Hostess Brands, Inc. Announces First Quarter 2020 Financial Results

First Quarter Results Exceed Expectations

Voortman Integration and Operational Enhancements On-Track to Deliver Continued Growth Momentum

KANSAS CITY, Mo.--(BUSINESS WIRE)-- Hostess Brands, Inc. (NASDAQ: TWNK, TWNKW) (the “Company”), today reported its financial results for the three months ended March 31, 2020.

“We achieved strong results exceeding our expectations during the beginning of the first quarter prior to the impacts of COVID-19,” commented Andy Callahan, the Company's President and Chief Executive Officer. “In light of the COVID-19 pandemic we have implemented meaningful changes to our operations to address our primary concern for the health and safety of our employees as we execute through this unprecedented operating environment. Our agile operating network has enabled us to be responsive and adjust to the changes we are facing while the dedication and perseverance of our employees has allowed us to successfully deliver against rapidly evolving consumer demands.”

Mr. Callahan continued, “During the quarter our team executed on the growth of core Hostess®, completed significant integration activities for the recently acquired Voortman business and implemented operational improvements enabling us to exceed our financial targets for the first quarter and enabling us to continue to drive future sustainable, long-term profitable growth. Going forward, while we are pleased with our start to the year and our opportunities to benefit from additional food-at-home consumption, the greatest uncertainty is the duration and magnitude of the COVID-19 pandemic and its potential impact on our business and supply chain. We are confident that the challenges and lessons learned during this time will make us stronger with our long-term objectives still well within our reach.”

Financial Highlights for the First Quarter 2020 as Compared to the Prior Year Period¹

• Net revenue was $243.5 million, an increase of 14.4% excluding the sale of the In-Store Bakery (“ISB”) business, driven by the acquisition of Voortman Cookies Limited (“Voortman”) contributing $17.1 million, or 8.1% of the growth and the sweet baked goods business adding $13.5 million, or 6.3% in growth, primarily driven by higher volume of core Hostess® branded products.
• Gross profit was $79.3 million, an increase of 8.5% excluding ISB, due to higher sales volume. Adjusted gross profit was $84.3 million, a 12.8% increase, excluding ISB.
• Net income was $2.6 million, or $0.02 per diluted share, compared to $26.6 million, or $0.21 per diluted share, in the prior period. The decline was primarily due to transaction, integration and other facility transition costs. Adjusted net income decreased $2.1 million, or 10.3%, to $18.6 million, resulting in $0.14 adjusted EPS consistent with the prior period. The decline in adjusted net income was primarily due to higher costs as a result of the Voortman acquisition in addition to less income due to the sale of ISB.
• Adjusted EBITDA was $51.0 million, or 20.9% of net revenue, an increase of 6.4%, excluding ISB. The increase, which was ahead of expectations, was primarily driven by higher volume and slightly accretive Voortman performance, partially offset by increased distribution and labor costs.
• Cash and cash equivalents were $96.2 million as of March 31, 2020 with a proforma leverage ratio of 4.5x after factoring in the expected 2020 EBITDA contribution from Voortman.

Operational Highlights for the First Quarter 2020

• Implemented meaningful safety measures company-wide to meet or exceed regulatory guidelines.
• On-track execution of key activities transitioning Voortman to the warehouse distribution model completed with transition costs now expected to be $25 million to $30 million, better than previous expectations, and meaningful progress against attainment of cost synergies underway.
• Drove incremental operational efficiencies across the Hostess operating network, including significant improvements in the operating performance of our new primary distribution center which has proven instrumental in supporting the increased volume from the Voortman acquisition and increasing consumer demand.
• Point of sale increased 5.1% and market share was 18.5, up 17 basis points within the Sweet Baked Goods category.

2020 Outlook

The Company previously issued its full year 2020 guidance on February 26, 2020, which did not include the impact of COVID-19. Despite first quarter results that exceeded Company expectations, the Company is suspending its 2020 Outlook due to the rapidly evolving situation and the high degree of uncertainty caused by the COVID-19 pandemic. The Company does not believe that it can estimate the full financial impacts of the pandemic with reasonable accuracy. The Company believes it has sufficient liquidity to satisfy its cash needs, as supported by cash on hand, cash flow from operations and access to its revolving credit facility. The Company reaffirms its long-term financial objectives of organic revenue growth, adjusted EBITDA margins and free cash flow conversion in the top-quartile of its peers.

First Quarter 2020 Compared to First Quarter 2019¹

Net revenue was $243.5 million, an increase of 9.3%, or $20.8 million, compared to $222.7 million. Excluding ISB, net revenue increased 14.4%. The acquisition of Voortman contributed net revenue of $17.1 million in the quarter and 8.1% of the growth, excluding ISB. The remaining increase was from the $13.5 million or 6.3% growth from sweet baked goods primarily driven by higher volume of core Hostess® branded multi-pack products due to strong demand particularly in the grocery and dollar channels generated in part from increased store traffic in response to COVID-19.

Gross profit was $79.3 million, or 32.6% of net revenue, compared to $75.2 million, or 33.8% of net revenue. Excluding ISB, gross profit increased 8.5%. Adjusted gross profit was $84.3 million, or 34.6% of net revenue, compared to $76.8 million, or 34.5% of net revenue. Adjusted gross profit, excluding ISB, increased 12.8%. Adjusted gross profit increased as a result of higher revenue partially offset by increased distribution and labor costs.

Operating costs and expenses were $64.2 million, or 26.4% of net revenue, compared to $39.1 million, or 17.5% of net revenue. These costs increased primarily due to transition costs incurred to shift Voortman from a direct-to-store delivery operating model to a direct-to-warehouse model including contract termination costs for the independent distributors and severance costs as well as normal operating costs of the Voortman operations.

The Company's effective tax rate was 8.6% compared to a benefit of 4.6%. The current year effective tax rate was impacted by the write off of deferred taxes related to Voortman, which resulted in a discrete tax benefit of $0.5 million. The prior year effective tax rate was impacted by the remeasurement of deferred taxes as a result of the relocation of the Company's primary distribution center from Illinois to Kansas, which resulted in a discrete tax benefit of $6.0 million.

Net income was $2.6 million compared to $26.6 million and EPS was $0.02 per diluted share compared to $0.21 per diluted share. Adjusted net income was $18.6 million compared to $20.8 million and adjusted EPS was $0.14, consistent with the prior period. In addition to the changes in gross profit and operating expenses noted above, adjusted net income declined due to increased depreciation, amortization and interest expense as a result of the Voortman acquisition and the sale of ISB.

Adjusted EBITDA was $51.0 million, or 20.9% of net revenue, compared to $49.4 million, or 22.2% of net revenue, an increase of $1.6 million, or 3.2%. Excluding the impact of ISB, adjusted EBITDA increased $3.1 million or 6.4%. The increase was primarily driven by higher sweet baked goods sales and the addition of Voortman, which was slightly accretive for the quarter, partially offset by increased distribution and labor costs.

Cash from operations for the three months ended March 31, 2020 was $13.1 million compared to $28.4 million for the same period last year. The decrease was primarily attributable to higher integration and transition costs.

Conference Call and Webcast

The Company will host a conference call and webcast with an accompanying presentation today, May 8, 2020 at 8:30 a.m. EDT to discuss the results for the first quarter. Investors interested in participating in the live call can dial 800-920-5548 from the U.S. and 212-231-2900 internationally. A telephone replay will be available approximately two hours after the call concludes through Friday, May 22, 2020, by dialing 844-512-2921 from the U.S., or 412-317-6671 from international locations, and entering confirmation code 2196135. 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 Brands, Inc. is a leading packaged food company focused on developing, manufacturing, marketing, selling and distributing fresh baked sweet goods in North America. The Hostess® 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 in addition to Twinkies® and CupCakes, including Donettes®, Ding Dongs®, Zingers®, Danishes, Honey Buns and Coffee Cakes. In January 2020, the Company acquired Voortman Cookies, Limited which produces a variety of cookies and wafers products, including sugar-free products under the Voortman® brand. 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: Snacking and In-Store Bakery. The Snacking segment consists of sweet baked goods, cookies, bread and buns and frozen retail products that are sold under the Hostess®, Dolly Madison®, Cloverhill®, Big Texas®, and Voortman® 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. The Company divested its In-Store Bakery segment's operations on August 30, 2019.

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; our ability to successfully integrate, achieve expected synergies and manage our acquired businesses and brands; 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; 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 2019 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. The impact of COVID-19 may also exacerbate these risks, any of which could have a material effect on the Company. This situation is changing rapidly and additional impacts may arise that the Company is not aware of currently. 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.

Adjusted gross profit, adjusted operating income, adjusted net income, adjusted EBITDA and adjusted EPS collectively referred to as “Non-GAAP Financial Measures,” are commonly used in the Company's industry and should not be construed as an alternative to gross profit, operating income, net income or earnings per share as indicators of operating performance (as determined in accordance with GAAP). These Non-GAAP Financial Measures may not be comparable to similarly titled measures reported by other companies. The Company has included these Non-GAAP Financial Measures because it believes the measures provide management and investors with additional information to measure the Company's performance, estimate the Company's value and evaluate the Company's ability to service debt.

Non-GAAP Financial Measures are adjusted to exclude certain items that affect comparability. The adjustments are itemized in the tables below. You are encouraged to evaluate these adjustments and the reason the Company considers them appropriate for supplemental analysis. In evaluating adjustments, 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 Non-GAAP Financial Measures should not be construed as an inference that future results will be unaffected by unusual or recurring items.

The Company defines adjusted EBITDA as net income adjusted to exclude (i) interest expense, net, (ii) depreciation and amortization (iii) income taxes and (iv) share-based compensation, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of its ongoing operating performance. 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.

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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

Source: Hostess Brands, Inc.

Released May 8, 2020