Hostess Brands, Inc. Announces Net Revenue Increase For Third Quarter 2018

Hostess Brands, Inc. (NASDAQ: TWNK) (NASDAQ: TWNKW) (the “Company”), today reported its financial results for the third quarter ended September 30, 2018.

Business Highlights1:

• Net revenue increased $18.7 million, or 9.7%, to $211.0 million, driven by $18.9 million from the business acquired in February 2018 (“the Cloverhill Business”).
• Point of sale increased 3.8%, of which 3.7% was from the Cloverhill Business.
• Market share was 18.9%, up 90 basis points, of which 70 basis points was from the Cloverhill Business.
• Net income was $11.2 million, compared to $16.1 million. Excluding the impact of the losses incurred as we transform and rebuild the Cloverhill Business, net income would have been $18.5 million. Diluted EPS was $0.08 per share, compared to $0.09 per share.
• Adjusted EPS was $0.10 per share, compared to $0.14 per share. Excluding the impact of the losses incurred as we transform and rebuild the Cloverhill Business, adjusted EPS would have been $0.13 per share.
• Adjusted EBITDA was $40.1 million, or 19.0% of net revenue, compared to $54.7 million or 28.4% of net revenue. Excluding the impact of losses incurred as we transform and rebuild the Cloverhill Business, Adjusted EBITDA would have been $44.9 million.
• Cash and cash equivalents were $127.4 million as of September 30, 2018 with a leverage ratio of 4.46x, both driven by year to date operating cash flows of $109.9 million.
• The Company expects continued growth above the Sweet Baked Goods (“SBG”) category average in 2018 and is updating the full year adjusted EBITDA outlook to $185 million to $190 million.

“The Hostess team continued to grow our point of sale ahead of the category and further expand our market share this quarter. We have seen very good point of sale growth within five of our six tracked channels as compared to the prior year. We are executing our proven and differentiated model that leverages our strong brands, consumer relevant innovation and collaborative customer partnerships to drive Hostess share growth and profitable category growth for our customers,” commented Andy Callahan, President and Chief Executive Officer of the Company.

“The transformation of the Cloverhill Business is progressing as originally projected and will be an important growth contributor in the future. Continued sales growth behind our launch of new Hostess®-branded breakfast products, the continued transformation of our Cloverhill Business, along with the successful sell-in of our multi-faceted pricing actions are expected to provide substantial revenue and profit growth. Moving into 2019, I am confident we have built a stronger foundation with a proven model to grow and create shareholder value,” concluded Andy Callahan.

Third Quarter 2018

Net revenue was $211.0 million, an increase of 9.7%, or $18.7 million, compared to $192.3 million. The acquisition of the Cloverhill Business, which was completed in the first quarter of 2018 to expand the breakfast portfolio and manufacturing capabilities, contributed $18.9 million of incremental net revenue. The Company launched Hostess®-branded Danishes and Jumbo Donettes® in September and expects to build off the early positive reception of the Hostess®-branded breakfast launch in 2019. Organic growth in the small format, grocery and dollar channels contributed to an increase in net revenue; however, this growth was largely offset by lower revenue in the mass retail channel.

1This press release contains certain non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted earnings per share (“EPS”) and adjusted EBITDA. Please refer to the schedules in the press release for reconciliations of non-GAAP financial measures to the comparable GAAP measure. Unless otherwise stated, all comparisons of financial measures in this press release are to the third quarter of 2017. All measures of market performance contained in this press release, including point of sale and market share, include all Company branded products within the SBG category as reported by Nielsen but do not include other products sold outside of the SBG category. All market data in this press release refers to the 13-week period ended September 29, 2018 and the prior-year comparable period. The prior-year comparable period excludes the performance of the brands acquired with the Cloverhill Business. Current and prior period market data presented herein reflects a restatement made by Nielsen during the quarter to increase the number of stores used to calculate convenience channel point of sale results. The Cloverhill Business which the Company purchased includes the Cloverhill® and Big Texas® brands, as well as the breakfast manufacturing assets.

Gross profit was $60.4 million, or 28.6% of net revenue, compared to $78.4 million, or 40.8% of net revenue. Adjusted gross profit was $64.1 million, or 30.4% of net revenue, compared to $78.4 million or 40.8% of net revenue. The declines in adjusted gross profit and adjusted gross margin were primarily attributable to a shift in mix of revenue to include the recently acquired non-Hostess® branded products, which resulted in lower adjusted gross margin of 630 basis points. The Company has made significant progress to stabilize and improve the Cloverhill Business, including reducing waste and improving unplanned down-time. Efforts to transform the acquired business into a profitable operation by the end of 2018 are going well and remain on schedule. This transformation includes significant capital projects that are expected to be completed in the fourth quarter in order to improve the efficiency of the bakery operations. Also contributing to the overall lower adjusted gross margin this quarter were higher transportation costs and other inflationary pressures, which resulted in a 330 basis point decrease in adjusted gross margin. In response to these rising costs, in October 2018 the Company announced price increases and customer allowance adjustments that we believe will help offset inflation while maintaining the Company's growth potential.

Advertising, selling, general and administrative (“SG&A”) expenses were $30.6 million, or 14.5% of net revenue, compared to $31.0 million, or 16.1% of net revenue. The decrease was attributable primarily to lower expenses related to corporate incentives, partially offset by an increase in retail display deployment to support revenue growth.

The Company's effective tax rate decreased from 39.0% to 18.9%, primarily as a result of the lower federal statutory rate enacted by the legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”) as well as a $2.2 million charge in the third quarter of 2017 to reflect a change in state tax law.

Net income was $11.2 million, compared to $16.1 million. Net income attributed to Class A was $7.9 million, or $0.08 per diluted share, compared to $9.5 million, or $0.09 per diluted share.

Adjusted EPS was $0.10, compared to $0.14 per diluted share. Adjusted EBITDA was $40.1 million, or 19.0% of net revenue, compared to $54.7 million, or 28.4% of net revenue. The decreases in adjusted EPS and adjusted EBITDA were primarily attributable to higher costs as the Company transforms the Cloverhill Business and higher transportation costs and other inflationary pressures.

Cash from operations for the nine months ended September 30, 2018 was $109.9 million compared to $117.8 million for the same period last year. The decrease was attributable to lower net income from operations offset by lower tax payments and the timing of vendor payments and customer receipts.