Nov 11, 2017
Executives
Katie Turner - Managing Director ICR and Head-Investor Relations Bill Toler - Chief Executive Officer Tom Peterson - Chief Financial Officer Dean Metropoulos - Executive Chairman
Analysts
Farha Aslam - Stephens Bill Chappell - SunTrust Robinson Humphrey Brian Holland - Consumer Edge Research Michael Gallo - CL King and Associates Rob Dickerson - Deutsche Bank Matthew Grainger - Morgan Stanley Steve Strycula - UBS
Operator
Greetings, and welcome to the Hostess Brands Third Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Katie Turner, for opening remarks. Thank you.
You may begin.
Katie Turner
Thank you. Good afternoon, and welcome to Hostess Brands Third Quarter Fiscal 2017 Earnings Conference Call.
By now, everyone should have access to the earnings release for the period ended September 30, 2017, that went out this afternoon at approximately 4:05 P.M. Eastern time.
If you've 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 release 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 forward-looking statements.
Please refer to the company -- 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 perspective 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 financial information for the quarter ended September 30, 2016, giving effect to the November 2016 business combination as if it had occurred on January 1, 2016.
All references to the results for the quarter ended September 30, 2016, refer to such unaudited pro forma results. In addition, growth rates recorded for ISB are based upon 2016 net revenue, including periods prior to the company's acquisition of Superior Cake Products, Inc.
And now I would like to turn the call over to Hostess' CEO, Bill Toler.
Bill Toler
Thank you, Katie. Good afternoon, everyone.
Appreciate you joining us today. I'll begin today's discussion with a brief overview of the third quarter and key business highlights.
Afterwards, our CFO, Tom Peterson, will provide greater detail on our Q3 financial results and guidance for fiscal 2017. And then Dean Metropoulos will also provide thoughts on our business performance.
Then Tom, Dean and I will open up the call for questions. We had solid performance across our major brands for the third quarter, particularly given the tough comparisons we knew we were lapping from Q3 last year.
A few key highlights include our top seven brands were up a strong 7.7% at point of sale in retail, and these brands represent 73% of our net revenue. Our current year in new product innovation continues to build momentum, adding $17 million in net revenue in Q3, up from $16.3 million in the second quarter of 2017.
In-Store Bakery net revenue growth improved for the quarter and increased 5.8% versus last year and has accelerated from the first half growth of only 3.2%. Adjusted EBITDA margin was a solid 28.4%, flat to year ago in margin percentage.
And we continue to have very strong cash position performance with approximately $101 million in cash at quarter's end. Importantly, our innovation pipeline is strong, and we are very pleased that we have started the fourth quarter out with double-digit growth we expected in October.
Keep in mind, October represents a significant amount of our growth for the fourth quarter. In line with our guidance, we expect to return to growth in Q4, with net revenue up between 9% and 12.5%, and we will end the year with an increase in revenue for the total year of between 6.5% to 7.3% and adjusted EBITDA margins of around 29.7%.
Now to review our quarterly results in more detail. Q3 revenue was $192.3 million, and adjusted EBITDA was $54.7 million.
Key contributors to our top line in the quarter were our robust 2017 product innovations and growing traction in our other whitespace opportunities, including In-Store Bakery, Food Service and other developing channels. Year-to-date, our 2017 product initiatives are building sustainable volume, particularly Chocolate Cake Twinkies, White Fudge Ding Dongs, Golden Cupcakes.
And this strong growth was offset, though, in the third quarter by the expected tough lap on Brownies, Suzy Qs and deep-fried Twinkies, which created a headwind of approximately $14 million quarter-over-quarter. This overlap alone represents 7% of Q3's total sales.
Importantly, this year-over-year differential drops to less than $4 million in Q4 as the 2016 innovation had unique volume peaks in Q2 and Q3 of last year. For Q3 in total, results were largely in line with our expectations with two exceptions.
First, we had product supply issues from a co-packer we work with on a few of our items. While co-packed products overall are a small part of our business, the impact was over $3 million in revenue for the quarter.
We have secured production from other co-packers for the majority of this affected product, and this disruption is largely behind us. The second impact was some of the disruption was caused by Hurricanes Harvey and Irma, which caused thousands of stores to be closed for some period of time and disrupted transportation and logistics during the quarter.
As you have heard from many food companies, these disruptions were meaningful, and our transportation costs increased significantly as the industry is recovering from these events. When we entered the year, we anticipated that Q1 would get the year started quickly, and we knew that we'd show less growth in Q2 and Q3, followed by a strong finish to the year.
We have entered the fourth quarter with our category, Sweet Baked Goods, improving, our important C-store volumes are getting stronger, with robust product innovation momentum and continued strength across our whitespace opportunities in place. However, given the co-pack challenges, hurricane and higher transportation that I've previously alluded to, we are revising our revenue guidance from that single number of $781 million for the year to be now in a range of $775 million up to $781 million, and revising our EBITDA guidance from the $235 million single number we have been using to a range of $230 million to $233 million.
At the midpoint of both those ranges, is 7% revenue growth and 7.5% EBITDA growth for the full year. And importantly, also without the previously mentioned onetime events, we would not have adjusted our expectations for EBITDA for the year.
For Nielsen, for the third quarter ending September 30th, Hostess Sweet Baked Goods market share was essentially flat during the quarter, but it's up 0.7% or 70 basis points in share year-to-date. We see growth in key sales channels, including convenience and dollar, during the quarter.
As we previously communicated on our Q2 call, to help drive growth in C-store, we included incremental in-store merchandising to accelerate that growth. We're pleased with that traction so far.
Our share of convenience grew to 21.8% in the third quarter, resulting in our highest quarterly share since relaunch of the company. In addition, for the four weeks ending September 30th, we are pleased to report Hostess reported sales up 2.8% versus last year in that important channel, and our share growth is over 100 basis points versus the same period a year ago.
It is great to see this important sales channel strengthen for us, and we believe we are well positioned for future growth in C-stores. Our results across major channels are another measure of our momentum.
In addition to convenience, Q3 also represented the highest share since relaunch in food of the food channel in Nielsen. Convenience and food are the largest channels in Sweet Baked Goods and represent almost 70% of the total point of sales in Sweet Baked Goods.
Delivering our highest share since relaunch in both these channels, it is a significant accomplishment and will continue to fuel our momentum. Likewise, the growth our brands is critically important.
On a Nielsen basis, we've been driving growth through product innovation and sales and marketing efforts. Twinkies, Ding Dongs, Coffee Cakes, Ho Hos all reported double-digit growth for Q3 compared to prior year.
We expect this trend to continue as our new core product line extensions, like White Fudge Ding Dongs, Golden Cupcake and Chocolate Cake Twinkies, continue to gain distribution in the marketplace. Our team remains focused on three growth drivers: rebuilding the core, innovation and line extensions and whitespace opportunities.
The rebuilding of the core has continued in 2017. We're gaining distribution with the majority of our retailers, filling voids, adding items count, getting more shelf space.
We've added an average of 1.7 items on the shelf, bringing our average count to the retailers to 21.8 items year-to-date. Hostess has been leading the way with innovative new products.
We're thrilled to announce the Hostess Bakery Petites as the latest product launch that delivers a premium snacking platform. Our Cake Delights, Brownie Delights and Crispi Thins are great for on-the-go snacking, are made with no artificial colors, no artificial flavors and no high-fructose corn syrup.
They have been rolled out in the marketplace over the last few weeks and will continue to gain distribution into 2018. It is still very early, but thus, we feel very excited about this unique product offering, its potential for growth and its potential to elevate the category.
As you would expect from Hostess, we have a robust pipeline of new products for 2018 and focus on new innovative offerings to elevate that category, including cake slices, Peanut Butter Ding Dongs, and will further expand us into whitespace segments in Sweet Baked Goods, like jumbo Donettes or full-size Donettes, if you will. We will also renovate key existing items such as Butterfinger Brownies, have a full rollout of the Peanut Butter Twinkie and move the Suzy Q to a pan-baked product to bring back an iconic eating experience.
Extension of the Hostess brand in new product categories and new segments within Sweet Baked Goods, like peanut butter, has yielded good results and will continue to be a focus. We have gained $10 million in point of sale from the launch of peanut butter Ho Hos and a limited-time offer we did on Peanut Butter Twinkies.
The third part of our growth strategy is whitespace opportunities that represent tremendous potential for our brands. We continue to build traction in In-Store Bakery, Food Service, other developing channels.
These channels are not measured in our Nielsen numbers that we frequently quote and that most of you closely follow. In our In-Store Bakery business, we have momentum.
We're up almost 6% in the quarter. We continue to roll out Hostess Bake Shop brand.
And the new subcategories we've entered include Donettes, [indiscernible] club stores and also handheld flyers in certain retail channels. In summary, we are pleased with the overall progress and results year-to-date.
We are well positioned for Q4 to be our strongest quarter of the year, and we will finish the year up between 6.5% and 7.3% in revenue and adjusted EBITDA up between 7% and 8.5%. Thank you.
And now I'll turn it over to Tom for some more detail and perspectives. Tom?
Tom Peterson
Thank you, Bill. I will now review our third quarter financial performance and some other data from today's press release.
For comparative purposes, we will compare our 2017 results to our unaudited pro forma financial we will compare our 2017 results to our unaudited pro forma financial statements for the quarter ended September 30, 2016, which present our results as if the business combination had occurred on January 1, 2016. We believe this discussion provides helpful information on the comparative performance of the Hostess business during this period.
Net revenue for the third quarter was $192.3 million, a 2% or a 3.9% -- $3.9 million decrease from the third quarter of 2016 revenue of $196.2 million. Third quarter growth was from our 2017 new product initiatives, including Chocolate Cake Twinkies, White Fudge Ding Dongs and Golden Cupcakes, which are performing better than 2016, but this growth was offset by an approximate $14 million impact from lapping 2016 product innovation, $3 million impact from a co-manufacturer's production challenges and $2 million from discontinued items.
Without the above impacts, the company would have grown almost 8%. We also had some shipment and point-of-sale disruption associated with Hurricanes Harvey and Irma.
We generated $78.4 million of gross profit for the third quarter of 2017. Gross margin was 40.8% of net revenue, down 140 basis points from the same quarter last year as a result of the cost of transportation as a percentage of revenue increasing by 120 basis points due to the tightening of transportation capacity as an ongoing impact from the hurricane and an increase in refrigerated transportation.
We expect this tightening to continue, at least through the fourth quarter. SG&A expenses, including advertising, were $31 million or 16.1% of revenue.
This compares to $29.1 million or 14.8% of revenue for the third quarter of 2016. The increase in SG&A was attributable to an increase in noncash share-based compensation of $3.6 million.
We generated adjusted EBITDA of $54.7 million or 28.4% of revenue compared to adjusted EBITDA of $55.6 million or 28.4% of revenue for the third quarter of 2016. The 1.7% decrease in adjusted EBITDA is the result of the 2% decrease in revenue, the reason of which had previously been highlighted, offset by reductions in EBITDA impacting SG&A.
Our effective tax rate for the third quarter, including the effect of non-controlling interest income allocation, was 39% due to a $2.2 million nonrecurring charge to reflect the change in state tax law. Without this charge, our effective income tax rate would have been 30.5%.
Our effective tax rate was 28.5% for the same period last year. GAAP net income was $16.1 million or $0.09 per fully diluted share compared to $26.3 million or $0.18 per fully diluted share for the same quarter last year.
The decrease in net income was due to the recovery of recall costs in the third quarter of 2016 of $4 million, which have previously been expensed; also, additional noncash share-based compensation in the third quarter of 2017; and the expense of debt costs that were previously deferred. Adjusted EPS, which excludes the impact of the recovery of recall costs and certain other onetime items, was $0.14 per share compared to $0.16 for the third quarter of 2016, with the decrease being a result of the dilutive warrant impact.
Our cash flow generation continues to be strong, with operating cash flows for the quarter of $50 million, driven by our strong EBITDA results and the benefit in working capital from payables. Our CapEx for the quarter was $7.7 million, mainly for property and equipment to support our strategic growth initiatives and productivity improvements.
We continue to anticipate approximately $30 million to $40 million in CapEx for the full year. Turning now to the balance sheet.
Net debt as of September 30, 2017, was $892.6 million. And we had cash and cash equivalents of $101.2 million and approximately $96 million available for borrowing under our revolving line of credit.
Our total leverage ratio as of September 30, 2017, was 3.96 times based on trailing 12 month pro forma combined adjusted EBITDA of $225.2 million. This is improved from 4.51 times at the end of 2016.
And excluding the use of cash for future acquisitions or optional debt reductions, we expect a leverage ratio of 3.65 to 3.75 times at year-end on an increase in cash for the year of $95 million to $105 million. This 3.65 times to 3.75 times leverage will be a reduction to leverage by 0.8 turn against our 2016 leverage of 4.51 times.
In terms of our outlook for 2017, we continue to expect revenue to grow ahead of the Sweet Baked Goods category average. And as Bill mentioned, based on our year-to-date results, we are modestly updating our guidance to reflect the following ranges.
We expect 2017 net revenue of $775 million to $781 million, an increase of 6.5% to 7.3% compared to prior year; and adjusted EBITDA of $230 million to $233 million, an increase of 7% to 8.4% compared to prior year. Given our expectations for the full year, this implies fourth quarter revenue growth of 9% to 12.4%, and we expect to have the best organic growth rate of the quarter -- of the year.
This return to growth is driven by our 2017 innovation continuing to perform well, the launch of Bakery Petites, getting past our significant laps of 2016 innovation and regaining our market sales of our Honey Buns and Danishes. We currently anticipate net income of $94 million to $96 million for 2017, which is expected to result in basic EPS of $0.62 to $0.64 and diluted EPS of $0.58 to $0.60 per Class A common shareholders based on expected basic and diluted shares outstanding of approximately 99.1 million to 104.8 million, respectively.
In summary, we believe we are well positioned for a strong end of the year. I will now turn the call over to Dean for a few comments, and we will then open the call for questions.
Dean Metropoulos
Thank you, Tom, and thank you all for being interested in our company. As an important shareholder and Executive Chairman since our proud rise from Chapter 7, I feel we're having an excellent year with a growth rate of 6.5% to 7.5%, pretty unheard of in our industry, that is $775 million to $781 million; and an EBITDA of $230 million to $233 million or 29.7% to 29.8% margin, again, pretty unheard of in our industry.
Very importantly, we plan to finish Q4 with a very strong 9% to 12.5% growth. And equally importantly, we plan to deliver over $100 million in free cash flow for the year.
Summarizing some of the things that Bill and Tom talked about for 2017. We called out early part of the year that Q3 and Q2 of 2017 would be flattish to last year as we launched several new products during those quarters of 2016.
In addition, as they both mentioned, we had two onetime nonrecurring hits outside of our control in Q3 and are still delivering a very strong year. Number one, a long-term co-packer with labor problems hit us for over $3 million in sales and obviously the related margins on a very important breakfast program product.
Additionally, the hurricanes hit us with approximately $2 million in lost sales and related lost margins and over $2 million in the quarter in added transportation costs. I love being able to absorb such uncontrollable surprises like those two and still deliver a great cash flow -- great -- the growth in cash flow without a lot of apologies.
In conclusion, we will deliver exactly what we expected and had a strong year with 6.5% to 7.3% growth rate and a strong EBITDA of 29.7% to 29.8%, notwithstanding the two beyond-our-control Q3 hits. Plus, we're finishing with a very strong Q4 of 9% to 12.5%, and we're already halfway through the quarter.
Lastly and very importantly, our management team transitioned through a very tough first-time public company year and with so many, many distractions. So we feel very good about this special company and our business, and we thank you all for your continued interest.
With that, I would like to turn it over to questions.
Operator
Thank you. Ladies and gentlemen, at this time we'll be conducting a question-and-answer session.
[Operator Instructions] Our first question is coming from the line of Farha Aslam with Stephens. Please proceed with your question.
Farha Aslam
A couple of questions. So you've had a strong innovation program this year, and others in the industry have also yielded some new, more robust innovation.
Could you talk about how much space you're getting and how much space the category is getting in retail?
Bill Toler
Yes, the category space has largely remained constant. And the reason for that is there's a lot of weaning out of items that had come into the shelf over the last four or five years that haven't been delivering the velocity to stay on the shelf, right?
For example, Weight Watchers completely discontinued themselves. Sara Lee has gone out as a part of Bimbo, that's gone now.
Otis Spunkmeyer has been narrowed way down. So I would say that really, the category is getting cleaned up a bit from having some over-proliferation back a few years ago.
And so now the overall space hasn't grown much, but we are adding items and getting space for us, and we're building market share to earn that space.
Farha Aslam
And clearly, you're finishing the fourth quarter pretty strong here. Could you give us just an early read on next year in terms of what you think sales and earnings growth we should expect from Hostess?
Bill Toler
Yes. We're not ready to give a firm number on that yet, but we can tell you that we feel very good about our innovation pipeline, the new products are rolling out, some new customer wins and that we expect to be in a place to tell you on our next call that we'll be growing at levels well ahead of the category, continuing to build share and continuing to grow.
Farha Aslam
So your long-term sales growth guidance is sort of mid-single digits. Do you expect to kind of come in around that level for next year as well?
So do you expect sales to grow next year?
Bill Toler
Not sure on this one. We're not ready to make a declarative statement on that, and feel very good about where the business is in the innovation pipeline particularly.
Not ready to call a specific number or a range against that, though.
Operator
The next question is coming from the line of Bill Chappell with SunTrust. Please proceed with your question.
Bill Chappell
So one thing you said in the release is that the point of sales growth was up kind of 7% for, I guess, for what represents 70% plus of your business. That's not what we see in the Nielsen.
So I'm just trying to understand where the outperformance is or what we're missing.
Bill Toler
Hard to know how to answer that not knowing what you're seeing, but we're seeing that on our key brands. It really comes down to, the shortfall on Brownies, Suzy Q and deep-fried Twinkies are creating the sales shortfall.
The growth on our other core businesses is really quite good. So I need to get a little more information from you before we can specifically compare notes on that, but that's exactly what we're seeing.
Bill Chappell
And then in terms of the innovation, I mean, sort of, there's a lot going out. How much are you expecting from Petites and other rollouts in the fourth quarter in terms of -- I don't know, if sell-in to a large customer, if that's adding, like, a point to sales or more than that or how we should look at that in terms of the fourth quarter guidance.
Bill Toler
For the quarter, it's worth a couple of points roughly, just the Petites themselves. But as you saw, we did for 2017 innovation, Q1 was 5 million, Q2 was 16 million, Q3 was 17 million.
We think we'll see a similar number for that. The big deal is we're not lapping the big '16 innovation number, so '17 has been a really nice build.
Remember, last year, we did 44 million in 2016 innovation. This year, we've already done almost 40 million in 2017, and we expect to have a solid quarter on that as well and go way past what last year's was.
So that's really how we expect it to flow out.
Bill Chappell
Okay. And then last one, you announced your retirement, I guess, a couple of weeks ago, but the company didn't reiterate the full year numbers at that point.
It seems like you're roughly other than someone else reiterating your full year at this point. Was there a reason why you couldn't announce that two weeks ago?
Do you not have the systems in place or you didn't know? Or am I missing something?
Bill Toler
No, nothing more complicated than we chose to keep them apart. We felt like one was a personal situation for my retirement.
The other was we knew we were going to talk earnings in a couple of weeks, and felt like it was the right way to handle it.
Dean Metropoulos
And Bill, let me say this, this is Dean. We can't get into a situation where in a couple of weeks, we're talking about numbers, projections and all of that.
We're going to remain pretty disciplined. We're very confident.
And again, I think the news with Bill's retirement, it was what it was when we mentioned it promptly, but we're not going to be reviewing numbers every time we have something to talk about in the news.
Operator
The next question is coming from the line of Brian Holland with Consumer Edge Research. Please proceed with your question.
Brian Holland
Quick question or I guess let's start with a housekeeping item and just maybe to shore up or to follow up on Bill's question. So the innovation contribution sounds like it's going to be similar to what we saw in Q3, and do appreciate the way you broke that out this quarter.
But if I recall from your prepared remarks, Bill, the headwind from the prior year goes from 14 million, did you say, 4 million? Is that a number you gave?
Bill Toler
Definitely.
Brian Holland
Okay. So obviously, you have that gap.
And then on top of everything else and, I guess, given you're a sort of an impulse-serving category, but I get the store disruptions. So because similar to Bill, I'm not seeing quite the lift.
I think part of that might be at least the flow-through from the supplier data because we can see that's concentrated in a certain category. But is there a -- like, a sell-in component that will help contribute in Q4 to offset the projected [Indiscernible]?
Bill Toler
Yes, there's a little pipeline you build. Every time you put a new product in, you build a pipe for that particular product.
There's a small benefit of that, but it's not anything like the velocity you get from people purchasing the product.
Brian Holland
And then if I could and to the extent that you guys are comfortable addressing this, as we roll into Q1 next year and, again, to just focus on the innovation versus lapping issue, you've got Suzy Qs coming on in Q1 and some other stuff. I mean, does the equation between innovation and prior year headwinds look closer to Q4 or closer to Q3 as we start the year?
Bill Toler
Well, I would say this, I think we're going to say it's a lot like we just did in Q2 and Q3, right? And the velocity of the '17 innovation, which as really what you're asking about, is showing to be much more sustainable and growing than what we saw a year ago in '16, ones which really hit kind of a bubble and then really didn't keep sustaining.
So we should be having a positive lap in Q1 based on the sustainability in 2017 already.
Brian Holland
And then the last question for me. Just -- and with Dean on the line, it would be great to hear sort of how you're thinking about -- how you're going about the CEO search.
What are the parameters? What expertise are you looking for?
Is -- are you looking for someone that will be based in Kansas City? And I guess with that, let me offer my congratulations to Bill as well.
Bill Toler
Thanks a lot.
Dean Metropoulos
I know that issue is going to come up, and a few of you have spoken to me directly about it and certainly very happy to address it. First of all, let me reassure everyone that we have an excellent management team at the -- here at the company, with a culture of results orientation and accountability.
We have been here from the beginning of our Chapter seven journey, all even, in fact, predating Bill's arrival. We appreciate Bill's partnership.
He's been great to work with, and -- but we also feel very comfortable as we move forward. I led the exit out of this Chapter seven story as CEO and Executive Chairman.
And now I plan to step up until such time as we transition to a new CEO, and the search is well underway. So we feel very good about where we're heading.
We are looking at candidates. We already have received a number of names.
We're looking for strong, non-bureaucratic-type individuals, very agile, very accountable, very results oriented, aggressive in growth, innovation. Clearly, we're going to be on the lookout for acquisitions.
I intend to be very involved for quite a number of months and perhaps even years, so I will certainly support this new CEO as we look at growth and including acquisitions. So he's going to feel comfortable that he can throw several balls up in the air and run his business with a very solid management team and, at the same time, step in and integrate acquisitions and transmit, more importantly than anything, in his acquisitions -- and I've been through 82 of them, so I know -- is to transfer the culture we have at this company, which is a very exciting culture to that new acquisition platform.
So that's pretty much the background. So that's pretty much the background.
Operator
Our next question is coming from the line of Michael Gallo with CL King.
Michael Gallo
Yes. So my question is just on the acceleration and the reacceleration in growth in Q4.
I was wondering if you can parse out at all what you've seen to date, how much of that is from the new innovation going in versus just a reduction and the drag from Brownies and Suzy Qs, so we can kind of get an idea of how that will begin to flow through as we get to 2018?
Bill Toler
Yes. I mean, we're going to see probably $5 million to $6 million from Bakery Petites.
We expect to see 2017 innovation continue along this path. We did $16 million in Q2, $17 million in Q3 and a similar number in Q4, might be a little bit less, but plus the Baker Petites, it'll be the biggest innovation quarter of the year, pretty much as we had it planned, right?
So that's where that comes in. The biggest thing is we're now changing the year ago because of the unique bubble we saw in Q3 from the other items.
Michael Gallo
And then in terms of the margins, can you update us on where you are in terms of the commodity basket as you look out the next 12 months?
Tom Peterson
Yes. We're almost fully locked in for 2018.
A slight bit of inflation, very modest amount of inflation for next year, we look pretty good on commodities.
Operator
Our next question is coming from the line of Rob Dickerson with Deutsche Bank.
Rob Dickerson
So just one question on the C-store side. I think, Bill, you mentioned that C-stores are coming back a little bit.
I remember -- I think it was in Q2, you said there was kind of the -- more of the headwind that you felt relative to original expectations for the year or that there was a slight traffic slowdown. So I'm just kind of curious.
And then you -- I think you had said, really, the expectations weren't for that to really materially pick up too quickly. So I'm just kind of looking for update as to how you kind of saw Q3 play out.
Feel overall in C-stores, has that improved.
Bill Toler
Yes, it has. And I think it's perhaps traffic driven.
We don't have recent traffic numbers. Certainly, some merchandising included has driven pieces of that.
We had a previous seasonal campaign around some display efforts we did over the summer. And we're seeing mid-single-digit growth in C-store now on a shipment basis, and consumption is up about 3%.
So it's starting to turn and come back to the levels that we're comfortable with. We also had some new customer wins in C-store where we're picking up distributions that we hadn't had before.
So all of it is kind of, I would say, regaining the mojo that we've been used to in this most important channel for us.
Rob Dickerson
And then a very technical question on EPS, I know EBITDA came down a bit. Sounds like it was more driven by the one-times, I guess, in Q3.
And -- but just to clarify, because I don't think you really called it out, but I mean, EPS doesn't go up, right? I mean, it was at $0.58.
Now it's $0.58 to $0.60. And I know it's driven by the -- sorry, go ahead.
Tom Peterson
Yes. It's driven by the warrant -- the price.
So it is the calculation of the warrant, that's the primary change. And then there was a slight change in stock compensation for the fourth quarter estimates.
Rob Dickerson
Okay, cool. And then just in terms of, I guess, the Q4 growth expectation on top line, the 9% to 12% and then kind of how we feel about '18, obviously, a lot of questions about it.
I'd say, speaking to investors, there's been kind of, let's call it, like a overall cloud or level of doubt that you'll be able to do that. So I'm just -- kind of just want to clarify, with all of the questions asked, you're feeling very good about your ability to basically outgrow food obviously in Q4, but the overall picture of Hostess relative to bankruptcy Q1 coming out -- or becoming a public company and now Q4 into '18, it doesn't sound like there's that much of a change relative to where you thought you'd be a year ago.
Dean Metropoulos
This is Dean, and I'm going just to wrap -- say a couple of things again. There's a lot of obviously discussion about quarterly launches of new products last year; these year, hurricanes, supplier disruptions, et cetera.
The key to focus -- and this company is a highly entrepreneurial, very aggressively growing company. And the key to it is that we will deliver this year approximately 7% growth, which is very powerful, 29% -- 29.6% strong EBITDA margins plus $100 million in additional cash flow.
As we talk about that very confidently and go through the noise of what quarter we launched what product and some hurricane activity that was beyond our control, the important thing is that this company delivers, we expect to deliver strong results next year, we are confident about it. It's very difficult.
And by the way, many of you yourselves had instructed me and advised me as friends from the past that don't get too specific with a lot of projections because it's not a good thing to do. So we feel very confident about next year.
We will do well above the category. We plan to drive innovation and continue to drive a very strong entrepreneurial culture in our company and look for additional incremental opportunities through acquisitions.
So you can assure yourself of a very, very active management team that will stay up all over the performance of this business.
Operator
Thank you. The next question is coming from the line of Matthew Grainger with Morgan Stanley.
Please proceed with your question.
Matthew Grainger
Just had a couple of questions, more on the cost side. Just given the impact of higher freight costs, which obviously is something that's impacting everyone in the industry right now, it doesn't seem like you're really expecting a material change in EBITDA margins outside of that small onetime impact from your co-packer.
So given that 120 basis point step-up that you mentioned in the press release, what are the offsets in the P&L or on SG&A that allow you to compensate for that in the second half? And it -- if it continues into 2018, what options do you have to continue to compensate for that step-up in costs?
Tom Peterson
Yes. The primarily offsetting item that we have this year -- and we've spent less in permanent rack deployment in our advertising and marketing spend.
And also, if you look at the margins last year to this year, related R&D expense is less than last year, which helped us hold margin. As we look at the future, we'll need -- we need to leverage out of that.
Associated with that, we have automation opportunities, we have a continuous improvement program in the bakeries, and we're currently talking to the management team about what we do if the transportation costs continue. We're looking at various transportation options.
Could be some other carriers that are becoming more aggressive, but this is an industry-wide issue. We're keeping pushing on it because we want to hold our EBITDA margins where they are.
Dean Metropoulos
And as an additional to that, there has been improvement in the costs in case of production. We have been continually investing in automation.
We have a plan to continue that process into next year to offset surprising costs like freight and transportation. So it's a continuous process in this company of looking for opportunities for efficiencies, improvements, mix as well as purchasing.
And as Tom mentioned, our commodities for next year are pretty well covered. There won't be any surprises there.
So I think it's a very balanced approach to offset the $7 million or so that we expect in higher transportation costs.
Matthew Grainger
And then on the innovation side, a lot of what you pursued this year has been a little bit more near in flavor variants of existing products. Obviously, some of its meaningful with the chocolate and peanut butter Twinkies, but the latest push behind the Petites line seems like something that's a bit more, novel in terms of what you've tried in the past, just coming at the category from the perspective of a more natural product, fewer ingredients.
So just curious what the cost in margin implications are of trying to take the innovation pipeline in that direction.
Bill Toler
Yes. First of all, I don't know if I agree with novel.
We think it's category elevating and really fits into the trend of permissible indulgence, fits into millennials eating these kind of products, doing more of the snacking and grazing-type things. We're really comfortable with where this is from a strategic perspective.
These products have very good margins. We're making probably 80% of the volume from these items in-house in one of our most effective lines, effective parts of the business.
And we have very good margins on this and expect to be able to market and drive trial and do all the things we want to do to build our brand and to elevate a category like this.
Operator
Our next question is coming from the line of Steve Strycula with UBS. Please proceed with your question.
Steve Strycula
So quick question for Bill and for Dean. Just wanted to get a sense of category trends recently in the quarter.
I think you said the third quarter was flat, Bill, you said, for next year. You think that you guys can return to your consistent track record of growing market share.
Can you just help us understand and unpack a little bit what happened maybe in the third quarter specifically from, again, a relative share standpoint and why that kind of re-expand next year? And then I have a follow-up.
Bill Toler
Yes, sure. First of all, for the year, nine months in, we've got 70 basis points of share growth, right?
We have, sort of over the last 12 months, talked to you guys about 50 points a year being a target. We're at 70 now.
We think we're going to expand that further in Q4. So we'll have a very good year ahead of our projections that we've given out over the last 12 months or so.
So that should work well. In Q3 specifically, it's really just a function of the share that Brownies and Suzy Q had picked up a year ago that correspond to the lap and the challenge for this year.
So we look at it in more than just a quarterly basis; we look at it on a yearly basis. And overall, we're going to gain more share this year than last year.
We also had the co-pack issues of all the products being cut. So we lost a little bit of momentum there where the products weren't on the shelf, and there's some unique items of Danish and Honey Buns and cinnamon rolls, things like that, that are tied into our breakfast portfolio.
So that's really the reason for the flatness in the share in Q3. And also, the reason we feel like we're going to continue to gain and expand is that we're doing things that go outside and expand the category.
Petites, full-size donuts, peanut butter, all those things Petites, full-size donuts, peanut butter, all those things are really more pushing mix in the category than it is just tuck-in closed line sections.
Steven Strycula
Great. And then Petites look great.
My question would be, there's launch in the fourth quarter. You mentioned earlier on in the call that the full year 2017 innovation would be well above last year, which was $44 million.
Did I miss a number that you threw out there, what it would kind of end the year in a ballpark range? Apologize if I missed it.
Bill Toler
No, we didn't give that number. I mean, you're sitting here with $5 million, $16 million to $17 million so that's $38 million.
Petites should be $5 million or $6 million. That's $44 million, and another probably $14 million or so to it for the other core 16, 17 items.
And you get to a pretty good number compared to the $44 million of last year. That will be a key part of why we're driving this 7% growth for the year.
Steven Strycula
Great, that's helpful. And then to wrap up, Tom, did I hear you say, I think, in response to maybe Matt's question that in the fourth quarter, stock-based comp or bonus comp was a little bit lower?
Is any of the guidance range adjustments reflective of maybe some bonus comp coming out that goes back in next year? That would be it for me.
Tom Peterson
There is bonus comp that comes out of EBITDA and also an adjustment based on Bill's retirement. There's some stock-based compensation adjustment associated with that.
Operator
It appears there are no further questions at this time. So I'd like to pass the floor back over to management for any additional concluding comments.
Tom Peterson
Bill Toler
We thank you all for interest in Hostess, and we look forward to speaking with you soon. Take care.
Tom Peterson
Thank you.
Operator
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.