Hostess Brands: Announces Q3-2020 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 nine months ended September 30, 2020.

«We are very pleased with the double-digit revenue growth and continued Ebitda margin expansion in the quarter driven by the strong profit accretion from our Voortman business and continued growth of the Hostess®-branded business. We are encouraged by the steady return of the convenience channel and our achievement of year-over-year growth in our single-serve business which continues to reinforce the benefits of our operating model and ability to better service this important consumer group,» commented Andy Callahan, the Company’s President and Chief Executive Officer. «We are also very excited about our 2021 innovation slate which establishes new platforms for incremental growth and we are confident that the investments we are making to support our continued growth momentum will drive increased shareholder value over the long-term.»

Financial Highlights for the Third Quarter 2020 as Compared to Q3-2019

• Net revenue was USD 260.9 million, an increase of 18.5 percent[*], driven primarily by strong performance of recently acquired Voortman Cookies Limited («Voortman») and Hostess® branded sales, partially offset by lower private-label and other non-Hostess branded sales.
• Gross profit was USD 91.2 million, an increase of 32.6 percent[*]. On an adjusted basis, gross profit increased 23.9 percent[*] primarily due to the accretive margin expansion generated from the successful integration of Voortman and increased Hostess® branded sales.
• Net income was USD 24.0 million, or USD 0.18 per diluted share, compared to USD 10.7 million, or USD 0.07 per diluted share, in the prior year period. Adjusted net income increased USD 6.1 million, or 31.8 percent, to USD 25.3 million, resulting in USD 0.19 adjusted EPS compared to USD 0.13 adjusted EPS in the prior year period. The increase in adjusted net income and adjusted EPS was primarily due to the accretion from the Voortman acquisition.
• Adjusted Ebitda was USD 60.2 million, or 23.1 percent of net revenue, an increase of 29.2 percent[*]. The increase was primarily driven by Voortman’s adjusted Ebitda contribution and higher Hostess® branded sales.
• Cash and cash equivalents were USD 152.3 million as of September 30, 2020 with a proforma leverage ratio of 4.0x after factoring in the expected 2020 adjusted Ebitda contribution from Voortman.

[*] Excluding the In-Store Bakery business sold in 2019.

Operational Highlights for the Third Quarter 2020

• Developed exciting 2021 innovation slate which establishes platforms for incremental future growth in both the sweet baked goods and specialty better-for-you cookie segments with strong initial sell-in performance.
• Achieved strong profit accretion from Voortman while continuing to expand distribution following the completion of key integration activities.
• Executed key operational changes including completion of a new Donette production line during the third quarter in response to continuously increasing consumer demand while keeping our manufacturing and distribution facilities operational in the challenging environment caused by the Covid pandemic.
• Total Hostess manufacturer point of sale increased 6.7 percent and market share was 19.7 percent within the Sweet Baked Goods category driven by 8.5 percent Hostess® branded point of sale growth, which was ahead of the category growth of 7.5 percent.

Third Quarter 2020 Compared to Third Quarter 2019

Net revenue was USD 260.9 million, an increase of 14.8 percent, or USD 33.7 million, compared to USD 227.2 million. The increase in net revenue was driven primarily by the acquisition of Voortman which contributed USD 26.8 million of net revenue. Sweet baked goods net revenue increased 6.3 percent or USD 13.9 million, primarily driven by higher volume of core Hostess® branded products partially offset by lower sales of private label and non-Hostess® branded products.

Gross profit was USD 91.2 million, or 35.0 percent of net revenue, compared to USD 70.4 million, or 31.0 percent of net revenue. Adjusted gross profit was USD 91.2 million, or 35.0 percent of net revenue, compared to USD 75.2 million, or 33.1 percent of net revenue. Adjusted gross profit increased 23.9 percent[*] as a result of accretion from Voortman supported by achievement of synergies, lower promotional activity and higher productivity efficiencies, partially offset by higher operating costs due to Covid-19.

Operating costs and expenses were USD 49.8 million compared to USD 46.8 million. The increase was primarily attributed to the addition of Voortman’s operating costs, including transition costs, partially offset by prior-year charges totaling USD 5.8 million due to costs related to the sale of the In-Store Bakery business, debt refinancing costs, remeasurement of the tax receivable agreement and costs related to the transition of the Company’s primary distribution center.

The Company’s effective tax rate was 20.8 percent compared to 22.0 percent. During the three months ended September 30, 2020, the effective tax rate was impacted by a tax law change which resulted in a discrete tax benefit of USD 1.2 million. During the three months ended September 30, 2019, the effective tax rate was impacted by a discrete tax benefit of USD 0.5 million related to the divestiture of the In-Store Bakery operations.

Net income was USD 24.0 million compared to USD 10.7 million and EPS was USD 0.18 per diluted share compared to USD 0.07 per diluted share. Adjusted net income was USD 25.3 million compared to USD 19.2 million and adjusted EPS was USD 0.19 compared to USD 0.13. Adjusted net income increased as a result of the higher volume and increase in gross profit noted above, partially offset by higher operating costs and depreciation and amortization as a result of the Voortman acquisition.

Adjusted Ebitda was USD 60.2 million, or 23.1 percent of net revenue, compared to USD 47.8 million, or 21.0 percent of net revenue, an increase of USD 12.4 million, or 25.9 percent. Excluding the impact of the In-store Bakery Business, adjusted Ebitda increased USD 13.6 million or 29.2 percent. The increase was driven by approximately USD 9.2 million of adjusted Ebitda from Voortman and higher volume of core Hostess® branded products.

Cash from operations for the nine months ended September 30, 2020 was USD 108.0 million compared to USD 107.4 million for the same period last year. Operating cash flow benefited from the incremental profits generated by Voortman as well as increased sales of Hostess® branded products partially offset by cash used to fund Voortman’s transaction and warehouse transition costs.

[*] Excluding the In-Store Bakery business sold in 2019.

2020 Outlook

Assuming there are no significant disruptions due to the Covid pandemic, we have raised our expected consolidated financial results for the full year 2020 to the upper-end of our previous outlook as follows:

• Adjusted Ebitda of USD 235 million to USD 240 million (from previous outlook of USD 230 million to USD 240 million), including Voortman Adjusted Ebitda of USD 27 million to USD 30 million (from previous outlook of USD 25 million to USD 30 million)
• Adjusted EPS of USD 0.73 to USD 0.75 (from previous outlook of USD 0.70 to USD 0.75)
• Leverage ratio of approximately 4x at the end of 2020 (consistent with previous outlook)

The Company reaffirms its long-term financial objectives of organic revenue growth, adjusted Ebitda margins and free cash flow conversion in the top-quartile of its peers.

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.