Hostess Brands (TWNK) Tops Q4 EPS by 3c, Beats on Revenues; Offers 2018 Outlook

Hostess Brands (NASDAQ: TWNK) reported Q4 EPS of $0.17, $0.03 better than the analyst estimate of $0.14. Revenue for the quarter came in at $196.2 million versus the consensus estimate of $189.83 million.

Fourth Quarter 2017 Summary (Compared to Pro Forma Combined Fourth Quarter 2016)1:

• Net revenue increased 9.7% to $196.2 million, representing the Company\'s best organic growth rate for the year. The Company's strong performance was led by the introduction of the Hostess Bakery PetitesTM, a premium snacking platform made with no artificial flavors or colors, and no high fructose corn syrup, which contributed 3.1% of the net revenue increase.
• Net income was $189.6 million (includes $163.1 million of one-time gains relating to the recently enacted tax law referred to as "Tax Reform"), compared to $22.0 million. Diluted EPS was $1.74 per share compared to $0.14 per share.
• Adjusted EPS increased 13.3% to $0.17 per share.
• Adjusted EBITDA increased 9.4% to $57.8 million, or 29.5% of net revenue.
• Point of sale increased 4.3%. Point of sale for the top seven brands increased 8.2% (which comprise 74% of total net revenue).

Outlook

“We are well positioned to grow and enhance stockholder value in 2018 through the execution of our strategic initiatives,” commented Dean Metropoulos, Executive Chairman of Hostess. “These key strategic initiatives are focused on further core distribution expansion, innovation, expansion of white space and serving as a platform for future acquisitions. We plan to grow well above the sweet baked goods category in 2018.”

In an effort to enable and drive growth in its breakfast product portfolio1 and bring important co-manufacturing capabilities in-house, during the first quarter of 2018 the Company acquired certain US breakfast assets from Aryzta, LLC (referred to below as the “Acquisition”). The Acquisition included the Chicago Cloverhill bakery facility and the Big Texas® and Cloverhill® brands. The Acquisition is expected to provide $60 million to $70 million of net revenue for 2018. The Company expects short-term EBITDA losses of $15 million to $20 million, and corresponding adjusted EPS dilution of $0.10 to $0.12 as a result of anticipated operating losses from the acquired business through the second half of 2018 as the Company improves the sales and operating performance of the facility. The Company expects the acquired business to be EBITDA positive in the first half of 2019. By 2020, the Company expects the Acquisition to contribute approximately $20 million to $25 million in EBITDA.

The Company expects adjusted EBITDA of $220 million to $230 million for the year ended December 31, 2018. See the schedules in the press release for a reconciliation of anticipated 2018 adjusted EBITDA to anticipated net income of $98 million to $106 million for 2018.

The Company expects adjusted EPS of $0.65 to $0.70, an increase of 3% to 11% from adjusted EPS of $0.63 for 2017. The impact of Tax Reform is expected to provide a benefit to adjusted EPS of approximately $0.12. Please refer to the schedule in this press release for the calculation of expected basic, diluted, and adjusted EPS. The Company\'s expected tax rate for 2018 is approximately 21% giving effect to the non-controlling interest, a partnership for income tax purposes.

The Company anticipates cash provided by operations of $175 million to $180 million in 2018. Significant anticipated cash outflows from investing and financing activities include $50 million to $60 million of total capital expenditures, $34 million to buy out a portion of the tax receivable agreement and $24 million to fund the Acquisition. The net increase in cash for 2018 of $35 million to $40 million would result in a leverage ratio of 3.60x to 3.80x at year end, prior to any additional acquisitions or optional debt reductions.

For earnings history and earnings-related data on Hostess Brands (TWNK) click here.

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