Superior acquisition drives Hostess’s revenue increases in 2016

This was the company’s first full year earning call as a public company, after it completed the acquisition of a controlling interest in Hostess Holdings, and changed its name from Gores Holdings to Hostess Brands, in November last year.

During the call on Tuesday, Bill Toler, president and CEO, said he was pleased with the company’s performance in 2016.

“Our financial performance benefited from increased distribution and product innovation initiatives, as well as continuing to build market share on our core products. We feel confident with our momentum heading in to 2017,”​ he said.

Despite net income being down by $6.3m to $82.4m in 2016, compared to 2015, Tom Peterson, EVP and CFO, reported Hostess saw a net revenue increase of $106.8m (17.2%) to $727.6m.

Net revenue was $178.8m for Q4 2016, an increase of $31.8m (21.6%), compared to net revenue of $147m for the same period the year before.

According to Peterson, this was primarily due to $10.2m of revenue from the acquisition of Superior Cake Products on May 10, as well as new product development, including the launch of Suzy Q's and Hostess Sweet Shop Brownies, and increased distribution.

“The acquisition of Superior … expanded our platform into the In-store Bakery,”​ said Toler. “Superior is our first entry into this $8bn space and we believe it offers significant growth potential.”​

The advantages of the acquisition​

According to Hostess, the In-Store Bakery (ISB) category is currently growing around 4% annually, which last year, was faster than the center of the store, sweet baked goods category. Superior’s product line includes eclairs, black and white cookies, madeleines, brownie bites and creampuffs, all new products to Hostess.

Additionally, Peterson reported an adjusted EBITDA of $215.3m for the full year 2016.

Gross profit for the fourth quarter increased by $15.9m to $77m, compared to $61.1m in fourth quarter of 2015.

Gross margin improved 116 basis points to 43.4% in 2016 and 43% for the quarter, compared to 41.5% the year prior, driven by commodity cost decreases and improved bakery costs.

Two divisions on the up​

The company’s Sweet Baked Goods segment saw a net revenue increase of 9.9% ($60.5m) from $609.9m to $607.4m for the fiscal year 2016. Gross profit was $299m, up from $258.9m.

The division’s fourth quarter report also showed positive growth, including net revenue up by 13.6% ($19.4m) from $142.8m to $162.1m.

Gross profit was $72m, up from $59.5m.

Peterson also reported on the performance of the company’s Other Segment – that consists of branded bread and buns, in-store bakery products and frozen retail.

This division increased its net revenue by $46.3m (423.6%) from $10.9m to $57.2m. Gross profit was $17m for 2016, compared to $4m in 2015.

The segment’s net revenue for the fourth quarter by $12.4m (291.5%) to $16.7m, compared to $4.3m in 2015, thanks, again, to the impact of the Superior acquisition.

Gross profit was $5.0m, up from $1.6m in Q4 2015.

The falls and rise of Hostess​

Toler told analysts that, despite facing bankruptcy twice in the last 12 years, the 96-year-old company today holds a 16.7% market share of the sweet baked goods category, according to Nielsen.

“Much of this growth can be attributed to the investments we have made … including approximately $160m to upgrade our manufacturing facility, implement new IT systems and enhance production efficiencies through the installation of automated baking and packaging lines,”​ said Toler.

The company has also switched to a direct-to-warehouse model, which, said Toler, “has paved new opportunities for us, expanding our distribution reach and making it easy for us to innovate across the whole spectrum.”​

Toler said NPDs in 2017 will include cinnamon sugar crunch Donettes, white-cut fudge covered Ding Dongs, chocolate cake Twinkies and peanut butter Ho Ho.

“Peanut butter has always been the number-one flavor gap in our portfolio in all of our consumer surveys. And, now, we've developed a peanut butter Ho and anticipate rolling out more peanut butter products throughout the year as well”, ​he said.

Fun fact​

According to the company’s website, bakery manager Jimmy Dewer invented the Twinkies in 1930. The name itself came from a “Twinkle Toe Shoes” billboard he saw on the way to show off his idea.