Hostess Brands, Inc. Announces Fourth Quarter 2018 Financial Results

KANSAS CITY, Mo.–(BUSINESS WIRE)–Hostess Brands, Inc. (NASDAQ: TWNK) (NASDAQ: TWNKW) (“Hostess” or the
“Company”), today reported its financial results for the fourth quarter
and full year ended December 31, 2018.

Business Highlights for the Quarter¹:

• Net revenue increased $18.6 million, or 9.5%, to $214.8 million,
  driven by $20.0 million from the recently acquired Cloverhill Business
  partially offset by slightly lower organic net revenue.
• Total Company point of sale increased 4.0% and market share was 17.4%,
  up 44 basis points, primarily from the addition of the Cloverhill
  Business.
• Net income was $16.4 million, compared to $189.6 million. Diluted EPS
  was $0.12 per share, compared to $1.74 per share. The 2017 results
  benefited from a one-time tax reform gain of $163.1 million.
• Adjusted EPS was $0.17 per share, flat as compared with the fourth
  quarter of 2017.
• Adjusted EBITDA was $51.4 million, or 23.9% of net revenue, in-line
  with the Company’s expectations.
• Cash and cash equivalents were $146.4 million as of December 31, 2018
  with a leverage ratio of 4.5x, both driven by year-to-date operating
  cash flows of $143.7 million.

A Look Ahead to Full Year 2019:

• The Company expects continued revenue growth well above the Sweet
  Baked Goods (“SBG”) category in 2019 driven by innovation from
  Hostess-branded breakfast and other core products as well as expanded
  distribution and improved merchandising execution over the course of
  the year.
• Full year 2019 adjusted EBITDA guidance is $200 million to $210
  million, an increase of 7% to 13% over 2018, primarily driven by
  revenue growth, the realization of already executed multi-faceted
  pricing and merchandising programs and achievement of operating
  efficiencies.
• The Company expects a leverage ratio of 3.5x to 3.7x at the end of
  2019, driven by strong operating cash flows.

“We are pleased with our solid finish to the year. The team executed on
our plan to advance our business in a dynamic operating environment. Our
achievements have created a strong foundation for Hostess to build on in
the future. We are excited to be celebrating Hostess’ 100-year
anniversary and the iconic brand strength we bring to market with our
entrepreneurial spirit, energy and enthusiasm. As we move forward into
2019, we are confident that our enhanced capabilities, strategic
insights and capital investments will drive future innovation,
sustainable growth and increased shareholder value,” commented Andy
Callahan, Hostess’ President and Chief Executive Officer.

Fourth Quarter 2018

Net revenue was $214.8 million, an increase of 9.5%, or $18.6 million,
compared to $196.2 million, driven by $20.0 million from the Cloverhill
Business. The Company experienced a slight decline in organic net
revenue driven by the mass retail channel, offset by net revenue growth
in the dollar, club, small format and grocery channels.

Gross profit was $68.8 million, or 32.0% of net revenue, compared to
$80.8 million, or 41.2% of net revenue. Adjusted gross profit was $73.8
million, or 34.3% of net revenue, compared to $80.8 million or 41.2% of
net revenue. These declines were primarily attributable to a shift in
mix of revenue to include the recently acquired non-Hostess® branded
products of the Cloverhill Business, which resulted in lower adjusted
gross margin of 390 basis points. Significant capital improvements
completed in the fourth quarter of 2018 are expected to increase
efficiency and profitability in 2019. Also, higher inflationary
pressures including increasing customer allowances resulted in a 320
basis point decrease in adjusted gross margin this quarter. The Company
is implementing multi-faceted pricing actions along with bakery
efficiency programs to partially offset inflation while maintaining the
Company’s growth potential.

Advertising, selling, general and administrative (“SG&A”) expenses were
$28.6 million, or 13.3% of net revenue, compared to $25.9 million, or
13.2% of net revenue. The increase was attributable primarily to a
forfeiture of stock-based compensation in 2017.

The Company’s effective tax rate was 18.2% 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”). In 2017, the
Company recognized an income tax benefit of $98.8 million which includes
a benefit of $111.3 million due to Tax Reform. The remaining tax expense
of $12.5 million in 2017 represents an effective tax rate of 32.2%.

Net income was $16.4 million compared to $189.6 million. The fourth
quarter 2017 net income was impacted by a one-time Tax Reform gain of
$163.1 million. Net income attributed to Class A stockholders was $11.8
million, or $0.12 per diluted share, compared to $179.7 million, or
$1.74 per diluted share.

Adjusted EPS was $0.17 per diluted share, consistent with the fourth
quarter of 2017. Adjusted EBITDA was $51.4 million, or 23.9% of net
revenue, compared to $57.8 million, or 29.5% of net revenue. The
decrease in adjusted EBITDA was primarily attributable to higher costs
and other inflationary pressures. Adjusted EBITDA as a percentage of net
revenue is down due to cost pressures as well as unfavorable product mix
from the Cloverhill Business which is a strategic growth area for the
Company in the future.

Cash from operations for the year ended December 31, 2018 was $143.7
million compared to $163.7 million for the same period last year. The
decrease was attributable to lower net income from operations partially
offset by lower tax payments and the timing of vendor payments.

Sweet Baked Goods Segment: Net revenue was $203.1 million,
an increase of $17.8 million, or 9.6%, compared to $185.3 million driven
by the Cloverhill Business as well as a slight decline in organic
revenue driven by the mass retail channel, offset by net revenue growth
within the dollar, club, small format, and grocery channels.

Gross profit was $66.3 million, or 32.6% of net revenue, compared to
$78.4 million, or 42.3% of net revenue. The decline was primarily
attributable to the addition of revenue from the Cloverhill Business at
negligible margins as well as other inflationary pressures.

In-Store Bakery Segment: Net revenue was $11.7 million, an
increase of $0.8 million, or 7.3%, compared to $10.9 million. The
increase in net revenue was attributable to increased sales volume.
Gross profit was $2.5 million, or 21.3% of net revenue, compared to
gross profit of $2.4 million, or 22.4% of net revenue. The decrease in
gross margin was primarily attributable to higher transportation costs.

The Company recognized impairment charges of $3.3 million to the
goodwill and intangible assets within the In-Store Bakery reporting
unit. These charges reflect the impact of the decision to discontinue
the Hostess Bake Shop product line as compared to expectations when the
In-Store Bakery reporting unit was remeasured during the Hostess
business combination. Based on the Company’s impairment assessment, the
fair value of the In-Store Bakery reporting unit continues to be well in
excess of the initial cash purchase price of the Superior on Main
business acquired in 2016.

Outlook

The Company expects the following financial results for the full year
2019:

• Net revenue growth well above the SBG category;
• Adjusted EBITDA of $200 million to $210 million, an increase of 7% to
  13% from 2018;
• Adjusted EPS of $0.57 to $0.62, an increase of 6% to 15% from 2018;
• The net expected increase in cash of $90 million to $100 million would
  result in a leverage ratio of 3.5x to 3.7x at the end of 2019, absent
  any additional acquisitions or optional debt reductions, compared to
  4.5x at December 31, 2018;
• Cash provided by operations of $150 million to $160 million;
• Capital expenditures of approximately $30 million to $35 million;
• Income tax rate of 21% to 22% giving effect to the non-controlling
  interest.

The Company provides guidance only on a non-generally accepted
accounting principles (non-GAAP) basis and does not provide a
reconciliation of the Company’s forward-looking financial expectations
to the most directly comparable GAAP financial measure because of the
inherent difficulty in forecasting and quantifying certain amounts that
are necessary for such reconciliation; including adjustments that could
be made for deferred taxes; remeasurement of the Tax Receivable
Agreement, changes in allocation to the non-controlling interest,
transformation expenses and other non-operating gains or losses
reflected in the Company’s reconciliation of historic non-GAAP financial
measures, the amount of which could be material. Please refer to the
Reconciliation of Non-GAAP Financial Measures included in this press
release for further information about the use of these measures.

Conference Call and Webcast

The Company will host a conference call and webcast with an accompanying
presentation today, February 27, 2019 at 4:30 p.m. EST to discuss the
results for the fourth quarter. Investors interested in participating in
the live call can dial (877) 270-2148 from the U.S. and (412) 902-6510
internationally. A telephone replay will be available approximately two
hours after the call concludes through March 13, 2019, by dialing (844)
512-2921 from the U.S., or (412) 317-6671 from international locations,
and entering confirmation code 13687132. The simultaneous, live webcast
and presentation will be available on the Investor Relations section of
the Company’s website at www.hostessbrands.com.
The webcast will be archived for 30 days.

¹This press release contains certain non-GAAP financial
measures, including adjusted gross profit, adjusted gross margin,
adjusted EBITDA, adjusted EBITDA margin, adjusted net income attributed
to Class A stockholders and adjusted earnings per share (“EPS”). 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 fourth 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 refer
to the 13-week period ended December 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 reflect a restatement of
convenience channel data executed by Nielsen during the quarter. The
Cloverhill Business, which the Company purchased in February 2018,
includes the Cloverhill® and Big Texas® brands, as well as the breakfast
manufacturing assets. The Company’s leverage ratio is net debt (total
long-term debt less cash) divided by adjusted EBITDA.

About Hostess Brands, Inc.

Hostess® is the second leading brand by market share within the SBG
category. The brand’s history dates back to 1919, when the Hostess®
CupCake was introduced to the public, followed by Twinkies® in 1930.
Today, the Company produces a variety of new and classic treats
including Ding Dongs®, Ho Hos®, Donettes®, Hostess Bakery Petites® and
Fruit Pies, in addition to Twinkies® and CupCakes. For more information
about Hostess® products and Hostess Brands, please visit
hostesscakes.com. Follow Hostess on Twitter: @Hostess_Snacks; on
Facebook: facebook.com/Hostess; on Instagram: Hostess_Snacks; and on
Pinterest: pinterest.com/hostesscakes.

The Company has two reportable segments: SBG and In-Store Bakery. The
SBG segment consists of sweet baked goods, bread and buns and frozen
retail products that are sold under the Hostess®, Dolly Madison®,
Cloverhill® and Big Texas® brands. The In-Store Bakery segment consists
of Superior® products sold through the in-store bakery section of
grocery and club stores.

Forward-Looking Statements

This press release contains statements reflecting the Company’s views
about its future performance that constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve substantial risks and uncertainties.
Forward-looking statements are generally identified through the
inclusion of words such as “believes,” “expects,” “intends,”
“estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,”
or similar language. Statements addressing the Company’s future
operating performance and statements addressing events and developments
that the Company expects or anticipates will occur are also considered
as forward-looking statements. All forward-looking statements included
herein are made only as of the date hereof. The Company undertakes no
obligation to update any forward-looking statement, whether as a result
of new information, future events, or otherwise.

These statements inherently involve risks and uncertainties that could
cause actual results to differ materially from those anticipated in such
forward-looking statements. These risks and uncertainties include, but
are not limited to, maintaining, extending and expanding the Company’s
reputation and brand image; protecting intellectual property rights;
leveraging the Company’s brand value to compete against lower-priced
alternative brands; correctly predicting, identifying and interpreting
changes in consumer preferences and demand and offering new products to
meet those changes; operating in a highly competitive industry; the
ability to maintain or add additional shelf or retail space for the
Company’s products; the continued ability to produce and successfully
market products with extended shelf life; the ability to drive revenue
growth in key products or add products that are faster-growing and more
profitable; volatility in commodity, energy, and other input prices and
the ability to adjust pricing to cover increased costs; dependence on
major customers; geographic focus could make the Company particularly
vulnerable to economic and other events and trends in North America;
increased costs in order to comply with governmental regulation; general
political, social and economic conditions; a portion of the workforce
belongs to unions and strikes or work stoppages could cause the business
to suffer; product liability claims, product recalls, or regulatory
enforcement actions; unanticipated business disruptions; dependence on
third parties for significant services; insurance may not provide
adequate levels of coverage against claims; failures, unavailability, or
disruptions of the Company’s information technology systems; the
Company’s ability to achieve expected synergies and benefits and
performance from the Company’s strategic acquisitions; dependence on key
personnel or a highly skilled and diverse workforce; and the Company’s
ability to finance indebtedness on terms favorable to the Company; and
other risks as set forth from time to time in the Company’s Securities
and Exchange Commission filings.

As a result of a number of known and unknown risks and uncertainties,
the Company’s actual results or performance may be materially different
from those expressed or implied by these forward-looking statements.
Risks and uncertainties are identified and discussed in Item 1A-Risk
Factors in the Company’s Annual Report on Form 10-K for 2018. All
subsequent written or oral forward-looking statements attributable to us
or persons acting on the Company’s behalf are expressly qualified in
their entirety by these risk factors. The Company undertakes no
obligation to update any forward-looking statement, whether as a result
of new information, future events, or otherwise.

HOSTESS BRANDS, INC.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted
EBITDA margin, adjusted net income attributable to Class A Stockholders
and adjusted EPS are non-GAAP financial measures commonly used in the
Company’s industry and should not be construed as an alternative to
gross profit, net income or earnings per share as indicators of
operating performance or as alternatives to cash provided by operating
activities as a measure of liquidity (each as determined in accordance
with GAAP). These measures may not be comparable to similarly titled
measures reported by other companies. The Company has included these
measures because it believes the measures provide management and
investors with additional information to measure the Company’s
performance and liquidity, estimate the Company’s value and evaluate the
Company’s ability to service debt.

Adjusted Gross Profit and Adjusted Gross Margin

Gross profit and gross margin are adjusted to exclude certain items that
affect comparability. The adjustments are itemized below.You are
encouraged to evaluate these adjustments and the reason the Company
considers them appropriate for supplemental analysis. In evaluating
adjusted gross profit and adjusted gross margin, you should be aware
that in the future the Company may incur expenses that are the same as
or similar to some of the adjustments set forth below. The presentation
of adjusted gross profit and adjusted gross margin should not be
construed as an inference that future results will be unaffected by
unusual or recurring items.

Contacts

Investors, please contact:
Katie Turner
ICR
646-277-1228
katie.turner@icrinc.com

Media, please contact:
Hannah Arnold
LAK Public Relations, Inc.
212-329-1417
harnold@lakpr.com
or
Marie
Espinel
LAK Public Relations, Inc.
212-899-4744
mespinel@lakpr.com

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