KANSAS CITY — Lifted by strong sales and operating profits in its core Sweet Baked Goods segment, adjusted net income of Hostess Brands, Inc. surged in the second quarter ended June 30.
Net income on a reported basis of Hostess Brands in the quarter was $16,669,000, equal to 11c per share on the common stock, down 32% from $24,620,000, or 19c per share, in the second quarter last year. Sales were $241,060,000, up 12% from $214,849,000.
Adjusted net income was $24.1 million during the second quarter, up 19% from the same period a year earlier. Hostess said the decline in unadjusted net income was largely attributable to discrete income tax adjustments of $7.8 million.
Pricing actions together with greater sales volume helped Hostess offset inflationary pressures lifting ingredient, labor and packaging costs. Continued operational cost efficiencies also helped boost results, Hostess said.
Hostess attributed the sales gain to higher volume of core Hostess branded products together with strong sales of new Hostess breakfast items.
“The continued execution against our pillars for growth are evidenced this quarter by meaningful revenue growth, increased market share and improvement in our industry-leading profitability,” said Andrew P. Callahan, president and chief executive officer. “The strength of the Hostess brand and our investments in our fundamental capabilities have helped us achieve broad-based success across channels. We will continue to focus on execution in the second half of 2019 as we build upon our strong foundation for sustainable growth and shareholder value creation.”
In an Aug. 7 conference call with analysts, Mr. Callahan identified a number of highlights achieved in the second quarter. Commenting on the 12% jump in sales, Mr. Callahan said distribution and merchandising support improved in multiple channels with no single channel accounting for more than one third of the company’s revenue growth.
He cautioned that second-quarter sales were boosted by July 4 merchandising.
“Additionally we are currently performing preventive maintenance and operations enhancements to a few of our lines,” he said. Sales could be adversely affected in a $5 million to $10 million range in the third quarter, he said.
The Sweet Baked Goods segment, which accounts for more than 95% of Hostess sales, had second-quarter gross profit of $80.9 million, up 26% from $64.4 million in the second quarter last year. Sales were $229.3 million, up 12% from $204.2 million.
Hostess said its previously announced agreement to sell its In-Store Bakery segment to Sara Lee Frozen Bakery for $65 million is expected to be completed in the third quarter.
“The company expects to use the net proceeds from the transaction to pursue a range of potential strategic options, including reinvesting in its business, de-leveraging its balance sheet and pursuing potential strategic acquisitions, while effectively managing its capital structure,” Hostess said.
Mr. Callahan said a major impetus for the decision to sell was the company’s inability to successfully introduce the Hostess brand into the in-store category.
Despite the sale and the caution about third-quarter sales offered by Mr. Callahan, the company said it was leaving its 2019 sales and EBITDA guidance unchanged. Hostess continues to expect organic revenue growth well above the average for the sweet goods category. Full-year EBITDA is projected at $200 million to $210 million, up 7% to 13% from 2018.
Asked to elaborate on the Hostess new product pipeline, Mr. Callahan said the company will continue to market its birthday cupcake and has a new snack pack of Donettes.
“We’re looking at new brownie innovation that’s coming out,” he said.
He said new Zingers are generating excitement and driving growth in that business.
In the first half of 2019, Hostess net income was $43,281,000, or 32c per share, down 20% from $53,922,000, or 43c, in January-June 2018. Sales were $463,798,000, up 9% from $424,592,000.