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 and nine months ended September 30, 2019.
Business Highlights for Q3/2019 versus Q3/2018
- Net revenue increased USD 16.2 million, or 7.7 percent, to USD 227.2 million due to higher volume of core Hostess® branded products and breakfast innovation driven by distribution and merchandising support, as well as the previously announced price increases, partially offset by the sale of the In-Store Bakery (ISB) business on August 30, 2019. Excluding ISB, net revenue increased 9.2 percent.
- Gross profit increased USD 10.0 million, or 16.6 percent, to USD 70.4 million due to higher sales volume and pricing actions as well as continued operating efficiencies. Adjusted gross profit increased USD 11.1 million, or 17.4 percent, to USD 75.2 million, or 33.1 percent of net revenue, representing a margin improvement of 270 basis points.
- Net income was USD 10.7 million, or USD 0.07 per diluted share, compared to USD 11.2 million, or USD 0.08 per diluted share, in the prior period. The decline was primarily due to costs related to the sale of ISB and debt refinancing.
- Adjusted net income increased USD 4.8 million, or 32.9 percent, to USD 19.2 million, resulting in USD 0.13 adjusted earnings per share.
- Adjusted Ebitda increased USD 7.6 million, or 19.0 percent, to USD 47.8 million, or 21.0 percent of net revenue, representing a margin improvement of 201 basis points.
- Cash and cash equivalents were USD 266.9 million as of September 30, 2019 with a leverage ratio of 3.5x.
The Company Refines Full-Year 2019 Outlook
- The Company expects continued organic revenue growth well above the Sweet Baked Goods («SBG») category in 2019 driven by Hostess® branded core and new product innovation due to expanded distribution and improved merchandising execution as well as benefits from increased pricing.
- The Company expects full year 2019 adjusted Ebitda of USD 202 million to USD 208 million, an increase of 9 percent to 12 percent over 2018, primarily driven by revenue growth and achievement of operational efficiencies. This reflects the reduction of USD 3 million as a result of the sale of ISB during the third quarter.
- The Company’s expected leverage ratio estimate is 3.2x to 3.4x at the end of 2019, driven by strong operating cash flows and cash received from the divestiture of ISB.
«We are very pleased with the continued growth momentum of our product offerings and our demonstrated ability to meaningfully increase point-of-sale Dollars and market share across sales channels,» commented Andy Callahan, President and Chief Executive Officer. «We achieved significant revenue growth in our Hostess® branded core and new breakfast products during the quarter. This strong top-line growth combined with ongoing cost efficiencies from the disciplined investments in our Chicago bakery contributed to a significant increase in profitability and strong cash flow generation. With our focus on growth and efficiency grounded in our five pillars, we remain confident about the growth potential we have for the balance of the year and 2020. We are excited by the improved capabilities we have built which support meaningful growth ahead of an expanding category that will lead to top-quartile financial results into the future.»
This press release contains certain non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted Ebitda, adjusted Ebitda margin, adjusted net income, adjusted net income attributed to Class A stockholders and adjusted earnings per share («Adjusted 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 third quarter of 2018. All measures of market performance contained in this press release, including point of sale and market share, are for the 13 week period ended September 28, 2019 and 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. The Company’s leverage ratio is net debt (total long-term debt less lease obligations, unamortized debt premiums and cash and cash equivalents) divided by adjusted Ebitda for the trailing twelve-month period.
Third Quarter 2019 Compared to Third Quarter 2018
Net revenue was USD 227.2 million, an increase of 7.7 percent, or USD 16.2 million, compared to USD 211.0 million. Excluding ISB, net revenue increased 9.2 percent. Sales of core Hostess® branded products, including Donettes® and CupCakes, continued to increase due to strong distribution and merchandising support across multiple sales channels. Sales of new Hostess® branded items, including Danishes, provided revenue growth, along with increased sales of Dolly Madison® branded products, leveraging the customer relationships from the Cloverhill acquisition. Net revenue also benefited from pricing actions implemented in late 2018. Consistent with the Company’s expectations, revenue growth was negatively impacted by the temporary shutdown of certain production lines to perform maintenance and operating enhancements.
Gross profit was USD 70.4 million, or 31.0 percent of net revenue, compared to USD 60.4 million, or 28.6 percent of net revenue. Adjusted gross profit was USD 75.2 million, or 33.1 percent of net revenue, an USD 11.1 million increase as compared to USD 64.1 million, or 30.4 percent of net revenue, in the prior year period. Gross margin increased as a result of previously announced favorable pricing actions, increased sales volume and operating cost efficiencies, partially offset by a shift in product mix.
Operating costs and expenses were USD 46.8 million, or 20.6 percent of net revenue, compared to USD 36.7 million, or 17.4 percent of net revenue. These costs increased due to higher incentive compensation and additional corporate expenses incurred in connection with the relocation of the Company’s primary distribution facility and the category sales and marketing functions. Additionally, the sale of ISB resulted in transaction fees, a remeasurement of the tax receivable agreement and loss on sale. Professional service fees were also incurred in anticipation of refinancing of the Company’s term loan and revolver which was finalized in October 2019.
The Company’s effective tax rate was 22.0 percent compared to 18.9 percent. The increase in the effective tax rate is due to the Class B for Class A share exchanges in the second and third quarters of 2019. Subsequent to these exchanges, more income from Hostess Holdings, L.P. was allocated to Hostess Brands, Inc.
Net income was USD 10.7 million compared to USD 11.2 million. Net income attributed to Class A stockholders was USD 8.8 million, or USD 0.07 per diluted share, compared to USD 7.9 million, or USD 0.08 per diluted share. Adjusted net income was USD 19.2 million compared to USD 14.5 million. Adjusted earnings per diluted share was USD 0.13, compared to USD 0.10.
Adjusted Ebitda was USD 47.8 million, or 21.0 percent of net revenue, compared to USD 40.1 million, or 19.0 percent of net revenue, an increase of USD 7.6 million, or 19.0 percent. The improvement in adjusted Ebitda margin was primarily attributable to increased sales volume, pricing actions and operating cost efficiencies.
Cash from operations for the nine months ended September 30, 2019 was USD 107.4 million compared to USD 109.9 million for the same period last year. The decrease was attributable to the timing of working capital conversion.
Sweet Baked Goods Segment: Net revenue was USD 220.2 million, an increase of USD 18.5 million, or 9.2 percent, compared to USD 201.7 million driven by additional volume and price increases. Gross profit was USD 68.8 million, or 31.3 percent of net revenue, compared to USD 58.9 million, or 29.2 percent of net revenue. In addition to the increase in sales volume and price increases, gross profit benefited from bakery operating efficiencies.
In-Store Bakery Segment: Net revenue was USD 7.1 million, a decrease of USD 2.2 million, or 24.0 percent, compared to USD 9.3 million. Gross profit was USD 1.6 million, or 22.9 percent of net revenue, compared to gross profit of USD 1.5 million, or 16.1 percent of net revenue. The decrease in net revenue reflects the Company’s sale of ISB on August 30, 2019.
Refinancing and Extension of Term Loan and Revolver
On October 1, 2019, the Company refinanced its USD 976.4 million outstanding term loan and its USD 100.0 million revolving credit agreement extending the maturities to August 3, 2025 and August 3, 2024, respectively. Additionally, the interest rate margin on the revolver was reduced from between 3.00 percent and 3.50 percent per annum to 2.25 percent per annum. All other terms under the term loan and revolver, including variable interest rates, required principal payment, collateralization and financial covenants, remain unchanged.
The Company has refined its outlook for 2019 to reflect current expectations for the remainder of the year:
- Net revenue growth well above the SBG category;
- Adjusted Ebitda of USD 202 million to USD 208 million, an increase of 9 percent to 12 percent from 2018
- Adjusted EPS of USD 0.58 to USD 0.61, an increase of 7 percent to 13 percent from 2018;
- Cash provided by operations of USD 140 million to USD 150 million;
- The expected increase in cash of USD 135 million to USD 145 million would result in a leverage ratio of 3.2x to 3.4x at the end of 2019, absent any acquisitions or other strategic uses of cash, compared to 4.5x at December 31, 2018;
- Capital expenditures of approximately USD 30 million to USD 35 million;
- Income tax rate, excluding discrete items, of 22 percent to 23 percent giving effect to the non-controlling interest and the related share exchanges occurring in the second and third quarters. The Company expects to pay distributions to the non-controlling interest holders of USD 6 million to USD 7 million and corporate tax payments (net of refunds) of USD 1 million to USD 2 million in 2019.
The Company provides guidance only on a 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, changes in allocation to the non-controlling interest, 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.