May 9, 2018
Executives
Rachel Perkins - IR Dean Metropoulos - Chairman Andrew Callahan - President, CEO & Director Thomas Peterson - EVP & CFO
Analysts
William Chappell - SunTrust Robinson Humphrey Farha Aslam - Stephens Inc. David Palmer - RBC Capital Markets Brian Holland - Consumer Edge Research Michael Gallo - CL King & Associates Robert Dickerson - Deutsche Bank AG Pamela Kaufman - Morgan Stanley
Operator
Greetings, and welcome to the Hostess First Quarter 2018 Earnings Conference Call. [Operator Instructions].
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Ms.
Rachel Perkins. Thank you, ma'am, you may begin.
Rachel Perkins
Good afternoon, and welcome to Hostess Brands' First Quarter 2018 Earnings Conference Call. By now, everyone should have access to the earnings release for the period ended March 31, 2018 that went out this afternoon at approximately 4:05 p.m.
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 would refer to the 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 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 have included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
Now I will turn the call over to Hostess Brands' Executive Chairman, Dean Metropoulos.
Dean Metropoulos
Thank you, Rachel, and good afternoon, everyone. First, please let me welcome our new CEO, Andy Callahan.
Andy brings great new energy and new perspectives to our business while steering our sense of urgency and performance culture. I'm very confident that Andy will steward this company very well into the future.
In addition, our new Head of Operations, Stuart Daley, has already landed running and providing great leadership to our strong operational team that has delivered industry-leading performance. I'm very proud of this team for the performance they have, in fact, delivered.
I'm certain Hostess will be - continue to be a storied company well into the future. A little bit about the quarter.
We are pleased with our results which are very much in line with the annual guidance we have communicated. Our total revenues were up 13.1%, and excluding our Cloverhill acquisition, net revenues were up a solid 5.2%, well ahead through the category.
EBITDA was $47 million or 22.5% of net revenue, this included some losses from Cloverhill. Without such losses, the EBITDA was 26.8%.
As we have communicated, we have some headwind, right, in transportation, corrugated pricing and the abrupt discontinuance by Cloverhill the company required of our important Honey Buns, Danish and Cinnamon Roll business, which resulted in some lost sales and increased outsourcing cost. I think we announced that to you all late last summer.
These products are just coming back to our newly-acquired operation in Chicago, which we are rapidly transforming, and this impact, this negative impact will disappear in the second half. Three months ago, we announced the acquisition of an excellent business, Cloverhill in Chicago.
A business we've known well and was one of our co-packers and a business that I looked to acquire about five years ago. This acquisition included two well positioned brands, Big Texas and Cloverhill, and good operational capabilities that strongly augment our breakfast, vending and Food Service business.
In addition, included a very nice manufacturing operation outside of Chicago. While our Cloverhill business weighed on the margins for the quarter, we have already implemented a major turnaround of this challenged bakery.
As you know, we bought it for only $25 million as it was losing significant dollars, and it will soon be breaking even, be profitable by fall and wonderfully accretive into the future. Our cash flow continues to be strong with operating cash flow in the quarter of $38 million, which drove a cash balance at the end of the quarter of $100 million even after paying for the $25 million for the acquisition and cleaning up a $34 million liability.
As we focused on continued innovation, capitalizing on our newly-acquired company to expand our breakfast vending and Food Service business, we feel quite comfortable about our top line for 2018 and beyond. The timing of our innovation, our merchandising and promotional plans and building back the volume of Cloverhill business may not fully line up quarter-to-quarter.
The quarterly comparisons are not how we strategically think about building our business, and it should not be the basis of how the strength of our company is viewed. It's ultimately about market share, growth and cash flow.
And as we allayed your concerns in 2017 with a strong closeout of the year, very much in line with what we were projecting throughout the year, we again expect to have a strong year this year, well outperforming the category and very much within the EBITDA guidance we've given you. We feel highly confident about this.
I feel excellent about our year and our future, and I'm very proud that we have a highly accountable, resourceful and hungry culture, and we will aggressively pursue organic growth as well as smartly valued strategic acquisition. I have been somewhat surprised by the over 20x multiple being paid for acquisition.
Truly, I don't believe that will prove shareholder accretive. I know we will find and make good acquisitions, and I promise you they would be quickly accretive.
With that, I will turn it over for a few comments from Andy, and then to Tom for a more detailed financial review and then question. Thank you very much.
Andy?
Andrew Callahan
Great. Thanks, Dean, and thanks for the opportunity to lead this really great company.
I am thrilled to be speaking with everyone on my first earnings call. I'm on my third day with the company, so I'm going to focus my comments on what attracted me to host this and why I believe we have tremendous potential this year and long into the future.
First off, I would like to congratulate Bill Toler for his tremendous achievement and success of bringing back the Hostess Brands and company. I know he will be missed by the team and will continue to be a trusted resource for me.
And as Bill has generously offered, I know he's only a phone call away. Congratulations, Bill.
So really, why did I - real quickly, why did I join Hostess? Really, three reasons.
The team, the brand and the growth potential this company has. The team has accomplished so much in such a short period of time, as everybody has witnessed.
And as Dean mentioned, the team is hungry, they're action-oriented and they're talented. Unlocking the potential of the business starts with unlocking the potential of the team, and I'm honored and humbled to be leading such a talented group.
Additionally, they share a passion for the Hostess Brands on par with our consumers and customers, and that's really saying something, that Hostess Brands is something special. The emotional connection of our brand with our consumers is strong and is a great place and platform to grow from.
And finally, the potential to grow and create value has multiple paths, and we have many assets to unlock this growth. And I'm going to be working really closely with the team to sharpen and realize this growth and this value potential.
So Hostess is just getting started, and I'm really honored to be part of it. So that's enough from me.
I'm going to turn it over to Tom who's going to bring you through the results, and that's why you really called.
Thomas Peterson
Thanks, Andy. I will now review our first quarter financial performance and other data from today's release.
Net revenue for the quarter was $208.7 million, a 13.1% or $24.2 million increase from the first quarter of 2017's revenue of $184.5 million. This strong top line results were driven by the acquisition of our Cloverhill bakery, which contributed $14.5 million of net revenue growth, representing the results for two months of the quarter.
We also had strong net revenue, excluding Chicago, which increased 5.2% with increased sales in the Sweet Baked Goods segment from the continued momentum of our 2017 product innovations. Some additional key highlights from the quarter include Hostess point-of-sale at retail increased 6.3% for the 12-week period ended March 24, and we also continue to see strength in our top 7 brands where point-of-sale was up 8.5%.
These brands represent 69% of the company's net revenue. The Hostess Brands market share for the 12-week period was 17.9%, up 124 basis points.
The 17.9% 12-week share is a record for the company since relaunch. We continue to drive share growth for the Hostess Brands and our most important channels.
C-store share was up 106 basis points; food, up 103; Walmart, up 275; and dollar increased 61 basis points. New product innovation from 2017 continue to build momentum, adding $12 million in net revenue for the quarter.
We generated $71.2 million of gross profit for the first quarter of 2018. Gross margin was 34.1% of net revenue.
As we expected, we incurred temporary margin declines from the acquisition of our Cloverhill bakery, which produced negative gross profit for the quarter of $4.3 million and decreased margin by 478 basis points. As we continue to transform the Chicago Bakery, we expect the negative margin dilution will soften, and we can - and we expect Chicago to be EBITDA positive by year-end or sooner.
We also expect to see cost savings associated with repatriating the Hostess branded items that we were forced to immediately outsource in the summer of 2017. As we have noted on previous calls, transportation costs continue to be elevated and decreased margin by 150 basis points.
We also paid our hour workers a one-time bonus related to tax reform, which reduced gross margin by 47 bps. SG&A expenses, including amortizing, were $30.8 million or 14.8% of revenue.
This compares to $28.6 million or 15.5% of revenue for the first quarter of 2017. The increase in SG&A dollars was primarily attributable to an increase in non-cash share-based compensation of $1.1 million due to the lapping of expense for awards issued in March 2017.
We also continued our increase in displays deployment in support of our revenue growth. We generated adjusted EBITDA of $47 million or 22.5% of revenue compared to adjusted EBITDA of $54.5 million or 29.5% of revenue.
The decrease in adjusted EBITDA is attributed to the negative gross profit of the Chicago bakery, along with heightened transportation costs. Our effective tax rate, including the impact of the non-controlling interest, was 18.2%.
In the first quarter of 2018, we entered into an agreement to buy out Apollo's current and future tax savings under the tax receivable agreement. We recognized a gain of $12.4 million as a part of this transaction.
And excluding this non-taxable gain, our effective tax rate was 21.3%, in line with our expectations. Adjusted EPS, which excludes the net income allocated to the non-controlling interest, along with certain other onetime items, was $0.14 per share compared to $0.15 for the first quarter of 2017.
Our cash flow generation continues to be strong with operating cash flows for the quarter of $38.3 million. Our CapEx for the quarter was $9.2 million, mainly for property and equipment to support our new K client installed in Columbus, Georgia.
We had cash and cash equivalents of $100.5 million and net debt of $890 million. As of March 31, our leverage ratio was 4x.
In terms of our outlook for 2018, we are reaffirming our previously issued guidance. We expect revenue to grow well above the Sweet Baked Goods category average for the year.
We also continue to expect the revenue contributions from the Cloverhill bakery to be $60 million to $70 million for the year. Our adjusted EBITDA expectation is $220 million to $230 million, which includes the short-term adjusted EBITDA losses associated with the bakery.
We expect adjusted EPS of $0.65 to $0.70, or an increase of 3% to 11% from the adjusted EPS of $0.63 in 2017. Our expected tax rate for 2018 is approximately 21%, given the effect of the non-controlling interest, a partnership for income tax purposes.
In summary, we believe we are well positioned for another solid year in 2018. Now Dean, Andy and I are available for your questions.
Operator
[Operator Instructions]. Our first question comes from Bill Chappell with SunTrust.
William Chappell
Just going back to Cloverhill, just want to make sure I understand, kind of you hold it for a couple of months. Is there any - I understand you reiterated the range, but did you see less kind of initial sales, you've seen customers kind of drop off earlier, and then as we picked back up on the back-end.
And then on the same side, are you seeing - it sounds like you're seeing the turnaround on the cost side happening faster, so is there a chance that maybe it doesn't lose as much as you were expecting this year? I mean any change to kind of your outlook both from top and bottom line after owning it for a couple of months?
Dean Metropoulos
I'll take that, Tom and Andy. Bill, we pretty much expected what we are getting.
Number one, the company was losing significant dollars. We've cut those losses in half by just rationalizing SKUs, better scheduling, and so forth.
And by the way, within a week, we'd be breaking even. So that's the plan we had expected.
That's what we've done also when we first started out with Hostess. There were no major surprises.
Part of the difficulty, we want to fully automate the plants and bring it to where Hostess brands are and delivery times for a lot of this equipment takes place through August, September. We do expect this to be quite profitable in the last quarter.
We expected to be breakeven certainly within the next few weeks and through the summer. No major significant losses coming the last quarter to be accretive.
It's a question of timing on a lot of the automation and the upgrading of the equipment. And that was a little longer than, frankly, we anticipated.
And that's mostly because of delivery times. But I think this acquisition will be wonderfully accretive for 2019.
And I think we'll really round out a strong - a good year for us this year. Again, it's a little early to talk outside of the range of $220 million, but we feel highly confident in that.
On the other hand, this second quarter, there's some merchandising planning that we're doing with a major retailer that might not - part of our innovation launches might be delayed somewhat, so we may have a reasonably flat quarter. But we again just as last year, we feel highly confident for the year.
William Chappell
Got it. And then in terms of the momentum of the core business this quarter, it seems like that's largely driven by some of the new product launches, the restage of Suzy Q, is the category - are you seeing - I mean, the category does seem to have improved, do you feel like that's sustainable as we look over the next few months?
Or it's kind of fits and starts to the overall category growth?
Dean Metropoulos
So Tom, you can talk about that, but we do see a reasonable 1% type growth for the category for the year. And as we said, we will do well above that and gain some market share.
Thomas Peterson
Yes. The 0% to 1% is where we think the category will be.
In the first quarter, it was down 1%. This last four-week period, it was up 0.6%.
So we saw a little better, better four weeks and the prior four weeks, the four-week period ending March 24 was up. So we're getting a little more confidence that we're seeing some better numbers from the quarter whereas last year, it was down.
William Chappell
Okay. And then last for me, in terms of incremental freight costs for this year, is that a headwind or you - and would we expect any pricing to offset that?
Dean Metropoulos
Well, we have not assumed price increases in our model. And again, we feel very confident about achieving our guidance, but we have not seen price increases.
And we are looking at some distribution considerations, logistics considerations that might streamline our logistics to cut back some of that, but it's a little early to talk about. So we are anticipating facing those headwinds.
But we will do overlapping by next September, as you know, Bill.
Operator
Our next question comes from Farha Aslam with Stephens.
Farha Aslam
Could we talk about Bakery Petites. What is the ACV on that product now?
And how is that rolling out to the rest of the retail market, the performance of Bakery Petites?
Dean Metropoulos
Tom?
Thomas Peterson
Yes. Petites are fully - I don't have the ACV in grocery as it's going launch.
Petites is fully distributed in Walmart and has been since September. It is rolling out the grocery, as we speak, it's been coming out over the last few months.
And the launch is going - well received in some major retailers, as Kroger's going to reset over the next few short weeks, and you'll see it at Kroger, and it's rolling out well.
Farha Aslam
Okay. And then just the timing of innovation for this year, and the key initiatives that you have?
Thomas Peterson
Sure. We have to finish out the rollout of Petites.
We have large doughnuts, which we have both the large copacked doughnuts that we brought out, the jumbo doughnuts that we were bringing out at the beginning of the year. We also have the capability to make internal doughnuts, and we'll probably transition some to that with the new Cloverhill bakery.
They made large doughnuts. We have some - we also have loaf cakes and a couple other C-store items, and then we have some things in the fall we're working on that we haven't talked about yet.
Farha Aslam
And then can we just circle back on Cloverhill. I think at the time of the acquisition you were looking for a loss of about $15 million to $20 million in EBITDA.
When you think about this year, how - what kind of loss will you see?
Dean Metropoulos
Tom, you may go ahead with that. Although, I'm probably going to be more optimistic than Tom, But go ahead, Tom.
Thomas Peterson
Yes, we did say $15 million to $20 million. We - as Dean said, we are ahead of schedule on breaking even.
We're holding out and making sure we get through some operational challenges that we have in making sure that our SKU rationalization holds, we have some price increases over the summer to get at and we also have the automation to do. But I think we'll be ahead.
We'll definitely beat the $15 million to $20 million. We had a few - we want to make sure we get through those customer issues over the summer as we integrate them both into SAP.
We do - we did a vending channel price increase. We've done a significant SKU rationalization.
Those all are going well so far, but if we need to get through a few months of that to make sure that holds.
Farha Aslam
Just on where the sale - what capacity utilization is at Cloverhill? And at full capacity, what sales do you expect?
Dean Metropoulos
Go ahead, Tom, and I'll jump in as well.
Thomas Peterson
Yes. So we are expecting $60 million to $70 million this year, which includes some estimates for SKU rationalization and certain discontinuation of products.
It can probably do in the range of $150 million, maybe a little higher than that. As we - one of the things we want to do in it is move up our price point, get some more Hostess branded and more branded product sales, which gets our revenue per pound up, so we can get more revenue out of the same capacity.
Operator
Our next question comes from David Palmer with RBC Capital Markets.
David Palmer
With regard to gross margin transfer '18, excluding the gross - excluding the Chicago bakery and including, what are you thinking there? How will this - the gross margins trend through the year?
Thomas Peterson
So we are on 34.1%. If you take out the Chicago or Cloverhill cost, if you take out the extra copacking and the tax reform, we would have been right at 40%.
So you could - so you can see that's just slightly below where we were last quarter. So as we - as Chicago dissipates through the year, we'll get up to that, more of that kind of a number over the quarters.
David Palmer
Got it. And with regard to Petites, it looks like you could attribute 2% of mix or a two point lift directly from that, but that doesn't explain your acceleration fully, could you speak to what seems to be a fairly broad-based strength in your results lately, if there's something going on in the category or the way that retailers are treating your product that's giving you a lift lately, and do you think that will continue?
Thomas Peterson
Yes, some of it is timing, with the cadence of the quarters, we did have a very good quarter. POS for the whole quarter was up 6.3%, and our revenue, organic revenue, was up 5.2%.
So some of that's timing. We did have a good quarter.
We are seeing broad-based. And we've talked about it, we have either record or very close to record share in our four man categories, that's food, that's mass, that is dollar and that is C-store.
Those four channels are going - have been going well and we've seen some broad-based support for our business.
David Palmer
And with regard to Petites, was there launch costs associated with that, that will ease over time?
Thomas Peterson
Sorry, could you repeat that, David?
David Palmer
Sure. With Petites, was that a margin issue in the quarter?
In other words, were there launch costs associated with that, that should ease through the year? Or do you continue to accept some cost for the rollout as you continue to gain more ACV?
Thomas Peterson
Yes, we do expect some - it should be in the future, when it's a long-term item, it will be margin accretive to multipack, but we are putting a lot of the product on shippers and pallets. We're doing a lot of initial coupon - trial, driving an awareness through couponing, which goes down in that revenue, and we're also putting it on - we have it on rollback of Walmart.
Operator
Our next question comes from Brian Holland with Consumer Edge Research.
Brian Holland
Just to drill down on the margin component here. So everybody's model is different.
I had more delusion on the gross profit line from the Chicago Bakery than what was actually reported. You - I don't - I didn't see anything about the $15 million to $20 million reiterated, it sounds like you're increasingly confident, that's not - that's going to be better than that, that level of dilution.
But you did hold the EBITDA number. I'm just curious if you could maybe parse out a couple of things.
So one, does the EBITDA stay the same because you're going to do better on the Chicago Bakery than you thought but maybe incremental concerns, whether it's freight or what-have-you on the core business? And then you called out higher co-packing costs in Q1.
Forgive me if you expanded on this, and I didn't catch it, but is that tied at all to transitional ramping of the bakery, if you could just kind of parse some of those things out, that would be great.
Dean Metropoulos
Tom?
Thomas Peterson
Yes. At $220 million to $230 million overall, we are gaining confidence on the Cloverhill acquisition that will do better than the $15 million to $20 million.
But we are at $220 million to $230 million overall, that's we're going to stay with guidance and we're going to - and that's where the company's comfortable with. From a copacking standpoint, remember, last summer when we lost our ability to make Hostess branded Honey Buns, danishes and cinnamon rolls, we had to go find other manufacturers of those items.
Those other manufacturers are more expensive, and so we are now lapping that as we're in Q4, we are back in business, which was the important thing as we got our products on the shelf. And now in Q1, we're still - we were still manufacturing all those items at the co-manufacturer.
We are transitioning some of those items over quicker than others as the bakery can support it. We're transitioning those items, and then we'll be probably by the end of the summer, we'll have everything packed in the Cloverhill bakery.
Brian Holland
Okay. And so just as we think about the balance of the year, is there anything that weighed on the gross margin in Q1 that you expect to dissipate or kind of, I guess, just generally improve over the course of the year?
I assume you think freight will remain a headwind of similar magnitude. So I'm just worried - wondering - I mean, I guess, the bonuses that you paid out to the employees is probably just a Q1 thing.
So maybe if there's - if you could just help us understand as you get over the balance of the year, maybe the puts and takes on gross margin that you kind of started on earlier?
Thomas Peterson
Sure. Yes, you take out the Chicago 478, you take out co-packing.
As we move it back in, that was about 60-ish basis points, then you take out tax reform, 47. Those are all transitory or will dissipate through the year.
The tax reform is a single quarter. The Chicago Bakery employees that will remain with us are going to participate in the same bonus plan.
This quarter, smaller number but they are going to participate this quarter with the rest of the business. And the rest of it, so you take that away, and we were at the 40 margin.
We see that really being kind of where the business is right now, trans was 150-odd basis points, it's here to stay. We do have the last though it's not worse come Q3, but we continue to believe it stays there.
Dean did articulate we're working on some transportation optimization ideas that may change, and we may pull some levers on that, they're not - we're working on those, they're a little too early to report, and they take a little time to effect. But for now, it's to stay.
Brian Holland
Okay. And then last one for Andy, if it's not unfair to ask, I think folks who, at the time of your hire, looking back at your background at Tyson, and kind of some of the brands that you were leading saw nice improvement during your tenure.
I think some of that certainly attributable to what was a strong value add innovation pipeline, which I think has certainly been one of the compelling drivers of growth here at Hostess. So I'm just wondering, when you kind of look out at that white space and maybe just your commentary about how attractive that was to you, how untapped you think that potential still exists today, maybe just any general thoughts about leveraging what you were able to do at Tyson at a high level over here with this brand?
Andrew Callahan
I appreciate that. Well, it's one of the major components.
As I said, there's three reasons I joined, obviously the team. You can't unlock the potential of the business without unlocking the potential of the team, and this is really a passionate group.
So I will say that in 2.5 days I've been nothing but more encouraged by the team and the enthusiasm they have for the brand. But no, I think the Hostess brand is just beginning.
I mean, you saw the resiliency of it, it's a remarkable story of coming back. And as I learned a little bit more about the emotion connection that consumers have with this brand is extremely high.
So I'm very enthusiastic about it. I'm passionate about being able to grow and create value through growth, and I think reimagining brands in a way that's contemporary with consumers, provocative and looking for ways to bring really new ideas to them when you have a foundation of that brand equity really creates growth potential.
So I'm very optimistic about it. We're just getting started in that journey and getting - I remember joining Jimmy Dean [ph] 10 years ago, and I felt the same way as I do today, and that's been a great growth story.
So I am highly optimistic and enthusiastic about it. A lot of work to be done there, but very optimistic that we're going to realize it.
Operator
Our next question comes from Michael Gallo with CL King.
Michael Gallo
I wanted to just to dig in a little bit further on Cloverhill. Obviously, I only had a partial quarter.
As you look to the second quarter, I know you mentioned you cut the losses in half. Would you expect the losses, given you'll have a full month more to be sequentially better?
And I guess, from the standpoint of kind of what you still have left to do and the sequencing of that, what's kind of the biggest item, is it just the automation or getting the equipment in and/or is it getting the products, the Hostess products transitioned back into the facility?
Dean Metropoulos
All of the above. Number one, I do think that the losses are pretty close to being behind us and within just a few weeks, 2, 3, 4 weeks at most, we should be close to breaking even.
We're trying to rebuild a lot of the equipment, a lot of the equipment was somewhat in disrepair. We're upgrading a lot of that, a lot of the automation.
There's hundreds of employees that - I mean, Hostess has 1,200, 1,300 employees in total. This company had 1,100 or 1,000 when we acquired it, it's down significantly.
So there's a big opportunity to automate. And as I said, in my opening remarks, automation equipment has taken us months.
But we expect deliveries in August, September installation and this last quarter should be beneficiary. So all of that is coming together.
I think again, we, as Tom suggested, we have to rationalize a lot of SKUs that were just not profitable. We've taken some price - or and are taking some price increases.
It would be interesting to see how that process as we reduce SKUs to improve the efficiencies and we take some price increases to reflect the true cost because costs were not very well understood in the previous company. It will be interesting to see how we transition.
The company does make a very good quality product. We knew that from the Hostess co-packed product.
So we do think the business deserves proper pricing with the retailers. So in general, I think we're pretty much on the mark with what we expected.
As I said, we knew the business pretty well.
Michael Gallo
Helpful context, Dean. And then just a follow-up question on In-Store Bakery.
Didn't hear you talk too much about that, how should we think about the progress in In-Store Bakery and what do you expect this year? And perhaps, Andrew has some thoughts there as well coming from his experience in the grocery segment?
Dean Metropoulos
Well, I'll answer a little bit. We brought a new CEO of that group about 1.5 months, two months ago.
He's landed running, I like him very much and I think the team thinks very well of him. He's been launching - relaunching and being aggressive with the product line.
One of the things we learned with the sites these days. You got to be a fairly meaningful player and you got to be able to offer a lot more varieties and seasonals.
This is - we bought a small business, probably to get our toe in the water, a fairly complicated space. And it's proven to be a little complicated.
On the other hand, it will grow reasonably, again, better than the category. We'll continue to expand its geography quite a bit.
We've got some new business that is been signed on. I do think that business is going to grow 4%, 5%, 6%.
Frankly, I had hoped that it would do a lot more than that. But as I said, we were surprised by the complexity of the sub.
We also thought that some of the Hostess products, perhaps, retailored and redeveloped to be more artisan. We have a bigger appeal to some of the stores.
The category is fairly different. We do continue to look if there's an acquisition that's meaningful, it gives us a much broader product profile and a much better capability to offer seasonal products.
We will certainly look at it pretty hard. It's a highly fragmented sector, we are looking at some, but I think we want to make something more meaningful and more than - but we think this little business will do well.
We've got the EBITDA since we bought it, and I think we'll continue to do okay. But not as meaningful as we expected because of some of the issues I mentioned.
But our new CEO is very good, by the way.
Operator
Our next question comes from Rob Dickerson with Deutsche Bank.
Robert Dickerson
So I guess, just a couple of questions, kind of follow-ups to everybody's prior questions, which are fairly margin, let's call it, more base business driven. So I guess, first, kind of what I've heard so far is there is some margin pressure on the base business, it seems like, I mean, I guess, I mean frankly by saying that, you're comfortable now with the $220 million to $230 million for the year in EBITDA, even though it seems like the Chicago Bakery drive might be a little bit less that like there is probably a little bit more incremental base business drag, kind of just off of maybe just a little bit more margin pressure, that's number one.
And then number two is just kind of general thoughts around kind of top line growth relative to profitability. I mean, we hear from a lot of CPG companies these days that it's all about, like you're saying, too, rationalizing SKUs, you're improving your profitability, you want to have more pricing power, you don't want to be on promo too much.
What I'm kind of hearing from you, though, is that there's also a little there. There might be a little bit more promotional activity Walmart rollback, et cetera that's maybe helping you drive some volume, but maybe kind of you're also foregoing maybe some margins.
So I'm just - I kind of really want to focus on that margin piece. Top line's great, we all see it, but are you giving some of that back on the margin side such that your EBITDA base business EBITDA growth just can't grow at the same rate as your revenues can?
Thomas Peterson
Rob. Yes, we are putting up some good growth and there are other food companies that it's all about the margins and the SKU rationalization and getting that profitability.
But we continue to invest in innovation, we continue to put good what we think are strong merchandising tools to grow our market share, to grow the long-term value of the company, get new products, invest in new platforms like Bakery Petites, go into large doughnuts, invest in a bakery that was losing money, all in the long-term growth model of putting a good growth. Yet, the cadence of the quarters aren't going to come in all smooth, we expect Q2 probably be the lowest growth quarter of the year like Dean mentioned earlier.
But we continue to focus on balancing long-term growth, which we want, and we want to innovate, and we want to get in the white space. Some of those are lower margin than what kind of the core base business was and is and on the back end of that, we'll get the cost structure.
Dean Metropoulos
Yes. And just a comment.
Innovation is always going to be challenging to maintaining the same percent of margins only because we make a million Twinkies an hour, that's a little bit of an exaggeration, it's a highly automated product, and the cupcakes and so forth. As you get into more unique different type of products, sometimes the same margin potential is and the efficiency is not quite the same.
But as I've always said, we're focused on achieving growth and balanced EBITDA percentage, it's all about cash flow and EBITDA dollars, but the percentage could be somewhat volatile based on some of the innovation or some of the mix of our products.
Operator
[Operator Instructions]. Our next question comes from Pamela Kaufman with Morgan Stanley.
Pamela Kaufman
I'm curious about what contributed to your strong market share gains at Walmart in the quarter? Was that mainly driven by some of the promotional activity on Bakery Petites?
Or have they changed their approach in managing the category for your products, in particular, as they went through some of the reviews that you mentioned last quarter? And then just on that point, I guess, to what extent is some of the gross margin pressure that you're seeing in the core business related to this channel mix shift or your larger format stores?
Dean Metropoulos
Well, number one with Walmart and certainly, Walmart, the particular support to help the volume and the market share growth there. They're going to be adjusting some of the merchandising in this quarter so you'll see probably a slight fall back on that market share.
So it does move up and down based on the promotional programs that we partner with all our retailers in this particular case, the ones you mention, it has had that type of impact and will have an impact on this coming quarter. In terms of the margin, our costs are superefficient.
So it is a mix issue. The petite have a slightly lower margin than say, the Twinkie, the peanut butter products have slightly low margin than a cupcake or the Twinkie.
In the single-serve, that also impacts the margin, the mix of margin also is affected by the single serve versus the multipack. So it is somewhat of complicated but that's what we do, that's what we are in business to do, drive models that are not singular and offer a wider range of opportunities.
At the same time, that's what averages out your risk profile, and we do balance promotional activity. And as I said, in the case of Walmart, the one you mentioned, yes, it was very supportive.
In the second quarter would be somewhat less so because of some of the timing and so on.
Operator
At this time, I would like to turn the call back over to management for closing comments.
Dean Metropoulos
So we want to thank everybody for their interest. Again, I'm particularly proud.
This is a very, very agile, very entrepreneurial company. We will have a wonderful future, both in remaining very focused on efficiencies and being one of the best efficient companies in the industry as well as driving innovation.
And I assure you, we'll stay focused on making the right acquisitions and being good stewards of our shareholder investment. So with that, we thank you all very much for our and your interest and our interest in communicating to you.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time, and thank you for your participation.
Dean Metropoulos
Thank you.