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August 9, 2019

Hostess Brands expects $10m hit on third-quarter revenues from upgrade work

Hostess Brands expects to take a hit on its third-quarter revenues from plant upgrades and maintenance work.

By Dean Best

Hostess Brands expects to see as much as US$10m shaved off its third-quarter revenues amid upgrades and maintenance work to some of the US baked goods maker’s production lines.

The Missouri-based business reported second-quarter and first-half revenues yesterday (8 August) and also announced plans to open a new test kitchen and consumer research centre at its new headquarters, which is being relocated to Kansas. Chief executive Andrew Callahan said the R&D facility will help expand capacity and reduce the time and cost of new product development.

Breakfast and premium snacking are “growth platforms over the next few years”, Callahan added. “Our team is building out our pipeline of consumer-focused innovation to drive future profitable growth.” 

Revenues for the six months increased 9% to US$464m, although net income slid 20% to $43m. Operating income was up 8% at $73m. The Twinkies and Ding Dongs brand owner reiterated its full-year guidance for adjusted EBITDA of $200m to $210m, representing growth of 7-13% over 2018. EBITDA was $55m in the second quarter.

Callahan said the plant upgrades are part of the Nasdaq-listed company’s ongoing improvement programme and despite the hit to revenues he was optimistic about the growth opportunities. 

“Looking ahead, based on the strength of our year-to-date results and continued demand momentum expected for the balance of the year, we’re confident in our ability to grow revenue well ahead of the category and continue to achieve our full-year guidance,” the CEO noted.

The development comes on the back of Hostess’ plan to move its distribution centre from Illinois to Kansas, a switch it expects to complete by the first quarter of next year. The relocation is “an important step in elevating our infrastructure for future profitable growth”, Callahan said.

He added that a “significant portion” of the cost savings from the new distribution centre will be reinvested in the business “to further enhance our foundation and enable additional consumer-driven profitable growth”. 

Hostess reduced its cost base by 20 basis points in the second quarter and finance chief Thomas Peterson said the company expects cash flows to “provide us with the flexibility to pursue a range of potential strategic options, including reinvesting in our business, deleveraging our balance sheet, and pursuing potential strategic acquisitions while effectively managing our structure”. 

As a result, Hostess expects to cut its leverage by 1.1 to 1.3 times based on the anticipated EBITDA growth and cash flow generation.

Having just announced the sale of its in-store bakery arm – Superior Cake Products – to local peer Sara Lee Frozen Bakery and reduced spending at its Clover Hill business, the CFO said Hostess is on track to cut its adjusted EBITDA-to-debt ratio to 3.2 to 3.4 times by year-end. 

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