Milling & Baking News - August 25, 2020 - 22

Financial Results

KANSAS CITY - The completion of
significant integration activities for the
recently acquired Voortman business
and implementation of operational
improvement highlighted a strong
second quarter at Hostess Brands that
company executives said exceeded financial expectations.
Hostess net income in the second
quarter ended June 30 was $17.37
million, equal to 13¢ per share on the
common stock, up 4.2% from $16.7
million, or 11¢ per share, in the second
quarter last year.
Sales were $256.23 million, up 6.3%
from $241.06 million. Adjusting for the
$6.8 million cost of obtaining warehouse space needed to facilitate the
Voortman transition, adjusted net revenue was $263 million. Hostess said
the increase in adjusted net revenue
was driven primarily by the acquisition of Voortman, which contributed
$30.4 million of adjusted net revenue
during the second quarter.
"Strong growth of our core Hostess
branded revenue was partially offset

Hostess Brands share price
$15.00
$13.50
$12.00
$10.50
$9.00
Sept. Nov. Jan. March May July
2019
2020
Source: New York Stock Exchange

by lower private label and other nonHostess branded revenue," Andrew
P. Callahan, president and chief executive officer, said during an Aug. 5
conference call with analysts. "As we
expected, we were impacted by the
mix shift from single-serve to multipack sales resulting from changing
consumer shopping habits due to
COVID-19. However, we did see this
improve over the course of the second
quarter and into July."
Mr. Callahan said point-of-sale increased 7.4% and market share was
19.3%, down 7 basis points. Meanwhile, Hostess branded point-of-sale
was up 9.2%, representing continued
22 / August 25, 2020

Milling & Baking News

growth ahead of the sweet baked
goods category and demonstrating
"the strong consumer demand with
a well-known and trusted Hostess
brand during this time."
He added that Hostess branded volume partially was offset by declines in
non-tracked channels.
"The decline in non-tracked channel
as well as shifts in timing of July 4 merchandising shipments year-over-year
help explain the Q2 delta between our
point-of-sales growth and Sweet Baked
Goods net revenue growth," he said.
Adjusted EBITDA of $65.1 million
was up 18.1% from a year earlier. Excluding the in-store baking business,
adjusted EBITDA was $67.1 million,
up nearly 24% from a year ago.
Despite the unprecedented challenges in the convenience store channel, Hostess was able to generate
year-over-year point-of-sales growth,
giving the company its highest share
position ever in the segment, Mr. Callahan said. He credited the strength
of the company's warehouse distribution model, where Hostess was able
to benefit from its ability to get products into the stores.
Taking a closer look at consumption
at home, Mr. Callahan said Hostess
has increased its household penetration and improved repeat purchase
rates during COVID-19. During the
second quarter, the number of households buying Hostess products increased 10%, Mr. Callahan said, which
exceeded the overall sweet baked
goods category, which increased 7%
during the quarter. In addition, Hostess trip, dollar growth and units per
household were also up versus the
prior-year period, Mr. Callahan said.
"Importantly, repeat purchases are
also up," he said. "So our trial is creating more loyal Hostess consumers."
Innovation, a core pillar of Hostess' long-term sustainable growth,
exceeded expectations during the second quarter, Mr. Callahan said. New
products introduced in the quarter included Hostess branded brownies and
Lemon CupCakes, while a new Tiger
Tail Twinkie launched on July 21.
"As we begin our largest selling
period with customers during Q3, we
(work) collaboratively with them to
optimize programming to meet our
dynamic consumer environment," he
said. "We made the proactive decision to delay the rollout of certain new

items to prioritize core growth in Q2,
but the team is diligently working to
be ready to launch when the time is
right."
The second quarter was a key period for the integration of the Voortman business. Building on progress
made during the first quarter, Mr.
Callahan said Hostess completed
key integration activities during the

VOORTMAN'S

Voortman integration efforts highlight
strong second quarter at Hostess

second quarter, including transitioning Voortman's direct-store delivery
distribution model to the Hostess
warehouse model in both the United
States and Canada.
Mr. Callahan said Hostess was particularly pleased to have achieved continued Voortman point-of-sale growth
during the second quarter, even as the
company transitioned its warehouse
activities while simultaneously rationalizing almost half of the pre-warehouse transition stock-keeping units.
"Our team is actively developing
new products to drive increased distribution into new channels and evaluating additional growth platforms for
the Voortman brand as we position the
business for future profitable growth,"
he said. "We are excited about the
many opportunities for growth in the
Voortman business and with the progress we are making as we leverage
Hostess' leading brand, broad-based
distribution model, focused and tailored customer approach, innovation
and promotion expertise and scale
merchandising capabilities."
Looking ahead to the remainder of
fiscal 2020, Brian T. Purcell, executive
vice president and chief financial officer, said Hostess expects adjusted
EBITDA of $230 million to $240 million, with Voortman EBITDA contributions of $25 million to $30 million.
"We expect margins in the second
half of the year to be slightly lower
than Q2 as operating efficiency levels
normalize and we increase our investment in merchandising and marketing
to drive continued long-term growth,"
he said. "This puts us well on track for
achieving adjusted EPS of 70¢ to 75¢ per
share and reaching our leverage target
of around 4x by the end of 2020." MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - August 25, 2020

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