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 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 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 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 s 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.