All right. Thanks. Good afternoon, everyone. We appreciate you joining us today for Hain Celestial's Investor Day. I wanted to go over a few brief housekeeping items first. For those of you in the room and listening on the webcast, the Investor Day presentation is available on the investor relations portion of the company's website, so you can access that now. For those in the room, the Wi-Fi password, if you need it, is HAIN, in all capital letters. We'd also like to remind you too, if you've got your cell phones with you, to put them on vibrate or silent during the prepared remarks and Q&A. After Mark and James present, we will have a formal Q&A session, and we'll do our best to take all of your questions within the allotted time. I will go through our lovely safe harbor statement.
Caution you that management will make forward-looking statements today within the meaning of the federal securities laws. In addition, there are non-GAAP financial measures, and there's a reconciliation of the non-GAAP to GAAP financial measures in the back in the appendix within the presentation. It's my pleasure today to introduce Mark Schiller, President and CEO.
Good morning, everybody. Thank you, Katie, and thank you all for coming. That's a good start. I appreciate your interest in the business, and I look forward today to providing you with some color on our transformational strategic plan. As I mentioned on the earnings call, we really have a tale of two businesses here that are performing very differently. The international business is a strong performing business, and we're pleased with how it's doing and its future prospects. The quality and stability of the international business has been quite impressive. It's at over 50% of our sales and profit. It is a very important part of our algorithm and our growth story. I'm going to spend a little bit of time on that today.
With regard to the U.S., we're certainly not happy with our performance and our results, but we're confident that we have the plan to transform the business and to generate improved performance. As we embark on the journey, I wanted to reiterate, the commitments that I gave you on the earnings call were around clarity, credibility, and consistency. After several years of under-delivering, I believe that these are going to be essential to restoring your confidence in Hain and re-earning your trust. That's why the board hired me, and that's my commitment to you, our stakeholders. With that said, let me start today with a little bit of clarity around what I hope you take away from today's presentation. Oops, there's the confident. First of all, Hain is a leader in the health and wellness space, and we're very well positioned.
Secondly, we have a strong performing international business that's positioned for continued success. Third, as I told you on the earnings call, we have a deep understanding of the U.S. business and its performance, and many of our issues are self-inflicted. Fourth, w e have a clear strategy for accountability in place to transform the business. Lastly, the result of all these changes are going to end up with a smaller but faster-growing and much more profitable business going forward. Let me take them one at a time, starting with our leadership within health and wellness. As you all know, health and wellness represents a very significant fundamental shift in the marketplace. It's a long-term trend. Consumers are increasingly voting with their pocketbooks. They want to feel better. They want to live longer. They want to thrive. This market of transformation cuts across all demographics, all stores.
We're seeing that this is clearly here to stay, as you all know. Since 2015, the percent of food sales that are categorized as healthy has grown from 8% to 10%, and the number of healthy new products has increased exponentially over that time, and household penetration of natural and organic products has doubled since 2008. Clearly, it's a big space with a lot of growth, and it's reshaping our industry. Hain is exceptionally well-positioned, we believe, to win in this space, and it starts with our passion. Health and wellness is at our core. It's part of our DNA. It permeates everything that we do. You can see this passion in how we approach our brands, our planet, our employees, and we believe that it gives Hain a real competitive advantage.
When you compare us to other big CPG manufacturers, we offer authenticity that consumers and retailers trust. We don't need to create a separate division to focus on healthy living, and we don't need to worry about how to nurture smaller health-oriented businesses within a big bureaucracy. We have a nimble, scrappy culture that enables us to move to market much more quickly than the big guys while they're still debating and researching whether or not they want to move forward. Compared with smaller companies, the startups that you'll see out at Expo West next week, we have more resources, both people and dollars, better customer relationships, a global network of brands and capabilities, and a track record of success that allows us to get products to the shelf faster.
Our expertise cuts across over 50 brands and 30 categories. Importantly, we're the leader in the channels that are most focused on health and wellness. 40% of our sales come from the natural channel, e-commerce, and Whole Foods. We believe we have more SKUs in Whole Foods than any other supplier. The health-focused retailers view us as strategic partners who understand where the consumer is going and a company that has the resources to shape the market. The mainstream retailers look at us for advice on how to reset their shelves, how to price offerings, and which emerging health and wellness needs are going to be lasting versus fads.
In short, we've earned a seat at the table over many years, and we are very important to retailers as they try to get bigger in health and wellness. We also compete globally in health and wellness and are distributed in nearly 80 countries. This gives us tremendous insight into what's happening and what is likely to come to the U.S. in the future. Many international companies are far ahead of the U.S. on innovation, on marketing, regulation, and social responsibility. By being a global company, we can leverage these insights to drive our performance for our stakeholders. That being said, you may ask yourself, why hasn't it shown up in our results? I would tell you, in fact, it has, outside the United States, where we've delivered consistent, steady, and stable growth.
Let me just give you a quick overview of that international business before I come back to the United States. Over the last three years, our sales have grown at an average of 4% per year, our profits have grown 11% per year, and our EBITDA margins have expanded over 200 basis points. We have strong battle-tested general managers around the world who have over 155 years of combined CPG experience. We're fortunate enough to have a few of those leaders here today. You guys can raise your hand as I call your name. Beena Goldenberg from Canada, Mark Cuddigan from the U.K., and Dr. Wolfgang Goldenitsch from the EU. These are just a few of the talented leaders who have been able to navigate a very challenging competitive environment internationally and thrive year in and year out. After our formal presentation, I encourage you guys to seek them out.
You can learn more about our business around the world and why I'm so confident in our future there. We've built some great brands as well. Brands like Ella's Kitchen, the top-selling baby food brand in the U.K. with a 29% market share. Brands like Tilda, it's the leading basmati rice brand, and brands like Linda McCartney and Yves that give us scale in the fast-growing plant-based meat alternative category. Like these businesses, we have other businesses internationally that have high growth, scale, and attractive margins. Again, that's why I'm so bullish on our prospects around the globe. While we've built a great business internationally, there's still significant untapped opportunity. Previously, these businesses were largely managed independently, and we've just started to unlock the synergy possibilities across those businesses. We started to selectively integrate our many acquired brands that have upside in streamlining certain areas of the business.
While we'll be careful not to jeopardize the momentum that we've created, we're looking at harmonizing things like accounts payable, purchasing, and cash management. We've already begun consolidating manufacturing facilities and ERP systems. We also have a great opportunity to share our best practices with one another and collaborate across businesses. This will reduce costs and accelerate our top-line growth. Lastly, we sell our products in over 80 countries, and while we do that, we're still very underdeveloped outside of North America and Europe. We have many opportunities to expand into new geographies, but we also have numerous platforms and brands that are still not ubiquitous within Europe and North America. In summary, we've got a very solid international business that's consistently delivered shareholder value with meaningful upside yet to be realized.
Let me turn now to the U.S. performance, we know this is where we've had the biggest issues, but also where we have the biggest opportunities. As everybody knows, we've underperformed in recent years, we're not pleased with the results. I've spent my first 100 days here at Hain diagnosing the reasons for the performance, I want to take you on a little bit of a historical journey and explain why we are where we are and what we're going to do to fix it. For 20 years, this business grew consistently. We made numerous acquisitions. We were able to buy assets relatively inexpensively because we were largely the only one focused on health and wellness, we saw it coming before everybody else did.
About five years ago, other people jumped in, increasing the competition for shelf space, driving up the price of acquisitions, making it harder to compete. As the leader in health and wellness, we didn't adjust quickly enough to the changing needs and the changing competitive environment, our sales and profits began to erode fairly quickly. There's four primary reasons why this happened, I want to walk you through each one of those and then again, explain to you how we're going to fix it. First, we were an acquisition company, we never really built the operating company underneath it to manage all of it. We didn't integrate business processes and build the capabilities to effectively manage so many brands. Instead, we kept a siloed culture with differing processes, differing KPIs, different ways of doing things.
Second, we weren't able to effectively manage all of the complexity. With 50+ brands, over 130 co-manufacturers, and thousands of SKUs, we simply have more complexity than companies that are several times our size. We didn't have the resources and the infrastructure to effectively manage so much complexity. Third, we didn't invest enough in our brands to keep them as leading brands. Whereas five to 10 years ago, being natural or organic was meaningful and a significant point of difference, today it's just not enough to win in many competitive categories. We also didn't invest enough in innovation and marketing to differentiate our brands and create loyal consumer franchises. Fourth, we prioritized growth rather than profitable growth at the brand and SKU level. We focused on growth on every brand, at every customer, every day, and too often it resulted in poor ROI.
We invested in lowering prices on brands that weren't elastic and in distribution that we ultimately couldn't maintain. We launched hundreds of line extensions that fragmented our velocities and ended up becoming significant future distribution losses. As a result of the investments we made, we didn't drive sustainable growth and earn our place on the shelf. We lost a lot of distribution, we still have a long tail of brands and SKUs that don't justify the space that they have today. Based on all of that, you may be thinking to yourself, "That sounds pretty challenging." You may be asking if it's fixable. Is there a good company underneath all of this that's worth investing in? The answer I'm going to tell you is a resounding yes.
We believe there's a great company underneath it all, one with significant value creation potential. There are great brands with strong margins in high-growth categories. We have strong customer relationships. We have passionate employees craving leadership. There's plenty of strengths that we have to build on. The performance issues in the U.S. are largely self-inflicted and can be resolved. I've seen this before in my previous company, I've successfully navigated through it to create industry-leading performance. It's going to take time, it's going to take hard work, I believe that it can and will be fixed. To get at it, we're going to have to do things very differently than we've done historically. That's where our new strategy comes in.
As I referenced on the earnings call, we're embarking on a new journey anchored in four key strategies that will transform the business over the next several years. First, we need to simplify the portfolio and the organization. I believe we can do just about anything, we can't do everything. We need to be more choiceful and prioritize the things that are going to drive the greatest value, focus more resources against them, and take out the complexity that is inhibiting this focus. Second, we need to build some core capabilities to enable better decision-making and better performance. We have some skill and process gaps that need to be fixed going forward. Third, we're going to focus on investing in a core set of brands that will restore profitable top-line growth to Hain U.S.
Fourth, we will build a relentless focus on margin and cash flow, ensuring that we understand the impact of all the decisions we make on the financial health of the company. Let's take each one of these individually, starting with simplifying the portfolio and organization. Within this strategy, there's two primary areas of focus. The first one is on segmenting the portfolio, the second is on realigning our resources according to the brand roles and creating an org structure that supports it. Starting with the portfolio, we did an extensive analysis of all of the brands, looking at both past performance and future potential. The goal was to segment the brands based on where we have a right to win and where we can generate attractive return. The result of all that was putting brands into four distinct categories. The first category is investment brands.
These are strong brands that have high margins, high responsiveness to investment, compete in attractive categories or segments. The goal here is to accelerate growth of these brands by reallocating resources to them and increasing investment. Our investment brands span four primary categories, personal care, tea, snacks, and Greek yogurt, and includes strong brands like Terra, Sensible Portions, Celestial Seasonings, Alba, JASON, and The Greek Gods. This group of brands makes up 50% of our sales in the U.S. and almost 90% of our profit. Its EBITDA margins were 18% last year. These brands also show steady velocity growth of about 3%-5% as we rationalize the poor moving SKUs, much of the volume is transferring back to the existing SKUs remaining on the shelf. They also compete in categories that are growing at an average rate of 5%.
In short, there are some great businesses with strong levels of performance that have been overshadowed by the underperformance of the rest of the U.S. business. Further, while we're pleased with the velocity growth that we're seeing on these brands and these power categories, we believe that we can accelerate that growth by reallocating resources from other slower businesses. The second category is sustainable contributors. These are brands that have scale and stability but do not warrant additional investment at this time due to their current return profile. The goal here is to improve the profitability while retaining the stability on the top line. That may mean exiting some unprofitable segments, refocusing on segments that have the most long-term growth and profit potential. When we do, we'll look at reclassifying these into investment brands and refocusing our efforts on growth.
Sustainable contributor brands include Earth's Best and MaraNatha, which make up 18% of our sales, but only 2% of our profit. Importantly, these brands compete in categories that have growth approaching 9%. Clearly, these are very good categories and they're good brands, but we have work to do before we're ready to invest in them for growth. The third category is incubation brands. Today, these brands are a very small percentage of our sales and profits, but they may have significant potential for future growth. They compete in very attractive categories, but we might not have the right consumer or value proposition yet. The goal here is to see how we can leverage our global presence to create a winning strategy for growth.
Over time, some of these brands may be placed in the investment segment and some of them may be harvested, but additional work is needed to assess the current strategy before deciding how we're going to proceed. This segment includes the plant-based beverages, which is a big business for us globally, and plant-based meat substitutes, which are growing at over 20% a year. In both cases, we have brands, products, and technologies within our global portfolio, but haven't figured out yet how to leverage them to create the right proposition here in the United States. We also have the right and potential to incubate other emerging opportunities in health and wellness here, like cannabis foods and personal care products, to determine if there's opportunity for us to invest there as well. The fourth category is profit maximization brands.
These are brands that we will shift away from focusing on growth and instead place emphasis on improving profit and margin. We'll do that through SKU rationalization, pricing, cost reductions, assortment optimization, and in some cases, shutting down or selling brands if it's worth more to someone else or if it significantly helps us reduce complexity. In short, it's all about choices, and we've determined that we can't fragment our limited resources across 50+ brands. We must put a disproportionate amount of focus and resources against the places where we're going to get the biggest return. For brands in this category, the focus is on profit and simplification instead of investing for growth. This group makes up 27% of our sales, but only 5% of our profit.
We have some sizable brands in here like Spectrum Oils, Arrowhead, Imagine Soups, Rudi's Bread, but we also have placed our Cultivate brands in here, which are very small and many of which are under $10 million in sales. In aggregate, these brands compete in categories that have no growth, and given their declining sales and low margins, we need to focus solely on profit and simplification here. Now that we've categorized the brands, the next step is to refocus our resources and our structure on how we're going to win. What does that mean exactly? Hain has not necessarily prioritized how resources were deployed across brands. The result was that not enough focus was put against the biggest opportunities for value creation.
The results, going forward, more innovation and marketing resources will be moved to the investment brands with the highest ROI and growth potential, and our productivity resources will be focused on the for-profit brands and the sustained brands. With regard to structure, we're going to build a more streamlined structure with clearer leaders for each segment who understand the role of the brands and the corresponding KPIs. They'll be responsible for creating common processes, eliminating redundancy, ensuring cross-functional input into decision-making, and deploying resources against this strategy. The second of our strategies is about strengthening capability. This strategy includes two important focus areas, building a world-class team, and second, building core skills and embedding a results-oriented culture. Let's first talk about the team. We've already started building a world-class team and have hired talent.
Chris Boever, raise your hand, Chris, has been hired to lead our sales team and strengthen our innovation. Chris has been in CPG for over 25 years with some great companies. He's the leader of our sales organization and has that group relentlessly focused on assortment optimization, trade investment ROI, and leveraging the portfolio to strengthen customer relationships. Chris and I worked together at Pinnacle for many years, and we're utilizing much of that playbook to improve our performance and set up our future success. Rob Gulliver is our new head of human resources. He's been an an HR leader for over 20 years and has extensive experience building great teams, performance cultures, and driving transformation. He joins us after eight years leading HR at the NFL, and we're fortunate to have him on the team. No, it's not his fault that it was a bad Super Bowl.
Our newest addition is Alan Cranston. Alan joins us next week. This is day minus two, I guess, for Alan. He's going to be our leader of transformation. Alan has been with Newell Rubbermaid for the last 15 years and has taken out over $750 million of costs from that organization. He'll lead our productivity initiatives and help us set up recurring processes needed to deliver sustainable, profitable performance. Three important senior hires in my first 100 days with more to come. You'll see new leaders over the next 100 days in important areas like pricing, supply chain, marketing, and innovation, to name a few. I'm building the team and the skills for us to successfully execute this strategy. I'm thrilled to have these new hires on board, and I'm looking forward to working with them as we lead Hain into our new transformation journey.
The second focus area that we have here is about building capabilities. Our biggest needs right now are in the four capabilities listed on the screen. Project management capability building is going to focus on managing complex cross-functional projects with greater discipline and structure. Innovation capability will focus on embedding a new stage gate process and rebuilding our pipeline for investment brands. Pricing, led by Chris, will focus on creating robust pricing strategies for each of our brands, better understanding the economics of our pricing decisions. Productivity, led by Alan, will focus on creating internal capability to accelerate the Terra work. We'll also create new productivity work streams to create metric-driven productivity culture. Underlying our plan to build capabilities is the drive to create a focused and results-oriented culture.
Culture change is always hard work, having the right structure, the right KPIs and accountabilities, getting the organization focused, and linking rewards to them is what drives value. This is going to be a very important part of Robert's role going forward. The third strategy is about reinvigorating profitable top line on the investment brands, and there are two focus areas here. One is optimizing distribution and assortment, and the other is creating world-class marketing and innovation. As I stated earlier, the investment brands are high margin, high velocity businesses with great potential to cross into the mainstream. To realize their full potential, the first priority is to get them in distribution in the right customers so that consumers can have easy access to them. We have opportunities to improve our assortment and to achieve our fair share of space.
For example, 50% of the sales on these brands are concentrated in the top 200 SKUs. You'll be surprised to find out that those 200 SKUs only fit in about 25%-30% of customer stores. Just think about that for a second. If we just double the distribution from 30%-60%, we can create several hundred million dollars of growth for Hain. You may be wondering if that's achievable. If it's there for the taking, why hasn't it been done? What I'm going to tell you is, while it's going to be hard work to do it, I'm very confident that it's achievable. For starters, these 200 SKUs have velocities that are well above category average, so they deserve to be in distribution, and we just need to make retailers aware that they exist and that they should carry them.
Secondly, where we can't expand our space and we have lower velocity items on shelf, we can proactively swap them out for higher velocity, higher margin SKUs, and that's good for the retailer who gets more productivity out of his or her space while also being good for Hain. Thirdly, we simply have not focused on this before. This is the first time that we're putting a focused effort against getting the right SKUs into the right accounts. We have very clear goals in place by salesmen to go after closing these voids, and we're monitoring them weekly. As customers reset their categories, we fully expect to see significant progress in expanding our distribution on these high-priority SKUs. Another way to accelerate growth is through great marketing and innovation. We're deploying marketing money from the profit maximization brands to accelerate growth in the investment brands.
We've started assessing our innovation pipeline and are pulling together more robust innovation frameworks to focus on fewer, bigger, and more incremental ideas. While we're just getting started, we have some things already in hand that we can invest in. Here's two examples of ideas that are differentiated and resonating with consumers. Garden of Eatin' Grain Chips, which you'll find on the table in front of you, are made with organic root vegetables and seeds instead of typical grains like rice and corn. We're capitalizing on the paleo trends by offering a great-tasting chip without any flour, soy, or dairy. On Celestial, we have a premium wellness line of teas that takes some of the biggest health needs and provide it in a hot, drinkable format. Digestion, mental vitality, immune support, antioxidants are just some of the benefits that you'll find in Celestial's TeaWell.
Both of these ideas are margin accretive, both have shown high velocity in their test market. Our goal now is to expand them more broadly and to get consumer dollars behind them to generate awareness and trial. That investment will come from shopper marketing, digital, social, mobile marketing, where we have seen strong returns and can spend the money more efficiently. As an example, on Celestial Seasonings, we have a social media campaign that generates a positive ROI and a payback that is four times the food and beverage average. Year to date, we have only spent $1 million on it. By reallocating dollars from the for-profit brands to the growth brands, like Celestial, we can ensure that these launches get strong consumer support, awareness, and trial. The fourth strategy is about expanding margins.
This is a significant area of focus for us and one that will play an important role in driving our algorithm going forward. As you know, our EBITDA in the U.S. has dropped considerably over the past few years, we intend to get all of that margin back. Many of the things that we've already talked about today are going to help us here. Things like portfolio segmentation, simplification, assortment optimization, and reallocation of resources to higher margin businesses all play a role in recapturing expansion. I want to go deeper on a couple of areas, specifically how we're going to accelerate our productivity work, strategic pricing, and addressing brand and SKU profitability. Let's start with the first one, productivity. As you know, we've been working on Project Terra for a while.
We've made solid progress to date, we've reflected $90 million of savings in our F19 guidance, we expect increasing momentum here in the future. James is going to talk more about this in a minute, I just wanted to show you thus far, here's where we've been focusing our efforts on consolidating distribution centers, taking out uneconomic trade, rationalizing low-margin SKUs, reducing customer reductions, and reducing G&A not tied to the realization of our new strategy. All are yielding meaningful savings, we expect that that will continue. Going forward, there are also lots of areas of untapped productivity potential that we haven't touched yet, like customer profitability, vendor consolidation, design to value, and strategic pricing. Let me touch on strategic pricing a little bit here. As I mentioned earlier, we are building this capability as we speak.
Many of our brands are inelastic. Reducing price doesn't really increase our sales. We know we need to do better here because we've increased our trade investment considerably over the last several years while our sales have been decreasing. Further, when we compare ourselves to other CPG companies, we're not getting as much price realization in the marketplace. As I mentioned earlier, we're working to ensure we have the right everyday price, the right promotion strategies, and that our investments are generating a positive ROI. We will also simplify our pricing structure to make it easier for us to understand and monitor customer profitability. While we went through SKU rationalization last year, we see that about half of our TDPs declines this year are tied to. There is still a lot more work to do here, particularly on the profit maximization brands.
As you can see on the left side of this chart, we have too many profit maximization brands that are losing money, which also means we have lots of SKUs that are losing money. In many cases, they have poor velocities and additional losses are somewhat inevitable. Rather than wait for the retailer to discontinue these items, we're going to proactively eliminate the SKUs from our portfolio and encourage retailers to swap them out for the faster moving, higher margin items in our portfolio. This will help us minimize TDP losses and improve the productivity of the space that we have.
While we're currently conducting a thorough review of all of our SKUs, looking at sales, margins, velocity, complexity, and are developing a plan to eliminate, cost reduce, reassess investments, or take pricing on things that don't lose money, what's going to result from all this will be brands with stronger velocity SKUs on shelf and significant margin expansion overall. To summarize the new strategy, there's really four key elements to transforming our business: simplification, strengthening capabilities, reinvigorating profitable growth, and expanding margins and cash flows. Hopefully, after hearing this presentation, you can see why the strategies laid out today will drive attractive returns for our stakeholders. I want to end my section here with a quick summary of why is this different from what we've been doing so far at Hain. We're moving from an acquisition-focused company to an operating company.
From an unfocused company that tried to be all things to all people, to one that's got very clear priorities. From pursuit of growth at all costs to unwavering focus on profitable growth. From buying our way onto the shelf to earning our way off of the shelf. From an organization that overlooks the impact of complexity to the one that greatly values simplification. From M&A being the primary driver of value to the creation of organic growth being our value driver going forward. We're confident that these actions will take hold and transform our business. James is going to come up in one minute and talk about how it comes to life within our algorithm. At a high level, it means that we expect to be a smaller business with higher growth rates and higher margins.
We're going to shrink in the short term with additional volume declines as we overlap distribution losses, rationalize unproductive SKUs, and eliminate poor investments. While we are doing that, we expect margins and profit dollars will grow. As time goes on, we anticipate the overall top line growth will be restored as the profit maximization brands become a smaller and smaller percentage of the total, and the investment brands begin to grow more in line with their category. With that, let me turn it over to James, who'll talk more about the numbers and how we expect this to come to life for Hain over time.
Thank you, Mark, and good afternoon, everyone. Today, I will share the new Hain value growth engine that is a result of the strategies Mark presented today. Oh, I apologize. I'll also recap our fiscal 2019 outlook and provide an update on our productivity initiatives. I will take you through our future state financial algorithm and migration path to deliver those results. Lastly, I'll provide commentary on our balance sheet and cash flow before turning the presentation back to Mark. Hain's historical value growth model has been driven by a focus on accelerating the top line. We are changing that model and redirecting our resources to deliver sustainable profit growth. To make this happen, our focus going forward will be on building our brands to investment grade.
We believe that having fewer, more material brands will support a far more efficient operating model that will drive significantly higher levels of profitability. The combination of faster top-line growth and higher margins will allow us to increase our return on invested capital and generate stronger levels of free cash flow. We plan to use our increased cash flow to continue to build investment-grade brands, delever our balance sheet, pursue profitable M&A, and provide returns to shareholders. As a result, we expect to be able to attract new consumers and customers to our franchise, and in time, achieve advantage rates of absolute profit growth. We provided the following updated fiscal 2019 outlook when we reported our Q2 2019 earnings a few weeks ago.
As a recap, we expect reported net sales from continuing operations in the range of $2.32 billion-$2.35 billion, adjusted EBITDA of $185 million-$200 million, and adjusted earnings per share in the range of $0.60-$0.70. As a reminder, our guidance is provided on a non-GAAP basis and does not include HPP discontinued operations, does not include any potential impact from Brexit or restructuring costs related to this new strategy. As we stated on the earnings call, we are not satisfied with our performance in the U.S. and have huge urgency in transforming our business. We have created a more systematic approach to improve profitability and reallocate resources to support opportunities to accelerate profitable growth and to maximize shareholder return.
The projected second half of fiscal 2019 will show sequential improvement and profitability from the first half, and fiscal 2020 will be better than fiscal 2019 as we continue to implement our action plan. As Mark mentioned, Project Terra continues to be a significant global initiative to aggressively reduce costs and complexity and gain greater operational efficiency. We are realizing material benefit from Project Terra with budgeted savings of $90 million in fiscal 2019. You may be wondering why we're not seeing these savings translate into better margins on our P&L. The answer lies in other unplanned costs that we are working to offset. The primary issues we have been dealing with are headwinds the entire industry has been facing, such as increased freight and service-related costs, investments we made in trade to hold our distribution, and several operational issues which we believe are largely behind us.
These include startup issues with our new mixing center in Pennsylvania, investments in non-economic distribution, which negatively impacted price realization, personal care service issues, which led to lost profitable volume, and obsolete materials and aging inventory as the result of soft sales on lower velocity offers. Over time, we expect the operational issues to right themselves and the positive impact of productivity initiatives to be more evident in our P&L. As Mark has reviewed earlier, we have a robust productivity agenda and are confident that it will result in expansion of our margins. Now let me shift to our algorithm going forward. As stated earlier, we have identified four roles for segmenting and managing the brands in our portfolio. Our goal is to build a strong portfolio of investment-grade brands that deliver higher rates of growth, profitability, and are material in size.
At its simplest level, we can lump the four categories of brands into two groups, get bigger and get better. Those brands that are targeted to get bigger are comprised of our investment-grade brands. Those brands where we must get better are our sustainable contributors, incubation, and profit maximization brands. For those brands where we aim to get bigger, our investment brands, we expect to grow both the top line and the bottom line. These brands represent our strongest brands with higher margins, which compete in categories with strong growth. In order to capitalize on the potential of these brands, we will reallocate resources, optimize assortment, and gain our fair share of distribution. In addition, we'll increase our marketing and innovation investments. For the get better grouping, which is comprised of the sustainable contributors, incubation, and profit maximization brands, we have two goals.
First, create fuel for growth by aggressively increasing margins. We'll do this by taking out unprofitable SKUs, increasing productivity resources against these brands, eliminating complexity and uneconomic investments, and taking opportunistic pricing. The second goal is to strengthen our financial performance in our highest potential brands, like Earth's Best, so they can become investment grade. Today in our U.S. business, our get bigger brands represent roughly 50% of sales and 90% of profit. Our get better brands represent 50% of sales and only 10% of profit. As you can see from the chart, over time, we expect our new strategic framework will deliver significant margin expansion across our portfolio and rejuvenate top line on the get bigger brands. Starting with our get bigger investment brands.
Over time, we expect to achieve 5%-7% top line growth and EBITDA margins of 16%-18%, well ahead of our fiscal 2019 performance. We are confident that we can achieve the 5%-7% top line growth because it is in line with the current category growth rates. We currently see mid-single-digit velocity growth on our brands, and we are just starting to invest in growth and resource these brands appropriately. We are confident in achieving the 16%-18% EBITDA margins because we are optimizing distribution and product assortment, creating margin and creative innovation, eliminating uneconomic investments, turbocharging productivity, and sharpening our pricing. Since most of these brands are self-produced, we expect manufacturing leverage as we run more volume through our plants.
Among the get better brands, we know that the top line will shrink as we reallocate resources to the investment brands, reduce uneconomic investments, and eliminate SKUs. The margins and profits will grow as we dramatically reduce complexity, take pricing, and drive productivity aggressively. If we find that we have get better brands where we cannot significantly improve margins, we'll reassess their role going forward and either shut them down or sell them to a more logical owner. As a result, over time, our get better brands will become an increasingly smaller, more focused portfolio with 10%-12% EBITDA margins, which is materially higher than our current margin of 2%. As you can see from the slide, the level of performance our strategies will deliver is significantly better than the performance of Hain U.S. today.
Looking forward, the outcome of our strategy will be a new Hain we believe will consistently deliver significantly higher levels of performance than the one you see today. On a consolidated basis, we believe the new U.S. get bigger brand portfolio and international can achieve top line growth of 3%-6% and EBITDA margins between 13% and 16%. Underpinning this outcome will be a refocused U.S. business on get bigger brands that delivers both 16%-18% EBITDA margins and top-line sales growth of 5%-7%. An international business with lower top-line growth of 1%-3%, but with similar levels of profitability. EBITDA margins of 15%-17%, versus the 13% today. As we showed you earlier, the international team has done a strong job expanding margins, and we expect that to continue.
That said, we have done a segmentation of the international brands as well, and there are a few profit maximization businesses which we will also have to get better. As with the U.S., we'll either need to improve the profitability levels or we'll likely exit them. That's been factored into our 15%-17% margin future state for international. While we'd like to believe we can fix or exit entirely the uneconomic parts of our business, we know there will always be a tail. That said, we believe through the strategies we've identified, the tail become much smaller part of our portfolio over time. As we consider the future state algorithm, we know that the challenges that led to Hain's underperformance have unfolded over a prolonged period of time and will not be fixed overnight.
That said, we expect our transformation plan will deliver improved profitability and profit growth during each stage of its delivery. In fiscal 2020, we expect a shrinking top line while we move aggressively to eliminate unattractive SKUs, cease uneconomic investments, take pricing, and remove complexity. The combination of a smaller top line and the get better brands and the stabilization of our get bigger investment brands will drive higher margins and profit growth. In fiscal 2021, we'll continue to aggressively drive margin improvements and eliminate unattractive brands and SKUs, but we expect to offset these reductions in top line with higher rates of growth among our get bigger investment brands, and in certain areas of our international portfolio. In fiscal 2022, we expect our get better brands to represent a much smaller part of our total business.
As the resources behind our get bigger brands and international business start to accelerate growth, the overall algorithm will have higher rates of growth and profitability that will carry us strongly into our future. As part of this multi-year transformation, our expectation is that investments in get bigger brands and the international business will be self-funded from reallocating resources from increased top-line growth and with our aggressive margin expansion strategy. In addition, we will prioritize our CapEx to driving growth on our get bigger brands and to material productivity initiatives. We believe our annual CapEx rate of $70 million-$80 million is the appropriate level. Finally, it should be noted that the speed of our transformation will be influenced by the pace at which we can address our get better brands, especially profit maximization brands, which make up a large percentage of our sales in the U.S. today.
While we can control the productivity and margin enhancement initiatives, we cannot control when or if we sell some of these brands. This is important because with 50+ brands, we have significant complexity. This dilutes focus and impacts the rate at which we can reallocate resources to places with the biggest growth opportunity. Hope, you have a good feel for the new Hain and how the algorithm comes to life. Now, I want to spend a few minutes on cash flow and return on invested capital. Going forward, we will deploy a disciplined capital allocation strategy with return on invested capital playing center stage in our decision-making. Based on fiscal 2019 EBITDA and working capital expectations, we anticipate cash flow from operations of $75 million to $90 million. We have already taken steps to improve our cash conversion cycle.
In just a few short months, we have lowered our inventory significantly, reduced our cost to serve, and improved our service levels. Our cash conversion cycle in the U.S. was 75 days at the end of Q1 and was 71 days at the end of Q2. We expect continued improvement throughout the year, and over time, our targeted cash conversion cycle would be more in line with the industry average of approximately 55 days. We will accomplish this by eliminating complexity in our supply chain, removing unprofitable SKUs, and exiting certain brands, including the cash flow-negative Plainville business that we just exited. All of which will drive down our inventory levels. Where possible, we'll also be standardizing payment terms with our vendors and customers. All of our investment decisions will be predicated on return on investment criteria.
Our return on invested capital at the end of Q2 was approximately 5%, which is below our estimated weighted average cost of capital of 8%. That is unacceptable. Return on invested capital will be a main focus of the company and will improve as we improve our profit trajectory and exit lower-margin brands. Our main priorities for potential use of cash are delever the balance sheet, as our current bank leverage ratio is 3.97 times, buy back our shares, return capital to shareholders in the form of a special dividend, or strategic M&A focused on building scale and capability in our core categories. To summarize, Hain will be a smaller, more focused company with higher margins and profit.
That's a fundamentally different approach for us and one which should greatly benefit all of our stakeholders. Our transformation to build consistent and sustainable performance in the U.S. has already started, we see positive changes throughout our organization. We are excited about the journey and are optimistic about our future. With that, I'd like to turn the presentation back to Mark.
Thank you, James. Hopefully, my goal today was to give you a clear and meaningful insight into our current situation and the future potential of the business. As I've stated in the past, we have a lot of opportunity here, in my first 100 days at Hain, my excitement has only accelerated. The issues we face are not new to me, we will deploy parts of the playbook that I've used successfully in the past to transform this business. As you've listened to us today, I'm hopeful that the points on this slide are clear and credible. We have a lot of work ahead of us, we're excited and confident in our plan. With that, James and I will be happy at this time to take questions from anyone in the audience. I think Katie's got the mic back there.
Steve Wilson, Lapides Asset Management. You showed a very interesting chart. That was the one where it was above breakeven, below breakeven, it played out across I don't know what they specifically represented in terms of whether those were the brands or those were specific clusters of SKUs or what. There was obviously a disproportionate amount of not just money losing, but massively money losing. When you broke it up the other way, in terms of the four buckets, everything was profitable, obviously some well below others. It's unclear to me if we just sort of take off the back quartile of that everything is fixed or that there's something more fundamental. It looked like visually, if it's representative, over half the brands or products or SKUs are actually losing money today.
Obviously any growing company, they will be investing in some products will be below the line. What should that be? How much of that is really lack of discipline and all the things you've talked about versus what should be in a growing, vibrant company?
Yeah, good question. There's a couple of questions in there. The first, that chart was profit maximization brands. That was just that 4th bucket of brands. You saw that about half of them were profitable and half of them weren't, which is why in aggregate, that whole bucket was basically a breakeven bucket and didn't generate a lot of profit to the company. Certainly, our goal is going to be to exit or profit improve the brands that were red on that chart. It's not as simple as that. In some cases, we have manufacturing plants that if you start taking out volume and SKUs, you have stranded overhead.
In general, we have a very robust cost reduction program in place where I talked about SKU rationalization, design to value, pricing, et cetera, optimizing the SKUs that we have on the shelf to improve the outlook of that portfolio of brands. As I said before, our goal is to either get those brands profitable or to exit those brands. We're not sitting around waiting, hoping that somebody shows up and knocks on our door and says, "We'd like to buy them." We're immediately focusing on how do I take the uneconomic investments on those brands off and redeploy the money that I was spending there to the other brands that have more growth potential.
What that means is those brands will actually decline faster, but you may end up with a smaller, better profit picture on those brands than you would have otherwise, because there's a lot of things there that simply aren't economical. In aggregate, that group is breakeven or slightly better, but there is certainly some brands and SKUs in there that aren't making money. Your question around a growth portfolio and what should the shape of the company be. Look, in a perfect world, we want every brand profitable and making money. Even the ones that are profitable, I want to get them up to mid-teens returns.
That's why we're focused very much on that group of brands that we called investment brands, because those already have high gross margins, they're in high growth categories, and they're showing signs of strength at retail and high responsiveness to investment. By putting a disproportionate amount of focus there, we will get this company to grow much faster versus spreading what limited resources we have across 55 brands.
Great. Thank you. Rob Dickerson from Deutsche Bank. Couple of questions. I guess, first question is just in terms of the rationalization piece. Same chart we just discussed. To go back to that and say, well, half are down, half are up. A big piece of the rationalization comes from that segment. If we just think rough math, because that's where people will go when you say, okay, EBITDA grows next year, margin goes up, but sales come down. Is it like ballpark, we're thinking 10%-15% of the portfolio could be rational? Is that fair or
It's an order of magnitude in the U.S., because I'll also tell you there's some outside of the U.S. where we'll do some rationalizing as well. In the U.S., it's about 300 SKUs, plus or minus. Again, like this year, it's not going to all happen on one day. You have to rationalize the SKUs when the customer is resetting the shelf, because they have to take inventory out of their warehouses and replace it with something else. If we just go in tomorrow and say, "We're cutting 300 SKUs," we leave holes on the shelf and we have angry retailers. It will happen sequentially over a year as each individual retailer sets each individual category. That's why a lot of the conversation around last year's SKU rat was, why are we still seeing declines? Because it takes a while to cycle through all of that.
Meanwhile, we're not waiting. We're taking the costs out of those SKUs now. We're proactively trying to swap them where we can. We're taking pricing where we can. We're eliminating unprofitable trade investment, where we've put investment into hold space that we really aren't going to be able to hold anyway. Let's at least make some money. We're not waiting for the category resets to start moving on the margins on those businesses.
Okay, great. Then just quickly, on cash usage, I know as you laid out the four potential usages of cash, the first was debt reduction. Just curious, if EBITDA goes up, obviously you're not under-levered, but you're not maybe over-levered as we look forward a year. Is debt reduction the priority up front or are we looking?
No. That was laid out in what the potential use of it would be. Depending on the time, when the cash we're generating, it could be stock buyback, could be de-lever the balance sheet. Those are not in any particular order. Yeah, obviously, when we start generating cash, we'll make the decision at that time.
Great, thank you.
Hi. Ken Goldman, JP Morgan. I had two questions. First, on slide 41, I was hoping to get a clarification on that. It might be easier, I don't know if you can go back there, but the new Hain, when you talk about that.
Yeah.
You talk a little bit about the +3% to +6%. Does that include or exclude the Get Better brands? Because I don't see those up there. The 13%-16%, is that below the average of Get Bigger and International because of the absence of Get Better in there, or is that because of the inclusion of corporate, as you mentioned?
This will be the inclusion of the corporate segment.
Okay.
That's the 13%-16%.
In the very small footnote down there.
Right.
Good thing I brought my glasses.
The corporate overhead is in that number. To your question about is the Get Better in there, we're assuming over time, things in the Get Better bucket either become investment grade, like Earth's Best, which is a huge brand, but not investment grade today, or that it's exited.
Okay. Thank you for that. Second question is the special dividend that you mentioned as a possibility. I was a little surprised to see that. Usually, that's not up for companies that are growing. Usually, that's an option for companies that don't really have a lot to do with their cash. I was a little surprised to see that as an option including to talk about that.
One we would consider depending on a divestiture and the cash that was driven by it, that could be an option that we would potentially use. We're laying out the potential options of cash. Obviously, at the time, if there's something like that would happen, we'd evaluate it.
Thank you. Alexia Howard with Bernstein. First of all, thank you very much for giving us a very interesting sort of internal lens on how the different components of the company kind of look at the moment and what the potential is. As I think about one of the questions that we have out here, it's more about, what about the external pressures here? If I think about the retailers getting tougher to do business with, or potentially, you mentioned the number of healthy new products that have increased exponentially, competitively over the last few years. I guess on the retailer side, what confidence or what can you tell us that would give us more confidence about the strength of those retailer relationships?
Maybe particularly in the e-commerce channel, because we heard that you were slowing things down because of the demands that are coming out of that segment or that channel at the moment. Are you seeing any slowdown in the funding for some of these new brands that are just popping into the market from all over the place right now? Thank you.
Yeah. It's a great question. First thing I would tell you is our job is to build great brands with strong consumer franchises. If you do, you're insulated. If consumers want your brand, if they seek it out by name, if it stands for something in their life, you're gonna have a strong, stable business. That's part of why we want to invest in the brands that were in the investment bucket. Those are good brands. They're differentiated brands. The products are good. We have strong consumer franchises. Those we think can be competitively insulated and whether we're getting pressure from the ankle biters at Expo West or the big companies that want to start moving into health and wellness, we think those brands have great potential to be insulated. It's gonna take investment. It's gonna take innovation.
It's gonna take us doing things to keep them relevant and fresh, more so than we've done in the past. That's why we focus in on those brands there. With regard to your question on e-commerce, what I would tell you is we've made many uneconomic decisions in pursuit of growth. For example, if a customer wants customized packaging, we've just historically said yes, regardless of whether we made money at it or not. What we're doing now is saying, "You know what? That thing that we're offering you doesn't make money. Here's an alternative. If you're interested in that, great. If not, we will walk away from the volume." Which is a very different cultural decision for us than how we've operated in the past. It's been growth at all costs. It's say yes to everything.
By the way, that's part of why we have strong relationships, because we have said yes to everything, but it has to be a partnership. Our experience in the past, Chris has done this very well at Pinnacle Foods, is good customer relationships are give and take. The customer needs something and we need something, you work together to make sure both sides' needs are met. When you do that, you become a partner of choice because you're listening to them and helping them grow, and they're listening to us and helping us grow.
It's not in a customer's best interest to milk the heck out of your suppliers, it's not in the supplier's interest, look at what's gone on in the marketplace this past week to just say, "We're going to do stuff that's good for us, but not good for the retailer." That partnership becomes very important. Again, we have good relationships because we've said yes a lot.
We're translating those now into relationships that leverage the strength of our portfolio because we are in a lot of categories and have a lot of credibility and knowledge that is important to the retailers, but doing it in more of a win-win way. That does mean, in some cases, we are going to walk away from some unprofitable business in some of those emerging channels. It really is about profitable growth, not just growth at any cost. That's a shift for us. Yeah.
Hi, Amit Sharma, BMO Capital. A couple of clarifications and then a question for Mark. If you can go back to slide two, I just want to make sure we are reading it right. Sustainable contribution portfolio EBITDA margins are 2%? That seems?
Yes.
Unbelievably low.
That is correct. I don't have to go all the way back. I know the answer. Yeah.
No, that's just unbelievable. Okay. Got it. Yes. I just want to make sure it's not there.
We call that opportunity. Yes.
2%, you lie. It's a big opportunity. The other thing is, can you provide a little bit more clarification on where trade. We heard a lot about reallocation of trade spending. We do get a lot of questions about where is the trade spending? Are you underspending? Any clarity you can give on where that trade spending is, and are you going to increase it or is it simply a reallocation?
Yeah.
The last one for you, Mark, I think you're touching on that a little bit, but I think more than any other company that we cover, you serve different masters, right? From exposure to different retailers. As you put this plan into practice, can you talk about some of the larger retail relationships you have? How are they thinking about it?
Sure.
What's good for Whole Foods may not be good for Walmart, for example.
Yeah.
If you can talk about that as well.
Yeah. Let me try and There was a lot of questions there. First, on the sustain brands and why they're not profitable. The biggest brand we have in the company is Earth's Best. It's not a very profitable brand. Why? We compete in over 30 segments with that brand. We're in pizza bites, we're in snacks, we're in diapers, we're in wipes, we're in jars and pouches, and a lot of these things don't make money. Let's just get rid of the segments that don't make money, have a smaller business that's very profitable. That's what I mean by we've got to get the profit profile of that brand right first, and then we will go invest in it. While the margin is low, there's a lot of opportunity there.
I'm confident we can get the margins up on that business by just being more choiceful about how we use the brand and where we go enter. We've entered places we can't make any money at. Places where we're not self-manufacturing, places where we have no pricing power or no point of difference. Just because we can put our name on wipes doesn't mean we have a right to succeed in wipes. We're not going to make any money there, let's get out of it. That's number one. With regard to customer relationships, the great thing about having such a broad portfolio is we do have different offerings for different customers. The things that Whole Foods want may not be exactly the things that Walmart want.
Walmart's going to want things with high velocity and mainstream potential, because the burden of proof on their shelf is much higher velocity than it is on Whole Foods' shelf. We have things that are high velocity in that investment brand bucket that have great potential, and the best example I could give you is Sensible Portions, where we had a good, robust business. We had some supply issues. We got thrown out. They tried private label. It didn't work as well. Now we're back in. If your brand is strong, if your product is strong, if the velocities are high, the customer's gonna want those things. In the mainstream channel, the burden on velocity is much higher than it is in the natural channel. Natural channel is more about variety and choice.
We have certain things that we will do with Whole Foods in the Natural channel. There's other things we'll do with the Walmarts and Krogers of the world in the MULO channel. Having so many categories and so many brands actually gives us an ability to play well with both of them, where other companies either play in one area or play in the other. Our portfolio is an advantage for us there.
Trade spending?
Oh, trade spending. Yes, thank you. A lot of the trade spending investments, I'll categorize them into three places. One was price protection. We took price increases, had trouble passing them through in some cases, and just added trade to hold the price point where it was. I think we've got to be much more strategic in our pricing, and I gave some examples in the presentation around. We don't really have strong enough understanding of pricing elasticities, what should our everyday price be, what should our promoted strategy be. As we sharpen our toolkit there, we will get much smarter in terms of how to pass pricing through strategically. That's number one. Number two, we made uneconomic investments in trade to hold distribution that wasn't going to be sustainable. When you've got something that isn't moving, you throw money at it.
That may solve your problem in the short term, it isn't going to sustain those brands' distribution in the long haul, that was investment that lost money. By just taking that investment out and accepting the fact that that SKU is not going to have a home in the long term, we will make more money. We'll be smaller, we'll make more money because we threw money at it that really wasn't profitable at the end of the day. The third piece I would say is, we've got to get stronger on the ROI on high-low trade, where we're investing for merchandising support. On a brand that has a 40% or 50% gross margin, you're going to get a lot better return than when you put it on a brand that's got a 5% gross margin.
We have to be more thoughtful and choiceful about how we deploy that money around the things that are going to give us a better return.
Akshay Jagdale, Jefferies. I wanted to ask first about, you present a good thesis on execution. One of the biggest pushbacks we've gotten is about the strength of the brand. Maybe, in the context of distribution.
Yep.
You mentioned you're focusing on certain SKUs. We've heard that before for a number of years now, top 500 SKUs, et cetera.
Can you just delineate between sort of strategy, execution, and brands? Because there is some brands.
Yes.
That were emphasized that should not have been, maybe there was money spent on them. Can you give us a little bit more color on that piece?
Sure.
If you look at a distribution chart over 10 years, for natural organic, it's slanted upwards and for Hain, it's slanted down.
What are the behaviors that are going to change? What are the incentives that you're putting in place to change those behaviors?
Yeah.
It was a sales-led organization, right? The distribution thing just doesn't mesh. I have a follow-up on margins.
Yeah. The emphasis in the company was get distribution everywhere on everything. The first point I'd make is that's not strategic enough, right. Things that will sell in Whole Foods Market may not sell in Walmart, and you got to be thoughtful about whether you go after that distribution or not. Second, our innovation was really about line extension. I'm making this up, so don't quote me on it, we got 12 flavors of Sleepytime tea. We could probably sell the same amount with five flavors as we can with 12. All we're doing by putting 12 on the shelf is fragmenting the consumer purchases across more items, which lowers the velocity of everything and makes it all vulnerable versus having fewer, stronger SKUs.
When you look at our portfolio, those brands on the left side, the investment-grade brands, they actually have increasing velocities, but we are losing average number of items per store. What that means is instead of 12 Sleepytime teas, somebody's saying, "I'm going to cut this to eight." What we're seeing is as they cut it, the velocities on everything else is going up. A lot of that volume is transferring back to those brands, and that's why those brands are stronger. On the right side of the page, when you look, which I think was your right, it was my right. When you look at the profit maximization brands, a lot of those just don't have the velocities that they need to hold their space. There is a long tail in the profit maximization brands that is going to get smaller.
The question is, we could wait for the retailers to discontinue them, or we could be more proactive in terms of how we do it. That's why let's swap out things that we know are high velocity, things that are low velocity for things that are high velocity. We can do that proactively. As we look at innovating, we've got to get to more benefit-driven innovation that adds something that the consumer needs versus another flavor of something that they already have. That's why I gave you the two examples of the grain-free chips and the TeaWell. Those are new benefits for the consumer that don't exist versus here's just another flavor of tea.
I think those have a much better shot at bringing incremental consumers into the category, which is good for the retailer and good for us because the category expands, versus just another flavor that fragments the consumers that you already have and takes up space on the shelf.
Just one on margins related to execution. The SKU rat, it's been enormous already, right? 800 basis points cumulatively over two years, and margins have gone down. What went wrong there?
Well, they're not necessarily correlated, right. The margins went down because we didn't execute the mixing center right, because we've had service issues on personal care, because we've had obsolescence from all of this complexity where products became old age and we had to throw them out. There's a lot of reasons for the margins going down that we talked about in the presentation. The SKU rat was designed to simplify the organization some, but we didn't go nearly deep enough. The reason I know that, which I said on the earnings call, is we still have a disproportionate amount of our SKUs that are sitting in the lowest quartile in terms of their velocity. If they're not turning, we're going to lose them. There's more to come. We have 2,200 SKUs, and 90% of the volume is done in the first 1,000.
Don't quote me on that, but order of magnitude, that's right. There's a very long tail here. Some of that we're going to get rid of by shedding brands. Some of that we're going to get rid of by proactive SKU rationalization. Some of that we're going to get rid of by optimizing assortment around fewer SKUs that makes other SKUs obsolete. We're going to work on it. It's going to take some time, has to be aligned with category resets, but it should be good at the end of the day for the margins of the business.
Hi, Steve Strycula with UBS. First of all, thank you for the increased transparency today. A lot of slides were very helpful. Two-part question. First part, very quick on the SKU rationalization. I believe you said roughly 300 SKUs will be eliminated over four 12 months. That's about 14% of your SKUs. Should we think about that being a five to seven point drag to sales over the forward year?
To be honest, we're doing the work as we speak, so I'm not exactly sure what it's going to be. It's going to depend on which brands. If the SKU rat on a high margin brand versus a low margin brand may be somewhat different. It's going to be less than 14%, certainly, but I don't have an exact number for you yet. We're still doing the work.
Okay. Then on the margin normalization chart that you put up there, was that a 2022 target, roughly, when the furthermost column as to when things should really normalize? If so, that's taking the midpoint of EBITDA margins from 8% to roughly 14%-15%. If we had to bucket that into three simple pieces, the part that's contingent on absolute sales growth, the part that's contingent from supply chain improvement, and the part from trade optimization, how would we rank order those? Thank you.
Yeah. The first thing I would tell you is the rate at which we get to the future state algorithm is going to be dependent on how fast we rationalize the tail. Because the tail is the drain financially and 90% of the profits is on the investment-grade brand. Shrinking the size of the tail does two things. One, it improves your margin and your profitability, but it also eliminates complexity. Today, with 55 brands, somebody's got to forecast it, somebody's got to manufacture it, somebody's got to distribute it, somebody's got to sell it. It takes resources away from the things that have growth potential. It's hard for me to tell you on January of 2022, we're going to be at this algorithm because if we can shrink the tail faster, we can move faster. If it takes longer, it's going to take longer.
That's the first point I would make. It also is going to be part of the second part of your question, which is what's each piece worth? Again, it's going to depend on how fast we can move the resources from the tail to the growth brand. At the end of the day, in a perfect world, you'd want to just have a portfolio of those growth brands, right. They're all high margin, high growth, high velocity, and we would have a very robust algorithm. As James said, it's not realistic that we're going to get there tomorrow, and every company's got some tail brands. The problem is in a company with 55 brands, if 35 of them are tail brands, that's what's crippling us. We've got to get that to a much more manageable number.
We're doing that, again, proactively with the things that we control. We will shut down some brands that we just don't see a path to making money. We will optimize margins on the ones that we keep. Then as opportunities come to divest some of those brands, we will certainly consider it in the spirit of eliminating complexity and improving the financial performance.
Hi, Eric Hines with Segall Bryant & Hamill . I wanted to ask about return on invested capital. You guys talked about it at a brand level. We've heard it mentioned a couple other times throughout the presentation. Is there a corporate goal you have around ROIC? As you talk about some of the culture change that is occurring, how are incentives changing in lockstep with that? What can we expect around incentive change throughout the organization to reflect the new Hain?
Why don't you take the ROC target? I'll talk about the incentive.
Clearly, where we currently are at 5% with our weighted average cost of capital at 8%, that's not acceptable. Clearly, getting over that, over time, we would expect to try to get to closer to industry average. It would be over 10% in that range or even higher as we increase our profit, as well as we start to exit some of the low-margin brands, that obviously helps as well. Clearly want to improve it to closer to industry average.
On the incentives, it's a great question. The first thing I would tell you is historically, our bonus system was black box. At the end of the day, somebody told you got one or you didn't. It wasn't tied to metrics. It wasn't, here's your plan. Here's the leverage against you delivering or not delivering that plan, which allows you to calculate on an ongoing basis, am I going to get a bonus or not? We've changed that already. The second is the LTIP. The way the LTIP was done for me is I got three years' worth of grants up front. It's tied to a 15% annual shareholder return from the price that the stock was at when I joined. If we generate that 15% annual return, we get paid. If we don't, we get nothing.
My incentives are very much tied to shareholder return. Since I've come on, every one of the vice presidents and above have the exact same incentive. We are all tied to shareholder return. If there's a 10% return to shareholders, we get nothing. It's a very high bar, but it's a very lucrative payout if we can deliver it. I wouldn't be here if I didn't think I could do it.
A couple of things. One is, I may have missed this, I apologize, if the tail is as long as you're suggesting here, why is it only 300 SKUs then that are coming out? Is there an argument to be made that it should be dramatically more if 90% of the profits are coming from the piece of the business that's in the investment segment? Again, I may have missed this, you've talked a lot about reallocation of resources towards the brands that deserve it. Does that mean that there's actually also incremental spending around A&C? Does that, as a percent of sales or whatever metric, have to go up just in an absolute sense? Therefore tied into that, how do you guard against pushing the organization to deliver too much too soon from a profitability standpoint?
We understand why sales are going to be down next year.
Yep.
You're talking about EBITDA being up, I guess there's a magnitude, you haven't obviously given us a range yet.
Right.
It would seem like with all of the work and the heavy lifting that you're doing here, why wouldn't fiscal 2020 be a year where you give yourself the room to say, "I don't know how fast this is going to go or how slow it's going to go, and I may have to invest a tremendous amount more incrementally than I expect"?
Part of the reason we're not giving guidance today on FY 2020 is because we want to see how the next several months play out. I would tell you there's enough uneconomic investment, and I'll call them missteps in terms of self-inflicted wounds on supply chain, that we believe that we can grow profit next year while still investing in marketing. There's a lot of uneconomic trade that can be redeployed into marketing of these brands. There's a lot of cost that went into the poor service on personal care and the mixing center debacle that should be tailwinds as we go into next year. I do believe growth is there to be had. And what that growth is going to be, we're not prepared to articulate yet. With regard to the 300 SKUs, it's complicated.
The reason it's complicated is we have stranded overhead we have to think about, right. If I take out hundreds of SKUs on brands where we manufacture, all I'm doing is passing those costs onto the remaining SKUs that are left in the brand. We have some contractual obligations on things that make it challenging. HPP was a good example on the Plainville business that we just exited. We had long-term contracts that made it very difficult for us to shut that brand down if we wanted to, even though it was losing money. There are some, I'll call them factors behind the scenes that impact the number of SKUs.
The other is, as we start to invest in some of these brands, some of the things that are sitting in the bottom quartile of the category, all boats should rise if we are able to get more consumers into some of these franchises. It is a little bit of a number of factors. We think 300 is about the right starting point. As I said, we're still doing the work. It might be a little more. It's not going to be 1,000. There is certainly a lot of opportunity. What are you telling me here? Oh, we do have Yeah, it's a very good point. Thank you. That's my notetaker. Personal care is a very complex business because you're in so many segments. You got hand creams and shampoos and toothpastes and conditioners. About 600 of our 2,200 SKUs just sit in personal care.
It's a very, very complicated business. That is the nature of that business. You have to be represented across many different categories, and you have to constantly bring innovation. There's a lot of swapping in and out of SKUs in that business, which is very innovation intensive. If you pull that aside, it's a good point . There's about 1,600 SKUs in the food side of the business, and taking out about 300 of them, is a little bit bigger number on a smaller base. Good point. Yeah.
Hi, there. I've got a two-part question. The first part is, you spoke a little bit about the trade spend being to keep distribution. Obviously, the old regime had some fairly prominent distribution losses at some retailers. I'm thinking particularly in baby food. What percentage of your distribution losses that we're seeing in some of the industry data come from low velocity SKUs that we don't feel are profitable? What percentage are from competitive displacement from a retailer wanting to experiment with some of the rising brands? The second question, completely unrelated, is obviously we sold the Plainville business for zero. Do we have visibility or line of sight on selling the Empire and the chicken business over the next, call it six to nine months?
With that, are there any other operating or capital losses that we can do to offset any gains on those sales?
I'll let James take the second part. On the first part, they're all interrelated. Customers deciding they want to dabble in other brands is also related to slow velocity items that aren't earning their keep. When a retailer resets his shelf in every category once a year and new stuff is coming, whether that's existing brands that want to invest and partner with a retailer or whether that's new products coming, what the retailer's gonna do is look at the existing items that he has and say which ones are not earning their space. If you have a disproportionate amount of your SKUs sitting in that bottom quartile on velocities, you're the most vulnerable. It's interrelated. Them coming and taking it out is related to other things coming to take its place, because that's put something in the space.
As I said, as we get better at innovation, we'll have things to put in our own space because every company has brands and SKUs in the bottom quartile. You have to have stuff to proactively replace your own underperformers. The problem is when it's the 12th flavor of Sleepytime tea, the retailer doesn't want it. It's got to be something like TeaWell that says, "Hey, I'm gonna offer antioxidants or immunity or new benefits that are different than just flavored tea." "Okay, great. That sounds different. I'll give it a chance." Part of it stems from innovation, and then part of it, as I said, is we've done such shotgunning of our distribution that we have relatively low distribution on everything.
If you just consolidate our efforts around high velocity, high margin SKUs, which is the 200 SKUs that Chris and his team are focused on, these are very high velocity and very high margin SKUs that we said we want to make ubiquitous. We're gonna be willing to proactively trade out some of the low velocity and low margin items to get better stuff in its place. We want to be in that dialogue when they go to replace stuff versus us just having nothing and them saying, "Well, I'm gonna take your stuff out." We haven't had good enough innovation, and we haven't been proactive enough in terms of replacing our own underperformers. By the way, when you go to a retailer and you talk about your own underperformers, now you're partnering with them. You're not trying to sell him something.
You're trying to make his section more productive, which is a much more healthy relationship to have with a retailer. When they believe that you want to help them grow, you're gonna get a lot more ties than when you're just trying to ram stuff onto the shelf. We've got some work to do there. That's why Chris is here. He did that very, very well at Pinnacle, and he has great customer relationships. We've got to crank up the innovation machine, and while we're doing it, we're cranking up the assortment optimization machine, which we can do today. I'll let you answer the Plainville question.
Now that we exited the Plainville business, the Empire Kosher and the FreeBird, the chicken business, is very profitable, consistent profit growth, cash flow positive, and there's a lot of interest in it right now. We're going through the sale process right now, but there's a lot of interest in it. From a tax shield, obviously, we've generated a tax loss on Plainville, so we'll be able to offset any tax gain on the Empire and FreeBird with that loss. We do have a tax shield.
A couple of quick questions, one on pricing. I think you'd spent a little bit of time on that, but you had a chart up there versus your peers. Obviously, it doesn't look great. Hopefully, that's not a reflection of brand power, but more just pricing discipline. Is there any way you can give us some more detail on what your plans are for the next couple of years to improve that? It looks like that could be a huge benefit for you guys.
Yeah.
I have a question around cash flows. Obviously, there's a lot of work to be done, and cash flows have been going the wrong direction lately. Without that cash flow, how do you feel that you can be successful in this turnaround that needs to take place? Thank you.
Yeah, I'll let you answer cash flow in a second. What I would tell you on pricing power is, first and foremost, we've got to have things on the shelf that the consumers want and that are somewhat inelastic, right? Part of what we did very well at my last company was margin-accretive innovation that traded consumers up, such that if I didn't get one incremental sale out of a consumer, I was now getting them to pay $0.50 more for that thing that they were buying versus the thing they were buying yesterday. TeaWell fits that bill. TeaWell on Celestial Seasonings sells for $1 or $1.50 higher than regular Celestial Seasonings.
If we just get that on the shelf and we get not one single incremental consumer, but we get those consumers to pay the extra $1.50, we've got a higher dollar ring, which means more pricing, and we've got higher margin, penny profit and absolute margin. Margin-accretive innovation, a good, better, best model on innovation is going to be a big part of pricing power. The second, as I mentioned, is we just didn't have a lot of discipline around how and where we spent money. There was a lot of money spent. MaraNatha is almond butter that sells for $8 a jar. We discount it to $6 a jar. Well, it doesn't bring anybody in because they can get Skippy for $2.99. The people that are spending $8 a jar, they want what MaraNatha stands for.
They want the health and wellness behind it. They want the authenticity. They want the belief that it was made in somebody's garage and that it's artisanal, and they don't want Skippy. By dropping the price from $8 to $6, we're not bringing anybody else in. All we're doing is actually trading down pricing. We're getting less dollars for every purchase that we're making. There's a double whammy there. There's negative pricing and there's negative profit that goes with discounting something that we didn't make any money on. By pulling that out, by just making people pay the $8 a jar that they're willing to pay, we get price realization. That's the second key way that we're going to do better going forward, is taking out that uneconomic investment and then innovating to trade consumers up over time.
On to cash flow?
Yeah.
Cash flow clearly is the focus of the company now, and we are really driving the cash conversion cycle. We're really spending a lot of time on driving down our inventory levels and improving that. That obviously will help on a go-forward basis, improve our operating cash flow as well as when profitability improves, obviously, that will drive incremental cash flow as well. A real focus on the company and really driving down the cash conversion cycle to closer to the industry average of 55 days.
Last question, I think.
Yes. Eric Larson, Buckingham. We haven't talked an awful lot about supply chain. You had one slide up there that shows you have 130 co-packers. I believe you pack about 45% of your sales with co-packers. I think that number is about right. It's $1 billion of revenue for 130 co-packers. That's what, $8 million per co-packer? How does that look, and will you pivot toward more manufacturing, or will you just try to consolidate the co-packer? How do you view that supply chain going forward?
Yes. By eliminating unprofitable brands and SKUs, we will reduce the number of co-packers. We have dozens of co-packers who make one or two SKUs for us, which is tremendous complexity, which goes back to my message around we did not place any value on complexity when we were making decisions previously. To go through all of the work to qualify a co-manufacturer, to manage the relationship, to manage the inventory flow out of his warehouse into our warehouse for something that maybe we sell $40,000 a year on, is a colossal waste of energy. The shrinking of the tail, there's not only a huge economic benefit of getting out of things that don't make money, there's a huge, I'll call it, intangible benefit of getting out of complexity because somebody has to manage all of that.
That's why I'm so adamant and bullish on shrinking the size of the tail and making this a smaller company, because there's a lot of energy being wasted on things that really are not worth the effort at the end of the day. As we go through the SKU rationalization process, that is one of the lenses that we are using, is complexity. It's not just what's the velocity or what's the sale of this item. It's also, does this item add significant complexity to our organization or not? We're going to consolidate to fewer co-packers. By eliminating the 300 SKUs that I talked about, as well as exiting some unprofitable brands, we think we can order of magnitude cut the number of co-mans in half.
Which would be dramatic in terms of simplification of our supply chain, which will result in less SKUs aging out. It will manifest itself in terms of better service because you don't have to take those items and put them in 10 distribution centers. There's a huge intangible benefit that comes with complexity reduction that I'm not prepared to quantify today, but I'm very confident that we will get a benefit from reducing that complexity. That's why we're very focused, not only on growing the growth brands, but also shrinking the tail as fast as possible. I think we are out of time. With that, I thank you guys all for your time and attention. We'll be circling around a little bit over the next few minutes, but thanks for your time and thanks for coming. Hopefully, that was very helpful. Thank you.