The Kraft Heinz Company (KHC) Q4 2018 Earnings Conference Call Transcript

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The Kraft Heinz Company  (NASDAQ:KHC)Q4 2018 Earnings Conference CallFeb. 21, 2019, 5:30 p.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Good day. My name is Chelsea and I will be your operator today.

At this time, I would like to welcome everyone to The Kraft Heinz Company's Fourth Quarter 2018 Earnings Conference Call.

I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin.

Chris Jakubik -- Head of Global Investor Relations

Hello, everyone and thanks for joining our business update.

We'll start today's call with an overview of our fourth quarter and full year results as well as our view on the path forward from Bernardo Hees, our CEO; and David Knopf, our CFO. After that Paulo Basilio, President of our U.S. zone will join us for the Q&A session.

Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ materially due to risks and uncertainties and these are discussed in our press release and our filings with the SEC. We will also discuss some non-GAAP financial measures during the call today.

These non-GAAP measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and at the end of the slide presentation available on our website.

Lastly, as you may have seen in today's press release, we conducted an internal investigation into our procurement area with the assistance of external legal and accounting advisors and found we should have recorded $25 million in prior periods, which we booked in Q4 2018. To be clear, we do not expect this to be material to our current period or any prior period financial statements.

Now let's turn to Slide 2 and I will hand it over to Bernardo.

Bernardo Hees -- Chief Executive Officer

Thank you, Chris and good afternoon, everyone.

With the closing of one year and the start of a new one, I think it's best to begin our update today similar to how we do things internally, with a scorecard, to better understand where we delivered, where we did not and why. At this time last year, we set plans to drive profitable sales and consumption growth by investing in deployment of new capabilities and a strong pipeline of innovation and white space initiatives. And while we expected this to translate into near-term margin pressure in United States and Rest of the World segment. We anticipated a stronger net savings to deliver constant currency EBITDA growth for the year. Overall, we successfully drove profitable sales and consumption growth accelerated, but we fell short in delivering the net savings we expected.

From a commercial perspective, we firmly restarted organic growth. In United States, our second half performance came back to offset the self-inflicted losses from the first half of the year. We became one of the few within our industry posting real volume-driven growth, growing volume mix nearly 4%. In Canada, similar to United States, we ended the year with positive consumption growth from improvements in coffee and cheese. Our EMEA business built momentum on the back of white space gains in condiments and encouraging share trends across our U.K. base.

In Rest of the World, we are gaining traction in driving real growth with the start-up of our new (inaudible) plant in Brazil and our Cerebos acquisition in Australia and New Zealand. And our Foodservice business, on a global basis, is approaching $4 billion in sales and gaining momentum from white space initiatives in all markets.

And this leads to the second aspect of our scorecard, the significant progress we made developing, deploying a strategically advanced capabilities. We have strong returns on investment in marketing, category management and e-store sales. We continue to expand in e-commerce and reach driving 79% channel growth in United States alone and a 1/10 (ph) market share index versus traditional retail.

And we setup Springboard and evolv ventures as platforms to accelerate our innovation to consumers, to customers and find new ways to disrupt ourselves. So when you think about the sustainability of our growth, breakthrough innovation, a strong in-store activity, distribution gain and white space expansion, are all coming together. In fact, our consumption turnaround in the United States had been driven by brand-building initiatives across the portfolio, not just a few categories. We are sustaining momentum in brands where we've been successful like Heinz, Philadelphia, Oscar Mayer bacon, Classico, (inaudible) in our frozen snack category at large, all growing mid-single digits in 2018.

Turning around, other key brands like Kraft mac & cheese, Oscar Mayer hot dogs and A1 to low single-digit growth after several years of decline, stabilizing historically challenged brands like Kraft salad dressing, Mayo and our kids single-serve beverage business after years of mid-single-digit declines and building new brands into meaningful platforms of growth like (inaudible) which now $120 million platform; Devour, a $7 million brand in less than three years and Just Crack an Egg at $50 million after only 12 months.

While some of this was supported by incremental promotion and price investments to improve consumption and distribution trends. We saw strong LOIs and created a solid base of support and commercial momentum for 2019.

Where we fell short in 2018 was operations, specifically, our entire EBITDA miss was driven by net savings versus expectations within our United States supply chain. To be fair, we must first recognize that our team operate at industry-leading levels globally; in quality, with top-tier performance in the industry; in safety, with our best results ever; and in customer service, achieving industry-leading case fill rates and on-time, in-full delivery rates as we saw volumes ramp up.

The core cause of our shortfall in 2018 was forecasting the pace and magnitude of our savings curve in 2018, not merger-related synergies and not an increase in DDB cost. In fact, DDB delivered savings across all of fixed-cost packets outside of our commercial investments and helped to fund our initiatives.

To put our performance in context, we started 2018 expecting approximately 3% growth inflation, excluding key commodity costs with savings programs expected to offset gross inflation. We ended the year with approximately 3% inflation net of savings, specifically driven by higher supply chain costs and low operational savings in the United States. There is no question, we are disappointed that profitability did not ramp up with consumption gains as anticipated. We are overly optimistic on delivering savings that did not materialize by year-end. For that, we take full responsibility and we have taken steps to ensure this does not happen again by touching planning process, procedures and organizational structure.

In the end, we see three takeaways from 2018; one, we're successfully driving sustainable consumption growth; two, we have the ability to deliver top-tier organic growth at industry-leading margins; and three, we need to better plan and execute our operational net savings initiatives.

Before we outline the 2019 plans, David will provide more details on our 2018 financials.

David Knopf -- Chief Financial Officer

Thank you, Bernardo and hello, everyone.

As we show on Slide 3, while our overall performance fell short of our expectations, the year-on-year drivers are straightforward. Consumption-driven growth negatively impacted by cost inflation net of savings in the U.S. with tax savings offsetting lower EBITDA, higher depreciation and interest expense. From a trend perspective, there are a few important details to highlight. On the top line, consumption-driven growth momentum continued to build through Q4. For total Kraft Heinz, Q4 volume/mix growth was 4% with growth in every reporting segment driven by innovation, marketing, white space and go-to-market investments and led by improved consumption in a vast majority of U.S. categories.

Total company Q4 pricing was down 160 basis points, including 80 basis points from key commodity pass-through in the U.S. Also note that the sequential decline in pricing versus Q3 was accentuated by a deceleration in contribution from price in our Rest of World Segment. And regarding U.S. pricing trends, as Bernardo mentioned, we were happy with the returns and results on this front.

To provide more context and adjust for program timing, it's useful to understand the key drivers of U.S. pricing from a second half perspective. U.S. pricing in the second half of 2018 was down 2.4 percentage points with 1 point from passing through lower key commodity costs. So U.S. pricing net of key commodity impacts was down 1.4% in the second half. Out of this, 40 basis points of the decline was primarily related to defending our natural cheese business by closing freight debts to private label. The remaining 1 point was a combination of opportunistic price investments in support of our innovation pipeline to stimulate incremental consumption with good lift and solid returns. Looking forward, and excluding the impact of key commodity pass-through, we do not expect pricing to be down in 2019 either in the U.S. or globally.

Moving to EBITDA. We said on our last call that we expected our EBITDA growth rate to improve beginning in Q4. While this turned out directionally accurate, Q4 constant currency adjusted EBITDA was significantly below the expectations we previously outlined. As Bernardo mentioned, this was driven by shortfalls in the United States. To be more specific, while the one-off factors we outlined in Q3 by and large fell away as expected, anticipated savings did not materialize, particularly in our procurement area and to a lesser extent, we had higher-than-anticipated costs in both manufacturing and logistics.

Taken together, top line trends and bottom line results lead us to the key factors we considered over the past few months in finalizing our 2019 plans outlined on Slide 4.

And I'll hand it back to Bernardo to start it off.

Bernardo Hees -- Chief Executive Officer

Now it's time for us to focus on the year ahead, what we see in front of us and how best to grow our business for the long term. Our industry has been and is likely to remain challenged on the forefront. Continued fragmentation of consumer demand, a general lack of affordability to reinvesting brands, retail competition where assortment is likely to grow in importance and finally, in the short term, ongoing cost inflation. Given our savings shortfall and the high inflation we're seeing, we could focus on maintain or expanding margins, but risk forfeiting commercial growth and market share by slowing our pace of innovation and channel development, focusing on marketing efficiency versus incremental marketing presence and compromising talent development at a critical time. We have not and we will not. We are choosing to focus on improving our long-term growth trajectory and returns by; driving consumption and market share, leveraging next-generation capabilities for brand and categories advantage, and importantly, securing the right talent in areas critical to grow.

In fact, in light of the industry backdrop, we have concluded that there is no better time for Kraft Heinz to improve our growth profile. And looking forward, we have set three objectives for 2019; first, leverage our industry-leading margins to sustain our commercial momentum; second, more actively manage our portfolio; and third, expand (ph) our balance sheet as we continue to position Kraft Heinz for industry consolidation. I will cover our commercial growth initiative and David will outline our portfolio, capital restructure and financial expectations.

By far, the biggest and the best thing you can do to build the long-term value of our portfolio is to capture sustainable commercial growth by building on the sales momentum from 2018. And we have the stronger global pipeline we ever had to go after incremental consumer demand. In the United States, we'll be launching a record level of innovation, improving base consumption, velocities and leveraging brands and go-to-market investments.

In Canada, the priority is (inaudible) consumption in (inaudible) as well as sauces and condiments. In Europe and Rest of the World markets, white space initiatives will focus on driving incremental sauces consumption and opening new geographies. And in Foodservice, all regions have significant opportunities to gain distribution and white space.

We will support these initiatives with fully funded brand programs, taking advantage of our superior (inaudible) efficiency or cost per impression and increasing our immediate effectiveness or sales lift per impression, by deploying new creative tools in digital marketing. In a nutshell, we plan to go to market in 2019 with a stronger innovation pipeline than we ever had, backed by more marketing dollars while leveraging advantaged category managed and go-to-market initiatives to win assortment and improve distribution across all channels, including e-commerce. And we plan to do this while we maintain industry-leading margins.

Now let me turn back to David as the remaining objectives are a big part of his 2019 goals.

David Knopf -- Chief Financial Officer

I'll start with our financial expectations going forward on Slide 6. Regarding top line, we are now well positioned to continue organic net sales growth driven by incremental consumption gains. This will reflect volume/mix growth from innovation, distribution and white space initiatives and pricing actions that balance cost inflation and our market share objectives. On pricing, note that we exited 2018 at strong levels of merchandising support and distribution and price gaps are currently in a better place. So we do not expect pricing to be a drag year-on-year for 2019 as a whole. In fact, our U.S. business recently announced list price increases that are scheduled to take effect late in Q1.

From an organic growth perspective, in the very near term, Q1 is likely to decline versus the prior year due to unfavorable trade timing and a shift in Easter-related shipments to Q2 this year from Q1 last year. Trade timing in Canada, comparisons with a very strong winter soup season in the U.K. and destocking in Asia Pacific. For the year, we are targeting positive organic net sales growth with commercial gains partially offset by price elasticity. And on a nominal basis, a combination of currency headwinds and divestitures is likely to result in a 3 percentage points to 4 percentage point headwind to net sales.

Regarding profitability, we fully expect to maintain industry-leading margins. At the same time, we think it's prudent to begin the year by properly level-setting expectations. To do so as a one-off for 2019, we are breaking with our established guidance practices and setting a range for expected adjusted EBITDA of $6.3 billion to $6.5 billion for this year. This includes; commercial gains offset by stepped up support of marketing innovation, e-commerce and people; another year of low to mid-single-digit percentage non-key commodity inflation net of cost savings; as well as foreign exchange rates and the two divestitures already announced.

In addition, we currently expect to begin 2019 with the first quarter that is likely to see a high teens decline in adjusted EBITDA in percentage terms. We will be up against our toughest EBITDA comparisons for the year, particularly in light of our expected net inflation curve, stepped-up commercial spending levels and with pricing not taking effect until late Q1.

Finally, at the EPS line, while we continue to believe that we can deliver top-tier growth, it will take hold from 2020 onwards. This is because in addition to our EBITDA outlook, 2019 will see approximately $0.25 of non-operating headwinds versus 2018. This will come from a combination of several factors; $80 million of incremental depreciation expense; a roughly $120 million reduction in the other income line, mainly due to rising interest rates, increasing pension interest costs and less favorable market returns on planned assets assumed versus 2018, approximately $40 million of additional interest expense and a full year effective tax rate between 20% and 22%. Taken together, top line EBITDA and EPS drivers, while we expect to take a step backwards in 2019, we remain confident in delivering consistent profit growth from 2020 onwards, driven by fully leveraging our advantage brands, cost structures and capabilities.

The rest of our plan is focused on how we can take additional steps to improve our portfolio's growth trajectory, strengthen our balance sheet and position ourselves against inorganic opportunities. It starts with the potential for more active portfolio management, specifically through divestitures, as a way to further improve our growth and returns as well as accelerate our deleveraging.

The recent transactions we have announced India beverages and Canada natural cheese provide a good template of precedent for additional actions to exit areas with no clear path to competitive advantage and sell assets with strong valuations with some earnings dilution. We have now dedicated more resources, adding experience with Carlos Piani fully focused on our portfolio management efforts. And as we're able to execute such actions, we will look to deleverage with the proceeds, which leads to our next objective, further strengthening our balance sheet.

I think it's important to first recognize that we have the capacity to drive industry-leading cash generation along with industry-leading margins and expect to hold existing working capital and CapEx levels even as we drive the growth agenda we've outlined. In addition, given the industry backdrop and opportunities in front of us, we now see even greater strategic advantage in accelerating or deleveraging toward our ongoing 3 times leverage target and strengthening the term structure of our debt.

To do this, we're undertaking two specific actions. First, we intend to dedicate the divestiture proceeds from the sale of our India beverage and Canada natural cheese businesses to debt reduction. We also intend to do the same with proceeds from additional divestitures we are currently considering. Second, today we're announcing a reduction in our quarterly dividend to $0.40 per share or $1.60 per year, down from a rate of $2.50 per year. This will not only provide us greater balance sheet flexibility, it will also establish a base dividend that we can grow consistent with EBITDA growth over time. And we are comfortable that this level of dividend can accommodate the two divestitures we have already announced as well as those we are currently considering. These initiatives will accelerate the strengthening of an already solid balance sheet with a fully funded pension plan and continue to position Kraft Heinz for industry consolidation.

Now I'll turn it back to Bernardo to close.

Bernardo Hees -- Chief Executive Officer

Thank you, David. Before we take your questions, I think it's useful to put our progress to date, our plans and priorities, as well as our expectations beyond 2019 into context. When we put Kraft Heinz together in mid-2015, our focus through 2017 was (inaudible) necessary product renovation and supply chain integration, taking out cost that drops no benefit to our consumers, establishing, retool and routines, and testing and learning new tools to adapt to a rapidly changing environment. Beginning 2018 and into 2019, we'll focus on leveraging our industry-leading margins to establish key growth pillars through innovation and white space expansion, accelerate the global deployment of advantage capabilities across all channels and geographies and now more actively managing our portfolio for better growth and returns. From 2020, we expect to see growth on both the top and bottom lines at the full leverage of our advantage brands cost structure and investments close to the P&L.

So to summarize, we have continued to invest and focus on building our highly scalable operational model to position ourselves for sustainable organic growth and returns. And doing so at a time when the need for industry to modernize and consolidate is more evident than it was five or even three years ago.

Now we will be happy to take your questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question will come from the line of Andrew Lazar with Barclays. Your line is open.

Andrew Lazar -- Barclays -- Analyst

Good afternoon, everybody.

Bernardo Hees -- Chief Executive Officer

Good afternoon.

Andrew Lazar -- Barclays -- Analyst

I guess I'll kick it off with -- you mentioned, I think David that you thought that there was an opportunity for greater strategic advantage, I think were the words you used, for greater divestiture activity today than previously. I was hoping to get a little more clarity on what you meant by that. Is it a matter of just simply strengthening the balance sheet because you see more opportunities for more transformational deals now than you did before? Is it that valuation opportunities on those potential assets for sale are greater than maybe what you would have expected previously? I'm trying to get a better handle on that. Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, Andrew, it's Bernardo. Let me take this part of the question. I think we're seeing a large (technical difficulty) in the industry and we are going through, commercially a good momentum, right, with acceleration in consumption, in share gains, in volumes right. Also too that you're coming out of the integration, we know more about the categories and the competitive advantage of each one of our brands than ever before. So with that in mind, our decision here was to execute the strategy on deleveraging faster so we can better position the company for future consolidation, right?

As usual, we (inaudible) than we are actually doing. But as we did in the second half of last year, we did divestiture of India beverage and the Canadian natural cheese business. I think it's a good framework for the things we are looking today and that's exactly the point there right now.

Operator

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Your line is open.

Bryan Spillane -- Bank of America -- Analyst

Hi, good afternoon, everyone.

David Knopf -- Chief Financial Officer

Good afternoon.

Bryan Spillane -- Bank of America -- Analyst

I guess two questions or two points, I guess related to the, I guess the build from -- through -- from the end of '18 through getting back to growth in 2020. One is just how much incremental investment is contemplated in your 2019 plan? So how much more are you spending in addition of -- in terms of what you stepped up in 2018?

And then second, the visibility in your business has not been very good. I think we've experienced that here in the second half. So I think it would be really helpful if you could provide a little bit more color in terms of sort of how you see a bridge to actually getting to some growth in 2020? Thank you.

David Knopf -- Chief Financial Officer

Hi Bryan, thanks for the question, this is David. So let me step back for a second and I can break down our 2019 outlook a bit more and get a sense for our EBITDA expectations year-over-year.

So overall, we expect gains from consumption growth to be in line with the stepped-up spending behind our initiatives. So really the main drivers for the expected EBITDA decline year-over-year are a few factors; first, the net inflation that we talked about that we expect to see again in 2019; the divestitures I talked about; FX and to a lesser extent, variable compensation. So to be more specific, if you assume the midpoint of our range or roughly $700 million decline year-over-year, let me elaborate on the four main drivers behind that.

So first off, on the commercial side, again we should be neutral on the bottom line as we expect the positive contribution from further consumption gains to be in line with the stepped-up investments as we accelerate the pace of our innovation, base business performance and channel development.

Second, beyond that roughly half of the total EBITDA decline or roughly $300 million to $400 million is driven by continued inflation net of cost savings in the low to mid single-digit range consistent with what we saw in 2018. So this will be driven by another year of mid single-digit growth -- low to mid single-digit growth inflation excluding key commodities and given the recent experience, actions we've taken to replan the savings and pushing out the savings curve.

Third, we expect the combination of foreign exchange headwinds and the divestitures we've already announced that should drive another $250 million headwind to adjusted EBITDA versus 2018.

And then finally, we have an impact from variable compensation which is another roughly $80 million year-over-year. So taking together, this will put us where we saw the highest margin in the industry and we believe that is the right base to build from. So to elaborate more on why we're confident even with the miss in expectations that we saw in Q4 and the decline in EBITDA that we're seeing in 2019, let me elaborate a little bit on why we're so confident in 2020.

First on the top line, we should be very well positioned for solid organic growth globally, OK? We're already seeing real consumption-driven growth in the U.S. and globally today that we're able to create in the second half of 2018 and in 2019 we expect to further improve our consumption rate behind the largest innovation pipeline that we've ever had and more support on the core business. And we have a rapidly growing international business with significant exposure to emerging markets and white space opportunities to accelerate that growth globally.

At EBITDA, in 2019 we are spending ahead to support an even larger innovation pipeline than I mentioned and accelerating channel development, particularly in e-commerce. So the right spending in commercial support levels, capabilities and marketing will have been established this year in 2019.

And then on the cost side, the extraordinary inflation that we're seeing in 2018 and that we're now seeing in 2019 from things like tariffs and transportation should mitigate over time as we're starting to see in the spot markets today. And we're also confident that we will be able to -- we'll be in a much stronger position to manage those costs through pricing in our savings curve going forward in 2020.

And finally at EPS, our non-operating below-the-line cost that I talked about should be at run rate levels so that we can leverage the organic growth into both EBITDA and EPS growth 2020 going forward.

Bernardo Hees -- Chief Executive Officer

Bryan, just to add to what David just said, to the numbers. We are seeing a strong consumption-driven growth in our business today that we plan to accelerate and the base we're assessing for 2019 get us to the right metrics and KPIs in all our key investments, marketing, innovation supply chain, channels, digital. So with that base we are very confident as we grow the business in 2019 and '20 that EPS and EBITDA grows together with that perspective.

Operator

Our next question comes from the line of Ken Zaslow with BMO. Your line is open.

Ken Zaslow -- BMO -- Analyst

Hi, good evening, everybody.

Bernardo Hees -- Chief Executive Officer

Hi, Ken.

Ken Zaslow -- BMO -- Analyst

I have one question. What are the key changes that will take place to change the planning and execution of the savings so we can become more -- so they can become more reliable and kind of put it into a better action? Are they going to be management changes, is it going to be a change to the methodology oversight? Can you talk about that?

David Knopf -- Chief Financial Officer

Hi, Ken, thanks for the question, this is David. So again, let me step back for a second and kind of walk through our Q4 performance versus our original expectations, provide a little more context and then I'll hand it over to Bernardo to provide a little more color on what we're doing differently to make sure this doesn't happen.

On the Q3 call, we did expect Q4 EBITDA growth to improve sequentially as I talked about versus the 14% year-over-year (inaudible) saw in Q3, OK? And that assumption was based on the fact that we expected transitory headwinds and one-offs in Q3 that would fall away, which would effectively bring our run rate growth to more of a high single-digit decline year-over-year. And then on top of that, we expected savings to accelerate, leading to a significant sequential improvement from Q3 to Q4.

Obviously, in the end, the transitory one-off factors did fall away as expected but we have three negative impacts in the quarter that we didn't expect. First, we had roughly a 3.5 percentage point impact of unanticipated cost headwinds, which I can explain further. Second, we did -- we didn't have any anticipated savings curve that we expected to materialize in the quarter to partially offset the inflation we're seeing. And then finally, we did have an incremental FX drag of about 1.5 percentage points in Q4 versus Q3.

So given all these factors, the year-on-year decline in Q4 is much closer than Q3 and we didn't see the sequential improvement.

With that I'll hand it over to Bernardo to answer your other question.

Bernardo Hees -- Chief Executive Officer

Ken, I think it's a very fair point and even though we're disappointed with the miss, that's pretty much focused, like David said, in the supply chain operations in United States. We did took (ph) several actions to not allow this to happen again, right? Actions in the planning process, in organizational structure and position ourselves to make sure our savings curve really match, right, the timing and the effectiveness for the year. So (inaudible) we understand the reasons of the miss and we saw in the Q4 higher cost and more volumes coming to the pipe. And we could not offset to timing of our savings curve, we did took (ph) actions, process, planning and structure to not repeat that again.

Ken Zaslow -- BMO -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Dara Mohsenian with Morgan Stanley. Your line is open.

Dara Mohsenian -- Morgan Stanley -- Analyst

Hi, good afternoon, guys.

Bernardo Hees -- Chief Executive Officer

Good afternoon.

Dara Mohsenian -- Morgan Stanley -- Analyst

Could you -- first just for clarification, can you provide a bit more detail on the circumstances behind the SEC subpoena on the procurement side? It sounds like it originated externally as opposed to finding something internally. So just curious for the circumstances there.

And then on the pricing front, you mentioned increases in the U.S. by the end of Q1. Can you give us a rough idea of what percentage of your business that represents? And given we've seen the price gap move up versus private label in a lot of your key product categories in the U.S. over the last few years, do you think there might need to be a broader reset of price gaps at some point, particularly with the market share momentum we're seeing at private label? Thanks.

David Knopf -- Chief Financial Officer

Hi, this is David. Thanks for the question. So, I'll answer the first part of your question and then hand it over to Paulo to U.S. pricing in the U.S.

So the Company was notified by the SEC regarding an investigation into the Company's procurement area. Following this, we conducted a very thorough internal investigation with the support of an independent law firm and accounting firm. And we determined that we should have recorded $25 million in prior periods, which we booked in Q4 2018. And to put it into context, that compares to our overall procurement spend of over $11 billion which excludes big four commodity spend. So this misstatement was not material for our current or prior year financial statements. And finally, we did implement several improvements, internal controls and took remedial measures to mitigate the likelihood that this happens again.

So with that I'll hand it over to Paulo to address pricing.

Paulo Luiz Basilio -- Unit President

Thanks, Dave. Let me start from the -- answering the private label question and then we can -- we move to the 2019 pricing. While we're seeing the private label expanding, and it's doing so at a more -- we are seeing this happening in a more restrained pace, around 0.2 points of share in Q4, it was a material step down from previous quarters that we're seeing.

And we are seeing the most pressure is mainly in areas where low commodities, excess capacity and with competition come together, mostly in our -- in some subsegments of our cheese portfolio. In natural cheese, we see also the retailers have used price matching to drive traffic. And we're being able to invest back, that was part of our price investment we'd had in the second half to narrow the price gaps. And after that we saw branded and private label share starting to stabilize. So again, we're always monitoring the value proposition of the market and where (inaudible) innovate and differentiate our brands and products on that matter.

When you think about 2019 pricing, we already have announced our pricing. We did an analysis in terms of -- to define the right part of the portfolio that we are pricing, being very cautious about the balance between sales and cost to provide the best value equation and helping to drive category growth. And we are seeing -- already announced we -- this thing is going to take effect in Q1 and we expect overall -- our overall pricing to turn positive over the course of '19.

Operator

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open.

Ken Goldman -- JPMorgan -- Analyst

Hi, thanks so much. Bernardo, as you know, one of the bare thesis over the years on the 3G philosophy has been that I guess the intense cost-saving efforts will over the long run sort of erode brand equities. And I realize you've had a better top line lately but one could argue it took $300 million spending infusion to get there. And I think more importantly, you took a $15 billion writedown on two of your biggest brands, Kraft and Oscar Mayer. And to me that literally means the brand equity there aren't what they used to be. So when investors are looking at the consistent financial disappointments at Kraft, maybe even bring (inaudible) into the discussion, and if they ask why is the 3G belt-tightening strategy goes too far and that could damage brands, is there at least some evidence starting to point to yes there? I'm just curious for your thoughts on that.

Bernardo Hees -- Chief Executive Officer

Hi, Ken, let David talk about the impairment here that you just mentioned. Then I come back here to talk about the model that's what is implicit in your question here. Thanks for that. David, can you start?

David Knopf -- Chief Financial Officer

Thanks, Bernardo. So, in terms of the impairment, the writedown was primarily reflected -- it reflected revised margin expectations and this was for really three businesses of ours; first, the Kraft natural cheese business; second, our Oscar Mayer cold cuts business where we talked about issue that we had in the first part of the year; and then third, our Canada retail business. And really the fundamental driver behind the reduction in expectations was driven by our second half performance, OK, which was primarily driven by supply chain issues that we had in the cost side as you know.

And then just to provide a little more context, since the merger, we've also seen significant pressure on valuations from a higher discount rate come into play, which was partially offset (technical difficulty) taxes, but that's really the context around the impairment.

And I'll hand over to Bernardo to answer the rest of your question.

Bernardo Hees -- Chief Executive Officer

Ken, look, we still believe in and strongly that our model is working and has a lot of potential for the future, right? First, let's remember, we continue to create with a leading industry margins, right, and now we are growing right at the same level as the top-tier companies redeem similar portfolio, right? So that's very important (inaudible) perspective. Second, the niche we have and we're acknowledging here, properly has been focused on operations, supply chain in United States. The commercial momentum with consumption growth continue to accelerate (inaudible). We think that's (inaudible) we're doing since 2018, now 2019, we can say we have the right base to be growing through consumption volumes and share at the same time, maintaining high leading (ph) margins to the industry.

Into 2020, like David highlighted to the (inaudible) numbers, right, we do believe to that base, we have been in a very solid position to be growing top line and bottom line. Not only that, we are working more actively the portfolio and now with the reduction of the dividend allowed us to have more flexibility in our balance sheet to really deleverage faster and position ourselves to more consolidation in the future that we believe is necessary and will happen with that model. And so, we are confident in the things we're doing even though we acknowledge we did have the miss in the fourth quarter like highlighted by David.

Ken Goldman -- JPMorgan -- Analyst

Can I ask a very quick follow-up? David and Bernardo, thank you for that. That's helpful.

David Knopf -- Chief Financial Officer

Yes, please.

Ken Goldman -- JPMorgan -- Analyst

David, I think you mentioned that it was more of a short-term like the last couple of quarter issue with the two brands and maybe discount rates have risen. The companies generally don't take writedowns because recent performance was bad and because discount rates have risen. Isn't there something broader and longer term that usually leads to these kind of impairments?

David Knopf -- Chief Financial Officer

Yes, that's a great question and thanks for that. Just to be clear, by far and away, the majority of the impairment, which was really concentrated in these three businesses that I mentioned, it was by far and away driven by the second half performance and the new level of margin and profitability that we're talking about versus what it was before. So the margin profile and what we established in the second half was really the key driver behind the impairment.

Ken Goldman -- JPMorgan -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of David Driscoll with Citi. Your line is open.

David Driscoll -- Citi -- Analyst

Great. Thank you and good evening.

Bernardo Hees -- Chief Executive Officer

Good evening.

David Driscoll -- Citi -- Analyst

I just had a couple of questions, but I think they're reasonably short. Can you give us some sense of the size of the assets that you wish to sell that haven't been announced? Would it be something like on the magnitude of 5% of the revenue base?

And then I had a question about the savings programs. I think you made a statement, David, in your script that in the forecast, the savings programs had been quote-unquote, pushed out. So I'm a little confused as to kind of why that's happening and why can't you achieve the internal savings at the same time that you're generating the revenue performance?

And then related to that, if you didn't hit the savings that you expected in the fourth quarter, don't those savings programs show up in like the first quarter of '19 or second quarter of '19, I mean, I don't think there's a -- they shouldn't disappear, but it feels like within the guidance that they did and I just may be don't understand what's happened right there. Thank you.

Bernardo Hees -- Chief Executive Officer

Hi, David, it's Bernardo. Let me address the first part of the question. We're not discussing here size or so. What we're saying that we will work our portfolio to strengthen our balance sheet as we're doing with the dividend to have more flexibility for future consolidations as we see it. As David said, our objective is to deleverage, right, to 3 times in the middle term at a faster pace than we're doing today.

With that and then all that you have in the portfolio today, with our competitive advantage by brands and category, allowed us to be in a very good position to understand the magnitude that what we can do or we cannot do. I don't want to elaborate more than we are doing right now. With that David, can you open again the '18 and '19 to clarify here to David?

David Knopf -- Chief Financial Officer

Hi, David, this is David. Thanks for the question. So on the savings side, we were overly optimistic on our ability to offset significant inflation in the quarter. And again that drove a significant part of the miss. So the savings miss was really a combination of two things; underdelivery from supplier negotiations and delayed manufacturing projects. And to give you a little bit of color on what some of those projects were like, they included line optimizations, yield improvements and assumed even better performance on some of our footprint plans that we discussed previously. So because of this miss, as Bernardo said, we took significant action to address our processes, planning and structure internally and simultaneously spent a lot of time and focus really revisiting our savings projects and we replanned.

As a function of that, our savings curve is being pushed out as we implement those changes, as we revisit our savings programs going forward. So that's really what's driving the delay in the savings curve and that's embedded in my 2019 expectations.

David Driscoll -- Citi -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Jason English with Goldman Sachs. Your line is open.

Jason English -- Goldman Sachs -- Analyst

Hello, good evening, folks. Thank you for squeezing me in.

Bernardo Hees -- Chief Executive Officer

Good evening.

Jason English -- Goldman Sachs -- Analyst

Your guidance for next year suggests that the majority of the synergies you realized on consolidating Heinz and Kraft will have effectively been wiped out. In that context, I'd love to hear your thought process and rationale on continuing to pursue a strategy of consolidation. Where do you see the value creation coming from? This would certainly suggest that maybe there's not as much opportunity as someone maybe once envisioned?

David Knopf -- Chief Financial Officer

Hi, thanks for the question, this is David. So since the merger, EBITDA has been held back by more than $1 billion versus what we had really kind of set out for. And within that we had nearly $0.5 billion of costs that we put back into the business, OK? These are costs that are different and independent from the cost that we took out in the integration, right? So most of the synergies and the integration savings that we captured were non-consumer, non-commercial related cost savings, OK? So, the synergies that we realized are very much intact.

The costs that we put in are squarely within different areas and we're putting costs in that are consumer-facing and drives commercial growth, OK? So these are things like expanding our innovation pipeline, our go-to-market infrastructure in the U.S. and international, our digital and e-commerce capabilities and while there's a significant amount of investment we put behind us, we are starting to see the returns, which is why we're growing in the second half.

On top of that, we also had significant amount of FX headwinds that also affected our sales and EBITDA trajectory and then finally, the inflation and the inability to executing it to savings curve as we talked about that.

With that I'll hand it over to Bernardo to address as well.

Bernardo Hees -- Chief Executive Officer

Jason, I actually -- as Dave said, the investments we're doing and the things we're doing are not correlated to the savings we got through the merger, that will be still here and (inaudible) more as the year goes. I actually would say the opposite. I think we are more prepared with the capabilities and we are more ready for industry consolidation to better performance in the future than we were two, three or five years ago. To that sense, I think we're having more firepower with a better balance sheet profile is important.

Jason English -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Lavery with Piper Jaffray. Your line is open.

Michael Lavery -- Piper Jaffray -- Analyst

Good evening.

David Knopf -- Chief Financial Officer

Good evening.

Michael Lavery -- Piper Jaffray -- Analyst

Just wanted to understand, you mentioned your -- that you should be measured on organic growth and that hasn't come through the way I think people might have expected. But I think there's been forgiveness around that because you are deal guys and (technical difficulty) about the outlook?

Bernardo Hees -- Chief Executive Officer

Michael, I'm sorry, you faded a bit there. We didn't quite hear the question.

Michael Lavery -- Piper Jaffray -- Analyst

(multiple speakers) deal-driven --

Christopher Jakubik -- Head Of Investor Relations

Michael, could you repeat the question? You kind of faded there a little bit.

Michael Lavery -- Piper Jaffray -- Analyst

Yeah, sorry, no problem. You've said a couple of years ago that you should be measured on organic growth for your business and that obviously has had some struggles. You're also known as deal guys but we haven't seen a deal yet either. Can you just help us understand why somebody should be excited about the prospects from here? Is it a deal that you know you can get done? Is it organic growth or is it a combination?

Bernardo Hees -- Chief Executive Officer

Hi, Lavery, it's Bernardo again. Look, I think if you see the second half performance of our commercial initiatives and returns of our investment, it's going to see a very positive scenario in that sense, right? We're having volumes, consumption and market share gains in the vast majorities of our categories. Even categories that have been declining for quite some time are seeing a momentum, right? And we do know there is more to come. Not only that, even with the miss of the fourth quarter, we continue to operate at industry-leading margins and we think the 2019 base that David just highlight is a base we can grow sales and EBITDA going forward. With the actions we are taking on dividend and the work we're doing in the portfolio is to manage to be successful and we are confident we can be.

We will have a balance sheet that's more flexible and more prepared for future consolidation. So in that sense, I think the commercial momentum is happening. In that sense, I think even with the miss in U.S. operations, we still have the base of the margin here that allows us from this base to build 2020 and beyond and the balance sheet flexibility for future consolidation for us to be a consolidator if the industry goes our way.

Operator

Thank you. Our next question comes from the line of Rob Moskow with Credit Suisse. Your line is open.

Robert Moskow -- Credit Suisse -- Analyst

Hi, thank you for the question. Bernardo, I had a question about the supply chain. It was a -- you had very poor order fill rates, I think a year or two ago you had issues in frozen potatoes, you had issues with sliced lunch meat. And now this year, we're having more supply chain issues. And the commentary that there's some cost savings going on in the supply chain, I'm still I guess uncomfortable with it because it indicates that maybe you need to try to make it more efficient. It sounds like you need a bigger investment in the supply chain. Maybe you need to expand the footprint, increase flexibility and increase capabilities. Is there going to be a big dollar investment in people and in the footprint that's necessary as part of this rebase? Thanks.

Bernardo Hees -- Chief Executive Officer

Thanks, Rob for the question. No, actually I think it's important to understand what did not happen in the fourth quarter was this ramp-up of the savings, right? We are in the same level of the third quarter and actually, let me put perspective a little bit to what you said. We came into 2018 as one of the best service provider in the industry. Our on-time and in-full (inaudible) like we said in the original highlight is really now at top quartile worldwide. So in that sense, the whole investment in footprint, right, capacity and service is already behind us. Do we have more -- we always have things to do and improve, but to the base that you're asking, it's actually the opposite. We did believe there was more saved timing on the savings curve and that for that we are taking full responsibility that did not materialize and they will come to life in 2019 '20 and beyond. But there is no bigger investment in supply chain, to your point, because I'm operating better or in the same level of the third quarter, with one of the best service in United States today.

With that said, let me pass over to Paulo to detail the supply chain cost here in the United States.

Paulo Luiz Basilio -- Unit President

Hi, Rob, this is Paulo. So no, I just want to reaffirm here what Bernardo was saying that 2018 was a great year for supply chain in terms of service. Think about the four pillars of supply chain; quality, safety, service and cost. It's completely fair to say that our supply chain delivered very well three of the four pillars; quality, safety and a great service to support the strong volume that we had in the year. In cost, we all (inaudible) we are not able to deliver the additional saves we expect and then we had -- we ended up having more inflation, also (inaudible) expecting the end of the year.

Robert Moskow -- Credit Suisse -- Analyst

Okay. I'll follow-up later. Thank you.

Operator

Thank you. And our next question comes from the line of Chris Growe with Stifel. Your line is open.

Chris Growe -- Stifel -- Analyst

Hi, good evening.

Bernardo Hees -- Chief Executive Officer

Good evening.

Chris Growe -- Stifel -- Analyst

Hi. I have two questions for you. A real quick one would be, just to be clear on the $250 million of EBITDA pressure from divestitures, does that include -- incorporate what's already happened or would also could happen going forward?

And if I could just ask a second question in relation to a comment you make in the release about your return on investment being strong in the fourth quarter and the year. Obviously, if you measured that based on market share or even top line growth, that's a fair comment. But the degree of profit that it took to achieve that growth is quite significant. And I think it would really weigh on that overall calculation of that of return on investment. So I just want to get a better sense of how you're measuring your return on investment as you call it and how to think about that going forward given the extreme cost in this quarter? Thank you.

David Knopf -- Chief Financial Officer

Hi, Chris, this is David. Thanks for the question. So I'll answer the first part and then hand it over to Paulo to address your second. So the $250 million you mentioned, approximately $70 million of that is related to the divestitures that we've made to date, OK? And then the remaining amount is really the FX headwinds that we're seeing in some of our international markets. So this does not include any future divestitures that we're considering. It only includes the divestitures that we've executed today, the two deals that Bernardo mentioned earlier.

Paulo Luiz Basilio -- Unit President

Hi. So I'm going to talk a little bit about the pricing and the return on the pricing investment that we had here. If you consider -- if you think about our second half as a whole, OK and you consider that actually we invested 1% in price when you exclude the impact from commodity and the 0.4% that we invested specifically to close the gap in the natural cheese. And you see the performance in volume that we had growing almost 4%. I think it's clear to see that even though this was only -- it was not the only lever of the volume improvement, you can see that we have a very strong return on this particular investment. But also it's important to say that our volume improvement was also supported by the much better service level as we're talking, a strong innovation and launches, renovation and additional brand and channel support, besides the high level of store activity and promotions that we are (inaudible) here.

Operator

Thank you. And this concludes today's question-and-answer session. I'd now like to turn the call back to Mr. Chris Jakubik for closing remarks.

Christopher Jakubik -- Head Of Investor Relations

Thank you everybody for joining us this evening. For analysts that have follow-up questions, myself and Andy Larkin will be available for follow-ups all evening and into tomorrow. And for those in the media with follow-ups, Michael Mullen will be available to take in calls. Thanks very much and have a great day.

Bernardo Hees -- Chief Executive Officer

Thank you, all.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.

Duration: 64 minutes

Call participants:

Chris Jakubik -- Head of Global Investor Relations

Bernardo Hees -- Chief Executive Officer

David Knopf -- Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

Bryan Spillane -- Bank of America -- Analyst

Ken Zaslow -- BMO -- Analyst

Dara Mohsenian -- Morgan Stanley -- Analyst

Paulo Luiz Basilio -- Unit President

Ken Goldman -- JPMorgan -- Analyst

David Driscoll -- Citi -- Analyst

Jason English -- Goldman Sachs -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Christopher Jakubik -- Head Of Investor Relations

Robert Moskow -- Credit Suisse -- Analyst

Chris Growe -- Stifel -- Analyst

More KHC analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Hot Biotech Stocks To Watch Right Now

tags:AMGN,ARQL,ALNY,BIIB, What happened

Puma Biotechnology (NASDAQ:PBYI) rose 11.7% in June, according to data provided by S&P Global Market Intelligence, after the European Medicines Agency's Committee for Medicinal Products for Human Use (CHMP) reversed its previous negative decision and recommended approving the biotech's breast cancer drug Nerlynx.

So what

Nerlynx is already approved in the U.S., but European regulators tend to be more safety conscious than their U.S. brethren. Cancer drugs can usually get away with some nasty side effects -- think hair loss or even worse -- given the lethality of the disease, but Nerlynx is taken as adjuvant treatment, meaning it's used after other treatments to keep the cancer from recurring.

Given the modest efficacy benefit in patients who aren't currently sick and the fact that the drug is taken for a year, CHMP seemed to be worried about the benefits justifying the side effects, which include gastrointestinal issues. Fortunately for shareholders, Puma Biotechnology was able to convince regulators during a reexamination that the benefits justified the risk.

Hot Biotech Stocks To Watch Right Now: Amgen Inc.(AMGN)

Advisors' Opinion:

• [By Keith Speights]

  It's a big drugmaker with a blockbuster immunology drug as its top-selling product. It pays an attractive dividend. And it faces some uncertainties. This description fits Amgen (NASDAQ:AMGN), but it applies just as well to Johnson & Johnson (NYSE:JNJ).

• [By Logan Wallace]

  Navellier & Associates Inc lifted its holdings in Amgen, Inc. (NASDAQ:AMGN) by 1.5% in the 2nd quarter, according to the company in its most recent 13F filing with the Securities and Exchange Commission. The fund owned 23,176 shares of the medical research company’s stock after purchasing an additional 353 shares during the period. Navellier & Associates Inc’s holdings in Amgen were worth $4,278,000 at the end of the most recent reporting period.

• [By Todd Campbell]

  When a brand new class of cholesterol-lowering drugs called PCSK9 inhibitors won Food and Drug Administration (FDA) approval in 2015, it was heralded as the biggest advance in battling heart disease since the invention of statins. The launch of PCSK9 inhibitors was accompanied by billion-dollar-plus predictions for sales. However, revenue has fallen far shy of blockbuster status, leaving drugmakers Amgen Inc. (NASDAQ:AMGN), Regeneron Pharmaceuticals (NASDAQ:REGN), and Sanofi SA (NYSE:SNY) in the lurch.

• [By Todd Campbell]

  One of these two drugs is Amgen's (NASDAQ:AMGN) Repatha, and the other is Praluent, which was co-developed by Sanofi SA (NYSE:SNY) and Regeneron Pharmaceuticals (NASDAQ:REGN). Both drugs launched to billion-dollar blockbuster expectations, but because they're complex biologics that are expensive to make, they cost about $14,000 per year. Their high cost, plus the fact that they're injected rather than taken orally, may make them best suited for patients with stubbornly high cholesterol who are at the greatest risk of heart disease.

• [By Chris Lange]

  Amgen Inc. (NASDAQ: AMGN) saw its short interest rise to 10.78 million shares from the previous level of 9.98 million. Shares were last seen trading at $196.64, in a 52-week trading range of $163.31 to $201.23.

Hot Biotech Stocks To Watch Right Now: ArQule Inc.(ARQL)

Advisors' Opinion:

• [By Joseph Griffin]

  Shares of ArQule, Inc. (NASDAQ:ARQL) were down 5.4% during trading on Wednesday . The company traded as low as $4.71 and last traded at $4.73. Approximately 3,358,864 shares traded hands during trading, an increase of 289% from the average daily volume of 863,008 shares. The stock had previously closed at $5.00.

• [By Lisa Levin] Gainers Foot Locker, Inc. (NYSE: FL) rose 15.3 percent to $53.50 in pre-market trading after the company reported better-than-expected results for its first quarter. Evofem Biosciences, Inc. (NASDAQ: EVFM) rose 10.4 percent to $4.58 in pre-market trading. Evofem Biosciences reported closing of public offering of common stock and warrants. Resonant Inc. (NASDAQ: RESN) rose 7.3 percent to $4.88 in pre-market trading after declining 1.94 percent on Thursday. SolarEdge Technologies, Inc. (NASDAQ: SEDG) shares rose 5.7 percent to $59.65 in pre-market trading after falling 8.43 percent on Thursday. Yirendai Ltd. (NYSE: YRD) rose 5 percent to $30.00 in pre-market trading after reporting Q1 results. Deckers Outdoor Corp (NYSE: DECK) rose 4.9 percent to $108.75 in pre-market trading after reporteingd better-than-expected results for its fiscal fourth quarter. Blue Apron Holdings, Inc. (NYSE: APRN) rose 4.2 percent to $3.21 in pre-market trading after gaining 3.70 percent on Thursday. Recro Pharma, Inc. (NASDAQ: REPH) rose 4 percent to $5.85 in pre-market trading after dropping 54.67 percent on Thursday. ArQule, Inc. (NASDAQ: ARQL) rose 3.8 percent to $4.70 in pre-market trading after gaining 4.86 percent on Thursday. Babcock & Wilcox Enterprises, Inc. (NYSE: BW) shares rose 2.9 percent to $2.85 in pre-market trading after climbing 7.78 percent on Thursday. Bilibili Inc. (NASDAQ: BILI) shares rose 2.5 percent to $14.20 in pre-market trading after surging 11.33 percent on Thursday.

  Find out what's going on in today's market and bring any questions you have to Benzinga's PreMarket Prep.

• [By Stephan Byrd]

  Get a free copy of the Zacks research report on ArQule (ARQL)

  For more information about research offerings from Zacks Investment Research, visit Zacks.com

• [By Logan Wallace]

  ValuEngine downgraded shares of ArQule (NASDAQ:ARQL) from a strong-buy rating to a buy rating in a research report sent to investors on Saturday.

  Several other brokerages also recently issued reports on ARQL. Zacks Investment Research upgraded shares of ArQule from a hold rating to a buy rating and set a $2.75 target price for the company in a research note on Tuesday, May 8th. B. Riley set a $4.00 target price on shares of ArQule and gave the company a buy rating in a research note on Monday, March 26th. Roth Capital raised their target price on shares of ArQule from $5.00 to $6.00 and gave the company a buy rating in a research note on Tuesday, April 17th. BidaskClub upgraded shares of ArQule from a hold rating to a buy rating in a research note on Saturday, May 19th. Finally, Leerink Swann upgraded shares of ArQule from a market perform rating to an outperform rating in a research note on Thursday, April 5th. One research analyst has rated the stock with a sell rating, six have issued a buy rating and one has issued a strong buy rating to the company. The company has an average rating of Buy and a consensus price target of $5.35.

• [By Cory Renauer]

  What's behind these dramatic gains? Read on to find out.

  Company Gain in H1 2018 Market Cap Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) 270% $1.19 billion ArQule, Inc. (NASDAQ:ARQL) 235% $482 million Endocyte, Inc. (NASDAQ:ECYT) 222% $959 million Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) 205% $3.99 billion

  Data source: YCharts.

Hot Biotech Stocks To Watch Right Now: Alnylam Pharmaceuticals Inc.(ALNY)

Advisors' Opinion:

• [By Keith Speights]

  It's not exactly David vs. Goliath. However, Bellicum Pharmaceuticals (NASDAQ:BLCM) and Alnylam Pharmaceuticals (NASDAQ:ALNY) are definitely in different leagues right now. Both are clinical-stage biotechs, but Bellicum's market cap is less than $350 million while Alnylam's market cap is close to $10 billion.

• [By Todd Campbell]

  Spark Therapeutics (NASDAQ:ONCE) reported its hemophilia A drug significantly reduced bleeding events and the need for prophylactic factor VIII infusions, but investors sold shares on worry that the gene therapy's safety could be a problem. Investors similarly headed for the exits with Rite Aid (NYSE:RAD) and Alnylam Pharmaceuticals (NASDAQ:ALNY) after the former scuttled an attempt to sell itself and the latter secured a first-in-class FDA approval. Are these falling stocks worth buying?

• [By Cory Renauer]

  After 16 years as a public company, Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) finally got the go-ahead to launch its first product earlier this month. Onpattro is the first in a new class of drugs that alter gene expression, but Pfizer, Inc. (NYSE:PFE) just reported some impressive results with a possible competitor that works a lot differently.

Hot Biotech Stocks To Watch Right Now: Biogen Idec Inc(BIIB)

Advisors' Opinion:

• [By Chris Lange]

  Ionis Pharmaceuticals Inc. (NASDAQ: IONS) shares made a handy gain on Friday after the firm announced an expanded strategic collaboration with Biogen Inc. (NASDAQ: BIIB). Through this partnership, these companies are planning to tackle and develop novel antisense drug candidates for a broad range of neurological diseases.

• [By Benzinga News Desk]

  A distillery in a small Spanish town has claimed it invented the original Coca-Cola (NYSE: KO) recipe and now wants recognition: Link

  ECONOMIC DATA Initial Jobless Claims For Week Ended May 25 221K vs 225K Economist Estimate, Down From 234K In Prior Week Personal Income Apr. Up 0.3%, Personal Spending Up 0.6% The Chicago PMI for May is schedule for release at 9:45 a.m. ET. The pending home sales index for April will be released at 10:00 a.m. ET. The Energy Information Administration’s weekly report on natural gas stocks in underground storage is schedule for release at 10:30 a.m. ET. The Energy Information Administration’s weekly report on petroleum inventories will be released at 11:00 a.m. ET. Federal Reserve Bank of Atlanta President Raphael Bostic is set to speak at 12:30 p.m. ET. Fed Governor Lael Brainard will speak at 1:00 p.m. ET. Data on money supply for the recent week will be released at 4:30 p.m. ET. Federal Reserve Bank of Dallas President Robert Kaplan is set to speak at 8:30 p.m. ET. ANALYST RATINGS Canaccord upgrades Biogen (NASDAQ: BIIB) from Hold to Buy Morgan Stanley upgrades Corning (NYSE: GLW) from Equal-Weight to Overweight Morgan Stanley downgrades Micron (NASDAQ: MU) from Overweight to Equal-Weight Cantor downgrades HealthEquity (NASDAQ: HQY) from Overweight to Neutral

  This is a tool used by the Benzinga News Desk each trading day — it's a look at everything happening in the market, in five minutes. To get the full version of this note every morning, click here.

• [By Chris Lange]

  Short interest in Biogen Inc. (NASDAQ: BIIB) increased to 3.50 million shares from the previous 3.16 million. The stock recently traded at $262.15, within a 52-week range of $244.28 to $370.57.

Could Geron Be a Millionaire-Maker Stock?

Last year, Geron's (NASDAQ:GERN) stock ripped higher in anticipation of Johnson & Johnson's (NYSE:JNJ) continuation decision revolving around the duo's experimental blood cancer drug imetelstat. However, the biotech's shares promptly gave back all of these annual gains -- and then some -- when J&J decided that imetelstat didn't fit into its long-term plans. 

Geron's epic fall late last year, though, might turn out to be a once-in-a-lifetime opportunity for patient investors. The hematology-oncology space, after all, is one of the most highly valued and fastest-growing areas in all of healthcare. Moreover, J&J reportedly didn't base its decision on imetelstat's clinical performance, but rather on a strategic portfolio review.

Image Source: Getty Images.

This beaten-down biotech stock could thus turn out to be a hidden gem in the event that imetelstat's upcoming late-stage program is a success. Let's dig deeper to consider if risk-tolerant investors should take a flier on this penny biotech stock right now. 

Background and outlook

For those new to this story, J&J was evaluating imetelstat in two mid-stage trials for the blood disorders known as relapsed/refractory myelofibrosis and lower risk myelodysplastic syndromes, respectively. Following Geron's presentations at last year's American Society of Hematology meeting, we learned the following about these two studies: In patients with advanced myelofibrosis who have stopped responding or never responded to treatment with Incyte's Jakafi, imetelstat failed to reduce spleen volumes in a manner that would clearly indicate a strong therapeutic benefit in this patient group as a whole. 

That said, patients in this trial did yield an encouraging trend in terms of median overall survival, compared to those from other studies. Therefore, imetelstat might still have an important role to play in the treatment of patients no longer eligible for Incyte's front-line therapy. 

Unfortunately, Geron will probably need a partner to pursue this high-value indication. A pivotal study with overall survival as its primary endpoint could easily take three to four years to complete. And that kind of extensive development timeline is well beyond Geron's reach from a financial standpoint right now. 

Imetelstat's prospects in lower-risk myelodysplastic syndromes, however, appear to be much brighter. In short, the drug's midstage trial results for this second indication prompted Geron to move forward with a late-stage trial scheduled to get underway in mid-2019. If this next study is a success, imetelstat's commercial opportunity could be as high as $1.5 billion. 

Can Geron deliver a million-dollar payday?

With imetelstat's advanced myelofibrosis indication in question, investors should probably focus solely on the drug's prospects in myelodysplastic syndromes for the time being. But that's not all sunshine and unicorns, either. Acceleron Pharma and Celgene's luspatercept is likely to gain a first-mover advantage for this indication, which could cut deeply into imetelstat's peak sales opportunity.  

Even so, Geron's stock could still produce some astonishing returns on capital. For example, an investment of $10,000 at current levels has the potential to appreciate into something along the lines of $25,000 to $28,0000 in the next few years -- even if imetelstat ends up only grabbing 12% to 15% of the myelodysplastic syndromes market and Geron's stock garners at least an average premium. 

Bottom line: Although this penny biotech stock may not be one of the rare gems that can easily transform a small amount of capital into a million-dollar payday, there's arguably enough upside potential here to warrant a serious look by aggressive investors who are comfortable with heavy doses of risk.

 

Tesla's Model 3 loses reliability rating

Tesla's stock sank nearly 4 percent on Thursday after Consumer Reports said it was pulling its recommendation of the company's Model 3 due to declining reliability.

The consumer watchdog organization, which just released its 10 best cars, SUVs and pickups, said it can no longer recommend the Tesla Model 3 electric sedan after noticing substantive manufacturing defects, including "loose body trim" and "glass defects," such as windows cracking too easily.

Tesla CEO Elon Musk has argued that the company is repeatedly improving the Model 3 through manufacturing changes and software upgrades. But the company's aggressive move to accelerate the pace of production in 2018 may have caused some issues, according to Jake Fisher, senior director of auto testing for Consumer Reports.

Yet "people who have told us they have problems with the car have also told us they're very satisfied with the car," Fisher said.

Driving modes: 'Romance mode' puts a roaring fire inside your Tesla for Valentine's Day and beyond

Tesla competition: Tesla shares slide after Amazon invests in self-driving company, Aurora

That reflects the popularity of the Tesla brand and its position as a status symbol for many buyers, he said.

"You may not be buying a Tesla Model 3 because you want the most reliable car," Fisher said.

As a brand, Tesla ranked 19th, just behind Buick and just ahead of Ford on Consumer Report's annual list of best new vehicles. Subaru ranked first overall among 33 brands, followed by four luxury brands: Genesis, Porsche, Audi and Lexus.

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SUBCOMPACT CAR: Toyota Yaris ToyotaFullscreenHYBRID/ELECTRIC CAR: Toyota Prius Frederic J. Brown, AFP/Getty ImagesFullscreenFULL-SIZED PICKUP TRUCK: Ford F-150 Gene J. Puskar, APFullscreenMIDSIZED CAR: Toyota Camry Hybrid Ian Langsdon, EPA-EFEFullscreenCOMPACT LUXURY CAR: Audi A4 Jim Fets, AudiFullscreenLARGE CAR: Toyota Avalon Hybrid Ryan Garza, Detroit Free Press-USA TODAY NetworkFullscreenLUXURY SUV: BMW X5 Robert Hanashiro, USA TODAYFullscreenSUBCOMPACT SUV: Hyundai Kona Romain Blanquart, Detroit Free Press-USA TODAY NetworkFullscreenCOMPACT SUV: Subaru Forester Danielle Parhizkaran, for USA TODAYFullscreenMIDSIZED SUV: Subaru Ascent Mark Phelan, Detroit Free PressFullscreenInterested in this topic? You may also want to view these photo galleries:Replay1 of 102 of 103 of 104 of 105 of 106 of 107 of 108 of 109 of 1010 of 10AutoplayShow ThumbnailsShow CaptionsLast SlideNext Slide

Tesla said in a statement that its cars are "the safest and best performing vehicles available today."

"We're setting an extremely high bar for Model 3. We have already made significant improvements to correct any issues that Model 3 customers may have experienced that are referenced in this report, and our return policy allows any customer who is unhappy with their car to return it for a full refund," the company said.

Tesla's stock fell 3.7 percent to $291.23, the lowest close since Jan. 23, according to Bloomberg. 

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Janney Montgomery Scott LLC Has $1.21 Million Position in First Hawaiian Inc (FHB)

Janney Montgomery Scott LLC boosted its position in First Hawaiian Inc (NASDAQ:FHB) by 148.3% in the 4th quarter, according to its most recent filing with the Securities and Exchange Commission. The fund owned 53,557 shares of the bank’s stock after purchasing an additional 31,985 shares during the quarter. Janney Montgomery Scott LLC’s holdings in First Hawaiian were worth $1,206,000 as of its most recent filing with the Securities and Exchange Commission.

A number of other hedge funds have also recently made changes to their positions in the stock. FMR LLC raised its stake in First Hawaiian by 117.2% in the second quarter. FMR LLC now owns 9,109,111 shares of the bank’s stock worth $264,346,000 after buying an additional 4,916,096 shares in the last quarter. Northern Trust Corp raised its stake in First Hawaiian by 19.4% in the second quarter. Northern Trust Corp now owns 357,272 shares of the bank’s stock worth $10,368,000 after buying an additional 58,141 shares in the last quarter. State of Alaska Department of Revenue raised its stake in First Hawaiian by 47.8% in the third quarter. State of Alaska Department of Revenue now owns 11,126 shares of the bank’s stock worth $302,000 after buying an additional 3,596 shares in the last quarter. First Hawaiian Bank bought a new position in First Hawaiian in the third quarter worth about $382,000. Finally, Massachusetts Financial Services Co. MA raised its stake in First Hawaiian by 16.7% in the third quarter. Massachusetts Financial Services Co. MA now owns 1,018,304 shares of the bank’s stock worth $27,657,000 after buying an additional 146,073 shares in the last quarter. 78.72% of the stock is owned by hedge funds and other institutional investors.

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In other news, Director Paribas Bnp sold 24,859,750 shares of the stock in a transaction that occurred on Friday, February 1st. The shares were sold at an average price of $26.11, for a total transaction of $649,088,072.50. The transaction was disclosed in a legal filing with the SEC, which is accessible through this hyperlink. Corporate insiders own 0.10% of the company’s stock.

Shares of FHB opened at $27.49 on Wednesday. The stock has a market capitalization of $3.67 billion, a price-to-earnings ratio of 13.15, a price-to-earnings-growth ratio of 3.71 and a beta of 1.15. The company has a debt-to-equity ratio of 0.17, a quick ratio of 0.79 and a current ratio of 0.79. First Hawaiian Inc has a fifty-two week low of $21.19 and a fifty-two week high of $31.28.

First Hawaiian (NASDAQ:FHB) last announced its quarterly earnings data on Thursday, January 24th. The bank reported $0.58 earnings per share for the quarter, topping the Zacks’ consensus estimate of $0.52 by $0.06. The business had revenue of $177.08 million for the quarter, compared to analysts’ expectations of $190.93 million. First Hawaiian had a net margin of 32.05% and a return on equity of 11.62%. During the same quarter in the prior year, the company earned $0.42 earnings per share. As a group, equities analysts predict that First Hawaiian Inc will post 2.17 earnings per share for the current year.

The firm also recently disclosed a quarterly dividend, which will be paid on Friday, March 8th. Shareholders of record on Monday, February 25th will be issued a $0.26 dividend. This represents a $1.04 dividend on an annualized basis and a yield of 3.78%. The ex-dividend date is Friday, February 22nd. This is a boost from First Hawaiian’s previous quarterly dividend of $0.24. First Hawaiian’s dividend payout ratio is 45.93%.

FHB has been the topic of a number of recent research reports. Citigroup cut their price objective on shares of First Hawaiian from $32.00 to $26.00 and set a “neutral” rating on the stock in a report on Monday, October 29th. BidaskClub upgraded shares of First Hawaiian from a “sell” rating to a “hold” rating in a report on Tuesday, October 30th. Zacks Investment Research cut shares of First Hawaiian from a “hold” rating to a “sell” rating in a report on Tuesday, November 20th. Finally, Compass Point set a $28.00 price objective on shares of First Hawaiian and gave the stock a “buy” rating in a report on Friday, January 25th. Five investment analysts have rated the stock with a hold rating and five have given a buy rating to the stock. The stock has an average rating of “Buy” and an average price target of $30.00.

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First Hawaiian Profile

First Hawaiian, Inc operates as a bank holding company for First Hawaiian Bank that provides a range of banking services to consumer and commercial customers in the United States. It operates through Retail Banking and Commercial Banking segments. The company accepts various deposit products, such as checking and savings accounts, and time deposit accounts.

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Want to see what other hedge funds are holding FHB? Visit HoldingsChannel.com to get the latest 13F filings and insider trades for First Hawaiian Inc (NASDAQ:FHB).

United Insurance Holdings Corp (UIHC) Q4 2018 Earnings Conference Call Transcript

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United Insurance Holdings Corp  (NASDAQ:UIHC)Q4 2018 Earnings Conference CallFeb. 19, 2019, 5:00 p.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Greetings and welcome to the United Insurance Holdings Corp Fourth Quarter and Year End 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded.

I would now like to turn the conference over to your host, Adam Prior of The Equity Group. Thank you. You may proceed.

Adam Prior -- Investor Relations

Thank you, and good afternoon, everyone. Thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. In addition, the Company has made an accompanying presentation available as well. You're also welcome to contact our office at 212-836-9606 and we would be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website. Before we get started, I'd like to read the following statement on behalf of the Company.

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws including statements relating to trends and the Company's operation and financial results and the business and the products of the Company and its subsidiaries. Actual results from UPC may differ materially from those results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the U.S. Securities and Exchange Commission. UPC specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of the new information, future developments or otherwise.

With that, I would now like to turn the call over to Mr. John Forney, UPC's Chief Executive Officer. Please go ahead, John.

John Forney -- President and Chief Executive Officer

Thanks, Adam. This is John Forney, President and CEO of UPC Insurance. With me today is Brad Martz, our Chief Financial Officer. On behalf of everyone at UPC, we appreciate your taking time to join us on the call. As Adam said, for the first time, this quarter we are publishing an investor presentation in conjunction with our earnings release. You can find it on our website at the address shown at the top of our press release and I encourage you to review it. While we will not be going slide by slide through that presentation, we may refer from time to time to some of the data and analytics Included therein. As expected, we had a lot of noise in the quarter from Hurricane Michael and other cat activity, not to mention the effects of the new accounting rule related to equity gains and losses. However, underneath it all, there were a lot of positives; one, we continued to produce strong organic growth both personal lines and commercial lines grew at a double-digit rate in the quarter. For the year, we wrote about 150,000 new personal lines policies, retained over 89% of our business and ended the year with over 560,000 personal lines policies in-force, 60% of them outside the state of Florida.

For the year, in commercial lines, we wrote 1,233 new policies, retained over 86% of our business and ended the year with over 5,300 policies in-force. Overall premiums of both commercial and personal lines business have been stable. Our underlying combined ratio for the quarter declined over 600 basis points from a year ago. Hopefully, this helps put to risk any lingering concerns about underlying performance after the outlier non-cat losses we had in Q3. Please make sure to look at page 12 in the investor presentation, which shows that our accident year actuarially indicated personal lines loss ratio for 2018 without its lowest level since 2014. both, overall and in Florida.

The Florida actuarial indication for non-cap personal lines loss ratio was down over 5 points year-over-year. We have taken a variety of rate and underwriting actions over the past couple of years that have enabled us to continue to grow organically where we want to grow, while driving down underlying loss ratios, thereby providing us additional underlying margin to withstand future cat activity and remain profitable.

Third, during the quarter, we gained approval in Florida for our first A.M. Best-rated product from our newly formed subsidiary journey. Subsequent to year-end, we wrote our first journey policy and there will be many more to come. That speed to market, journey wasn't even formed until the end of September, and we are in the market with an approved admitted market product two months later, and I've already put business on the books.

Thanks to the great team at AmRisc for all their efforts to help us get journey launched and into the market so quickly. This will be a big vehicle for growth for us in 2019 and beyond, as we add states and products to it. Last positive, I'll highlight, during the quarter, we extended our quota share reinsurance program with Munich Re, TransRe and Gen Re and negotiated renewal of much of our 2018 loss affected cat layers at favorable pricing. We appreciate the strong partnership mentality demonstrated by our reinsurers. And we look forward to working with them to complete the remainder of our six-one (ph) renewal. Please refer to pages 17 and 18 in the investor presentation to get a better appreciation for the depth of our reinsurance programs which cover a variety of risks for our various entities and in aggregate total of $4 billion.

At this point, I'd like to turn it over to Brad for his remarks.

Brad Martz -- Chief Financial Officer

Thank you, John, and hello, this is Brad Martz, the CFO of UPC Insurance. I'm pleased to review UPC's financial highlights and would also like to encourage everyone to review our press release and investor presentation for more information. The highlights for the fourth quarter included first solid top-line growth with premiums written increasing nearly 16% and gross premiums earned totaling $308 million. For the year, gross premiums earned grew to just under $1.2 billion, an increase of 20% year-over-year.

Second, UPC saw significant improvements in its underlying results. Our underlying combined ratio was 81.3%, an improvement of over 6 points from the same period a year ago, driven by positive movement in both the underlying loss and expense ratios. This helped bring our underlying combined ratio down to 89.1% for the year, which is up almost 4 points year-over-year, due to catastrophe losses being 5 points higher in 2017.

Third, UPC had a core loss of $1 million or $0.02 a share, a decrease of $34 million from the prior year, due primarily to catastrophe losses of $41.7 million or $0.72 a share, compared to only $1.4 million or $0.02 a share in the same period a year ago.

For the year, UPC had core income of $16.5 million or $0.38 a share, which declined $18.4 million from the prior year, primarily from a $24.2 million decline in merger and amortization expenses before tax.

Finally, UPC experienced favorable income tax adjustments in both the current periods and the prior period as well as the change in federal effective rate year-over-year. So, the company's results before income tax provide a much clearer measure of performance. For example, if you take UPC's fourth quarter loss of $19.4 million and add back the catastrophes of $41.7 million, which are not comparable year-over-year, as well as the net investment losses of $12 million, which are non-operating, you get $34.3 million of income before tax.

That's a 20% increase over the prior year using the same calculation. Similarly, for the year, a similar result in curiosity (ph) to compare our income before tax and just remove the net investment losses, which are almost all unrealized. UPC's pre-tax income also increased from $843,000 in 2017 to $3.4 million in 2018. This year-over-year improvement is inclusive of all cat losses, which are comparable for the full year. In short, management feels the true earnings power of the business remained strong despite all the items impacting comparability and we believe it's reasonable that margins will improve further in 2019. Additional details regarding UPC's total revenue for the quarter beginning with direct premiums written, they consist of 71% personal lines and 29% commercial lines. Commercial lines grew 19% year-over-year, slightly faster than personal lines at just under 15%. Roughly 59% of our growth in direct written premiums came from Florida and the Northeast remained our fastest-growing region, up 16% year-over-year, led by New York.

Assumed commercial excess and surplus lines premiums grew 122% to $22.9 million during the quarter. A 17.1% change in ceded earned premiums for the quarter was slightly higher than the 12.4% growth in gross earned premiums, due to lack of any quota share sessions for the one month of December 2017. Investment income increased 42% year-over-year to $7.5 million in the quarter. Realized gains of $2.3 million and unrealized losses from equities of $14.3 million resulted in a $12.6 million decline in revenue for the quarter and $7.6 million for the year, due to the new GAAP accounting rule change John mentioned previously.

Other revenue decreased $6.6 million or 63% year-over-year, due to the change in our presentation of ceding commissions earned, implemented during the second quarter of 2018. The ceding commissions earned during the current quarter were $10.7 million.,

Moving on to losses. UPC's fourth quarter losses increased $50 million or 69.4% from $72.1 million last year to a $122.1 million this year, due to a $9.7 million or 13.7% change in non-cat losses, consistent with our premium growth and a $40.3 million increase in catastrophe losses. This produced a gross loss ratio of 39.6%, up 13 points year-over-year and a net loss ratio of 67.2%, up nearly 24 points from last year.

Net retained cat losses during the current quarter added 13.5 points to the gross loss ratio and 23 points to the net loss ratio. Hurricane-related losses totaled $28.2 (ph) million and the remaining $13.6 million was due primarily to the increased retention of non-hurricane events under the Company's aggregate reinsurance program. Reserve development on prior accident years of $8.5 million added nearly 3 points to the gross loss ratio and 5 points to the net loss ratio during the quarter. For the year, this was $4.3 million or about four-tenths of 1% on total reserves of nearly $200 million and a base -- premium base of $1.2 billion gross earned, which is not very significant. Despite this development, UPC saw favorable trends in non-cat loss ratio by accident year across all lines of business both inside and outside of Florida with the biggest improvements coming from personal lines in Florida.

Excluding the impact of net retained catastrophe losses and reserve development, UPC's gross and net underlying loss ratios improved nearly 3 points compared to the same period a year ago. UPC's non-loss operating expenses decreased $5.9 million or 7.2% year-over-year during the quarter, driven primarily by an $8.5 million decrease in amortization expense related to our 2017 merger with American Coastal. So, our underlying expense presents more comparable result after adjusting for ceding commissions. It increased $1.1 million or 1.4% year-over-year. The underlying gross expense ratio improved 2.5 points to 24.6% and the underlying net expense ratio improved over 3 points to 41.7%.

Moving to our balance sheet, UPC ended the year with total assets of over $2.3 billion including nearly $1.1 billion of cash in invested assets. At December 31, the duration of our fixed maturities declined to 3.5 years, while yield to maturity improved to 3.15% and 100% of our holdings or investment grade with an overall composite rating of A+. Unrestricted liquidity at the holding company was approximately $71 million at the end of the year and shareholder's equity attributable to United shareholders decreased to $520.2 million with a book value per share of $12.10 and $12.31 excluding accumulated other comprehensive income. Lastly, tangible book value per share excluding OCI increased over 3% despite occurring approximately $100 million of catastrophe losses during 2018.

I'd now like to reintroduce John Forney for some closing remarks.

John Forney -- President and Chief Executive Officer

Thanks, Brad. It was not a very satisfying 2018 for you or for us, much higher than normal cat activity sapped our earnings. But even while processing almost 100,000 claims about four years worth during one year, we continue to build a strong and diversified franchise. 2019 is off to a good start relative to the path couple years in terms of cat activity. So, we feel optimistic that the investments and operational improvements we have made have a good chance to help us produce much better results in 2019 and beyond. We appreciate your support for UPC as we continue to move forward.

That concludes our remarks and we're happy to take questions at this point.

Questions and Answers:

Operator

At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi. Good evening. My first question, can you give us where Hurricane Michael losses were booked for the quarter on both a gross and net basis?

Brad Martz -- Chief Financial Officer

Hi. Elyse, this is Brad. Hurricane Michael for the quarter was booked $128 million and net was $27 million.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then so was the remainder of the cats in the fourth quarter really just related to how the retention works on your reinsurance program over the other -- were there other smaller events?

Brad Martz -- Chief Financial Officer

Yes, they were about $4 million worth of new events during Q4 that were truly new and the remaining little $9.6 million, $9.7 million was related to the increased retention related to the events from prior accident quarters in 2018.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Perfect. And then the the unfavorable development in the quarter is $8.5 million or so. Can you just give us a little bit more color on what that stemmed from, I'm assuming most likely probably accident year '17. But if we can just get a little bit more color there, that would be helpful.

Brad Martz -- Chief Financial Officer

Yeah, we missed on the most immature accident quarters from 2017 Q3, Q4 of last year. So, we had to take a more conservative approach to our development factors this year. I mean, the primary driver is Florida non-cat homeowners severity. We are actually seeing lower frequency and the rate changes we've implemented are obviously helping the accident year loss ratio improvement we described and shown in the investor presentation. So, we remain pretty optimistic about the trends, but we obviously missed on our expectations development.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then on -- you know, you mentioned like the way changes, you guys also mentioned them a bunch last quarter as well. We were discussing some of kind of the one-off, non-cat losses. Can you give us an update maybe specific to Florida and some other rate, as a more rate that you guys are looking to take as we think about 2019?

John Forney -- President and Chief Executive Officer

We are looking to take more rate in Florida. We have a refiling pending. So you'll continue to see that occur, but as we mentioned, our non-cat loss indications for the year in Florida were down 5 points year-over-year. So we feel good about how we're positioned.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. In terms of the tax rate, there was some true-up that impacted the current quarter. Do you have an outlook for how we should think about the tax rate for 2019?

Brad Martz -- Chief Financial Officer

Outlook on tax rate remains unchanged at 26%. You're just going to see some unusual results when you have low levels of income given the size of some of our temporary differences. So, we understand the frustration there trying to, make sense of the tax results, but posting stronger book income relative to taxable income will help correct that.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then my last question, I mean you placed on part of your reinsurance program to start the year then. Also, some of it comes up at mid-year. As we get closer to mid-year, are you guys anticipating making any significant changes to your outbound reinsurance purchase this year?

John Forney -- President and Chief Executive Officer

We'll purchase slightly more reinsurance to account for the growth. But the structure that we've employed has served us so well over the last couple of years that we don't anticipate any major changes in the structure and we're in the midst of discussions with all our major partners right now about the the exact layering and pricing. So, it's business as usual in terms of reinsurance placement. We have very strong partners and we're working with them right now to get the placement done.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, thank you very much, I appreciate the color.

Operator

Our next question comes from the line of Markus Hollander with Raymond James. Please proceed with your question.

Markus Hollander -- Raymond James -- Analyst

Hey. Good evening, guys. Thanks for taking my question.

John Forney -- President and Chief Executive Officer

Thank you.

Markus Hollander -- Raymond James -- Analyst

So at least touched on some of the questions I wanted to ask. But I guess just on the underlying combined ratio target of 85% obviously being at above or below the five-year average. I was just hoping you guys could give us some more color on how are you -- how was the Company set up to achieve that and if there is a time frame for it?

Brad Martz -- Chief Financial Officer

Time frame is immediate. We expected that target and price our products accordingly each and every year. Obviously, there is volatility and uncertainty in our business and that's reflected in that history, but time frame is immediate.

John Forney -- President and Chief Executive Officer

And I would say, it really is the five-year average that we've had, you know, it's a couple of basis points off and there is some distortion in last year's underlying combined ratio relative to '17 because of the effects of the different sessions in each year under our quota share and the effects of the unwinding of the debt that goes along with the merger that we did with American Coastal. Those distort things. When you look at underlying stuff, if you took out all quota share sessions or underlying our cat loss ratio growth before any sessions to reinsurers went down significantly. So, the underlying book of business is performing at a level that supports that underlying combined right now. And so it's not --it's not as -- it doesn't even suppose any improvement in our underlying results to get to that, if that makes sense.

Markus Hollander -- Raymond James -- Analyst

Yeah. Thanks for that. And then another one on the journey sub. You mentioned in your remarks, you guys already wrote a business for with AmRisc, but I think you said it was an admitted policy. And I understand the whole rationale for the radio was to get on the non-admitted side of the business, is that reasonable or are you just guys just planning to write that type of business in 2019?

John Forney -- President and Chief Executive Officer

The journey is an admitted market company and although it has been that they play on journey is not to get into the surplus line space. We've accomplished that through blue line. The play on journey was to get into different markets on the personal lines side and different products on the commercial line side, and that's what we've done. The first policy that we wrote with journey was commercial lines admitted market apartment building in Florida, which typically has gone to E&S markets, because apartment lenders require an A category A.M. Best rating. We now have an admitted market A category A.M. Best rating in Florida, which is kind of a category buster and gives us a really nice advantage.

Markus Hollander -- Raymond James -- Analyst

Okay, great. Thanks for that. And then just lastly, do you guys think the losses in the retro market will have any meaningful impact on your insurance pricing when it comes to renewals?

John Forney -- President and Chief Executive Officer

Time will tell. We're-- obviously, there's been a lot of stress in the reinsurance markets. You all know that as well, as we do. But the partners that we do business with are looking at the long-term like we are, and over the long term, we expect our partners to make money not every year, just like over the long term our results are going to be a lot better than they've been in 2018 and 2017. So, yes, there's been some pain on the reinsurance side and we want our reinsurance partners to feel like they have a profitable long-term relationship and that it's a win-win. So that's why I said we're working with them right now to try to find a fair way to do it.

Markus Hollander -- Raymond James -- Analyst

Okay. Thank you for your answers.

Operator

(Operator Instructions) Our next question comes from the line of Christopher Campbell with KBW. Please proceed with your question.

Christopher Campbell -- KBW -- Analyst

Yes, hi, good afternoon, gentlemen.

John Forney -- President and Chief Executive Officer

Hi, Chris.

Christopher Campbell -- KBW -- Analyst

Hey. I guess my first question just kind of following up on Elyse's about the unfavorable development. So it sounds like that's the most recent accident year. So I guess how is that going to factor into your core loss ratio Pex (ph) for 2019?

Brad Martz -- Chief Financial Officer

As I mentioned, it's going to have a trickle down effect to the most immature accident quarters. But it's immaterial really in the scheme of things. On our overall loss ratio, it's 20 basis points, something like that. If that -- I mean, it's just not a material number and it was sort of a prudent year-end thing for us to do, but again as I said, the non-cat loss ratio Pex factoring all that in, in Florida, are 500 basis points lower year-over-year. So, we are seeing a material improvement in the business and an immaterial amount of development for the year doesn't impact that.

Christopher Campbell -- KBW -- Analyst

Got it. And just -- I understand it's immaterial, but I guess just where was the development coming from? Is that kind of more or like -- are you seeing AOB creep back into like the core business or anything like that? Just any other colors you could get. -- or any other color if you could get on it?

John Forney -- President and Chief Executive Officer

AOB, it's not a significant factor for us. As we've talked about before, we've been reducing -- we've never had a lot of business in Tri-County. We don't -- haven't written any new business in date since I've been at this Company 6.5 years ago. We stopped writing new business in prior sometime ago. We've been non-renewing policies down there. Our premiums are up 30% or 40% down there and our loss ratio -- non-cat loss ratio in the Tri-County year-over-year 2017-2018 was down 12 points -- 1,200 basis points, 12 percentage points of non-cat loss ratio. So, no, that's not what's driving it.

Brad Martz -- Chief Financial Officer

Exactly. And again, I got to reiterate 2018 we feel like was as well reserved as we've ever been. So we're taking all this information into account setting your annual reserves on the current accident year as well. So we don't expect that to continue and I have no concerns about the development whatsoever.

Christopher Campbell -- KBW -- Analyst

Okay, got it. That's very helpful. I guess another one on the reinsurance cost, looks like the ceded premiums were up to 40% versus 36.7%, I guess, a year ago. So I guess just could you unpack that on what's driving that increase, is it, -- is it more coverage. I guess just how should we think about like the higher cost in terms of what more United is getting for that.

Brad Martz -- Chief Financial Officer

It's a full 12 months of the commercial, residential business produced by American Coastal is what it is . Last -- in 2017, you only had nine months of that, the commercial res has a higher ceding ratio relative to the personal lines, as you might expect. So, that's the change.

Christopher Campbell -- KBW -- Analyst

And the other change is that there wasn't any quota share in place...

Brad Martz -- Chief Financial Officer

Just one month.

John Forney -- President and Chief Executive Officer

...for a month of December 2017. So, we had one full month more of 20% sessions on their quota share in 2018. So, no, we're not paying more if there is some comparability issues.

Christopher Campbell -- KBW -- Analyst

Okay, got it. That makes sense. And then, just I was looking at the slide deck that you guys had, was there any more Irma loss creep, because I think the last number I had for you guys was like $747 million and then slide 18 of the presentation has like a number $900 million. So is $900 million the new number for that?

John Forney -- President and Chief Executive Officer

It's not very new, but it's been -- it's a number from a couple months ago.

Christopher Campbell -- KBW -- Analyst

Okay. So, $900 million is your latest gross number for Irma, correct? Hello?

John Forney -- President and Chief Executive Officer

Yes.

Christopher Campbell -- KBW -- Analyst

Okay, got it, guys. Just want to confirm that. And then I would just want to know little bit on switching to Michael. I know you guys had a big range, like the $50 million to $120 million gross originally. Now, it's only like $8 million above that at $128 million. I guess are you seeing the -- any signs that Michael could have loss creep similar to Irma, are you seeing, like the attorneys making their way up north or anything like that?

John Forney -- President and Chief Executive Officer

We're not seeing any evidence of that on our book.

Christopher Campbell -- KBW -- Analyst

Okay, great. And then just one other. Yeah, just kind of of question about like just the collateralized piece. I know like I think I asked a question last quarter about just in terms of I guess you guys released collateral and I understand it's not a commutation and I think you said like losses would have to develop like twice as much for that to like matter. So I guess and just how do you need to plug that going into like the next program, because the collaterals released. I mean, how does that work in terms of that piece of the program is like -- is the reinsurer already using that to write new business, because you don't think that the losses are going to hit that? I guess it's a buffer table question in essence, but I guess just if we're leasing that collateral, the reinsurers are going to start using that to write. How does that impact your program and then what you have to purchase going forward?

John Forney -- President and Chief Executive Officer

As it impacted us at all the collateralized programs that worked exactly as they were designed to work and exactly as they were advertised. There's buffer tables that allow collateral release after certain periods of time, if losses developed up into those areas, where collateral was released, the reinsurers are obligated to post new collateral and we clawed back. That's worked multiple times on Irma flawlessly within a matter of days and so we don't have any concerns about the collateralized reinsurers or how it works and the partners that we deal with have access to a lot of capital. So, they are not strapped for cash and trying to beg and borrow to make ends meet. They have capital to support their past obligations and their future obligations and so we haven't seen any signs of distress from our reinsurance partners on the collateralized side.

Christopher Campbell -- KBW -- Analyst

Got it. Is there any concern on the reinsurer side just in terms of the loss creep and then having to like you know maybe return collateral after it's been released on a buffer table? Is there any concerns on the reinsurer side, like maybe they wouldn't want to participate on our program, going into next year, they would have higher rates if that were an issue?

John Forney -- President and Chief Executive Officer

Nobody has enjoyed the Irma loss creep at all. Obviously, the numbers have gone up significantly for the industry as a whole over a long period of time and that's not something that anybody planned on. For us, our losses on Irma as a percent of our market share in the affected areas are still less than they should be than our market share, the PCS number, and so relatively speaking we performed well on Irma. Doesn't mean that we've enjoyed it or that our reinsurers have enjoyed paying losses that far after the fact and everybody's got to fact that into how they price their products going forward. So, that's how it works and we all had to figure out what exactly that means.

Christopher Campbell -- KBW -- Analyst

Great. Well, thanks for all the answers. Best of luck in 2019.

Operator

Thank you. We now like to turn the call back over to management for closing remarks.

John Forney -- President and Chief Executive Officer

Okay. Well, thank you so much, everybody, for joining us on the year-end call. We really appreciate your interest. We appreciate the good questions, and we look forward to continue dialog over the rest of 2019. So thank you, again.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

Duration: 33 minutes

Call participants:

Adam Prior -- Investor Relations

John Forney -- President and Chief Executive Officer

Brad Martz -- Chief Financial Officer

Elyse Greenspan -- Wells Fargo -- Analyst

Markus Hollander -- Raymond James -- Analyst

Christopher Campbell -- KBW -- Analyst

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