KANSAS CITY — Strong earnings growth at Hostess Brands, Inc. was achieved in 2019, and solid gains are projected by the company for 2020. Adjusted for a divestiture, 2019 earnings before interest, taxes, depreciation and amortization rose 11% from a year earlier.
Hostess net income in the year ended Dec. 31, 2019, was $77,565,000, equal to 57c per share on the common stock, down 4.7% from $81,426,000, or 63c per share, in fiscal 2018. Results in 2019 included a $7,128,000 gain during the fourth quarter on a foreign currency contract, a hedge against its January 2020 acquisition of Voortman Cookies Ltd., a Canadian business. In 2018, the company recorded a gain of $12,373,000 on the buyout of a tax receivable agreement.
Sales in 2019 were $907,675,000, up 7% from $850,389,000.
Offering guidance for the new year, Hostess projected revenue growth higher than the sweet baked foods category, adjusted EBITDA of $225 million to $240 million, up 13% to 20% from 2019, excluding the EBITDA contribution of the divested in-store baking business. Adjusted earnings per share were forecast to climb 7% to 23% in 2019 and the company forecast a year-end leverage ratio of 4 times EBITDA, up from 3.4 times at the start of the year. The leverage level was boosted by the acquisition of Voortman in January 2020.
“We are excited by the transformative operational progress our team achieved during the year, which will continue to fuel sustainable long-term profitability and value for our stockholders,” said Andrew P. Callahan, president and chief executive officer. “Our fourth-quarter and full-year financial results reflect meaningful growth in net revenue with a solid increase in market share and strong gross profit margin expansion resulting from gains in volume and distribution of Hostess branded core products and breakfast innovation. We expect 2020 to continue this positive momentum driving another year of meaningful growth, including the continued growth of our Hostess branded products, execution of operating enhancements and the integration of our recently completed acquisition of Voortman.”
In a Feb. 26 call with analysts, Mr. Callahan said fourth-quarter point-of-sale business improved 8.3% and that Hostess gained 113 basis points of market share to 18.6%.
“This strong consumer-driven demand and price realization drove our 6.7% net revenue growth in the quarter when we exclude the revenue of the In-Store Bakery business,” he said. “Donettes, CupCakes, Danishes, including both core and new innovation, were revenue growth drivers with continued strong distribution and merchandising support across multiple sales channels.”
Mr. Callahan said the launch in 2019 of a triple chocolate brownie helped the company “capture a disproportionate share” of the brownie subcategory, a business he said is worth $250 million and growing.
Also during 2019, the company boosted its share in the breakfast segment to 17.4% from 16.5%, he said. Numerous new product introductions contributed to the gains.
“We are also excited to expand the distribution in 2020 of the new Hostess cream cheese coffee cake, which is off to a great start and fills a void in the market for the No. 2 consumer-preferred flavor,” Mr. Callahan said.
Gross margins widened by a full percentage point in 2019, to 13.4%. During the year, the company enhanced operations at its Cloverhill operation in Chicago, lifting its profitability, and transitioned its distribution facilities to Kansas from Illinois, “expanding our capabilities and capacity for growth,” the company said. The relocation was completed in November.
“The new location is closer to the company’s largest bakery and more centrally located within the United States, providing the company with the ability to reach customers faster, reduce transportation costs and improve service levels,” Hostess said. “This critical transition provides enhanced infrastructure for future profitable growth.”
Mr. Callahan said the move would give Hostess improved access to labor as well as better highway “trucking lanes.” State tax incentives also were a plus, he said.
While solid sales gains are projected for 2020, sales growth will be scant in the first half of the year, said Brian T. Purcell, executive vice-president and chief financial officer.
”We expect growth to be muted in Q1 with limited contributions from Voortman due to the inventory de-load by distributors in anticipation of the transition to the warehouse model in Q2 as well as shifting of some promotional programming in our Hostess business,” Mr. Purcell said. “As Andy mentioned in his comments, we’ve made calculated strategic decisions, including selected s.k.u. (stock-keeping unit) rationalizations and delays in timing of certain merchandising events to allow for the successful completion of our key ongoing transformational efforts, including the refinement of our new warehouse operations, the integration and transition of Voortman and the addition of key capacity in our facilities. These actions will result in a slight step back in revenue growth in the first half of the year.”
In Voortman, Hostess acquired a baker of premium, branded wafers and sugar-free and specialty cookies with distribution mainly in the United States and Canada.
Hostess projected 2020 net revenue and adjusted EBITDA contribution from Voortman of approximately $90 million and $20 million, respectively.
“The next two quarters, as we integrate Voortman, will require significant effort and operational investments as we transition them from direct-store delivery to the warehouse distribution model,” Mr. Callahan said. “We have confidence in the team’s ability to successfully execute similar to what was accomplished during the Hostess relaunch a few years ago. The shift to the warehouse model will provide expanded distribution opportunities and synergies as we are able to go to market with a more diversified portfolio.”
In the fourth quarter, Hostess net income was $23,555,000, equal to 18c per share, up 44% from $16,352,000, or 12c, in 2019. Sales were $216,666,000, up 0.9% from $214,815,000 in 2018.