Hostess Brands Inc (TWNK) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Hostess Brands' Fourth Quarter 2017 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, Katie Turner. Please go ahead.

Thank you. Good afternoon, and welcome to the 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 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 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 a 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, getting us back 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 quoted 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. The company now includes Hostess branded bread products and frozen retail in Sweet Baked Goods. Previously, these were included in other with In-Store bakery. In-Store Bakery is now recorded separately.

And now, I'd like to turn the call over to Hostess' CEO, 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 with key business highlights. And Dean Metropoulos, our Executive Chairman, will review our recent acquisition that enables us an expansion of our breakfast strategy. And finally, Tom Peterson, our CFO will have greater detail on our financial results and guidance for fiscal 2018. Then we'll open up the call up for questions.

We are very pleased with our strong finish to 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 generated solid sequential increases from Q3 to Q4 as we grew across multiple areas of our business.

Key highlights for the quarter includes net revenue increased 9.7% to $196.2 million, representing the company's best organic quarterly growth rate for the year. Our current year new product innovation continued 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 increase of 6.5% versus last year and accelerated from 5.8% net revenue growth in Q3. Overall point-of-sale as measured by Nielsen increased 4.3%. Our top 7 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. And we continue to have a 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 white space 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 you] throughout the year, when we entered 2017, we anticipated Q1 would get the year started quickly, we will show less growth in Q2 and Q3 and we'll finish with a strong finish in Q4. We are very pleased with our team's execution in achieving these results.

Overall, we have a flat SBG Sweet Baked Goods category, but enjoyed favorable mass, C-store and 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 this strategically important channel, which we expect to be strengthened 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, rounding out all 4 of our major channels. Each one delivering our highest share since relaunch in those channels, a significant accomplishment and will continue to fuel our growth.

Hostess has been leading the way with new innovative products. While still very early, we're pleased to 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 are bringing in incremental Hostess consumers which, in turn, bringing in new households into the category. We believe petites are driving incremental distribution food, mass and C-store for 2018.

White space opportunities continue to represent tremendous potential for our brands. Throughout the year, we consistently gained 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 that 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, gaining new distribution where Hostess brings key capabilities to this area of the 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?

Thank you, Bill, and thank you for extending your stay until such time as we complete our CEO search and finalize a candidate. We remain very focused on finalizing and selecting the final CEO candidate who we will lead the company in the next phase of its growth. But as all of you know, as Executive Vice 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 in -- with the management of 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 in purchasing, Rob Molina in pricing and trade, Matt Kunz with logistics, Matt Hall with operational H&R, Todd Crook who ensures these plants are humming carefully. There's an ownership team here that I assure you will not allow a day or a beat to be skipped during the transition or 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 points that Bill made. Number one, we ended up very strong with the 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 at 29.7% by any measure a remarkable number, this great performance on both of those statistics. And end up the year with $135.7 million cash flow, lowering our leverage ratio down to 3.73x. 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 will have an excellent year next year, very strong and well above the category. So as we look at the past 4-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 4, 5 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 3 or 4 weeks, we see this has been a great contributor both to the top line as well as the cash flow for the many years to come. As part of this business, and with 2 great brands, Big Texas and Cloverhill Brands, these are well developed and they target certain segments, consumer and channel 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 in the business that we've acquired has a lot of flexibility and versatility for the breakfast program, and we feel that will serve the business very, very well for the years to come. So as we bring in the in-house production that was being copacked 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 for 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 Buffet, 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, activists are pushing them to focus on core businesses, there would 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 of the company. Thank you.

Now with that, Tom, please give us the details of the financials.

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 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 as of 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, a 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 increase 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 through offsets 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, increased corrugate display 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, was 32.2%, 32.2%. As noted in our filings, we had a one-time noncash gain due to tax reform of $153.1 million, which includes $52 million related to the gain from remeasuring our tax receivables agreement liability, which is reported in operating income. Adjusted EPS, which excludes the net income allocated to the noncontrolling interest and certain other onetime items was $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 results. 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 to the balance sheet with $135.7 million at year-end, and our net cash improved by $113.8 million to a year-end balance of $858.1 million. As a result, this drove our leverage ratio to 3.73x, an improvement from 4.51x at the end of 2016.

In terms of our outlook for '18, 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 limit the 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 impacts 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 noncontrolling 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. Both Dean and I are now available for your questions.

(Operator Instructions) Our first question comes from Bill Chappell of SunTrust Robinson Humphrey.

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?

I think we're down in the final strokes with a couple of 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 so hands on, including myself that it's going to be seamless to everyone anyway, but we feel pretty confident that, that role would be filled in the very near future.

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 can give me some idea of how you can offset that as we move into 2018 because it certainly is an issue affecting everyone.

Yes. So it was 120 basis points in the quarter, and we continue to work on various transportation moves in order to get some more dedicated lanes. We are working with new carriers certainly. We're turning over every rock within our bakery and within the company to do both offsets from, specifically from transportation as well as other offsets in the bakery. And I'd say more on transportation is fair game than we have done in the past. We are pushing very hard to get that number back.

Yes. We can do customer pick-ups. We can do selective plant directs for certain customers. There's pooling opportunities we're working on. It's certainly a headwind, Bill, but we are working to mitigate it. We got a very talented leader in a function that's going to -- it's always driven a lot of value here, and we think that will continue. But yes, it's certainly a headwind.

So it's fair to say, you expect to be less than 120 basis points in headwind in '18.

Yes.

Okay. Perfect. And then last one, I know you don't give top line guidance but you are going to grow faster or significantly faster than the Sweet Baked Goods category. What is your expectation for the category growth in '18?

We think it's going to continue to perform about like it has, sort of that flattish to plus 1%, maybe it slips slightly below like it did for full year '17, but it's going to be in that 0% to 1% area, and we're going to be good bit above that, we believe.

Our next question comes from Farha Aslam of Stephens Inc.

First question is on your innovations. Could you tell us kind of the pace of innovations as you go into the first quarter, kind of what the follow-through is and the cadence that you anticipate throughout the year?

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. And they sort of feather out over the first 3 or 4 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 review dates around, so their schedule is a bit fluid at this point. But that's how a C-store and grocery work which, of course, are 2 of our biggest channels.

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?

Yes. I think that's a fair statement. Our innovation program, in aggregate, should be bigger in '18 than it was in '17, driven by Bakery Petites.

Okay. That's very helpful. And then as a follow-up for Dean, you had certain payouts that you would achieve at the time that Hostess went public, but given the new acquisition and the dilution you're taking, those hurdles seem really difficult to meet. Did you renegotiate those compensation agreements in light of the acquisition?

No. We do not. And again, I'm not sure I fully understood the point that you were asking because I think there are a couple of possible answers to it, and if you could just repeat your question.

So Farha, there is an adjustment feature.

In the current.

In the current agreement. There is an adjustment feature for acquisitions that we would apply, the estimated EBITDA associated with that acquisition, with the rest of the acquisition we did in...

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 transitioned very, very quickly, and we don't see it as a big dilution.

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?

We committed to being EBITDA positive around the end of the year. We hope and believe and we're pushing very hard for it to be faster than that. But we -- as we've said in our release is it should be towards the end of the year as we rebuild it. So we're first of all fixing the operations, then we're going to bring our products back in to the bakery, and then we're going to work on rebuilding sales and revenue.

And innovation coming out of that facility as well

Yes. Late '18, early '19.

Our next question comes from Brian Holland of Consumer Edge Research.

So I guess if we can start with the top line outlook or maybe the lack of specifics there, can you just speak to maybe why you weren't 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 not being more specific?

Yes, I mean, it's 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 see growth in the business in a substantial way across many channels, products and innovation and core. We just felt it best for us to talk about our performance and 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 as we had in the last 4 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 is how great brands and great products are defined.

Okay. And then as we -- and obviously, if there's 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 rollout, 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 the sell-in on Bakery Petites in Q1. I know Suzy Qs 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?

Yes. Two parts to that, I think, Brian. First of all, I think you understand in Q4 as we -- anytime you build a pipeline, getting products onto a shelf, you're going to have an inventory build slightly above consumption, and 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.

And I'll get out of here with this one on the acquired Arista Bakery and the assets there. You're kind of getting a blank slate here as revenues wound off and they obviously had the well-documented labor issues. I guess, what I'd be interested to hearing a little bit more about and 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 of, for lack of a better term, how you can sort of Hostess-ize this Chicago facility if you can at all? And maybe just how that's going to look?

It's a great question, Brian. I mean, first of all, let's think about it in 2 areas. One is our relative share in sort of cakes and doughnuts and things that we do in the Hostess facility is about a 20 share. Our share in breakfast is about a 15, so we see this as a strategic gap closing opportunity to get those shares much closer together to be able to get cinnamon buns and honey buns and doughnuts and other Danish, those 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 to go out to a copacker and operate at much lower margin. We have a way of going in and really this opportunity in Chicago is kind of the way that Dean and the culture of this company and the culture of the way Dean has operated for 30 years, is really ideal for what we do. We go in and find opportunity, we buy value and we create huge upside from being able to run the plants 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 go in and create value in these kind of facilities. So yes, I like the -- we'll use your word as well, we Hostess-ize kind of everything we do and this one is kind of prime for who we are.

Our next question comes from Ken Goldman of JPMorgan.

I just wanted to follow up on the commentary of the cadence of the quarters and thank you for giving some color there. It 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's sort of offsetting that, what's going to create more consistent EPS cadence, is it the timing of 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 so.

Yes, my comment was more around revenue consistency. Make sure, just clarify. So from a -- our EPS will be up this year, one of the -- offsetting -- of course, offsetting Aryzta is almost exactly the same amount in tax reform, we'll get 12 months 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 Aryzta. Then as we turn it around, there's lots of decrease and hopefully, we'll perform better than our -- than what we guided to on that (inaudible). But yes, our EBITDA will be down the first 2 quarters.

And 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 the exact amount, but how much of that dilution is in the gross margin line versus elsewhere in the P&L?

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 just going to fit in it's mostly is gross margin.

And 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 certainly 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 the 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 may be early next year that you'll see the strong accretion, but it's already underway.

Our next question comes from Rob Dickerson of Deutsche Bank.

The first question is just kind of on I guess implied base business EBITDA growth for '18. So if you're guiding to $220 million, $230 million but it's a 15 to 20 loss from the acquisition. So let's just call it 240-ish, 245, it kind of gets you to that mid-single digit range. So just curious, is the -- if we're thinking kind of mid-single digit on the base business for EBITDA growth implied for '18, 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 remains on the gross margin side?

Yes. I think those are reasonable assumptions there. We haven't said mid-single digits per se, but your math it's certainly within the range of how we think about it as well, Rob.

Okay, cool. Good to know. And then I guess, secondly, on the acquisition front, Dean, I know you said you remain steadfast, looking at acquisition valuations are high referenced the annual letter from the weekend. But I'm curious, in terms of just kind of in a near-term capacity to integrate the current acquisition, is it rational to think that over, let's say, at least first half of '18 or into kind of maybe even for the year, that activity on the acquisition side might remain light given the recent [acquisition].

No, I think that's fairly independent and that makes a good place to expand on that. First of all, as regards to this acquisition, the Cloverhill acquisition, I think it's not going to drag through the year. We'll have systems. People are all over this. People are all over this business. And I think we will have it integrated within the next 6 months. In terms of making another acquisition, to the extent we're busy with this one, we'll let that stand alone. 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 1, 2 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.

Okay, great. And then just a follow up on the acquisition side. I feel like originally, when you (inaudible) Hostess, part of the conversation was around general snacking right at the time And so as we heard about different meat snacks companies or that there are different opportunities in the broader snacking right here. We saw the acquisition for inter-bakery and then, obviously, the one you just announced. So I just want to confirm that the scope of acquisition still remains beyond baked snacks?

We think of ourselves as a snacking platform. Obviously, right now, we are pretty much 100% in Sweet Baked Goods, we have a bread business of course as well. And we are looking across this whole range of snacking because we believe that's where we best can leverage the model that we've developed, through the warehouse model. The strengths we got 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.

Okay. And last question, same line of thought. I think I heard you say in the prepared remarks that you think there were -- maybe in Q&A, that there's a bit of, let's call it, larger food companies who potentially might start to increasingly kind of spin 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 I'm just kind of looking for some clarity as to why you think that might happen.

Yes, I don't -- you hear a lot of noise around that. There seem to be a lot of noise before people actually do something. There's been a couple of examples recently, obviously, Nestle with candy business, and Unilever with the spreads business. So there are things that are going on. Perhaps, they're slightly accelerating, right? We don't have anything specific in that arena right now, but things come up all the time that we certainly will take a look at.

And at the same time, I think you see a lot of activist activity that's pushing for exactly that type of strategic focus by the larger CPG companies. And I think that has a bearing on the boards of these companies as well.

Our next question comes from Michael Gallo of CL King.

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?

Yes, it's a conservative number. The facility a few years ago did a good bit more volume than this. The one thing we've got to sort out, remember, it's only 28 days ago, is sort of the complexity of the way the operation was run, probably hurt their overall effectiveness and we certainly don't want to be too complicated, too many SKUs, too many customers, and not have a focus on the right kind of products. They make great products in that facility. They'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 become the -- a big part of what that facility does. So it probably leads to a bit -- 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 because you got to go in and get it fixed first. But as Dean has said and Tom has said, and we all said -- that activity is underway now and showing some early encouraging sign.

And by the way, I think the 2 brands are very valuable. They do target different channels and different customer segments than we fully 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 facilities. So we all believe this is a very strategic acquisition, and it will prove itself well in terms of its accretiveness in the future.

Our next question comes from Matthew Grainger of Morgan Stanley.

Just 2 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 reinvestment back into the business or if -- we should think about your tax benefit as flowing more to the bottom line given the dynamics around the Aryzta acquisition.

For this year, I think it will flow to the bottom line or offset with Aryzta. We are looking at it, other acquisitions, we're looking at capital, with the immediate deductibility of capital and looking at productivity projects. But I think for the rest of this year, I'd consider it -- we'd consider it kind of that.

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?

I think in a macro sense, we have. Competition has been aggressive and we've still been able to gain share over the last 3 or 4 years. We certainly watch everything, everybody does and are ready to make moves as needed to fix the segment or repair a business or get in a customer area or a channel it needs to. But we certainly have in a macro sense that flexibility left for us.

Okay. And then last question, just on the ISB business, you just brought in new leadership so this might be premature, but just curious how you're thinking today about the opportunities and limitations for that business and where you can take it over the next year?

Yes. I mean, the consumers 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, 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 subsegments 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. That's how we continue to make moves, to make ourselves better and to grow in that business. And we're actually sitting in a room right now in front of a bunch of products he showed us yesterday, and it's pretty exciting. I would say it's the most excited we've been about ISB in a while, so it's good to see.

And incidentally, that's a highly fragmented sector, and we do believe there are a couple of very nice prospects that may be coming up for sale in the coming year.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

Like to thank you all for being on the call with us today, and appreciate your support and interest in Hostess. And I'm sure we'll be speaking to many of you soon.

This concludes today's conference. You may disconnect your lines at this time, thank you for your participation.