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 June 30, 2018 (1).
Business Highlights
- Second quarter net revenue increased USD 12.7 million, or 6.2 percent, resulting from the USD 20.8 million of net revenue provided by the operations of the Chicago bakery, which the Company acquired in February 2018.
- Hostess® branded point of sale increased 2.4 percent for the 13-week period ended June 30, 2018. Point of sale for the top seven sub-brands increased 4.4 percent. These sub-brands represent 66.1 percent of the Company’s net revenue.
- The Hostess® brand’s market share for the 13-week period ended June 30, 2018 was 17.5 percent, up 42 basis points.
- Net income was USD 24.6 million compared to USD 28.2 million. Diluted EPS was USD 0.18 per share consistent with prior year.
- Adjusted EPS was USD 0.14 per share compared to USD 0.17 per share.
- Adjusted Ebitda was USD 47.6 million, or 22.1 percent of net revenue, compared to USD 63.2 million or 31.1 percent of net revenue.
- Cash and cash equivalents were USD 115.3 million as of June 30, 2018 with a leverage ratio of 4.22x, both driven by year to date operating cash flows of USD 81.2 million compared to USD 66.2 million for the first half of 2017.
The Company expects continued growth above the Sweet Baked Goods (“SBG”) category average in 2018. The updated full year adjusted Ebitda outlook has been reduced to USD 190 million to USD 200 million.
«During the second quarter I was pleased to continue to see overall point of sale and market share growth ahead of the SBG category giving us confidence in our growth potential moving forward. The overall growth was reduced by meaningful and larger than anticipated reductions in both promotional support and associated retail inventory from one of our largest retail partners. Additionally, the escalating inflationary pressures, including transportation and other supply chain costs, were more pronounced than we anticipated. The recently acquired Chicago bakery added significant revenue at negative margins as we continue to transform the bakery, further reducing our overall margins in the second quarter,» commented Andy Callahan, President and Chief Executive Officer of Hostess.
«We expect sequential improvement to our margins in the second half of 2018 and as we progress into 2019, anchoring our overall growth thesis. This includes a disciplined approach to strategically align our pricing and merchandising structure, recapture display volume and ensure the efficient alignment of our distribution and manufacturing network to support our growth. Additionally, as we complete the transformation of our Chicago bakery, we believe it will be a platform to profitably expand our presence in the Breakfast sub-category. We are confident that the fundamental strength of the Hostess® brand along with the results of these efforts will continue to create value for stockholders,» commented Andy Callahan.
Second Quarter 2018
Net revenue was USD 215.8 million, an increase of 6.2 percent, or USD 12.7 million, compared to USD 203.2 million. The Chicago bakery, which the Company acquired in the first quarter of 2018 to expand its breakfast product portfolio and manufacturing capabilities, contributed USD 20.8 million of net revenue, which was partially offset by reduced Hostess® branded display volume and corresponding retail inventory reduction at one of the Company’s largest retail partners. The Company continued to gain market share in the SBG category with strong growth in sub-brands including Donettes® and Hostess Bakery Petites®. The company gained 42 basis points of market share through strong performance in the convenience, food and club channels which contributed to overall point of sale growth of 2.4 percent for the Hostess® brand ahead of the total SBG category.
(1) This press release contains certain non-GAAP financial measures, including 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 second quarter of 2017. All measures of market performance contained in this press release, including point of sale and market share, are specific to Hostess® branded products within the SBG category and do not include other brands or products sold outside of the SBG category.
Gross profit was USD 66.9 million, or 31.0 percent of net revenue, compared to USD 88.4 million, or 43.5 percent of net revenue. The decline was primarily attributed to a combination of the shift in mix of revenue to include Chicago non-Hostess branded products, which are currently unprofitable, and the continued efforts to transform the recently acquired Chicago bakery which collectively resulted in 709 basis points lower margin. Over the short term, the Company continues to invest in converting the operations and processes to be more streamlined and efficient. The Company believes this investment will provide the infrastructure necessary to deliver profitable growth in the breakfast subcategory. Also contributing to the lower gross profit this quarter were higher transportation costs and other inflationary pressures, which resulted in a 447 basis point decrease in gross margin and lower overhead absorption due to decreased production volume.
Advertising, selling, general and administrative (SG+A) expenses were USD 27.9 million, or 12.9 percent of net revenue, compared to USD 32.6 million, or 16.0 percent of net revenue. The decrease was attributed primarily to lower expenses related to corporate incentives.
The decrease in the Company’s effective tax rate from 28.6 percent to 0.8 percent was primarily attributed to a discrete tax benefit of USD 5.0 million resulting from a change in the Company’s estimated state tax rate based upon adjustments to the Company’s state apportionment factors. The lower federal statutory rate enacted by the legislation commonly referred to as the Tax Cuts and Jobs Act also impacted the effective tax rate for the quarter.
Net income was USD 24.6 million, compared to net income of USD 28.2 million. Net income attributed to Class A stockholders was USD 19.3 million, or USD 0.18 per diluted share, compared to USD 18.8 million, or USD 0.18 per diluted share.
Adjusted EPS was USD 0.14, compared to USD 0.17 per share. Adjusted Ebitda was USD 47.6 million, or 22.1 percent of net revenue, compared to adjusted Ebitda of USD 63.2 million, or 31.1 percent of net revenue. The decreases in adjusted EPS and adjusted Ebitda were primarily attributable to higher costs as a result of the integration of the Chicago bakery and higher transportation costs and other inflationary pressures. Reduced Hostess® branded display volume also negatively impacted adjusted Ebitda. See “Reconciliation of Non-GAAP Financial Measures” in the schedules to this press release.
Cash from operations for the first half of the year was USD 81.2 million compared to USD 67.8 million for the first half of 2017. The increase was primarily attributed to the timing of vendor payments and customer receipts as well as lower income tax payments.
Sweet Baked Goods Segment: Net revenue was USD 204.2 million, an increase of USD 12.5 million, or 6.5 percent, compared to USD 191.7 million. The revenue increase driven by the addition of the Chicago bakery was partially offset by reduced Hostess® branded display volume and corresponding retail inventory reduction at one of the Company’s largest retail partners.
Gross profit was USD 64.4 million, or 31.5 percent of net revenue, compared to USD 85.5 million, or 44.6 percent of net revenue. The decline was primarily attributed to the addition of currently unprofitable products and higher costs as a result of the integration of the Chicago bakery and higher transportation costs and other inflationary pressures.
In-Store Bakery Segment: Net revenue was USD 11.6 million, an increase of USD 0.1 million, or 1.1 percent, compared to net revenue of USD 11.5 million. Gross profit was USD 2.5 million, or 21.5 percent of net revenue, compared to gross profit of USD 3.0 million, or 25.8 percent of net revenue. The decrease in gross margin was primarily attributable to a shift in product and channel mix and higher transportation costs.
Outlook
Due to expected headwinds in the second half of 2018 from reduced promotional support from one of its largest retail partners and inflationary pressures, the Company has reduced its full year guidance for 2018 adjusted EPS to USD 0.52 to USD 0.58 from the prior guidance of USD 0.65 to USD 0.70 and now expects adjusted Ebitda of USD 190 million to USD 200 million compared to prior guidance of USD 220 million to USD 230 million. See the schedules in this press release for additional guidance and a reconciliation of anticipated 2018 adjusted Ebitda to anticipated net income of USD 73 million to USD 81 million for 2018.
