U.S. Markets open in 4 hrs 35 mins

Edited Transcript of TWNK earnings conference call or presentation 8-May-19 8:30pm GMT

Q1 2019 Hostess Brands Inc Earnings Call

KANSAS CITY Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Hostess Brands Inc earnings conference call or presentation Wednesday, May 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew P. Callahan

Hostess Brands, Inc. - President, CEO & Director

* Katie M. Turner

ICR, LLC - MD

* Thomas Alan Peterson

Hostess Brands, Inc. - Executive VP, CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Alexis Nicole Borden

Citigroup Inc, Research Division - Senior Associate

* Chase West

Consumer Edge Research, LLC - Analyst

* Grant Blandford O'Brien

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Kenneth B. Goldman

JP Morgan Chase & Co, Research Division - Senior Analyst

* Pamela Kaufman

Morgan Stanley, Research Division - Senior Analyst

* Robert Frederick Dickerson

Deutsche Bank AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to the Hostess Brands Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Katie Turner. Thank you Ms. Turner, you may begin.

--------------------------------------------------------------------------------

Katie M. Turner, ICR, LLC - MD [2]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the Hostess Brands' First Quarter Fiscal 2019 Earnings Conference Call. By now, everyone should have access to the earnings release for the period ended March 31, 2019 that went out this afternoon at approximately 4:05 p.m. Eastern time. The press release and an updated investor presentation are 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 filing, you'll see a discussion of the factors that could cause 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 will provide investors with useful information on the underlying growth trends of the business and has included in its earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.

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

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Katie. Good afternoon and thank you for joining us today. I'll begin our discussion with a brief overview of our first quarter business highlights and provide an update on our 2019 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.

We are encouraged by our strong start to 2019. Our financial results for the first quarter were fueled by the depth and breadth of our Sweet Baked Goods product offerings. Our team executed diligently on our 2019 pillars for growth with an increase in consolidated net revenue and adjusted EBITDA.

In addition, our disciplined operational and integration efforts resulted in a positive contribution from the Cloverhill business. We continue to expect Cloverhill profitability to improve as the year progresses.

Here are a few first quarter highlights. Net revenue increased 6.7% to almost $223 million. These results were driven by additional sales volume in multiple channels led by strong growth in the club channel, including expansion of our value brands, leveraging the Cloverhill business. We also benefited from the multifaceted price increases that were executed at the end of 2018. Point of sale increased 1.6% and market share of 18.2% was consistent with the prior year period.

As you may notice, for the quarter, our net revenue growth of 6.7% outpaced our Nielsen track point of sale increase of 1.6%. This is primarily a result of a disproportionate amount of growth within certain non-tracked dollar, club and private-label customers. That said, we continue to experience strong merchandising activity and expect accelerated overall and Hostess-branded net revenue growth in Q2.

Importantly, we are seeing positive trends in both merchandising and consumer support headed into Q2 and we believe our operational and financial results position us well to achieve our annual outlook as we continue to advance our strategic goals.

Going forward, we are keenly focused on our robust operational plan to drive sustainable, profitable growth in 2019 and beyond, grounded in 5 pillars. We have taken important actions during the first quarter and year-to-date to execute on these pillars.

Within growing the core, our team is emphasizing the appropriate mix of products to meet the needs of all consumer segments and need states, consumer preferences and overall growth.

I am pleased with our progress in strengthening Hostess' partnership across all channels, particularly grocery in the first quarter. Our multifaceted pricing actions were implemented across all sales channels and we have continued to see good overall volume growth.

As we grow through innovation, we are pleased with customer acceptance of the Hostess' breakfast products thus far and expect to grow these products to increase as we progress through 2019 and customers complete product resets.

We believe breakfast and indulgent premium snacking are strategic growth platforms over the next few years. They are both highly incremental to our business and extendable. We continue to build out our pipeline of consumer-focused innovation to drive future profitable growth. We are confident that with the right innovation, we can drive growth in the category.

We also continue to improve through agility and efficiency. We are very pleased that our Cloverhill business' profitability improved again this quarter. Our team implemented meaningful, operational supply chain and price value initiatives as part of the comprehensive integration and transformation of the Cloverhill Business, which will continue to pay off.

Also, we are pleased with the progress of other bakery efficiency program as evidenced by our ability to offset a majority of the margin pressures we experienced in the first quarter.

In addition, today we announced the decision to relocate our primary distribution center from Illinois to Kansas by the first quarter of 2020, which is an important step in elevating our infrastructure for future profitable growth. As a result of this geographic move, the new Kansas-based distribution center will be closer to our largest bakery and more centrally located in the United States.

Upon completion, we expect to improve our customer service, take miles out of our network and improve lane rates. Additionally, this new distribution center will position us well to support our future portfolio growth. We believe this further strengthens our category differentiated direct-to-warehouse distribution system and core prebuilt pallet and shipper merchandising capabilities.

Our ability to efficiently and effectively build pallet-ready displays, shippers and other merchandising forms fuels our LTOs and merchandising programs with retailers. We expect to reinvest a significant portion of the savings achieved with this move to further enhance our strong foundation and enable additional consumer-driven profitable growth opportunities.

We are focused on cultivating the talent and capabilities of our team and have added talent within operations, marketing and human resources to enhance our growth.

Specifically, we recently added a Chief Human Resource Officer to lead our efforts as we attract and retain talent as well as further enhance our performance-based culture. Additionally, in April, we welcomed a Chief Marketing Officer to our executive leadership team who will be responsible for overall profitable brand growth. He will oversee consumer insights and analytics, brand strategy and innovation.

In connection with this appointment, we also announced our plan to open an office in Chicago to serve as our new hub for marketing and category management. We believe having a team based in Chicago will enable us to tap into the region's deep pool of CPG marketing talent and further strengthen our capabilities as we continue to grow.

We will continuously look to add expertise to the organization in 2019 to build best-in-class fully integrated marketing analytics, innovation and marketing functions.

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 we believe sets us apart from our peers and positions us to win with consumers and our valued customers.

We look forward to providing you with additional updates on the progress of our key pillars for growth in the coming quarters.

We believe that our team and our operational strategy, when combined with our robust cash flow and strong balance sheet, will create value for our shareholders for many years to come.

Now I will turn it over to Tom to go through the details of the quarter's results.

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [4]

--------------------------------------------------------------------------------

Thanks, Andy. I will now review our first quarter 2019 financial performance and other data from today's release.

Net revenue for the quarter was $222.7 million, a 6.7% or $14 million increase from the first quarter 2018's revenue of $208.7 million.

We generated $75.2 million of gross profit for the first quarter and gross margin was 33.8%.

Adjusted gross profit was $76.8 million or 34.5% of net revenue as compared to 34.6% in the first quarter of '18.

From a margin standpoint, we are pleased that our adjusted gross profit margin was flat as we offset inflationary pressures in transportation and other input costs with pricing actions and productivity savings in operations.

As we continue to develop opportunities to profitably grow our business, we are focused on adding incremental gross profit. At times, this might result in lower gross margin percentages as we initially penetrate the value segments with our brands that have lower margins than the portfolio average. But importantly, these brands meet the needs of a distinct consumer segment. Throughout the remainder of the year, we expect the coming quarters to have higher gross margin as compared to the first quarter of 2019.

Our effective tax rate was a benefit of 4.6% compared to an expense of 18.2% in the prior year. The first quarter 2019 effective tax rate includes a $16 million -- $6 million discrete tax benefit from the planned relocation of the company's primary distribution center from Illinois to Kansas due to the remeasurement of deferred tax balances. We have partnered with the State of Kansas and local governments on the relocation of the distribution center and expect to receive significant tax incentives and credits as a result of the move.

Adjusted EPS was $0.14, flat compared to the first quarter of 2018. We had cash and cash equivalents of $160.5 million and net debt of $820.9 million as of March 31.

Our operating cash flow for the period ended March 31 was $28.4 million compared to $38.3 million for the same period last year. The decline year-over-year is due to the timing of accounts receivable collections and we have already seen this trend reverse in April 2019.

We continue to expect 2019 cash flows will 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 capital structure.

Our net leverage ratio, as of March 31, 2019, has improved to 4.4x. Given our expected EBITDA growth and inherent strong cash flow generation, absent any significant business transactions, we remain committed to reducing our leverage meaningfully throughout 2019, particularly as we reduce the spend associated with the Cloverhill business transformation.

For fiscal 2019, we are reaffirming our outlook. We continue to expect net revenue for the year to grow well above the Sweet Baked Goods category driven by new innovation, including Hostess branded breakfast products and other core innovations as well as expanded distribution and improved merchandising execution over the course of the year.

As a result, we expect Q2 and Q3 to be our highest revenue contribution quarters of the year and have very good visibility to growth drivers in all channels.

We expect adjusted EBITDA to be in the range of $200 million to $210 million with the remainder of the year EBITDA growth expanding above this quarter, and adjusted EPS will be in the range of $0.57 to $0.62 per share, primarily driven by the execution of multifaceted pricing and merchandising programs and achievement of operating efficiencies.

We anticipate ending the year with a net debt leverage ratio between 3.5 and 3.7x driven by strong operating cash flows of $160 million -- $150 million to $160 million in 2019 and expect capital expenditures in the range of $30 million to $35 million.

Our expected tax rate, excluding discrete items for 2019, is 21% to 22%.

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

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Tom. In closing, we believe our strong start to 2019 positions us well to achieve our annual outlook.

We are very pleased with the growth we generate in key areas of our core Hostess branded business and Cloverhill Business. We remain excited about the growth potential we have for the balance of the year. Across our team, we are working to further advance our high performance-based culture to consistently win with all stakeholders.

We believe our 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 our shareholders.

With that, Tom and I are available for your questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Rob Dickerson with Deutsche Bank.

--------------------------------------------------------------------------------

Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Great job, first of all. There's a bunch in there, I'll try to keep this short and hop back in the queue. And -- so I don't really annoy anyone. I guess firstly, just the top line results, obviously, came in better than probably most people expected, part of that was driven by club. So first question is just, what really drove that club expansion? I don't think, historically you have a huge club business. And then secondly, with respect to the top line, was there anything in Q1 that maybe was a bit of a tailwind if there'd be -- Easter shipments or maybe a bit of a pipeline fill on the club side? Or would you expect, let's just say in theory, that kind of the trend we saw in Q1 at least in revenues would maybe be sustainable as we go through the year?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Thanks, Rob. Appreciate the question. Just to step back, feel good about the growth in Q1 and honestly feel great about the growth since we continue to progress through the year.

We've said that repeatedly there's several growth drivers. Innovation is going to continue to drive better growth throughout the year as we get through the distribution. We talked about leveraging Cloverhill and I'll get into more about that when we talk about club going through the year and the breadth of our merchandising, which we expect to improve as we go through the year, are all growth drivers for us. So we feel good about Q1, but importantly also feel good about as we progress through the year. So let me answer specifically with that being said, your 2 questions.

On club. Club was a terrific growth driver for us. We talked about when we acquired the Cloverhill business of not only did it give us a platform to expand into breakfast but it also gave us some access to certain customers and channels to be able to expand that.

We've leveraged that in club, not only for the Cloverhill and Big Tex brands but also to expand our Hostess branded business as well as we launched Dolly in club as well as across some other channels. So the innovation of taking that platform and spreading that across multiple channels, it was also in other channels not just club, but it did help the club business. But I think it's important to note that it was both value and Hostess' growth in club that grow -- that drove that growth.

So the second piece of your question was related to how much did the Easter -- timing of the Easter merchandising versus shipments in Q1 impact it.

Honestly, it did have an impact but it wasn't really the driver of the growth. It did have a small impact. But I think as we flush out the year, as I said, don't expect a step back in Q2 growth, I guess would be a headline, because I feel good about the merchandising that's going to support the pull through of that. And there was some timing, though, but it wasn't really the driver of the Q1 growth. There was also some of -- I would say, a little bit of a pipeline too with some of the launch in the new items like Dolly and some of the others. But importantly, really it was not the driver of the growth.

--------------------------------------------------------------------------------

Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Okay. Super. And then just quickly on profitability. I think Tom said, gross margins should be higher for remainder of the quarters relative to the Q1. Is there -- if you're willing to comment on just potential EBITDA margin, would you expect -- kind of as you get through that -- get through the P&L rest of the year, is there any reason why the EBITDA margin would be lower as we go forward just given timing of investments? Or is it probably fairly similar to what we saw in Q1? That's it.

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [5]

--------------------------------------------------------------------------------

Yes. Thanks, Rob. Our EBITDA margin should be higher than Q1 for the balance of the year. We do make some investments in Q3 around promotions with back-to-school that took kind of timing of promotions. But for the balance of the year, our EBITDA margins will be higher.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Bill Chappell with SunTrust.

--------------------------------------------------------------------------------

Grant Blandford O'Brien, SunTrust Robinson Humphrey, Inc., Research Division - Associate [7]

--------------------------------------------------------------------------------

This is actually Grant on for Bill. Had a quick one on the Chicago Bakery and then a follow-up. I think you guys said that was a positive contributor to the quarter. I was hoping you could quantify that. And then, is there any change to the outlook for 2020 for $20 million to $25 million in EBITDA for that business or is that time line maybe moved up a little bit at this point?

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [8]

--------------------------------------------------------------------------------

Yes. Thanks, Grant for the question. So we're -- as we move forward and we've talked a lot about the Cloverhill investment and the Cloverhill business, we're moving forward with it being one of the core 4 bakeries and we're not going to break it out separately. We will say it did have a good quarter, we're excited about the profitability program throughout the year progressing and improving and there is no change. We still continue to expect what we've said at the original acquisition and kind of continued on, is that bakery can contribute $20 million to $25 million in next year.

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

And importantly on that question -- we feel great about it, as Tom said -- we expect the profitability as Tom said, to improve. And we've leveraged it for way more than what we bought and that's exactly the headline, as Tom said -- as Tom stated.

--------------------------------------------------------------------------------

Grant Blandford O'Brien, SunTrust Robinson Humphrey, Inc., Research Division - Associate [10]

--------------------------------------------------------------------------------

Got it. And then I guess just a follow-up on innovation for this year. I think some of the innovation last year coming into this year now and at least in track channels and correct me if I'm wrong and non-tracked have slowed a bit. So I don't know if there's anything that you guys have done to change your innovation process, whether it be looking at the category differently or looking at adjacencies differently that kind of gives you more confidence in the innovation slate this year?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

Well, we did a couple of things. One is, we just hired a new CMO, feel great about that focus, we're going to have an innovation. What we're posting for innovation today is not our ambition as we continue to move forward. Expect innovation but given some of the timing of the resets as we go through to the distribution to grow as we move in through Q2. Across all channels for breakfast and across our other Totally Nutty breakfast, Birthday Cupcake, we're seeing resets across all channels for our largest customers coming through in April through Q2.

So we still have a lot of good innovation in front of us. But -- and then the spirit of your question is, yes, we expect to be focused on building that pipeline even more than it is today. I feel good about some good innovation in the back half of the year as well. But we'll launch and feel really excited about having the CMO on board to continue to build on the pipeline that's already building. It's an important critical pillar and we feel pleased with where we are before but recognize that our ambition is much higher.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Ken Goldman with JPMorgan.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

--------------------------------------------------------------------------------

I wanted to ask about the big customer that you lost display space with last year. And I have 2 questions here. First, just based on Nielsen data, it suggests that consumer takeaway of Hostess products within that customer really started spiking in the 2nd week of April, which obviously is not in your first quarter. So I just wanted to be sure, did the first quarter benefit in any way from a shift into this customer in advance of recovered display space? I guess the answer is no given what you've said so far but I just want to be sure. And I guess, my second question is, to what degree did your guidance entering this year include this display space coming back assuming that's what's happening? I really just want to get a sense of whether what we're seeing in Nielsen is incremental to when you first gave an outlook for the year?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [14]

--------------------------------------------------------------------------------

Yes, Ken. So 2 things. One is -- it's very similar to Rob's question as well. We did see a modest timing of some shipments in Q1 that had takeaway in Q2. However, it was not the driver of the -- of above 6% to 6.7% growth in Q1. So I just want to make sure I'm crystal clear. There was some but it was modest. It wasn't the driver of the growth.

But more importantly, we did expect merchant -- the breadth of the merchandising improvements including our largest customers to improve as the year went through. We expected it to get better as we came out of Q1. Across the board we're seeing that and I expect that to continue and to accelerate as we go through the year. We did expect that in our guidance, where we'll be plus or minus. But we did expect to see that and it's coming to fruition.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

--------------------------------------------------------------------------------

All right. And just to be clear, I had had the impression and maybe I was overly eager, but I had had the impression that most of what you were expecting with that customer was in terms of your improvement was based on easier comparisons as things -- as you went through the year. But it now seems like you really have actually better performance. But it doesn't sound like numbers with that customer, even into the second quarter are better meaningfully than what you've expected, is that a fair characterization?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [16]

--------------------------------------------------------------------------------

Yes. And we're always looking to build our -- grow our category, build our customers' business through building the Hostess business. So we'll continue to work to improve those. But yes, it's -- we are in line with what we expected.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Alexis Borden from Citi.

--------------------------------------------------------------------------------

Alexis Nicole Borden, Citigroup Inc, Research Division - Senior Associate [18]

--------------------------------------------------------------------------------

Question on the inflation. Is your inflation expectations for this year similar to where you kind of started out from your last kind of in February? Or have there been any changes in your inflation outlook and what maybe pieces might have changed, if any?

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [19]

--------------------------------------------------------------------------------

Yes. So we -- when we went and prepared our initial forecast for the year, we took a pretty good look at the inflationary environment, which for us, primarily this year is sugar, corrugate, little bit of other raw materials, and transportation costs, and we are in line with that forecast. We've seen some softening and there is some -- word of some softening in transportation, but we still feel very comfortable with our inflation forecast.

--------------------------------------------------------------------------------

Alexis Nicole Borden, Citigroup Inc, Research Division - Senior Associate [20]

--------------------------------------------------------------------------------

Okay. And then this quarter you executed your pricing at retail, has the price, volume [and] elasticity been in line with where you have expected? Or kind of what has been the response to that pricing relative to your expectations?

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [21]

--------------------------------------------------------------------------------

Yes, so we have seen elasticity -- volume declines from elasticity, but it is in line with our expectations as the pricing has gone through. We've seen some retail price increases as our customers pass that through and it is in line.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question is a follow-up question from the line of Ken Goldman with JPMorgan.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

--------------------------------------------------------------------------------

I have some questions I've never gotten back on, but I have a question. You spoke a couple of months ago about the need and the desire to add customers so that your Cloverhill plant starts to fill capacity. If you addressed it in your prepared remarks, I missed it. Can you update us on the process of bringing customers on board there? And whether that's ahead or behind what you've thought it would be?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [24]

--------------------------------------------------------------------------------

It's -- If I understand the question, it's -- we bought -- I'm trying to think specifically what I said that we bought the Cloverhill business and then we -- what we did was we brought, we redomiciled some of our CoPack business and brought it on board to fill the plant. We're also building both the branded business as well as expanding the Cloverhill and Big Tex business, the distribution of those businesses to other customers. That is going well across multiple channels because we're taking some of that business through some of our C-store, some of our value channels. We've added some customers. So we've added customer and distribution across the board. We've also expanded our branded breakfast business. So generally we're executing the plan of what we expected to do.

And then the other side of that would be the -- obviously the capital was completed, the core capital was completed as we ended and came out of 2018, which is a tremendous effort. So our efficiency and cost continues to improve as we go through the plant. So feel really great about Cloverhill. Hopefully, I addressed kind of the question, but I feel good about the expansion both from the new products we're bringing on as well as the customers we're adding.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

--------------------------------------------------------------------------------

Okay. Yes. That's helpful. And I'm not sure I phrased it exactly, I'll follow up with you after on that one. But I did have a couple more if I can. First, can you help us quantify -- you talked about reinvesting some of the benefits from the move of the distribution facility. There's efficiency benefits, I think there's tax benefits too. Can you help us quantify what those are by any measure?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [26]

--------------------------------------------------------------------------------

Yes, we're not going -- we're not breaking them out right up but you think about our pillars and our growth model, we want to continue to balance above-industry growth and above-industry margins but not cut to expand margins. We'd rather invest and grow. And the investments we expect to be that are insights around innovation, investing in our consumer to drive growth and basically, investing to build our brand, build our innovation and ultimately build our profitable growth. And that's the plan that we're unveiling and that's where we expand. So that doesn't mean we're -- we expect and the result of that model would be an expected growth of absolute EBITDA. We expect to do that above our peers and above -- and lead the industry.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [27]

--------------------------------------------------------------------------------

Okay. That's helpful. And then I was hoping to get a sense of where your core margins came in excluding Cloverhill. I know you're not providing Cloverhill's impact anymore, but could you at least tell us if the core margin, on a legacy basis, was up year-on-year? Or any kind of description there would be helpful?

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [28]

--------------------------------------------------------------------------------

Yes. The core margins were probably flat year-on-year. And then the Cloverhill margins improved during the year as we rolled out. And when you think about core margins we're, if it's everything excluding Cloverhill that also includes Hostess within the club channel and the value brand Dolly Madison, so there is some value impact and some mix as well but it was flat.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

And then last one, I promise. Can you help us think about SG&A margin or SG&A as a percent of sales going forward? It was pretty high this quarter, and it was higher than we expected last quarter. Just -- if you can just remind us of some of the drivers of that and how sustainable those are in terms of higher -- and I'm really talking G&A, not advertising and selling, that would be helpful.

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [30]

--------------------------------------------------------------------------------

All right. Yes. So as you recall last year, we didn't pay an incentive payment and this year we are planning on paying that and have included it within our guidance, and also we have stock compensation, which wouldn't be included in EBITDA but that did grow this year as we're lapping some holes within the team. As we lap that, we have additional stock comp and then there's some other hiring that we've done with the team as we invest in consumer and that's really where it is. It should be up more close to where it will run for the year. It will go a little higher as we build out a little more into consumer, but it is at that level.

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [31]

--------------------------------------------------------------------------------

The majority of it, though, is bonus and stock comp.

--------------------------------------------------------------------------------

Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [32]

--------------------------------------------------------------------------------

And you're allocating that throughout the quarters, right?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [33]

--------------------------------------------------------------------------------

Yes. It's allocated ratably.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our next question comes from the line of Pamela Kaufman with Morgan Stanley.

--------------------------------------------------------------------------------

Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [35]

--------------------------------------------------------------------------------

You talked about Cloverhill giving you greater access to distribution and club stores, can you remind us how you're planning to leverage Cloverhill's distribution footprint? And how much more distribution opportunity you have through their channel mix?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [36]

--------------------------------------------------------------------------------

Yes, there is -- well, we expect it to continue to grow. Cloverhill gave us the ability to manufacture some core breakfast platform items. It also gave us access to the value brand that came in different forms. And when you combined that acquisition with the Hostess brand as well as the best-in-class sales and distribution model we have, that leverages the breadth of distribution, the combination of those 2 when we put them together allowed us to blow out and get access to value customers. With the value brand, our normal customers are getting into this segment as well as launching the breakfast platform under the Hostess brand. All of that's happening and it's what's driving our growth and why I'm confident that we'll continue to see growth as the year proceeds.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from the line of Chase West with Consumer Edge Research.

--------------------------------------------------------------------------------

Chase West, Consumer Edge Research, LLC - Analyst [38]

--------------------------------------------------------------------------------

Just wanted to touch quickly on M&A with leverage coming down in the quarter and I know you remain committed to reducing leverage through '19, but could you just update us on your M&A omissions? And maybe if you're seeing any potential outfits in the marketplace?

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [39]

--------------------------------------------------------------------------------

So Tom, I'll start and you can feed in. Obviously we don't comment on any potential targets or anything. Feel great about our cash flow. We should deleverage, we'll deleverage really quickly. We're generating a lot of cash with our EBITDA growth. And it gives us a great optionality because I believe -- and with great conviction that we have a very scalable platform to be able to add onto. And I believe that as we move through the year one of our greatest or best returns of our cash is through acquisitions. So it'll be important as we delever to go out through the year to continue to look across and find things. Dean is obviously a great partner of mine and the leadership team has a great track record of M&A and a great partner in that process. So we're going to be very diligent smart, but when we do it I'm confident we'll be very successful.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Our next question is a follow-up question from the line of Rob Dickerson with Deutsche Bank.

--------------------------------------------------------------------------------

Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

Quick one. Just in terms of the DC move, it sounded like in the remarks that, to me obviously, you're doing this because it's somewhat margin enhancing. I mean there's maybe agility, speed-to-market, what have you. But I'm curious if that should be finished by I guess sometime in 2020, were there any upfront costs in 2019? And if so, would they just be adjusted out? And then secondly as we get into 2020 I'm assuming once the project is completed there is some margin enhancing opportunity outside of faster market distribution, what have you. That's all.

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [42]

--------------------------------------------------------------------------------

Let me -- I'll let Tom talk about the financial. So let me say first. We've done, obviously, a lot of thinking about this. Our ability to -- our consolidated distribution center where we also do all of our knitting and merchandising and build our pallets, it really fuels our ability to drive scaled merchandising, our LTO programs at some of our largest customers. So it's very important [to] our ability to be able to do that really well. And this move will not only continue to build that and enhance that efficiently but also give us the room and scale to continue to grow. So it does that while also putting us in lanes that take miles out of the system, gives us access to our very well developed West Coast customers to better service them as well nationally.

So there's really a lot of good stuff here.

It will -- we'll be able to do all of that better stuff cheaper, more efficiently just because of where we're located and we want those dollars to invest and continue to grow above the industry average. So that's the way we're thinking about it. I'll let Tom talk about a way of -- the costs will get adjusted in '19 because they will come out.

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [43]

--------------------------------------------------------------------------------

Yes. Thanks, Andy. Rob, there will be some capital costs associated with the transition and that is included in our $30 million to $35 million guide. And then there will be transitional costs with some inventory write-offs and some retention and severance transitional costs, and those will be adjusted out of EPS.

--------------------------------------------------------------------------------

Robert Frederick Dickerson, Deutsche Bank AG, Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Okay. Perfect. And then just -- sorry, I do have one more. I figured Ken asked a few, so I'm going to ask a couple. As a follow-up actually to Ken's follow-up on the incentive comp piece, which we obviously we saw the administrative line was higher than we've seen historically and higher than we expected. Just to be clear I guess everybody kind of understands this. As we model forward, right, there is this $17 million amount in administrative line in Q1. Did you say that that amount kind of roughly should be kind of what we're thinking about or what we should be thinking about in Q2, and then also in Q3 and Q4 or not? I just want to be clear on that.

--------------------------------------------------------------------------------

Thomas Alan Peterson, Hostess Brands, Inc. - Executive VP, CFO & Treasurer [45]

--------------------------------------------------------------------------------

Yes. It should roughly be that amount plus or minus.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

--------------------------------------------------------------------------------

Andrew P. Callahan, Hostess Brands, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Thank you. And thanks, everybody for calling in. As we close out Q1 we are very pleased with the start of the year and very confident as we progress the year that we'll continue to drive value and drive it by building on our growth. We're focused on building a sustainable business model and feel great about our progress. We'll continue to work diligently to drive that growth and drive it profitably. So appreciate it. Feel great about the start of the year and feel very confident as we proceed through the year. Appreciate your interest, have a great afternoon. Thank you.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.