Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 8-K
 
 
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 8, 2019
 
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Hostess Brands, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
1-37540
 
47-4168492
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
1 East Armour Boulevard, Kansas City, Missouri
 
64111
 
 
(Address of principal executive offices)
 
(Zip Code)
(816) 701-4600
(Registrant’s telephone number, including area code)

Not applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
                                
o Emerging growth company
o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.
Title of each Class
Trading Symbol
Name of exchange on which registered
Class A Common Stock, par value $0.0001 per shre
TWNK
NASDAQ Capital Market
Warrants, each exercisable for a half share of Class A Common Stock
TWNKW
NASDAQ Capital Market







Item 2.02 Results of Operations and Financial Condition.

On May 8, 2019, Hostess Brands, Inc. (the "Company") issued a press release announcing financial results for the three months ended March 31, 2019, a copy of which is attached as Exhibit 99.1.

The information in this Item 2.02 and Exhibit 99.1 attached hereto is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

Item 7.01    Regulation FD Disclosure

On May 8, 2019, the Company disseminated an investor presentation to be used in connection with the earnings call. A copy of the investor presentation is furnished as Exhibit 99.2 to this Current Report on Form 8-K.

The information furnished in this Item 7.01, and Exhibit 99.2 attached hereto is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as may be expressly set forth by specific reference in such filing.

The Company expressly disclaims any obligation to update or revise any of the information contained in the investor presentation. The investor presentation is available on the Company’s website located at www.hostessbrands.com, although the Company reserves the right to discontinue that availability at any time.

Item 9.01     Financial Statements and Exhibits.
(d) Exhibits
Exhibit
No.
 
Description of Exhibits
 
 
99.1
 
99.2
 




 





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
 
 
HOSTESS BRANDS, INC.
 
 
 
 
Date: May 8, 2019
 
By:
/s/ Thomas A. Peterson

 
 
Name:
Thomas A. Peterson
 
 
Title:
Executive Vice President, Chief Financial Officer


 




Exhibit
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Hostess Brands, Inc. Announces First Quarter 2019 Financial Results
Reports Net Revenue Increase of 6.7% from the Prior Year Period
Announces Plan to Relocate Distribution Center by First Quarter 2020
Reaffirms Full Year 2019 Outlook

KANSAS CITY, MO, May 8, 2019 - Hostess Brands, Inc. (NASDAQ: TWNK, TWNKW) (the “Company”), today reported its financial results for the first quarter ended March 31, 2019.
Business Highlights for the Quarter1 
Net revenue increased $14.0 million, or 6.7%, to $222.7 million. Organic growth contributed $7.2 million or 345 basis points of incremental net revenue primarily from strong growth in the club channel and higher revenue due to price increases. The acquisition of the Cloverhill business contributed $6.8 million or 326 basis points of incremental net revenue.
Total Company point of sale in tracked channels increased 1.6% and market share of 18.2% was unchanged from the first quarter of 2018.
Net income was $26.6 million, compared to $29.3 million. Diluted EPS was $0.21 per share, compared to $0.23 per share.
Adjusted net income was $20.3 million, compared to $20.5 million in the first quarter of 2018.
Adjusted EPS was $0.14 per share, unchanged from the first quarter of 2018.
Adjusted EBITDA increased $2.4 million, or 5.1%, to $49.4 million, or 22.2% of net revenue.
Cash and cash equivalents were $160.5 million as of March 31, 2019 with a leverage ratio of 4.4x, both driven by first quarter operating cash flows of $28.4 million.

Reaffirms Full Year 2019 Outlook

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 operational 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 encouraged by our strong start to 2019 fueled by the breadth and depth of our sweet baked goods product offerings,” commented Andy Callahan, President and Chief Executive Officer.  “Our team is executing on our 2019 pillars for growth, including the strengthening of our core Hostess brand, expansion of breakfast and accelerating growth of our value brands fueled by the acquisition of the Cloverhill business.”

Mr. Callahan continued, “In executing on our pillar to drive agility and efficiency, we have made the decision to relocate our primary distribution center from Illinois to Kansas by the first quarter of 2020. We expect this geographic move will support profitable growth, better service to our customers and increase cost efficiencies. Looking ahead, we continue to believe we are well positioned to achieve our 2019 annual outlook.”


1This press release contains certain non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income attributed to Class A stockholders and adjusted earnings per share (“Adjusted 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 first quarter of 2018. 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 March 23, 2019 and the prior-year comparable period. The prior-year comparable period excludes the performance of acquired brands prior to their acquisition by Hostess. The Company's leverage ratio is net debt (total long-term debt less lease obligations, unamortized debt premiums and cash and cash equivalents) divided by adjusted EBITDA for the trailing twelve-month period.



First Quarter 2019 compared to First Quarter 2018
Net revenue was $222.7 million, an increase of 6.7%, or $14.0 million, compared to $208.7 million. The increase was driven by additional sales volume in multiple channels led by strong growth in the club channel resulting from various factors including core Hostess®-branded product growth, the expansion of value brands and the addition of breakfast items supported by the acquisition of the Cloverhill Business in February 2018. With the additional month of operations in 2019, the Cloverhill Business contributed $6.8 million of incremental net revenue to the quarter. Revenue growth was also driven by price increases which were executed at the end of 2018.
Gross profit was $75.2 million, or 33.8% of net revenue, compared to $71.2 million, or 34.1% of net revenue. Adjusted gross profit was $76.8 million, or 34.5% of net revenue, a $4.6 million increase as compared to $72.2 million, or 34.6% of net revenue, in the prior year. The higher gross profit was driven by increased volume and price actions, partially offset by inflationary pressures in transportation and other input costs. Additionally, efficiency initiatives across multiple bakeries have helped to offset sales growth in lower margin products.
Operating costs and expenses were $39.1 million, or 17.5% of net revenue, compared to $38.4 million, or 18.4% of net revenue. Operating costs and expenses increased primarily due to higher incentive compensation and recruiting costs and higher broker fees due to increased revenue. Additionally, during 2019 the Company recognized a $1.7 million gain on the remeasurement of the tax receivable agreement within other operating income. During the first quarter of 2018, the Company recognized a $1.4 million impairment charge within other operating expenses.
The Company's effective tax rate was a benefit of 4.6% compared to an expense of 18.2%. The current year effective tax rate was impacted by the remeasurement of deferred tax balances driven by the announced relocation of the Company's primary distribution center from Illinois to Kansas which resulted in a discrete tax benefit of $6.0 million during the quarter. The Company's prior year effective tax rate was impacted by the $12.4 million gain on the buyout of a portion of the tax receivable agreement.
Net income was $26.6 million compared to $29.3 million. Net income attributed to Class A stockholders was $21.1 million, or $0.21 per diluted share, compared to $23.8 million, or $0.23 per diluted share.
Adjusted net income was $20.3 million compared to $20.5 million. Adjusted EPS was $0.14 per diluted share, unchanged from the first quarter of 2018. Adjusted EBITDA was $49.4 million, or 22.2% of net revenue, compared to $47.0 million, or 22.5% of net revenue. The increase in adjusted EBITDA was primarily a result of higher net revenues, partially offset by higher transportation, input, broker and other operating costs.
Cash from operations for the three months ended March 31, 2019 was $28.4 million compared to $38.3 million for the same period last year. The decrease was attributable to the timing of customer receipts as well as higher working capital needs to facilitate the increased sales volume.
Sweet Baked Goods Segment: Net revenue was $212.9 million, an increase of $13.6 million, or 6.8%, compared to $199.3 million driven by additional volume, primarily in the club channel as well as price increases. Gross profit was $73.1 million, or 34.4% of net revenue, compared to $69.4 million, or 34.8% of net revenue. The increase in gross profit was the result of increased net revenue partially offset by higher transportation and other input costs.
In-Store Bakery Segment: Net revenue was $9.9 million, an increase of $0.4 million, or 4.3%, compared to $9.5 million. The increase in net revenue was attributable to increased sales volume. Gross profit was $2.0 million, or 20.7% of net revenue, compared to gross profit of $1.8 million, or 19.1% of net revenue. The increase in gross profit was primarily a result of increased sales volume.
Distribution Center Relocation
Today, the Company also announced the relocation of its primary distribution center from Illinois to Kansas by the first quarter of 2020 which will provide enhanced infrastructure for future profitable growth. As a result of this geographic move, the new Kansas-based distribution center will be closer to the Company’s largest bakery and more centrally located in the United States. Upon completion, the Company expects to be able to reach customers faster, reduce transportation costs and improve service levels. In addition to these cost and operational efficiencies, the State of Kansas is also providing tax incentives to the Company.
Outlook
The Company reaffirms its outlook for 2019:
Net revenue growth well above the SBG category;

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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, 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, excluding discrete items, 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, May 8, 2019 at 4:30 p.m. EDT to discuss the results for the first quarter. Investors interested in participating in the live call can dial (877) 451-6152 from the U.S. and (201) 389-0879 internationally. A telephone replay will be available approximately two hours after the call concludes through May 22, 2019, by dialing (844) 512-2921 from the U.S., or (412) 317-6671 from international locations, and entering confirmation code 13690145. 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.
About Hostess Brands, Inc.
Hostess® is a 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 Donettes®, Ding Dongs®, Zingers®, danishes, honeybuns and coffee cakes, 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 on Main® and private label 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

3


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.

4


HOSTESS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share data)
 
March 31,
 
 
December 31,
 
2019
 
 
2018
ASSETS
 
 
 
 
Current assets:

 
 

Cash and cash equivalents
$
160,483

 
 
$
146,377

Accounts receivable, net
129,231

 
 
105,679

Inventories
43,158

 
 
38,580

Prepaids and other current assets
5,695

 
 
8,806

Total current assets
338,567

 
 
299,442

Property and equipment, net
221,636

 
 
220,349

Intangible assets, net
1,895,231

 
 
1,901,215

Goodwill
575,645

 
 
575,645

Other assets, net
12,761

 
 
14,062

Total assets
$
3,043,840

 
 
$
3,010,713



 
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 

Current liabilities:

 
 

Long-term debt and lease obligations payable within one year
$
13,243

 
 
$
11,268

Tax receivable agreement payments payable within one year
3,700

 
 
4,400

Accounts payable
74,648

 
 
65,288

Customer trade allowances
44,114

 
 
42,010

Accrued expenses and other current liabilities
18,950

 
 
18,137

Total current liabilities
154,655

 
 
141,103

Long-term debt and lease obligations
974,440

 
 
976,736

Tax receivable agreement
63,145

 
 
64,663

Deferred tax liability
275,238

 
 
277,954

Total liabilities
1,467,478

 
 
1,460,456

Commitments and Contingencies

 
 

Class A common stock, $0.0001 par value, 200,000,000 shares authorized,100,046,442 and 100,046,392 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
10

 
 
10

Class B common stock, $0.0001 par value, 50,000,000 shares authorized, 30,255,184 shares issued and outstanding at March 31, 2019 and December 31, 2018
3

 
 
3

Additional paid in capital
927,570

 
 
925,902

Accumulated other comprehensive income
1,307

 
 
2,523

Retained earnings
292,491

 
 
271,365

Stockholders’ equity
1,221,381

 
 
1,199,803

Non-controlling interest
354,981

 
 
350,454

Total liabilities and stockholders’ equity
$
3,043,840

 
 
$
3,010,713



5


HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share data)
 
Three Months Ended
 
March 31,
 2019
 
 
March 31,
2018
Net revenue
$
222,738

 
 
$
208,743

Cost of goods sold
147,550

 
 
137,502

Gross profit
75,188

 
 
71,241

Operating costs and expenses:
 
 
 
 
Advertising and marketing
8,863

 
 
8,870

Selling expense
8,520

 
 
7,387

General and administrative
17,471

 
 
14,562

Amortization of customer relationships
5,985

 
 
5,994

Other operating expense (income)
(1,761
)
 
 
1,556

Total operating costs and expenses
39,078

 
 
38,369

Operating income
36,110

 
 
32,872

Other expense (income):
 
 
 
 
Interest expense, net
10,236

 
 
9,340

Gain on buyout of tax receivable agreement

 
 
(12,372
)
Other expense
440

 
 
83

Total other expense (income)
10,676

 
 
(2,949
)
Income before income taxes
25,434

 
 
35,821

Income tax expense (benefit)
(1,178
)
 
 
6,519

Net income
26,612

 
 
29,302

Less: Net income attributable to the non-controlling interest
5,486

 
 
5,461

Net income attributable to Class A stockholders
$
21,126

 
 
$
23,841

 
 
 
 
 
Earnings per Class A share:
 
 
 
 
Basic
$
0.21

 
 
$
0.24

Diluted
$
0.21

 
 
$
0.23

Weighted-average shares outstanding:
 
 
 
 
Basic
100,085,141

 
 
99,895,075

Diluted
100,777,609

 
 
105,041,015

Results of Operations by Segment
Three Months Ended
(In thousands)
March 31,
2019
 
 
March 31,
2018
Net Revenue
 
 
 
 
Sweet Baked Goods
$
212,879

 
 
$
199,293

In-Store Bakery
9,859

 
 
9,450

 
$
222,738

 
 
$
208,743

Gross Profit
 
 
 
 
Sweet Baked Goods
$
73,145

 
 
$
69,438

In-Store Bakery
2,043

 
 
1,803

 
$
75,188

 
 
$
71,241



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HOSTESS BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 
 
Three Months Ended
 
 
 
 
March 31,
2019
 
 
March 31,
2018
 
Operating activities
 
 
 
 
 
 
Net income
$
26,612

 
 
$
29,302

 
 
Depreciation and amortization
10,878

 
 
10,091

 
 
Impairment of property, goodwill and intangibles

 
 
1,417

 
 
Debt discount (premium) amortization
(228
)
 
 
(271
)
 
 
Non-cash change in tax receivable agreement
(1,761
)
 
 
(12,372
)
 
 
Share-based compensation
2,281

 
 
1,623

 
 
Deferred taxes
(2,882
)
 
 
4,786

 
 
Change in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(23,552
)
 
 
(11,437
)
 
 
 
Inventories
(4,578
)
 
 
2,006

 
 
 
Prepaids and other current assets
2,917

 
 
2,055

 
 
 
Accounts payable and accrued expenses
16,594

 
 
11,560

 
 
`
Customer trade allowances
2,104

 
 
(438
)
 
 
Net cash provided by operating activities
28,385

 
 
38,322

 
 
 
   
 
 
 
 
 
Investing activities
 
 
 
 
 
 
Purchases of property and equipment
(9,493
)
 
 
(8,019
)
 
 
Acquisition of business, net of cash

 
 
(23,910
)
 
 
Acquisition and development of software assets
(1,342
)
 
 
(558
)
 
 
Net cash used in investing activities
(10,835
)
 
 
(32,487
)
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
Repayments of long-term debt and capital lease obligation
(2,530
)
 
 
(2,526
)
 
 
Distributions to non-controlling interest
(457
)
 
 
(4,153
)
 
 
Payment of taxes related to the net issuance of employee stock awards

 
 
(407
)
 
 
Payments on tax receivable agreement
(457
)
 
 
(34,000
)
 
 
Net cash used in financing activities
(3,444
)
 
 
(41,086
)
 
Net increase (decrease) in cash and cash equivalents
14,106

 
 
(35,251
)
 
Cash and cash equivalents at beginning of period
146,377

 
 
135,701

 
Cash and cash equivalents at end of period
$
160,483

 
 
$
100,450

 
 
 
 
 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
Interest
$
11,087

 
 
$
9,942

 
 
Net taxes paid (refunded)
$
(10
)
 
 
$
507

 
Supplemental disclosure of non-cash investing:
 
 
 
 
 
 
Accrued capital expenditures
$
1,436

 
 
$
642

 

7


HOSTESS BRANDS, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Adjusted gross profit, adjusted gross margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, 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.
Adjusted EBITDA
The Company defines adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization and (iii) income taxes, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating adjusted EBITDA, 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 Company's presentation of adjusted EBITDA should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of the Company's results as reported under GAAP. For example, adjusted EBITDA:
does not reflect the Company's capital expenditures, future requirements for capital expenditures or contractual commitments;
does not reflect changes in, or cash requirements for, the Company's working capital needs;
does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debt; and
does not reflect payments related to income taxes, the Tax Receivable Agreement or distributions to the non-controlling interest to reimburse its tax liability.
Adjusted Net Income and Adjusted EPS
Net income and net income attributed to Class A stockholders are adjusted to exclude certain items that affect comparability. Net income attributed to Class A shareholders is then divided by weighted average diluted Class A shares outstanding to determine adjusted EPS. The adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating adjusted net income and adjusted EPS, 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 EPS should not be construed as an inference that future results will be unaffected by unusual or recurring items.





8



HOSTESS BRANDS, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited, amounts in thousands, except shares and per share data)
 
 
Three Months Ended
 
 
March 31,
2019
 
March 31,
2018
Reconciliation of Adjusted Gross Profit
 
 
 
 
Gross profit
 
$
75,188

 
$
71,241

Non-GAAP adjustments:
 
 
 

Acquisition and integration costs
 
1,563

 

Special employee incentive compensation
 
33

 
983

Adjusted gross profit
 
$
76,784

 
$
72,224

 
 
 
 
 
Adjusted gross margin
 
34.5
%
 
34.6
%
 
 
 
 
 
Reconciliation of Adjusted EBITDA
 
 
 
 
Net income
 
$
26,612

 
$
29,302

Non-GAAP adjustments:
 
 
 

Income tax provision (benefit)
 
(1,178
)
 
6,519

Interest expense, net
 
10,236

 
9,340

Depreciation and amortization
 
10,879

 
10,091

Share-based compensation
 
2,281

 
1,623

Tax Receivable Agreement remeasurement and gain on buyout
 
(1,761
)
 
(12,372
)
Impairment of property and equipment, intangible assets and goodwill
 

 
1,417

Acquisition and integration costs
 
1,563

 
47

Special employee incentive compensation
 
355

 
983

Other
i
440

 
83

Adjusted EBITDA
 
$
49,427

 
$
47,033

 
 
 
 
 
Reconciliation of Adjusted Net Income and Adjusted EPS
 
 
 
 
Net income
 
$
26,612

 
$
29,302

Non-GAAP adjustments:
 

 
 
Tax Receivable Agreement remeasurement and gain on buyout
 
(1,761
)
 
(12,372
)
Remeasurement of deferred taxes
 
(6,047
)
 

Impairment of property and equipment, intangible assets and goodwill
 

 
1,417

Acquisition and integration costs
 
1,563

 
47

Special employee incentive compensation
 
355

 
983

Tax impact of adjustments
 
(409
)
 
1,131

Adjusted net income
 
20,313

 
20,508

Non-controlling interest allocation of net income
 
(5,486
)
 
(5,461
)
Non-controlling interest allocation of adjustments
 
(446
)
 
(558
)
Adjusted net income attributed to Class A stockholders
 
$
14,381

 
$
14,489

Weighted average Class A shares outstanding-diluted
 
100,777,609

 
105,041,015

Adjusted EPS
 
$
0.14

 
$
0.14


i. For the three months ended March 31, 2019 and 2018, other expenses included transaction and other non-operating professional fees.

9
q12019earningsinvestorpr
® First Quarter 2019 Earnings Investor Presentation May 8, 2019


 
Disclaimer Forward Looking Statements This investor presentation contains statements reflecting our views about the future performance of Hostess Brands, Inc. and its subsidiaries (referred to as “Hostess Brands” or the “Company”) that constitute “forward-looking statements” 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 our future operating performance and statements addressing events and developments that we expect or anticipate will occur are also considered as forward-looking statements. All forward looking statements included herein are made only as of the date hereof. We undertake 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; our ability to maintain, extend or expand our reputation and brand image; failing to protect our intellectual property rights; our ability to leverage our brand value to compete against lower-priced alternative brands; our ability to correctly predict, identify and interpret changes in consumer preferences and demand and offering new products to meet those changes; our ability to operate in a highly competitive industry; our ability to maintain or add additional shelf or retail space for our products; our ability to continue to produce and successfully market products with extended shelf life; our ability to successfully integrate, achieve expected synergies and manage our acquired businesses and brands; our ability to drive revenue growth in our key products or add products that are faster-growing and more profitable; volatility in commodity, energy, and other input prices and our ability to adjust our pricing to cover any increased costs; the availability and pricing of transportation to distribute our products; our dependence on our major customers; our geographic focus could make us particularly vulnerable to economic and other events and trends in North America; consolidation of retail customers; increased costs to comply with governmental regulation; general political, social and economic conditions; increased healthcare and labor costs; the fact that a portion of our workforce belongs to unions and strikes or work stoppages could cause our business to suffer; product liability claims, product recalls, or regulatory enforcement actions; unanticipated business disruptions; dependence on third parties for significant services; ability to achieve expected synergies and benefits and performance from strategic acquisitions; inability to identify or complete strategic acquisitions; our insurance not providing adequate levels of coverage against claims; failures, unavailability, or disruptions of our information technology systems; departure of key personnel or a highly skilled and diverse workforce; and our ability to finance our indebtedness on terms favorable to us; and other risks as set forth under the caption “Risk Factors” from time to time in our Securities and Exchange Commission filings. Industry and Market Data In this Investor Presentation, Hostess Brands relies on and refers to information and statistics regarding market shares in the sectors in which it competes and other industry data. Hostess Brands obtained this information and statistics from third-party sources, including reports by market research firms, such as Nielsen. Current and prior period market data presented herein reflects a restatement of Convenience Channel data executed by Nielsen during 2018. Additionally, prior period Nielsen data was adjusted to exclude the Cloverhill® and Big Texas® brands in the periods they were not owned by Hostess. Hostess Brands has supplemented this information where necessary with information from discussions with Hostess customers and its own internal estimates, taking into account publicly available information about other industry participants and Hostess Brands’ management’s best view as to information that is not publicly available. Use of Non-GAAP Financial Measures This Investor Presentation includes non-GAAP financial measures, including earnings before interest, taxes, depreciation, amortization and other adjustments to eliminate the impact of certain items that we do not consider indicative of our ongoing performance (“Adjusted EBITDA”), Adjusted EBITDA Margin, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Net Income and Adjusted Earnings per Share (“Adjusted EPS”). Adjusted EBITDA, Adjusted Gross Profit, Adjusted Net Income and Adjusted EPS exclude certain items included in the comparable GAAP financial measure. Adjusted EBITDA Margin represents Adjusted EBITDA divided by net revenues. Adjusted Gross Margin represents Adjusted Gross Profit divided by net revenues, Hostess Brands believes that these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to Hostess Brands’ financial condition and results of operations. Hostess Brands’ management uses these non-GAAP financial measures to compare Hostess Brands’ performance to that of prior periods for trend analysis, for purposes of determining management incentive compensation, and for budgeting and planning purposes. Hostess Brands believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. Management of Hostess Brands does not consider these non-GAAP financial measures in isolation or as an alternative to financial measures determined in accordance with GAAP. Other companies may calculate Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted Net Income, Adjusted EPS, and other non-GAAP measures differently, and therefore Hostess Brands’ non-GAAP measures may not be directly comparable to similarly titled measures of other companies. Totals in this Investor Presentation may not add up due to rounding. 2


 
Hostess Brands Celebrating 100 Years of Delighting Consumers Key Highlights LTM Net Sales: $864 million Efficient Continuous Manufacturing Proven LTM Adj. EBITDA: Iconic Brands 18% $189 million Innovation to and Distribution Scalable Market Share Drive Growth Model Platform LTM Operating Cash Flow: $134 million Financial data are for the last twelve months (“LTM”) ended March 31, 2019 as reported. Adjusted EBITDA is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” and the Appendix for an explanation of all non-GAAP financial measures and reconciliations to the comparable GAAP measures. Market Share for the Company within the Sweet Baked Goods (“SBG”) category per Nielsen U.S. total universe, 52 weeks ending March 23, 2019. 3


 
At Hostess Brands . . . We delight consumers and build iconic brands supported by our core competencies to drive profitable growth Strong Brand Equity Strong Brand Our Growth Strategy Equity Ø Strengthening our core Hostess brand and expanding into adjacent categories through innovation and strong partnerships with our Significant Low Cost customers Cash Flow Model Ø Leveraging our highly efficient and CORE profitable business model COMPETENCIES Ø Executing strategic acquisitions to Collaborative accelerate growth while effectively Continuous Customer managing our capital structure Innovation Partnerships 4


 
Strong Market Position Growing in the SBG Category Market Share Point-of-Sale 18.1% $1,199 4.1% CAGR $1,154 17.4% $1,109 GainingPoint Almost Annually 1 Share 16.6% $1,021 15.4% in millions 2016 2017 2018 2019 2016 2017 2018 2019 SBG Category POS Source: Nielsen, Total Nielsen Universe for the SBG Category and the Company within the SBG Category. Point of Sale and Market Share, 52 weeks ending 3/26/16, 3/25/17, 3/24/2018 & 3/23/19. Current and prior period market data presented herein reflects a restatement of Convenience Channel data executed by Nielsen during the fourth quarter 5 2018. Additionally, prior period Nielsen data was adjusted to exclude the Cloverhill® and Big Texas® brands in the periods they were not owned by Hostess.


 
Sustainable, Profitable Growth Through Strengthening Scalable Platforms ▪ Core Hostess continues to grow with strong customer partnerships and sharpened analytical capabilities ▪ Innovation focus to fuel growth in the core and complementary indulgent and snacking categories based on consumer-centric ideas ▪ Operating with speed and agility, while investing in high ROI activities ▪ Developing consumer and customer insights to enhance growth ▪ Additions of top talent in areas to complement existing team ▪ Consistent, strong cash generation provides strategic options to create shareholder value 6


 
Progress Against 2019 Growth Pillars Pillars for Growth First Quarter 2019 Actions ü Grow the Core Profitably drive core growth by Multi-faceted price increase across all channels completed ü building the consumer brand and building customer Developing new tools and capabilities to improve analytics relationships ü Expanding Hostess Partner Program to grocery ü Grow Through Innovation Accelerate Launch of Birthday Cupcakes and Totally Nutty ü growth through innovation based on consumer Expansion of Breakfast and Value brands insights and industry-leading capabilities ü Continued development of pipeline of innovative products ü Cloverhill Business improved profitability since acquisition Improve Through Agility & Efficiency ü Developing in-house distribution capabilities in Kansas, expected to Operate at lowest practical cost and optimum value generate significant savings and enhanced servicing by Q1 2020 to consumers ü Achieved additional core bakery savings Cultivate Talent & Capabilities ü Hired Chief Human Resources Officer and Chief Marketing Officer Focused on investing in talent, insights and ü Announced development of new hub for marketing, innovation and information to create industry-leading capabilities to category management in Chicago support the next phase of growth Leverage Strong Cash Flow Generated ü Generated operating cash flow of $28.4 million from high cash conversion rates and efficient ü Improved leverage by 14bps and on target to achieve full year target operating capital needs 7


 
Current Results and Outlook


 
First Quarter 2019 Highlights ▪ Net revenue increased $14.0 million, or 6.7%, to $222.7 million. Organic growth contributed $7.2 million or 345 basis points of incremental net revenue primarily from strong growth in the club channel and higher revenue due to price increases. The acquisition of the Cloverhill Business contributed $6.8 million or 326 basis points of incremental net revenue. ▪ Total Company point of sale increased 1.6% and market share of 18.2% was consistent with the first quarter of 2018.* ▪ Adjusted EBITDA increased 5.1% or $2.4 million to $49.4 million, or 22.2% of net revenue ▪ Cash and cash equivalents were $160.5 million as of March 31, 2019 with a leverage ratio of 4.4x, both driven by first quarter operating cash flows of $28.4 million. * Point of sale and market share data for the 13 weeks ended 3/23/19 versus the comparable period in the prior year. Prior period market data presented herein reflects a restatement of Convenience Channel data executed by Nielsen during fourth quarter of 2018. Additionally, prior period Nielsen data was adjusted to exclude the Cloverhill® and Big Texas® brands in the periods they were not owned. 9


 
Consolidated Financial Results Meaningful Growth in Revenue and Gross Profit Quarter Ended March 31, Change ($ in millions, except per share data) 2019 2018 $ % Net Revenue $ 222.7 $ 208.7 $ 14.0 6.7% Adjusted Gross Profit $ 76.8 $ 72.2 $ 4.6 6.4% Adjusted Gross Margin 34.5% 34.6% -10 bps —% Adjusted EBITDA $ 49.4 $ 47.0 $ 2.4 5.1% Adjusted EPS $ 0.14 $ 0.14 $ — —% Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures. See “Use of Non-GAAP Financial Measures” and the Appendix for an explanation of all non-GAAP financial measures and reconciliations to the comparable GAAP measures. 10


 
Quarterly Point of Sale & Market Share Across Multiple Channels POS Change 1.8% 2.4% (1.9)% 5.1% 78.3% (11.4)% $140 $120 $100 ) s $80 n o i l l i M $60 ( POS Dollars $40 $20 $0 Convenience Grocery Drug Dollar Club Mass Q1 2018 Q1 2019 Market Share 23.0% 13.3% 44.3% 22.5% 20.5% 15.9% Market Share 20 Change (bps) 0 (50) (60) 870 (380) Point of sale and market share data for the 13 weeks ended 3/23/19 as compared to the comparable period in the prior year. Current and prior period market data presented herein reflects a restatement of Convenience Channel data executed by Nielsen during fourth quarter 2018. Additionally, prior period Nielsen data was adjusted to exclude the Cloverhill® and Big Texas® brands in the periods they were not owned by Hostess. 11


 
Full-Year 2019 Guidance Reaffirming Previous Guidance 2018 2019 Guidance ($ in millions, except ratio, per share data and tax rate) Growth well above Net Revenue $850.4 the SBG Category Adjusted EBITDA $186.2 $200 - $210 Adjusted EPS $0.54 $0.57 - $0.62 Leverage Ratio 4.5x 3.5x - 3.7x Cash Flow from Operations $143.7 $150 - $160 Capital Expenditures $ 48.4 $30 - $35 Effective Tax Rate 18.2% 21% - 22% Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures. See “Use of Non-GAAP Financial Measures” and the Appendix for an explanation of all non-GAAP financial measures and reconciliations to the comparable GAAP measures. The Company’s leverage ratio is net debt (total long-term debt less cash) divided by adjusted EBITDA. 12


 
A Look Ahead to 2019 Revenue Growth Well Above the SBG Category & Significant Adjusted EBITDA Growth Q1 Q2 Q3 Q4 þ Execute Pricing & ¨ Expand Distribution ¨ Continue ¨ Finish 2019 Launch Breakfast of New Products Distribution Build Strong with of Breakfast & Significant ¨ Accelerate Growth Other Innovation Revenue & Behind Improved EBITDA Growth Merchandising ¨ Strong Back-to- Execution School ¨ Substantially Programming Improve Net Leverage 13


 
Appendix


 
Non-GAAP Reconciliations Adjusted Gross Profit & Adjusted Gross Margin Three Months Three Months Ended Ended ($ in millions) 3/31/2019 3/31/2018 Net revenue $ 222.7 $ 208.7 Cost of goods sold 147.6 137.5 Gross profit $ 75.2 $ 71.2 Gross margin 33.8% 34.1% Non-GAAP adjustments: Acquisition and integration costs 1.6 — Special employee incentive compensation — 1.0 Adjusted gross profit $ 76.8 $ 72.2 Adjusted gross margin 34.5% 34.6% 15


 
Non-GAAP Reconciliations Adjusted EBITDA Three Months Three Months Ended Ended ($ in millions) 3/31/2019 3/31/2018 Net income $ 26.6 $ 29.3 Non-GAAP adjustments: Income tax provision (1.2) 6.5 Interest expense, net 10.2 9.3 Depreciation and amortization 10.9 10.1 Share-based compensation 2.3 1.6 Tax Receivable Agreement remeasurement and gain on buyout (1.8) (12.4) Impairment of property and equipment, intangible assets and goodwill — 1.4 Acquisition and integration costs 1.6 — Special employee incentive compensation 0.4 1.0 Other 0.4 0.1 Adjusted EBITDA $ 49.4 $ 47.0 16


 
Non-GAAP Reconciliations Adjusted Net Income & Adjusted EPS Three Months Three Months Ended Ended ($ in millions, except shares and per share) 3/31/2019 3/31/2018 Net income $ 26.6 $ 29.3 Non-GAAP adjustments: Tax Receivable Agreement remeasurement and gain on buyout (1.8) (12.4) Remeasurement of deferred taxes (6.0) — Impairment of property and equipment, intangible assets and goodwill — 1.4 Acquisition and integration costs 1.6 — Special employee incentive compensation 0.4 1.0 Tax impact of adjustments (0.4) 1.1 Adjusted net income 20.3 20.5 Non-controlling interest allocation of net income (5.5) (5.5) Non-controlling interest allocation of adjustments (0.4) (0.6) Adjusted net income attributed to Class A stockholders $ 14.4 $ 14.5 Weighted average Class A shares outstanding-diluted 100,777,609 105,041,015 Adjusted EPS $ 0.14 $ 0.14 17