Hostess Brands: Announces Q2-2019 Financial Results

Kansas City / MO. (twnk) Hostess Brands Inc., one of the largest manufacturers and marketers of sweet baked goods in the United States including «Twinkies», «Ding Dongs», «Ho Hos», «Donettes» and a variety of new and classic treats, reported its financial results for the three and six months ended June 30, 2019.

Business Highlights for the Quarter

Business Highlights for the Second Quarter 2019

Business Highlights for the Second Quarter 2019 as Compared to the Prior Year Period:

• Net revenue increased USD 25.2 million, or 11.7 percent, to USD 241.1 million due to higher volume of both core and new Hostess® branded products driven by distribution and merchandising support as well as realization of price increases.
• Total Company point of sale in tracked channels increased 6.3 percent and market share of 19.0 percent was up 81 basis points.
• Gross profit increased USD 16.6 million, or 24.8 percent, to USD 83.5 million due to higher sales volume and pricing actions as well as continued operating efficiencies.
• Net income was USD 16.7 million, compared to USD 24.6 million, or diluted earnings per share of USD 0.10 per share. The decline was primarily due to discrete income tax adjustments of USD 7.8 million.
• Adjusted net income increased USD 3.8 million or 18.9 percent to USD 24.1 million, representing USD 0.17 adjusted earnings per share.
• Adjusted Ebitda increased USD 7.5 million, or 15.7 percent, to USD 55.1 million, or 22.9 percent of net revenue, compared to USD 47.6 million, or 22.1 percent of net revenue.
• Cash and cash equivalents were USD 189.3 million as of June 30, 2019 with a leverage ratio of 4.0x, both driven by operating cash flows of USD 74.1 million for the six months ended June 30, 2019.

Despite Reduction for the Anticipated Sale of In-Store Bakery Operations (ISB), the Company Reiterates 2019 Net Revenue and Adjusted Ebitda Outlook.

• The Company expects continued organic revenue growth well above the Sweet Baked Goods («SBG») category in 2019 driven by Hostess® branded core and new product innovation due to expanded distribution and improved merchandising execution as well as benefits from increased pricing. This will be partially offset by reduced revenue from the anticipated disposition of ISB in the third quarter of 2019.
• The Company expects full year 2019 adjusted Ebitda of USD 200 million to USD 210 million, an increase of 7 percent to 13 percent over 2018, primarily driven by revenue growth and achievement of operational efficiencies, partially offset by the anticipated divestiture of ISB in the third quarter of 2019.
• The Company has improved its expected leverage ratio estimate to 3.2x to 3.4x at the end of 2019, driven by strong operating cash flows and the anticipated cash received from the divestiture of ISB.

«The continued execution against our pillars for growth are evidenced this quarter by meaningful revenue growth, increased market share and improvement in our industry-leading profitability,» commented Andy Callahan, President and Chief Executive Officer. «The strength of the Hostess® brand and our investments in our fundamental capabilities have helped us achieve broad-based success across channels. We will continue to focus on execution in the second half of 2019 as we build upon our strong foundation for sustainable growth and shareholder value creation.»

Second Quarter 2019 Compared to Second Quarter 2018

Net revenue was USD 241.1 million, an increase of 11.7 percent, or USD 25.2 million, compared to USD 215.8 million. The net revenue growth was primarily from increased sales of Hostess® branded products driven by higher volume of both core products and new Hostess® branded breakfast products as distribution and merchandising support improved in multiple sales channels. Dolly Madison® branded products also provided revenue growth as the Company leveraged the acquired Cloverhill customer relationships. Net revenue also benefited from increased pricing implemented in the fourth quarter of 2018.

Gross profit was USD 83.5 million, or 34.6 percent of net revenue, compared to USD 66.9 million, or 31.0 percent of net revenue. Adjusted gross profit was USD 83.5 million, or 34.6 percent of net revenue, a USD 14.2 million increase as compared to USD 69.3 million, or 32.1 percent of net revenue, in the prior year period. Pricing actions and increases in sales volume partially offset the impact of inflationary pressures on ingredient, labor and packaging costs. The Company also benefited from continued operational cost efficiencies.

Operating costs and expenses were USD 46.6 million, or 19.3 percent of net revenue, compared to USD 32.2 million, or 14.9 percent of net revenue. These costs increased due to higher incentive compensation and additional corporate expenses incurred in connection with the relocation of the Company’s primary distribution facility and category sales and marketing functions. Additionally, there was a USD 1.3 million loss on the remeasurement of the tax receivable agreement obligation in the second quarter of 2019 as compared to a USD 1.8 million gain on remeasurement in the prior year period driven by changes in estimated future state rates.

The Company’s effective tax rate was 35.2 percent compared to 0.8 percent. In the second quarter of 2019, the Company recognized a discrete tax expense of USD 2.8 million as compared to a discrete tax benefit of USD 5.0 million recognized in the prior year period resulting from revaluing deferred tax balances based on changes in its estimated state apportionment factors and tax rates.

Net income was USD 16.7 million compared to USD 24.6 million. Net income attributed to Class A stockholders was USD 11.5 million, or USD 0.10 per diluted share, compared to USD 19.3 million, or USD 0.18 per diluted share. The decline was primarily due to discrete income tax adjustments of USD 7.8 million.

Adjusted net income was USD 24.1 million compared to USD 20.2 million. Adjusted EPS was USD 0.17 per diluted share, compared to USD 0.14 per share. Adjusted Ebitda was USD 55.1 million, or 22.9 percent of net revenue, compared to USD 47.6 million, or 22.1 percent of net revenue.

Cash from operations for the six months ended June 30, 2019 was USD 74.1 million compared to USD 81.2 million for the same period last year. The decrease was attributable to the timing of customer receipts as well as higher working capital needs to facilitate the increased sales volume. Operating cash flow for the second quarter of 2019 was USD 45.7 million, an increase of 6.5 percent from the prior year period.

Sweet Baked Goods Segment: Net revenue was USD 229.3 million, an increase of USD 25.0 million, or 12.3 percent, compared to USD 204.2 million driven by additional volume and price increases. Gross profit was USD 80.9 million, or 35.3 percent of net revenue, compared to USD 64.4 million, or 31.5 percent of net revenue.

In-Store Bakery Segment: Net revenue was USD 11.8 million, an increase of USD 0.2 million, or 1.5 percent, compared to USD 11.6 million. The increase in net revenue was attributable to increased sales volume. Gross profit was USD 2.5 million, or 21.4 percent of net revenue, compared to gross profit of USD 2.5 million, or 21.5 percent of net revenue.

Divestiture of ISB

As previously announced, the Company has entered into a definitive agreement to sell ISB to Sara Lee Frozen Bakery for a purchase price of USD 65.0 million in cash, subject to post-closing adjustments. The transaction is expected to close during the third quarter, subject to customary closing conditions. The Company expects to use the net proceeds from the transaction to pursue a range of potential strategic options, including reinvesting in its business, de-leveraging its balance sheet, and pursuing potential strategic acquisitions, while effectively managing its capital structure.

New Corporate Headquarters and Research and Development Center

The Company is opening a new consumer research center with a lab, sensory test kitchen and focus group space within the Company’s new corporate headquarters building which is relocating within the Kansas City metro area. This new research and development center, which is anticipated to open during the first quarter of 2020, will enhance the Company’s in-house innovation capabilities and expand capacity for new product research and development.

Outlook

Despite the impacts of the anticipated divestiture of ISB, the Company reiterated its net revenue and adjusted Ebitda guidance as well as improved its leverage outlook for 2019 to reflect the strong year-to-date financial results:

• Net revenue growth well above the SBG category;
• Adjusted Ebitda of USD 200 million to USD 210 million, an increase of 7 percent to 13 percent from 2018;
• Adjusted EPS of USD 0.57 to USD 0.62, an increase of 6 percent to 15 percent from 2018;
• The net expected increase in cash of USD 145 million to USD 155 million would result in a leverage ratio of 3.2x to 3.4x at the end of 2019, absent any acquisitions or other strategic uses of cash, compared to 4.5x at December 31, 2018;
• Cash provided by operations of USD 145 million to USD 155 million, a reduction from previous expectation of USD 150 million to USD 160 million;
• Capital expenditures of approximately USD 30 million to USD 35 million;
• Income tax rate, excluding discrete items, of 21 percent to 22 percent giving effect to the non-controlling interest and the related share exchanges occurring in the second quarter. The Company expects to pay minority shareholder distributions of USD 7.5 million to USD 8.5 million and corporate tax payments of USD 2.0 million to USD 3.0 million in 2019.

The Company provides guidance only on a non-generally accepted accounting principles (non-GAAP) basis and does not provide a reconciliation of the Company’s forward-looking financial expectations to the most directly comparable GAAP financial measure because of the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation; including adjustments that could be made for deferred taxes; remeasurement of the tax receivable agreement, changes in allocation to the non-controlling interest, transformation expenses and other non-operating gains or losses reflected in the Company’s reconciliation of historic non-GAAP financial measures, the amount of which could be material. Please refer to the Reconciliation of Non-GAAP Financial Measures included in this press release for further information about the use of these measures.