The Hain Celestial Group, Inc.

2023 earnings 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, Chris Mandeville with ICR. Thank you. You may begin.

Good morning, and thank you for joining us on Haynes Celestial's second quarter fiscal 2023 earnings conference call. On the call today are Wendy Davidson, President and Chief Executive Officer, and Chris Belairs, Executive Vice President and Chief Financial Officer. During 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 Haynes Celestial's annual reports 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 Hayne 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 be made available on the website. And now I'd like to turn the call over to Wendy.

Thank you, Chris, and good morning, everyone. We appreciate you joining us for my first earnings call since joining Hain. First, let me thank Mark Schiller for his leadership of the company over the past four years through a time of significant transformation of our company portfolio and operating model. In the past month, Mark has been a valuable resource in my transition into the company and the role. I'm only a few weeks into the job, but I've had the opportunity to review many of our key commercial, supply chain, and brand plans across our businesses. In the coming weeks, I will have a greater opportunity to visit our locations and connect more with our local teams to further my understanding. What I have learned thus far has only confirmed my decision to join Haines and our opportunity to build a sustainable, profitable, and high-growth business with leading brands in the better-for-you consumer space. During my early weeks with our team, I have been impressed with the potential of our brands many of which are number one or number two in their category. However, while much work has been done to simplify the portfolio and generate productivity, it is apparent that a variety of challenges have prevented sustained investment to scale our brand. In fact, I've noticed our brand building spend has historically been far below industry average. And in certain instances, we have been off air for over a year on some of our largest brands. Moving forward, I anticipate committing greater support behind those brands, and eventually spending more in line with our category growth peers with sustained brand building support. I see strong potential to drive growth in our categories and brands with expanded reach across channels and geographies. But to do so, we will need to ensure we are investing in the organizational capacity and capabilities to enable accelerated growth. I am impressed with the talent on our team and appreciate the time and efforts they have spent to help me more fully understand the state of the business, our capabilities, and our opportunities. I'm encouraged by the progress in advancing end-to-end supply chain improvements. And while we are in the early stages of integrated business planning implementation, in my experience, I've seen firsthand the impact this can have in improving planning and forecasting discipline across the business. In our international business, we will be adding resources in our commercial capabilities to improve our distribution and in-market performance. and we are streamlining our operating model in our North American business to accelerate our go-to-market potential. While we are facing similar headwinds and challenges as the rest of the industry in our categories and markets, the company has taken on a number of initiatives to drive productivity, improve service level, and enhance margins. The organization and team are passionate to drive growth and deliver on the opportunity we have to scale our brands. As I am still in my early weeks, I'm examining the key elements of the current HANE 3.0 strategy and growth algorithm. I will not be providing any formal updates to our long-term strategy today, except to say that I am committed to building a clear path to sustainable top and bottom line growth. I will be ready to share my thoughts in the next quarter and a more detailed strategic plan outlook sometime in the late summer, early fall. In the past few years, we've established a level of transparency into our performance and our strategic growth plans which I will continue. And I look forward to working with you and providing updates as we shape and execute our growth plan. For now, I'll turn it to Chris for the business update.

Thanks, Wendy. And good morning, everyone. We are pleased to report a solid second quarter ahead of guidance in both adjusted gross margin and adjusted EBITDA on a constant currency basis. Importantly, we continue to see sequential improvements in both the international and North America business units. And with a better than expected second quarter, we are reaffirming our full-year adjusted net sales and adjusted EBITDA by constant currency guidance of minus 1 to plus 4% versus prior year. As it relates to the underlying health of our brands, we continue to see bright spots in our in-market consumption versus prior year period. U.S. consumption dollars in our snacks business grew 5%, driven by double-digit gains on sensible portions. We also saw double-digit distribution growth in our U.S. snacks business for the quarter as we successfully entered new markets and channels. We are particularly encouraged with early gains in C-stores as dollar growth was up 90% and TDPs increased double digits. With our supply chain challenges largely behind us, Terra realized positive U.S. consumption growth for the second straight quarter with velocities up an impressive 15%. Both Sensible and Terra also saw year-on-year increases in repeat buyers in the U.S. In the baby food category, Earth's Best grew over 15% in the U.S., driven by strong velocities despite persistent supply chain challenges due to continued industry-wide pouch and formula shortages. And Greek God's yogurt remains a standout, growing 19% in the quarter in the U.S. driven by velocity growth of 11% and TDPs of 8%. Now shifting to our international in-market consumption performance for the quarter versus prior year period. In the U.K., total store sales grew 7% in the quarter, with the categories we compete in growing 4%. Excluding plant-based categories, our U.K. portfolio grew 4%. Hartley's jams were up over 20% versus prior year period, picking up two full points of share. Our UK soups portfolio was up 10% versus prior year period, with Cully and Sully as a standout with 20% growth. We're also seeing strength in the continental Europe non-dairy category, especially in private labels, where we are a significant supplier. For example, in Germany, the total category grew by 11% in the quarter versus the prior year period, with private label growing almost 21%. Now, turning to our reported results. In the second quarter, consolidated net sales decreased 4.8% versus the prior year period to $454.2 million. Consolidated adjusted net sales decreased 2.4%, and included an approximate 2% impact from select retailer inventory reductions in North America during the quarter. Foreign exchange was a $26 million reported net sales headwind in the quarter. Adjusted gross margin was 22.9% in the second quarter, a decrease of approximately 170 basis points versus the prior year period. However, adjusted gross margin increased approximately 140 basis points sequentially a favorable outcome relative to our guidance of flat to up modestly quarter over quarter, driven by greater price realization as well as strong productivity gains within our supply chain. These actions allowed us to offset elevated inflation, which we expect to plateau as we head into the second half of the fiscal year. Adjusted EBITDA on a constant currency basis was $52.7 million versus $59.3 million in the prior year period. Relative to Q1, adjusted EBITDA dollars and margin on a constant currency basis increased by approximately 37% and 270 basis points, respectively, which compares favorably to our guidance, where we called for only modest improvement. Including the impact of foreign exchange, Q2 adjusted EBITDA was $49.8 million. The lower year-over-year adjusted EBITDA was a result of higher raw materials and finished goods inflation, as well as lower volumes, partly offset by pricing, productivity, and timing shifts in marketing spend. The shifts in marketing spend are a result of supply chain challenges and moderating sales in select categories from retailer inventory reduction. In our guidance for the second half, please note that we have moved these brand-building investment dollars into Q3. Adjusted EPS was $0.20 versus $0.36 in the prior year period. Increased interest expense accounted for approximately 7 cents of the year-over-year decline, as rising rates as well as a higher outstanding debt balance translated into an incremental $8.3 million in interest expense compared to the prior year quarter. Now, turning to our individual reporting segment. In North America, reported net sales increased 2.7% to $282.4 million in the second quarter. Adjusted net sales decreased by 1.9% versus the prior year period. In the quarter, we saw select customers aggressively reducing inventory levels, particularly in T. This reduced our adjusted net sales growth by 3% versus the prior year period. And excluding this, we would have been ahead of our quarterly segment guidance of being flat to the prior year period. Selected categories such as snacks up double digits in the quarter and yogurt up high single digits continue to perform well, while our Canadian business is showing good progress as pricing negotiated last quarter took greater hold. These areas of strengths were offset by retailer inventory reduction activities, particularly in tea, where we also faced a difficult comp created by the year-ago Omicron surge. well-documented industry-wide formula and pouch supply challenges in the baby food category, and top-line softness in personal care and parm crisps due to lost customer programs previously discussed on our Q1 call. Q2 adjusted gross margin in North America was 25.2%, a 250 basis point improvement versus Q1, and a 50 basis point improvement versus the prior year period. Our margin performance has continued to improve sequentially as our pricing actions took further hold and our productivity efforts resulted in additional efficiencies. Adjusted EBITDA at constant currency in North America was $38.8 million, a 5.5 million or 16.4% increase versus the prior year period. North America's adjusted EBITDA margin was 13.6% on a constant currency basis. a 150 basis point increase from the prior year period. This is further evidence of the strengthened potential of the North America business. In our international business, reported net sales declined 14.9%, to $171.8 million in the second quarter. When adjusted for the impact of foreign exchange of $24 million, net sales declined 3.2% compared to the prior year period. representing a 350 basis point sequential improvement from last quarter. Our year-over-year decline for international adjusted net sales reflects a 1.7% increase in the UK that was more than offset by a 14.3% decline for continental Europe. The UK increase was driven by our baby food portfolio, and because of our diverse offerings, we benefited from the ongoing shift toward private label. The rate of decline for continental Europe improved notably when compared to Q1 2023 due to non-dairy beverage category performance and private label mix shift within the category, where we have a meaningful presence. As further evidence of the ongoing recovery in continental Europe, note that adjusted net sales growth versus prior year improved sequentially in five of six months in the first half. International gross margin was 19%, essentially flat with Q1 2023 results. Adjusted gross margin saw meaningful compression compared to the prior year period due to ongoing high inflation in raw materials, increased energy costs, and fixed costs deleveraged. That said, the rate of year-over-year decline improved sequentially to down 540 basis points versus down 700 basis points in the first quarter. International adjusted EBITDA at constant currency was $21.9 million, a 36.2% decrease from the prior year period. As a percentage of net sales on a constant currency basis, adjusted EBITDA was 11.2%, down 580 basis points versus the prior year period, yet up 130 basis points compared to the first quarter. Shifting to cash flow and the balance sheet. Second quarter operating cash flow was $2.5 million versus $30.4 million a year ago. The lower operating cash resulted from a reduction in net income and use of cash for networking capital as inflation continued to increase the value invested in inventory. As we anticipate generating incremental positive cash flow in the second half of the fiscal year, we would expect resulting cash to be used to pay down debt. CapEx was $6.8 million in the quarter, approximately $3.3 million lower than Q2 2022. Finally, We ended the quarter with cash on hand of $43 million and net debt of $835 million, translating into net leverage ratio of 4.3 times as calculated under our amended credit agreement. Regarding our outlook, we are reaffirming our full-year ranges of minus 1 to plus 4% growth for adjusted net sales and adjusted EBITDA growth on a constant currency basis. Before I provide some updated color on how to think about the remainder of the year, I would note two things. First, we are reaffirming our expectations for approximately $40 million in net interest expense for fiscal 2023. And second, the strength of the dollar has moderated quite a bit in recent months. As such, assuming a dollar exchange rate of $1.19 against the pound and $1.03 against the euro for the remainder of the year, we now expect our full-year currency exchange headwind to be approximately $85 million and $10 million for adjusted net sales and adjusted EBITDA, respectively. For the second half of fiscal 2023, we now expect, on a consolidated basis, low single-digit adjusted net sales growth versus the prior year period, adjusted gross margins to be up year over year, and sequentially better than the first half of the year, as we continue to benefit from our pricing actions, and recognize a ramp in savings from our robust productivity agenda. And consistent with our original guidance, we expect adjusted EBITDA growth at constant currency to be second-half weighted due to easing comparisons, abating supply chain disruption, plateauing inflationary pressures, and greater benefits realized from both existing and planned pricing actions, as well as increased productivity. Turning to our segment outlook, For North America in the second half, we expect adjusted net sales growth of low single digits versus the prior year period, as we realize consistently strong growth in areas such as snacks and yogurt that will be partially offset by softer trends in other areas of the business during Q3 that I will discuss momentarily. North America adjusted gross margins are expected to be approximately flat versus the first half of this year, but up when compared to the prior year period. And last, Constant currency adjusted EBITDA approximately in line with the first half as we accelerate brand building investments to better support our future growth, yet up high single digits when compared to the prior year period. For international, we expect the following for the second half. Adjusted net sales to return to positive growth up mid-single digits compared to the prior year period, driven by accelerated growth in the U.K. relative to the first half of the year. UK performance is expected to be driven by new and already implemented pricing actions, expanded distribution, and the lack of significant declines from last year as consumer confidence and total store sales plunged after the start of the Russian-Ukraine war. In addition, we anticipate improved performance in our non-dairy business as the category performance continues to improve, especially in private label, where we are a significant supplier. International adjusted gross margins will improve materially versus the first half and versus the prior year period, as we benefit from aforementioned pricing actions, energy cost caps, and subsidies, productivity savings, which ramp meaningfully, and early signs of inflation stabilizing. And last, adjusted EBITDA on a constant currency basis is expected to realize strong growth versus the prior year period, with margins several hundred basis points higher than both the first half of this year and second half of fiscal 2022. Speaking specifically to the third quarter now, on a consolidated basis, we expect adjusted net sales growth to be down low single digits due in part to the North American demand surge for baby formula in the prior year period, coupled with persistent packaging and formula shortages in the baby food category, and previously mentioned lost customer commercial programs in North America within personal care and palm crisps. Adjusted gross margins are expected to be down modestly compared to the prior year period, and sequentially, with expected improvement in Q4. An adjusted EBITDA on a constant currency basis is expected to be in the mid $40 million range, with the majority of the decline versus Q2 2023 being driven by the previously discussed shift in marketing spend, as well as the broader increase in brand building investments Wendy noted earlier. In conclusion, we are very encouraged by the momentum we have leaving the first half, and we remain highly focused on executing our strategic priorities as we enter the second half of fiscal 2023. We've taken significant steps to offset higher inflationary costs, and while we continue to take the actions necessary to secure greater profitability, we will balance this against the opportunity to invest behind our brand and our primary focus of accelerating top and bottom line growth. With that, allow me to turn it back to Wendy.

Thanks, Chris. To summarize, as we head into the second half of our fiscal year, we are tracking the guidance and showing great momentum in several of our brands, but more can be done to support their growth. As I mentioned earlier, in my first few weeks, we've made some early decisions to streamline our operating model, leverage our global capabilities, focus our leadership, and invest behind our brands. I look forward to providing more details in the next quarter as we assess the actions needed to unlock the full potential of our brands and portfolio. And I look forward to fully unveiling our renewed plans to maximize shareholder value and return our brands to sustainable long-term growth in the late summer or early fall of this year. Now, I'd like to turn it back to the operator to open the line for your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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 2 if you'd 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. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Hi, good morning, and welcome, Wendy.

Good morning. Thanks.

Sure. It sounds as though I think your most recent sort of successful turnaround experience at Glambia was in many ways similar to the work done as part of Hain's 2.0 program, SKU rationalization and portfolio and cost optimization, and I think generally removing a lot of complexity. I was hoping you could talk a bit more about your experience in sort of building brand equities, particularly, as you've mentioned several times in the course of the the prepared remarks and the slide deck, the plan to reinvest behind Haynes Brands to accelerate growth. And then I've just got a follow-up.

Yeah, thank you, Andrew, and it's great to chat with you. As you mentioned, the experience at Glambia was similar to the work that was done prior to my arrival in streamlining the portfolio to focus for growth. There were lots of challenges that Mark and Chris talked about last year That really prohibited the investment behind those brands relative to supply chain. With those largely behind us, it opens the opportunity for us to be able to, in some of our higher growth brands, ensure that we are driving both physical and mental availability. Physical availability and driving channel reach, right price pack architecture to put the right products in the right place so that they're available for the consumer, and then making sure that we have an always-on message I was a bit surprised joining the company that some of our brands haven't been on air in over a year, and we haven't been in a position to be able to keep them top of mind with the consumer. So we're in a much better position to do that in the back half of this year, both because we have a supply chain that will support that, but we also have built it into our model because of the productivity savings to be able to do so.

Got it. And I guess... It sounds like, so obviously the step-up in brand marketing will start in the back half of this year, given the business structure and supply chains in a better place. I guess, is marketing spend or the increase in marketing spend in fiscal 23 going to be higher than was in the original plan? Or is the step-up versus where you think you're going really more about fiscal 24 at this point?

Okay. A bit of it will be closer to the back half of this year. So think of it into quarter four and allows us to be able to start 24 with a much stronger momentum. As you know, when you turn off marketing, it takes a while to feel the impact. When you turn it back on, it also takes a while to feel the impact. So we'll be investing in quarter three. ramping up a bit more in quarter four. We won't expect to see significant impact to that in our revenues until we get into the quarter four time period.

Thank you. Looking forward to meeting you. Absolutely.

Thank you. Our next question comes from the line of Matt Smith with CFO. Please proceed with your question.

Hi, good morning. Thank you. Taking on to the comment around increase in marketing spend in the second half. Could you talk about your expectation that elasticity trends improve? We can track the volume and pricing performance and measure channels, but that would capture the impact of the supply chain performance as well. So can you talk about that moderating elasticity expectation in relation to your increased marketing investment and the supply chain improvement?

Yeah, thank you. Good morning. From an elasticity standpoint, we're actually seeing elasticities about in line with what we expected. And you've probably heard Mark talk about this in the past, that our brands and the place we play in our categories tend to be a bit more price protected than some parts of the category. sensitive consumer. So our last 50s have been in line with where we expected them to be. But as we go into the back half of this year, the investments behind marketing will ensure that we've got right shopper programs. In some cases, it's shippers. It allows us to be able to have incremental points of distribution. So it's not all just traditional marketing, but it will allow us to invest in right place, right message, right time.

Thank you for that. And just a quick follow-on. Can you talk about the price gaps today, particularly in your snacking portfolio? And is there a need to increase the investment in promotional spending there to sure up the volume performance? Or do you believe the marketing investment should lead to that improved elasticity? I'll leave it there and pass it on after your response. Thank you.

Across the board, Matt, the price gaps have remained with a few isolated examples, both in snacks and the broader portfolio. The price gaps have remained about where they were before we started taking price. It's something, as you've heard on prior calls, we monitor that very closely. Price thresholds and our prices are gaps relative to competition. And so we haven't really seen much of a change there, again, with the exception of a few isolated examples. And so we don't really see that as being a major player in SNAC's performance right now. And again, it's one of the reasons, one of the main reasons why elasticities have performed where we thought they would, or in some cases even better, because it's really that gap to competition that has been stable and therefore didn't then lead to a consumer behavior.

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

Thank you. Our next question comes from the line of Ken Goldman with JP Morgan. Please proceed with your question.

Hi, good morning. Good morning. Wendy, with the understanding, you know, you're still in, I guess, information gathering mode, what do you see early on as Hain's greatest core competence? I'm asking because I think there's some questions out there about what Hain really stands for. You know, given you have a diverse set of categories and You're pretty big in Europe, but also pretty big in the U.S. I think people are curious, at least the questions I'm getting, you know, what gives Haynes sort of the right to win overall in the market? I realize it's a very broad question and maybe a little early to ask you that, but I'm just curious what your initial thoughts are there.

Yeah, good morning. You know, I would say, I guess I'll answer it with the reasons why I came to Haynes, less so than where I think we're headed going forward. I think Haynes has a fantastic portfolio of brands. And as I said in my opening, that are largely number one or number two in their categories. But when we look at the broader category, we're under-indexed and under-shared. So can we be a bigger player in the categories around better for you, fill in the blank, better for you snacking, better for you baby, better for you yogurt, better for you plant-based. So lots of categories that we're in that the consumer continues to look to. Hain has a credibility in that space that in some ways we've maybe underleveraged in reach across channels and reach across our geographies. So those are the reasons why I came here, and those are still the opportunities that I see ahead of us. we've also got, I think, a really passionate group of people. And I know everybody says that. You come to a company, you say, well, you know, the people are really interested in the company. But it's very unique here. Every person that I met with in my early days, when I asked why they came to Hain or why they stayed at Hain, all centers around a belief in where we're bringing better for you to the consumer. And we're all the consumer as well. So it's It's really inspiring to see the people here. I think there's an opportunity for us to align ourselves around categories where we can win with brands that can be a bigger player and get our full share, fair share, and full potential across the marketplace.

Thank you for that. And a quick follow-up. As you think about getting your fair share, often companies talk about that. It's harder, sort of, I've found, to achieve fair share than to kind of point it out. So what do you think... the steps might be, and maybe this is a little premature to ask this, right, but the steps might be to sort of getting Hain its fair share. Is it a question of, you know, leaning in on marketing? Is it a question of top-to-top conversations with customers? I'm just trying to get a sense of the plan of attack there because it has been, you know, a question about Hain for a while about how they can expand distribution.

Yeah, you know, I think the work that the team had done over the last four years really put us in a great position along those lines. Streamlining the portfolio around where we play. Brands that we should be in, categories we should be in to focus the energies of the company. When you have too many small brands, the entire organization and that complexity is distracted with lots of small opportunities instead of placing a few big bets. So I think we're better positioned to be able to go after the market opportunity It's early days, so too soon for me to say sort of how we will do that. I will say that if you look at CPG 101, it's do you have the core portfolio in all the right places? Do you have the right pack and size and right price architecture to be in the right place in the right way? Is your sales team executing across the marketplace in the way you want? And have you built a P&L shape that enables you to consistently support the brands in all the points of distribution. And then you follow that up with planful innovation that keeps fresh news around the brands, but that is sustained investment around the innovation big bets. Those are basic playbook around building brands and building high growth businesses. That's what I'm assessing where we are as a baseline and where we need to go from here.

Thank you so much.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question. Good morning.

Good morning. Hi. Can I continue with Ken's question about capabilities and competencies, but ask more about what's missing? So you've been in the business for a few weeks now. It sounds as though marketing investment on the financial side, that's something that needs to be stepped up. But are there any capabilities that really do need shoring up in your view, given what you've seen so far? And then I have a follow-up.

You know, it's really too soon for me to assess our starting point around some of those capabilities, but I'll give line of sight to sort of what I'm poking around at to explore. I'm looking at our capabilities around insights and analytics. and consumer and category insights and analytics to make sure that we're able to see what's happening in the marketplace and where we need to be. We're looking a lot around our innovation capabilities, but also our ability to build strong brand strategies and even things like our agency model and support model. I'm looking at what we do around communications and public relations. So how are we not just doing paid media but where we're getting earned media credit for our categories and brands. To be a category leader, you need to know the most about the categories. You need to be delivering great, strong brand news, and you need to be top of mind even with media. So those are the things I'm looking at. On the sales side, do we have the right resources against all the channels that we should be playing in? Do we have the right customer and channel mix? Are we too concentrated in particular areas and we've got white space in the market where the consumer would expect to see our products and brands? So it's looking at where those potential gaps might be.

Great. Thank you so much. And then just a quick follow-up and more specifically, I remember talking to the previous management team and they were talking about how energy costs in Europe were the big unknown for the remainder of the year. Do you now have much more visibility into that? Are we sort of okay on that front now? And has it come through better than expected? And I'll pass it on. Thank you.

We do, Alexia. Great question. So we have better visibility, and we have a little bit of a feeling that it's actually going to be a bit of a tailwind in the back half, not materially changing, but maybe shoring up some places where there were going to be risks. So in both the U.K. and in Germany primarily, and also in Austria specifically, The government, as I think you know, they rolled out some cap programs and some subsidy programs so that any of the exposure we had would probably now be laid off as a result of those. So better visibility and a slight tailwind relative to what we had been seeing before.

Great.

Thank you very much. I'll toss it on.

Thank you. Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thanks. Good morning. Wendy, your comment about advertising and brand building is interesting. The advertising at Hain has been pretty low for a while, one to one and a half percent of sales for a pretty long time. Where do you see advertising as a percent of sales going over time and perhaps to the pushback that some people would say, and perhaps even legacy leadership, that advertising is not going to be as high for some of your categories or for some of your brands at the scale that they're at. It just doesn't make as much sense. What would you say to that?

Yeah, good morning. You know, I would say that it depends on the part of marketing that you would be focused on and what's right for the brand. So over time, we want to make sure that we are consistently investing behind awareness of the brands. at a level that will allow it to break through in a category. That will differ by category, it will differ by brand, but it won't just be advertising. Brand building holistically will be, are we using it to drive distribution? Are we doing shopper activation programs? Are we doing things on digital that keeps our brands top of mind? What's the role of e-commerce, not just traditional e-commerce, but even our own channels that we can use as brand-building vehicles to keep our brands top of mind with the consumer. So I would look at it as the 360 of marketing rather than just traditional advertising. Our categories and brands and even the consumers we're appealing to aren't necessarily going to be in mass media.

So do you think your advertising, is there a certain percentage of sales that you might get to And then maybe more specifically, are there categories where you think you're being outspent on a category basis for nearing competitors at your size, categories that would be more likely to get that spending? Thanks.

Yeah, I would say it's early for me to say where I think I want our long-term investment around brand building to be. And it would also be really soon for me to say, where is our spend versus the competitors we should truly benchmark ourselves against? But that's exactly what we're looking at. How do we ensure that we have optimum share of voice and that we are investing in a way that can provide continuous support behind the brands, not just, you know, we wouldn't want to come out big and then be able to and then have to be in a position to starve the brands later in the year. or later in the second year. So figuring out what that right shape looks like for each brand and category will be a key part of our next phase of focus.

Okay, thank you. You bet.

Thank you. Our next question comes from the line of Brian Holland with Cowan & Company. Please proceed with your questions.

Yeah, thanks. Good morning and welcome, Wendy. If I could just ask about the second half of 2023, you reaffirmed the top line guide, but obviously some moving parts in there, the shifting of the brand spend. We obviously had some of the retail inventory adjustments. So I guess I'm just wondering, you know, within the reaffirmed guidance, has anything changed around the shape of that specifically in Do retailer inventory adjustments remain a little bit of a pain through the second half or into the second half? And similarly, you know, is productivity ahead of plan, therefore maybe, you know, some capacity coming back a little bit faster than what you would have expected last quarter? Thanks.

So, Brian, to confirm, we reaffirm both net sales and EBITDA for the full year. So we feel comfortable about that. And to your point, kind of, below the surface that there are a number of moving parts. So certainly versus the original guidance, we believe we're on track. And how we're getting there is the same or a little different depending upon the quarter. You heard us talk about kind of the view we have for what the third quarter will look like, and then that relative to the fourth quarter, of course. On the retailer destocking that took place in the second quarter, we think we're through the worst of that. That was more of an isolated thing for the second quarter. I don't see that as as continued overhang for the balance of year. And productivity, to your point, ahead of plan, back end loaded. So I would say our productivity savings that we've built into the forecast right now and that it's embedded in guidance is about 60-40, back half versus front half. So as we've talked, certainly in the original guidance and as we talked on the last call, we believe that productivity would ramp throughout the year, and we're seeing that come to fruition.

Great color. Much appreciated, Chris. And then if I could just ask, in recent weeks, there's a new story out that Whole Foods has talked about supplier price concessions. I'm just wondering, and I appreciate you may not want to talk too specifically about any one customer. But just kind of curious what you're seeing more broadly in your retail conversations, what folks are looking for from you, and really what's possible because we're not talking about maybe some moderating of inflation here, but not, you know, fully reversing quite yet. So just how you plan on having or how those conversations are taking shape here as we think about where price goes from here.

Yeah, good morning. I'll start and then let Chris add in some additional color. More broadly, when I took a look at the pricing actions that we have taken to date, Haynes taken pricing to cover for the majority of inflation, but not all. And the balance of our profit delivery was through our productivity initiatives. And that's sort of what you would want to do is you take pricing and where you can, but not to fully offset inflation. And then there's some efficiency initiatives you want to do inside the company that will assure that you can cover your profit without passing it all along to customers or the consumer. And I think the team's effectively done that. We still have some inflation pressures coming at us in the space, especially around packaging. But we feel comfortable that we've been able to offset the majority of that through our productivity and won't need to take additional pricing this year, except for a few areas, especially around international. That said, I think because of that and because of the fact that we are largely an entry price point into the more premium parts of our categories, I'm not anticipating that we're in a position where we will need to take ourselves backwards. But that's something that we monitor very closely, as Chris said. I don't know, Chris, if you want to add any additional color.

Yeah, Brian, as we said in the prepared remarks, you know, we see inflation plateauing, but actually beginning to sort of reverse and become a significant tailwind in the back half of the year. that doesn't look like it's on the horizon as we sit here today. And keep in mind, the vast majority of our input costs, our raw material and our packaging costs for the back half of the year are mostly locked in at this point. So even if you did start to see some deflation beginning to emerge, when that will actually pass through to our cost structure and our gross margin is probably still out over the horizon a little bit. And as Wendy indicated, there is a difference between what we're seeing in North America and what you're seeing internationally still. I think with CPI coming down month over month in December in North America, good news. And certainly, I think it supports what we said in the prepared remarks around plateauing. In international, there are still some items that are running pretty hot, and no sign yet that that's going to abate in the short term. So we're definitely seeing the two segments differently and managing the business differently as well.

Thank you. Our next question comes from the line of Michael Avery with Piper Sandler. Please proceed with your question.

Thank you.

Good morning.

Good morning.

You had your North America organic revenue growth down, looks like just a little over 2%. But then you called out the core brands, you know, Snacks Up 5 and some of these others in the, you know, double strong, double digits category. How much does that, and Wendy, I know you're still settling in and fairly new, but how much does that make you think about further portfolio optimization given that there's still, you know, you just mentioned again the value of, being streamlined, how much further can you push that if you still have a bunch of these smaller brands that also are quite a bit of a drag on growth?

You know, I think from a portfolio shape, the bigger question I'm asking is less about where we currently are or looking backwards, but as we look forward, are the categories large enough? Are they growing? What's our relative position? What is our opportunity to be able to get a larger share in some of those categories? That's probably the bigger focus as we go forward. And so those are the things that we're evaluating. But there are some one-time or sort of episodic events over the last year, and then some because of our supply chain situation that resulted in some softness in categories But I don't think that's an indication that those aren't spaces we want to be in or that those aren't areas that could turn around. Those are still questions that we need to explore.

Okay, that's helpful. And just to follow up a little bit related to Alexia's question, you also had these co-manufacturing contracts that I think renewed or reset January 1st. Obviously, you're reiterating guidance, so it must be around what you expected. But just to the extent that that also would spill into next fiscal year, can you give a sense where those landed? Was that better than you expected or, you know, offset, you know, worse, but offset by something else? Or how should we think about where those landed?

Michael, are you specifically talking about the Coman contracts in non-dairy beverage on the continent? Exactly, yeah. Yeah, thanks. Okay. So yes, we are beginning to land those contracts. As you've heard before, as we've discussed on previous calls, those tend to be full calendar year contracts. So we've been bidding on those throughout the back half of last calendar year. And now we're beginning to see some of that volume come into our portfolio. It's slow. Some of the contracts, I think we've said in the past that some of those retailers may move more slowly in transiting from the old contract to the new than they have historically because the new contracts have priced in some of the inflation that's taken place over there. So we've definitely won some good contracts and are beginning to see that. And we'll continue to see that ramp up over the back half of this year and into the first half of next year as well.

Okay. Thanks so much.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thanks so much. A lot of questions have been asked, so maybe I'll just shift to capital structure a little bit. I respect your comments on further optimization or lack thereof needs in certain brands, but as you kind of speak to the ability to scale, I guess, some brands in more specific categories over time, the first question is, is it logical for us to think that that step up in brand investment would likely be focused you know, on more specific categories to actually get you there. And then secondly, kind of as part of the overall review process that you're doing internally, you know, is there any area where you would actually consider or think about at least adding to CapEx to maybe build a bit more internal capacity relative to doing the command model? And that's it. Thanks so much.

As it relates to whether we want to be self-produced or co-man, I think that really comes down to where we think supply chain is going to be a distinctive part of a brand or a category. I've worked at companies that were majority co-man and it was never an issue because they were areas where the manufacturing was not what made it unique. It was the brand or it was the route to market. So it'll be on a category by category basis, brand by brand basis. That said, the one thing we do need to do, and the team has done a nice job of managing our co-manufacturing relationship, similar to how we manage our own manufacturing. So monitoring the same levels of plan attainment, cost structures, quality, ability to be able to service the marketplace. We need to hold our manufacturing partners to the same standards that we would hold our own manufacturing locations. And some of the adjustments that we're making in our operating model is so that we do have a full end-to-end supply chain model that has that visibility and management.

All right, super. We'll see you next week. Sounds good.

Thank you. Our next question comes from the line of Andrew Wolf with CL King and Associates. Please proceed with your question.

Thanks. Good morning and welcome, Wendy. My question is also on your marketing. You're welcome. So as I look at Hain and I see the U.S. versus the U.K., Europe, at least in my view, it's structurally pretty different between the brands, their distribution, their maturity, their growth potential, and things like that. I guess the question really is, is the structural difference enough that you have to kind of almost come up with two different kind of playbooks, one for each segment that's quite different than, you know, if Hain truly had, you know, global brands?

Well, I think today you're right. There are very few in our portfolio that today are truly global brands. The question though is, do we have brands in our portfolio that could be more global or could span broader geographies? And if so, how do you effectively have a global brand strategy And then local execution, regional execution. Those are big questions that we'll be asking as we go through this strategic review is to make sure that where we can, we will. And how do we best get global leverage around those brands and global awareness? It's very possible that, you know, you look at our business today, we have some wonderful regional and local gems. that, as I said in my opening remarks, are number one or number two in their categories in their region. They may only stay local or regional, but we do have some brands that could span outside of its core geography, and we have a right to play there. Those will be the areas that we're exploring and setting ourselves up to be able to go after that.

Thank you. And this is a follow-up, Chris, on the tea, you know, destocking you referenced earlier. Just for my own benefit, could you clarify, you know, it was a warm winter, at least, or late fall, and that can drive, you know, disappointments in demand for the category. Was it more of that, or is it kind of brand-related, or was it just also just the fact that the retailers have been, you know, in the U.S. have had negative volumes for quite a while, and they're just kind of readjusting? Could you just give a little clarity on what you think happened, and

What's the go-forward look from the retailer? Yeah, good question, Andy. Definitely not brand-related. We see it as being category-related, and it was driven by two things. One, you mentioned the warmer weather that depressed tea sales throughout the quarter. But a part of it, the second part actually goes all the way back to earlier in the year, kind of the December-January period at the beginning of the calendar year when the Omicron surge took place. So Omicron surged right about the time that retailers would have been starting to bleed down their inventories from the prior tea season. So they bought in a second round of inventory to account for the Omicron surge. Then Omicron faded, and a lot of retailers were left with heavier inventories that they normally would have had coming out of tea season. And so then we arrived at this year's tea season. They ordered again, and now they found they kind of almost had two sets of inventories, some left over from the Omicron surge. and some from the new. So at that point, we started to see late in the quarter the selected retailers beginning to reduce their tea inventories. We believe across the category, not just on Celestial.

Okay. Thank you, though, for clarifying. Appreciate it.

Thank you. Ladies and gentlemen, our final question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Thank you. Yes, so just on the comment about being cash flow positive in the second half of 23, Wendy, have you decided how much capital will be allocated to the marketing effort? I know you said probably pick up towards the back end of 23 and then obviously into 24. But has there been a dollar amount that you determined or how do you look at that balance?

You know, that's something that we're still really assessing, both what we need, but also how we fill that into the overall shape. So, I mean, I think the way Chris has expressed it is right, which is a ramp up, and you'll see it as a ramp up, but what that is in terms of dollars, we're not final on that yet.

And then just lastly, as a follow-up, So I believe North American sales were up 3%, net sales up 3% this quarter in the fiscal second quarter of 23, and they were up 9% in the fiscal first quarter of 23. What do you think the reason is for the slowdown, even though it's still up?

So we talked on the last call about some of the things that were going to be a little bit of a headwind in Q2. We had the hair care program last year that was shipped in both Q2 and Q3 last year. So we'll see that again as negative overlap that we've got to replace in Q3 this year. But that was a piece of the headwind in Q2 that led to modestly lower growth sequentially this There was also a program, a club store program that wasn't repeated that led to a little bit of a headwind in Q2. So I think we accounted for most of the things in our guidance on the last call that led to to lower growth, expected lower growth in Q2 for North America than what we saw in Q1. The one thing that we didn't see and we didn't see coming and we didn't include in our guidance, it was the reason why we were a little shy of guidance on North American net sales in the quarter was what we were just talking about with Andy, the TD stocking that took place. Sort of a one-time event that reduced T sales in the quarter. And again, we don't see that continuing on into the back half.

Okay, great. Thanks so much. I appreciate it.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Davidson for any final comments.

I want to thank everybody again for joining us today to review our second quarter performance and updated fiscal year outlook. I'd like to close by reiterating how excited I am to be at Hain and about the long-term prospects of our brands and our business. And I want to thank our Hain team for their warm welcome and their action orientation in these first few weeks. I look forward to sharing more with you all on our strategic outlook and initiatives in the months ahead. Take care.

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