The Hain Celestial Group, Inc.

Greetings and welcome to the Hames Celestial first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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, Chris Mandeville, Managing Director of Investor Relations at ICO. Thank you, Chris. You may begin.

Good morning, and thank you for joining us on Haynes Celestial's first quarter fiscal year 2023 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer, and Chris Polaires, Executive Vice President and Chief Financial Officer. In the course of this call, management may make forward-looking statements within the means 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 in those described in these forward-looking statements. Please refer to Haines 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, as well as 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 presentation inclusive of additional supplemental financial information, which is 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. in an archive that will be made available on the website. And now, I'd like to turn the call over to Mark Schiller.

Good morning, and thank you, Chris. On today's call, I'll give you an overview of our Q1 performance and outlook for the balance of the year. I'm pleased to report that we exceeded our constant currency margin and EBITDA guidance in Q1 and showed material sequential improvement. As a result, we are reaffirming our annual profit guidance with the continued caveat that we expect Europe to be unusually volatile and that our anticipated total fiscal year profit growth is skewed to the back half. Let me now dig into the Q1 results in more detail. On our last earnings call in August, we laid out our annual plan expectations. You'll recall that our guidance for the year was in constant currency given the expected volatility in foreign exchange rates. While we didn't give specific guidance on revenue in Q1, our total sales growth in constant currency was in line with the Q4 sales growth as expected. On adjusted gross margin and adjusted EBITDA, we guided that Q1 would be modestly below Q4. That said, our adjusted gross margin, which is normally the lowest in the first quarter due to seasonality, came in much better than we guided, up considerably from Q4. Our adjusted EBITDA dollars margin also improved versus Q4, which is better than we guided. To understand our progress better, let me now pivot to the operating units. In North America, net sales were up 8.6% versus a year ago. While this is less growth than we achieved in Q4, much of the softening was expected. First, as expected, we pulled back on promotional spending on brands that were experiencing supply disruption. As a result, on the growth brands, our non-promoted consumption was up an impressive 17%. That's six points higher than our total consumption revenue growth for these priority brands. As expected on the last earnings call, most of these supply disruptions are now behind us. Second, as expected, after a huge surge in baby formula demand in second half last year due to well-publicized industry-wide shortages, we had less supply in Q1. Third, we had some significant club programs on personal care and farm crisps in Q4 and lost those rotations for fiscal 23. While this was not anticipated, much hard work is being done to get those back in second half later this year. Digging in a little deeper on the revenue side, our growth brands in North America continued to gain share in both units and dollars. We gained aggregate market share again on our growth brands for the eighth quarter in a row and 23rd time in the last 24 months. Velocities were up a solid 11% versus a year ago. Within SNAC, sensible portions consumption continued to grow double digits, as it has for the last three years, despite some supply disruptions in the quarter. where we've had extended supply disruptions which are now substantially resolved, net sales grew 27% in the quarter, the highest quarterly growth on the brand in almost four years. In addition, household penetration on Terra was up more than 60% in the quarter versus a year ago. In the middle of the P&L, North America adjusted gross margin grew modestly versus a year ago after being down considerably last quarter and was also up 270 basis points sequentially versus what we delivered in Q4. Our margins were higher for three primary reasons. First, we have greatly improved the performance of our internal supply chain. Our factories are running better with greater throughput, less waste, and fewer changeovers. In addition, we continue to add more productivity as resources are freed up from fighting supply issues. Second, we've done a good job addressing longstanding supply issues on our largest brand, as evidenced by the strong consumption and shipment data. While some supply disruptions are expected to continue on several of our pantry brands and baby formula, Most of our big issues have now been resolved. As a result, the cost of these disruptions is expected to drop significantly. Third, we also took more pricing in North America in Q1, thereby strengthening overall margins. Thus far, elasticities remain relatively low and in line with our plan assumptions. With regard to profits in North America, the improvement in gross margin has flowed through to the bottom line. Just the EBITDA dollars and margin were up in Q1 versus Q4. Total EBITDA dollars were also up 28% versus Q1 last year, restoring growth after multiple quarters of decline. In summary, we have continued optimism in North America. Our growth brands have performed well, and our overall profit performance has improved considerably. We expect continued momentum skewed to the second half of the year. Shifting now to international, we also made some sequential improvements. However, given the volatile European environment, Financial progress was modest, and as expected, foreign exchanges had a material impact on our reported results. In constant currency, our year-over-year sales trend in Q1 improved 280 basis points versus the Q4 year-over-year trend. As previously mentioned, our plant-based businesses continue to struggle along with the categories, offsetting the progress on the rest of the international business. Our adjusted gross margin percentage improved versus Q4, which is noteworthy given that Q1 is historically our lowest margin quarter. Year over year adjusted EBITDA growth has also improved modestly compared to the Q4 growth rate. In the UK, with very high inflation and political turmoil, consumer confidence is at a multi-year low. As a result, consumers are trading down to private label and shifting shopping patterns from traditional grocery toward discounters. You'll recall that the entire UK grocery store sales declined in Q3 and flattened in Q4. In Q1, total UK store sales continued to rebound as expected. Our business there also modestly improves sequentially on a constant currency basis from a net sales decline in Q4 to 3.5% growth in Q1. We continue to grow share and deliver solid growth on several of our largest brands, baby, jelly, and soup categories. While sales trends for the industry and our UK business are benefiting from continued price increases, like the rest of the industry, our units are declining. This has created significant planty leverage, which our team has aggressively addressed by stripping out costs. Combination of additional pricing mid-quarter and these aggressive cost controls have led to 140 basis point improvement in adjusted gross margin versus Q4. In continental Europe, where our business is almost entirely plant-based beverages, our overall P&L performance was very similar to what we delivered in Q4. While we continue to make progress in replacing the volume from the large co-manufacturing contract we lost in Q3, As consumer shift to private label declines from our higher margin brands and branded customers is offsetting those gains. As with the UK, we've been aggressively taking out costs by reducing labor, streamlining our org structure, and adding productivity. While Chris will give you more details in a moment, let me turn to our go-forward outlook. As discussed many times, we live in a volatile world, and there are many sources of potential upside and downside based on things outside of our control. The challenges include currency fluctuations, consumer behavior, recessions, inflation, the Russia-Ukraine war, just to name a few. As a result, we expect continued volatility as we move through the year, especially in Europe. That said, we're doing a good job controlling the controllables and now have more visibility than we did just a few months ago and are optimistic that we'll begin to see some normalizing. In Q2, we expect modest sequential improvement in total company profit performance, As pricing hits the market, costs stabilize somewhat, and we continue to drive efficiency and productivity. That said, we do expect some softening in the North America top line in Q2, driven by three things. First, we expect continued shortages on baby formula, with less inventory to sell in Q2 than we've had in previous quarters. Second, we were not successful in renewing the club hair care program from last year, and we'll start overlapping those shipments in Q2. And third, we expect a softening of the tea category due to warmer weather, and overlapping the Omicron COVID surge from last year. We're working with our retail partners on how to best improve the shelf set and merchandise the category to optimize the upcoming season. As we stated when we released annual guidance, we do expect continued improvement and a return to profitable growth in the second half of the year, driven by several factors. First, we expect the strengthening of the overall sales globally. In North America, we have good momentum on our growth brands. In the UK, we expect the entire store and our brands to continue to improve as we lack COVID and realize the recently taken prices. In continental Europe, we anticipate restoring growth on our non-dairy beverage business as we win more private label and co-manufacturing contracts. Second, we have more pricing coming. We will start to realize the full impact of our Q1 US and UK price increases in this quarter. And in Canada, we've successfully negotiated new pricing, which begins now. with the full quarter benefit realized in the second half. In continental Europe, despite high inflation, we have not been able to take pricing on negotiated annual contracts since last January. We're optimistic that we will get some inflation priced into the new Don Dairy beverage contract starting in Q3. Third, productivity ramps up as the year progresses, and we expect more than half of our $40 to $50 million of productivity savings in the second half. Fourth, input costs are starting to crest, and while we expect second half inflation to still be up double digits, it should be lower than what we experienced in the first half. We had planned for some pricing relief in the second half and have covered about 75% of our tradable ingredients at prices in line with our plan assumptions. On energy, Continental Europe has announced their intention to subsidize the cost, just as the UK has done. You'll recall that we currently have no coverage in the second half of the year in Continental Europe, so government subsidies will give us some welcome relief. Fifth, we expect less supply disruptions as global demand eases. In addition, we now have secondary suppliers for most of our co-manufacturers and multiple suppliers for most major ingredients. And lastly, given the softer performance in the back half last year, withheld shipments in the UK during pricing negotiations and the $10 million write-off in Q4, we have easier overlaps. In summary, our business is improving, and there are signs that the macro environment is beginning to stabilize. We continue to believe that our brands and our strategy and our team are doing well. As a result, we expect continued progress, especially in the back half of the year. Let me now turn things over to Chris to provide more color on our financial performance and outlook.

Thanks, Mark, and good morning, everyone. As Mark discussed, our first quarter results were better than the guidance we provided in August. with sequential improvements in gross margin and bottom line growth versus the fourth quarter of fiscal 22. Improved performance in North America, driven by continued strength of our growth brand, solid performance in our supply chain and productivity initiatives, and volatility in results from our international business, including a large swing due to strengthening of the U.S. dollar versus the pound and the euro. In the first quarter, consolidated net sales decreased 3.4% to $439.4 million. Consistent with recent trends, foreign exchange remained a material headwind in the quarter. On a constant currency basis, consolidated net sales decreased less than 1%. The strong dollar resulted in a $27 million net sales headwind in Q1. Reported and adjusted net sales growth in North America were 9% and 3% respectively. In our international operating segment, constant currency adjusted net sales growth improved sequentially versus the fourth quarter. In Q1, international reported net sales decreased 20%, but the decline on a constant currency basis was only 7%, an improvement of approximately 280 basis points versus Q4. Adjusted gross margin was 21.5% in the first quarter, decreasing approximately 240 basis points versus the prior year period. However, sequentially, versus the fourth quarter of fiscal 22, adjusted gross margin increased approximately 210 basis points due to the impact of pricing catching up to inflation and strong operations performance, offset somewhat by seasonal mix. This is better performance than our Q1 guidance of a modest decrease in gross margin versus the fourth quarter. Total SG&A, including marketing, came in at 16.8% of net sales for the quarter. Adjusted EBITDA on a constant currency basis was $38.6 million versus $47.3 million in the prior year. Including the impact of foreign exchange, adjusted EBITDA was $36 million. Raw material and finished goods inflation and foreign exchange were the primary drivers of lower year-over-year adjusted EBITDA. First quarter adjusted EPS was $0.10 versus $0.25 in the prior year period. Now turning to our individual reporting segments, In North America, reported net sales increased 9% to $288.4 million. Adjusted to foreign exchange movements, acquisitions, and divestitures, net sales increased more than 3% versus the prior year period. Adjusted gross margin in North America during the first quarter was 22.7%, which is a 270 basis point improvement versus 2.4, and a 40 basis point improvement versus the prior year. Notably, as our pricing is now catching up with inflation and with ongoing improvement in supply chain performance, this is the first year-over-year increase in gross margin since the third quarter of fiscal 2021 and speaks to the sequential momentum we are seeing in North America. Q1 adjusted EBITDA at constant currency in North America was $30.9 million, a $6.8 million or 28% increase versus the prior year. Adjusted EBITDA margin was 10.7%. which is 160 basis points higher than prior year. In our international business, Q1 adjusted net sales declined 7% on a constant currency basis from the first quarter of fiscal year 2022, and foreign exchange reduced net sales by an additional 14 percentage points to a reported 21% decline versus 2022. In the UK, constant currency adjusted net sales increased 3.5% versus prior year, which continued the sequential improvement that we saw in the back half of fiscal 22. In continental Europe, constant currency adjusted net sales declined 27% in Q1 compared to the prior year period, driven by the softness in the plant-based non-dairy beverage category and the lost co-manufacturing contrast that we had discussed previously. With an aggressive push on operations productivity, international gross margin in the first quarter at 19.1%, was 80 basis points higher than Q4. However, with continued high raw material inflation, increased energy costs, and fixed cost deleverage, Q1 gross margins fell approximately 700 basis points versus prior year. Adjusted EBITDA at constant currency in Q1 was $17.5 million, a 46% decrease from the prior year period. As a percent of net sales, adjusted EBITDA was 9.9%. 720 basis points below prior year. Shifting to cash flow and the balance sheet. First quarter operating cash flow was negative 5.1 million versus 37.6 million a year ago. Lower operating cash flow resulted from a reduction in net income and use of cash for working capital as inflation has continued to increase the value invested in inventory and receivables versus a year ago. We made $7.2 million in CapEx investments in the quarter, approximately $11 million less than during Q1 of 2022, as we are continuing to experience long lead times for certain assets while we prioritize growth and productivity projects. Finally, we closed the quarter with cash on hand of $52 million, net debt stood at $847 million, and net leverage of 4.1 times as calculated under our amended credit agreement. Now turning to our outlook for the remainder of fiscal 23. As Mark said earlier, we are reaffirming our full year guidance of minus 1 to plus 4% adjusted net sales and adjusted EBITDA growth at constant currency with growth skewed toward the second half of the year. Assuming dollar exchange rates against the pound and euro by $1.13 and 98 cents respectively, for the full year we now expect currency exchange to result in a headwind of approximately $110 million and $14 million for adjusted net sales and adjusted EBITDA, respectively. In the second quarter and in the second half, we expect that, as we have discussed for the first quarter, sequential improvement across the income statement and balance sheet will continue due to top line and margin momentum in North America, 2023 price increases offsetting mid-teens inflation, Continued improvement in our supply chain, fewer disruptions, and robust productivity, and an uncertain but improving retail environment in the UK and new non-dairy beverage contracts in Europe. In the second quarter, we expect consolidated adjusted net sales growth at constant currency will be similar to Q1. As the overlap becomes more modest, we expect accelerating constant currency adjusted net sales growth in the back half. The foreign exchange headwind will also moderate in H2 as we begin to overlap the strengthening of the U.S. dollar that began earlier this calendar year. Constant currency adjusted net sales in North America in the second quarter is expected to be approximately flat versus prior year due to the loss of a fiscal year 2022 Q3 club hair care program that began shipping in Q2 last year. The ongoing well-publicized shortage of baby formula and unseasonably warm weather and an overlap of the year ago COVID Omicron surge creating a headwind for our tea and soup brands. We anticipate that international constant currency adjusted net sales growth will improve sequentially over the next three quarters as we replace the lost non-dairy co-manufactured contract in continental Europe and we see continued improvement in total UK store sales. With the pricing that we took in Q1 in both the U.S. and the U.K. fully in effect in Q2, adjusted gross margins expected to be flat to up modestly versus the first quarter. And we expect further sequential improvement in H2 as we benefit from pricing in the European non-dairy beverage segment and a robust productivity agenda where the benefits are more heavily weighted toward the back half of the year. Next, we should end fiscal year 2023 having recovered a significant percentage of the inflation-driven gross margin decline that we experienced in fiscal year 2022. Below gross profit, we anticipate that Q2 marketing and SG&A as a percent of net sales will be consistent with the first quarter, and that rate should improve in H2 as we benefit from top-line growth and fixed cost leverage. The full impact of pricing in North America and the UK, improving international top-line momentum, robust productivity, and seasonality will contribute to continued sequential improvement in adjusted EBITDA at constant currency in the second quarter and the back half. While still below fiscal 2022 levels, Q2 constant currency adjusted EBITDA is expected to increase versus the first quarter, and adjusted EBITDA margin in the second quarter should improve modestly compared to Q1. In H2, as we overlap the onset of the war in Ukraine, the loss of a non-dairy co-manufacturing contract in Europe, numerous ongoing supply disruptions, the 40-year high inflation, and the one-time write-off in Q4 last year, we anticipate a return to constant currency-adjusted EBITDA year-over-year growth in Q3 and in Q4. As I noted on our last call in August, the environment in Europe and the U.K. remains volatile and therefore difficult to forecast. The ongoing effects of the war in Ukraine continue to ripple through the global supply chain, with many ingredient costs still up 50% or more versus a year ago. In the midst of a cost of living crisis and with three prime ministers in less than two months, UK consumer confidence in September was at the lowest level since the measure began in 1974. And last week, both the ECB and the Bank of England announced 75 basis point rate increases. In the UK, it was the largest hike in 33 years. Against this backdrop, our international team continues to respond rapidly to changing customer and consumer priorities. As we continue to focus on improving our cash conversion cycle and be selective in the timing of certain CapEx projects, we expect full-year free cash flow to be in line with the prior year. With leverage now slightly above our stated target three to four times range, You can expect for the next several quarters to see us apply our free cash flow primarily toward debt reduction. In summary, the momentum that the business gained in Q1 was material and consistent with our expectations. We continue to control the controllables and expect that results throughout the balance of the year will continue to improve. I will now turn the call back to Mark.

Thank you, Chris.

I'd like to close by thanking our entire global team for their resilience, flexibility, and tenacity during these turbulent times. I appreciate their hard work and collaboration and look forward to continued progress together. Let me now turn it back to the operator so we can answer your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing on the star key. One moment, please, while we poll for questions.

Thank you. Our first question is from Brian Holland with Cowan. Please proceed with your question.

Yeah, thanks. Good morning. I wanted to ask about the Europe non-dairy beverage business. You mentioned new contracts there. How has the progress of recouping the customer volume lost last year versus expectations, just given the category softness that you've referenced? Do you still think you'd get back as much of that as you anticipated at the time you lost it?

Yeah. So the first thing I would say is we've recouped about 70% of the lost volume from that contract or have commitments for 70%. Hasn't all started shipping yet. But we're making good progress in bringing on new customers to replace that volume. On the flip side, however, as the economy gets weaker and we see people migrating to private label, the branded part of the category is softer than it was months ago. most of the contracts that we have added are branded players that we're co-manufacturing for. And so their volumes have come down a little bit versus what we had anticipated. So while we're gaining volume by bringing on more customers, the size of that volume and the size of the orders from existing customers has abated a bit, kind of offsetting one another. With regard to future contracts, which is the process we're in now for private label annual contracts that become effective in the third quarter. We're in the midst of the bidding process now. And I would say in an environment where there is more capacity than demand, those contracts are going to be very competitive. And we're going to certainly try and get inflation built into those contracts, but how much we'll be able to get into and how many of them will win, time will tell. We'll have a much better idea on the next conference call.

Appreciate the color, Mark. And then, You've talked about last couple of quarters now about just, and you just referenced here some of the softness and plant-based demand and the impact on the business. I'm wondering more broadly, just given some of your peers that are more heavily weighted towards indulgent snacking have called out strong demand, you play obviously in the better for you space. So if we strip aside plant-based, what's the interplay between indulgent and better for you? Are you seeing any impact here of consumers being less focused on the type of products that you sell and maybe pivoting more towards indulgence just given, you know, macro sensitivities, anxiety, et cetera?

Yeah, so I'm not sure if that's a Europe question or a North American question, but I'll answer it both ways. In North America, you see that the consumption on our growth brands, which are all health and wellness brands, is very high, you know, excluding promoted volume because we had to pull back on promotions due to supply challenges on some of the brands. Our consumption in North America or in the US was up 17%. So we're not seeing any softening, and in particular on salty snacks, we're seeing very robust growth every single quarter for the last three years, and that continues to be very robust. In the UK, our portfolio is a bit different. We do have some center of store things like jams and jellies and preserves and soups. that are somewhat, they're all health and wellness oriented, but they're different than some of the categories that we have here in North America. So less organics and those kinds of things, although we do have fresh soups and we do have Ella's Kitchen, which is an organic baby food, and some brands that are like that. In Europe, we're seeing much more trade down from branded to private label, and that's not, there's no difference between indulgent products and health and wellness products. People are just trading down. They have 15% inflation. They have a lot of turmoil politically, as you know. And so people are nervous and they're trading down. The good news for us is we are in the private label business in the UK as well as in Europe, albeit a smaller part of our business in the UK. But we do have somewhat of a built-in hedge if people do trade down. We're seeing that trade down on all categories. It's not unique to health and wellness or indulgence.

I'll leave it there. Thanks. Thank you. Our next question is from Andrew Lazar with Barclays.

Please proceed with your question.

All right. Thanks. Good morning, everybody. Good morning. Mark, I think you laid out a couple of discrete factors that are going to cause North America adjusted sales growth to slow. some in the fiscal second quarter. But I seem to remember, I guess on the last quarter's conference call, there was some concern raised from investors about sort of slowing or slightly slowing trends, like consumption trends, broadly in North America. And it doesn't sound like that necessarily played out, right? Because you talked just before about the strong consumption you're seeing broadly in North America right now. So can you talk a little bit more about what you're seeing in North America around consumer habits, like What do you see? Elasticity remains pretty manageable, as you've said in the prepared remarks. Your products tend to be right at premium price points, and maybe those are a little bit more protected from certain consumers in this type of environment. But what are you seeing around North America and anything there that makes you incrementally concerned around consumer behavior in North America going forward?

Yeah, great question. So part of, again, the difference between the consumption and the shipments in Q1 is the supply disruptions that we talked about. So we had some of our biggest brands like yogurt and sensible portions and others that formula on baby food that because we didn't have supply, we pulled back on trade. So some of the slowdown that people are seeing in the total consumption numbers, if you just pull back the onion and look at Non-promoted versus promoted volume. We'll see that our non-promoted volume was up 17%. So that's why you may have seen some sequential slowdown in the total number. The good news is we've fixed most of those issues, and we're back fully promoting in Q2 on those brands. But there are still disruptions on things like formula and some of the pantry brands, cooking oils as an example, given the Russia-Ukraine war, where we'll still see some supply disruptions and some gap between shipments and consumptions. With regard to the broader question, our elasticities are in line with what we expected. Our unit declines are smaller than the rest of the categories that we're in. We are not seeing evidence of consumers trading down. There isn't a lot of private label in the healthy part of the category, but even if you look at the unhealthy part of the category, the indulgent part of the category, we're not seeing a big significant pickup in private label share and consumption relative to branded products. So there is a real bifurcation between the way the consumer is behaving in Europe and the way the consumer is behaving here. And so while there are a couple of factors that I articulated in the prepared remarks on why Q2 will slow a bit, at the end of the day, our growth brands are doing what we said they would do. They continue to grow double digit, and we feel optimistic that that momentum is still there for the long haul.

And then in North America, with the pricing that you've taken and are in the process of taking, Have you found that generally the competitive environment around price points and such are pretty consistent with what you're doing, such that you don't anticipate necessarily gaps opening up in a way that could be problematic? Thank you.

Yeah, so we have taken more pricing in the U.S. that hit in Q1. The Canadian pricing is hitting as we speak, and it was high single-digit pricing, so it's significant additional pricing in the algorithm. We watch very closely, Andrew, what our price gaps are versus our competitors, our thresholds, whether velocities and elasticities are changing. And so there's a lot of adjusting going on, customer by customer, brand by brand, if we haven't taken enough or if we've taken too much, because we do want to stay at a certain kind of gap to our competitive set. I don't anticipate any major changes versus the pricing that we've taken. We've not seen significant changes in the trajectory of our business. Again, there may be a segment here or a segment there or a customer here or there that we have to make some adjustments, but I expect relatively minor tweaks.

Thank you. Thank you. Our next question is from Alexia Howard with Fernstein.

Please proceed with your question.

Good morning, everyone.

Good morning.

Can you talk a little bit more about exactly sort of when the pricing is expected to come through? I know you had some this quarter, but you're expecting to have some. Is it both Europe and the U.S. that's planning to have more as we roll through the year, or is the Q1 pretty much it?

So the pricing in the U.S. occurred in the middle of the first quarter, so it's in place. We will do some minor pricing in the second half. It may be more via waitouts or adjustments to trade depth as opposed to list price increases. But there will be some minor tweaks here and there in the second half of the year. In the case of the UK, the pricing hit at the end of the first quarter. So it really fully started getting reflected in market in October. And I'm pleased that we got all of that pricing through without having to stopped shipping anywhere during the negotiations. And again, thus far, it appears like the elasticities are holding up well. In Canada, the pricing is hitting now in the second quarter, so there was very little pricing in the first quarter. And in Europe, the non-dairy beverage contracts that we're negotiating, that pricing will hit in the second half of the year. As we bid on contracts to replace the lost co-manufacturer contract that we had in the third quarter, we've obviously been bidding at what we think the market will bear on those things. And they're getting some of the inflation built into the contracts, but it's challenging in an environment where there's more supply than demand. So all that said, I think most of the pricing, with the exception of the private label non-dairy beverage contract, is in the market now. You'll see the full impact of things like Canada next quarter. You only get a partial impact this quarter. And we will continue to look at inflation and the rest of the market. If inflation goes up from here, we'll have to take more pricing. If inflation goes down from here, then we've probably taken enough. So we continue to monitor our performance and we continue to monitor inflation and the consumer. But right now, I think the vast majority of our pricing has already been taken.

Great. Thank you. And just as a quick follow-up, I know you talked about this gap between the measured channel data and the reported numbers. And a lot of that's to do with supply chain constraints. But could you talk about channel shifts? What's happening in measured channels versus e-commerce versus club versus the natural channel? Are you seeing a trade down? So natural is still very weak. E-commerce maybe still down year on year. That's what we've been hearing from others. I'm just curious about those channel dynamics. Thank you, and I'll pass it on.

Yep. E-commerce has somewhat flattened in terms of growth. The natural channel is still declining a bit. What I would characterize as emerging channels for us, drug, convenience, food service, those are growing very rapidly for us. I can't speak to the channel in total, but I can speak to our business, which, again, part of our HANE 3.0 strategy was to continue to drive distribution in additional channels and make these products more ubiquitous. So we're seeing I think we were up 25% in the quarter and drug and something like 60% inconvenience. So we're making good progress there. I think the biggest, um, Delta that we've had is in club. And I mentioned in the prepared remarks that we lost some rotations on both. Um, that's how we rolled the farm crisp business as well as the hair care program, uh, on personal care. And so we are going to see some softness in the club channel. uh relative to the rest of the business but we're working hard to get those back and we've um been showing a lot of innovation to that channel that quite frankly there's um some pretty good enthusiasm on and we have one of those pieces of innovation on that's how we roll hitting the market late this quarter uh so we're optimistic that we'll get some of that back but um right now it's a little bit of a hole in our in our plan great thank you very much i'll pass it on

Thank you. Our next question is from David Palmer with Evercore ISI. Please proceed with your question.

Thanks. Mark, you were always very willing and able to focus on long-term targets in the past, and that was because you're making real changes at the company in terms of mix and internal functions. I wonder how much has really changed in your terms of your long-term views based on everything that's happened in the last 18 to 24 months? I mean, how do you view pain today versus back in late 21? I think back then you were talking about it being an 8% to 11% EBITDA grower and getting gross margins up into the high 20s. So any thoughts about how things have really changed for you? And I have a follow-up.

Yeah, I mean, what's good about having a portfolio is you get the yin and the yang. Well, some things are performing better than you expect, other things not quite as much. I think given all the noise of COVID and inflation and the Russia-Ukraine war, it's hard to tell whether some of these things are more permanent changes or more transitory changes. And when we get back to whatever a new normal is, how do those behaviors change? But what I would say is there's categories like salty snacks that continue to perform exceptionally well and become a bigger and bigger part of our business. And then there's other pieces that have ebbed and flow. Tea had a huge surge during COVID. Then it has to overlap. Baby had a huge negative during COVID when people were at home making their own baby food, and then as society reopened, it got much stronger. So there is kind of some back and forth there. The only place where I would say anything has fundamentally changed is the The gap between supply and demand in non-dairy beverage is different than it was pre-pandemic. There was much more demand than there was supply, and now it's the other way around. So what we need to do is keep right-sizing infrastructure and make sure we can get back to the margins that we used to enjoy on that business and get back the lost volume that we talked about last year. So that's the one that we're watching closely. But other than that, I don't think there's any material fundamental changes that we would call long-term.

And the other one I had, back then you were pretty clear about your M&A priorities, maybe becoming more of a fast-growing pure play food company. A lot of that was the plant-based direction you were trying to go. I wonder how much you just mentioned about the non-dairy beverages, plant-based. And, of course, there's also been a tougher environment with higher interest rates that might make M&A harder. How are you really shifting your view there about M&A and your ability to affect the shift in your portfolio? And I'll pass it on.

Well, so we are always looking at M&A both on the buying side and the selling side. It is more challenging in this environment with high interest rates for people to get financing. There is interest in some of our non-priority assets, but getting those deals done has been challenging. And obviously, given our current leverage, we're less likely to be doing any buying right now until we do some selling. And there is still a tale here that we've talked about in Hang 3.0 that we would like to, over time, exit. So all I would tell you is those conversations continue. Our desire to continue to simplify the portfolio and reshape it is still there. But the marketplace is going to somewhat dictate what we can and can't do in this environment.

Thanks. Thank you. Our next question is from Michael Lavery with Piper Sandlin.

Please proceed with your question.

Good morning. Thank you. Good morning. I just wanted to come back to plant-based. You broke down the growth in international and show that down 9%. How much of that was driven by the lost contract? And I guess as you look ahead, you talk about the competitive pricing for trying to fill that capacity and renew some existing contracts. You just touched on bright-sizing infrastructure as well. How much is... potentially rationalizing some of that capacity on the table, or is the expectation that there's enough demand? How does that sort of shake out?

Yeah, so we have multiple manufacturing plants for plant-based, and I think depending on where we net out on contracts that we're going after and have a better visibility to what the volume is going to be, we will certainly continue to look at do we have the right infrastructure to support that. I mean, we have been aggressively taking costs out since we lost that contract, and part of the reason you see some progress on margins is because we have been aggressively taking out costs, eliminating overtime, taking longer holidays around national holidays, looking at the non-manufacturing labor that we have in the plant. And so we will continue to rationalize the infrastructure to whatever the demand is. And vice versa, if demand goes up considerably, we also look at adding capacity. And this is all part of kind of our productivity culture, where we're constantly evaluating where do we need more capacity, where do we have too much capacity. In some places around the world, we're repatriating volume from our co-manufacturers into our facilities. And in other places, we're rationalizing the capacity that we have. So it's an ongoing conversation, but given that we're at an inflection point on replacing that volume from last year, we're not going to do anything until we have better visibility to what that looks like.

Okay, great. And just on the sales momentum, can you give a sense of the clients you called out, how much is driven by the lost contract versus in-market or, you know, pressure on demand?

Yeah, so I don't have a specific breakdown on the pieces, but there are a few components. One is obviously that lost contract. The second is the softness in the category and people trading down to private labels. So a lot of our plant-based beverage volume is branded, our own brand, and co-manufacturing for other brands. So as the branded side of the equation has lost, I think, five share points in the last 12 to 18 months in that category, the branded volume has also declined. And so that's a chunk of it as well. And, again, I don't know what the relationship is, whether it's 50-50 or 60-40, but they're both contributing at a fairly meaningful level.

Okay, great. Thanks so much. Thank you. Our next question is from Ken Goldman at JP Morgan. Please proceed with your question.

Hi, thank you. I guess my question is, or my first one, in light of the first quarter's reported figure and now your updated guidance for 2Q, does your outlook still assume that North America organic sales growth will grow mid-single digits for the year? If you said that, I missed it. I'm just curious if some of those maybe unique headwinds in 2Q are kind of conspiring to drag that down a bit for the whole year.

Yeah, so, and Chris, feel free to chime in, but we haven't changed our guidance for the year. There are puts and takes on any given quarter, and there is some new news with the continuing shortage on formula and some of the softness in the club channel that I mentioned, but we have not yet changed our guidance for the long haul because there's a lot of programs that we're also adding in the second half of the year. So at this point, I'd say we're still holding our guidance, but there's definitely some puts and takes in that.

Yeah, exactly right, Mark. So holding total guidance, but also within North America, to your question specifically, we do still expect mid-single-digit adjusted net sales growth in North America, for sure.

Got it. Perfect. Then I guess the easy follow-up to that is, does that still apply to your gross margin guidance? I think previously it was for flat to slightly down. Again, I didn't hear you update that. Should we just assume that that's still the outlook?

Yes. Great. I'll pass it on. Thank you. Thanks, Ken. Thank you. Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thanks so much. Just to kind of follow up on the gross margin piece, I thought I heard you say in prepared comments you may be able to recover a fair amount of the kind of profitability margin loss as you get through the year, just driven by, you know, potentially some supply chain improvements and also the incremental pricing coming. So, one, I just wanted to make sure I heard that correctly. Was that for total company? And then if we think about kind of how you exit the year in 23, like how much should we be expecting some of that gross margin to recover, you know, as we go sequentially Q2 to Q4? Thanks.

Yes. The thought there was that the exit rate, by the time – so, sorry, begin again. It's a consolidated – so, total HANE – And as we exit the year, the Q4 run rate, the total hang, we believe will begin to look a lot like what it did a year ago before we put that backwards.

Okay, got it. And then just another clarification question. On FX, I thought you said maybe for the full year, the drag could be like $14 to $110 million, and that was for sales and EBITDA. So just curious, I might have missed it, have you said kind of what that drag was in Q1 and how we should be thinking about the trajectory in absolute terms as we get through the year? That's it, thanks.

Yeah, so the prepared remarks we said, $110 million net sales full-year headwind and $14 million EBITDA full-year headwind. In Q1, the net sales headwind was $27 million. And the EBITDA headwind was 2.5 or 2.6, I think. So the trajectory kind of stays the same in total dollars, even though there's puts and takes within that. So we expect in the back half of the year, we'll overlap to the beginning of the strengthening of the dollar from last year. So the rate effect goes down a little bit. But as net sales grows, then that's an offset. And so the quarter-by-quarter impact ends up looking pretty similar throughout the year, even though there's some – some changes with the details.

Sorry, Super. That's all I have. Thank you so much. Thank you. Our next question is from John Baumgartner with Mizuho Securities.

Please proceed with your question.

Good morning. Thanks for the question. Good morning. Good morning. I wanted to ask about farm crisps. The Q1 sales contribution was much lighter sequentially, and I think you mentioned some distribution losses. Can you quantify the impact from those losses? How are you thinking about regaining those? And then, I guess, aside from distribution, how is the underlying volume holding up, given what looks like to be, you know, you've raised prices, they're not double digits? Just, you know, lay land on par, Chris, would be appreciated. Thank you.

Yeah, so in Q4, we had some significant club activity that we did not have in Q1. And so there was definitely less of a contribution, so that's how we roll. in Q1 than there was in Q4. You know, a good portion of that business is skewed toward non-measured channels, and a lot of that is rotations that, you know, they're in and out kind of distribution. And so we've lost some of those in the first half of the year, and we're working to strengthen and confirm those for the back half of the year. So I don't have on an annual basis what the impact of that will be. but certainly we did have a gap between Q1 and Q4. On the measure channel side, we continue to gain market share, but it is a high-priced snack relative to other mainstream snacks, and it is a relatively low awareness and household penetration category because it's a somewhat nascent category. So the loyals are still loyal, but the trial when you have to go to the store now and your pocketbook is somewhat constrained, Are you going to try a snack that's $5 or are you going to try a snack that's $3? So we've got more work to do to generate more trial in the measure channels, but we are certainly continuing to gain share there, which is encouraging.

Okay. And then on the inflation outlook, Chris, I think you mentioned 75% covered. The inflation is a little bit better in H2 now relative to what you saw a couple of months ago. Is that just largely the reflection of the volatility energy complex? Is there anything else on the ingredient side that has gotten materially better, or I guess marginally better, that you think can stick? Thank you.

We're seeing some of the ingredients, some of the packaging, some of the raw materials are moderating a little bit either versus where we expect them to be in the first half or moderating a little bit versus our expectations, what we put in the plan. But on a few select places, we're beginning to see a little bit of softening versus where we had been. And to your point, a piece of it also is definitely the energy complex, whether it's the trends or some of the programs that have been discussed in both the U.K. and in continental Europe to provide some subsidies, some caps.

Okay. Thanks for your time. Thank you. Our next question is from Andrew Wolf with CLK.

Please proceed with your question.

Great. Thank you. I want to ask about the UK and, you know, the fact that there was some sales growth in the market despite, for Hayne, despite, you know, the consumer confidence being at, you mentioned, a record low. So could you kind of unpack that? Like, you know, how was the company able to achieve that in the regard to price versus volume was price driven or turn up promotions. I'm sure some of it was made. Well, I'm not sure where some of it, any, uh, your fill rates just having, you know, able to fill the orders at a higher percentage. I mean, it's a pretty nice result in, in regard to, or was it just comparisons just to help us understand, you know, uh, that improvement versus marketing conditions.

Yeah. I think there's, there's two drivers there. One is certainly pricing. We've been aggressive on pricing in the UK from day one and have gotten pricing into the market faster than others, which has helped. The other, which I alluded to, is about 20%, 25% of our sales in the UK is private label. Private label is growing double digits. So that part of the business is growing much faster than the branded side for the entire store. And so having a presence there, which we've talked in the past about how a That helps us in terms of relationships with customers, but certainly in a recessionary environment where in the UK the pattern has been to trade down short term, and then when the inflation abates to trade back to branded, it's a little bit of a natural hedge for us that we're certainly benefiting from, and that's helped the results as well.

Okay, and is most of that private label within the category where just the structure of the market is they ask the manufacturer to also make the private brand, or is it truly incremental in different categories?

No, no. So this is really about maximizing your overhead absorption in your factory. So 92%, I think, of our UK sales are self-manufactured, which is very different than North America where it's a little more than 50%. And so we've got lots of plants with lots of overhead. And a long time ago, a decision was made to use that stranded overhead to get into private label and partner with retailers. And so it really is us expanding our distribution in categories that we're already in. There is no kind of unique private label manufacturing of categories that we don't have brands in.

Okay, and I just wanted to also revisit or follow on on the plant-based business in the international segment. And I guess I want to also kind of unpack it. Obviously, beverages have a specific event that happened. But I also want to add about entrees, the Linda McCartney brand, food ingredients. I mean, from time to time, natural and organic product category is just kind of slow because they do. It seemed to happen here in the U.S. You know, is there something structurally happening in these categories in your guys' view in Europe, or do you just think it's more of event-driven and, you know, macro-driven in terms of the demand side?

Yeah, so when the pandemic hit and animal protein was difficult to get because of lots of you know, issues within the manufacturing facilities and COVID outbreaks and the like. A lot of people tried plant-based proteins for the first time, and some stayed and some left. And so part of this is just overlapping a COVID surge, and that's why the categories are soft. The other dynamic in the U.K. is the growth migrated from frozen to chilled, We are the number two player in frozen. We're a very small player in chilled. So that's impacted our short-term results a bit, but actually in the most recent quarter, we've seen chilled start to slow and frozen start to pick back up. Again, I think because of spoilage and shorter shelf life, consumers who are interested in plant-based are more likely to fill their freezer and know that they're not going to have to throw something out because it expires, which is the risk with short shelf life products. So It's a dynamic category. You know, the softness globally is well documented. We like our positioning. We feel like we have a great brand with a lot of potential, but it's, you know, again, there's kind of the ebbs and flows of COVID and some of the shifts between segments that has driven some short-term volatility.

Okay, thank you. Thank you. Our next question comes from Anthony Vendetti with Maxim.

Please proceed with your question. Thanks. Yeah, just a quick question on the e-commerce side. Is that continuing to grow significantly? Can you just talk a little bit about the quarter results on that side?

Yeah, so it was more flattish this last quarter. I think as people were out and about much more this summer than they were in previous quarters with the cold weather and the COVID lockdown that happened last winter. We've seen some of that volume slow a bit. It's still about a little bit less than 11% of our total volume in North America. It's a very small percentage of our volume in Europe. And quite frankly, the entire food business has never really taken off in Europe to the extent that it did here in North America. So it's stable. We're well positioned. There are certain categories like baby, like personal care, where it's a pretty significant portion of our business. So we watch that closely. You know, people don't want to, they get a lot more variety on the internet than they would in a store, particularly on health and wellness brands. So it's important for a company like ours, given the amount of choices we can give people online relative to brick and mortar. But it's stable. It's not declining, but it's not growing double-digit like it was at the beginning of the pandemic.

Okay, thanks. Appreciate it. Thank you. Our next question is from Rebecca Schoonerman with Morningstar. Please proceed with your question.

Good morning. Thanks for squeezing me in. So most of my questions have been answered, but I just have one left. I'm wondering if the current environment is in any way hampering your ability to launch your new products or set the stage for meeting your long-term growth objectives, either in terms of shortages or in terms of the economic environment? Thank you.

Great question. So we continue to launch new products, but we're being much more selective, primarily because We were very proactive during the pandemic when everybody else stopped innovating. We kept innovating with things like veggie puffs and screaming hot veggie straws and wellness teas and other things that we never got full distribution on, even though they're performing very well. And so we've made the choice to make sure we fill out the distribution on the winners before we start bringing more in. But that said, there are things like we just launched peanut butter and jelly bites. under Earth's Best that got 50% ACV and is off to a terrific start. We've had some seasonal things on yogurt that did very well. So we're being more selective and trying to finish the play on the big ideas that we launched over the last couple of years, but we have a nice robust pipeline. Retailers are accepting innovation as they're resetting categories, and we expect that we'll continue to use innovation as a major part of our growth strategy.

Okay, great. Thanks for the call.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mark Schiller for any closing comments.

Thank you, everyone. We appreciate your interest and your time today. We're around for the rest of the day and look forward to additional conversations. Thanks so much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.