KANSAS CITY — The completion of significant integration activities for the recently acquired Voortman business and implementation of operational improvement highlighted a strong second quarter at Hostess Brands that company executives said exceeded financial expectations.
Hostess net income in the second quarter ended June 30 was $17.37 million, equal to 13¢ per share on the common stock, up 4.2% from $16.7 million, or 11¢ per share, in the second quarter last year.
Sales were $256.23 million, up 6.3% from $241.06 million. Adjusting for the $6.8 million cost of obtaining warehouse space needed to facilitate the Voortman transition, adjusted net revenue was $263 million. Hostess said the increase in adjusted net revenue was driven primarily by the acquisition of Voortman, which contributed $30.4 million of adjusted net revenue during the second quarter.
“Strong growth of our core Hostess branded revenue was partially offset by lower private label and other non-Hostess branded revenue,” Andrew P. Callahan, president and chief executive officer, said during an Aug. 5 conference call with analysts. “As we expected, we were impacted by the mix shift from single-serve to multipack sales resulting from changing consumer shopping habits due to COVID-19. However, we did see this improve over the course of the second quarter and into July.”
Mr. Callahan said point-of-sale increased 7.4% and market share was 19.3%, down 7 basis points. Meanwhile, Hostess branded point-of-sale was up 9.2%, representing continued growth ahead of the sweet baked goods category and demonstrating “the strong consumer demand with a well-known and trusted Hostess brand during this time.”
He added that Hostess branded volume partially was offset by declines in non-track channels.
“The decline in non-track channel as well as shifts in timing of July 4 merchandising shipments year-over-year help explain the Q2 delta between our point-of-sales growth in Sweet Baked Goods net revenue growth,” he said.
Adjusted EBITDA of $65.1 million was up 18.1% from a year earlier. Excluding the in-store baking business, adjusted EBITDA was $67.1 million, up nearly 24% from a year ago.
Despite the unprecedented challenges in the convenience store channel, Hostess was able to generate year-over-year point-of-sales growth, giving the company its highest share position ever in the segment, Mr. Callahan said. He credited the strength of the company’s warehouse distribution model, where Hostess was able to benefit from its ability to get products into the stores.
Taking a closer look at consumption at home, Mr. Callahan said Hostess has increased its household penetration and improved repeat purchase rates during COVID-19. During the second quarter, the number of households buying Hostess products increased 10%, Mr. Callahan said, which exceeded the overall sweet baked goods category, which increased 7% during the quarter. In addition, Hostess trip, dollar growth and units per household were also up versus the prior-year period, Mr. Callahan said.
“Importantly, repeat purchases are also up,” he said. “So our trial is creating more loyal Hostess consumers.”
Innovation, a core pillar of Hostess’ long-term sustainable growth, exceeded expectations during the second quarter, Mr. Callahan said. New products introduced in the quarter included Hostess branded Brownies and Lemon CupCakes, while a new Tiger Tail Twinkie launched on July 21.
“As we begin our largest selling period with customers during Q3, we (work) collaboratively with them to optimize programming to meet our dynamic consumer environment,” he said. “We made the proactive decision to delay the rollout of certain new items to prioritize core growth in Q2, but the team is diligently working to be ready to launch when the time is right.”
The second quarter was a key period for the integration of the Voortman business. Building on progress made during the first quarter, Mr. Callahan said Hostess completed key integration activities during the second quarter, including transitioning Voortman’s direct-store delivery distribution model to the Hostess warehouse model in both the United States and Canada.
Mr. Callahan said Hostess was particularly pleased to have achieved continued Voortman point-of-sale growth during the second quarter, even as the company transitioned its warehouse activities while simultaneously rationalizing almost half of the pre-warehouse transition stock-keeping units.
“Our team is actively developing new products to drive increased distribution into new channels and evaluating additional growth platform for the Voortman brand as we position the business for future profitable growth,” he said. “We are excited about the many opportunities for growth in the Voortman business and with the progress we are making as we leverage Hostess’ leading brand, broad-based distribution model, focused and tailored customer approach, innovation and promotion expertise and scale merchandising capabilities.”
Looking ahead to the remainder of fiscal 2020, Brian T. Purcell, executive vice president and chief financial officer, said Hostess expects adjusted EBITDA of $230 million to $240 million, with Voortman EBITDA contributions of $25 million to $30 million.
“We expect margins in the second half of the year to be slightly lower than Q2 as operating efficiency levels normalize, and we increase our investment in merchandising and marketing to drive continued long-term growth,” he said. “This puts us well on track for achieving adjusted EPS of 70¢ to 75¢ per share and reaching our leverage target of around 4x by the end of 2020.”