Feb 28, 2018
Executives
Katie Turner – Investor Relations Bill Toler – Chief Executive Officer Dean Metropoulos – Executive Chairman Tom Peterson – Chief Financial Officer
Analysts
Bill Chappell – SunTrust Robinson Humphrey Farha Aslam – Stephens Inc. Brian Holland – Consumer Edge Research Ken Goldman – JP Morgan Rob Dickerson – Deutsche Bank Michael Gallo – CL King Matthew Grainger – Morgan Stanley
Operator
Greetings, and welcome to the Hostess Brands Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A 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 full year 2017 earnings conference call.
By now, everyone should have access to the earnings release for the period ended December 31, 2017, that went out this afternoon at approximately 4:05 PM Eastern time. If you’ve not received the release, it’s available on Hostess’ website at www.hostessbrands.com.
This call is being webcast, 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 the factors that could cause the Company’s actual results to differ materially from these forward-looking statements. Please remember that 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 the 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.
Hostess has also supplemented its earnings release with unaudited pro forma financial information for the quarter and year ended December 31, 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 and year ended December 31, 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. Lastly in the fourth quarter Hostess reassessed its segment reporting and company now includes Hostess branded bread products and frozen retail and Sweet Baked Goods.
Previously these are all included in other with In-Store Bakery. In-Store Bakery is now reported separately.
And now I would like to turn the call over to Hostess’ CEO, Bill Toler.
Bill Toler
Thanks, Katie. Good afternoon and thank you for joining us today.
I’ll begin our discussion with a brief overview of the fourth quarter and key business highlights. And Dean Metropoulos, our Executive Chairman will review our recent acquisition enables us an expansion of our Breakfast strategy.
Finally, Tom Peterson, our CFO will provide greater detail on our financial results and guidance for fiscal 2018. Then we’ll open up the call for questions.
We are very pleased with our strong finish 2017. Our innovation pipeline fueled our financial results for the quarter and drove our record total SBG, Sweet Baked Goods market share for the year.
In addition we generate solid sequential increases from Q3 to Q4 as we grew across multiple areas of our business. Key highlights of the quarter include net revenue increased 9.7% to $196.2 million, representing the Company’s best organic quarterly growth rate for the year.
Our current new product innovation continue to build momentum adding $22 million in net revenue, up from $17 million in Q3 and $16 million in Q2. In-Store Bakery net revenue growth improved for the quarter with an increased 6.5% versus last year and accelerated 5.8% net revenue growth in Q3.
Overall point of sale as measured by Nielsen increased 4.3%. Our top seven brands point of sale was up 8.2%.
These brands represent 74% of our total Company’s net revenue. Adjusted EBITDA margin was a solid 29.5% of net revenue compared to 29.6% in Q4 last year and increasing from 28.4% in Q3 of this year.
We continue to have very strong cash position with approximately $136 million in cash at the end of the year. Key contributors to our top line in the quarter were our robust 2017 product innovation and growing traction in our whitespace opportunities, including In-Store Bakery, Food Service and other developing channels.
We are pleased with our 2017 new product initiatives, which are building sustainable volume led by Bakery Petites, Chocolate Cake Twinkies, White Fudge Ding Dongs and Golden CupCakes. As we have told your records throughout the year, we entered 2017, we anticipated Q1 would get the year started quickly, we would show less growth in Q2 and Q3 and we finish with a strong finish in Q4.
We are very pleased with our team’s execution and achieving these results. Overall we have a flat SBG, Sweet Baked Goods category, but enjoy a favorable [indiscernible] dollar channel volumes with robust product innovation and continued strength across our white space growth opportunities.
For Nielsen, for the fourth quarter ending December 31 Hostess Sweet Baked Goods market share was 17.2%, up 90 basis points from prior year well above the 50 basis points we expressed as our goal earlier this year. Our share of convenience stores grew 140 basis points to 21.9% in Q4, resulting in a record share since relaunch, which provided a solid recovery over the modest point of sale growth we saw in the middle of the year.
Point of sale growth for the quarter was up 5.3% versus last year in convenience, we continue to gain momentum on the strategically important channel, which we expect to be straightened by our recent Breakfast acquisition. Our momentum continued within mass and dollar, with POS up 12.2% and 7.5%, respectively.
In addition, the convenience 2017 also represented the highest share since relaunch in mass, food and dollar, ramming up all four of our major channels. Each one delivering a higher shared in since relaunch in those channels a significant accomplishment and will continue to fuel our growth.
Hostess has been leading the way with new innovated products while still very early, we’re pleased report our initial results from Bakery Petites as our latest product launch that launches a premium snacking platform. Our petites have no artificial flavors, no artificial colors and no high fructose corn syrup.
Our petites initially bringing in incremental Hostess consumers, which in turn, bringing a new household into the category. We believe the key to our driving incremental distribution in food, mass, and C-store for 2018.
White space opportunities continue to represent tremendous potential for our brands. Throughout the year, we consistently gain traction in In-Store Bakery, Food Service international and other developing channels.
These channels are not measured in our Nielsen numbers that we frequently quote and then most of you follow so closely. In our In-Store Bakery business, we are building momentum with growth of 6.5% for the quarter.
We continue to roll out In-Store Bakery innovation, gain new distribution where Hostess brings key capabilities this area store. We also hired a new General Manager to bring focus to that ISB performance area.
We continue to believe there’s a lot of potential within In-Store Bakery. And now, I’d like to turn it over to Dean.
Dean?
Dean Metropoulos
Thank you, Bill, and thank you for extending your stay for the first time as we complete our CEO search and finalize the candidate. We remained very focus on finalizing and selecting the final CEO candidate who will lead the company in next phase of its growth.
But as all of you know, as Executive Chairman of the company, the largest shareholder and the Founder of the post 7 – post Chapter 7 Hostess, I remain and have been very, very involved with the management the company both in the operation, the strategic growth of the business, working closely with Bill, Tom, Andy Jacobs, Michael Cramer, but there’s a variety of other excellent executives who own their functions, folks like Rob Kissick on purchasing, Rob Molina in pricing and trade, Matt Kunz with logistics, Matt Hall with operational H&R, Todd Crook who insurers these plans are humming carefully. There’s an ownership team here that I assure you will not allow a day or [indiscernible] during the transition over the management of this company during its entire future.
So with that, again, I’m very pleased with our management team. I want to repeat a few of the other points that Bill made.
Number one, we ended up very strong with a fourth quarter, we’re now up 9.7%, 6.7% growth for the year by any measure, those are very, very good numbers. 2018 EBITDA 29.7%, by any measure remarkable number, this great performance on both of those statistics, and end of the year with $135.7 million cash flow, lowering our leverage ratio down to 3.73 times.
This is a wonderful cash machine and Hostess is in fact, a very wonderful company. As we look into 2018, our momentum as well as our innovation pipeline, we feel very strong we’ll have an excellent year next year, very strong and well above the category.
So as we look at the past four plus years, at the transition of this company from Chapter 7, it’s been consistently hitting superior targets of growth as well as EBITDA and cash flow, and we feel very good about it. We also mentioned to you recently about the tuck-in acquisition we’ve made, this is the business I had looked at four or five years ago.
And it became available. It was a business that disrupted some of our supply this past summer, which again created some headwinds this past year, but it’s an excellent tuck-in acquisition.
And I think as we begin to get very involved with transforming it and restructuring it, turning into the Hostess culture, and by the way, everybody is all over this business in the past three to four weeks. We see this has been a great contributor both for the topline as well as the cash flow for the many years to come.
As part of this business, that we do great brands, Big Texas and Cloverhill brand, these are well developed and a target certain segments consumer and channels segments that augment the whole strategy of Hostess very, very well. In addition, the acquisition allows us to forego certain contemplated investments that we were anticipating making to bring in our Breakfast products in-house as we continue to put a lot of emphasis on growing those products.
In addition, the facilities and the business that we’ve acquired has a lot of flexibility and versatility for the breakfast program, and we feel that will serve this business very, very well for the years to come. So as we bring in the in-house production that would be in co-packed outside as we transform this company in the coming months, we feel this business will be very, very accretive going forward.
As you also know from my own background, we’ve made some 80 plus acquisitions all of them had been the best returns in the consumer sector and we continue to be committed and focused on making acquisitions the Hostess in the future. Rest assured, we have looked at every snack acquisition that has been announced this year.
We just could not get quite comfortable with the valuations that these acquisitions went for. However, we will remain disciplined and very focused on acquisitions, but as my friend Warren Buffett said in his recent letter, acquisition prices are at all time highs and for him, as well as for us acquisitions need to have a sensible purchase valuation.
So again, we will remain disciplined and we feel very confident that as larger companies continue to focus on core businesses activates and pushing into focus on core businesses that will be significant acquisition activities for the years to come and we plan to be there looking at them synergizing, looking for synergies, looking to apply our culture for performance and transformation in place, and we feel very confident about that next dimension of Hostess’ future growth. So we’re in great place with cash flow and existing momentum in our sales and we continue to be very focused on making the right acquisitions for the company.
So we feel very, very good, I say that both as a shareholder and as well as an executive at the company. Thank you.
Now with that, Tom, please give us the details of financial.
Tom Peterson
Thank you, Dean. I will now review our fourth quarter financial performance and some other data from today’s press release.
For comparative purposes, we will compare our 2017 results to our pro forma financial statements for the quarter ended December 31, 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 Hostess during the period.
Net revenue for the fourth quarter was $196.2 million, 9.7% or $17.4 million increase against the fourth quarter of 2016 of $178.8 million. These strong results were led by the introduction of Bakery Petites, which contributed 3.1% of net revenue – of our net revenue increased along with the continued revenue growth from our spring 2017 innovation.
We generated $80.8 million of gross profit for the fourth quarter of 2017. Gross margin was 41.2% of net revenue, down 180 basis points from the same quarter last year.
As we expected and highlighted on our Q3 call, higher cost of transportation continued in Q4 and as a percentage of revenue increased more than 100 basis points due to tightening of transportation capacity. We expect this tightening to continue into 2018 and are working to offset to soften the impact to our margin.
SG&A expenses, including advertising, were $25.9 million or 13.2% of revenue. This compares to $26.4 million or 14.8% of revenue for the fourth quarter of 2016.
The decrease in SG&A was primarily attributable to forfeitures of stock-based compensation, partially offset by professional fees related to public company compliance. We were also able to increase our product display space, which as a result increase corrugate as slated deployment cost.
We generated adjusted EBITDA of $57.8 million or 29.5% of revenue, compared to adjusted EBITDA of $52.9 million or 29.6% of revenue for the fourth quarter of 2016. This 9.4% increase in adjusted EBITDA is a result of the higher revenue and lower SG&A as compared to the prior period.
Our effective tax rate for the fourth quarter, excluding the income tax benefit associated with tax reform with 32.2%. As noted in our filings, we had a one-time non-cash gain due to tax reform of $163.1 million, which includes $52 million related to the gain for remeasuring our tax receivable agreement liability, which is reported an operating income.
Adjusted EPS which excludes the net income allocated to the non-controlling interest and certain other one-time items with $0.17 per share compared to $0.15 for the fourth quarter of 2016. Our cash flow generation continues to be strong with operating cash flows for the quarter of $45.9 million, driven by our strong EBITDA guidance.
Our CapEx for the quarter was $10.8 million, mainly for property and equipment to support our strategic growth initiatives and productivity improvement. We continue to add cash and balance sheet with $135.7 million at year end, and our net cash improved by $113.8 million, to year-end balance of $858.1 million.
As a result, this drove our leverage ratio to 3.73 times, an improvement from 4.51 times at the end of 2016. In terms of our outlook for 2018, we continue to expect revenue to grow well above the Sweet Baked Goods category average.
We also expect the revenue contribution from our recent acquisition to be $60 million to $70 million for the year. Our adjusted EBITDA expectation is $220 million to $230 million, which includes our anticipated short-term adjusted EBITDA losses associated with our Breakfast acquisition.
Transformation of this business is well underway, and we will stem the losses as quickly as possible to win it to short-term detriment on adjusted EBITDA. We expect adjusted EPS of $0.65 to $0.70 a share or an increase of 3% to 11% from the adjusted EPS of $0.63 in 2017.
The impact of tax reform is expected to provide a benefit to adjusted EPS of $0.12, which reflects a 27% to 28% corporate tax rate for 2018, prior to the application of the non-controlling interest or an effective tax rate overall of 21%. In summary, we believe we are well positioned for another strong year in 2018 as we continue to build on our strategic initiatives.
Bill, Dean and I are now available for your questions.
Operator
At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bill Chappell of SunTrust Robinson Humphrey.
Please proceed with your question.
Bill Chappell
Thanks. Good afternoon.
Dean Metropoulos
Hey Bill. How are you Bill?
Bill Chappell
Good. Hey Dean, I guess, first question, so with Bill Toler changing his departure date from tomorrow to the end of March, does that imply that we’ll have a replacement in the next 30 days?
Dean Metropoulos
I think with on the final strokes with a couple candidates and we’re finalizing all our – the vetting with the Board. And Bill, as I said, there’s no reason to put a gun to our head, if it’s 20 days, 30 days, 35 days, we’re still hands on, including myself that it’s going to be seamless to everyone anyway, but we feel pretty confident that, that role will be filled in the very near future.
Bill Chappell
Okay. And then, Tom, maybe you can help on the gross margin in the quarter, just trying to understand, how much of that was – of the hit was freight?
And then maybe if you give me some idea of how you can offset that as we move into 2018, because it’s certainly as a issue affecting everyone.
Tom Peterson
Yes. So it was 120 basis points in the quarter, and we continue to work on various transportation moves to more dedicated lanes.
We are working with new carriers certainly, we’re turning over every rock within our bakery equipment, within the company to do both offsets from, specifically for transportation as well as other offsets in the bakeries and I’d say more on transportation that’s fair game than we have that in the past, we are pushing very hard to get that number back.
Dean Metropoulos
Yes. We can do customer pick-ups, we can do selected plant directs for certain customers.
There’s pooling opportunities working on it. It’s certainly a headwind, Bill, but we are working to mitigate it.
We have very talented leader in that function, that’s going to as always driven a lot of value here, we think that will continue. But yes, it’s certainly a headwind.
Bill Chappell
So it’s fair to say, you expect to be less than 120 basis points in headwind in 2018.
Bill Toler
Yes.
Bill Chappell
Okay. And then…
Bill Toler
Yes.
Bill Chappell
Okay. Perfect.
And then last one, I know you don’t give top line guidance but you can go faster or significantly faster than the Sweet Baked Goods category, what is your expectation for the category growth in 2018?
Bill Toler
We think it’s going to continue to perform about like it has, sort of that flattish to plus 1%, maybe it looks slightly below like it did for full year 2017, but it’s going to be in that 0% to 1% area and we’re going to be good bit above that, we believe.
Bill Chappell
Okay, great. Thanks so much.
Bill Toler
Thanks, Bill.
Dean Metropoulos
Thanks, Bill.
Operator
Our next question comes from Farha Aslam of Stephens Inc. Please proceed with your question.
Farha Aslam
Hi, good evening.
Bill Toler
Hi Farha.
Dean Metropoulos
Hi Farha.
Farha Aslam
First question is on your innovation. Could you tell us kind of the pace of innovation as we go into the first quarter, kind of what the follow-through is and the cadence that you anticipate throughout the year?
Bill Toler
Sure. Each year’s innovation really starts in the prior October when you go to NACS, the National Convenience Store convention, and you show your new products for the next year.
You begin shipping those new products sort of slowly, if you will, to convenience stores in January. They sort of feather out over the first three months or four months of the year.
And then in grocery, you generally get acceptance in March and April, and planogram changes in March and April. So you start to get the volume building late Q1, early Q2 there.
And Wal-Mart is right now in the midst of moving some or a few dates around, so their schedule is a bit fluid at this point. But that’s how a key store in grocery work, which, of course, two of our biggest challenge.
Farha Aslam
So when you’re thinking about Bakery Petites, do you expect momentum to accelerate as we go into 2018 compared to 2017, as you get more distribution into C-stores and grocery?
Bill Toler
Yes. I think that’s a fair statement.
Our innovation program, in aggregate, should be bigger in 2018 than it was in 2017, driven by Bakery Petites.
Farha Aslam
Okay. That’s very helpful.
And then as a follow-up for Dean, if you had certain payout that you would achieve at the time that Hostess went public, but given the new acquisition and the dilution you are taking, those hurdles seem really difficult to meet. Did you renegotiate those compensation agreements in light of the acquisition?
Dean Metropoulos
No. We do not.
I’m not sure I fully understood the point that you’re asking because I think there are couple of possible answers to it and if you could just repeat your question.
Bill Toler
So far, there is an adjustment feature.
Dean Metropoulos
In the current estimate.
Bill Toler
In the current agreement. There is an adjustment feature for acquisition that we would apply, the estimated EBITDA associated with that acquisition, with the impressive acquisition thatwe did it.
Dean Metropoulos
But to make it very clear, the word dilutive, it is a very temporary dilution because this company was losing like $5 million a month, just a few months – some time ago. I think we will transition that.
In fact, it’s been transition very, very quickly and we don’t see it as a big dilution.
Farha Aslam
How quickly do you think you can get to EBITDA positive in this year? Kind of the timing roughly of getting this business to like EBITDA positive?
Dean Metropoulos
We committed to be EBITDA positive around the end of the year. We hope and believe we’re pushing very hard to be faster than that.
But we – as we’ve said in our release, it should be towards the end of the year as we rebuild it. So we’re first of all, fixing the operations that we’re going to bring our products back in to the bakery, and then we’re going to work on rebuilding sales and revenue.
Bill Toler
And innovation coming out of that facility as well.
Dean Metropoulos
Yes. Late 2018 earlier.
Farha Aslam
Great. It’s very helpful.
Thank you very much.
Operator
Our next question comes from Brian Holland of Consumer Edge Research. Please proceed with your question.
Brian Holland
Thanks. Good evening, gentlemen.
Bill Toler
Hey Brian.
Brian Holland
So I guess, start with the top line outlook or maybe the lack of specifics there, can you just speak to maybe why you are more specific kind of the logic behind that? Is that just owing to either volatility in the category, volatility in your business with respect to innovation pipeline, et cetera?
Or such that you didn’t feel comfortable providing a more specific range? I know you spent most of 2017 talking in the terms that you laid out this evening, but just curious beyond that, maybe what the logic was in that be more specific?
Bill Toler
Yes, I mean, it certainly not due to any lack of confidence in our ability to deliver the numbers, right. Our internal plans are as aggressive as they’ve always been.
We seek growth in the business in a substantial way across main channels, products and innovation and core. We just sell it best for us to talk about our performance in relativity to the category because at the end of the day, if you’re winning share, you’re winning.
And so we’re expecting to build and grow share this year just we have in the last four years. And so we felt like it was a better way to communicate to talk about exceeding the category growth winning share with the consumer because ultimately that’s how to find how great brands and great products are performing.
Brian Holland
Okay. And then as we – and obviously, if there is not a specific range, it’s maybe a little bit more challenging to talk about cadence but obviously, you grew – shipments grew faster than consumption on the Bakery Petites roll out, if I’m not mistaken in the fourth quarter.
Can you just at least give us a sense without, I understand if you don’t want to quantify, but as we think about how the year rolls out. You don’t have much that you’re lapping from an innovation standpoint similar to Q4, but you had to sell in on Bakery Petites in Q1, I know Suzy Q’s are coming.
Can you help us understand, just as we start into the year there, maybe how this builds throughout the year and any sort of inflections that we should be aware of as we move through the year?
Bill Toler
Yes. Two parts to that, I think, Brian.
First of all, I think you understand in Q4 as we – at anytime you build a pipeline, getting products onto a shelf, you’re going to have a inventory build slightly above consumption, that’s really what that is as you build your own pipeline with your customers, that’s the reason for that. If you’re talking about the cadence this year versus last year, we would say, at this point, this is a more consistent year in terms of quarterly year-over-year.
Last year, we had Q1 and Q4 and sort of the best-performing quarters, Q2 and Q3, were a little less so. And so this year, as we look at across the quarters, it’s much more consistent, if you will, on a regular growth rate per quarter.
Brian Holland
Thanks. I’ll get out of here with this one on the acquired Aryzta Bakery and the assets there.
You’re kind of getting a blank slate here as revenues round off and they obviously had the well-documented labor issues. I guess, what I’d be interesting to hearing a little bit more about some specifics behind, clearly, it’s – we all understand what you were able to do coming out of bankruptcy with the Hostess facilities and automating those and then building this innovation pipeline.
With that as sort of background, can you give us a sense for lack of a better term, how you can sort of Hostess size this Chicago facility? If you can at all, maybe just how that’s going to look?
Bill Toler
Yes. It’s a great question, Brian.
I mean, first of all, let’s think about it in two areas. One is our relative share in sort of cakes and donuts and things that we do in the Hostess facilities, is about 20 share, our share in Breakfast is about 50.
So we see this as a strategic gap closing opportunity to get those shares much closer together. So we know to get cinnamon buns and honey buns and donuts and the other danish, these other great products out of that Chicago Bakery, really complements our Breakfast portfolio.
Now allows us to bring them in and to run them as our own products versus having go out to a co-packed and operate at much lower margin. We have a way of going in and really this opportunity in Chicago has had their way that Dean and the culture of this company and the culture of Dean has operated for 30 years, it’s really ideal for what we do.
We go in and find opportunity and we buy value and we create huge upside from being able to run the clients more efficiently, staff them differently, plan them differently, get rid of the SKUs that don’t make money, manage the assets in an aggressive way. All those things are going on and we’re seeing tracking week by week already improving in productivity per person in terms of waste reductions, in terms of getting the packaging out of there, getting all the planning done right.
So this is really a vintage sort of Hostess and Metropoulos kind of deal to be able to going and create value in this kind of facility. So yes, I like – we use your word as well, we Hostess size kind of everything we do and this one is kind of pride of who we are.
Brian Holland
Thanks, gentlemen.
Bill Toler
[Indiscernible]
Brian Holland
I’m still recovering from the parade.
Bill Toler
Yes, me too. That’s good.
Thanks, Brian.
Operator
Our next question comes from Ken Goldman of JP Morgan. Please proceed with your question.
Ken Goldman
That’s good timing. It’s my first call and I’m an eagle’s fan as well, so fly eagle, fly again.
I just wanted to follow-up on the commentary of the cadence of the quarters and thank you for giving some color there. It’s sounds as though the negative impact of Cloverhill will be more of a headwind early in the year than late.
As we think about what sort of offsetting, what’s going to create more consistent EPS cadence. Is it the timing of a net innovation and some of the comparisons that you have there?
I’m just trying to get a sense of really, what’s going to offset that Cloverhill impact, which will obviously affect you more right now than in December.
Tom Peterson
Yes, my comment was more around revenue consistency. Just make sure, just clarify.
So from a – our EPS will be up this year, one of the offsetting – of course, offsetting the risk is almost exactly the same amount in tax reform, we’ll get $0.12 of tax reform, right, if we – Aryzta right now is $0.12 to the negative. Our EBITDA will be lower in Q1 and Q2 than this year because of the risk and then as we turn it around to get it, there’s a lot of decrease and hopefully, we’ll perform better than our – than what we guided to on that…
Ken Goldman
Thank you. That’s a good helpful clarification.
And then I don’t think you’ve called this out, forgive me if I have. But have you given any kind of sense for how much the acquisition, obviously, it will be dilutive, you talked about this by the exact amount.
But how much of that dilution is in the gross margin line versus elsewhere in the P&L?
Tom Peterson
Mostly, it’s going to be in gross margin, because there won’t be a lot of SG&A added. We do have a few salespeople that we’ll add.
We’ll have a little bit of G&A as we absorb it into Hostess, but it’s really fit in, its mostly gross margin.
Dean Metropoulos
And I’ll – I want to highlight something that we’ve discussed in the past as well that any acquisition we make will be very accretive to cash flow, top line and certain EBITDA. It may not be accretive to the EBITDA percentage.
It’s very, very hard to match 29.7% with acquisitions. So everything will dilute to 29.7%, but we assure you, the payback and the cash flow contribution as well as the top line will be very accretive.
And including this business within a very short period of time, it maybe early next year that you’ll see the strong accretion, but it’s already underway.
Ken Goldman
Thank you, Dean.
Dean Metropoulos
Okay.
Operator
Our next question comes from Rob Dickerson of Deutsche Bank. Please proceed with your question.
Rob Dickerson
Thank you very much.
Bill Toler
Hi, Rob.
Rob Dickerson
Hey, how was going. The first question is just kind of on, I guess, implied base business EBITDA growth for 2018.
So if you’re guiding to 20 to 30, but it’s fit into 15 to 20 loss from the acquisition. So let’s just call it 240-ish to 245, it kind of get you to that mid-single digit range.
So just curious, is the – for thinking, kind of mid-single digit on the base business for EBITDA growth implied for 2018, is most of that just kind of coming through basically top line growth, such that operating margins could potentially still be flattish despite some headwind that remained on the gross margin side?
Bill Toler
Yes. I think those are reasonable assumptions there.
We haven’t said mid-single digit per se, but your math is certainly within the range of how we think about it as well, Rob.
Rob Dickerson
Okay. And then I guess, secondly, on the acquisition front, Dean, I know you said you remained steadfast looking acquisition valuations are high referenced, the annual letter in the weekend.
But I am curious, in terms of just kind of near-term capacity to integrate the current acquisition. Is it rational to think that over, let’s say, at least first half of 2018 or into kind of maybe even for the year, that activity on the acquisition side might remain light given the recent acquisition.
Dean Metropoulos
No, I think that’s fairly independent and that – good to expand on that. First of all, as regards to this acquisition, the Cloverhill acquisition, I think it’s not going to drag to the year, we’ll have systems people are all over just back to this business, and I think we will have it integrated within the next six months.
In terms of making another acquisition, to the extent we’re busy with this one, we’ll let that standalone. I will certainly step in and begin to work with the existing management on the culture and when we’re ready to integrate it and put all the resources to it, we’ll jump all over it.
So it’s going to be opportunistic. When the acquisition’s available, we’d be all over it.
And if it’s the right valuation and the right fit strategically and financially synergistically, we will not let it go. And as I said, if we need to wait one or two months to make sure the current one is fully integrated, we’ll do so and operate it independently.
And I would sort of step in and oversee it with the existing management and assess it. And then when we’re ready, we’ll integrate it.
Rob Dickerson
Okay, great. And then just follow-up on the acquisition side, I feel like originally, when you leaseback with Hostess to part of the conversation was around general snacking right at the time.
And sometimes we heard about different meats snack companies are there different opportunities in the broader snacking right. Here we saw the acquisition for In-Store Bakery and then obviously, the one you just announced.
So I just want to confirm that the scope of acquisitions still remain beyond baked snacks?
Dean Metropoulos
Yes. We think of ourselves as a snacking platform.
Obviously, right now, we are pretty much 100% in Sweet Baked Goods, we have a best business of course, as well. And we are looking across this whole range of snacking as we believe that’s what we best in leverage the model that we developed, through the warehouse model.
The strength we guide in C-store Grocery, Wal-Mart and other channels, dollars and such. We think the combination of many snack assets across a wide range will make a lot of sense for us.
Rob Dickerson
Okay. And last quick question, same line of thought, I think I heard you say in your prepared remarks that you think there were maybe in Q&A, that there’s a – let’s call it, larger food companies potentially might start to increasing the split off some brands or assets.
And I’m just curious I think we all probably have a perspective as to why that might happen, if it does happen. But just kind of looking for some clarity as to why you think that might happen.
Bill Toler
Yes, I don’t – you hear a lot of noise around that. They seem to be a lot of noise people actually do something.
There’s been a couple examples recently, obviously, Nestle with candy business, and Unilever with the spreads business. So there are things that are going on, perhaps, slightly accelerating, right?
We don’t have things specific in that arena right now, but things come up all the time and we certainly will take a look at.
Dean Metropoulos
And at the same time, I think you see a lot of activist activity that’s pushing for exactly that the type of strategic focus by the larger CPG companies. And I think that has a bearing on the boards of these companies as well.
Rob Dickerson
Okay. Makes complete sense, thank you very much.
Dean Metropoulos
Thank you.
Operator
Our next question comes from Michael Gallo of CL King. Please proceed with your question.
Michael Gallo
Hi, good morning. Good afternoon and congratulations on a accelerated growth as well as the acquisition.
My question is on the acquisition of the Aryzta asset. I was wondering how we should think about the pathway or sort of the bigger drivers of the reversal of EBITDA that you expect between sales growth, whether it’s redoing the distribution complex or just enhancing or improving the manufacturing capabilities there?
And whether we should think about the $60 million to $70 million as kind of a trough number? And where – what the potential of the assets is to grow that number over time?
Thanks.
Bill Toler
Yes. It’s a conservative number.
The facility a few years ago, a good bit more volume than this. One things we’ve got sort out, remember, it’s only 28 days ago, is sort of the complexity of the way the operation was run, profitably hurt their overall effectiveness and we certainly all want to – we too complicated too many skews, too many customers and not have a focus on the right kind of products.
They make great products in that facility, we’ve got several big customers, we want to put the Hostess Brands back in there, we want to innovate across their products and the Hostess products and that becomes a big part of what that facility does. So probably lease to a business certainly bigger than $60 million or $70 million, how long it takes to get there, it’s going to take a little while to do it.
But you got to go in and get it fixed first but as Dean has said and Tom has said, that activity is underway now and showing some early encouraging sign.
Dean Metropoulos
And by the way, I think the two brands are very valuable. They do target different channels and different customer segments.
Then we probably reach today, and so we think the brands have a lot of legs to them as well, as well as the versatility, the flexibility and the infrastructure of the facility. So we all believe this a very strategic acquisition, that it will prove itself well in terms of its accretive as in the future.
Michael Gallo
Thanks very much.
Bill Toler
Thanks, Mike.
Operator
Our next question comes from Matthew Grainger of Morgan Stanley. Please proceed with your question.
Matthew Grainger
Hi, everybody good afternoon. Thanks.
Bill Toler
How are you?
Matthew Grainger
Good. Thanks.
Just two questions. One curious how you think about the potential for reinvestment of tax savings?
You mentioned that the dilution from the acquisition, basically offsets the tax benefit. So we’re left with 3% to 11% or kind of mid to high single-digit range?
And as we think through that, I’m just not clear on whether that implies that you are going to be accelerating any reinvest back into the business or if we should think about your tax benefit is flowing more to the bottom line given the dynamics around the Aryzta acquisition.
Bill Toler
Yes. So this year, I think it will flow to the bottom line or offset with the risk that we are looking at it other acquisitions we’re looking at capital, with the immediate deductibility of the capital and looking at productivity projects.
But I think for the rest of this year, I’d consider it – we consider kind of span.
Matthew Grainger
Okay. And I guess, in terms of your outlook, your competitive outlook for the year and what’s envisioned in your guidance, have you left any contingency around competitors potentially reinvesting more heavily and trying to take market share in the context of a flattish category?
Tom Peterson
I think in a macro sense, we have. Competition has been aggressive and we’ve still been able to gain share over the last three or four years.
We certainly watch everything, everybody does and are ready to make moves that needed to fix the segment or repair a business or get to the customer area or a channel that needs to. But we certainly have in a macro sense, that flexibility work force.
Matthew Grainger
Okay. Thanks.
And then last question, just on the ISB business, you just brought in the leadership so this might be premature, but just curious how you’re thinking today about the opportunities, the limitations for that business and where you can take over the next year?
Bill Toler
Yes. I mean, the consumer has continues to tell us that they’re going to spend over $8 million a year in ISB.
We need to be there and be there in a bigger way. We’ve learned some things in the last 18 months or 20 months about the category in terms of its fragmentation and segment.
We brought in a guy from a very good ISB company, at a very good ISB segment, and he’s already brought us some ideas and some promotional schemes and some approaches to the category that we have not been doing. He’s also helping us broaden ourselves beyond the sub-segments we’re in now, and we think that we’re going to see better results there.
But as we have said frequently on these calls, it’s been a category that has been a bit of a challenge for us and that’s how we continue to make moves, to make ourselves better and to grow in that business. And we’re actually sitting in the room right now in front of a bunch of shareholders yesterday, and it’s pretty exciting, I’d say, it’s the most excited we’ve been about ISB in a while, so it’s good to see.
Dean Metropoulos
And incidentally, that’s a highly fragmented sector and we do believe there are couple of very nice prospects that may be coming up for sale in the coming year.
Matthew Grainger
Okay, okay we’ll keep an eye on that. Great thanks.
Thanks for the color.
Operator
Ladies and gentleman, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing comments.
Bill Toler
We would like to thank you all for being on the call with us today, we appreciate your support and interest in Hostess. And I’m sure we’ll be speaking with many of you soon.
Thank you.
Operator
This concludes today’s conference. You may disconnect your lines at this time.
Thank you for your participation.