Q4 2019 Earnings Call
Greetings and welcome to Hain celestial fourth quarter fiscal year 2019 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Katie Turner. Thank you you may begin.
Thank you good morning, and thank you for joining us on <unk> fourth quarter and fiscal year 2019 earnings conference call on the call today are Mark Miller, President and Chief Executive Officer, and James like Executive Vice President and Chief Financial Officer.
During the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These statements are based on management's current expectations and involve risks uncertainties that could differ materially from actual events and those described in these forward looking statements.
Please refer to Hain celestial <unk>.
Okay and other reports filed from time to time with the Securities and Exchange Commission and its press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Please note management's marine.
non-GAAP or adjusted financial measures a reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release. The company has also prepared a few presentation slides outlining the fiscal 2020 outlook and additional supplemental financial information, which are posted on Hain celestial is web site under Investor Relations.
This call is being webcast and an archive of it will also be available on the web site I'd now like to turn the call over to Marc Schiller.
Thank you Katie and good morning, everyone as you'll recall at the beginning of the third quarter, we laid out our revised strategy and financial plan that strategy was founded on transforming the U.S. performance and continuing the steady margin and profit expansion in the international business. The U.S. transformation was built on four key strategic pillars, one simplifying the portfolio and organization to strengthening our core capabilities, three expanding margins and cash flow and four reinvigorating profitable topline growth in a core set of brands. We explained that in the short term we would start to see immediate progress on the first three and that topline growth would materialize later as we optimized in store assortment and build innovation and velocity driving marketing programs.
With regard to the second half fiscal 19 earnings. We told you to expect the following in the U.S. One continued margin gross margin and EBITDA margin expansion versus the first half with sequential improvement each quarter to improve trends in EBITDA dollars and three continued topline erosion with some expected volatility. We also communicated that the amount of the decline would depend on how fast we were able to shrink the money, losing brands and skus by eliminating on economic activity rationalizing skews and taking strategic pricing.
Internationally. We said you should expect continued steady performance in both adjusted gross margin EBITDA margin in dollars and that despite the uncertainty associated with Brexit, we expected a solid Q4.
With that in mind I'm pleased to report that our fourth quarter results showed strong progress against our strategy and commitments as expected. These financial results demonstrates the Queen sequential performance improvements in many key areas of our business and we remain on track to achieve our fiscal 2020 operational and financial objectives that we laid out during our Investor day in February .
To summarize our Q4 results.
Our team generated operational improvements both in the us and internationally.
This executional progress drove significant sequential improvement in consolidated adjusted grow Mark gross margin adjusted EBITDA margin and adjusted EBITDA dollars in Q4 compared with other quarters this fiscal year.
Q4, adjusted gross margin increased for the third straight quarter and finished at 23.0%. This was up 140 basis points from Q3 270 points from Q2 and 400 points from Q1.
Adjusted EBITDA margin also increased for the third straight quarter and finished at 10.2%. This was up 90 basis points from Q3 250 points from Q2, and 410 points from Q1 with solid improvements in both the us and international.
Importantly, I'm very pleased to tell you that our adjusted gross margin and EBITDA margins. In Q4 also increased versus year ago. This is the first year on year quarterly increase in those two metrics since the second quarter fiscal 2018, reaffirming that our financial performance has improved dramatically since implementing our new strategy.
Now to provide a little more color, let me start with the us business.
Our adjusted gross margin improved for the third straight quarter, finishing up at 24.9% up 160 basis points from Q3 480 points versus Q2, and 630 points versus Q1 importantly, it was also up 250 points versus last year. The first such year over year increase since Q1 of fiscal 18.
Adjusted EBITDA margin in the US also had its third consecutive quarter of improvement ending at 10.1% that result is 50 basis points improvement versus Q3, 350 point improvement versus Q2, and 560 point improvement versus Q1. This too was an increase versus last year. The first such year over year increase since 2015.
We told you there were multiple opportunities to improve profitability in the US now that we have the right people on the team focused on the right areas with the right tools, our financial progress has improved materially and our confidence in our transformation is growing every day.
Before I turn to the international business I wanted to give you some detail on progress were making against our four strategies to demonstrate and validate our confidence that we are setting ourselves up for sustained and continued progress.
Starting with our first strategy simplifying the organization, we indicated that we had too many brands for a company our size and that the complexity was inhibiting our ability to execute and deliver superior performance to that end in the quarter. We completed the divestiture of remaining hain pure protein brands and the west soy brand, which were low margin and low growth with minimum potential to be accretive to our portfolio.
In addition in addition to simplifying the portfolio. These divestitures also improved our balance sheet as we paid down debt and reduced our leverage to 4.2 times.
Our team also took aggressive actions to further our SKU optimization effort. This is expected to address over 90% of the low margin skus in the U.S and Canada by eliminating cost, reducing and or pricing skews that don't have meaningful profit.
Overall, we are eliminating approximately 350 skews, which is about 12% of our total skews in North America. It also eliminates the need for about 20 co manufacturers again further simplifying our business.
Our second strategy strengthening our core capabilities.
In Q4, we started a restructuring of the North American business to create centers of excellence reduce layers increase spans of control and focus resources.
We've consolidated five sales forces into one created cross functional business teams to better build our brands and increased resources in areas like innovation and consumer insights. We've also implemented a new trade management system to give us better visibility to our spending and its effectiveness.
Allowing us to optimize promotions with customers.
While we expect there will be some modest savings going forward from this restructuring the primary drivers of these changes our efficiency and effectiveness.
In addition to the changes in structure. We've also added two more senior leaders to our organization in Q4 that brings the total new hires on my leadership team since the first of the year to six we now have a world class team with capabilities and skill sets that are well aligned with our transformation journey.
Our third strategy expand margins and cash flow our team has been delivering significant progress in the middle of the BNL with more to come in fiscal 2020 and beyond.
Just comparing our second half performance to the first half distribution crop costs dropped to 120 basis points inventory dropped 13% service improved a 150 basis points and ended the year at over 95%, while we have more work to do here, we're making good progress.
Fines and penalties related to poor service dropped by 47% pricing increased by more than 2%.
Our fourth strategy is reinvigorating profitable topline growth in a core set of high potential brands. We've identified these brands at our February Investor day is to get bigger brands residing in personal care snacks tea and yogurt categories.
You will recall, we expected to see year over year revenue declines in fiscal 19 in fiscal 20. This is partly due to lapping distribution losses, and partly due to the elimination of an economic investments and SKU rationalization.
That said unit velocities on our get bigger brands increased 10.2% in the quarter.
That's up from a 100 basis points up from the last quarter and 800 basis points from the first half.
So while the district total distribution points are down due to margin expansion programs. The items left on the shelf for turning faster than the category growth rate. That's a key indicator of the health of these businesses.
We expect these velocity has remained strong because we are also reallocating resources to these get bigger brands with the goal of creating category growing innovation and equity driving marketing programs.
While in the early stages, we're starting to build the foundation for consistent growth and we'll talk more about these changes when we present at the Barclays Investor Conference next week.
I know that some of you look at the total us topline decline of 11% in the quarter and have questions about the underlying health of the business.
To that end, let me first I will remind you that we articulated at Investor day.
And our last earnings call that the top line in the us would be choppy as we pull out on economic investment reduce unproductive skews and reassess pricing.
I also explained that the faster we attack those issues the faster the topline would erode, resulting in a smaller but more profitable business in the short term and a stronger foundation from which to grow in the future.
As we evaluate our performance we see several important signs that our topline is getting stronger not weaker first I just mentioned the velocity improvements and to get bigger brands second the consumption of get bigger investment brands grew slightly in Q4 as measured in mainstream loulo channels.
Third the percent of skews with velocity sitting in the bottom quartile of their categories has dropped 4% since the beginning of the fiscal year, meaning that the skews still on the shelf are more likely to hold their shelf space going forward.
In addition, we are lapping a year ago quarter, where customers built inventory prior to a price increase and as a result, this year our consumption outpaced shipments by 4% in the quarter again, suggesting the sales decline in Q4 somewhat overstated.
So in short the Q4 top line is not a concern it should be viewed as a positive that we were in fact able to pull out even more on profitable investments and simplify our business, while delivering our profit metrics.
In summary, I'm very pleased with our progress in the us and our ability to deliver on our adjusted gross margin and adjusted EBITDA margin expansion as promised.
While creating a much stronger foundation for the future now let me shift to the international business as we communicated last quarter, we expected to see continue margin expansion and improved adjusted EBITDA with some topline softness as we eliminated low margin promotions and work down customer inventory build as a hedge against the potential Brexit disruptions in March.
That said the international results in the quarter were very solid adjusted EBITDA was up 9% versus the same period last year and up a very strong 14.7% in constant currency adjusted gross margin improved to 21.6% in the quarter up 150 basis points from Q3 220 points from Q2, and 240 points from Q1 and versus year ago. It was also up 160 basis points.
Adjusted EBITDA margin was at 13.8%, excluding corporate overhead, which is up 140 basis points from Q3 220 points from Q2 and 430 points from Q1. This is the highest EBITDA margin. The international business has delivered since 2015. It was also an impressive 230 basis points better than year ago.
Similar to the U.S., we have segmented the international brands and are aggressively reducing on an uneconomic investments in lower margin and lower growth potential brands between that aggressive margin management and customer inventory reductions topline was down in the quarter, but we saw solid growth across a number of brands.
We're encouraged by the strength of our portfolio, where we have more than 10 number one and number two share brands.
Many of them are exhibiting growth and our plant based meat substitutes and beverages are particularly strong.
All in all given the difficult business environment in Europe , and the uncertainty in the UK surrounding Brexit the team did an exceptional job navigating these challenges in delivering strong performance.
Yesterday, we also announced a tale of the sale of the Tilda brand for $342 million, which was 13 and a half times EBITDA.
This represents a significant premium to most other food transactions done in the UK or in the rice and pasta industry over the past several years till there's a strong brand, but one that was facing significant input cost pressures due to increased government regulations and as a result, EBITDA had been stagnant for several years.
By divesting Tilda, our growth rates will accelerate and we further reduced our input cost risks as you know till the sales are primarily based in the UK. So selling it also significantly reduces our exposure to Brexit in Forex.
So while we may not have explicitly talked about selling this business. The sale is another example of us executing our strategy. It simplifies our organization reduces risk and allows us to better focus our resources in places, where we can create significant value for shareholders.
Now, let me briefly turn to F 20 to give you a few headlines.
As you'll recall from Investor Day, we told you that the US would deliver further adjusted gross margin and EBITDA margin expansion as we continue our focus on economic growth and productivity along with that we expected the topline would continue to shrink and have 20 before growing again.
You will see that our guidance reconfirms our commitment to those promises that said, we're going to make a few more important changes in terms of how we guide and report that better reflect where we are focusing our energy and how we're operating the business. The first change for fiscal 2020 is that we are not going to give topline guidance because we're not relying on topline prove improvement to deliver the fiscal plan that said.
We will give you visibility throughout the year into the health of the get bigger brands, which are growing which are going to be the growth generating businesses and the future of Hain. We're also going to continue giving you visibility to adjusted gross margin and EBITDA margins our guidance will focus on the adjusted EBITDA dollars and earnings per share. Since these measures showed the health of our strategy strength of our business and quality of our execution.
Terms of fiscal 20 headlines we will one grow adjusted gross profit and EBITDA dollars, even with lower topline to reestablish a profitable and stable baseline from which to grow three set up to get bigger brands for top line acceleration in fiscal 2001, and four effectively and intentionally manage the net impact of volume price mix and margin.
Second change to the fiscal 2020 guidance will be our reporting entities instead of reporting the us UK and rest of world, We're changing our reporting segments to North America International and corporate.
We see tremendous opportunity for synergies in North America, and purchasing manufacturing marketing and innovation and our linking the U.S and Canadian teams closer together in terms of how we operate similarly, the international teams will work closer together as well to maximize our ability to deliver synergies.
The third change for fiscal 20 is how we report our international business.
As you know the British pound has dropped more than 25% since the first of the year due to the challenges and uncertainty related to Brexit.
Focusing our international financial reporting on US dollar equivalents will make understanding our true business performance in Europe .
Even more challenging.
Our job is to continue to build a great business and provide you with visibility to the areas of focus that are under our control given the significant currency currency fluctuations will provide financial performance in both local and constant currency as well as performance versus the planned exchange rate that will ensure we provide you as much transparency as possible. So you can assess our real performance and the items controlled by management.
In summary, our results show signs that the business transformation strategy, while in the early stages is working.
We're running this business with much greater discipline around a very clear strategy and a culture focused on productivity and profitable growth.
We have a long road ahead, but our team remains optimistic about our future and our ability to deliver against our commitments from Investor day.
With that brief overview, let me turn it over to James will provide more detail on our Q4 financials and fiscal 2020 guidance.
Thank you Mark and good morning, everyone. Today I will focus my discussion on our financial results from continuing operations unless otherwise noted.
Fourth quarter consolidated net sales decreased 10% year over year to $558 million or a 7% decrease on a constant currency basis. This was generally in line with our expectations when adjusted for constant currency acquisitions divestitures and certain other items net sales decreased 6% versus the prior year period, adjusted gross profit was 128 million or 23%.
190 basis point improvement year over year, and 140 basis point sequential improvement.
Improvements were driven by trade efficiencies and supply chain cost reductions in the us and project Terra savings, partially offset by commodity inflation.
With this Q4 profit result, we delivered on our annual guidance on both adjusted EBITDA and EPS.
SGN as percentage of net sales was 15.8% up from 13.9% in the prior year period. This was driven primarily by increased incentive compensation in 2019 on lower consolidated net sales.
Adjusted EBITDA was $57 million compared with $61 million in the prior year period, adjusted EBITDA margin improved 90 basis points on a sequential basis from Q3, driven by both the us and our international businesses.
This represents the third consecutive quarter of sequential margin improvement, even as we face $2.3 million of unfavorable FX.
We reported adjusted EPS of 21 cents based on an effective tax rate of 25.9% compared to 27 cents in Q4 last year with an effective tax rate of 25.4%.
In small covered much of our segment reporting highlights let me now focus on our cash flow and balance sheet.
Operating cash flow for Q4 was $37.5 million.
Which was a significant improvement from 13.1 million in Q3.
Capital expenditures in the quarter was $21 million and $77 million for the fiscal year.
Going forward, we continue to expect an improvement in our operating free cash flow generation as we further improve our cash conversion cycle and continuing to improve profitability.
Which I'll discuss in more detail with our fiscal 2020 outlook.
As of June Thirtyth, our cash balance was 39.5 million and net debt was $599 million.
Inventory decreased on a constant currency basis by $20 million sequentially from Q3.
Excluding the impact of SKU rationalization.
This reflects better forecasting and an improvement in our service to our customers in the U.S.
Importantly, our inventory is $50 million less than our peak inventory levels in August of 2018.
Our bank leverage ratio was 4.22 times as of June Thirtyth compared to 3.32 times at the end of fiscal 2018.
We used the proceeds from the sale of the Hain pure protein business to pay down debt.
In terms of productivity previously referred to as project Terra.
We have made significant progress and save 32.9 million of cost in the quarter and $91.6 million in fiscal 2019, which was slightly better than we expected.
We implemented an organizational redesign to better align resources and capabilities with the transformational strategic plan.
Much of the savings associated with the redesign has been redeployed to eliminate complexity and build out our capabilities to deliver on our strategic transformation.
We are in the process of eliminating 350, low profit and velocity skews, primarily in North America, representing approximately 50 million in annual net sales for the fiscal year 2019.
Over time, we expect that our SKU rationalization will improve North America gross margins by approximately 150 basis points.
Part of the restructuring cost in the UK, we consolidated manufacturing facilities, which we expect will drive approximately 3 million anticipated annual savings as well.
These efforts resulted in the charge of $38 million related to inventory write downs severance lease obligations fixed asset write offs and other charges in Q4.
Before I get into guidance I would like to share our financial perspective on the sale of Tilda.
We expect.
The transaction to be about four cents to six cents dilutive to shareholders, depending on the use of proceeds.
But given a strategic merits and premium price. We believe this is a good decision for the shareholders.
That said I'd like to give you some insight into our capital allocation philosophy, and how we are thinking about deploying our proceeds from this transaction.
First and foremost management and the board are committed to allocating our capital to create the most long term shareholder value.
Our first capital allocation priorities to ensure we have the optimal capital structure to run the business.
After ensuring the leverage ratio is within our target range management and the board evaluate opportunities to either invest the excess capital, but to distribute the excess capital via share repurchases or dividends.
We intend to do just that with the proceeds from the till the sale.
Reduce our current debt and evaluate other distribution opportunities.
Now focusing on our outlook for fiscal 2020. Please keep in mind, we are excluding tilda, which contributed approximately $200 million in net sales and 25 million and adjusted EBITDA for fiscal 2019.
So from a financial modeling perspective, you will need to take that out of your fiscal 2019 results when comparing it to our fiscal 2020 guidance.
While we have not finalized how we're going to utilize all of our proceeds from the sale of Tilda.
For the purposes of guidance, we have assumed all of the proceeds will be used to pay down debt.
For fiscal 2020, excluding the results of Tilda.
We expect reported adjusted EBITDA of 168 million to $192 million compared to adjusted EBITDA of $165 million in fiscal 2019.
On a constant currency basis, we expect adjusted EBITDA of 173 million to $198 million, an increase of 5% to 20% as compared to adjusted EBITDA of $165 million in fiscal 2019.
This represents significant improvement in our adjusted EBITDA performance, given that Forex and reinstating bonuses create an approximate 15 million dollar headwind in this algorithm.
Excluding these items, we expect our adjusted EBITDA will improve by $18 million to $42 million, a major improvement from last year and reflective of our continued momentum and confidence in our plan.
Adjusted earnings per diluted share on a reported basis are expected to be in the range of 59 cents to 72 cents compared to adjusted EPS of 60 cents for fiscal 2019, we an effective tax rate of 26% to 28%.
On a constant currency basis. The adjusted EPS is expected to be 62 cents to 75 cents, an increase of 3% to 25%.
It's important to note that in addition to the Forex and reinstating the bonuses, which creates a 10 cents headwind on EPS. Adjusted EPS also has a headwind of $7 million from the full year impact of our long term incentive stock based compensation for approximately five cents per share.
Excluding this non operational headwinds, our adjusted EPS would increase 20% to 45%, which demonstrate significant progress from fiscal 2019.
Due to the fluctuations in foreign exchange rates that I have mentioned, particularly with the British pound and the uncertainty around Brexit our annual guidance assumes an exchange rate of one dollar and 21 cents as compared to $1.30 in fiscal 2019.
As Mark mentioned earlier, we will provide results both on a reported and constant currency basis going forward.
Keep in mind, each penny in the British movement in the British pound equals approximately $650000 of adjusted EBITDA on a translation basis.
So the nine cent movement in currency as the 6 million dollar headwind going into fiscal 2020.
We expect significant profit growth from our efforts across the organization, including continued solid results in our international business, along with further portfolio and investment optimization and substantial operating improvements in North America.
With fiscal 2020, we expect productivity savings to be similar to what we generated in fiscal 2019 with slightly lower inflation.
Interest and other expense are expected to be approximately $23 million with depreciation amortization stock based compensation expense of approximately 65 million.
We anticipate a significant improvement in cash flow from operations to be in the range of 110 million to $140 million compared to $39 million in fiscal 2019.
This is approximately a $70 million to $100 million improvement from the prior year excluding tilda.
It should also be noted that tilda was a very cash cash intensive business and as a result of the sale our cash conversion cycle will improve by 10 days.
Our cash flow guidance includes $20 million to $25 million of associated charges related to the restructuring and Sq SK you rationalization that started in Q4 and other related items, which is significantly lower than the prior year, which included the CEO succession plan payment and transformational strategic plan that we do not expect to recur in fiscal 2020.
We expect capital expenditures of $70 million to $80 million in line with our fiscal 2019 capital spending.
We are making investments in manufacturing so our higher growth businesses can meet demand and productivity investments to improve margins.
From a cadence perspective for net sales, we expect to shrink the rate of topline decline in the second half of the fiscal year.
From a profit perspective, we expect Q1, adjusted EBITDA to demonstrate slight growth year over year on a constant currency basis.
In part based on our expectation that we will have higher incentive compensation expense in Q1 of fiscal 20, and we are lapping a long term incentive compensation reversal.
These two items represent an approximately 6 million dollar headwind compared to the prior year period.
Q1 will also continue to be the lowest dollar profit contribution quarter similar to prior years, given the seasonality in our business.
In total profitability will improve as official fiscal year progresses, with Q3, and Q4, representing the largest dollar contribution quarters of the year.
Our operational and financial results in the second half of fiscal 2019 gives us confidence that our transformational strategy is working and we look forward to reporting continued progress throughout fiscal 2020 with that I will turn the call back to Mark.
Thank you James in summary, we have confidence in our strategy and remain committed to delivering strong consistent results for all our stakeholders with that said, we're happy to take your questions operator.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad a confirmation tele indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
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Our first question is from Andrew Lazard with Barclays. Please proceed.
Hi, Mark and James how are you.
Great how are you.
Good thank you.
So you are my two questions I guess I'll start off with.
You know understanding that you're still early on in the <unk> and the turnaround phase the.
The EBITDA range for fiscal 20 is fairly wide and I was hoping you could talk a bit about maybe some of the key factors that might push chain either to the lower end of the range or what needs to go right to reach the higher end of the range as well.
So let me let me take a shot at that Andrew So on the on the upside.
Theres, many things that we have underway.
With regard to productivity.
Assortment optimization on the top line pricing that we have not baked into this algorithm that everything goes right. So we're counting on continued progress but to the extent that we execute with excellence.
There's going to always be upside on both the topline and.
On the productivity in middle of the PML terms of things that could go wrong I'd say the two risks in this plan that are of note. One is Brexit, which is an uncertainty that becomes very difficult for us to forecast and while we've taken significant steps to mitigate any potential impact and we have done extensive analysis to know that we're not competitively disadvantaged versus anyone else.
There's always risk there because there's there's uncertainty I think the second risk in the plan is always around distribution and I say that because as we're executing all of these changes.
We rely on our retail partners to work with us and we operate in an environment that is competitive and so to the extent that we can stabilize and grow distribution, we have significant upside to the extent that we lose more distribution than planned we would have downside, but I think we've we've set a plan that strikes a very good balance.
And I am optimistic and confident that we will deliver on the expectations we set today.
Thanks for that and then that leads into sort of my next question, which is.
As you are now we are moving along the SKU rationalization process and pulling some of the less productive and less profitable if could use off the shelf how I guess, how how have you been managing.
The the shelf space that gets freed up I know you'd like to be able to replace as much of that in your sort of get bigger brands with ones that are more productive on the shelf. Some of that may lead to just distribution losses for some period of time, but I guess, how is the conversion of shelf space going on relative to your expectations and and how is the sort of the conversation with retailers and customers been going as you've gone through this process.
Yes. Good question. So I would say it's gone in line with what we expected as you'll recall when we reset guidance last year, we talked about how we had a disproportionate amount of skews sitting in the bottom quartile in terms of velocity. So we knew that we were going to be a net loser of space.
And as we continue to pull out on economic investment I would expect that we will continue to be a net loser space certainly through the first half of fiscal 20.
As we talked about at Investor Day, we have a program called Max the mix, which is about optimizing our assortment and proactively replacing our nonperforming skews with watch much higher velocity and higher margin skews, that's going fairly well, we're making some progress there, but honestly the big key to us ultimately growing shelf space again is going to be minimizing the number of skews in the bottom quartile so that when a retailer is resetting the category.
And looking at the things that arent turning as fast that we are have a very small percentage of our skews. There and then secondly that we have innovation to put in to replace the things that are coming out in some categories right now we have it like T with our T. well proposition that's doing very well in other categories. We don't have as much innovation and so it becomes a little bit more challenging to hold onto that space.
Thanks very much.
Thank you.
Our next question is from Alexia Howard with Bernstein. Please proceed.
Good morning, everyone.
Good morning.
Good morning, Sam.
I guess just following up on Andrews question Am I right in thinking from your comment that the distribution losses or reductions are expected to play out through the first half of fiscal 2000 teach then it should be in that initiative early second half of fiscal 2018.
Well Scott like the promises those s. can you exit.
And we should start to see normalization of sales growth in the last I am just trying to get a sense that signing that and then as my follow up are you able to PON I caught the UK sales dynamics between the regular that the food drug and mass the measured channel the natural channel on the E Commerce channel and roughly how big each of those segments going you now thank you and I'll talk about.
Yes, so on the distribution question remember that we put this strategy in place in Q3 of last year and so we are still taking out on economic investment until we get through the second quarter of this year. So I would expect that the distribution losses would be more significant in the second half I'm sorry in the first half and then when we get to the second half we've already.
Lap some of those losses part of what you guys need to understand is that we don't have total control over the distribution and an example, I would give you as we go through some of the uneconomic investments we partner with retailers on that conversation. So for example, I believe at Investor Day, I talked to you about one skew at one retailer that loses close to $1 million. We went to that retailer and said you can either take a 50% price increase or will discontinue the skew.
We're not sure what the answer to that question is going to be but obviously, if they take the price increase the distribution holds if they don't take the price increase the distribution goes out. So some of it is a little bit hard to predict but either one of those outcomes is going to be a better outcome for Hain. Then if we continued to do nothing and lose money in that with that skew in that customer.
So as we look at on economic investment, we're having a lot of those conversations with retailers in some cases were able to replace last year's program with a better program in some cases, we're able to in some cases, we are discontinuing items in some cases, we're holding items. So it's a little bit harder to predict which is part of the reason why we have been more reluctant to.
Guide on the topline because there is some choppiness there answered in terms of some of those decisions, but certainly given that we've pulled more we will pull more economic on economic investment out in the first half and we will start to lap the things that we pulled out in the second half I would expect that the distribution trends will get better in the second half of the year, although again, they will still likely be down in the second half because the profit maximization brands, we're taking a much more aggressive stance and we are on the get bigger brands.
With regard to your question on channels, we do have visibility to all the channels and obviously as we're looking at these on economic investments they vary by customer and by channel.
In many cases, we are partnering with retailers to change the pack size or the configuration that we were selling to them. A. Good example would be we were hand packing things for specific customers and channels and have been able to replace it with a more automated package going forward that allows us to improve our margins and hold our distribution. So there's there are definitely customer specific channels specific conversations that will impact the results in each and so right now I would say, we're seeing decline across most of the channels because we're looking at investments in every channel and really trying to optimize the foundation. So that we have a strong core to grow from but it varies by customer and it varies by channel in terms of which things are staying in which things are being replaced in which things are being pulled out.
Great. Thank you very much on profit.
Thank you.
Our next question is from Ken Goldman with Jpmorgan. Please proceed.
Hi, Thank you good morning.
Thank you again.
Andrew is ours question on the downside.
So your guidance you had mentioned that Brexit is a risk I think everyone is obviously aware of that I just wanted to get a little bit more color. If I could have what you are looking for in terms of the worst case scenario from Brexit that's baked into your numbers and I know, it's so hard to analyze and predict but I guess I assume in your numbers. Your suit you were forecasting a hard Brexit and the results from that but I just wanted to get a little bit more color about what's actually in your in your guidance for that.
Yes, what I would tell you is even with the hard Brexit, it's hard to exactly tell you what the impact is going to be.
But what what we are doing and what we have been doing is taking steps to mitigate the impact of any change what does that look like sourcing from different locations moving around the ports in which we distribute we entered the country. So there were on moving goods through ports that are less busy and less likely to be clog. If there becomes a backlog due to Brexit putting extra inventory into the country. So that we have more time to react to whatever changes come moving from.
From truckloads to container loads, so that we actually have less shipments going over the border. So there is a lot of things that we are doing to impact what we can control. What we can control is what kind of tariff would get put on businesses how long the the bottleneck at the border becomes.
What happens to labor.
In our in our manufacturing plants with regard to immigration. So some of that is really very hard to forecast what I would tell you is the things that we can control. We are controlling that are built into this algorithm and guidance the things that we don't control.
Are are going to be risks to this plan, but I would tell you I think we're very well prepared as you saw in the fourth quarter, we delivered double digit earnings growth in constant currency. Despite.
This Brexit environment, there was certainly expectations that there might be something material that happened at the end of Q3 and I think if you look at our Q3 and Q4 results, we weather did very well and better than most so I'm optimistic I think we've built in the appropriate amount of risk and I think we're well prepared to handle it.
Okay. Thank you for that and then my second question is on innovation and Mark you talked about how there is some in the market today. Some coming later can you give us a little bit more color on again I know you don't want to sort of give out state secrets on a on a public call, but any help you can get in terms of the timing of some and maybe some of the categories. You're focused on I assume is obviously focused on sort of being that the investment brands you have so maybe that's a.
Too broad of a question, but I just was hoping to get a little bit more idea of when we can expect some of the benefits of that innovation plan to start flying start flowing through into more in a more meaningful way maybe.
Yes, we have reallocated the resources to the investment brands, you will see significantly more innovation in personal care this year than last year, because we couldn't service the business adequately last year, we basically stopped all marketing and innovation because we couldn't supply a well now that we have the plant the new plant up in California, and our supply is much better in our services much better we have a robust.
Pipeline of innovation that is going to be coming in personal care, we really have almost two years worth of innovation thats going to be going out.
We have a t., well, which I talked about before which was launched in limited markets, that's going to be going into distribution more broadly on t. and we also have a pretty robust pipeline of ideas on TV.
We have a robust pipeline of ideas on yogurt, some of which we hope will hit the market in the second half of the year and the snacks portfolio.
We have multiple brands within snacks, but we have some innovation.
And a couple of very big ideas that we are.
Fast tracking to try and get into the market in the second half as well. So you will see little innovation in the first half you'll see more innovation in the second half and then I think when we hit F. 21, you will see robust innovation across all the brands and categories.
Great. Thanks, so much.
Thank you.
Our next question is from Bill Chappell with Suntrust Robinson Humphrey. Please proceed.
Thanks, Good morning.
Good morning.
Steve just wanted to go a little bit back to the till the decision and just trying to understand I guess.
It obviously was was valuable.
Highly viable someone else and it was a business that was growing and and so im just trying understand would you look to sell other growth businesses.
As if the right price came along was there a real sense of urgency to sell till the <unk>.
And does it really does not make sense being part of the the total business.
Yes, so a couple of points first when we were at Investor Day, What we told you is it any brands that we felt.
We're not going to be accretive to the business that we would sell tilda did not fit in that bucket, but what we did get until there was an unsolicited offer at a very premium valuation, which forced us to take a look at it and say is now the time to sell this business I would tell you. There was several factors in our decision to sell at one obviously was the valuation which was 13 and a half times.
And honestly by the time, all the cash settles with working capital and the like will it will net close to 350 million for this transaction.
Which is pretty close to what we paid for it.
But when we paid for it was at $1.65 currency and is now at a $1.21. So we've created some good value overtime and felt that this was a very premium valuation to other deals that have gone on in the market.
The second factor was that we have some headwinds on that business.
There has been significant increase in government regulations around the importing of rice and some of the specs that you need for that for the rice, which makes it very difficult to source from a country like India, which has far fewer controls around its supply and so what's happened is over the last several years the input costs have almost doubled on that brand and while you've seen robust topline you've actually seen significant erosion in gross margin and EBITDA margin on that business. So while it was a premium margin business. It was it was becoming dilutive to our algorithm because of these headwinds and we didnt see any relief in those headwinds anytime in the near future I think the third obviously, given the the currency fluctuation and Brexit.
The feeling was that this is a good time to mitigate some of our risk in the UK and so the combination of those factors is what led us to decide to make that sale.
With regard to your view on the second part of your question, which was around would we sell other businesses that are growing you know what I would tell you is our preference is to focus on brands that are uneconomic and that don't have potential to be accretive to our algorithm, but as a public company.
People come to us all the time with offers to to buy businesses and we evaluate each one of them on their merits and so while 'til the wasnt specifically for sale for the reasons I gave you. It was the right deal at the right time on that business and should we receive other offers on other businesses, we would certainly entertain them.
But proactively or we are really focused on the low margin businesses and exiting those.
Or fixing them in a short period of time.
Got it and then just one follow up on clarification. So you are reducing.
350, skews it represents 50 million in revenue should we assume that most of that falls out of 2020 or is this just overtime and 2020 in 2021 that will fall out I'm, just trying to understand from a modeling standpoint.
Yes, so again, we have to wait till the categories reset in order to take those skews I can't go to a retailer and just pull stuff off the shelf and leave holes. So we wait for the the category resets and they reset throughout the year. So the ones that reset in the first quarter, you'll have almost all of that volume drop out in F 20, the ones that reset in the fourth quarter, you'll have more of that volume drop out and have 21. So.
Of that $50 million I'd assume about 60% or so 65% drops out in 20, and the other 35% to 40% will drop out and have 21, but all of these skews our money, losing skews that's important for you to understand so every single one of them when they come out our algorithm gets better and there's about 150 basis points of margin improvement across the entire portfolio that comes with us pulling those 350 skews out.
Got it thank you.
Thank you.
Our next question is from Mike elaborate with Piper Jaffray. Please proceed.
Good morning.
Good morning.
Yes can you just touch on where you see the status of the portfolio evolution, obviously that till the deal you mentioned wasn't even necessarily one that you had anticipated but.
How much more might there be to calm and how should we think of where you sit today versus some of the.
The remaining work to go.
Yes, so you'll remember from Investor day, we talked about a half a billion dollars worth of sales degenerated zero profit.
We are working on that half a billion dollars.
And like we've said, we're doing everything we can to improve the profitability of those businesses SKU rationalization pricing designed to value.
Et cetera.
To maximize their potential while we have them, but if we can't stabilize them and get them to double digit EBITDA margin. We should have always said that we would explore selling them.
West Soi, we sold in the fourth quarter. There are conversations on other businesses in that tail I expect some of those will come to fruition over the course of the year and I also expect that some of them will remain within our portfolio.
And some of them will get fixed and become much more attractive brand. So that really is a half a billion dollars of business that we are actively trying to I'll say quote unquote fix and we have active conversations with external partners on how to do that and we're working feverously internally to fix them at the same time.
And a little bit related to that you said at Investor Day that you expected top line down in fiscal 20 up in fiscal 2002 and is somewhere sort of yellow sideways arrows in between for fiscal 21.
I know you're not giving.
Specific topline guidance, but just.
About six or so months past Investor day, what's the right way to think about fiscal 21, what is still generally be that same bucket is there anything looking trending like it's maybe trending ahead of that or potentially a little slower.
Well, what I said at Investor Day, still holds which is the rate at which the entire algorithm turns around is directly linked to how fast we shrink the tail.
The get bigger brands are are stable, we actually if you look at our consumption on the get bigger brands, it's up like a half a percent. So those businesses are stable on their way to becoming growth businesses.
But you have a very large tail that has been a drag and it is going to continue to decline at a fairly significant rate to the extent that we are able to exit.
Some of those brands in fiscal 20, our ability to make fiscal 21, a growth year becomes much more likely but I don't control the pace of that happening obviously, you need the right buyer at the right price.
Where there is no interest in a business and it loses money, we'll look at shutting it down.
On that we have a little bit more control over but the pace at which that the entire algorithm shifts to growth is going to be directly related to the shrinking of the tail I have every confidence that the growth brands are going to grow remember, they're flat now with no marketing investment, yet and very little innovation and just starting the assortment optimization.
Program. So the fact that they are stable with with relatively little focus gives me great confidence that when we put the resources against that that we've articulated we start to see that innovation come to market in the marketing come to market on that those will be growing it's just a matter of what happens to the the profit maximization brands and that's not totally in our control. So we've been we've been a little bit conservative in the guidance for F 21, because we're assuming that we have those brands forever, but as those brands the number of those brands and the size of those brands relative to the total sales shrinks the algorithm will shift toward growth.
That's very helpful. Thank you thats it thank you very much.
Thank you.
Our next question is from John Baumgartner with Wells Fargo. Please proceed.
Good morning, Thanks for the question.
Good morning.
James I'm wondering if you could touch more on the go to Paris savings program I mean, the 90 million came through for 2019, you can see from the aggregate three phase how do we think about the phasing of the savings from here is the cumulative 350 still expected through fiscal 20 curious if so it doesn't sound a lot of savings are actually dropping to the bottom line. This year. So any any comments on the season would be helpful.
So in the the project Terra and the productivity savings, we believe that it will be the savings for this year will be similar to what we had in 2019 and obviously, we have some inflation offsetting the use of the gross productivity savings and a lot of that is going to come from you know our board cost were doing zero based budgeting for our board cost and SGN, a we'll continue to focus on design to value improve our price architecture continue on network and supply optimization, and then invest capital where we have productivity. So it's going to be roughly the same is obviously some inflationary headwinds against it that we're up against but we'll get to the gross $350 million.
Okay, and then Mark just to follow up on the international businesses collectively Canada Europe . The UK. They were all sustaining mid to high single digit organic revenue through the end of 18. Thank you broke down this past year as we saw again in Q4.
The long term alagoas, now with 1% to 3% going forward, but the comments. This morning sounded fairly upbeat. So can you just bridge, what's happening with the short slowdown last year, the lower oligo going forward and how that reconciles with some of the more positive comments.
Yes, what I would say is in constant currency. The fourth quarter was was not bad at all any of the problem has been the Forex. So if you look at how the business in the UK and Europe are performing in local currency they are growing.
But when you have a 25% devaluation in the pound in absolute which is the way we have been reporting it's declining so peel back the onion and look at it in constant currency versus.
Absolute currency and that's one of the reasons, we said going into F. 20, we're going to provide you with guidance both in constant currency and absolute currency, because I don't know whats going to happen to the pound from here given.
New Prime Minister and potential hard Brexit on the horizon, the markets don't like uncertainty and the currency is going to fluctuate on but if you look at just how they're performing in local currency. The businesses are doing very well very well on the topline very well in terms of margin expansion very well on the bottom line and I would expect that momentum to continue barring again something in Brexit that I can't control, but we feel really good. We've got 10 brands that have number one and number two shares they are very well positioned relative to the competitive environment. They are very well positioned relative to Brexit. We did an extensive third party analysis of what percent of our ingredients come from outside the UK or or.
Versus the other competitors in our categories. If anything we think were slightly advantaged. So as pressures are on everyone with increased costs, our ability to pass on pricing should be there our ability to weather the storm better than some of our competitors should be there. So I am optimistic about our performance there and the strong leadership team that we have in place and the performance they've been delivering.
So maybe if we tie it back to that long term algo, the plus 1% to 3% I guess I guess, what drives the deceleration in the future versus the rates in the past because I mean, the sales base is still pretty small here. So we think there's opportunity to grow off that base is it just more of a conservative stance more SKU rationalization, there as well just trying to bridge the long term outlook.
Yes, so short term similar to the U.S., we have segmented the brands internationally and are looking at on economic investments there too. So short term there will be some headwinds on top line just as there are in the U.S., although obviously they've been better managed overtime. So the amount of on economic investment is smaller there than it is here in the U.S.
But when you strip that aside there is robust growth potential we've got a great plant based.
Meat substitute business and Linda Mccartney, we have.
Plant based beverages that are growing very nicely.
We have some very high margin businesses and Hain Daniels that are well positioned competitively. So in constant currency I expect that these are growth businesses in absolute currency again, just given the difference between the dollar 30 and $1.21 pound.
Year over year in local currency its going to be fine in absolute currency its going to show a negative on the topline we lost $53 million in F 20 versus F. 19, just due to that nine cents currency fluctuations so $53 million of topline comes out just due to currency. So if you if you take that out and you look at in local currency, it's a much more robust business.
Great. Thanks for your time.
Thank you.
Our next question is from David Palmer with Evercore ISI. Please proceed.
Good morning.
Question on gross margins when you.
You decompose that gross margin impact for the quarter and even thinking ahead.
How would you break that down a bit in terms of because I think the gross margins were better than a lot of people expected.
Obviously ton of moving parts in terms of Sq rationalization. So there must be stuff going on in terms of a mix that has a pretty big impact, but if you could do your best to break down that and how you're thinking about gross margin specifically for fiscal 2000, and I have a follow up.
Yeah. So.
I don't have specific numbers by specific tactic because they somewhat overlap, but it is a combination of SKU rationalization on economic investment pricing mix and then to the middle of the P. and L. The huge improvements we've made in our supply chain that are all the combination of those things are all driving the margin improvement as you get to F. 20, we expect year over year margin improvement every quarter.
So not necessarily sequential because Q1 is a much lower margin quarter than Q4 as an example, so it will be Q1 will be lower than Q4, but it will be higher than year ago.
So I would expect that continued progression throughout the year and.
Margin expansion every quarter versus year ago.
If if we were to think ahead, even as we get out of fiscal 20 into 21, what are some things that might be hitting at that point I would imagine as far as your.
Your network the co packing network or perhaps you will be further along on some of the innovation cycle that you can see internally.
And what what are some things that might give you another gear at that point as you as you think about fiscal 21 and beyond.
Yes on the topline, it's three primary things assortment optimization, which again at Investor day, we talked about our highest margin highest velocity skews are only in 30% of the HCV. So theres a significant distribution opportunity on those skews.
Second is going to be innovation, which I talked a little bit about earlier on the call and the third is going to be marketing. We are in the process of creating new marketing campaigns.
And having a robust formula for evaluating ROI that we hadn't had previously I'll show you some of that at Barclays Investor Conference next week some of the progress that we've made there in the middle of the personnel as we simplify the number of skews that we have to manage and the number of co manufacturers that we have to manage its going to allow us to simplify our supply chain less distribution centers were working to get every skew into each distribution center. So we can ship hold truckloads.
It's going to be a very important cost savings metric and then the other one that that will help us.
Both on top line and in the middle of the PML is pricing today, we charge basically the same amount whether you're ordering two pallets are ordering a full truck, we don't differentiate well, whether we're shipping at a thousand miles or 200 miles. We just don't have a very robust pricing matrix. So theres a lot of opportunity in terms of.
Just like every other CPG company, having bracket pricing.
Charging for the amount of miles that you're driving making sure that we have the right price size architecture on shelf as weve done a robust.
Analysis at shelf, we find in some cases, we are the same price as everyone else and we're offering free five seven more ounces of product than everyone else.
So theres theres, a significant amount of work going on on the pricing and you will start to see that hit the marketplace as we get towards the middle of that 20, which again I'm hopeful we'll improve our trajectory in the back half of the year.
Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
I'd like to thank you guys for all your time and understanding and support we are very excited about the progress we're making I think if you go back to Investor Day, and you look at the things that we promised we're delivering pretty much on all of them.
And frankly at a faster rate than what we committed to so I'm excited about where we are I'm confident in our future and I look forward to continued dialogue with you all as we move forward on this this path of transformation. So thank you.
And with that I'll turn it back to the operator.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Thanks.