Hain Celestial Group Inc (HAIN) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hain Celestial Announces Third Quarter Fiscal Year 2018 Earnings Results Conference Call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Mary Celeste Anthes. Ma'am, you may begin.

Thank you, Ashley, and good morning, everyone. Thank you for joining us today.

Today, we'll be commenting on Hain Celestial's third 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 with us today.

Our discussion today includes 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 and presentation, all which are posted on our website at www.hain.com under Investor Relations.

The conference call is being webcast and an archive of the webcast and accompanying presentation 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.

I'm very pleased with the continued performance of our international business this quarter. We delivered mid-single-digit net sales growth, outpacing most packaged food peers, along with solid profitability improvements. Our international business is growing and becoming more profitable every quarter as Project Terra cost reductions are taking hold in Europe. As a result of the planned divestiture of Hain Pure Protein, international now represents about half the company's net sales today.

In the U.S., I'm disappointed with our results in the quarter. Our top line still reflects the tail from products outside of the top 500 SKUs, which declined double digits. We completed the discontinuation of more than 700 SKUs, and we have begun to accelerate a more aggressive SKU program, the 2018 Project Terra SKU rationalization. We believe this action should eliminate these declines and finally allow us and our metrics to reflect the strength of the Hain core brands. Our profitability in the U.S. is not what we expected and we know and we can do better.

We've been working with the team from AlixPartners to significantly improve our margins. Unfortunately, like many other companies, increased freight, commodity cost and labor offset Project Terra savings that were delivered. We have implemented price increases to help partially offset the increased costs and we expect price increases and Project Terra cost savings to improve our margins in the future quarters.

Back in June, we talked about investing $40 million to $50 million on brand building and we stayed on course with this plan in order to drive growth and build brand awareness. I believe you'll see the results of our investments in the coming quarters.

If you don't invest in your brands, they won't be around in the future. We believe that brands still and will matter and so does the connection of our brands with our consumers. We remain committed to the 4-point plan, which is include -- 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 on the strategic plan; and last but, of course, not least, returning value to Hain Celestial's shareholders.

As we've discussed on prior calls, our working group, along with management, has been working closely with our advisors to review our portfolio of businesses, brands and operating strategy to maximize value for our shareholders. We continue to evaluate alternatives to enhance the value of our assets for shareholders and will report on further decisions as appropriate in the future.

We announced last quarter our intention to pursue the divestiture of one of our noncore assets, Hain Pure Protein, a leading 100% organic and antibiotic-free fresh poultry business in the U.S. As a result, HPP is now being treated as a discontinued operation for reporting purposes and will no longer be part of our earnings or future guidance. We have a robust level of interest in HPP and we expect to complete the sale process during the first half of our fiscal 2019. We expect to use the proceeds to pay down debt, buy back stock or pay a special dividend as well invest back in our business.

Now let's focus on our third quarter results from continuing operation, which, again, excludes Hain Pure Protein. Our worldwide net sales reached $633 million, an 8% increase compared to $589 million in Q3 last year. Adjusted EBITDA was $73 million, essentially flat with the prior year, reflecting higher brand-building investments and higher freight commodity and labor costs. Adjusted EPS of $0.37 compared to $0.35 in quarter 3 last year.

While our international business is sometimes overlooked, this is a big focus for our company. In the U.K. market, there is a big emphasis on brands and health and wellness and (inaudible). In Europe, with over 600 million people, where our plant-based organic and natural products are doing extremely well. And of course, in Canada, which continues to generate very good results for us.

Our U.K. net sales growth of 19% primarily reflects 20% growth from Tilda, 27% growth from Ella's Kitchen and 17% growth from the Hain Daniels brands with strong, strong performance from Hartley's, Linda McCartney, Cully & Sully and New Covent Garden. Hain Celestial Brands Canada net sales grew 12% and were driven by Yves Veggie Cuisine, Tilda and Live Clean brands. Hain Celestial Europe was up 25% and had strong growth from Joya brands, Danival, along with other private label products. The EMEA region was up over 30% off a low base, but what an opportunity for us to sell a lot of Hain products in that market, along with our Tilda brand.

Our joint venture with the Future Group in India is proceeding as planned and we expect that our Terra plant to be operational in the first half of our fiscal 2019. In China, we're working to expand our distribution network to target key e-tailers and also work with our partner, Hutchison Whampoa, to increase our distribution throughout China.

You see in the recent announcements from India and the bids from Walmart and Amazon to buy Flipkart, India will be the next frontier, like China, in e-commerce. Given Hain Celestial's strong performance with Amazon in the U.S., our roots in India with Tilda, we believe we can capture incremental growth in that market and half of Amazon sales in India are expected to come from food.

In the U.S., results continue to be challenged and we're not yet growing at the level we believe we can achieve. The first part of our 4-point plan is investing in our brands, which we have been doing. To this end, we're beginning to see the benefit of our investments with improving tend -- trends in MULO+ C and on measured channels as well as in the April 22 scanner data.

Our U.S. team continues to diligently work on the strategic plan to drive growth of our top 11 brands and our top 500 SKUs while further implementing 2018 product -- Project Terra SKU rationalization that Gary will take you through in a few minutes. We have 27 brands that are either #1 or 2 in their respective categories and geographic regions and it is imperative that we invest behind those brands to drive value for our consumers and customers and shareholders.

In meetings that I've recently attended with our key retailers and e-commerce partners, they appreciate the increasing level of support we are providing behind our brands. To that extent, we have recently picked up over 38,000 new distribution points in the U.S.

Products that deliver on health and wellness are a major focus of our retail and e-commerce partners today and around the world. Hain Celestial remains incredibly well-positioned with our organic, natural and Better-For-You branded products. As a point of reference, our online consumption with key customers is up solid double digits.

Now moving on to the second part of our plan is executing on Project Terra cost savings and productivity improvements. We delivered approximately $25 million of savings in Q3, which included HPP. These savings are in line with what we set out to achieve as we close in on our target of $100 million for this fiscal year. As part of Project Terra this quarter, we announced the consolidation of 2 of our soup manufacturing facilities in the U.K., which should be completed by the second half of fiscal 2019. From the overall opportunity to enhance our profitability, we expect $30 million -- $37 million in cost savings contribution from Hain Pure Protein for fiscal years 2019 and 2020. With the planned divestiture of HPP, I've tasked the global team with finding additional opportunities in the rest of the business.

At Hain Celestial, we consistently done a phenomenal job of maintaining a strong balance sheet while other companies are leveraging up with debt to achieve growth through acquisitions. 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. I believe that with a new focused sales organization, a strong operational team working with AlixPartners and strategic brand investments, when combined with our pricing action, we will get the U.S. definitely moving in the right direction. We acknowledge these efforts will take some time to yield results, but we are encouraged with what we are seeing in our business.

Over the last 25 years, I have never seen so much change in demand as I do today for natural organic healthy products and also in the way consumers are purchasing and shopping. We've created an incredible company with incredible brands at Hain Celestial. We've been a visionary in the organic natural products industry and we're still leading the way. We've made a lot of progress on our business and transformation with the greatest opportunity still ahead. I want to thank all the Hain employees that have been able to get us there and will continuously get us to the next step with all their great work.

With that, I will now turn it over to Gary to take you through our U.S. strategy. Gary?

Thank you, Irwin. Good morning, everyone.

We acknowledge that we remain in the early innings of realizing our full growth potential. Our U.S. team continued to take steps to execute on our strategic plan during the third quarter to grow our top 500 SKUs and Hain Celestial's top 11 brands, which represent 93% of our sales today in both measured and unmeasured channels. While we're not pleased with the rate of our improvement, we have made incremental progress in key areas of our business, a few of which I'll highlight today.

We recognize we're in a competitive environment where we are seeing cost headwinds and shifts in retailer dynamics and priorities. Importantly, consumers continue to seek our natural and organic and Better-For-You products, so we remain well-positioned to drive long-term success.

Our core strategic priorities remain unchanged. We are doubling down on our efforts to: firstly, simplify our portfolio; secondly, reduce cost and complexity and mitigate the cost of headwinds; and thirdly, focus on our core 11 brands and top 500 SKUs.

In this quarter, you will see we've taken clear and consequent actions to address each of these strategic imperatives. We will continue on this path through the remainder of the fiscal year and beyond as we continue to transform this business to create a stronger core for future growth.

We are starting to build positive momentum in our outlook on core distribution from our most recent round of retailer line reviews. We've already confirmed over 38,000 new points of distribution across a range of retailers for core SKUs, which have an impact in the FY '19. This comes on the back of the brand investments that we have executed in FY '18, along with our new sales force structure and capabilities we've invested in others last year, which have taken time to build but are now showing Hain is starting to deliver tangible results in the U.S.

While we've not yet seen these initiatives translate into our measured channel numbers, I believe we're in the beginning of the inflection point in our MULO+ C numbers. And given the increased distribution points and the brand investment we've been making, I believe we will see continued improvements in those numbers during the fourth quarter and into fiscal 2019. The measured channel numbers may be inconsistent as we aggressively further reduce our noncore SKUs, but we expect to see continued improvements over subsequent quarters.

We've also acted decisively to mitigate cost headwinds. We've implemented price actions to help partially offset the increased costs and expect such savings to impact margins in fiscal '19.

Turning to the net sales trend. U.S. net sales were down 2.9% for the third quarter. Excluding SKU rationalization, which is inclusive of the further Project Terra rationalization identified on this call, the divestiture of Rosetto and inventory realignment, which is a total of $11.1 million, quarter 3 net sales were up 1% year-on-year.

Turning to our price/mix and volume. We saw a slight decline in overall price of 242 basis points, a benefit of mix of 88 basis points and negative volume impact of 138 basis points. We invested an additional $7 million year-over-year in quarter 3 in trade and marketing programming and incurred significant headwinds which affected our margins. This drove a reduction in our year-over-year EBITDA of $8.8 million, below our expectations.

We also recognized top line net sales impacts of approximately $11 million from the following key brands. Sensible Portions net sales were down $4.9 million year-over-year as we lost additional distribution from one large mass customer in March. To mitigate the impact of this lost distribution, we have strong incremental programs for Sensible Portions in the fourth quarter including club programs and expanded distribution in non-measured channels. We expect our new product innovation to offset some of the impact of this loss and to be the basis of future growth. We have also fully addressed the supply chain constraints that have affected us in the last quarter.

Secondly, Spectrum net sales were down $2.3 million, driven primarily by the continued category decline of coconut oil. As we look to continue to diversify our oils business, in quarter 3, we experienced growth of 5% for Spectrum olive oil, which is a part of our core oil range.

The Greek Gods net sales were down $2 million and this was primarily on the back of lost distribution on multi-serve packs in a category that is experiencing softer overall performance, with Greek and specialty yogurt category down 1.7% in the latest 12 weeks. The core 6 Greek Gods 24-ounce SKUs are flat in dollars and up in -- 5% in units.

Rudi's Organic Bakery net sales were down double digits or $2 million as a result of lower velocities and some distribution losses. Our new DSD models for Rudi's fresh bread with a new product formulation commenced in late quarter 3 for the northeast region and we're encouraged by the early authorizations received. In addition, one major customer, Babies"R"Us, ceased trading during the quarter. Year-on-year, our sales were down $2.3 million, which was partially offset by sales in other channels.

Turning now to our top 11 brands. On the back of our investment strategy, we experienced positive results for certain brands in quarter 3 and we expect to gain more traction of our momentum in quarter 4 and fiscal year '19. Four of our top 11 brands posted solid increases in net sales versus quarter 3 last year and one was essentially -- one brand was essentially flat.

Alba Botanica personal care net sales were up 10%; Celestial Seasonings tea net sales were up 7%; Imagine soups and broths net sales were up 4%; and Earth's Best food and infant formula net sales, excluding diapers, were up 4% or, including diapers, up 3%. In addition to our top 11 brands, our fiscal year '17 launch of Live Clean continued to show very strong momentum with the business more than doubling year-over-year for quarter 3. In Avalon Organics and Arrowhead Mills, net sales were up double digits.

In summary, we're pleased to see the results of sustained brand investment in Alba Botanica, Earth's Best and Avalon Organics all showed positive signs of driving sustained growth and we're very pleased with our strong Celestial Seasonings turnaround.

Our team is diligently working to reduce business cost and complexity, including the rationalization of lower-margin SKUs. In quarter 3, our U.S. business results reflect the continuation of this portfolio transformation.

Near-term, it will take time for us to work through further planned SKU optimization. However, we believe these actions will result in a higher quality, more profitable U.S. portfolio that will be better positioned to drive sustainable growth.

As a result of this ongoing review, we added approximately 430 additional SKUs to our rationalization program for a total of over 1,100 to-date. We expect these additional SKUs to be phased out of our portfolio by the end of fiscal year 2019, representing approximately $40 million of net sales reduction in fiscal '19.

In total, SKU rationalization represented $16 million drag to quarter 3 U.S. segment net sales versus prior year and $12 million of which was from the incremental SKUs we added this quarter. This impacted growth by 5.8%. In the fourth quarter, we expect the impact of SKU rationalization to be $10 million net sales drag to quarter 4 segment versus prior year, which we expect will impact growth by 4%.

Now I'd like to focus on our third quarter consumption data for the U.S. business. In MULO+ C, our top 500 SKUs were down 4% for the 12 weeks ended 3/25/18, which will be the time period referenced throughout unless otherwise noted.

Celestial Seasonings bag tea was up 4% in the last 12 weeks in MULO+ C and an even stronger 5% growth across all channels. This continues to underline the promising results we have seen from the continued brand investment plans we've implemented. These are similar to the types of investments we are now making across other core brands, so I'm optimistic we'll see positive impact on our growth in our core brands over the coming quarters.

Arrowhead Mills is up 5% as the packaging relaunch and distribution expansion continue to perform. Imagine soups and broths were up 3% on the back of well-received innovation. And Live Clean was up 187% as expansion and velocities continue to grow on the back of good brand support and investment.

More broadly, our MULO+ C performance was particularly impacted by a few factors -- a few key factors. Firstly, the ongoing loss of additional distribution at Sensible Portions at one retailer, which is a 20-point brag -- drag in the 12 weeks increasing to a 2-point drag in the latest 4 weeks. This skews the data because the brand grew 4% in all other MULO customers.

The coconut oil category was down 21% and this represents 50% of our MULO dollar sales for the Spectrum brand. And the category weakness was a 50-point drag on MULO sales.

MaraNatha was down 17%, primarily due to private label distribution expansion and aggressive price promotions, resulting in a 40-point drag in MULO velocities in a category that was flat in dollars. On the positive side, MaraNatha continues to grow in the non-measured channels, up 2% in the latest 12 weeks, with new authorizations already gained from our innovation in a large mass retailer in fiscal '19.

As I mentioned earlier, we recognize the current competitive environment is very dynamic. For quarter 4, our team has strengthened our position in MULO+ C and unmeasured channels with $15 million of incremental promotional programs versus our prior plan, being implemented now across a number of brands and retail customers. This will include in-store demonstrations, targeted digital activation with loyalty programs and other in-store activation.

We've already started to see the early impact of some of this activity with improving MULO reads in recent weeks. However, we expect our results to continue to be uneven in the measured channel in the near-term as we aggressively take out noncore SKUs.

We believe these incremental programs and some core SKU distribution guidance will help drive improved trends in MULO+ C in quarter 4 of fiscal '18. Our target and expectation for the end of quarter 4 are for our MULO+ C growth rate to be around flattish and that will certainly better position us for growth in fiscal '19.

Turning now to non-measured 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 2% in the non-measured channel from the latest 12 weeks ending 03/25, with a strong acceleration in the latest 4 weeks to 13% as the timing of club programs take effect and the trends in the natural channel continue to improve in the quarter for our top 500 SKUs. When we look at the overall performance of our top 500 SKUs across all channels, they're down a net 1% in consumption dollars in the latest 4 weeks and down 2% in the latest 12 weeks.

E-commerce was up double digits in consumption sales across our full range of top brands off a small base today. The shift to online and mobile remains a clear strategic focus for us and we continue to invest ahead of sales in solutions to drive our future growth.

So for the fourth quarter of fiscal 2018, we will expect to see short-term operating profit challenges as we continue to battle cost headwinds. The plan already executed to mitigate them with pricing actions will drive trial of our key brands with an additional $15 million consumption driving spend program versus our prior plan, which will impact our quarter 4 operating income by approximately $10 million and generate momentum across our core brands that we expect to feed into fiscal '19. We'll commence strong club programming for personal care and new permanent programs for snacks in quarter 4 that will also feed into fiscal '19. We'll continue to invest on e-commerce expansion ahead of sales with expected double-digit growth. And we will continue our SKU rationalization program and reduce complexity and impact gross margins by 40 basis points. And finally, we'll continue to drive Project Terra initiatives expected to deliver $8.3 million in quarter 4, including working with major manufacturing partners to eliminate key input cost headwinds we faced in fiscal '18. While these short-term investments and actions on our portfolio have an impact to our financial performance, we firmly believe these decisions set the Hain U.S. business up for a stronger long-term growth platform with momentum leading into fiscal '19.

That concludes my overview. And I'll now turn the call over to James.

Thank you, Gary, and good morning, everyone.

First, as we referenced in today's earnings release, during the third quarter, the results of operations, financial position and cash flows related to the Hain Pure Protein segment are presented as a discontinued operation for the current and prior periods. I will focus my discussion on our financial results from continuing operations unless otherwise noted.

For the third quarter, consolidated net sales increased 8% to $633 million or 2% on a constant currency basis. When adjusted for constant currency, acquisitions, divestitures and certain other items, net sales would have increased 3%.

Adjusted gross profit was $146 million or 23%, a 62 basis point decline. This decline was due to higher freight and commodity costs and increased trade investment in the U.S. segment as well as higher commodity costs in the U.K. segment. These headwinds were partially offset by an improvement in operating efficiencies achieved in the U.K. and Rest of World segments and Project Terra cost savings of $19 million.

SG&A as a percentage of net sales was 13.4%, a 50 basis point increase, primarily due to higher marketing investment in the U.S., U.K. and Canada, partially offset by Project Terra savings.

Adjusted EBITDA was down 2% to $73 million from $75 million in the prior year period.

We reported adjusted EPS of $0.37 based on an effective tax rate of 21.6% compared to $0.35 in Q3 last year based on an effective tax rate of 31.3%. The lower tax rate resulted in a $0.04 benefit.

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 underlying financial results.

U.S. adjusted gross margin declined 240 basis points year-over-year to 25.5%, largely due to the key items I previously mentioned, including higher freight and commodity cost and increased trade investment, partially offset by Project Terra savings. U.S. SG&A decreased primarily due to Project Terra savings, partially offset by higher planned marketing of $2.5 million. Accordingly, U.S. adjusted operating income decreased to $35.9 million from $44.3 million as we continue to invest in the U.S. business to drive future growth.

In the U.K., net sales increased 19% to $238 million over the prior year period or 5% on an adjusted basis. Adjusted gross margin improved 220 basis points to 19.9%. This improvement was driven by operating efficiencies, price realization, Project Terra savings, favorable FX, partially offset by commodity inflation. We continue to review our operations for cost savings, evidenced by the consolidation of our soup operations. U.K. adjusted operating profit increased to $20.8 million from $14.1 million in the prior year.

Net sales for Rest of World increased 15% to $113 million over the prior year period. It was 6% on a constant currency basis, with Canada and Europe growing high single digits. Adjusted gross margin within the Rest of World segment was flat at 23.3% and adjusted operating margin increased 140 basis points to 10.9%. The sales growth in addition to operating efficiencies, Project Terra cost savings and favorable currency drove the increased profitability in the Rest of World segment.

Now turning to our cash flow and balance sheet. For the third quarter, capital expenditures were $23.7 million and operating free cash flow was $15.3 million, a decrease of $16.6 million from the prior year period. The change in operating free cash flow was primarily due to increased capital expenditures in the current year as we continue to invest capital to gain efficiencies as well as a decrease in GAAP earnings in the current year period.

At March 31, our cash balance was $117 million and net debt was $632 million, which is a $4 million improvement from the prior year period. Our bank leverage ratio was 2.89x at the end of Q3 2018, down from 3.28x in Q3 2017.

Now moving to fiscal 2018 guidance. Please refer to Slide 25 on the earnings call presentation on our website where we have provided a reconciliation of previously communicated guidance, adjusted for the exclusion of HPP.

We are reiterating our annual net sales guidance. We expect net sales in the range of $2,434,000,000 to $2,503,000,000, an increase of approximately 4% to 6% as compared to fiscal year 2017. On a reported basis, we are expecting the U.S. to be flat to slightly down, while the U.K. and the Rest of World are expected to grow high single digits to low double digits.

Based on a continued investment in marketing and brand awareness, which will amount to $40 million in fiscal 2018, as well as freight, commodity and inflation headwinds that will exceed $40 million in fiscal 2018, we are updating our adjusted EBITDA and earnings per share guidance.

Adjusted EBITDA in the range of $250 million to $260 million, reflecting $64 million of Project Terra savings, which excludes $25 million of HPP savings. These marketing investments, which will occur primarily in the United States, in the short term are negatively impacting our profitability. However, we firmly believe that while we rationalize SKUs, it is critical that we invest in our core brands to fuel long-term top line growth and we are committed to staying the course on these investments.

Adjusted earnings per diluted share in the range of $1.11 to $1.18, which includes an $0.08 to $0.09 benefit due to tax reform. We expect our effective tax rate for fiscal 2018 to be 24%; estimated interest and other expense of $27 million; and estimated depreciation, amortization and stock-based compensation of $75 million.

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 $105 million to $125 million and we expect capital expenditures to be approximately $75 million. Our previous guidance included a forecast of approximately $25 million of cash flow from operations being generated by HPP.

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, which 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 fourth quarter of fiscal year 2018 and we are confident of achieving our net sales and updated profitability results.

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

(Operator Instructions) Our first question comes from Rupesh Parikh of Oppenheimer.

So maybe first to start off with HPP. I know the deal is expected to close in the first half of next year, but at this point, do you expect the net proceeds and what you're going to redeploy in the business or share buybacks to offset the dilution associated with the transaction?

So Rupesh, as I said, there's 3 places: Buyback, pay down debt, a special dividend and invest within our business. So I think each of those are an option. And buyback is way up there as an option.

Okay. Great. And then, maybe a question for Gary and Irwin. As you look at the U.S. business, I mean, clearly a step back here given some of the macro challenges out there. How are you -- as you guys look forward, how are you guys thinking about, like, the intermedia operating margin targets or the potential improvement from here as you look out the next year and beyond?

So I think the big thing here as we look out -- and, Rupesh, I think the easiest thing -- and a lot of companies when they've hit the headwinds in regards to freight, labor and COGS, they cut their spending. And I think the most important thing is we're seeing tremendous wins, tremendous opportunities. We put through a very good price increase and got it through.

So going into 2019 and 2020, we feel good about getting some better growth in the U.S., #1. And I think what's important in the U.S. as you look at our business from a growth standpoint, ex-SKU rationalization, Gary talked about Babies and Toys"R"Us and losing Sensible Portions, so I think, putting the numbers together, what our true growth was in the U.S. is #1.

Number 2 is we've invested $40 million more this year than last year, mostly coming in the U.S. So A, I feel good, going into '19, we're going to get some good growth. I feel good that we got our costs -- our price increase through. Most companies have not got a price increase through. That will offset a lot of the headwinds.

The other thing is, working with AlixPartners and the team here, we've taken a lot of costs out and it takes time to get these costs through. So we're looking for that margin improvement and that growth going into 2019 in the U.S. business.

Our next question comes from Amit Sharma of BMO Capital Markets.

James, just a quick one for you. So the EBITDA for HPP business through the first 3 quarters, do you have that number? Just trying to reconcile the $48 million number that you put in the press release for the full year?

Yes. So year-to-date, it's approximately $26 million of EBITDA.

Okay. So you're expecting a pretty big jump in the fourth quarter?

Right.

Okay. Got it. And then, Irwin, just talking about the U.S. business, right? I mean, you talked about much higher incremental investment this year. But as we look to '19 and '20, what's the right margin base for this number? I mean, if you look at '17, margins are down by almost 250 basis points versus last year. As we look to '19 and '20, is that the right margin structure or do we expect it to get better?

Absolutely, we'll get better. I think, #1, Amit, is, this year, SKU rationalization will improve margins. Taking a price increase will improve margins. And just in regards to streamlining our business and taking out co-packers, that will help our margins tremendously. And one of the things affecting us is mix in our business and how that's changing from brick-and-mortar to e-commerce and our investment there.

So as we move forward, I've said we'd like, in our U.S. margins, a 3 in front of it. And there's a lot of plans in place. If you don't invest in the brands and the growth, and we believe we have the brands and the growth -- we have the brands that can grow, what consumers want.

We've taken some price action to get price increase. Unfortunately, this year, we have got some tremendous Project Terra savings, but they were there -- they were supposed to be used for spending on the business and dropping to the bottom line. Unfortunately, the majority of Terra savings were spent on our marketing trade programs and offsetting some major headwinds that come after us like most other consumer packaged goods companies. But going into '19, I think we got much more visibility, we got price increase and we've done a lot with our plans and co-packers to take costs out.

Got it. And then, one for Gary. A very quick one, Gary. Celestial Seasonings, you moved some of the spending from Q2 to Q3. Can you give us an update? How did that go? Or how did it perform -- the brand performed in the quarter?

Yes. Yes. Absolutely. No, we're extremely happy with the results of it and I think it is a great example of the work the teams are doing in having a very disciplined approach to brand investment.

In the quarter 3 campaign, we had a 3-part digital program which was considered best-in-class by Facebook and over 56 million impressions; a very strong increase in purchase intent, up 17%; 32% lift on unaided brand recall. And as a consequence, you're seeing a flow through into the results that we've had for Celestial through the tea season.

And in addition to that, we're running a further program which is in market as we speak. It's exceeding expectations as well, a very targeted digital-based program for consumption-driving activity. And we're seeing in the latest read that we're outpacing category growth. We're up 4.5% versus the category 2.8% in the most recent read with good incrementality.

So we're very pleased with the work that's going on. And if you think about, this is a massive turnaround of this brand from where it was just 18 months ago.

And, Amit, what it shows is we know how to build brands. And I think in regards to 2 years ago, where our packaging change was and in a competitive category and what's happened with Celestial, it's a great success story and shows what we can do with the rest of our brands.

I mean, just a lot -- I mean, that's not so much in doubt. I think the question that I'm getting is what do you have to pay for that? I mean, look at the guidance decline this year, it just seems like the price to change the trajectory of top line is probably steeper than what we were expecting it to be.

Well, I can say in the case of tea, our profitable -- profitability performance is improving year-on-year. The investment is absolutely paying out. Obviously, there's timing differences between when you invest and when you get returns. For any investment you make in marketing plans, you have to invest ahead of the growth. That's equally true from that channel plans with e-commerce. But ultimately, this is a long-term play. You build brands over days, weeks, months and years, not just as a one shot.

And I think if I take a couple of other examples just to sort of prove that out, you see what's happening to Alba Botanica. The Do Good, Do Beautiful campaign was another great example of how we continue to build that brand out. 400% lift in digital and social media impressions, 43% lift in household penetration and increased -- and aided brand awareness. This is another example where consistent and persistent support behind the brand is generating velocities and returns and giving us opportunities in new channels with new product offering.

So it's about the sustaining. You've got to start the flywheel somewhere. You have to make the investment to start the flywheel turning. Then ultimately, then you have to keep moving along with that. And then, your payout are over the medium term, of course, as you start to see your brand awareness lift and your trial repurchase lift.

Our next question comes from Alexia Howard of Bernstein.

So, I guess, my question is what deteriorated since the CAGNY presentation? That was in February. You are halfway through the quarter. What's a little alarming is that the margin guidance or the profitability seems to have deteriorated versus what we thought what's going to happen this year then. I know you're taking pricing. Would love to hear how much and when that's likely to kick in. And what gives you the confidence that fiscal '19 could be a return to profit growth rather than being another transition year?

Well, first of all, Alexia, I think CAGNY was in the middle of February. And it's not what's deteriorating. If you look at 4 -- going into Q4, the big thing for us is we continued to spend and will continue to spend. It was very easy to pull back and stop the spending. But as we look to taking price as we met with our retailers and put price increases in front of them, and it's not that easy to get pricing through today, it was important to show it was not just to price to drop to the bottom line or cover costs, it was price to invest back in our business and invest back in our brands. So that, #1.

Number 2, in regards to some of the categories and slow down, I think it's just from a timing standpoint in regards to when sets are reset and getting the new sets in place. And as Gary talked about and I talked about, we got over 37,000 new distribution points, okay? So it's -- the other big one is just additional headwinds coming at us in freight, labor and COGS that we thought some of the Project Terra savings that would be able to offset them, just weren't coming through as we had planned.

Gary, on the pricing increases...

Yes. I think a few additional points, Alexia, just to note. In terms of category performances, we've seen softer category performances than we had anticipated. I mean, that part is now essentially flat. It's not growing at the moment, which was not really our expectation. Greek specialty yogurt is actually down. It was up 3.2% in the latest 52 weeks, but down nearly 2% in the latest 12. So it's definitely become a softer category. And we expect the coconut butters to plateau. Even though it had a 4% in the 52, we expected that to plateau, but in fact, that decline just continues, around minus 20% down in the last 12 weeks. So some of the category dynamics have definitely shifted. The SKU rat impact, of course, is a little higher when we finally finished this work. That's definitely had an impact in our business. And we would say that some of the other challenges in some of the businesses we're working on and investing in now, we've seen our promotional performance is a little softer. It's harder work in nut butters, oils and Rudi's, which is something that we are working through in quarter 4, obviously, with our investment plans, but these are some of the dynamics that are definitely influencing the results.

And the magnitude of the costs -- I'm sorry, of the price increase, is it low single digits, mid-single digits, high?

It's low single digits. And it's timing. And it happens in our fourth quarter, the end of the fourth quarter. And we were able to get it through. And it went effective -- it was announced in late March and most of our retailers have worked with us on it on timing and promotions, et cetera.

Our next question comes from David Palmer of RBC Capital Markets.

Just a question on SKU rationalization and the journey you've been on. Could you talk about your evolution in your thinking about what is the defendable and expandable core? What has been the total reduction since you began the process and when you think it will be over? And what's your confidence that the recent doubling down will be the end of this process?

Great. So as I indicated in my remarks, we're now at around about 1,100 SKUs that have come out. Our focus absolutely is on the top 500 SKUs and the top 11 brands and to obviously have a very strong core set that we take to market across all our channels. What's encouraging as you see when you pull out those most recent reductions, just the delta around growth and the impact that they have in the business.

And in addition to that, I should point out, when you look at the MULO results, and I know you can read the TDP trends here, the TDP trends for us are around about -- down around about 7% in the latest 12 weeks. More than 40 -- 470 basis points of that drag is just in the most recent SKU rationalization. So you can see it's a substantial drag not just in our top line performance, but it's also a drag in our core TDPs. If we flip it around and talk to what's happening as a position of strength in our business, we have 3 businesses in very good shape: personal care, tea, baby performing well, and even Snacks is performing well outside of the recent distribution losses across whole channels.

So what we can see is we have a core set now that we can defend and grow from. And the investment plans in quarter 4 are targeted very precisely around trial and consumption repeat for those specific brands. And I think we're at a point now where we feel good about the size of the portfolio we have and the range. And we're demonstrating to retailers that we're having a more efficient core range, which is ultimately what they want as well. One of the early movers on that was our tea business where we've definitely got less SKUs on the shelf than we had in prior year. We were very consequent with our actions in taking SKUs out. We have a stronger core set and it's actually performing better per point of distribution with a smaller set. And ultimately, that's the best outcome all around.

So I think we're in good shape now with the -- this transition that we're working through. We have a very strong base to work from. And ultimately, it will pay dividends not just for us, but also for the retailers to see a strong core set. And it's on that back that we see the points of distribution gains we're getting because they, too, had belief that this is the right core set to put in their stores.

That's helpful. I mean, with regard to your investments that you're making, if any specific examples you're making where you are focusing on those core brands and you're making some -- what's the nature of those brand investments? Whether they be new product news and sort of in-store marketing or other types of advertising, that would be helpful.

Yes. Sure. So the one that's in market today already is with our tea business. It's operating through a digital loyalty card, loyalty-based targeted program, highly targeted. It's been extremely effective. It's actually totally beat the metrics we anticipated. That's one example. We'll have in-store sampling for our nut butters, which is really about gaining trial. We think we've got a fabulous product. The most important thing is to gain trial in store point-of-purchase. We'll have other activation programs again in-store around targeted brands, but it's going to touch our pantry brands, it's touching our tea brands, it touches our snacks brands primarily, so it's our core grocery lines and it's across a range of retailers. So we'll have different individual activation tools by retailer as we see it works best for that particular retailer, but the idea is we're trying to drive trial and consumption and ultimately generate repeat purchase. So it's a very targeted in-store activation or digital activation on loyalty programs.

Our next question comes from Pablo Zuanic of SIG.

Look, 2 questions. One, when we look -- I understand on the adjustments, we have to make to scanner data because of timing of promotions and SKU rationalization. But when I look at your like-for-like sales growth this quarter, up 1%, previous quarter, down 5.4%, the scanner data did not imply an improvement, right? In both cases, it was down about 8%, 9%. So it means that there was significant improvement in the measured channels. You said, I think, e-commerce was down. So I'm just trying to understand the very erratic nature of the unmeasured channel for you because I think the adjusted growth in September was 0; adjusted December, minus 5; now March, plus one. But again, the scanner data, those 3 quarters were minus 6, minus 8, minus 0.9 -- minus 9%, sorry, so obviously very erratic. So that makes me think is there a lot of pipeline feel? Is there a lot of onetime promotions that helps in numbers in non-measured channels, but then we go back to another quarter where numbers are down? Just give us some context there because it just seems to me that, for whatever reasons, the performance in non-measured channels for you has been very erratic quarter-to-quarter.

And the second question is very simplistic. When I look at the EBIT margin decline in the U.S. unit, how much of that is reinvestment? And how much of it is just gross margin squeeze from what's happening in the market, whether it's freight cost or commodities or your prices being down 2.4%?

Okay. Good morning, Pablo. So I'll tackle your first question, which is around the unmeasured channels.

And I just want to clarify one point. E-commerce is not down. It's growing double-digit as I indicated in my earlier remarks and it's broad-based across a range of e-retailers, not just one of them.

But to your point on unmeasured channels, we had some shifts in programming, which we had called out previously, related to one large club customer. It was just a shift in the timing of a program. And, of course, those programs are big. When they're national, they can make significant changes to your quarter-on-quarter results. But more generally, our unmeasured channel growth has been strong and is getting stronger. As I called out, again, in my comments, most recent 4-week read at 3/25 was the top 500 were growing at 13%. And again, it's a reflection of program timing, but if you think about the large club customers we have in those channels, one of the good news pieces for us is we've got incremental permanent programming for some of that snacks business. So we've cycled out, if you like, just a seasonal program into a permanent program. So it will be in over 280 clubs every day for Terra. So that's a new program and that's a permanent fixture of unmeasured channel growth that we'll see. We're seeing broad-based improvement across our e-com retailers, which will continue. So it really -- the major, let's say, transitional pieces are just between the seasonal programs that you have, and we will continue to have those around some of our summer programs for Alba for example, and also our permanent programs which are coming into play. But overall, unmeasured channels continue to be strong.

And in the measured channels, the scanner data, as I called out, SKU rationalization, of course, is a big drag both in TDPs and in the top line numbers you see. So that's the big point of reconciliation that impacts scanner data that you can see.

Pablo, does that answer your question? I think the big thing is he said -- I'm not sure, from a data standpoint, the unmeasured channels, but -- where you're getting that, but just a correction, we are growing in e-commerce. We are growing in club. We are growing in supernaturals. And I think the adjustment there was the SKU rationalization, which Gary said it's about...

Onetime.

It's almost like a 4-point drag on that.

In regards to the margin piece, Pablo, as I said earlier, from a margin standpoint on spending and the margin point on COGS, I'll let James take you through that, but it is substantial. That's where it's all coming from. So go ahead, James.

So we got about -- in the U.S., we got about $9 million of Project Terra savings. We invested about $7.5 million between trade and below the line marketing. And then between freight, commodity costs and other inflation costs, it's about $10 million of headwinds. So $9 million of savings, $7.5 million of investment with $10 million of headwinds, so that's the real hit to the gross margin.

If I can ask a very quick follow-up. When I do -- when I do start talking to investors and I try to show them what you have, franchise strength, sometimes I struggle because I go to a yogurt section and Greek yogurt is one of many there in the organic section. And even organic, it's not big for yogurt in total. Just very high level, trying to -- I mean, yes, you talk about the top 11 brands, but in terms of what we see on the shelves in terms of space, in terms of what I would call franchise strength, can you maybe run those 11 or just highlight the ones where you think you really have significant strength? You've lost some space, but okay, some of that has been SKU rat, I understand that, but just if you can big picture comment on that.

Well, I think the core ambition and the strategy we've laid out, the top 11 brands that we're calling out are the most important ones, the ones that we believe have a serious brand franchise opportunity. You've seen already we have businesses such as personal care, whether it's Avalon, Alba. If you have a look at the results that we're getting for Terra Chips outside of just the measured channels, but the unmeasured channels as well. Sensible Portions is a fantastic franchise. It suffers just one situation with one major retailer. I think across our top 11 brands, they all have a reason to be on the shelf, have a reason to play. That's our opportunity, getting down to a tighter set, stronger focus and a resilience to drive those top 11 brands. We'll make this a much stronger unit to fight for growth in the future. But for sure, ACV, availability and trial and repeat is still our tremendous opportunity with these brands. As you point out, that's a good news for us. Now we've got to get on and make sure that we make that happen.

And these brands have different strength and significance in different retailers and I think that's what's important, too. As you look at natural organic versus online, in online, we're very strong with baby, very strong with personal care. If you look at Whole Foods today, we have over 1,200 SKUs authorized in Whole Foods and Sprouts. You look at a Walmart and Kroger, they're 2 of your strongest Greek Gods customers. So I think it's by customer, it's by class of trade, Pablo, where we have our strengths.

And back to Gary's point, other than Celestial, which has our strongest ACV, and probably Earth's Best, there's a lot of white space out there for us to gain. And as we talk to retailers today, whether it's soda, whether it's conventional snacks, whether it's conventional baby, where there is declines, there is opportunities. And listen, one of the things we go up against is private label. It's not other brands. And that's why if there's going to be private label, we got to be that other brand. And how do you become that other brand? You've got to invest in it and also show what is the significance of your brand. And when you walk into meetings with retailers today, they know how much you're spending on your brand. They're not going to be the builder of your brand. They rather build their own. So that's why it's important for us to invest back in our brands.

Our next question comes from Bill Chappell of SunTrust.

This is actually Stephanie on for Bill. I was just going back to the guidance update. Could you break it down? So there's -- the adjusted guidance, once you take out the EBITDA guidance, once you take out HPP, could you kind of bucket what goes to higher freight and commodity costs? What's the incremental spending? What's the softest category just so we can have a kind of better idea?

And then, secondly, just looking at -- this is the second quarter in a row we're seeing Sensible Portions, Spectrum and Greek Gods all down mid-teens or double digits, which I think you cited to various reasons. Should we expect to see an improvement kind of in the fourth quarter or starting in fiscal '19? Just some more color there would be helpful.

So on the breakdown on the investment is about $40 million plus. The headwinds are $40 million, $45 million as we see them now and that's being offset by about $64 million of savings in Project Terra in the U.S. So we have excess of about $85 million, $90 million of investment and headwinds being partially offset by the $64 million savings in Project Terra. Gary?

So just on the question regarding the performance of the business. We have incremental programming activity in snacks, pantry, baby, tea and yogurt coming in quarter 4. I do expect improved performance. Sensible Portions will have expanded distribution in a couple of key retailers for us in quarter 4 as well as an everyday program that we're running. And we have some new innovation going into the market in the natural channel as well for organic straws for the first time, which is also another driver for us. So I expect to see some continued improvement for Sensible Portions.

And if I look at the most recent reads outside of the 2 big retailers or the retailer we lost distribution in, we can see that, that performance continues to improve. I think the most recent read was around plus 9%, plus 10%, so that's continuing to gain traction. So yes, it's all -- this incremental programming we're putting in quarter 4 is very much targeted, as I said earlier, to these specific top brands to drive trial and consumption growth.

And I think what Gary said is Sensible Portions is growing in grocery. Our main SKUs, Greek Gods are growing and some of the new innovation that didn't work. And listen, we're trying to get that distribution back that we lost at that major customer with Sensible Portions. And if not at that major customer, we're looking to grow at grocery. As Gary mentioned, we're coming out with organic Sensible Portions that will expand into natural organic food stores and supernatural. So it's a great brand with a great product so there's great growth to get that -- great opportunities to get that distribution back.

Our next question comes from Scott Mushkin of Wolfe Research.

This is Mike Otway in for Scott. I guess, Irwin and Gary, in terms of the U.S. business, so the company is clearly working really hard to improve performance there, but high-level, kind of stepping back, what do you think are the biggest reasons over the last few years that Hain's business kind of is where it is currently? Kind of what -- now take us back, what's happened and why do you think you guys find yourself at this point currently?

And, I guess, my follow-up to that would be once you move beyond the targeted sales initiatives, broadly speaking, what do you think believe needs to be done to grow the top line at a more robust rate? Is it driving more mindshare with consumers, stronger household awareness? Just trying to think big picture why do you think the business is where it is currently from a few years ago? And then, what are the kind of the big things that needs to be done to drive growth at a faster clip?

So maybe I'll take the last part of the question first because I think it's the most interesting piece of where are we going. Absolutely, the opportunity for us is to drive brand awareness and household penetration. And if you think about the historical growth of this business, it was very much in the natural channel, if you like the unmeasured channels in its past. We are now seeing natural organic products transition across to core retail sets in conventional retailers where, in some cases, maybe a brand is not so well-known compared to some of the existing core sets that are on the shelf.

So the opportunities to drive trial. It's to drive new consumers to try the product, put out our brand in the repertoire and enjoy it. It's also to drive a lot more additional trial and awareness through e-commerce, which is where a lot of our future consumers are going first to look at what is the best product. They're looking at ratings, reviews. They're looking to try the products there first based on what they see as clear evidence of success. So our ability to drive trial is not just through traditional means that you might have done in terms of marketing advertising, but also how we activate the consumer throughout our e-commerce and digital space, which is where we are spending a lot of time and energy. And I think that's an extremely big opportunity for us because it's a way to reinvent the business in the current context of how retailing is done.

And at the same time, we are seeing a resurgence of what's happening outside of the conventional channels, what's happening in the unmeasured channels, whether it's through club customers or whether it's through Whole Foods and the joint partnership now at Amazon, we see tremendous opportunity to leverage both of those pieces as one

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in our shares in many places in this e-com space, whether it's click-and-collect or pure online. So I think this is really going to be how we will meet the consumer's needs and drive that awareness and penetration from today and beyond and that's why we're putting our energy into this space.

And I think what we said originally, I've never seen so much change in the market in 25 years. And it's just health and wellness has gone mainstream. There is a big, big target audience to go after. The investments are higher, which we have to support. And last but not least is streamlining the brands and the products. Where one time, we had 25 different brands within a Whole Foods and Sprouts, now it's taking your top 11 brands, investing in your top 11 brands and taking complexity out. But as I've said, I've never seen the more -- the demand for health and wellness as it is out there today. I've never seen the opportunity to grow the business, but you've got to support your brands more than you've ever had. Before, you used to be able to stack them high and watch them fly. It's now support your brands and invest back in your brands. And that's what we're doing to make sure our brands are relevant and have a reason for being.

With no further questions, I'd like to talk turn the call back to Irwin Simon for closing remarks.

Thank you, operator. Thank you, everybody, for listening to our comments today.

I know it was a tough, tough quarter for us, but we are making significant headway. We are creating a lot of value within our brands. We will absolutely take these products to the next level. You've got to invest, as I said. We are working on our Project Terra. And with that, the thing is here within Hain is that we have the products that consumers want, but we need to make sure is, A, consumers know our products and want to buy our products and come back and repeat, and that's by investing in them.

With that, I -- it is melanoma month. I go out and ask everybody to make sure you put suntan lotion on, especially Alba, Avalon or JASON's. With Memorial Day coming up, you'll enjoy our Sensible Portions great new snacks, our Terra Chips, our Garden of Eatin', along with barbecuing, our FreeBird products or Empire products. We do have a lot of great products out there and I love to hear any feedback from our shareholders or anybody else.

With that, I got to thank, again, all our employees around the world that are working diligently and hard to make all of these things happen at Hain. And I thank you for your support. I look forward to speaking to you soon. Have a great day.

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