Rayburn: Hostess faces 'difficult,' 'painful' path
Aug. 24, 2012
by Eric Schroeder
ENGLEWOOD CLIFFS, N.J. — Acknowledging that a “difficult” and “painful,” path to recovery remains, Greg Rayburn, chief executive officer of Hostess Brands, Inc., remains hopeful that the embattled Irving, Texas-based baker will successfully emerge from its second bankruptcy in four years. Mr. Rayburn provided insight into the challenges (including an 8% across the board wage/salary cut) facing the company as part of an Aug. 23 interview that aired on CNBC.
Reflecting on how Hostess ended up in this position, Mr. Rayburn told CNBC that excessive debt and inadequate reinvestment into a business over a period of many yearsis a recipe for serious trouble at many companies, including Hostess.
“I think for Hostess, we have a path to emerge, but it’s a difficult one, it’s a painful one,” Mr. Rayburn said. “It’s painful for the employees because it requires wage concessions, pensions concessions, and they’ve been through this ringer once already. So there is a way, but it’s not an easy way.”
Hostess recently proposed a deal to its union members that would save $200 million in costs, but would come at the expense of cutting wages and health care for 19,000 employees. The unions are expected to vote on the proposal in September.
Asked by the show’s panel whether Hostess’ problems were an expense issue or a revenue issue to the degree revenues aren’t growing enough to diminish the need to cut costs, Mr. Rayburn said sales trends at the company have been surprisingly good.
“What has fascinated me about Hostess — because I have done a bunch of different businesses over 29 years — is that our revenues have been stable,” he said. “And so, when you look at, we’ve had everything you can imagine: two bankruptcies, bad press, corn prices like dust bowl levels, which impacts us hugely, because when you are in bankruptcy you can’t hedge. Well, you can hedge for like two months, but you can’t hedge long term. …
“But revenues are solid. So, the strength of the brands is remarkable to me. Whether it’s Drake Cakes, Dolly Madison, there are powerful brands, there is powerful demand. The difficulty is the cost structure.”
Asked how much Hostess’ management is asking its employees to give up to make the business viable, Mr. Rayburn was blunt.
“A lot,” he said. “I think in terms of wage concessions it’s about $40 million a year. So, this is an 8% wage cut year one, but I think the key to that is, and what’s different about this from other deals I’ve done, is it is total company wage concessions, it’s not one specific union. In other words, it’s management and everyone. From my point of view, the only way to make this work is everyone has to get in the same boat.”
While Hostess’ battles with its unions have taken center stage over the past several months, Mr. Rayburn was quick to point out that unions don’t “bring down companies.”
“I think that’s an overly simplistic point of view, and I hear that,” he said. “And there are aspects of union participation that are difficult. In our case, the multi-employer pension plans, which are in the press quite a bit, and the potential liabilities for those, that is a deterrent to investment. That’s a difficult issue, but it’s not one you can’t deal with.”
Mr. Rayburn acknowledged the pension plans stand as liabilities that will need be funded down the road, but are only huge liabilities “if done poorly.”
“In our case, we’ve solved that,” he said. “We can stay in these multi-employer pension plans, and I think that works for our employees, works for our unions. But we have ways to make sure that they’re financially sound. But I don’t think it’s a union issue, I think financial engineering can always get you.”
Mr. Rayburn refused to fault past management for Hostess’ current situation, and instead spread the blame around.
“In Hostess’ case, there is plenty of blame for everyone,” he said. “You can look back and you could say, ‘Was it this? Was it this?’ You know frankly, everyone gets complicit in that.”