Hostess exceeds expectations in strong Q2
Kansas City An excellent second quarter at Hostess Brands, which exceeded financial forecasts according to company leaders, was highlighted by the conclusion of major integration activities for the recently acquired Voortman business and the adoption of operational enhancements.
Hostess’s net income increased by 4.2% to $17.37 million, or 13¢ per share on common stock, in the second quarter that ended on June 30 from $16.7 million, or 11¢ per share, in the same period the previous year.
Sales increased 6.3% to $256.23 million from $241.06 million. Net sales was $263 million after deducting the $6.8 million expense of renting warehouse space required to support the Voortman changeover. According to Hostess, the acquisition of Voortman, which generated $30.4 million in adjusted net sales in the second quarter, was the main factor for the rise in adjusted net revenue.
President and CEO Andrew P. Callahan stated during a conference call with analysts on August 5 that “strong growth of our core Hostess branded revenue was partially offset by lower private label and other non-Hostess branded revenue.” “As anticipated, the adjustment in customer buying patterns brought on by COVID-19 caused a mix shift in sales from single-serve to multipack. But we did witness this better into July and the remainder of the second quarter.
According to Mr. Callahan, market share decreased by 7 basis points to 19.3%, while point-of-sale climbed by 7.4%. Hostess-branded point-of-sale was up 9.2% in the meantime, indicating “the strong consumer demand with a well-known and trusted Hostess brand during this time” and continuing growth ahead of the sweet baked goods sector.
He said that decreases in non-track channels somewhat offset the Hostess branded volume.
“The Q2 delta between our point-of-sale growth in Sweet Baked Goods net revenue growth and year-over-year shifts in timing of July 4 merchandising shipments helps explain,” he said, citing the fall in non-track channel as well.
With $65.1 million in adjusted EBITDA, it increased 18.1% over the previous year. Adjusted EBITDA was $67.1 million when the in-store baking operation was excluded, a nearly 24% increase from the prior year back then.
Hostess managed to deliver year-over-year point-of-sales growth, giving the firm its highest share position ever in the segment, Mr. Callahan said, despite the extraordinary obstacles in the convenience store channel. He gave credit to the company’s effective warehouse distribution strategy, which allowed Hostess to profit from its capacity to supply the stores with goods.
Examining consumption at home in more detail, Mr. Callahan reported that during COVID-19, Hostess improved repeat buy rates and expanded its household penetration. According to Mr. Callahan, the number of homes purchasing Hostess products climbed by 10% in the second quarter, outpacing the 7% increase in the category of sweet baked goods as a whole. Furthermore, the number of hosts, dollar growth, and units per household increased in comparison to the previous year, according to Mr. Callahan.
He stated, “Importantly, repeat purchases are also up.” “Therefore, our trial is generating more devoted Hostess customers.”
According to Mr. Callahan, Hostess’ long-term sustainable growth is based on innovation, which surpassed expectations in the second quarter. Hostess-branded Brownies and Lemon CupCakes were among the new items released during the quarter. On July 21, a new Tiger Tail Twinkie was on sale.
“We (work) collaboratively with them to optimise programming to meet our dynamic consumer environment as we begin our largest selling period with customers during Q3,” he said. “We decided to prioritise core growth in Q2 by delaying the rollout of some new items, but the team is working hard to be prepared to launch when the time is right,” the statement reads.
An important time for the Voortman business integration was the second quarter. Mr Callahan reported that Hostess finished important integration tasks in the second quarter, building on the gains from the first quarter. These tasks included switching Voortman’s direct-store delivery distribution approach to the Hostess warehouse model in both the US and Canada.
According to Mr. Callahan, Hostess was especially happy to maintain Voortman point-of-sale growth in the second quarter, despite the company transitioning its warehouse operations and rationalising over half of the stock-keeping units prior to the warehouse transition.
“As we position the business for future profitable growth, our team is actively developing new products to drive increased distribution into new channels and evaluating additional growth platform for the Voortman brand,” he stated. “We.”are enthusiastic about the numerous prospects for expansion within the Voortman company, as well as the advancements we are accomplishing through the utilisation of Hostess’ dominant brand, extensive distribution network, targeted and concentrated customer approach, innovative and promotion know-how, and large-scale merchandising skills.
Considering the balance of the 2020 fiscal year, Hostess anticipates adjusted EBITDA of $230 million to $240 million, with Voortman EBITDA contributions of $25 million to $30 million, according to senior vice president and chief financial officer Brian T. Purcell.
“As operating efficiency levels normalise, we expect margins in the second half of the year to be slightly lower than Q2; in order to drive continued long-term growth, we are increasing our investment in merchandising and marketing,” he stated. This puts us in a good position to succeed by the end of 2020, adjusted EPS of 70¢ to 75¢ per share and achieving our leverage objective of about 4x.