Hostess Brands: Reports Q2-2020 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 three and six months ended June 30, 2020.

«Growth in core Hostess® and Voortman® branded products and excellent execution on the integration of Voortman helped to propel second quarter financial results ahead of expectations,» commented Andy Callahan, the Company’s President and Chief Executive Officer. «In a dynamic operating environment resulting from the on-going Covid-19 pandemic, we executed very well, supported by a strong team, our core competencies and nimble culture. We supported strong demand by collaboratively working with retail and distribution partners to adjust the nature and timing of our merchandising programs as we continued to advance our innovation pipeline to drive long-term growth. We are confident that we can leverage the Company’s leading brands, category-leading distribution and agile operating network to satisfy evolving consumer behaviors and create an even stronger company in the future.»

Q2-2020 Financial Highlights as Compared to Q2-2019

  • Net revenue was USD 256.2 million, an increase of 11.7 percent – excluding the In-Store Bakery business sold in 2019. Adjusted net revenue was USD 263.0 million, an increase of 14.7 percent*, driven primarily by strong performance of recently acquired Voortman Cookies Limited («Voortman») and Hostess® branded sales, partially offset by lower private-label and other non-Hostess branded sales.
  • Gross profit was USD 89.4 million, an increase of 10.5 percent*. Adjusted gross profit was USD 98.1 million, a 21.1 percent* increase due to the accretive margin expansion generated from the successful integration of Voortman ahead of expectations.
  • Net income was USD 17.4 million, or USD 0.13 per diluted share, compared to USD 16.7 million, or USD 0.10 per diluted share, in the prior year period. Adjusted net income increased USD 5.1 million, or 21.2 percent, to USD 29.2 million, resulting in USD 0.22 adjusted EPS compared to USD 0.17 adjusted EPS in the prior year period. The increase in adjusted net income and adjusted EPS was primarily due to the accretion from the Voortman acquisition.
  • Adjusted Ebitda was USD 65.1 million, or 24.8 percent of adjusted net revenue, an increase of 22.6 percent – excluding the In-Store Bakery business sold in 2019. The increase was primarily driven by Voortman’s adjusted Ebitda contribution.
  • Cash and cash equivalents were USD 127.8 million as of June 30, 2020 with a proforma leverage ratio of 4.3x after factoring in the expected 2020 adjusted Ebitda contribution from Voortman.

Operational Highlights for the Second Quarter 2020

  • Executed meaningful changes to Hostess product mix and production schedules in response to dynamically changing consumer demands in order to achieve margin expansion in our base business.
  • Completed key integration activities transitioning Voortman to the warehouse distribution model from a direct-store delivery model. Continue to expect transition costs of USD 25 million to USD 30 million, better than original expectations, and made meaningful progress against attainment of the USD 15 million of cost synergies target.
  • Continued to implement heightened safety measures company-wide to protect employees.
  • Point of sale increased 7.4 percent and market share was 19.3 percent, essentially flat, within the Sweet Baked Goods category. Hostess® branded point of sale of 9.2 percent was ahead of the category growth.

This release contains certain non-GAAP financial measures, including adjusted revenue, adjusted gross profit, adjusted gross margin, adjusted Ebitda, adjusted net income, adjusted operating income, and adjusted earnings per share (EPS). Unless otherwise stated, all comparisons of financial measures in this release are to the second quarter of 2019. All measures of market performance contained in this 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 refer to the 13 week period ended June 27, 2020. All market data in this release reflect the restatement of historical convenience channel data executed by Nielsen during 2020. The Company’s proforma leverage ratio is net debt (total long-term debt less cash) divided by adjusted Ebitda (including USD 25.0 million of expected Voortman Ebitda less USD 1.2 million of ISB historical Ebitda).

2020 Outlook

The Company previously issued its full year 2020 guidance on February 26, 2020, which did not include the impact of Covid-19. Despite year-to-date results that have exceeded Company expectations, the Company’s full 2020 Outlook remains suspended due to the dynamic operating environment and the high degree of uncertainty caused by the Covid-19 pandemic. However, assuming there are no significant disruptions to our supply chain or changes to consumer demand resulting from U.S. movement restrictions, we now expect the following consolidated financial results for the full year 2020:

  • Adjusted Ebitda of USD 230 million to USD 240 million, including Voortman Adjusted Ebitda of USD 25 million to USD 30 million.
  • Adjusted EPS of USD 0.70 to USD 0.75
  • Leverage ratio of approximately 4x at the end of 2020

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, 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.

Second Quarter 2020 Compared to Second Quarter 2019

Net revenue was USD 256.2 million, an increase of 6.3 percent, or USD 15.1 million, compared to USD 241.1 million. Adjusting for the USD 6.8 million cost of obtaining warehouse space needed to facilitate the Voortman transition, adjusted net revenue was USD 263.0 million an increase of 14.7 percent*. The increase in adjusted net revenue was driven primarily by the acquisition of Voortman which contributed USD 30.4 million of adjusted net revenue. Sweet baked goods net revenue increased USD 3.3 million, primarily driven by higher volume of core Hostess® branded multi-pack products partially offset by lower sales of private label and non-Hostess branded products and lower sales of Hostess® branded single-serve products due to impacts of Covid-19 on consumer shopping habits.

Gross profit was USD 89.4 million, or 34.9 percent of net revenue, compared to USD 83.5 million, or 34.6 percent of net revenue. Excluding ISB, gross profit increased 10.5 percent. Adjusted gross profit was USD 98.1 million, or 37.3 percent of adjusted net revenue, compared to USD 83.5 million, or 34.6 percent of adjusted net revenue. Adjusted gross profit increased 21.1 percent* as a result of accretion from Voortman supported by achievement of synergies and higher operating efficiencies gained with increased volume, partially offset by negative product mix and higher operating costs due to Covid-19.

Operating costs and expenses were USD 54.8 million compared to USD 46.6 million. The increase was primarily attributed to costs related to the transition of Voortman’s operations as well as Voortman’s on-going operating costs, partially offset by prior-year charges for long-term incentive payments, remeasurement of the tax receivable agreement and an impairment of the In-store Bakery business.

The Company’s effective tax rate was 24.0 percent compared to 35.2 percent. The Company recognized a discrete tax expense of USD 2.8 million in the prior year resulting from revaluing deferred tax balances based on changes in the estimated state apportionment factors and tax rates.

Net income was USD 17.4 million compared to USD 16.7 million and EPS was USD 0.13 per diluted share compared to USD 0.10 per diluted share. Adjusted net income was USD 29.2 million compared to USD 24.1 million and adjusted EPS was USD 0.22, compared to USD 0.17. Adjusted net income increased as a result of the higher volume and increase in gross profit noted above, partially offset by higher operating costs, depreciation, amortization and interest expense as a result of the Voortman acquisition.

Adjusted Ebitda was USD 65.1 million, or 24.8 percent of adjusted net revenue, compared to USD 55.1 million, or 22.9 percent of adjusted net revenue, an increase of USD 10.0 million, or 18.1 percent. Excluding the impact of ISB, adjusted Ebitda increased USD 12.0 million or 22.6 percent. The increase was primarily driven by approximately USD 9 million of adjusted Ebitda from Voortman.

Cash from operations for the six months ended June 30, 2020 was USD 60.7 million compared to USD 74.1 million for the same period last year. The decrease was primarily attributable to higher integration and transition costs.