Hostess Brands, Inc. Announces Fourth Quarter 2018 Financial Results

KANSAS CITY, Mo.–(BUSINESS WIRE)–Hostess Brands, Inc. (NASDAQ: TWNK) (NASDAQ: TWNKW) (“Hostess” or the
“Company”), today reported its financial results for the fourth quarter
and full year ended December 31, 2018.

Business Highlights for the Quarter1:

  • Net revenue increased $18.6 million, or 9.5%, to $214.8 million,
    driven by $20.0 million from the recently acquired Cloverhill Business
    partially offset by slightly lower organic net revenue.
  • Total Company point of sale increased 4.0% and market share was 17.4%,
    up 44 basis points, primarily from the addition of the Cloverhill
    Business.
  • Net income was $16.4 million, compared to $189.6 million. Diluted EPS
    was $0.12 per share, compared to $1.74 per share. The 2017 results
    benefited from a one-time tax reform gain of $163.1 million.
  • Adjusted EPS was $0.17 per share, flat as compared with the fourth
    quarter of 2017.
  • Adjusted EBITDA was $51.4 million, or 23.9% of net revenue, in-line
    with the Company’s expectations.
  • Cash and cash equivalents were $146.4 million as of December 31, 2018
    with a leverage ratio of 4.5x, both driven by year-to-date operating
    cash flows of $143.7 million.

A Look Ahead to Full Year 2019:

  • The Company expects continued revenue growth well above the Sweet
    Baked Goods (“SBG”) category in 2019 driven by innovation from
    Hostess-branded breakfast and other core products as well as expanded
    distribution and improved merchandising execution over the course of
    the year.
  • Full year 2019 adjusted EBITDA guidance is $200 million to $210
    million, an increase of 7% to 13% over 2018, primarily driven by
    revenue growth, the realization of already executed multi-faceted
    pricing and merchandising programs and achievement of operating
    efficiencies.
  • The Company expects a leverage ratio of 3.5x to 3.7x at the end of
    2019, driven by strong operating cash flows.

“We are pleased with our solid finish to the year. The team executed on
our plan to advance our business in a dynamic operating environment. Our
achievements have created a strong foundation for Hostess to build on in
the future. We are excited to be celebrating Hostess’ 100-year
anniversary and the iconic brand strength we bring to market with our
entrepreneurial spirit, energy and enthusiasm. As we move forward into
2019, we are confident that our enhanced capabilities, strategic
insights and capital investments will drive future innovation,
sustainable growth and increased shareholder value,” commented Andy
Callahan, Hostess’ President and Chief Executive Officer.

Fourth Quarter 2018

Net revenue was $214.8 million, an increase of 9.5%, or $18.6 million,
compared to $196.2 million, driven by $20.0 million from the Cloverhill
Business. The Company experienced a slight decline in organic net
revenue driven by the mass retail channel, offset by net revenue growth
in the dollar, club, small format and grocery channels.

Gross profit was $68.8 million, or 32.0% of net revenue, compared to
$80.8 million, or 41.2% of net revenue. Adjusted gross profit was $73.8
million, or 34.3% of net revenue, compared to $80.8 million or 41.2% of
net revenue. These declines were primarily attributable to a shift in
mix of revenue to include the recently acquired non-Hostess® branded
products of the Cloverhill Business, which resulted in lower adjusted
gross margin of 390 basis points. Significant capital improvements
completed in the fourth quarter of 2018 are expected to increase
efficiency and profitability in 2019. Also, higher inflationary
pressures including increasing customer allowances resulted in a 320
basis point decrease in adjusted gross margin this quarter. The Company
is implementing multi-faceted pricing actions along with bakery
efficiency programs to partially offset inflation while maintaining the
Company’s growth potential.

Advertising, selling, general and administrative (“SG&A”) expenses were
$28.6 million, or 13.3% of net revenue, compared to $25.9 million, or
13.2% of net revenue. The increase was attributable primarily to a
forfeiture of stock-based compensation in 2017.

The Company’s effective tax rate was 18.2% primarily as a result of the
lower federal statutory rate enacted by the legislation commonly
referred to as the Tax Cuts and Jobs Act (“Tax Reform”). In 2017, the
Company recognized an income tax benefit of $98.8 million which includes
a benefit of $111.3 million due to Tax Reform. The remaining tax expense
of $12.5 million in 2017 represents an effective tax rate of 32.2%.

Net income was $16.4 million compared to $189.6 million. The fourth
quarter 2017 net income was impacted by a one-time Tax Reform gain of
$163.1 million. Net income attributed to Class A stockholders was $11.8
million, or $0.12 per diluted share, compared to $179.7 million, or
$1.74 per diluted share.

Adjusted EPS was $0.17 per diluted share, consistent with the fourth
quarter of 2017. Adjusted EBITDA was $51.4 million, or 23.9% of net
revenue, compared to $57.8 million, or 29.5% of net revenue. The
decrease in adjusted EBITDA was primarily attributable to higher costs
and other inflationary pressures. Adjusted EBITDA as a percentage of net
revenue is down due to cost pressures as well as unfavorable product mix
from the Cloverhill Business which is a strategic growth area for the
Company in the future.

Cash from operations for the year ended December 31, 2018 was $143.7
million compared to $163.7 million for the same period last year. The
decrease was attributable to lower net income from operations partially
offset by lower tax payments and the timing of vendor payments.

Sweet Baked Goods Segment: Net revenue was $203.1 million,
an increase of $17.8 million, or 9.6%, compared to $185.3 million driven
by the Cloverhill Business as well as a slight decline in organic
revenue driven by the mass retail channel, offset by net revenue growth
within the dollar, club, small format, and grocery channels.

Gross profit was $66.3 million, or 32.6% of net revenue, compared to
$78.4 million, or 42.3% of net revenue. The decline was primarily
attributable to the addition of revenue from the Cloverhill Business at
negligible margins as well as other inflationary pressures.

In-Store Bakery Segment: Net revenue was $11.7 million, an
increase of $0.8 million, or 7.3%, compared to $10.9 million. The
increase in net revenue was attributable to increased sales volume.
Gross profit was $2.5 million, or 21.3% of net revenue, compared to
gross profit of $2.4 million, or 22.4% of net revenue. The decrease in
gross margin was primarily attributable to higher transportation costs.

The Company recognized impairment charges of $3.3 million to the
goodwill and intangible assets within the In-Store Bakery reporting
unit. These charges reflect the impact of the decision to discontinue
the Hostess Bake Shop product line as compared to expectations when the
In-Store Bakery reporting unit was remeasured during the Hostess
business combination. Based on the Company’s impairment assessment, the
fair value of the In-Store Bakery reporting unit continues to be well in
excess of the initial cash purchase price of the Superior on Main
business acquired in 2016.

Outlook

The Company expects the following financial results for the full year
2019:

  • Net revenue growth well above the SBG category;
  • Adjusted EBITDA of $200 million to $210 million, an increase of 7% to
    13% from 2018;
  • Adjusted EPS of $0.57 to $0.62, an increase of 6% to 15% from 2018;
  • The net expected increase in cash of $90 million to $100 million would
    result in a leverage ratio of 3.5x to 3.7x at the end of 2019, absent
    any additional acquisitions or optional debt reductions, compared to
    4.5x at December 31, 2018;
  • Cash provided by operations of $150 million to $160 million;
  • Capital expenditures of approximately $30 million to $35 million;
  • Income tax rate of 21% to 22% giving effect to the non-controlling
    interest.

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.

Conference Call and Webcast

The Company will host a conference call and webcast with an accompanying
presentation today, February 27, 2019 at 4:30 p.m. EST to discuss the
results for the fourth quarter. Investors interested in participating in
the live call can dial (877) 270-2148 from the U.S. and (412) 902-6510
internationally. A telephone replay will be available approximately two
hours after the call concludes through March 13, 2019, by dialing (844)
512-2921 from the U.S., or (412) 317-6671 from international locations,
and entering confirmation code 13687132. The simultaneous, live webcast
and presentation will be available on the Investor Relations section of
the Company’s website at www.hostessbrands.com.
The webcast will be archived for 30 days.

1This press release contains certain non-GAAP financial
measures, including adjusted gross profit, adjusted gross margin,
adjusted EBITDA, adjusted EBITDA margin, adjusted net income attributed
to Class A stockholders and adjusted earnings per share (“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 fourth quarter of 2017. All measures of market
performance contained in this press 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 in this press release refer
to the 13-week period ended December 29, 2018 and the prior-year
comparable period. The prior-year comparable period excludes the
performance of the brands acquired with the Cloverhill Business. Current
and prior period market data presented herein reflect a restatement of
convenience channel data executed by Nielsen during the quarter. The
Cloverhill Business, which the Company purchased in February 2018,
includes the Cloverhill® and Big Texas® brands, as well as the breakfast
manufacturing assets. The Company’s leverage ratio is net debt (total
long-term debt less cash) divided by adjusted EBITDA.

About Hostess Brands, Inc.

Hostess® is the second leading brand by market share within the SBG
category. The brand’s history dates back to 1919, when the Hostess®
CupCake was introduced to the public, followed by Twinkies® in 1930.
Today, the Company produces a variety of new and classic treats
including Ding Dongs®, Ho Hos®, Donettes®, Hostess Bakery Petites® and
Fruit Pies, in addition to Twinkies® and CupCakes. For more information
about Hostess® products and Hostess Brands, please visit
hostesscakes.com. Follow Hostess on Twitter: @Hostess_Snacks; on
Facebook: facebook.com/Hostess; on Instagram: Hostess_Snacks; and on
Pinterest: pinterest.com/hostesscakes.

The Company has two reportable segments: SBG and In-Store Bakery. The
SBG segment consists of sweet baked goods, bread and buns and frozen
retail products that are sold under the Hostess®, Dolly Madison®,
Cloverhill® and Big Texas® brands. The In-Store Bakery segment consists
of Superior® products sold through the in-store bakery section of
grocery and club stores.

Forward-Looking Statements

This press release contains statements reflecting the Company’s views
about its future performance that constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve substantial risks and uncertainties.
Forward-looking statements are generally identified through the
inclusion of words such as “believes,” “expects,” “intends,”
“estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,”
or similar language. Statements addressing the Company’s future
operating performance and statements addressing events and developments
that the Company expects or anticipates will occur are also considered
as forward-looking statements. All forward-looking statements included
herein are made only as of the date hereof. The Company undertakes no
obligation to update any forward-looking statement, whether as a result
of new information, future events, or otherwise.

These statements inherently involve risks and uncertainties that could
cause actual results to differ materially from those anticipated in such
forward-looking statements. These risks and uncertainties include, but
are not limited to, maintaining, extending and expanding the Company’s
reputation and brand image; protecting intellectual property rights;
leveraging the Company’s brand value to compete against lower-priced
alternative brands; correctly predicting, identifying and interpreting
changes in consumer preferences and demand and offering new products to
meet those changes; operating in a highly competitive industry; the
ability to maintain or add additional shelf or retail space for the
Company’s products; the continued ability to produce and successfully
market products with extended shelf life; the ability to drive revenue
growth in key products or add products that are faster-growing and more
profitable; volatility in commodity, energy, and other input prices and
the ability to adjust pricing to cover increased costs; dependence on
major customers; geographic focus could make the Company particularly
vulnerable to economic and other events and trends in North America;
increased costs in order to comply with governmental regulation; general
political, social and economic conditions; a portion of the workforce
belongs to unions and strikes or work stoppages could cause the business
to suffer; product liability claims, product recalls, or regulatory
enforcement actions; unanticipated business disruptions; dependence on
third parties for significant services; insurance may not provide
adequate levels of coverage against claims; failures, unavailability, or
disruptions of the Company’s information technology systems; the
Company’s ability to achieve expected synergies and benefits and
performance from the Company’s strategic acquisitions; dependence on key
personnel or a highly skilled and diverse workforce; and the Company’s
ability to finance indebtedness on terms favorable to the Company; and
other risks as set forth from time to time in the Company’s Securities
and Exchange Commission filings.

As a result of a number of known and unknown risks and uncertainties,
the Company’s actual results or performance may be materially different
from those expressed or implied by these forward-looking statements.
Risks and uncertainties are identified and discussed in Item 1A-Risk
Factors in the Company’s Annual Report on Form 10-K for 2018. All
subsequent written or oral forward-looking statements attributable to us
or persons acting on the Company’s behalf are expressly qualified in
their entirety by these risk factors. The Company undertakes no
obligation to update any forward-looking statement, whether as a result
of new information, future events, or otherwise.

     
HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except shares and per
share data)

 
December 31, December 31,
2018 2017
ASSETS
Current assets:
Cash and cash equivalents $ 146,377 $ 135,701
Accounts receivable, net 105,679 101,012
Inventories 38,580 34,345
Prepaids and other current assets 8,806   7,970
Total current assets 299,442 279,028
Property and equipment, net 220,349 174,121
Intangible assets, net 1,901,215 1,923,088
Goodwill 575,645 579,446
Other assets, net 14,062   10,592
Total assets $ 3,010,713   $ 2,966,275
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Long-term debt and capital lease obligation payable within one year $ 11,268 $ 11,268
Tax receivable agreement payments payable within one year 4,400 14,200
Accounts payable 65,288 49,992
Customer trade allowances 42,010 40,511
Accrued expenses and other current liabilities 18,137   11,880
Total current liabilities 141,103 127,851
Long-term debt and capital lease obligation 976,736 987,920
Tax receivable agreement 64,663 110,160
Deferred tax liability 277,954   267,771
Total liabilities 1,460,456   1,493,702
 
Class A common stock, $0.0001 par value, 200,000,000 shares
authorized, 100,046,392 and 99,791,245 shares issued and outstanding
at December 31, 2018 and 2017, respectively
10 10
Class B common stock, $0.0001 par value, 50,000,000 shares
authorized, 30,255,184 and 30,319,564 shares issued and outstanding
at December 31, 2018 and 2017, respectively
3 3
Additional paid in capital 925,902 920,723
Accumulated other comprehensive income 2,523 1,318
Retained earnings 271,365   208,279
Stockholders’ equity 1,199,803 1,130,333
Non-controlling interest 350,454   342,240
Total liabilities, stockholders’ equity and non-controlling interest $ 3,010,713   $ 2,966,275
 
   

HOSTESS BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except shares and per
share data)

 
Three Months Ended Twelve Months Ended
December 31,
2018
    December 31,
2017
December 31,
2018
    December 31,
2017
Net revenue $ 214,815 $ 196,221 $ 850,389   $ 776,188
Cost of goods sold 146,014   115,428   583,112     449,290  
Gross profit 68,801   80,793   267,277     326,898  
Operating costs and expenses:
Advertising and marketing 7,697 8,700 35,069 33,004
Selling expense 7,464 7,668 30,071 32,086
General and administrative 13,445 9,528 52,760 52,943
Amortization of customer relationships 6,074 5,994 24,057 23,855
Business combination transaction costs 250 297
Related party expenses 89 97 362 381
Tax receivable agreement liability remeasurement (114 ) (51,812 ) (1,866 ) (50,222 )
Other operating expenses 3,552   (144 ) 4,969     859  
Total operating costs and expenses 38,457   (19,969 ) 145,719     92,906  
Operating income 30,344 100,762 121,558 233,992
Other expense:
Interest expense, net 10,341 9,517 39,404 39,174
Gain on buyout of tax receivable agreement (12,372 )
Other expense 15   483   146     3,914  
Total other expense 10,356   10,000   27,178     43,088  
Income before income taxes 19,988 90,762 94,380 190,904
Income tax expense (benefit) 3,636   (98,812 ) 12,954     (67,204 )
Net income 16,352 189,574 81,426 258,108
Less: Net income attributable to the non-controlling interest 4,522   9,888   18,531     34,211  
Net income attributable to Class A shareholders/partners $ 11,830   $ 179,686   $ 62,895     $ 223,897  
 
Earnings per Class A share:
Basic $ 0.12 $ 1.80 $ 0.63 $ 2.26
Diluted $ 0.12 $ 1.74 $ 0.61 $ 2.13
Weighted-average shares outstanding:
Basic 100,034,285 99,673,097 99,957,049 99,109,629
Diluted 100,113,695 103,389,524 103,098,394 105,307,293
 

Results of Operations by Segment

Three Months Ended Twelve Months Ended
(In thousands) December 31,

2018

December 31,

2017

December 31,

2018

December 31,
2017

Net Revenue
Sweet baked goods $ 203,132 $ 185,330 $ 808,355 $ 733,827
In-Store Bakery 11,683   10,891   42,034   42,361  
$ 214,815   $ 196,221   $ 850,389   $ 776,188  
Gross Profit
Sweet baked goods $ 66,311 $ 78,358 $ 258,995 $ 316,916
In-Store Bakery 2,489   2,435   8,282   9,982  
$ 68,800   $ 80,793   $ 267,277   $ 326,898  
 
   
HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 
Twelve Months Ended
December 31,
2018
    December 31,
2017
Operating activities
Net income $ 81,426 $ 258,108
Depreciation and amortization 41,411 38,170
Impairment of property, goodwill and intangibles 4,717 1,003
Non-cash loss on debt modification 1,453
Debt discount (premium) amortization (1,079 ) (925 )
Non-cash change in tax receivable agreement (14,237 ) (50,222 )
Share-based compensation 5,600 7,413
Loss on sale/abandonment of property and equipment 253 11
Deferred taxes 10,255 (81,270 )
Change in operating assets and liabilities:
Accounts receivable (3,667 ) (11,775 )
Inventories 3,569 (3,901 )
Prepaids and other current assets (510 ) (3,039 )
Accounts payable and accrued expenses 14,418 4,839

Customer trade allowances

1,499   3,820  
Net cash provided by operating activities 143,655   163,685  
 
Investing activities
Purchases of property and equipment (44,585 ) (32,913 )
Acquisition of business, net of cash (23,160 )
Proceeds from sale of assets 639 85
Acquisition and development of software assets (3,839 ) (2,381 )
Net cash used in investing activities (70,945 ) (35,209 )
 
Financing activities
Repayments of long-term debt and capital lease obligation (10,105 ) (5,144 )
Debt fees (1,066 )
Distributions to non-controlling interest (9,551 ) (12,985 )
Payment of taxes related to the net issuance of employee stock awards (1,025 ) (436 )
Payments on tax receivable agreement (41,353 )
Proceeds from the exercise of warrants   1  
Net cash used in financing activities (62,034 ) (19,630 )
Net increase in cash and cash equivalents 10,676 108,846
Cash and cash equivalents at beginning of period 135,701   26,855  
Cash and cash equivalents at end of period $ 146,377   $ 135,701  
 
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 37,617 $ 45,431
Taxes paid $ 3,422 $ 16,617
Supplemental disclosure of non-cash investing:
Accrued capital expenditures $ 7,858 $ 1,089
 

HOSTESS BRANDS, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted
EBITDA margin, adjusted net income attributable to Class A Stockholders
and adjusted EPS are non-GAAP financial measures commonly used in the
Company’s industry and should not be construed as an alternative to
gross profit, net income or earnings per share as indicators of
operating performance or as alternatives to cash provided by operating
activities as a measure of liquidity (each as determined in accordance
with GAAP). These measures may not be comparable to similarly titled
measures reported by other companies. The Company has included these
measures because it believes the measures provide management and
investors with additional information to measure the Company’s
performance and liquidity, estimate the Company’s value and evaluate the
Company’s ability to service debt.

Adjusted Gross Profit and Adjusted Gross Margin

Gross profit and gross margin are adjusted to exclude certain items that
affect comparability. The adjustments are itemized below.You are
encouraged to evaluate these adjustments and the reason the Company
considers them appropriate for supplemental analysis. In evaluating
adjusted gross profit and adjusted gross margin, you should be aware
that in the future the Company may incur expenses that are the same as
or similar to some of the adjustments set forth below. The presentation
of adjusted gross profit and adjusted gross margin should not be
construed as an inference that future results will be unaffected by
unusual or recurring items.

Contacts

Investors, please contact:
Katie Turner
ICR
646-277-1228
[email protected]

Media, please contact:
Hannah Arnold
LAK Public Relations, Inc.
212-329-1417
[email protected]
or
Marie
Espinel
LAK Public Relations, Inc.
212-899-4744
[email protected]

Read full story here

error: Content is protected !!