Jun 22, 2017
Operator
Good day, ladies and gentlemen. Welcome to The Hain Celestial Group Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time.
[Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over Mary Anthes, Senior Vice President, Corporate Relations.
Ma’am, you may begin.
Mary Anthes
Good morning. Thank you, Shannon.
And thank you all for joining us today. We’re pleased to finally be reporting Hain Celestial’s fourth quarter fiscal year 2016 and first, second and third quarter fiscal year 2017 earnings results.
Irwin Simon, our Founder, Chairman, President and Chief Executive Officer; Gary Tickle, Chief Executive Officer, Hain Celestial North America; and James Langrock, Senior Vice President Finance and as of tomorrow, CFO, have joined us as well as several members of our management team. 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 may cause results to differ listed in our publicly filed documents, including our Form 10-K filed with the SEC.
A reconciliation of GAAP results to non-GAAP financial measures is available in our earnings release which is posted on our website at www.hain.com under Investor Relations. The conference call is being webcast and archive of the webcast and the accompanying presentation will be available on our website under Investor Relations.
Please limit yourself to one question in Q&A and if time allows, we will take additional questions. Now, let me turn the call over to Irwin.
Irwin Simon
Thank you, Mary and good morning everyone. And we appreciate everyone joining us on this call.
Man! It’s been a while since you’ve heard from us, and we’re pleased to be back speaking with you today.
I’d like to begin by thanking our employees, our Board of Directors, and shareholders for their support. I’d also like to give a big shout out to our finance teams, legal teams for getting us across the finish line.
The accounting review and audit process has been a thorough and time-intensive effort. We’re pleased that this is behind us.
At the same time, we’ve used this opportunity to review the strengths of our global business, taking a deep dive across our operations to expand Project Terra, and put in place new initiatives to drive Hain Celestial’s future growth. I am confident that our leading natural organic brands, our strong teams, and strategic initiatives position us well to execute on our mission to create and inspire a healthier way of life, which is important to us.
Hain Celestial remains uniquely positioned in the growing organic natural and Better-for-You products industry. We have continued to make significant progress across key areas of our business.
Our net sales grew 4% on constant currency basis over the last nine months. During this time, we also generated a $148 million in operating cash flow and completed one strategic tuck-in acquisition in the UK, Yorkshire Provender, a premium fresh soup business.
Importantly, we’ve done a lot of work to better the position of Hain Celestial for the future in the current challenging operating environment. We’re executing on our strategic plan to drive growth, build brand awareness, and last but not least, enhance shareholder value.
Across our team, we look at all areas of our business and have expanded Project Terra to streamline our operations, improve our efficiencies, and last but not least which is important, drive out cost. The savings realized from Project Terra will enable us to invest at least $40 million to $50 million annually in incremental marketing dollars to support our top brands.
John Carroll, a proven leader with more than a decade of experience at Hain will lead this project. We’ve established a strong leadership team across our organization, adding deep consumer and operating expertise to drive the execution of our strategic plan.
As we focus on driving growth, we also expect to generate substantial cash flow, we plan to continuously invest in our business, and return value to shareholders. Since we last spoke, the validity of our brands and mission has only been reaffirmed.
We believe Danone’s acquisition of WhiteWave and Amazon’s pending acquisition of Whole Foods have highlighted the strategic and financial value of our brands in the category of health and wellness. We are one of Whole Food’s largest suppliers of natural organic products across many categories.
Amazon is one of our fastest growing customers. We expect the combination to be very positive for Hain Celestial as we sell more products through brick and mortar and e-commerce.
We have taken the important steps to increase and build availability of our brands across all sales channels around the world. I have never been more excited about the prospects for Hain Celestial.
We have a stronger team than ever before with a deep bench, and the right strategic plan with new processes, new procedures in place to deliver long-term growth and profitability. Many of you have wondered why the completion of this process took so long.
The review was self-initiated and involved a fully independent review led by our audit committee with independent counsel, our independent auditors; we also engaged the revenue recognition expert and a global consulting firm to assist in this review. This was an intensely comprehensive effort encompassing three years of audited financials as well as numerous customer transactions related entries dating back to fiscal year 2014.
As a result of the matter identified in Q4 of 2016, we first looked at a series of steps to ensure that there was no intentional wrongdoing related to the preparation of our financial statements. Our accounting team then undertook a global review of the financial statements including a review of all revenue policies, procedures, and contractual arrangements.
We performed an evaluation of trade spending, reviewed other major financial statements to ensure we were in compliance with U.S. GAAP.
This comprehensive global review was substantially completed in Q3 of 2017 and resulted in no material changes to our previously reported financial statements. We have made significant improvements in people, processes, and systems.
As a result, we believe, we now have best-in-class in financial controls. Turning to the findings of our accounting review, James Langrock, our new CFO, which we announced today, will take you through the details, but you should be reassured, there was no material changes to our previously reported financials, no impact on cash flow or cash balances, no impact in the validity of underlying transactions, and no change to Ernst & Young’s previously issued audit opinions.
We have expanded and strengthened our finance teams with seasoned professionals. We have announced this morning that Pat Conte, our CFO, has decided to leave to pursue other opportunities.
I want to thank Pat for his many years of contribution over the last eight years to Hain and wish him well in his new endeavors. I’m pleased to announce that James Langrock, as I mentioned before, our SVP of Finance and Treasurer has been promoted to Executive Vice President and Chief Financial Officer.
James has more than 25 years experience in financial and executive leadership positions. I have the highest confidence in James, his expertise, his experience and look forward to continued contributions to the execution of our strategic initiatives.
Working closely with James is Mike McGuinness, our Chief Accounting Officer, who also has been very important leader on our financial team. The efforts of James, Mike, and the entire team were instrumental in the completion of our internal review and audit process.
Before I turn the call over to James, who is getting ready to talk and is chomping at the bit, I’d like to formally introduce Gary Tickle for the first time, our CEO of North America. Many of you have met Gary at Expo West and you will continue to meet him over the year.
Gary joined us in the fall from Nestle, and Gary has spent 20 years around the world with Nestle in the infant nutrition’s business and many other. Gary will drive the future growth in North America, as we achieve greater cost savings and invest behind our top performing brands.
Now, I’ll turn it over to James. Let’s go, James.
James Langrock
Thank you, Irwin, and good morning, everyone. I’m extremely excited to lead The Hain Celestial finance team as we execute on our strategic initiatives.
We have made tremendous improvements in our financial controls, improving processes and upgrading and adding key personnel. We have expanded our team with new hires including a new controller for the U.S.
segment, a global revenue controller ahead of internal audit, and a Chief Compliance Officer. We have also improved our financial controls globally through enhanced standardized contract accounting policies; expanded review processes and monitoring controls over contracts with customers, customer payments in incentives, and the implementation of an extensive revenue recognition and contract review training program as well as new policies and procedures around revenue recognition and other significant accounting matters.
Strong financial controls and accuracy in financial reporting are our highest priorities and we have taken the learnings from the accounting review to ensure that we have best-in-class accounting and internal controls in place. Looking at slide nine, you can see that the impact of the corrections to the historical net sales and EPS were not material.
Net sales changed by 3% or less in fiscal 2014, fiscal 2015 and for the nine months ended March 31, 2016. Non-GAAP earnings per share changed 5% or less in fiscal 2014, fiscal 2015 and for the nine months ended March 31, 2016.
It is important to note that these adjustments also did not change the historical trending of the financial results and there was no impact on our cash flows or cash balances. The changes to net sales related to the following items.
We corrected certain promotion expenses that should have been classified as reduction of revenue but were recorded primarily as SG&A expenses. These corrections are reclassifications on the income statement and do not impact net income.
This reclassification represented 80%, 60% and 90% of the revenue adjustments made in fiscal 2014, 2015 and 2016 respectively. The remaining adjustments to revenue related to the timing of the trade and promotional accrual and certain sales cut-off adjustment.
The items I just referenced as well as other material adjustments are described in more detail in our Form 10-K for the year ended June 30, 2016. I will now review our financial results for the nine months ended March 31, 2017 referenced on slide 10.
Please refer to the GAAP to non-GAAP reconciliation tables in our earnings release for additional information on our financial statements. Net sales were $2.1 billion, a decrease of $20 million or 0.9%, which includes $96 million of unfavorable foreign currency impact.
Net sales increased approximately 4% on a constant currency basis. Net sales in the U.S.
segment were $882 million, a decrease of $60 million or 6%. Net sales were negatively impacted by $55 million due to inventory realignment at certain customers and SKU rationalization as well as $11 million of unfavorable foreign currency due to Ella’s Kitchen, which is part of our Better-for-You baby platform based in the UK.
After giving effect of these items, net sales would have been up 0.5%. We’re encouraged by the growth in our other business segments.
Outside of the U.S., every segment grew on a constant currency basis. UK net sales were $574 million.
Foreign currency exchange rates impacted our UK results by $84 million while the benefit of the Orchard House Foods acquisition contributed a net increase of $75 million, which includes growth under our ownership. On a constant currency basis, net sales increased $100 million or 17.8%.
During the first quarter of fiscal 2017, UK segment divested its private label juice business and associated facility, which represented approximately $25 million in net sales during fiscal 2016. Our Rest of World segment, net sales were $285 million, an increase of 6.5%, which now includes the Cultivate platform.
On a constant currency basis, net sales for Hain Celestial Canada increased $7 million or 7%. Net sales for Hain Celestial Europe increased $19 million or 17%.
The acquisition Mona of contributed net increase of $13 million, which includes growth under our ownership. Hain Pure Protein net sales were $387 million, an increase of 2.1%.
We faced difficult comps during the Thanksgiving and holiday season, as our competitors recovered from a supply shortage, which contributed to lower pricing this year compared to the prior year. We also impacted by supply disruptions, production constraints at our facilities in the current year.
Adjusted EBITDA for the first time month of 2017 was $190 million, a decrease of $98 million, compared to the prior year due to several factors I will discuss further on the next slide. We earned $0.64 per diluted share or $0.79 on an adjusted basis.
Foreign currencies impacted report results by $0.09 per share. The effective tax rate was 29.8%.
2017 has been a transitional year at Hain during which we undertook proactive initiatives to drive future growth. Like many other companies, we have experienced a challenging global, economic and food retail environment.
For the first nine months of fiscal 2017, adjusted EBITDA was $190 million or 8.9% of net sales, as compared to $288 million or 13.4% in the prior year period. The primary drivers of decline were $31 million decrease in EBITDA within our HPP segment, driven by price declines for turkey, supply disruptions and production constraints at our facilities.
EBITDA within our U.S. segment decreased $16 million due to pricing and trade spend investments, as well as unfavorable sales mix.
The U.S. segment was further impacted by an inventory realignment at certain customers, as well as SKU rationalization, which negatively impacted EBITDA by $17 million.
Foreign exchange negatively impacted EBITDA by $14 million. There was an impact of $12 million related to duplicative overhead costs, broadly due to the accounting review, as well as Cultivate brand investments.
Finally, $8 million of our UK segment EBITDA decreased due to operational inefficiencies related to lower fruit yields. We believe that all these negative factors are behind us.
We are seeing momentum in our fiscal 2017 fourth quarter and we are well-positioned to substantially increase profitability in fiscal 2018. Now, moving to Q4 2017 guidance on slide 12, presented on an adjusted basis that is further detailed in our press release.
We made significant progress on our strategic initiatives in 2017. We are confident that we have reached an inflection point and that the Company is well-positioned for long-term growth and profitability.
We are experiencing solid momentum in the fourth quarter and we expect net sales to be in the range of $715 million to $735 million. Q4 2017 is expected to be negatively impacted by approximately $40 million of foreign currency headwinds, which is assumed in the net sales guidance.
At the midpoint of our guidance, on a constant currency basis, net sales would increase approximately 4% over the prior year’s fourth quarter. Within that growth, we expect the U.S.
to be flat and the other business segments to grow in the high single digits. Adjusted EBITDA is expected to be in the range of $80 million to $85 million.
At the midpoint of our guidance, EBITDA on a constant currency basis will be relatively flat with the prior year. It is important to note that the majority of the operational issues that we faced in the nine months of the year have been successfully resolved in Q4, 2017, reflecting recovery in HPP and currency-related price realization in the UK.
In addition, SKU rationalization and inventory realignment are nearly complete, even as we increase our brand level investments. We expect these improvements to continue and have a favorable impact on margins in fiscal 2018.
We expect fully diluted adjusted EPS to be between $0.40 and $0.43. Excluded from adjusted EPS in Q4 of 2016 is a non-cash pretax goodwill and trade impairment charge of $124 million which primarily related to our UK segment.
With respect to cadence of our quarters from a sales perspective, our second quarter is historically our strongest quarter with the third and fourth quarters roughly consistent and our first quarter being the lowest. Looking ahead to fiscal 2018, we expect a strong recovery as we realize increased benefits from our productivity and cost savings initiatives.
We are confident that a majority of the factors that affected us in fiscal 2017 are behind us. In fiscal 2018, we expect net sales to increase by 4 to 6% on a year-over-year basis.
We are expecting low to mid single digit growth in the U.S. and HPP while the UK and the rest of world will grow mid to high single digits.
We expect some sales impact from our U.S. SKU rationalization but expect it to largely abate by the end of fiscal 2018.
We are anticipating strong growth in profits with adjusted EBITDA to be in the range of $350 million to $375 million, which reflects a $100 million of Project Terra savings including annual productivity and an increase of marketing of $40 million to $50 million, primarily in the U.S. We believe these investments are critical to deliver continued top-line growth over the long-term.
Our fiscal year 2018 adjusted EBITDA target is a combination of three primary factors. First, Project Terra cost savings of $100 million.
Our productivity and cost saving opportunities are driven by further optimization of our business systems, processes and personnel. Second, core business growth of $30 million to $40 million; we have capacity in place in key growth areas to leverage topline growth into robust margin contribution.
We want to outperform the categories in which we operate, and our strategic plan outlines specific growth targets to each of our businesses. In summary, while we expect significant contributions in fiscal 2018 from top-line growth and margin enhancement, we also plan to continue to invest in the business.
For the first nine months of fiscal 2017, we generated operating cash flow of $148 million, an increase of 12% over the prior year. Capital expenditures for the first nine months of 2017 were $45 million and operating free cash flow was $104 million, as compared to $74 million of operating free cash flow in the prior year period.
At March 31st, our cash balance was $163 million and net debt was $627 million as compared to net debt of $792 million at the same point in the prior year. From January 1, 2016 through March 31, 2017, we paid down $170 million in debt.
We expect to pay down approximately $40 million during the fourth quarter of 2017. Now, turning to fiscal 2018 cash flow.
Based on fiscal 2018 EBITDA expectations, we anticipate cash flow from operations of $235 million to $270 million. We expect capital expenditures to be in the range of $65 million to $75 million, which would provide us with cash available to allocation in the range of $160 million to $205 million.
Our strong cash flow generation provides us with financial flexibility to support our strategic initiatives including acquisitions. With our improvement in EBITDA and free cash flow generation and assuming a $100 million debt pay down, our leverage ratio would improve from 3.2 times to between 1.8 times and 1.9 times before taking into account strategic bolt-on acquisitions and share repurchases.
With that, I will turn the call over to Gary.
Gary Tickle
Thank you, James. I’m delighted to be a part of the Hain Celestial team and to be speaking with all of you today.
I’m excited about the prospects for our operational improvement and enhanced growth in our business. Demand for organic natural and Better-for-You products continues to grow and we are well-positioned with the broad range of products and attractive categories to capitalize on this growth.
We have products with authentic compelling stories, brand stories, as well as differentiated product mix to appeal to our customers and consumers, who are looking for Better-for-You products. This is the DNA of who we are Hain Celestial.
Within our industry-leading organic, natural and Better-for-You brand portfolio, we are capitalizing on our core strengths and resources to drive growth. Beginning in fiscal 2017 in the U.S., our brands have been managed under strategic platforms.
This grouping was determined by common consumer needs, route to market or internal advantage to leverage our management capabilities and resources in these core platforms. The core platforms have also enabled us to develop opportunities for incremental growth and margin improvement aligned with our consumer demand.
With these platforms in place, we have focused on brand building initiatives in existing markets, product innovation, continued expansion of our core product availability and driving improvements in people, processes and technologies. I’ll give you a bit of detail on how we plan to enhance some of the focus platforms in our U.S.
business. Firstly, Better-for-You Snacking.
We plan to drive growth through distribution, innovation and strategic brand investment as we solidify our top-10 snack position of Terra Chips, Garden of Eatin’ and Sensible Portions. For Fresh Living, we will drive new innovation in the yogurt category with the Greek Gods brand.
As we stabilize our plant-based business, we are looking to grow by harnessing our European knowledge and expertise with future innovation in this category. In Better-for-You Baby, we have focused on expanding Ella’s Kitchen in the natural channel continuing to support the Earth’s Best friend and its strong growth.
These initiatives include further improving profitability. In Better-for-You Pantry, we’ll increase support to MaraNatha and Spectrum brands with new innovation while strengthening Imagine’s leadership on the back of a very strong 2017 performance.
In Tea, our objective is to reinforce our number one herbal tea brand position with new marketing and branding initiatives on the back of improved performance in the fiscal 2017 tea season for Celestial Seasonings. For Pure Personal Care, as we support the U.S.
launch of Live Clean, we will also increase brand investment in Alba Botanica, Avalon Organics and Jason. Turning to slide 19.
We believe we have tremendous opportunity to grow in our categories. Of the total CPG landscape measured by MULO and Convenience in the 52-week period to April 2016, 93% of turnover is in the conventional food space, representing potential growth in share opportunities for Hain Celestial.
Put another way, organic and natural products represent just 7% of sales. This presents immense opportunities for Hain Celestial as we look not only to engage the natural and organic shopper but to become part of the consideration set of the conventional shopper.
Our growth roadmap requires us to deliver on four specific strategies. Firstly, focus resources on leading brands and products that represent 90% of our business and which are outgrowing our entire business.
Secondly, continuing to drive cost out of our business and the streamlining of our product portfolio and supply chain to reduce complexity. Thirdly, increasing investment in our leading brands and consumer engagement with a focus on innovation where our cost savings will fuel our investment plans to create a virtuous circle of growth.
And fourthly, enhancing our in-market retail activation within the store and online to improve sales execution with more effective trade and business. Our goal for the U.S.
is to drive low to mid single digit net sales growth by increasing market share and household penetration for our top 500 products. We also expect to grow operating income faster than the topline in percentage terms driven by our reinvestment plans and operating leverage.
We are actively reshaping our portfolio around our core brands with a continued focus on the top 500 SKUs which account for 90% of MULO+C. You will recall that MULO+C represents around 60% of our U.S.
net sales with the balance in the natural channel, club, e-commerce, food service and military. In my commentary, I will reference the May 21, 2017 IRI, MULO plus Convenience read unless otherwise specified.
In the 52-week period, our top 500 SKUs grew over 5% in MULO+C and they continue to outperform our total business. Looking at the latest 12 weeks MULO+C, the total channel shows less than 1% growth while our top 500 grew more than 1.5%.
In the same 12-week period, our TBP growth for the top 500 was 3.4% with a strong TDP growth of over 5% in the last 52 weeks. We have seen broad industry trends towards recalibrating inventory and focusing on SKU efficiencies.
We’ve taken positive actions aligned with this trend, actively reducing finished goods inventory at certain customers to reduce spoil, increased product freshness and improved our customer service levels. This reduced our top-line sales in the first nine months of fiscal 2017 by $36.4 million with a minor impact on the top-line expected in the fourth quarter.
We are continuing our efforts to rationalize approximately 600 SKUs that represent over 20% of our total SKUs in MULO+C. As part of this rationalization in the U.S., we reduced our top-line for the first nine months of fiscal 2017 by approximately $19 million.
We expect this to be concluded in fiscal 2018. Going forward, we will continue to review our portfolio to ensure we are optimizing our mix.
This rationalization has been a drag on our top-line growth of around 2% during the first three quarters of fiscal 2017 with an expectation of around 1% of the fourth quarter. However, we plan to benefit from reduced planning and manufacturing complexity, improved retail execution and lower spoils over the long-term.
The impact of SKU rationalization has resulted in 1.8% drag on MULO+C consumption in the first nine months of fiscal 2017. Excluding this, our underlying nine months consumption growth for the U.S.
business would have been 2.6%. Consumption for our top 11 brands was up 4.9% excluding SKU rationalization.
As part of the transformation in our business, we’re making clear and deliberate choices around how to reinvest our cost savings to accelerate growth in our businesses. In 2017, our brand building investment increased by 20% over 2016, as we rolled out our strategy.
We have continued to expand our investment in consumer insights to better inform our strategic choices and investment in brand positioning and communication. With respect to branding, we have commenced significant redesign work on our MaraNatha brand with new packaging coming to the market in the last couple of months.
We’re already seeing both TDP growth and unit growth in the most recent four and 12 weeks of MULO+C through to June 11, 2017. As we develop new assets for deployment against our brands to raise consumer engagement levels, we’ve already started work in the digital space.
We’ve invested in branded digital programs to drive increased brand awareness and broaden household penetration. A recent example in our Celestial Seasonings tea business where we made a significant investment in a strong 360 degree digital consumer campaign, The Magic of Tea campaign started last fall, which reached approximately 46 million consumers and garnered 352 million impressions.
We also increased trade funds for in-store executions where we saw a double-digit growth with one of our major retailers. This grew herbal tea volume share by 1% in the hot tea season from October 16th through the March 2017.
Further solidifying Celestial Seasonings position is the number one share brand in herbal tea in the U.S. The learnings from these programs position us for a strong fiscal 2018.
Importantly, we also remain focused on innovation. To call out a few of the 75 products we launched at Expo West, we’ve already had a great consumer feedback on our Terra Plantain chips and Garden of Eatin’ bowl [ph] flavored Tortilla chips, our Celestial Seasonings Sleepytime assortment and the Live Clean Personal Care launch which started in January 2017.
And lastly, I make special note of the excellent year we’re having on Imagine soups and broths. Following product development or reformulation, revised branding and packaging and a strong support program, Imagine brand generated growth of 32% of MULO+C in the last 52 weeks.
Innovation of course goes beyond purely product and we continue to challenge our end-to-end processes to look for improved ways of working that will drive efficiencies, lower complexity and increase our responsiveness to the marketplace. We have tremendous opportunities to further market penetration with our existing products.
While about 50% of U.S. household purchase at least one Hain Celestial product in the course of the year, this is achieved with household penetration rates still well below conventional averages.
For example, looking household data for all channels in the recent 52 weeks, MaraNatha is at 3% household penetration compared to Jif at 40%. Similarly Sensible Portions is 13%, compared to Lays at an average of 72%.
These trends make it clear that we have significant room to grow our brands, which appeal the broad range of multi-generational consumers including millennials and baby boomers. Our top 500 SKUs and top 11 brands will be the focus.
These brands are Celestial Seasonings, Dream, Earth’s Best, Garden of Eatin’, Imagine, MaraNatha, Sensible Portions, Spectrum, Terra, The Greek Gods and Alba Botanica which represent 79% of our sales in the last 12 weeks. We have strong foundations to build on.
With Garden of Eatin’, Sensible Portions and Terra Chips, we have three of the top selling snacks in the natural category. Sensible Portions is growing by double-digits in all but one retailer in MULO+C.
And Terra has recorded 14% growth in MULO+C for the 12 week period. We will continue to increase in-store activation and investment behind the strong platform for growth.
We’re also making significant gains with our Earth’s Best baby products with 8.6% growth in the latest 12 weeks MULO+C read, including retaining our number one share position in organic infant formula, posting double-digit growth for our Earth’s Best Sesame Street products in key accounts and strengthening frozen offerings with chicken nuggets leading the growth, retaining Earth’s Best position as the leading kids natural frozen entrée SKU. We also undertook a strategic review of price value mapping and reduced pricing on key products to reflect shifts in commodity prices and to achieve competitive price points in the market.
These actions, which reduced net sales by $5.6 million over the first nine months of 2017, primarily impacted Spectrum oils, MaraNatha nut butters, as well as certain SKUs in the Earth’s Best baby portfolio. We expect a further $1.4 million net sales impact in the fourth quarter.
To-date, we are encouraged by the unit growth and more recently the unit share growth we’ve experienced as a result of these pricing actions. We want more consumers to try more Hain Celestial products more often.
We will enhance investments in consumer engagement with a focus on brand building assets, consumer insights research and consumer communication. We will also invest with our retailers and distributor partners to drive improved execution in stores as well as to expand our online offering and partnering with retail channels.
With the recent announcement of Amazon’s intention to acquire Whole Foods, we see further positive opportunities for growth. We are one of Whole Foods’ largest suppliers of branded natural and organic foods.
Our large assortment of product is found in Whole Foods today with over 1,200 items selling in the latest 12 weeks, and we currently have two representatives on the Whole Foods supplier advisory council. There is a great deal of speculation about how Amazon might choose to leverage Whole Foods but we feel that the hallmarks of what makes Amazon successful being consumer convenience and greater product accessibility coupled with competitive pricing and data driven customization are likely to be applied in some form to Whole Foods.
This presents us with a real opportunity to increase availability and household penetration for our range and to further expand the growth of natural and organic offerings to conventional shopping sites, which as I mentioned earlier still represents around 93% of the shopper basket today. In summary, with great products and a clear plan to support our core brands to drive growth, we’re executing on strategic roadmap to transform the U.S.
business. To that end, we’ve made significant enhancements to our U.S.
team, bringing in seasoned professionals with broad CPG, natural foods industry and brand building experience. We have a strong team in place to execute on our strategic plan.
These new additions as well as the existing leaders in our business, all have proven track records across a range of categories and companies. It’s a great privilege to lead the North American team.
So, in closing, 2017 has been a year of significant transformation. Briefly recapping, we have reduced our SKU count by around 20%, the top-line impact of $19 million year-to-date, reducing complexity and increasing focus on our core range, impacting our operating income negatively by $4.3 million.
We have realigned our finished goods inventories with the top-line impact of $36 million in order to move to a more consumption-driven operating model, it also has impacted our operating income negatively by $12 million. We have generated savings of $22 million year-to-date and at the same time started to accelerate our brand and marketing spend by around 20% year-on-year.
We’ve also invested in capability and new talent and building new business processes. In 2018, we’ll have a stronger focus on the top 500 SKUs and top 11 brands.
We’ll have a smaller portfolio of higher performing products, giving us a stronger shelf performance and greater consume relevance and the leadership role with our customers. We’ll have more than 50% increase in total brand marketing spend compared to 2017 funded through our productivity savings plan.
This should drive low to mid-single-digit growth on the top-line, while improving bottom-line performance by low-double-digits. 2018 is a year of exciting opportunity for growth in Hain, and we’re looking forward to winning in the marketplace.
I look forward to meeting many of you in the coming weeks and to continue to update you on our U.S. business.
And now, I’ll turn it back over to, Irwin.
Irwin Simon
Thank you, Gary, and a lot to look forward to. And I promise you, just because we haven’t spoken for four quarters, I won’t keep you on the phone for four hours of commentary.
I want to briefly review our UK, rest of the world, our Hain Pure Protein segments and our Cultivate business. To start, UK sales were up 18% in constant currency year-over-year and UK being a tough, tough market.
We have a strong position with key brands in the UK. Tilda, which is the number one basmati rice rights, broadening every day use with super grains pulse and rice, and now we’re coming off a strong Ramadan.
Ella’s Kitchen, the number one organic baby food in the UK was recently acknowledged by The Grocer for 11 years of the consecutive double-digit growth outperforming the market and increasing the share in the UK. We’re expanding this brand throughout Europe, China, India and the Middle East.
We also held the number one fresh soup business in the UK with New Covent Garden in Ireland and growing strongly in this category with planned launches in new channels and new geographies throughout Europe. Linda McCartney, our meat free brand is outperforming the overall market with branded offerings, and we’re investing in additional manufacturing capabilities for this product.
Our further UK brands also hold number one positions in fresh fruit Hartley’s and Sun-Pat and other categories. And we’re also expanding our U.S.
businesses such as our Dream, our Celestial Seasonings and MaraNatha. We are well positioned to execute our growth strategy and focus on new customers, new sales channels, product innovation and emphasizing our manufacturing in the UK.
We expect to generate $755 million to $765 million in net sales in the UK in fiscal 2017, which includes the impact of $115 million due to unfavorable currency. And right now, it excludes Ella’s Kitchen, which reports into the U.S.
segment. We expect adjusted EBITDA for fiscal 2017 to be $66 million $69 million and primary to FX transactions -- translations, and operating and efficiencies, which relate to our fresh fruit business, which James has talked about.
And we are seeing some good rebounds in our yields in our fresh fruit business, as well as delay in a regulatory approval on the Orchard House acquisition. For Q4, I’m pleased to report, as I said before, experience a great turnaround on our businesses in our fruit business and our price increase.
We look forward to 2018. We expect high-single-digit top-line growth as we realize our full year recovery from FX-related price increase, better fruit yields, and we are expecting strong performance from Tilda, Linda McCartney, Yorkshire Provender and our other soup business.
We also expect EBITDA rebound strongly ahead of 2016 driven by contributions from what I’ve mentioned above and Project Terra, related to the integration of warehouses, manufacturing, our back office consolidation, and looking at our private label business. Europe net sales were up 17% in constant currency for the first nine months of 2017.
Next to Danone, we are the second largest producer by volume of non-diary-based beverages, including our Dream, Joya, Natumi brands. Lima and Danival which are organic brands are mostly sold in natural food stores and the Benelux brands in Germany.
We’re up mid-single digits in health food channels and low double-digits in the grocery channel, driven by our expansion, distribution and presence of new products. We’re expanding our successful global brands like Ella’s Kitchen, Celestial Seasonings, and Terra.
We remain focused on increasing household penetration of our branded and private label products in Europe by leveraging our position in grocery and health food channels. Canada net sales were up 7% in constant currency for the first nine months of 2017.
In Canada, our meat-free business, Yves is the number one meat alternative brands and has a growing position in the U.S. We’re launching many new products to broaden the appeal of the brand behind core vegetarian consumers.
Europe’s Best is the number one branded frozen fruit business in Canada. We also sell many of our global brands like Terra, Celestial Seasonings, Sensible Portions and Tilda in Canada.
Going forward, we will leverage our strong market position to continue our growth in Canada and throughout other global products, focusing on top selling products and leveraging production capabilities of our personal care products. Our Cultivate platform was created like many other companies have done, as an incubator for small brands that need extra love and attention and small brands that grow into big brands.
At Hain, we will support this by a dedicated infrastructure and R&D. We’ve made key investments in innovation, underscoring the additional value of this platform which it can create.
Already we’re seeing the great success in brands like DeBoles, GG Crackers, BluePrint et cetera. We expect Cultivate to be profitable in 2018.
We’ll continue to drive international growth and profitability through the execution of our strategic initiatives. For fiscal 2017, we expect to generate $380 million to $390 million in net sales and $38 million to $40 million in adjusted EBITDA.
For fiscal 2018, we are targeting high-single digit top-line growth including low double-digit growth from Europe driven by our non-dairy plant-based business. As well as the mid-single digit growth from Canada driven by Yves, Live Clean and our Sensible Portions brand.
We expect low double-digit growth in adjusted EBITDA in our fiscal 2017, leveraging top line positive contribution from Cultivate brands and Project Terra cost savings. Hain Pure Protein remains an important segment for future growth in a compelling on trend industry.
We are an innovator here and a disruptor in the fresh antibiotic-free and organic poultry categories. And we expect the organic protein category to double-digits.
We have a great opportunity to leverage our position as one of the largest suppliers in the space. Fiscal 2017 has been a transitional year for this business.
We still achieved the 8% increase in pounds sold as prices remained at multiyear lows. And we experienced disruptions and product delays related to our new FreeBird plant.
To help us capture the profitability, we believe we are capable of putting in place new products, new innovation, and we have also put in place new leaders in this business. The plant start-up delays we experienced during the first nine months of fiscal 2017 are now behind us.
Our cost cutting initiatives are taking place now. Our growth strategy for this business includes competing our operational turnaround, driving synergies to our poultry infrastructures between HPP and Empire Kosher, improving our product mix and expanding our presence in the fast casual and meal kit delivery areas.
We expect strong profitability in Hain Pure Protein as we look ahead to 2018. As we just discussed, the protein category, particularly our segment in organic and antibiotic-free is growing.
We expect 2017 net sales of $515 million to $525 million for this segment, followed by low to mid single digit top line growth in fiscal 2018. We expect profitability in fiscal 2018 to recover back to at least 2016 levels.
This will primarily be driven by improvement and growth in our operations. The moment we started to experience in Q4 of 2017, reinforces our confidence for our recovery in HPP next year.
Today, our global team is executing on a four-point plan to enhance shareholder value, expanding on Project Terra. On a global basis, we are also increasing our focus on top performing brands and capabilities to drive innovation and a higher level of consumer engagement.
Through Project Terra, we are aggressively taking cost out of our business. We have made key hires across our global organization with strong industry expertise to help execute on these strategic priorities.
And finally, we are pursuing a balanced approach to capital allocation. We will continue to effectively manage our strong free cash flow while return excess capital to our shareholders.
I would like to refer to our brands and our intellectual property behind them as a resource bank. And let me tell you something, this is a rich bank.
The extensive capabilities, competencies and value we bring to each product and platform, are a result of the processes and people across our brands, investments that we made over many, many years. These resources enable unique capabilities including being a first mover and on trend categories and product innovation.
In addition, we have critical scale across geographies, procurement, distribution as well as expertise in operations and integration to expand both organically and throughout strategic acquisitions. The barrier to entry in the organic category is not easy.
We believe there are significant competitive advantages that differentiate us in the industry. We have successfully managed through varying macro economic cycles over the last two and half decades as well as adapted to previous shifts in consumer behaviors.
What has made us successful, what will drive our continued success in the future is our ability to evolve our business as we grow a Better-for-You brand, expand relationships with new and existing customers and attract new consumers globally. Today, we have a global and diversified customer base with multichannel distribution across traditional grocery, club, convenience store, fast casual, mass market and natural food stores.
Now I’ll go into more detail on our cost saving program. As part of Project Terra, we’ve identified $100 million in cost savings.
Based on our learnings and identified additional opportunities, we’re expanding the savings and now expect to realize $350 million through 2020 including our annual productivity savings. Our global productivity initiatives will include plant productivity, co-pack savings, network optimization in the area of manufacturing; sourcing and other productivity improvements in logistics; supply chain investments that will enable us to drive efficiencies and lower costs across manufacturing, logistics and planning infrastructure.
Importantly, a portion of these savings will be reinvested to fund our strategic growth and enhance our margin initiatives. Just as we’ve taken a deep dive into our operations, we’ve also taken detailed look at our organization structure and management team to strengthen our capabilities.
Specifically, we’ve recently created several new roles for proven executives, made key hires with deep consumer products and natural foods and operate experience both globally and the U.S. I am confident with the global team we have assembled and their operating expertise which help us further extend our leadership position in organic natural and Better-for-You industry.
Hain Celestial has a solid balance sheet that provides the foundation of our capital allocation priorities. We will continue to make high return on invested growth and productivity investments in the business.
At the same time, we’ll continue to evaluate opportunities to further streamline our portfolio from categories -- from a category standpoint and we will consider non-core brand divestitures that do not meet our return on invested targets or no longer fit strategically within our core portfolio. While strategic, accretive acquisitions help further enhance scale in our core platforms, we remain like we’ve always had, disciplined in our approach to M&A.
We’ll also look at opportunities to return to shareholders and please to announce a new $250 million share repurchase program, which reinforces management and the Board’s confidence in our strategic plan. Consistent with our commitment to be best-in-class in corporate governance, we appointed Andy Heyer chair of the audit committee, a seasoned consumer goods investor as lead Director of our Board in May of this year.
We regularly evaluate our Board to ensure we have the right mix of expertise, relevant experience, and we’re in active discussions with accomplished executives to refresh our Board of Directors. Finally, after a long quiet period, and it’s been long and it’s been quiet, we look forward to interacting with the financial community and resuming our active dialogue with each and every one of our stockholders.
We’re pleased with our Q4 business momentum and expect our plans and our initiatives to deliver a strong rebound in fiscal 2018. Over the medium term, we will generate 4 to 6% top-line growth through a combination of mid-single digit top-line growth and on trend business innovation.
And we anticipate achieving 9 to 11% growth in EBITDA, reflecting 200 basis points of margin expansion from operating leverage and Project Terra cost savings. In closing, I’d like to reinforce that our team of over 7,800 employees remains focused on the execution of our strategic initiatives as we drive Hain Celestial’s next chapter of growth and success.
Our team is energized and focused on the execution of our strategic initiatives. As we further capitalize on our core strengths and resources to drive growth and position our business for long-term success.
Thank you so much for listening today. With that, I will finally now open it up for questions.
Thank you, everybody.
Operator
Thank you. [Operator Instructions] Our first question comes from the Andrew Lazar with Barclays.
You may begin.
Andrew Lazar
I guess, I think per the slides, it looks like you look to reinvest perhaps around a half or little less than half of the sort of cost savings in productivity over the next three years on marketing, and I’m trying to get a sense of what does that sort of marketing include. Is it consumer, trade and all price investments kind of rolled up into one or is that primarily just the consumer side?
And the reason I ask is because I know that before the accounting review and about a year ago, some of the issues that you were starting to talk a bit about and then you mentioned on the call today, was the need to be, in certain categories perhaps a bit more price competitive, in certain areas the need to ramp up the consumer spend side of the equation. So, trying to get a sense of what that reinvestment incorporates.
Thank you.
Irwin Simon
Andrew, I’ll let Gary talk about it from the U.S. side and I’ll talk about it from a global side.
Gary Tickle
Thanks Andrew, thanks for the question. So, to answer your question, first of all, you’re correct.
As I indicated in my discussion, we certainly have taken some price initiatives already to be more price-competitive, but the future plans predominantly around brand investment for consumer and shopper market activation work. So, this is really about building brands, building brand equity, improving household penetration through that work.
So, this is really geared towards not price, but towards brand and consumer.
Irwin Simon
And Andrew, that’s same around the world. Again, we have some great brands around the world, as you heard me talk about whether it’s Ella’s being the number one baby food, whether it’s Tilda, whether it’s Hartley, it’s spending towards the consumer.
And in regards to price, a big thing there is how we take out cost is as we consolidate co-packers. We have looked at every formula, we’ve looked at the cost of manufacturing, we looked at products coming from plant to our warehouse, realigning our distribution systems.
So with that, hopefully, we can take a lot of costs out that can be directed back towards the price.
Andrew Lazar
And then, just a quick just follow-up, a general one which is, I guess some of the questions that I’ve gotten so far this morning have been, while you had a lot of discrete items that you pointed out that impacted fiscal 2017 that hopefully won’t obviously repeat in 2018, they’re obviously still looking for a pretty significant growth in sales and EBITDA in 2018. And I guess, the question I’m getting is just how do we know you’re giving yourselves, I guess enough room to get the business back to where it needs to be for the, call it medium long-term and is the -- I guess is the reinvestment enough in 2018, based on what you’re hoping to get out of it from an EBITDA standpoint?
Irwin Simon
So, Andrew, I think a good, one telling tail is what we’re seeing in Q4, and we’re seeing some good things in Q4. And so that’s number one.
We’re seeing a good turnaround on our Hain Pure Protein business; we’re seeing our fruit yields in the UK business; we’ve got pricing on most of our products in the UK. Gary has gone through his SKU rationalization and inventory alignment.
We’ve gone through with our Cultivate business, it’s cleaning up a lot of those businesses. For instance in BluePrint, we eliminated one SKU of cashew milk, which was a $3 million to $4 million hit for us.
So, we’ve replaced it, we’ve grown the business. So, there was a lot of one-offs and that added up to a lot of money and a lot of things happened.
But, the good news is, we’re already seeing the actions that have been put in place to recover going into 2018.
Operator
Thank you. Our next question comes from Scott Mushkin with Wolfe Research.
You may begin.
Scott Mushkin
So, I wanted -- welcome back. Nice to hear you guys’ voices again.
So, I wanted to get some clarification on the recent U.S. trends.
I’ve kind of missed that a little bit when Gary was going through it. So, I was wondering if you guys can just revisit that.
And has that slowed down a little bit?
Gary Tickle
So, you’ve seen obviously the broader industry trends and of course in MULO+C, there’s certainly been a slowdown. Some of our unreported channels, we see strength across the mass club where we see better performances and of course online is double-digit growth for us.
But it’s a top 500 obviously that’s our core focus; this is where we know our future is going to be; this is where the consumption trends are definitely stronger. If I look at some of the trends for the key items that are important to us, Imagine Soup is up 33%, 34% in the latest 52.
We’re really encouraged to see with the work we’ve done for MaraNatha. Their very recent numbers in the last four weeks, we see dollar growth the first time we’ve seen in 12-monhts.
The work in snacks, Sensible Portions is in double-digit growth everywhere, except for one retailer. And we look across our broader range for Earth’s Best.
The baby business is somewhat masked by the fact we’ve had to pull back for Ella’s but for Earth’s Best, organic baby food jobs and for infant formula we are seeing strong growth. So, we see net of some of these drags at top 500 is growing around 4.9% net of SKU rationalization in the latest 52 weeks.
Irwin Simon
And Scott, I think, again what Gary said in his script, 60% of what you see of our business today goes to MULO, the other 40% is channels you don’t see. And again, we’re in a transition here with our SKU rationalization, number one, but some price decreases, number two.
And the other big thing is what we’re seeing is we’ve done a lot of overhauling on our products and packaging. MaraNatha, major rollout on MaraNatha on our new packaging.
So, it’s new SKUs coming in, old SKUs going out; same with other packaging on Spectrum, same with packaging on our Personal Care. So, this past year, we have spent 20 plus million dollars on repackaging, rebranding, repositioning a lot of products.
And that’s what you are seeing is old products coming in, old products coming out. And as Gary said before, that tale of about a 1,000 products out there is still what affects us when you look at MULO.
Scott Mushkin
And then my second question is going to be a good lead in to at Irwin is just with the proposed transaction between Amazon and Whole Foods. I was just kind of doing some poking around on pricing and seeing what couple of your items have priced on Amazon versus ATB, which we’ve done some work on and Whole Foods.
And there are very large differences. I mean, if you look at Jason’s, it’s 1099 on Amazon, it’s for 13 -- it’s 1499 at Whole Foods and 1199 at ATB.
Assuming the Whole Foods prices migrate towards Amazon’s over time, how do you think about that vis-à-vis your business? And I guess the other thing is what’s -- why are there such large discrepancies in your opinion?
Irwin Simon
Scott, I think what you should do is just not look at our products, I think look at all…
Scott Mushkin
I think it’s everybody’s, I mean it’s not just…
Irwin Simon
Right. So, I think it’s all products that are sold on Amazon versus Whole Foods.
Listen, I -- as you heard me say and I’ll let Gary talk. I think this is great for us.
I think the strength that it brings Whole Foods, the opportunity for more and more consumers to get our products, we are one of Whole Foods largest supplier of products, and Amazon is one of our fastest growing customers out there. Amazon loves to know about consumers buying at Whole Foods, so the combination of both.
The other thing is we all know Whole Foods has not been growing. So, now, with better pricing, there is better opportunity for them to grow.
We have been working with Whole Foods, and you heard Gary mentioned that we have two people on their council in regards to their category management. So, with that, I am pretty excited about the combination.
And at the same time, we had Sprouts in here yesterday in the combination -- with their growth and their opportunities we are pretty excited about that also. The other thing Scott, every retailer out there today, as they look at Whole Foods range of products, Whole Foods is one of the best showrooms for Hain.
And as other retailers walk in there and see our products, they want more and more our products in their stores.
Scott Mushkin
Gary, did you have any comments on that? I mean, are you guys making the same margin or…
Gary Tickle
Just to come back to Irwin’s point, I think the opportunity to create a wider physical presence for us through Whole Foods and higher virtual presence through Amazon is a great mix, because again, we have a very small window, a very small opportunity right now at 7% of the total population buying organics. So, we’ve got 93% still waiting to really experience our products.
So, this is great opportunity for them to leverage their sale, and their ability to get the product to consumer base, which has a very high overlap with the prime membership. So, they’ve got a very loyal consumer base that couldn’t potentially access their products.
So, there is huge upside potential for us. I don’t want to comment specifically too much on margins because I think the business models are very different today.
But they ultimately -- if they have better quality access and let’s say competitive pricing, it’s got to be good news for us.
Irwin Simon
And Scott, I think what’s important is I rather be selling a lower margin product with 5% growth than a higher margin product with negative growth. It’s not a race to the bottom; it’s a race to the top.
So I think that’s what we are looking at, the big time growth opportunity for us on the combination of both. And along that there is plenty efficiencies to continuously take out of the business.
Operator
Thank you our next question comes from Amit Sharma with BMO. You may begin.
Amit Sharma
Gary, a question on your streamlining the portfolio and then a couple of related questions on that. So, you’ve talked about that a little bit.
Can you provide a little bit more color on your top 11 brand? What’s the strategy going forward on those brands?
How are they going to be different than what it has been in the past? And as you talk about $40 million to $50 million incremental spending what does that bring spending level to now with that incremental spending as you think about these core brands?
Gary Tickle
Okay. So, thanks for the question, Amit.
Obviously, for us, the top 11 brands are the critical driver for our future. It really will be brand dependent.
We won’t have enough time maybe go into absolute detail, but clearly we have an outline planned for each of those brands as to what is the key objective around engaging the consumers. Some, it’s greater awareness; some it’s more shopper activation work in stores but -- and some of it’s more digital.
So, there is a broad range which we’ll get a chance maybe to talk in more detail about that we have clear plans for each one of them and how we intend to invest to better engage with the consumer and also tune up better in the store for the consumer. To your question, where does that put us in levels?
I think it makes us far more competitive with the broader landscape of spend and what we anticipate will be the competitive environment to spend against brands. It’s a significant investment, as you can see year-on-year.
And I still think there’s upside for us in the future to reinvest more of those savings based on generating this virtuous circle of generating savings, driving the top-line and ultimately making smart choices on how we invest. But, we have very detailed plans for the next three to four years on how we plan to invest behind the brand.
Irwin Simon
And Amit, I think we have -- I don’t think, I know, we have some great strategic plans, how we spend our trade dollars and the benefits we get for those. There is a circle here in regards to the reduction of inventory by our customers which is good, which gets better shelf life, gets better selection, it gets your fresher product move in through, it gets better promotions in place.
There is a lot in place in regards to not so much reduced trade dollars. It’s just that you’re going to get benefit from them instead of just going into someone else’s margins.
Gary Tickle
Yes. I think the thing for us is we have very authentic brand stories to tell and we have a consumer base out there who loves to hear about them.
So, we intend to tell those stories well.
Amit Sharma
And just to be clear, what is that level of trade spending, Irwin today, even if you’re not reducing the dollars on that? As a percent of sales, are you able to say?
Irwin Simon
Overall, company-wide, it’s about 15%, Amit.
Amit Sharma
And then below the line spending is how much after the incremental spending?
Gary Tickle
You’re talking about dollars or percentages here?
Amit Sharma
Percentages of sales, so if trade is 15, how much of below the line spending do we have on marketing and other promotional activities?
Gary Tickle
Yes. I won’t go into too much specifics other than to say, as you can see, it’s about a 50% increase on where we’ll land in 2017.
So, it’s a very significant investment and it’s all predicated on obviously us driving the savings to fuel the investment.
Amit Sharma
Got it. And just one more for me.
Irwin, pretty substantial slowdown in the HPP business and then looking for a pretty solid recovery in 2018 as well. Can you talk about, I think you said all of that doesn’t really assume turkey pricing recovery there.
So, can you talk about why we expect HPP business to recover to 2016 levels in 2018?
Irwin Simon
Sure. Listen, the big things that happened with HPP is three things.
Number one, we built a new plant. And getting our plants up to snuff and getting the plant running and just having capacity to be able to deliver.
So, now our - free bird plant is up and running and with that we’re producing a lot of chicken. Secondly is we’ve rolled out a major organic deli program, both under the FreeBird Plainville name and some other own brands.
So, good margins from that business and we expect some good growth from that business. The third piece, last year during Thanksgiving, we went through a third-party warehouse and we had tremendous inefficiencies in getting our turkeys out, even though we sold 2 million turkeys and cost us a ton of dollars.
That’s behind us and that’s fixed. Turkey prices came down and you saw other major turkey branded companies talk about that during avian bird flu, you’re able to get $4, $5 a pound, but you saw our pound is up by 8 million pounds.
The big thing is we have now taken a lot of costs out of our business, admit to offset a lot of that. We’ve also integrated our entire business and our HPP business to take a lot of backroom cost side out of that.
We’ve also focused on our fee, we focused on our rollout. So, a big part of it is just getting more and more efficiencies out of the business, going to higher margin products like deli for the process, working on the branded side of the business.
And some of the big growth, in the area for us is like HelloFresh types of business, our fast casual, which helps Hain get into other food service and other categories for us. So, we’re already seeing in the fourth quarter, a good turnaround in the business and we expect that to continue through 2018.
Amit Sharma
And just, is this portfolio still the longer term with Hain?
Irwin Simon
Listen, you heard what I said in my script. We are going to look at all our businesses, all our categories and evaluate what strategically makes sense.
Listen, the organic category is growing nicely, but this is a different business to manage. So, we are going to look at everything.
And is it long-term business for Hain? I can’t answer you now.
But I will tell you, we will evaluate where and when it makes sense.
Operator
Our next question comes from Akshay Jagdale with Jefferies. You may begin.
Akshay Jagdale
Good morning. It’s been a while, so good to have you back.
I just wanted to ask about the inflection in the EBITDA and the margins. When you look at 2017, it’s a bit shocking how much the EBITDA has declined.
And I think you did a good job with that bridge that you presented. So, when you look at the 2018 bridge, you have two big components there, right.
One is the savings from Project Terra, $100 million. I believe they were $70 million in 2017, so they’re $30 million higher.
But a good chunk of that is going to be -- the incrementality is going to be reinvested in marketing. So, really, what it comes down to I think is your core business growth has to improve very, very significantly.
And the way, I look at it, half of the problem was U.S. and half of the problem was UK and HPP.
So, can you just -- I know you gave us a lot of data; we’re trying to digest all of that. But coming off a year where you saw a significant decline in margins and EBITDA, what gives you the greatest confidence that things will improve?
If you could start with the UK business; HPP, I think it was pretty clear that you’re saying, you’re going to see a $30 million increase year-over-year roughly and none of that is predicated on commodity prices improving. So, that’s strong enough statement.
But help us understand UK, why are you going to see that inflection? And then, maybe Gary can talk about what was -- why are the things that you saw in the U.S.
one-off. Obviously, the investments in the team, we get that.
But if you could get into little bit of why where they one-off and are you seeing them turn around? Thanks.
Irwin Simon
All right. So, Akshay, good question.
Number one, Akshay, throughout our nine months or a year on a constant currency on an adjusted basis, we are still seeing 4% growth. Okay?
So, where do we feel confident about next year, 4% to 6% or a little, we feel confident because we’ve seen it. And with all the distraction and everything going on here and seeing 4% growth across the businesses, and other than the U.S.
businesses, you see high single digit growth. So with that, take the time that we’ve been focused on everything else and put that towards our business, we should -- we feel good about our growth.
Stepping back and looking at the UK as some of the things that distracted -- some of the things that happened. Number one, currency hit us by almost $20 million.
Now, part of the currency we’re not getting back because the pound is at 1.27 or 1.29, not 1.40 to 1.42 where it was last year around this time. With that, unfortunately we buy a lot of products in U.S.
dollars and we got hit hard by another $10 million where we never got pricing through. Throughout the year, we were able to get approximately 10 million pounds of price increases through our UK business, which we’ll start to see a reflection in the fourth quarter which is a big number.
The second thing is El Niño and weather wise, being in the fruit business is something you can’t control. Unfortunately, fruit this year did not have a good season and our fruit yields were terrible, which hurt us in the first three quarters.
Our fruit business, which did not make a lot of money in the first three quarters will make somewhere as around 3.5 to £4 million in the fourth quarter, which is a good indication of what we expect to see next year. Third thing is in the UK, we did our acquisition of Orchard House which included a fruit and juice business.
We got held-up for almost nine months with the CMA, which delayed integration of our fruit plants, which delayed integration of our juice business and ultimately forced us to sell our juice business. It was about £25 million of sales -- or $25 million and about £2.5 million of profit that we had to sell in that business.
So just with those alone that adds up to significant increases that we’ve -- and opportunities that we’re seeing in Q4. So, that’s why I’m feeling good about the rebound in the UK business.
We have a new leader in the UK business James Skidmore that joined us last July. We are going through plant optimization there; we are going through backroom optimization there and we see a lot of opportunities to take cost out of our UK business.
In regards to Hain Pure Protein, I think went through it in regards to cost optimization, in regards to going into branded products, in regards to our new plant on board, and we’re seeing good success in the fourth quarter. So that’s why we’re feeling comfortable about going into 2018 as we already see some of these one-offs that happened already in place.
Gary Tickle
Maybe just to talk a little bit about the U.S., obviously I went through some detail around the one-offs that related to the work we’ve done in SKU rationalization and also the realignment of our inventory, finished goods inventory in the supply chain which obviously have both significant impacts which will have the abating in the SKU rationalization in 2018, the majority of the impact is in 2017, and that’s obviously a significant hit for us to take. But the underlying performance of the business is still around 50 basis points of growth net of all of these one-offs.
What’s also encouraging as I mentioned is when we look at the top 500, it’s definitely outgrowing the pace of the broader category and the TDP growth is encouraging as well. So, we are getting expanded distribution for these products.
And we have had some one-off declines we know and they pull back for Ella’s Kitchen which was significantly through target this year; it’s been a drag in the business. And of course, we took some pricing this year to become more price competitive.
So, we expect that to continue to give us traction through 2018. And of course with a very significant investments tailwind that’s coming behind these brands in 2018 to get us back into low to mid single digit growth, I feel very confident that we have all of the things in place now to make 2018 a success.
Irwin Simon
And Akshay, we are going through the organizations in regards to our SG&A and other savings, and we’ve almost had one hand tied behind our back during this process and where we have had duplications in personnel where we need efficiencies. So, with that we have embarked upon a major cost initiative in Project Terra.
We are also looking at the organization in regards of personnel where we are duplicated where we have to integrate backrooms. And we will make those changes where they have to happen also.
Akshay Jagdale
And just on the Project Terra, $350 million, can you help me parse out what’s truly incremental relative to the $100 million or at least $100 million you talked about a year ago? Because I think now you are -- you have got another extra year in the timeframe and then you also have annual productivity savings.
So, how does it compare to the -- in my estimate, the 100 is going to 150, and the rest is the productivity savings annually. Is that roughly correct or can you…
Irwin Simon
So, when we announced Project Terra, it was basically the U.S. Now, it encompasses around the world.
And it encompasses whether we are producing rice in the UK or producing rice in India and shipping it directly to the U.S. and Canada.
It encompasses looking at all our plans in Europe; it encompasses what we are doing in backrooms; it encompasses procurement on a global basis. So, when we announced Project Terra last year, it was basically the U.S.
and it was based over a three-year period, approximately $50 million or so a year. What now this encompasses is everything around the world including Project Terra.
But going longer and deeper into plant and the distribution centers, looking at how many offices, rents, people et cetera, so it encompasses everything and that’s what the difference is. So, there is only one cost savings now is Project Terra.
It’s not our everyday productivity plan and Project Terra, everything is consolidated into one.
Akshay Jagdale
But the increase relative to what you said a year ago is truly incrementally, it’s 50 million, right; it’s not 250 million, is that correct?
Irwin Simon
It is true; it is incremental than what we said a year ago.
Akshay Jagdale
And then just last one for Gary. So, in the U.S.
-- it’s two-part question. One is, when we look at the Nielsen data, recently it’s been down, right.
So, I know you’re -- the measured channel is only a component but that’s all we can look at and everybody looks at it. So what should we expect from the measured channel in relation to your targets for 2018, as we go through 2018?
And related to that, what is the margin impact roughly of the SKU rationalization on the U.S. business and why didn’t that already start to take hold in 2017?
Thanks.
Gary Tickle
Okay. So, you’re right.
You can’t see all of the channels, and it’s a mixed bag of course because from what you can see publicly related data for the natural channel; it’s been softer and we had a higher exposure to the tail in our natural channel. So, obviously the SKU rationalization had a bigger impact in the natural channel.
But, if you have a look at how -- let’s say non-reported channels where we have online, club channel, there we’re seeing strong double digit growth and we expect that to continue. So, if you look at the mix through 2018 for the MULO+C, I would still expect us to see once we pass some of the drag that we’re in, the things like the Ella’s pull back, I think the biggest drag that we will continue to face will be for Sensible Portions because that was in the MULO read where we had one of our major customers cut distribution.
So, that’s had an impact and that will probably carry through to maybe quarter one, quarter two next year. But I would still expect us to get back into growth, low single digit growth in MULO+C.
I haven’t modeled it out completely to be so quick, but I was expected that would be reasonable given we get passed most of this drag in 2017. And you asked about margins.
Sure, we had a number of things to take in this year. Obviously, with the distributor and customer finished goods realignment that had a significant impact on topline sales and the margin that went with it.
And of course the SKU rationalization, there were margin SKUs but we also had some other headwinds that we had to absorb as well as an increase in marketing spend this year of around 20%, which was a conscious choice as we started to move into this strategy of investing behind the brand. So, it was a conscious choice to start that process immediately and to set us up for 2018.
So, as a consequence, you don’t see all of that fall to the bottom-line. But for sure that’s why we expect a stronger performance in 2018 as we get through these one-offs and this transformation in 2017.
Operator
Our next question comes from John Baumgartner with Wells Fargo. You may begin.
John Baumgartner
Hi. Good morning.
Thanks for the question. Irwin, if I’m hearing you correctly, it sounds as though you’re more willing to accept lower margins in return for a better growth going forward.
And I guess if so, how are you thinking about the role of private label? I mean, is there a case you made now that private label price points are needed to sustain volume growth for the natural organic industry, just given how many -- the interest levels from middle and lower income consumers and now your cost savings will hit those margins better or is it your vision that you’ll be able to build enough equity in your brands and move forward more as a branded company?
How do you think about the balance between brands and private label?
Irwin Simon
So, number one, brand equity, brand equity, and when my twin boys were born, I wanted to call one brand and one equity. So that’s how much I believe in brands versus private label.
93% of our business in the U.S. and Canada today is branded business.
And I’m a big believer of millennials and consumers will buy brand. In this country, in the U.S., only 18% of sales are branded products.
I think there is a place for branded products and where Hain is, we’ll build upon our brand business. But John, I don’t want to be the highest priced product in the store with no sales.
And I think we have to come to realization factor; price is important in the natural organic industry, also how do we sell more products, and that is volume driven is one of the most best way to do it and how are we going to take costs out. So, I think working together with our retail partners, and that is on manufacturing, on distribution.
We’re going through and looking at our packaging or formulations on how do we get better margins out of our product. So, in the UK, it’s a different world, where private label is a much bigger percentage of products and when you have your own plants and you cover a lot of overhead and absorption of overhead and alongside with shipping.
So, brands are our key priorities, focusing on brands, focusing on growth, and with that hopefully getting the right margin between growth, taking cost out that we did if we weren’t going to get the growth.
Operator
Our next question comes from Ken Goldman with JP Morgan. You may begin.
Ken Goldman
Hey. Good morning, everyone.
Thanks for taking the question. Irwin, just one for me, I know we’re running a little long here.
You highlighted your strong presence with Amazon and I really do appreciate some of the benefits to Hain of the merger that’s going to come. But, is there may be an offset and that Amazon doesn’t have a strong private label natural and organic brand, that’s about the change.
Might there be some pressure on you as Amazon starts to emphasize its 365 and Whole Foods brands or is that really smaller in your view compared to what some of the tailwinds might be?
Irwin Simon
Listen, I never ever, ever, don’t take for granted or don’t be serious about their 365 and their private label. On the other hand, Ken, we’ve been doing this for 23 years, and the barrier to entry and supply of organic is difficult out there from a manufacturing standpoint, from a supply standpoint and continues to be.
And again that is why spending money on our brands and being price competitive, a consumer is going to buy a brand over private label if you’re price competitive and there is something unique about the brand. So, what Hain has to do is invest in its brands, have its brand connect to consumers, at the same time, innovation is key to us.
We’ve introduced over 93 new products, got to have continuous supply. And by the way, there is a lot of other retailers that buy our products too.
It’s just not Amazon and Whole Foods, okay. And I had multiple, multiple calls from retailers and saying, hey, make sure you got enough product for us.
So, I think it’s important for us to build upon our brands, focus on our brands and sell products. The big thing is, Ken, natural organic foods should not be for the 1%; it should be everybody that wants to buy a food product.
And I think the opportunity for Hain here is this year. What Amazon and Whole Foods combination will do is drive more and more awareness to natural organic products and that’s where the big opportunity for us is to pick up a big piece of that conventional market that wants to convert to natural organic.
And we see it in baby food on the WIC program. Organic baby food, which is jars, became part of the WIC program and most of you know what the WIC program is, and what we’ve seen in our growth in jars because being on the WIC program shows how everyday consumers want organic baby food, not conventional baby food.
Operator
Thank you. Our next question comes from David Palmer with RBC.
You may begin.
David Palmer
Just a big picture question, I’m just trying to think about your long-term growth rate. Clearly, your businesses has had a tough go in fiscal 2017.
But if we give you the credit for a strong rebound in fiscal 2018, your business will still be flattish for a couple of years. The big picture feels like organic and inorganic growth has gotten way more expensive than it used to be and that the reality is generally the same now as it was or starting to be little over a year-ago.
So, beyond the near-term rebound, what are some reasonable long-term target growth rates for Hain, if the environment remains as it is?
Irwin Simon
So, David, I’m a little confused here because I think number one, we’ve talked about 4% to 6% growth in 2018. So, that’s first of all what we are looking at from a company standpoint.
Secondly, what we’ve said in regards to organic becoming more expensive, I think I’ve talked about how we are looking to make organic more and more affordable. And from a standpoint on our growth across the rest of the world, we’ve seen mid to high single digit growth in all our businesses around the world.
And as Gary talked about in his North America business with focusing on this top 500 SKUs, with focusing on taking inventory reductions out there within the trade, these looking for low to mid-single digit growth next year in the U.S. business.
David Palmer
So, you think that if I were to summarize that the savings, you can keep these types of savings going such that you can compete with these food companies that are clearly getting more into the business that you’ve done which is promoting and getting shelf space but also buying assets that you think that you can maybe have a flywheel going that lasts more than this year such that you could be more competitive. Is that a good summary?
Irwin Simon
That is a very good summary.
Operator
Thank you. Our next question comes from Pablo Zuanic with FIG.
You may begin.
Pablo Zuanic
Thank you. I have a good picture question for you, Irwin, and then just a brief follow-up.
This happened on your watch. And when I say this, earnings restatement, no results for four quarters, shipping issues that relates to -- or find and then, apparently still ongoing SEC investigation.
So, on your side, I mean what do you see that you need to do different? I mean, do you need to delegate more, do you need to focus less on acquisitions?
Can you just comment on that if you can, just more on a personal level? Thanks.
Irwin Simon
So, Pablo, I want to correct you. There is no restatement here.
And everything has happened on my watch. So, I accept the responsibility.
So, there is absolutely no restatement, no material change to our financials. So, I want to make sure we correct you on that.
On 2017, it’s been a tough year, it really has with looking back at our financials, it’s been distraction, it’s been the distraction of resources. It’s been a tough 2017 for every other food company but that’s not what I need to worry about, I need to worry about Hain.
But, what I can come back and say this year, we are a company of good brands, good strategy, great people. And one of the things that happened in 2017, we enhanced our organization; we have made a lots of changes.
In the meantime, in 2017 Pablo, with all of that was going, we still true up a $148 million of cash; we will pay back almost $220 million to debt. We have invested over 50 plus million dollars on CapEx.
We grew our top line 4%. And with that we went through one of the most extensive -- look at our numbers over a three-year period and come out with some pretty good results.
So, yes, it was not a stellar year from a performance but what we are seeing is a great turnaround in Q4 and some good forecast going into 2018.
Pablo Zuanic
Just a brief follow-up. When you talk about customer inventory reductions, is that something channel specific; is it chain specific or is it something that the industry seeing, as a whole, if you can elaborate on that please?
Irwin Simon
Pablo, I think it’s an industry as a whole. It’s customer specific.
It’s around distributors whether it is customers slowdown, whether it’s a part of SKU rationalization, whether it’s mix, wanting to have a better selection of shelf life out there, a better selection of inventory. One of the biggest things we need to ensure and we went through it last year, in 2017, we were running at 93% to 94% service levels.
We can’t run at 93% to 94% service levels, we need to run at 97%, 98% service levels. We got to have the right inventories in the system and right inventory at our customers.
And with that, this was a big part of it. So, it was an all around effort by our distributors, by our customers and just from our standpoint in regards to taking cash, taking cost out of our business, having better cash less inventories out there, fresher shelf light, less oils, having a better mix, reducing out of stocks with many, many business benefits why we did this.
Pablo Zuanic
And just very quickly in terms of categories and you’ve talked about what’s doing well, what’s not doing well. But on those top categories, when we are trying to look at this kind of data, where should we expect the better performing categories and where -- which would be the less performing or the once that are declining?
Just give us a range in terms of -- I am not asking for guidance at the product level, but just to try to get a view of okay, we should expect Hain Celestial Tea to continue to decline, flat, maybe chips growing, just give us a sense in terms of how do you expect that at the category level? Thanks.
That’s all.
Gary Tickle
Obviously, when you look across our core platforms, we have some clear growth drivers. In the case of snacks, we expect that to be back in growth.
I mentioned we have one point of drag from Sensible Portions because of one retailer but broadly speaking we expect growth from that business to be consistent in 2018. If you look across our pantry business, we expect MaraNatha, Imagine Soups to be continued drivers in baby; Earth’s Best, we expect continued growth, some of the drag from Ella’s will abate in 2018.
So that should definitely see improvement. We should see a turnaround to growth again for Greek Gods with the new innovation that’s coming.
In Personal Care, we expect continued strong growth behind Live Clean as well as the core platforms we already have out there. So, we expect broad-based growth across many of our businesses for 2018.
Irwin Simon
And Pablo, I think as I said earlier, what we’re going through today is where are categories we’re not in, where are categories that we should be in, and should we be divesting certain categories, where are the growth categories for the future. Now, the big thing is we look at innovation, we look at new categories, what are the trends, what’s going on out there.
And a big part of Cultivate is where are the small companies out there that are going to grow into big companies, like of Greek Gods, like Ella’s, like we just thought Yorkshire Lavender in the UK. So, we’re going to look at that.
And as the categories that we just don’t see the future growth and we’ve identified those within the Hain’s portfolio to make some decisions on it. And whether some of the distribution channels have changed, the method of the product, commodity now is no longer unique.
So, we are going to look at every bit of that and make some decisions on divestitures, make some decisions for future acquisitions and where do we streamline the portfolio.
Operator
Thank you. We have time for one more question.
Our next question is from Alexia Howard with Bernstein. You may begin.
Alexia Howard
So, I guess the biggest question that I am getting from investors is, is this going to end up being a cycle where pricing needs to continue to come down over time? You’ve obviously got a lot of brands, they are in the health and wellness area, which is great.
But they are pretty fragmented brand set. And the concern is that when you’re up against really big retailers like Walmart, how much pricing power and negotiating leverage do you really have or are you going to have to in order to keep distribution, are you going to have to continue to take pricing down over time?
How do you respond to that question to make us comfortable that this isn’t going to end up being a vicious circle downwards?
Irwin Simon
So, if I step back for a second and look at our brands today, I think if you look at us whether it’s nut butters, whether it’s our snacks, whether it’s Earths’ Best, I think we do a pretty good job in regards to pricing to some of the bigger companies and do a good job at pricing our product lines out there. I think the good news about Hain is when you say we have a bunch of fragmented brands, not really the underlying denominator in a lot of these products, our organic fruits and vegetables, there is a lot of common denominators, procurements here, a lot of the products are made in same plants, a lot of the products are shipped on the warehouses on the same trucks.
So, yes, there may be fragmentation and Earths’ Best is maybe not as big as Gerber as a conventional product. But we do have some significant size and scale in a lot of our products here.
And that’s one of the reasons, Alexia, we are looking at our top 500 SKUs to really get scale and invest in those. The second thing is Alexia which we really come back and think, there is a big opportunity for growth for us to keep going after conventional products.
And it’s the category in food as you know was not growing, but there is a bigger and bigger shift going on from conventional products to more and more natural organic. So yes, pricing may come down, but hopefully from size and scale, we’ll get the benefit there.
Gary Tickle
I would just add to that. I think the other piece of this is really about value and value perception for the consumer, because price is just dictated partially by how the consumers sees the value of the product.
And our whole intention is to make sure we have good investment behind our core brands, the consumer understands the value proposition and why, I would pay the price that is on the shelf today and whether it understands that that’s a better choice to make. And to Irwin’s point that they would see as a conventional shopper, why even paying a penny more makes sense to convert to be a natural organic selection in the portfolio rather than a conventional choice, and that we should be the brand of choice, because they see us as the best value proposition.
Operator
Thank you. I’d like to turn the call back over to Irwin Simon.
Irwin Simon
Thank you very much, operator. With that being our last question, we expect over the next few weeks to get around and see all our shareholders out there and talk to all of you.
We expect to be back in August with the major in-depth review of 2017 and our outlook for 2018; we’ll do a lot more detail on sales, margin, segment et cetera, have a lot more for you. As you know, we traditionally give guidance, on 2018 in August, we’ll give you a lot more.
It’s been a tough year, it’s been from a personal standpoint, from a team standpoint. I’m happy with the news that came out today.
I’m happy, as I said, I am with the team that is surrounded by myself to go out, move this business forward and it’s the amount of time that was put into looking back at our numbers is put into our business, just watch out of what we’re going to do. So, I want to thank once again all our employees.
And let me tell you something, they deserve a big round of applause, because, I don’t think there is one weekend that most people have not been here whether it’s Father’s Day, Mother’s Day, Thanksgiving, et cetera and they deserve a lot. I want to thank our shareholders, who have stuck with us, who supported us.
And we will be spending time with you and talking to you about the future of our business. I want to thank our consumers and customers that always buy our products.
The important thing is we feed infants and toddlers their first foods; we feed a lot of food out there that is very important to health and wellness and the future of food. We feel a big part of reducing whether it’s childhood obesity, health and wellness, and we’ll continue to be a big part of that.
We look forward to talking to you again in August and most likely over the next few months, we’ll talk to you. Thank you very, very much for your time today and have a great day.
And if you need a list of our products to buy, it is online and it’s available at most retailers across the U.S. and Europe.
Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation.
Have a wonderful day.