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Edited Transcript of HAIN earnings conference call or presentation 8-Nov-18 1:30pm GMT

Q1 2019 Hain Celestial Group Inc Earnings Call

MELVILLE Dec 11, 2018 (Thomson StreetEvents) -- Edited Transcript of Hain Celestial Group Inc earnings conference call or presentation Thursday, November 8, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary W. Tickle

The Hain Celestial Group, Inc. - CEO of North America

* James M. Langrock

The Hain Celestial Group, Inc. - Executive VP & CFO

* Mark L. Schiller

The Hain Celestial Group, Inc. - President, CEO & Director

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Conference Call Participants

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* Akshay S. Jagdale

Jefferies LLC, Research Division - Equity Analyst

* Alexia Jane Burland Howard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Amit Sharma

BMO Capital Markets Equity Research - Analyst

* Andrew Lazar

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Eric Jon Larson

The Buckingham Research Group Incorporated - Analyst

* Jon Robert Andersen

William Blair & Company L.L.C., Research Division - Partner

* Kenneth B. Goldman

JP Morgan Chase & Co, Research Division - Senior Analyst

* Matthew Jacob Fishbein

Deutsche Bank AG, Research Division - Research Associate

* Michael Scott Lavery

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD and Senior Retail & Staples Analyst

* Steven A. Strycula

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Katie M. Turner

ICR, LLC - MD

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Presentation

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Operator [1]

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Welcome to The Hain Celestial First Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions)

And the conference is being recorded. (Operator Instructions)

I would now like turn the conference over to Katie Turner, Investor Relations. Please go ahead.

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

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Good morning. Thank you for joining us on Hain Celestial's First Quarter Fiscal Year 2019 Earnings Conference Call.

On the call today are Mark Schiller, President and Chief Executive Officer; James Langrock, Executive Vice President and Chief Financial Officer; and Gary Tickle, Chief Executive Officer Hain Celestial North America, and as well as several other members of Hain Celestial's management team are here with us today.

During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws.

These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements.

Please refer to Hain Celestial's annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

A reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release and presentation, all of which are posted on Hain Celestial's website at www.hain.com under Investor Relations.

This call is being webcast and an archive of it will be available on the website.

Now I'd like turn the call over to Mark Schiller.

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [3]

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Thank you, Katie, and good morning.

It's great to be speaking with everyone today on my first earnings call as President and CEO of Hain Celestial.

Let me start by thanking my predecessor and our founder Irwin Simon for building this great company. Irwin had the incredible foresight to see the consumers were making a shift toward healthier living and healthier eating, long before most of the packaged goods industry, and he built an organic, natural and better-for-you products company that has been a leader for many years. Irwin's contributions are many and his influence on this industry has been profound. I'm honored to succeed him, and I look forward to building on his legacy.

As I reflect on the path ahead, I realize that I'm privileged to lead a multibillion-dollar company with branded products sold in over 80 countries at a time when consumer demand for organic, natural and better-for-you products continues to grow. I see great potential and significant opportunity to accelerate the vision and mission started over 25 years ago, as we further build consumer awareness, loyalty and access to our portfolio of brands. It's truly an honor to lead Hain Celestial, and I would like to thank all of our passionate employees and external stakeholders around the world for the warm welcome.

It is officially only my fourth day leading the company, yet already everyone's initial efforts to help me quickly begin a thorough review of the business have been helpful, and I look forward to meeting many more of our team members, partners and stakeholders in the coming weeks, as we work to build on the strong foundation we have and take Hain Celestial's business to the next level.

I believe my strong operating background lends itself well to the challenges we face. For those who don't know me, I have many years of experience leading organizations across all key general management, operational and commercial functions, particularly during my last several leadership roles at PepsiCo's Quaker foods and snacks division and as Chief Commercial Officer of Pinnacle Foods. When I joined Pinnacle, I faced very similar challenges to what we are facing at Hain in the United States. While the portfolio at Hain competes in more on-trend categories with better growth prospects, we have a similar need to reinvigorate and differentiate our brands with world-class marketing and innovation. We need to manage complexity and drive out costs. We need to expand our distribution, deliver smart pricing and improve efficiency.

In short, I've faced these challenges before and have successfully helped lead transformation and operational improvements in these areas. As the CEO of Hain Celestial, I intend to apply those skills here and help transform our company into a world-class operator.

This week marks the beginning of that journey, and over the next several weeks and months, I'll be listening and learning and thoroughly validating and refining our strategic priority.

I intend to focus on bringing operational excellence in all key areas of the business, and I'm eager to accelerate our marketing and innovation efforts, execute Project Terra and refine our processes to ensure consistent and reliable earnings growth.

As I said before, this is week 1 for me. This is the analysis phase for me as well.

I expect the situation assessment and corresponding strategy refinement to take about 90 days, and once complete, I will give you more details on my findings and clarify how our path will evolve in February at CAGNY.

Let me end by thanking you all for your well wishes and support. I'm thrilled to be here and very excited about the journey ahead.

With that overview, I'll turn the call over to James to talk about our performance in Q1.

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [4]

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Thank you, Mark, and good morning, everyone.

As a reminder, the results of operation, financial position and cash flows related to the Hain Pure Protein segment are presented as a discontinued operation for the current and prior periods. We continue to make substantial progress and expect to complete the divestiture by the third quarter of fiscal 2019.

Today, I will focus my discussion on our financial results from continuing operations, unless otherwise noted.

As we discussed during our fourth quarter earnings call, the cadence of our business in fiscal 2019 is such that the year will be back end weighted on top line due to the timing of distribution gains and planned trade programs and on the bottom line due to the majority of the realization of Project Terra savings increasing throughout the year, especially in Q3 and Q4.

As such, we expected a slow start to the year.

In Q1, we experienced production challenges primarily in our personal care business as a result of robust demand for our products and supply chain challenges, which impacted results. We have already made the necessary changes, and we expect this to be resolved by the end of Q2.

Gary will provide more color on the Personal Care business as well as the progress already made to resolve the Q1 operating challenges. In the first quarter, consolidated net sales decreased 5% to $560.8 million, or a decrease of 4% on a constant-currency basis. When adjusted for constant currency, acquisitions, divestitures and certain other items, net sales would have decreased 2%.

Adjusted gross profit was $106.5 million or 19%, a 250 basis point decline year-over-year. This decline was due to planned higher trade and promotional investments in the United States, production issues within our Personal Care platform and supply disruptions in the United States and increased freight commodity costs, partially offset by $13 million of Project Terra savings.

SG&A as a percentage of net sales was 14.6%, relatively flat with the prior-year period.

The decrease in SG&A in absolute dollars resulted from $3 million of Project Terra savings and decreased performance-based compensation expense in corporate and the U.S.

Adjusted EBITDA was down 36% to $34.1 million from $53.5 million in the prior year period. We reported adjusted EPS of $0.09 based on an effective tax rate of 25.1% compared to $0.20 in Q1 last year based on effective tax rate of 27.7%.

I will now provide you with key financial results of each of our business segment.

For the U.S., net sales decreased 8%, while 4% when adjusted for acquisitions, divestitures and certain other items including SKU rationalization.

U.S. adjusted gross margin declined 520 basis points year-over-year to 18.6%, largely due to the planned increase in trade and promotional investments, higher freight and input costs as well as production challenges primarily within Personal Care and supply chain challenges. These declines were partially offset by Project Terra savings.

As I mentioned, these production and supply chain challenges have been addressed, and we expect them to abate by the end of Q2. U.S. SG&A was down 3% compared to the prior year period, primarily related to decreases in incentive compensation expenses and Project Terra savings. And U.S. adjusted operating income decreased to $7.7 million from $23.1 million.

In the U.K., net sales decreased 2% to $218.6 million over the prior year period or relatively flat on an adjusted basis, which was in line with our expectations.

Adjusted gross profit decreased $2.1 million, and our gross margin decreased 63 basis points as commodity inflation and increased labor costs were partially offset by Project Terra cost savings.

U.K. adjusted operating income decreased $2.3 million to $10.7 million from the prior year period. Again, this was in line with our expectations as the result of the decreased gross margin.

Net sales for the rest of world decreased 5% to $98.3 million over the prior year or down 2% adjusted for acquisitions, divestitures and certain other items including SKU rationalization, with Canada relatively flat, Europe up 1% and Hain Ventures, formerly known as Cultivate, down 14%. Europe and Canada performed to plan, offset by Hain Ventures which was down off a small base. Rest of the world adjusted gross profit decreased $1 million to $22.3 million, and adjusted gross margin was relatively flat. Adjusted operating margin increased 60 basis points to 9.3%, primarily due to significant improvement in profitability within our European business, with 14% growth in adjusted operating income.

Now turning to our cash flow and balance sheet. For the 3 months ended September 30, 2018, capital expenditures were $22.5 million, and operating free cash flow was a negative $40.8 million, a decrease of $28.5 million from the 3 months ended September 30, 2017.

The change in operating free cash flow was primarily attributable to decreased net income in 2019 and an increase of $11.3 million in capital expenditures as we make investments in manufacturing facilities to support demand in our higher growth businesses and spend capital to fund Terra savings. As of September 30, our cash balance was $56 million, and net debt was $666 million.

Inventory has increased $23 million sequentially or 6%. This is due to a number of factors. First, in the U.S., we are building inventory ahead of the planned Personal Care move to a new facility and our distribution wins in the second half of fiscal year -- of the fiscal year.

There are seasonal increases in inventory for Canada, Tilda and Europe. Our bank leverage ratio was 3.33x as of September 30 compared to 3.32x in fiscal 2018.

On November 7, we amended our credit agreement to modify the calculation of the consolidated leverage ratio related to costs associated with the CEO succession payment as well as the Project Terra cost reduction program.

Similar to the last 2 quarters, Hain Pure Protein's results are noted as a discontinued operation for reporting purposes and are not part of our earnings from continuing operations.

In the first quarter, Hain Pure Protein net sales were $113.5 million, a decrease of 5% compared to the prior year period.

Now I'll turn it over to Gary to provide more detail on our U.S. business.

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [5]

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Thank you, James, and good morning, everyone.

Today, I will review our U.S. business results for the first quarter and discuss the reasons we have confidence in our expectations to generate improvement in topline growth and profitability throughout the remainder of the fiscal year.

As I discussed on our quarter 4 call, our fiscal 2019 plan called for an improved rate of growth and profitability to begin in the second quarter as a result of our brand investments, distribution gains already won, price optimization and cost savings realizations, all of which we expect to benefit from as the year progresses.

We continue to expect that improved growth for the fiscal 2019 is achievable, and believe that we have a visibility into our future results based on the benefits from many of the initiatives that have been underway from fiscal 2018 and the start of this year.

With regards to the first quarter, our results were weaker than planned due to a few operational challenges in the U.S. business, a majority of which have been -- now been resolved. I'll speak to these items in more detail in a minute.

U.S. net sales decreased 7.5% for the quarter. Our SKU rationalization continued as planned, impacting net sales in the quarter by $9.7 million, in line with our expectations. Taking this into account, U.S. net sales decreased 3.9%.

Focusing on our U.S. top line results in more detail. As we outlined on our last earnings call, we anticipated net sales for quarter 1 will be down slightly year-over-year due to planned significant incremental trade and shopper marketing investments year-over-year.

We are already beginning to see the benefits of these programs in our incremental improvements and consumption results, which we expect to continue in Q2. However, 2 key issues impacted our results.

Firstly, production challenges primarily from robust demand in our Personal Care business and secondly, supplier disruptions. Both of these resulted in net sales being lower than we expected. Importantly, if it were not primarily for these 2 items, both net sales and profitability would have been more in line with our expectations.

In aggregate, our retail takeaway trends are improving. Our trade and brand investments are helping generate an improved consumption trajectory.

In our most recent MULO+ C read, which represents 60% of our total U.S. business today, we are down 4.5% for the latest 12-weeks ended 21 October, and down 2.4% after SKU rationalization. This is a 210 basis points improvement over the 52-week read. We've also demonstrated sequential improvements in the 12 week read since March 2018. Our top 11 brands continue to post improved consumption in MULO+ C, up 200 basis points in the latest 12 week read of 10/21 versus the 52-week read.

When we look across all channels, both measured and unmeasured, the latest 4-week read shows positive consumption for the first time since April 2017. Now this is only one 4-week period, but it gives us confidence we're on the right track.

We continue to see softness in the Spectrum business, with net sales down 20% on the back of continued category softness in coconut oil.

We also continue the cycle -- the loss of Sensible Portions in 1 mass retailer, negatively affecting sales by $4.5 million in the quarter. As a reminder, the brand is still growing double digits outside the 1 mass retailer.

We acknowledge that we still have a way to go, but we remain focused on driving consistent improvements as we progress through fiscal 2019.

Now I'd like to provide more detail on the growth we generated in Personal Care, which created a short-term bottleneck late in the quarter.

This impacted our expected net sales growth, sales mix and our overall profitability since Personal Care represents one of our higher-margin product categories.

As you may know, our Personal Care business has continued to outperform with our brands up 6.9% excluding SKU rationalization for Q1, we in fact expected even higher rates of growth for the quarter than we achieved.

We're particularly pleased with our ability to generate these results given that we incurred production and supply chain constraints that impacted our sales by around $5 million. Our service levels for Personal Care were below 80% in the quarter, as we could not fully meet our strong growth plans. We took immediate action to mitigate this with new production and supply sources implemented.

Production and supply continues to improve, and we expect to end the second quarter with service levels in the low 90% range, and we're confident we will benefit from a recovery in quarter 3 based on the actions taken at the end of quarter 1 and early quarter 2.

In addition, we're adding Personal Care capacity that we expect to come online in the second half of fiscal 2019. We also encountered high-than-expected costs and service issues related to the planned transition to our new mixing center. This impacted sales to certain customers and resulted in higher charges related to service.

We are confident that these mixing center supply issues are behind us. This situation has since improved considerably, and we're now shipping to plan in the quarter.

To summarize, our net sales performance reflected 2 specific challenges late in the quarter, and we believe they are short-term in nature.

Our team acted swiftly to mitigate the situation, and going forward, we expect these to be fully behind us as we exit the second quarter.

Looking forward to the balance of fiscal '19, we recognize that we're in a process of rebuilding a business to return to growth and continue to be encouraged by the momentum we're seeing in key brands.

We're gaining new distribution wins and have visibility into growth from expanded distribution of 7 of our key brands across several retailers for the second half of fiscal '19.

A few key highlights include, after a challenging year for Sensible Portions, we're very pleased to have regained significant expanded distribution in a key mass retailer with 2 separate initiatives, the strength of the Sensible Portions brand and our strategic brand investments that helped us to regain shelf space in this important retailer. We'll have a new item at the front of the store in over 1,400 stores and an average of 8 check lanes, first shipping in December 2018. We'll also have new Sensible Portions offered in the core snack set, with over 4,400 points of distribution which will start shipping in January 2019.

As a reminder, Sensible Portions has continued to grow at 14% on the latest 12 weeks outside this mass retailer MULO+ C. We expect to build on this strong momentum going forward.

Our Terra Chips business continues with good momentum on the back of planned brand investment in quarter 1. With the brand up 12% in the latest 12 weeks of 10/21 MULO+ C and more expansion of distribution to come late in the second quarter.

We also see continued strong momentum behind Earth's Best brand with over 9% growth in the latest 12 weeks of 10/21 MULO+C, as we build off expanded distribution gains in quarter 1 with additional new distribution gains in the second half of fiscal 2019 at a major drug customer and a natural customer, which, we believe, will continue to drive brand momentum.

Looking ahead, we remain confident based on the line of sight we have on distribution gains, the additional innovation coming to the market and new innovation in the areas of our business, we expect to continue to build momentum in our core 11 brands and drive net sales and profit improvement, as we implement our Project Terra cost savings.

In summary, the challenges in the quarter were execution driven, and a majority of these items are behind us already.

We have clear line of sight to an improvement in consumption behind key brand investments, distribution gains and innovation.

This gives us confidence in driving net sales growth and probability as the year progresses.

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

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [6]

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Thanks Gary. Before I get to guidance, I will provide an update on Project Terra.

Project Terra is a comprehensive global plan that the entire organization is aggressively working on to reduce cost and complexity as well as driving more profitable sales growth.

We have made significant progress on Project Terra and saved $16 million of costs in the quarter, which had met our expectations.

On Slide 17 of the earnings presentation, you will note that for fiscal 2019, we expect to achieve $90 million to $115 million in cost savings, which we expect to build quarter-over-quarter as we progress throughout this year.

Some of the things we are working on include a thorough review of our promotional events at key retailers, which will allow us to achieve planned sales volume with reduced trade support.

We expect to see significant improvement in our gross-to-net realization during the second half of the year.

We also expect further improved gross margin through continued focus on raw material procurement and strategic negotiations with our co-manufacturers.

This includes design to value initiatives. We're enhancing our S&OP capabilities with the goal of managing down our distribution and inventory carrying costs while improving the service level of top-selling SKUs.

We are conducting a detailed portfolio review to optimize our business, drive efficiency and even further reduce cost as we work to create value for stockholders.

That said, we are reiterating our fiscal 2019 guidance and expect reported net sales from continuing operations in the range of $2,500,000,000 to $2,560,000,000, an increase of approximately 2% to 4% as compared to fiscal year 2018 or an increase of 3% to 5% on a constant-currency basis.

We are expecting the U.S. and the U.K. to be up low to mid-single digits on a constant-currency basis, and rest of the world is expected to grow mid- to high single digits.

We expect adjusted EBITDA of $275 million to $300 million, an increase of approximately 7% to 17% compared to fiscal year 2018. This reflects $90 million to $115 million of Project Terra cost savings and productivity, which we expect will accelerate as the year progresses; and increased brand investment globally. And we expect approximately 2% cost of goods sold inflation from ongoing freight and commodity costs.

On Slide 20 of our earnings presentation, we have an adjusted EBITDA bridge from fiscal year 2018 to fiscal year 2019 for your reference.

We expect adjusted earnings per diluted share in the range of $1.21 to $1.38. We expect our effective tax rate for fiscal 2019 to be between 27% and 28%.

Based on fiscal 2019 EBITDA and working capital expectations, we anticipate cash flow from operations of $100 million to $150 million, and we expect capital expenditures of $80 million to $100 million. We are making investments in manufacturing in our higher-growth businesses to meet demand.

Our cash flow guidance includes $35 million of associated charges related to the CEO succession agreement and $40 million of costs we expect to incur to implement certain Project Terra initiatives and other related items.

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

We believe we have the right plan in place to achieve our guidance for fiscal 2019.

On the top line, as Gary has mentioned, we have already won the distribution, and based on the timing, expect to see the benefit to our sales. And on the bottom line, we have a detailed cost reduction plan that the organization is working intently on every day.

As we have said, while we believe we are addressing the production challenges, they will impact Q2 2019. Accordingly, we expect net sales to be flat to slightly up compared to Q2 last year, and adjusted EBITDA to be between $55 million to $65 million.

In summary, our team remains focused on the execution of our strategic initiatives.

With that, we are available for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Andrew Lazar with Barclays.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2]

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Mark, welcome, and congratulations to you. Looking forward to working with you again going forward.

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [3]

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Thank you.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [4]

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Yes. So 2 things from me. I guess first just to clarify a little bit around the guidance for the full year. Obviously, as you guys have talked about it, it implies a very hefty inflection point in the second half, and you went through a lot of the reasons why you've got some visibility and confidence in that. But I guess, Mark, for you, obviously, you're only a week in. Is it that -- do you feel like it's just too early perhaps to put your full perspective based on your 90-day assessment into what that might mean for guidance? Or is your sense that from what you see, you feel very comfortable in the full year guidance even in the context of not having had your 90 days yet, if you will. And then I just got a follow-up.

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [5]

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Yes, having only been here 3 days, Andrew, I don't have a strong point of view at this point, so I'm going to refer all questions relative to guidance and performance to the rest of the team.

What I'm going to do over the next 90 days is really immerse myself in the business and the facts and the strategy and come back to everyone with a point of view on where we are and what we need to be doing to continue to change the trajectory of the business. But right now, I'll leave questions relating to both performance and guidance to James.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [6]

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Got it. Kind of makes sense. And then at Pinnacle, you were dealing with a relatively focused portfolio. Hain obviously, much, much more diverse, and of course, including an international component as well. I guess what are the sort of the best practices or the opportunities you see from your work on the Pinnacle portfolio is that you think you can apply obviously at this Hain portfolio going forward which admittedly is a lot more complex?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [7]

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Yes, clearly there's an opportunity for simplification. And that's one of the things that we're addressing with Project Terra, both in terms of looking at the portfolio and how to prioritize resources against the portfolio, but also in terms of managing all of the complexity of having so many brands. So as example, we've got over 100 co-packers on this business. We've got to figure out how to simplify that. So I'd say, a general theme would be around simplification. I think a second theme would be around process. Do we have the right systems and processes to deliver consistent, reliable, repeatable performance? And what can we bring to the party with regard to that? And obviously, I've got some experience from my previous company. And then it really is, do we have resources allocated in the right place to really deliver against what we need? So those are some of the things that we'll be focused on. Obviously, there's a lot in place already with things like Project Terra. But I'm going to assess all of those things and how we've allocated resources, where we're focusing our energies and make sure that we've got the right strategy to deliver consistent performance.

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Operator [8]

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The next question is from Ken Goldman with JPMorgan.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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Mark, welcome from me as well. Congratulations. You and James talked today about some of the brands working very well. And some of the categories and brands may be lagging a little bit. From my perspective, this seems to have been maybe the story for Hain for a long time, right? That if not for the bad stuff, earnings would have been great. So I guess along those lines, can you talk about your perception of the board's appetite and your appetite really for maybe a more sizable or a number of divestitures, or is it -- I know you've just been there 3 days. So maybe there is no answer there. But I'm just trying to get a sense of how you see the size, the complexity of the company in terms of a number of categories, brands, SKUs that you currently have?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [10]

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Yes, the easiest answer is I don't have a point of view at this point. It really is 3 days into it. Clearly, complexity is something we have to address. How we're going to address it is not clear at this point. But it's on the radar screen. We know it's an area of focus and something that we have to go after. But how and when is the -- 3 days into it, I really don't have a point of view at this point.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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Understood. And then for a quick follow-up for me. You talked about making progress on divesting HPP. Can you walk us through some of the milestones that you may have crossed? Because it feels like there's been progress that's been made on that for a long time now. I'm just trying to get a better sense of where your confidence is that this will actually happen when you think it will this time?

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [12]

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Ken, this is James. So clearly, we believe that the business is very attractive with very good growth potential. It's obviously taking little bit longer than we expected, but on this past quarter, we've made some significant progress on the sales process. So we believe that we will have it completed by the end of Hain's Q3. With that being said, though, I'm not sure how appropriate it would be to be commenting on an ongoing process, but we've had made some very significant headway this past quarter.

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Operator [13]

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The next question is from Alexia Howard with Bernstein.

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Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [14]

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Welcome to Mark as well. can I hone in on the gross margin trends in the U.S., that 520 basis point decline this quarter. I know you called out the production challenges and probably freight -- unexpected freight cost inflation. Are you able to quantify how much of that was due to the ramped-up investment in trade spend as well as some of those onetime factors? And when you expect to get a better trajectory maybe then back to a positive trajectory in the U.S. on the gross margin? And then my follow-up would just be when do you think we're going to be lapping the end of the SKU rationalization. I'm looking at page 17, it looks as though it's all done by the end of this fiscal year. Have we only got a couple more quarters of that?

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [15]

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So the U.S. gross margin, we were, as we mentioned on our last call that we knew it was going to be down in Q1, we were forecasting that. A big piece of that was the planned trade spend going into Q1. So that was as planned. So that was driving down the gross margin on a year-over-year basis. D&W, we knew we had headwinds going into the quarter but that was actually a little higher than we anticipated because of some of the supply chain issues and disruptions that we had. Then clearly our inflation and other input cost we were forecasting as well that came in pretty much in line what we thought. The Terra savings we had, we got the Terra savings that we were forecasting which is very good news. And the thing that did hurt the margin and drove it down was the personal care issues. That's one of our highest margin business. so the missed sales on that obviously had a negative impact. And then some of the other supply chain issues had a negative impact. So that being said, we are working through that, the issues that we had. We're going to be through that. We've addressed a lot of them already and working through that. So that will abate by the end of Q2. So we'll see improvement in Q2 in our gross margin, and then that will accelerate in Q3 and Q4 throughout the year as we continue to get more and more Project Terra savings. So this I would say Q1 is the low point, and it's going to accelerate for the remainder of the year.

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Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [16]

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And then on the SKU rationalization?

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [17]

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On the SKU rationalization, we'll be through that cycle through that by the end of our fiscal '19.

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Operator [18]

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The next question is from Scott Mushkin with Wolfe Research.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [19]

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Mark, welcome. So I just wanted to understand a little bit on the challenges of the manufacturing. Obviously, this has been an ongoing issue, whether it's your own facilities or the co-packer's. And I was wondering if you can maybe just -- is it like a series of unfortunate events? Do you think it's something that's going on with your processes, because it does seem to be a recurring issue. And I guess my concern is you talked about Sensible Portions really ramping up at the beginning of next year, and I guess my comfort around that is -- I guess I'm cautious about that, given the challenges you've had, so I was wondering if you could do that and then I will follow-up, please.

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [20]

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Yes, great. It's Gary here. First of all, the Personal Care issue that created the short-term bottleneck later in the quarter was very specific to 1 co-manufacturer, was quite a unique set of circumstances related to that co-manufacturer. And ultimately, created very short-term acute issues for us. But production and supply continues to improve as you move through the second quarter. We're already in the high 80s and expect to be in the low '90s, as I mentioned in terms of supply level. We're very confident that we're going to benefit from a full recovery in quarter 3. And to that point, we mentioned that we're adding additional personal care capacity to our own manufacturing plant later at the end of fiscal '19. So I think it's a very unique, sort of, circumstances around that particular issue, not a widespread or an operational issue, generally, it's that very specific to 1 co-manufacturer. As for Sensible Portions, I'm very confident we have the ability to manage this internally. We've done a lot of work in our own manufacturing facility in Lancaster, Pennsylvania. I was there just recently. The factory is in great shape, really ready to go. We already have a clear line of sight to how we're going to manage the capacity upload for this. So I have no concerns about meeting those requirements. We've done a fair amount of investment over the last 12 months in that site to continue to improve the performance and the throughput through that site. So I think we're in good shape for that.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD and Senior Retail & Staples Analyst [21]

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Okay. And my follow-up question is, I was a little bit surprised, and I want to make sure I heard it right that you guys think you're going to be able to take down trade support as we go through '19, and I was just wondering what the thought process there? Obviously, you've done a lot of work to get back on the shelves, get the sales line hopefully moving. and I was a little bit surprised about that comment. It seems like keeping shelf and having the support in place at least for now would make more sense. But I just wanted to see if I heard that correctly?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [22]

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Yes, I think it's important to point out that we've always called out very specific planned trade investment in this quarter, unique to this quarter around special programming in the Club channel for a couple of key brands and some additional support from expanding distribution. That's just timing related across the range of customers and retail customers and also some e-commerce expansion investment ahead of growth. I think the important takeaway is that we have some additional tools at our disposal now working on how we're going to optimize that trade spend. I don't think for us it's a case of pulling trade away from getting our key brands, but more about being very efficient and very effective both for us and our retail partners in terms of how we get the best return on the investments. So I'm confident with the planning that is going in, very detailed planning, that we're going to optimize that spend, and like all plans and all expenditures, you have to continually review to make sure you've got the most efficient investment.

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Operator [23]

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The next question is from Amit Sharma with BMO Capital Markets.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [24]

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Mark, let me just begin with you. I think you laid out a very interesting parallel between Pinnacle Food and your experience there and Hain. I mean, granted you've taken some time. But as you look back at your Pinnacle experience, and obviously lots has been changed there to turn around that business. But what are the top one or 2 things that come to mind that moved the needle most over there? And do you think your due diligence for this post, do you feel like a similar label can be applied here as well?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [25]

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Yes, I think that there are a number of analogies between where Pinnacle was 5, 6 years ago and where Hain is now, and I give you 3 themes. One is again, around simplification. We have a lot of brands, we a lot of customers, we have a lot of geographies. And how do you take the resources that you have and apply them in the places that will give you the largest return versus peanut buttering it across everything. That's an opportunity here, and one that we will sort out. I think the second is around robust innovation and marketing support of the businesses to resurrect the top line. We have some great brands here. And we've got to figure out how to keep them relevant, how to keep them in front of the consumers in the right ways and meet needs that aren't being met in the marketplace. So there be will emphasis on resurrecting and continuing to support places where we have robust growth on the top line. And then the third is really around the cost side of the business and what are the processes, resources, capabilities that we need to build into to be able to manage our spending efficiently, to be able to manage the complexity that we have. And again, I think all 3 of those were themes that applied in my previous company that we will apply here as well.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [26]

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How long does it typically take for you to implement these changes? Or how long will it take at Pinnacle?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [27]

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Yes. It's too early at this point for me to say, obviously. I have to better understand the facts and where we are and what capabilities we have, and what opportunities we have. So I'm going to do that assessment over the next 90 days, and be ready to unveil kind of the path forward and the mountain that we're going to climb at CAGNY. So it's going to take me a little bit of time to assess that. Some things will be fast fixes, some things are going to take much longer. But I really have to get the foundational learning to be able to give you a good answer to that question.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [28]

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And that's fair, and I don't want to like accelerate the time line. But it sounds like from what your focus is that on these 3 initiatives, a deeper look at where your earning base is, and perhaps resetting it isn't really an unreasonable outcome from this analysis, right?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [29]

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Well I don't know about resetting it, but I am going to do the analysis and assess where we are and what it's going to take for us to deliver consistent reliable growth. And again at this point, 3 days in, I don't really have a point of view on the algorithm, and whether it's spot on or whether it needs some modification. It's way too early at this point for me to have a point of view on that.

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Operator [30]

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The next question is from Akshay Jagdale with Jefferies.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [31]

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I just wanted to follow up on the same line of questioning in a different way. So obviously, you've come in, you have an outside perspective. So when you were looking at this business, looking at taking the job of CEO, how did you think about like structural issues versus things that you'd fix? Because we've obviously concluded that a lot of the issues are not structural, but to me there's 2 major buckets, right? You've got the market share losses and then you got the cost issue. How did you land up with the conclusion that these aren't spectral, because obviously, you bet on the success of the company with a lot of your pay being connected to options, right. So I know it won't be a straight line up, but essentially, you're saying you can come in and make this business more profitable and have it grow at some point, sustainably. So can you help me understand how you thought about like structural issues versus ones that you can fix and the way you landed at that?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [32]

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Yes. What I would say at this point is everything is on the table. So I haven't drawn any conclusions around structure at this point either. I think what I'm doing right now is a thorough assessment of where we are, what's working, what's not working. Where do we have a strong foundation to build from and where do we need to pivot? And that includes anything and everything in the P&L. So it really is fair game at this point for me to assess everything, and that's what the board has asked me to do. Clearly, we have some great brands, as you heard from the commentary. We have some brands with terrific momentum. But we also clearly have some challenges, right. So how do we build on what's working, and how do we pivot on the things that aren't? And whether that entails structural changes or not is TBD at this point, I don't have a point of view yet. But I don't want you to conclude that we've made any decisions relative to that.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [33]

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Got it. And just one follow-up for the U.S. business, for Gary. The Sensible Portions distribution is really good news. Can you give us some background on what led to that? And I'm sure the pilot program and the issues that, that retailer was having with private label might have led to it. But can you give us some background on what led to that success? And how does that distribution compare in total? So what you have now, with what ounces you have gotten back? How does that compare to the peak in 2016? Are you anywhere close to that? Or is there another reset in March that you are hoping to improve upon.

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [34]

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Yes. So I think the key steps that led to the changes. One, we have had a very successful pilot program running in recent months, which has demonstrated the strength of the brand and the relevance it has to the consumer, which is great news. I think in addition to that, the clear proof point that operationally, we were able to deliver and deliver a strong solution reliably and efficiently for the customer. And ultimately, I think we were very, very -- we reacted very positively to the request of the customer for what they needed in the store. And so the formats, et cetera, that they required for the store. So it's very positive news, and is a demonstration that the team can absolutely deliver again for this brand. In terms of the ultimate outcome relative to where we were, I think it's still too early to completely gauge that. I called out the extent of the new layout. The good news is it's not just going to be in the corner shelf there, we're also going to have something front of the store for the first time. So this will be new business for us, and we will have to assess how does that performs. But we have some guidance of how it's done in another mass retailer, and we're pretty confident it's going to perform strongly.

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Operator [35]

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The next question is from Rob Dickerson with Deutsche Bank.

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Matthew Jacob Fishbein, Deutsche Bank AG, Research Division - Research Associate [36]

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Matt Fishbein on for Rob. Welcome Mark, congratulations. One for James and one for Gary. James, what exactly were the supply chain challenges, which if I understand correctly, were separate from the Personal Care issues that you experienced in the quarter? And the challenges, you said, should be resolved by Q2 -- or at the end of Q2. So will we see a similar impact in Q2 as we saw in Q1, or a smaller one? Just wanted to make sure I heard correctly, will any of that impact from those challenges spillover into Q3, Q4? Just want to clarify what you meant by they'll abate by the end of Q2. And for Gary, on the U.S. business, the total, so all brand distribution gains you're anticipating in the second quarter. Should we expect those to show in the measured channel data? And just wanted to confirm, I know we were talking about net distribution gains for the year. Are these distribution gains that we'll be seeing after the retailer reset still beat net distribution gains in total relative to last year?

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [37]

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So I'll take the first question as well, just to clarify the 2 separate issues. Before that we had specific production challenges related to our Personal Care business, and I reference there that through quarter 2 we'll see improvement and the issue abate. We expect to be in the low 90% range in terms of service levels through Q2 and back to full service level in Q3. So that was a reference on service, very specific to Personal Care. Outside of that, the remaining supply disruptions were related to our new mixing center. We incurred some start-up issues that slowed the throughput at this site. We had a slower ramp-up than we expected. The good news is in recent weeks, we've seen complete steady-state performance out of that facility. So we don't anticipate any further challenges, we should be in full service at that facility now. So that's behind us. Your second question was related to the distribution gain. We are definitely going to see distribution gains continue through our measured channel, but also in our unmeasured channels. I think I've called out, we've got distribution gains for 7 of our key brands. We're just cycling into distribution gains in a large mass retailer for Imagine soup, as we speak. We had distribution gains coming through Terra Chips at the back of the quarter. We've had distribution gains from MaraNatha and Earth's Best as well, so key wins for us are just starting to turn up and you've seen in our consumption data improved performance in the measured channel, but although we've had very strong performance in the unmeasured channels in the high single-digit growth.

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Operator [38]

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The next question is from Eric Larson with The Buckingham Research Group.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [39]

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Congratulations, Mark, and we wish you all success there. My question goes to, a lot of people in the industry are now taking some list pricing because of the higher input costs, particularly transportation. We haven't heard a lot of that from you to date particularly, but you've got some strong Project Terra savings. Maybe this is for Gary. Do you have -- have you taken pricing? Do you have the ability to take pricing relative to how you perceive your price gaps with your major competitor products against each other? Can you talk a little bit about that lever that you may have available, and whether you've used any of that?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [40]

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Yes. In fact, in our last earnings call we already referenced the fact that we'd put a planned price increase through. It was a broad-based price increase in the trade. And we anticipated to realize those benefits in this quarter, which we have. Just due to contractual terms, we'll see some of it increase in quarter 2. But ultimately, that price increases has been passed through. I think we were one of the earlier large wholesalers to actually pass these increases through, and so we'll see that flow through for quarter 2 and the balance of the year.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [41]

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So second half will probably get the full benefit? Or will that actually -- full benefit of that price increase start in Q2?

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [42]

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The full benefit -- this is James. The full benefit would be more in the back half with some of the contractual arrangements that we have. But also specifically to your question on freight, we did have -- we took action on freight pricing on our delivered shipments. So part of the price increase was around -- we were able to pass on some of the freight increases to our customers. So we -- part of that action was related to freight price increases.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [43]

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And I guess I'm going to apologize to you. I guess -- did you mention in Q1 what the percentage of your list price increase was? And was it straight across the board or was it weighted towards some other products? I'm sorry, I do not remember that number.

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [44]

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Yes, we called out -- it was about 4% to 5% price increase. It was broad-based. It wasn't specifically targeted to just one category. It was a broad-based increase.

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Operator [45]

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The next question is from Michael Lavery with Piper Jaffray.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [46]

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Question on e-commerce, more for Gary and James. You over index there, obviously. How do you think about the assortment in terms of balancing growth and profitability? And then just a related follow-up, can you give any color on the Fountain of Truth launch? And is there an early read there? And do you have any other brands you think might lend themselves to direct-to-consumer sales online?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [47]

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Sure, so in terms of e-commerce, it's certainly been a business where we over indexed in one category for a substantial period of time. And actually our conscious work has been to broaden our assortment online, which we're successfully doing. We're seeing the assortment broaden over time, which is a very positive sign for us. Brands in the personal care range, snacks, et cetera, we think will continue to grow very strongly as they have done in the last quarter. So yes, we expect to have a broad portfolio online, which is important in terms of margin mix management, which is something we're very conscious of. In terms of Fountain of Truth, it's very early days of course. I think we passed an important online milestone. It's been an online only launch, to date. We passed the 10,000 Instagram follow mark, which is sort of a relevant mark to be able to do other things online. Very encouraged by the very positive ratings and reviews we're seeing. And there's a lot more to roll out, which we'll have more to talk about in future quarters in other forums as to how we'll launch this brand. So it's e-com only at this stage, but very encouraging early signs off the small base of course. And we'll have more to say in the future quarters about how we roll that out into other areas.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [48]

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And just any other brands you think would fit direct online sales as well, or is it just your focus?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [49]

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We're still exploring some of those options. I mean, if you think about where some of the other markets are today, Personal Care obviously is one that is very interesting to us. So is snacks and some other key products within particular brand portfolios. So there's work going on to investigate those. No commitment at this point, but logically, we want to learn what we can from this Fountain of Truth launch to help inform us in our choices. But we've built this platform to the point of view that we can do other things with this platform beyond Fountain of Truth.

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Operator [50]

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The next question is from Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [51]

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Mark, a couple of questions. I guess one, I realize you say everything is on the table, but as you look at the brand portfolio, you probably have 2x or 3x the number of categories or brands, category brands that Pinnacle had. So I mean, is it a manageable portfolio with that many brands and that many categories that you're trying to compete in? And would you look to skinny that down, or does this make sense as is?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [52]

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Yes. I mean, there are definitely a lot of brands, about twice as many as there were at my previous company. I think one of the things that we, at a minimum, have to do is segment the portfolio. So which are the brands that have the highest margins, the most growth potential, the most competitive installations, the strongest consumer proposition. Those are the ones that we need to double down on, and each brand has to play a specific role in our portfolio. So today, we're trying to grow all of them. And we have got to be more choiceful in terms of where the biggest opportunities are. Because you end up starving the real stars if you spread the peanut butter too thin. So that's a huge opportunity for us and one that we're actively evaluating and moving towards. Whether we have too many brands in the portfolio or not, is to be determined. I mean we really have to figure out once we do that segmentation work of the portfolio, and know what the role is of each one. We'll look at what we have left and say what's the best course of action. How do the right amount of investment in the ones that we think have the growth potential, and how do we best manage the ones that we think have less growth potential? And we'll do all of that in the context of complexity, as I mentioned, because the more things we can focus on the more effective we are going to be. But if you have too many things to focus on, you end up being somewhat ineffective. So we've got work to do on that portfolio segmentation. Obviously, we want to make sure that we are concentrating on a set of brands that are going to improve the trajectory of the company from where it's been. And if you look, and we've talked before about the top 11 brands in the portfolio and the growth potential in those brands. Those are clearly going to be part of the prioritization at the end of the day. But once we figure this all out, then we have to look at, are we structured right against those brands? Are we resourced right against those brands? And how do we start to make trade-offs between what we have to get more optimal performance. And then as I said, ultimately, we'll figure out what does that mean for the brands in the portfolio. Do we have too many? Do we have not enough in certain parts of the business where we want to be bigger leaders in certain segments. All of that analytics is happening, just give us a little bit of time to get back to you with the strong point of view.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [53]

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Okay. And just as a follow up. And I know -- I'd kind of like to just ask the same question that I have asked in a different way. Normally, after a choppy quarter and as the CEO comes in, he has kind of a grace period to go ahead and cut numbers. And you've kind of set up even more of a back-end loaded year than I think anybody would like to see. So was it considered to just go ahead, hey, let's go ahead and just -- I understand that you're new and you only have a few days on the job. But you've been looking at the situation, presumably, for the past few months. Was it considered to do that? Or did the new distribution gains at Walmart give you greater confidence or give the company greater confidence that no, this is still a good plan for this year?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [54]

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I'm not going to comment on how we go about creating our guidance. But what I will tell you is there is a lot of reasons to believe the second half is going to be considerably stronger than the first half. And you've heard a lot of those on this call, whether they are distribution gains or brand momentum or Project Terra savings. We are making progress in a lot of areas. And so we have every reason to believe that the back half is going to be considerably stronger than the first half. With regard to guidance, as I said, I've been here 3 days. And I'm not in a position at this point to comment on that. But we're going to look at how the business is performing and what we need to do to get it to where we want it to be. And guidance will follow. But right now, we believe we've got a plan we can make and deliver, and we're working diligently to make that happen. And we have every reason to believe that will be the case.

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Operator [55]

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The next question is from Steve Strycula with UBS.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [56]

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And I have a quick question for you. Appreciate the fact that you've only been on the job for 3 days. But as a former industry competitor, what were the, at a very high level, were the brands in Hane's portfolio or categories that I guess you had most admiration for? And I have a follow-up.

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [57]

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The snacking portfolio I think is exceptional, Terra Chips and Sensible Portions in particular are 2 powerhouse brands. Baby, between the Earth's Best brand here and the Ella's brand overseas, we have a terrific position there. Teas are a very exciting place to be. And the Personal Care business is very interesting. Very high margins, very fast growth. We've got some terrific brands, and I'd say those are probably the 4 categories that I think are most exciting where we have the most potential. But even as you look at the rest of the portfolio, we play in some very interesting spaces, like plant-based eating is an example. That also has a lot of potential and a lot of momentum in the marketplace. So the advantage of having such a vast portfolio is there are a lot of things here to like. The challenge is not liking everything and figuring out how to focus your energy and your resources. But very excited about the portfolio, and that was one of the primary reasons that I joined is we're talking about powerhouse brands in health and wellness, which is exactly where the consumer is going, and we've got the biggest portfolio in the marketplace. So our ability and opportunity to lead here is tremendous. And that's exactly what we plan on doing.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [58]

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Great. That was helpful. Quick question for James. James, with the first quarter coming in softer than the way you had planned likely internally from both the sales and EBITDA contribution, how should we think about where -- to maintain your full year guidance, where did you have to make that up to still feel confident that you can hit the full year? So what were the key delta pieces that you used to offset the shortfall in first quarter?

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James M. Langrock, The Hain Celestial Group, Inc. - Executive VP & CFO [59]

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So clearly, we are making really good traction on Project Terra savings. We got $16 million in Q1, so off to a very strong start. The range is $90 million to $115 million. So we have really clear line of sight to all those initiatives. So that's where we would make up the shortfall and then clearly getting through the operational issues through Q2 to start Q3. So really, it's in the Project Terra savings initiatives.

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Operator [60]

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The next question is from Jon Andersen with William Blair.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [61]

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Just a couple of quick ones. I was wondering if you can talk a little bit more about the SKU rationalization, maybe Gary. I think it was a $10 million headwind in the quarter. How do you project the cadence of that SKU rat, and the impact going forward. It sounds like you expect that to be largely complete by the end of the fiscal year? But what kind of cadence or what kind of headwind do you anticipate over the next 3 quarters? And then am I accurate in saying as we get into fiscal 2020, you don't expect to be talking about that at that point?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [62]

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Yes, so the cadence is roughly $10 million a quarter is our plan, as we called it out. So we do intend, as you mentioned, to be through that by the end of fiscal '19. So into fiscal '20, we should have concluded that and exercised -- those SKUs should be out of our system. And we should be then focusing on the remaining range.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [63]

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Okay. And the consumption trend that we can see in the measured channels, is there a time frame by which you're kind of looking at the measured channel consumption and expecting or anticipating an inflection into positive growth? And if so, kind of what is that time frame we should be looking for?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [64]

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Yes, so as mentioned earlier. Obviously, our below numbers continue to improve sequentially, which is excellent for us. And we do expect, obviously, some inflection as a result of the planned distribution going to Sensible Portions year-over-year. And if you think around the February, March time frame, we're going to have quite a significant inflection of where we had loss of distribution last year, and this year we'll be gaining it. On top of the momentum we're seeing in terms of the other brands, we've already called out. So continued improvement in performance, but definitely there's going to be some key inflection points coming at the back of quarter 2 into quarter 3.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [65]

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Excellent. That's really helpful. I think I missed this earlier on the call, but just any -- on a pure protein sale, still confident? It sounds like it may be pushed out a quarter but still confident in sales of that business. And then what are the plans for use of proceeds upon completion of that transaction?

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Gary W. Tickle, The Hain Celestial Group, Inc. - CEO of North America [66]

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So yes, we made significant progress this quarter, and we anticipate that we will close by the end of our Q3. And the use of proceeds depending at the timing of it, we'll look at all the options to us. Do we pay down debt? Do we buy back shares? Do we do a special dividend? So when we do sell it we get the proceeds. Depending where we are, we'll look at all of those options.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [67]

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Okay. And the last one for Mark. Mark, when you talked about the portfolio earlier in the segmentation work. I'm assuming you're kind of talking -- there is an analogy here to Pinnacle, where Pinnacle had kind of leadership brands and foundation brands, and there were resources allocated based on those definitions and specific roles in the portfolio. Is that how you kind of see this playing out? And two, is the portfolio segmentation work that's being done over the next 90 days, is that being done internally? Is there external support for that? How is that being kind of looked at and implemented?

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Mark L. Schiller, The Hain Celestial Group, Inc. - President, CEO & Director [68]

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Yes, so I'll answer the second part first. There's internal analysis and there's external assistance with that analysis. And we're well into that analysis. It started before I got here. Obviously, I'm going to get immersed in it and shape it. I think yes, at the end of the day, the first part of the question. Segmenting the portfolio is about prioritizing where you're going to put your resources and where you're going to place your bets. And clearly, there's more growth potential in some parts of this business than others, and there's higher margins in some parts that are more responsive to consumer spending, et cetera. And so what you will end up seeing is us putting greater emphasis on some brands and more of a foundational approach to the other brands. Similar to what we did within Pinnacle, and we need to do that. We've got a lot of brands. And we've got, again, multiple geographies. We need to do it across the world, not just in the U.S. That opportunity exists everywhere. And that will help us be razor-sharp and efficient with everything we do to make sure that we get the maximum return on every dollar we are spending.

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Operator [69]

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This concludes the question and answer session. I will now turn the conference back over to Hain Celestial for closing remarks.

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Katie M. Turner, ICR, LLC - MD [70]

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Great. Thanks, everyone for your questions and for your participation on today's call. We look forward to speaking to you again at our fiscal second quarter earnings in February. Have a great day.

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Operator [71]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.