Hostess Part 2: Tailwinds ahead

by Josh Sosland
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IRVING, TEXAS — A post-bankruptcy Hostess in 2012 would be in a very different position from when it first sought creditor protection in 2004. The company is no longer the largest baking company in the United States or even second largest. Greg Rayburn, chief executive officer, said the degree to which the business has held up while in bankruptcy bodes well for how the business will fare afterward.

“We’ve had sort of everything and the kitchen sink thrown at us during the course of this bankruptcy and our sales have held up very well,” he said. “We have a very strong sales platform of products with sales around $2.5 billion a year, and I think that needs to be viewed as a platform for further product differentiation and brand extension and that’s going to go hand in hand with different distribution channels and methods. So you’re going to see, I think Hostess has a pretty strong competitive path going forward on the basis of that and that platform I think is pretty sound at the demand level. We sell lots of Twinkies, Ding Dongs, Ho Hos and Wonder Bread and Drake cakes and Dolly Madison. Our customer base is also very supportive of our survival because they need more suppliers rather than fewer, particularly in a consolidating industry.”

Asked about declines in unit volume sales that have hit Hostess (and other bakers), Mr. Rayburn acknowledged the company has had issues in keeping current with new product trends. Ultimately, though, he defended the company’s overall sales performance.

“I think where Hostess has probably underperformed is I don’t think it’s done enough brand extension and new product development,” he said. “So you’ve got a great base of products, but I don’t think we’ve put enough emphasis on R.&D. spend. So part of this plan is to sort of double our R.&D. spend to get it focused at issues like that and I think that is all opportunity for us.

“I think the demand has been very good, and I’ve been very pleased with the way sales have held up. And I’ve done this for a lot of different companies and a lot of different industries and typically you would not expect revenues to be as stable as ours have been in the face of a lot of strike talk, bankruptcy talk, commodity price increases and everything else you could name. I think we’re seeing good customer demand, we see it at the retail level and we certainly see it at the end customer level.

“I think the opportunity for us is to create off of that platform and create new products that will be more top of mind because they’re new for that customer base to try.”

Asked to dip a bit deeper into trends in baking such as whole wheat and gluten-free dieting, Mr. Rayburn declined to offer much elaboration.

“We have (whole) wheat line extensions now that have been a big part of the plan that we’ve put together in terms of our business plan,” he said. “We probably were late trend-wise on that, but I think that is something in which we have very good products in that space now. I don’t want to get too far into gluten-free because I really don’t want to talk about our strategies in a lot of detail.”

Mr. Rayburn did offer observations on the impact of the summer’s drought and resultant surging flour prices.

“I think all the players in the business are going to some extent going to have to take pricing,” he said. “When you have corn that’s up to current levels and you have wheat where it is, whether or not you’re hedged, I think at some point you’ll see the industry react taking pricing.”

Finding a permanent chief executive officer is toward the top of the list for steps to be taken by the company during its first 100 days after bankruptcy, Mr. Rayburn said.

“We’ve actually started a process of defining a profile and looking at search firms to go down the path of looking for a permanent c.e.o.,” Mr. Rayburn said. “Everything sort of has to start at the top. So I’ve told the company and the unions that I’ll stay in whatever capacity they would like for as long as it takes to make sure that the train doesn’t go off the tracks. I think we have a profile for candidates, and we’re going to push through that process. I think we want to get that person on board so that they can also be part of defining that first 100 days.”

Regarding his own involvement, Mr. Rayburn emphasized a commitment to stay as long as needed to help the company exit bankruptcy but also suggested the period he will remain with the company will not be very long.

“I don’t ever have an end date on the engagements that I do, and I’ve stayed at companies for half years before,” he said. “I have agreed to stay in whatever capacity and whatever both parties and interests prefer, because it’s in my best interests to make sure that Hostess is successful for the long haul.”

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