Hostess Brands Inc. reported its financial results for the three and nine months ending September 30, 2022.
Andy Callahan, the Hostess Brands’ president and chief executive officer, commented in the announcement: “Hostess Brands delivered another quarter of record-high sales, highlighting the strength of our snacking-oriented portfolio, impactful innovation that targets growing snacking occasions, and successful pricing actions to offset elevated inflation. The resiliency of our operating model and the agility of our talented team enabled us to deliver double-digit adjusted EBITDA growth in a volatile environment.”
He continued, “Given our strong year-to-date results and continued momentum, Hostess Brands is raising its full-year net revenue, adjusted EBITDA, and adjusted EPS guidance as we continue to make investments in innovation and advertising to generate top-tier growth over the longer-term.”
Third-quarter 2022 financial highlights
Net revenue of $346.2 million increased 20.2% from the same period last year as higher price/mix accounted for 20.1% of the quarterly growth, with remaining growth attributed to higher volume.
Gross profit increased 16.6% to $115.4 million, or 33.3% of net revenue, while on an adjusted basis, gross profit increased 16.9% to $116.1 million, or 33.5% of net revenue. Third quarter gross margins declined by 105 basis points, 93 basis points on an adjusted basis, from year-ago levels as favorable price/mix and productivity were more than offset by 18.5% inflation and inefficiencies caused by continued supply-chain fragility.
Net income was $66.3 million or $0.48 per diluted share driven in part by a $33.0 million gain on receipt of Voortman insurance proceeds. Adjusted net income and adjusted EPS, which exclude the receipt of Voortman insurance proceeds, were $32.2 million, and $0.23, respectively, both increased in comparison to the same period last year.
Adjusted EBITDA increased 12.2% to $72.7 million. Adjusted EBITDA margin of 21.0% declined from 22.5% in the prior year period due to lower gross margins and higher operating expenses.
Cash and cash equivalents and short-term investments were $232.7 million as of September 30, 2022, resulting in a net leverage ratio of 2.9x.
Capital expenditures increased to $63.8 million from $36.7 million in the prior-year period. The company now expects capital expenditures to be in the $125-$135 million range in 2022.
Raising full year 2022 net revenue guidance to 17% - 19% growth, as well as raising full year adjusted EBITDA and adjusted EPS guidance to $290 - $293 million and $0.96 - $0.98, respectively.
Other highlights
The company’s Sweet Baked Goods point-of-sale (POS) increased 17.0%, maintaining its share of category dollar sales at 21.4%.
Voortman branded POS grew 28.8% and its share of the Cookie category increased by 26 basis points driven in part by the ongoing momentum in the faster-growing sugar-free sub-segment.
Full year inflation is expected to be in the high teens for the full year, in-line with previous estimates.
Repurchased $94.1 million of shares year-to-date through September 30, 2022, the majority of which were under the previously announced $150 million share repurchase program.
Year-to-date planned increase in advertising and marketing driving consumer demand. Incremental investments planned in the fourth quarter to support the launch of Bouncers innovation.
Guidance and outlook
The company is raising its full year 2022 guidance:
Third quarter 2022 compared to third quarter 2021.
Net revenue was $346.2 million, an increase of 20.2%, or $58.2 million, from the prior-year period. Contribution from pricing actions and product mix provided 20.1% of the growth, while higher volume accounted for 0.1% of the quarterly growth. Compared to the same period last year, sweet baked goods net revenue of $307.3 million increased 18.7% or $48.5 million, while cookies net revenue of $38.9 million increased 33.2% or $9.7 million.
Gross profit was $115.4 million or 33.3% of net revenue, compared to 34.4% for the same period last year. Gross margin declined 105 basis points, 93 basis points on an adjusted basis, as favorable price/mix, including revenue growth management initiatives, and productivity benefits were more than offset by inflation and inefficiencies caused by supply-chain fragility. Adjusted gross profit increased 16.9% on pricing actions and productivity partially offset by inflation.
Operating income was $54.4 million, an increase of 16.7% from the prior-year period. Adjusted operating income of $54.2 million increased 9.7% from the same period last year, as higher gross profit more than offset higher workforce investments, depreciation and advertising.
Adjusted EBITDA of $72.7 million, or 21.0% of net revenue, increased 12.2% from the same period last year as higher gross profit was partially offset by higher operating expenses.
The company’s effective tax rate was 12.8% compared to 27.4% in the prior year. The effective tax rate for the three months ended September 30, 2022, was impacted favorably by the $33.0 million non-taxable gain related to receipt of proceeds under the Voortman acquisition representation and warranty insurance policy and a tax benefit related to revaluing our deferred tax liabilities due to a change in the estimated state tax rate. The current year effective tax rate, excluding these and other immaterial discrete items, was 26.7%, consistent with the prior-year period.
Net income was $66.3 million, a significant increase from $26.2 million from the prior-year period due to the $33.0 million gain from receipt of the Voortman insurance proceeds. Adjusted net income of $32.2 million increased 11.4% from the same period last year. Diluted EPS was $0.48 compared to $0.19 in the prior-year period due to the changes in net income. Adjusted EPS was $0.23 compared to $0.21 in the prior-year period due to the increase in adjusted net income.
Operating cash flows for the nine months ended September 30, 2022, were $164.2 million, as compared to $147.6 million for the same period last year. Operating cash flow benefited from increased profitability, including receipt of the Voortman insurance proceeds of $33.0 million, partially offset by an increase in tax payments and an increase in working capital.
