Hostess Brands: Announces Q4 and Full Year 2017 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 full year ended December 31, 2017.

Fourth Quarter 2017 Summary (Compared to Pro Forma Combined Fourth Quarter 2016)

• Net revenue increased 9.7 percent to USD 196.2 million, representing the Company’s best organic growth rate for the year. The Company’s strong performance was led by the introduction of the Hostess Bakery Petites^TM, a premium snacking platform made with no artificial flavors or colors, and no high fructose corn syrup, which contributed 3.1 percent of the net revenue increase.
• Net income was USD 189.6 million (includes USD 163.1 million of one-time gains relating to the recently enacted tax law referred to as “Tax Reform”), compared to USD 22.0 million. Diluted EPS was USD 1.74 per share compared to USD 0.14 per share.
• Adjusted EPS increased 13.3 percent to USD 0.17 per share.
• Adjusted Ebitda increased 9.4 percent to USD 57.8 million, or 29.5 percent of net revenue.
• Point of sale increased 4.3 percent. Point of sale for the top seven brands increased 8.2 percent (which comprise 74 percent of total net revenue).

Full 2017 Summary (Compared to Pro Forma Combined Full Year 2016)

• Net revenue increased 6.7 percent to USD 776.2 million led by current year product innovations of USD 62.5 million.
• Net income was USD 258.1 million (includes USD 163.1 million of one-time gains relating to Tax Reform) compared to USD 82.4 million. Diluted EPS was USD 2.13 per share compared to USD 0.54 per share.
• Adjusted EPS increased 5.0 percent to USD 0.63 per share.
• Adjusted Ebitda increased 6.9 percent to USD 230.2 million, or 29.7 percent of net revenue.
• Hostess’ year-to-date market share through December 30, 2017 was 17.2 percent, increasing 72 basis points from the prior year.
• Cash and cash equivalents at December 31, 2017 of USD 135.7 million with a leverage ratio of 3.73x both driven by operating cash flows of USD 163.7 million for the year.

«We are pleased with our strong finish to the year,» commented Bill Toler, President and Chief Executive Officer of Hostess. «We were able to capitalize on the momentum provided by our robust product innovation and continued distribution gains to increase our market share. We are optimistic about the continued growth opportunity from our product innovation, including our «Hostess Bakery Petites» platform and the new breakfast opportunities from our acquisition of the «Big Texas» and «Cloverhill» brands.»

Fourth Quarter 2017 (Comparisons to the Pro Forma Combined Fourth Quarter 2016)

Net revenue was USD 196.2 million, an increase of 9.7 percent, or USD 17.4 million, compared to USD 178.8 million. New product initiatives contributed USD 22.2 million of growth. This growth was partially offset by a decrease in net revenue from 2016 product innovations and discontinued items.

Gross profit was USD 80.8 million, or 41.2 percent of net revenue, compared to USD 77.0 million, or 43.0 percent of net revenue. Higher transportation costs resulting from a tightening of shipping capacity caused a 120 basis point decrease in gross margin. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.

Advertising, selling, general and administrative (SG+A) expenses were USD 25.9 million, or 13.2 percent of net revenue, compared to USD 26.4 million, or 14.8 percent of net revenue. This decrease was primarily due to forfeitures of stock based compensation. The decrease was offset by increased display rack deployment and additional professional fees related to public company compliance.

The income tax benefit of USD 98.8 million for the quarter ended December 31, 2017 includes a benefit of approximately USD 126.4 million due to the remeasurement of deferred tax items due to Tax Reform partially offset by a tax expense of USD 15.1 million due to the remeasurement of the tax receivable agreement also due to Tax Reform. The remaining tax expense of USD 12.5 million represents an effective tax rate of 32.2 percent, giving effect to the non-controlling interest, a partnership for income tax purposes and excluding the impact of the tax receivable agreement remeasurement.

Net income was USD 189.6 million, compared to USD 22.0 million. Net income attributed to Class A stockholders was USD 179.7 million, or USD 1.74 per share, compared to USD 14.4 million, or USD 0.14 per share. This increase was primarily attributed to a USD 111.3 million tax benefit recognized due to the remeasurement of certain deferred tax items and a gain of USD 51.8 million on the remeasurement of the tax receivable agreement, both due to Tax Reform. Earnings attributed to Class A stockholders were USD 1.74 per share, compared to USD 0.14 per share.

Adjusted net income attributed to Class A stockholders, or adjusted EPS, increased to USD 17.6 million, or USD 0.17 per share, compared to USD 15.0 million, or USD 0.15 per share. The increase was due to increased sales volume, lower interest expense in 2017 due to the repricing of the Company’s First Lien Term Loan, and forfeitures of stock-based compensation.

Adjusted Ebitda increased 9.4 percent to USD 57.8 million, or 29.5 percent of net revenue, compared to USD 52.9 million, or 29.6 percent of net revenue.

The Company has two reportable segments: Sweet Baked Goods and In-Store Bakery. The Sweet Baked Goods segment consists of fresh and frozen retail sweet baked goods as well as Hostess® branded bread products. The In-Store Bakery segment consists of products sold in the bakery section of grocery and club stores. During the fourth quarter, the Company reassessed its segment presentation. Previously, the «Other» category included In-Store Bakery as well as bread and frozen retail products. The 2017 fourth quarter, full year reporting and comparable prior periods presented below reflect bread and frozen retail products within the Sweet Baked Goods segment and discrete presentation for In-Store Bakery. The Company expects to file a Current Report on Form 8-K on March 1, 2018 to provide additional historical financial information reflecting the new segment presentation.

Sweet Baked Goods Segment: Net revenue was USD 185.3 million, an increase of USD 16.7 million, or 9.9 percent, compared to USD 168.6 million. The increase was driven primarily by net revenue from current year product innovations of USD 21.7 million. Gross profit was USD 78.4 million, or 42.3 percent of net revenue, compared to USD 74.0 million, or 43.9 percent of net revenue. Higher transportation costs caused a 120 basis point decrease in gross margin. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.

In-Store Bakery Segment: Net revenue was USD 10.9 million, an increase of USD 0.7 million, or 6.5 percent, compared to USD 10.2 million primarily due to product innovation. Gross profit was USD 2.4 million, or 22.4 percent of net revenue, compared to USD 2.9 million, or 28.8 percent of net revenue. Higher transportation costs caused a 250 basis point decrease in gross margin. The decrease in margin was also attributed to increased ingredient and storage costs.

Full Year 2017 (Comparisons to Pro Forma Combined Full Year 2016)

Net revenue was USD 776.2 million, an increase of USD 48.6 million, or 6.7 percent, compared to USD 727.6 million. The increase was driven primarily by current year product initiatives of USD 62.5 million, and white space opportunities growth led by In-Store Bakery and other developing sales channels, partially offset by a decrease in net revenue from 2016 innovations and discontinued items. The acquisition of Superior Cake Products, Inc. in May 2016 provided approximately USD 11.9 million of growth in 2017.

Net income was USD 258.1 million compared to USD 82.4 million. Net income attributed to Class A shareholders was USD 223.9 million or USD 2.13 per share, compared to USD 53.7 million or USD 0.54 per share. This increase was primarily due to a USD 111.3 million tax benefit recognized due to the remeasurement of certain deferred tax items and a gain of USD 51.8 million on the remeasurement of the tax receivable agreement, both due to Tax Reform.

Adjusted net income attributed to Class A common stockholders, or adjusted EPS, increased to USD 66.7 million or USD 0.63 per share compared to USD 58.3 million or USD 0.60 per share. The increase was attributed to lower interest expense, higher sales volume and 2016 impairment charges not incurred in 2017.

Adjusted Ebitda increased 6.9 percent to USD 230.2 million, or 29.7 percent of net revenue, compared to USD 215.3 million, or 29.6 percent of net revenue.

Sweet Baked Goods Segment: Net revenue was USD 733.8 million, an increase of USD 33.0 million, or 4.7 percent, compared to USD 700.9 million. Gross profit was USD 316.9 million, or 43.2 percent of net revenue, compared to USD 310.5 million, or 44.3 percent of net revenue. Gross profit increased primarily due to increased net revenue. Higher transportation costs caused a 70 basis point decrease in gross margin. Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types.

In-Store Bakery Segment: Net revenue was USD 42.4 million, an increase of USD 15.6 million, or 58.5 percent, compared to USD 26.7 million. This increase is primarily due to the Superior acquisition and subsequent growth in In-Store Bakery products. Gross profit was USD 10.0 million, or 23.6 percent of net revenue, compared to USD 5.4 million, or 20.3 percent of net revenue. Gross profit increased primarily due to increased net revenue.

Balance Sheet and Cash Flow

As of December 31, 2017, the Company had cash and cash equivalents of USD 135.7 million and approximately USD 96.1 million available for borrowing, net of letters of credit, under its revolving line of credit. The Company had outstanding term loan debt of USD 993.8 million and net debt of USD 858.1 million as of December 31, 2017, resulting in a leverage ratio of 3.73x. See the schedules in the press release for the calculation of the leverage ratio.

Outlook

«We are well positioned to grow and enhance stockholder value in 2018 through the execution of our strategic initiatives,» commented Dean Metropoulos, Executive Chairman of Hostess. «These key strategic initiatives are focused on further core distribution expansion, innovation, expansion of white space and serving as a platform for future acquisitions. We plan to grow well above the sweet baked goods category in 2018.»

In an effort to enable and drive growth in its breakfast product portfolio and bring important co-manufacturing capabilities in-house, during the first quarter of 2018 the Company acquired certain US breakfast assets from Aryzta, LLC (referred to below as the «Acquisition»). The Acquisition included the Chicago Cloverhill bakery facility and the Big Texas® and Cloverhill® brands. The Acquisition is expected to provide USD 60 million to USD 70 million of net revenue for 2018. The Company expects short-term Ebitda losses of USD 15 million to USD 20 million, and corresponding adjusted EPS dilution of USD 0.10 to USD 0.12 as a result of anticipated operating losses from the acquired business through the second half of 2018 as the Company improves the sales and operating performance of the facility. The Company expects the acquired business to be Ebitda positive in the first half of 2019. By 2020, the Company expects the Acquisition to contribute approximately USD 20 million to USD 25 million in Ebitda.

The Company expects adjusted Ebitda of USD 220 million to USD 230 million for the year ended December 31, 2018. See the schedules in the press release for a reconciliation of anticipated 2018 adjusted Ebitda to anticipated net income of USD 98 million to USD 106 million for 2018.

The Company expects adjusted EPS of USD 0.65 to USD 0.70, an increase of 3 percent to 11 percent from adjusted EPS of USD 0.63 for 2017. The impact of Tax Reform is expected to provide a benefit to adjusted EPS of approximately USD 0.12. Please refer to the schedule in this press release for the calculation of expected basic, diluted, and adjusted EPS. The Company’s expected tax rate for 2018 is approximately 21 percent giving effect to the non-controlling interest, a partnership for income tax purposes.

The Company anticipates cash provided by operations of USD 175 million to USD 180 million in 2018. Significant anticipated cash outflows from investing and financing activities include USD 50 million to USD 60 million of total capital expenditures, USD 34 million to buy out a portion of the tax receivable agreement and USD 24 million to fund the Acquisition. The net increase in cash for 2018 of USD 35 million to USD 40 million would result in a leverage ratio of 3.60x to 3.80x at year end, prior to any additional acquisitions or optional debt reductions.