Hostess Brands – Strategic Update & Mid-term Outlook –
18 February 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Dean Johnson (DJ)
Former Director, Sales, Foodservice at Hostess Brands Inc (Gores Holdings Inc)
Agenda:
1. Snacking vs health and wellness tailwinds and US sweet baked goods category update
2. Hostess Brands' (NASDAQ: TWNK) portfolio and brand review, including growth strategy, channel
penetration opportunity and innovation
3. Update on Hostess's Voortman cookies acquisition and distribution gain potential
4. Mid-term growth and profitability outlook
Contents
Q: What were the key pre-coronavirus trends relevant to Hostess Brands’ core categories across sweet baked
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goods and cookies?
Q: How would you say coronavirus impacted the trends you outlined?
Q: Hostess has experienced weakness in its single-serve product offerings. When do you think there will
start to be a recovery in that area, if ever?
Q: Could you give a brief overview of Hostess Brands US’s snacking portfolio? What is the rough sales split
across the Hostess brand and other brands?
Q: What is Hostess’s exposure to private label? You mentioned the previous acquisitions.
Q: What are the key segments and products Hostess plays in?
Q: Hostess’s sweet baked goods division has performed well for some time, excluding the Voortman
acquisition. What do you think was the reason for this growth?
Q: Hostess has benefitted from the stay-at-home consumer dynamic. What are your expectations for sweet
baked goods sales post-pandemic? Should we expect declining or relatively flat revenues?
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Q: Hostess boasts brand awareness of over 90%. What implications do you think that has for Hostess’s
ability to attract new customers? You said it wouldn’t perform well in an environment where kids are going
back to institutions.
Q: Could you elaborate on Hostess’s core consumer demographics? Do you think it is well-placed to sell to
Gen Z?
Q: You mentioned that Hostess perceives the breakfast category as a key area of expansion and innovation.
Is it overstating or understating the overall opportunity in this category?
Q: What are your overall thoughts on the Hostess breakfast innovation pipeline?
Q: What is the strength of Hostess’s e-commerce presence? What is your outlook for the channel?
Q: Could you name some of the other key market players? Hostess notes it is the second largest brand by
market share within the sweet baked goods category.
Q: Do you think private label is a threat? How big of a threat is it?
Q: How strong is brand loyalty to Hostess products?
Q: Hostess operates in a direct-to-warehouse product distribution system. Are there any benefits to this
model? How does it differ from other industry players?
Q: Could you give a brief overview of the Voortman portfolio?
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Q: What do you think was the strategic rationale for Hostess to acquire Voortman? What are the key drivers
of this business? How does it differ from Hostess’s core business?
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Q: What do you think is the TAM for Voortman within breakfast relative to other categories? How could its
portfolio be geared towards breakfast?
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Q: What do you think of the overall decision to purchase Voortman?
Q: What are the trends in sweet snacking regarding health and wellness? Can you elaborate on the granola
bar trends?
Q: Do you think Hostess is adequately preparing for the accelerating consumer shift towards health and
wellness?
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Q: How do you think Hostess can build a meaningful presence in fresh, unprocessed foods, given consumer
preference for this category?
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Q: Which brands or products within the Voortman portfolio would you say fall under the category of health
and wellness?
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Q: Do you think offering sugar-free items alone is enough to adjust to consumer trends of healthy eating
habits?
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Q: What do you think are the best- and worst-case scenarios for Hostess Brands over the next six months? 11
Q: Is there anything you think investors should know about Hostess Brands’ management team and their
ability to execute on priorities?
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Hostess Brands – Strategic Update & Mid-term Outlook
Transcription begins at 00:01:27 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled Hostess Brands – Strategic Update and Mid-term
Outlook. I’m Nyree Hinton, and I will be facilitating today’s Interview with Mr Dean Johnson, former Director
of Sales Foodservice at Hostess Brands.
Dean, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
DJ: I agree.
NH: Thank you, Dean. Could you start by giving an overview of your background and the various roles you’ve
held in the industry?
DJ: I have spent roughly 28-29 years in the CPG, consumer packaged goods, industry, typically, all of it,
almost all of it, on the food service side, so think of food away from home, selling into restaurants, schools,
broadline distributors like Sysco US, Reinhart, Gordon Food Service. Predominantly, most of those years have
been, I would say 20 of those years have been, in the commercial bakery segment, so Sara Lee, Aryzta, and the
brands that you would know from Aryzta are Otis Spunkmeyer and La Brea Bakery, and then, of course, I
spent some time at Hostess. All of that time, I either was an individual contributor who called on specific
customers or customer groups, or I was a team leader who managed a sales team within the food service
segment.
[00:03:40]
Q: What were the key pre-coronavirus trends relevant to Hostess Brands’ core categories across sweet baked
goods and cookies?
DJ: I’ll go with maybe three trends. One of them is consumers are looking for more premium bakery items.
Think of walking into a Starbucks or walking into a Panera Bread, and the bakery cases that you see there,
those are what consumers are looking for, higher-end, more premium, any of those type of items, as well as,
let’s say, a typical food service operator in the restaurant and dining channel, those consumers and those
restaurant operators are looking for easier options in that premium category. That’s gone on for a number of
years. Think of high-end cheesecakes, high-end desserts, having the right mix of items on the menu. More
premium baked goods. Then secondly is the need for healthier options, especially in the snacking and even
sweet baked goods categories. Think of, in the grocery store, in the cereal or granola aisle, so granola bars,
Kind bars, Clif bars, so items that have fewer ingredients, more wholegrains, less sugar, a smaller ingredient
statement. Then I would say the third thing is more innovation. You see that with, I would say, the Kind bar,
again, a simpler ingredient but that was a little bit of innovation there, targeting the right customer
demographic. I think one area that Hostess does play well in, I wouldn’t necessarily call it full-blown
innovation, but what they do with LTOs, so limited time offerings or seasonal offerings. Think about cupcakes
in the summer that are frosted to look like a baseball, so more of those type of themed LTOs, that’s a piece.
Those three things, more premium, healthier options and then innovation. Consumers don’t just eat three
meals a day anymore. Because they’re travelling more, prior to COVID at least, they tend to snack more times
throughout the day, so they’re looking for something that’s easy to carry, easy to pack in a lunch, easy to throw
in their car and go, so it’s a Clif bar, a granola bar, maybe it’s a Pop-Tart. Those are three right there.
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[00:07:18]
Q: How would you say coronavirus impacted the trends you outlined?
DJ: I don’t think those trends have changed, certainly the channels that consumers shop in, so think of all of
those food service operators that have been closed. I’m here in Michigan, so we are only allowing 25% of
consumers into on-premise dining or to sit down in a restaurant right now, so that’s not yet come back. Those
operators are closed. Then in retail, you’ve got two groups. You’ve got small stores, so think of convenience
stores, the Speedway gas stations, those took a big hit in March, April and May and have slowly come back, but
where everyone is shopping now is large store retail. For me, in Michigan, it’s Meijer, it’s Kroger, it’s Spartan
stores, Aldi, those larger grocery stores. I don’t think the trends have changed but certainly the way that
consumers are getting their food and beverages, their snack cakes, that’s changed. The need for more premium
items, healthier options, innovation, that hasn’t necessarily changed, and even more so, through COVID, what
we’ve seen with consumers is they fall back to brands that they can trust, brands they know, Heinz,
Campbell’s, Coca-Cola, Pepsi, Hostess, especially with more people shopping online. Again, in my area, Meijer
and Kroger and Walmart all have full-standing online ordering platforms now, so when consumers are doing
that, they’re choosing brands that they know, brands that they trust. I don’t think that the trends have really
changed through COVID, just the shopping patterns have really very much changed.
[00:09:47]
Q: Hostess has experienced weakness in its single-serve product offerings. When do you think there will start
to be a recovery in that area, if ever?
DJ: I think the recovery won’t start until H2 2021, and maybe you can see it through there and through into
2022. For instance, all of the folks that work in offices are now home. What we’re being told is, slowly, in H2 of
the year, companies are going to allow a smaller percentage of their office workers to come back. That’s going
to be the start of it. There may be companies that keep a certain amount of remote workforce in place for years
to come, and that’s definitely going to affect everybody’s small store sales. You’re going to have fewer people
on the roads heading into an office, and so their business will most likely, all companies are trying to figure out
how they can better execute, better perform in a large store, knowing the food service channel is completely
different than it was a year ago and small store is going to be slower to come back. I think that’s what we’re
going to see in small store.
[00:11:27]
Q: Could you give a brief overview of Hostess Brands US’s snacking portfolio? What is the rough sales split
across the Hostess brand and other brands?
DJ: I think a good estimate, now we’re including Voortman as well, it’s probably about 70% Hostess-branded
items. When you’ve got Dolly Madison, which is really the same line-up of items but it’s geared towards
vending, so there’s a little more aggressive price for the vending operators, it’s a less-margin item. They also
purchased Cloverhill from Aryzta, in I want to say 2018 or 2017. That Cloverhill brand, it’s a smaller brand, it’s
one bakery out of Chicago, and then with Voortman, so I would say about 70% Hostess, Voortman being the
newest piece of that acquisition.
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[00:12:54]
Q: What is Hostess’s exposure to private label? You mentioned the previous acquisitions.
DJ: I guess it’s not a lot. For instance, in large store, you don’t really have any private label snacking items in
that aisle. Move over to 7-Eleven, they, they being Hostess, lost a bunch of items to a 7-Eleven-branded
cupcake and snack cake portfolio, and I think they were produced by Flowers. I’m almost positive of that.
There is definitely a risk there, and all companies have that with private label, and I think what Hostess has
done is they’ve gotten into a little bit of the private label business with Aldi, where they’re doing, right now,
mini muffins in a small package through Aldi. Yes, there’s risk there, but they could also lean more into private
label and try and execute in that area too.
[00:14:15]
Q: What are the key segments and products Hostess plays in?
DJ: Think snack cakes, your Twinkies, Ding Dongs, CupCakes, everything you see in that grocery bread and
snack cake aisle, and then a little bit of breakfast items. They recognised a few years back that breakfast was a
key segment, is a key snacking segment. Hostess has done Donettes, the mini doughnuts, for a long time, and
then they got into regular, what they call, Jumbo Donettes which is just a regular size doughnut, that was a
couple years ago as well, so they sell those as a single serve with two Donettes in a pack. Breakfast being
Donettes, Cloverhill-branded Danish, the Cloverhill Big Texas Cinnamon Roll and then a very small amount of
muffins. That’s really where you see a lot of the breakfast segment going, is to that muffin category. Cloverhill,
for example, that is not a premium snack item, it is not premium, and the reason I say that is it’s something
that’s sold into the prison channel, so it’s as inexpensive, low margin as Hostess can produce. I don’t know that
that’s ever going to be a big growth driver for them. Those are the segments that they play in, as well as cookies
with their Voortman acquisition. With cookies, it’s the store-bought baked chocolate chip, oatmeal raisin,
sugar cookies, and then all of their different, I don’t even know what you want to call it, the wafer cookies is
the best way to describe that. Snacking with snack cakes, breakfast items and then cookies are their segments.
[00:16:41]
Q: Hostess’s sweet baked goods division has performed well for some time, excluding the Voortman
acquisition. What do you think was the reason for this growth?
DJ: I think they do a lot of things well, and I’ve got to believe operational efficiencies is absolutely one of
them, making sure that the bakeries that they own and operate, they run at full capacity and they’re very
efficient. I know that they put a lot of time and effort into that. When they came out of Chapter 11, and this is
five or six years ago, there was a little bit of a pent-up demand for Hostess products because consumers
thought they were never going to be able to find a Twinkie or a Ding Dong again, and that wasn’t the case. I
think there was a one or two month lull in production and then a couple of bakeries started up again and they
spent a lot of time making sure they were operating really at 100% capacity and operating efficiently. That’s
one reason. I think the other reason is they’ve done a good job of putting support behind the right type of
customers, not just large store but small store customers as well. Walmart, Kroger, Sam’s Club, Costco, the big
box stores, the big supermarket chains and then small store convenience chains like Speedway, they’ve done a
good job with partnering with them and supporting them in the right way.
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[00:18:35]
Q: Hostess has benefitted from the stay-at-home consumer dynamic. What are your expectations for sweet
baked goods sales post-pandemic? Should we expect declining or relatively flat revenues?
DJ: I think there’s definitely a chance that Hostess is going to run into declining revenues. The reason I say
that is, best-case scenario, things open back up in the summer. You’re going to have more folks that are willing
to eat out again. They’re not going to be shopping in large store as much as they were. If they’re travelling, they
will be shopping at small store. That could benefit with Hostess’s single-serve items, but where Hostess has a
lot of trouble is that food service operator. Once the fall hits, and kids get back in school, again, knock on
wood, whether it’s high school or college and university, that’s not a channel that Hostess does well in. You’re
going to have those consumers, those shoppers, spending more time in K-12 and college and university, they’re
not going to be buying multi-serve packs from large store, so there’s definitely a chance for declining revenues.
[00:20:15]
Q: Hostess boasts brand awareness of over 90%. What implications do you think that has for Hostess’s ability
to attract new customers? You said it wouldn’t perform well in an environment where kids are going back to
institutions.
DJ: Hostess is an iconic brand. It’s been around for 100 years. I think their big hurdle, moving forward is, yes,
it’s a very recognisable brand, they’re selling into small store, convenience stores to the 18- to 34-year-old
male, who’s looking for a quick snack in the middle of the day, and then they’re also selling into large store, to
the mum who’s shopping for the pantry and providing snacks for the kids, those consumers have a lot of great
brand awareness but that’s not the millennial shopper, that’s not the gen Z shopper, they’re looking for
healthier options. 5-10 years down the road, that’s where they’re really going to have to think hard and come
up with the right strategy to penetrate that gen Z, the kid who’s 20-25.
[00:22:07]
Q: Could you elaborate on Hostess’s core consumer demographics? Do you think it is well-placed to sell to
Gen Z?
DJ: I think that’s going to be tough for them because, like I said, it’s been around for 100 years, it’s great
brand, and probably a lot of the folks that buy them are my parents’ age, in their 80s, and it’s not necessarily
that gen Z, and they’ve got to try hard to figure out how to tap into that market. It might not be with the
Hostess brand, it might have to be with another brand, and I think maybe that’s part of the Voortman’s
acquisition, but they’ve got to figure that out, they’ve got to figure out where is that consumer going? If it’s a
healthier, better-for-you snack option then they’ve got to come up with that, and it might have to be in a
different brand. For instance, Kellogg’s came up with the Nutri-Grain bar, so consumers, they recognise the
Nutri-Grain brand, they might not know it’s tied to Kellogg’s even though it probably says Kellogg’s on the
back of the label. A better example is, and this has only been around for a couple of years, it’s called BelVita.
It’s a funny name, but it’s a snack bar, it’s a wholegrain cinnamon or wholegrain chocolate chip, and that’s a
Kraft or Mondelēz brand that they grew from the ground up, basically. I think what they did was try to come
up with a different brand that would connect with consumers of a certain age, gen Z, that wasn’t tied to the
Kraft brand or the Nabisco brand, and I think they did a good job with that. That’s what Hostess has to figure
out.
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[00:24:39]
Q: You mentioned that Hostess perceives the breakfast category as a key area of expansion and innovation. Is
it overstating or understating the overall opportunity in this category?
DJ: No, they’re spot on. Breakfast snack items, it’s grown and grown. Like I mentioned earlier, Starbucks and
Panera, those two operators are a big part of that. Everybody has got to get their Starbucks coffee in the
morning, what a better way to add on a muffin or a morning bun, things of that nature. Absolutely breakfast is
growing. I think that’s one reason Hostess acquired the Cloverhill Bakery. It’s a good option for them, but
again, consumers are looking for more premium and Cloverhill is not necessarily that more premium. It does
fit into the convenience store segment, it fits into the prison channel. They’re right, yes, breakfast is a growing
segment.
[00:26:04]
Q: What are your overall thoughts on the Hostess breakfast innovation pipeline?
DJ: I think it was okay. Like I mentioned before, they went from a six-pack of mini Donettes to the two single-
serve pack of Jumbo Donettes, so they’ve recognised that. Muffins were a part of that innovation strategy
when I was there, it’s just we didn’t really have enough time to get it up and running. The muffin line-up that
we went with was done by a co-packer, so outside the organisation, smaller runs, it was never going to make
the kind of margin that Hostess was really looking for. I think they’re on to something. They’ve got to grow
that daypart, they’re just not there yet.
[00:27:07]
Q: What is the strength of Hostess’s e-commerce presence? What is your outlook for the channel?
DJ: As far as the channel goes, it’s only going to grow and grow. Think of Amazon, think of the grocery
retailers I mentioned earlier, like Walmart, Meijer and Kroger, and this just happened in the last year, they’ve
got their online platforms up and running. I don’t think that many people are going to go directly to Hostess to
purchase snack cakes, you’re going to go to Amazon or you’re going to go to Kroger because you’re buying
other things there. You’re not typically going to pull out a separate website for Hostess just to get snack cakes.
I just don’t think that’s a real option. Where they need to spend their time is partnering with the right type of
e-commerce experts, like Amazon, like Walmart, which they probably already do, or somebody like GoPuff. I
don’t know if you’re familiar with GoPuff, but they’re popping up in every college market. They’re like the
Amazon for snack foods for college students. A college kid that doesn’t have a car, who’s living in Ann Arbor
and going to the University of Michigan, he can get onto GoPuff and order sodas, bottled water, snacks and
cookies and pretzels and stuff like that. Those are the e-commerce partners that Hostess needs to target, and it
seems like a much easier challenge than trying to set up their own e-commerce site, to me.
NH: I haven’t heard of GoPuff, but it seems interesting.
DJ: They’re new. They’re great, but they’re new.
[00:29:39]
Q: Could you name some of the other key market players? Hostess notes it is the second largest brand by
market share within the sweet baked goods category.
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DJ: You’ve got McKee Foods, their brands that you would recognise are Little Debbie and then Drake’s, and
then you’ve got Grupo Bimbo, which has some of the Sara Lee-branded snack cakes and then their own
Bimbo-branded snack cakes, and then I would say after that you’ve got Flowers. Flowers produces Mrs
Freshley’s and then they purchased Tastykake out of Philadelphia eight or 10 years ago. Those are the other
three big players.
NH: What advantages do you think Hostess has over those competitors in this segment?
DJ: They’ve got the most iconic brand of those. Little Debbie, they’re pretty well-known, but they focus more
on their I think it’s called Nutty Buddy, they’re that wafer bar but larger than, say, a Voortman’s cookie, and
then Little Debbie does the Oatmeal Cream Pies. I think Little Debbie, they promote at a lower price so they
probably make lower margins, where Hostess holds to a little bit higher price, a more premium price above
those other competitors and they make good margin on it. Again, the brand there is really everything.
[00:31:48]
Q: Do you think private label is a threat? How big of a threat is it?
DJ: On private label? It’s not a threat in large store but it definitely is in small store. Like I mentioned, the 7-
Eleven moved to a private label, their own 7-Eleven-label cupcake, and so that’s where somebody like Flowers,
I believe, who it was, came in to produce that for them. Yes, it’s definitely a threat. I don’t think it’s a big
threat, but it’s a threat.
[00:32:35]
Q: How strong is brand loyalty to Hostess products?
DJ: I would say it’s very strong. The comment I made earlier on, when they went through Chapter 11 and
Hostess was going to close their doors, and I think they did for two months, there was a ton of publicity. It was
just publicity, it wasn’t all good, some of it was bad and negative, but it was publicity and it got people
thinking, “Wait a minute, I haven’t tried a Ding Dong in a long time or had a Hostess cupcake, are we never
going to have one again?” When the bakeries got producing again, I know they had a lot of trouble keeping
inventory in stock because people came back, consumers came back and bought what they could, I guess,
because they were afraid they might not ever see a Ding Dong again. There’s definitely a lot of brand loyalty
there among the people that purchase Hostess, for sure.
[00:33:59]
Q: Hostess operates in a direct-to-warehouse product distribution system. Are there any benefits to this
model? How does it differ from other industry players?
DJ: Many companies use the warehouse model. Hostess has a partnership with a company called McLane that
distributes everything to large store and small store. On the vending and food service side, Hostess works with
Dot Foods, and Dot is a redistributor, so then out of Illinois, they redistribute to those vending warehouses or
the broadline distributors, like Sysco US and Gordon. From an operational standpoint, it’s much less
expensive to go through that warehouse model than a DSD model, DSD being direct-store-delivery, where in
the past, and I’m guessing on the number here, but there might have been 30 direct-store-delivery warehouses
around the country, and then those Hostess-owned and Hostess-operated DSD warehouses and routes, they
then delivered into the small store and the large store. The DSD model is more expensive operationally to run,
but it does give the company, like Hostess, control of their own destiny. They control that, they’re not letting
another distributor, like a McLane and their sales team, then sell into the Speedway convenience store. Maybe
Private and confidential 8
the McLane rep that sells into that Speedway one day is not selling in Hostess and is selling in something like
Mrs Freshley’s instead. Those things can happen.
I’m wondering if, with that DSD model, maybe they were a little short-sighted when they went away from it,
because when they went away from it was right when Hostess came through the Chapter 11 bankruptcy filing,
so they got rid of all of those DSD sales centres. At the time, they were only selling Hostess through them. To
make it profitable, you probably need a USD 200 or a USD 250 minimum for somebody like a Speedway to
purchase your items. That’s why they went away from it, it wasn’t profitable any longer. When I say it might
have been short-sighted is because after Hostess got back up and running then they purchased Superior Cake,
which did the soft-baked cookies, that was a line-up that was similar to Lofthouse, and then recently Hostess
sold Superior to Sara Lee. What I’m saying is after Superior, they purchased Cloverhill, then they purchased
Voortman, so there, with Hostess, you had four brands that you could much more easily sell into a large store
or a small store account and potentially make that minimum of USD 200 or USD 250, make that DSD network
profitable again and control the relationship between you, between Hostess, and all of those stores. I wonder if
some people think it might have been a little short-sighted to cut loose the DSD network, but, again, another
reason why they probably are very operationally efficient is because they cut loose that whole DSD model, in
my opinion.
[00:38:32]
Q: Could you give a brief overview of the Voortman portfolio?
DJ: It’s really basically just store-bought cookies. Like I said before, your basic line-up of five or six items, the
chocolate chip, oatmeal raisin, the sugar cookie, maybe one or two others, like an iced molasses cookie,
something like that, and then all of those wafer cookies, something you’d serve as a side on a side of ice cream,
something that my grandparents bought many years ago. I think that’s really what their line-up is. They also
do sugar-free cookies, but I can’t imagine there’s a big draw for those items. That’s really what their line-up is.
I think Voortman at one time was DSD as well and now they’re probably partnered with Hostess and their go-
to-market strategy through McLane.
[00:39:54]
Q: What do you think was the strategic rationale for Hostess to acquire Voortman? What are the key drivers of
this business? How does it differ from Hostess’s core business?
DJ: It’s similar to their core business, it’s just simply they’re branching out with their portfolio, with their line-
up of snack foods. You’re going from snack cakes to cookies. It gives them another spot in the grocery store
selling into the cookie aisle, basically. They probably did a little bit of research and said, “If you’re going to be
an expert in the snacking category, you need to have a cookie portfolio in your line-up,” and then they saw the
fact that Voortman does offer sugar-free cookies and they probably thought, “That would be something for us
to sell as a better-for-you item.” I’ll go back to that BelVita cookie or snack, I think they have plans with
Voortman to do something like that, maybe a wholegrain, reduced-fat, lower-sugar cookie. That should be
their strategy. That’s an okay strategy that might work for Hostess.
[00:41:34]
Q: What do you think is the TAM for Voortman within breakfast relative to other categories? How could its
portfolio be geared towards breakfast?
DJ: I think it’s got to be some type of a breakfast snack, this is a bad example, but like a granola bar, that’s not
necessarily just at breakfast, that’s an all-day snack, which is a great idea. I’ll bring up that BelVita example
Private and confidential 9
again. I think that would work under a Voortman brand. Anything that’s better-for-you or a healthier
wholegrain snack, that’s just not going to fly as a Hostess item because there’s too much of that connotation
that when I buy Hostess, it’s going to be a little indulgent, a decadent snack cake. I don’t think anybody would
associate a wholegrain better-for-you item with Hostess. Maybe they would with Voortman. I don’t know if I
can answer that really, but Voortman would be a better place to put that wholegrain snack item than at
Hostess. If that’s the way they’re thinking, that’s probably not a bad idea.
[00:44:10]
Q: What do you think of the overall decision to purchase Voortman?
DJ: I don’t know. I would say it’s a good decision to branch out their snacking portfolio, so branch out just
from snack cakes, Twinkies and Ding Dongs. Cookies is probably the right way to go, I think it’s a good
decision, but what else is there? I think sometimes Hostess is a little bit short-sighted in their thinking, they’re
looking at the next period and not the next five years or the next 10 years. That’s where the next five and 10
years are going. Nobody thought you were going to eat an Impossible burger five years ago, and that’s where
Hostess needs to be thinking. What kind of better-for-you wholegrain snack item? Just walk down the granola
bar aisle, they’re everywhere, and Hostess hasn’t done a really good job of getting into that type of healthier
snack. I think Voortman is the way to do that. Maybe that’s why they bought Voortman? We’ll see.
[00:45:45]
Q: What are the trends in sweet snacking regarding health and wellness? Can you elaborate on the granola bar
trends?
DJ: That’s really where gen Z and millennials, that’s what they’re looking for, they’re looking for that cleaner
label, fewer ingredients. Like Panera, I brought up Panera before, if you walk around to the back of Panera
where their fountain sodas are, where you can get a drink or an iced tea, they’ve got a billboard back there, and
on that billboard, they list their top 90 or top 100 banned ingredients, and that’s what the next generation of
consumers are looking for, fewer ingredients, healthier ingredients, wholegrain, reduced fat, reduced sugar.
It’s not just consumers, it’s the restaurant operators, like the Panera I just mentioned, it’s the entire country
when it comes to middle schools and high schools. Michelle Obama helped with this, the Healthy and Hunger-
Free Kids Act, back in 2010 or whatever, that completely changed the way that kids eat in high school, middle
school and elementary school. It’s all wholegrain, it’s reduced fat. The Pop-Tart that Kellogg’s sells into a high
school is completely different than the Pop-Tart you or I can buy in a Walmart. Companies, and it’s been a
struggle, but they’ve listened and they’ve understood what not just consumers but purchasing directors at big
companies are looking for, and that’s exactly what it is, it’s that healthier snacking option. I don’t think
Hostess is there yet.
[00:48:20]
Q: Do you think Hostess is adequately preparing for the accelerating consumer shift towards health and
wellness?
DJ: No, they’re not. They’re absolutely not. Like you said, if they did research and they found that it was just a
slim margin that sweet snacks won out over health and wellness, 10 years ago, it was probably a big, big
margin that sweet snacks won out, and so that’s changing and that’s going to affect their business. They can
still produce that wholegrain item that’s sweet, they’ve got to do work against that, that’s a lot of R&D effort
and that’s not something where Hostess wants to spend any money right now, I don’t think, but that’s where
the trend is going, for sure. Two years ago, one year ago, they were not prepared for that. Maybe with the
Voortman acquisition, that’s going to get them on a better footing, but I don’t think they’re prepared yet for it.
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[00:49:49]
Q: How do you think Hostess can build a meaningful presence in fresh, unprocessed foods, given consumer
preference for this category?
DJ: It’s really that the ingredient statement, I don’t think they’ve done any work with trying to figure out, on
the back of a package of Ding Dongs, it’s a 25-item ingredient statement list, and a lot of that, right or wrong,
it’s to help with shelf life. When McLane delivers to a Speedway gas station, they’re guaranteeing 45 days of
shelf life. Based on that, you’ve got to add a lot of shelf-life extenders and ingredients that extend the shelf life
and so it’s hard to shorten up that list of ingredients. If Hostess wants to get serious with offering those better-
for-you items, they need to start with the ingredient statement. That is going to be super difficult for them to
manage, I think. That’s where they need to start. I would say the second one is that brand, and maybe it’s
under a Voortman brand, I’m making this up, a wholegrain chocolate chip, it might not be called a cookie, but
it could be something like a snack bar or a granola bar or something like that that doesn’t have that “it’s a
sweet, sugary treat” connotation. It’s something that the kids can eat and mom can feel good about buying it at
the grocery store because it’s wholegrain and it’s got less sugar than a bowl of cereal, or something like that.
Those are the two things they need to work on, their ingredients they use and then that new item, that new
brand that’s going to attract a different type of consumer.
[00:52:31]
Q: Which brands or products within the Voortman portfolio would you say fall under the category of health
and wellness?
DJ: I think, to be honest, that statement is a complete stretch. Voortman does one item and it’s a sugar-free
wafer cookie and that’s it. If that’s what management said on a conference call with the investor community, I
think somebody would have probably called them out to say, “Wait a minute, Voortman has one sugar-free
item. Are you trying to tell us that that’s health and wellness? What are your real plans? What’s your strategy,
Hostess, for this Voortman acquisition, for this brand, for new items?” That is a complete stretch, in my
opinion.
[00:53:45]
Q: Do you think offering sugar-free items alone is enough to adjust to consumer trends of healthy eating
habits?
DJ: No. Like I said before, that’s a stretch. It has to be wholegrain, reduced fat, reduced sugar, smaller
ingredient statement. Those products are out there. Like I said, walk down that granola bar aisle, look at a
Kind bar, look at some of those items, I think that’s where they need to spend their time, for sure. Just sugar-
free? No, that’s not going to get it done.
[00:54:46]
Q: What do you think are the best- and worst-case scenarios for Hostess Brands over the next six months?
DJ: I think you’re going to see small store come back slowly, like I said, over the rest of H2 2021 and into
2022. If and when that happens, that’s going to be good for Hostess. I don’t know how penetrated Voortman is
in small store, but Hostess should be able to leverage their relationships in small store with their Hostess
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brand and get some of those Voortman items in there, smaller pack sizes, single-serve pack sizes vs the multi-
serve, I don’t think Voortman is into that yet. I see the small store business coming back. I think you’re going
to see a little bit of their business in large store drop. Then in food service, I just don’t see any change there.
They don’t do a lot in food service. Vending? That should come back, and I think that’s already started to come
back a little bit as blue-collar and white-collar workers get back into the manufacturing facilities and have
access to those vending machines again. I don’t think they’re going to continue to grow fast with the vaccine
coming. There’s a good chance that revenues will decline ever so slightly, but they should pick up business in
small store, I think.
[00:56:41]
Q: Is there anything you think investors should know about Hostess Brands’ management team and their
ability to execute on priorities?
DJ: No, I don’t think so. They’re a smart group. I’ve met every one of them. They stay in their lane and their
lane is snack cakes and they do it well. Venturing out, that’s where they’ve stumbled before. They stumbled
with the Superior Cake acquisition. I don’t know if Cloverhill was, I don’t know how that went, I think the jury
is still out there. Voortman, another acquisition. Are these all part of a bigger strategy, and is that strategy
making sense or did they just buy some other brands and some other bakeries because the price was right and
that was a way to grow their business? I think what they do well, they’re good at, the Hostess-branded items.
Like I said, they’re good operationally, but it’s branching out beyond that. I’m confident with them managing
the Hostess brand, but having a real full-blown strategy for health and wellness, better-for-you items and how
to incorporate those other brands into their business, I think the jury is still out there.
[00:58:26]
NH: Let me close by saying thank you, Dean, for your input. Clients, if you would like to speak to Dean in a
private call or meeting, please let your relationship manager know. Thank you again for joining Third Bridge
Forum's Interview today, this now concludes our meeting. Goodbye.
DJ: You’re welcome.
Transcription ends at 00:58:40 of the recorded material
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