Hostess Brands: Announces Q4 and FY-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 fourth quarter and year ended December 31, 2019.

Business Highlights for Q4/2019 versus Q4/2018

• Net revenue was USD 216.7 million, an increase of 6.7 percent excluding the impact of the sale of the In-Store Bakery («ISB») business, driven primarily by strong performance of Hostess® branded products across retail channels.
• Point of sale increased 8.3 percent and market share was 18.6 percent, up 113 basis points.
• Gross profit was USD 70.8 million, an increase of 6.7 percent excluding ISB, due to higher sales volume and pricing actions as well as continued operating efficiencies. Adjusted gross profit was USD 75.3 million, a 5.7 percent increase excluding a USD 2.5 million decline from the sale of ISB.
• Net income increased 44.0 percent to USD 23.6 million and diluted EPS increased 41.7 percent to USD 0.17 per share primarily due to a foreign currency contract gain, partially offset by transaction and other facility transition costs and the sale of ISB. Adjusted net income was USD 22.8 million, compared to USD 23.5 million and adjusted EPS was USD 0.16 per share, compared to USD 0.17 per share. Improved operating performance was offset by the sale of ISB, and higher depreciation and stock compensation expense.
• Adjusted Ebitda was USD 52.4 million, or 24.2 percent of net revenue, compared to USD 51.4 million, or 23.9 percent of net revenue. Adjusted Ebitda increased 6.3 percent, excluding the USD 2.2 million decline due to the sale of ISB.

Full Year 2019 Financial Highlights versus FY-2018

• Net revenue increased 8.7 percent, excluding the ISB business, driven primarily by Hostess® branded growth.
• Point of sale increased 6.5 percent and market share was 18.8 percent, up 80 basis points.
• Gross profit increased 13.4 percent and adjusted gross profit increased 12.4 percent, excluding any impact of ISB.
• Net income was USD 77.6 million and adjusted Ebitda was USD 204.7 million. Adjusted Ebitda increased 11.4 percent, excluding any impact of ISB.
• Reduced leverage to 3.4x.

Transformative Operational Accomplishments:

• Implemented operational enhancements to drive significant profitability improvement of Cloverhill Business.
• Completed strategic changes to portfolio through disposition of ISB business on August 30, 2019 and acquisition of Voortman Cookies, Limited («Voortman») on January 3, 2020.
• Executed transition of distribution capabilities to Kansas, expanding our capabilities and capacity for growth.
• Advanced capabilities through addition of key talent and enhanced tools and data analytics to improve performance.

Andy Callahan, the Company’s President and Chief Executive Officer, commented, «We are excited by the transformative operational progress our team achieved during the year, which will continue to fuel sustainable long-term profitability and value for our stockholders. Our fourth quarter and full year financial results reflect meaningful growth in net revenue with a solid increase in market share and strong gross profit margin expansion resulting from gains in volume and distribution of Hostess® branded core products and breakfast innovation. We expect 2020 to continue this positive momentum driving another year of meaningful growth, including the continued growth of our Hostess® branded products, execution of operating enhancements and the integration of our recently completed acquisition of Voortman.»

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This press release contains certain non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted Ebitda, adjusted operating income, and adjusted earnings per share («EPS»). Please refer to the schedules in the press release for reconciliations of non-GAAP financial measures to the comparable GAAP measure. Unless otherwise stated, all comparisons of financial measures in this press release are to the fourth quarter or full year of 2018, as applicable. All measures of market performance contained in this press release, including point of sale and market share, include all Company branded products within the SBG category as reported by Nielsen but do not include other products sold outside of the SBG category. All market data in this press release refer to the 13-week period ended December 28, 2019 and the prior-year comparable period. The Company’s leverage ratio is net debt (total long-term debt less cash) divided by adjusted Ebitda.

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2020 Outlook Summary

• The Company expects organic revenue growth ahead of the SBG category in 2020 driven by expansion of core products as well as new innovation.
• Full year 2020 adjusted Ebitda is expected to be in the range of USD 225 million to USD 240 million, an increase of 13 percent to 20 percent over 2019, excluding the USD 5 million of 2019 ISB adjusted Ebitda, primarily driven by organic growth, continued operating efficiencies and the contribution of approximately USD 20 million from the acquisition of Voortman.
• The Company expects a leverage ratio of approximately 4x at the end of 2020, increased by the additional debt incurred to finance the Voortman acquisition partially offset by strong operating cash flows.

Fourth Quarter 2019 Compared to Fourth Quarter 2018

Net revenue was USD 216.7 million, an increase of 0.9 percent, or USD 1.9 million, compared to USD 214.8 million. Excluding the impact of the sale of ISB, net revenue increased USD 13.5 million or 6.7 percent. Growth was driven by increased sales volume of Hostess® core products such as Donettes®, strong performance from core and breakfast innovation products and continued growth of our Dolly Madison® branded products. These increases were achieved across sales channels, with growth most notably driven within the club, convenience and mass retail channels.

Gross profit was USD 70.8 million, or 32.7 percent of net revenue, compared to USD 68.8 million, or 32.0 percent of net revenue. Excluding ISB, gross profit increased 6.7 percent. Adjusted gross profit was USD 75.3 million, or 34.8 percent of net revenue, compared to USD 73.8 million or 34.3 percent of net revenue. Adjusted gross profit, excluding ISB, increased 5.7 percent. Gross margin increased as a result of increased sales volume and operating efficiencies, partially offset by higher input costs.

Operating costs and expenses were USD 31.2 million, or 14.4 percent of net revenue, compared to USD 38.5 million, or 17.9 percent of net revenue. The Company recognized a USD 7.1 million gain on the valuation of a foreign currency contract originated during the quarter to hedge the January 2020 purchase of Voortman in Canadian dollars. In 2018, the Company recognized a USD 3.3 million asset impairment. Excluding these items, operating costs and expenses increased due to costs incurred for the Voortman acquisition and facility transition costs.

The Company’s effective tax rate was 20.2 percent, compared to 18.2 percent. The increase in the effective tax rate is due to the Class A for Class B share exchanges during 2019. Subsequent to these exchanges, more income from Hostess Holdings, L.P. was allocated to Hostess Brands, Inc.

Net income was USD 23.6 million compared to USD 16.4 million and dilutive EPS was USD 0.17 compared to USD 0.12. Adjusted net income was USD 22.8 million, compared to USD 23.5 million and adjusted EPS was USD 0.16, compared to USD 0.17. Improved operating performance was offset by the sale of ISB, and higher depreciation and stock compensation expense. Additionally, adjusted EPS declined as a result of the dilutive impact of the warrants.

Adjusted Ebitda was USD 52.4 million, or 24.2 percent of net revenue, compared to USD 51.4 million, or 23.9 percent of net revenue. Excluding the impact of ISB, adjusted Ebitda increased USD 3.1 million or 6.3 percent.

Cash from operations for the year ended December 31, 2019 was USD 144.0 million compared to USD 143.7 million for the same period last year.

Relocation to New Distribution Facility

In November 2019, the Company executed its previously announced relocation of its primary distribution center from Illinois to Kansas. The new location is closer to the Company’s largest bakery and more centrally located within the United States providing the Company with the ability to reach customers faster, reduce transportation costs and improve service levels. This critical transition provides enhanced infrastructure for future profitable growth.

2020 Outlook

On January 3, 2020, the Company completed its purchase of Voortman, a manufacturer of premium, branded wafers as well as sugar-free and specialty cookies with distribution mainly in the United States and Canada. Voortman® is a leading brand with a well-defined consumer position that complements and extends the growing Hostess® portfolio into the growing cookie and better-for-you sweet snacking categories with meaningful runway for future growth. As the Company transitions Voortman to unlock meaningful distribution expansion in key growth channels, it expects 2020 net revenue and adjusted Ebitda contribution of approximately USD 90 million and USD 20 million, respectively.

The Company expects the following consolidated financial results for the full year 2020:

• Organic net revenue growth above the SBG category;
• Adjusted Ebitda of USD 225 million to USD 240 million, an increase of 13 percent to 20 percent from 2019 excluding the USD 5 million of 2019 ISB adjusted Ebitda;
• Adjusted EPS of USD 0.65 to USD 0.75, an increase of 7 percent to 23 percent;
• Leverage ratio of approximately 4x at the end of 2020 compared to 3.4x at December 31, 2019, absent any additional acquisitions or optional debt reductions;
• Capital expenditures of approximately USD 50 million to USD 60 million, including USD 20 million expected for the Voortman integration;
• Income tax rate of 24 percent to 26 percent giving effect to the non-controlling interest.

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.