Hain Celestial Group Inc (HAIN) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hain Celestial Second Quarter Fiscal Year 2018 Earnings Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Mary Celeste Anthes, Senior Vice President, Corporate Relations. Ma'am, you may begin.

Good morning, Brian, and thank you all for joining us today. We are pleased to report Hain Celestial second quarter fiscal year 2018 earnings results.

Irwin Simon, our Founder, Chairman, President and Chief Executive Officer; Gary Tickle, Chief Executive Officer, Hain Celestial North America; and James Langrock, Executive Vice President and Chief Financial Officer, as well as several members of the Hain Celestial management team are here with us today.

Our discussion today will include forward-looking statements which are current as of today's date. We do not undertake any obligation to update forward-looking statements either as a result of new information, future events or otherwise. Our actual results may differ materially from what is described in these forward-looking statements and some of the factors which may cause results to differ, are listed in our publicly filed documents including our 2017 Form 10-K and other reports filed with the SEC.

A reconciliation of GAAP results to non-GAAP financial measures is available in our earnings release, which is posted on our website along with the presentation under Investor Relations.

This conference call is being webcast. An archive of the webcast will be available on our website under Investor Relations. (Operator Instructions) Now let me turn the call over to Irwin Simon. Irwin?

Thank you, Mary, and good morning, everyone.

Our global teams continue to make significant progress across key areas of our business in fiscal 2018 second quarter.

We remain committed to the 4-point plan we laid out in June of last year, which includes investing in our top brands and capabilities to grow globally, delivering on Project Terra cost savings and productivity, enhancing our leadership team to deliver to our strategic plan and, last but not least, returning value to Hain Celestial shareholders.

Hain Celestial remains uniquely positioned in the growing organic natural and Better-For-You products industry. Across the U.S., U.K., rest of the world, we have 24 of the leading brands that are #1 and #2 in their respective categories, and our most significant brand-building investments to date started this fiscal year.

With regards to the quarter's performance, our worldwide net sales reached $775 million, a 5% increase compared to $740 million last year. Adjusted EBITDA increased 19% to $83 million from $70 million in the prior year, and adjusted EPS increased 28% to $0.41 compared to $0.32 in quarter 2 last year.

Our second quarter results reflect the strength of our diversified businesses. Our international business segments generate solid growth year-over-year. U.K. and the rest of the world, which includes Europe, Canada, Cultivate were up mid-single digits in constant currency net sales. Our U.K. net sales growth primarily reflects 13% growth from Tilda, 15% growth from our Ella's business and 12% growth from the Hain Daniels brands, with strong brand performance from Hartley's, Linda McCartney and the Cully & Sully brand.

Net sales growth from the Hain Celestial Canada was driven by the Yves Veggie Cuisine, Sensible Portions and Live Clean brands. Hain Celestial Europe has strong growth from Natumi, the Joya brand, the Dream brand and their own labels.

In the U.S, we continue to execute on our strategic plan to drive growth of our top 11 brands and top 500 SKUs. We have made significant brand-building investments and identified numerous opportunities to drive improved growth and profitability. While the U.S. business is not yet growing at the level of our international business or my expectations, we expect these investments to pay significant returns in the future periods.

The results of some of our brand-building investments are evident in this quarter. Celestial Seasonings, net sales were up 13%, a significant turnaround. Net sales for MaraNatha increased 8%, a significant turnaround. Earth's Best increased 6%, and in snacks, Terra and Garden grew low-single digits.

Our personal care portfolio also continued to outperform with Alba Botanica's, Avalon Organics Live Clean brands, all up solid double digits. We also got ones that had issues in decline, and Gary will discuss the plans to grow them in the future.

We're also very pleased with Hain Pure Protein's improved results during the most important quarter of the year for the protein business: Plainville Farms, net sales increased 15%; FreeBird brand, net sales increased 17%; and our Empire Kosher brand net sales increased 7%, which was partially offset by a decrease in private label and the discontinuation of our rand -- Round Hill conventional brand. Hain Pure Protein remains one of the leading 100% organic and antibiotic-free fresh poultry producers in the U.S.

For Q2, we had a very strong finish to the holiday season, delivering well over 1.4 million turkeys to our customers and consumers. While we incurred incremental cost to meet the strong demand, our profitability tripled compared to the prior year. In addition, we're pleased to report that everybody got their turkey for Thanksgiving. Our service levels were 99%.

Now moving on to an important project called Project Terra -- global cost savings and worldwide productivity initiatives. We delivered approximately $35 million of savings in the first half of 2018, in line what we set out to achieve as we move forward to our target of $100 million. As we've told, most of these savings are back-end loaded.

During the quarter, to help achieve this number, we engaged AlixPartners, a leading consulting firm that specializes in implementing cost saving initiatives, to work with us, to ensure we drive out as much nonvalue-added cost out of the business as possible. AlixPartners is supporting our efforts to accelerate and amplify our savings initiative, especially in procurement-related areas by consolidating resources around direct product costs such as ingredients, packaging and co-manufacturers. We're also addressing general and administration costs across our operations as we execute on our $350 million Project Terra plan.

Today, we announced we're exploring a divestiture of Hain Pure Protein as we look to reduce complexity and drive the greater efficiencies across our business to simplify our brand portfolio. The category for fresh, organic, antibiotic-free protein remains strong. While we continue to believe this is a highly attractive business with very good growth potential, as you saw in our numbers last quarter, we have determined it is not core to our go-forward strategy. We have received a tremendous amount of interest in this business. We believe this strategic move will enhance shareholder value as we position Hain for future growth.

Before I turn the call over to Gary, let me share a few thoughts on the direction of the industry and how Hain is uniquely positioned to benefit from where the industry is headed.

In my 25 years at Hain Celestial, I haven't seen an industry change as much it has over the last couple of years. During our meetings with major retail partners, we have a seat at the table and they are focused on 3 key areas: Brick & Mortar; Click 'N' Pick and e-commerce. They are collaborating with our teams on organic natural products that resonate with their consumers, particularly as we position ourselves for the shift that continues to increase the move to e-commerce.

Today, a solid part of Hain Celestial business occurs via e-commerce. In the United States alone, we have approximately $80 million in net sales. Three years ago, we had minimal sales. We expect to double or even triple that over the next 2 to 3 years. According to IRI, e-commerce could represent 10% of grocery sales by 2022. In addition, it is estimated that 70% of shoppers will be buying their groceries online within 5 to 7 years, according to projections from the Food Marketing Institute and Nielsen's. Total online grocery spending could reach $100 billion. So we keep moving where the consumers are moving to.

Organic products have 3x greater share of sales online than conventional products, and we continue to position Hain to win with our leading organic natural products.

Other investment areas include international. We expect our business in India, Middle East and Africa to grow nearly $100 million by the end of fiscal 2021. At the same time, in China, we see tremendous e-commerce opportunities for our Earth's Best brand, particularly, in infant formula.

We believe we're making the right strategic changes and investments in our go-to-market strategy, with particular emphasis in the U.S. to support the shifting consumer purchasing dynamics and evolving retail landscape. We acknowledge these efforts will take some time to yield results, but we are encouraged with what we are seeing in our business.

As I mentioned earlier, a key piece of creating stronger and more profitable Hain Celestial is simplifying our business. Part of this strategy requires us to walk away from overly complex and low-margin SKUs. As a result, our team remains intensely focused on the growth and investment behind our top 11 brands and our top 500 SKUs in the U.S.

And last but not least, always to keep expanding on our Project Terra cost savings and productivity initiatives. These efforts are creating an even stronger Hain Celestial for the long term. Gary will discuss his U.S. business wins, challenges and an update on their transformational strategic initiatives in more detail in a few minutes.

I also want to touch on tax reform. James will review it in greater detail, but I'm really excited about the opportunities for Hain as we go from an effective tax rate of 30% to a much lower rate in the mid-20s. This will provide us significant opportunity to use these savings to fuel incremental investments into our brands to grow the top line to drive awareness and household penetration, as well to invest in our people and infrastructure, which we've already started.

Over the last 25 years, we've created an incredible company at Hain Celestial. We've been a visionary in the organic natural products industry and we are still leading the way. We've made a lot of progress on our business transformation with our greatest opportunities still ahead. With that, I will now turn over to Gary to take you through his U.S. business. Thank you.

Thank you, Irwin. Good morning, everybody.

In the U.S., our team continued to execute on our strategic plan to drive growth for our top 500 SKUs driven by the top 11 brands in both measured and nonmeasured channels. During the second quarter, we made progress in key areas of our business, a few of which I'll highlight today.

We acknowledge that we're in the early innings of realizing our full growth potential. Our focus is on winning where our customers and our shoppers are engaging with our products and brands. The evolution of our consumer preferences and shopping behaviors is creating different growth dynamics between traditional or what we refer to as measured MULO+ C channels and our nonmeasured channels, which includes Whole Foods and Sprouts, the natural channel club and e-commerce, amongst others. This evolution is evident in both the performance of our top 500 SKUs in the overall U.S. business, and the performance I'll discuss these dynamics in more detail shortly. But first let's review our U.S. performance.

U.S. net sales were down 3% for the second quarter. Excluding SKU rationalization, the divestiture of Rosetto and inventory realignment of $13.5 million, Q2 net sales were down 5.4%.

Turning to our price mix and volume. We saw a slight decline in overall price of 60 basis points and mix of 30 basis points. Volume impact was a further 200 basis points.

From a brand perspective, we have recognized approximately $15 million in top line net sales headwinds in the quarter. Firstly, Sensible Portions was down $6.5 million year-on-year. We experienced supply issues related to one copacker, and we continued to cycle through the loss of distribution from one large mass customer. This lowered our planned promotional programming and delayed one club program to Q3.

We believe the supply has been resolved and we are now able to fulfill demand with strong incremental programs in the second half of this fiscal year, including club programs and expanded distribution in the nonmeasured channels that we expect to drive future growth.

Secondly, Spectrum net sales were down double digits around $2 million, driven primarily by the category decline in coconut oil, which is declining around 23%. However, we continue to grow share in coconut oil as we cycle extensive changes from our rebranding initiatives for the total Spectrum oil offering. In addition, our brand marketing campaign was kicked off in mid-October 2017.

Thirdly, Rudi's Organic Bakery net sales were down double digits, around $2.8 million, as a result of lower velocities and some distribution losses. Our team continued to work on regaining distribution including the development of a new DSD model for Rudi's in fresh bread with a new product formulation, commencing in late Q3 for the Northeast region. In addition to the Midwest, this will be the first in a potential expansion of this new route to market for Rudi's.

Finally, we saw some service level issues related to our personal care, soups and broths brands. This impacted results by around $3.7 million year-over-year. We expect a full recovery in supply chain through Q3 for both personal care, soups and broths.

For comparative purposes versus the prior year period, we had a shift in the timing of promotional spending for Tea and another promotional program for snacks from Q2 to Q3 of this fiscal year, which in total was a drag of approximately $2.5 million.

Turning now to the top 11 brands. There were also a number of positive results from our brand-building efforts as these efforts gained traction and momentum. 6 of our top 11 brands posted solid increases in net sales versus Q2 last year and one brand was essentially flat. Celestial Seasonings tea and Alba Botanica personal care, each generated double-digit net sales growth. MaraNatha had net sales increase of high-single digits. Earth's Best, net sales increase was mid-single digits, and Terra and Garden of Eatin, net sales increased low-single digits. Other brands that are up double digits are Live Clean, Avalon Organics and Arrowhead Mills.

As we've previously reported, we have engaged in a strategic evaluation of our product portfolio in order to reduce complexity and eliminate lower margin SKUs. We believe this will enhance our long-term growth prospects and drive stockholder value. As a result of this ongoing review, we added about 120 additional SKUs to our rationalization program for a total of over 700 to date, which we expect to be phased out of our portfolio by the first quarter of 2019. In total, SKU rationalization represented $4.4 million of drag to Q2 segment net sales versus prior year and $1.7 million of which was from the incremental SKUs we added this quarter.

As Irwin mentioned today, natural organic product share is 3x greater online versus Brick & Mortar stores. This is an opportunity for us but it also distorts growth trends in measured business and unmeasured channel sales. Many of our major traditional retail partners are investing in a range of .com solutions either separately or in association with their physical stores. And the result is more consumer products are becoming available online. This is a clear strategic focus for us, and we're investing across these solutions to drive our future growth.

E-commerce is growing strongly for us with growth at around 40% in consumption sales, and this is coming across a range of our key brands. This includes strong growth off a small base of our portfolio in the range of .com solutions our retail partners are investing in. In addition, other specialty channels and club formats continue to show strong potential for our products and brands.

Starting in mid-Q3, there will be expanded investment in the online channel with new dedicated programs and new methods of selling online. We've built strong growth plans on the back of this investment for late Q3 and into Q4.

Now I'd like to focus on our second quarter consumption data for the U.S. business. Our fundamental strategy remains to bring clear focus on the top 11 brands and top 500 SKUs, which is our core portfolio for the future growth and 93% of our sales today. This focus will allow us to continue to drive cost and complexity out of our business, including the rationalization of overly complex and lower margin SKUs. While the U.S. growth rate will be impacted by this portfolio transition, the end result will be a higher quality, more profitable portfolio that will be better positioned to drive growth growing forward.

In MULO+C, our top 500 SKUs were down 2.3% for the 12 weeks ended 12/31/17, which would be the time period I'll reference throughout unless otherwise noted.

We are not pleased with the performance, particularly given natural organic category was up mid-single digits in the quarter for MULO+C, driven in part by expanded distribution of private label in the category.

Our team continues to strengthen our position in MULO+ C with improved promotional programs planned in the second half of fiscal 2018. We've had positive meetings with all our key retail partners across MULO and nonmeasured channels with a focus on our top 11 brands and top 500 SKUs as we look towards category resets. We expect expanded distribution on key retail partners including for MaraNatha, Alba, Sensible Portions, Earth's Best and Live Clean. As a result, we expect to have improved trends in MULO+ C in the second half of the year as these changes yield benefits.

In the nonmeasured channels, which includes Whole Foods, the natural channel, Amazon club and specialty stores, our brands are strong and getting stronger. The top 500 SKUs grew at 10% in the nonmeasured channels, and the trends in the natural channel continued to improve in the quarter for our top 500 SKUs across the following key brands: Alba Botanica, Avalon Organics, Arrowhead Mills, MaraNatha and Terra were all up double digits. Celestial Seasonings, Garden of Eatin and Ella's Kitchen were up high-single digits. We will continue to see expanded programs in the fourth quarter in the club channel, particularly for personal care.

So the question is why is the scanner data in our internal U.S. numbers showing a weaker level of performance? It can be explained by all of the SKUs outside the top 500, which to put in perspective, is approximately $23 million of consumption sales in the quarter and about $90 million of annual consumption sales.

These -- the tail -- this tail of SKUs are declining double digits in measured channels and in unmeasured channels. That is what's driving -- dragging down our growth. Over time, the impact of the SKU rationalization and the SKU tail will decline. The net results of these initiatives will be a stronger, higher-growth U.S. business. As that happens, you'll see our reported numbers in the scanner data become more representative of the performance of the business.

For the second half of fiscal 2018, we will expand, execute against our strategic plan for growth. This includes brand-building efforts and investments in our top 11 brands, which we expect to generate ongoing momentum for the top 500 SKUs across the total channel view, especially in unmeasured channels, particularly with positive performance in e-commerce. We have a stronger promotional programming than in the first half of the year, particularly in snacks and tea, and expanded distribution on core SKUs, as I mentioned. We have a strong club program in place for personal care in quarter 4 and a very strong plan on e-commerce expansion.

That concludes my overview, and I look forward to meeting with many of you in the coming weeks and continuing to update you on our U.S. business. Thank you, and I'll now turn the call over to James.

Thank you, Gary, and good morning, everyone.

Consolidated net sales increased 5% to $775 million or 2% on a constant currency basis. When adjusted for constant currency, acquisitions, divestitures and certain other items, net sales increased 1%.

Adjusted gross margin was $157 million or 20.2%, 140 basis point year-over-year improvement. This improvement was driven by operating efficiencies achieved in the U.K., HPP and Rest of World segments and Project Terra cost savings of $18.6 million, partially offset by commodity inflation, higher freight costs as well as unfavorable mix in the United States segment.

SG&A as a percentage of net sales was 11.6%, a 30 basis point increase, primarily due to increased marketing and headcount investments in the U.S. Adjusted EBITDA increased 19% to $83 million from $70 million in the prior year period. We reported adjusted EPS of $0.41 compared to $0.32 in Q2 last year based on an effective tax rate of 24.2%. The lower tax rate had a $0.02 benefit in the quarter. I'll talk more about the implications of tax reform in a bit.

I will now provide you with key financial results for each of our business segments. For the U.S., Gary discussed the top line highlights. So I will discuss the underlining financial results. U.S. adjusted gross margin declined 85 basis points year-over-year to 26.4%, largely driven by commodity inflation, unfavorable mix and higher freight cost, partially offset by Project Terra cost savings.

U.S. SG&A increased due to planned marketing investments of $5 million as well as planned headcount increases in sales and marketing of $1.6 million. Accordingly, U.S. adjusted operating profit decreased from $40.6 million to $31 million as we continued to invest in the U.S. business to drive growth in the back half of the year.

At Hain Pure Protein, net sales increased 4% to $159 million. Adjusted gross margin increased 510 basis points to 10.6% and adjusted operating margin increased 560 basis points to 7.9%. This was due to operating efficiencies achieved and Project Terra cost savings along with a strategic shift to more organic and antibiotic-free poultry.

In the U.K., net sales increased 12% to $238.2 million over the prior year period or 5% on an adjusted basis. Adjusted gross margin improved 200 basis points to 17.8%. Adjusted operating margin increased 140 basis points to 6.9% driven by sales growth, price realization and continued operational efficiencies, partially offset by commodity inflation.

Net sales for the Rest of the World increased 12% to $107.7 million over the prior year period or 6% on a constant currency basis with Canada, Europe and Cultivate, all growing mid-single digits. Adjusted gross margin within the Rest of World segment increased 210 basis points to 24.1% and adjusted operating margin increased 290 basis points to 10.6%.

Sales growth, operating efficiencies and Project Terra cost savings drove the increased profitability in the Rest of World segment. As Irwin mentioned, we are pleased with the growth in net sales and profitability across the Hain Pure Protein and international business segments.

Now turning to our cash flow and balance sheet. For the second quarter, capital expenditures were $16.1 million and operating free cash flow was $28.8 million as compared to operating free cash flow of $89.1 million in the prior year period. The change in operating free cash flow resulted from favorable working capital in the prior year due to the timing of inventory purchases.

At December 31, our cash balance was $139.2 million and net debt was $627.9 million, which is an $18 million improvement from the prior year period. Our bank leverage ratio was 2.97x at the end of Q2 2018, down from 3.01x in Q2 2017.

We also announced an amended senior credit facility. This provides for unsecured borrowings up to $1.3 billion from $1 billion with the same pricing grid and financial covenants as our prior facility. There's a $1 billion revolver and a $300 million term loan with 5% annual amortization, all due in 5 years, maturing in February 2023.

With regard to the Tax Cuts and Jobs Act, we expect our effective tax rate for fiscal 2018 to be 26% and for fiscal 2019 to be approximately 24% to 25%. In addition to the benefit from a lower effective tax rate, we also had a onetime Q2 net benefit of $23 million associated with the corporate tax reform, including the reduction in the statutory federal income tax rate from 35% to 21%, resulting in a deferred tax benefit of $29 million. We also recorded a repatriation toll charge estimated to be approximately $5 million, payable over an 8-year period beginning in fiscal year 2019.

Now moving on to 2018 guidance. We are reiterating our fiscal 2018 net sales guidance. We expect net sales in the range of $2,967,000,000 to $3,036,000,000, an increase of approximately 4% to 6% as compared to fiscal year 2017. We are expecting low to mid-single digit growth in the U.S. and HPP while the U.K. and the Rest of the World are expected to grow mid to high single digits.

We are updating our adjusted EBITDA and earnings per share guidance to take into account continued investment in marketing and brand awareness, primarily in the United States as well as recent freight and certain commodity price headwinds. We expect adjusted EBITDA in the range of $340 million to $355 million, an increase of approximately 24% to 29% compared to fiscal 2017, which reflects $100 million of Project Terra savings and an increase in brand investment of $40 million to $50 million primarily in the United States. These investments are important to our efforts to deliver an accelerated top line growth over the long term.

Adjusted earnings per diluted share in the range of $1.64 to $1.75, which includes an $0.08 to $0.09 benefit due to tax reform. We are utilizing the savings from the tax reform to continue to fund the marketing investment and to offset headwinds I mentioned previously. We expect significant contributions in fiscal 2018 from top line growth and margin enhancement while also making important investments in the business.

Now turning to our outlook for fiscal 2018 cash flow. Based on fiscal 2018 EBITDA and working capital expectations, we anticipate cash flow from operations of $200 million to $235 million, and we expect capital expenditures to be approximately $75 million.

With respect to the cadence for the remainder of the fiscal year, from a net sales perspective, we continue to expect Q3 and Q4 essentially consistent with one another. Adjusted EBITDA and EPS will improve each quarter throughout fiscal 2018.

As a reminder, our guidance is provided on a non-GAAP or adjusted basis excluding the impact of any future acquisitions and other nonrecurring items we will continue to identify with our future financial results.

In summary, each of our business segments has done a thorough review of their opportunities and potential challenges for the second half of fiscal year 2018. And we are confident on achieving our results.

With that, Irwin, Gary and I are now available for questions. Operator?

(Operator Instructions) And our first question comes from the line of Scott Mushkin from Wolfe Research.

Thanks for the slide deck. I think it's very useful.

Scott, can you speak up? We can't hear you. You're in your low voice today.

I just said thank you for the detail on the slide deck, appreciate it.

So what I wanted to do is ask you a little bit about the U.S. business, how to turn it around. And I was hoping you guys could give us a little bit more detail on the brand-building activities, what you're spending, what you're doing to try to drive some pull through the channel.

And then the second question I had was related to the exact same thing. It seems to us like in the measured channel and I know it's having its challenges, but I was just down in Texas at H-E-B, and I was surprised to see how little space Earth's Best baby food had down there. And I was just wondering -- it seems to us that you guys are maybe losing some momentum in that measured channel. And I wanted you guys to maybe walk through some of the actions maybe you could take to stop that.

Thanks for the question, Scott. So it's a multiheaded question. So maybe the best way of addressing it is, let's talk about the outlook and where we're going, and I'll talk about it in a few specific buckets that are important to our success.

Firstly is programming. Secondly is expanded distribution. The third one is online acceleration. The fourth one is innovation and the fifth one is channel focus.

So in terms of programming, in the back half of the year, we already have a clear line of sight to a stronger programming schedule. We know we moved something specifically for tea out of quarter 2 into quarter 3, and we're doing that on the back of strong base velocity. So we expect that program to pay out.

In snacks, we have a much stronger program laid out for Sensible Portions and Terra. Some of that is in MULO, some of that is in unmeasured channel but we have a clear line of sight to that as well. And we know in terms of our pantry business, we have some clear objectives around distribution drives and some in-store programming and marketing with a couple of our key retailers. So we definitely see clear programming growth in the back half.

In distribution, because you talked a little bit about this, of course, we have to cycle through each of the retailers' review processes. And of course, in some of these, we're still cycling out of lost distribution in previous cycles. But if we look forward to what expanded distribution looks like, we have expanded distribution on Sensible Portions, Alba, Live Clean, a number of expansions in the specialty channels such as T.J. Maxx, some expanded distribution coming in Rite Aid as well as in our club channels, and all of those are quite significant in the back half of this year on top of still going through review cycles right now for a number of customers where we're awaiting decisions. So there's still opportunity for us to expand even further on the distribution front.

In terms of online, we have clear plans, as I pointed out, to really accelerate the online opportunity. Here, our brands definitely overindex already, and have very high ratings and reviews, 4-plus stars. And we are setting up a differentiated way of going-to-market in online, which you'll see come out in the middle of this quarter, and we can talk more about it at the end of this quarter. But it's an opportunity not just to sell but also to market our brands because many of our consumers go online first to find out which brands to choose, even if they choose to buy them in Brick & Mortar.

Fourthly, in innovation we have a very strong plan around Spectrum in terms of some new innovation. MaraNatha has new innovation coming out. We have new packaging coming out for Spectrum as well, as well as some changes to our Rudi's bread formulations. These are just some of the things that're coming out as well as some of the personal care innovation. So we have a very strong back half program for innovation.

And finally, in the channels themselves, you called out MULO. But for us, if we look in the nonmeasured channels, and we look particularly to the natural channel, we've seen sequential improvement quarter-on-quarter with each read in terms of our core performance, the TDPs that we have and the growth in velocity of those core ranges. So I'm very encouraged with what I'm seeing in what was our bread-and-butter channel from past days. It's definitely going through renewal.

So marketing plans are giving us the opportunities to obviously represent our brands, come back to our core retailers and give them a reason to give us distribution. And I feel strongly that the investments we've made have given us these opportunities, and this is why we're getting these expanded distribution chances in the back half of this year

And Scott, just to jump in here. Number one, I think as we mentioned, Earth's Best up 6%. Ella's in the U.K. is the #1 baby food in the U.K. and one of the fastest-growing in Europe. So I mean we have a big focus on baby.

The biggest changes going on in where baby products are sold is e-commerce. And if you come back and look at H-E-B, I wouldn't be surprised again, a big part of their assortment is e-commerce and I'm not sure what was in the store. But if you just look today what's happened with our baby business, where Babies and Toys R Us was a big, big customer, they're closing stores and we see what's happening there. So there's such a big transformation I've never seen -- as you go to a retailer today, you talk about their Brick & Mortar which they hope to keep flat, their Click 'N' Pick, and then their e-commerce.

Now let's be very clear. In e-commerce, through a retailer, that does not show up in IRI or Nielsen numbers, okay? So I think as you look the baby business, in regards to birthrate, it's flat. We're up. It's ultimately taking share, and I just think it's continuously a shift in regards to where shoppers shop today. And I think the more important is, the conversations we've been having with retailers is how they want to take out conventional products and put more and more natural products.

So I'm a little surprised at that on H-E-B, because where the space is going to is more and more from a Gerber products to more and more natural organic products, and that's what we're seeing out there, and that's why you see the growth in Earth's Best that you do.

Yes. Baby is the fastest platform online in terms of growth for us.

Because you want moms. Scott, did that answer your question?

Yes. Good luck with that U.S. business. I think people really want to see it turned around.

Our next question comes from the line of Andrew Lazar from Barclays.

So I guess, Irwin, my question revolves around some of the decisions around portfolio optimization. I guess regarding HPP, I'm just curious why now is the right time to explore divestiture and what led to kind of that decision being talked about now.

And then maybe more importantly is, I guess, what does that decision mean or not mean for further possible portfolio moves? I guess could or should Hain be moving maybe even faster or more aggressively around identifying those pieces of the portfolio with the most value potentially to others? We all see some of the multiples as you see being paid for some assets that don't have anywhere close to the growth of some of yours. So just wanted to -- if you could address those things that would be great.

So number one, on HPP, Andrew, I think we've built this business from basically scratch to over a $500 million business today. We're, if not the leading, one of the fastest-growing leading organic and antibiotic-free protein businesses. And with that, our protein businesses grew -- FreeBird grew 15%, 17%. Plainville grew in that same range.

One of the things as we look at this business and as we're approached today, number one is how we've become a global supplier of protein. And when you have your plants basically on the East Coast, it's hard to ship past the Midwest or past the Southeast. So it's a tremendous CapEx investment. And in regards to supply today in turkey pricing and labor, I think it being part of a larger strategic protein company makes a lot more sense. So that's why a lot of interest and I come back and say we really built a great business there.

I mean, the Plainville brand is a big brand today within turkey, within deli, within turkey breast, turkey burgers, et cetera. You walk into most fast casual restaurants today and we created the name FreeBird. You see the name FreeBird on a lot of restaurants, a lot of fast casual, lot of wait table and then a lot of retailers. So there's something we built that's worth a lot.

Andrew, we come back today and look at the rest of our business and we'll look through where are the opportunities that could be a part of someone else. But again, you need to look through what's your trapped overhead, what's your other investments here and how you reinvest back in the business. And as I say, we have a board today and a working group that's working through this. And there is great valuations out there. Yes, they are. But what do we replace it with and how do we reduce trapped overhead if we were to divest that?

HPP was easier as it's run separately, it's not integrated. But I will tell you this here: we are continuously evaluating our portfolio, both from a sale and from an acquisition standpoint. And what makes sense if we -- it's kind of like a hockey trade. We trade 2 players and we get 1 major player. So we're looking at it from both standpoints.

And our next question comes from the line of Ken Goldman from JPMorgan.

I just wanted to ask a couple of quick questions if I can. The tax benefits that you talked about, I think you said $0.08 to $0.09. Is that a gross number? Does it assume some reinvestment? This -- I could do the simple math on what it means but I just kind of wanted to hear it from you and make sure I'm looking at it correctly.

Ken, that's the gross. That's the tax savings component of it and then -- that we spent it. And that's one of the reasons the EBITDA has come down.

But Ken, we will spend it in the back half, as James said. And as you know, that affects EBITDA as you spend it. So we will spend it on marketing. We will spend it to offset some of the freight headwinds out there but it will be spent. And no different than the $0.02 was spent in the second quarter outside some of the freight that hit us there.

Great. And then Irwin and Gary, you have kind of a unique insight given how much of your product is sold online, how much of the volume is shifting to that channel.

There's a little bit of a debate going on in the -- I guess the food retail community about which is going to be a more powerful driver in the near term, right? Whether it's going to be you called it Click 'N' Pick, click-and-collect, whatever you want to call it versus home delivery. As you guys look at the options, the benefits, the negatives of sort of both of those systems, can you help us understand what you're seeing, which is growing better in your view and maybe which has a longer-term potential and why?

So Ken, I'll answer that first. I don't think there's any negative benefit because that's where the consumer is going. So you're not going to persuade the consumer today from ordering online. We're not going to tell Mrs. Goldman that she can't order products online today because that's where she's going to order, okay? And I see it within my house. I see it in regards to young moms and that. So the consumer is going there whether there's a negative benefit from margin, cost, et cetera.

In regards to Click 'N' Pick, I mean you're going to see more and more retailers I think close stores and use those stores for Click 'N' Pick because that's where consumers want to pull up and do that. So I always say you got to go where the puck is. You got to make it work in regards to the finances and the economics and you got to take this seriously. It will be $100 billion out of the $800 billion over the next 2 to 3 years. And I see what our online business is growing. As you heard me say before, our online business was minimal 2, 3 years ago. We expect to triple it over the next 2 to 3 years.

Now there is some cannibalization there, of course there is, from brick-and-mortar. But every major retailer today, as you step back, all 3 of these are major, major initiatives with different products and different plans to grow their top line and grow their business.

Yes. I'll just add into that, that the shopping experience of the millennial consumer is very different in that it's very fragmented. They have many more shopping trips and they do it over many different formats in any given week.

I think the winners will be those who do the best job of servicing the consumer, providing them the best offer at the right price with the best convenience. So it's a race really to see who does that best. But the reality is we see it in the click-and-collect models with our brick-and-mortar retailers. We're performing very strongly there. We're overindexing in their baskets, which tells us that we have brands that are very, very strong and they appeal to the consumer base who are interested in these types of models, which is very encouraging for us.

But I think you're going to see a fragmentation continue, and I echo Irwin's point that bricks-and-mortar, pure bricks-and-mortar is probably going to have to play a different role down the line.

And Ken, the other opportunity for us is where conventional categories are declining. If the snack category, conventional snacks are declining, it's the opportunities for there. If the soda category is declining 5% a year, there's space available in brick-and-mortar for more and more healthier foods, and that's why you're seeing the resurging of private label because they are taking space away from more and more conventional food.

So I come back and say from a Hain's standpoint, there is major opportunities for us in brick-and-mortar as they want more and more health and wellness products. From a pick-and-click, that's what consumers are going after. And in regards to e-commerce, that is what our consumers want, and then you heard me talk about the percentage of natural organic products sold on e-commerce. So there's multiple benefits for us across all 3 classes of trade and all 3 channels.

And our next question comes from the line of Amit Sharma from BMO Capital Markets.

Irwin and Gary, a couple of questions on -- actually clarifications on the guidance and then I have a -- little bit longer term. When you give $80 million stock-based compensation in the adjusted EBITDA, how much of that has yet to come in the back half? That's one. Number two, any outlook on commodities inflation for the rest of the year?

Yes. So the stock-based comp, it's pretty even throughout the year. So from a model standpoint, I would just take the $80 million and divide it by 2, so $20 million and amortization for the back half, so that's how I would do it. It's pretty consistent throughout the year.

Commodities inflation?

We believe that we still have some commodity inflation in the back half. It's including freight. We got pretty hit pretty hard on freight. We don't see that abating in the back half of the year as well.

So it's basically 3 items: it's freight, it's vanilla and butterfat. And we hope to see those abating near the end of year. So they're the big ones, Amit.

Got it. And then Irwin, you said $80 million online sales. You're talking about retail sales, right? Not your sales in the U.S. in the online channel, right?

Well, I don't think we've been so precise in our numbers but absolutely, we would expect to be significantly closer to 100 than to 50 in terms of our x factory sales, our shipments. So if you talk about in consumption, it will be a lot higher than that.

Okay. That's great. And then Julie joined the company last quarter or maybe this quarter. Can you just talk about some of the things that she is doing? And is that part of the reason why you feel a lot more optimistic about your progress in the online channels?

Sure. Absolutely. Yes, to come back to your question, which is a very valid one. First of all, in the click-and-collect model, obviously, we're engaging with each of the retailers around how we accelerate that and how we are clear with what portfolio we go with and we get that right. But the biggest play for us is the investment and the structure we're putting in for how we actually market online.

It's extremely important that when you're online, you have the right content, you have the right material, you have the right way of driving -- if you're like eyeballs to the product because being online is not enough. You've got to be online, present and available and also found by the consumer. There are not many people who'd buy products from an online site on Page 50, right? So you can be online but you have to be consequently online. So a lot of the work that Julianne (sic) [Julie] is doing is getting the structure and content right, making sure we're A+, making sure that we have the right marketing vehicles behind it to drive the consumers to the products and then ultimately setting up a lot of the fulfillment work that we're doing right now. So we'll have different fulfillment model coming forward for Hain Celestial as well to help facilitate to make sure the products are available.

And also I should say on the logistics side, and I've mentioned this on previous calls, we've made significant investment in our logistic setup, investing in 2 mixing centers to ensure that we can get the product to the e-com providers in the right format and a timely basis and at the right cost. Because this is also important because we have a complex portfolio. So we have a lot of work going on but it's a mixture of structure, investment in marketing, go-to-market strategy and fulfillment, which is all going to be unleashed in this quarter.

And Amit, I think any company, any retailer that is not moving to online or click-and-pick is going to fail, and I think that's a big part of Hain's business and that will continue to be. And that's where our consumers are today and that's where our consumers will continue to go. And I've never seen, and I've been out with Gary and his team visiting most major retailers, where that is a big, big part of their business today and their future growth. And I must say with Julie joining us and bringing on her team coming from a very experienced consumer packaged-good business, what we have in place today both in supply, both in being able to ship and being able to support our brands. And if you go to online today one of the #1 words searched is organic.

And Irwin, just last one for me. Does this shift have margin implications that we should be considering if we model for a faster growth in your online portfolio?

No. I think the main thing is, Amit, of course, you make the upfront investment, which is something we already called out. You have to build this, you have to invest in it, you have to bring the consumer to the model and then you ultimately start to build it out. It's -- I think people oversimplify online by saying I'm online, so tomorrow I sell $100 million worth. The reality is, like everything else, you have to build it and you have to bring the consumer to you. So you have to invest upfront, but that's been called out already by James.

And I think again, the online business is growing in numbers that are unbelievable. If you moved our online business to a MULO number, it's 6%, 7% of that business already. So just think how important that is and the growth opportunity there. So again, from a margin standpoint, it's -- margin is important here. But if you miss those sales, it's going to be so hard to come and try and get those back later on.

And our next question comes from the line of Alexia Howard from Bernstein.

Can I ask about the innings that you're in on the SKU rationalization? You've been after that I think for a couple of years now. And it sounds as though if that tail of product is still about $90 million in annual sales, it's still got a long ways to go. So I'm just wondering I guess, when you would see the heavy lifting completed? And also, when you expect to see the North American business get back to growth?

Gary, you take it and then I'll jump in there.

Yes. So thanks, Alexia. Obviously, we indicated on the last earnings call that we were doing a complete strategic review of the wider portfolio. I called out and we've added some SKUs to the list immediately that we feel we need easy wins. That strategic review will continue to conclude probably by the end of this quarter or early next quarter and then which of course is quite detailed. We're going through a cost of complexity review and we're making sure we're very clear that the choices we make will result in a bigger shift, if you like, in the portfolio. So that work is ongoing. So I think we'll have more to say about that probably in the next earnings call about our final choices. That work is ongoing behind the scenes now.

And I think, Alexia, what we're looking at also, a lot of these SKUs are profitable SKUs and cover a lot of overhead and made in plants where SKUs in the top 500. And is there opportunity to take these SKUs at a MULO and sell them to e-commerce or sell them into natural organic, if they're profitable and they have the sales to support it? And you pull -- it's about $70 million of sales. And that's what it is, $70 million of sales at shipment level with some good contribution there.

As you pull that out, what's important here is to get the head growing also to support the overhead that you're pulling out from these brands. The other thing which we got to make sure is can we grow these brands somewhere else because there is some real good products there. So there is a lot of work going into this. But our biggest decliners are $70 million of sales here, which gives some good contribution to Hain.

Yes. I think that's an important point that we're being very careful about this because some of these brands, which may not perform in traditional channels, are performing in e-com. And so we have to have a close understanding of what their future role might be -- it may be more a channel play than maybe a smaller business but very profitable business on a specific channel. So this is why we've got to be very confident with our choices. It may not have a role in conventional bricks-and-mortar but definitely have a role in e-com.

And our next question comes from the line of Akshay Jagdale from Jefferies.

So wanted to ask about the U.S. first. Just a point of clarification. You haven't changed your sales guidance for the U.S. So want to make sure I heard that correctly. And what's the update on the EBITDA guidance for the U.S.? And then I have a couple of follow-ups.

So we haven't changed -- you're right, we have not changed the sales guidance for the U.S. Obviously, we're making investments in the U.S. and we also have some headwinds that we talked about. So from an EBITDA standpoint, we have -- we're guiding to low double-digit EBITDA growth in the U.S., but now with the revised guidance, it's probably more mid-single-digit EBITDA growth on a year-over-year basis.

Got it. Okay. And then just in terms of these investments and the effectiveness of this, and this is more for Gary. So I understand we can -- I wanted to ask about the tail, but first, if we just focus on the top 11 brands, what we're seeing especially in the measured channel, and you have more color in the total channel, but what we're seeing is 3 brands really underperforming what I think is their long-term growth potential.

So you've got Sensible Portions, you got Greek Gods and then you got Spectrum. They're way off from where their trend has been long term. And -- so help me in the context of those 5 points that you mentioned earlier today.

It seems like Sensible Portions is a distribution problem, right, which might get reset here with one of your larger customers. So -- and then this quarter, it looks like there was an additional Sensible Portions problem with the supply chain issue. So one, am I reading that correctly on Sensible? And then you didn't mention Greek Gods at all with the new Seriously Indulgent product and where you are.

So just give us a high-level view of like can we actually grow Sensible Portions, Greek Gods and Spectrum at mid-single digits? And when is that -- from a time line perspective, is that 2 years from now? Is it in the near term? And how do we get there, right? Because it seems like when people look at your results, they were unexpectedly lower, right? And we're going to assume the trend line continues from here, which is lower, unless you give us reasons to believe otherwise. So just help me understand longer term how to think about that.

I think, again, we come back and I think Gary explained -- I'll let him take you through Sensible Portions, but I think the big thing on Sensible Portions, I mean we had a manufacturing issue that goes back to the beginning of summer, we just didn't have supply. And when you're down, it's not a distribution issue. It was a supply issue and we had to pull all promotions. And now being back in supply with our supplier and scrambling like we are, I think Sensible Portions is an incredible snack, an incredible product and tremendous opportunity. And I think there's a whole plan which Gary read to you of distribution that we will get in the back half that will suffice and get us back to flat in growth.

Greek Gods, great yogurt product. I think the category has been down 2%, 3%. I mean, Greek Gods for us from a shipment standpoint has basically been flat, and we've just been overlapping some innovation there. There's some new innovation coming, and then there's some timing as we're filtering out of the kefir product, et cetera. But I got to tell you, I mean Greek Gods is a business that was built from $11 million to well into the hundreds of millions of dollars today. And there's a lot of emphasis on new packaging, new products.

The indulgent product is doing extremely well. And actually what we're seeing in MULO today, I think Greek Gods is seeing some -- at Walmart, it had some great growth.

Spectrum, I'm stealing Gary's thunder here, we are seeing, and we're in the midst of a major, major overhaul on Spectrum. And I think what Gary will tell you is the growth that's going on in Spectrum in conventional channels today is up double digits. And I think as you saw coconut oil, where the big growth was in coconut oil, coconut oil has lost some of its wind in growth. Now it's moved into olive oil and Spectrum naturals. So I think there's really good plans in place and Gary will add to those. So hopefully, you believe that, Akshay, and look at where the growth are and the opportunity is.

Yes, Akshay. I'll pick up the question. So on Sensible, you're right. We've had good growth in Sensible. It's a great product, it's a great brand and it's been doing very well. Very frustrating to have the quarter we did in terms of some of the supply issues and the poor choices we made. And as you know, we have been cycling some rotation out of one of our large retailers. We have stronger programming coming. We have actually distribution gains with 3 major customers coming in the back half and that's very encouraging for us. We think that's a huge opportunity to get growth and expansion opportunities. We've got other things coming down the pipe I can't discuss yet. We're a little bit early in that for -- to talk about that work, but there is more coming for Sensible. We will continue to cycle out of distribution from one of our major retailers and we know we've got more distribution losses coming in March. So we've got puts and takes in this calendar -- this fiscal year for Sensible, but longer term, I feel very confident. We still have a great brand, a great product with still lots of opportunities to grow both in the measured and unmeasured channels. We're still very small online, huge upside opportunity to drive more growth in the online business. And we certainly have some acceleration plans there as well. In Spectrum, it's a couple of tails, right? Because Spectrum is a brand that rolls up with many different subsections. Over the last few years, we've had very good success with coconut oil and the coconut oil category has grown very strongly. That's flipped over in the last 6 months in particular. It's in something like 23% decline. We're growing share in that business, which is great but it's not great when the category is not growing. So that's definitely dragging down the overall Spectrum number. Within the core oils business, the biggest opportunity is distribution. We still have relatively low distribution of our core oil set, which as Irwin said, we're just in the process of rebranding, repackaging and of course we've just started marketing it for the first time, encouraging to see olive oil outperforming the category for olive oil for the first time, which is just an early indication that we can get traction for this portfolio, but really distribution is our opportunity and we're in front of customers now talking about that so that we move away from being dependent on coconut oil for the success of Spectrum. So I still feel confident we can do that. We're doing a lot of work in the natural channel as well to drive this. And I'm very encouraged to see by one of our major, let's say ,natural channel partners and the performance we see for Spectrum. So I still believe we're very early on here. It's a category that's growing. We should be growing with it and I think we've got immense opportunity to do that. Sorry just to complete, on Greek Gods, we're cycling out of course some innovation that didn't stick from prior year. We are seeing continued growth for Seriously Indulgent and Walmart. Obviously, we're looking for distribution opportunities beyond Walmart and that's the plan in the back half of this year and into '19. And then on the core set, I mean the core SKUs are performing strongly. If you look at the natural channel, we're up mid-single digits. They're doing very well. And it's still the most efficient product on shelf in terms of in the category, the actual performance of our core set is very strong. So distribution push on that core is still the biggest opportunity for Greek Gods, and that's where we're spending our energy. So I still think we've got great products and where they're available, they're doing well. We have to improve the availability, and that's our focus.

Got it. And on profitability, again, in the U.S, first of all, like Celestial turnaround has been outstanding. So the numbers you reported are impressive but that didn't translate into the margins. And my question on margins is really most of the companies that do SKU reductions, especially to the extent that you're undertaking, have a pretty significant positive profit benefit pretty early on. And we haven't -- we have definitely not seen that in your results. So just trying to gauge that. I mean should that be an expectation going forward? Or is there something structurally different you think with Hain that, that transformation is not going to be margin and profit-accretive?

So from a margin perspective, as we work through it, it should be -- but it's being masked by some of the headwinds that we've talked about. So we are starting to see the benefit. Those are lower-margin SKUs. So as we cycle through this, you will see the benefit of getting out of these SKUs.

And our last question comes from the line of Rupesh Parikh from Oppenheimer.

So in your prepared comments, you discussed additional private label, I think competition or maybe more product additions within the MULO+ C channel. I'm just curious what you guys are seeing from a competitive front -- on the private label side and also from other brand players.

So Rupesh, good morning, good question. Listen, and again, meeting with retailers, the comment on private label and being asked to manufacture private label because of the supply, I think retailers have really jumped into private label because what they saw out there were conventional brands were not changing to more healthier products, were not innovating and not supporting their brands. And they've said why should they make the margin where they're not investing, and that's not what the consumer wants today and we can do it better with our brands. And with that, what it creates for Hain and what it's doing, there is a private label brand and you see with Kroger and 365 have built and other retailers, but they also want brands. It's not a race to the bottom in regards to private label. They want brands. And I think as we've met with every one of our customers in regards to how we revitalize the center of the store, how we have healthier products, how we have different packaging, how we want between private label and branded natural organic products to replace some of these conventional products that consumers are not buying today. So that's why you see retailers jumping into more and more private label and coming up with some great products.

And then one more quick question. Just you called out freight and other cost I don't -- seen that from a number of other players. Is there an ability to pass through these higher costs as the year progresses? Or it's this the environment that right now (inaudible) to do that?

Absolutely. And I think it's something that's happening throughout and we are doing that as we go through pricing. It's not only freight, higher vanilla cost, higher butterfat cost, as I've said. But we're in the midst right now of pushing some pricing through because of freight and seeing how we can do that because it is something that's -- just did not happen last quarter because of hurricanes. There's a shortage of trucks, shortage of drivers. The other thing as we go through some of our Project Terra, as we look at our lanes and reformatting that, how we're able to take cost out of it and how we're able to ship by rail. But if you come back and look at Hain and it's $2 million, $3 million a quarter, it's a lot of dollars that we really are looking at from a freight standpoint. And the other thing is what we're doing right now with retailers, we're working with them on how to ship directly from our factory, how they're picking up, how we're using some of their backhauls to try and get some cost out. It's an industry issue and we're all trying to deal with it but we're going to have to take some pricing because of that.

Thank you, everybody, for your comments today. Hopefully, everybody had a chance to look at our press release, listen to our comments. Listen, there's a lot going on here. There's a lot of transformation. I think the team has showed what we can do. Things don't happen overnight. We've invested close to $10 million between SG&A -- in the SG&A between marketing people. In the trade spend, you can't just pull the plug on trade spend and offset one and sort of say I'm taking it out of trade spend. It takes time. In regards to the U.S. business, whether it's Celestial, in regards to our packaging overhaul, MaraNatha, Earth's Best, Terra, Garden of Eatin', Avalon Organics, we've shown how we turn brands around. And things happen out there unfortunately. And you get back and say, well, it's another thing. It's another thing. Sensible Portions, unfortunately, we had a product issue. It's a great product. We have great distribution opportunity. And you heard what I said before, as the conventional snack category declines 5%, they want healthier products, healthier snacks. And Garden, Terra and Sensible Portions are opportunities there. So I really feel we got the portfolio to drive growth both at brick-and-mortar, both at Pick 'N' Click and both at e-commerce and that's where the growth is. So as they say in the hockey, you go where the puck is and that's where the puck is going today.

In regards to our strategy, yes, we are redefining our strategy, looking at the portfolio. We have made an announcement on Hain Pure Protein where does it make sense to streamline, where is it going to make sense to SKU at. And that is something the working group, the board will continuously look at and do. In regards to people, and with that, we today have some of the best team in place. It takes time to get everybody up to speed. In regards to the U.S, there's almost a completely new team.

In regards to shareholders and returning to shareholders, it's something that we'll continuously do. In regards to what happens with the dollars in divesting Hain Pure Protein, in buying back our stock, investing it, paying down debt but there is -- as you look to our leverage today, there's a lot of bandwidth here in regards to whether it's doing other acquisitions, buying back our stock, paying down debt. And what I say is we are not starting from a white paper. Think about the 24 brands that we own around the world today and think about what we have to offer and what consumers want.

So with that, I close this call thanking everybody. Some of you I hope to see at the natural organic food show in Anaheim in March, which we will introduce and parlay some of our great new products, innovation that Gary talked about, both on food, personal care. And I look forward to discussing more about Hain with those that are going to be attending CAGNY. And last but not least, I hope when you're out there buying, you think of Hain and buy one of our products. With that, have a great day and be safe out there. Thank you.

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