Milling & Baking News - August 14, 2018 - 14

Financial Results

Hostess quarterly earnings slump;
2018 guidance cut; shares tumble
Continued from Page 1

cost pressures would weigh on earnings and by reduced sales to a major
customer.
"During the second quarter I was
pleased to continue to see overall
point of sale and market share growth
ahead of the snack baked goods category giving us confidence in our
growth potential moving forward,"
he said. "The overall growth was
reduced by meaningful and largerthan-anticipated reductions in both
promotional support and associated
retail inventory from one of our largest retail partners. Additionally, the
escalating inflationary pressures,
including transportation and other
supply chain costs, were more pronounced than we anticipated. The
recently acquired Chicago bakery
added significant revenue at negative margins as we continue to
transform the bakery, further reducing our overall margins in the second quarter."
The effects of higher inflation and
the reduced sales to the major customer prompted Hostess to cut its
full-year guidance for 2018 to earnings per share of 52c, down from 58c
as the previous guidance. The company is forecasting EBITDA in a range
of $190 million to $200 million, down
$30 million from previous guidance.
Net income is forecast at $73 million
to $81 million.
In a call with investment analysts
Aug. 7, Mr. Callahan characterized
the company's results as a "significant miss versus expectations" and
cited "quickly escalating inflationary
costs" together with the effects of the
moves by the customer.
Thomas A. Peterson, executive
vice-president and chief financial officer, said escalating wheat prices were
not part of the inflationary pressure
the company experienced.
"We're hedged pretty far out on
wheat, so this short-term wheat increase hasn't (had) impact to date,"
he said.
Mr. Callahan identified five keys
the company sees as necessary to restoring profitable growth:
* aligning price and merchandising
program to improve the top line;
* managing distribution and operations network to reduce cost;
* increasing display support across
key channels;
14 / August 14, 2018

Milling & Baking News

* innovation;
* and continuing progress on the
company's Chicago baking plant integration.
Mr. Callahan said it had been some
time since the company has raised
prices, but he projected confidence
about prospects for Hostess being
successful.
"We are working on plans to restructure our customer pricing and
merchandising programs to manage
inflation while maintaining growth
and profitability," he said. "We believe the inflationary pressures of the

HOSTESS BRANDS

C.P.G. (consumer packaged goods)
industry are systemic and here to stay
for the balance of 2018 and into 2019.
As such, we will implement a retail
price increase and incremental retail
programs to help offset the inflationary headwinds we and others in the
industry are experiencing.
"We believe Hostess is highly profitable for our customers, and our
strong brand strength and large lift
on display provides us with a lot of
flexibility."
He said the Hostess brand has "innate pricing power."
While efforts to raise prices will begin during the balance of 2018, the effects mostly will be felt next year, Mr.
Callahan said.
He went on to offer cause for expectations that business with the major retailer (unidentified by the company) could rebound moving ahead.
"The corporate change in display
philosophy during Q2 not only impacted Hostess, but also drove share
loss for this customer," he said. "Consistently, across many examples,
when Hostess performs well and is
growing through merchandising and

innovation, Hostess and our customers consistently grow market share
together."
Gross profit of the Sweet Baked
Goods segment in the second quarter was $64.4 million, down 25%
from $85.5 million in the second quarter last year. Pressuring profits were
expenses associated with the integration of the Chicago baking plant and
higher transportation costs and other
inflationary pressures.
Net sales were $204.2 million in
the second quarter, an increase of 7%
from $191.7 million in the same period last year. The increase reflected
the addition of the Chicago bakery
(acquired from Aryzta L.L.C. in January), partly offset by the sales cutbacks to the major retail customer.
Despite the drag on results attributed to the Chicago plant, Mr. Callahan said the facility is still expected
to perform in line with plan and to
provide "accretive opportunities" in
2019 and beyond.
Also on a positive note, Mr. Callahan said the company's share of the
sweet baked goods category rose 42
basis points, to 17.5%.
A success during the quarter was
Bakery Petites, introduced in late
2017, Mr. Callahan said.
"The Bakery Petites platform
specifically continues to build distribution and added 36 basis points
to our market share for the quarter,"
he said, adding that 91% of Bakery
Petites sales were new consumers to
the Hostess franchise and almost 70%
were incremental to the category.
"For breakfast, the addition of Chicago gives us the firepower to drive
meaningful improvement through
our share of this subcategory," Mr.
Callahan said. "Breakfast represents
51% of the sweet baked goods category, while Hostess-branded share
of breakfast is currently 15%."
New products introduced included
Jumbo Donettes, multi-packed Danishes and cinnamon rolls.
Gross profit of the In-Store Bakery
segment totaled $2.5 million, down
from $3 million in the same period
last year. Sales were about flat at $11.6
million, versus $11.5 million. Margins
tightened, mostly because of a shift
in the product and channel mix and
higher transportation costs.
In the first six months of 2018, Hostess net income was $53,922,000, or 43c
per share, up 2.8% from $52,406,000,
or 35c, in the same time last year.
Sales were $424,592,000, up 10% from
$387,716,000. MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - August 14, 2018

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