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Hostess Brands, Inc. (NASDAQ:TWNK)
Q2 2019 Earnings Call
Aug. 07, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 and answer session will follow the presentation, and if anyone should require any operator assistance during the conference, please press *0 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.

Katie Turner -- Vice President of Investor Relations

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 30, 2019 that went up this afternoon at approximately 4:05 p.m. Eastern time. The press release and updated investor presentation are available on Hostess's 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 refer to Hostess's earnings release, as well as the company's most recent SEC filing, you will see a discussion of the factors that could cause the company's actual results to differ materially from these forward looking statements. Please remember the company takes no obligation to update or revise these forward-looking statements.

The company will make a number of references to non-GAAP financial measure. The company believes these measures provide investors with useful perspective on the underlying growth trend of the business and has included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measure.

And with that I'd like to turn the call over to Hostess Brands' President and CEO Andy Callahan.

Andy Callahan -- President and Chief Executive Officer

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 2019 outlook. Finally, we'll be happy to take your questions.

I am really pleased with our team's execution against our pillars for growth during the second quarter of '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 net revenue growth, increased market share, and an improvement in our industry-leading profitability.

In particular, a few key second quarter highlights. Net revenue increased 11.7% to approximately $241 million, our highest revenue quarter since relaunch. These results were driven primarily from increased sales of Hostess branded product, 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 [audio skip] -- We are also pleased with the solid Dolly Maddison branded growth as we leveraged our acquired Clover Hill customer relationship.

Net sales growth also benefited from our 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 a 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 Nielson 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 in our core Hostess branded product. 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 Nielson data. We've proactively pushed school merchandising support to better space our promotions throughout the year. As a result we expect strong July point of sale to be partially offset in August.

Additionally we are currently performing preventive maintenance and operational enhancements to a few of our lines. 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, 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 capability and will continue to do so in Q3. These investments helped us increasingly achieve growth across channels.

A few key highlights. Within growing the core, we continue to build our analytic capability and insights to drive the success of our Hostess partner program across both grocery and convenience. We talked extensively in previous calls about our investments in further understanding our elasticity, mix, and incrementality. These investments have enabled strong execution of our distribution and shelf mix programs and to focus execution of our multifaceted pricing action. We will continue to build our fundamentals across the 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 product 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 birthday cupcake as we celebrate 100 years of Hostess. This latest execution has further showcased the strength of our limited time offers or LTO 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 Hostess and category growth. Moving forward in the second half of '19, as customers complete product reset, we expect continued innovation growth. Breakfast and indulgent premium snacking are growth platforms over the next few years.

Our team is building out our pipeline of consumer-focused innovation to drive future profitable growth. Similar to our customer insight, 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 initiative 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 through our bakery efficiency initiative. In addition, the relocation of our primary distribution center from Illinois to Kansas is moving ahead and on track with our expectation. 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 completion, we expect to improve our customer service via taking miles out of our network and improving lane rates, as well as support -- We believe this further strengthens our category differentiated direct-to-warehouse distribution system and core prebuilt pallet and shipper merchandising capability. Our ability to efficiently and effectively build pallet-ready displays, shippers, and other merchandising forms 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 and capabilities. Under the leadership of our Chief Marketing Officer Chad Lusk and our Chief Operating Officer Andy Jacobs, we are 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 strength in customer and business fundamentals.

We are well-positioned to build upon our brand, operational, and business fundamental capabilities with even sharper consumer-driven insight. 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 strong talent base.

We will continue to leverage our strong cash flow to help fuel our growth, deleverage, 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, deleveraging our balance sheet, and pursuing potential [audio cut] while effectively managing our capital structure.

Superior has been a high-performing business, and we believe it will continue to thrive in Sara Lee Frozen Bakery's portfolio as we focus our future investments on areas of our business that better leverage our core competencies and pillars for growth. I wanna 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 capability. 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, robust innovation, and significant cash flow that 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 quarter's details.

Tom Peterson -- Chief Financial Officer

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 2018's revenue, driven by a combination of volume and price increases across multiple channels. We believe our record Q2 revenue performance will be largest year-over-year growth for 2019.

Adjust 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 in 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 $0.17, compared to $0.14 in the second quarter of prior year. We ended the quarter with cash and cash equivalents of $189.3 million and net debt of $790 million. Our operating cash flow for the six months ended June 30 were $74.1 million, compared to $81.2 million for the prior year. For the quarter, our operating cash flow was $45.7 million or a 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 30 has improved to 4x. During 2019 we expect to improve overall leverage by 1.1x to 1.3x, given our expected EBITDA growth and inherent cash flow generation, absent any significant business transaction. 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 to a 3.2x to 3.4x.

To expand further on our planned ISB 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 ISB sale to be approximately $0.03 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 ISB business in the third quarter. We continually expect net revenue for the year to continue to organically grow well above the sweet baked goods category, driven by Hostess branded core and new product innovation, expanded distribution, and improving merchandising execution over the course of the year and execution of our multifaceted pricing program.

We expect adjusted EBITDA to be in the range of $200 million to $210 million, driven by the revenue growth and achievement of our operating efficiency. Despite the $0.01 dilution from the ISB sale, adjusted EPS is expected to continue to be in the range of $0.57 to $0.62 per share, primarily driven by the execution of the multifaceted pricing and merchandising program and achievement of efficiencies.

We anticipate ending the year with net debt leverage ratio between 3.2x and 3.4x, driven by strong operating cash flows of $145 million to $155 million and the expected proceeds from the ISB sale, partially offset by capital expenditures in the range of $30 million to $35 million. Our expected tax rate, excluding discrete items, is 21-22%.

Now I'll turn it over to Andy for his final remarks.

Andy Callahan -- President and Chief Executive Officer

Thanks, Tom. We are very pleased with our business fundamentals, increasing core capabilities, and the broad base 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 the sweet 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.

Questions and Answers:

Operator

Thank you. And if anyone would like to ask a question during today's conference, it is *1 on your telephone keypad, and a confirmation tone will indicate that your line is in the question queue. You may press *2 if you would like to remove your question from the queue, and for any participants using speaker equipment it may be necessary to pick up your handset before pressing the * key.

And with that, we go to our first question from the line of Rob Dickerson with Deutsche Bank. Please proceed with your question.

Rob Dickerson -- Deutsche Bank -- Analyst

Great. Thank you so much. Great quarter, I guess. Two very easy questions. First question is just with respect to the Q2 revenue gross result and then how maybe we should think about the back half given I think you said $5 million or $10 million maybe on the line transition shift but then also pull forward of volume in the July data that we're seeing, which is obviously very impressive of Fourth of July and back to school and then also off the sale of 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% in sweet baked goods for Q2, the data looks better, but there's volume pull forward. So maybe just some perspective as to kind of maybe what you think is kind of a right, normalized rate. Are you growing more like 7-8%? And kind of if you would take away all the noise. And that's it. Thanks.

Andy Callahan -- President and Chief Executive Officer

Hey, thanks, Rob. Appreciate it. Just a headline. Absolutely. We expect to continue to grow, and we're gonna continue to grow ahead of the sweet 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% percent. Q2 was up 11.7%. Our Nielson takeaway in July was really strong, and as you mentioned 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 a supply I talked about, but that'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 like I talked about in previous quarters, I feel really good about our merchandising plans. I feel really good about the initiatives we put in place. We're already planning for thinking forward into 2020. So I feel really good about the future growth prospects.

Rob Dickerson -- Deutsche Bank -- Analyst

Fair enough. Thank you so much.

Andy Callahan -- President and Chief Executive Officer

Thanks, Rob.

Operator

Thank you. And our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

David Palmer -- Evercore ISI -- Analyst

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 your all-channel consumption may have differed from shipment 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. It's somewhat -- could be related. That would be interesting to hear about. And from your graph it looks like club, mass, and dollar were where you were having outsized growth there. I guess my question would be going forward is there gonna 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.

Andy Callahan -- President and Chief Executive Officer

Yeah, thanks. Appreciate the question. So there was a shipment year-on-year for very strong July 4th merchandising that went into June. We think that's about $200 million at this point potentially or so. So just for that one. If you look at a total, merchandising for back to school, it is a time in July and August, if you look at total July and August, you know, that merchandising would have been about the same. And that really helps us execute some of our investments, but also it helped sequence -- We've a fairly robust merchandising program, so it helps us sequence them throughout the full period. So that's on that.

It's absolutely true. So just on yours, I don't wanna leave convenience out either. We've seen some really good growth in our small format as well. It's a great channel for us. That team's doing a great job. We're seeing it. Our grocery growth, it is growing. It's not growing as robustly. There's very strong growth in the others, and I feel good about the programs there. We continue to work and battle on grocery as well. It doesn't look as good of performance when you compare it against some of the really, really strong performance, but we're working hard to accelerate grocery's growth as well.

David Palmer -- Evercore ISI -- Analyst

All right. Thank you.

Andy Callahan -- President and Chief Executive Officer

Thanks, David.

Operator

Thank you. And our next question comes from the line of Brian Holland with D.A. Davidson. Please proceed with your question.

Brian Holland -- D.A. Davidson -- Analyst

Yeah, thanks. Good afternoon, gentleman. So not to continue to beat on the topline here on that topic, but I guess just to maybe sum up here. The merchandising, you know, it wasn't a catalyst in Q1 or one that you highlighted, but you've talked for a while, you've intimated you've got sidelines on getting some improvement there. And obviously you're gonna lap some headwinds to that regard in the second half. I appreciate the commentary with respect to kind of the shipment shift into Q2, the pull forward.

But if we're just backing up here, net debt, as we look into the second half of the year, thinking about what you're lapping along with the distribution, the innovate strong, and you've got the merchandising. And I'm wondering where are we in the process of merchandising? Are we back to sort of the level that you think -- and I know it shifts at different periods -- but are you back to where you thought you would be? Or is there more opportunity for merchandising to grow and then in that context net-net, are we talking about more tailwind sequentially than headwinds as we look over the back half of the year versus what we've seen -- [audio cut].

Andy Callahan -- President and Chief Executive Officer

-- 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 base merchandising activities that we've sold in across multiple channels, we have good line of sight for those, and I feel as I 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 gonna be as high as Q2, but I expect it to 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 partnering 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 way we look at it.

Brian Holland -- D.A. Davidson -- Analyst

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 wanna make sure that...

Tom Peterson -- Chief Financial Officer

Yeah, on average they will be.

Brian Holland -- D.A. Davidson -- Analyst

Okay.

Tom Peterson -- Chief Financial Officer

As a back half, we always have back-to-school and the merchandising programs we do in Q3 that always have Q3 as generally our lowest quarter of the year, and then Q4 with the --

Andy Callahan -- President and Chief Executive Officer

That's just timing.

Tom Peterson -- Chief Financial Officer

That's just timing. The back half, on average.

Brian Holland -- D.A. Davidson -- Analyst

Okay. Perfect. That's all for me. Thanks, guys.

Tom Peterson -- Chief Financial Officer

Thank you.

Andy Callahan -- President and Chief Executive Officer

Thanks, Brian.

Operator

Thank you. And our next question comes from the line of Steven Strycula with UBS. Please proceed with your question.

Steven Strycula -- UBS -- Analyst

Hey, good afternoon, and congratulations on a good quarter. So quick question for Tom. Just midpoint to midpoint, before the divestiture the midpoint was $205 million for EBITDA for the upcoming fiscal year. It looks about $3 million of that will be haircut for getting rid of ISB. First of all, how are you gonna report that? Is it gonna be discontinued ops for the third quarter? And then how should investors think about the new midpoint of your guidance? Would you have raised this quarter if it weren't for the divestiture? And then I have a follow up. Thanks.

Tom Peterson -- Chief Financial Officer

Yeah, thanks, Steve. So we are not gonna report it as a discontinued operation due to its size, and despite the sale of ISB our EBITDA guidance is still $200 million to $210 million. Just by the math, the midpoint would be $205 million.

Steven Strycula -- UBS -- Analyst

Okay. And then for the Chicago bakery profitability, how should we think about that? You really didn't mention a lot of that on the call today. I imagine we'll hear about that more on September 10. But is it still attracting profitability to the goals that you outlined previously? And was that business profitable in the second quarter? I think it was close to break even, nominally profitable in the first quarter. Thank you.

Tom Peterson -- Chief Financial Officer

Thanks, Steve. It was. Clover Hill business was profitable in the second quarter. We have, and we didn't speak about it as much, we have revenue pipelines and we have cost initiatives, and with those Clover Hill is on plan for meeting its cost initiative.

Steven Strycula -- UBS -- Analyst

All right. Thank you.

Operator

Thank you. And our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Ken Goldman -- JP Morgan -- Analyst

Hey, thank you. A few from me, if I can. First, you mentioned tax incentives from 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?

Tom Peterson -- Chief Financial Officer

Sure. The primary tax incentives that Kansas gives start a year after the move, and those do not run through, those credits do not run through the tax line.

Ken Goldman -- JP Morgan -- Analyst

Got it. Okay. And you'll let us now down the road roughly how big those are, though? That's I think important.

Tom Peterson -- Chief Financial Officer

Yeah.

Ken Goldman -- JP Morgan -- Analyst

Okay. And then the -- You mentioned the $5 million to $10 million affected by downtime maintenance. That's a lot as a percentage of your quarterly sales. So two things. First, why is that figure so high? Is there something unusual about the nature of the maintenance? And second, I think I heard you mention this will affect demand-driven growth. I'm not sure how the downtime affect demands, or maybe I just heard that wrong. I just wanted to clarify that if we could.

Tom Peterson -- Chief Financial Officer

So just on the second piece. We expect to continue to grow. We are taking down a couple of lines for maintenance, so it may have been cute with words. But I just expect is we're growing a lot. We expect to grow a lot. So we may be just modifying some of our ability to ship to meet the full demand for those couple of weeks. And then related to it, these lines are reviewed routinely. So there's never a good time, but this is really, think about it, continuous improvement of quality for the long term. So it's a combination of upgrading some of the hardware and maintenance in areas, and then the pulling apart and improving some of the lines. So the consistency of the output is consistent. So we've a clear line of sight to the work plan. I feel good about it. There's never a good time to do it, but that's why. Because the lines need to be down and the maintenance needs to be done. So that's what we're doing.

Ken Goldman -- JP Morgan -- Analyst

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 wanna prioritize reinvestment and debt payout. You mentioned MNA, but you can make an argument that, given your growth, your stock's not terribly expensive on a cash basis. So is an increased buyback just too far down the priority list today? Or if your stock doesn't move much higher, you know, clearly you have someone who's been a fairly willing seller the last few months. Just curious if that's an increasingly attractive use of cash for you, or it's just off the table right now?

Andy Callahan -- President and Chief Executive Officer

Well, as we've said multiple times, we like, as Tom mentioned, we're really deleveraging 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 MNA. We'll be very disciplined about that, and if not continue to de-lever at this point. So I feel good about our cash position. With that being said, also every quarter and every meeting we look at our cash options. So it's a continuous process.

Ken Goldman -- JP Morgan -- Analyst

Thank you.

Andy Callahan -- President and Chief Executive Officer

Thanks, Ken.

Operator

Thank you. And our next question comes from the line of Pam Kaufman with Morgan Stanley. Please proceed with your question.

Pam Kaufman -- Morgan Stanley -- Analyst

Hi. Thanks for the question. Congrats on the quarter. You mentioned that the cash flow in the quarter was impacted by timing of customer receipts. Can you elaborate on that? And also what's contributing to your outlook for lower cash from operations this year? Is it mostly the divestiture, or are there other factors driving that?

Tom Peterson -- Chief Financial Officer

Yeah, sure. Thanks, Pam. We mentioned the cash flex in the first quarter, which did drive some of the improvement in the second quarter, and our DSOs are doing well right now. And then on the decrease that is primarily from the divestiture.

Pam Kaufman -- Morgan Stanley -- Analyst

Okay, thanks. And then secondly and just on the innovation pipeline, can you give an update on your planned innovation for the back half of the year?

Andy Callahan -- President and Chief Executive Officer

Sure. First of all, we feel really good about breakfast coming in. Our LTOs have been doing extremely well. We'll continue to expand on birthday cupcake. We've come out with some snack pack Donettes, 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...Oh, accelerating on some of the Totally Nutty work. We're working on expanding some liable capacity on that that's coming on line 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 insight and some of the platform concepts that I've seen Chad work one. Not quite ready for prime time, but I feel like our innovation pipeline's really growing as well. And the execution of what we're doing 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 space, 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 a more convenient snack pack in Donette, really excited around the attraction around that. We came out with some new zingers and really excited about how that's accelerated and driving that business growth. So our innovation year-on-year has contributed significantly, and I feel good about that continuing in the back half.

Pam Kaufman -- Morgan Stanley -- Analyst

Great, and just one more question if -- You discussed executing on your price increase and completing that in Q1, and it's evident in the Nielson data that there are price increases occurring throughout the portfolio. But on an overall basis pricing is somewhat flat. So [audio cut] some of the categories where you're knotting pricing, and is there an opportunity to reverse that?

Andy Callahan -- President and Chief Executive Officer

So there's a couple things going on. I'm not exactly sure of the data that you're looking at so we can take that offline. I'm more than happy to fill it, but let me maybe comment on a couple things. The pricing, the multifaceted pricing action that we took was across the board. We did some downsizing on items and kept it. We looked at some mix, and then we surgically, based on the analysis we did, priced within certain items and channels where we felt the elasticity or the price-to-value could handle it. That's really executed the way we expected and is contributing to the business in Q2.

What you may be seeing is also mix. We've driven into some value businesses with the Clover Hill acquisition that you may see within the mix. They're, by definition, at a lower revenue rate, and we're doing a nice job of executing those across channels, whether it's club, within value small format stores, or within brand. And that's been doing well for our business, and there may be some mix in play there. But I'm more than happy to take it offline and expand it.

The headline is I'm pleased with the execution and the analysis we did up front on our pricing action.

Pam Kaufman -- Morgan Stanley -- Analyst

Great. Thank you.

Andy Callahan -- President and Chief Executive Officer

Sure.

Operator

Thank you. And our next question will come from the line of Bill Chapel with SunTrust. Please proceed with your question.

Bill Chapel -- SunTrust -- Analyst

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?

Andy Callahan -- President and Chief Executive Officer

So we're currently in Kansas City at Missouri, and we're moving to Kansas, the state of Kansas. We're moving over. Yeah.

Bill Chapel -- SunTrust -- Analyst

Sorry. And then in terms of -- Just kinda going back to the ISB, kind of a little more on your thoughts there in terms of -- I understand, it was one where you probably would've needed to make more acquisitions to be of scale and 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 a auction, or did someone come to you and say, "Hey, this would be more valuable to us"? And what does that say just about the space? It just doesn't fit with kinda what you originally thought would be a good fit with that core?

Andy Callahan -- President and Chief Executive Officer

So first of all, the ISB business we had, the team we had, was absolutely terrific. It did a great job. We've grown the business since we bought it. We grew profit. It grew revenue, as Tom mentioned in his prepared remark. What we looked at, and I've commented on this several times, Bill, is our best use of cash are ones that we determine build on where we're scaled and what we're really good at, and that is building brand, collaborating with customers to build their category, leveraging our consolidated and centralized warehouse distribution model, and building just delighting consumers in the need space that we have within breakfast and indulgent snack.

The ISB business, although great, our assessment was for it to continue to grow even beyond where we were we would need to invest in cash and scale it to the same level that we had because it goes through a different distribution system, it sold into a different part of the store, it has some different products. It's not branded. 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 is the team, that focus was better, and that the ISB business, the great business that that team has built, would thrive under someone who would be ready to invest in it. And that's what Sara Lee is willing to do.

So I think it was a win-win. The team performed it. They integrated it terrifically. They billed it terrifically. And then when it didn't fit with -- when we tried the Hostess brand and it didn't fit, we made the fast decision to put it into an ownership that we thought could grow it and give the business a great -- It is a great business. It's maybe one of the greatest in that space, but for us it was about focus.

Bill Chapel -- SunTrust -- Analyst

Got it. And then just one other. In terms of kind of health of the overall sweet baked goods category, I mean, it seems like it's fairly stable to growing, but with regards to your market share, should we expect another step forward? In the past it was kind of a thought of maybe one day you could get back to that 23% share of pre-bankruptcy, and then that was no longer talked about for a while. And now you're getting back to five year highs. Should we expect, especially as you move into breakfast and other items, that 23 is attainable?

Tom Peterson -- Chief Financial Officer

My expectation, I know our team's is, is to continue to grow share, but I'd like to shift to we're not just looking at our category. We're looking at our consumer frame of reference and saying when they're looking for indulgent snacking and looking for breakfast solutions we compete in a much larger pool that way. We believe our sweet baked goods offering have attributes and our brand have a lot of elements that we think can grow our share of that broader need space, and 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 yeah, I think we've 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 is there's a lot of advantage we have, not some of the product. We couldn't deliver to the standards that we expect out of Hostess in some of the product floors, but we're building very profitably where we have an advantage. And we're gonna continue to do that.

Bill Chapel -- SunTrust -- Analyst

Great. Thank you.

Tom Peterson -- Chief Financial Officer

Thanks, Bill.

Andy Callahan -- President and Chief Executive Officer

Thanks, Bill.

Operator

Thank you. And our next question comes from the line of Jon Braatz with Kansas City Capital. Please proceed with your question.

Jon Braatz -- Kansas City Capital -- Analyst

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 both 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 gonna be any start-up costs associated with that that we might see later this year or early next year?

Andy Callahan -- President and Chief Executive Officer

There is some capital cost. We've included that, and that's within our capital. There's no extra capital associated with that, but there is some relatively modest capital cost. So let me explain what this does. We historically had our R&D center, since relaunch, we've had our team in a separate building with one of our partners. It's been cumbersome to kind of collaborate to coordinate across. Sometimes it's just not as hard.

We don't have 100% access to the equipment and facilities we need, and therefore we do a lot more in our actual full scaled up facility. And therefore the ability to be able to do that or do benchtop samples or to run a sale sample and all of those things are 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 it for us. It enables us to look at a breadth of ideas a lot faster.

So our R&D can really do faster prototyping and testing and other things related to our product, so I'm really excited about our ability to be able to do that. It's not necessarily unique that a company of 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 kind of the idea.

Jon Braatz -- Kansas City Capital -- Analyst

Okay. Thank you very much.

Tom Peterson -- Chief Financial Officer

Thanks, Jon.

Operator

Thank you. And our next question comes from the line of Donald McLee with Berenberg. Please proceed with your question.

Donald McLee -- Berenberg -- Analyst

Thanks for taking the question. Just to go back to distribution and merchandise support actions you talked about earlier. How much of that was isolated to the quarter, and maybe are there -- or are they more sustainable measures that you can replicate for the remainder of the year that will support similar volume strength?

Andy Callahan -- President and Chief Executive Officer

Okay, so thanks. We have a good line of sight to our total program for the year, and as I said before part of it's the good broad-base merchandising we've seen. A lot of it's our pricing actions, and some of it's our just fundamentals. It may have been mix and customers. So there's some components there. I would think about our back half continuing to grow, continuing to grow well above the sweet baked goods category.

Donald McLee -- Berenberg -- Analyst

Okay. Thanks for the time.

Andy Callahan -- President and Chief Executive Officer

Yeah, thank you.

Operator

Thank you. And our last question comes from the line of Steven Strycula with UBS. Please proceed with your question.

Steven Strycula -- UBS -- Analyst

Hey, guys. Just had a quick follow-up. You've been getting a lot of questions, and just wanted to make sure that we kind of set the record straight on what to expect for Q3. Tom, the in-store bakery, are we gonna have much of a revenue contribution if at all in the third quarter? And then the fact that Andy was saying that you should 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 maybe that part should grow like maybe in a low single digit range? Clarification would be great.

Tom Peterson -- Chief Financial Officer

Yeah, thanks, Steve. We are still gonna grow on an absolute basis, and we will grow organically, obviously with the adjustment for ISB. We expect to have revenue for a couple months of the quarter. We expect to close in the third quarter, toward the end of it. But we will -- we still continue to expect to grow ahead of the sweet baked goods category.

Steven Strycula -- UBS -- Analyst

Okay, great. And then strategically you guys 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 DSE model? Do you actually view warehouse as a relative competitive strength in that channel versus DSE? Because I know that you have some competition that would also like to have a piece of that pie, but it seems like you guys continue to gain share there. Thanks.

Andy Callahan -- President and Chief Executive Officer

Yeah, thank you. Yeah, I do believe the warehouse model has unlocked the distribution network. We've given them a category. They have terrific relations with our customer. I give credit to our time, under Scot Ward's leadership. They do a terrific job. But we do execute it very well. We have great distributor partners and great relationships with the C-store. We do think it's an advantage to be able to access the breadth of a distribution in C-stores. There's no sweet baked goods business that has the breadth of distribution that we have across all channels, and that includes C-store as well.

You know, when you have high velocity smaller stores, our warehouse model is highly advantaged, but we're not content with just having the distribution model. We continue to invest in analytic to fuel our Hostess partnership program to make sure that we're optimizing the mix, we're pricing to value, and we're driving the breadth of the distribution in the market that warrant it. So a lot of those fundamentals that you don't see that the team's executing in C are driving the growth, and that's a foundation that's terrific to build on with consumer programs as well as innovation.

So the last piece I'd say is we can really effectively and efficiently through our centralized distribution drive merchandising, toppers on the shelves or wracks within those stores, very efficiently. So we do have a great model, but more importantly the team's executing really well. And we're not content. We're continuing to fuel it with new analytics and insights.

Steven Strycula -- UBS -- Analyst

Great. Thank you.

Andy Callahan -- President and Chief Executive Officer

Thank you.

Operator

Thank you, and we actually have one question in the queue at this time with Rebecca Scheuneman with Morningstar. Please proceed with your question.

Rebecca Scheuneman -- Morningstar -- Analyst

Yes, thank you, and congratulations on a great quarter. So I'm sorry to beat a dead horse here with the revenue line, but that's kind of a -- I'm looking at it, and 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 expect to be the same throughout the second half? Or was there something unique about the second quarter that drove that above trend?

Tom Peterson -- Chief Financial Officer

We typically don't guide to the POS. I would look to continue to grow the 6% POS. 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 that was the timing of the back-to-school, but we expect the continued growth well above the sweet baked good category in the back half. I feel good about our merchandising programs. It's driven by more than just our merchandising. It's driven by our mix, fundamentals, multiple channels, as well as the merchandising. So...

Rebecca Scheuneman -- Morningstar -- Analyst

Okay. Okay. Thank you very much.

Tom Peterson -- Chief Financial Officer

Yeah, thank you.

Operator

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.

Andy Callahan -- President and Chief Executive Officer

Thank you, and I appreciate all the questions. Q2 was a terrific quarter. We closed strong in the quarter. We continue to invest in our business, and I expect can [audio cut] for years to come. So thanks for your interest in Hostess, and everybody have a great afternoon.

Operator

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.

Duration: 54 minutes

Call participants:

Katie Turner -- Vice President of Investor Relations

Andy Callahan -- President and Chief Executive Officer

Tom Peterson -- Chief Financial Officer

Rob Dickerson -- Deutsche Bank -- Analyst

David Palmer -- Evercore ISI -- Analyst

Brian Holland -- D.A. Davidson -- Analyst

Steven Strycula -- UBS -- Analyst

Ken Goldman -- JP Morgan -- Analyst

Pam Kaufman -- Morgan Stanley -- Analyst

Bill Chapel -- SunTrust -- Analyst

Jon Braatz -- Kansas City Capital -- Analyst

Donald McLee -- Berenberg -- Analyst

Rebecca Scheuneman -- Morningstar -- Analyst

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