Aug 12, 2018
Executives
Katie Turner - ICR IR Dean Metropoulos - Chairman Andrew Callahan - President, CEO Thomas Peterson - EVP & CFO
Analysts
Ken Goldman - JPMorgan Farha Aslam - Stephens Inc. Bill Chappell - SunTrust Robinson Humphrey Michael Gallo - CL King Steven Strycula - UBS Brett Hundley - The Vertical Group
Operator
Greetings, and welcome to the Hostess Brands Incorporated Second Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Ms. Katie Turner, Investor Relations.
Please go ahead madam.
Katie Turner
Good afternoon and welcome to Hostess Brands' Second Quarter 2018 Earnings Conference Call. By now, everyone should have access to the earnings release for the period ended June 30, 2018 that went out this afternoon at approximately 4:05 p.m.
Eastern Time. If you have not received the release, it’s available on Hostess’ website at www.hostessbrands.com.
This call is being 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’ earnings release as well as the company’s most recent SEC filings, you will see a discussion of the factors that could cause the company’s actual results to differ materially from these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements.
The company will make a number of references to non-GAAP financial measures. The company believes these measures provide investors with useful perspective on the underlying growth trends of the business and has included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
Now I would like to turn the call over to Hostess Brands' President and CEO, Andy Callahan.
Andrew Callahan
Thanks, Katie. I want to start by thanking the many Hostess team members, partners, and customers who have spent extra time over the past three months investing energy and knowledge to get me up to speed on the great Hostess business.
It’s been terrific on boarding the passion and enthusiasm for Hostess is clear. What's also clear is the foundational pillars for continued industry leading profitable growth of Hostess remained strong.
Hostess has multiple paths for value creation and differentiating assets to unlock this growth within the core business as well as continued strong operating cash flow and the opportunities to acquire adjacent businesses. We are currently sharpening the focus on the most impactful pillars to support our growth.
Tom will discuss in more detail Q2 results which were a significant miss versus expectations. Q2 was directly impacted by the quickly escalating inflationary cost in the supply chain and a decline in retail inventory and consumer pull due to lower promotional support from one large retail partner as well as additional allowance with customers to drive growth.
Although the expenses associated with the transformation of Chicago were significant in the first half of 2018, we expect to perform in line with our original acquisition model in 2018 and remain very optimistic about the accretive opportunities it provides in 2019 and beyond. Despite the short-term impact of these headwinds, consumers continue to purchase hostess at a rate ahead of the Sweet Baked Goods category which is the foundation for long-term growth.
Let me go through some second quarter highlights. Hostess branded point-of-sale increased 2.4% for the 13-week period ended June 30.
This is well ahead of the category. Point-of-sale for the top seven Hostess sub-brands increased 4.4%.
These sub-brands represent nearly 66% of our Q2 net revenue and 84% of total point-of-sale dollars. Hostess Brands' market share was 17.5% up 42 basis points.
Hostess Brands also gained significant point-of-sale and market share growth in important sales channels. Let me go through some highlights here.
Point-of-sale in convenience channel was up 6.4% for the quarter and share was up 192 basis points to 23.1%, which is a record high for the new company and solidifies Hostess Brands' number one share position in this important channel. Point-of-sale within food channel was up 4.3% and market share was up 43 basis points to 13.4%, also an all-time for us.
And additionally, Hostess point-of-sale dollars within club were up 152% while share was up 108 basis points. As I mentioned, this impressive consumption increase was partially offset by 12.6% lower POS at a large retail partner due to a change in the corporate product display philosophy and the corresponding reduction in retail inventory which we expect will moderate moving forward as we move into the back half back-to-school merchandising.
Our focus in the second half of 2018 is to align our business and accelerate our growth while working to recover inflation driven cost increases. We are focused on five areas to support this profitable growth; aligning our price and merchandising program to improve the top line, continuing to manage our distribution and operations network to reduce costs, increasing display support across all key channels, driving the innovation agenda, and continuing the transformation of our Chicago Bakery.
We are working on plans to restructure our customer pricing and merchandising programs to manage inflation while maintaining growth and profitability. We believe the inflationary pressures of the CPG industry are systemic and here to stay for the balance of 2018 and into 2019.
As such, we will implement a retail price increase and incremental retailer programs to help offset the inflationary headwinds we and others in the industry are experiencing. We believe Hostess is highly profitable for our customers and our strong brand strength and large latch-on [ph] display provides us with a lot of flexibility to balance covering inflation while driving growth.
We will begin selling in these programs in the second half of 2018 and expect the majority of the impact to be in 2019. We are also intently focused on the execution of bakery and warehouse efficiency programs.
We are putting emphasis on the proactive evaluation of SKUs to optimize our portfolio and deliver increased profitability. We are also completing an evaluation of our warehouse locations in other bakery savings initiatives to drive profitable growth opportunities including the continued optimization of the Chicago Bakery which I previously discussed.
We have good line of sight to increase in the display support behind hostess in third and fourth quarter at one of our largest retail partners. The corporate change in display philosophy during Q2 not only impacted Hostess but also drove share loss for this customer.
Consistently across many examples, where Hostess performs well and is growing through merchandising and innovation, Hostess and our customers consistently grow market share together. This particular retailer has been a great partner to Hostess since the re-launch and my discussions with them had been collaborative and focused on profitably growing the category.
We are pleased with the merchandising support we have secured from all of our large customers during important back-to-school period which should help support the sequential improvement we expect to achieve in the third quarter. Additionally, our innovations around Bakery Petites and Breakfast are very encouraging.
Both of these innovations are platforms highly incremental to the portfolio and extendable. The Bakery Petite's platform specifically continues to build distribution and added 36 basis points to our market share for the quarter.
We continue to gain distribution in Q2 growing Bakery Petite to an ECB [ph] of 40% over the four-week period ended June 30. Recent consumer data showed that 91% of Bakery Petite sales were new consumers to the Hostess franchise and nearly 70% were incremental to the Sweet Baked Goods category.
Our innovation approach of driving new users to the Sweet Baked Goods category is working with Bakery Petite and we plan to extend this platform with new innovation items in the future. We also continue to develop other new and innovative products within all base snacking subcategories including the introduction of Totally Nutty and Up Scale peanut butter wafer bar.
For breakfast, the addition of Chicago gives us the firepower to drive meaningful improvement through our share of this subcategory. Breakfast represents 51% of the Sweet Baked Goods category while Hostess branded share products is currently 15%.
A 600 basis point share gap when compared to 21% sharable base snacking subcategory. We are excited about expanding at the Breakfast category new products including Jumbo Donettes, Multipack Danishes and Cinnamon Rolls and we are very pleased with the strong support from our largest retailers including commitments to our Danish offering which we expect to launch this fall.
To give an update on Chicago, the Bakery transformation is going very well. Well over half the margin compression this quarter compared to prior year was associated with Chicago.
We have good line of sight to growth and profit and expect to exit the year with run rate profit. The feedback from large customers after touring the facility has been terrific and we are confident it gives us another platform for growth in Breakfast as we continue to work to expand further into this subcategory.
We are leveraging our strong Hostess infrastructure, industry knowledge to support the Chicago transformation and are extremely pleased with what our team has achieved within a few short months. While the short-term operational cost to transform the Chicago Bakery was significant, we are still expecting significant future returns and as I mentioned in 2019 we will be highly accretive in both revenue and EBITDA from Chicago.
As we enter the second half of 2018 the team is focused on our priorities with a sense of rigor and urgency. We are taking significant steps to recover higher inflationary costs while returning to growth.
As we look ahead to 2019 we are confident that our efforts will deliver results. The fundamental strength of the Hostess Brand, the unique pricing power it provides and our strong balance sheet provides us flexibility to add the right assets to our portfolio and will continue to fuel growth and create sustainable value for our shareholders.
Now I'll turn it over to Tom to go through the details of the quarter results.
Thomas Peterson
Thanks, Andy. I will now review our second quarter financial performance and other data from today’s release.
Net revenue for the quarter was $215.8 million a 6.2% or 12.7 million increase from the second quarter of 2017 revenue of $203.2 million. Our top line results were driven by the product acquisitions from the Chicago Bakery which contributed $20.8 million revenue offsetting this incremental revenue with lower revenue from a large retail partner as Andy already discussed resulting from reduced display space along with retail inventory reduction.
Excluding the impact of Chicago acquisition and the lower revenue at this partner, our net revenue is up slightly when compared to last year. We generated $66.9 million of gross profit for the second quarter of 2018 and a gross margin of 31%.
As we fully integrate the Chicago operations into Hostess, the cost structure has already been combined and resulting in less comparable margin inflation on a standalone basis. The Hostess margins were negatively impacted through the quarter by the transformation and rebuild of Chicago.
But as a reminder, we acquired this business for $25 million which included $10 million of inventory. This business was losing significant amounts of money which we have already reduced substantially.
We expect to end the year with positive run rate EBITDA and expect incremental margin improvement in 2019. Consistent with others in the CPG industry, escalating inflationary pressures including transportation and other supply chain costs were more pronounced than we anticipated, resulting in a 447 basis point increased gross margin.
SG&A expenses including amortizing were $27.9 million or a 12.9% of net revenue. This compares to $32.6 million or 16% of net revenue for the second quarter of the prior-year.
The decrease in SG&A dollars was primarily attributable to lower corporate incentive expense. We generated adjusted EBITDA of $47.6 million or 22.1% of net revenue, compared to adjusted EBITDA of $63.2 or 31.1% of net revenue for prior-year.
The decrease in adjusted EBITDA was primarily due to the cost of the transformation of the Chicago Bakery, higher transportation costs and other inflationary pressures, as well as a reduction in branded display volume at a large retail partner. Going forward, although the new Breakfast margins from Chicago that's from products out of our Chicago Bakery will reduce overall Hostess' EBITDA margins we expect accretive EBITDA dollars from this platform going forward.
Our effective tax rate including the impact of the non-controlling interest was 0.8% compared to 28.6% in the prior year period. This decrease was associated with the discrete tax benefit of $5 million resulting from a change in the company's state proportion factors.
The lower federal statutory rate enacted by tax reform also impacted the effective tax rate for the quarter. Adjusted EPS which excludes the net income allocated to the non-controlling interest along with other items was $0.14 per share compared to 17% for prior-year.
Of this our EPS was impacted by $0.02 from the acquisition of Chicago. Our cash flow generation continues to be strong with operating cash flows for the six months ended June 30 of $81.2 compared to $66.2 for the first half of last year.
Our CapEx for the first half of the year was $21.2 million, mainly for property and equipment to support our new cake line installed in Columbus, Georgia and investments in the operations of the Chicago Bakery. We had cash and cash equivalents of $115.3 million and net debt of $873.5 million as of June 30.
Our leverage ratio was 4.22x. In terms of our outlook for 2018 we continue to expect organic revenue to grow above the Sweet Baked Goods category average for the year and expect the revenue contributions from the Chicago bakery to be $70million to $80 million.
From a profitability perspective we are updating our guidance and now expect adjusted EBITDA to be in the range of $190 million to $200 million. This revised guidance reflects our year-to-date results and the expected headwinds in the second half of 2018 from inflationary pressure and reduced display volume.
We expect adjusted EPS of $0.52 to $0.58 per share. Our expected tax rate for 2018 is approximately 20% to 21% giving effect to the non-controlling interest our partnership for income tax purposes.
We anticipate ending the year with a debt leverage ratio between 4.2x and 4.45x. Now I'll turn it over to Andy for some final remarks.
Andrew Callahan
Thanks, Tom. In summary, we have been impacted by escalating costs and display merchandising changes that impacted our short-term results.
However, as seen in the point of sales results, consumers continue to purchase Hostess at a rate ahead of the category and we believe that will continue. As we execute our strategy to increase merchandising, expand innovation, reduce costs, and finalize the Chicago transformation, we see significant profitable growth ahead.
With that, Tom and I are available for your questions and I'll turn it over to the operator.
Operator
Thank you. [Operator Instructions] The first question is from Ken Goldman, JPMorgan.
Please go ahead sir.
Ken Goldman
Hi, thank you very much. I'm just trying to get a little bit more color Andy if I can on the issue with your large customer, and I guess the question I have is, you used the tone that I heard from you was somewhat constructive on recovery in the back half of the year, you say your discussions have been collaborative, sounds like you anticipate some of those promotions returning in the back half of this year.
But I also didn't hear anything necessarily official in terms of agreements or anything like that. So I'm trying to get a sense of the recovery that you have at least in your head or as part of your guidance, is that realistic based on what you're seeing in the marketplace or is a more of a hope at this point just based on your history with that customer?
Andrew Callahan
Thanks Ken, I appreciate the question. Two things, one is we don't, and we are not commenting specifically on any of our programs with the customer.
I'm sure you can appreciate that. But as we look to the back half I am very confident that we will see sequential improvement in our merchandising from Q2 to Q3 to Q4.
Especially against our highly profitable core business as we move forward. So that is, we are not - this is not speculative on the merchandising that we have included in our go forward plans, it could certainly be better.
What is most important across all of our retailers is we know and consistently when we do well and I mentioned this in our March is when Hostess is being supported and we are driving share growth for Hostess we also drive share growth for customers and Hostess is highly profitable in general for our customers. So we see very strong collaboration across the board so it's not speculative, but we continue to look for opportunities to find ways to build our business across all of our customers.
So I would believe, I would think that there is upside if not but it is our best on any merchandising, but is our best call of what we anticipate right now.
Ken Goldman
Well and that's helpful. If I can just push a little bit Andy just to make sure I understand because the first thing you mentioned was you're not talking about any one customer, but you are talking about one customer right?
You guys are clearly stating that one of your larger customers has removed some shelves space worsening promotion. So I'm not quite sure why you can't talk about that customer on the call if you are talking about it publicly and I'm just trying to get a sense for you know where that confidence comes from because I am hearing some vagaries but I'm not hearing anything specific that there's we have agreements to get stuff back on shelf by x date.
I'm just kind of missing something there and in terms of getting my confidence back that this would really work.
Andrew Callahan
Well we do have line of sight. When I said we don't talk about specific customers, we don't – we're not going to outlay the specific contracts or agreements we have going forward.
What we do have basic, what I had line of sight to is a sequential improvement, it expands the stores, it expands the number of products on display, all of those are improvements. And so I have confidence with a great degree as I look through over majority of the year we are going to see improvement on it and we'll continue to work with the customer to profitably grow their business and improve upon that.
Ken Goldman
And as a quick followup is it costing Hostess anything in terms to get back on shelf so to speak in terms of better terms for the customer? I'm just trying to think of the profitability for the cost of that in terms of getting back to where you were previously?
Andrew Callahan
No, it's about building joint growth plans with the customer.
Ken Goldman
Okay, thank you so much.
Andrew Callahan
Thanks Ken.
Thomas Peterson
Thanks Ken.
Operator
The next question is from Farha Aslam, Stephens Inc. Please go ahead.
Farha Aslam
Hi, good evening.
Andrew Callahan
Hi Farha.
Thomas Peterson
Hi Farha.
Farha Aslam
I have a quick question on first modeling, the cap rate that you've given includes the $5 million per se consideration is that right?
Thomas Peterson
I mean, I don’t, it doesn’t. I think the 21 to 22 is our go forward rate.
No, it doesn’t include that.
Farha Aslam
Okay, you’re operating number excludes that one-time tax benefit as the second quarter?
Thomas Peterson
Yes.
Farha Aslam
Okay that’s helpful. and then just on your wheat cost and commodities outlook.
You guys highlighted that you think inflation on transportation? How should we think about the recent run off at wheat and how that will impact you?
Thomas Peterson
Yes, so we noted transportation inflation, we've also had some packaging inflation and expect some inflation in commodities next year. We have not – we're hedged pretty far out on wheat, so we haven't seen - this short-term wheat increases hasn’t impacted us to date, if it’s the same over the long-term it would, but today that hasn’t.
Farha Aslam
Okay and moving to price will you price for transportation, packaging and wheat, or will you think you need to come back at the market for wheat?
Thomas Peterson
No, we’re going to price for the broad inflation across the business and also look across multiple levers make sure that we balance our growth and recovering the cost. So for example we have mix, we have display activity, we have a comprehensive program that we'll bring to our customers, but for sure it will include a price increase across most or all channels.
Farha Aslam
Okay, thank you for the added color.
Operator
We have a question from Mr. Bill Chappell, SunTrust.
Please, go ahead Sir
Bill Chappell
Hi, yes good afternoon. Andy, I guess going back to the Walmart issue, I guess I'm a little confused on the change in guidance today because I think you had talked about, I mean you've known that they changed our buyers five to six months ago that you had lost the shelf space I think when you were out back in May, so what's changed that you didn’t already know three to four months ago in terms of the outlook in the second half?
Andrew Callahan
Yes, specifically to what our go forward merchandising plan was very clearly the magnitude of the merchandising was greater than we had the plans which we were negotiating at the time still kind of working through. The second component was the associated meaningful reduction in inventory that associated with not only the display, but also days of supply that frankly, we didn't have line of sight to.
So those two and then coupled with obviously the quickly escalating cost increases were two meaningful deltas versus May.
Bill Chappell
So just to go back you just didn’t have the systems kind of in place to understand what the magnitude would be, is at the quickest way to look at it?
Andrew Callahan
Are you talking about their cost increases?
Bill Chappell
No I'm talking about Walmart.
Andrew Callahan
No it wasn’t the systems in place, it was just you know working with the customer they have their right levels of merchandising, trying to get back, understanding selling what’s best for the customer, our line of sight and what we anticipated with that at the time. We did not approve the associated inventory reductions into our forecast.
Bill Chappell
Got it, and then going to Cloverhill, Dean on the last call said the goal was to try to get it closer to breakeven by the end of the quarter on a monthly basis and it sounds like may be taking some steps backwards if you're going back to the original, full year guidance is that the right way to look at it? And then how do we get confidence that it turned a profit in the fourth quarter and then it can get to that $25 million goal next year?
Thomas Peterson
Yes, I feel very confident about 2019. When we acquired the business one of the first things that we did was get the systems in place and build - which took some time to get it on to our SAP, align the cost, get a full cost picture.
There's been a significant amount of cost we put in the business just relative to resources, other things, fixing some fundamental issues. The important piece about Chicago is we have a good line of sight.
The progress is tremendous relative to it. We will exit the year with EBIT and revenue above our acquisition economics and our confidence that 2019 we believe will be better than our acquisition economics in both revenue and EBITDA.
So we know a lot more now just based on pulling the system together versus what we saw during the acquisition.
Bill Chappell
Okay, I turn it over, thanks.
Operator
The next question is from Michael Gallo, CL King. Please, go ahead Sir.
Michael Gallo
Hi, good afternoon. Just a couple of questions, Andy or Tom, I just want to kind of parse out again, what your expectations are now embedded for Cloverhill in the back half for the year look like sort of back of the envelope you lost about $6 million-ish in the quarter.
You know, you are short of saying, I think it's going to break-even kind of by the end of the year on a run rate basis just in kind of losses kind of Q3, Q4 albeit lower than Q2. But how should we think about the cadence of getting to the original $20 million to $25million, is it just kind of things you've said back a quarter or two, and really your overall view of being able to get there is unchanged or is there something structural about that mix of business that makes you think it might be harder to get there overall?
Thomas Peterson
Yes, Thanks Mike. You know, Chicago is going very well and one thing along the way is we're deploying a significant amount of capital during this quarter and next quarter during Q3 and Q4 which we flattened out the business for now and then we'll start to, we'll build in those Hostess Breakfast will be back in the fourth quarter and we'll exit the year as we said run rate EBITDA positive.
But some of that requires a significant amount of downtime, down day just so we can get the equipment in, so we've blended in production to a certain amount and that gives us conference that one, we'll get the bakery right, we are going to invest in right assets in the bakery. We'll get the productivity improvements.
We'll get the automation that we're putting in and then we'll turn to 2019 and build out the breakfast portfolio.
Michael Gallo
And then just from the basis of – obviously point-of-sales continues to do well, some of your innovations continue to do well. I think this is the first time I have heard you talk about pricing in quite some time.
Given the overall total category macro trends are you confident that you can push pricing without losing share? Do you think you’ll have to get it more from just innovation perhaps caring higher price points or what gives you confidence that you'll be able to get pricing in a category that’s kind of stagnated?
Thanks.
Andrew Callahan
Thanks for the question. So you are right, we have not priced in a while which is why we are going do the analysis and do it right.
So you mentioned a couple of things, one is innovation is a very important part of our growth program and it will continue to be. Our ability to recover the high escalating cost is an end to that in additional to that.
So there will be a pricing component, but we're going to do it in a way that leverage is all of the levers to be able to do that. We're going to look at not only the absolute everyday price, the discounts, the amount of the discounts on display, but we're going to look at all those and put together a program that we've optimized as to recovery of the cost while balancing the growth.
So we're doing that detailed analysis now because we're going to get it right and we will begin to start selling that in 2018, but we expect the majority of the impact to be 2019. So we are going to – we're looking at it across all elements to be able to make sure we do it right.
Michael Gallo
Thank you.
Andrew Callahan
Thanks Mike.
Operator
We have a question from Mr. Steven Strycula, UBS.
Please go ahead Sir.
Steven Strycula
Hi, good afternoon. Two-part question, the first one would be on pricing, just a clarification, have you guys already sent out your price notifications to retailers or is this more of a plan to do so in the coming weeks and months and is that across what percentage of the portfolio?
Andrew Callahan
We have not sent anything out to our retailers yet. We expect to that in the beginning in the end of Q3 Q4 timeframe.
And we do anticipate it being broad based across the program and we'll as I said before we'll balance the recovery verses the growth.
Steven Strycula
Okay then, a followup question for Tom, Tom can you unpack you've guided down or the company guided down rather EBITDA about $30 million to your new range from midpoint to midpoint, and I was just - a lot of investors would like to unpack that a little bit and see how much was attributable to the large customer, inventory adjustments, how much of that was inflation, how much of that was Chicago Bakery, if you could kind of just round numbers give us a little bit of a feel for how that $30 million breaks down across variables that would be very helpful?
Thomas Peterson
Yes, I think we're not going to break out the numbers in detail, but obviously the display and you can see our organic revenue decline was 4% which was more than we guided to. At the beginning of the quarter or last quarter’s call we guided that more flattish.
So you can kind of estimate that. And then we have been seeing inflationary pressures in the 2% to 2.5% range and that's up to 4.5% and 450 basis points against margin and that’s kind of the spread they are carrying that forward.
Steven Strycula
Okay, what was the delta on the inflation piece relative to what we saw from the start of the year, I mean the freight has been inflationary since, you know I think as I started this point in February, so what were incremental pieces that kind of led to that 2.5% to the 4.5% hike? Thank you.
Thomas Peterson
Yes, thanks Steve. There is freight involved in that.
There is some wage and benefit inflation involved in that. We've started to see more and more corrugate and little bit of raw material inflation that we're starting to see along with that.
And we've seen some customer allowances to drive growth. We're continuing to drive growth and we're continuing to invest in our customers.
Operator
[Operator instructions] We have a question from Mr. Brett Hundley, The Vertical Group.
Please go ahead Sir
Brett Hundley
Hey, thanks. Good afternoon guys.
Just to make sure I'm clear. So to follow on that last question, when we talk about freight, raw material cost increases, is that around a 400 basis point impact to gross margins for the full year, am I in the right neighborhood there?
Thomas Peterson
Yes, it escalated to 4.5% this quarter.
Brett Hundley
Okay, and so as far as the full-year impact it would be up towards that 400 basis point number?
Thomas Peterson
Yes, that's where we have estimated at and a little more than that as we continue to - transportation continues to get more expensive.
Brett Hundley
Okay, yes, I can appreciate you guys wanting to take your time on pricing strategies in order, but I am trying to get an early sense for what the company might look to potentially recruit in 2019. I also wanted to ask you about your core Sweet Baked Goods sales growth.
So would the hope be that by Q4 that the number that we see in your results starts to better approximate point-of-sale trends, would that be the hope?
Thomas Peterson
Yes, you will start seeing sequential improvement and you will start seeing the core business start really getting to what you saw a year ago. There is one exception to that, we had a disproportionate new product display that won't be matched at the same magnitude, but that was just a trial vehicle that will impact given the size of it that will impact this behind Bakery Petite, but if you break out the core business you will see that growth continue and get better as we see sequential improvement versus Q2 as we mention at one of our large retailers.
Brett Hundley
Yes, okay and then I just have a broader M&A question for you guys actually and then I'll yield the floor. When you guys evaluate potential deals across the landscape one of the common things that we always hear from you is talking about branded opportunities.
But I wanted to ask you just how important the existing branded mix of our target might be. So I guess in other words, if there was a potential target out there that had really compelling return attributes, but it wasn’t necessarily a branded focused business, may be it offered channels, maybe it offered other opportunities.
Is there a case to be made for looking out and acquiring such an asset so long as it may ultimately allow for potential branded distribution as well?
Thomas Peterson
Yes, I think the headline of that would be yes. There would be that opportunity that certainly when I think about M&A and the team thinks about it and it's really close to the core and then there are things that will add value and value creation and leverage our very strong cash flow.
If you take Chicago for example, Chicago was opportunist, some may argue that it wasn’t purely a branded, but it’s going to be as we mentioned highly accretive in both EBITDA and revenue in the back half. It gives us access to some value brands that gives us – we're able to expand and to till bend and into other urban channels that we didn’t have before with Cloverhill and Big Texas, and it also gave us Breakfast platform of which we are going to bring the Hostess Brand into.
So by connecting capabilities there is a broad range of things that we can do. So the shorter answer is yes, and believe that there is going to be opportunities out there and that’s an important part of our focus going forward.
Brett Hundley
Thanks for your comment.
Operator
Ladies and Gentlemen, at this time we've reached the end of the question-and-answer session. I'd like to turn the conference back to management for closing remarks.
Andrew Callahan
So just to close, obviously the short-term were impacted by some short-term impacts. We're working extremely hard to recover those.
What’s most important is that the fundamental growth pieces and value creation of the Hostess Brands remains extremely strong. And as we move through the back half of 2018 with great urgency on initiatives, we will move through the year with great tailwinds behind Chicago, behind recovering our costs, and behind maintaining and even accelerating our point-of-sales growth that we've experienced year-to-date.
So thanks for your time. I appreciate your thoughts and questions.
I will now close it up.
Thomas Peterson
Thank you.
Operator
This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.