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.