The Hain Celestial Group, Inc.

Greetings and welcome to the Haynes Celestial second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Anna Kate Heller of Investor Relations. Thank you. You may begin.

Thank you. Good morning, and thank you for joining us on Hanes Celestial's second quarter fiscal year 2021 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer, and Javier Drogo, Executive Vice President and Chief Financial Officer. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. These refer to Hanes Celestial's annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time to time with the Securities and Exchange Commission. in its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hanes Celestial's website under the investor relations heading. Please note, management's remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. As a reminder, beginning in Q1 of fiscal year 2020, the company changed its segment reporting to focus on North America, international and corporate, which had previously been reported as the U.S., U.K., and rest of world segments. This call is being webcast and an archive of it will also be available on the website. I'd also like to note that we are conducting our call today from our respective remote location. As such, there may be brief delays, crosstalks, or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now I'd like to turn the call over to Mark Schiller.

Thank you, Anna Kate, and good morning. I hope everyone is safe and doing well in these turbulent times. On today's call, I'll give some color on our strong second quarter results and explain how we continue to position ourselves for sustainable, profitable, long-term growth. Let me start with the Q2 results. On our last earnings call, I stated for the second quarter, we expected continued mid-single-digit top-line growth after adjusting for divestitures and discontinued brands, several hundred basis points of margin improvement, and adjusted EBITDA growth comparable to the 25% we delivered in the second half of fiscal 2020. I'm pleased to report that we have met or exceeded all of these projections and, again, delivered another very strong quarter. For the fourth straight quarter, sales growth was up over 5% in constant currency, excluding divestitures and discontinued brands. For the sixth straight quarter, gross margin was up more than 200 basis points. And for the fourth straight quarter, adjusted EBITDA margin was also up more than 200 basis points. Adjusted EBITDA dollars was up 38% in the quarter versus last year, while investing 15% more dollars in marketing. That's the fifth straight quarter of double-digit adjusted EBITDA dollar growth. Both North America and international delivered strong sales, profit, and margin expansion, further demonstrating that our strategy is working across the globe and we have considerable momentum. If we reflect back on the financial targets we laid out on Investor Day two years ago, we are already delivering at or near the three-year growth and margin targets one year ahead of schedule. and we are doing it while increasing our marketing investment. When we started our transformation two years ago, we said that we would begin by showing immediate progress on margins with lower sales as we eliminated unprofitable brands, SKUs, and low ROI investments. The result would be a smaller, more profitable company that was ready to grow again. As you know, we have delivered and exceeded on those expectations. We also said that in order to restore sustainable profit growth, there was four things that we needed to focus on. First, we needed to be a more reliable supplier to our customers. This meant making it easier to do business with Hain, which we've done by simplifying our sales force and supply chain to deliver improved service. I'm pleased to report that our service levels have been strong for some time now, and we've distinguished ourselves in this area throughout the pandemic. Second, we needed to provide the right sizes and price points to make our products more affordable and competitive by channel. We achieved this by doing things like downsizing and lowering the price on many offerings to be more competitive in the grocery channel, creating the right multi-packs for e-commerce and the club consumer, and creating trial sizes to get our snacks on the front end of the store near the cash register. Third, we needed to improve our marketing and focus our dollars on the get-bigger brands which have the most growth potential. To accomplish this, we've consolidated marketing partners, revamped all our campaigns, refocus our spending on the channels that show the most potential like e-commerce, and reallocate the dollars from the get better brands to the get bigger brands. And lastly, we need to provide breakthrough innovation that would be margin accretive and attract incremental consumers and drive eating occasions for our brands and categories. We've done that with products like sensible portion scream and hot veggie straws that brought young males into healthier snacking. Celestial seasonings tea with new category benefits like energy, probiotics, melatonin, and gut health, and new formats like K-cups and trial packs. While this work is ongoing, the results so far have been terrific. Starting before the pandemic and continuing for the last year, we've seen strong sales growth across the Get Bigger portfolio, and there are clear indications that those trends are accelerating. In the most recent quarter, the Get Bigger brands, which represent two-thirds of the sales in North America, grew more than 10% for the fourth straight quarter. We gained market share again in snack behind the continued strength of sensible portions, restored growth on Garden of Eden, and stabilized performance on Terra. Greek gods yogurt again grew double digits and gained significant market share. Key health share in measured channels while growing almost 20% overall. And personal care continued its double digit top line growth with particular strength in unmeasured channels. In the most recent four weeks, the Get Bigger brands have shown strong momentum with volume growth and share gains accelerating. Household penetration and buying rate grew close to 10% in the second quarter. That's the third straight quarter of growth as we continue to see new households trying our Get Bigger brands and repeating at a high rate. ACV distribution on the core Get Bigger brands grew last quarter, and average items per store grew by more than 10%. In fact, 11 of our 13 biggest brands in the U.S. game distribution last quarter demonstrating the breadth of strength across our portfolio. Shelf space gains are largely being driven by our innovation, which has delivered strong velocities and high incrementality to our categories. As customers begin resetting their shelves again, starting with snacks and baby later this quarter, we expect to see our space continue to grow materially. Importantly, we also have more innovation coming. We just launched sensible portions of veggie puffs, which are so far turning fast as our veggie straws, and again, highly incremental. We also have more tea, yogurt, and personal care launches happening next quarter. So, we expect to see TDP growth be a significant driver of growth as the pandemic wanes. From the investments needed to profitably drive the sustainable growth, we also needed to continue eliminating complexity and cost from the organization. That journey continues, and there are quite a few sizable initiatives underway. First, as you know, we've been optimizing our portfolio by exiting businesses and SKUs that have limited potential within Hain and add unnecessary complexity. Last quarter, I told you we were in the process of selling our fruit business, and in early January, we were able to successfully complete that transaction. This $140 million food service-oriented business, which had been declining 25% to 35% during the pandemic, was very complex and delivered no profit. By selling it, We not only continue to simplify and focus our company, we also will see our go-forward company-wide gross margins expand by about 150 basis points, and our EBITDA margins expand by roughly 100 basis points. In the last 20 months, we have now sold or shut down 17 non-strategic businesses which had collective sales in excess of $900 million, but less than $15 million of EBITDA. In doing so, we've generated $430 million in proceeds, which equates to about 30 times the EBITDA. We've used that money to reduce our debt to under two times and buy back some stock. Second, as we've discussed previously, we are currently executing our simplified pricing model, which encourages retailers to order in bigger quantities and fill up trucks. This will increase our capacity by freeing up dock doors in our DCs, reducing administrative work for Hayne and our customers, and reducing costs. In addition, this will also improve our carbon footprint as consolidating orders means less trucks on the road. In Q2, we began implementation of this simplified pricing model and have seen some terrific results. The average order size increased by almost 50% and costs have come down materially. As we roll this out to the rest of the customers in the current quarter, we expect to see continued material savings for both Hain and our customers. Third, in both North American and international, we've built a robust productivity capability and process and have identified almost $150 million of additional cost savings initiatives that will bear fruit starting this year and continuing over the next several years. One of the biggest focus areas on the productivity list is optimizing our manufacturing footprint. In Q2, we made the decision to consolidate our Terra and Sensible Portion snack plants in North America and expect that project to be completed before year end. In doing so, we will be investing in significant automation, further simplifying our operation and reducing costs. In the UK, we're also simplifying our manufacturing operations and have taken steps to consolidate our soup manufacturing locations, right-sizing our remaining facilities and repatriating some of our co-manufactured volumes to drive absorption and efficiency. While there are many more initiatives underway, hopefully these few examples give you confidence in our ability to drive continued margin expansion. We've built an accountable productivity capability and culture. We have the right team and tools, and importantly, we have a robust pipeline of projects to drive further improvement over the next several years. In summary, Q2 is another strong quarter for Hain, and I'm very proud of the strong results the team has delivered in the quarter and the profitable growth momentum on the business. Our transformation plan is clearly working. And we continue to believe there is significant upside both in North America and our international business. With that, let me now turn it over to Javier, who will give you more color on our recent results.

Thank you, Mark. And good morning, everyone. There are five key aspects of the second quarter financial information that I want to highlight in today's call that demonstrate continued strong performance from the execution of our transformation plan. First, We deliver strong top line growth versus prior year for the fourth consecutive quarter with adjusted revenue growth that was balanced across North America and international. Second, our growth was supported by significant continued margin expansion. Third, we're generating much stronger cash flows. Fourth, our balance sheet remains strong with excellent capital allocation flexibility. And finally, our business is well positioned for continued success. So let's drill into each of these aspects, starting with the top line. Keep in mind, I will focus my discussion on our financial results from continuing operations. Second quarter consolidated net sales increased 4% year-over-year to $528 million, modestly above internal expectations. Foreign exchange benefited second quarter net sales by around 200 basis points, while divestitures and brand discontinuations reduced net sales by 360 basis points. After adjusting to exclude these factors, net sales increased close to 6% versus the prior year period, consistent with the previously provided guidance of mid-single-digit top-line growth on an adjusted basis. As mentioned during our last call, we were anticipating some of the third quarter volume to move into the second quarter, particularly as retailers built inventory, largely in anticipation of potential disruptions from Brexit and the impending UK lockdown. This sales shift from Q3 to Q2 did materialize during the quarter. On profitability, for the second quarter, adjusted gross profit increased 20% versus the prior year period to $134 million. Currency impact on gross profit was a tailwind of about $2 million. Gross margin improved roughly 330 basis points, driven by a reduction in low trade ROI trade investments, our significant supply chain productivity initiatives, improved product mix from our skew rationalization efforts, and better overhead absorption in our plants. Distribution and warehousing costs as a percentage of sales improved versus the prior year period due to the consolidation of shipping locations and improved utilization of trucks contributing to improved gross margin despite higher freight costs in the U.S. SG&A came in at 16.2% of net sales similar to the prior year period, The positive impacts to SG&A were driven by lower broker commissions, reduced headcount as we consolidated our North American operations into one business unit, and reduced travel. These improvements allowed us to increase marketing spending to support our North America Get Bigger brands and our UK Hayne Daniels business. Our marketing support for the North America Get Bigger brand was close to 7% of net sales in Q2. Second quarter adjusted EBITDA increased to $62 million compared to $45 million in the prior year period, representing a 38% increase versus Q2 last year. Currency impact on adjusted EBITDA was a tailwind of $1.6 million. Adjusted EBITDA margin of close to 12% represented a significant improvement of about 290 basis points year-over-year driven by gross margin improvements while increasing marketing spending. Our adjusted EPS of 34 cents was double the prior year period of 17 cents. We benefited from an adjusted effective tax rate of 24% compared to 27.8% in the prior year period. The lower tax rate was mainly driven by the company's ability to claim deductions and foreign tax credits on foreign taxable income. Now, to provide some detail on the individual reporting segments where both regions contributed with strong adjusted top-line growth, profit growth, and profit margin improvement. Starting with our North American business, on the top line, second quarter net sales increased 5.5% versus the prior year period after adjusting for currency movements, divestitures, and brand discontinuations. Without these adjustments, net sales increased close to 1% year over year to $283 million. Foreign exchange impact on the quarter was a small tailwind of 20 basis points. From a profitability perspective, Q2 results were strong as we delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar expansion. Specifically, our North America business expanded adjusted gross margin by close to 380 basis points, resulting in adjusted gross profit of $81 million, or an increase of 16% versus Q2 last year. This improvement was driven by a reduction in low ROI trade investments and lower supply chain costs as a result of our skew rationalization effort, productivity initiatives, and efficiencies in our supply chain system. Adjusted EBITDA increased to $40 million, a 31% increase. Currency impact on adjusted EBITDA was minimal. Adjusted EBITDA margin of 14% represented an improvement of about 330 basis points versus the prior year period, driven by gross margin improvements. Looking into the components of the North American portfolio, the Get Bigger brands, which represented two-thirds of the North American net sales, delivered sustained strong net sales growth of about 11% versus the prior year period. That's the fourth straight quarter of double-digit top-line growth. Notable brand growth call-outs include Celestial Teas, Sensible Portions, and Garden of Eating Snacks, Greek Gods, and a number of our personal care brands. Adjusted EBITDA margins for the Get Bigger brands improved close to 100 basis points compared to Q2 last year, yielding a margin of 15%. We achieved this improvement in profitability, notwithstanding stronger investment in marketing activity to support innovation launches and core products, as well as increased investment in e-commerce. The Get Better brands, which I will remind you are being managed primarily for profit, showed a net sales decrease versus the prior year period of about 3% after adjusting for currency movements, brand discontinuations, and divestitures. The Get Better brand, consistent with their portfolio role, continued to show very robust adjusted profit and margin improvement. Specifically, adjusted EBITDA grew by more than 70%, with an improvement in EBITDA margin of more than 600 basis points, building a margin slightly north of 12%. This level of profitability is at the high end of our long-term target of 10% to 12% for the Get Better brands. Now let me shift to our international business where performance for the quarter was a key contributor to the results of the total company. Net sales versus prior year increased close to 9% on a reported basis and north of 6% after adjusting for currency movement and divestitures. Foreign exchange increased sales by 430 basis points while divestitures reduced sales by 190 basis points. Net sales growth was driven by the strength of our non-dairy brands such as Gioia and Attuni in Europe, most of our Hayne Daniels business, including our leading market share Linda McCartney and Harley's brands in the UK, as well as our Ella's UK business. Our food business was a drag on growth due to its food service exposure. Net sales versus a year ago for our international segment excluding the food business increased by close to 14% in constant currency after adjusting for divestitures. To note, the international Q2 growth was helped by a volume shift from Q3 to Q2 driven by customers' inventory building largely to avoid disruptions from Brexit. As previously communicated, we have successfully divested our food business as of mid-January. As a result, it will be adjusted out of our results for the balance of the fiscal year. Given the adoption of the North American playbook in our international business, adjusted gross margin and dollars and adjusted EBITDA margin and dollars were all up considerably in the quarter versus the prior year period. Adjusted gross margin improved by more than 300 basis points versus the prior year period, driven by a reduction in low ROI trade investment and lower supply chain costs as a result of productivity initiatives and deficiencies in our supply chain system that were implemented in our Haned Daniels and continental European businesses. Adjusted EBITDA grew by 28% versus the prior year period to $38 million, supported by an adjusted EBITDA margin improvement of gross to 200 basis points, resulting in an EBITDA margin slightly higher than 13%, driven by a higher adjusted gross margin. Excluding fruit, the remaining international business delivered an EBITDA margin of close to 16%, up 150 basis points versus a year ago. This level of profitability for the international business X fruit is consistent with the long-term target of 15% to 17% announced two years ago. In Q2, due to the classification of our fruit business as a massive hill for sale and the agreed-to final purchase price, the company recorded an additional loan cash impairment charge of about $24 million. Our UK food business had trading 12-month net sales of about $138 million with about negative $4 million in adjusted EBITDA. Shifting to cash flow and balance sheet, Q2 operating cash flow improved by $43 million to $64 million, and operating free cash flow, defined as operating cash flow minus CAPEX, was $46 million, close to a $42 million improvement from the prior year period. These improvements resulted primarily from stronger earnings and better working capital management. At the end of Q2, our inventory was $312 million, $19 million higher than the levels at the end of September 2020. This was an intentional inventory build to ensure high levels of customer service while avoiding supply disruptions due to COVID lockdowns and Brexit challenges. That said, we expect inventory levels to decrease throughout the second half of fiscal 2021. Our Q2 inventory and other working capital account usage resulted in a 55-day cash conversion cycle that was slightly higher than the prior quarter by one day, but below our target of 60 days due to improvements in accounts payable days. Cash on hand at the end of the quarter was $61 million, including the cash in our food business, while net debt stood at $234 million and gross debt leverage was only 1.5 times. Our balance sheet is the strongest it has been in years, and as a result, we have significant capital allocation flexibility. Given our healthy balance sheet, as well as our expectations to continue to generate strong free cash flow, we remain well-positioned to both reinvest in the business and return value to shareholders. Consistent with our capital allocation principles, and pursuant to the repurchase program authorized by the Board in 2017, during the quarter, we bought back $29.7 million of our shares at an average price of $32.15, leaving us with about $118 million of additional repurchases remaining under our 2017 program. Looking ahead, given our strong Q2 performance and confidence in managing the controllable aspects of the business, we are reaffirming our fiscal 2021 outlook that calls for gross margin and adjusted EBITDA margin expansion, as well as strong double-digit adjusted EBITDA and offering free cash flow growth. As we move into the third quarter, we expect to continue to deliver strong gross margin and EBITDA margin improvement, as well as adjusted EBITDA growth near 10%. As Mark mentioned, the business is performing exceptionally well and has tangible top-line momentum. That said, The reported top line results for Q3 will be impacted by the following. The divestitures the company carried out including fruit, the Brexit volume pull forward that was mentioned earlier and discussed on the last earnings call, and the lapping of a personal care club program that we expected to occur later this calendar year. Excluding these factors, we expect top line strengths that should be evident in the syndicated data. As part of the second half outlook, we have assumed the following. Foreign exchange translation will continue to be a tailwind versus prior year. Cost of goods inflation of around 2%, which has been more than offset by our productivity initiatives. Capital expenditures between 4% and 5% of net sales. An increase of a prior year to drive multiple productivity projects and to carry out projects that were delayed from last year due to COVID-19. An adjusted effective tax rate between 24% and 25%. In summary, The momentum illustrated in the prior three quarters has continued into fiscal Q2. We exceeded expectations both on the top and bottom line, and we continue to believe that we are well positioned to deliver continued strong earnings growth and margin expansion for the balance of the fiscal year. I will now turn the call back to Mark.

As you can see, we had another very strong quarter. While Javier just outlined some timing headwinds that will impact the top line in Q3, we expect continued improvement in our business fundamentals and anticipate continued robust margin and profit expansion. On behalf of the Board of Directors Management Team, I want to thank the global team at Haines Celestial. Our number one priority is keeping employees safe, and I'm proud of the way the team has done so while continuing to execute in this dynamic operating environment, especially given the robust surge in demand that we've seen. With that, let me turn the call over to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your question. Our first question comes from the line of Ken Goldman with J.D. Morgan. Please proceed with your question.

Hey, good morning, everybody. I wanted to ask about your gross margin guidance for the third quarter. You're obviously guiding to, quote, strong, I think is the word you use, improvement year on year. The street's looking for about 150 basis points above the year-ago period. This would be the smallest increase in a while, but it's also off the hardest comparison. So I just wanted to get a little deeper, if I can, and ask, is that 150 basis point improvement, is that kind of in line with what you're considering just on a rough basis for the third quarter? You know, even if we can get any help there on a quantitative level, it would be appreciated.

I'll take that, Mark, if you want to. No, go ahead. I think the expectation for the quarter will be higher on the gross margin basis.

Perfect. And then my follow-up on a related note, you're guiding, I think you previously had guided 2% COGS inflation for the year. I think today you said 2% COGS inflation for the back half of this year. You know, we've heard a bunch of companies talk up freight. Obviously, some corn and soybeans and other raw materials are up. I know you have quite a different portfolio of COGS that you buy than a traditional food company. But I just wanted to ask, is that 2% number, you know, relatively low, lower than others because you think that you've locked in a lot of of your key items, or really are your commodities, even on a spot basis, just not up as much as the group in general? Just trying to get a sense of, you know, maybe the timing if you do have a spike coming in fiscal 22 or something like that. I'll take that, Mark, and then we can have some comments.

Yeah, so... We have five months left into the year, and so we have good visibility as to what we think our basket of different raw materials and finished goods is going to be for the rest of the year. So we feel pretty comfortable about that 2% number. You're absolutely right on the freight cost increases. We have seen double-digit inflation throughout the year, and we expect that to continue through the second half of our fiscal year. but that's embedded within our assumptions of that overall 2%. And then on your second point, yes, you're absolutely right. Our basket of ingredients is slightly different than the average CPG, so we're not as impacted by some of the, you know, inflationary backdrop that you could say is impacting, you know, some of our competitors. Great, Dave. Thank you, Javier.

Thank you. Our next question has come from the line of Alexia Howard with Fernstein. Please proceed with your questions.

Good morning, everyone.

Good morning. Good morning, Alexia.

Hi. So my first question is really around the numbers coming through better than expected relative to your guidance that you provided last quarter. So, for example, on the EBITDA line I'm focusing on, You came in at 38% growth year-on-year versus the 25% you guided to last quarter. What surprised you in a positive way? And then as I think about the 10% you're guiding to for the third quarter, what are the puts and takes there? What could go better or perhaps worse than expected as a follow-up?

Yeah, so on Q2, I think our execution was very strong, both in terms of service and promotion activity. I think we were anticipating a little bit more price competition than we saw, which allowed us to get a disproportionate share of the merchandising events, which we wanted to do to try and bring more people into the franchise. I think that was a positive. We continue to execute exceptionally well on our productivity agenda. You know, the projects that we have are coming to fruition. They're generating the savings that we anticipate and then some. And, in fact, in Q2, we had a headwind on freight that was more than we anticipated. And so the fact that we were able to deliver 38% EBITDA growth and cover that extra cost should just, again, you know, give you confidence that our execution has been very strong. As you move to Q3, I think, obviously, we have the COVID overlap. the surge in March which is a headwind and we have some of the timing that Javier talked about in terms of some of the volume in international moving from Q3 to Q2 as they built for Brexit and they built for the impending shutdown that they are now living under as well as the deferral of a personal care program in the club channel because of COVID has been delayed as they're just getting back to merchandising and and they're behind schedule, and so it'll happen later in the year. So some of those things obviously impact EBITDA because there's dollars associated with that volume, that is, some of which has shifted forward and some of which has shifted later. But all that said, what I would point to, despite those timing adjustments, despite the overlap of the surge, there's terrific momentum in the business that you see in the syndicated data. We're picking up TDPs at a very high rate. We're gaining market share. We're gaining new households. And we continue to have a very robust productivity agenda. So we're confident that you will continue to see that 100 basis points of margin improvement that we talked about on last call and the double-digit EBITDA growth that we talked about. So we feel pretty good about our ability to overlap. We feel really good about the momentum that we've got. And, you know, hopefully we can come in and deliver another quarter with some upside.

Great. And then as a quick follow-up, The number of brands that you've divested recently, how many have you left with? I think you started with 55. The last I heard you were down to 37. It sounds as though the core is really the 12 or 13, you know, biggest, most strong brands across the portfolio. Where are you in that divestment process? And I'll pass it on.

Yeah, so we continue to reshape the portfolio with the same criteria that we had on Investor Day. The things that we think have mainstream potential, that have leading market share, that are responsive to marketing and innovation, those are brands that we're going to invest in for growth, and we continue to do so. We've done a good job of shrinking the tail, but I would still tell you that outside of those 13 brands in North America, there are still more in the tail that we would for the right opportunity look at exiting. And we have a few in international as well. So I wouldn't say that we're finished. But importantly, I would also say we're now pivoting toward conversations around acquisitions and trying to bulk up in the categories that we prioritize. And in some cases, like in Europe, where we have a very strong non-dairy business and a very strong meat-free business, there's potential to acquire capacity so that we can continue to grow at the rate that we have been. So it's going to be more balanced going forward. You'll see some more divestitures, but hopefully you'll also see some acquisitions as we move through the next couple of years.

Great. Thank you very much. I'll pass it on.

Thank you. Our next question has come from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Hi, Mark and Javier.

Hey, Andrew.

Morning. I guess first off, Mark, it's obviously been evident, you know, for some time the progress Hain is making on the margin side of the business and in relation to the company's long-term goal. You know, on the top line, there, of course, have been many, many moving pieces. I guess if we were to take the portfolio, you know, as it stands today, adjusting out the announced divestitures and such, and knowing the next few quarters are impacted by things like COVID comps and whatnot, just steady state, what sort of growth rate do you think the portfolio is sort of delivering right now? And I guess where in relation is that to I think what the long term goal was, was five to seven on the get bigger, and maybe it was minus five to minus 10 on the get better. I'm trying to get a sense of kind of, you know, excluding all the puts and takes and the year over year lapse and kind of the vestitures, just where you think this portfolio is now? And do you think there's more room to go from where it is today?

Yes, so if you look at the last three quarters and you take out all the divestitures and all that noise, the entire portfolio, including international, has been growing mid-single digit, about 5%. The Get Bigger brands have been growing around 10. International has been growing around 10. The Get Better brands have been flat to slightly declining, although, to your point, the long-term guidance we gave was minus 5 to minus 10 on those Get Better brands. The business has been performing in line with what the long-term guidance has been. Now, the question, of course, is how much of that is COVID and how much of that is driven by the things that we are creating. And the reason I'm bullish going forward is because if you go back to Investor Day, our main thesis on the get-bigger brands was always that they had mainstream potential and that we were going to be able to drive distribution and trial in the mainstream channels where we were very underdeveloped. We've got, you know, significant presence in the natural channel with many number one and number two share brands, but we were underdeveloped in the mainstream channels. And what you're starting to see right now in the data is double digit growth in terms of distribution points on those get bigger brands, three straight quarters of very significant household penetration growth. innovation that is working that's very incremental to the categories and we just need these categories to reset. And so as we start going through the calendar year 2021 and customers start resetting their shelves again, starting with snacks and baby food at the end of this quarter and into the beginning of April, you're going to see us pick up significant space. And that's the gift that keeps on giving. If you're bringing in things that are turning and that have earned their space, that's going to be very incremental in terms of our growth rate. So I think as COVID wanes, you'll see the distribution gains and the incrementality of that space, bringing in new consumers that will offset any losses that we have, you know, coming from the waning of the pandemic. So we feel pretty good about where we are, we feel really good about the momentum we have on the core business. And, you know, it's just a matter of us getting through the pandemic. and seeing where we are on the other side. But all the signs are very positive right now in terms of momentum on the business.

Thank you for that. And I think you mentioned that marketing as a percent of sales for the get bigger brands is currently at 7%. I guess where was that? I'm almost afraid to ask. Where was that when the get bigger brands when you sort of first defined the get bigger sort of segment? And is 7%, do you think, probably around the right number? Or is there a reason for that to go higher sustainably?

Yeah, so we were in the 2% to 3% range when we started this journey. And we have been adding marketing for, I think, four or five straight quarters. And we also re-deployed some of the marketing from the Get Better brands to the Get Bigger brands. But we are around 7%. I think that's generally a good number with the exception of personal care that tends to have a little bit higher spending levels. So we will look to increase in personal care as we start to build that mainstream distribution that I just talked about. We're still very dominant in the natural channel but not as penetrated in, you know, the grocery channel and you don't see it in the syndicated data to strengthen that business that you see in the other ones because it's largely a non-measured channel and natural channel business. So it As personal care starts to get that distribution, and we're seeing it now, ALBA in the last, I think, six weeks is up about 4% on distribution as an example, and we have a lot of innovation coming. That will be the catalyst for us to increase the spending there because we'll have enough of a footprint nationally to be able to make, you know, more meaningful investments there. But the rest of the business, I think we're about where we need to be. Great.

Thank you so much.

Yep. Thank you. Our next questions come from the line of David Palmer with Pebricor ISI. Please proceed with your question.

Thanks and congrats so far in the year. Kind of follow-ups to those questions. I'm wondering if we could maybe go out further and talk about your targets. Sometimes, particularly with this COVID-related comparisons, it's easier to talk about the longer-term than some of the near-term, you know, violent quarterly comparisons. And You guys are, you mentioned you're up towards the higher end of your targets already on get better EBITDA margins. You're get bigger, including some marketing reinvestment and COVID-related expenses. You're in the mid-teens. And I would imagine that personal care business is relatively higher margin, or at least could be, and that's being held back by COVID-related forces. So I'm wondering if already internally you're thinking – that the high end of the 13 to 16 EBITDA margin target for fiscal 23 is very much in sight. Could you comment on that? I have a quick follow-up.

Yeah, I think you're spot on. Right now, we are delivering at the mid-end of the three-year guidance at the end of year two, and we expect that we are going to continue to see margin expansion into F22 and beyond. I mentioned in my comments that we have about $150 million worth of productivity initiatives in North America and international that we're working on that will more than offset, you know, inflationary costs and wage increases and other costs coming our way. Plus, we'll also have the unwinding of some of the costs related to COVID, the cost of keeping employees safe and quarantining them. and the like. And so we expect that margins are going to continue to expand. And I would again remind you that we are at the low end of the industry in terms of where our margins are, even with the 500 basis points of improvements that we've made. So there's more to go. We're not running out of ideas. And I think between the momentum that we're starting to see on the top line and the continued momentum in the middle of the P&L, I would expect that this is going to be a meaningful growth company going forward.

And just, you know, speaking more directly to the things, the gives and takes with regard to margins as you lap this COVID period, you know, think post-vaccine and herd immunity, as we get into that zone, how do you think about the legacy of this year in terms of margin? And what I'm thinking about is you might have had some some tailwinds, you know, some of your at-home products, but you have some headwinds with some of, you know, perhaps the personal care, your COVID-related costs. You know, so I'm wondering, do you feel like you've maybe borrowed, COVID has given you a boost this year on your margin targets, or is it a net neutral? Thanks.

Yeah, it's a great question because the direct costs are easy to calculate. It's the indirect costs that are hard. So, for example, we have amazing innovation, and because customers haven't reset, we haven't gotten it in full distribution. That's a headwind that is clearly caused by COVID that I can't put a dollar value to. But, look, there are some tailwinds here. We do have some absorption that's come with higher volume. We do have you know, some competitive opportunities that have materialized because we've serviced our business better than others. And we've been promoting at times when others have not that have allowed us to get more merchandising and more consumers into our franchise. But at the same time, the headwinds are meaningful. And just even in this quarter, this personal care program that we mentioned that was very sizable last year because of COVID, it's not going to happen until later in the year because, you know, the customers are behind on their merchandising. So, I think in Q3 it's definitely a headwind between the March surge, the timing on the personal care program, and the pull forward of volume into Q2. COVID is definitely a headwind in Q3. I think it was probably a little bit of a tailwind in the first half, but not nearly as much as it was when the pandemic started, you know, March through June last year.

Thank you.

Thank you. Our next question has come from the line of Rob Dickerson with Jefferies. Please proceed with your questions.

Great. Thanks so much. Hey, Mark. I just wanted to touch on pricing. Obviously, it sounds like, you know, your gross inflation is not as bad as others, but then I also, you know, I've heard you before, you know, discuss just kind of plans to optimize Pricing across sizes, sorry, pack sizes and channels, people still seem to be a little less price sensitive during the pandemic. And then I think today I heard you say maybe there was a little less price competition than maybe you had, you know, foreseen just a few months ago. So, you know, maybe if you could just touch on kind of how you're feeling about kind of the – price competition within, you know, your given categories, and if there really is a need for you to try to push on, you know, increases in list pricing outside of just the optimization and the mix efforts. Then I have a follow-up. Thanks.

Yes, on the list pricing, I think, you know, with the freight cost surge that everybody's seeing, including us, and some of the commodity inflation, we'll see whether others start taking list price increases or not. But we've... We've been spending a lot of our time and energy, again, making these products ready for mainstream channels. And what I mean by that is we've done a lot of downsizing, a lot of trial sizes. And so when you look at the syndicated data, you see that our prices are actually flatter down where others have been going up. That's all with intent, and it's all in the spirit of getting us the distribution and the trial and the channels that we think are going to be a big part of our growth going forward. We do have dry powder there. As I said, when we built the plan, we put aside some money for pricing if needed because we don't want to, you know, be late to the party and miss out on all the opportunity if all of a sudden everybody starts dropping prices. But I think given the pressure that everyone's seeing on the cost side, I think the, you know, the promotional environment is going to be a lot more subdued than it might be when you come into the overlap of the pandemic. There's cost increases that people are incurring at a higher rate than us. It's going to be hard for them to absorb those costs and drop their prices, too. So, I think, if anything, we'll see prices continue to go up, and we will opportunistically look for ways to do that. But the good news is we have enough productivity to offset the vast majority of the cost increases that we're seeing anyway, and that's why you see such robust margin expansion.

All right, yeah, that sounds great. I guess just quickly, just in terms of cash flow allocation, current leverage right now, right, is obviously benign. You're just sold fruit. There's some, I guess, news flow around or divestment potential around Earth's best. Bottom line, right, you're generating decent free cash flow. You're getting excess cash off the divestment. You're buying back a little bit of stock, not a ton. And then I heard you today say maybe, you know, starting to focus a little bit more on acquisitions. Maybe, you know, that's more so in Europe relative to the U.S. So just kind of simplistically, you know, as we think of kind of the go-forward cash allocation, you know, is it what you're saying, you know, clearly is, you know, look, instead of potentially paying a dividend, let's say, you know, we are focused more so on looking at some, you know, added capacity and capability and some of our core brands that will be remaining post divestment in Europe, not necessarily like leaning more into yogurt in the US. That's it. Thanks.

Yeah. So let me take a quick shot. And I'll let Javier talk about our capital allocation. We continue to reshape the portfolio. You mentioned Earth's Best. You know, what I would tell you is we're not going to comment on specific rumors, and I wouldn't be distracted by them. If there's something that we are actively trying to sell, we will tell you. We did with Fruit. We did with HPP. The fact that there's some rumors swirling around things in our portfolio, we get contacted all the time, and there's interest in lots of things that we have. We would be more interested in selling off the tail outside of those Core 13 brands that I mentioned. And as we generate more proceeds, we have some optionality. And why don't I let Javier talk about how we've been deploying our capital and how we think about it going forward.

So on the capital allocation front, you know, one of the things that we look at is where can the company get its highest adjusted return, risk adjusted return across a number of options. And those options are internal investments, and external investments, and generally the external investments obviously deal with M&A. There is a consideration about share repurchases and dividends. Share repurchases are looked at through the same lens. We seek to invest, you know, our capital to the highest and best use, and so if we think our share price is, you know, below what we consider to be an intrinsic share value, we try to move and purchase some shares. So right now, that's the lens through which we look at our capital allocation. If there were to be the opportunity where after we've looked at internal and M&A activities and our shares are what we consider to be adequately priced, we would consider a one-time dividend. But I don't think we're at that stage, and I don't think that for the foreseeable future, certainly not in the near term, that we would consider a permanent dividend at this point. So those would be sort of the choices and how we look at those choices.

And just one thing I would add, Rob, to your comment on international acquisitions. We're looking at acquisitions in North America as well. It's around bulking up in the categories that we think have the most growth potential and where we have a significant presence. That would be the leadership brands here in North America as well as the categories that I mentioned international.

All right, great. Thanks so much. Appreciate it. Thank you.

Our next questions come from the line of Michael Lavery of Piper Sandler. Please proceed with your questions.

Good morning. Thank you. Good morning. I want to just swing the pendulum back a little bit the other way from David's question to just the rest of the year or even third quarter. And obviously you gave pretty specific color on EBITDA and gross margin. But just curious, thinking about the top line, how much should we expect maybe that to be up or not? Is it all driven by margin? I know you've got the tough comps and some of the Brexit pull-forwards. But just maybe some color on what you're thinking, you know, as you plan internally around where the top line lands.

Yeah, so the reported number will be negative because, first and foremost, we have almost 1,000 basis points of overlap on divestitures that have to get adjusted out, right, businesses that we've sold that we're no longer selling. And then on top of that, we've got the Brexit slash UK lockdown pull forward and the timing of this. club program, which has some size to it. So, you know, that adds another 500, 600, 700 basis points of drag on the top line. So we're looking at, you know, before you just get to how is the business performing between those timing issues and the overlap of divested and closed businesses, it's, you know, 1,500, 1,600 basis points. So that's going to be pretty material. And again, versus the other quarters that we've been reporting, remember, we just sold the fruit business, which is $140 million. That's a meaningful adjustment that has to be made on top of the things that we sold over the previous nine months. And then you add the two things that are timing related. It's going to look materially different on the top line. That said, the underlying health of the business, which you can see in the syndicated data, is strengthening. And so I don't want people to be distracted by timing issues because the data is going to really tell you what the health of the business looks like. And we continue to grow share in tea, snacks, yogurt. We've now stabilized Garden of Eden and Terra, which had been struggling previously. We've got significant TDP expansion. We've got significant household penetration growth. So I think if you strip that all out, you've got a very healthy business underneath it and some very robust growth that we've seen in Europe as well. But the reported number is going to be negative, and that's part of why we're making the comments here so that people are aware and adjusting their models accordingly.

No, that's helpful. And I'm sorry, I meant to specify organic growth. But so you called out some of the underlying drivers. Would organic revenue growth then sound like maybe at least around flat or perhaps slightly up?

Well, X the timing issues, it would be in that mid-single-digit range again. right? So we've for the last three quarters, we've been in the five to 6% organic growth rate. But now you've got the Brexit timing and the club program that are going to drag those down by, you know, five to 700 points. So it will be slightly negative to flat on adjusting for divestitures. But again, at the time, we're going to be in the next single digits again.

Okay, great, really helpful. And just a quick follow up, you touched on some of this, but where you call out the uncertainties that limit, you know, guidance being too specific. Certainly there's UK lockdowns and some, you know, just mobility uncertainty that can spring up that's not yet in hand. But anything else maybe driving that? Are you past any absenteeism issues, or is that an uncertainty? Or what are some of the key variables that you would call out that keep you from being more specific on the outlooks?

Well, so Brexit, number one, even though Brexit has been signed, it was signed in secret and then handed over to business after it was done to say, now you guys figure out what this means. And we are seeing some delays at the border. We're seeing increased paperwork. There's going to be some costs, but we think they're manageable. But we're still sorting through all of that, number one. Number two, obviously, COVID and what the impact of COVID could be, a positive or a negative right now. It's more of a positive in Europe because they're under very strict lockdown and you've got countries like Germany that say they're not even going to get close to vaccinating all of their citizens until the fall. So, I expect that it will endure longer there. We have freight costs that are escalating at a very rapid rate and there are, significant challenges getting anything from China right now. There's been a number of articles written on that. The ports are backlogged. Luckily for us, in preparation for the lockdown, we went long on things like packaging and raw materials that come out of China so that we would be ready for the surge. So we're in pretty good shape there. But if that endures for a much longer period of time, if the freight costs endure for a longer period of time, those could be headwinds as well. But So a lot of those things we don't really have control over. We can just plan for as best as possible. The things that we control we feel really good about, you know, the execution, the customer relationships, the service of the business, the quality of innovation, all of those things that we control we feel that we have tailwinds on and we'll continue to see momentum. And thus far we've done a really good job of managing some of these macro things blockers, if you will, that create headwinds in the, you know, in the face of the momentum that we're generating naturally. So we feel pretty good about it, but just hopefully that gives you some color around. There's still a lot of volatility here. We don't know how fast vaccines get deployed here. We don't know how fast consumer behavior changes. And so it's just, once we get through it, it will be much clearer. but there's still going to be some uncertainty, I think, over the next six months in terms of how this all plays out.

Very helpful. Thank you very much.

Thank you. Our next question has come from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Thanks. Good morning. Good morning, Bill. Good morning. Hey, good morning. Just two questions, kind of one on the same line of questions. I mean, trying to understand what your expectations are for category growth, not necessarily what you're seeing yourself in the turnaround. And when I say that, I've got to think that the conditions or the comps for this spring are more favorable than you would have thought last, you know, July, August when you were giving guidance and that more people are working from home, more schools are still at virtual schools. And on that, conversely, I mean, I've got to think that even though we had some postponement, as we go look the next fall, which is your fiscal 22, you've got to expect the categories to drop back down as we somewhat return to normal. I mean, is that not the way you're looking at it? I mean, we just had some kind of postponement of the drop off, or are you really thinking that you're going to grow or the categories will grow through this, that this is a permanent level you know, after we get through the just the initial stock up of growth?

Yeah, so the first thing I would tell you is we, we look at sub categories within the category. So for example, in snacks, we share ourselves against natural snacks, not all snacks. We do that because that's where we have the highest interaction indices and consumers who have made a decision to buy something organic are not as likely to buy something that's not organic as an example. So if you go back pre pandemic, the natural categories, the categories that we're in that cater toward health and wellness. We're growing mid single digit, high single digit in some cases. And given that this has been a health and wellness crisis, given that we think the return to normal behavior is going to be a long tail, because to your point, I'm not sure anybody's going back to the office five days a week. I think you will still have some level of working from home. and other behavior changes that are going to not have this be a light switch where all of a sudden everybody's vaccinated and we just go back to the way it used to be. So I would expect that these categories will continue to be growth categories, even overlapping what we've seen. Now it'll be a little choppy as we get through the fourth quarter. We saw, you know, a 50% surge in T in the fourth quarter last year. That will be difficult to overlap. But in general, I think when you get to the back of this, You're talking about categories that are going to grow because that's where the consumer is heading. You're talking about e-commerce that is going to be here to stay, which over-indexes on healthy products. We're talking about, you know, consumer behavior changes, both lifestyle changes as well as, you know, where they work and how they travel and all that that are going to lead to more in-home eating occasions than pre-pandemic. So we feel like we're still in the right part of the market, and that part of the market is going to grow in F22. Again, it'll be a little choppy as we get through the next six months, but we expect that we'll be able to lap this and still see growth in the categories that we competed.

Okay. No, I appreciate that. And then just on your market share gains, you said they've come despite the inability to launch new products and innovation. So I'm just trying to understand – have most of your gains come because you've been able to service clients and your competitors, smaller competitors haven't? And will that flip back as you know, we they they get kind of their feet under them. And they also haven't been able to launch their new product. So I mean, do you expect the competitive landscape for everybody to kind of change over these next few months?

Yeah, I mean, there's, there's a couple things that I think, have led to us gaining share. Number one, we service the business really well, as you said, and for a company that historically had not serviced well, the fact that we went from, you know, below average to above average as the pandemic hit, has been a feather in our cap with retailers in terms of them looking at us as a real player and partner that they want to work with. Number one, number two, We did launch a bunch of innovation. We just didn't get it in ubiquitous distribution because of the pandemic. And where we have launched it, the data is so compelling that when you take it to other retailers and say, let me show you how energy tea is, you know, 80, 90% incremental to the category and how it's turning in the top half of the category on velocity, you've got to have this thing on your shelf. So I think we've got proof points in our innovation that others don't have because they didn't launch anything at all in many cases. And so I think that's a second tailwind for us. And then the third is we've done a really good job with our marketing dollars bringing new people into the franchise. And so our franchises are much bigger than they were before, and we're not just bringing them in for one occasion and then they leave. We're finding that those that have come in are becoming repeat purchasers and are staying with us. And our three plus purchase group of consumers continues to grow every quarter because we're turning these people into loyalists. So I think we're very well positioned to do better than the rest and continue to grow share. But there's no question that the competition is going to be different as the pandemic waves. Some of it will be on pricing, some of it will be on innovations. But again, I think it feels like Because we've been leaning in, we're one step ahead of people, and we intend to stay one step ahead with our customers and be the partner of choice. And so we're pretty bullish and optimistic on our ability to continue to grow share.

Great. Thanks so much for the color. Thank you.

Thank you. We have reached the end of the question and answer session. I would like to hand the call back over to management for any closing comments.

I appreciate everybody's time and engagement today. I know we ran a little bit long at some technical difficulties at the beginning and started a bit late. But hopefully, you get a sense that the things that we're doing are working. You see it in the results. And hopefully, we give you confidence in the future and the trajectory of the business. And I'll leave it at that. Thank you, guys. And we look forward to the one-on-one conversations throughout the day. Thanks. Thank you. Thank you. That does conclude today's call.

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