Milling & Baking News - May 21, 2019 - 18

Financial Results

Cloverhill baking plant begins
bearing fruit for Hostess Brands
KANSAS CITY - It has been a little
more than a year since Hostess Brands,
Inc. acquired a Cloverhill baking plant
from Aryzta L.L.C. in a move Hostess
believed would boost its position in the
breakfast category and better situate the
company in club and vending channels.
In the months that followed, the integration of Cloverhill proved challenging
and the plant was a drag on earnings. In
the first quarter of 2019, though, the company's initial forecasts for Cloverhill's
potential began to seem justified.
Hostess net income in the first quarter ended March 31 was $21,126,000,
equal to 21c per share on the common
stock, down 11% from $23,841,000, or

during a May 8 conference call with
investment analysts. "We continue to
expect Cloverhill profitability to improve as the year progresses."
The Cloverhill plant was discussed
extensively during the conference call
and played a significant role in the
company's strong performance in sales
channels other than grocery. Mr. Callahan said sales growth of 6.7% was well
in excess of Nielsen data indicating
Hostess sales growth of 1.6%. He said
much of the growth was in non-tracked
dollar, club and private label channels.
In sales analysis by channel, Hostess
said sales were up 1.8% at convenience
stores, up 2.4% at supermarkets, down

Hostess Brands sales and market share by channel
Point of sale change
1.8%

2.4%

-1.9%

5.1%

78.3%

Point of sale in millions

$140

-11.4%
Q1 2018

$120

Q1 2019

$100
$80
$60
$40
$20
$0

Convenience

Grocery

Drug

Dollar

Club

Mass

13.3%

44.3%

22.5%

20.5%

15.9%

-50

-60

870

-380

Market share
23.0%

Market share change (basis points)
20

Point of sale and market share data for the 13 weeks ended March 23, 2019.
Source: Hostess Brands

24c per share, the in the first quarter
last year. Net sales were $222,738,000,
up 7% from $208,743,000.
Results a year earlier were boosted
by a $12.4 million gain on the buyout
of a portion of a tax receivable agreement. Hostess said adjusted net income in the quarter was $20.3 million,
nearly unchanged from $20.5 million
the year before. Adjusted EBITDA was
$49.4 million, up 5% from $47 million
a year earlier. EBITDA was boosted by
the higher revenues, partly offset by
elevated transportation, input, broker
and other operating costs.
The Cloverhill business accounted
for $6.8 million, or nearly half, of sales
growth during the first quarter.
"Our disciplined operational and
integration efforts resulted in a positive contribution from the Cloverhill
business," Andrew P. Callahan, president and chief executive officer, said
18 / May 21, 2019

Milling & Baking News

1.9% at drugstores, up 5.1% in dollar
stores, up 78.3% in club stores and down
11.4% in mass merchandisers. The figures played into the discussion about
Cloverhill's performance and potential.
"We talked about when we acquired
the Cloverhill business not only did
it give us a platform to expand into
breakfast, but it also gave us some access to certain customers and channels
to be able to expand that," Mr. Callahan
said. "We've leveraged that in club, not
only for the Cloverhill and Big Texas
brands but also to expand our Hostess
branded business. We also launched
Dolly (Madison) in club as well as
across some other channels. So the innovation of taking that platform and
spreading that across multiple channels, it was also in other channels not
just club, but it did help the club business. But I think it's important to note
that it was both value and Hostess'

growth in club that drove that growth."
Later in the call, Mr. Callahan explained Cloverhill gave Hostess the
capacity to bake core breakfast products and gave the company access to
the value category.
"When you combined that acquisition with the Hostess brand as well
as the best-in-class sales and distribution model we have that leverages the
breadth of distribution, the combination of those two when we put them
together allowed us to blow out and
get access to value customers," he said.
"With the value brand, our normal customers are getting into this segment as
well as launching the breakfast platform under the Hostess brand."
Also lifting sales in the first quarter
were "multifaceted price increases" executed at the end of 2018, Mr. Callahan
said. The increases were effected across
all sales channels and did not stop the
company from generating volume
growth. The breakfast business, and
Cloverhill, again was an important part
of the company's optimistic view of the
outlook for the remainder of the year.
"As we grow through innovation,
we are pleased with customer acceptance of the Hostess' breakfast products thus far and expect to grow these
products to increase as we progress
through 2019," he said. "We believe
breakfast and indulgent premium
snacking are strategic growth platforms over the next few years. They
are both highly incremental to our
business and extendable."
Commenting on the company's balance sheet, Thomas A. Peterson, executive vice-president and chief financial officer, said the company's net debt leverage ratio improved to 4.4 times EBITDA
in the first quarter of 2019. He said the
company remains committed to reducing leverage meaningfully throughout
2019. He also said the improving balance
sheet offers Hostess a range of options,
including "reinvesting in our business,
deleveraging our balance sheet and
pursuing potential strategic acquisitions
while effectively managing our capital
structure." He forecast a yearend leverage ratio of 3.5 to 3.7 times EBITDA.
In the Sweet Baked Goods segment,
gross profit was $73.1 million, up 5%
from $69.4 million in the first quarter
last year. Sales were $212.9 million, up
7% from $199.3 million. Gross profit of
the In-Store Bakery segment was $2 million, up 11% from $1.8 million in the first
quarter last year. Sales were $9.9 million,
up $400,000, or 4%, from $9.5 million.
Hostess left guidance for 2019 unchanged from its earlier forecasts. MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - May 21, 2019

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