The Hain Celestial Group, Inc.

And welcome to Hein Celestial Third 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. I would now like to turn the conference over to your host, Anna-Kate Heller, investor relations. Thank you, and over to you. Thank you.

Good morning, and thanks for joining us on Haynes Celestial's third quarter fiscal year 2022 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer, and Chris Villers, Executive Vice President and Chief Financial Officer. During the course of this call, management may make forward-looking statements within the meetings of 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 Hayne 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 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, Chris and I will give you some color on the Q3 performance, our Q4 outlook, and what we're doing to enable the Hain 3.0 strategy that we discussed on Investor Day last September. Q3 was a very challenging quarter as additional unexpected inflation, supply disruptions, ingredient and package shortages and eroding European consumer confidence, primarily caused by the Russia-Ukraine conflict, had a significant impact on our business and financial performance. While these disruptions led to softer than anticipated results in the quarter, strong consumption and market share gains leave us confident in the underlying business health and long-term trajectory. Let me explain why we feel this way. First, consumption and sales in North America are exceptionally strong, and we expect that momentum to continue into Q4. In fact, while I don't have a complete archive of the company's reported earnings history, we do know that this quarter was the highest net sales growth quarter in North America in the last seven years. In a moment, I'll share with you some impressive details behind these sales and what that means for our future growth. Second, while our top line was soft and international, most of the revenue issues within the quarter were driven by short-term factors that we believe will improve in Q4. Although we expect short-term inflation and consumer confidence challenges to continue internationally, it's worth noting that we have nine number one and two-share brands that are well-positioned for growth as conditions normalize. Third, since we don't know when the inflationary pressures we are all facing will ameliorate, we do expect it to continue and are taking actions to reduce our ongoing cost basis while passing on significant additional pricing. To date, we've taken two rounds of pricing, both here and in Europe, and thus far, we've seen only a marginal impact on our unit growth. Our primary priority has been and will be to continue servicing our customers, even if this impacts short-term profit, to allow us to further build consumer trial and loyalty, as well as strengthen customer relationships. Despite industry-wide supply challenges, we're maintaining service levels in the 90% range, which is exceeding most of our competitors' and allowing us to take share. This was and is a conscious decision and one that we are confident strengthens Hain for sustainable long-term profitable growth. Digging into the reporting segments, in North America, we saw strong momentum on the top line with consumption in the U.S. up 11% in the quarter, well above the industry average of less than 5% for branded food. Sales in the quarter grew 13% overall. Excluding acquisitions and divestitures, our sales were up a very strong 9%. So recall that on Investor Day, we identified six categories we're focusing on for growth, plant-based, snacks, tea, baby, yogurt, and personal care. Our growth brands in these categories, which make up about 80% of our volume and profit, delivered dollar consumption growth of almost 16% versus a year ago, more than double the rate of their respective categories. Compared to pre-pandemic, consumption on these growth brands is up 23%, with velocities up 20%, underscoring the strength of the brands and its relevance. In aggregate, our growth brands led by snacks, baby, and tea gained share again this quarter. And in fact, we've grown aggregate market share of these growth brands every single four-week period for more than a year. Household penetration on these brands also grew 10% in the quarter, a very important metric given the size of our brands. The growth brands also delivered strong unit velocity growth of 6% compared to a 4% decline in unit velocity for all food companies. More impressive, unit growth was up 4% while average food companies declined 4%, and that strong Hain unit growth was delivered with double-digit pricing versus a year ago, indicating that we're gaining users and loyalty. In fact, we increased our buyers 11% compared to less than 1% increase in our categories. And our heaviest buyers who purchased more than three times a year grew 14% in the past quarter. Category and brand level, snacks and baby were particularly strong this past quarter. Our snacks portfolio share grew 1.3 points with consumption up over 25% on a one-year basis and almost 40% versus pre-pandemic levels. Household penetration was up 17% versus last year and 40% compared to pre-pandemic levels. Sensible Portions, which is the company's biggest brand, has grown household penetration 23% versus a year ago and 70% since the beginning of the pandemic. Our Earth's Best Baby Food brand was also particularly strong with consumption up 35% and household penetration up 17% versus the same quarter last year. Dollar market share grew 1.9 points and unit consumption was up double digits, while pricing was also up double digits. For personal care, total channel consumption inclusive of club and e-commerce was up 25% in the quarter, and total PC net sales in the quarter were up double digits, driven by strong programs in club on ALBA, hair, and sun products. Both these club initiatives will continue into Q4. Garden of Eden and Terra, which struggled with supply challenges in the first half of the fiscal year, both returned to growth in the quarter, a great example of how well we're addressing some of the macro challenges and a very positive indicator of the underlying strength of these businesses. So bottom line, our growth brands are performing exceptionally well in North America and showing the growth potential that we outlined in Hain 3.0. In the middle of the P&L, gross margins compressed materially as we continue to face unexpected challenges with ingredient shortages, rising fuel costs, and increased labor expense, adding additional disruption costs. To offset these costs, we took more pricing in the quarter. The pricing, however, lagged inflation, thereby contributing to the margin erosion in the quarter. The expected impact of these price increases will be fully reflected in Q4 and is part of our go-forward guidance. Shifting to international, our issues were predominantly driven by top-line softness. Sales in constant currency, excluding divestitures, were down 8%, well below what was expected. There were three primary drivers of the revenue decline, which we anticipate will improve in Q4. First, consumer sentiment in Europe has dropped significantly since the start of the Russia-Ukraine conflict. Wages aren't keeping up with inflation. People are concerned about their future and therefore are making tradeoffs in their consumption. In the quarter, total grocery sales across the entire store were down almost 7%, with units down 9%. This affected all food brands and categories, including our own. Looking forward, the overlap versus a year ago gets significantly easier and we expect total store declines to mitigate going forward. Second, we had a major customer cancel plant-based beverage orders in Europe a year earlier than planned. As a result, we lost close to $8 million of sales in the quarter versus last year. The good news here is that the category is still growing nicely and we've already started selling the excess capacity to new and existing customers and expect to have replaced 50% of the lost volume by the end of the fourth quarter. Third, we took a hard line and chose to stop shipping products to those retailers who initially resisted our price increases. The good news is we eventually prevailed and got the increases accepted, but the longer-term benefit came at a short-term cost. We lost four to five weeks of sales on several brands at multiple retailers during the negotiations hurting both our short-term sales growth and share performance within the quarter. We're now shipping fully to all customers, and therefore this is not going to be a headwind in Q4. In the middle of the international P&L, margins were eroding versus last year, driven almost entirely by price increases, lagging inflation, increased energy costs, which we discussed on our last earnings call, and stranded overhead costs driven by the lower volumes. With pricing now in place and volume expected to improve in Q4, We anticipate that margins will increase sequentially. As we look to Q4, for the entire company, while we are lowering our guidance to reflect the impact of the issues that hit us in Q3, we expect sequential improvement and continued strong top-line growth in North America. Chris will give you more details on the forecast in a few minutes. Pivoting to our HANE 3.0 strategy, we remain excited and optimistic about our direction. You'll recall that our strategic pivot to growth is predicated on driving distribution, creating category-expanding innovation and increasing marketing in a core set of growth categories and brands. While we expect to invest our robust productivity improvements into more marketing over time, in the short term, we've been using those dollars to help offset unprecedented inflation and drive brand growth through strong service and high in-stock levels at shelf. This strong service has both enabled us to pick up significant trial and gain incremental merchandising and distribution opportunities. As a result, despite the many macro headwinds, we're seeing clear signs of sales momentum and brand strength in North America across our growth brands, and we expect that momentum to continue. While international growth was certainly more challenging in Q3, as I mentioned earlier, I'd remind you that we have nine number one and two share brands in our portfolio and are well positioned for future growth. Brands like Ellis Kitchen, which has grown share for 15 straight years and increased sales more than 30% in the recent quarter, show the strength of our portfolio and how well we are positioned for the future. Short-term, we have to navigate the consumer angst over the Russia-Ukraine conflict and some of the lost plant-based command volume, but we remain confident that our brands are strong and our future is bright. As part of the Hain 3.0 growth strategy, we also made the acquisition of That's How We Roll to bulk up our presence in the high-growth snacks category. I'm pleased to report that the business grew 20% in the quarter, and the integration is going very well. We've identified more synergies than originally assumed and fully expect these brands to deliver consistent double-digit EBITDA margins over time. Just this week, we started commingling its products at our DCs, allowing customers to order everything on one Hain invoice and receive all ambient Hain products on one truck. This takes trucks off the road, which is great for the environment, and allows the That's How We Roll products to basically ride for free on our trucks. I mentioned earlier that we're intensely focused on reducing our ongoing costs. As we look forward and deal with short-term cost pressures and long-term growth opportunities, we're embarking on a restructuring to set us up for the future. As part of that restructuring, we're reassessing our org design and resource allocation with the goal of accelerating growth, increasing efficiency and effectiveness, and reducing costs. Among the changes already underway, We are, one, increasing resources within supply chain and our purchasing, co-manufacturing, and productivity teams to deliver additional cost reductions. Two, adding additional resources on capacity planning to support peak growth categories. Three, eliminating the chief commercial officer role, elevating other sales leaders to report directly to me. Four, integrating the That's How We Roll brand into Hain, eliminating many redundant roles and redeploying many of their teammates to fill critical open positions at Hain. And five, right-sizing our infrastructure in Europe to reflect some of the short-term headwinds there. While we'll provide more detail about the complete restructuring on the next call, we're confident that these changes will make us leaner and more agile to address the short and medium-term inflation we are seeing and more effective in driving our Hain 3.0 strategy. With that, let me now turn it over to Chris to provide more details on our performance and go-forward guidance.

Thanks, Mark, and good morning, everyone. As Mark said, Q3 was very challenging given the unprecedented environment that we and other companies are facing industry-wide. Now, turning to financials, let me highlight a few key aspects of our third quarter results that 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, while total Hain Q3 reported net sales increased 2%, versus the prior year period, reported net sales in North America were up more than 13% and 9% excluding M&A. Second, our growth brands in North America grew approximately 12% in the third quarter, more than 900 basis points higher than the growth rate in the first half of the year. Third, our balance sheet remains strong with good capital allocation flexibility. And finally, as we look forward to the fourth quarter, we are encouraged by the sequential top and bottom line improvement we are already seeing across Haines. Let me start with a discussion of our top line results. Third quarter, consolidated net sales increased 2% year-over-year to $503 million, driven by strong consumption growth in the U.S., partially offset by declines in the international business unit, resulting from soft total store sales in the UK, the loss of sales from a large non-dairy Coman account, and a decision we made to temporarily halt shipments on select brands during price negotiations. Foreign exchange reduced third quarter net sales by approximately 150 basis points, while acquisitions, divestitures, and brand discontinuations benefited net sales by 210 basis points. After adjusting to exclude these factors, net sales increased by 1.5% versus the prior year period. During the quarter, we experienced higher than expected inflation and continued industry-wide disruption and warehouse cost pressures driven by labor shortages, freight carrier availability, and other freight cost issues that we incurred as we chose to prioritize customer service, resulting in a reduction in adjusted gross margin of about 400 basis points. Our international operations were negatively impacted by lower sales in the UK grocery channel compared to prior year period, the previously mentioned loss of a large non-dairy Coman customer, the price negotiation shipment halt, and fixed cost deleverage. Total SG&A, including marketing, came in at 15% of net sales for the quarter, in line with the prior year period. Third quarter adjusted EBITDA decreased compared to a year ago to $58.7 million, primarily driven by accelerating raw material and finished goods inflation and ongoing supply chain disruptions, partially offset by price increases we've taken year to date and supply chain productivity. Our adjusted third quarter EPS of $0.33 decreased compared to $0.44 in the prior year period. Now let me provide some detail on the individual reporting segments, starting with our North American business, where, as Mark said earlier, we are continuing to gain share and see strong momentum in consumption. On the top line, reported net sales for the third quarter increased by more than 13% year-over-year to $326 million. Adjusted for foreign exchange movements, acquisitions, and divestitures, net sales increased about 9% versus the prior year period. Our growth brands, delivered close to 12% net sales growth versus the prior year period, driven by exceptional performance on the snacks brands. We expect growth brands to continue their strong momentum in Q4. From a profitability perspective, adjusted gross margin for our North American business during the third quarter decreased by 480 basis points versus the prior year period to 23.7%. While the industry-wide supply chain challenges impacted the profitability of the quarter, The year-to-date pricing actions we have taken and our robust productivity pipeline are beginning to catch up with inflation, which was a 740 basis point headwind versus the prior year period. Consistent with the pressure on gross margin, adjusted EBITDA in Q3 for North America decreased 23% to $37 million from the prior year period. Adjusted EBITDA margin of 11.4% represented a decrease of 540 basis points versus the prior year period. Now let me shift to our international business. Net sales for the third quarter versus the prior year period decreased 14% on a reported basis, driven by mid-single-digit declines across the UK grocery store channel, the loss of a major non-dairy beverage customer, and the impact of shipment halts during the price increase negotiations with certain customers in the UK. Currency movement was a 360 basis point headwind in the quarters. From a profitability standpoint, adjusted gross margin for our international business decreased by 310 basis points, driven by increased energy costs and fixed cost deleverage. Adjusted EBITDA in Q3 decreased 28% to $26 million from the prior year period. Adjusted EBITDA margin of 14.9% represented a decrease of 300 basis points versus the prior year period. Shifting to cash flow and the balance sheet, Operating cash flow was $31 million in Q3 and $99 million for the first nine months of the year. While year-to-date operating cash flow was lower by $47 million versus the prior year, the company benefited from a tax refund claim under the CARES Act of about $54 million during the first nine months of fiscal 21. Capital spending for the third quarter was $6 million, which reflected lower spending than expected given supply chain challenges and labor availability. We expect in Q4 to return to levels in line with our 3% to 3.5% of net sales target. Cash on hand at the end of the quarter was $58 million, while net debt stood at $778 million. Net debt leverage, as now calculated under our amended credit agreement, was 3.3 times. Our balance sheet remains strong, and as a result, we believe 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 3.6 million shares or 3.8% of the outstanding common stock at an average price of $36.48 per share for a total of approximately $130 million, excluding commissions, leaving us with about $187 million of additional repurchase authorization under our 2022 program at the end of the third quarter. Now turning to our outlook. For the fourth quarter, we expect low to mid-single-digit adjusted net sales growth, with as-reported net sales growth approximately 500 basis points higher than the adjusted net sales growth rate, mainly driven by the acquisition of That's How We Roll. This implies continued sequential improvement in Q4 adjusted net sales growth versus Q3, and significant growth versus the first half of the year. Sales in North America are expected to grow double digits behind continued strong consumption. And international should be less negative as we get the full benefit of pricing, sell some of the lost co-man volume, and see sequential improvement in total store sales. Modest adjusted gross margin reduction with sequential improvement versus Q3. The improvement is driven by additional absorption in our plants from higher volume, pricing taken throughout Q3, and additional productivity projects coming to fruition. Q4 adjusted EBITDA low to mid single digit decline, including an approximate 300 basis point currency headwind. Also note that we expect fourth quarter SG&A dollars to grow approximately 12 million versus prior year, due to the addition of that's how we roll overhead, lower Q4 fiscal year 21 people related costs, higher brokerage commissions and normalized expenses with return to office. This implies full-year results of approximately flat net sales versus the prior year, modest adjusted gross margin reduction, and low double-digit adjusted EBITDA decline. Our updated full-year guidance reflects the impact of the pricing actions we've already taken in North America, the UK, and the EU, offset by the highly inflationary environment that we are operating under, ongoing supply chain disruptions, and soft but improving grocery store trends in the UK and EU. In summary, we are navigating a very challenging business environment and remain encouraged by the strong top-line momentum we are achieving and are on track to deliver our Hain 3.0 strategy. I will now turn the call back to Mark.

Thank you, Chris. While Q3 was certainly a challenging quarter, we're encouraged by our North American top line momentum, optimistic about improving international trends ahead, and our laser focus on reducing our overall cost basis as we navigate current macro headwinds. And importantly, we remain confident in our HANE 3.0 strategy and significant potential over the long haul. On behalf of the HANE executive team and the board of directors, I want to thank all our teammates for their hard work, tenacity, and nimbleness. With that, let me turn it back to the operator so we can take your questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a 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 keys. Request to all the participants to limit yourself to one question and one follow-up. One moment, please, while we poll for questions. The first question comes from the line of David Palmer with Evercore ISI. Please go ahead.

Good morning. Mark, you made a comment there in your prepared remarks about the pricing and that that was going to be part of your ongoing guidance. It reminds me that we're at kind of an interesting time coming out of the fiscal year into a new fiscal year. So I'm wondering, what do you mean by that? I mean, what sort of ongoing performance are you expecting here? What sort of margin reclaim? are you expecting from these pricing actions that you're taking?

Yeah, good morning, David. The comment in the script was basically that we took pricing in the middle of the third quarter, so we will have the full realization of that pricing in Q4. But that said, look, we do expect that we're going to need to continue to take pricing in this environment. Inflation, while we're certainly hopeful that it ameliorates and comes down a bit, We're planning for it not to happen and are already preparing additional increases both here and in Europe. We will be surgical in those increases just as we have been, and that's part of why our unit volume has held up so well in the face of double-digit pricing. And we have multiple levers in terms of how we will take that pricing, whether it's list pricing, changing our trade strategy in terms of depth and frequency, looking at the weight of products, et cetera, and And so we expect that we will, over time, take enough pricing to cover the costs, which is our intent. And we're using the productivity that we generate to really cover the vast majority of these supply disruptions that we're facing.

And I'll just ask a long-term one. In the past, you've talked about, you know, that aspirational gross margin target of 30% by fiscal 25%. You know, these are new times where nominal top line is higher, and sometimes the gross margins may not be keeping up over the long term if you're pricing for a gross profit dollar, but you might be able to leverage that better down to the EBITDA margin line. So I'm wondering, are you still thinking that gross margins of 30% are achievable, fiscal 25%?

Yeah, it's a great question. Obviously, 25 is a long way away, so we have lots of time between now and then, and I would certainly expect that inflation will come down dramatically between now and then. And so if we can keep this pricing and it sticks over time as costs come down and moderate, we expect that we will see significant margin expansion over time. Short term, obviously, we've got the same headwinds that everybody else does, and we we're making the conscious decision to prioritize service over margin in the short term because we have relatively small brands in the scheme of things with relatively low household penetration. And our ability to service the customer and keep the shelves full is getting a tremendous trial where there are lots of holes on the shelf for many who are struggling with supply. So short term, we'll continue to see some pressure, but we are confident in our ability to expand margins over time.

Thank you.

Thank you. The next question comes from the line of Michael Lavery with Piper Sandler. Please go ahead.

Thank you. Good morning. Morning. I realize you certainly don't want to get into too much detail on 2023 yet, but can you give some sense of just how maybe your thinking has changed, or if this quarter, especially in the international, had some unexpected pressures, what should we be expecting to flow through? Specifically, maybe are you planning on the sentiment headwinds there being a headwind for maybe most of the next year? Is the energy cost outlook something we should keep in mind? Just any breadcrumbs you can offer for how you're thinking about the next few quarters would be great.

Yeah, it's obviously early for us to talk too deeply about 23, and we're in a very volatile environment where things are changing all the time. And I remind folks that when we gave our guidance for Q3, the Russia-Ukraine war had not started yet. And it has obviously changed things pretty dramatically, both here and in Europe and in terms of global supply challenges. So it's a little bit early for us to give any kind of real guidance around 23. What I would say, though, is we are planning for inflation to continue. We are taking additional pricing to cover it. We are ramping up resources and restructuring, as I mentioned in the prepared remarks, to increase our productivity and to ensure that we've got supply locked up and so that we can service the business well. We're navigating the short-term headwinds by being very aggressive in terms of how we handle the headwinds. It's too early to talk about what's going to happen six, nine, 12 months from now because we are going to learn a lot over the next few months about the Russia-Ukraine war. We're going to learn a lot about consumer sentiment and whether they're trading down or not. And so it's pretty early for us to kind of put a stake in the ground at this point.

That's helpful color, though. And can I just follow up on the pricing, I guess, dispute that you mentioned in the international segment? And it sounds like it was a few brands, I think, and a few retailers. I guess I just would love to understand that situation a little bit better. That seems like a kind of unusual event. Can you maybe just catch us up on what played out there and what, if any, residual impact there is going forward?

Yeah, so the European retailer market and the Canadian market, for that example, for that aspect, are much more consolidated than they are here. You have fewer, bigger retailers. And so negotiations on pricing has always been more difficult there than it is here. That said, we started presenting our price increases again before It looked like things were stabilizing. And so we were getting some pushback on retailers as to whether or not the energy costs were going to continue, whether costs were going to come down. And so in that negotiation, we made the tough decision to say, if you're not going to accept our price increases, we're not going to ship your product. The good news is after a couple of weeks of back and forth and us not shipping, we were able to get all of the retailers to accept the price increases. And those are now firmly in place. So a lot of it is really what's the macro environment and what's the retailer's perspective on whether the inflation is transitory or not. I think we clearly learned from this war that inflation is getting worse. It's not getting better. And supply challenges are getting worse, not getting better. And so we stuck to our guns. We are trying to make sure that we're passing on our costs. And we were successful in doing it. Now, again, we're going to take more increases going forward, and we will certainly reflect and go forward guidance any anticipated disruptions associated with that. But there's no question that the inflation is significant and that that has to get passed on ultimately to the consumer.

Well, and it sounds like ultimately getting the products in reflects the consumer demand, too. So thanks for that, Cliff, and thanks for the question.

Yeah, and it also reflects the strength of the brands, right? With nine number one and two-share brands, the retailers need our products. We have the number one, two, and three-share chilled soup brands as an example, which is very short shelf life. So whatever we lost during that period of not shipping is lost. It's not like inventory is depleted and it comes back. It's very short shelf life product. But when you have the top three brands in a category – the retailer's category suffers dramatically if they're not accepting product from us. So we think we're in a good position to negotiate. It's certainly a partnership, and we work hard to make sure that we're appeasing the retailers but also covering our costs.

Okay, great. Thanks.

Thank you. The next question comes from the line of Alexia Howard with Bernstein. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Alexa.

Okay. So, can I ask about the composition of the input cost and freight pressures? You have on slide 14 the 740 basis points of headwind from inflation and energy and supply chain disruption. Is it possible to break that down to let us know how much of it was input cost ingredient related and packaging? How much of it was freight? and how much of it was supply chain disruption. And specifically, what changed most dramatically from when you gave guidance last quarter, just so that we have a feel for where the big pressures have shifted over the last couple of months?

Yeah, so we're seeing double-digit inflation across almost everything, Alexia. So packaging, ingredients, freight, labor costs have gone up dramatically. So that certainly changed considerably versus when we wrote the original plan and gave the original guidance back last summer. We have about double the inflation that we originally had planned for. With regard to the question within the quarter, certainly gas prices have gone up dramatically, which impacted freight. We're seeing the knock-on effect of oil prices on things like packaging going up. And while we have contracts on all of our ingredients, when there are supply shortages, our ability to get those ingredients becomes challenged, and we have to find alternatives often at a premium cost. And so, you know, as an example, with 75% of the world's sunflower oil coming from Russia and Ukraine and 60% of the palm oil coming from Indonesia, which is that they're not going to export any of it, there is a supply-demand issue with regard to oils, which affects our spectrum business, which affects our snacks business. And so we seek to find alternatives in a very constrained environment, and that comes at a cost. And so that was a big part of what changed versus what was originally planned when we gave the guidance for Q3.

Thank you. And then as a follow-up, just trying to get at the – the short-term factors that pressured sales in Europe, and I know that you outlined them qualitatively. Are you able to quantify things like that, how much the several weeks of not shipping to those retailers hit your top line in Europe? And if there were other factors like the co-manufacturing piece, how much of it was short-term versus the overall decline that we saw this quarter. Thank you, and I'll pass it on.

Yeah, so the first thing I would point out is total store softness, which in the UK was down 7%. That's total store every category. Food was down 7%, and units were down 9%. So in an environment where the store is consolidating at that kind of a rate, even if we're gaining share, our volumes are going to be down. It's hard to distinguish... how much was caused by the soft store versus how much was caused by stop shipping as an example. But in the charts that we provided, it was roughly a third we're attributing to the store declines, a third to the stop shipping, and a third to the lost coman volume. And just to add a quick color on the coman, you know, the non-dairy beverage market still is extremely robust. And the fact that one of our major customers decided to repatriate the volume is a sign of the strength of the category. Unfortunately for us, that repatriation, which we knew was coming, came a year earlier than we had planned for. And so we will resell that volume. The private label has gained seven share points in plant-based beverages in the last 18 months, and that's largely where our volume is. So replacing that volume over time is not going to be an issue. We just have to wait for existing contracts. to expire for us to replace it. And as I said in the prepared remarks, we expect we'll have half of it replaced already by the end of the fourth quarter. So we're confident we'll get all that volume back. And if you look at another chart that was in there, you also see that the overlap from the consumer softness in the UK also gets better as we get into the fourth quarter. So we've got a lot of reasons to believe that the trends are going to improve from here.

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

Thank you. The next question comes from the line of Ken Goldman with J.B. Morgan. Please go ahead.

Hi. Thank you so much. Mark, I wanted to follow up on your comment about perhaps needing to take or think about taking more pricing in the EU. As you consider what happened in the third quarter with shipments withheld and understanding that's not super uncommon in the EU. It's obviously not something we see a lot in the U.S., but how does that affect how much pricing you might consider for the next round? You did emerge victorious by your words, but not without some short-term pain. So I'm just curious how you balance some of those factors in your thought process there.

Yeah, so first and foremost, the retailers are our partners, so we work with them to make sure we're meeting their needs and our needs. In the negotiations we just had, You know, we went out with some pricing. We had to give a little in some cases to get the pricing in, but at the end of the day, it was a win-win for both. We're going to continue to pass on whatever inflation we have that we can't cover with productivity. We do it surgically. We look at our price gaps versus our competitive set. We look at price thresholds. We look at the elasticity data that we have. And so we're not just, you know, randomly throwing out pricing or taking kind of an across-the-board X percent pricing. It's very surgical. It's very pinpointed. Some of it will be in lists. Some of it will be in trade. Some of it may take the form of waitouts, as I mentioned. And we will do it in a way that meets our needs but also meets the retailer's needs. And so while the negotiations may be challenging and difficult, and that's just part of the nature of price increases in Europe, at the end of the day, we need the retailers and the retailers need us, and we will find a way for us to get pricing passed through in a way that works for both parties.

Thank you. And then quick follow-up. You've been fairly aggressive with share repo this year. Is it fair to assume that this pace will maybe cool off a little bit now that you may not drive quite as much free cash flow as you previously anticipated and Or is the stock heading toward a valuation level that's just too attractive to ignore as you see it?

Yeah, it's a great question. I'm not going to give a specific answer because that's a conversation between us and the board. And it also depends on what other uses for capital or for cash that we have. So part of our productivity agenda includes a lot of automation. So there will be some needs for capital. there is acquisition opportunities that we're still pursuing, and then, of course, share buybacks is another. So we look at all of these things through the same lens and decide where we're going to get the best and highest return for shareholders. Some quarters that may be repurchases, other quarters it may be capital or it may be M&A. So it's hard for me to give you a specific answer until we've made those specific decisions.

Understood. Thanks. Thank you.

The next question comes from the line of Eric Larson with Seaport Research Partners. Please go ahead.

Yeah, thanks, everybody. Thanks for the question. So, Mark, obviously a lot of moving pieces here. But in your prepared comments, you also talked about, you know, consumers in Europe trading down, you know, I think maybe their situation over there is a little more dire than maybe what we might have in the U.S., but one of the concerns we're seeing now is consumers in the U.S. are getting pretty stretched, and is there a possibility of trade-off or maybe slowdown in your very strong consumption growth rates in North America as this inflation becomes you know, even more problematic here as well?

Yeah, so first, and thanks for the question. First, I would say in the UK, just know that we are also a private label supplier. So as consumers change behavior and trade down, we benefit on one side of the equation where we may lose on another. But it's not an all or nothing equation for us there. In North America, what I would tell you is if you go back to the last recession, healthy food grew 8% at a time when the store declined. That's during the housing crisis of 2007 and 8. Because we have a much more affluent consumer, they tend to be much more inelastic. Now, I'm certainly not going to suggest that it isn't possible that we'll see some trade down. And we're watching that exceptionally closely. Obviously, we just took some pricing. We're going to assess what the impact of that pricing is. But I would argue based on history that that people are much more affluent and used to paying a premium for healthy food and that will continue even if the economy gets softer and people are more strapped in their wallet because it's not really the affluent consumer that is affected as much as kind of the middle income and lower income consumer. We do watch that said, however, we do watch our price gaps versus our competitive set. So if you've made a decision to buy organic, where do we fit versus other organic products? As an example, we want to be very cognizant of those price gaps and watch those closely. And we've learned from the first two rounds of pricing where we took too much pricing relative to our competitive set, where maybe they didn't go up at all. We had to adjust back down. And in other cases, we didn't take enough, right? There's opportunity to take more. And because these are very dynamic times, we have a very robust pricing capability that watches that closely. And we expect that with the inflation that we're seeing and the words that we've heard from others on their earnings calls, we expect that others are going to take more pricing as well. And we will watch our gaps very closely.

Okay, thanks. And then my final question here, a follow-up question is, can you give us a little bit more color on maybe the timing of productivity that's been one of your big positives for the last three years? Obviously, some setbacks here with cost inflation, et cetera, but can you – give us an idea of, you know, and remind us of the ranges of guidance for long-term productivity that you've had and what we might start seeing some of that incremental productivity, you know, show up in the P&L.

Yes, we've been generating about $40 to $50 million of productivity a year, which is around 4%. And we expect that we will continue to do that. What I would tell you, though, is in the last, three to six months, some of our productivity resources have shifted to things like reformulations as opposed to just capital automation projects and things like that. In an environment where certain ingredients are going up dramatically and other ingredients haven't gone up at all, we are looking at our formulas very closely and flexing those formulas in a way that minimizes our cost. That's a big source of productivity for us going forward and you've already seen that in certain brands like Garden of Eden where we did a complete reformulation dramatically lowered the cost and we're actually able to lower the price of the product such that we are now growing high single digits and very well positioned for the future so it is it's a combination of projects as I mentioned in the prepared marks we are adding resources and productivity because we have so many projects and people are spending a fair amount of time fighting the various supply challenges that we have, and I don't want to lose any momentum on productivity as a result. So I expect we'll still be in that $40 million to $50 million range, and it's materializing in the P&L today. You just don't see it given the magnitude of the inflation and the disruption costs, but we are generating good productivity, and we have a very robust pipeline of ideas that we're continuing to work.

All right, thank you.

Thank you. The next question comes from the line of Anthony Ventetti with Maxim Group. Please go ahead.

Thanks. Just two questions. So the first is on the top line. Obviously, you've been taking price increases and been successful, and you're going to continue to do that where you can. But in this particular quarter, was volume – It was volume down year over year because since the price increases, it looks like it may have accounted for most, if not all, of the revenue growth. And then just a quick follow-up is on, you know, you mentioned obviously there's been increased costs throughout, whether it's ingredients, packaging costs, freight, labor costs. And how much of the increased raw material costs would you contribute to the war in Ukraine?

Yes, on the volume question, volume was up in North America, but it was down in international. Given the top line softness that we mentioned, the not shipping product, the weak consumer, volume was definitely down. in our international business, but it was up in North America. In the prepared remarks, I talked about how our unit growth is mid-single digits in an environment where we're taking double-digit pricing. We feel really good about the strength of our brand and the fact that we're gaining households and gaining units at a time when our categories are not and our competitors aren't necessarily either. It really is a tale of two cities with regard to that question. On the raw materials, what I would tell you is the war has impacted pretty much everything. And what I mean by that is, obviously, gas prices have gone up. You all see it at the pump. The derivatives of oil, things like packaging, are going up because of the war. And in particular, I mentioned earlier, oils. The cost of oils are going up exponentially because both Indonesia hoarding what they have and Ukraine not planting or harvesting anything. There's just going to be a shortage of oils relative to the supply that's out there. Now, the good news for us is we have contracts that extend all the way through the end of the calendar year. But just because we have contracts doesn't mean that the supplier has supply, right? And so... Um, they're honoring the prices that they have when they have supply, but if they don't have it, we have to go find alternate sources. And that comes at a premium cost, um, because there just is more demand than there is supply right now. So I'd say oils is a big piece. Trade is a big piece. Packaging is a big piece. And even in, in, uh, Europe, a lot of the, um, uh, manufacturing, uh, employees, the people that pick the crops, a lot of them come from the Ukraine. And those people are not available. So there's also wage inflation pressure as well as a result of the war.

Okay, great. That's helpful. Thanks, Mark. Thank you.

Ladies and gentlemen, due to time constraint, I would request all the participants to just limit your question to one question. Thank you. The next question comes from the line of John Baumgartner with Mizohu Securities. Please go ahead.

Good morning. Thanks for the question. Hi, John. Mark, I'd like to revisit the subject of productivity, given the increasing importance there in offsetting cost push. As we think through the next phases for contribution, and you just discussed this a bit in terms of the ingredients, but What's been on the board, I think, is, you know, lean manufacturing, automation, regional integration. When you sort of rank order your projects for F23, to what extent is that, you know, call it 40 to 50 million of savings contingent on, you know, outside parties, maybe vulnerable to ongoing disruption to the supply chain? I guess I'm really asking more about the mechanics of the activities and what could potentially get delayed, you know, rather than just, you know, the straight dollar contribution.

Yeah, a great question. So the two biggest productivity areas, which I just mentioned a few questions ago, is reformulation and capital automation projects. Those are the capital projects are the ones that are subject to potential disruption because we're reliant on other people having the labor and the materials to be able to provide us the capital on time. And so we're seeing, in some cases, some slippage in the timing of the receipt of those materials. But at the end of the day, there's a lot of projects and productivity, automation of packaging design. In the case of That's How We Roll, which we just bought, grinding our own cheese versus pre-ground cheese. There's also capacity projects. that are capital-dependent, where we've grown so fast in some categories that we are adding capacity. So those are the things that rely on third-party equipment manufacturers. Those are the ones that are somewhat at risk, but so far, so good. Those seem to be on track, and we will watch those closely.

Thank you.

The next question comes from the line of Rebecca Shuneman with Morningstar. Please go ahead.

Great, thank you. So my first question is, I was just wondering if you could shed a little bit of light on the soft volumes, you know, the down percent, the 9% fall in volumes in Europe. You know, I would think that with, you know... the problems and the consumer concerns over there, that this would be very resilient. Can you explain why this is more discretionary than I would have expected?

Well, so part of it is certainly driven by the Russia-Ukraine war and just people's angst around their own finances and what the implications of the war are going to be going forward, right? So Russia has cut off supply to Poland on certain things. They've threatened Finland. You know, people are anxious about kind of what's coming, which is affecting purchases, and certainly we're seeing some trading down as a result of it. But the other thing that's also very relevant here is if you look at the overlap, and there's a chart that we provided with the earnings chart, that shows that we had a very elevated volume period last year, which was because Europe was in complete lockdown. And unlike the United States where we have red states and blue states and some were locked down and some weren't, there was complete lockdown a year ago. And now that they're completely open, the lunch occasion has left the home as people go back to work and kids go back to school. And so some of this is an overlap issue that, again, if you look at the charts, that was included, that overlap gets much easier going forward. So I do expect that it will get better just from an overlap perspective alone. And I think at the end of the day, people have to eat. And so you can't have perpetual declines in unit sales within grocery over an extended period of time unless everybody's eating out of home. And I don't think restaurants are going to be a beneficiary of consumer angst. I think people are more likely to eat more at home, not less at home over time. So I think some of it is just a short-term reaction to the magnitude of the disruption there and the overlap, but I do expect it will get better over time.

Thank you.

The next question comes from the line of Scott Mushkin with RE Capital. Please go ahead.

Hey, guys. Thanks for taking my questions. So I guess I wanted to, and maybe you said this already and I missed it, but how much of the, the inflation is reflected already on your shelf price? Do you think so?

Yeah. So, uh, our pricing lags inflation. And so what was built into the third quarter pricing that we just took was the inflation that we saw coming in the second quarter. We've not fully reflected in the costs of the Ukraine war. Because, again, we were outselling the third quarter increases in, you know, December, January before the war started. So hence the need for additional pricing. And we want to first read the impact of the pricing we just took before we come out with the next round of pricing so that we understand the elasticities and where brands are resilient and where brands may see a negative impact from that pricing. So there's more coming. It does lag. Certainly we have more pricing coming. in q4 than we did in q2 because of the pricing that we just took but it's not sufficient to totally cover all of the inflation which is why we've guided to some margin uh erosion continuing in q4 not as not as significant as it was in q3 but still there will be some erosion now is so that that's good i just want to make sure i understand so it's all like if i went and bought a central part whatever i'm buying you know one of your products here in the u.s or is

ex-Ukraine, is all that now reflected in the price through the second quarter of the inflation, or is it still we have some in the second quarter to kind of drip through, and then we're going to have another big price increase at the shelf? I just want to make sure I understand.

Yeah, so the pricing that was taken in the third quarter reflects all the known costs through the end of the second quarter. But obviously, Per the earnings announcement today, we've seen additional costs in Q3 that will be reflected going forward. And also you have to remember our fiscal year ends in June and we have contracts that are on a fiscal year basis. We have some that are on an annual year basis. So as contracts roll off, they are likely to be inflationary versus what we contracted for a year ago before all of these cost increases materialized. So inflation is going to continue. And we need to, again, make sure that we pass that on and do it in a very disciplined way.

And then, you know, one final one, and then maybe you said this too already. If I missed it, I apologize. Price increases coming because of the Ukraine war and what's going on, which is just, you know, obviously they've all taken off quite a bit versus what we've seen thus far.

I'm sorry, I missed part of your question. You cut out. Say it one more time.

Oh, sorry. So basically the size of the future price increases given what's going on with the commodities and labor versus what we've already seen. And if you said that already, I apologize, but I must have missed it if you did.

No, I didn't. So the first increase we took was in the 7%, 8% range. The second one we took was in the 4% range. This will probably be somewhere in the middle of those two.

All right, guys, perfect. Thank you.

The next question comes from the line of John Anderson with William Blair. Please go ahead.

Thanks. Good morning, everybody. I'm struggling here to come up with a question after all of those, but let's see. Let's ask about – I'll ask about the Coman in Europe. Since you had a shift in that business with one of your customers – it would be helpful to kind of understand, I guess, how much command you do in Europe and, you know, what kind of visibility you have into that business and maybe how much kind of turns over on an annual basis. Really just the question is, you know, is it likely or unlikely that you could be surprised with, you know, with a customer, you know, repatriating, you know, on a regular basis or if this is a unique situation. Thanks so much.

Yeah, so we are the number three supplier of plant-based beverages in continental Europe, both co-manufacturers for branded companies as well as private label. All of those relationships have annual contracts. And so we have one large customer, you could guess who it is, who's decided to repatriate the volume. It was intended to happen a year from now. That was the direction we were given, and we were somewhat surprised by the timing of it. But it does speak to the health of the category and the continued growth potential. So over the last three or four years, demand has outstripped supply. And so it doesn't shock me that one of the biggest players in the category has decided to repatriate some of that volume. But there's plenty other volume out there to be had. Most of our contracts are at least 12 months in length. We don't have any expiring in the immediate term. Most of them expire at the end of the calendar year if they expire at all and aren't multi-year. And so we're picking up some volume here and there, as I mentioned. We'll have half of the volume already recaptured by the end of Q4. And I would expect by the end of the calendar year, we will have all of it recaptured. So look, private label and Coman is a bid business. We are a low-cost supplier. We've actually been making plant-based beverages for 30 years, and we're really good at it. And so we can be very competitive on cost and still make good margins for ourselves. So I'm not overly worried about any long-term disruptions. Is it possible that there are short-term ones? Maybe. but this was a bit of a unique circumstance given the size of the customer here.

Thank you.

Ladies and gentlemen, we have reached the end of question and answer session, and I would like to turn the call back to Mark Schiller for closing remarks.

Thank you, everybody, for your time today. Obviously, we'll be available throughout the day to answer continued questions. I just reiterate we're extremely proud and excited with the growth that we're seeing in North America, and we do believe that some of the pressures that we saw in Q3 will improve as we go forward. So our thesis is intact, our team is strong, our execution is good, and we're very optimistic about the future. With that, I thank you.

Thank you. This concludes today's conference call. you may disconnect your line at this time thank you for your participation