Good day, ladies and gentlemen, and welcome to the Hain Celestial Announces First Quarter Fiscal Year 2018 Earnings Results Conference Call. At this time, all participants are in a listen only mode. Later, we'll As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Anthus, Senior Vice President, Corporate Relations.
You may may begin.
Good morning, Skyler, and thank you all for joining us today. We are pleased to report Hain Celestial's 1st quarter fiscal year 2018 earnings results. Irwin Simon, our Founder, Chairman, President and Chief Officer Gary Tickle, Chief Executive Officer, Hain Celestial North America and James Langrock, Executive Vice President and Chief Officer as well as several members of Hain Celestial's management team are with us today. Our discussion today will include forward looking statements, which are current as of today's date. We do not undertake any obligation to update forward looking statements either as a result of new information, future events or otherwise.
Our actual results may differ materially from what is described in these forward looking statements and some of the factors which may cause results to differ are listed in our publicly filed documents, including our 2017 Form 10 ks and other reports filed with the SEC. A reconciliation of GAAP results to non GAAP financial measures is available in our earnings release, which is posted on our website at www.hayne.com under Investor Relations. This conference call is being webcast, and an archive of the webcast and accompanying presentation will be available on our website under Investor Relations. Our call will be brief, so please limit yourself to one question. If time allows, we'll take additional questions and management will be available after the call for further discussion.
Now let me turn the call over to Irwin Simon. Irwin?
Thank you, Mary, and good morning, everyone. We appreciate you joining us today. We hope everyone had an opportunity to review our press release that was released this morning. We're pleased to report a solid first quarter results, which met our expectations for net sales profitability across all our segments as we continue to successfully execute against Project Terra initiatives. In a highly dynamic consumer packaged goods world, and I say dynamic and highly changed and highly changeable, the retailer environment, we've had tremendous progress on our focused customer centric go to market initiatives, including the benefits of our SKU rationalization, increased brand investment in the U.
S. We've also had good execution against our strategic initiatives by AimPure Protein, our U. K. Business, our European business and our Canadian business. While Gary and James will take you through our results in more detail, I want to speak to a few highlights of the quarter.
Our worldwide net sales increased 4%, driven by double digit growth from Earth's Best, FreeBird, Hartley's, Spectrum, Alba Botanical, Jason's, our Linda McCartney brand, EASE Veggie Cuisine, Avalon Organics, New Covent Garden Soup, Arrowhead Mills and Live Clean. Also growth coming from our Sensible Portions, Tilda, Terra Imagine, Ella's Kitchen, Lima and our Sun Pat business. Our net sales growth combined with solid gross margin expansion helped us grow adjusted EBITDA to $59,500,000 from 45,600,000 dollars in the prior period. And earnings per diluted share of $0.19 compared to $0.08 in the prior period or 0 point 2 $3 on an adjusted basis compared to $0.14 in the prior year. The natural and organic product category continues to grow mid single digits across the U.
S. And our natural conventional specialty channels. Hain Celestial is uniquely positioned to succeed in this category with the scale of our diverse portfolio of organic and natural brands, the infrastructure we have in place and the opportunity to increasingly benefit from our strategic investments that we've already made. In this quarter, the U. S.
Segment grew net sales 4% with double digit increases from ErsteVest, Spectrum, Arrowhead Mills, Avalon Organic, Jason's and LiveFleet and other consumer products, Imagine Sensible Brands. Gary will talk more about our brand investment and the timing of our consumer products later on. We strategically are working with all our customers to drive category growth and household penetration. In the U. S, our brands reached 57,400,000 in the last 52 weeks, an increase of 1,300,000 households versus a year ago.
Household penetration needs to increase to drive sales growth. Much of the growth we're seeing from customers like Whole Foods, Amazon, Sprouts is the results of planning earlier in the calendar year, where our teams work with their category management teams and we're seeing a core product assortment now being optimized on shelf, executed consistently across the store base. We believe that our brand investment should create even greater opportunities for our customers to drive sales of Hain Celestial products. As I've said before, I continue to believe there are a lot of positives from Amazon's acquisition of Whole Foods and we're seeing the benefits already. Those of you who subscribe to Whole Foods Global newsletter saw yesterday that Arrowhead Mills was cited as one of the top food trends in 2018.
And those of you that are in stores this weekend probably saw a full 6 foot display of our flowers and other Hain products, and hopefully you bought some. In the UK, a tough market. Net sales were up 4% in constant currency, adjusted for acquisitions and divestitures, driven by growth from Linda McCartney, Hartley's, Sun Pat, New Covet Garden Soup, as well as profitability from our fruit business and growth from our Ella's Kitchen and our Kildreth brand. I'm pleased to see the growth coming from our brands in the UK and we'll continuously look to drive brand development and plant efficiencies to enhance our margin profiles there. 1 of the initiatives we identified is the exit of our chilled dessert business from our Faket Am facility starting in November.
This exit should be completed by February 2018. We plan to relocate the capacity to support the growing demand for our plant based meat free Linda McCartney brand, which was up 23% in the Q1. We continue to see opportunities in India, Middle East and believe by 2020, the Middle East and India could represent $100,000,000 in net sales. We also see these opportunities in Asia. I recently attended the World Food India, where I met with Prime Minister Modi to express our commitment to invest and work together on expansion efforts in the region from purchasing, procurement to selling more products in the EMEA region, namely India, Middle East Africa.
As you know, earlier this year, under strategic joint venture with the Future Food Group, a leading retailer in India, we broke ground on a snacks plant, which we expect to open in May of 2018. In Europe, net sales were up 10% in constant currency, driven by double digit growth from our Joya brand, our Danable brand, along with strong growth from Tilda and our private label offerings of plant based milk products. In Canada, net sales were up 13% in constant currency, driven by Eaze Veggie Cuisine, a strong, strong brand, Sensible Portions, Tilda's Celestial Seasons and our personal care brands. The Canadian team has done a great job of taking these brands and building from the ground up to where they are today. In Canada, we just announced the expansion of a new Yves plant to fulfill the needs of our growth of Yves Veggie Cuisine.
The new plant will enable us to provide both capacity to the East and West Coast in the U. S. Lastly, in Cultivate, and as we talk to you about investing in these brands that were smaller brands, in the quarter Health Valley, DeBose and Hollywood and GG crackers showed good growth. Blueprint has some big plans and watch out for this brand to grow tremendously as we look to launch many, many new products. We like what we're seeing in Cultivate and we like some of the new innovative acquisitions that are coming to Cultivate Way.
At Hain Pure Protein, we have strategically converted more of our poultry products from antibiotic free to organic. Hain Pure Protein overall net sales increased 2% with FreeBird and Plainfield Farms up 6%. Freebird was up nearly 20%, benefiting from our new facility. We are completely sold out of chicken capacity already. Empire to Kosher declined by $2,000,000 with more sales attributed to the prior year period due to the timing of the Jewish holidays.
Our Plainville Farms Turkey brand decline was due to overall lower pricing and our decision in a reduction conventional turkeys. With operational challenges now behind us at HPP, we're excited about the up and coming holiday season in which we expect to deliver somewhere between 1,500,000 to 1,800,000 turkeys, and this all happens in this in the next 2 weeks. So please place your order early for your Plainville turkey. Now moving to Project Terra. Global cost savings and worldwide productivity initiatives.
We delivered approximately $16,900,000 in savings this quarter versus 6.6 $1,000,000 in the prior period, in line what we set out to achieve this quarter. As we move towards our $100,000,000 for the year, we used approximately $6,000,000 to invest in brand marketing, mostly in the U. S. And $3,000,000 to offset higher freight and commodity costs with the balance falling to the bottom line. Our savings came from our COGS, headcount, HPP live costs, manufacturing and various operations.
As in the past, our productivity savings are typically higher in the second half of the year based on actions we take in the first half. A few examples of these of our Westchester, Pennsylvania facility in early January. Over the last 24 years, we have assembled one of the most attractive portfolio of assets in our space. Looking forward, we will continue to evaluate all opportunities to build upon our platforms, strengths and eliminate complexity enhanced margins, including accretive acquisitions and non core divestitures. I believe that tremendous value remains to be realized given the strength of our brands, our growing product, Project Terra and our people and our loyalty of our customers and consumers.
We're excited with what's ahead for Hain and we're in the early innings of our business transformation with the greatest opportunity ahead. We'll continue to enhance our leadership. Steve Leckey just joined us as our Chief Information Officer, most recently from WhiteWave. Julie Bowerman, most recently at Coca Cola, joined us as our Senior Vice President board, in line with our strategic commitment to enhance the leadership team throughout the business. The Board of Directors has established a working group to aggressively evaluate our portfolio of businesses, brands and operating strategy to return capital to further enhance shareholder value.
Lastly, I'd like to thank all our directors for their very contributions, and I look forward to working with our new independent directors who provide diverse valuable industry experience to the company. With that, I'd like to turn the call now over to Gary to take you through the U. S. Business. Thank you.
Thank you, Erwin. It's my pleasure to present the Q1 results for the U. S. Business. We are continuing to execute on our strategic plan to drive growth for our top 500 SKUs in measured and unmeasured channels and the top 11 brands.
In the Q1, we generated net sales of $263,000,000 an increase of 4% from quarter 1 last year. As a reminder, dollars 21,000,000 of Ella's Kitchen sales have been removed from the U. S. And are now reported in the UK segment. Including the divestiture of Roseto from Q4 FY 2017, the impact of SKU rationalization and the planned inventory realignment in FY 2017, net sales are flat year on year.
Gross margin improved 100 basis points year on year and excluding SKU rationalization improved 110 basis points. Major drivers of gross margin improvement were trade spend efficiencies along with terror improvement projects which were partially offset by higher commodities and freight and planned price reductions on spectrum. Our operating income for the Q1 was $27,100,000 which was $1,200,000 lower than versus prior period. The major impacts on operating income were a planned $4,000,000 increase in consumer engagement investment and other investments and capabilities, including salaries of $1,500,000 as we build out internal sales and marketing capabilities in advance of a change to the go to market model, which will remove around 30 brokers from our model with annualized savings of around $5,000,000 starting in FY quarter 3, 2018. Turning to consumption trends, there continues to be a number of factors influencing the shopper's choice of channel.
At Hain Celestial, we remain focused on providing the right brand and product proposition in all channels, both measured and unmeasured. We are focused on selling more of our products more often to more consumers wherever the consumer chooses to shop. The MULO plus convenience measured channel, I'll refer to the 10, 18, 17 IRA MULO plus C convenience data, which represents about 60% of our sales unless otherwise specified. The unmeasured channel, which is the balance of our business, is comprised of a diverse range of customers, including the Natural Channel customers, Whole Foods, Costco, Sprouts, Amazon and other e commerce customers and Babies R Us. I'll use the same read date of teneightseventeen for the unmeasured channel with some minor variations on read date for this channel due to data availability.
To provide context for our performance, the latest 52 week consumption sales growth in the measured channel was minus 1.9 percent or negative 0.7 percent for Haynesville Airsteel, excluding the SKU rationalization impact. While in the non measured channels, consumption sales growth was +1.8 percent or plus 3% excluding SKU rationalization impact. In the latest 12 weeks, this performance gap was even more significant as our growth in measured channels was negative 6.5% or negative 5 point 3 percent excluding SKU rationalization, while growth in the non measured channels was plus 1.1 percent or plus 2.3 percent excluding SKU rationalization. To further illustrate the diverging trends between measured and non measured channels, our top 500 items in MuO plus C are minus 2% in the latest 12 weeks, while in our non measured growth of the top 500 is at +8%. As a combined channel view, which encompasses Mu O plus C and the unmeasured channel, we show growth of 1% for the top 500 in the latest 12 week period.
The strong performance, stronger performance among our non measured channel customers is attributable to both the recent activity we've seen in the natural channel with major customers as well as the continued strong performance in club and acceleration in online customers with e commerce growth now over 30% for the quarter year over year with double digit growth for all platforms. We also see continued out the door sales trend improvement quarter over quarter through FY 2017 and into FY 2018 with our biggest distributor partner even after considering the impact of SKU rationalization. Such improvements reaffirm our strategy of focusing investment in consumption driving activities with the consumer and at the shelf. For fiscal year 2018, we continue to expect the growth in our non measured customer base to outpace the Muuloplasty channel results. Turning now to Mueller plus C in more detail for each of our key platforms with some color on non measured channel performance.
Firstly, I note the latest quarter of Mueller plus C data is negatively impacted by 120 basis points for SKU rationalization. Better for You Snacking is up 1.7% in the 52 weeks and down 5.7% in the 12 weeks. Primary drivers are 300 basis points of drag from the partial loss of distribution of sensible portions at 1 major customer. This resulted in 190 basis points of drag for the total Hain in Mueller Plus C. Garden of Eden and Terra had distribution losses at one club customer and one rotation of Terra chips in FY 'seventeen was not repeated in FY 'eighteen, resulting in 2 70 basis points of consumption drag, which also resulted in 110 basis points of drag on total Hain for Molo Plus C.
However, overall velocity on our snack business is growing in the high single digits. Carrier chips is up high single digits excluding club rotations and growing double digits in the non measured channel. And accessible portions continues to show strong double digit growth in both measured and unmeasured channels being up 12% excluding the partial loss of distribution of 1 large customer. Turning to Better For You Pantry, we are down 2 0.7% in the 12 weeks. Spectrum Naturals, which includes our olive oils and coconut oils, was down 17%, Spectrum and Essentials is down 12% and Rudy's Organic Bakery is down 31%.
In the case of Spectrum, the coconut oil segment is now in the 37% decline in the latest 12 weeks with Spectrum actually gaining share in the latest 12 weeks. Coconut oil represents 49% of our Spectrum oil business. Spectrum is the focus of a major brand revision as well as strengthening of the culinary position of this brand. In just the last 3 weeks, the first consumer engagement activities have been initiated with some of the new packaging already arriving at shelf along with digital advertising, event marketing and the partnership with chef Marcus Samuelsson. This is a major effort to bring the number one natural and organic oils brand to the forefront.
For Rudy's Organic Bakery, the consumers shifted their purchase behavior to look for gluten free and organic offers in the fresh aisle rather than the frozen aisle. As part of our aisle. As part of our future solution that we have just ended into an agreement with for manufacturing DSD Supply with a new partner which will give us expanded distribution in the Northeast to the Fresh Isle commencing in April 2018. We'll have more to say on this on future calls. Maranatha was essentially flat in dollars and up 6% in units from the quarter for Milo plus C as brand support campaigns started to reach consumers in the recent weeks.
We're cycling some promotions in 2017 that were not repeated in 2018 in quarter 1, but we continue to see strong double digit growth of Maranatha in unmeasured channels and low single digit consumption growth across all channels, which is very encouraging. Imagine Soups and Broths, which were the first to benefit from revised packaging and brand support continued its strong performance with 19% growth in the last 12 weeks. We have a timing difference on promotional activities for soups year on year, so we'll have more activity in Q2 in FY 2018. Arrowhead Mills continues to have good growth after revised branding and packaging work with 21% growth in the last 12 weeks. We're also seeing improved results in the unmeasured channels with overall growth returning to the brand.
The Personal Care business was up 80 basis points in dollars and 9.1% in units with a change in mix and driven by good performance by Alba Botanica up 6% in units and Jason up 2% in units and Live Clean continuing to gain momentum and TDP growth. This business continues to see strong performance in unmeasured channels being up high single digit. Better For You Baby has improved performance with Earthspeth organic infant formula growing 7%, which was offset by softer baby food consumption driven by reduction in distribution for Earthspeth by 2 retailers and the lapping of Ella's Kitchen removal from a large customer and reduction in doors at another customer, which has generated an overall consumption drag for Hain of 1%. We've seen a net 8.5% decline for our baby segment in the 12 weeks in Milo plus C. Notably, we continue to see very strong growth in unmeasured channels and particularly online as parents shift behavior to more convenient choices with strong double digit growth.
Better For You Baby is our biggest online platform today. Overall consumption is still negative, but unmeasured channel growth is accelerating both online and with major Muleaux Plus C comparatives in future periods. The seriously indulgent yogurt from the Greek Gods brand launched in a number of in a select number of major retailers, and we're already seeing good early performance with plus 4 percent dollar growth and plus 8 percent unit growth at the brand's largest mass customer who has been the first to launch the concept. Early response in the unmeasured channels was also encouraging with distribution still expanding, although the net consumption for Greek gods is still negative as we let the exit of prior year innovation in Muleaux Plus C and have yet to expand seriously indulgent to other customers in Muleaux Plus C. Celestial Seasoning's Tea was flat in dollars in bagged tea.
The timing of promotional activity was planned for October in 2018, and so we're lapping higher comparatives from 2017, where the activity ran earlier. Activity will be stronger in quarter 2 and through the hot tea season. Celestial Seasonings K Cup Tea was down 36% with a reduction in total distribution points of 46%, which is in line with a wider format and segment issue with retailers reducing facings and consumers also choosing to shop online for this format. Finally, in reviewing our consumption highlights, I reaffirm our strong focus on shopper and consumer engagement in the digital and e commerce space. We believe e commerce provides a significant growth opportunity.
Today, our online business is the fastest growing channel at over 30% in Q1, and we've only just begun to exploit and invest in the unique ways in which the channel can accelerate our brand growth. Across all our strategic platforms, we're seeing double digit growth in the quarter with several platforms above 40% in e commerce. In summary, from a total consumption view, we have growth in our top 500 SKUs representing 93% of consumption dollars across all channels, while we have significant declines of over 30% for the remaining 7 percent of the portfolio or $28,000,000 in consumption for the Q1. This represents around 1500 SKUs. We are thoroughly reviewing the role of these SKUs across channels and platforms.
Our clear goal is to unlock the significant potential of Hain U. S. And our core top 500 SKUs and the 11 priority brands, while reducing costs and complexity. As the retail landscape is rapidly evolving, we'll be mindful of the role of some of these SKUs may play in select channels, but not necessarily all channels. Turning now to our investment in brand building and consumer engagement.
In this quarter, we have launched the Maranatha Too Good For Jelly campaign, along with the continued brand graphics changes in market. We are happy with the early results we are seeing with over 28,000,000 impressions garnered across the multichannel investment, including digital video, paid social media and paid search to reach the consumer as at September 30, 2017. This effort continues through the balance of the fiscal year. The Live Clean launch of Personal Care is also showing continued momentum with expanded distribution and good consumer response with Milo plus C consumption run rates approaching $1,000,000 per quarter and good performance in unmeasured channels also. We'll also continue in market support for the seriously indulgent yogurt range.
And finally, as mentioned, the Spectrum relaunch has just begun in recent weeks with more to come as the new brand building and positioning is rolled out to the market. In closing, quarter 1 2018 is a continuation of the execution of our growth strategy across all channels and customers, with results in line with our expectations for the Q1. Briefly recapping, we're executing against our strategic plan for growth. We're seeing solid momentum of the top 500 SKUs across our channel view, offset by declines in the remaining 7% of consumption in our portfolio, which we are addressing. We've seen continued growth in non measured channels with strong e commerce inertia.
We're continuing our investment in consumer communication ahead of growth and we are reiterating our financial 2018 outlook of low to mid single digit sales growth and low double digit EBITDA growth for the Hain Celestial US Business. I look forward to meeting with many of you in the coming weeks and to continue updating on our US business. Thank you, and I'll now turn the call back over to James.
Thank you, Gary, and good morning, everyone. We are extremely pleased with our Q1 financial results, which were in line with our expectations. We ask that you refer to our GAAP to non GAAP reconciliation tables in the press release for additional information on our financial results. As previously discussed, effective July 1, 2017, Ella's Kitchen was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment through the changes in our internal management and reporting structure. All prior period data has been adjusted to reflect this new operating and reporting structure.
Ella's Kitchen represented approximately $85,000,000 in net sales in fiscal year 2017. The solid momentum we achieved during the Q1 provides us with even more confidence that we're on track to meet our sales and profitability guidance 2018. Net sales for the Q1 performed to our expectations at $708,000,000 a 3.9% increase compared to $682,000,000 in the prior year. On a constant currency basis, net sales increased 3.3%. Adjusted gross margin increased 220 basis points year over year, driven by more efficient trade spend in the United States, price realization and operating efficiencies in the United Kingdom and improved profitability at HPT.
SG and A as a percentage of net sales was 12.8%, a 30 basis point increase, primarily due to increased investment in the U. S. In both personnel and advertising costs as we continue to focus on brand awareness in our U. S. Business.
Erwin and Gary discussed the top line highlights for our business segments, so I'll provide you with more of the underlying financial results for each segment. In the U. S, while gross profit increased by almost 10% year over year, operating income was down slightly from the prior year. As discussed previously, the U. S.
Business is investing to build brand awareness and consumer engagement to fuel growth and profitability in fiscal 2018 and beyond. We expect profitability in the U. S. To significantly improve in the back half of fiscal twenty eighteen. Hain Pure Protein, the actions we implemented in fiscal 2017 have positively impacted sales and profitability, as we went from $1,000,000 operating loss last year to a $3,600,000 operating profit this year.
In the UK, our operating income improved by nearly 40%, driven by a 200 basis point improvement in operating margin within our Hain Daniels business due to price realization and operational efficiencies. Operating income within the Rest of World segment increased almost 80%. Both Canada and Europe achieved excellent results with sales in both segments growing in low double digits at constant rates. The sales growth, in addition to operational efficiencies and favorable currency, drove the increased profitability in the Rest of World segment. We are pleased to report adjusted EBITDA of $60,000,000 for the Q1, and we are on track to deliver $350,000,000 to $375,000,000 adjusted EBITDA for fiscal year 2018.
We earned $0.23 per diluted share on an adjusted basis, in line with our expectations compared to $0.14 in Q1 of 2017. As a reminder, Haines' Q1 has historically been the smallest quarter of the fiscal year. The effective tax rate was 28.5%. Now turning to our cash flow and balance sheet. For the Q1, capital expenditures were $15,000,000 and operating free cash flow was negative $34,000,000 as compared to negative $2,000,000 of operating free cash flow in the prior year period.
The decrease in operating free cash flow was primarily attributable to an increase in inventories at both Tilda and HPP. We deliberately built rice inventory at Tilda to take advantage of favorable pricing. At HPP, inventories increased as we prepared for the Thanksgiving holiday. At September 30, our cash balance was $127,000,000 and net debt was 6 $38,000,000 which is $100,000,000 improvement from the prior year. Our bank leverage ratio decreased to 2.94 times at the end of Q1 2018 from 3.11x@q4 2017.
Building off the momentum in Q1, we are pleased to reiterate our fiscal 2018 guidance, including net sales in the range of $2,967,000,000 to $3,036,000,000 an increase of approximately 4 to 6% as compared to fiscal year 2017. We are expecting lowtomidsingledigitgrowthinthe U. S. And HPP, while the U. K.
And the rest of the world are expected to grow mid to high single digits. Adjusted EBITDA of $350,000,000 to 3.75 $1,000,000 an increase of approximately 27% to 36% compared to fiscal year 2017, which reflects $100,000,000 of Project Terra savings, including annual productivity and an increase in brand investment of $40,000,000 to 50,000,000 dollars primarily in the U. S. These investments are important to our efforts to deliver accelerated top line growth over the long term. Adjusted earnings per diluted share in the range of $1.63 to 1 $0.80 with an expected tax rate of approximately 30%.
Expect interest and other expense to be approximately $25,000,000 We expect depreciation and amortization and stock based compensation Based on fiscal 2018 EBITDA expectations, we anticipate cash flow from operations of $235,000,000 to $70,000,000 and we expect the capital expenditures to be approximately $75,000,000 With respect to the cadence for the remainder of the fiscal year, from a sales perspective, we continue to expect Q2 to be our strongest quarter with the 3rd and 4th quarter essentially consistent with one another. EBITDA and EPS will improve each quarter throughout fiscal 20 18. As a reminder, our guidance is provided on a non GAAP or adjusted basis, excluding the impact of any future acquisitions and other nonrecurring items, which we'll continue to identify with our future financial results. In summary, we are pleased with the solid momentum we experienced in our Q1 of fiscal year 2018. We significant contributions in fiscal 2018 from top line growth and margin enhancement, while also making important investments
in the business.
Thank you very much. And with that, we will now open up the call for questions. Operator?
Our first question comes from Andrew Lazar with Barclays. Your line is now open.
Good morning, everybody.
Good Good morning, Andrew.
Hi. So quick one, Gary, thanks for all the detail on a lot of the consumption and measured and non measured. I guess if the one thing that came across as you talked about is, we're looking at 12 week versus the 52 week. As you mentioned, the gap between scanner and obviously shipments sort of widened quite a bit and you went through a lot of the detail. If you had to, I guess, boil it down to the sort of the key just 2 or 3 things that you think have led to that widening?
And then maybe when we should start to expect to see the data come a little bit more in line with what shipments look like would be helpful. And I just got a very quick housekeeping one for James.
Okay. So I think first thing I'd say, if we have a look at the milo plus C data, we certainly do expect it to improve. But in terms of the alignment to the overall business, the overall projection for the year from my side is at the earliest we'll start to see better reads start to come through in quarter 3 simply because of some of the things we're cycling. But I mentioned on the call that I expect that we would see stronger performance in the unmeasured channels for the balance of the year. We may have a flat to slightly negative full year performance in Millo plus C.
So it will be the unmeasured channels just because of the dynamics of how the business is performing will be the stronger driver of growth. And so we won't see all of that turn up in MULO plus C in fiscal 'eighteen. To your question around the widening, I think this is it's an interesting time. We're definitely seeing the consumer shifting channels. They've obviously got a lot of opportunities now.
There's a lot of new news coming with what's happened with Amazon and Whole Foods that's brought traffic back to that category. And as I mentioned, we're seeing online growth moving very fast for us, growing very quickly. So I think this channel blurring is going to continue and that's part of the reason why we see divergence because I don't expect anytime soon our online business to slow down. If anything, I expect it to accelerate. And I would also point out that the work that we've done, the teams have done with some of our big non measured channel partners it's really starting to pay dividends.
We're seeing good solid performance across all of our key platforms with them, and I expect that to continue. So I think this is just a function of how we're going to see this channel blurring occur for the consumer in
the coming quarters. And Andrew, I think it's important. Hain always had a big business outside Mulo, whether it's Whole Foods, whether it's Sprouts, whether it's the independents. And if you look at Amazon and Whole Foods today, 2% of overall sales of food go through there. So you think about it, dollars 800,000,000,000 at $16,000,000,000 of food sales that are now going through there that 5 years ago was not there.
So that's where we're seeing and I think you once asked me where the sales going and the shift and whether it's the Thrive, whether it's the Boxed, whether it's the Fresh Direct and our other line business. That's where we're seeing a tremendous shift. And I think if you look at our business today, it's probably 58%, 55% is Mueller and the rest is other channels. So there's a big shift going on to our business from other channels.
Great. Thanks for that. And then, James, just a quick one. If we wanted to adjust on our own sort of last year, the next three quarters for the shift in Ella's from the U. S.
To the U. K, You gave us the sales number for the full year. Is there a way you could do that for EBIT? Just to give it I know it's a lot smaller, but just to give us a sense of what we would need to think about adjusting out and into the other segment from EBIT?
So I will give it to you for the Q1 on the operating income, Andrew, if that helps. So their operating income in Q1 for Ella's was about $3,500,000
Okay. And no reason to think that was hugely volatile over the course of the year necessarily?
No, it's pretty consistent, Andrew.
Great. Thank you very much.
Our next question comes from Ken Goldman with JPMorgan. Your line is now open.
Hi, thank you so much. One question for me to start. You talked a little bit more about the portfolio review. Erwin, can you give us a little more color as to what you're looking at? What the goals are?
What maybe some of your larger investors are thinking about? I'm just trying to get a sense of what the key variables will be in terms of what you really think of as core and what you may think of as more valuable to outside the firm?
Thanks, Ken. So a couple of things. How you take complexity out of the business is number 1. Let's come back from the UK business. In the UK, private label is a big part of business over there.
But our private label contribution is 6%, 7% on EBITDA, where our branded business is 18%. Do you focus on branded or do you have the right mix there? But there's a lot of overheads that our private label business absorbs over there. If you look at our protein business, and it's a hot category and you recently saw Hormel just pay a tremendous price for a protein business, a lot of complexity. And with that, is it better off
in someone's hands that's already in
business? More towards private label, are they more into the DSD businesses. So do you streamline our businesses? So that's what we're looking at Ken, taking out complexity, where is there is risk in every business with commodities, where are higher risks in commodity business and where are the growth areas. And the other thing from an acquisition standpoint, where are the up and coming new categories, how do we focus on plant based, which is becoming a bigger, bigger part of our business, whether it's our EASE business, our nondairy business, our snacks business, our personal care business, blueprint in the drinks business.
So there's a lot of we're in a lot of businesses, are we putting enough dollars against some of those high growth areas and focus on 10 brands instead of the number of brands we have. So that's some of the stuff that we're working on right now.
Great. I'll let it go there. Thank you, Irwin. Okay.
Our next question comes from Bill Chappell with SunTrust. Your line is now open.
Hi, good morning. This is actually Stephanie on for Bill. I just have a question on the U. S. Segment, Gary, and just kind of gapping the reported sales growth in consumption, unless I heard this wrong.
It sounded like measured channels were down, call it, mid single digits during the quarter and then unmeasured performed much better, but it was really only up 1%. So I'm just looking to get a little bit more color on how, I know obviously there's a difference between shipments and consumption, but kind of the drivers of the 4% growth? Thanks.
Yes. So as I mentioned, thank you for the question, was that in this quarter, we were essentially flat on the top line. If you take out the cycling of the SKU rationalization, the exit from Rosettos and also the inventory realignment from prior year. So obviously, the balance is between what you see in the measured scan data, which is significantly negative, and the balance of that, of course, is all in the unmeasured channels, which is getting us back to flat. And of course, the trajectory of the non measured channels is where we're seeing stronger performance both in with our major customers and the non measured channel and also online.
So that's essentially how the 2 balance out.
Thanks. And that's really helpful. And then as we look for the remainder of the year, are there any other inventory realignments or kind of big one time items that we need to be aware of just for modeling the quarters going forward? And that's it for me.
Yes. So this is James. So you'll have a similar impact in Q2. And then in 3 and 4, the inventory realignment is de minimis. But you'll still have an impact in Q2, similar to Q1.
Our next question comes from Akshay Jagdale with Jefferies. Your line is now open.
Good morning.
Can you hear me? Yes, we can hear you. Good morning.
Perfect. Hey, good morning. First one is again for Gary. So thanks again for all the color. But as we think of the cadence for the sales growth going forward, so you mentioned excluding the SKU rational to mid single digits top line growth.
So how should we think lowtomidsingledigits top line growth. So how should we think of the cadence of this going forward, right? I'm assuming it's going to accelerate on a reported basis. I mean, can you give us some color because there's so many moving parts in the year ago period with the inventory realignment, etcetera. Just help us model like cadence of the sales growth as we go through the year and then the EBIT growth because if you're going to have a similar EBIT performance in 2Q, which is down slightly, let's call it, year over year.
Then in the back half, you're going to have to see pretty massive margin expansion. So can you just help me help us with that? And I have one follow-up.
Okay. So a lot of questions here, but I think the first one is in terms of cadence, we see quarter on quarter improvement in growth and that's very much how the plan was built. We knew this plan had to be developed with a transformational business in line where the investment was front half weighted, growth was back half weighted. There are a number of factors we can go into why that is the case. But basically, the investment plan is front half weighted and that's why we see our EBIT relatively flat in the 1st two quarters, but we expect improvement in that as that balances out the following two quarters and the growth picks up.
And that's just how the model was built. That's at a very high level. Obviously, there's a lot of detail by brand and by category as to
how those pieces are built out, but
that's the expectation from the
growth acceleration on the top line, is that on a reported basis or excluding the SKU rationalization or both?
No, I always talk reported basis here.
Okay, perfect. And just one on HPP, your guidance basically implies you're going to get back to fiscal 'sixteen levels in that business on EBIT. In fiscal 'sixteen in the Q1, you made $10,500,000 Q2 2019. I know there's a lot of money to be made in the second quarter and the next couple of weeks, but the Q1 seems to have been a little bit below expectations. So are we going to make all of that up in the Q2?
Is that the expectation or am I missing something? Thank you.
Well, first of all, you heard what I said before just on HPP, on Empire and timing there during the holidays. The second thing is, a big part of HPP is our chicken business, which was up 26% and continues to grow. And yes, there's a big reliance on Thanksgiving. But one of the things we've talked about in our total protein business, how we're moving more and more into deli for the process ground. But between Empire's growth, between our protein, our chicken business growth being up 26% and our growth in other turkey products.
And some of the cost savings that are coming out of HBP, we feel good about making some good moves in the back half of our protein business.
Perfect. I'll get back in queue. Thank you.
Our next question comes from Amit Sharma with BMO Capital Markets. Your line is
now open.
Hi, good morning everyone.
Good morning.
Gary, a very quick question for you. When you talk about low to mid single digit growth in the U. S, are you comparing that to 3.7% growth in the quarter or are you comparing that to the flat growth in the quarter?
No, no. It's always through reported growth. So it's to the 3 point 7%.
Okay. Got it. Perfect. And then as we think about creative growth in the non track channels, right? Historically, you have thought about those channels as maybe less margin or lower margin business.
I mean, just generalizing it compared to the measured. Is that still the case? Or has your profitability increased in those non track
channels? Yes. I think you have to understand the mix in the non measured channels is changing. So whatever may have been historically stated may have changed because, of you've got a mix now between online, we have strong natural players who've come up and researched if you like in the unmeasured space and in between, we've got club and a couple of other specialty players as well. So I don't think of it as being a massive margin dilution by virtue of being in our measured channels.
It does obviously depend on ultimately the mix of product you sell in those channels. And that's part of the work we're doing on the curation of our top 500 and how we focus on those in the unmeasured channel. But I'm not seeing it as a choice for margin dilution just by moving into unmeasured.
Yes. So just maybe a little bit modest dilution, but not massive. And then just one more for Erwin. Irvin, lots of conversation around retail pricing and not just in Holds Ford and Amazon, but overall retail and how brands may be losing some of their cache. Are you when you talk to your customers, are you hearing anything from their demands for more pricing concessions in order to hold on to the shelf space or any other changes in how business has been done in those channels?
I think what I'm hearing, I'm not being asked for more dollars from the retailers, but I think what's important today, retailers want you to support your brands and invest in your brands. And it's not what's changed tremendously, Amit, is and what you've seen with NHANES, our trade dollars, our promotional dollars is not where we're spending our dollars today. It's connection with the consumer. And I think everybody out there is focused on 2 things, data and content. And good content or good brands and good products and supporting your brands and driving products, natural products, I think it's important that you get out there and you bring awareness to your brands.
Now price is important. You can't price them 20%, 30% higher than the conventional, but consumers got to know your brand. And every retailer that I've met with at senior levels, one of the reasons they're moving to private label is they feel that a lot of the other consumer packaged goods companies are not investing in their brands, not innovating in their brands, and they're saying why should we pay a premium and let's go and do a private label because our brand may be stronger.
Got it. Thank you so much.
Our next question comes from Scott Mushkin with Wolfe Research. Your line is now open.
Hey, guys. Thanks for taking my questions. So I kind of wanted to go back to the growth rates just to make sure I understood what was said. And then I actually had a question. So the U.
S. Business grew 4% in the quarter roughly. I think that's what you guys reported. Is that correct?
Yes. Yes, that's right.
Okay. And then I think you also said in the 12 week period end of 10/18, the measured channel, which is takeaway from retailers, fell 6.5%. And then the other unmeasured channel, and I think I got this number right, was up 1.1? The
we're talking about the top 500 there, Scott, was up around 1% across all channels.
Okay. So I guess maybe I'll just take it offline. I'm just trying to square it. I guess I'm trying to understand the takeaway versus the shipping, if there's a mismatch there and understand the 4% growth.
Yes. So what we said we are flat in the quarter on top line, net of all the impacts I referred to. So if you to treat this very simply, the 6.5% that you're seeing in measured channels is offset by the unmeasured channel performance.
Okay. I think I'm going to follow-up offline. I don't want to waste a lot more time on that. I know we talked about it. So my second question is the brand building.
And vis a vis, I think you called out Arrowhead Mills and the display, I think Erwin did the display in Whole Foods and the product just looks incredible there. And it's such an incredible product too. So I was just wondering if you could talk about, A, how you go about building a brand? Do you think 5% like kind of commitment from a revenue perspective is still the right number? I know Ella's in the U.
K. Was built for a lot less than that. Then I also wanted to understand how you think about your brand portfolio vis a vis where you want to put those brands. I know Arrowhead Mills also is moving into Walmart and that seems to be interesting given how much success it's having at the Whole Foods Amazon platform. So I was wondering if you guys could talk to your brand building and your philosophy?
Thanks.
Yes, sure. And it's a good question. And obviously, one of our key focuses here is improving household penetration and the awareness of our brands. The organic and natural space is certainly interesting to consumers. And for those who are crossing over from conventional brands, this is a whole new world for them for many of them.
They don't know the brands well. They're not so familiar with them. So a big part of our work is really on just the initial consumer engagement and driving brand awareness. And if I give a live example of some of the work that's going on for Maranatha, we've just done our first round of research just to understand how that initial read has worked out and 6 weeks results. But we can see already the purchase intent has gone up for the product.
The aided brand awareness has gone up by 71%. That's just in the 6 week read from the 1st round of work we've done. And this is the type of work we're doing both for Maranatha. We've started for Spectrum. We did some work for Imagine and there's more work to come.
This is extremely important because we have brands here that are valuable brands that are not necessarily well known to a number of consumers. So that's the initial build point for a lot of these brands to raise their unaided awareness and aided awareness. And then ultimately from there you can start to build out the story for these brands so the consumer has a richer and deeper understanding what these brands stand for. The beauty of Hain is we have really rich stories to tell and that's ultimately our ambition is to tell these stories in a meaningful way because we know consumers in this space care about the history of the brand, the provenance and ultimately the back story of the company that supports them. And this is something that's truly unique for Haines that this is all we do.
This is what we're passionate about. This is what we do every day. And for the consumers who find us, try us, buy us and understand this, this is something they're passionate about. It makes them more loyalists. So it's the typical brand funnel build.
In terms of investment, I think this is something that's interesting and changing in the world we're in today. Share of mind is the most important thing to get and how you get it today is very different from even 5 years ago, how you engage consumers online in a place where they're listening and they're interested, how you interrupt them and tell them something that's relevant to them is changing a lot because a lot of it's done on a mobile screen, frankly, rather than on a television or a billboard ad. So the spend levels are going to be different by brand depending on the nature of the interruption. And I don't put a magic figure of percentage anymore because I think those traditional metrics were fine when you were very much in a TV and print space. But now when you're thinking about page search terms, you're talking about being part of native content, you're being part of ratings and reviews.
The cost base can look very different by brand depending on what you're trying to achieve. I'll give you one example. Today, our brands turn up very strongly on Amazon. Our average rating is over 4.1 out of 5 stars, which is an excellent position to be in because that is effectively media and advertising every single day for our brands. It's an endorsement for our brand and it's a we know even for bricks and mortar shoppers, they often go here to look for what the rating is on the product.
So that's a silent solution, if you like, for the long term benefit of the brand. You don't necessarily pay for it every day. So we have to think differently about the mix than traditionally.
I think what's important, Scott, is our brands and you look at Natural organic brands, a bigger percentage of natural organic brands there are bought online and bought brick and mortar. So if you look at where the future is and where our brands are bought and where purchasing is going. We're in sync, but consumers need to know your brands and we got to have the ranking and that kind of shows where Ella's for instance, where it was in brick and mortar and as it moved to online, the sales and we're not talking about the UK and Europe, but what we're seeing in sales of Ella, Ella's online versus brick and mortar is tremendous.
We do have time for 1 or 2 more questions. Our next question comes from Alexia Howard with Bernstein. Your line is now open.
Good morning, everyone.
Good morning, Alicia.
So with the progression of the segment operating profit growth or decline, I guess, this quarter on the adjusted side in the U. S. Business. You mentioned that some of that was due to the increased marketing spending. How long do you expect that to continue?
When do you expect to get back to profit growth in the U. S? And given the phrasing of it, was that marketing investment within the SG and A line, I assume it is? And was pricing actually up year on year in the U. S.
Segment? Thank you and I'll pass it on.
Okay. Yes. So Alexia, the as I mentioned earlier on an earlier question, quarter will essentially be around flat with prior year again because our investment is front weighted. So we'll see in quarters 34 a return to profit growth, which is just essentially how we built the investment plan. And the question around profit growth.
Yes, that's right. You'll end up with net profit growth for the year. And then for the question around pricing, minimal pricing, we had a small price impact from a planned price reduction on spectrum, which started last year. It was around $500,000 or $600,000 impact, not so significant this year. We will have some small tea to capture the costs for higher COGS related to the quality standards we have for our tea.
But essentially, it will a minor impact, it's really net neutral.
Thank you very much. I'll pass it on.
Thank you.
And our next question comes from Andrew Wolf with Loop Capital Markets. Your line is now open.
Hi, thanks. Good morning. I wanted to follow on just with one question on e commerce and online business. So I think historically, it's pretty well known that not just for Hain, but for the consumables broadly, online business has really been concentrated in a few categories. And you guys mentioned baby is a leading one for Hain, and I think that's been one of the categories where online penetration has been pretty good for a while.
Could you just kind of generally speak to what kind of broadening you're seeing as you talk about the good growth, the leading growth you're seeing in online business? Is it still in some narrow categories? Is it sort of going 1 category at a time? Are you seeing a really broad broadening, not just what's on Amazon's website, but what's actually selling through to consumers home delivery? Thanks.
Yes. It's a good question. And I think this is part of the inflection point I referred to earlier in terms of what's happening in our measured channels. We are seeing broad based growth across our platform. So whether it be snacking, pantry, personal care is up over 70% for the quarter.
Babies, obviously, growing very strongly. So this is quite broad based. And it's not truly not because we know this is where our shoppers increasingly choose to shop. We know from the feedback we have with our online trading partners that natural and organic is a very strong search term. So this is an area that we think will continue to accelerate as mix model unlocks between what happens online and what happens in bricks and mortar with some of the major players.
So for us, it's broad based, it's consistently broad based and we expect that just to continue.
And Andy, we're seeing this along the fresh line too, whether it's Amazon Fresh for turkey and chicken, fresh direct. In the UK, we're also seeing this with a lot of retailers, whether it's TILDA products online, Ella's, of course, in the UK. So it's just not U. S, we're seeing that around the world.
And our last question And our last question comes
from David
Palmer with RBC Capital. Just a follow-up on consumption trends. The 55% of your business that is measured channels, you said it was down mid single digits or so in the quarter. In the scanner data that we see, it looks like that decline rate accelerated a little bit in recent weeks, last 12 weeks, maybe down 7% to 8%. Are you seeing that sort of dynamic playing out?
And are you seeing the non measured commensurately accelerating such that you're staying roughly flat in consumption? And I have a follow-up.
Yes, sure. So you're right. We have had a recent acceleration in the measured channels. Part of that is driven by a couple of key factors. One is that for our Celestial Tea business, which is a significant business for us, we have timing issue in terms of when our promotional program starts this year versus last.
So they're off by a quarter. That will address itself in this period. We've also had the drag, as I said before, the sensible portions, partial loss of distribution, which is a big impact. And in this last read, we had this 1 Terra chip program that was not renewed from one of our club customers. So that had a disproportionate impact in the quarter as well.
So there's a couple of things that drove the more recent numbers. And the unmeasured channels, as I said, we continue to see an acceleration with the online customers, solid business and most of the other customers as well. So it is shifting slightly, but this is somewhat timing related to when our activities fall. When we look forward to our program for the balance of the year, we're pretty clear that we have a line of sight to all the major programs that are happening in the MULO space that are going to drive more positive results. I can certainly take you through the detail of that when we get time.
There's a lot of information by channel. But ultimately, the expectation is that we see a bit of a rebalancing in the low plus C in the coming periods.
And then very much related to that, when we envision how you're getting the acceleration in non measured, what brands and channels are really doing the most heavy lifting in that acceleration? Thank you.
Yes. Certainly, online is a big piece of it. But I have to say, all of our key large club customers are also performing well. And of course, we've seen the resurgence performance of Whole Foods, which was something that predated actually the Amazon tie up. A lot of good work has been done by my team there to work with the Whole Foods group closely on our core category performance and driving the top 500 more strongly.
And we're extremely encouraged by the performance we're seeing in that business. So also part of the drive.
Thank you.
Thank you, everybody. We remain confident that our leading natural organic, better few brands, our strong team, our strategic initiatives position us well to execute on our mission and create and inspire a healthier way of life. What's working for us, our SKU rat, our focus on our top SKUs and spending on the consumer to enhance our brand awareness. We expect further improvement in our results throughout the fiscal year as we term sustainable shareholder value. I'd like to thank our team of over 7,000 employees and our Board of Directors for their contributions and support.
Together, we will further capitalize on our core strength and resources to drive Hain Celestial's chapter of growth and success. Lastly, as I said earlier, don't forget to buy your Plainville turkey, your Arrowhead Mills stuffing, your Imagine Bone Broth and gravy along with many, many Terra products and numerous other hanging products. Thank you very much for listening and everybody have a healthy, happy, safe Thanksgiving. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the