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 months ended March 31, 2018.
First Quarter 2018 Summary(1)
- Net revenue increased 13.1 percent; excluding the Chicago Bakery(2), net revenue increased 5.2 percent.
- The Chicago Bakery, acquired on February 1, 2018, contributed USD 14.5 million of net revenue.
- Point of sale increased 6.3 percent for the 12-week period ended March 24, 2018. Point of sale for the top seven sub-brands increased 8.5 percent. These sub-brands represent 69.1 percent of the Company’s net revenue.
- The Hostess® brand’s market share for the 12-week period ended March 24, 2018 was 17.9 percent, up 124 basis points. This represents a record market share for the brand since its re-launch in 2013.
- Net income was USD 29.3 million (including a one-time gain of USD 12.4 million related to the buyout of a portion of the tax receivable agreement) compared to USD 24.2 million. Diluted EPS was USD 0.23 per share compared to USD 0.15 per share.
- Adjusted EPS was USD 0.14 per share compared to USD 0.15 per share.
- Adjusted Ebitda was USD 47.0 million, or 22.5 percent of net revenue, compared to USD 54.5 million or 29.5 percent or net revenue.
- Cash and cash equivalents of USD 100.5 million as of March 31, 2018 with a leverage ratio of 4.00x, both driven by operating cash flows of USD 38.3 million.
«We are pleased with our sales momentum and strong start to 2018», commented Dean Metropoulos, Executive Chairman of Hostess. «Our Chicago Bakery transformation is well underway, which we believe will provide significant opportunities for revenue growth within the Breakfast subcategory and be accretive to our future earnings. We continue to introduce new innovative items that have expanded the Hostess® brand market share and continue to expect to grow well above the category average in 2018 and beyond».
(1) This press release contains certain non-GAAP financial measures, including adjusted net income attributed to Class A stockholders, adjusted earnings per share (EPS) and adjusted Ebitda. 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 are to the first quarter of 2017.
(2) On February 1, 2018, the Company acquired certain breakfast-related assets from Aryzta LLC. These assets included the Chicago Cloverhill bakery facility, the related inventory, and the Big Texas® and Cloverhill® brands. Throughout this press release, these assets are referred to collectively as the «Chicago Bakery».
First Quarter 2018 (Comparisons to the First Quarter of 2017)
Net revenue was USD 208.7 million, an increase of 13.1 percent, or USD 24.2 million, compared to USD 184.5 million. The Chicago Bakery, which the Company acquired during the quarter to expand its breakfast product portfolio and manufacturing capabilities, contributed USD 14.5 million of net revenue. Excluding the Chicago Bakery, net revenue increased 5.2 percent, driven by the continued momentum from the Company’s 2017 product innovations.
Gross profit was USD 71.2 million, or 34.1 percent of net revenue, compared to USD 79.3 million, or 43.0 percent of net revenue. The decline was primarily attributed to USD 4.3 million in negative gross profit from the Chicago Bakery resulting in a 478 basis point decrease to gross margin. In addition, higher transportation costs as a result of tightened shipping capacity, higher co-packing costs and one-time bonuses paid to hourly employees as a result of the projected benefits of the newly enacted tax legislation also impacted gross profit.
Advertising, selling, general and administrative (SG+A) expenses were USD 30.8 million, or 14.8 percent of net revenue, compared to USD 28.6 million, or 15.5 percent of net revenue. This increase on a dollar basis was primarily attributable to an increase in non-cash share-based compensation of USD 1.1 million due to a full quarter of stock compensation expense for the three months ended March 31, 2018, compared to only a partial quarter for the three months ended March 31, 2017. The Company has also increased display rack deployment in support of revenue growth.
In the first quarter of 2018, the Company entered into an agreement to buyout the Apollo Funds’ rights to all current and future tax savings under the tax receivable agreement in exchange for a USD 34.0 million cash payment, resulting in a gain of USD 12.4 million.
The Company recognized an impairment loss of USD 1.4 million related to the planned disposition of certain production equipment before the end of its useful life.
The Company’s effective tax rate was 18.2 percent, giving effect to the non-controlling interest, a partnership for income tax purposes, compared to 29.2 percent. The decrease in the Company’s effective tax rate was primarily attributed to a lower federal statutory rate enacted by the legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Reform). The tax impact of the gain on the buyout of the tax receivable agreement also decreased the Company’s effective tax rate.
Net income was USD 29.3 million, compared to net income of USD 24.2 million. Net income attributed to Class A stockholders was USD 23.8 million, or USD 0.23 per share (on a diluted basis), compared to USD 15.8 million, or USD 0.15 per share.
Adjusted EPS was USD 0.14, compared to USD 0.15 per share. Adjusted Ebitda was USD 47.0 million, or 22.5 percent of net revenue, compared to adjusted Ebitda of USD 54.5 million, or 29.5 percent of net revenue. The decreases in adjusted EPS and adjusted Ebitda were primarily attributable to the negative gross profit from the Chicago Bakery.
The Company has two reportable segments: Sweet Baked Goods (SBG) and In-Store Bakery. The SBG segment consists of sweet baked goods that are sold under the Hostess® and Dolly Madison® brands, Hostess® branded bread and buns and frozen retail products. The operations attributed to the Chicago Bakery are included in the SBG segment. The In-Store Bakery segment consists of Superior® and Hostess® branded products sold through the in-store bakery section of grocery and club stores. Prior to the fourth quarter of 2017, the Company had two operating segments: SBG and Other. The analysis below reflects the new segment presentation for both the current and comparative periods.
Sweet Baked Goods Segment: Net revenue was USD 199.3 million, an increase of USD 24.5 million, or 14.0 percent, compared to USD 174.8 million. The Chicago Bakery contributed USD 14.5 million of the increase in net revenue. The remaining increase was driven primarily by continued growth from 2017 product innovations. Gross profit was USD 69.4 million, or 34.8 percent of net revenue, compared to USD 76.8 million, or 43.9 percent of net revenue. The decrease in gross margin was primarily due to the Chicago Bakery operations, which produced negative gross profit for the quarter. Gross profit was also impacted by higher transportation and co-packing costs and bonuses paid to hourly employees as a result of the projected benefits of the newly enacted tax legislation.
In-Store Bakery Segment: Net revenue was USD 9.4 million, a decrease of 0.3 million, or 3.0 percent, compared to net revenue of USD 9.7 million. Gross profit was USD 1.8 million, or 19.1 percent of net revenue, compared to gross profit of USD 2.5 million, or 25.8 percent of net revenue. The decrease in gross margin was primarily attributable to a shift in product and channel mix. Gross margin further decreased due to higher transportation costs as well as one-time bonuses paid to hourly employees.
Balance Sheet and Cash Flow
As of March 31, 2018, the Company had cash and cash equivalents of USD 100.5 million and approximately USD 96.1 million available for borrowing, net of letters of credit, under its revolving line of credit. The Company generated operating cash flow of USD 38.3 million during the quarter. The Company had outstanding term loan debt of USD 991.3 million and net debt of USD 890.8 million as of March 31, 2018, resulting in a leverage ratio of 4.00x based on adjusted Ebitda of USD 222.7 million for the twelve months ended March 31, 2018. See the schedules in the press release for the reconciliation of adjusted Ebitda to net income and the calculation of the leverage ratio.
The Company expects that its continued focus on its strategic initiatives of core distribution expansion, innovation and white space expansion will result in growth well above the SBG category in 2018. In addition, the Company expects to continue to serve as a platform for future acquisitions.
The Company reaffirms its outlook for adjusted EPS of USD 0.65 to USD 0.70. Please refer to the schedules 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 reaffirms its outlook for adjusted Ebitda of USD 220 million to USD 230 million for the year ended December 31, 2018. See the schedules in this 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 reaffirms its outlook for 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 of the Chicago Bakery. The net increase in cash for 2018 of USD 35 million to USD 40 million is expected to result in a leverage ratio of 3.50x to 3.70x at year end, prior to any additional acquisitions.