about it.
And delivering for us is a six-month
play, not a two-year play. So clearly,
acquisitions will be an important part
of the future while also focusing on
organic growth." MBN
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Milling & Baking News - September 12, 2017

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