Mary Celeste Anthes - Hain Celestial Group, Inc. Irwin David Simon - Hain Celestial Group, Inc. Gary W. Tickle - Hain Celestial Group, Inc. James M. Langrock - Hain Celestial Group, Inc..

Andrew Lazar - Barclays Capital, Inc. Kenneth B. Goldman - JPMorgan Securities LLC Stephanie Benjamin - SunTrust Robinson Humphrey, Inc. Akshay Jagdale - Jefferies LLC Amit Sharma - BMO Capital Markets (United States) Scott A. Mushkin - Wolfe Research LLC Alexia Jane Howard - Sanford C. Bernstein & Co.

LLC Andrew Wolf - Loop Capital Markets LLC David Palmer - RBC Capital Markets LLC.

Good day, ladies and gentlemen, and welcome to the Hain Celestial Announces First Quarter Fiscal Year 2018 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Ms. Mary Anthes, Senior Vice President, Corporate Relations. Ma'am, you may begin..

Good morning, Skyler, and thank you all for joining us today. We are pleased to report Hain Celestial's First 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 Hain Celestial's management team are 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 at www.hain.com under Investor Relations. This conference call is being webcast, and an archive of the webcast, and an accompanying presentation will be available on our website under Investor Relations.

Our call will be brief, so please limit yourself to one question. If time allows, we'll take additional questions, and management will be available after the call for further discussion. Now let me turn the call over to Irwin Simon.

Irwin?.

Thank you, Mary, and good morning, everyone. We appreciate you joining us today. We hope everyone had an opportunity to review our press release that was released this morning.

We're pleased to report a solid first quarter results, which met our expectations for net sales profitability across all our segments as we continue successfully execute against Project Terra initiatives.

In a highly dynamic consumer packaged goods world – and I say dynamic and highly changed and highly changeable, the retailer environment – we've had tremendous progress on our focused customer-centric, go-to-market initiatives, including the benefits of our SKU rationalization, increased brand investment in the U.S.

We've also had good execution against our strategic initiatives by Hain Pure Protein, our U.K. business, our European business and our Canadian business. While Gary and James will take you through our results in more detail, I want to speak to a few highlights of the quarter.

Our worldwide net sales increased 4%, driven by double-digit growth from Earth's Best, FreeBird, Hartley's, Spectrum, Alba Botanica, JASONs, our Linda McCartney brand, Yves Veggie Cuisine, Avalon Organics, New Covent Garden Soup, Arrowhead Mills and Live Clean; also, growth coming from our Sensible Portions, Tilda, Terra, Imagine, Ella's Kitchen, Lima and our Sun-Pat business.

Our net sales growth combined with solid gross margin expansion helped us grow adjusted EBITDA to $59.5 million from $45.6 million in the prior period, and earnings per diluted share of $0.19 compared to $0.08 in the prior period, or $0.23 on an adjusted basis compared to $0.14 in the prior year.

The natural and organic product category continues to grow mid single-digits across the U.S. and our natural conventional specialty channels.

Hain Celestial is uniquely positioned to succeed in this category with the scale of our diverse portfolio of organic and natural brands, the infrastructure we have in place and the opportunity to increasingly benefit from our strategic investments that we've already made. In this quarter, the U.S.

segment grew net sales 4%, with double-digit increases from Earth's Best, Spectrum, Arrowhead Mills, Avalon Organics, JASONs and Live Clean, and other consumer products, Imagine, Sensible brands. Gary will talk more about our brand investment and the timing of our consumer products later on.

We strategically are working with all our customers to drive category growth and household penetration. In the U.S., our brands reached 57.4 million in the last 52 weeks, an increase of 1.3 million households versus a year ago. Household penetration needs to increase to drive sales growth.

Much of the growth we're seeing from customers like Whole Foods, Amazon, Sprouts is the results of planning earlier in the calendar year where our teams work with their category management teams, and we're seeing a core product assortment now being optimized on shelf, executed consistently across the store base.

We believe that our brand investment should create even greater opportunities for our customers to drive sales of Hain Celestial products. As I've said before, I continue to believe there are a lot of positives from Amazon's acquisition of Whole Foods, and we're seeing the benefits already.

Those of you who subscribe to Whole Foods' global newsletter saw yesterday that Arrowhead Mills was cited as one of the top food trends in 2018. And those of you that are in stores this weekend probably saw a full six-foot display of our flours and other Hain products, and hopefully you bought some.

In the UK, a tough market, net sales were up 4% in constant currency, adjusted for acquisitions and divestitures, driven by growth from Linda McCartney, Hartley's, Sun-Pat, New Covent Garden Soup, as well as profitability from our fruit business and growth from our Ella's Kitchen and our Tilda brand.

I'm pleased to see the growth coming from our brands in the UK, and we'll continuously look to drive brand development and plant efficiencies to enhance our margin profiles there. One of the initiatives we identified is the exit of our chilled dessert business from our Fakenham facility starting in November.

This exit should be completed by February 2018. We plan to relocate the capacity to support the growing demand for our plant-based, meat-free Linda McCartney brand, which was up 23% in the first quarter. We continue to see opportunities in India, Middle East and believe, by 2020, the Middle East and India could represent $100 million in net sales.

We also see these opportunities in Asia. I recently attended the World Food India where I met with Prime Minister Modi to express our commitment to invest and work together on expansion efforts in the region, from purchasing, procurement to selling more products in the IMA region, namely India, Middle East and Africa.

As you know, earlier this year under strategic joint venture with the Future Food group, a leading retailer in India, we broke ground on a snacks plant, which we expect to open in May of 2018.

In Europe, net sales were up 10% in constant currency, driven by double-digit growth from our Joya brand, our Danival brand, along with strong growth from Tilda, and our private label offerings of plant-based milk products.

In Canada, net sales were up 13% in constant currency, driven by Yves Veggie Cuisine, a strong, strong brand; Sensible Portions; Tilda; Celestial Seasonings; and our Personal Care brands. The Canadian team has done a great job of taking these brands and building from the ground up to where they are today.

In Canada, we just announced the expansion of a new Yves plant to fulfill the needs of our growth of Yves Veggie Cuisine. The new plant will enable us to provide both capacity to the East and West Coast in the U.S.

Lastly in Cultivate, and as we talked to you about investing in these brands that were smaller brands, in the quarter, Health Valley, DeBoles and Hollywood and GG Crackers showed good growth. BluePrint has some big plans, and watch out for this brand to grow tremendously as we look to launch many, many new products.

We like what we're seeing in Cultivate, and we like some of the new innovative acquisitions that are coming the Cultivate way. At Hain Pure Protein, we have strategically converted more of our poultry products from antibiotic-free to organic. Hain Pure Protein overall net sales increased 2%, with FreeBird and Plainville Farms business up 6%.

FreeBird was up nearly 20%, benefiting from our new facility. We are completely sold out of chicken capacity already. Empire Kosher declined by $2 million with more sales attributed to the prior-year period due to the timing of the Jewish holidays.

Our Plainville Farms turkey brand decline was due to overall lower pricing and our decision in a reduction of conventional turkeys.

With operational challenges now behind us at HPP, we're excited about the up and coming holiday season in which we expect to deliver somewhere between 1.5 million to 1.8 million turkeys, and this all happens in this next two weeks. So please place your order early for your Plainville turkeys.

Now moving to Project Terra global cost savings and worldwide productivity initiatives, we delivered approximately $16-point (09:46) million in savings this quarter versus $6.6 million in the prior period, in line what we set out to achieve this quarter.

As we move towards our $100 million for the year, we used approximately $6 million to invest in brand marketing mostly in the U.S. and $3 million to offset higher freight and commodity costs with the balance falling to the bottom line. Our savings came from our COGS, head count, HPP live costs, manufacturing and various operations.

As in the past, our productivity savings are typically higher in the second half of the year based on actions we've taken the first half.

A few examples of these actions included the exit of the chilled dessert business manufacturing at Fakenham which I just talked about, as well as the recently announced closure of our West Chester, Pennsylvania facility in early January. Over the last 24 years, we have assembled one of the most attractive portfolio of assets in our space.

Looking forward, we will continue to evaluate all opportunities to build upon our platforms, strengths and eliminate complexity and enhance margins, including accretive acquisitions and non-core divestitures.

I believe that tremendous value remains to be realized given the strength of our brands, our growing product, Project Terra and our people and our loyalty of our customers and consumers. We're excited with what's ahead for Hain, and we're in the early innings of our business transformation with the greatest opportunity ahead.

We'll continue to enhance our leadership. Steve Liedtke just joined us as our Chief Information Officer most recently from WhiteWave. Julie Bowerman, most recently at Coca-Cola, joined us as our Senior Vice President of Digital Engagement and E-Commerce, overseeing our digital strategy, including customer and commercial development.

Last but not least, we've made some major changes on our board in line with our strategic commitment to enhance the leadership team throughout the business. The Board of Directors has established a working group to aggressively evaluate our portfolio of businesses, brands and operating strategy to return capital to further enhance shareholder value.

Lastly, I'd like to thank all our directors for their various contributions and I look forward to working with our new independent directors who provide diverse, valuable industry experience to the company. With that, I'd like to turn the call now over to Gary to take you through the U.S. business. Thank you..

we're executing against our strategic plan for growth. We're seeing solid momentum of the top 500 SKUs across our channel view, offset by declines in the remaining 7% of consumption in our portfolio which we are addressing. We're seeing continued growth in unmeasured channels with strong e-commerce inertia.

We're continuing our investment in consumer communication ahead of growth, and we are reiterating our financial 2018 outlook of low to mid single-digit sales growth and low double-digit EBITDA growth for the Hain Celestial U.S. business. I look forward to meeting with many of you in the coming weeks and to continue updating on our U.S. business.

Thank you, and I'll now turn the call back over to James..

Thank you, Gary, and good morning, everyone. We are extremely pleased with our first quarter financial results which were in line with our expectations. We ask that you refer to our GAAP to non-GAAP reconciliation tables and the press release for additional information on our financial results.

As previously discussed, effective July 1, 2017, Ella's Kitchen was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment through the changes in our internal management and reporting structure. All prior period data has been adjusted to reflect this new operating and reporting structure.

Ella's Kitchen represented approximately $85 million in net sales in fiscal year 2017. The solid momentum we achieved during the first quarter provides us with even more confidence that we are on track to meet our sales and profitability guidance for fiscal 2018.

Net sales for the first quarter performed to our expectations at $708 million, a 3.9% increase compared to $682 million in the prior year. On a constant currency basis, net sales increased 3.3%.

Adjusted gross margin increased 220 basis points year over year, driven by more efficient trade spend in the United States, price realization and operating efficiencies in the United Kingdom, and improved profitability at HPP.

SG&A as a percentage of net sales was 12.8%, a 30 basis point increase primarily due to increased marketing investment in the U.S. in both personnel and advertising costs as we continue to focus on brand awareness in our U.S. business.

Irwin and Gary discussed the top line highlights for our business segments, so I'll provide you with more of the underlying financial results for each segment. In the U.S., while gross profit increased by almost 10% year over year, operating income was down slightly from the prior year. As discussed previously, the U.S.

business is investing to build brand awareness and consumer engagement to fuel growth and profitability in fiscal 2018 and beyond. We expect profitability in the U.S. to significantly improve in the back half of fiscal 2018.

At Hain Pure Protein, the actions we implemented in fiscal 2017 have positively impacted sales and profitability, as we went from a $1 million operating loss last year to a $3.6 million operating profit this year.

In the UK, our operating income improved by nearly 40%, driven by a 200 basis point improvement in operating margin within our Hain Daniels business due to price realization and operational efficiencies. Operating income within the Rest of World segment increased almost 80%.

Both Canada and Europe achieved excellent results, with sales in both segments growing in low-double digits at constant rates. The sales growth, in addition to operational efficiencies and favorable currency, drove the increased profitability in the Rest of World segment.

We are pleased to report adjusted EBITDA of $60 million for the first quarter, and we're on track to deliver $350 million to $375 million adjusted EBITDA for fiscal year 2018. We earned $0.23 per diluted share on an adjusted basis, in line with our expectations, compared to $0.14 in Q1 of 2017.

As a reminder, Hain's first quarter has historically been the smallest quarter of the fiscal year. The effective tax rate was 28.5%. Now turning to our cash flow and balance sheet.

For the first quarter, capital expenditures were $15 million and operating free cash flow was negative $34 million as compared to negative $2 million of operating free cash flow in the prior-year period. The decrease in operating free cash flow was primarily attributable to an increase in inventories at both Tilda and HPP.

We deliberately built rice inventory at Tilda to take advantage of favorable pricing. At HPP, inventories increased as we prepare for the Thanksgiving holiday. At September 30, our cash balance was $127 million and net debt was $638 million, which is a $100 million improvement from the prior year.

Our bank leverage ratio decreased to 2.94 times at the end of Q1 2018 from 3.11 times at Q4 2017. Building off the momentum in Q1, we are pleased to reiterate our fiscal 2018 guidance, including net sales in the range of $2.967 billion to $3.036 billion, 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 UK and the Rest of World are expected to grow mid to high single-digits.

Adjusted EBITDA of $350 million to $375 million, an increase of approximately 27% to 36% compared to fiscal year 2017, which reflects $100 million of Project Terra savings, including annual productivity, and an increase in brand investment of $40 million to $50 million primarily in the U.S.

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 a $1.63 to $1.80, with an expected tax rate of approximately 30%. We expect interest and another expense to be approximately $25 million.

We expect depreciation and amortization and stock-based compensation expense of approximately $80 million. Now turning to our outlook for fiscal 2018 cash flow. Based on fiscal 2018 EBITDA expectations, we anticipate cash flow from operations of $235 million to $270 million, and we expect the capital expenditures to be approximately $75 million.

With respect to the cadence for the remainder of the fiscal year, from a sales perspective, we continue to expect Q2 to be our strongest quarter, with the third and fourth quarter essentially consistent with one another. 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 which will continue to identify with our future financial results. In summary, we are pleased with the solid momentum we experienced in our first quarter of fiscal year 2018.

We expect significant contributions in fiscal 2018 from top line growth and margin enhancement while also making important investments in the business. Thank you very much. And with that, we will now open up the call for questions.

Operator?.

Our first question comes from Andrew Lazar with Barclays. Your line's now open..

Good morning, everybody..

Good morning..

Morning, Andrew..

Good morning, Andrew..

Hi. So a quick one, Gary. Thanks for all the detail on a lot of the consumption in measured and non-measured.

I guess if – the one thing that came across as you talked about is, we're looking at 12-week versus the 52-week, as you mentioned, the gap between scanner and obviously shipments sort of widened quite a bit and you went through a lot of the detail.

If you had to, I guess, boil it down to sort of the key just two or three things that you think have led to that widening, and then maybe when we should start to expect to see the data come a little bit more in line with what shipments look like would be helpful. And then I've just got a very quick housekeeping one for James.

Okay. So I think first thing I'd say, if we have a look at MULO+C data, we certainly do expect it to improve.

But in terms of the alignment to the overall business, the overall projection for the year from my side is, at the earliest, we'll start to see better reads start to come through in quarter three, simply because of some of the things we're cycling.

I mentioned on the call that I expect that we would see stronger performance in the unmeasured channels for the balance of the year. We may have a flat to slightly negative full year performance in MULO+C, so it will be the unmeasured channels, just because of the dynamics of how the business is performing, will be the stronger driver of growth.

And so we won't see all of that turn up in MULO+C in fiscal 2018. To your question around the widening, I think this is – it's an interesting time, we're definitely seeing the consumers shifting channels. They've obviously got a lot of opportunities now.

There's a lot of new news coming with what's happened with Amazon and Whole Foods that's brought traffic back to that category. And as I mentioned, we're seeing online growth moving very fast for us, growing very quickly.

So I think this channel blurring is going to continue, and it's part of the reason why we see divergence because I don't expect, anytime soon, our online business to slow down. If anything, I expect it to accelerate.

And I would also point out that the work that we've done – the teams have done with some of our big non-measured channel partners is really starting to pay dividends. We're seeing good solid performance across all of our key platforms with them, and I expect that to continue.

So I think this is just a function of how we're going to see this channel blurring occur for the consumer in the coming quarters..

And, Andrew, I think it's important, Hain always had a big business outside MULO, whether it's Whole Foods, whether it's Sprouts, whether it's the independents. And if you look at Amazon and Whole Foods today, 2% of overall sales of food go through there.

So you think about it, $800 billion, that's $16 billion of food sales that are now going through there that five years ago was not there. So that's where we're seeing it.

And I think you once asked me where are the sales going and the shift, and whether it's the Thrives, whether it's the Boxed, whether it's the FreshDirect and our other online business, that's where we're seeing a tremendous shift. And I think as you look at our business today, it's probably 58%, 55% is MULO and the rest is other channels.

So there's a big shift going onto our business from other channels..

Great. Thanks for that. And then, James, just a quick one. If we wanted to adjust on our own sort of last year the next three quarters for the shift in Ella's from the U.S.

to the UK, you gave us the sales number for the full year, is there a way you could do that for EBIT? I know it's a lot smaller, but just to give us a sense of what we would need to think about adjusting out and into the other segment from EBIT?.

So I'll give it to you for Q1 on the operating income, Andrew, if that helps. So their operating income in Q1 for Ella's was about $3.5 million..

Okay.

And no reason to think that was usually volatile over the course of the year, necessarily?.

No. It's pretty consistent, Andrew..

Great. Thank you very much..

Our next question comes from Ken Goldman with JPMorgan. Your line's now open..

Hi. Thank you so much. One question from me to start. You talked a little bit more about the portfolio review.

Irwin, can you give us a little more color as to what you're looking at, what the goals are, what maybe some of your larger investors are thinking about? I'm just trying to get a sense of what the key variables will be in terms of what you really think of as core and what you may think of as more valuable to outside the firm..

Thanks, Ken. So a couple things, how you take complexity out of the business is number one. Let's come back from the UK business. In the UK, private label is a big part of business over there, but our private label contribution is 6%, 7% on EBITDA, where our branded business is 18%.

Do you focus on branded or do you have the right mix there? But there's a lot of overheads that our private label business absorbs over there. If you look at our protein business, and it's a hot category, and you recently saw Hormel just paid a tremendous price for a protein business, a lot of complexity.

And with that, is it better off in someone's hands that's already in that business? And there's numerous assets, whether they're smaller assets, that are moving more towards private label, are they more into the DSD businesses, so do you streamline our businesses. So that's what we are looking at, Ken, taking out complexity.

Where is – there's risk in every business with commodities, where are higher risks in commodity business, and where are the growth areas? And the other thing from an acquisition standpoint, where are the up and coming new categories? How do we focus on plant-based, which is becoming a bigger, bigger part of our business, whether it's our Yves business, our non-dairy business, our snacks business, our personal care business, BluePrint in the drinks business.

So we're in a lot of businesses, are we putting enough dollars against some of those high growth areas and focus on 10 brands instead of the number of brands we have. So that's some of the stuff that we're working on right now..

Great. I'll let it go there. Thank you, Irwin..

Okay..

Our next question comes from Bill Chappell with SunTrust. Your line's now open..

Hi. Good morning. This is actually Stephanie on for Bill. I just have a question on the U.S. segment, Gary.

And just kind of gapping the reported sales growth in consumption, unless I heard this wrong, it sounded like measured channels were down, call it, mid single-digits during the quarter and then unmeasured performed much better, but it was really only up 1%.

So I'm just looking to get a little bit more color on how – I know obviously there's a difference between shipments and consumption, but kind of the drivers of the 4% growth. Thanks..

Yes. So as I mentioned – thank you for the question – was that in this quarter, we were essentially flat on the top line if you take out the impact of the cycling of the SKU actualization, the exit from Rosetto, and also the inventory realignment from prior year.

So obviously the balances between what you see in the measured scan data, which is significantly negative, and the balance of that of course is all in unmeasured channels, which is getting us back to flat.

And of course, the trajectory of the non-measured channels is where we're seeing stronger performance, both with our major customers in the non-measured channel and also online. So that's essentially how the two balance out..

Thanks, and that's really helpful. And then as we look for the remainder of the year, are there any other inventory realignments or kind of big one-time items that we need to be aware of just for modeling the quarters going forward? And that's it for me. Thanks..

Yes, so this is James. So they'll (41:24) have a similar impact in Q2, and then in three and four, inventory realignment is de minimis. But you'll still have an impact in Q2 similar to Q1..

Thanks so much..

Our next question comes from Akshay Jagdale with Jefferies. Your line is now open..

Good morning.

Can you hear me?.

Yes, we can hear you..

Good morning..

Good morning..

Perfect. Hey. Good morning. First one's again for Gary, so thanks again for all the color, but as we think of the cadence for the sales growth going forward, so you mentioned excluding the SKU rationalization, et cetera, it was flattish growth – or flat growth. Your guidance is for, I think, low to mid single-digits top line growth.

So how should we think of the cadence of this going forward, right, assuming it's going to accelerate on a reported basis? I mean, can you give us some color, because there so many moving parts in the year ago period with the inventory realignment et cetera, just to help us model like cadence of the sales growth as we go through the year.

And then the EBIT growth, because if you're going to have a similar EBIT performance in 2Q, which is down slightly, let's call it, year over year, then in the back half, you're going to have to see pretty massive margin expansion. So can you just help us with that? And I have one follow-up..

Okay. So, a lot of questions there, but I think the first one is in terms of cadence, we see quarter on quarter improvement in growth, and that's very much how the plan was built. We knew this plan had to be developed with the transformation in business and why and where the investment was front half-weighed, the growth was back half-weighted.

There are a number of factors we can go into why that is the case, but basically the investment plan is front half-weighted and that's why we see our EBIT relatively flat in the first two quarters, but we expect improvement of that as that balances out for the following two quarters and the growth picks up. And that's just how the model was built.

That's at a very high level. Obviously, there's a lot of detail by brand and by category as to how those pieces are built out, but that's the expectation from the business so the cadence was back up..

And the growth acceleration on the top line, is that on a reported basis or excluding the SKU rationalization or both?.

I always talk through reported basis here..

Okay. Perfect. And just one on HPP, your guidance basically implies you're going to get back to fiscal 2016 levels in that business on EBIT.

In fiscal 2016 in the first quarter, you made $10.5 million; second quarter, $19 million, I know there's a lot of money to be made in the second quarter and the next couple weeks, but the first quarter seems to have been a little bit below expectations.

Are we going to make all of that up in the second quarter? Is that the expectation or am I missing something? Thank you..

Well, first of all, you heard what I said before just on HPP, on Empire, and timing there during the holidays. The second thing is a big part of HPP is our chicken business, which was up 26% and continues to grow.

And yes, there's a big reliance on Thanksgiving, but one of the things we've talked about in our total protein business, how we're moving more and more into deli for their process ground. But between Empire's growth, between our chicken business growth being up 26%, and our growth in other turkey products.

And some of the cost savings that are coming out of HPP, we feel good about making some good moves in the back half of our protein business..

Perfect. I'll get back in queue. Thank you..

Our next question comes from Amit Sharma with BMO Capital Markets. Your line's now open..

Hi. Good morning, everyone..

Good morning..

Gary, a very quick question for you.

When you talk about low to mid single-digit growth in the U.S., are you comparing that to 3.7% growth in the quarter or are you comparing that to the flat growth in the quarter?.

No, no, it's always to reported growth, so it's to the 3.7%..

Okay. Got it. Perfect.

And then as we think about greater growth in the non-tracked channels, right? Historically, you've thought about those channels as maybe less margin or lower margin businesses, I mean just generalizing it, compared to the measured, is that still the case or has your profitability increased in those non-tracked channels?.

Yeah, I think you have to understand the mix in the non-measured channels is changing, so whatever may have been historically stated may have changed because, of course, you've got a mix now between online, we have strong natural players who've come up and resurged, if you like, in the unmeasured space, and in between, we've got club and a couple of other specialty players as well.

So I don't think of it as being a massive margin dilution by virtue of being in our measured channels.

It does obviously depend on ultimately the mix of products you sell in those channels, and that's part of the work we're doing on the curation of our top 500 and how we focus on those in our measured channel, but I'm not seeing it as a choice for margin dilution just by moving it to unmeasured, no..

So just maybe a little bit modest dilution but not massive. And then just one more for Irwin. Irwin, lots of conversation around retail pricing and not just in Whole Foods and Amazon but overall retail and how brands may be losing some of their cachet.

When you talk to your customers, are you hearing anything from their demands for more pricing concessions in order to hold on to the shelf space or any other changes in how business has been done in those channels?.

data and content. And good content or good brands and good products, and supporting your brands and driving household penetration will drive sales.

It's not about price, price, price anymore, and I think on commodity items, it is, but organic products, natural products, I think it's important that you get out there and you bring awareness to your brands. Now, price is important, you can't price them 20%, 30% higher than a conventional, but consumers got to know your brand.

And every retailer that I've met with at senior levels, one of the reasons they're moving to private label is they feel that a lot of the other consumer packaged goods companies are not investing in their brands, not innovating in their brands, and they're saying why we should we pay a premium, then let's go out and do a private label because our brand may be stronger..

Got it. Thank you so much..

Our next question comes from Scott Mushkin with Wolfe Research. Your line's now open..

Hey, guys. Thanks for taking my question. So I kind of want to go back to the growth rates just to make sure I understood what was said, and then I actually had a question. So the U.S. business grew 4% in the quarter roughly, I think that's what you guys reported.

Is that correct?.

Yes. That's right..

Okay.

And then I think you also said in the 12-week period ended 10/18, the measured channel which is take away from retailers, fell 6.5%, and then the unmeasured channel – I think I got this number right – was up 1.1%?.

We're talking about the top 500 there, Scott, was up around 1% across all channels..

Yeah. Okay. Okay so I guess maybe I'll just take it offline. I'm just trying to square – I guess I'm trying to understand the take away versus the ship-in, if there's a mismatch there and understand the 4% growth (50:39).

Yeah. So what we said was, Scott, that basically we are flat in the quarter on top line, net of all the impacts I referred to. So if you treat this very simply, the 6.5% that you're seeing in measured channels is offset by the unmeasured channel performance..

Okay. I think I'm going to follow up offline. I don't want to waste a lot more time on that, I know we talked about it.

So my second question is the brand building and vis-à-vis I think you called out Arrowhead Mills and the display – I think Irwin did – the display in Whole Foods, and the product just looks incredible there, and it's such an incredible product too.

So was just wondering if you could talk about, A, how you go about building the brand? Do you think 5% like kind of commitment from a revenue perspective is still the right number? I know Ella's in the UK was built for a lot less than that.

Then I also wanted to understand how you think about your brand portfolio vis-à-vis where you want to put those brands. I know Arrowhead Mills also is moving into Walmart and that seems to be interesting, given how much success it's having at the Whole Foods-Amazon platform.

So I was wondering if you guys could talk to your brand building and your philosophy. Thanks..

Yeah, sure, and it's a good question, and obviously one of our key focuses here is improving household penetration and the awareness of our brands. The organic and natural space is certainly interesting to consumers, and for those who are crossing over from conventional brands, this is a whole new world for them for many of them.

They don't know the brands well. They're not so familiar with them. So a big part of our work is really on just the initial consumer engagement and driving brand awareness. Now to give a live example of some of the work that's going on for MaraNatha.

We've just done our first round of research just to understand how that initial read has worked out, and six weeks results, we can see already the purchase intent has gone up for the product. The aided brand awareness has gone up by 71%, that's just in the six-week read from the first round of work we've done.

And this is the type of work we're doing both for MaraNatha. We've started for Spectrum. We did some work for Imagine, and there's more work to come. This is extremely important because we have brands here that are valuable brands that are not necessarily well-known to a number of consumers.

So that's the initial build point for a lot of these brands to raise their unaided awareness and aided awareness, and then ultimately from there, you can start to build out the story for these brands so the consumer has a richer and deeper understanding of what these brands stand for.

The beauty of Hain is we have really rich stories to tell, and that's ultimately our ambition is to tell these stories in a meaningful way because we know consumers in this space care about the history of the brand, the provenance, and ultimately the back story of the company that supports them.

And this is something that's truly unique for Hain is that this is all we do. This is what we're passionate about. This is what we do every day. And for the consumers who find us, try us, buy us and understand this, this is something they're passionate about. It makes them more loyal. So it's the typical brand funnel build.

In terms of investment, I think this is something that's interesting and changing in the world we're in today.

Share of mind is the most important thing to get, and how you get it today is very different from even five years ago, how you engage consumers online in a place where they're listening and they're interested, how you interrupt them and tell them something that's relevant to them is changing a lot, because a lot of it's done on a mobile screen, frankly, rather than on a television or a billboard ad.

So the spend levels are going to be different by brand depending on the nature of the interruption. And I don't put a magic figure or percentage anymore because I think those traditional metrics were fine when you were very much in a TV and print space.

But now when you're thinking about page search terms, you're talking about being part of native content, you're being part of ratings and reviews, the cost base can look very different by brand, depending on what you're trying to achieve. I'll give you one example. Today, our brands turn up very strongly on Amazon.

Our average rating is over 4.1 out of 5 stars, which is an excellent position to be in because that is effectively media and advertising every single day for our brands; an endorsement for our brand. And it's a – we know even for bricks-and-mortar shoppers, they often go here to look for what the rating is on the product.

So that's a silent solution, if you like, for the long-term benefit of the brand, you don't necessarily pay for it every day. So we have to think differently about the mix than traditionally..

And I think what's important, Scott, is our brands, when you look at natural organic brands, a bigger percentage of natural organic brands there are bought online than bought brick-and-mortar. So if you look at where the future is and where our brands are bought and where purchasing is going, we're in sync.

But consumers need to know your brands and we got to have the ranking, and that kind of shows where Ella's, for instance, was in brick-and-mortar, and as it moved to online, the sales – and we're not talking about the UK and Europe, but what we're seeing in sales of Ella's online versus brick-and-mortar is tremendous..

Thanks, guys. Appreciate it..

Thank you.

Next question?.

We do have time for one or two more questions. Our next question comes from Alexia Howard with Bernstein. Your line's now open..

Good morning, everyone..

Good morning..

Good morning, Alexia..

So with the progression of the segment operating profit growth – or decline, I guess, this quarter on the adjusted side in the U.S. business, you mentioned that some of that was due to the increased marketing spending.

How long do you expect that to continue? When do you expect to get back to profit growth in the U.S.? And given the phrasing of it, was that marketing investment within the SG&A line? I assume it is. And was pricing actually up year on year in the U.S. in the segment? Thank you and I'll pass it on..

Yeah. So, Alexia, as I mentioned earlier on an earlier question, quarter two we'll essentially be around flat with prior year, again because our business is front-weighted. So we'll see in quarters three and four a return to profit growth, which is just essentially how we built the investment plan. And the question around price....

Return to (57:13) profit growth..

Yeah. That's right. So you'll end with up with net profit growth for the year. And then for the question around pricing, minimal pricing, we had a small price impact from a planned price reduction on Spectrum, which started last year. It was around $500,000 or $600,000 impact, not so significant this year.

We will have some small pricing adjustments on the upside coming through later in the year, primarily in tea, to capture the costs for higher COGS related to the quality standards we have for our tea. But essentially, it will have a minor impact, it's really net neutral..

Thank you very much. I'll pass it on..

Thank you. Next question..

And our next question comes from Andrew Wolf with Loop Capital Markets. Your line's now open..

Hi. Thanks. Good morning. I wanted to follow on just with one question on e-commerce and online business.

So I think historically, it's pretty well-known that not just for Hain but for the consumables broadly, online business has really been concentrated in a few categories, I think you guys mentioned baby is a leading one for Hain, and I think that's been one of the categories where online penetration's been pretty good for a while.

Could you just kind of generally speak to what kind of broadening you're saying that you talk about the good growth, leading growth you're seeing in online business? Is it still in some narrow categories? Is it sort of going one category at a time? Are you seeing the really broad – broadening, not just what's on Amazon's website but what's actually selling through to consumers for home delivery? Thanks..

Yes. No, it's a good question. And I think this is part of the inflection I referred to earlier in terms of what's happening in unmeasured channels. We are seeing broad-based growth across our platforms. So whether it be snacking, pantry, personal care is up over 70% for the quarter, babies, obviously growing very strongly. So this is quite broad based.

And it's really not because we know this is where our shoppers increasingly choose to shop, we know from the feedback we have with our online trading partners that natural and organic is a very strong search term.

So this is an area that we think will continue to accelerate as the, let's say, the mix model unlocks between what happens online and what happens in bricks-and-mortar with some of the major players. So for us, it's broad-based. It's consistently broad-based, and we expect that just to continue..

And Andy, we're seeing this along the fresh line too, whether it's AmazonFresh, for turkey and chicken, FreshDirect. In the UK, we're also seeing this with a lot of retailers, whether it's Tilda products online, Ella's of course in the UK, so it's not just U.S., we're sitting that around the world..

Okay. Thank you for the color..

And our last question comes from David Palmer with RBC Capital Markets. Your line's now open..

Thanks. Just a follow up on consumption trends. The 55% of your business that is measured channels you said is down mid single-digits or so in the quarter. In the scanner data that we see, it looks like that decline rate accelerated a little bit in recent weeks, last 12 weeks maybe down 7% to 8%.

Are you seeing that sort of dynamic playing out? Are you seeing the non-measured commensurately accelerating such that you're staying roughly flat in consumption? And I have a follow-up..

Yeah. Sure. So you're right, we have had a recent acceleration in the measured channels. Part of that is driven by a couple of key factors. One is that for our Celestial Tea business, which is a significant business for us, we have a timing issue in terms of when our promotional program starts this year versus last.

So they're off by a quarter, that will address itself in this period. We've also had the drag, as I said before, the Sensible Portions partial loss of distribution which is a big impact.

And in this last read we had this one Terra Chip program that was not renewed from one of our club customers, so that had a disproportionate impact in the quarter as well. So there's a couple of things that drove the more recent numbers.

In the unmeasured channels, as I've said, we continue to see an acceleration with the online customers, solid business in most of the other customers as well. So it is shifting slightly but this is somewhat timing-related to when our activities fall.

When we look forward to our program for the balance of the year, we're pretty clear that we have a line of sight to all the major programs that are happening in the MULO space that are going to drive more positive results.

I can certainly take you through the detail of that when we get time, there's a lot of information by channel but, ultimately, the expectation is that we see a bit of a rebalancing in MULO+C in the coming periods..

And then very much related to that, when we envision how you're getting the acceleration in non-measured, what brands and channels are really doing the most heavy lifting in that acceleration? Thank you..

Yeah, certainly online is a big piece of it but I have to say all of our key large club customers are also performing well. And, of course, we've seen the resurgence performance of Whole Foods which was something that predated, actually, the Amazon tie-up.

A lot of good works being done by my team there to work with the Whole Foods group closely on our core category performance and driving the top 500 more strongly, and we're extremely encouraged by the performance we're seeing in that business. So that's also part of the drive..

Thank you..

Thank you, everybody. We remain confident that our leading natural organic Better-For-You brands, our strong team, our strategic initiatives position us well to execute on our mission and create and inspire a healthier way of life.

What's working for us, out SKU rat, our focus on our top SKUs and spending on the consumer to enhance our brand awareness.

We expect further improvement in our results throughout the fiscal year as we execute on Project Terra, our strategic initiatives, and continue to drive incremental sales growth margin improvement to deliver long-term sustainable shareholder value.

I'd like to thank our team of over 7,000 employees and our Board of Directors for their contributions and support. Together, we will further capitalize on our core strength and resources to drive Hain Celestial's next chapter of growth and success.

Lastly, as I said earlier, don't forget to buy your Plainville turkey, your Arrowhead Mills stuffing, your Imagine Bone Broth and Gravy, along with many, many Terra products and numerous other Hain products. Thank you very much for listening and everybody have a healthy, happy, safe Thanksgiving. Thank you..

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