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, 2020.
«We achieved strong results exceeding our expectations during the beginning of the first quarter prior to the impacts of Covid-19,» commented Andy Callahan, the Company’s President and Chief Executive Officer. «In light of the Covid-19 pandemic we have implemented meaningful changes to our operations to address our primary concern for the health and safety of our employees as we execute through this unprecedented operating environment. Our agile operating network has enabled us to be responsive and adjust to the changes we are facing while the dedication and perseverance of our employees has allowed us to successfully deliver against rapidly evolving consumer demands.»
Callahan continued, «During the quarter our team executed on the growth of core Hostess®, completed significant integration activities for the recently acquired Voortman business and implemented operational improvements enabling us to exceed our financial targets for the first quarter and enabling us to continue to drive future sustainable, long-term profitable growth. Going forward, while we are pleased with our start to the year and our opportunities to benefit from additional food-at-home consumption, the greatest uncertainty is the duration and magnitude of the Covid-19 pandemic and its potential impact on our business and supply chain. We are confident that the challenges and lessons learned during this time will make us stronger with our long-term objectives still well within our reach.»
Financial Highlights for Q1-2020 as Compared to the Prior Year Period [1]
- Net revenue was USD 243.5 million, an increase of 14.4 percent excluding the sale of the In-Store Bakery («ISB») business, driven by the acquisition of Voortman Cookies Limited («Voortman») contributing USD 17.1 million, or 8.1 percent of the growth and the sweet baked goods business adding USD 13.5 million, or 6.3 percent in growth, primarily driven by higher volume of core Hostess® branded products.
- Gross profit was USD 79.3 million, an increase of 8.5 percent excluding ISB, due to higher sales volume. Adjusted gross profit was USD 84.3 million, a 12.8 percent increase, excluding ISB.
- Net income was USD 2.6 million, or USD 0.02 per diluted share, compared to USD 26.6 million, or USD 0.21 per diluted share, in the prior period. The decline was primarily due to transaction, integration and other facility transition costs. Adjusted net income decreased USD 2.1 million, or 10.3 percent, to USD 18.6 million, resulting in USD 0.14 adjusted EPS consistent with the prior period. The decline in adjusted net income was primarily due to higher costs as a result of the Voortman acquisition in addition to less income due to the sale of ISB.
- Adjusted Ebitda was USD 51.0 million, or 20.9 percent of net revenue, an increase of 6.4 percent, excluding ISB. The increase, which was ahead of expectations, was primarily driven by higher volume and slightly accretive Voortman performance, partially offset by increased distribution and labor costs.
- Cash and cash equivalents were USD 96.2 million as of March 31, 2020 with a proforma leverage ratio of 4.5x after factoring in the expected 2020 Ebitda contribution from Voortman.
Operational Highlights for the First Quarter 2020
- Implemented meaningful safety measures company-wide to meet or exceed regulatory guidelines.
- On-track execution of key activities transitioning Voortman to the warehouse distribution model completed with transition costs now expected to be USD 25 million to USD 30 million, better than previous expectations, and meaningful progress against attainment of cost synergies underway.
- Drove incremental operational efficiencies across the Hostess operating network, including significant improvements in the operating performance of our new primary distribution center which has proven instrumental in supporting the increased volume from the Voortman acquisition and increasing consumer demand.
- Point of sale increased 5.1 percent and market share was 18.5, up 17 basis points within the Sweet Baked Goods category.
[1] This press release contains certain non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted Ebitda, adjusted net income, adjusted operating income, and adjusted earnings per share («EPS»). 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 of financial measures in this press release are to the first quarter of 2019. All measures of market performance contained in this press release, including point of sale and market share include all Company branded products within the SBG category as reported by Nielsen but do not include other products sold outside of the SBG category. All market data in this press release refer to the 13 week period ended March 28, 2020. The Company’s proforma leverage ratio is net debt (total long-term debt less cash) divided by adjusted Ebitda (including USD 20.0 million of expected Voortman Ebitda less USD 3.0 million of ISB historical Ebitda).
2020 Outlook
The Company previously issued its full year 2020 guidance on February 26, 2020, which did not include the impact of Covid-19. Despite first quarter results that exceeded Company expectations, the Company is suspending its 2020 Outlook due to the rapidly evolving situation and the high degree of uncertainty caused by the Covid-19 pandemic. The Company does not believe that it can estimate the full financial impacts of the pandemic with reasonable accuracy. The Company believes it has sufficient liquidity to satisfy its cash needs, as supported by cash on hand, cash flow from operations and access to its revolving credit facility. 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.
First Quarter 2020 Compared to First Quarter 20191
Net revenue was USD 243.5 million, an increase of 9.3 percent, or USD 20.8 million, compared to USD 222.7 million. Excluding ISB, net revenue increased 14.4 percent. The acquisition of Voortman contributed net revenue of USD 17.1 million in the quarter and 8.1 percent of the growth, excluding ISB. The remaining increase was from the USD 13.5 million or 6.3 percent growth from sweet baked goods primarily driven by higher volume of core Hostess® branded multi-pack products due to strong demand particularly in the grocery and dollar channels generated in part from increased store traffic in response to Covid-19.
Gross profit was USD 79.3 million, or 32.6 percent of net revenue, compared to USD 75.2 million, or 33.8 percent of net revenue. Excluding ISB, gross profit increased 8.5 percent. Adjusted gross profit was USD 84.3 million, or 34.6 percent of net revenue, compared to USD 76.8 million, or 34.5 percent of net revenue. Adjusted gross profit, excluding ISB, increased 12.8 percent. Adjusted gross profit increased as a result of higher revenue partially offset by increased distribution and labor costs.
Operating costs and expenses were USD 64.2 million, or 26.4 percent of net revenue, compared to USD 39.1 million, or 17.5 percent of net revenue. These costs increased primarily due to transition costs incurred to shift Voortman from a direct-to-store delivery operating model to a direct-to-warehouse model including contract termination costs for the independent distributors and severance costs as well as normal operating costs of the Voortman operations.
The Company’s effective tax rate was 8.6 percent compared to a benefit of 4.6 percent. The current year effective tax rate was impacted by the write off of deferred taxes related to Voortman, which resulted in a discrete tax benefit of USD 0.5 million. The prior year effective tax rate was impacted by the remeasurement of deferred taxes as a result of the relocation of the Company’s primary distribution center from Illinois to Kansas, which resulted in a discrete tax benefit of USD 6.0 million.
Net income was USD 2.6 million compared to USD 26.6 million and EPS was USD 0.02 per diluted share compared to USD 0.21 per diluted share. Adjusted net income was USD 18.6 million compared to USD 20.8 million and adjusted EPS was USD 0.14, consistent with the prior period. In addition to the changes in gross profit and operating expenses noted above, adjusted net income declined due to increased depreciation, amortization and interest expense as a result of the Voortman acquisition and the sale of ISB.
Adjusted Ebitda was USD 51.0 million, or 20.9 percent of net revenue, compared to USD 49.4 million, or 22.2 percent of net revenue, an increase of USD 1.6 million, or 3.2 percent. Excluding the impact of ISB, adjusted Ebitda increased USD 3.1 million or 6.4 percent. The increase was primarily driven by higher sweet baked goods sales and the addition of Voortman, which was slightly accretive for the quarter, partially offset by increased distribution and labor costs.
Cash from operations for the three months ended March 31, 2020 was USD 13.1 million compared to USD 28.4 million for the same period last year. The decrease was primarily attributable to higher integration and transition costs.
