Hostess Brands Reports Third Quarter 2022 Results

Hostess Brands, Inc. (NASDAQ: TWNK) (the "Company", "we", "our") today reported its financial results for the three and nine months ended September 30, 2022.

"Hostess Brands delivered another quarter of record-high sales, highlighting the strength of our snacking-oriented portfolio, impactful innovation that targets growing snacking occasions, and successful pricing actions to offset elevated inflation. The resiliency of our operating model and the agility of our talented team enabled us to deliver double-digit adjusted EBITDA growth in a volatile environment," commented Andy Callahan, the Hostess Brands' President and Chief Executive Officer.

He continued, "Given our strong year-to-date results and continued momentum, Hostess Brands is raising its full-year net revenue, adjusted EBITDA, and adjusted EPS guidance as we continue to make investments in innovation and advertising to generate top-tier growth over the longer-term."

Third Quarter 2022 Financial Highlights¹

• Net revenue of $346.2 million increased 20.2% from the same period last year as higher price/mix accounted for 20.1% of the quarterly growth, with remaining growth attributed to higher volume.

• Gross profit increased 16.6% to $115.4 million, or 33.3% of net revenue, while on an adjusted basis, gross profit increased 16.9% to $116.1 million, or 33.5% of net revenue. Third quarter gross margins declined by 105 basis points, 93 basis points on an adjusted basis, from year-ago levels as favorable price/mix and productivity were more than offset by 18.5% inflation and inefficiencies caused by continued supply-chain fragility.

• Net income was $66.3 million or $0.48 per diluted share driven in part by a $33.0 million gain on receipt of Voortman insurance proceeds. Adjusted net income and adjusted EPS, which exclude the receipt of Voortman insurance proceeds, were $32.2 million, and $0.23, respectively, both increased in comparison to the same period last year.

• Adjusted EBITDA increased 12.2% to $72.7 million. Adjusted EBITDA margin of 21.0% declined from 22.5% in the prior year period due to lower gross margins and higher operating expenses.

• Cash and cash equivalents and short-term investments were $232.7 million as of September 30, 2022, resulting in a net leverage ratio of 2.9x.

• Capital expenditures increased to $63.8 million from $36.7 million in the prior-year period. The Company now expects capital expenditures to be in the $125 - $135 million range in 2022.

• Raising full year 2022 net revenue guidance to 17% - 19% growth, as well as raising full year adjusted EBITDA and adjusted EPS guidance to $290 - $293 million and $0.96 - $0.98, respectively.

Other Highlights

• The Company's Sweet Baked Goods point-of-sale ("POS") increased 17.0%, maintaining its share of category dollar sales at 21.4%.

• Voortman® branded POS grew 28.8% and its share of the Cookie category increased by 26 basis points driven in part by the ongoing momentum in the faster-growing sugar-free sub-segment.

• Full year inflation is expected to be in the high teens for the full year, in-line with previous estimates.

• Repurchased $94.1 million of shares year-to-date through September 30, 2022, the majority of which were under the previously announced $150 million share repurchase program.

• Year-to-date planned increase in advertising and marketing driving consumer demand. Incremental investments planned in the fourth quarter to support the launch of our Bouncerstm innovation.

Guidance and Outlook

The Company is raising its full year 2022 guidance:

The Company provides guidance 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, 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.

Third Quarter 2022 Compared to Third Quarter 2021

Net revenue was $346.2 million, an increase of 20.2%, or $58.2 million, from the prior-year period. Contribution from pricing actions and product mix provided 20.1% of the growth, while higher volume accounted for 0.1% of the quarterly growth. Compared to the same period last year, sweet baked goods net revenue of $307.3 million increased 18.7% or $48.5 million, while cookies net revenue of $38.9 million increased 33.2% or $9.7 million.

Gross profit was $115.4 million or 33.3% of net revenue, compared to 34.4% for the same period last year. Gross margin declined 105 basis points, 93 basis points on an adjusted basis, as favorable price/mix, including revenue growth management initiatives, and productivity benefits were more than offset by inflation and inefficiencies caused by supply-chain fragility. Adjusted gross profit increased 16.9% on pricing actions and productivity partially offset by inflation.

Operating income was $54.4 million, an increase of 16.7% from the prior-year period. Adjusted operating income of $54.2 million increased 9.7% from the same period last year, as higher gross profit more than offset higher workforce investments, depreciation and advertising.

Adjusted EBITDA of $72.7 million, or 21.0% of net revenue, increased 12.2% from the same period last year as higher gross profit was partially offset by higher operating expenses.

The Company's effective tax rate was 12.8% compared to 27.4% in the prior year. The effective tax rate for the three months ended September 30, 2022, was impacted favorably by the $33.0 million non-taxable gain related to receipt of proceeds under the Voortman acquisition representation and warranty insurance policy and a tax benefit related to revaluing our deferred tax liabilities due to a change in the estimated state tax rate. The current year effective tax rate, excluding these and other immaterial discrete items, was 26.7%, consistent with the prior-year period.

Net income was $66.3 million, a significant increase from $26.2 million from the prior-year period due to the $33.0 million gain from receipt of the Voortman insurance proceeds. Adjusted net income of $32.2 million increased 11.4% from the same period last year. Diluted EPS was $0.48 compared to $0.19 in the prior-year period due to the changes in net income. Adjusted EPS was $0.23 compared to $0.21 in the prior-year period due to the increase in adjusted net income.

Operating cash flows for the nine months ended September 30, 2022 were $164.2 million, as compared to $147.6 million for the same period last year. Operating cash flow benefited from increased profitability, including receipt of the Voortman insurance proceeds of $33.0 million, partially offset by an increase in tax payments and an increase in working capital.

Conference Call and Webcast

The Company will host a conference call and webcast with an accompanying presentation today, November 2, 2022 at 4:30 p.m. ET to discuss the results for the third quarter. Investors interested in participating in the live call can dial 877-451-6152 from the U.S. and +1-201-389-0879 internationally. A telephone replay will be available approximately two hours after the call concludes through November 16, 2022, by dialing 844-512-2921 from the U.S., or +1-412-317-6671 internationally, and entering confirmation code 13733435. 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. (NASDAQ: TWNK) is a snacking powerhouse with a portfolio of iconic brands and a mission to inspire moments of joy by putting our heart into everything we do. Hostess Brands is proud to make America's No. 1 cupcake, mini donut and sugar-free cookie brands. With annual sales exceeding $1.1 billion and employing approximately 2,600 dedicated team members, Hostess Brands produces new and classic snacks, including Hostess® Donettes®, Twinkies®, CupCakes, Ding Dongs® and Zingers®, as well as a variety of Voortman® cookies and wafers. For more information about Hostess Brands please visit hostessbrands.com.

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 continued ability to produce and successfully market products with extended shelf life; the ability to pass cost increases on to our customers; the ability to maintain or add additional shelf or retail space for the Company's products; our ability to identify or complete strategic acquisitions, alliances, divestitures or joint ventures; 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; adverse impact or disruption to our business caused by COVID-19 or future outbreaks of highly infectious or contagious diseases; volatility in commodity, energy, and other input prices and the ability to adjust pricing to cover increased costs; significant changes in the availability and pricing of transportation; dependence on major customers; increased labor and employee related costs; strikes or work stoppages; product liability claims, product recalls, or regulatory enforcement actions; dependence on third parties for significant services; unanticipated business disruptions; geographic focus could make the Company particularly vulnerable to economic and other events and trends in North America; consolidation of retail customers; unsuccessful implementation of business strategies to reduce costs; increased costs to comply with governmental regulation; failures, unavailability, or disruptions of the Company's information technology systems; dependence on key personnel or a highly skilled and diverse workforce; 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 2021. 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 profit margin, adjusted operating income, adjusted net income, adjusted net income margin, adjusted EBITDA, adjusted EBITDA margin 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 net revenue, 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 or the tax receivable agreement.