The Hain Celestial Group, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Haines Celestial first quarter 2022 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Anna Kate Heller, Investor Relations. Please go ahead.

Thank you. Good morning, and thanks for joining us on Hayne Celestial's first quarter fiscal year 2022 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer, and Javier Drobo, Executive Vice President and Chief Financial Officer. During the course of this call, management may make forward-looking statements with the meaning of the federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. 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. Please refer to Haynes 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 and 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. This call is being webcast, and an archived bit will also be available on the website. And now I'd like to turn the call over to Mark Schiller.

Thank you, Anne and Kate, and good morning. Let me start by thanking our 3,000 employees for their continued hard work and excellent performance in the face of many macro challenges. We've kept one another safe and worked collaboratively with urgency to deliver continued strong results. On today's call, I'll give some color about our Q1 performance, progress against the Hain 3.0 strategy we laid out on Investor Day, and how we are addressing the challenging macro environment. Starting with Q1, we delivered better performance than we guided on our last earnings call on both the top line and the bottom line. With regard to top line growth, adjusted net sales were basically flat year over year, versus our guidance of being down low to mid-single digits. On adjusted EBITDA, we had guided to a decline of mid to high teens versus a year ago, and we came in better than that, down 13.8%. Looking at the reporting segments, North America adjusted net sales were down 1% compared with a year ago and up 8% versus fiscal 2020. This is strong performance, given that year-ago comparisons include significant headwinds from overlapping $8 million of pandemic-driven hand sanitizer sales and explosive growth in several of our largest categories. Our growth brand sales were up 1% versus year-ago and up 10% compared to two years ago. Particularly encouraging, we also delivered strong double-digit consumption growth that accelerated throughout the quarter and into Q2 across many of our growth brands, which collectively make up about 70% of our North American sales. In fact, in the most recent 12 weeks ending October 24th, our growth brands were up 12% compared to last year and 20% versus two years ago, with household penetration, ACV, velocity, and average items per store all growing. Sensible portions, Earth's Best, Celestial Seasonings, and ALBA were all up 20% or more versus pre-pandemic two years ago and are gaining share. Adjusted EBITDA in North America, excluding divestitures, was down 32% in line with our expectations. There were three primary drivers for the decline. First, remember that last year we grew 63%, so the COVID-related overlap was significant and planned for in our guidance. Second, these results were also impacted by industry-wide supply chain challenges, which I'll discuss in detail later. And third, due to long lead times, there was a lag between inflation hitting our P&L and the timing of pricing. It's important to note that after our price increases hit the market, our September adjusted EBITDA was up 22% versus a year ago. In international, we delivered another strong quarter with adjusted net sales up 2% versus a year ago, and 14% versus fiscal 2020. We saw particularly strong consumption performance on Hartley's, Ellis Kitchen, and our three leading share refrigerated soup brands, which all grew double digits and gained significant share compared to two years ago. Adjusted EBITDA when excluding divestitures was up 21% compared to a year ago, and 72% versus two years ago, reflecting the continued successful execution of our numerous productivity projects in Europe. Importantly, margins expanded considerably versus a year ago, with adjusted gross margin and adjusted EBITDA margins up 576 and 487 basis points, respectively. While we're in the process of converting all our internal reporting to reflect our new Hain 3.0 strategy, we do have some metrics to share with you today. You'll recall from Investor Day that we segmented our brands globally into growth brands, fuel for investment brands, and simplify brands. Our growth brands make up roughly 70% of our sales and 75% of total company profit. Our aspiration over time for this group of brands is to consistently grow near double digits. In the first quarter, after adjusting for divestitures, these brands grew 3% versus last year and 18% compared to two years ago in aggregate. Within the growth brands, we created two distinct segments, turbocharged brands and investment brands. The turbocharged group comprised of meat-free, non-dairy beverage and snack brands grew adjusted net sales 5% year-over-year and 20% versus two years ago. The targeted investment group comprised of our tea, baby, yogurt and personal care brands grew 0.4% versus last year and 15% versus two years ago. So in summary, our sales momentum is increasing and our top-line performance versus pre-pandemic is extremely strong on our growth brands. Let me switch topics here and spend a few minutes talking about inflation and the supply chain challenges impacting all companies, and then touch on the pricing and productivity improvements we are pursuing to offset them. When we finalized our plan and communicated our anticipated inflation costs, we expected mid-single-digit inflation in North America and low single-digit inflation in international. Since that time, crops have come in highly inflationary and transportation costs have continued to skyrocket, in each case more than we initially anticipated. As a result, we now expect additional $20 to $25 million in inflation to hit our P&L this year, and we fully intend to take additional pricing actions to offset it. We're covered 90% on commodities and packaging for the balance of the fiscal year. Our remaining exposure lies primarily in transportation and labor. which impacts both costs and supply. With regard to supply chain disruptions, as with every other company, we faced unprecedented challenges. The good news is we've made terrific progress since Q4 last year. Starting with inbound materials and co-manufactured products, we found backup or alternative sources of supply to ensure that we continue our service at very high levels. On our self-manufactured products, our factories are running well, and we've made terrific progress in the locations where we've had labor shortages, both here and in Europe. We've filled about two-thirds of the open positions that we had at the beginning of Q1, and importantly, are keeping up with elevated demand. On the distribution and warehousing side, we're currently fully staffed and have the capacity to keep up with increasing sales. Also impacting the entire industry, transportation remains our biggest challenge. The shortage of drivers here and abroad is well known, resulting in delayed receipt of inbound materials, inability to secure trucks, and many scheduled orders not being picked up on time. When this occurs, it impacts both service and costs. We continue to consolidate orders to reduce the number of trucks needed, and we're collaborating with customers to refine pickup and delivery windows to ensure we keep service levels high and to share costs. So you're probably wondering how these challenges are impacting our P&L. First, we're prioritizing service even when it requires increased costs because, one, in times of significant supply disruption, strong service leads to increased shelf space and merchandising opportunities. Two, additional sales growth will generate profit dollars to help offset the inflation. And three, it strengthens our customer relationships and positions us as a reliable go-to partner in the future, especially when many are struggling with their service levels. The second way we're managing the cost challenges is by taking significant pricing. In North America, we've taken list price increases on virtually every brand with the average increase of about 6% to 10%. Thus far, the elasticities have been very low, and we've seen minimal impact on volume. In Europe, our pricing will be effective in early Q2 and has already been accepted by most retailers. We expect similar low elasticity since virtually every company has announced plans to take pricing across their brands. With new unplanned inflation hitting our P&L, we expect to take additional price increases that will be effective in the second half of the fiscal year. Again, these increases will be across many brands and include multiple pricing levers. The third way we're managing cost challenges is via productivity. As discussed on Investor Day, we have hundreds of active projects being implemented with an expectation that we will achieve close to $50 million of productivity this fiscal year. Importantly, the productivity projects go beyond saving money by providing other benefits like reducing our need for additional labor in our factories, furthering our sustainability agenda, and simplifying our company. Looking forward, we expect to see accelerating sales momentum this fiscal year. We're confident because we are, one, we have gained significant distribution with more expected. Two, we've already secured sizable incremental merchandising events that we've discussed on previous earnings calls. Three, we're making strong progress on addressing the items that have had service challenges. And four, in line with our HANE 3.0 strategy, we're building capabilities and embedding changes to our processes to enable accelerated top-line growth. On the cost side, we'll continue surgical execution of pricing and productivity to offset the macro supply challenges I've mentioned. And we continue to leverage our nimble and scrappy culture to find creative solutions for disruptions in our supply chain. In summary, we're excited by our momentum and confident that we have the right brands and strategies to accelerate top-line growth from here and create a company that consistently delivers high growth on both the top and bottom line. With that said, let me now turn it over to Javier to provide more details on our Q1 performance and go-forward outlook.