The Hain Celestial Group, Inc.

Greetings and welcome to Haines Celestial's second quarter 2022 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 your host, Anna Kate Heller, Investor Relations. Thank you. You may begin.

Thank you. Good morning, and thanks for joining us on Haynes Celestial's second quarter of fiscal year 2022 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer, Chris Belairs, incoming Executive Vice President and Chief Financial Officer, and Javier Drogo on his final earnings call as Executive Vice President and Chief Financial Officer of Haynes. 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. 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 Haynes 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 archive of it will also be available on the website. And now I'd like to turn the call over to Mark Schiller.

Thank you, Anna Kate, and good morning. On today's call, I'll give some color on our Q2 performance and balance of your forecast, as well as progress against the Hain 3.0 strategy we laid out on Investor Day. Joining me today on the call are Javier Adrovo and Chris Belairs. I'd like to take this opportunity to thank Javier for his hard work, his contributions to Hain 2.0, and his assistance in smoothly transitioning all of his duties. I also want to welcome and introduce Chris who officially begins his role as CFO starting tomorrow. I'm very excited to have Chris joining our company and team. He brings a wealth of CPG experience, a deep operating background, and exceptional leadership skills. I look forward to partnering with him on our Hain 3.0 journey.

Let me briefly turn it over to Chris to say a few words. Thanks, Mark, and good morning, everyone.

This is my third week at Hain, and everything I've seen has confirmed the reasons I was so excited to join the company. Hain is a leading global health and wellness company, and we are exceptionally well-positioned with great brands and a very talented team. I'm looking forward to helping to lead the Hain 3.0 journey and continuing to grow shareholder value.

Thank you, Chris, and again, welcome to the team.

Let me start today's call by giving some color on our Q2 results. I'm pleased that we delivered top line performance at the high end of our original guidance and in line with our pre-earnings announcement in January. As I'll discuss in more detail, we're seeing strong consumption in our growth brands that is leading to accelerating top line growth for the company. With regard to profitability, our bottom line came in slightly below our original guidance driven by continued and well-publicized industry-wide supply chain and labor challenges. While the team is doing a great job with pricing and productivity to offset almost all of these additional costs, late in the quarter, we did experience some incremental unforeseen costs, which led to about a $3 million miss to our original adjusted EBITDA guidance. I'll discuss those more in a minute. Digging deeper on the top line, net sales were down 2% versus a year ago when adjusted for currency and acquisitions, divestitures, and discontinued brands. Compared with two years ago before the pandemic, adjusted net sales were up 7%. Our growth brands, which make up almost 70% of our total company sales, were up slightly in the quarter versus year ago and up 12.6% versus two years ago. I'm pleased to report that net sales in the United States, our biggest market, were strong and continue to show material sequential improvement. Adjusted for divestitures, net sales in the United States were up 3.7% versus last year, and 9.7% compared to the same quarter two years ago. And consumption last quarter for all U.S. brands and measured channels was up over 10% compared to last year and 16% versus two years ago. This is a testament to the success of Hain 2.0 and gives us further confidence in our Hain 3.0 plan. Our U.S. growth brands in snacks, tea, yogurt, baby, and personal care categories, which make up 85% of sales, had consumption growth of 14% versus last year and 22% versus two years ago. Household penetration on those growth brands was up again in Q2 on top of growth last year and up almost 10% versus two years ago. Snacks and baby food led the way with growth of more than 25% year over year. Celestial seasonings gained more than a full share point and delivered high single-digit growth in the quarter, overlapping significant growth from last year. I'm also encouraged to see consumption stabilize on Greek gods after significant supply chain challenges early in the quarter and solid consumption growth on Garden of Eden, driven by a product reformulation and some terrific work on price size architecture. Unit velocities on the growth brands in the U.S. were up mid-single digits, even with retail prices increasing more than 7% in the quarter, and average items per store also increased nicely despite supply chain challenges. So in summary, We're seeing tremendous momentum on the top line in the U.S., and that growth has accelerated thus far in Q3. In international, adjusted net sales came in below a year ago, as expected, driven by the overlap of customers stocking up last year in anticipation of Q3 Brexit disruptions and increased regulations on baby food imports in China. We expect both of those issues to continue into Q3, but have no long-term impact on our strategy and outlook. Relative to two years ago, our international net sales were up 8.5%. Within the quarter this year, we did deliver more than 20% growth and gained more than three share points in both baby and soup, and also grew share in meat-free, snacks, jelly, and marmalade. Importantly, we also saw velocities improve more than 10% on our entire UK business. With regard to company-wide adjusted EBITDA, we came in a bit below our original guidance for the quarter and first half. while there was certainly continued pressure on costs, I'm pleased to say that we were offsetting most of these. The small miss can be primarily attributed to two things, which both happened in the back half of the quarter, giving us limited time to respond. First, we experienced significant increased energy costs in Europe, where prices in the quarter accelerated to as much as 10 times what they were last year. Yes, you heard that correctly, 10 times. Imagine for a moment the impact on the economy if everyone's heating bill went from $200 a month last winter to $2,000 a month this winter. That's what we faced in Europe during the back half of Q2. Fortunately, while energy prices are still inflated, they have started to come down somewhat, and we have locked in energy contracts for the balance of the fiscal year, which are reflected in our revised go-forward guidance. Second, the emergence of the Omicron variant created additional global labor shortages and challenges throughout the supply chain, impacting both service and cost. The good news here is that we're seeing signs that Omicron appears to be peaking, which should result in some of the related short-term challenges abating later in the third quarter. Switching to margins, like the rest of the industry, we experienced continued high inflation and supply disruptions during the quarter. To offset these costs, we continue to aggressively drive productivity projects and have taken significant pricing in the first half of this fiscal year, both here and internationally. We were very surgical in our pricing decisions, analyzing many variables including price gaps and thresholds, brand velocities, consumer loyalty, and brand momentum. So far, as you've heard earlier, our pricing has been very effective and unit volume impact has been minimal. In both North America and international, we're in the process of taking additional pricing in the second half of the year and are in discussions with our customers as we speak. Those increases will all become effective over the next 90 days. In total, we will have taken more than $100 million of price increases this year. Shifting gears to our updated guidance, we continue to expect low single-digit net sales growth for the year, adjusted for currency, divestitures, acquisitions, and discontinued brands. That implies mid to high single-digit growth in the second half, driven by North America, where we have consumption momentum, expect continued distribution expansion, have secured several large merchandising programs, and have the benefit of additional pricing in market. On the margin front, we now estimate our total inflation to be around 10% for the entire company, versus a plan of about 5% to 6%. We also expect a total of about $40 to $50 million of additional out-of-plan costs this year related to the supply disruptions. These incremental costs emanate from a number of areas, including finding backup sources of supply and transportation on very short notice, air freighting materials, service-related fines, prolonged out-of-stocks and material shortages, and production disruptions. While we expect solid growth on the top line and strong pricing and productivity, Those gains are being offset by inflation and continued external industry-wide supply chain disruptions and labor challenges. While we anticipate that many of those costs will go away over time, we've lowered our EBITDA guidance for the year to reflect those realities. Javier will provide more details on our forecast in a few minutes. Elaborating further on our momentum and growth algorithm that we unveiled with Hayden 3.0, we're very encouraged by the strong momentum on consumption in the U.S. business. with our growth brands now up more than 16% in the most recent four weeks ending January 23rd and 31% versus two years ago. Our 3.0 strategy emphasized the importance of distribution expansion and innovation as key drivers of our top-line acceleration. We have momentum in both areas driven by strong brand velocities and new products that are attracting additional customers and consumers to our categories. We also talked about investing in marketing to drive awareness and household penetration across our growth brands. While short-term our investments have been more limited this year due to cost pressures, we plan to further invest to accelerate growth per our strategy next year. Also recall that our 3.0 strategy highlighted our intent to continue reshaping the portfolio. This includes making acquisitions in high-growth categories like snacks. As you know, we recently acquired the That's How We Roll company, which included the high-growth Palm Crisp brand. This gives us another highly incremental scaled snack business, which we expect will source volume from new competitors in categories like high protein bars and beef jerky. It also gives us access to additional segments in snacking, like SnackMix, where ParmCrisp recently launched innovation. And like the rest of our growth brands, we also have significant distribution expansion opportunities in new and existing channels and geographies. On the margin side, while the short-term profit contribution will be nominal as we invest in the brand, pursue additional pricing and productivity, and realize synergy. By next fiscal year, this should result in adjusted EBITDA margins in line with the company average, making this acquisition highly accretive on both the top and bottom line. So in summary, we're proud of how we're navigating a very challenging business environment and are encouraged by the strong top-line momentum we are achieving and are extremely excited about our HANE 3.0 strategy. And importantly, we remain on track to deliver it. With that, let me now turn it over to Javier to discuss our financials in more detail.

Good morning, everyone, and thank you very much, Mark. I also want to take this opportunity to thank the board and the rest of my Hain colleagues. It has been an exciting journey, and I wish the company continued success. Now turning to the financials, let me highlight a few key aspects of our second quarter results to demonstrate strong execution of our transformation plan and the building of a solid growth platform as we move into Hain's 3.0 journey. First, we delivered top line sales results at the high end of our original guidance and demonstrated resilience in a challenging operating environment. Second, despite the supply chain challenges and highly inflationary environment impacting the entire industry, our overall adjusted EBITDA margin improved versus the prior year and our international business deliver another quarter of adjusted EBITDA growth. Third, our balance sheet remains strong with good capital allocation flexibility. And finally, we believe that we are well positioned to deliver on our updated four-year guidance as well as the new long-term algorithm we laid out during our Investor Day presentation last September. I will start with a discussion of our top-line results, and then I will drill into each of these aspects. As we overlap last year's COVID demand surge and a Brexit related demand pull forward, second quarter consolidated net sales decreased 10% year over year to $477 million. Foreign exchange impact on the second quarter net sales was minimal, while divestitures and brand discontinuations reduced net sales by close to 8% compared to the prior year period. When adjusting for these two factors, net sales for the quarter were down 2% versus the prior year quarter. This translates to a first half sales decrease of about 1%, which is at the high end of the previously provided first half guidance of a low single digit percentage decrease. The adjusted net sales decline was mainly driven by planned lower sales in international, partially offset by higher sales in the US. During the quarter, we experienced higher than planned inflation and continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability, and other freight cost issues that we incurred to prioritize customer service, resulting in a small reduction in adjusted gross margin of about 70 basis points. The supply chain challenges also impacted our international operations with the added headwind of higher than expected energy costs that we are now forecasting to remain throughout the rest of fiscal year 22. Despite these headwinds, we were still able to deliver adjusted gross margin expansion in our international segment of about 280 basis points when compared to Q2 fiscal year 21. Total SG&A, including marketing, came in at 15% of net sales for the quarter, lower than the prior year period by about 100 basis points. The favorability was mostly driven by lower labor-related costs across all regions, including our corporate segment, and lower sales broker fees. Marketing expenditure as a percent of net sales was reduced by about 40 basis points versus the prior year period, largely North America, where we reduced spending on brands facing supply disruptions. While second quarter adjusted EBITDA decreased 5% versus a year ago to $59.3 million, Adjusted EBITDA margin increased by 66 basis points year-over-year to 12.4%, primarily driven by the previously mentioned reduction in SG&A costs. Our adjusted second quarter EPS of 36 cents increased compared to 34 cents in the prior year period. We benefited from an adjusted tax rate of 19% compared to 24% in the prior year period, mostly driven by deductions related to stock-based compensation from PSU investing. Now, let me provide some detail on the individual reporting segment, starting with our North American business, where we continue to face the industry-wide supply chain issues we have discussed before, but are seeing continued momentum in consumption. On the top line, reported net sales for the second quarter decreased about 3% year-over-year to $275 million. However, after adjusting for foreign exchange movements, acquisitions, and divestitures, net sales increased about 1% versus the prior year period. The impact of the that's how we roll acquisition for the quarter was less than 20 basis points of net sales growth versus the prior year period given the transaction closing date of December 28. The turbocharged category delivered close to 20% net sales growth versus the prior year period and 23% growth versus Q2 fiscal year 20 driven by the strong performance of our snacks business. In the targeted investment category, our tea and yogurt products delivered close to 10% growth versus the pre-pandemic Q2 period two years ago, with our baby food products contributing to growth versus the prior year. From a profitability perspective, adjusted gross margin for our North American business decreased by 380 basis points versus the prior year period to 24.7%. However, this represented a sequential improvement of about 240 basis points versus the prior quarter. While the industry-wide supply chain challenges impacted the profitability of the quarter, our pricing actions and productivity initiatives contributed to a sequential improvement in margins. Adjusted EBITDA in Q2 decreased 16% to $33 million from the prior year period. Adjusted EBITDA margin of 12.1% represented a decrease of about 190 basis points versus the prior year period, but a sequential improvement of about 300 basis points versus Q1 fiscal year 22. Now let me shift to our international business. Net sales for the second quarter versus the prior year period decreased 18% on a reported basis. After adjusting for currency movements and divestitures, net sales for the quarter were down about 6% versus the prior year period, driven by softness in our baby food exports to China and the lapping of the Brexit-related volume pull forward in Q2 of fiscal year 21. Compared to Q2 fiscal year 20, adjusted net sales growth increased around 9%. The growth during Q2 of fiscal year 22 versus two years ago was driven by the performance of our growth brands, which in aggregate delivered constant currency growth of close to 18%. From a profitability standpoint, adjusted gross margin for our international business increased by about 280 basis points, driven by the divestiture of the food business and the impact of our productivity initiatives, partially offset by higher than expected energy costs. We grew adjusted EBITDA by close to 7% versus the prior year period, and adjusted EBITDA margin improved by 390 basis points to 17%, driven by higher gross margins and lower SG&A expenses from lower labor-related costs and third-party expenses. Shifting to cash flow and the balance sheet, operating cash flow was $30 million for Q2 and $68 million for the first half of the year. While first half operating cash flows were lower than the prior year first half, the company benefited from a tax refund claim under the CARES Act during the first half of fiscal year 21. Capital spending for the second quarter was $10.2 million, or 2.1% of net sales, which reflected lower spending than expected given supply chain challenges and labor availability. For the full year, we expect capital spending to be between 3 and 3.5% of net sales. Cash on hand at the end of the quarter was $77 million, while net debt stood at $662 million. Net debt leverage, as now calculated under amended credit agreement, was 2.7 times. Our balance sheet remains strong, and as a result, we have significant flexibility to both reinvest in the business and return value to shareholders. Consistent with our capital allocation principles, during the quarter, we repurchased 2 million shares, or 2.1% of the outstanding common stock, at an average price of $44.31 per share for a total of approximately $90 million, excluding commissions, leaving us with about $117 million of additional repurchase authorization remaining under our 2021 program at the end of the second quarter. The company also announced today that its board of directors has approved an additional $200 million share repurchase authorization. Share repurchases under this authorization will commence after the company's existing authorization is fully utilized. Now turning to our outlook, we are reaffirming our full year net sales guidance and lowering our profit guidance a bit for fiscal year 2022. Compared to fiscal year 2021, we expect low single digit adjusted net sales growth with the as reported net sales growth lower than the adjusted net sales growth by about 200 basis points from divestitures and acquisitions and 40 basis points from currency. Modest adjusted gross margin reduction and approximately flat adjusted EBITDA growth. Let me give you some color in our updated guidance. We expect our second half to deliver adjusted top-line growth versus prior year in the mid to high single-digit range, driven largely by the performance of our North America business. Mark explained the reasons for our optimism earlier in the call. Given the highly inflationary environment that we are operating under, we have updated our adjusted gross margin and adjusted EBITDA guidance for the full year, Specifically, energy cost increases in international and actions that the company continues to take to overcome supply chain challenges have added additional costs to our P&L and are expected to continue for the rest of the fiscal year. Given our pricing actions and productivity initiatives, along with the expectation that these extraordinary challenges will eventually reverse, we remain confident in achieving our HADE 3.0 profitability targets. For additional context to our financial performance in the second half of the year, the company expects sequential improvement to its adjusted EBITDA growth performance throughout the quarters of fiscal year 22, with Q4 of fiscal year 22 anticipated to deliver the highest adjusted EBITDA growth versus the prior year quarter, given the full implementation of all pricing activity by that time, and a prior year fourth quarter that was already impacted by the supply chain challenges that have continued throughout this year. In summary, we were able to deliver our second quarter results in an exceptionally challenging operating environment while making progress on our long-term initiatives. Kane has strong momentum and is well positioned to deliver against its Kane 3.0 aspirations. I will now turn the call back to Mark.

Let me end by thanking our thousands of employees around the world who have worked exceptionally hard in a very challenging environment. Their can-do attitude, scrappiness, and teamwork have helped us to deliver solid performance throughout the pandemic, and their dedication and resilience will continue to serve us well as we work toward making our HANE 3.0 vision a reality. With that said, we'll now take your questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. Our first question comes from the line of Anori Naughton with JP Morgan. Please proceed with your question.

Hi, good morning. Good morning. Thank you for the question. I wanted to ask about your guidance for EBITDA growth. a pretty significant ramp in the back half, and thank you for providing that cadence update for the fourth quarter. That's helpful. But it would be helpful for us to understand a little bit more about what are the assumptions you're making that give you enough confidence that this new guidance is conservative enough for today's volatile environment?

Yeah, thank you for the question. You know, we have been obviously on this journey for quite some time. We have productivity that's coming to fruition in the second half. We have volume acceleration that we are expecting in the second half that will drive some of that EBITDA. We have more pricing coming in the second half that will also improve the margins because, again, the inflation is hitting before the pricing catches up. And we expect some mixed improvements in the second half as well. So I think you put all that together, and we're confident that we will have a significant improvement in our EBITDA. And remember, last year we also had a challenging fourth quarter, which we get to overlap this year, which will also be helpful in terms of driving that EBITDA growth.

Mark, if I may, I would also like to add that we have quite strong visibility to our EBITDA cost of goods going forward for the second half. So we are probably more than having more than 90% visibility for the spending. So we feel pretty good about the cost forecast that we have embedded in the second half as well.

Great. That's super helpful. And then can you just update us on, you know, I think in the second quarter you were expected to do some inventory reload and customers in the U.S. Can you just update us on where you stand and what's embedded in your assumptions for the back half?

Yeah, so our inventories are relatively strong across most of our brands, but we have had some supply disruptions related to the industry-wide issues that everybody is familiar with. And so there are a couple of brands or segments within brands where we still have some gap in terms of our inventory levels at customers versus what they've been historically. We expect that we will make some improvement on that in the second half, just as we did on the first half, but we haven't assumed that those issues completely go away. So again, I think we're taking a balanced approach in terms of what we have visibility to and what we have in place to help us kind of fill the pipeline on those places where we have challenges.

Great, thank you.

Our next question comes from the line of Michael Lavery with Kuiper Sandler. Please proceed with your question.

Good morning. Thank you. Good morning.

I just wanted to touch on the EU energy piece. It obviously sounds like a very significant, huge move and obviously a big enough cost to matter. But it sounds like you've locked that in. Can you just clarify, does that mean that it can't get worse or better? Or is it options where if the cost picture improves, you might potentially have some upside to your numbers?

No, it's pretty much locked in. So we have visibility and clarity around what that will be. It's significantly inflationary versus a year ago and versus our original plan and even the first quarter earnings. It's added about $10 million of cost. some of which happened in Q2 and the rest of which will happen in the second half of the year. And that, you know, at the risk of completely oversimplifying, that explains completely the change in our EBITDA guidance. It's highly inflationary. Like I said, it was up as much as 10 times what it was a year ago. And it's now come down a bit. We locked in. And while it's, again, probably 70% inflationary for us year over year, at least we have visibility and certainty to it at this point.

Okay, great. That's helpful. And just another one on pricing. You said you're in discussions with some customers. Can you characterize the nature of that? I guess it just feels like pricing has become almost automatic in this environment. Is there any real resistance or pushback, or is it more just sort of negotiating orders of magnitude and some tweaks around the edges. Can you just give a sense of what the dialogue there is like?

Yeah, I think there's a – so it's a little bit different in the U.S. versus the rest of the world, so let me take those separately. In the U.S., there's certainly general recognition around the inflation because everyone's feeling it, including customers with their labor challenges and their supply chain challenges. And so I think there's a general recognition that pricing is needed Every company is taking it, and those conversations are going very well. It's always a negotiation because, again, they control the shelf space, and often there's a gift for the get. But as we saw in the first half where we largely got our pricing through as expected, we anticipate that will happen here as well. International is a little bit of a different story on a couple of fronts. Number one, We have a much more significant private label business, particularly in Europe, where you have contracts, and it's very difficult to change pricing when you have contracts. So those are going to be much more challenging conversations. And the retailers are just much more resistant to pricing there and can be more punitive. Now, we got it in in the first half. We had some impact from that. We lost distribution in a couple of categories. as a result of that pricing action, but we did get the pricing in. And as we are having conversations now for the second half of the year, again, there's a general recognition that that pricing needs to happen. It's just a question of what's the give for the get that we continue to negotiate. But I do expect the pricing will all get in before the end of the day.

Really helpful. Thanks so much.

Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.

Good morning. Thanks for the question. Good morning, John. Maybe first off, just in terms of the outlook, obviously the supply chain environment has been tough to forecast here, as we can see. But if we think about the reiteration of net sales for F-22, can you just walk through the visibility and confidence into that target? I mean, to what extent do you see risk, whether from COVID, following Omicron or supply chain, that your shelf resets don't materialize or the innovation doesn't launch? How do you think about that for the next six months or so?

Yeah, so for North America, for the U.S. in particular, the confidence is very high. We've got consumption momentum. We've got distribution momentum. We're getting significant pricing in place and seeing our unit volume growing at the same time. We have some big merchandising programs that have been secured that we've talked about on previous calls. And so we will see a material acceleration in North America driven by the U.S. business. In international, what's interesting in international right now is in the U.K., entire grocery store sales are down versus a year ago, the entire store. So some of our categories are down. And, you know, while we're gaining share in those categories, our expectation is as we lap the The lockdown period from a year ago where everybody was in their home and now as they've opened up the country and people are going back to work, we've lost some of the occasions that were in-house. So the lunch occasion and the kids being home from school and the lack of travel. So it's affecting the entire store there. But again, we think that will be short-lived. And as we get through the end of the third quarter, we expect that that will mitigate and that we will continue to see growth because our brands are gaining share. Our brands are seeing double-digit velocity growth. And so we have confidence in the fact that as long as the entire kind of store environment normalizes, that our share and our volume will come with it.

Okay, great. And just to touch on the Palm Crisps acquisition, that sort of gets you into the deli part of the store, which is a newer area for Hain. So can you, Mark, can you speak to your plans for these two brands here? How do you think about the distribution opportunities? Any ideas for innovation? What and how do you see the brand contributing to the Snacks business going forward? And then also, what is your assumption for the EBITDA contribution from that business for the duration of this year? Thank you.

Yeah, so starting with the second part of the question, the EBITDA contribution for the second half is going to be pretty nominal because they haven't taken pricing yet to offset all of these costs. They were going through a process and didn't want to take pricing in the middle of that process. So we're going to need to get that pricing in place. Obviously, we just bought the business, and so you don't want your first conversation with the retailer to be, you know, we're taking a price increase. But we will get that through the second half of the year, and we'll also – we have some significant synergy projects and productivity projects that we think will get this business to be kind of EBITDA average as we get to the F23 plan. But it will contribute nominally in the second half of the year. On the top line, we're very excited about the Palmcrest business. It is very high growth. It's got huge distribution opportunities. It's got a lot of momentum. You know, the household penetration is up 33% versus a year ago. The distribution is up. We've got innovation. that gets us into new segments. They just launched the snack mix, which is one of the segments we identified in the Hazen 3.0 strategy that we wanted to look at. They're already in it, and they're off to a great start with that. There's also, because these are really cheese-based snacks, they also have other opportunities in food service with this product as a salad topper or a replacement for croutons. And they have additional innovation ideas that I'm not going to go into on this call because I don't want to tip my hand competitively too early. But there's some pretty significant innovation opportunities that will drive growth as well. So when you think about our 3.0 journey and the things that we said we're going to drive at distribution and innovation are really core to our strategy going forward. And those are exactly where the opportunities are for palm crisps, And given we have a much bigger footprint in terms of customer relationships across the board and resources calling on customers, we think we can help them with that distribution expansion. Parmcris, I'll just add, is a terrific kind of differentiated snack because it's very high protein and very low carb. So versus... Other high-protein snacks like bars and beef jerky, as an example, it has much lower sugar and much lower carbs, but the same amount or even higher protein. And versus other savory snacks, if you will, it's much higher in protein. So it's meeting a consumer need that isn't met. And, again, we think that bodes very well for this kind of nascent category to become much bigger over time. On finsters, which was part of the acquisition but not really the thrust, of our purchase. It's a terrific little brand. It's much smaller, most of the volumes in Palm Crisp, but it's well positioned in cookies with no palm oils, no high fructose corn syrup, non-GMO. And so we're going to manage that more likely with our fuel brands as opposed to our growth brands. But Palm Crisp is really where we see the upside. We're putting most of our resources and attention.

Great. Thanks, Mark. Appreciate it. Yep.

Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Thanks. Yeah, it's just, you know, obviously we're all dealing with inflation. And, Mark, I know you've been able to push across price increases. What's your expectation, and you've been able to take them going forward, is this a wee – hitting sort of the peak of that? Are you getting any pushback at this point? And then in terms of your supply chain costs, you know, they continue to be an issue. Do you see at this point a time where you think they're going to start to abate or at least level out?

Yeah, so on pricing, we have done a very good job of kind of offsetting our costs with pricing, but there are other pricing levers that we haven't fully utilize yet. So most of our pricing at this point has been list price increases. But we certainly are looking at trade spending, both depth and frequency of promotion. And we're also looking at waitouts, right? Because if you can keep the list price the same and take a few ounces out, that's another way to get pricing in. And then certainly as we're encouraging customers to fill up trucks, that's also a way for us to get some of the costs out of the middle of the P&L that could also be beneficial on the cost side. So I think there is more pricing opportunity, but it's going to come in different ways. And on the supply chain side, as I've said on previous calls, the things that we control, we're doing a really good job with. So the output in our factories, the distribution and warehousing is fully staffed. We've got inventory. We're able to ship It's the things that we don't control in the supply chain, which is where we're having most of the challenges. Inbound ingredients. There's things, for example, like a worldwide shortage on pouches right now, which impacts both our baby food business in Europe as well as the United States. There just aren't any pouches. And that's because there's labor shortages and there's an inability to keep up with demand globally, which is affecting everyone. So those are the things that Those kinds of things, trucks not showing up to pick up orders and ship them to customers, which require us to find something on short notice at a very premium price to make sure we can clear our docks and get the product out the door. Those are the things that are driving our costs. I think a lot of it is driven by labor shortages throughout the supply chain, not our labor shortages, but global labor shortages. And I think that as those abate, we will see things normalized. But right now, all we can do is find backup sources of supply and continue to react to kind of the challenges that we've been facing. The good news is as we get to the fourth quarter, we start to lap this that started really fourth quarter of last year. So we have one more quarter of kind of elevated costs. They've been relatively stable in terms of their elevation since fourth quarter of last year. So I think as we start to lap this, it will be less of a conversation about the incrementality of those costs. And hopefully, as ingredient costs come down and some of these things normalize, we'll start to see some of the costs abate as we get into the fourth quarter and into next year.

Okay, and just a quick follow-up today. Is there anything else that you could do at Hain, whether it's investments in infrastructure or, Shipping, you know, I know you outsource that, but is there anything that doesn't require too much of a capital expense that could help alleviate some of these concerns? Or basically at this point, with only one more quarter of elevated costs, you think you can ride this out and everything should somewhat normalize, like you said, starting maybe your fiscal fourth quarter?

Yeah, so we're certainly not resting on a laurel. So even though our hope is that things kind of stabilize, we are aggressively automating in our plants, trying to take out the need to sell all these open jobs because, again, it's good for the cost and it also alleviates some of the labor disruption. We're increasing our inventory levels on things where we've had issues with regard to service and supply. So we're doing things to try and mitigate and protect ourselves from further disruptions. But it's hard to predict disruptions that go on in somebody else's factory or in terms of crops. And so we're reacting quickly to the things that we can't see and we're responding internally with things that we can do to kind of mitigate some of the challenges that we've seen. And so as those come to fruition, we would expect that, again, our costs will come down a bit as that productivity continues to hit the marketplace and we can alleviate some of the bottlenecks.

Excellent. Thanks for that update.

Our next question comes from the line of Alexia Howard with Berenstein. Please proceed with your question.

Good morning, everyone.

Good morning, Alexia.

Okay, so can I first of all focus on the sales side? You saw 1% growth in North America, but the measured channel growth was very strong this quarter. Where was the shortfall? Because it must have been, I guess, outside of measured channels. And then in Europe, the negative growth that you saw this time, are you expecting that to improve going forward once we've lapped the stocking up that happened around Brexit and the China baby food phenomenon?

Yeah, so the gap between shipments and consumption in North America is really driven by a couple of things. Number one, there is channel shifting going on. Remember last year that we had massive growth in e-commerce as an example, and while it's still up 70% on a two-year basis, it's been negative in the short run. Now, the good news is our second quarter trends in e-commerce were better than our first quarter trends, and it again, seems to be moving back toward flat, but it has been a headwind that is part of the difference. The second is part of North America is Canada. And in Canada, we are still overlapping. We've now completed it, but we were overlapping the sanitizer success from previous years. And there is a slowdown in the plant-based business that's been well publicized that one of our biggest brands in Canada that's also got some some short-term headwinds so between that and again a little bit of gap on some of the supply on a couple of the brands that's really the difference between the shipments versus consumption in Europe I would expect as the store normalizes that our sales will normalize but as I said the entire grocery store is down and and again, it's driven by the overlapping of complete lockdowns. Last year, remember, they had much more severe lockdowns for a prolonged period of time versus what we've experienced here in the U.S. People were not allowed to go to work for a long period of time, and those occasions have now left and gone out of the house as people go back to work in the office, and they've made the decision that Omicron is while people are still getting sick, that the hospitalizations and the deaths are much, much lower than they were previously, and they're going for herd immunity, which means that people have gone back to a more normalized life and a very significant number of eating occasions have left the grocery store. Again, that kind of laps at the end of Q3. um where they started to exit last year but last year last year we had brexit and we had the lockdown which led to kind of significant in-home consumption acceleration so we just have to lap that for another quarter great i really appreciate it um javier all the best with the new role and uh and welcome to chris and i'll pass it on thank you our next question comes from the line of david palmer with evicor isi please proceed with your question

Thanks. Good morning. I'm just thinking about gross margins in light of not just input costs and pricing timing, but also what will be viewed as transitory COVID costs. And I just wanted to check in with you about your long-term targets. Do you still think that longer-term gross margins around 30% could be achieved from the mid-20s, And as you're thinking about this year and maybe just the COVID era, how much transitory friction is there in total as we can think about, God willing, we'll get past these things. And in fiscal 23, for example, we'll start perhaps having the pricing stick and some of these COVID era friction costs go away. So I'd be curious about your commentary on all that.

Yeah, so remember that the Hain 3.0 strategy was a 2025 destination, and so we've got lots of time to get there. I think what's encouraging is our top-line momentum, particularly in the United States, has accelerated dramatically in terms of consumption, which I think votes very well for that journey. As I said in the prepared remarks, we've had about 10% Inflation plus another $40 to $50 million of what I would call these transitory costs. And we've got about $100 million of pricing and about $50 million of productivity to offset those things. And so that's why you've seen our gross margins, while down slightly, they've been pretty solid relative to the rest of the industry. I do expect over time that these costs will go down. I don't expect that we're going to continue to see double-digit inflation. And I do expect that this pricing will stick because we're seeing unit growth on top of the pricing, which, again, is very encouraging to us that, you know, when we originally planned, we had assumed that there would be some volume fall off. And we're not seeing that. In fact, we're seeing volume accelerating. So I think we expect over time these costs will come down. And as that happens, obviously, our margins will go up, assuming we can hold on to all this pricing. And we still have productivity that is planned out for several years. So I'm optimistic that we will get there, but we're in a very volatile environment right now, and we need to see some relief on some of these things in order to see those margins go back up.

I'm sure it's tough to disentangle what pricing is covering in terms of transitory versus non-transitory. Do you feel like really you're pricing for – everything but the transitory costs, and because if you're pricing for transitory plus traditional input costs, then you would obviously have a situation where you would be ahead of plan after these transitory costs go away. I mean, how should we think about how you're pricing for your costs?

Yeah, so our model has been, and our model for 3.0 is we're going to price to cover inflation, and then we're going to use the productivity to reinvest in our brands and accelerate the bottom line. short term we've priced to cover inflation uh and the productivity is being used to cover these transitory costs so we're not investing as much in marketing or taking as much to the bottom line because of all these transitory costs so uh as as again i over the next several years as we get into this 3.0 journey i expect we'll continue to price to cover inflation um and so that productivity becomes our opportunity to significantly increase the EBITDA growth, but short-term, these transitory costs have sucked up that productivity.

That's helpful. Thank you.

Our next question comes from the line of Eric Larson with Seaport Research. Please proceed with your question.

Yeah. Thank you, everybody. And, Javier, good, you know, congratulations and good luck to you and welcome aboard, Chris. So, two quick questions. If you look at where consensus estimates are right now for EBITDA for fiscal 22, it's at $268 million. And so you're guiding this year to sort of flat versus last year. That's $258 million. So if you kind of just, you know, kind of wash out all of the puts and takes going on here, it seems like the entire adjustment to your EBITDA guidance for this year is the incremental $10 million of energy costs in Europe. Is that a fair way to kind of, you know, wash this all down to something that we can, you know, better understand?

Yeah, it's a little bit of an oversimplification, as I said, but at its core, that is what's driving the decline. We do have incremental costs, but we do have incremental pricing. We have incremental productivity that's covering some of the transitory costs. So there's There's a lot of puts and takes in this environment, but at its simplest level, yeah, we've got 10 million more of costs, and we're taking the guidance down 10 million. So that can explain it at 30,000 feet. But I certainly would tell you underneath the water, there's a lot more puts and takes in there. There's some things that have been negative surprises, and there's some things that have been positive surprises. But it all walks us out to basically about a $10 million change.

Yeah, there's a lot of moving parts. I'm just trying to, again, simplify it to the best that we can to see where the real incremental change was. So the second question is, you've got $100 million of pricing already taken this year. So just use a simple $2 billion revenue base. That's 5%. It seems that the price increases by other packaged goods companies are actually higher than that. Are you trying to maintain as much price competitiveness and use some of your great productivity opportunities to maybe try to be more price competitive going forward through this? Or, again, is that an oversimplification of how I'm looking at this?

Well, so we look at pricing as a percentage of our cost, not as a percentage of our revenue. So as a percentage of our cost, it's significantly higher than the 5% that you said. Okay. And if you look at the retail data, you'd see that our most recent 12 weeks, we're up about 7%. And that's before we take the second round of pricing. So I would expect at the end of the day, you'll see about 10% increase in pricing at retail. And we do analyze this by segment, by category in great detail to make sure that our price gaps aren't getting any wider, to make sure that our velocities aren't dropping. And like I said, in some cases, it's been way better than we thought, where we're actually picking up units and velocity despite a significant increase. Baby would be a good example of that, where we've taken double-digit increases and our velocities have picked up dramatically. And then there's other cases where, you know what, we took pricing and our competitors haven't taken yet, and we're seeing some velocity fall off, so we have to make adjustments. And that's what I meant before by my puts and takes comment. It's not all going exactly as planned, but on balance it's going as planned. But you're going to see about 10% retail pricing at the end of the day. Got it.

Okay, thanks. One more real quick question. If you liked your stock price at an average price of $44 in the second quarter, I would assume you like it a lot at 36. Is that a fair observation?

Yeah, I'm not going to divulge what our internal strategy is relative to, you know, at what price we consider the stock to be. But it's a fair conclusion to say that if we like the stock in the mid-40s, we certainly like it in the mid-30s.

Thank you, everybody. Appreciate it.

Our next question comes from the line of Rebecca Schuerman with Morningstar. Please proceed with your question.

Good morning, and thank you for the question. So, you know, I think I'd like to start with if you could kind of provide a little update on the staffing levels. You might have mentioned that you're fully staffed, but that could have just been in the warehouse. I believe last quarter you said the warehouse had returned to full staffing, but there were still some shortages in the manufacturing plants. If you could provide a little update there and also give me a picture of what it's like at your retail customers and if shortages there are impairing your ability to launch new products.

Yeah, so within our factories, with the exception of one plant that has been kind of a perpetual challenge for us since last spring, we're pretty fully staffed. And our turnover is very low. And so we feel great about that. We do have one plant, and I've said it previously, we did a consolidation of two different snack plants into one right before the labor challenges hit. And it's a very competitive marketplace where wages have gone up considerably. And while we are getting much more output out of that plant than we were six months ago, for sure, we still do have some labor challenges in that one plant. In Europe, we don't have labor challenges. We have COVID challenges with high absenteeism. As they've moved everybody back to work, we're seeing increased cases of COVID. And therefore, we have, again, short-term challenges. Some people are going out for five days and coming back, and that's disrupting production a little bit, but we don't expect that to be a long-term issue. With regard to retailers and even suppliers, they are seeing labor challenges just as the rest of the world is seeing labor challenges, whether that's in our industry or other industries, and that's where the disruptions come in. It can be that a customer is supposed to come and pick up an order and their truck doesn't show up because they couldn't get a driver. It could be an ingredient that doesn't arrive on time because they're having challenges. It could be a co-man who has 10 customers and has to take the volume that they have and split it among 10 people, even though their output may not be at the level that it was previously. So as I said before, internally, I think we've got good control of our labor. Externally, those are the things that are driving these transitory cost increases that we're facing. And we're doing the best we can to offset them, finding backup sources of supply, air freighting materials, finding a truck to pick up the order if a customer wasn't able to get a truck. Again, all those things come with extra cost. And that's that $40 million to $50 million that I said in my prepared remarks. And so far, we're doing a really good job because our service levels are above average for the industry. And we know that because, again, customers are giving us more distribution and They're offering us merchandising programs that other people have dropped out of, and they wouldn't be doing that if our service levels weren't good. So while it's adding cost, we're doing a pretty good job of keeping the customer service at the end of the day, and that's the priority because for us to be a growth company, we have to be a reliable supplier. And short-term, we may have to eat those costs and find productivity to offset it.

Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

Hey, guys. Thanks for taking my question. So you said earlier about Europe that people have gotten back more to normal, eating out more. So the thought process, and we get this from our clients, is as we get to the second half of calendar 22 and things cycle, the price increases cycle, and then maybe we're seeing some volume hiccups. How do you think the business performs through that vis-a-vis yourself, but also maybe competition if we start to see a ramp up in promotions and maybe even retailers asking for price decreases?

We're going to obviously watch the consumer, right? If the consumer is willing to accept the increases, then we're going to keep the increases in there. If the consumer is trading down or we see that competitors are lowering their prices, we're going to have to be responsive to that. But I do expect, as you just pointed out, that things will normalize as we start to lap people going back to work. And it was a very, you know, unlike here where some people are working at home, I think I saw a study recently, 38% of people are back to the office 100% of the time, another 35% are kind of half in, half out, and another 30 or so percent are home. It's a little bit of a mixed bag here. There they kind of swung the pendulum all the way to the left and then swung it all the way to the right. So we are overlapping complete lockdowns for a period of time that are driving occasions out of the home. As that normalizes and we lap that, I do expect that volume will normalize within the grocery store. And I do expect that in double-digit inflation, everybody is working to get that inflation down. And as that materializes, we'll just have to watch the marketplace in terms of what does that do to retail prices and consumer behavior. And we will certainly lead in categories where we are share leaders, and we'll follow in categories where we may not be the leader. But we've got a very robust kind of pricing team both here and in Europe that are watching these things exceptionally closely. And you see it so far in the data that we've done a really good job of responding to people that haven't moved when we have or people who have moved more or less than we have. And we're watching the promotional environment just as closely to see where prices are going down. We've got to stay within certain gaps of people so that our consumers don't trade to other brands. So we're on it. We're watching it. But yes, I would expect these things are going to normalize as we get into F23, certainly better than some of the challenges we've been having now, because we're going to be overlapping those challenges pretty soon.

That is all the time we have for questions. I'd like to hand the call back over to Mr. Schiller for closing remarks.

I thank you guys for all your interest today. Obviously, it's a very challenging environment, as you've heard from everyone. I'm incredibly encouraged by the top-line momentum that we're seeing today. in consumption in the United States. That has been one of the proof points that's been missing in our Hain 2.0 journey. We said that was to set up top-line growth in 3.0, and the fact that it's accelerating, we're very excited about. So I look forward to the one-on-one calls later today, and again, thank you all for your interest.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.