Milling & Baking News - March 12, 2019 - 18

Financial Results

Hostess Brands sees promising
picture emerging for 2019
72% from $223,897,000, or $2.26 per share.
Sales were $850,389,000, up 10% from
$776,188,000 in 2017.
In the fourth quarter, net income was
$11,830,000, or 12c per share, down sharply from $179,686,000, or $1.80, in the same
quarter in 2017. Sales were $214,815,000,
up 9% from $196,221,000.
Results in 2017 included a one-time
tax gain of $163.1 million. The company
said adjusted fourth-quarter earnings per
share were about unchanged from the
same period in 2017. The sales gain of
$18.6 million in the fourth quarter of 2018
was more than entirely accounted for by
a $20 million contribution from Cloverhill
Bakery, acquired early in 2018.
Hostess said organic sales to mass
merchandisers declined slightly while
dollar, club, small format and grocery
channels rose. Gross profits were $66.3
million, down 15% from $78.4 million.
Gross margins fell to 32.6% from 42.3%.
Contributing to the decline, Hostess said,
were the "negligible margins" of the Cloverhill business.
The anticipation of better results from
Cloverhill in 2019 is central to optimism
about overall results. In a conference call
with investment analysts Feb. 27, Mr.
Callahan referenced the "integrated and
transformed Cloverhill, which is fueling
better access and capability in breakfast."
"The Cloverhill business completed
the installation of core capital improvements setting us up for accretive revenue
and EBITDA growth for years to come, a
great corporate milestone," he said. "In
2019, we expect the Cloverhill business
profitability to continue to improve as the
year progresses."
More broadly, he said Hostess is better
positioned to participate in the promising snacks category with the company's
"iconic brands and loyal consumers."
"To support this growth, Hostess
has developed a scalable infrastructure
with an efficient operating model, differentiated capabilities that support
collaborative customer partnerships,
robust innovation and significant cash
flow that we believe sets us apart from
our peers, and positions Hostess to create value for all stakeholders."
The statement encompassed many of
the five pillars he listed during the call
as central to future growth - the company's core business, innovation, agility and efficiency, the cultivation of talent and capabilities and leveraging the
company's strong cash flow.
18 / March 12, 2019

Milling & Baking News

He said Hostess is in the midst of a
"proactive evaluation" of its stock-keeping units to optimize its portfolio, in line
with consumer preference and to maximize growth.
Innovation opportunities include the
breakfast category, where Hostess sees
potential for a $100 million business as
its "fair share." Beyond breakfast, the
company is focusing on premium products aimed at attracting newer consumers willing to buy products at higher
price points.
"Hostess' Totally Nutty peanut butter
wafer bars and our new Hostess Danish

Hostess Brands L.L.C.
share price
$15.00
$13.90

per share

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$12.80
$11.70
$10.60
$9.50
March May
2018

July

Sept. Nov. Jan. March
2019

are great examples of this," he said. "We
believe breakfast and premium innovations such as Bakery Petites are key platforms of growth over the next few years.
They are both highly incremental to our
business and expandable."
At the same time, he said the company
is exploring opportunities with its "value
portfolio," expecting to gain access to
new channels through Cloverhill and utilizing the Dolly Madison brand.
Having made considerable progress
with its Cloverhill business, Mr. Callahan said additional opportunities for
heightened efficiency have been identified and will be pursued in 2019. Additionally, the company's cash flow gives
Hostess "the flexibility to pursue a range
of strategic options."
Gross profit of the Hostess Sweet
Baked Goods segment was $66.3 million,
or 32.6% of net revenue, which compared
with $78.4 million, or 42.3% of net revenue in the previous year.
Gross profit of the In-Store Bakery
segment was $2.5 million in 2018, versus

$2.4 million the year before. Net revenue
was $11.7 million, up 7% from $10.9 million in the fourth quarter. Gross margins
narrowed to 21.3% from 22.4%, reflecting
the effects of 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," he said. "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."
Capital improvements in the fourth
quarter of 2018 are expected to boost efficiency and profitability in 2019, Hostess said.
Higher inflationary pressures, including increasing customer allowances,
were blamed for an overall narrowing by
320 basis points in adjusted gross margins in the fourth quarter.
"The company is implementing multifaceted pricing actions along with bakery
efficiency programs to partially offset inflation while maintaining the company's
growth potential," Hostess said.
Hostess executives earlier in the year
said prices would be raised and were
asked by analysts about timing and
perhaps challenges experienced effecting price increases. Mr. Callahan said
the company has done its research and
was confident.
"As we've mentioned, we did a lot of
research on the analytics and elasticities
across our portfolio," he said. "We priced
the balance of recovery of the inflation and
margin, but while maintaining growth.
And therefore, we did price across select
areas of the portfolio, mostly around single-serve, and then took other initiatives
related to rolling out our Hostess Partnership Program, some downsizing and
some other initiatives across the rest of the
portfolio. So most of the list price increasing was within the single-serve and some
areas within our value channel."
For 2019, Hostess projected "revenue
growth well above the sweet baked foods
category, predicting that innovation in
breakfast products, other core products,
expanded distribution and improved
merchandising execution will help. EBITDA guidance in the new year is $200 million to $210 million, up 7% to 13% from
2018, "driven by strong operating cash
flows." Earnings per share are forecast to
grow 6% to 15% in 2019. MBN
bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - March 12, 2019

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