Strong results trigger rally in Hostess shares

by Josh Sosland
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Hostess' sales in 2017 were up 26% from the year before.

KANSAS CITY — Riding the back of strong fourth-quarter results exceeding Wall Street expectations, Hostess Brands, Inc. achieved earnings and sales growth in the year ended Dec. 31, 2017. Cheered by the gains after disappointing results earlier in the year, Hostess Brands shares surged more than 10% in early trading March 1.

Hostess net income in the year ended Dec. 31 totaled $223,897,000, equal to $2.26 per share on the common stock, compared with earnings of $57,211,000 in 2016, which included 10 months before the company’s initial public offering. Sales in 2017 were $776,188,000, up 26% from $615,588,000.

Results in 2017 included a one-time gain of $163.1 million related to tax rate reductions enacted late in the year. Adjusted earnings per share for the year were 63c, up 5% from the year before. Adjusted EBITDA in 2017 was $230.2 million, equating to 29.7% of revenue. Adjusted EBITDA was up 7% from 2016.

William Toler, Hostess
William Toler, president and c.e.o. of Hostess

We are pleased with our strong finish to the year,” said William D. Toler, president and chief executive officer of Hostess. “We were able to capitalize on the momentum provided by our robust product innovation and continued distribution gains to increase our market share. We are optimistic about the continued growth opportunity from our product innovation, including our Hostess Bakery Petites platform and the new breakfast opportunities from our acquisition of the Big Texas and Cloverhill brands.”

Investors appeared similarly pleased by the Hostess results. In trading at mid-afternoon on March 1 on the Nasdaq exchange, the company’s shares were trading at $14.01, up $1.77, or 14%. The share price remained well below the 52-week high of $17.18.

In the fourth quarter ended Dec. 31, net income was $179,686,000, equal to $1.80 per share, up from $14,354,000, or 15c per share, in the fourth quarter of 2016. Sales were $196,221,000, up 10% from $178,829,000.

The $163.1 million gain was recorded in the fourth quarter of 2017, and adjusted earnings per share were 17c in the quarter, up 13% from 2016.

“The company’s strong performance was led by the introduction of Hostess Bakery Petites, a premium snacking platform made with no artificial flavors or colors, and no high-fructose corn syrup, which contributed 3.1% of the net revenue increase,” Hostess said.

In a Feb. 28 conference call, Mr. Toler credited the Bakery Petites for the sales growth together with other new product introductions, including Chocolate Cake Twinkies, White Fudge Ding Dongs and Golden Cupcakes.

Conceding it’s still “very early,” Mr. Toler said Bakery Petites appear to be attracting “incremental Hostess consumers,” in turn bringing Hostess products into additional households.

In the fourth quarter, the Hostess market share in the sweet baked foods category was 17.2%, up 90 basis points for the year, Mr. Toler said. The gain was considerably greater than the company’s target for the year of 50 points. In convenience stores, the company gained 140 basis points, to 21.9% in the fourth quarter.

Gross profit of the Sweet Baked Goods segment of Hostess in 2017 was $316,916,000, up 2% from $310,549,000 in 2016. Sales were $733,827,000, up 10% from $700,856,000 in 2016.

The profit gain largely was driven by higher sales, Hostess said. The company attributed a 70-basis point narrowing of gross margins to higher transportation costs.

“Gross margin was also affected by a shift in product mix due to higher growth in multi-pack sales than other pack types,” Hostess said.

The higher transportation costs were not unexpected, said Thomas A. Peterson, executive vice-president and chief financial officer.

Thomas Peterson, Hostess
Thomas Peterson, executive vice-president and c.f.o. of Hostess

“As we expected and highlighted on our Q3 call, higher cost of transportation continued in Q4 and, as a percentage of revenue, increased more than 100 basis points due to tightening of transportation capacity,” he said. “We expect this tightening to continue into 2018 and are working through offsets to soften the impact to our margin.”

Asked about the impact of higher transportation costs on gross margin during the fourth quarter, Mr. Peterson said it was 120 points.

“We continue to work on various transportation moves in order to get some more dedicated lanes,” he said. “We are working with new carriers certainly. We’re turning over every rock within our bakery and within the company to do both offsets from, specifically from transportation as well as other offsets in the bakery. And I’d say more on transportation is fair game than we have done in the past. We are pushing very hard to get that number back.”

In the fourth quarter, Sweet Baked Goods gross profit was $78,358,000, up 6% from $74,021,000 in the final quarter of 2017. Sales were $185,300,000, up 9% from $168,605,000.

In-Store Bakery gross profits in 2017 were $9,982,000, up 94% from $5,430,000 the year before. Sales were $42,361,000, up 58%.

Fourth-quarter In-Store Bakery gross profits were $2,435,000, down 17% from $2,943,000 the year before. Sales were $10,891,000, up 7% from $10,224,000 in the fourth quarter a year earlier.

The higher sales stemmed from the acquisition of Superior and subsequent growth of in-store bakery products.

With the strong results, C. Dean Metropoulos, executive chairman, was hopeful about the company’s prospects.

C. Dean Metropoulos, Hostess
C. Dean Metropoulos, executive chairman of Hostess

We are well positioned to grow and enhance stockholder value in 2018 through the execution of our strategic initiatives,” he said. “These key strategic initiatives are focused on further core distribution expansion, innovation, expansion of white space and serving as a platform for future acquisitions. We plan to grow well above the sweet baked goods category in 2018.”

Commenting on the acquisition in early 2018 of the breakfast assets of Aryzta, L.L.C., Hostess said the acquired assets are expected to generate $60 million to $70 million of net sales in 2018. Still, the newly-acquired business is not expected to be profitable immediately.

“The company expects short-term EBITDA losses of $15 million to $20 million, and corresponding adjusted e.p.s. dilution of 10c to 12c as a result of anticipated operating losses from the acquired business through the second half of 2018 as the company improves the sales and operating performance of the facility,” Hostess said. “The company expects the acquired business to be EBITDA positive in the first half of 2019. By 2020, the company expects the Acquisition to contribute approximately $20 million to $25 million in EBITDA.”

For the year, the company is projecting earnings per share of 65c to 70c, up 3% to 11% from adjusted 2017 earnings of 63c. An additional 12c per share of tax benefit related to the tax legislation is expected as well. The company gave no top-line guidance for the new year.

Asked during the call why a revenue forecast wasn’t issued for 2018, Mr. Toler said the decision did not reflect concern the company will be unable to achieve its targets.

“Our internal plans are as aggressive as they’ve always been,” he said. “We see growth in the business in a substantial way across many channels, products and innovation and core. We just felt it best for us to talk about our performance and relativity to the category because, at the end of the day, if you’re winning share, you’re winning. And so we’re expecting to build and grow share this year just as we had in the last four years. And so we felt like it was a better way to communicate to talk about exceeding the category growth winning share with the consumer because ultimately that is how great brands and great products are defined.”
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