Q4 2019 Earnings Call
Greetings and welcome to the hosts that's brands Inc. fourth quarter 2019 earnings Conference call.
At this time, all participants are no listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
Now turn the conference over to your host Rachel Perkins from I see our.
Good afternoon, and welcome to hostess Brands' fourth quarter fiscal 2019 earnings conference call by now everyone should have access to the earnings release for the period ended December 31st 2019 that went out this afternoon at approximately oral five PM eastern time.
That's really an updated investor presentation are available on <unk> website at Www Dot Hotel brand.
This call is being webcast a replay will be available on the company's website <unk>.
This was like to remind you that todays discussion will include a number of forward looking statements. If you will refer to host the earnings release as well the company. Its most recent.
<unk> you will see a discussion of factors that could cause the company's actual results could 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 measure. The company believes these measures provide investors with these wall perspective on the underlying growth trends, but that's.
I'd have included net earnings release, a full reconciliation of non-GAAP financial matters, most comparable GAAP measures now I will turn the call over the whole just brands President and CEO, Andy Count Huh.
Thank you Rachel.
Good afternoon, Thank you for joining us today.
I'll begin our discussion by reviewing some key business highlight and a brief overview of our accomplishments in 2019 that are grounded in our pillars for growth and demonstrate the achievement of the goals, we laid out a year ago.
Then Brian Purcell, our new CFO will provide greater detail when our financial results the 2020 outlook.
I would like to formally welcome Brian to the hostess team CFO for his first earnings call. Brian is a very talented finance executive with strong accounting financial planning and analysis expertise with a broad depth of knowledge in the consumer package goods industry.
We're excited to have him on board working closely with me and the entire hostess team.
2019, what's a transformative year for hostess.
We're excited by the portfolio operational capability focus progress our team achieved throughout 2019, and we finished the year strong.
The initiatives, we advanced have strengthened our foundation and we'll continue to fuel our sustained profitable growth.
The key accomplishments include.
Driving net revenue growth of 8.7% and EBITDA growth of 11.4% for the year, excluding the in store bakery or I guess be business sold at August.
If the limitation of additional operational enhancements to drive significant profitability improvements in our Kloepper he'll business, which continued to be very important to our ongoing breakfast strategy.
Completion of key changes to our product portfolio, including the disposition of our non strategic I Espeed business, which resulted in a cumulative 38% return on our investment and the addition of the Boardman business.
Boardman will deliver accretive revenue and profit growth in year, one and expands our strategic footprint beyond suite baked goods, providing an additional platform for continued consumer packaged goods leading growth.
As a reminder, wartman is a growing portfolio of specialty products offerings, including wafers and sugar free cookies.
The next two quarters as we integrate workmens will require significant effort and operational investments as we transition them from direct store delivery to the warehouse distribution model.
We have confidence in the team's ability to successfully execute similar to what was accomplished during the hostess relaunch a few years ago.
The shift to the warehouse model will provide expanded distribution opportunities and synergies as we are able to go to market with a more diversified portfolio.
We also executed that transition of our primary distribution center to a strategically better geography with increased capacity and approved capabilities.
It's important move provides better access to labor and trucking lanes as well as he added benefit of state tax incentives, which will help offset the cost of the move over the long term.
We advanced the team skills and abilities through the addition of key new talent as well as the increase utilization of enhanced tools and data analytics to drive better informed decision making.
And we utilize these key data analytics to successfully execute our first pricing in six years supported by our strong brand strength.
At the same time, we continue to implement important enhancements to our bakery operations, while gaining market share and growing point of sale well ahead of the SPG category with our hostess branded core products and breakfast innovation generating higher volumes and increased distribution.
These operational and sales efforts resulted in adjusted EBITDA growth of 11.4%, excluding ice be inline with our expectations for the year.
And importantly generated strong operating cash flow and reduced our leverage more than one full term the 3.4 times from the end of 2018.
Our team's execution represents an important step on our journey of delighting consumers and building iconic brands as we remain focused on our vision for building a sustainable profitable growth company.
We have demonstrated another quarter of strong consumer driven demand broad based channel growth and enhancements to our cat capabilities that we will continue to leverage in growing categories.
For the fourth quarter point of sale increased 8.3% and market share increased 113 basis points to 18.6% representing growth well ahead of the sweet baked goods category and total food.
This strong consumer driven demand and price realization drove our 6.7% net revenue growth into quarter. When we exclude the revenue of the in store bakery business.
So net cupcakes day initiatives, including both core and new innovation, where revenue growth drivers with continued strong distribution and merchandising support across multiple sales channels.
Importantly, our hostess branded products drove 70% of the 6.7% suite baked goods net revenue growth in the quarter, demonstrating the strong health of our iconic hostess bread.
Additionally, our Dolly Madison branded products continued to post sales volume gains as well as we leveraged our acquired Cloverdale customer relationships, particularly in the club channel.
We remain focused on our operational plan to drive sustainable profitable growth grounded in our five pillars.
We've made meaningful progress and achieved important accomplishments throughout 2019, the strengthen hostesses Foundation and continue to remain focus on operational improvements supporting continued growth into 2020.
We are demonstrating that the right focusing capabilities, coupled with the breadth and depth of our portfolio can and will deliver strong financial results.
As we continue to grow our core we are successfully leveraging our hostess partner program to drive profitable growth across key customers. We have come a long way in a short period of time as we sharpened our analytical capabilities and insight.
Our team has done a good job leveraging a collaborative set of assets and insights to drive better performance for both the retailer and hostess.
As we progress through 2020, we expect these investments and lead to further distribution in key categories at certain retailers and support enhanced product mix driving profitable growth and our core host this branded products.
Additionally, we have gained valuable insights into our portfolio to more aggressively manage our mix optimizing our shelf and operating assets.
During 2019, we demonstrated our team's ability to effectively partner with our customers to successfully implement a multifaceted price increase across all channels.
We will be lapping the price increase in Q1, but we'll continually mine insights develop to react to market conditions in 2020.
Yes.
At hostess, we're taking our history of growing through innovation to a new level in 2020 and beyond.
As you've heard us consistently discuss the large and growing suite baked goods category is highly impulsive and expandable.
We have highly relevant and contemporary brands, including the hostess brand.
Chronic sub brands, such as Twinkies thing dogs, and Donuts and the most recent addition of the growing Boardman brand.
2019 was a significant year for our hostess cupcakes.
Kicking off the year, but the hostess 100th birthday suite Teneo National birthday event, and our new birthday cupcakes.
Followed by Mermaid Unicorn, and other seasonal cupcakes, which have continued to make hostess cupcakes, the highest selling cupcake in the United States.
In late 2019, we also introduced a triple chocolate brownie to help us capture a disproportionate share of a growing 250 million plus brownie sub category.
We are excited about this innovation for 2020 as we have a full year of contribution with expanding distribution and the resulting incremental revenue it will generate in the future.
Our expansion within breakfast is going well and we continued to speed see strong opportunities to drive incremental growth through this segment of the market.
In 2019, we achieved significant positive revenue growth from our breakfast innovation and increased our segments share from 16.5% to 17.4%.
This was led by the launch of new hostess brand at breakfast items as well as from small, but consumer important changes to core products grounded in consumer insights.
Two examples are the success of our two net snack packs, which serve a new usage occasion.
And the addition of icing to our Dana says, which differentiates from our competitors and provides a priority the lighter for our consumer.
We're also excited to expand the distribution 2020 of the new hostess cream cheese coffee cake, which is off to a great start and fills a void in the market for the number to consumer preferred flavor.
Our insights have never been better our pipeline is strong with validated ideas. Our newly formed team is continuing to utilize market insights and knowledge to develop a very strong innovation pipeline that we are confident we'll deliver sustainable profitable growth into the future.
Our consumer engagement plan in 2020 is moving to the next level leveraging our high impact low cost approach and relevant programming to reach our consumers to highly engaging media online in stores and through other pop culture channels.
Additionally, our ever changing and on trend line of products will continue to drive the contemporary relevance of a 100 year young brand.
In 2020, we will have a fresh lineup and fun and engaging products to connect with consumers be a high demand flavor and formed varieties and extensions as well as exciting usage driven driven limited time offerings that will drive incrementality increased by rates among existing consumers and bring new can.
Tumors to the category.
Over the course of 2019, Archie team achieved significant improvements through agility and efficiency.
We completed several operational improvements, including continued efficiency gains in the quarter Hill business and other enhancements at our bakeries to support future growth.
Including investing in our manufacturing capabilities in the second half of 2019 to improve both quality and efficiency.
We will eight we were able to reduce reliance on third parties and reduce costs by bringing capabilities in house, including the blending of some key ingredients and the production of our totally noddy wafer bar.
The team continuously demonstrated their agility as they were challenged by increased production requirements to meet a rising demand while simultaneously implementing various other efficiency and quality initiatives.
Additionally, as previously announced we relocated our primary distribution center from Illinois to Kansas during the fourth quarter and we're fully shipping out of Edgerton, Kansas by January Threerd 2020.
As you know this is a massive undertaking and I'm really proud of our team's effort to make this significant move.
The new location is closer to our largest bakery and more centrally located in the United States, expanding our capabilities and providing additional capacity to support our future growth.
Our transition is going well with our primary objective to profitably service our customers as we work towards improving efficiencies.
I'm confident we will be at full efficiency by the end of Q1 and be ready to integrate weren't in operations into the Edgerton warehouse in April.
During the first half of 2020, we're continuing to invest for the future with additional important operational upgrades underway to unlock additional capacity enhance and modernize the infrastructure our facilities and increased redundancy in and across our manufacturing footprint.
We're also excited to be moved into our new corporate headquarters and our nearly complete new test kitchen, and consumer research centre in Kansas.
This new center will expand capacity increase agility and improve efficiency of new product research and development, providing additional capabilities to drive growth.
We have thoughtfully plan certain promotional programming in innovation for the second half of the year to accommodate the completion of these key improvements, which will support long term growth and improved profitability.
During 2019, we invested in cultivating talent and capabilities through the addition of key new talent, including several new leadership team members, who are helping to shape hostess for the next phase of growth.
We will continue to invest in data and analytics to support our team with consumer driven insights and enhance operational capabilities to fuel future growth.
We are seeing dividends in our customer partnerships are category insights and our innovation pipeline that I will share with you later in the year as we prepare to discuss with our customers.
We are continuing to leverage our strong cash flow to help fuel our growth deleverage and support our capital needs.
To recap I hate to recap, we generated 144 million in operating cash flow for the year and approved our leverage by over one turn to 3.4 times at the end of 19.
The sale of our in store bakery business mid year helped fuel this improvement and we also refinance and extended our term loan and revolving credit agreements at favorable terms further solidifying our strong financial position for the future.
From a capital allocation perspective, we're excited to have completed the acquisition of Wortman, a leading north American wafer and Cookie company for $320 million in January.
This acquisition is aligned with our strategic focus and Leverages, our core competencies, which we believe provides a compelling return for our use of cash and strong cash flow.
The integration efforts are going very well the team has made great progress aligning customers to transition from direct store delivery to the hostess warehouse distribution model.
Optimizing the portfolio.
Making associated manufacturing adjustments and initiating the ERP transition ahead of our distribution conversion beginning in April.
We expect most of the shift to be completed by the end of the second quarter as we manage the complexity of our customer warehouse availability around this time.
We remain confident there is a meaningful opportunity for growth in the Boardman business as we leverage hostess broad based distribution model.
Focus and tailored customer approach innovation and promotion expertise and our scaled merchandising capabilities.
I'm, even more excited to complete the integration and drive the growth now that we have owned it for a couple of months and begun to dig into the business deeper.
We continued to be confident that we will capture the previously announced synergies of at least $15 million in the next 12 to 18 months and achieve targeted deal economics.
Following the temporary spike in our leverage ratio following the Boardman acquisition and transition efforts in the first quarter, we will be actively working to deleverage back down to our target of four times by the end of 2020, while continuing to make disciplined investments in the business to support growth.
In the short term, we will use our cash to deleverage quickly and invest in our business on a longer term basis. We will continue to use our cash 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 capital structure.
Following the relaunch of hostess under contemporary business model, we continue to make strategic investments in our capabilities to differentiate us within the industry.
We are part of a large growing and addressable markets, including indulgence snacking breakfast and now through Boardman better for you product characteristics in which there is ample room to grow.
We have a tested and proven playbook, which has driven sustained growth over the last five years and are continuing to grow with consumers and customers as we strategically invest in the business to fuel future growth.
In 2019, we delivered on our expectations, both financially and operationally positioning us well for our start to 2020.
We tackled a large transformation agenda, which positions us for continued profitable growth and provides platforms for expansion.
We remain confident in our fundamentals increasing core capabilities and the broad based growth opportunities. We have ahead of us.
We are fortunate to benefit from strong consumer demand for our products and fully expect our profitable growth momentum to continue into 2020 and beyond.
Now I will turn it over to Brian to go through the details of the quarter's results.
Thanks, Andy it's a pleasure to be speaking with all of you today.
I've had an exciting and busy couple of months since joining the hostess team in January I look forward to meeting many of you from the investment community in the coming weeks and months.
Today, I will review, our fourth quarter 2019 financial performance.
2020 guidance and other data from today's release.
Net revenue for the quarter was 216.7 million a 6.7% increase excluding the impact of the sale VIP business in August 2019.
This increase was driven primarily by a strong performance of core hosted branded products, such as doing thats as well as nucor and breakfast innovation across retail channels.
Gross profit was 70.8 million for the fourth quarter of 2019 and gross margin was 32.7%.
Excluding IP gross profit increased 6.7% from the fourth quarter of 2018.
From a margin standpoint.
Gross profit margin improve year over year due to higher sales volume and pricing actions as well as continued operating efficiencies, partially offset by higher input costs.
Net income increased 44% to 23.6 million.
And diluted EPS grew 41.7% to 17 cents, primarily due to a 7.1 million gain on the valuation of a foreign currency contract to hedge the January 2020 purchase of Boardman in Canadian dollars, partially offset by the transaction and facility transition.
Costs and the sale of our ASP.
Adjusted EPS was 16 cents compared to 17 cents in the fourth quarter of 2018.
The EPS impact.
Improved.
Operating performance was offset by the sale of is be the dilutive impact of our warrants and increased depreciation and stock compensation expense.
Adjusted EBITDA for the quarter was 52.4 million or 24.2% of net revenue compared to 51.4 million or 23.9% of net revenue in the same quarter in 2018.
Adjusted EBITDA increased 6.3%, excluding the 2.2 million decline due to the sale of Ais B.
Our effective tax rate was 20.2% compared to 18.2% in the prior quarter.
The increase was due to the class eight per class b share exchanges during 2019.
Subsequent to these exchanges less income is attributed to the non controlling interest it passthrough entity for tax purposes.
We had cash and cash equivalents of 285.1 million and net debt of 689 million as of December 30 Onest.
Our operating cash flow for 29 team was 144 million, reducing leverage to 3.4 times.
As we transition boardman to unlock meaningful distribution expansion in key growth channels. We continue to expect the 2020 financial contribution from the acquisition to be consistent with our initial expectations shared back in December.
We expect contributions from women to be more heavily weighted to the back half of the year. Once we complete the transition to the warehouse distribution model unlocking their growth potential as we begin to realize the cost synergies achieved with more integrated operations.
On a consolidated basis for fiscal 2020.
We remain confident in our ability to generate organic revenue growth ahead of the SPG category driven by expansion of core products as well as new innovation.
We expect the acquisition of wortman to contribute approximately 90 million of net revenue, partially offset by decline of 29 million due to the sale by SP.
We expect growth to be muted in Q1 with limited contributions from Wartman due to the inventory de load by distributors in anticipation of the transition to the warehouse warehouse model in Q2.
As well as shifting of some promotional programming in our hostess business as Andy mentioned in his comments, we'd be calculated strategic decisions, including selected S.K., you rationalizations and delays and timing of certain merchandising events to allow for the successful completion of our key ongoing transformational effort.
Including the refinement of our new warehouse operations, the integration of transition of Wortman and the addition of key capacity in our facilities.
These actions will result in a slight step back and revenue growth in the first half of the year. However, we're confident they're the right decision to support improved profitability and growth in long term.
Additionally, keep in mind throughout 2019, we benefited from our well executed price increases that were sold into new customers beginning in the fourth quarter 2018.
We're continuing to monitor the market in 2020 and are evaluating targeted price increases that may be necessary to combat inflationary pressures pressures facing our industry.
We expect adjusted EBITDA to be in the range of 225 million to 240 million, an increase of 12.5% to 20% over 29 team when excluding the I SP divestiture.
This increase is primarily driven by organic growth continued operating efficiencies and approximately 20 million from the acquisition of warrant.
The near term impacts of the completion of strategic initiatives. The lapping of 2019 pricing and continued inflationary pressures are expected to result in a slightly lower rate of growth in our base business in 2020 as compared to the strong 11.4% growth we achieved in 2019.
We have taken a balanced approach to mitigate our risk of commodity pricing fluctuations for 2020 on key ingredients and we'll continue to monitor prices as we progressed through the year and evaluate potential inflationary impacts the 2021.
Similar to revenue, we expect EBITDA growth to accelerate in the back half of 2020, as we execute the transition of Wartman complete strategic initiatives and as a result of the timing shifts of certain customer program.
With the combination of the timing of strategic initiatives, the divestiture of I SP and a drag during the important transition. We expect reported Q1 2020 EBITDA to be down mid single digits from prior year.
We expect to see improved growth in Q2, as we realize more meaningful contributions from wartman achieve efficiencies at our new distribution center and benefit from other cost savings initiatives currently underway.
We are confident these important strategic initiatives will set us up for meaningful growth in the second half the year and continuing into 2021.
Adjusted EPS is expected to be in the range of 65 to 75 cents per share an increase of 7% to 23% from 2019.
We anticipate that we will end 2020 with a leverage ratio around four times with a near term increase driven by the 140 million of additional debt utilized to finance the warrant acquisition and then declining over the course of the year supported by our extra expected strong operational cash flows.
Our expected tax rate for 2020 is 24% to 26%.
Now I will turn it over to Andy first closing remarks.
Thanks, Brian.
We're pleased with our strong finish to 2019 and the significant accomplishments we achieved throughout the year.
We will continue to leverage our sustainable scalable profitable operating model to drive strong long term financial performance in the top quartile of our peers.
Across the team we are working together to further advance our high performance based culture to consistently win with all stakeholders our investments in enhanced capabilities and the continued development of our innovation pipeline will continue to lead to net organic revenue growth above the category.
Series in which we compete.
Our strategy and our execution, our robust cash flow and our strong balance sheet will create value for our shareholders for many years to come.
With that Brian and I are available for your question.
Operator.
Thank you at this time, we will be conducting a question and answer session.
I would like to ask your question. Please press star one on your telephone keypad.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
A confirmation tonal indicate your line is in the question Q.
You May press Star too if you would like to remove yourself from the Q1 moment. Please while we poll for questions.
Our first set of questions come from the line or Brian Hoffman of D.A. Davidson. Please proceed with your question.
Yes. Thanks, Good evening, everyone first question about.
Just if you could help me with the EBITDA bridge, so I sort of thought that maybe 2020 would be another year of kind of outsized contribution from the Clover Hill bakery as you kind of ramped that up and realize some of some of the synergies.
I.
I'd, maybe I'm missing that I was kind of ticking closer to 10 or 15 million bump from that and if that were the case you'd obviously be assuming flat EBITDA on the legacy business. When you back outboard Mitch. So could you maybe help me with that did you did more of that contribution come in 2019.
Or is there may be something else I'm not thinking about here.
Yes, Brian Hey, Thanks for your question.
We feel terrific about the Clover Hill integration I think one of the things you should think about we bought we bought this for 10 million won't go back in it we transform that we've made all the transformations within.
The Chicago Bakery, we expanded the Clover Hill acquisition, a lot of those transformations have happened and we've realized a lot of that.
In F. Why 19 will continue to grow at an expanded its a platform for our hostess bakery business.
It's integrated within our complete distribution center, but a lot of that spring a lot of the growth that we're looking at.
In 19 as well as the organic.
Hostess business. So weve can we've converted it it's profitable and its continuing to grow it's helping to spur that total hostess brand organic growth.
Which we continue to expect to go into 2020.
As we integrate boardman. So a lot of that has been pulled forward and realized to help grow and invest the business for growth in 19.
At the cost savings are on our target it spurred growth, it's given revenue out of the portfolio.
But it's also integrated within our total business model.
Okay.
Thanks, that's helpful color and then on the.
On the topline and specifically the merchandising.
You talked about a little bit of a calendar shifts there it sounds to me like that is.
That's on your end, but your dictating that calendar I mean, so far as.
Your your the retailers aren't shifting you're shifting the calendar. So I want to confirm one that that's true and then as we look ahead to 2020, we talked about in Q3 expand the merchandising at key retailers. So just a quick two part question one.
What's your level of visibility on getting that merchandising looking that far out and as we think about the past two years or so obviously, we kind of attic trough year on merchandising 18, you had more 19, where do we get more in 20 versus 19, I know maybe getting back to 18 is going there are 17 is going to be difficult, but just kind of curious if.
We're continuing to get more merchandising support.
Each year as we move kind of offset 18 trough.
So so a lot of things in there Brian I appreciate the questions. It's all good because that we have some noise in our revenue growth.
But you said one thing that I wasn't just make sure I clarify if you look at our obviously our hike iconic hostess brand.
You're absolutely right. If you compare if you look at the two year stack, we continue to grow our business.
Well above the SPG category in one of the leading branded growers in CPG.
That even with the step back in 18, and then the step back up and 19.
And we expect to continue to grow the hostess brand the organic brand through in 2020 add about that same two year rate.
So even in 19, we did come back with the merchandising, but that was less than the third of our total post this branded growth. We're growing we're growing that the total business now you asked US another question, which was the first half second half if you step back.
If you step back and look at our strategic value creation pillars, we have a lean lean and agile operating model were transferred work, we're making investments move in the Edgerton, which strategically gave us access to the lanes to solve labor to lower costs and it gives us more capacity to integrate things and we're also integrating board.
All of these are exactly what we said we were going to do and are creating value overtime in the first half as we do this we do have some lapping of the revenue price increase which you'll see a step down. We're also investing in some capacity things, but for us executing niece, and therefore, simplifying our portfolio as we move to accelerate.
In the back half is exactly the right thing to do we have good visibility to some of these the pullback in some of the merchandising and also we have good visibility to some are larger customers the pod resets and how our merchandise is supposed to flow through so I feel really good about that we're also what we're doing when we bought you've mentioned clover here or earlier.
Well, we blew out distribution.
Across all of the channels and value.
If those SK use or not driving.
The value for the complexity in the work that it takes and it's not being responded to then we're focusing on them in the other channels in the channels, whether working or in some cases, the stores, where they're working and then in the back half will will backfill them with more even higher branded SK use.
So we're seeing the first half getting a larger impact of some of the focus and SK you rationalization in the merchandising as well as the revenue, but it accelerates in the back as we have good visibility that with that being said still think of the full year as hostess branded business continuing to grow at more of.
The two year rate as opposed to the.
Slightly higher 19, mostly due to the noise of the merchandising down enough.
Fair enough I appreciate the color best of luck.
Thanks, Brian.
Our next questions come from the line of Rob Dickerson of Jefferies. Please proceed with your question.
Great. Thank you so much.
So look.
Yes, if we look at the midpoint of the implied based business EBITDA growth or where you're guiding for 2020, we are around 6% right. If we back out the ice be the 5 million from last year. So.
Kind of.
A follow on basically to Stalin's questions.
You pointed to EBITDA in Q1 potentially down around mid single digit.
Base business EBITDA for the year looks like it's up mid single digit. So you know if we go through kind of a different bridge.
You are saying given the strategic initiatives, given the pullback and merchandising, which is a timing shift given.
Well the efficiencies and potential.
Distribution gains, let's say in different channels on Boardman.
That.
Basically in the back half.
At that EBITDA really should be up.
Nicely with apartments, but then also whats implied as it seems like it also should be up nicely without apartments, just the base. So I'm just trying to.
Trying to gauge.
One.
If that differential which is significant.
Makes sense, given what we need to have come in the back half and then secondly, just kind of Simplistically just like to get your thoughts.
On.
Do you have too much going on right is it with Mormons with strategic initiatives getting back in merchandising what have you.
You feel like the organization is centered.
And visibility on getting to that back half is.
More than more than warranted. Thanks.
Yes, no. It's a good question Rob I appreciate it let me start with do it do we have too much going on.
We have a very.
For normal active energized team Theres absolutely.
A lot going on.
But the team is energized about making it happen there energized about continuing to grow the hostess brand and they are energized about integrating wortman into a lean and agile platform. So.
They get energized about creating value and we're doing all the things. We said we would do but your point 12 taken about do we simplify and do we focus on things and that's one of the things we're doing in the first half.
Related to your first half second half.
I think you nailed and I'll, let Brian way and if he wants but.
[music].
We absolutely.
I have the Wartman.
Contribution is certainly first hit back half weighted we've announced that we're integrating into the edgerton warehouse, which will be ready to go the efficiencies of the Edgerton warehouse are improving as we get through Q1, we're seeing visibility to that but that's that's in the process.
And the Boardman, then we have a de load and with the ideas and the transition of the cost of the ideas in integrating them into Q2, you certainly see a meaningful jump up in that EBITDA in the back half and you see the same.
With hostess, although hostess as a little bit more muted, but for sure. The wartman you see that plus or minus if you look at the after we get through the transition and the integration.
The second half you can see you'll have good really good visibility to the value creation I see it by line of sight to it and it's certainly get gets me very excited and energized because I could just see the value creation not just over in 2020, but then I can see good good line of sight to as we accelerate the growth and.
Into 21 and beyond.
Okay Super and then just quickly on the overall category.
I know your guidance is always to grow hopefully ahead and materially ahead of the category.
What's the perspective.
You could add as to where you think the category growth is now relative to a year or two years ago and what the potential of that category.
Could be just trying to gauge few if you grow materially ahead of the category, that's great, but I don't know where you expect to category to grow men thats. It. Thank you, yes, I see the Katich. The categories has fluctuated depend on the timing I know, we had little bit noise here comparative the year ago, but I see the category at the one per.
Ascent, plus or minus as it goes as it grows up and down but as I've always said and we've seen this not just from us, but our competitors Rob I believe this categories highly expandable I just don't view at a suite baked goods I view it within indulgence snacking I view it within.
Breakfast I view it within.
And now with our Boardman acquisition within the Cookie category and with better for you attributes I believe I really like our categories because they have relatively high loyalty and they also are highly expandable so, but we've modeled the category about 1% and I'd. Good line of sight for US continue as I said about our two year trends being able to.
Above that category growth and we're going to we're going to make that happen in 20.
Super Thank you so much.
It's Rob.
Our next questions come from the line of Ken Goldman of JP Morgan. Please proceed with your question.
Hi, Thank you.
Ill beat the dead horse, a little bit more just on the on the guidance part.
Just a little bit curious some companies when they do a deal, especially deals that require big supply chain transition.
Look I think this one is well build and maybe a little bit of a fudge factor just in case something goes wrong. So I'm just trying to get a sense.
Is your guidance for that first quarter is it sort of right down the fairway, we really think it's going to be or are you building and maybe a little bit of prudence just to account for the black Swan event so to speak.
I I think I'll, let me answer it this way Ken if you can't if I can I think our our guys very responsible and I think we have opportunities.
To potentially.
Given the high side I think we have potentially.
To manage it right down the fairway, but that's not as I look at everything.
We have in our business the transition within Boardman. It is a large supply chain transition, but one of the things to just be aware of it's not just dependent on us our education efficiencies and transition are going very well as we talked about previously we're simplifying the portfolio to make sure we increased the probability and I have really good comp.
And it's in the team for the execution, but also it depends its relying on our customers because we need we're moving from our independent distributors into their warehouse now those cell lines are going very well, we've aligned top customers. We're focused on the EPS the right SK use the insights I see.
Relative to the consumers and the information we have as is a highly incremental to the two those cookie categories. It's highly loyal with our consumers. It plays a specific role within the category. So.
So I feel really good about that but we're still dependent on those warehouse slots with the customers, which creates some variability that we just don't have a 100% line a slight too so.
It takes it takes that to be able to get there. The core hostess business is going to continue to truck along and then when we get this added on ITC great value creation over the long term.
Great I'll, let it go there. Thank you, yes, yes, the range takes that into account. Thanks. Okay. Thanks. Thank you.
Our next questions come from the line of Stephens strike ULA of EWP. Yes. Please proceed with your question.
Hi, good afternoon.
So and you just wanted to clarify.
A quick question on the revenue outlook for the year.
For the first half are you implying that both the consumption dollars that we tend to track in Nielsen will be negative as you work through some of these merchandising.
Changes and throughout your supply chain and then when should or is that true and then too is that the same pattern for the cell and should we expect those to be dipping a little bit in the first half and then inflecting positive.
Help us understand that debt that cadence and then I've a follow up.
Are you talking about specifically within bartman or within the owner.
Organic business as you know so just stripping out boardman both out of the consumption data and then also for your sell entry organic sales calculus.
Yes, so what we'll see as we expect to see hostess, although it will be a little bit lower in Q1 based that just a lap and with some of the merchandising and is also was lapping some of the pricing will see a step down of hostess.
From where we've historically seen it we will not we're not expecting we're not guiding or expecting a decline specked in hostess to continue to grow it will grow more as we get through the later the year and I expect the tire year growth to be ahead of the category and in line with with.
You would see in the two year trends, so think about hostess like that that's that is going to be slightly offset by some of our value nonproductive skews that we're lapping that weren't as productive the cost of complexity was too expensive I consider that relative to the value creation total growth a little bit noisy.
Total hostess manufacturer will still be up and I expect to be up ahead of the category, even with that step back a little bit from the total hostess bread.
Okay, and Brian first of all congratulations and welcome welcome to those this party.
Wanted to just clarify on the guidance bridge that you laid out there do we think about.
Synergies being factored into the calculus for the current year for fiscal 20 or is that more conservatism and saying well earn them in the first 12 18 months that maybe that's more earmarked for 2021.
And does that guidance include.
Some level of reinvestment for this transition period in the business can you help us kind of just understand how much that reinvestment might be thank you Sir yes sure. So thanks for the question we.
Came out and said from a synergy standpoint that we're looking to get up to 15 million in synergies over the next 12 to 18 months.
Not all that is in our 20 number.
But in the majority of is we're going to see more in the back half of the year. So we have contemplated synergies in that guide.
Overall.
The 20 million from an EBITDA perspective so.
We've taken into account.
A lot of this synergies are dependent on the timing of all the customer warehouse transition because a lot of them are tied up into and now we have now side with the customers with lot of hide that as soon as we do that we expect to capture them and and accelerating as best we can a lot related to the salesforce a lot be able to getting into the Edgerton and then drive inefficiencies of a combined.
Yeah.
Edgerton warehouse with hostess and warrant it to step process, but we have a great urgency to do that but as Brian said they are contemplated in the back half, but not not.
Actually if I can have a quick follow up.
To Ken's question.
As you are planning and trying to figure out what is conservative guidance versus what is not.
For some of the uncertainty related to Fort Myers as to how some of those skews slot in or do not sought into the warehouse model. When will you given the think planograms are typically laid out in the March period. When will you know whether that breaks your way or does not break favourably. Your way. Thank you I'll pass along.
Yes, so a lot of that we're literally working through that now and there was a process. We started with our lead our largest customers because we had to then commit to a time internally and then work to grab everybody else within a window.
So for some of our largest customers.
We're in the process of working through the warehouse slots, which is going going well go very well, they're somewhat which we expected and positive in some negative, but then that means the trans trance transitioned into the planet grants and then once we get the planet grams now in the process of working through the merchandising.
That offsets some of the Planetariums as you know we do our merchandising our shipper program is best in class, we're integrating weren't in there. So we're in the process of doing that I expect that to be completed over the next.
Four to six weeks and then we're going to be activating it.
We're also working on some of our models and our consumer insights to understand the transference and the a loyalty of certain SK use versus the others will know that better when we get it into the shelf, but think about over the next four to six weeks, but thats why that process as a way. It is because we're negotiating slots and then we're optimizing the shelf back and then we're looking at the Incrementality of each.
Okay use and there was supplemented with merchandising I expect all this comac rate, but there is this level of uncertainty as we implement this across the entire us customer base as well as the entire Canadian distribution base. So you can manage the complexity and the timing creates some uncertainty, but it's in the process now teams done a great job going well very confident.
There's just a timing when that we're working through.
Thanks, so much.
Our next questions come from the line of David Palmer Evercore ISI. Please proceed with your question.
Thanks, just a clarification on Clover Hill did that reach the 20 to 25 million in EBITDA contribution in 2019, which essentially was earlier than what you had originally expected.
Yes, yes, we didn't so when we got to answer is yes, so when we got too.
The core business, yes, we got the cost savings we got the revenue we integrated launched hostess. We don't look at the PML that way I know I've said that a lot, but when you. When you include the customer acquisitions the growth the hostess at a purpose spurred within our customer base.
Yes, we hit the acquisition economics.
Do you see discrete investments that.
Let's say, that's 10 plus million more than we would've expected that occurred in that year and I know.
Everything is blurred together, but do you see discrete investments that you did make discretionary ones that may be setting you up for 2020 that was the offset to that that.
That gives you more confidence in this year.
Related to Clover Hill.
Correct I mean, if you if we if you are getting those.
Call it synergies earlier than expected.
We are you finding ways to spend that money such that you were setting yourself up for success in 2020 in what were those.
Well, we invested in that.
We talked about this early we invested in the capabilities of the Clover health business, we completed that through the beginning of last year, we had efficiencies that we drove out of the Chicago bakery throughout the year, we launched the hostess breakfast portfolio out of the back half and also expanded the.
The value business.
Some of those SK use were really profitable some of them weren't we looked at some pricing opportunities that we also built through the investments. We've made in the business were related to our capabilities, which were driving similar innovation growth. We've invested in MSS within our channels, which drove a lot of our C store investment growth as you as you know.
We've talked about and we've also talked about on the call our investment in capacity related to our core hostess business and capabilities and quality, which are also coming through into Q1. So the supported the growth that we've had over the last year within hostess of 8% the investments that we're making our all in the support of.
Of growth of quality of expanding into the breakfast. So those are the things that we're we're building the sustainable profitable business on.
Great and then just one last one on the.
That Portman steel.
Hi, I would assume revenue synergies are really not going to be much of a 2020 thing although it seems like one of those deals that's made to have those in terms of.
Cross even cross border, but certainly regional distribution upside can you talk to maybe where are those that distribution is and where you see that going and am I right in assuming that much of these synergies might be a line up for 2021 and beyond.
Thanks, Yes, well there is theres two areas the synergies you're right and I think theres are more revenue synergies that we beginning to see and I think that have opportunities for as we get to the back half a 20 and certainly 21. So for example.
Certainly within the channels looking at new forms and being of low.
Blow this business out across our distribution channel job one is to convert the distribution that currently exist and get into our warehouse simultaneously. We're looking at certain channels that didnt have distributors were looking at capabilities that exists up within the Bert Burlington manufacturing facilities has that helped support innovation or other thing.
Under the hostess brand or otherwise do can we look at suite baked goods within Canada and leverage some of the assets and trademarks that we have so there's certainly opportunities that we're looking at on the revenue side that provide us great opportunities for growth and that's even before we get our insights and innovation engine working.
To help accelerate that the other just revenue synergy, which says can build into as we look long term is just executing our in store.
Partner merchandising model shipper model.
LTO programs within our core customers, which we are working through in the back half of the year. So it really responds well and integrates well to our go to market mouse model, which has driven hostess growth for many many years and will continue in 20. We're we're one by one anbari urgently pulling those levers in integrating it into that system.
Great. Thank you.
Thank you.
Our next questions come from the line of Bill Chappell of Suntrust Robinson Humphrey. Please proceed with your question.
Thanks, Good afternoon.
Yeah.
First question on Boardman, and just kind of what you're expecting on the on the transition to warehouse.
When I guess when hostess.
Excuse me transition back to from DSE to warehouse, the big area, where you kind of lost some share shelf space was grocery so and I think workmens probably more indexed to grocery then then the than the core.
Hostess legacy business. So just trying understand what's you're expecting as you make the transition do you expect to to to not have it's stronger presence. There are you going to make that up more in the C stores and other channels to tell you. How you think about that over the next six months.
Yes, Bill Thanks for the question. The one thing that's a little bit slightly different in hostess hostess was completely out of the market and then re entered so then they had to regain some shelf space. So we expect us to.
And were more in a transition motor the warehouse as we re plug into back into existing shelf space.
Do you are exactly right way characterized it for shorts developed and primarily in the grocery channel that's true katonah than in the U.S., we are pruning SK use.
So we're not if it's going through the warehouse and we're looking at the efficient SK use we've done the analysis and that that some of the work I talked about we do expect a short term to step back from some of the consumption than some of the.
The the growth just as we.
Pull down the inventory put it back in the warehouse focus on the most profitable SK use but I would expect that too.
As we get into the back half in a 21 year, then grow beyond that because of the other levers I talked about relative to merchandising very quickly in the back half, but where were boardman was unable to get to think about our other channels whether its.
All of our cause our drug channels are smaller customers. We have a large developed C store business. As you know you are partnerships with some of the distributors versus our directly to the customers all of those were going to connect the dots in mind and that's going to add incremental.
Revenue to the business that the previous owners just couldn't can capture.
Got it and then just slipped back in grocery, but it will accelerate over time and on expected to be lower expected to grow through with smaller SK use in the merchandising programs, but it will certainly be a step back in first half an early as we transition.
Okay got it and then just looking at your market share Oh, Yes, certainly great eighteensix to in the year up your year over year, just trying to understand.
How much of that is.
Core or snacking and how much of that is your expansion into breakfast just trying to understand how are you gaining share in both areas or is it really been with the addition of having breakfast items.
That's really helping you get the share and is there more to come you thinking the breakfast where would you be and the.
Breakfast kind of share versus where you think you can go.
We expect to continue to grow share in practice as you know were relatively under developed its largest segment. We grew over one share point within breakfast and we're not done. We're now looking for the next back flow of innovation, which in the back half of the year, we'll talk about that were also launching.
Cream cheese coffee cakes and other items that we feel good about if you look at the the de cup within for the full year for.
For contributions there both growing our breakfast portfolio was.
That growth was I think about a third of the total growth but don't.
Quote me on that and then the rest of the portfolio was growing extreme extremely high as well a lot to the investment in the data that we're mining within C stores.
The well documented mass channel merchandising I'll come back and then the continued innovation were related to MTO is something innovation launches, but we're growing both on our snack cakes as well as breakfast some of our real strong performance cupcakes had a great year don't Thats had a great year.
So we had a good growth across the board, but breakfast was certainly a step up in innovation.
As we leverage to Cloverdale acquisition for the year.
Great. Thanks, so much.
Thanks, Bill Trisha.
Our next question.
Our final questions come from the line of Pamela Kaufman of Morgan Stanley. Please proceed with your question.
Hi, Thanks for the question.
Just wondering if you Ken.
Comment a little bit more on the cadence.
The 90 million topline contribution from Bartman, how do you expect that to break down over the next four quarters on it doesn't give any color on that it would be helpful.
Yeah, we're kind of run a steady state here, we're just looking at the charge right here Pam. It's a great question. It certainly gets noisy as we get into the the de load and then the load.
Brian as far as if you look if you look at sort of the cadence right. We're looking at the warehouse conversion in Q1.
It's probably two thirds back half one third.
First half would be a will lose guide in terms how to think about it.
Thanks.
Just to build on that Pam that's a little bit one of those areas, we're working hard to pull it up but.
We're working to when we get that sooner we could accelerate there is little bit a range of the revenue, but that's pretty good guy.
Thank you know and then just a question I know gross margin.
No underlying gross margin performance in the quarter. If you exclude the IC business last year, what was your gross margins.
React.
Yeah. If you look at so if you look at Q4, you back out the impact of Ais B.
We did see gross margin expansion, we did we saw Saar gross profit.
5.7 in terms of what we reported we were up a little over 40 Bips. If you back out highest beat was about neutral actually from a margin expansion standpoint. So we grew gross profit five seven excluding it and then just.
The absolute margin expansion was.
Neutral.
And so how should we think about the gross margin outlook for the 2020, just given the moving parts less I've worked and and I see I see divestiture.
Yes, so I think so if you look at the base business I think that we're looking on a full year basis.
Not guiding margin specifically, but in general we're looking to modestly expand margins.
We are seeing some headwinds from a commodity standpoint, the investments that we're making in the warehouse et cetera, and we're looking to offset that with productivity and some select pricing initiatives. So to think about the base business.
We're looking at modest margin expansion.
And if you so I SB will work if you back them out.
You'd obviously, if you look at the important piece the boardman side of the equation is going to be slightly margin accretive.
And I SB would be work in the other way.
Okay. Thank you.
Yes.
We have reached the end of the question and answer session I would now like to turn the call back over to management for any closing remarks.
Kevin I think your line may be on mute.
So that concludes the the call. So I appreciate Everybodys energy have not theres no further questions.
No we have no further questions at this time.
All right great I appreciate everybodys interest in hostess.
We're activating our value creation model I feel great about the future we have.
We have a big first half to go to continue to transform.
The company and create value and the long term value thesis is very strong. So I appreciate everybodys interest have a great afternoon.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.