Hostess Brands: Reports Strong Sales and Earnings Growth in 2022

Lenexa / KS. (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, 2022.

«Hostess Brands delivered another year of strong top and bottom-line results in 2022, highlighting our attractive snacking portfolio and the resiliency of our advantaged business model. I am very proud of the focus, agility, and commitment of the Hostess Brands team as they continue to execute with excellence against our key strategic growth initiatives in a dynamic environment,» commented Andy Callahan, the Company’s President and Chief Executive Officer. «Our track record of top-tier net revenue and earnings growth over the last three years, operational excellence and continued investments in our marketing and innovation capabilities give us the confidence to maintain our profitable growth momentum and deliver growth ahead of our long-term targets in 2023, as outlined by our initial guidance.»

Fourth Quarter 2022 Financial Highlights

• Net revenue of USD 339.5 million increased 14.2 percent from the same period last year, as 20.5 percent contribution from price/mix more than offset lower volumes in the quarter.
• Gross profit increased 10.4 percent to USD 121.9 million, or 35.9 percent of net revenue, while on an adjusted basis, gross profit increased 11.3 percent to USD 123.1 million, or 36.3 percent of net revenue. Fourth quarter gross margin declined by 124 basis points, 95 basis points on an adjusted basis, from year-ago quarter largely due to 20.2 percent inflation.
• Net income was USD 32.9 million, or USD 0.24 per diluted share compared to USD 36.5 million, or USD 0.25 in the same period last year. Adjusted net income remained relatively flat at USD 33.9 million, resulting in USD 0.25 adjusted EPS in both periods.
• Adjusted Ebitda increased 2.6 percent to USD 75.1 million as higher gross profit was partially offset by the planned increase in operating costs, particularly advertising and marketing. Adjusted Ebitda margin of 22.1 percent declined 249 basis points from 24.6 percent in the prior year period.

Full Year 2022 Financial Highlights

• Net revenue of USD 1,358.2 million increased 18.9 percent from last year driven by positive volume growth of 2.6 percent and 16.3 percent contribution from price/mix.
• Gross profit increased 13.6 percent from the year-ago period to USD 465.7 million, or 34.3 percent of net revenue, while on an adjusted basis, gross profit increased 13.9 percent to USD 467.7 million, or 34.4 percent of net revenue. Annual gross margin declined by 161 basis points, 152 basis points on an adjusted basis.
• Net income of USD 164.2 million, or USD 1.19 per diluted share increased from USD 119.3 million, or USD 0.86 per diluted share in the same period last year. Adjusted net income and adjusted EPS, which exclude the receipt of Voortman insurance proceeds, increased by double-digits to USD 134.6 million, and USD 0.98, respectively.
• Adjusted Ebitda increased 9.4 percent to USD 294.1 million. Adjusted Ebitda margin of 21.7 percent declined from 23.5 percent in the prior year period due to lower gross margins and higher operating expenses.
• Cash and cash equivalents and short-term investments were USD 116.5 million as of December 31, 2022. Net leverage ratio improved from 3.1x to 2.9x.
• Capital expenditures increased to USD 130.5 million from USD 65.4 million in the prior-year period as a result of the ongoing investments, including the addition of a new bakery in Arkadelphia, to support growth.

Other Highlights

• Hostess Brands’ Sweet Baked Goods point-of-sale (“POS”) increased by 9.2 percent and 16.4 percent for the quarter and year respectively. Its share of the Sweet Baked Goods category decreased by 150 basis points to 20.1 percent during the quarter and remained relatively stable at 21.2 percent for the year.
• Voortman® branded POS grew 28.2 percent for the quarter, nearly 1.5x faster than the overall Cookie category, and 27.7 percent for the year, driven in part by the ongoing momentum in the faster-growing sugar-free sub-segment.
• Repurchased USD 130.1 million of shares in 2022.
• Prepaid USD 100.0 million on its term loan.

2023 Financial Guidance

The Company’s guidance for the full year 2023 is as follows:

• Adjusted net revenue growth of 4 percent to 6 percent
• Adjusted Ebitda of USD 315 million to USD 325 million, an increase of 7 percent to 10 percent from 2022
• Adjusted EPS of USD 1.08 to USD 1.13, an increase of 10 percent to 15 percent from 2022
• Weighted average diluted shares outstanding of approximately ~135 million
• Capital expenditures of approximately USD 150 million to USD 170 million
• Income tax rate of approximately ~27 percent

Fourth Quarter 2022 versus Q4-2021

Net revenue was USD 339.5 million, an increase of USD 42.3 million, or 14.2 percent, compared to the same period last year. Contribution from previously taken pricing actions and favorable mix provided 20.5 percent of the growth, offset by a 6.3 percent decline in volume. Sweet baked goods net revenue increased USD 36.8 million, or 13.8 percent, while cookies net revenue increased USD 5.5 million, or 18.0 percent.

Gross profit increased 10.4 percent and was 35.9 percent of net revenue for the quarter ended December 31, 2022, a decrease of 124 basis points from a gross margin of 37.1 percent for the same period last year. The decrease in gross margin was primarily due to inflation, partially offset by favorable price/mix, including revenue growth management initiatives.

Operating income was USD 56.6 million. Adjusted operating income of USD 57.8 million increased 1.6 percent from the same period last year as higher gross profit was partially offset by higher advertising and marketing expense as well as higher investments in our workforce.

Adjusted Ebitda of USD 75.1 million, or 22.1 percent of net revenue, increased 2.6 percent from the same period last year. The improvement in adjusted Ebitda was driven by higher gross profit, partially offset by the planned increase in operating costs, particularly advertising and marketing expense, as well as higher investments in our workforce.

The Company’s effective tax rate was 27.3 percent compared to 19.6 percent in the prior year. Effective tax rates were impacted by non-taxable changes in the fair value of the warrant liabilities in the prior year as well as a tax benefit related to revaluing our deferred tax liabilities due to a change in the estimated state tax rate. The effective tax rates, excluding discrete items, were 27.3 percent and 27.7 percent in the current year and prior year period, respectively.

Net income was USD 32.9 million. Adjusted net income of USD 33.9 million remained relatively consistent as compared to the same period last year. Diluted EPS was USD 0.24 compared to USD 0.25 in the prior period. Adjusted EPS was USD 0.25 in both periods.

Cash flow from operations for the twelve months ended December 31, 2022 was USD 248.8 million compared to USD 203.0 million for the same period last year. Operating cash flow benefited from current year improvement in profitability, including the insurance proceeds of USD 33.0 million, partially offset by an increase in tax payments and an increase in working capital.