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Hostess Brands: Announces Q2-2017 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 second quarter and six months ended June 30, 2017.

Hostess® is the second leading brand by market share within the Sweet Baked Goods (SBG) category. For the 52-week period ended July 15, 2017 the Company’s market share was 17.1 percent per Nielsen’s U.S. SBG category data. The Company has a #1 leading market position within the two largest SBG Segments: Donut Segment and Snack Cake Segment, and has a #2 leading market position in total Sweet Baked Goods, according to Nielsen U.S. total universe for the 52 weeks ended July 15, 2017. The Donut and Snack Cake Segments together account for 50.4 percent of the Sweet Baked Goods category’s total dollar sales.

The Company’s results include those of Superior Cake Products Inc., which was acquired on May 10, 2016. Through Superior, the Company competes in the in-store bakery section of retailers.

On November 4, 2016, the Company completed the acquisition of a controlling interest in Hostess Holdings, L.P. (Hostess Holdings) and changed its name from Gores Holdings Inc. to Hostess Brands Inc. (the Business Combination). Hostess Holdings is the Company’s «Predecessor» for accounting purposes. As a result, the Company’s consolidated financial results are presented: (i) as of June 30, 2017 and December 31, 2016 (Successor); (ii) for the three and six months ended June 30, 2017 (Successor); and (iii) for the three and six months ended June 30, 2016 (Predecessor).

The Company has also presented supplemental unaudited pro forma financial information for the three and six months ended June 30, 2016, giving effect to the Business Combination as if it had occurred on January 1, 2016. The pro forma financial information does not include the operations of Superior prior to the May 10, 2016 acquisition date. All references in this press release to results for the three and six months ended June 30, 2016, refer to such unaudited pro forma results. The Company believes this unaudited pro forma information provides helpful supplemental information with respect to the performance of the Hostess business during this period.

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

Second Quarter 2017 Financial Highlights

  • Net revenue of USD 203.2 million increased 5.6 percent, or USD 10.8 million from pro forma second quarter 2016
  • Net income was USD 28.2 million, an increase of USD 6.3 million, compared to USD 21.9 million for the pro forma second quarter 2016
  • EPS on a fully diluted basis was USD 0.18 per share, compared to USD 0.15 for the pro forma second quarter 2016
  • Adjusted Ebitda increased 7.7 percent, or USD 4.5 million, to USD 63.2 million from USD 58.7 million for the pro forma second quarter 2016

Year-To-Date 2017 Financial Highlights

  • Net revenue of USD 387.7 million increased 10.0 percent, or USD 35.2 million from the pro forma six months ended June 30, 2016
  • Net income was USD 52.4 million, an increase of USD 18.2 million, compared to USD 34.2 million for the pro forma six months ended June 30, 2016
  • EPS on a fully diluted basis was USD 0.33 per share, compared to USD 0.23 for the pro forma six months ended June 30, 2016
  • Adjusted Ebitda increased 10.2 percent, or USD 10.9 million, to USD 117.7 million from USD 106.8 million for the pro forma six months ended June 30, 2016

«We are pleased with our continued ability to gain market share, achieve mid-single digit net sales growth and drive profitability in a challenging retail environment, particularly as we cycled very strong results in the prior-year period», commented Bill Toler, President and Chief Executive Officer of Hostess. «Our second quarter results were driven by new product initiatives and growing traction of white space opportunities, led by In-Store Bakery, Food Service, and International channel expansion. We are on-track to achieve our annual revenue and adjusted Ebitda outlook and remain focused on the execution of our three growth drivers: to further rebuild our core business, deliver compelling product innovation and line extensions, and pursue significant white space opportunities. These efforts will fuel future increases in net sales and profitability as well as enhance shareholder value».

Second Quarter 2017

Net revenue was USD 203.2 million, an increase of USD 10.8 million, or 5.6 percent, compared to pro forma net revenue of USD 192.3 million for the second quarter of 2016. The increase was primarily due to the Company’s 2017 new product initiatives, including Chocolate Cake Twinkies®, White Fudge Ding Dongs®, and Golden Cupcakes, among others, along with growth from the Company’s white space opportunities, led by In-Store Bakery (which contributed USD 4.7 million of growth due to the acquisition of Superior and In-Store Bakery product innovation), Food Service and International channels. These amounts were partially offset by declines in the Company’s prior year innovations and discontinued items.

Gross profit was USD 88.4 million, an increase of USD 2.3 million, or 2.7 percent, compared to pro forma gross profit of USD 86.2 million for the second quarter of 2016, driven by the increase in revenue.

Gross margin was 43.5 percent, compared to 44.8 percent for the pro forma second quarter of 2016. The decrease in gross margin was primarily due to a shift in product mix to include a full quarter of the Company’s In-Store Bakery operations and growth in multi-pack and club-pack product sales as a percentage of total growth.

Advertising, selling, general and administrative (SG+A) expenses were USD 32.6 million, or 16.0 percent of net revenue, compared to USD 29.4 million, or 15.3 percent of net revenue, for the pro forma second quarter of 2016. This increase was primarily attributable to an increase in non-cash share-based compensation.

Net income was USD 28.2 million, or USD 0.18 per share, compared to net income of USD 21.9 million, or USD 0.15 per share, for the pro forma second quarter of 2016. The increase in net income was attributed to 2016 costs associated with a product recall (these costs were subsequently recovered in the third quarter of 2016); a decrease in interest expense due to the pay-down of outstanding term loans and amendments to the Company’s loan agreements resulting in a lower effective interest rate; and revenue and gross profit growth. Net income of USD 18.8 million was allocated to Class A common stockholders, while the remaining USD 9.4 million was allocated to the non-controlling interest.

Adjusted Ebitda was USD 63.2 million, an increase of USD 4.5 million, or 7.7 percent, compared to adjusted Ebitda of USD 58.7 million for the pro forma second quarter of 2016. As a percentage of net revenue, adjusted Ebitda was 31.1 percent, compared to 30.5 percent in the same period last year. Adjusted Ebitda is a non-GAAP financial measure. Please refer to the schedules in this press release for reconciliations of non-GAAP financial measures.

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, frozen retail and licensing.

Sweet Baked Goods Segment: Net revenue was USD 182.7 million, an increase of USD 3.7 million, or 2.0 percent, compared to pro forma net revenue of USD 179.1 million for the second quarter of 2016. Gross profit was USD 82.4 million, or 45.1 percent of net revenue, compared to gross profit of USD 81.9 million, or 45.7 percent of net revenue, for the pro forma second quarter 2016. Gross margin decreased due to growth in multi-pack and club-pack product sales as a percentage of total sales growth.

Other Segment: Net revenue was USD 20.4 million, an increase of USD 7.2 million, or 54.3 percent, compared to net revenue of USD 13.3 million for the pro forma second quarter 2016. This increase is primarily due to the impact of the Superior acquisition completed May 10, 2016, and the result of white space growth initiatives. Gross profit was USD 6.1 million, or 29.7 percent of net revenue, compared to gross profit of USD 4.3 million, or 32.2 percent, of net revenue, for the pro forma second quarter 2016. Gross margin decreased due to the proportion of In-Store Bakery sales.

Year-To-Date 2017

Net revenue was USD 387.7 million, an increase of USD 35.2 million, or 10.0 percent, compared to pro forma net revenue of USD 352.6 million for the six months ended June 30, 2016. The increase was primarily due to the Company’s continued growth from 2017 new product initiatives, including Chocolate Cake Twinkies®, White Fudge Ding Dongs®, and Golden Cupcakes, among others along with growth from the Company’s white space opportunities led by In-Store Bakery (which contributed USD 14.4 million of growth due to the acquisition of Superior and In-Store Bakery product innovation), Food Service and International channels. These amounts were partially offset by declines in prior year innovations and discontinued items.

Gross profit was USD 167.7 million, an increase of USD 11.5 million, or 7.4 percent, compared to pro forma gross profit of USD 156.3 million for the six months ended June 30, 2016, driven by the increase in revenue.

Gross margin was 43.3 percent, compared to 44.3 percent for the pro forma six months ended June 30, 2016. The decrease in gross margin was primarily due to a shift in product mix to include the Company’s In-Store Bakery operations and growth in multi-pack and club-pack product sales as a percentage of total growth.

SG+A expenses were USD 61.2 million, or 15.8 percent of net revenue, compared to USD 53.0 million, or 15.0 percent of net revenue, for the pro forma six months ended June 30, 2016. This increase was primarily attributable to increased non-cash share-based compensation, increased professional service expenses and increased staffing levels to support growth.

Net income was USD 52.4 million, or USD 0.33 per share, compared to net income of USD 34.2 million, or USD 0.23 per share, for the pro forma six months ended June 30, 2016. The increase in net income was attributed to the USD 7.3 million impairment loss recognized during the six months ended June 30, 2016; a decrease in interest expense for the six months ended June 30, 2017; 2016 costs associated with a product recall (these costs were subsequently recovered in the third quarter of 2016); and revenue and gross profit growth. Net income of USD 34.7 million was allocated to Class A common stockholders, while the remaining USD 17.7 million was allocated to the non-controlling interest.

Adjusted Ebitda was USD 117.7 million, an increase of USD 10.9 million, or 10.2 percent, compared to adjusted Ebitda of USD 106.8 million for the pro forma six months ended June 30, 2016. As a percentage of net revenue, adjusted Ebitda was 30.4 percent, compared to 30.3 percent in the same period last year. Adjusted Ebitda is a non-GAAP financial measure. Please refer to the schedules in this press release for reconciliations of non-GAAP financial measures.

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, frozen retail and licensing.

Sweet Baked Goods Segment: Net revenue was USD 351.2 million, an increase of USD 17.4 million, or 5.2 percent, compared to pro forma net revenue of USD 333.8 million for the six months ended June 30, 2016. Gross profit was USD 157.3 million, or 44.8 percent of net revenue, compared to gross profit of USD 150.0 million, or 44.9 percent of net revenue, for the pro forma six months ended June 30, 2016. Gross margin decreased due to growth in multi-pack and club-pack product sales as a percentage of total sales growth.

Other Segment: Net revenue was USD 36.5 million, an increase of USD 17.8 million, or 94.9 percent, compared to net revenue of USD 18.7 million for the pro forma six months ended June 30, 2016. This increase is primarily due to the impact of the Superior acquisition completed May 10, 2016. Gross profit was USD 10.5 million, or 28.7 percent of net revenue, compared to gross profit of USD 6.2 million, or 33.1 percent of net revenue for the pro forma six months ended June 30, 2016. Gross margin decreased due to the proportion of In-Store Bakery sales.

Balance Sheet and Cash Flow

As of June 30, 2017, the Company had cash and cash equivalents of USD 66.2 million and approximately USD 97.3 million available for borrowing, net of letters of credit, under its revolving line of credit. The Company had outstanding term loan debt of USD 996.3 million and net debt of USD 930.0 million as of June 30, 2017, resulting in a total pro forma combined leverage ratio of 4.11x based on pro forma combined adjusted Ebitda of USD 226.2 million for the twelve months ended June 30, 2017. (See the schedules in the press release for the calculation of the pro forma combined leverage ratio and a reconciliation of pro forma combined adjusted Ebitda to pro forma combined net income of USD 100.7 million for the twelve months ended June 30, 2017.)

Outlook

The Company expects to continue to grow above the sweet baked goods category in 2017. The Company reaffirms its expectation of anticipated net revenue of USD 781 million and adjusted Ebitda of USD 235 million for the year ended December 31, 2017. (See the schedules in the press release for a reconciliation of anticipated 2017 adjusted Ebitda to anticipated net income of USD 96.0 million for 2017).

During the third quarter of 2017, the Company expects the impact of a recent change in a state tax law will cause an increase to the Company’s income tax expense of USD 2.5 million to USD 3.0 million, and an increase to the amount payable under the tax receivable agreement resulting in an additional expense of USD 1.5 million to USD 2.0 million.

Based upon the Company’s anticipated net income of USD 96.0 million for 2017, USD 34.0 million is expected to be allocated to the non-controlling interest based on the current ownership percentage in Hostess Holdings. The remaining USD 62.0 million allocated to Class A Common stockholders is expected to result in USD 0.63 basic earnings per share and USD 0.58 diluted earnings per share for the full year based on expected basic and diluted shares outstanding of approximately 99.1 million and 107.2 million, respectively.

Income tax related payments expected to be made by the Company relating to 2017 activity include: (i) tax payments between USD 17 million and USD 20 million during 2017 to cover the Company’s current federal and state income tax liabilities, (ii) between USD 15 million and USD 18 million of distributions to the holders of the non-controlling interest (a partnership for tax purposes) in respect of their income tax liability, and (iii) between USD 13 million and USD 15 million of payments to the selling equityholders of Hostess Holdings for 2017 activity under the terms of the tax receivable agreement. The tax receivable agreement payment is expected to be made in 2018.

The Company believes that it is well positioned to grow and enhance shareholder value through the execution of its strategic initiatives. These key strategic initiatives are focused on further core distribution expansion, continued new product initiatives and line extensions, the pursuit of white space opportunities and serving as a platform for future acquisitions.