Hostess Brands: Announces Q1-2021 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 months ended March 31, 2021.

«We had an excellent start to 2021 with strong net revenue and earnings growth across both Sweet Baked Goods and Voortman on top of strong growth in the prior year comparable period. Our brands’ strength drove impressive point-of-sale growth, leading to all-time high market share across several channels,» commented Andy Callahan, the Company’s President and Chief Executive Officer. «We continue to experience elevated at-home consumption, while at the same time, increased on-the-go snacking and consumer mobility are benefiting our profitable single-serve mix. Continued strong execution on productivity and pricing measures gives us the confidence to manage inflation and leaves us optimistic for the remainder of 2021.»

Financial Highlights for the First Quarter 2021 as Compared to Q3-2020

  • Net revenue was USD 265.4 million, an increase of 9.0 percent, driven primarily by the strong performance of «Hostess» and «Voortman» branded products.
  • Gross profit was USD 95.5 million, an increase of 20.4 percent. On an adjusted basis, gross profit increased 13.3 percent primarily from favorable mix and realization of Voortman cost synergies.
  • Net income was USD 26.7 million, or USD 0.19 per diluted share, compared to USD 81.7 million, or USD 0.02 per diluted share, in the prior year period. Adjusted net income increased USD 8.3 million, or 44.6 percent, to USD 26.9 million, resulting in USD 0.20 adjusted EPS compared to USD 0.14 adjusted EPS in the prior year period. The increase in adjusted net income and adjusted EPS was primarily due to higher sales volume, favorable mix and realization of Voortman synergies.
  • Adjusted Ebitda was USD 62.5 million, or 23.5 percent of net revenue, an increase of 22.5 percent. The increase was primarily driven by higher «Hostess» and «Voortman» branded sales, realization of Voortman synergies and operating efficiencies.
  • Cash and cash equivalents were USD 197.8 million as of March 31, 2021. Continued reduction of net leverage ratio to 3.6x driven by strong operating cash flow.

Operational Highlights for the First Quarter 2021 as Compared to Q3-2020

  • Continued excellent execution by the Hostess Brands team against our priorities of keeping our team and communities safe and servicing our consumers and customers during the Covid pandemic and dynamic operating environment.
  • Total Company manufacturer point of sale increased 8.7 percent and market share grew 163 basis points to 20.7 percent within the Sweet Baked Goods category driven by 10.6 percent «Hostess» branded point of sale growth.
  • Meaningful market share expansion with 327 basis points of growth in the Convenience channel and 786 basis points of growth in the Dollar channel.
  • Continued strong execution of 2021 innovation slate while advancing innovation pipeline to drive long-term growth.
  • New «Donette» line fully operational and new cake line on schedule for ramp up in the second half of 2021 expanding capacity to enable growth.
  • Implementing multi-faceted pricing actions in the second half of 2021.

[*]This press release contains certain non-GAAP financial measures, including adjusted revenue, adjusted gross profit, adjusted gross margin, adjusted operating income, adjusted Ebitda, adjusted net income, adjusted net income attributed to Class A stockholders 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 2020. 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 thirteen week period ended April 3, 2021 and reflects a scheduled one-week shift in current and prior-year reporting periods performed by Nielsen in April 2021 to better coincide with calendar periods. The Company’s leverage ratio is net debt (total long-term debt less cash) divided by the trailing twelve months adjusted Ebitda.

First Quarter 2021 Compared to First Quarter 2020

Net revenue was USD 265.4 million, an increase of 9.0 percent, or USD 21.9 million, compared to USD 243.5 million. The increase in net revenue was driven by sweet baked goods net revenue, which increased 5.0 percent, or USD 11.3 million, and strong Voortman growth of 61.9 percent, or USD 10.6 million contributing approximately 4.0 points to total growth. The significant Voortman increase over prior year was primarily due to the transition to the warehouse distribution model during the first quarter of 2020.

Gross profit was USD 95.5 million, or 36.0 percent of net revenue, compared to USD 79.3 million, or 32.6 percent of net revenue. Adjusted gross profit was USD 95.5 million, or 36.0 percent of net revenue, compared to USD 84.3 million, or 34.6 percent of net revenue. Adjusted gross profit increased 13.3 percent driven primarily by higher volume of «Hostess» branded products and favorable mix. Additionally, the increase was driven by the realization of Voortman synergies and productivity efficiencies as the Voortman business was not yet transitioned to the warehouse distribution model and fully integrated in the first quarter of 2020.

Operating costs and expenses were USD 48.5 million compared to USD 64.2 million, a decrease of 24.5 percent. The decrease was primarily attributed to prior year expenses incurred for the integration and conversion of Voortman’s operations and the realization of operating cost synergies.

The Company’s effective tax rate was 27.2 percent compared to 0.3 percent in the prior year. The increase in tax rate is primarily attributed to the USD 79.1 million change in fair value of warrant liabilities in the prior-year period, which is a non-taxable gain. The effective rate was also impacted by the removal of the non-controlling interest in the current-year period and a write-off of deferred taxes in the prior-year period related to Voortman.

Net income was USD 26.7 million compared to USD 81.7 million and EPS was USD 0.19 per diluted share compared to USD 0.02 per diluted share. The decrease in net income was due to gains on the change in fair value of our liability-classified warrants of USD 0.1 million compared to USD 79.1 million, partially offset by lower operating costs. Diluted EPS excludes the impact of the change in fair value of the warrants as it is anti-dilutive in both periods, resulting in an increase in diluted EPS. Adjusted net income was USD 26.9 million compared to USD 18.6 million and adjusted EPS was USD 0.20 compared to USD 0.14. Adjusted net income increased as a result of the favorable mix and operating efficiencies noted above.

Adjusted Ebitda was USD 62.5 million, or 23.5 percent of net revenue, compared to USD 51.0 million, or 20.9 percent of net revenue, an increase of USD 11.5 million, or 22.5 percent. The increase was driven by strong «Hostess» branded volume and favorable mix, as well as USD 8.0 million higher Voortman Adjusted Ebitda as a result of the integration and transition to the warehouse model.

Cash from operations for the three months ended March 31, 2021 was USD 32.9 million compared to USD 13.1 million for the same period last year. Operating cash flow benefited from current year improvement in profitability as well as lapping prior-year costs related to the integration and conversion of Voortman’s operations.

Restatement of Historical Warrant Accounting

As previously reported on Form 8-K issued May 6, 2021, following consideration of guidance issued in a recent SEC staff statement, the Company concluded that certain of its warrants should have been classified as liabilities and measured at fair value, with changes in fair value each period reported in earnings and as a result has restated all historical periods impacted.

There was no impact from the restatement to previously reported net revenue, gross profit, operating income, cash and cash equivalents, cash flows from operating, investing or financing activities or the Company’s reported net leverage ratio. Additionally, there was no impact from the restatement to previously reported adjusted non-GAAP results or our 2021 outlook.

As a result of the restatement, the Company recognized an incremental non-operating gain of USD 79.1 million for the three months ended March 31, 2020 based on the change in the fair value of the outstanding liability-classified warrants. The change in fair value for the three months ended March 31, 2020 was less than USD 0.1 million and the prospective changes in fair value of the outstanding warrant liabilities are not expected to be significant. See the appendix to this release for updated reconciliations of the restated GAAP financial results to the unchanged non-GAAP results for each of the quarterly periods in 2020.

2021 Outlook

The Company reaffirms the following expected consolidated financial results for the full year 2021:

  • Adjusted net revenue growth of 3.0 percent to 4.5 percent;
  • Adjusted Ebitda of USD 255 million to USD 265 million, an increase of 6.3 percent to 10.4 percent from 2020;
  • Adjusted EPS of USD 0.80 to USD 0.85, an increase of 6.7 percent to 13.3 percent from 2020**;
  • Leverage ratio of approximately 3x at the end of 2021 compared to 3.9x at December 31, 2020**;
  • Capital expenditures of approximately USD 60 million to USD 65 million, which includes a USD 25 million investment to increase the Company’s cake production capacity to support continued growth;
  • Income tax rate of approximately 27 percent, reflecting the elimination of the non-controlling interest in the fourth quarter of 2020 and higher state taxes.

[**]Outlook assumes an effective net share settlement of outstanding warrants which expire in November 2021 and no other strategic uses of cash.

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, 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.