The Hain Celestial Group, Inc.

Greetings, welcome to the Haines-Celestial second quarter 2024 earnings conference call. At this time, all participants are on 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. I'll now turn the conference over to your host, Alexis Tessier, Vice President of Investor Relations. You may begin.

Good morning, and thank you for joining us on Hanes Celestial's second quarter fiscal year 2024 earnings conference call. On the call today are Wendy Davidson, President and Chief Executive Officer, and Lee Boyce, Executive Vice President and Chief Financial Officer. During the course of this call, we may make forward-looking statements within the meaning of federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time to time with the SEC, as well as the press release issued this morning for a detailed discussion of the risks that could cause our results to differ from those expressed or implied in any forward-looking statements made today. We have also prepared a presentation inclusive of additional supplemental financial information, which is posted on our website at haine.com under the Investor Settings. Please note that remarks made today will focus on non-GAAP or adjusted financial measures. Reconciliations of non-GAAP financial measures to GAAP results are available in the earnings release and the slide presentation accompanying this call. This call is being webcast and an archive will be made available on the website. And now, I'd like to turn the call over to Wendy.

Thank you, Alexis, and good morning. And thank you all for joining us today. I will begin today's call by first reviewing our second quarter results and then provide an update on the progress with our Hain Reimagine strategy to return the business to profitable growth. Lee will then review our financial results in more detail along with our outlook for the year. We are pleased that our second quarter delivered sequential improvement from our first quarter as anticipated in revenue, growth margin, and adjusted EBITDA. Our international business segment continued its strong growth led by pricing, distribution, and currency benefits, and our North America's business segment improved revenue trends compared to our first quarter. Adjusted EBITDA for the first half came in ahead of our plan, but was down versus prior year due to lower volume and increased investments in marketing and SG&A, offset by both pricing and productivity. Lee will provide greater detail in his remarks. We are making continued progress on the four pillars of our Hain Reimagined strategy, focusing our business in our five core categories and our five core geographies. Progress in building our organizational capabilities to scale our brands and gain share, driving growth through innovation and channel expansion, and progress in generating fuel through working capital management and productivity savings to expand our margins and transform our business for sustained performance. This momentum contributed to the sequential improvement in both our top and bottom line trends and is expected to drive growth in our second half. As we outlined on Investor Day, fiscal 24 is the foundational year of our multi-year transformation strategy. In the first half of the year, we prioritize execution against the focus and fuel pillars of our strategy, which will enable us to fund incremental investments in capabilities for the build pillar in the back half of the year to support accelerated growth. Let's look now at some highlights across the business for the second quarter. Our snack category dollar growth trends have improved since the start of the fiscal year, and I'm pleased with the momentum we are building. This improvement in trend occurred despite the first half strategic changes we made in our promotional strategy and channel mix, which resulted in short-term impacts on our overall snacks category trends. Our largest snack brand, Garden Veggie Snacks, grew dollar sales more than 3% in the second quarter across all customers, measured and non-measured, and TerraChips grew dollar sales 8% in the quarter and grew units 5% and gained share. With channel expansion a key growth lever for our snack brands, we are pleased to see our non-measured trends outpacing measured channels, and both non-measured and C-store sales continuing to grow double digits. We are excited for our flavor burst innovation launch in the garden veggie brand that should further drive our revenue growth in the second half, which I'll elaborate on more shortly. In the baby and kids category, industry-wide organic formula supply shortages persisted from quarter one into quarter two. We continue to work with industry supplier partners, and I'm happy to report we have secured supply commitments that we expect to support double-digit year-over-year growth during the second half. and improved in-market consumption by the fourth quarter. Excluding formula, our overall global baby and kids category continues to perform well. Earth's best snacks and baby food are outperforming the total category driven by pricing and distribution gains with expansion into Canada this year. And our UK-based Ella's Kitchen brand grew net sales year on year, gaining share in e-commerce by optimizing online visibility and enhancing customer planning. In our beverage category, we grew net sales year over year. Celestial Seasonings, the number one bagged herbal tea brand in North America, grew dollar sales in the most recent quarter and gained share, driven by success in both brand building with our Magic in Your Mug campaign and with innovation with the continued performance of both Sleepy Time Melatonin and Throat Cooler. In the international segment, we grew non-dairy beverage net sales for the second consecutive quarter, driven by both private label and brand growth across our Lima and Natumi brands. Our meal prep category grew net sales year over year, led by Spectrum Oils, Maranatha Nut Butters, and Imagine Soup in North America, and branded soups, Hartley's Jams and Jellies, as well as our private label grocery business in International. Spectrum Oils grew dollar sales by mid-single digits, driven by strong velocities. And our branded suit portfolio continued its strong momentum with mid-single digit year-over-year growth, ahead of the category and gaining share. Our three international brands, New Covent Garden, Yorkshire Provender, and Cully & Sully, are the number one, two, and three leading fresh suit brands in the UK. Private label spread showed continued strength, growing dollars by double digits and gaining share. In the plant-based category, the overall category continues to be challenged. However, it returned to growth in the UK in the latest quarter in frozen, where the majority of our plant-based meat-free sales come from. We have two leading meat-free brands, Eve's, the number one brand in Canada, and Linda McCartney Foods, the number two brand in the UK. Eve's is performing better than category, resulting in both distribution and share gains, and we are seeing recovery in both branded and private label in the UK. Lastly, we continue to concentrate on stabilizing our personal care business. While we acknowledge we still have progress needed, we delivered year-over-year net sales growth overall, led by Alba Suncare, Avalon Organics, and in Live Clean, a leading personal care brand in Canada. We're seeing growth in e-commerce and other non-measured channels, leading to non-measured growth for our overall portfolio, and we've made progress optimizing our manufacturing capacity utilization for improved efficiency. As Lee will outline, we will be pulling forward some of the Hain reimagined initiatives originally planned in fiscal year 25 that will result in a top line drag to the personal care portfolio in the back half of this fiscal year, but enable us to accelerate key business mix improvements. Overall, we continue to be encouraged by the bright spots we're seeing across our five categories and our five geographies. Turning to our Hain Reimagined Progress, as we've said, fiscal 24 is the foundational year of our strategy. We're making great strides towards focusing our business, resetting our global operating model, enhancing critical capabilities across brand building, channel expansion, and innovation, and in implementing our fuel program. Our second quarter results demonstrate a marked improvement sequentially in year-over-year trends. This improvement is even more pronounced if you include the short-term impact of baby formula. This reinforces confidence that our Hain Reimagined strategy is on track as we begin to deliver on our promise of returning our company to profitable growth. As a reminder, Hain Reimagined is built upon four strategic pillars, focus, grow, build, and fuel. Starting with the focus pillar, We've made great progress in simplifying our business and aligning our global teams and functions to support a high performance culture. We recently welcomed a new chief people officer, Amber Jefferson, to our global executive leadership team. Amber will be instrumental in building out our people strategy to enable our high performance culture and a strong pipeline of talent to help us deliver on our full potential. During the quarter, we also made strong progress on streamlining our footprint as well. opening our right-sized headquarter in Hoboken, New Jersey, consolidating our sales offices in Europe, and continuing to optimize capacity utilization in our manufacturing facilities across both meat-free and personal care. The rollout of our agile working model to leverage our hub-and-spoke footprint is delivering on our high-performance culture objectives. In the past 12 months, our applications are up 300% on fewer job openings, and applications are up 500% with women. Our turnover remains below industry average, and our engagement score is improved by 8%. Looking ahead to the balance of the year, we will be pulling forward several focus pillar initiatives designed to establish a winning portfolio of SKUs, streamline our operations, and simplify our geographic footprint. These initiatives are an important step towards eliminating complexity in our business, allowing us to concentrate our resources more effectively on the areas where we have the greatest right to win. Under our growth pillar, our goal is to drive share gains across our core snack, baby and kids, and beverage platforms. These platforms have gained incremental distribution across mass and grocery channels, reinforcing our confidence that this momentum will continue to build throughout the year and support our pivot to growth in the back half. Our build pillar is centered on brand building, channel expansion, and innovation. As we mentioned previously, we're driving improved marketing efficiency through a reshaping of working and non-working media and leveraging both paid and earned media to drive brand awareness and reach. We launched our Hain, Agile, and Amped brand building model globally and began to ramp up brand campaigns in the first half of the year for Celestial Seasonings with Magic in Your Mug and the beloved Sleepytime Bear. and targeted marketing on Greek gods yogurt. We've begun to leverage global platform insights and campaigns for our leading baby and kids brands, Earth's Best with Good Food Made Fun in North America and Eat Play Fun for Ella's Kitchen in the UK. Our improved effectiveness and our brand building spend will drive more from our core products and brands and also support new innovation launch success. For innovation, we continue to enhance our capabilities and pipeline. working to leverage key insights to develop breakthrough, scalable innovations. Our recent launch of Garden Veggie Flavor Burst Tortilla Chips is a prime example. Created from consumer research highlighting a gap in the better-for-you snacking segment, Flavor Burst fills the better-for-you tortilla chip void by combining the craveable flavors of nacho cheese and zesty ranch with wholesome ingredients, including non-GMO corn and colorful veggies, with no artificial flavors and no artificial preservatives. Consumer testing results have been outstanding, and we've received nearly 100% retailer acceptance in both the U.S. and Canada. Flavor Burst will hit the market with strong initial ACV, and we expect distribution to build based upon retailer commitment, setting Flavor Burst up to be the strongest innovation launch in recent company history. We are supporting the launch through a robust omnichannel activation leveraging our Agile and AMP brand building model to drive awareness, trial, and repeat purchase, both on shelf and online. Flavor Burst Tortilla will be a strong driver of our year-on-year second half growth in this next category. To support the strong launch, you will see a sequential increase in marketing investment in quarter three. In addition to innovation, we are strengthening our channel expansion capabilities in both away from home and e-commerce. As our new teams scale up, We are pleased to see our C-Store sales up 15% in the quarter, driven by our snacks business, which was up 18%. Further, in January, we expanded snacks distribution to more than 10,000 C-Stores, increasing our store count in this margin of creative channel by double digits. And Garden of Eaton has had several significant wins in commercial restaurants, helping drive both revenue and reach. On the e-commerce side, we are pleased to see digital sales penetration at our unified commerce retailers growing and outpacing grocery category averages. Brand building, innovation, and channel expansion are key drivers of our pivot to growth in the back half of the year. Our last pillar is fuel, which is designed to unlock efficiencies across our business to fund our growth and drive margin expansion. Our productivity pipeline, as measured by cost savings initiatives and our manufacturing operations, is robust and on track to deliver our targeted savings to offset inflation within the year. Our revenue growth management initiatives are on track for fiscal 24 expected savings, largely in trade and non-trade efficiencies, net price realization, and price tech architecture. Our working capital initiatives are also on plan to reach fiscal 24 targets. We have approximately 80% of our payable targets committed to date, and our raw and pack inventory is over 20% lower than a year ago, and our finished goods remain below the expected seasonal build for the first half, better than we projected on the last earnings call. We are continuing to unlock value through our fuel program, which will facilitate reinvestment in the business and the return to growth in the back half of the fiscal year. I'm excited that we've made strong progress in our fuel initiatives and for our plan to deliver continued sequential improvement in our business and year-on-year growth in quarter three and quarter four. With formula supply recovery, distribution gains and innovation, and channel expansion, and continued momentum in our international region, we have many reasons to believe in our outlook for a pivot to growth in the back half in spite of the challenging macroeconomic environment. Before I hand the call over to Lee, I want to thank the entire Hain team for their dedication, their passion, and their hard work. As we've reimagined Hain Celestial and redefined the future of better-for-you, purpose-driven brands, our global team has played a pivotal role in putting new plans into action, coming together to grow our brands, our business, our impact, and our people. I want to thank them for their continued commitment to lead with purpose, to live our Hain values, and to demonstrate possibility thinking. With that, I'll turn the call over to Lee.

Thank you, Wendy, and good morning, everyone. Q2 delivered a sequential improvement in both top line and bottom line performance versus Q1. This was driven by the focus and fuel pillars of Hain Reimagined and establishes the pathway to continue to deliver sequentially improving growth rates as we move through the balance of the year. Consolidated net sales for the second quarter were flat versus the prior year period at $454 million. An improvement sequentially from the first quarter decrease of 3.3% year over year. Organic net sales for the second quarter adjusted to exclude the effects of divestitures and discontinued brands increased 0.2% versus the prior year period. An improvement sequentially from the 2.9% year over year decrease in the first fiscal quarter. Organic net sales growth in the second quarter reflects an approximately two percentage point benefit from foreign exchange. The increase in organic net sales was driven by sales growth in the international segment, offset by lower sales in the North America segment, as expected. Formula was a 2% drag on organic net sales growth in the quarter. We delivered second quarter adjusted EBITDA of $47 million, versus $50 million in the prior year period. Adjusted EBITDA margin was 10.4% as compared to 11% in the prior year period. Adjusted growth margin was 23.5% in the second quarter, an increase of approximately 60 basis points versus the prior year period. The increase was driven by pricing and productivity savings partially offset by deleverage on lower sales volume and by cost inflation. For full fiscal year 24, we anticipate gross margin to show an improvement of 50 to 100 basis points versus the prior year. SG&A increased 2.2% year over year to $74 million, representing 16.3% of net sales for the quarter. The increase was driven primarily by higher marketing expense and people-related expenses on the reinstatement of bonus accrual, as expected. Looking ahead, we expect to ramp up marketing spend in the third quarter in support of our flavor burst launch and additional programming in the back half of the fiscal year on our priority brands. During the second quarter, we took charges totaling $31 million associated with actions under the restructuring program, including contract termination costs, asset write downs, employee related costs, and other transformation related expenses. Of these charges, 21 million were non-cash. Interest costs for the second quarter rose 49% to $16 million. due to the higher variable interest on the unhedged portion of our debt, partially offset by lower outstanding borrowings. As a reminder, we have hedged our rate exposure on approximately 50% of our loan facility, with fixed rates at 5.6%, and remain keenly focused on driving down net debt over time. All of these factors combine to reduce net loss for the quarter of $14 million or 15 cents per diluted share compared to net income of $11 million or 12 cents per diluted share in the prior year period. Adjusted net income, which excludes the effect of restructuring charges amongst other items, was $11 million or 12 cents per diluted share versus $18 million or 20 cents in the prior year period. Now turning to our individual reporting segments. In North America, reported net sales decreased 5.2% year over year to $268 million in the second quarter. Organic net sales decreased by 4.8% versus the prior year period due to a sales volume decline in baby and kids, which is a function of continued industry-wide challenges in organic baby formula supply, as previously discussed, and lower sales in snacks as we shifted our promotional strategy and optimized our channel mix for improved trade efficiency and profitability. This was partially upset by growth in beverages. Formula was a 3% drag on organic net sales in the quarter. Second quarter adjusted gross margin in North America was 24.8%, a 40 basis point decrease versus the prior year period, driven by deleverage and lower sales volume and cost inflation, partially offset by pricing and productivity savings. Adjusted EBITDA in North America was $31 million, an 18.9% decrease versus the prior year period, and adjusted EBITDA margin was 11.7%, a 190 basis point decrease from the prior year period. These year-over-year declines resulted from lower volume, inflation, and marketing investments partially offset by productivity. In our international business, reported net sales demonstrated continued strength, increasing 8.5% to $186 million in the second quarter. Organic net sales growth was also 8.5%. This reflects 5.8 percentage points of growth from FX. As Wendy mentioned earlier, our growth was primarily driven by meal prep, including private label, and branded jams and jellies, private label meat-free and our branded soups brands, and non-dairy beverage growth. International adjusted gross margin was 21.6%, up approximately 260 basis points year over year, driven by pricing partially offset by inflation. International adjusted EBITDA was $26 million, a 35% increase from the prior year period, driven primarily by pricing, partially offset by lower volumes and inflation. Adjusted EBITDA margin was 13.9%, up approximately 270 basis points versus the prior year period. Now shifting to cash flow in the balance sheet. We generated second quarter cash from operating activities of $21 million. versus $3 million a year ago. The higher operating cash resulted from continued working capital management, including our accounts payable optimization and inventory management initiatives tied to the fuel pillar of Hain Reimagined. CapEx was $6 million in the quarter, and we now expect expenditures to be in the mid-40s for fiscal 2024. Finally, we closed the quarter with cash on hand of $54 million and net debt of $756 million, translating into a net leverage ratio of 4.2 times, as calculated under our amended credit agreement. We drove leverage lower than we had previously projected due to better cash flow on momentum from our fuel initiatives. Paying down debt and strategically investing in the business continue to be our priorities for cash utilization. Consistent with our stated priorities for cash, we have reduced net debt by $91 million since the end of Q1 2023. And as we have previously indicated, our long-term goal is to reduce balance sheet leverage to three times adjusted EBITDA or less. Turning to our outlook. We are making early progress against Hain reimagined, especially in the delivery of fuel as planned in this foundational year of the restructuring program. We have accelerated some of the initiatives outlined in the focus pillar, primarily portfolio and channel mix improvements. This is expected to create a near-term revenue headwind as we rationalize lower margin skews in sales. As a result, we believe it is prudent to take a more conservative view of the balance of fiscal 2024. In addition, we expect less of a tailwind from foreign exchange than when we initially provided guidance in August. Considering these factors, as well as performance year to date, we are adjusting our guidance for the full year. On the bottom line, we delivered better results versus expectations through Q2, year to date. However, as previously stated, a tenet of Hainry Imagined is to link our brand building, innovation, and channel expansion investments to the supporting generation of investment fuel. Consequently, The over delivery in the first half of fiscal year 2024 will be utilized in the second half to step up investments to drive longer term volume growth and margin expansion. Our revised fiscal 2024 guidance is as follows. We expect organic net sales growth of approximately 1% or more year over year. adjusted EBITDA to be between $155 and $160 million, and free cash flow of $40 to $45 million, which now reflects 2024 costs associated with Hain Reimagined. Our 2024 guidance assumes that first, currency exchange rates will not materially change from today's rates, resulting in an approximately one-point net sales benefit from foreign exchange. This compares to an approximately two-point net sales benefit when we gave guidance in August. Second, net pricing will recover most of the expected cost inflation as we continue to make progress on revenue growth management initiatives. And finally, the productivity will drive gross margin expansion and fuel investments. Lastly, we're now projecting the annual effective income tax rate to be 32 to 33%. This is primarily as a result of a shift in the geographical mix of earnings, the associated impact related to global intangible low taxed income, and limitations on certain deductions. While we are not providing specific guidance for the fiscal third quarter, we do want to provide some color on the shape of the balance of the year. In keeping with our expectation of momentum building throughout the year, we anticipate organic net sales growth in the third fiscal quarter to be greater than that in the fiscal second quarter, and organic net sales growth in the fiscal fourth quarter to be greater than that in the fiscal third quarter. Similarly, we expect continued sequential improvement in adjusted EBITDA growth rates. Now I turn back to Wendy for closing remarks.

Thank you, Lee. Amid our company's transformation, we remain committed to driving positive change for people, communities, and the planet through Better For You brands. Making a positive impact on the world around is core to our Hain Company purpose. To that end, we're proud to share that we will soon be publishing our annual global impact report, which outlines the progress we are making towards our goals for healthier people, healthier products, and a healthier planet. You will be able to access the report and learn more on our company website. I am encouraged that we are continuing to report sequential improvements and fuel generation through our Hain Reimagine Strategy. As we outlined on Investor Day, our approach will be to pay as we go to generate fuel and reinvest in the business to deliver profitable growth and margin expansion. This is a multi-year strategy to transform the business and will continue to balance the pacing and prioritization to deliver steady progress to our goals. We are pleased to see the second quarter demonstrate our progress made and the momentum in our business. The accelerating trends coupled with recent innovation and distribution gains across growth categories give us confidence that we will pivot to growth in the back half of the year. and the progress we're making in our fuel program will enable us to reinvest in the business to get the flywheel spinning and to realize our potential as a growth leader and better-for-you brand. We firmly believe the best is yet to come and appreciate you joining the call today. Thank you for your interest and for your continued support. With that, operator, please open the line for questions.

Thank you. At this time, we'll 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 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We also ask all participants asking questions to please limit themselves to only one question and one follow-up question. Dial everyone in the queue in ample time.

Our first question comes from the line of Jim Solero with Stevens Inc.

Please proceed with your question.

Hi, guys. Good morning. Thanks for taking our question. Good morning. Good morning, Wendy. I wanted to double-click a little bit on the snacking growth. You know, it seems like the data that we have visibility in with the track channels don't really capture the full picture and so if we think about the back half of the year can you just maybe break out how much of the growth you expect to come from recovery and track channels from what we can see versus you know distribution gains slash just organic sales growth in untracked channels yeah i appreciate the question and as we said when we

leaned into, Henry imagined on Investor Day, we were going to be driving disproportionate growth in channel expansion, especially in our snacks category. It's important to remind there were two big drivers in the snack category in the front half of the year. In quarter one, we had an impact in Terra because we made some decisions in optimizing promotion spend and in channel mix. And so that was a quarter one impact pleased to say that we actually saw Terra in growth in quarter two in both dollar sales as well as unit growth. In Garden Veggie, it was the opposite. We had good growth in quarter one. We made some choices in promotional shift and, again, some optimization around promotional spend in our RGM initiatives that impacted Garden Veggie straws or the Garden Veggie brand in quarter two. Really pleased that the distribution gains we've had in non-measured. So we mentioned in the earlier remarks that we now have our snacks brands in 10,000 C stores starting in January. We obviously have the Garden Veggie Flavor Burst launch that takes place right now. And we're beginning to see some momentum even in our measured channels in the latest four weeks. So I think the combination of cleaning up our promotional activity, leaning on our channel mix and the work that we're seeing on TDPs as well as Velocity combined with innovation and channel expansion in the back half give us confidence in the SNAC portfolio.

Great. And maybe a follow-up on the channel expansion. As you guys enter a channel where you've been underpenetrated in the past, is it kind of a you have to prove that the products can work? And so you come in with one or two SKUs and then give the retailer, you know, a trial period to see if they want to add more? Or should we think of there's already kind of a plan in place that we should see distribution ramp in on track channels as you guys introduce new products and, you know, get the promotional thing right size?

That's a great question. And the thing that I think we have felt all along, we know that we have beloved consumer brands. They're just not able to find them everywhere. So the opportunity for us isn't proving the viability of the products or the viability of the brand. It's making them more available to the consumer where they're shopping. We've had great retailer take rate in alt retail, in food service, and in C-Store. We're up double digits, in high double digits, in all three of those away-from-home non-measured channels. That gives us a lot of confidence as we go forward. But I don't think that this is a need to prove it. It's a need to make it accessible and available to the consumer.

Okay, great. Thanks, guys. I'll hop back in the queue. Good. Thank you. Our next question comes from the line of Andrew Lazar with Barclays.

Please proceed with your question.

Great.

Good morning, everybody.

Good morning. So, Wendy, I guess...

I'd love to get a better sense, or maybe I'm just not clear yet on sort of what changed or what you're seeing in the market that's leading you to want to accelerate some of these focus pillar actions and sort of what specific actions are really being accelerated. So, you know, are there certain parts of the business, brands or categories where you're accelerating the sort of SKU rationalizations?

Well, remember, well, good morning, Andrew. But remember what we said on Investor Day, that we would need to pay as we go. So as we unlock fuel, we would be able to lean into investments, but also some of the simplification work that we knew would be needed. Things like the work that was done with JOIA last year in international, we eliminated 50% of the SKUs in the JOIA portfolio. And the brand grew double digits. So a harder working core assortment in the Joya brand. We're taking a similar approach across the entire portfolio where we have a tale of skews that are both adding complexity into our Indian supply chain. It adds added inventory, both in raw and pack and in finished, but it also adds maybe unproductive skews in the assortment for our retail partners. So but that obviously when you do that, that kind of skew rat, it's a top line drag and it can also be a bottom line drag. So we knew we were going to need to pace that a bit because we over delivered EBITDA in quarter one and quarter two. It puts us in a position to both invest behind some of the brand building that we wanted to do. It allows us to accelerate the adding of some of the organizational capabilities that we want think headcount in revenue growth management and in away from home on the commercial sales side of our business. But it also allows us to accelerate some of those simplification things in SKU and footprint that we may have planned in fiscal 25 because we didn't think we'd be in a position to be able to do it. We're in a financial position to be able to do it in fiscal 24. So we're going to pull those forward into quarter four.

And so maybe I can just build upon that a little bit. I mean, You know, the other thing is, you know, we do distribute products into 75 markets. As we simplify our focus, you know, it is on five key markets. So it is an opportunity for us as well just to simplify where we've got physical assets. So that's come into account as well. Again, we will continue to distribute into kind of broader markets, but really focused on five key markets.

Got it. That's helpful. And then And then, Lee, just to follow up for you, I think you said in your prepared remarks that 4Q organic sales growth would be greater than what we see in 3Q. And I'm just looking at it, and just last year, right, the comparison in 3Q in terms of organic growth is far easier than in 4Q. So I'm just curious, what are some of the things maybe you can remind us that are still expected to dampen organic sales growth in the third quarter that would make the fourth quarter organic sales growth better? Thank you.

Yeah, I mean, so a couple of things.

I mean, we obviously got the ramp up of our new product initiative. Part of it is also just the pacing of our investments. So, you know, we're investing, we're stepping up investment in Q3, you know, and then that will kind of drive and the focus is driving that sequential improvement in volume. So part of it is tied into kind of the pacing of our investments, you know, and just as kind of as a reminder overall, we said we'd have a pay-as-you-go model. So, you know, with what we've delivered from an EBITDA perspective through the first half, that's given us the ability to then invest, increase that investment in Q3, and then we'll see that starting, you know, really coming through into the fourth quarter.

Well, and let me add to that, some of those distribution gains that we said that are coming certainly in this month, think C-Store and some of the away from home, it takes time, and even Flavor Burst launch, it takes time for that to ramp up. So we've assumed that we would fully realize some of that velocity in quarter four, but it takes some build time in quarter three. So you see some of that around the timing of those as well.

Great. Thanks so much. You bet. Thank you.

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

Thank you. Good morning.

On the North American snacks business, could you unpack for me the changes in the velocity or just the total sales for garden, veggie, and Tara? It seems to go in the opposite direction sequentially between distribution changes and promotional cadence. So I'm trying to Like Tara, you know, like just observationally, I saw it being promoted pretty heavily, at least at Whole Foods. So I'm trying to get a sense of, you know, is there an on-promotion aspect to this versus off-promotion previously? And also, you know, with Tara, I mean, with Garden Veggie, there's so much of it, you know, sold through or at least appreciable amounts sold through the club. Is there a change in any big change in the club distribution?

Yeah, well, as we mentioned in actually in some of the guidance that we gave going into the fiscal year, quarter one would have some very specific drags, one of which would be Tara, because we were making a decision to reduce the depth and frequency of large promotions, particularly in the club channel on Tara. And that was going to have a quarter one impact that allows us to have a much more stable distribution, but also promotional activity. And I would say, you know, and I mentioned earlier, we've seen unit volume growth as well as dollar growth in Terra in quarter two. And in the latest four weeks, we've seen double-digit dollar growth as well as our sales on promotion are about flat to where they've been. So we've stabilized the promotion frequency and depth to be right-sized, I would say, for Terra, and we can build from there.

Garden Veggie

It's a bit different, less so in channel mix, but much more around the promotional depth in quarter two. We didn't pace the same promotions that timing that we did a year ago. So some of that you see as a year on year drag going into quarter three. strong distribution gains on garden veggie, both in measured and non-measured. But what we're most excited about, obviously, is innovation news coming in garden veggie that actually creates overall brand news for the entire franchise of garden veggie. So it gives us confidence as we go into the back half. But what you saw in the front half is a little bit of some of the cleanup in our revenue growth management initiatives impacting both timing and depth a volume that's just a timing issue year on year.

Okay, Wendy, thank you. That's very clarifying. And just the follow-up is also actually with the veggie burst launch. It sounds like the acceptance was strong. Was the acceptance what you expected or was it actually a little better? And if it was better, did that affect your marketing plan or was it pretty much spot on and your marketing plan is the same just with respect to the launch?

Well, I would say, and I encourage you to order the product. You're going to love it. So once we tasted the product and we saw the consumer research, we were very excited about it. To be honest, we expected to have large retailer acceptance. But I would say we have almost 100% retailer acceptance across both Canada and the U.S. That gives us a lot of confidence as we go in. We've got a little bit more feature activity. Because of the strength of the launch, that's probably a bit more than we planned. So what we did was, as Lee said, we're leaning into the omni-channel marketing activity, and that actually has us ramping up our investment in brand building in quarter three, which will be reflected as sort of the outlook that we have in the balance of the year, because we want to make sure that we're appropriately supporting the innovation for a successful launch, both for our retail partners and for us.

Okay, thank you. Thank you.

Our next question comes from the line of Ken Goldman with JPMorgan Chase. Beautiful to see you with your question.

Hi, thank you. With the understanding that the data that we get, especially from some syndicated providers, it does not really tell the whole story on Hain. Some of the numbers we're looking at would suggest perhaps that the lifts that Hain is getting on some of its promotions may not be quite as strong as the company had hoped. I was just curious if you could comment on that. A, is that valid? And if not, you know, I'd love to hear it. And B, if it is valid, you know, can you talk a little bit more about the decision to kind of invest more in the business? Understanding also that not all those investments are of the promotion type, of course.

Yeah, good morning, Ken. And that's a great question. And we're seeing the same data that you're seeing in measured channels. And I would say And it depends on the brand. So Terra has a very effective response to promotional activity. And that is allowing us to more effectively invest our trade behind Terra, both on feature and merchandising, as well as discounting of promotions that actually gets lift. So feel very good about the plans that the team have on Terra and the response to that. Garden Veggie is a bit different. And what we're finding is that The frequency of our promotions is more important than the depth of those promotions. And having feature activity both in our SNAC portfolio in the U.K. and feature activity in the U.S. are really important in the SNAC category. So as a part of our revenue growth management initiatives, the team is now using some really good data analytics to evaluate trade effectiveness to make those adjustments and then move forward I feel better now because of those analytics that will allow us to increase the spend in the right way to move in the direction we need to rather than a peanut butter approach across the trade. And that's what you'll see us reflecting as we go into the back half is leaning into some of those ROI effectiveness decisions rather than just leaning more dollars.

Great. Thank you. I'll pass it on. Beth. Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question. Thank you. Good morning.

Good morning.

Just wanted to come back to some of the channel expansion, and could you put the 10,000 new C-Stores in context? I guess, you know, is that just the low hanging fruit and you feel like there's, you know, some more wood to chop. Have you kind of made the rounds and that's likely, you know, kind of the extent of the upside. How do you think about what the runway looks like there? And then you've touched on food service opportunities in the past. Maybe can you give an update of somehow that might be progressing as well?

Yeah, absolutely. Well, as we said on investor day, And before, one of the reasons why we are very bullish on away-from-home and non-measured channels, especially for brands like ours, is we know that they're beloved by the consumer, but they're not available on the consumer's sort of everyday shopping journey. It's making them more available and accessible. So putting them within arm's reach of the consumer. To put it in numbers, there's about 160,000 C stores. So... Putting it into 10,000 C stores is a good move for us, but it's a starting move for us. In a retail environment, there's about 28,000 points of distribution for retail. For food service, there's about 2 million points of distribution. The dollars per point of distribution might be smaller, but they are then mentally available to the consumer. They're building the brand because you see them everywhere you're going. That's our goal, is both to have it available when the consumer is in a big retail environment, but also to have it more aware as they're moving throughout their day, throughout their week. So C-Stores is a growth vehicle. We're seeing great growth, double-digit growth in the U.K., as well as double-digit growth in the U.S., up 18% in snacks in the U.S. alone in quarter two. In food service, we're up high double digits as we're getting some placements of brands like Garden of Eden with commercial restaurant chains. We're getting some of our yogurt products and some of our Celestial Seasonings tea placed where they're on the consumers sort of moving throughout their day journey. So we feel really, really good that we're getting early momentum in our away-from-home efforts.

No, that's helpful. And just to follow up on some of the – second half, moving parts on the top line. Can you give a sense for the SKU cuts or some of the geographic rationalization, just what either the timing or magnitude of that might look like? And similar for the flavor burst launch, just when we think about modeling in some of the pipeline fill and just to help us capture those pieces.

Yeah, so I, you know, probably you're not breaking out all of the pieces specifically, but if you just think about kind of the adjustments that we made, you know, we said, for example, for the original guidance we gave, there was a percentage point pull down due to FX, so that's one piece. Then, you know, the other pieces in there, obviously, the kind of the focus initiatives, as those are broken out, you know, And I would say there is a kind of a bit of a third element in there is, you know, we did see some kind of year-to-day performance, you know, deleveraging a little bit on some of the volumes. So, you know, I don't think we're going to break out the pieces specifically, but, you know, you've got a percentage point, and then you can see, you know, the focus initiatives and the pull forward is the other kind of the key element there.

And if you thought in terms of timing, I think was your question, we will see ramp up in flavor burst in quarter three and really hit stride as we get into quarter four. On the simplification initiatives, I think you will see the majority of that hitting in quarter four. And, you know, as Lee said, if you looked at our original guidance of two to four and You figure a point of that that we pulled back is from FX that's different than what we originally planned. And I'd call it a point or two around the simplification is about how you'd look at that. I hope that helps.

That's really helpful. Yes, thank you. Thank you. Our next question comes from the line of Matt Smith with Stifel.

Stifel, Steve, what's your question?

Hi, good morning. Wendy, I wanted to ask a follow-up to your previous response about the impact from the focus pillar actions, the rationalization of SKUs and channels. You were talking about the predominance of the one-point reduction of top-line guidance beyond the FX adjustments being tied to those focus initiatives and those being concentrated in the fourth quarter. So should we think of that as a mid-single-digit increase headwind to revenue growth as we look out into fiscal 25 as you annualize the fourth quarter impact in the next year? And should we think about SKU rationalization then hitting a normal cadence or should there be incremental focus pillar actions in fiscal 25 as well?

Yeah, I wouldn't look at it that way. We will feel it more discreetly in quarter four. but it won't continue to carry out into fiscal 25. These are things that we had actually built in and layered into Hain Reimagined. And if you recall on Investor Day, we said that as we generated fuel, we would throttle forward and back because we'd be in a position to be able to do so. As we saw the effectiveness of brand building, we would also throttle forward and back. This is allowing us to just pull forward some of the things around the Think of cleaning up inventory, stranded inventory, a brawn pack of SKUs that no longer need to exist in the portfolio, getting rid of some inventory finished goods in some of the SKU rats. It's working it through the trade. At the same time, we would expect, similar to what we saw in Joya, that harder working core to grow better. So it shouldn't be a straight one for one that carries on into the next year. It's something you'll feel discreetly in the quarter. And then you've got a better working core as we go into fiscal 25.

Sorry, just to build on that. I mean, I think that is a key point, just as a reminder on the algorithm overall that was presenting Henry imagining with 3% plus. But to Wendy's point, you know, part of that is, streamlining with this winning portfolio. So, you know, as you make some of these SKU rationalizations, it will be flowed back to some of our existing products.

Great. Thank you very much. I appreciate the detail, and I'll pass it on. Thanks. Thank you.

And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the question and answer queue with one question and one follow-up. Our next question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.

Good morning. Thanks for the question. Good morning.

Good morning. I wanted to come back to your comments in the prepared remarks about headwinds in the macro environment. And I think historically, Haynes typically leaned on a notion that the portfolio skews to higher-income households, so it's more insulated from the macro environment. Is something changing in the environment, either with more discretion among higher-income households, or are you seeing maybe less trade-up from mainstream consumers even? Just trying to better understand the context and the impact of these macro headwinds for you.

Yeah, that's a great question. If you would have recalled maybe a year ago when I first joined, we were talking about the – historically, you would have expected – that natural and organic as a category tended to outpace conventional. All of that flipped upside down during COVID when people gravitated back to conventional products. And in some cases, supply chains made conventional more readily accessible. We were waiting to see that consumer behavior really revert back to expectation. Really pleased, you'd see this in the Circana data, that we're beginning to see, I think in the middle of last year, calendar year, we started to see the consumer revert back to historical behaviors. But what changed was they still wanted natural and organic products, but they want them available in more places. So they're not just going to specialty retail anymore. They're going to food and mass and away from home. That's a great opportunity for Haynes. But we also have been evaluating the move from brand to private label. Happy to say in the U.S. market, we don't see that. Europe is a different story. We've seen the consumer much more impacted economically in Europe, and that's affected consumer behavior both in number of shopping trips but also the size of the basket. We've also seen private label recover faster. in our international business, in the industry than the brand. That benefits Hain because we actually are both private label and brand, and we're seeing the recovery in our private label business faster than our branded business but still outpacing category. That's why you see such strength in the international business while North America is beginning to recover. And it actually, I think, is a great example of the value of our geographic diversification in our business because it gives us a geographic hedge. as the consumer behaviors start to normalize.

So, I mean, if I build on that and look at your salty snacks business in the U.S., you know, I can appreciate the shifts from promotional timing and the innovation you're ramping now, but I mean, baseline volumes have been down for the portfolio since like, you know, mid-2022. Is this, building on those comments, is this a situation where some of that baseline volume consumption has gone from Nielsen channels into non-measures? And that sort of explains I guess the absence of more prominent velocity growth and baseline volumes in the portfolio? Or is there something else in Salty Snacks in addition to innovation or promo that needs to be tweaked to get better, you know, same store sales and deals and data?

Yeah, I would tell you that if I look back at the early observations when I joined the company and what really led to some of our focus around Hain Reimagined, one is that you actually, we need to have a harder working core. We need to have an always-on support around our brands. We need to make sure that we've got the right products on shelf and available where the consumer is shopping. And we need to have really meaningful innovation that we support both at launch but we continuously support. What's different now than I think what you would have seen in 2022, some of the challenges were financially the company wasn't in a position to continuously support with marketing and trade. We also had some significant supply chain disruption during that year, which pulled back a lot of promotional activity, and it also had our fill rates to the trade really below average. I'm really pleased to say that our fill rates and on-shelf availability in snacks is in top tier and has been for the last 12 months. We are in an always-on promotional support and marketing support behind the brands. But we've invested in really good consumer and category insights to make sure that our campaigns are meaningful, our price pack architecture is accurate, and that our innovation is meaningful to take to the marketplace. So I think what you should see from us is I think natural organic products, the consumer wants those products and they love our brands. We are putting ourselves in position to be better able to run the portfolio and to drive the right kind of growth, not just episodic growth quarter on quarter, but to have some good momentum. And as I mentioned earlier, we're seeing actually really good dollar growth in garden veggie in the latest four weeks in measured channels. If you add in non-measured, it's even better. Terra chips has actually really improved, especially in the latest four weeks, but we had unit movement in quarter two. So I feel good about the snacks recovery and pivot to growth, but you would have seen a lot of historical noise in that.

Thank you, Wendy. You bet. Thank you. Our next question comes from the line of John Anderson with William Blair.

Please proceed with your question.

Thank you. Good morning, everybody. Two quick ones. There's been a ton of discussion, rightly so, about the snacks business. I'm wondering if you could talk a little bit about a couple of the other focus areas, baby and kids and beverages, whether that be second half recovery, but letting the maybe remedy of the formula shortage, which you referred to in the prepared comments, but more broadly around perhaps innovation and channel expansion, some of the demand driving initiatives that are part of Hayden Reimagined. And then second, On gross margin for the year, I think you provided an updated outlook for 50 to 100 basis points of improvement. Could you remind us, is that a little, I think a little less than what you previously anticipated and what some of the puts and takes around that change are? Thank you.

Yeah, I'll cover the categories and then flip it over to Lee. From a category standpoint, as you mentioned, so our snacks category was off, call it mid-single digits. in quarter two total company. And that was really tracing to some of this move in promotional activity. Feel very confident as we go into the back half of the year because of what we're seeing in the latest four weeks. The baby category was off double digits in total for the organization. If you take out formula, the baby kids category was actually in growth, but formula was a significant drag. We have secured supply as well as incremental supply partners to ensure our availability to have that product in the back half. It will result in double-digit growth year-on-year in the back half of the year in the formula part of baby kids and get that entire category back to growth. The beverage category was up high single digits. between both North America and international. International was led by non-dairy beverage. That's actually a great category for us to be in. And we're a leader in both private label and brand with a really powerful portfolio there that continues to perform. You would have heard us talk a year ago about some of the capacity utilization in our plants. All of that has been addressed and we're running a solid operation five days a week, really good capacity utilization with the ability to support our customers. and a much more diversified customer contract base. Meal prep was up high single digits across both markets. In North America, led by Spectrum and our nut butters and our soups. And in international, by soups as well as jams and jellies. So that's a portfolio that continues to deliver. And then personal care was actually up almost 2% year on year as a total category. And that was led by Alba, Avalon Organics, and then Live Clean, which is a leading brand in Canada. So we're seeing really good bright spots at a category level. I feel good that we know what's driving both snacks and baby kids, and those are short-term acute, that we see improving trends as we've started quarter three that give us confidence in the back half.

Lee? Yeah, so just, you know, answering your question on margin, You know, we are seeing good margin improvement, but as you point out, you know, we had previously indicated 100 to 200 basis points. You know, we've now refined that to 50 to 100. So, a couple of elements there. You know, we are seeing some plant cost leveraging on the lower volumes versus our initial expectations. You know, I'd say on the flip side, again, we are, and we've talked about this a number of times, we are seeing sequential improvements driven by a Hain reimagined initiatives, but again, a bit lower than our initial expectations. I'd say the second element is really some of the mixed impact that we've seen. And a prime example of that is formula. You know, we originally thought formula would only impact Q1, but it did also bleed into Q2. We have secured supply in the second half, but again, you know, the full year is not in line with our initial expectations. I think more kind of on the positive side, you know, we are seeing the benefits of pricing come through and the focused RGM initiatives, you know, Wendy talked to a number of those. So those are driving, you know, strategic pricing opportunities. Overall, also our productivity pipeline is delivering. And then I'd just say the third thing, and it does tie in a bit with RGM as well, is, you know, we continue to evolve our trade strategy. So we are seeing a step up in ROIs versus history. But again, you know, the kind of what has changed as we've looked and within this current year is, you know, is kind of just the expectations on the volume and then some of the mix. We will see that improve as we move forward, you know, and again, as we make these investments and we get that sequential improvement in the top line.

Thanks so much. You bet.

Thank you. And our next question comes from the line of Anthony Vendetti with Maxim Group. please proceed with your question.

Thank you. Yeah, most of my questions have been answered. But I guess other than supply chain concerns or issues with baby formula, are there any other brands or SKUs that are dragging down just overall organic growth? And if so, are any of those brands Or SKUs, are you considering jettison them or shutting those down or selling those at this point? Or are you still in the evaluation stage for some of those other brands that are maybe dragging down growth?

Yeah, thank you. I appreciate the question. You know, we feel very good about the five categories. focus and the five geographies. What I would say is, as Lee mentioned earlier, in the five geographies, we want to make sure that that's where we are focusing our most efficient assets and footprints. We'll still distribute beyond those five, but we really want to streamline where we've got a physical footprint. In the five categories, we feel very good about the categories we're in, that they are repertoire categories for the consumer where they're looking for better-for-you brands and products to support healthier living. But it does mean that there's opportunities for us to ensure that we've got the hardest working portfolio in those five categories. So we will continuously be looking at right SKUs, right assortment, right brand support that's going to deliver on that company promise. And it should be a regular part of portfolio hygiene in our business. And then we should be running and driving growth across the portfolio.

Okay, great. Thank you so much. Thank you.

We have reached the end of the question and answer session. I'll now turn the call back over to CEO Wendy Davidson for her closing remarks.

Yeah, I really appreciate everybody joining us today. We are pleased, as we said, with the progress that we're making in this foundational year of our strategy and the sequential improvement. We feel really good about the momentum that we have going into the back half. and the fuel that we've generated in the front half to enable us to be able to pull forward some of our initiatives as we go into the back half of the year. Quarter two demonstrated sequential improvement, and that's what we were looking for. We're excited to pivot to growth in the back half. And again, I want to thank everybody for joining us, but also thank our HANE team for their passion and commitment.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.