Hostess Brands: Announces Q4 and FY 2016 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 financial results for the fourth quarter and full year ended December 31, 2016.

The Company’s results include those of Superior Cake Products Inc. from May 10, 2016, the date of its acquisition. Through Superior, the Company competes in the in-store bakery section of grocery and club retailers.

On November 04, 2016, the Company completed the acquisition of a controlling interest in Hostess Holdings, L.P. and changed its name from Gores Holdings Inc. to Hostess Brands Inc. (the «Business Combination»). As a result, the Company’s consolidated financial results are presented:

  1. as of December 31, 2016 (Successor) and 2015 (Predecessor);
  2. for the period November 04, 2016 to December 31, 2016 (Successor);
  3. for the period January 01, 2016 to November 03, 2016 (Predecessor); and
  4. for the quarter ended December 31, 2015 and for the years ended December 31, 2015 and December 31, 2014 (Predecessor).

The Company has also presented supplemental unaudited pro forma combined financial information for the quarter and year ended December 31, 2016, giving effect to the Business Combination as if it had occurred on January 1, 2016. All references in this press release to results for the quarter and year ended December 31, 2016, refer to such unaudited pro forma combined results. The Company believes this pro forma information provides helpful supplemental information with respect to the performance of the Hostess business during this period.

The Company also has supplemented its discussion with a presentation of adjusted Ebitda and adjusted gross profit, each a non-GAAP financial measure. Please refer to the schedules in this press release for an explanation and reconciliations of these non-GAAP financial measures.

Fourth Quarter 2016 Pro Forma Combined Financial Highlights

  • Pro forma combined net revenue increased 21.6 percent, or 31.8 million USD, to 178.8 million USD (revenue increased 14.8 percent, excluding Superior acquisition)
  • Pro forma combined gross margin improved 150 basis points to 43.0 percent
  • Pro forma combined net income was 22.0 million USD for the fourth quarter of 2016, an increase of 4.8 million USD compared to the fourth quarter of 2015
  • Pro forma combined EPS on a fully diluted basis was 0.14 USD per share
  • Pro forma combined adjusted Ebitda increased 25.4 percent, or 10.7 million USD, to 52.9 million USD

Fiscal 2016 Pro Forma Combined Financial Highlights

  • Pro forma combined net revenue increased 17.2 percent, or 106.8 million USD, to 727.6 million USD (revenue increased 12.9 percent excluding Superior acquisition)
  • Pro forma combined gross margin improved 116 basis points to 43.4 percent
  • Pro forma combined net income was 82.4 million USD for 2016, a decrease of 6.3 million USD compared to 2015
  • Pro forma combined EPS on a fully diluted basis was 0.54 USD per share
  • Pro forma combined adjusted Ebitda increased 21.0 percent, or 37.4 million USD, to 215.3 million USD

(All comparisons above are with respect to the Predecessor’s fourth quarter and year ended December 31, 2015)

«We are pleased with our strong revenue and profit growth for the year», commented Bill Toler, President and Chief Executive Officer of the Company. «Our financial performance this year benefited from increased distribution and product innovation initiatives as well as continuing to build market share on our core products. We continue to feel confident with our momentum heading in to 2017».

Fourth Quarter 2016 Pro Forma Combined Financial Results

Pro forma combined net revenue was 178.8 million USD for the fourth quarter of 2016, an increase of 31.8 million USD, or 21.6 percent, compared to net revenue of 147.0 million USD for the fourth quarter of 2015 primarily due to 10.2 million USD of revenue from the acquisition of Superior, product innovation, including the launch of Suzy Q’s® and Hostess Sweet Shop™ Brownies, and increased distribution.

Pro forma combined gross profit was 77.0 million USD for the fourth quarter of 2016, an increase of 15.9 million USD, compared to gross profit of 61.1 million USD for the fourth quarter of 2015.

Pro forma combined gross margin was 43.0 percent for the fourth quarter of 2016, compared to 41.5 percent for the fourth quarter of 2015. The improved gross margin was driven primarily by commodity cost decreases and improved bakery costs.

Pro forma combined advertising, selling, general and administrative (SG+A) expenses were 26.4 million USD for the fourth quarter of 2016, or 14.8 percent of net revenue, compared to 20.6 million USD, or 14.0 percent of net revenue, for the fourth quarter of 2015. This increase was primarily attributable to planned expansion of field marketing activities and increased incentive compensation related to improved operating performance.

The effective tax rate was 28.5 percent for the pro forma combined quarter ended December 31, 2016, giving effect to the non-controlling interest, a partnership for income tax purposes. The predecessor was a non-taxable pass-thru limited partnership and had no income tax expense or benefit.

Pro forma combined net income was 22.0 million USD, or pro forma combined earnings of 0.14 USD per share for the fourth quarter of 2016, compared to net income of 17.2 million USD in the fourth quarter of 2015. Gross margin improvements, discussed above, were the primary drivers of the increase in net income.

Pro forma combined adjusted Ebitda was 52.9 million USD for the fourth quarter of 2016, an increase of 10.7 million USD, or 25.4 percent, compared to adjusted Ebitda of 42.1 million USD for the fourth quarter of 2015. As a percentage of net revenue, pro forma combined adjusted Ebitda was 29.6 percent for the fourth quarter of 2016, compared to adjusted Ebitda of 28.7 percent of net revenues in the same period last year. Adjusted Ebitda is a non-GAAP financial measure. Please refer to the schedules in this press release for a reconciliation of non-GAAP financial measures.

Fourth Quarter Pro Forma Combined Segment Results

The Company has two reportable segments: Sweet Baked Goods and Other. The Sweet Baked Goods segment consists of sweet baked goods and the Other segment consists of branded bread and buns, in-store bakery products and frozen retail.

Sweet Baked Goods Segment: Pro forma combined net revenue for the fourth quarter of 2016 was 162.1 million USD, an increase of 19.4 million USD, or 13.6 percent, compared to net revenue of 142.8 million USD for the fourth quarter of 2015. Pro forma combined gross profit was 72.0 million USD, or 44.4 percent of net revenue, compared to gross profit of 59.5 million USD, or 41.7 percent of net revenue, for the fourth quarter of 2015.

Other Segment: Pro forma combined net revenue for the fourth quarter of 2016 was 16.7 million USD, an increase of 12.4 million USD, or 291.5 percent, compared to net revenue of 4.3 million USD for the fourth quarter of 2015. This increase is primarily due to the impact of the Superior acquisition. Pro forma combined gross profit was 5.0 million USD, or 29.9 percent of net revenue, compared to gross profit of 1.6 million USD, or 37.4 percent of net revenue for the fourth quarter of 2015.

Fiscal Year 2016 Pro Forma Combined Results

Pro forma combined net revenue was 727.6 million USD for 2016, an increase of 106.8 million USD, or 17.2 percent, compared to net revenue of 620.8 million USD for 2015, primarily due to strong results from new product launches in 2016 of 44.0 million USD and contribution of Superior net revenue of 26.7 million USD from the date of its acquisition. New products in 2016 included Deep Fried Twinkies®, Hostess Sweet Shop™ brownies, plus the relaunch of Suzy Qs® snack cakes. The Sweet Baked Goods segment represented 92.1 percent and the Other segment represented 7.9 percent of net revenue, respectively, for the pro forma combined year ended December 31, 2016.

Pro forma combined gross profit was 316.0 million USD for 2016, an increase of 53.8 million USD, compared to gross profit of 262.2 million USD, or 264.9 million USD, excluding the impact of a 2.6 million USD special employee incentive compensation payment, for the year ended December 31, 2015.

Pro forma combined gross margin was 43.4 percent for 2016, compared to 42.2 percent, or 42.7 percent, excluding the impact of a 2.6 million USD special employee incentive compensation payment for the year ended December 31, 2015. The improved gross margin was driven primarily by commodity cost decreases and improved bakery costs.

Pro forma combined SG+A expenses were 108.4 million USD for 2016, or 14.9 percent of net revenue, compared to SG+A expenses of 93.0 million USD, or 15.0 percent of net revenue, for 2015. The dollar increase in SG+A expenses was primarily attributable to the impact of the Business Combination, the addition of Superior, planned expansion of field marketing activities, and increased incentive compensation related to improved operating performance.

Pro forma combined net income was 82.4 million USD, or pro forma combined earnings of 0.54 USD per share for 2016, compared to net income of 88.8 million USD for 2015, with the decrease resulting from the income tax provision for 2016.

Pro forma combined adjusted Ebitda was 215.3 million USD for 2016, an increase of 37.4 million USD, or 21.0 percent, compared to adjusted Ebitda of 177.9 million USD for 2015. Pro forma combined adjusted Ebitda for 2016 was 29.6 percent of net revenue, compared to adjusted Ebitda of 28.7 percent of net revenue last year. Adjusted Ebitda is a non-GAAP financial measure. Please refer to the schedules in this press release for a reconciliation of non-GAAP financial measures.

Fiscal Year 2016 Pro Forma Combined Segment Results

Sweet Baked Goods Segment: Pro forma combined net revenue for 2016 was 670.4 million USD, an increase of 60.5 million USD, or 9.9 percent, compared to net revenue of 609.9 million USD for 2015. Pro forma combined gross profit was 299.0 million USD, or 44.6 percent of net revenue, for 2016, compared to gross profit of 258.2 million USD, or 42.3 percent of net revenue, for 2015.

Other Segment: Pro forma combined net revenue for 2016 was 57.2 million USD, an increase of 46.3 million USD, or 423.6 percent, compared to net revenue of 10.9 million USD for 2015 which is primarily due to the impact of the Superior acquisition. Pro forma combined gross profit was 17.0 million USD, or 29.7 percent of net revenue, for 2016, compared to gross profit of 4.0 million USD, or 36.2 percent of net revenue, for 2015.

Balance Sheet and Cash Flow

As of December 31, 2016, the Company had cash and cash equivalents of 26.9 million USD and approximately 97.2 million USD available for borrowing, net of letters of credit, under its revolving line of credit. The Company had outstanding term loan debt of 998.8 million USD and net debt of 971.9 million USD as of December 31, 2016, resulting in a total leverage ratio of 4.51x 2016 pro forma combined adjusted Ebitda of 215.3 million USD.

Outlook

The Company expects to continue to grow above the sweet baked goods category in 2017. The Company reaffirms anticipated net revenue of 781 million USD and adjusted Ebitda of 235 million USD for the year ended December 31, 2017.

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