Hostess Brands: Announces Strong Q4 and FY-2020 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 fourth quarter and year ended December 31, 2020. «I am proud of the many accomplishments our team achieved during this unprecedented year. Hostess achieved our 12th consecutive quarter of net revenue growth with double-digit revenue and Ebitda growth in the fourth quarter. We remain informed, nimble and focused on our commitment to keeping our employees and communities safe and healthy as we continue to service our customers and consumers,» commented Andy Callahan, Hostess Brands, Inc. President and Chief Executive Officer. «As we turn to fiscal year 2021, we are confident we will continue our profitable growth momentum and shareholder value creation over the long term behind our strong execution, high penetration in growing consumer segments, expansion of Voortman and ability to deleverage with our strong cash flow.»

Fourth Quarter 2020 Financial Highlights Compared to Q4-2019

  • Net revenue was USD 256.0 million, an increase of 18.1 percent, driven primarily by strong performance of Voortman Cookies Limited («Voortman») and «Hostess» branded sales, partially offset by other non-«Hostess» branded sales.
  • Gross profit was USD 95.8 million, an increase of 35.3 percent. On an adjusted basis, gross profit increased 27.2 percent, primarily due to improved price and mix, the accretive margin expansion generated from Voortman and operational efficiencies.
  • Net income was USD 24.4 million, or USD 0.18 per diluted share compared to USD 23.6 million, or USD 0.17 per diluted share. Adjusted net income increased USD 5.9 million, or 25.9 percent, to USD 28.7 million, resulting in USD 0.21 adjusted EPS compared to USD 0.16 adjusted EPS. The increases in adjusted net income and adjusted EPS were primarily due to the accretion from Voortman and an increase in «Hostess» branded sales.
  • Adjusted Ebitda was USD 63.7 million, or 24.9 percent of net revenue, an increase of 21.6 percent. The increase was primarily driven by Voortman’s adjusted Ebitda contribution and higher «Hostess» branded sales.
  • Cash and cash equivalents were USD 173.0 million as of December 31, 2020 resulting in a leverage ratio of 3.9x.

Other Quarter Highlights

  • Executed initial sell-in of 2021 innovation slate which establishes platforms for incremental future growth in both the sweet baked goods and specialty better-for-you cookie categories.
  • Continued strong profit accretion from Voortman following the completion of key integration activities.
  • Simplified capital structure with the final exchange of Class B units and removal of the non-controlling interest.
  • Increased total Hostess manufacturer point of sale by 4.9 percent, ahead of the Sweet Baked Goods category, driven by «Hostess» branded growth.

Full Year 2020 Financial Highlights Compared to FY-2019

  • Net revenue increased 15.7 percent*, and adjusted net revenue increased 16.4 percent*, driven by Voortman and «Hostess» branded growth.
  • Gross profit increased 21.1 percent*, and adjusted gross profit increased 21.2 percent*.
  • Net income was USD 68.4 million and adjusted Ebitda was USD 240.1 million. Adjusted Ebitda increased 20.1 percent*.
  • Cash from operations for the year ended December 31, 2020 was USD 159.2 million compared to USD 144.0 million.

*Excludes the In-Store Bakery business sold in 2019

2021 Outlook

Assuming there are no significant disruptions due to the Covid-19 pandemic, the Company expects the following consolidated financial results for the full year 20212:

  • 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.

Fourth Quarter 2020 Compared to Fourth Quarter 2019

Net revenue was USD 256.0 million, an increase of 18.1 percent, or USD 39.3 million, compared to USD 216.7 million. Growth was driven by the acquisition of Voortman which contributed USD 28.7 million. Sweet baked goods net revenue increased USD 10.6 million, or 4.9 percent driven by higher volume of core products partially offset by lower sales of private label and non-«Hostess» branded products.

Gross profit was USD 95.8 million, or 37.4 percent of net revenue, compared to USD 70.8 million, or 32.7 percent of net revenue. Adjusted gross profit was USD 95.8 million, or 37.4 percent of net revenue, compared to USD 75.3 million, or 34.7 percent of net revenue. Gross margin benefited from product mix, lower promotional activity, the accretion of Voortman, and operating efficiencies.

Operating costs and expenses were USD 51.5 million, or 20.1 percent of net revenue, compared to USD 31.2 million, or 14.4 percent of net revenue. The increase was attributed to lapping the prior-year benefits from remeasurements of a foreign currency contract and the tax receivable agreement as well as the 2020 addition of Voortman operating costs, higher employee incentive costs due to timing of accruals and an impairment of property and equipment.

The Company’s effective tax rate was 25.6 percent, compared to 20.2 percent. The increase in the effective tax rate is due to the Class A for Class B share exchanges during 2020.

Net income was USD 24.4 million compared to USD 23.6 million and dilutive EPS was USD 0.18 compared to USD 0.17. Adjusted net income was USD 28.7 million, compared to USD 22.8 million and adjusted EPS was USD 0.21, compared to USD 0.16. Adjusted net income increased as a result of the higher volume and increase in gross profit noted above, partially offset by higher operating costs and depreciation and amortization as a result of the Voortman acquisition.

Adjusted Ebitda was USD 63.7 million, or 24.9 percent of net revenue, compared to USD 52.4 million, or 24.2 percent of net revenue. The increase was driven by USD 8.6 million of adjusted Ebitda from Voortman and higher volume of «Hostess» branded products.

During the fourth quarter, all remaining shares of Class B common stock were exchanged for Class A common stock. This exchange eliminated the non-controlling interest reported on the Company’s consolidated statement of operations simplifying the Company’s organizational structure. As part of this exchange, and under the securities repurchase authorization announced in the third quarter, the Company repurchased 0.4 million of its Class A shares for USD 6.0 million in cash and 2 million private placement warrants for USD 2.0 million in cash. The Company has USD 92.0 million remaining under its securities repurchase program.