Q2 2019 Earnings Call
Greetings and welcome to the hostess brands incorporated second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode.
A question answer session will follow the presentation, if anyone should require any operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to Katie Turner.
Please proceed.
Thank you good afternoon, and welcome to hostess brands second quarter fiscal 2019 earnings conference call.
By now everyone should have access to the earnings release for the period ended June Thirtyth 2019 that went out this afternoon at approximately four or five P.M. Eastern time. The press release, an updated investor presentation are available on hostesses website at Www Dot horses grants Dot com. This call is being webcast and a replay will be available on the company's website.
Oh, just would like to remind you that today's discussion will include a number of forward looking statements.
If you refer to host if its earnings release as well as the Companys. Most recent FCC filing you will see a discussion of the factors that could cause the companys 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 comedy believes these measures provide investors with useful perspective on the underlying growth trends of the business and has included in its earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures and what I would like to turn the call over to Jose brands, President and CEO Andy Callahan.
Thank you Katie and good afternoon, and thanks for joining us today.
I'll begin our discussion with a brief overview of our second quarter business highlights and provide an update on our pillars for growth.
Then Tom Peterson, our CFO will provide greater detail on our financial results and 20, Nike and outlook.
Finally, well be happy to take your questions.
Hi, I'm really pleased with our teams execution against our pillars for growth during the second quarter up 19.
Our financial results were driven by the depth and breadth of our sweet baked goods product offerings with broad based strength across sales channels.
As a result, we generated meaningful revenue growth increased market share and an improvement in our industry leading profitability.
In particular, a few key second half second quarter highlights.
Net revenue increased 11.7% to approximately $241 million.
Our highest revenue quarter century large.
These results were driven primarily from increased sales of hostess branded products with higher volume of both core and new products.
Distribution and merchandising support improved in multiple sales channel with no more than one third of our revenue growing from any one channel.
We are also pleased with the solid dolley Madison branded growth as we leverage our acquired Clover Hill customer relationships.
Net sales growth also benefited from a well executed price increases that were sold into customers. During the fourth quarter of 2018 and completed in Q1 of 2019.
To put this in perspective.
Q2's, 11.7% revenue growth is on top of the strong Q1 growth, resulting in a total first half revenue growth of 9.2%.
Point of sale increased 6.3% and market share increased 81 basis points as compared to the prior year.
Our market share continues to increase and is at a five year high at 19%.
Similar to our results in the first quarter, our net revenue growth of 11.7% outpaced our Nielsen tracked point of sale of 6.3%, reflecting the breadth and depth of our distribution and the quality of our execution.
We had good merchandising execution during the quarter, particularly particularly in our core hostess branded products.
We did experience a pull forward of some shipments into Q2. This year to support July 4th merchandising that we expect to contribute to Q3 point of sale.
We have continued to experience very strong point of sale growth in the latest July Nielsen data.
We proactively pulled forward our back to school merchandising support the better space our promotions throughout the year.
As a result, we expect strong July point of sale could be partially offset.
In August .
Additionally, we are currently performing preventive maintenance and operational enhancements to a few over to Laurence. This is part of our ongoing continuous improvement program.
We currently expect that this will impact demand driven revenue growth potentially by $5 million to $10 million in the third quarter.
However, looking ahead based on the strength of our year to date results and continued demand momentum expected for the balance of the year, we're confident in our ability to grow revenue well ahead of the category and continue to achieve our full year guidance.
We remain focused on our robust operational plan to drive sustainable profitable growth in 2019 and beyond granted grounded in our five pillars. We made further progress and have taken important actions during the second quarter and year to date to execute on these pillars.
We are investing in our fundamental capabilities and we'll continue to do so in Q3.
These investments have helped us increasingly increasingly achieved growth across channels.
A few key highlights.
Within growing the core we continued to build our analytic capability and insights to drive the success of our host or hostess partner program across both grocery and convenience we talked extensively on previous calls about our investments in further understanding our elasticities mix and Incrementality.
These investments have enabled strong execution of our distribution and shelf mix programs and the focused execution of our multifaceted pricing action. We will continue to build our fundamentals across the builder business, creating a strong platform for continued growth and innovation.
As we grow through innovation, we remain pleased with the customer acceptance of the hostess breakfast products and the Incrementality of our innovation year to date versus the prior year period.
In addition, we have had a ton of fun with the success of our hostess Birthdate cupcakes as we celebrate 100 years of hostess.
This latest execution has further showcase the strength of our limited time offers were LTL programs at retail.
Our successful execution of innovation and Ltos at scale highlights the advantages of our distribution model and strong brands, which results in both the hostess and category growth.
Moving forward in the second half of 19 as customers complete product resets, we expect continued innovation growth.
Breakfast and indulgent premium snacking, our growth platforms over the next few years.
Our team is building out our pipeline of consumer focus innovation to drive future profitable growth.
Similar to our customer insights I am confident that our investment in understanding our consumer and the strengthening of these fundamentals will help drive growth for hostess and the category over the next several years.
We also continue to improve through agility and efficiency.
The meaningful operational supply chain and price value initiatives that we implemented and the integration and transformation of our Clover Hill acquisition are paying off.
During the quarter, we were able to reduce our overall cost base by approximately 270 basis points to our bakery efficiency initiatives.
In addition, the relocation of our primary distribution center from Illinois, Kansas is moving ahead and on track with our expectations.
We continue to expect this transition to be complete by the first quarter of 2020, which is an important step in elevating our infrastructure for future profitable growth.
Upon upon completion, we expect to improve our customer service via taking miles out of our network and improving lane rates as well as support portfolio growth.
We believe this further strengthens our category differentiated direct to warehouse distribution system, and core prebuilt palette and shipper merchandising capabilities.
Our ability to efficiently and effectively build pallet ready displays shippers and other merchandising forums fuels, our ltos and merchandising programs with retailers.
We are also excited to be opening a new test kitchen, and consumer research center within our new corporate headquarters, which will expand our capacity and reduce the time and cost of new product research and development.
The headquarters move into Kansas will also result in future tax savings.
We expect to continue to reinvest a significant portion of the savings achieved with the distribution center and headquarters move back into the business to further enhance our foundation and enable additional consumer driven profitable growth.
We are cultivating talent capabilities under the leadership of our Chief Marketing Officer, Chad Lusk, and our Chief operating Officer, Andy Jacobs, we're in the process of growing the consumer and customer analytics side of our business more deeply.
Specific to our consumer investments.
The step up of this capability is a logical sequence for hostess as we build off our strengthening customer and business fundamentals.
We are well positioned to build upon our brand operational and business fundamental capabilities with even sharper consumer driven insights.
The announcement of our Chicago Office has generated a very positive response and has already enabled us to attract industry, leading talent and experience.
Quickly building on our existing strong talent base.
We will continue to leverage our strong cash flow to help fuel our growth de leverage and support our capital needs.
Last week, we announced that hostess has entered into a definitive agreement to sell our in store bakery business to Sara Lee frozen bakery for $65 million in cash.
We expect to use the net proceeds from the completion of the transaction to pursue a range of potential strategic options, including reinvesting in our business de leveraging our balance sheet and pursuing potential strategic acquisitions, while effectively managing our capital structure.
Superior has been a high performing business and we believe it will continue to thrive in fairly frozen bakeries portfolio as we focus our future investments on areas of our business better leverage our core competencies and pillars for growth.
I want to personally thank the superior team for their contributions to the company and wish them well as they move forward under new ownership.
We are building our business and our capabilities.
As we move through 2019 and beyond we will continue to improve and build upon our scalable infrastructure with an efficient operating model differentiated capabilities that support collaborative customer partnerships.
Bust innovation and significant cash flow.
I know sets us apart from our peers and positions us to win with consumers.
And our valued customers.
With the second half of 2019, we are confident about our opportunities for future growth.
Our team.
Our strategy our execution when combined with our robust cash flow and strong balance sheet will create value for shareholders for many years to come.
Now, let me turn it over to Tom to go through the terrific quarters details.
Thanks, Andy I will now review, our second quarter 2019 financial performance and other data from today's release net revenue for the quarter was $241.1 million and 11.7% or 25.2 million increase from 2000, Eighteen's revenue driven by a combination of volume and price increases across multiple channels.
We believe our record Q2 revenue performance will be our largest year over year growth of 2019.
Adjusted gross profit was 83.5 million or 34.6% of net revenue compared to 32.1 in the second quarter of 2018.
From a margin standpoint, we are pleased that our adjusted gross profit margin was improved both sequentially and year over year, as we offset continued inflationary pressures and ingredients labor and packaging and other costs.
Offset by pricing actions and cost efficiencies in our operations on average we expect gross margins in the second half of 2019 to be at least as good as Q2.
Our effective tax rate was 35% compared to 0.8% in the prior year.
Both periods had discrete income tax items impacting the rate.
As a reminder, with the relocation of our distribution center and now our corporate headquarters to Kansas, We expect to receive significant future tax incentives and credits based on our ability to partner with the state of Kansas and local governments on the relocation.
Our adjusted EPS was 17 cents compared to 14 cents in the second quarter prior year.
We ended the quarter with cash and cash equivalents of 189.3 million and net debt of 799.
Our operating cash flow for the six months ending June 30 was $74.1 million compared to 81.2 for the prior year for the quarter, our operating cash flow was $45.7 million or 6.5% increase over prior year. We continue to expect 2019 cash flows to provide us with the flexibility to pursue a range of potential strategic options, including reinvesting in our business deleveraging, our balance sheet and pursuing potential strategic acquisitions, while effectively managing our structure.
Our leverage ratio as of June Thirtyth has improved to four times. During 2019, we expect to improve overall leverage by 1.1 to 1.3 times, given our expected EBITDA growth and inherent cash flow generation.
Absent any significant business transactions, particularly given our recent announcement and anticipated proceeds from our planned in store bakery divestiture and the reduced spend from the Clover Hill business transformation, we are on track.
Series.
We are on track to achieve our improved full year net leverage ratio of 3.2 to 3.4 times.
To expand further on our plan to ASP sale you may recall in 2016, we acquired superior for 51 million and grew net revenue and EBITDA by 30%.
The purchase price and cumulative profit earned from the business resulted in a 38% ROI, we anticipate the Ais b sale to be approximately three cents dilutive to EPS on an annualized basis.
For fiscal 19, we are reiterating our net revenue and adjusted EBITDA outlook as well as improving our views on leverage despite the anticipated sale of our IC business in the third quarter. We continue to expect net revenue for the year to continue to organically grow well above the suite baked goods category, driven by hostess branded core and new product innovation, expanding distribution and improving merchandising execution over the course of the year and execution of our multifaceted pricing programs.
We expect adjusted EBITDA to be in the range of 200 to 210 million driven by the revenue growth and achievement of our operation operating efficiencies.
Despite the one cents dilution from the I. SP sale adjusted EPS is expected to continue to be in the range of 57 to 62 cents per share primarily driven by the execution of the multifaceted pricing and merchandising programs and achievement of efficiencies.
We anticipate ending the year with net debt leverage ratio between 3.2, and 3.4 times driven by strong operating cash flows of 145 to 155 million and the expected proceeds from the I. SP sale, partially offset by capital expenditures in the range of $30 million to $35 million, our expected tax rate, excluding discrete items is 21% to 22%.
Now I'll turn it over to Andy for his final remarks.
Thanks, Tom.
We are very pleased with our business fundamentals, increasing core capabilities and the broad based growth we achieved in the second quarter and year to date.
Going forward.
I remain confident about the growth potential we have for the balance of the year.
Across the team we are working together to further advance our high performance based culture to consistently win with all stakeholders.
These efforts will lead to growth well above this week baked goods category and highly accretive revenue and profitability as we work to create value for all shareholders.
With that Tom and I are available for questions.
Thank you and if anyone like we'd like to ask a question. During today's conference. It is star one on your telephone keypad and a confirmation tone will indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the Q and for any participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
And with that we go to our first question from the line of Rob Dickerson with Deutsche Bank. Please proceed with your question.
Great. Thank you so much.
Great quarter I guess.
Two very easy questions. First question is just with respect to the Q2 revenue growth result, and how maybe we should think about the back half given I think you said five to 10 million maybe on the line transition.
Shift, but then also pull forward of volume.
The July data that we're seeing which is obviously.
Very impressive of fourth of July and back to school and then.
Also for the sale in store bakery I guess, one is like should we still think that net sales could maybe still grow in the back half kind of all in.
And then secondly, with respect to organic sales growth.
12% and so we baked goods for Q2, the data looks better but theres some volume pull forward. So maybe just some perspective as to how to.
Maybe what you think is kind of a REIT normalized rate. You know is are you growing more like 70% and kind of if you were take away all the noise.
No thats it thanks.
Hey, Thanks, Rob appreciate it.
The absent just a headline absolutely we expect to continue to grow and we're going to continue to grow ahead of this we've baked goods category in the back half coming off a very strong first half.
With that being said our all in first half as I said was up 9.2% Q Q2 was up 11.7%.
Our our Nielsen takeaway in July was really strong and as you mentioned thats too that was partly due to great execution, but it's a little bit high because we moved.
Merchandising up we will have a little bit of the supply I talked about that.
It's a little bit noise. So I would expect Q3 to not be as high of a growth rate, but still growing and I would see very strong growth as we get back into Q4, So I feel like I like I talked about in previous quarters I feel really good about our merchandising plans I feel I feel really good about the initiatives we put in place.
We're already planning for it.
Thinking forward into 2020, so I feel really good about the future growth prospects.
Fair enough. Thank you so much.
Thanks, Thanks Sara.
Thank you and our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
Thanks, just a follow up on that I guess, you have shipment timing as a potential noise factor. If you have an idea as to how much you're all channel consumption may have differed from shipments in the quarter that would be helpful. In the sense of how much of a drag that specifically would be in the third quarter.
That would be helpful. And also you just mentioned the promotion merchandising timing is another thing somewhat could be related.
That will be interesting to hear about and from your graph. It looks like club mass and dollar where we are having outsized growth there.
I guess my question would be going forward is there going to be perhaps a chance that the grocery.
Channel can get in the game with some of these growth rates in some of the merchandising you're doing so far in those other channels. Thanks.
Yes. Thanks I appreciate the question.
So the there was a shipment year on year for a very strong July 4th merchandising that went into June we think thats about 200 basis points potentially or so.
So just just to for that one if you look at a total merchandising for back to school.
It is a timing July and August if you look at total July and August that merchandising.
It would have been.
About the same and that really helps us.
Execute some of our investments, but also it helps sequence we have a fairly robust merchandising programs. So it helps us.
Sequence them throughout the the full period, so that's on that.
It's absolutely true so just on yours I don't want to leave.
Convenience out either we we've seen some really good.
Growth in our small format as well, it's a it's a great channel for us that team's doing a great job we're seeing it.
Our grocery.
Growth it is growing its not growing as robustly as very strong growth in the others and I feel good about the programs. There we continue to work in battle of grocery as well.
It doesn't look as good of performance when compared against some of the really really strong performance, but we're working hard to accelerate groceries growth as well.
All right. Thank you.
Thanks, David.
Thank you and our next question comes from the line of Brian Holland with D.A. Davidson. Please proceed with your question.
Yes, thanks, good afternoon, gentlemen, so not too.
Continue to beat on the top line here.
On that topic, but.
I guess just to maybe some up here.
The merchandising it wasn't a catalyst in Q1 or one that you highlighted but you've talked for a while you intimated you've got sightlines on getting some improvement there and obviously you're going to lap some headwinds to that regard.
In the second half.
I appreciate the commentary with respect to kind of the shipment shifts.
Into Q2, the pull forward.
But but if I were just backing up here net net as we look into the second half you're thinking about what you are lapping along with the distribution. The innovation pipeline remains strong and you've got the merchandising and I'm wondering where are we where are we in the process of merchandising are we back to sort of the level that you think and I know its shifts at different periods, but are you back to where you thought you would be or is there more low is there more opportunity for merchandising to grow and then in that context net net are we talking about more tailwind sequentially then headwinds as we look over the back half of the year versus what we've seen so far in the first half the year is it fair to say that more tailwinds or headwinds.
I'm not sure about the Tailwinds versus headwinds, we've got very strong growth in Q2. Some of it was timing we expect.
Continued meaningful growth ahead of this we baked goods category in the back half.
Let me address one comment though.
Our growth is driven not just by merchandising, it's driven by good fundamentals execution of our partnership programs. The team's focus on mix, we focus on executing a pricing action, which continues a lot of those continue through the back half of the year, our broad based merchandising activities that we've sold and across multiple channels.
We have good line of sight to those and I feel as confident as I talked about for the first half I feel about.
In the second half as well.
Will we get to the same percentage growth, it's not going to be as high as Q2, but I expect it to be continue to be.
Very robust in the back half of the year.
As far as do I think we're at the peak.
We're about where we expect it to be Andy Jacobs and his team are continuing to work with our customers to help grow their categories.
And we think the best way to grow that is through building innovation and partner with them to build great brands around hostess. So we're in a continuous improvement mode. When it comes to across our whole business and including merchandising. So that's the that's the way we look at it.
Okay perfect. That's helpful color I appreciate it and Tom did I hear you correct that you expect the gross margin in Q3 and Q4 to be at least as good as Q2, I just want to make sure I.
On average they wellbeing.
Okay.
As the back half, we always get back to school and the and the merchandising programs. We do in Q3 that I always have Q3 is generally our lowest quarter of the year and then Q4 with that.
Okay. That's just timing is that just timing, but back half on average.
Okay perfect.
That's all for me thanks, guys.
Thank you thanks, Brian .
Thank you and our next question comes from the line of Steven Strike ULA with you. Yes. Please proceed with your question.
Hi, good afternoon, and congratulations on a good quarter.
So thanks.
So quick question for Tom just midpoint to midpoint.
Before the divestiture sure you were at the midpoint was 205 million for EBITDA for the upcoming fiscal year. It looks like about 3 million of that will be haircut for.
Getting rid of Ais b.
At first of how are you going to port that is going to be discontinued ops for the third quarter and then how should investors think about the new midpoint of your guidance be would you have raised this quarter if it weren't for the.
The divestiture and then I've a follow up thanks.
Yes, thanks, Steve So we are not going to reported as a discontinued operation due to its size.
And despite the sale of Ais B, our EBITDA guidance is it still 200 to 210, just by the math would be the midpoint would be to a five.
Okay.
And then for the Chicago bakery profitability, how should we think about the you really didnt mentioned a lot of that on the call today national share about them on September 10th but is it still tracking to profitability.
Or to the goals that you outlined previously and was that business profitable in the second quarter I think it was close to breakeven nominally profitable in the first quarter. Thank you.
Thanks, David It was overhauled.
Business was profitable in the second quarter, we have and we didnt speak about it as much we have revenue pipelines and we have we have cost initiatives and with those covert Hill is on plan for meeting its cost initiatives.
All right. Thank you.
Thank you and our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.
Hey, Thank you.
A few from me if I can first you mentioned tax incentives from B.
The decision to stay within Kansas City can you help us understand when those kick in and how we think about the potential impact on your all in tax rate.
Sure that the primary tax incentives that that Kansas gives start a year after after the move.
And those do not run through.
Those credits do not run through the tax line.
Got it okay.
And you will let us know down the road and roughly how big those Arnaud.
It's I think we're now yes.
Yes.
Okay and then the.
You mentioned, the five to 10 million affected by downtime maintenance that that's.
That's a lot as a percentage of your quarterly sales.
So two things first why is that figure. So high is there is there something unusual about the nature of maintenance.
And second I think I heard you mentioned that this will affect demand driven and gross not sure how the downtime affect demands and maybe I just heard that wrong I just wanted to clarify that if we could.
So just on the second piece, we expect to continue to grow.
We are to taken down a couple of lines for maintenance. So it may have been cute with words, but what I. Just expect is we're growing a lot we expect it to grow a lot. So we may be.
Just modifying some of our ability to ship to meet the full demand for.
For those couple of weeks.
And then related to it.
You know these lines are reviewed routinely so there's never a good time, but its about this is really think about a continuous improvement in quality for the long term. So it's a combination of upgrading some of the hardware and maintenance in areas and then pulling apart and improving some of the lines. So.
The consistency of the output is consistent so.
We have a clear line of sight to the work plan I feel good about it there's never a good time to do it but.
But thats why because it needs to get it didn't get lines need to be down and the maintenance needs to be done. So that's what we're doing.
Okay, and then one last one for me I wanted to get a sense of your appetite for stock buybacks at a higher level.
Obviously, you still want to prioritize reinvestments in debt pay down and you mentioned M&A, but.
You can make an argument that given your growth your stocks not terribly expensive on a cash basis. So.
It is an increased buyback just too far down the priority list today or if your stock doesn't move much higher.
Clearly you have the some of it has been a fair fairly willing seller the list.
Last few months, just curious if thats an increasingly attractive use of cash for you or is just off the table right now.
Well as we've said multiple times first of all we like good as Tom mentioned were really de leveraging very fast so we like our position.
And we also like our Optionality, we continue to think.
That the best use of cash is either to invest in the business.
Look at M&A will be very disciplined about that.
And if not continue to de lever at this point, so I feel good about our cash position, but that being said also every quarter.
In every meeting we look at our cash options.
So it's a continuous continuous process.
Thank you.
Thanks, Ken.
Thank you and our next question comes from the line of Pam Kaufman with Morgan Stanley . Please proceed with your question.
Hi, Thanks for the question congrats on the quarter.
And you mentioned that that the cash flow in the quarter was impacted by the timing of customer receipts can you elaborate on that and also whats contributing to your outlook for lower cash from operations. This year is it mostly the odd divestiture or are there other factors driving that.
Yeah sure. Thanks, Pam we mentioned.
Cash collections in the first quarter, which did drive some of the improvement in the second quarter.
And Ah our Dsos are are doing well right now.
And then on the decrease that is primarily from the divestiture.
Okay. Thanks, and then secondly, just on the innovation pipeline can you give an update on your planned innovation for the back half of the year.
Sure we feel first of all we feel really good about breakfast coming in.
Our LCOS has been doing extremely well for continued to expand on birthday cupcakes.
We've come out with some snack pack dough nets, which continue to drive well, we're looking at a new brownie innovation.
That's coming out we feel great about that we're also looking at and.
Oh accelerating on some of the totaling 90 work, we're working on expanding.
Some reliable capacity on that that's going to get coming online pretty soon and we expect that to expand very well.
And then really as I mentioned in my prepared remarks, as well I'm also really excited about.
Some of the investments we have in in insights and some of the car platform concepts that I've seen Chad work on not quite ready for prime time, but I feel like our innovation pipeline is really growing as well and the execution of what we're doing is is coming along really well what's great about the brand just related to innovation.
A lot of it's about expanding usage within the need state, but also a lot of it is really leveraging our great brand and consumer affinity and small changes make a huge difference when we went to us more convenient snack pack in doing that so I'm really excited about the attraction around that we came out with some new zingers I'm really excited about how that's accelerating and driving that business grow so our innovation year on year as contributed significantly and I feel good about that continuing in the back half.
Great and just one more question.
You discussed executing on your price increase and completing that in Q1 and you know it's evident in the Nielsen data there are price increases occurring throughout the portfolio, but on an overall basis pricing is somewhat flat.
So.
You know, what's contributing to the declines in some of the categories, where you're not seeing pricing and is there an opportunity to reverse that.
So there is a couple of things going on I'm not exactly sure at that data that you're looking at so we can take that offline I am more than happy to fill it but let me maybe comment on a couple of things the the pricing and the multifaceted pricing action that we took.
Was across the board, we did some downsizing items and kept it we looked at some mix and then we surgically based on the analysis, we did price within certain items in channels, where we felt the elasticity or the price to value could handle it that's us really executed but the way we expected and is is contributing to the business in Q2, where you may be seeing.
It is also mix, we've we've we've driven into some value businesses with the Clover Hill acquisition that you may see within the mix. There. They are by definition at a lower revenue rate and we're doing a nice job of executing those across channels, whether its club within.
Value smaller format stores, where within band and that's been doing well for our business and there may be some mix at play there, but I'm more than happy to take it offline and expanded the headline is.
I'm pleased with the execution and the analysis, we did upfront under pricing action.
Great. Thank you.
Sure.
Thank you and our next question will come from the line of Bill Chappell with Suntrust. Please proceed with your question.
Thanks, Good afternoon.
This might be an odd question, but are you getting the benefits from moving to Kansas City, Missouri, or Kansas City, Kansas.
So we're currently in Kansas City, Missouri and were move into Kansas State accounted and oversight.
Sorry.
And then in terms of just kind of going back to the Ais b kind of.
A little more on your your thoughts there in terms of.
Yes, I understand it was one where you probably would have needed to make more acquisitions to be upscale in size.
But was this just trying to understand the Genesis of the process did you decide six months ago, let's move out and did an auction or did someone come to you and say hey, this would be more valuable to us are and how and and what does that say just about the space. It just doesn't fit with kind of what you. Originally thought we would be a good fit with the core.
So that first of all the IP business, we have the team. We had was absolutely terrific who did a great job we've grown the business since we bought it.
We grew profit we grew revenue as Tom mentioned in his prepared remarks.
What weve looked at and not commented on this several times Bill is our best use of cash.
Our ones.
That we we determined build on where where scale and what we're really good at and that is building brands up collaborating with customers to build their categories, leveraging our consolidate and centralize warehouse distribution model and and building just delighting consumers in the need states that we have within breakfast and indulgent snacking.
The IP business, although great are.
Assessment was for it to continue to grow even beyond where we where we would need to invest into cash and scale of that to the same level that we had because it goes through a different distribution system is sold into a different part of the store it has a.
Some different products, it's not brand it we looked at bringing the hostess brand there.
And it wasn't as successful so when we consolidated all those we felt that the focus on our core business, where we have tremendous opportunity and I'm really excited about as this the team.
That focus was better and that the I. SP business. The great business that that team has built with thrive under someone who would be ready to invest in it and that's with several lease willing to do so I think it was a win win the team performed at the integrated a terrifically they build a terrifically and then when it didnt fit with up when we tried the hostess brand. It didnt fit we made the fast decision to put it into an ownership that we thought could grow it and get the business a great. It is a great business is probably maybe one of the greatest in that space, but it for us it was about focus.
Got it and then just one other in terms of kind of.
Health of the overall suite big goods category I mean, it seems like it's fairly stable to growing but.
With regard to your market share.
Should we expect another step forward I mean <unk>.
In the past it was a kind of a thought of maybe one day you could get back to that 23% year pre bankruptcy and then there was no longer talked about for a while and now you're getting back to five year highs is should we expect <unk>, especially as you move into breakfast and other items that that 23 is attainable.
My expectation I know our teams as they continue to grow share.
But you know I'd like to shift to.
We're not just looking at.
Our category, we're looking at our consumer frame of reference in saying when they're looking for indulgent snacking overload booking for breakfast solutions, we compete in a much larger pool that way and we believe our sweet baked goods offering have attributes and certain and our brand have a lot of elements that we think can to grow our share of that broader need state. That's a lot bigger pie and when we continue to do that continue to execute and build off of our great customer fundamentals I think that we can continue to grow.
So, yes, I think weve grown on almost an average over the last year about a share point a year.
We expect to continue to grow some of the reasons, we weren't back to some of the levels as there's a lot of advantage we have not some of the products work as we couldn't deliver the consumer to the standards that we expect that a hostess in some of the product forms, but we're building very profitably of where we have an advantage and we're going to continue to do that.
Great. Thank you.
Thanks, Bill Thanks Bill.
Thank you and our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.
Hi, good afternoon, Andy and Tom.
Andy you spoke a little bit about the new facility.
In Kansas opening up next year.
Can you talk a little bit about how much of a needle mover that can be maybe boast on on the cost side and.
Your ability to better serve that customer the customers grab market share what are your expectations that that new facility can deliver and then secondly are there going to be any start up costs associated with that that we might see later this year or early next year.
[noise].
Yeah. There is some capital costs, we were concluded that and that's within our capital there's no extra capital associated with that but there is some.
Relatively modest capital cost.
The.
So let me explain explained with US we've historically had our R&D center centers since the relaunch we've had our team in a separate building with with one of our partners.
It's been cumbersome to a kind of collaborate and coordinate across sometimes this is just not as hard we don't have 100% access to equipment and facilities, we need and therefore, we do a lot more in our actual full scaled up facilities and therefore, the ability to be able to do that or do benchtop samples were to run a sale samples and all of those things are.
Our more expensive they take more time, so the ability to co locate it makes us which we are and we pride ourselves makes us much faster makes us much nimble makes us look at a breadth of enables us to look at abreast of ideas a lot faster. So our R&D team can really do.
Faster prototyping and testing and other things related to our product. So im real excited about our ability to be able to do that.
It's not.
Necessarily unique that companies with our stature would have that but it will be new to us and we've been highly successful without it and I expect us to drive momentum and the ability to innovate with it. So that's that's kind of the idea.
Alright, Thank you very much.
Thanks, John .
Thank you and our next question comes from the line of Donald Mclee with Berenberg. Please proceed with your question.
Thanks for taking the question just to go back to a dispute distribution end merchandise to put actions you talked about earlier, how much of that was isolated to the quarter and maybe are there more <unk> or are they more sustainable measures that you can replicate for the remainder of the year that'll support similar volume strength.
Okay. So thanks up like we have a good line of sight to our total program for the year and as I said before a part of it's a good broad based merchandising we've seen a lot of it's our pricing actions and some of its are just fundamentals related to mix and customers. So.
There's some components there I would think about our back half continuing to grow continue to grow well above the suite Oh.
Baked goods category.
Okay. Thanks for the time.
Yes. Thank you.
Thank you and our last question comes from the line of Steven Strike you live with you. Yes. Please proceed with your question.
Hi, guys just had a quick follow up I've been getting a lot of questions. In just wanted make sure that we kind of set the record straight on what to expect for for Q3.
Tom didn't store bakery are we going to have much of a revenue contribution if at all in the third quarter.
And then the fact that Andy was saying that she is still expect some growth in the quarter is that on an absolute dollar basis or is that more for just call. It the surviving operations that are not being divested.
That may be that part should grow like maybe in a low single digit range clarification would be great.
Yeah. Thanks, Steve we're still gonna grow on an absolute basis, and we will grow organically, obviously with the adjustment Fry SB, we expect to have revenue for a couple of months of the quarter, we expect to close in the third quarter towards the end of it.
But we will you know we we still continue to expect to grow ahead of this we baked goods category.
Okay, Great and then strategically you guys to continue to do well in convenience I know, that's a higher margin channel.
Can you speak about that channel specifically, how is the warehouse model.
Different than the DSD model do you actually be warehouses or relative competitive strength in that channel versus DSD, because I know that you have some competition. There would also like to have a piece of that pie, but seems like you guys continue to gain share there. Thanks.
Yeah. Thank you yeah I do believe the warehouse model has unlocked the distribution network and giving them a category they've terrific relations with our customer.
I give credit to our team.
Under Scott Ward's leadership, or they do a terrific job, but we do executed very well, we have great distributor partners and great relationships with the C store, we do think it's a it's a it's an advantage to be able to access the BRAF.
Of a distribution in C stores no. There's no suite baked goods business that has the breadth of distribution that we have across all channels and that includes C stores well when they when you have high velocity smaller stores. Our warehouse motto is highly advantage.
And we're not but were not content with just having the distribution model. We continue invest in analytics to fuel our hostess partnership program to make sure that we're optimizing the mix we're pricing to value.
And we're driving up the.
Breadth of the distribution in the markets that warranted. So a lot of those fundamentals that you don't see that the team is executing and C are driving the growth just and that's a foundation that's terrific that build on with.
Consumer programs as well as.
As well as innovation.
So the last piece I'd say is we can really effectively and efficiently through our centralized distribution drive merchandising you know toppers on the shelves that or racks within their stores very efficiently. So we do have a great model, but more importantly, the team is executing really well and we're not content, we're continuing to fuel it with new analytics and insights.
Great. Thank you.
Thank you.
Dave.
Thank you and we actually have one question in the queue at this time when Rebecca shoe in men with Morningstar. Please proceed with your question.
Oh, yes, thank you and congratulations on a great quarter, So I'm, sorry to beat a dead horse here, but the revenue line, but I'm just kind of Uh huh.
Hi, I'm looking at it and.
Yeah, the 6% growth that we saw on the point of sale is it reasonable to think that that's kind of the run rate that we can't expect expects to be sustained throughout the second half or was there something unique about the second quarter that drove that above trend.
We had if we don't we typically don't guide to the POS I would I would look to continue that growth to 6% of Pos we saw in the in the second half we actually stepped up in July if you look at the data.
We expect that to step down in August because I was timing of the back to school, but Oh, we have that we expect the continued growth well above this we baked goods category in the back half I feel good about our merchandising programs, it's driven by.
More than just our merchandising is driven by our mix fundamentals.
Multiple channels as well as.
As well as the merchandising.
So.
Okay. Okay. Thank you very much.
Yep. Thank you.
Thank you with no other questions in the queue at this time I would like to turn the call back over to management for any closing remarks.
Thank you and I appreciate that.
All the questions. So Q2 was a terrific quarter, we closed strong in the quarter.
We continue to invest in our business and I expect continued growth for now.
And for years to come so thanks for your interest in hostess and everybody have a great afternoon.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and we thank all of you for your participation.