Hostess chocolate cake Twinkies
Retailer response has been particularly positive for Hostess chocolate cake Twinkies.

KANSAS CITY – Even with slower growth at Hostess Brands, Inc. projected in 2017 than in 2016, executives remain confident in their ability to capitalize on what they view as excellent opportunities in the current year and beyond. Among keys to the realization of the company’s goals will be success with innovation, said William D. Toler, president and chief executive officer.

As previously reported, pro forma net income for the fiscal year ended Dec. 31 was $82,442,000, or 55c per share on the common stock, a decrease of 7% from $88,760,000 in the previous fiscal year primarily resulting from the income tax provision for 2016. Pro forma net revenue increased 17% to $727,586,000, versus $620,815,000 in the previous year. Adjusted EBITDA was $215.3 million in 2016, up 21% from 2015. For 2017, the company is projecting a sales gain of 7% and an adjusted EBITDA gain of 9%.

Commenting on financial results in 2016 in a March 14 conference call with investment analysts, Thomas Peterson, chief financial officer, said the company’s earnings growth was boosted by lower commodity prices, particularly eggs.

Hostess Bake Shop CupCake Cookies
Hostess unveiled the launch of a new in-store line brand dubbed Hostess Bake Shop.

Looking ahead to 2017, sales growth excluding the company’s in-store business will be about 5.4%, he said.

Adversely affecting margins in recent months have been higher growth rates in the company’s bagged donuts business than in single serve and multi-packs, Mr. Peterson said.

Opportunities for growth in 2017 include a significant expansion of the company’s in-store bakery business. During the call, Mr. Toler unveiled the launch of a new in-store line brand dubbed Hostess Bake Shop.

Mr. Toler was asked during the call whether growth opportunities broadly were narrowing. He insisted that is not the case.

William Toler, Hostess
William D. Toler, president and c.e.o. of Hostess

“Look, every share point you have to work for,” he said. “There is nothing easy or hard about any of them. I don’t know that it’s going to get any more difficult as we go forward. I think that’s up to how well we do our job of leading and innovating. And, if we keep bringing differentiated products like peanut butter, like brownies, like white fudge covered, like chocolate cake Twinkie into the marketplace, we’re going to continue to gain share. That’s how it’s played out over the last 3.5 years and how we think it can play out going forward. Competition has fought us.  They’ve innovated as well. They’ve helped drive some of the growth that way. But, frankly, the Hostess products are doing well with consumers, and we’re pleased with the outcome of our innovation and our efforts to broaden our distribution and continue to grow.”

Mr. Toler said Hostess market share in sweet baked goods has continued to grow steadily, rising to 16.7% in 2016. With that growth, the company is working to expand shelf space to a level commensurate with the company’s expanded market share, he said.

Hostess already is building a track record of innovation success, Mr. Toler said. Retailer response has been particularly positive for chocolate cake Twinkies, which he said has been “fastest out of the gates.”

Hostess white fudge Ding Dongs
White fudge covered Ding Dongs have experienced fast growth.

“(It is) the first time the Twinkie icon has been put in a chocolate cake, so that has been well received, and the velocity has been encouraging on that,” he said. “Getting into peanut butter where our competition has been for a while is giving us some real momentum there as well. White fudge covered Ding Dong -- simply put, that’s one of our best, fastest-growing brands into the first line extension on that.”

Offering a deeper peek into innovation for 2017, Mr. Toler said the company will introduce cinnamon sugar crunch Donettes as well as more peanut butter products through the year.

Mr. Toler said the financial impact from new product introductions mostly will be felt fairly early in the year.

Hostess Peanut Butter Ho-Hos
Hostess plans to introduce more peanut butter products throughout the year.

“We usually front-load the innovation into March and get the lion’s share of the benefit through the year,” he said. “There will be a second shot at that in September when a number of retailers will do a plug-and-play-type situation or pull and plug where you don’t get as much shelf expansion, but you do get some new items on.” 

Turning to international, in addition to reiterating plans to expand the presence of the Dolly Madison brand in Canada, Mr. Toler said Hostess business is growing in Mexico and the Caribbean.

“We use a number of distributors to further gain presence of Hostess items in stores,” he said. “We’ve also made progress in e-commerce where we have a small but emerging business that works well for online retailers selling our products going through their warehouses.”

Asked whether food service sales will grow more slowly than other expansion areas, Mr. Toler said that is likely to be the case.

Hostess Dolly Madison coffee cakes
Hostess plans to expand the presence of the Dolly Madison brand in Canada.

“Food service has been a slower channel for us,” he said. “And, that’s generally the way food service operates. I've been in that business for a long time…We think it’s going to be a nice business for us, but it’s going take time to build, and we’re off to a good start.”

Notwithstanding the executives’ confidence, Mr. Toler acknowledged some headwinds in sweet baked foods.

“The category has slowed a little bit in the last 24 weeks, probably more in the 1% to 2% range category growth,” he said. “Obviously, there are a lot of factors to that. It has slowed some so it may not be as robust as it was a couple of years ago. We expect it in that 1% to 2% range.”