Hostess Brands, Inc. (NASDAQ:TWNK) Q2 2017 Earnings Conference Call August 8, 2017 4:30 PM ET
Katie Turner - IR, ICR
William Toler - President and CEO
Thomas Peterson - EVP and CFO
Bill Chappell - SunTrust Robinson Humphrey
Brian Holland - Consumer Edge Research
Michael Gallo - CL King
Rob Dickerson - Deutsche Bank
Jon Braatz - Kansas City Capital
Steve - UBS
Farha Aslam - Stephens Inc.
Greetings and welcome to the Hostess Brands Second 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.
Thank you. Good afternoon and welcome to Hostess Brands Second Quarter Fiscal 2017 Earnings Conference Call. By now everyone should have access to the earnings release for the period ending June 30, 2017 that went out this afternoon at approximately 4:05 PM Eastern Time. If you have not received the release, it's available on the Hostess Web-site at www.hostessbrands.com. This call is being Webcast and a replay will be available on the Company's Web-site.
Hostess would like to remind you that today's discussion will include a number of forward-looking statements. If you refer to Hostess' earnings release as well as the Company's filings with the SEC, you will see a discussion of the risk factors that could cause the actual results to differ materially from these projections. 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 useful perspectives on the underlying growth trends of the business and has included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
In addition, Hostess has supplemented its earnings release with unaudited pro forma financial information for the quarter ended June 30, 2016 giving effect to the November 2016 business combination as if it had occurred on January 1, 2016. All references to results for the quarter ended June 30, 2016 refer to such unaudited pro forma results.
And now, it's my pleasure to turn the call over to Hostess' CEO, Bill Toler.
Thanks, Katie. Good afternoon everyone and thank you for joining us today. I'll begin today's discussion with a brief overview of the second quarter. Afterwards, our CFO, Tom Peterson, will provide greater detail on our Q2 financial results as well as reiterate our revenue and adjusted EBITDA guidance for fiscal 2017. Then Tom and I will open up the call for questions.
We are pleased with our continued ability to grow top line, bottom line and market share in a challenging retail environment, particularly given that Q2 was a difficult comp for us based on last year's very strong results. For the second quarter of this year, revenue grew 5.6% to $203.2 million and adjusted EBITDA was up 7.7% to $63.2 million. These represent a record result for revenue in a quarter and adjusted EBITDA in a quarter and we delivered a very strong 31.1% adjusted EBITDA margin as well. Our top line was driven by 2017 product innovation, strength in our core brands, and growing traction in our white space opportunities, including in-store bakery, foodservice and international channel expansion.
Results were largely in line with our expectation and we remain confident in our guidance for the full year. When we first provided annual guidance, we anticipated Q1 would get the year started quickly and we'd show less growth in Q2 and Q3, followed by a strong Q4 to finish the year. Our guidance of $781 million in sales and $235 million in adjusted EBITDA remains firm and represent over 7% sales growth for the year and over 9% adjusted EBITDA growth for the year.
Our positive momentum has continued in our Hostess Brands along with strong consumer demand for our core products. Hostess has leading brands in several subcategories. Donettes, Cup Cakes, and Twinkies, all three of these large core businesses grew point-of-sale in second quarter. We continue to gain market share and consumption dollar growth across our business.
Per Nielsen, our Sweet Baked Goods market share for the 52 weeks ending July 1 was up 17.1%, up 120 basis points from the prior year. Our share continues to expand this year as well, representing now 17.5% for the second quarter of 2017, and in Q2 we enjoyed share growth across Total Nielsen, our four largest channels, convenience, food, mass, and dollar.
As previously communicated, our expectations are to gain about 50 basis points of share per year. Since our performance has remained strong and the category has softened, we have gained 120 basis points in Q2 versus last year. Q2 represented the highest share we've enjoyed since launch in overall Nielsen and also in those four channels I alluded to which represent about 95% of our Sweet Baked Goods panel.
Unfortunately, as many of you know, the category is down 1.6% year-to-date, primarily due to reduced C-store trips and overall weakness across many categories within grocery. To help offset these C-store trends, we have included incremental in-store merchandising in Q3 to accelerate our growth. Our share of convenience grew 80 basis points over the prior year to 21.7% for the second quarter, resulting in our highest quarterly share since relaunch.
The growth of the brands is critically important as well. On a Nielsen basis, year-over-year we're growing Ding Dongs, Cup Cakes, Twinkies, Coffee Cakes, Zingers, Ho Hos and Donettes, all on a consumption basis. These brands represent nearly 83% of our sales in Nielsen and are all growing.
We have primarily driven growth in our brands through product innovation and sales efforts. Twinkies, Ding Dongs, Ho Hos, and Coffee Cakes, all reported double-digit growth for Q2 compared to prior year. We expect this trend to continue as our new core product line extensions, such as our White Fudge Ding Dongs, Peanut Butter Ho Hospitals, Apple Coffee Cakes, and Chocolate Cake Twinkie, continue to gain distribution in the marketplace.
Another measure of business momentum is volume. We are seeing very strong volume trends with over 9% growth in cases versus a year ago. Our sales channel and pack type mix is causing revenue growth to be lower than volume, but that volume creates important scale in our facilities and tonnage through our customers' registers. Even with that mix pressure, we delivered over 31% adjusted EBITDA margin, 60 basis points higher than Q2 of last year.
Our final measure of business momentum is shopper purchase dynamics, which continue to improve. In Q2, Hostess increased our household by 2%, while increasing dollar purchased in each of those household by 1.2%, units up over 2% and frequency up over 2%, all measures that show our brand and our business continues to penetrate into new households and further provide consumers the products they enjoy and want to continue to purchase and repurchase.
Our team remains focused on these growth drivers, rebuilding the core business, innovation and line extensions, and white space opportunities. Rebuilding the core has continued in 2017 and we're gaining distribution with a majority of retailers, filling voids and adding item count. We've added an average of two items on shell in the average retailer across all of Nielsen, bringing our average count for all retailers to 22.5.
The life blood of any growing business is innovation and it's been central to our share and volume growth. Our pipeline for later this year and into 2018 is robust and includes new offerings to help elevate the category, further expand us into white space segments in Sweet Baked Goods, and add key renovations to existing items.
Expansion of Hostess Brands into new spaces and segments within Sweet Baked Goods, like brownies and peanut butter, has yielded strong results and will continue to be a focus. Additionally, we're very pleased with the consumer reception to Hostess Brands in totally new categories, including frozen retail, foodservice, and in-store bakery.
The third part of our growth strategy is white space, where numerous opportunities represent tremendous potential for our brands. We have improving traction in in-store bakery, and both our foodservice and international did well in Q2. These channels are not measured in what we all call our Nielsen numbers that we frequently quote and that you guys follow very closely. As an example, our white space success, our total revenues in channels that are not measured by Nielsen, grew from 11% to 17% from Q2 last year to Q2 this year.
So while measured channel data is helpful, it's not a full representation of the success in any given quarter, and going forward as we further unlock these white space opportunities, we expect that growth in non-measured channels to continue to expand.
In our in-store bakery business, we're building momentum with the Hostess Bake Shop and new subcategories where Hostess brings key capabilities to this area of store. We're gaining distribution in western geographies and starting to fill out the national footprint in new large retailers. A great example includes our recently added handheld pies and our Donettes are now being sold in a large tub in the club-stores around the country. We're pleased that ISB posted a sequential improvement from Q1 to Q2. Momentum is expected to continue as we benefit from the recent refocusing of our own sales force in ISB and continued distribution expansion.
In our foodservice segment, our partnership with McCain is leading to new business wins. We've had recent success in gaining distribution in quick service restaurants, stadiums and amusement parks with our Deep Fried Twinkies. International business continues to expand with strong year-over-year revenue growth. We benefited from our ongoing rollout in the Canadian market via our Dolly Madison brand, new product launches in Mexico, and expanding our presence in the U.K. market.
We continue to explore M&A as well, generally focused on the following criteria; number one, a potential target that can leverage the Hostess brand and/or our warehouse model; number two, a potential target that can expand our baking capabilities, including further into ISB, or move us into adjacent categories that we should or could participate in; and third, a target that can enable us to build hell of a greater snacking platform.
Switching gears, I'd like to comment on the recent announcement regarding our Head of Plant Operations, Stuart Wilcox. He is moving on to another opportunity outside of the food industry. Stuart was a valued member of the management team but we have a deep bench with a lot of bakery and supply-chain experience and they are already stepping in to lead while we recruit for his replacement. We believe that one of the major keys to our success is our hands-on management approach that is ingrained in our culture, and you could be assured we're all deeply involved in every aspect of supply-chain and the plant operations.
In summary, we're very pleased with the overall progress and results through the first half of the year. We believe it's an excellent quarter, particularly in today's CPG industry when you could report the highest share in all four of your largest sales channels, the top six brands posting consumption growth, significantly consistent market share gains, volume that is 9% above year ago, and a 31% adjusted EBITDA margin.
The sequence of the year is playing out exactly as we have previously communicated, with larger growth in Q1 and expected in Q4 and slower growth in Q2 and Q3, delivering in aggregate 7.4% revenue growth for the year and over 9% EBITDA growth for all of 2017. We have entered the second half of 2017 with strong momentum and continue to believe that Hostess Brands and our innovation pipeline will enable us to build share and grow far above the SBG category. We remain well on track to achieve our annual outlook.
Thank you. Now I'll turn to Tom and provide more detail and perspective. Tom?
Thank you, Bill. I will now review our second quarter financial performance and some other data from today's press release. For comparative purposes, we will compare our 2017 results to our unaudited pro forma financial statements for the quarter ended June 30, 2016, which presents 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 the Hostess business during this period.
As Bill indicated, we are pleased with our financial performance despite the challenging retail environment and believe we are well-positioned to execute on our growth initiatives. Net revenue for the second quarter was $203.3 million, an increase of $10.8 million over pro forma second quarter 2016 revenue of $192.3 million. This represents a 5.6% year-over-year growth rate, primarily from our 2017 new product initiatives, including Chocolate Cake Twinkies, White Fudge Ding Dongs, and Golden CupCakes, and our white space growth led by our in-store bakery operations.
We generated $88.4 million of gross profit in the second quarter of 2017, or 2.6% growth year-over-year. Gross margin was 43.5% of net revenue, down 130 basis points from the same quarter last year as a result of the shift in product mix to include ISB and growth in our multi-pack and club-pack product sales as a percentage of total growth. With respect to the mix between segments, our gross margin in the Other segment decreased from 32.2% to 29.7% of overall business due to higher in-store bakery sales.
SG&A expenses, which include advertising, were $32.6 million or 16% of revenue. This compares to $29.4 million or 15.3% of revenue for the pro forma second quarter of 2016. The increase in SG&A was primarily attributable to an increase in non-cash share-based compensation, partially offset by decreased permanent rep appointment.
Also, as noted in our financial statement, we expensed approximately $1 million in the second quarter of 2017 and also the second quarter of 2016 related to a litigation matter. This matter is now closed and the expenses relating to this litigation ended in Q2.
We generated adjusted EBITDA of $63.2 million or 31.1% of revenue compared to adjusted EBITDA of $58.7 million or 30.5% of revenue for the pro forma second quarter of 2016. The year-over-year growth rate in adjusted EBITDA was 7.7%, driven by increased gross profit and lower operating expenses impacting adjusted EBITDA.
Our effective tax rate for the second quarter was 28.6%, compared to a pro forma effective tax rate of 28.5% for last year. GAAP net income was $28.2 million or $0.18 per fully diluted share, compared to $21.9 million or $0.15 per fully diluted share on a pro forma basis for the same quarter last year.
Our cash flow generation continues to be strong with operating cash flows for the quarter of $41.5 million, driven by our strong EBITDA results. Our CapEx for the quarter was $10.6 million, mainly for property and equipment to support our strategic growth initiatives and productivity improvement. We continue to anticipate approximately $30 million to $40 million in CapEx for the full year. We also distributed $8.9 million through our non-controlling interest, which represents two quarterly reimbursements for tax payments for the Class B shareholders.
Turning now to the balance sheet, net debt as of June 30, 2017 was $930 million and we have cash and cash equivalents of $66.2 million and also have availability on our undrawn revolving line of credit. We re-priced our term loan to reduce our interest cost by 50 basis points in the quarter, which was the second repricing in six months.
Our total leverage ratio as of June 30, 2017 was 4.11x based on trailing 12-month pro forma combined adjusted EBITDA of $226.2 million. This has improved from 4.51x at the end of 2016, and excluding the use of cash for future acquisitions, we expect this rate to continue to come down over the next year given our consistent cash flow generation.
In terms of our outlook for 2017, we continue to expect revenue to grow above the Sweet Baked Goods category average and are reaffirming our previously issued 2017 guidance of net revenue of $781 million and adjusted EBITDA of $235 million. We currently anticipate net income of $96 million for 2017, of which $34 million is expected to be allocated to the holders of the non-controlling interest. The remaining $62 million is expected to result in basic EPS of $0.63 and diluted EPS of $0.58 for Class A common shareholders based on expected basic and diluted shares outstanding of approximately 99.1 million and 107.2 million respectively.
Our 2017 net income and EPS guidance is slightly lower than prior guidance as a result of a change in state tax laws that will impact our third quarter results. We expect the change in state tax law will cause an increase to our deferred tax liability resulting in additional income tax expense of $2.5 million to $3 million and an increase to the tax receivable agreement resulting in additional expense of $1.5 million to $2 million. We are anticipating income tax payments of $45 million to $53 million to cover the Company's federal and state income tax, to reimburse the holders of the non-controlling interest for their tax liability, and for payments to the selling equity holders of Hostess Holdings for 2017 activity under the terms of their tax receivable agreement.
In summary, we are pleased with our year-to-date performance in 2017 and believe we are well-positioned to continue to deliver revenue and earnings growth. With that, Bill and I are available for your questions.
[Operator Instructions] Our first question comes from Bill Chappell with SunTrust. Please proceed with your question.
Just help me, couple of the statements of expecting to grow faster than the category and still reiterate your full-year revenue guidance when I mean clearly it looks like the category as with most food categories has slowed kind of from the original expectations over the past six months, and in that vein, maybe give us some more color on why you expect fourth quarter to be so strong with 2Q and 3Q being a little bit weaker?
They are weaker only in relativity, mainly because of the year ago lap, right. Last year in Q2 we lapped the big start on brownies and Suzy Q and in Q3 we lapped that unique frozen Twinkies event that Walmart created. So those are going to create the sort of reporting optics of year-on-year.
We also by Q4 will have the full innovation pipeline for the early year of 2017 we rolled out, and our innovation this year is doing better than last year's, which is good to see, and we've got some fall things that are coming out that we think are going to strengthen the momentum even further as we go into that fourth quarter, that aren't really announced yet with customers. We're working with a couple of lead customers to drive some innovation on that type stuff. So that's why we think Q4 will be stronger than Q3. But again, it's relative to those comps in a lot of ways.
And then in terms of the whole category slowing but maintaining your full year outlook?
I mean what's happened is category has slowed obviously, we've all seen it, but we've actually been able to pick up more share because of that. We think that partly stuff we're doing on our innovation is going to drive the growth and also we're growing outside the Nielsen panel. Our foodservice, international, those businesses, ISB is picking up momentum. So those things don't contribute to what we all refer to as the category because they are outside of that traditional Nielsen panel but they provide nice growth to us.
Great. And then one last one, just as you look at the new product launch, I mean there was a comment in the press release that you've had some declines from last year's launches. Are you promoting behind these enough or is it just a year later or two years later or is it more just this year's crop just is resonating with consumers better than last year's crop?
I mean every product goes through the sophomore slump, right. And I think that a year ago we had an unusual amount of support dedicated to the brownies when they first came out and to Suzy Q kind of bringing Suzy back with a pretty novel and exciting thing, and we're doing some things to kind of put a shot in the arm in Suzy late this year or early next year as well. But I think it's a lot of it, we probably put more focus, of a percent of our merchandising on those products a year ago, and now it's spread out across most of our core initiatives, things like Chocolate Cake Twinkies, Ho Ho Peanut Butter, like Fudge Covered Ding Dong. So I would just say, it's spread more this year. Last year we had it concentrated around those three items, two brownies and a Suzy.
Got it. I'll turn it over. Thanks.
Our next question comes from Brian Holland with Consumer Edge Research. Please proceed with your question.
So again thinking about sort of how this guidance plays out over the back half of the year, I know you talked about Costco in sort of being a rotational – I guess as I'm looking at the non-tracked channels, Costco was one that you talked about as thinking about as rotational, and then you've also got In-Store Bakery which you talked about, you didn't have a lot of visibility on, it took some time to get in to those markets and then the timing of those, you don't have traditional reset. So I guess I'm just trying to understand, to the extent we are looking at the non-tracked stuff, what sort of visibility do you have in the back half to drive that confidence that we can hold the line here on the top line?
I think the best one is, a year ago these non-tracked were 11% of our volume, now they are 17%, okay. So they've picked up sort of share of total because of the momentum we've created in those segments. And frankly, all of them are getting some level of traction. Now they are not – none of them individually is going to move the needle by itself, but each one is picking up a million here, a million there per quarter and you got three or four of those, and all of a sudden that's a nice part of your growth because we're growing kind of at this $10 million a quarter kind of rate. So you pick it up very quick when you start growing that way. So that's the reason that we feel comfortable with that. We also have momentum in each of those as well as momentum in our new products which are year-to-date stronger than the 2016 new products were.
Okay, I think that's helpful. Talking about the innovation, you mentioned – maybe you can correct me if I'm wrong here, maybe lower sales from prior year innovation, and actually maybe you can sort of expand on that, but I'm just curious, as clearly you've noted prior year innovation is being somewhat of an offset, does that play into cannibalization and to what extent do we think about that? And again, I mean when we think about the Hostess brand and where it could go, you guys have done some great work to in-store bakery and frozen novelty, but obviously there are some limits to where Hostess can play. And as we think about go forward innovation, can we continue to expand the consumption occasions for the consumer? I guess first of all, just in retrospect, what happened with this year and last year innovation this year to offset and to what extent, how do we think about cannibalization?
I think that we've got an unusual quarter in that the size of the 2016 innovation in Q2 of last year was unusually large. It's cycling down in Q2 of this year but being replaced by 2017, right. You could argue that last year's brownies and Suzy Qs were a little further out, so maybe it's slightly more incremental. This year we're closer in on Chocolate Cake Twinkie and Peanut Butter Ho Ho and White Fudge Covered Ding Dong, those are closer in. So that cannibalization incrementality question is certainly, it's a hard one to gauge, but overall core is kind of flattish, which is terrific when you're growing as much innovation as we are. So, core plus innovation is keeping the big brands growing. That's why I mentioned that all six of the big brands are growing for us, which is terrific.
We also had a few million dollar quarter-on-quarter shortfall from discontinued items. So we try to be smart and aggressive in helping the customers manage the category and we take out items such as our Red Velvet Cupcakes because it slowed down in sales and replaced that with Golden CupCakes, and obviously over time we think Golden will do better. So we try and keep the category fresh, we try and work in partnership with our retailers, and to do that sometimes you take a short term trade-off like we did with the discontinued items.
Last one from me and I'll pass it on, the Q3 comp, you included the Deep Fried Frozen Twinkies, which I think was sort of a disproportionate lift to third quarter results last year, and I think as I recall you talked about at the Investor Day maybe like some other products, Chocolate Lava Cakes, things like that, can you give us a sense of sort of – I understand that there are some sensitivities around that, but can we think about the kind of support and distribution new products will get such that you might have confidence, I don't know, if it's a full offset against the Deep Fried Frozen Twinkies last year or just how to think about that?
No, it's not going to be a full offset. You're going to see that small segment of the business will be down in Q3. And that's okay, that's a one-off, one-time level of support last year. The Molten Lava Ding Dong which is basically starting to ship now is rolling out into several large customers. But it won't come out with the fanfare and the uniqueness of that. So that will be a little bubble in the year just like it was for Brownies and Ding Dongs year on year. But we think that over time this item is going to do well. Deep Fried Twinkie is still in distribution, but frankly we're seeing the most traction on Deep Fried Twinkies in foodservice where it's offered in restaurants, offered in amusement parks and stadiums and other places, and that we think is probably the best place for it long-term, although it will still be available at retail.
Thanks a lot, gentlemen. Best of luck.
Next question is from Michael Gallo with CL King. Please proceed with your question.
My question just on the kind of lower half of the Sweet Baked Goods category, obviously you recently launched a second Coffee Cake product, but it would seem like you have a significant opportunity in the breakfast day part of the category, so I was wondering how we should think about over the next 12 to 36 months how you might approach that and whether we should think of Coffee Cake as maybe the first foray into making a more aggressive push in that area?
It's a good comment and question. Coffee Cake has been one of our core kind of historic, almost iconic identity products for Hostess. Launching the Apple item as a second item is something that is going well. It's pretty small at this point but it's building. The real key is what you said, Michael, which is the broader breakfast occasion, right. We got into Danish and Jumbo Muffins and Honey Buns a couple of years ago, and those products are currently undergoing some review for some product improvement.
And one of the comments I made in my remarks was around innovation of existing items and we think we have some room to improve those products and we think that can be an area, the breakfast occasion across most parts of the store is growing nicely except for dry cereal. And so we think that contemporizing and strengthening our offerings there will help us in breakfast. That will probably be more late 2017 or early 2018 but those are items that we certainly think are a good potential for us.
Okay, great. And then just a follow-up question for Tom, the change in the state tax law and corresponding increase in the tax rate, is that something we should think of as an ongoing basis or more as a one-time impact to the valuation allowance?
There will be a one-time impact for the valuation allowance and that will be slightly increased going forward. I think our rate for the year will be 31% to 32% for the year, with the rate change in Illinois, which is where our distribution center is, so that's why it's disproportionately large.
Okay. So that's a good tax rate to use kind of going forward?
For this year, that's the one-time catch-up, but that's for this year, yes.
And then for 2018 and beyond?
It matters where we are in Class B to Class A, but probably in that rough range.
Okay, great. Thank you.
Our next question is from Rob Dickerson with Deutsche Bank. Please proceed with your question.
So I just had a question on the gross margin, I guess the gross margin year-over-year came in a bit light. It looks like it was driven kind of by both segments. Like sales were up just under 6%, gross profit was just up under 3%. So I'm just curious, is there like is that fully driven by this – is it just within the Sweet Baked Goods area, it's not the margin mix differential per segment, but just in Sweet Baked Goods, is that more of non-tracked channel has slightly lower margin, it's really continued off of the bagged donuts or just lower margin, so it's being driven by margin mix shift down but is that being driven by a channel shift? I'm just trying to get a sense…
It's really a pack type shift, which essentially is a little bit of a channel shift. It's primarily the weakness in C-store relative to grocery. We've been growing in sort of high single-digits in grocery. That's mostly multi-pack for the year. C-store is only up marginally because of the traffic things we've been talking about. And what that does, it shifts our mix from single-serve which is higher-margin to multi-pack which is slightly lower margin. So that alone has driven that change in there.
Okay. And then just as we get through the year, I guess it's mainly Q4, is there an expectation for that to essentially continue or is that – if you get like a little bit easier comp in Q4, maybe there's a little bit more P&L leverage…
It's a little more straightforward on the comparable side, which is good. The other thing is we are seeing a slight uptick in C-store which we are encouraged by. I think that industry had a rough Q1 and it built a little bit over Q2 from a traffic perspective, and we think it's going to turn positive for us. Plus our innovation in 2017 and our late year innovation getting fully fleshed out is going to help us as well in Q4 year-over-year.
Okay, great. Thanks a lot.
Our next question is from Jon Braatz with Kansas City Capital. Please proceed with your question.
Bill, last year was a strong year in terms of new product innovation and this year looks like it's going to be strong too, but you referenced a sophomore slump relative to the 2016 introduction. Is there anything you can do or what can you do to avoid that slump next year or is this typical of the rollout in the following year?
It's really an industry issue, primarily driven by the fact that in a given year, in your first year you get the stocking cases, so you officially get to build your own pipeline. So you get kind of 8 to 12 weeks of volume that goes out there one time and then you lap that and you generally will have that. But also in our business, think about it as we have kind of one main display in cake and doughnut products and a store in that year and we bring out the new products, we're always going to have those new products feature more prominently. So you're going to have a cycling of that. Our job is to get that second and third display so we can keep expanding the brand, but in the short term you're going to see that almost always products are going to have that year on year, it leads to on an individual product basis declines simply because you have the pipeline in one year and you have the follow-up in the next, and also you continue to bring out new products and expand their footprint beyond.
Okay. Do you think it cycles back up then in the third year?
Look at it like this, that innovation has to in totality contribute to overall growth. And so we keep looking at it. That's why occasionally we take out an item, we rotate things through, that our job is to keep the category fresh, to keep bringing consumers new ideas, to keep bringing our customers new ideas, and if we are continuing to grow Hostess and gain market share, then in aggregate we are winning, right. And so that's going to always have a seasonal component to it, a limited time offer component to it, a new product component, a line extension, a refresh, all of those aspects come together to try and drive the total. And if you're driving that total and you are winning share, that's generally a pretty good overall proposition.
Okay. One last question, as talked to your customers and other people in the retail industry, the category slowed. Any thoughts on why that might be and why it may change in the upcoming quarters?
I think it comes down to overall what all the players are doing on the innovation front. Little Debbie has not done a lot, has done a little bit with muffins, Entenmann's continues to do a pretty good job with their muffins but not much beyond that, Tastykake had pushed hard for a couple of years and frankly some of that has slowed a lot. And so those are the areas that frankly haven't provided much news and sort of energy to the category. And I think that we have to continue to remind ourselves to push our own brand in the white space areas where we can get more incrementality and drive more growth.
We went into brownies and Suzy came back as kind of a standalone form, it provided a lot of incrementality and it's a good reminder to us to look at things like cookies, to look into other areas we can elevate the category to look into places that sweet goods are being offered that we currently don't have an offering. Those are the places we can continue to really carry the category on our shoulders and continue to expand this business, both for Hostess and for the retailers.
Our next question comes from Steve [indiscernible] with UBS. Please proceed with your question.
Congratulations on a good execution quarter. So first question would be about the middle of the P&L, specifically how it correlates with revenue growth of the overall business, is it possible to gain the market share that you are looking to do by managing call it like a low single-digit year on year advertising spend growth, how do we think about that, and also are you seeing any kind of lift from your partnership with Acosta and increasing the frequency of visits to the store and channel that used to be serviced by DST, are you guys seeing a lift there?
Yes, I'll start with the second one. The Acosta partnership is going very well. Our grocery growth and I think grocery shares of about 200 basis points in the last 18 months behind the DRT it's called, direct retail team initiative, and that really is sort of hands-on the shelf, hands in the back room, putting product out, reordering, we feel like those two things are very directly correlatable. In fact we have an incentive program with Acosta where we hold back their commission until we see the growth. So they are highly motivated to do that as well. So that's really a big part of that kind of growth.
Back to the overall marketing and advertising question, we have continued to believe and continue to see success from thinking of marketing as creating in-store presence, right. So, while our kind of capital aimed direct to consumer marketing is rather small, our direct-to-consumer marketing we view it as getting in-store display, that impulse purchase, that catching them in the aisles or walking down with a new product having that, what's new from Hostess display in C-stores and grocery and mass around the country, that's really the marketing efforts we make and that's how we get our products in front of consumers.
It's not a category that has historically spent lots of money in traditional DTC. So we feel like that really our marketing dollars are best served doing things like supporting retail efforts with Acosta, driving display, getting really creative on our point-of-sale, those type of things are the most effective marketing tools for us at this stage in our careers, I mean at this stage in the business cycle. Later on we may think about different types of marketing for different initiatives, but right now the way we have played it has been very effective and pretty efficient as well.
All right, that's really helpful. And then how should we think about, and this one already asked about this already, but just to kind of clarify a little bit, how should we think about the year-over-year growth rate in 4Q versus 3Q? Obviously it sounds like 4Q has a little bit more of an innovation pipeline. Can you walk us through those needle-moving innovations one last time? And then similarly for In-Store Bakery, you had really good organic underlying growth rate in that business year to date. How should we think about that in the back half?
Okay, good questions. We provide annual guidance, we don't want to get into kind of the quarter subtleties and [indiscernible] of that. If you think about sort of first half to date, second half to date, we have to grow at a lower growth rate in the second half than we did in the first to get to $781 million and $235 million. So, all we're trying to do is give you a little bit of color around expectations that because of the lap from a year ago, we knew Q2 would lap at a lower growth rate in Q3 because of the similar factors and that Q1 and Q4 would be higher growth rate factors.
But it's going to get you to the same number, right. So you can do the math of where we are and what we got to do, but the growth rate in second half is projected to be lower than it was in the first overall and it still gets us to the $781 million and $235 million. It will be driven by that innovation that's already rolling out, the 2017 innovation. There are a couple of add-ons that go in later in the year that will help us some as well, but also just general momentum in our white space categories, including ISB that you referenced, will be the sort of the overall formula that gets us to this plus 7.5% top line and plus 9% bottom line that we have guided for the year.
Great. And these growth CapEx investments that you are making right now, how should we think about that hitting the P&L from new products coming to market, is that more of a 2018 pipeline fill, the equipment you are putting in place today, is that the right way to think about it?
Yes, the equipment we are putting in place this year is for next year. You need to be about a year ahead. So the equipment we are putting in for this year is for next year, and the same with the following for what we have talked about for that. It's always for the next year.
Great. Thank you.
Next question comes from Farha Aslam with Stephens Inc. Please proceed with your question.
Could we talk about the Peanut Butter Twinkie, has it launched, is it in stores and how is it doing?
Absolutely. It is essentially launched as a limited time offer for our Summer of Twinkies. So it's not what I would call broadly available or in 100% of stores by any means. It really was primarily a Walmart and big grocery item. It's going out for the Summer of Twinkies. Then it will roll more into every day distribution. So first of all, it's doing great and it's a lot of fun product, I think it was one of the fun thing we had at Investor Day, and it's doing well, but it's not sort of at that 100% availability level yet, but it will become more and more available as the year moves through.
Is that one of the reasons you are confident about the fourth quarter because you are having broader distribution on a major launch?
It should help and I think Chocolate Cake Twinkie frankly has been the biggest success of the year. Peanut Butter Twinkie is a little too early to tell because it's kind of all in the middle of the big Twinkie support we get for the whole summer, but Chocolate Chip Twinkie has delivered quite nicely and it will probably be a bigger piece of this in the balance of the year. But all I guess adds to the confidence and the momentum we are feeling going into Q3 and Q4.
That's helpful. And when we think about the back half margins for that Sweet Baked Goods category, is it similar to the first half, because your guidance implies that you have some room for that to go down, how should we think about that?
We have it that it will go down just slightly in Q3 and Q4.
A lot of that is our Q3 Summer of Twinkies promotion events. Those are generally the biggest investments we make in the year. So sometimes our margin will dip in Q3 and come back in Q4 as we don't have as much promotional scheme going during the holidays. But those two things could lead to a slight downtick, yes.
Okay, so you had already planned that in your guidance?
And then could we talk about the [indiscernible] now that we've [indiscernible] in an acquisition and think about how we should think about sales growth for that business?
I think that will be hopefully a double-digit growing business for us, 2018, 2019 and 2020, as we really get the full footprint of that. As we have mentioned on other calls, we like the business a lot. Hostess makes a lot of sense over there and we are also learning a lot about the category dynamics. We just brought in the handheld pie execution with 4x the fruit into a couple of retailers, and that's gone very well. We're looking at some other cake analogues to go into, we are looking at some – we are selling now a tub of doughnuts or Donettes in club stores and we think that's an interesting ISB offering for things.
So we are tweaking our product mix, we are expanding our customer base, we're moving to the West Coast for frankly the first time that these products have been available in the West Coast. So, all those things are coming together for us as we are building momentum in this category. So, we think we should be able to grow double digits, kind of in that low double digit type percent year-on-year type change for this category. But we still got a lot to learn and how it executes.
That's helpful. And then final question is M&A, recently you have seen some frozen bakery businesses come up for sale. Is that an area you are interested in or are you going to continue to look for M&A in in-store bakery?
We look at a lot of things for the reasons that we talked about. It's places that the brand can go, assets and capabilities we'd like to have, things that build on our warehouse model, things that build on our snacking platforms, those are the primary criteria. So, some of the ones you have mentioned, some of those but maybe not all of them, so we are very judicious in what we purchase because we feel like we got a lot of growth left in the brand, but we also are interested in continuing to build the Company and expand the platform that we are operating from.
Okay. Thank you very much.
Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.
Thank you everyone for the time and being with us this afternoon. We are pleased to be able to share with you our Q2 and look forward to speaking with you in the future. Thank you so much.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.