Mar 14, 2017
Executives
Katie Turner - ICR Bill Toler - President and CEO Tom Peterson - EVP and CFO
Analysts
Bill Chappell - SunTrust Robinson Humphrey Brian Holland - Consumer Edge Research Michael Gallo - CL King Rob Dickerson - Deutsche Bank
Operator
Greetings and welcome to Hostess Brands Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode.
The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Katie Turner. Please go ahead.
Katie Turner
Thank you. Good afternoon and welcome to Hostess Brands fourth quarter and fiscal 2016 earnings conference call.
By now everyone should have access to the earnings release for the period ending December 31st, 2016 that went out this afternoon at approximately 4:05 PM Eastern Time. If you have not received the release, it's available on Hostess' website at www.hostessbrands.com.
This call is being broadcast and a replay will be available on the company's website. Hostess would like to remind you that today's discussion will include a number of forward-looking statements.
If you will refer to Hostess' earnings as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. Please remember the company undertakes no obligation to update or revise these forward-looking statements.
The company will make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspectives on the underlying growth trends of the business and has included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
In addition, Hostess has supplemented its earnings release with unaudited, pro forma combined information for the quarter and year ended December 31st, 2016 giving it back to the November, 2016 business combination as if it had occurred on January 1st, 2016. All references to the results for the quarter and year ended December 31st, 2016 refer to such unaudited, pro forma combined results.
Now, it's my pleasure to turn the call over to Hostess' CEO, Bill Toler.
Bill Toler
Thank you, Katie. Good afternoon everyone and we appreciate you joining us today.
It's been an exciting year at Hostess. As most of you know Hostess became publicly traded this past November.
This is our first full year earnings conference call as a public company. I will begin today's discussion with a brief overview of the company and the highlights of our growth initiatives.
Afterwards our CFO, Tom Peterson will provide greater detail on our fourth quarter and full year financial results as well as our outlook for fiscal 2017. Then we'll be glad to take the call and open it up for questions.
We had a strong finish to the year and are pleased to report solid momentum across our business. Before we get into the numbers, I'd like to talk a little bit about our company.
Hostess has a 96 year old history, a remarkable 90% brand awareness, and a strong, unique, emotional connection with consumers. These unique brand attributes give us the ability to drive category growth for our retailers.
As most of you know, our Executive Chairman, Dean Metropoulos, and Apollo acquired the Hostess brand and certain strategic assets out of bankruptcy liquidation in April 2013. Since the relaunch, we have grown to $727.6 million in net revenues for full year 2016 and $215.3 million in adjusted EBITDA for 2016.
Per Nielsen, our market share of the sweet baked goods category has grown consistently since relaunch and is now at 16.7% for the 52-week period ending December 31, 2016. Much of this growth can be attributed to the investments we have made in the business.
Including approximately $160 million to upgrade our manufacturing facility, implement new IT systems, enhance production efficiencies through the installation of automated baking and packaging lines. We've also switched to a direct-to-warehouse model -- distribution model that has paved new opportunities for us, expanding our distribution reach and making it easy for us to innovate across the whole spectrum.
To continue, to expand our presence in sweet baked goods, we acquired Superior Cake products in May 2016. That expanded our platform into the In-store Bakery, or as we call it ISB.
Superior is our first entry into this $8 billion space and we believe it offers significant growth potential. The category is currently growing around 4% annually, which last year was faster than the center of the store, sweet baked goods category.
Superior's product line includes eclairs, black and white cookies, madeleines, brownie bites, and creampuffs, all new products to Hostess. We plan to leverage our distribution model and resources so this primarily northeastern-centric company can be rolled out across the country in conjunction with our launch of the new Hostess BAKE SHOP line into the In-store Bakery.
Looking forward, we remain focused on our three main growth drivers; first, rebuilding our core business; next, innovating and extending our lines; and, third, moving into important white space categories. On the first one, we're rebuilding our core and ensuring that Hostess maximizes its market share potential.
To put it simply, we want more Hostess items in more stores. As the driver of category growth, we're working with retailers every day to expand our shelf space to equal our market share.
And as I've mentioned, we've had great success in expanding those core products into more stores in most of our channels. Secondly, were committed to innovation and line extensions to continue to excite our customers and consumers.
Innovation for us is about flavors, it's about seasonal items, limited time offers, new ideas, shapes, packaging. In 2017, some of our new product launches you'll see in stores this year include cinnamon sugar crunch Donettes, white-cut fudge covered Ding Dongs, chocolate cake Twinkies.
And, peanut butter, peanut butter has always been the number-one flavor gap in our portfolio in all of our consumer surveys. And, now, we've developed a peanut butter Ho Ho and anticipate rolling out more peanut butter products throughout the year as well.
Our third area of growth is white space, identifying new areas for our distribution and innovation. We acquired Superior to enter the In-store Bakery business which we view as a big opportunity given the category's strong growth profile.
And we have an exciting lineup of products slated for this spring, beginning with the Hostess BAKE SHOP. We're adding to the ISB line Hostess BAKE SHOP triple-dipped Ding Dongs and decorated Twinkies.
We're launching a Hostess CupCake cookie which is a play on Superior's black-and-white cookie, but with that famous Hostess squiggle. The frozen aisle is another area of white space.
We launched Deep Fried Twinkies last year; we'll be adding additional items to the line this year as well, and we've partnered with Nestle for a licensing arrangement on ice cream. In schools, we're proud to say that our whole-grain muffins qualified for the smart snack program, which makes for a great brand impression that kids can be buying Hostess products at school for years to come.
This tactical innovation of converting our mini muffins into whole-grain muffins helped us take a declining business at retail to one with double-digit growth and fits well in the consumer trends. And just last week, we announced the launch of Twinkies Cappuccino in partnership with Kerry Convenience in the c-store channel.
This will be our first product in the hot-dispensed beverage category. Internationally, we're expanding our Dolly branded products in Canada and continue to see upside potential there.
Our business is growing in Mexico and across the Caribbean as we use a number of distributors to further gain presence of Hostess items in stores. We've also made progress in e-commerce where we have a small, but emerging business that works well for online retailers selling our products going through their warehouses.
And, finally, in food service, we've partnered with McCain Foods to help us with the selling and distribution of deep-fried frozen Twinkies as a food service product. We just started this in February and have been encouraged by the initial progress.
In summary, Hostess is off to a great start as a publicly traded company with a strong finish to 2016 and we believe we're well-positioned to continue to grow over the next several years as we innovate and leverage both our iconic brand and infrastructure to take advantage of the opportunities that we see in our business. Now, I'll turn it to Tom for more details on the financials.
Tom?
Tom Peterson
Thank you, Bill. I will now review our fourth quarter financial performance and some other data from today's press release.
For comparative purposes, we will review unaudited, pro forma combined financial statements for the quarter and year ended December 31, 2016 which presents our results as if the business combination had occurred as of January 1st, 2016. Comparisons are to the actual 2015 fourth quarter and full year results of Hostess Holdings LP which are presented in our consolidated financial statements as predecessor.
We believe this discussion provides helpful information on the performance of the Hostess business during those respective periods. As we look at our pro forma financial and operating results for the fourth quarter, we're pleased with our improvements.
We posted strong topline growth over the past year as we continued to build our core product shelf space and market share as well as introduce compelling product innovation. And we have established the infrastructure that positions us to continue this growth and realize the operating leverage in our competitively advantaged business model.
Pro forma combined net revenue for the fourth quarter was $178.8 million, an increase of $31.8 million over the fourth quarter of 2015. This represents a 21.6% increase year-over-year growth rate reflecting $10.2 million in topline contributions from Superior and an increase in cases sold as a result of product innovation including the launch of Suzy Q's and Sweet Shop Brownies.
Excluding Superior, revenue increased 14.8% over the fourth quarter of 2015. We generated $77 million of pro forma combined gross profit in the fourth quarter of 2016 or 26% growth versus prior year.
Gross margin was 43% of net revenue, up 150 basis points from the same quarter last year. We benefited from the higher case volume as well as decreases in egg prices from 2015 when the reduced availability of egg supplies led to record high ingredients prices.
We view commodities as stable in 2017 and have covered most of our purchases for the year. Pro forma combined SG&A expenses were $26.4 million, or 14.8% of revenue.
This compares to $20.6 million, or 14% of revenue for the fourth quarter of 2015. The increase in SG&A was primarily attributable to the increased investments in field marketing and merchandising, higher annual incentive compensation related to the improved operating performance of the company, and expenses associated with the addition of Superior.
We generated pro forma combined adjusted EBITDA of $52.9 million, or 29.6% of revenue compared to adjusted EBITDA of $42.1 million, or 28.7% of revenue for the fourth quarter of 2015. Year-over-year growth in adjusted EBITDA was 25.4% driven by the increases in revenue and gross profit.
Pro forma combined GAAP net income was $22 million, or $0.14 per fully diluted share compared to $17.2 million last year. Briefly turning to our full year results, pro forma combined net revenue in 2016 was $727.6 million, an increase of 17.2% compared to net revenue of $620.8 million for 2015 due to $44 million from new product launches and $26.7 million in revenue contribution from the acquisition of Superior in May of 2016.
Excluding Superior, revenue increased 12.9% over 2015. We generated pro forma combined gross profit of $316 million, or 43.4% of net revenue, compared to adjusted gross profit of $264.9 million, or 42.7% of net revenue.
For 2015, excluding the impact of a one-time $2.6 million special employee incentive compensation payment, the improvement was driven by decreases in commodity costs and improved bakery costs. Pro forma combined SG&A expenses for the year were $108.4 million, an increase of $15.4 million as compared to SG&A of $93 million for 2015.
The increase in SG&A was primarily attributable to the impact of the business combination, the addition of Superior, planned expansion and field marketing, and increases in incentive compensation related to the performance of the business. Pro forma combined adjusted EBITDA increased 21% to $215.3 million, or 29.6% of net revenue, compared to adjusted EBITDA of $177.9 million, or 28.7% of net revenue for 2015.
Our earnings release provides more detail on our EBITDA including a reconciliation to net income. In addition, our earnings release includes an explanation of 2016 pro forma adjusted EBITDA compared to the projected 2016 adjusted EBITDA included in our proxy statement for the business combination.
Pro forma combined GAAP net income was $82.4 million, or $0.54 per diluted share compared to $88.8 million for 2015 as operating gains were offset by the income tax provision for 2016. Our effective tax rate was 28.6%.
Prior to the business combination, Hostess was not a taxpayer. Turning now to the balance sheet, net debt as of December 31, 2016 was $971.9 million.
At year end, we had cash and cash equivalents of $26.9 million and approximately $97.2 million available for borrowing under our revolving line of credit. Our total leverage ratio as of December 31, 2016 was 4.51 times 2016 pro forma combined adjusted EBITDA of $215.3 million.
We continue to expect this rate to come down over the next year given our consistent cash flow generation. From a capital allocation perspective, in addition to reducing our debt leverage ratio, we will continue to explore complementary tuck-in M&A in the fragmented ISB category as well as continue to make strategic investments to support our growth.
In terms of our outlook for 2017, we are reaffirming our previously issued 2017 guidance of net revenue of $781 million and adjusted EBITDA of $235 million. In summary, we finished 2016 with positive momentum across the business and are pleased with our operational and financial results.
Looking ahead, we believe Hostess is well-positioned to grow and enhance shareholder value through the execution of our strategic initiatives including further core distribution expansion, continued product innovation and line extension, as well as the pursuit of our white space opportunity. With that, we are available to take your questions.
Operator
At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bill Chappell with SunTrust.
Please go ahead.
Bill Chappell
Thanks. Good afternoon.
Bill Toler
Hey Bill, how are you?
Bill Chappell
Good. Just I'm looking at the guidance what does that imply for organic growth in the business I guess taking out -- what's your expected contribution from Superior?
Bill Toler
It's about 5.4% in total and we expect a little faster growth than Superior, but it's not a huge piece of the pie. So, really mid-5% is kind of numbers.
Bill Chappell
And how does that break out in terms of looking at -- do you expect the category to grow still 2% to 3% this year or are there any changes?
Bill Toler
Category has slowed a little bit in the last 24 weeks; probably more in a 1% to 2% range category growth, obviously there's a lot of factors to that. It has slowed some, so it may not be as robust as it was a couple of years ago.
It we expected that 1% to 2% range.
Bill Chappell
And then looking just kind of at margins, kind of the expectation, do you have major projects or anything that we're looking at over the first half that kind of help improve those going forward or there's more longer term?
Bill Toler
It's more longer term. I mean the big one would be, of course, the cake line for the next step function in growth, which will probably be very late this year or early next year.
Bill Chappell
Okay. The recent automation I think of the CupCake line, that's already in effect?
Tom Peterson
That wasn’t in effect, Bill, in the fourth -- this is Tom, in the fourth quarter that wasn’t in effect, so we're really late in the fourth quarter it was. So, we should see the impact of that this quarter.
Bill Chappell
Okay, great. And then last question for me in terms of new product launches, I mean it's obviously robust list, is that fairly front end loaded or I mean excluding the seasonal stuff like Halloween or Christmas is that fairly -- is that in the market now or should we see that over the next couple of months?
Bill Toler
Yes, a little bit of both. Actually, we go out with single-serve in January.
The major grocery reseller resets are in this spring March and April is a primary period. So, not a lot of that's in the volume today and that we usually frontload the innovation in March and get the lion share of benefit through the year.
There will be a second shot at that in September when our number of retailers will do sort of, what they call, a plug-and-play type situation or pull-and-plug where you don't get as much shelf expansion, but you do get some new items on, but it's primarily targeted around getting them out in March, April of the year.
Bill Chappell
Got it. Thanks so much.
Bill Toler
Thank you, Bill.
Tom Peterson
Thanks.
Operator
Our next question is from Brian Holland from Consumer Edge Research. Please go ahead.
Brian Holland
Thanks. Good afternoon gentlemen.
Bill Toler
Hey, Brian.
Brian Holland
So, quickly on the c-store. Seeing slowing traffic, tough comps, you've got gas prices as a headwind, Bill, I know you and I talked about the channel lapping a big lottery in the prior year.
Your points of distribution growth are exceeding your sales growth right now for a -- by a few bps, any concerns about how long that sort of continues or do you have any insight into that that you're talking to customers et cetera? How long may be that persist?
Bill Toler
Yes, I think a part of that is that we're getting items onto the shelf and they haven't built the trial and repeat yet. So, Chocolate Cake, Twinkie, Peanut Butter, Ho Ho, white fudge covered Ding Dong.
The TDP is total distribution points are out there and they are getting -- we're seeing that increase, but it takes a little longer for the trial and repeat to build the velocity underneath it.
Brian Holland
Sure. Thanks for that.
So, back to the question about the guidance and then trying to think about some of the white space opportunities that you've spoken to, so whether that In-store Bakery club international et cetera. Can you give us a sense how much of that is factored into your 2017 guidance that you provided here today specifically on the topline?
And maybe sort of how quickly we can attack some of these opportunities?
Tom Peterson
Yes. I would say it like this Brian that frankly most of the growth is core.
And we've got a number of white space initiatives coming out right now and it's early in the year, so it's hard to say which one of those whether it's the food service or international or ISB or frozen or all those -- which one is going to take off at what rate. So, while the $781 million certainly has some expectation around white space growth, a lot of that really comes from the core expansion of new products on the core and believe me I'm driving the Hostess Brand as it is today.
Brian Holland
Got it. Thanks.
That's helpful. So, talking specifically about the In-store Bakery opportunity, which I found to be interesting as I talked to industry contacts.
One, I guess -- and forgive me if I missed this and you said that -- have you started to roll that out? Is the Hostess BAKE Shop active anywhere at this point?
And maybe can you just kind of talk about the puts and takes with maybe fully realizing that opportunity relative where you are today? Maybe why you're bullish on the opportunity?
Why you made this acquisition the opportunity you see and then balancing against that maybe? Are there complexities we should be thinking about as we model this in and I'm talking to three or four years out?
Bill Toler
Yes, let me give you parts of that and then come back to me if I missed of it. Yes, the Hostess BAKE Shop is literally just starting.
I mean literally I think our first shipments on cupcake cookies were in late February, early March. So, it's not material in any of the financials, but we are starting to get some exposure in the marketplace, which is good, right that's important for the future, important for us to get that going on.
So, it's just starting. So, that's part one of it.
Part two is why ISB, I think, its core of your question. Really we think of it like this that Hostess, from a consumer perspective, has the permission to win in the right play and sweet baked goods categories all around the store, whether they are in our traditional aisle -- fresh aisle that we're in, whether it's the In-store Bakery, whether it might be in Frozen, the Hostess Brand certainly has the shoulders and has the strength to play in all those areas.
In-store Bakery, again, being larger than our package products also growing faster than our package products gives us a great place to take at Hostess Brand and also potentially make products on our assets that we could take over there under Superior brand or under other brands. So, it really gives us that leverage about where the brand can go in the store, where consumers expect and want to see Hostess, and where they give us the permission to win and In-store Bakery is right at the top of that list.
Brian Holland
Perfect. Thanks.
Last one and then I'll hop back in the queue. Looking at the gross margin, I know there is a lot to reconcile here with the pro forma, so I'm not sure if this is actually whole, it looks like gross margin might have missed me by about 50 basis points in Q4.
I'm more concerned as we look out to 2017, the closer you get back to sort of pre or legacy Hostess levels from a share and distribution standpoint and thinking about your competitors who are seeding back that share to you, do you think -- how much harder do you think the last few points of share or distribution will be to pick up not just from getting the placement on the shelves, but maybe promoting against your competitors who want to preserve sort of a net share gain from while you were dark. Is there anything you're seeing in the trade or any concerns that you might have to lean a little more heavily against the brand in the next 12 months relative to maybe the last three years?
Bill Toler
Yes, gross margins were up 150 basis points year-over-year. So, I'm not sure where you're getting the miss there.
We thought there was a very strong performance on that front. Back to the competitive question, look every share point you have to work for, right.
There's nothing easy or hard about any of them. I don't know that it's going to get more difficult was a go forward.
I think it's up to how well we do our job of leading and innovating. And if we keep bringing differentiated products like Peanut Butter like Brownies like white fudge covered, like Chocolate Cake Twinkie into the marketplace, we're going to continue to gain share and that's how it's played out over the last three and half a years and how we think it can play out going forward.
Competition has taught us, they've innovated as well. They have helped drive some of the growth that way.
But frankly the Hostess products are doing well with consumers and we're pleased with the outcome of our innovation and our efforts to broaden our distribution and continue to grow.
Brian Holland
Thank guys, I appreciate.
Bill Toler
Thanks Brian.
Operator
The next question comes from Michael Gallo with CL King. Please go ahead.
Michael Gallo
Hi, good afternoon. Congratulations on a strong finish to the year.
Bill Toler
Thanks Mike.
Michael Gallo
My question is just to kind of dig in on the composition of the growth for 2017. It seems like you don't have a lot expected on innovation in terms of driving the growth in terms of at least what's embedded.
I was wondering if you can speak to what you're seeing in terms of receptivity in the market, and what are sort of the more exciting areas which you think will drive some upside? I was also wondering if you can give us an update on your plans for entry into the food service business.
Thanks.
Bill Toler
Yes, sure. The growth is going to come from those three legs of the stool, right, rebuilding the core, more items and more stores, innovation, and white space.
And they bleed a little bit right. The innovation like peanut butter Twinkie drives more items in more stores, so it keeps building and broadening the base.
We've gotten very good response from retailers on a number of initiatives so far. Chocolate Cake Twinkie has been sort of the fastest out of the gates.
First time Twinkie icon has been put in chocolate cake, so that's been well received and the velocities have been encouraging on that. Getting into peanut butter where our competition has been for a while is giving us some momentum there as well and white fudge covered Ding Dong, simply put, that's one of our best fastest growing brands, it’s the first line extension on that.
So, those are meaningful innovations that are going into the stores and meaningful ones that customers are receiving well and we think will continue to provide nice growth through the year and beyond.
Michael Gallo
And then on food services?
Bill Toler
Yes, sorry, food service. Food service has been a slower channel for us and that's generally the way food service operates.
I've been in that business for a long time and what's happened is we've partnered with McCain. McCain, of course, the baked potato and appetizer company, they want to get further into desserts.
So, they actually help us in co-pack. We make the Twinkie ourselves, they co-pack and turn into a fried Twinkie and then their very large sales force reps it and sells into distribution.
So, it goes into Cisco and U.S. and ultimately out to retailers and restaurants -- restaurant chains who will use it.
So, that business obviously about half of all food is consumed in restaurants. So, we'll continue to build that presence there.
We think it's going to be a nice business for us, but it's going take time to build and we're off to a good start, but it's going to take some time.
Michael Gallo
Thanks very much.
Bill Toler
Thank you.
Operator
The next question is from Rob Dickerson with Deutsche Bank. Please go ahead.
Rob Dickerson
Thank you very much. Just a couple questions.
I guess the first question is -- pertains to gross margin. So, I think you said the gross margin expansion Q4 was driven primarily by commodity cost decreases, but it looks like implied organic sales were by up 14%.
So, first question is just why wasn't there more gross margin lift? Like 150 basis points is great.
I'm just trying to get my head around why that topline growth wouldn't push up more?
Tom Peterson
Right. Thanks for the question.
Mix is the reason. We sold more and saw higher growth rates in our bagged donuts versus our single-serve and multi-packs and that drove down margins a little bit between the mix of the products and that offset some of our growth -- the leverage that you would have expected.
Rob Dickerson
Okay, fair enough. Just to follow-up on that question.
The -- with the 14% organic for the quarter, and I think it's around -- you said 13% for the year, guiding to you said around mid-5%. Is the step down on that -- I think it was pretty well-telegraphed before today and it looks like it's pretty much in line, things look positive, 5%-plus organic sales growth is tough to find in CPG just in general these days.
But is the step-down from 2016 to 2017 -- is that driven partially because of a deceleration of your distribution gains? And then, a little bit off of a step-down in the category growth rate or is there something else there that we should be aware of?
Thank you.
Bill Toler
No, a little bit of its category, but bigger than that it's just the business is getting larger and so these double-digit laps are not going to happen like they have been the last few quarters. So, it's really about the scale of the business and there's also these white space initiatives that are still very early in their development and we're not yet far enough along to know which ones are going to take and which ones are going to be the biggest drivers of growth.
So, it's a number we feel good about and a number we put out there a few months ago, and we're reaffirming it today. But, yes, it's just a much bigger business now that's lapping a lot of momentum and a lot of gains and the category has slowed a touch.
Rob Dickerson
Okay, super. And just a few quick housekeeping items.
I guess on the diluted share count, it looks like it's around $100 million diluted, basic $98 million, that's for the Class A. It sounds like -- I mean kind of the past couple months at least there has been discussion around this $130 million total fully diluted ex-warrants.
So, the number that's listed excludes the Class B. so, I guess just one, how should I think about that?
And then as a follow-up to that, it looks like in the K, there is a little bit more detail on the exercising constraints of the warrant. So, it looks like you actually can't exercise the warrants until the stock reaches $24 per share.
So, I just wanted to clarify kind of what should the marketplace be using for a diluted shares outstanding figure count? And then, any color on that kind of $24 per share exercise schedule?
Thanks.
Tom Peterson
Sure. Thanks.
It's a little of how you look at the numerator and denominator. Our net income includes all shares, but then if you look at net income to common shareholders that excludes the B shares.
The B shares are held by Mr. Metropoulos and his family entities.
And those are the shares that don't count within EPS because EPS is calculated against net income to common shareholders, not all shareholders. So, it just reduces that to the $98 million share count.
So, if you were to look at net income to all shareholders, you would use the $130 million, if you are looking at net income to common shareholders, use the $98 million, $250 million from year end is the accurate number.
Rob Dickerson
Okay. That would make sure you'd--
Tom Peterson
And the exercise price on the warrants is for the public warrants is we cannot strike those until $24.
Rob Dickerson
Okay. And last two quick ones.
Again, in the K, it looks like you said $30 million to $40 million investment for further consolidation of production lines and expanding capacity. Is that your implied CapEx guidance for the year?
Or, is that -- that's just part of--
Tom Peterson
That is our CapEx guidance for the year. What's included in there is some movement of some assets, but primarily the first portion of a new cake line that we believe we need to have in place for 2018 based on our growth rates.
Rob Dickerson
Great. Last simple one is it looks like implied tax rate for 2017 is similar to Q4 around this 28.5%.
Is that -- one, is that right? And then, two, why is that different than kind of the 38% number that you've talked about before?
Tom Peterson
Right. That is the tax rate for Hostess Brands, Inc., that's their booked tax rate.
But hostess -- that 75% of the income of the company, since the B shares don't count. So, that's the difference between it and the 38%.
The B shares are taxed separately.
Rob Dickerson
Got it. So, for -- but for the Class A to common and we should be using the 28.5%.
Tom Peterson
Yes, Class A to common, you'll get -- the book income tax rate will be 28.5%.
Rob Dickerson
Okay, great. Thanks a lot.
Bill Toler
Thanks Rob.
Tom Peterson
Thanks Rob.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to management for closing remarks.
Bill Toler
Thank you very much. We appreciate the questions and your involvement and interest in Hostess and wish everyone a good day.
Thank you.
Operator
This concludes today's conference. You may disconnect your lines.
Thank you for your participation.