The Hain Celestial Group, Inc. (HAIN) Earnings Call Transcript & Summary

Good morning, everyone, and thank you so much for joining our virtual Strategic Decisions Conference this morning. I hope everyone is staying safe and well. It's my very great pleasure to introduce Mark Schiller, CEO of Hain Celestial since late 2018. We also have Glenn Welling this morning of Engaged Capital, who's on the company's Board. Hain has been undergoing a major transformation in the last year and has begun to see solid margin expansion. And more recently, the top line has also begun to perk up as well. The company has been shedding businesses and toning up to fighting strength with SKU rationalization and recent innovations. Now before we get started, I just want to run through a couple of housekeeping points. When we get into the interactive Q&A part of the session at the end, we'll be using pigeonhole. [Operator Instructions] So with that, thanks for listening to the housekeeping remarks. I'll hand it over to Mark for opening remarks.

Good morning, everyone. Thanks, Alexia. Really happy to be here, and I hope everyone is safe and adjusting to the new normal. I wanted to just give you a brief overview on the journey we've been going through to get us to this point. I know some of you are very familiar with our story, some of you probably not so much. So let me just take a few minutes to kind of walk us through our history and how we got to where we are. So this company was founded about 25 years ago on the notion that health and wellness was going to be here to stay. And I'd say for the first 20 years of our life as a company, we really were the only ones that were heavily investing in health and wellness. And we acquired about 50 to 60 brands over a 25-year period of time. About 5 years ago, others started to realize that health and wellness was here to stay. And we had all the big companies coming in with products, and we had little guys starting operations from their garages. And there was a huge squeeze for shelf space as well as a much higher cost for assets that we were buying. And what we found ourselves in the position of being more of a holding company than an operating company. We bought all these businesses. We never integrated them. And when we were forced to really operate and outperform competitors, we didn't really have the DNA to be able to do it. As a result, our U.S. business over about 18 months lost 75% of its profits. That's when Glenn and Engaged Capital came in. And he remade the Board. He brought in myself as the new CEO. And together, we have embarked on a journey to turn around our performance. Really, there are 5 core tenets to the strategy that was laid out last February, so about 15 months ago. The first is about simplification. Like I said, we had 50-plus brands. We had 40 different places around the country where we were shipping product from. Every brand had its own distribution network. We had 5 different sales forces in the U.S. We had 150 co-manufacturers. It was just tremendously complex. And so the first strategy was around simplification, consolidating sales forces, having less SKUs, shedding brands that really didn't make sense for us, consolidating locations, et cetera. The second was about capability building. And for us to be a good operating company, there were some basics that we needed to build into the organization: forecasting, innovation, project management for complex projects. We really didn't have a Hain way of doing things. And as a result, everyone was doing their own thing. And it was very difficult for us to get to best practice and having everybody do it in a way that would make the most sense and allow for continuous improvement and learning. The third was about maniacal control of cost. We had spent a lot of energy on trying to get growth at any cost. And in the later years, as we started to struggle, we put a lot of money out into the marketplace that had a very poor return. And so we spent a lot of energy over the last 15 months really getting rid of some of that uneconomic spending. So whether that was uneconomic investments in trade or in marketing or SKUs that really didn't make sense that were customized for an individual customer but were losing money, we spent a lot of time and energy and continue to do so on reducing our cost structure. And then the last was segmenting the brands so that you had a core set of brands that had great growth potential that would be managed for growth and the rest of the brands being managed more for profit. Those growth categories and brands sit in snacks, Personal Care, tea and yogurt. Those are the ones that we are focused on for growth. The rest of the brands were put in that Get Better bucket, which meant we were focused on profit. And if we couldn't get to a reasonable return on those businesses, we sell them or shut them down. And we've been in the process of doing that. Over the last 18 months, we've sold more than a dozen brands that had $750 million in sales but only $15 million of EBITDA. We sold those businesses for about $400 million, so roughly 27x earnings, which is a great return for shareholders and, at the same time, dramatically simplifying our business. If you look at the most recent quarter, what you see is that the strategy is working really well. We've restored top line growth for the first time in North America since fiscal 2018. We've seen significant margin expansion, both gross margin and EBITDA margin expansion. And we are getting very close to our long-term guidance in terms of the EBITDA that we're delivering for the North American business while still investing in marketing at the same time. And our Get Better brands, the ones that we're managing for profit, we generated more profit in the third quarter than we did all of last year, to give you a sense of the magnitude of margin improvement that we've made. So the strategy is working. We certainly had to pivot a little bit when COVID came. There are some puts and takes there, some things that are positive, some things that are negative. But on balance, the fact that people are eating more at home than ever has helped the top line. And the business has adjusted well and continues to thrive in this environment. So the takeaway, I think, from all of that is we have the right strategy. We have a great team. We are making really good progress to date, and we have a very bright future. So we're optimistic and excited about what we're doing, and I look forward to answering all your questions.

That's great. Thank you so much for the introduction. I really appreciate it. So let's maybe turn to Glenn to kick things off on the Q&A side of things. Glenn, for you, as you started to get involved with the company, what was it that struck you about the opportunity at Hain Celestial when you first got involved?

So look, Alexia, thanks for having Mark and myself to talk about Hain. I think it's an exciting story, and we thought it would be an exciting story when we invested 4 years ago. And I think you're starting to see the fruits of all the labor. But look, we have a formula to invest in great franchises that are either being mismanaged or undermanaged and need a catalyst for change. And it was clear at Hain that what had worked in founding and growing the company to scale was not working anymore. And it was also clear that the Board needed a push to make the leadership and strategic changes that were necessary to make Hain great again, to make the changes that Mark's been talking about for the last few minutes. And look, that's what we're really good at. And so we saw 3 major opportunities, and Mark addressed them in the strategy. But when we looked at the business from the outside, and it's absolutely played out that way once we were inside the Board room, we saw 3 opportunities. One, we saw a strong stable of brands that had been undermanaged and underinvested in since being acquired by Hain. The company had realized that there is going to be tremendous opportunity early, early on in the health and wellness space. But they hadn't built the capabilities internally once they acquired the assets to invest in them and grow them. You're seeing the implication -- you saw the implications of that, which is why we got involved to fix that. Number two, we saw an unfocused portfolio very similar to what you see in a lot of industries going through land grabs for a period of time, where you're trying to expand market share and grab all the assets you can. Hain did that in the health and wellness, consumer packaged food space, but they ended up with a very unfocused portfolio that needed to be rationalized. So resources -- so limited resources that you have as a company of our size can then be allocated to those what we're calling now our Get Bigger brands. And that hadn't happened. There wasn't a prioritization process inside the company that we saw in order to be able to allocate resources to the brands that mattered as opposed to everything. And then the last thing we saw is the company had been so focused on growth at the expense of everything else. But we saw tremendous opportunity for operational and efficiency improvements, said differently, margin and asset turn improvements throughout the organization. And so that's the strategy that Mark laid out and what the team has been executing on is exactly what we saw from the outside, and that's the way it's played out from the inside.

And just to follow up on that. In your view, how pivotal was the change in the Board composition? And how did you select the Board members once you turned everything over?

Yes. Look, it's critical, right? But the first step in catalyzing transformational change in any organization is getting the right directors in place. It's having the right governance structure and the right people in that room to make the right organizational leadership and strategic decisions. So at Hain was there was a Board of very tenured directors who were very loyal to the founder. And so until you break that loyalty in favor of fiduciary duty to shareholders, it's very hard to get the Board to make the bold decisions that they need to in a situation like this. So we've seen -- what I typically see as tenured directors of what has been a very successful company, they remember the good times, right? They have trust in the leadership that was able to get him through all the tough situations in years past is going to be able to do it again. And so in situations like that, what you really need is you need new perspectives in the boardroom to kind of counter those good memories and provide a level of objectivity and industry experience that often doesn't exist in the room. So the change is critical. And for us, we knew we were going to have to replace the CEO, we knew we were going to have to change the company's strategy. And so you knew you needed to change a very significant amount of the directors. As far as composition, look, knowing that we were going to -- we were not going to control the vote. I mean we initially ended up owning about 10% of the company, ultimately, 15% to 20% of the company. But knowing that we weren't going to control the vote in the Board room, we knew we needed to be highly objective, and we knew we needed industry knowledgeable directors. We needed industry knowledgeable directors because, like a lot of small mid-cap companies we invest in, there was not one director in the Hain boardroom when we arrived that had any experience as an executive in the consumer packaged foods industry. And so given the decisions that we're going to be need -- that the company is going to need to make regarding leadership and regarding strategic change, we needed real industry experience in the room. And so we brought in immense capability and credibility from the industry. We brought in Dean Hollis, who had been a former senior executive, one of the senior members of the ConAgra leadership team who had also been the former Chairman of Boulder Brands, of AdvancePierre Foods and SunOpta. We brought in Celeste Clark. Celeste was part of the Executive Committee at Kellogg's. We brought in Shervin Korangy, who was a former Blackstone partner responsible for their Pinnacle investment. We brought in Dawn Zier, the CEO Nutrisystem. And then we eventually added Frito's Head of Supply Chain, and we also added AdvancePierre's former CFO. And so it was absolutely critical that we had directors who were able to identify great talent because we knew we were going to need to replace the majority of the leadership team and also participate in what's the winning strategy for this business going forward. And so you look -- you flip to today, the entire Board's turnover, and I think as Mark will tell you, given the makeup of this Board, I don't think I've ever seen a dynamic between a Board and a management team that's as healthy as the relationships that have been built here. And by healthy, I mean it's got tremendous support for what management is doing but also provides a really necessary creative tension in the room to make sure that everybody is being pushed as hard as they need to be and in the right directions to get the best outcome for everybody. And then I think, Mark, you probably agree this is -- you've seen a lot of different Boards over your years. He's probably one of the most involved and probably one of the most effective.

Yes. It is very much a hands-on Board. It's a very collaborative dynamic and a very transparent dynamic. So I've been on a lot of Boards where management tries to keep the Board at arm's length or the Board is overly intrusive in the day-to-day operations. We've got the right balance. And as Glenn said, there really is a healthy give and take. They push us appropriately. They dig deep where necessary, but there's also high trust and high transparency. So they know that they're getting the full story, not the watered-down story. And we're all going after the same objective, which is to build a great company here. So it's a great team, both inside the company, the management team that has turned over. All my direct reports, almost all have turned over. And the Board, almost all have turned over since Glenn arrived. So it's working really well. I'm really proud.

Alexia, I just want to push -- I just want to highlight one word in there, which -- that Mark's used a couple of times, which is transparency. The biggest part of transformation is cultural change. And Hain, in order to move from what had been a very individually driven organization from the top, in order to be able to put a leadership team that had accountability and to be able to push that accountability down was a major, major cultural change that Mark and his leadership team have done a phenomenal job at. But that transparency of what's going well, what's not going well, making sure the organization all buys in, and that's an organization that never had transparency into what was going on even inside their brands or their businesses before is a -- was a entirely new way of managing this organization. And I know Mark can cover it in his remarks, but the cultural transformation that this organization has gone through, which is why you're seeing the results that you are, has been nothing short of extraordinary.

That's great. Thank you so much for the background there. It's just super helpful to have an understanding of the dynamics. Now Mark, you joined in November of 2018. And in February of last year, you laid out a strategic plan that moves towards an EBITDA margin of between 13% and 16% and top line growth for the company of between 3% and 6%. That's the goal. So we're a little over a year later. Obviously, the world has changed. But where are you on that journey now? And what can we expect going forward?

Yes. So if I can give you a bad baseball analogy, I'd say we're probably in the fourth inning. I mean we've got a long way to go. We were one of the poorer-performing CPG companies when I got here. I'd say we're moving toward the middle of the pack, but we've got a lot of upside left. I feel great that the Q3 results showed EBITDA margins in the 13% range while still allowing us to invest in the business in North America. So it would suggest we're getting close to the long-term targets already. And we're seeing top line growing for the first time in several years, which, again, is an encouraging sign. But we are really just getting started on many things. There's plenty of margin expansion opportunities still in the middle of the P&L. We are redesigning products that were overengineered. We're managing our customer mix and our brand mix to make sure that we're really focusing our resources and energies in the places [ where there is money ]. And we're marketing for the first time. The first year was really about rightsize the infrastructure, shed brands, take out unnecessary spending, eliminate SKUs, which were all a drag on the top line. But as the dust settles on those things and we're now investing against the consumer, we're starting to see the top line respond. And frankly, before the COVID environment, in the first couple of months of the third quarter, we had seen the top line on those Get Bigger brands that we said had all that potential. We're growing high single digit. Then COVID came in early, mid-March, and we got a little bit of a boost on top of that. But we had already started to turn the tide and see some really good growth numbers on those businesses, which gives us confidence we're on the right track.

Great. Can you just give us a little bit more flavor of how the 2 of you work together on an ongoing basis? I think a lot of people have been curious about that.

Yes. You want to go first or second, Glenn?

I'll go second.

Okay. Look, the advantage of coming in and being Glenn's guy, right, so versus an activist coming in and challenging management in the way they're doing things. Glenn made the change he needed to make and brought me in. And we've had an incredibly honest, candid, transparent, collaborative relationship from day 1. He and I talk on the phone several times a week. We have a strategy committee that I chair that Glenn is on. So he is a part of all of the strategic conversations around the business. He chairs the comp committee. So all of the incentives tied to the business and our performance, we collaborate on. And he has been exceptionally respectful of my strengths, and I am very respectful of his strengths. He brings things to the party that I don't have much experience in, and I bring an understanding of the industry and an operating regimen that he respects as well. So we challenge each other. We push each other. Many, many times, either one of us has changed our point of view. And I really view us as partners in a tough journey that we're moving on together. And that was one of my biggest concerns and one of the biggest places that I probed before I joined. And I believe I said to Glenn directly, look, if we're on the same team and we're moving up the same mountain, I'm in. If we're going to fight each other going up the mountain, I don't want to do this. And he was very candid with me on what he expects and he's -- and how he operates, and he's lived up to that in spades.

Look, I concur with everything Mark said, Alexia. I mean I believe the key to success is to know what you're good at and what you aren't and leave the stuff that you aren't to people who are. We knew what changes needed to occur at Hain, and we knew we needed a great operator. And we knew a great recruiter who could help us find a great operator, and that's why Mark's here. And so my goal is to put the right leadership in place to run the business and let them run the business. But on the flip side, there are things, as Mark referred to, that I think we are really good at that help motivate the team through compensation structures, by aligning the management team with shareholders. And I think we put those structures into place in order to make sure management had the right motivations and we're going to get the right behaviors. But in terms of the relationship, as Mark said, we talk a few times a week about strategic changes going on inside the company, about tactical issues, about personnel issues, about capital allocation. But leadership is critical to success and leadership at all levels from the Board down. And I think we've got a very, very healthy relationship of mutual respect and a completely shared alignment in terms of where we need to take the business and mutual rewards that are also identical. And so I couldn't -- I don't think you could see a more ownership Board and management structure that's more aligned than what we've got here.

Mark, back to you. You've obviously been in the company 18 months or so. What have been the biggest surprises so far, both positive and negative?

Yes. I think on the -- I'll start with the negative and end with the positive. I think on the negative, I was surprised at how little process existed in the company. I thought there would be basic processes and I'd just have to tweak them. But in fact, really, every brand was doing its own thing. And there was very, very little process, which was a huge part of the problem. So it took a lot of heavy lifting in that first 12 months to get the right people in place and the right processes in place. The good news is I've been in this industry for 30 years, and I know what needs to be done. I just thought that we would be further along in the starting. That said, we've made a lot of progress there, and I feel really good about where we are right now. We're not quite world-class yet, but we're certainly functional and taking a lot of costs out and improving as we go. On the positive side, quite frankly, I was most impressed and surprised by the flexibility and resilience of the organization. This is a tough, tough turnaround. This -- everybody that was here was not hired to work in a turnaround. They were hired to work in a growth company. And you bring a new leadership team in here with a very clear mandate to change the performance of the business, we've changed almost everything that we do here. And sure, there were people at the beginning who were resistant and exited the organization. But by and large, this group has been craving leadership, has been excited to go on a journey, is excited in terms of what's in it for them on the journey, not just financial rewards like getting a bonus, but training and career advancement and access to senior management and things that they really were craving in their career. And they've been very eager followers, and in many cases, have turned into eager leaders now that the mountain that we're climbing is really clear in how we're measuring success. So we've been really pleased by that. We would not have made as much progress had people been fighting us every step of the way. I think the first few months, until we laid out the strategy, it was a little bit of a tough slog. I felt like I was a little bit on an island. But once people knew what we were doing and it made sense to them and they understood their part in it, they very eagerly joined in and been a huge enabler to everything that you're seeing in terms of our performance.

Great. Now you talked about the cultural shift several times so far. There must have been some upheaval along the way, moving from a decentralized operating model to a more hands-on approach. How do you work through issues of employee morale, especially given plans to divest certain brands and businesses along the way?

Yes. The primary answer is transparency. I have literally laid my cards on the table to the group and said, this is where we're going. And you all have a choice to make in terms of whether you want to be part of it or you don't want to be part of it. And that doesn't make you a bad person if you don't want to be part of it. This may not be the right opportunity for you. And if you don't want to be part of it, we will help you find another job and make sure that you're set up for future success. But if you do want to be part of it, this is what success looks like and this is what we need. And you can expect that I will hold you accountable, and the other leaders will hold you accountable. And at the beginning, I think people were not sure what that really meant. But as we started to hold them accountable and say, hey, wait a minute. The deadline was Friday, and you missed it. Or No. Yes, we made progress, but we didn't make the progress that -- and people started to realize what good look like and what the expectations were. As I said, they aggressively signed up. I think in the previous regime, it was a little bit more black box. There was a little bit less clarity around what was expected and a little less hands-on leadership in terms of where we need to go and what the boxes were playing in and what's inbounds and out of bounds. And I think once you lay that out for people and you encourage them and you give them the resources they need, but you hold them accountable and then you tie the rewards to that accountability, I think people have come along for the ride. And the other thing I would tell you is during this COVID pandemic, I think you really see the mettle of a company and the DNA of a company when you get into a crisis like this. And it is incredible, the number of stories and the number of things that people have done, the heroic acts to keep the company moving forward, to source products when our primary source was shut down, to help their fellow employee through a health issue or through a financial issue. We have really just gelled as a team, and I think people are exceptionally proud right now to be a part of this organization, not only because the company is doing well but because of the way we're treating each other and the kind of respect and comradery that we've generated. So it's been a long road. It gets better every day, and I'm excited to be leading it.

So I've got a few more specific questions. How did the decision to divide the U.S. portfolio into the Get Bigger and the Get Better brands really help focus management's actions? What changed?

Yes. When I got here, we had, I think, 55 brands in the U.S. And like I said, every brand was doing their own thing. So they all had marketing dollars. They all had innovation dollars. They were all trying to do everything. And it's just not practical for a company this size that has 55 relatively small brands. We don't have any billion-dollar brands. These are all $25 million to $150 million brands. We were spreading the peanut butter so thin that we weren't really making an impact on anything. And we had no criteria for making decisions. So we did a thorough analysis of the brands, the categories. We looked at consumer loyalty. We looked at margins. We looked at category growth. We looked at responsiveness to marketing and innovation, and we set aside a set of brands that had scale that we felt we could grow the heck out of. And we said for the rest of them, we're going to manage you for profit. Your role is to generate the profit that we need to invest in these brands for growth. And we very quickly moved all the innovation resources, all the marketing resources over to those brands that had more potential and what -- if we don't report Get Bigger and Get Better, but if you peeled back the onion and looked at the P&Ls, what you'd see over the last 5 quarters is continuous investment in marketing in the Get Bigger brands. We first moved over some of the money, but then we've been continually investing while holding the margins more constant there. And on the Get Better brands, we've improved the margins 700, 800 basis points. And we shed a lot of businesses that were losing money that allows us again to make the investments that we need. So people are much clearer on the role of their brand. And there's -- we're telling them that it's important in your career development to spend some time on both managing businesses for profit is important. Managing businesses for growth is important. It takes a different set of skills to be a great marketer versus a great operator. And so we want people to get that variety of experiences, which, again, is part of the value proposition for them. And people have embraced it, and we've seen on both parts of the portfolio really live up to the vision that we laid out for them.

Yes. Alexia, I'd just jump in. One of the things that we saw day 1 was that the culture was focused on loving all your brands equally like you love your children. And so all of the resources were spread fairly equally across all of the 55 brands that Mark talks about. And so you could just see early on that we were suboptimizing our investment, whether it was marketing investment, whether it was CapEx investment, it didn't matter. And so this shift was really, really important to be able to say, okay. Which brands do you really want to invest in and which brands are you managing for profit so you have the profit to invest in the other brands?

That makes a lot of sense.

We're not spending enough on anything to really make a difference. You had to put more money against fewer things to really make an impact competitively.

Makes sense. So let's focus on the top line for a second. How do you anticipate sales growth developing from here on both the Get Bigger and the Get Better brands, especially in the light of the boost that you're currently enjoying from the pandemic situation?

Yes. So a lot of it obviously is going to depend on how the pandemic situation lays out. And as we think about our plan for fiscal '21 that we're in the process of finalizing, we're looking at what do we control and what don't we control. Obviously, I don't control the pandemic. There are more eating occasions in the home that we are enjoying, but those will start to gravitate back out of home as the environment opens up. That -- we will forecast that, we'll figure out what does that mean in terms of growth year-over-year. But the real focus is on how do we grow those brands that we said have the growth potential. And the good news is during this pandemic, we picked up a lot of new users. And so we need to delight those users. We need to communicate with those users. We need to give them incentives to come back and keep buying our brands. Because now that they've discovered us, we hope they're having a great experience, and we want to keep them for the long haul. So there's a lot of emphasis on how do we keep the people that have come in. We're also very conscious and aware of where people are gravitating. So e-commerce is becoming a bigger part of the equation. The good news there is it has always been a big part of the business for us, and we're very well positioned there. But we are putting more resources against acquiring users through the Internet and through e-commerce. We know there's more cooking behavior at home. So we have some brands that are really geared toward cooking. We're putting more emphasis on those brands. So we're managing the portfolio, and we're managing the focus around where the consumer is going. And then the other thing that we had been doing that is starting to bear fruit is, look, we were working on innovation for those brands that had growth potential. We had already started marketing those brands before the pandemic, and some of the ones that have seen the biggest boost are the ones that we were marketing beforehand because they were already in the consideration set because we had been talking to people. We have been showing them how these brands are relevant to their lifestyle. And so I'll use tea as an example, which is one of our bigger brands, one of our more profitable brands. We had been -- when I got here, we spent about $1 million a year on marketing on tea, which is one of our biggest businesses. It's insignificant and not going to make an impact. As we moved resources over and invested, a lot of those resources have gone into the tea business. And we're now seeing growth rates in the 50% range every single week on that business. A lot of it again is the pandemic, where people are worried about getting sick and they drink tea or they need a calming moment, so they drink tea. But we're bringing new people into the franchise, and we're doing all the things that we need to do to keep them for the long haul, which bodes really well for the growth of that business. The one last thing I would say is there's 4 categories I mentioned that were priorities. Tea, yogurt and snacks are 3 of them. Those are all doing very well in the pandemic, and we have picked up a lot of users. The fourth category is Personal Care. And as you can imagine, as people are sitting in front of their computers in sweatpants, they're not -- have not been as worried about their appearance. They're not out in the sun during Sun Care season. So those categories have not fared well thus far in the pandemic and will do better as society reopens. The one part of that portfolio that's done incredibly well for us is we have a hand sanitizer business in Canada that we expanded into the U.S. during this pandemic. That's growing like crazy. So we think we're pretty well positioned here. We think we're doing the right things. We're conscious of where the consumer is going, and we're building all of that into our plans going forward. On the Get Better brands, we continue to manage them for stable top line and margin improvement because that's really where we think the most potential for those brands are. They're, in some cases, great franchises. But when you're talking about a 2% or 4% EBITDA margin, they're just not investment-grade brands. We've got to get those margins up before we start turning them into growth brands.

That makes sense. So you've been rationalizing SKUs for several years now. And the company now seems to be largely through that effort. How far through are you? And when will we start to see that become less of a headwind to the top line?

Yes. So the SKU rationalization program that we announced end of third quarter last year and started really executing in the fourth quarter will wind down at the end of this fiscal year or midway through the first quarter of next year. I will say, though, in this environment, one of the things that retailers have been focused on and companies have been focused on is giving more space to those SKUs that make up 80% or so of your sales. So we still do have some small SKUs in the portfolio. We'll probably do some minor SKU rationalization consistent with the partnership that we have with our retailers and where they want to put their space. But in general, we're most of the way through it. So we're fortunate that we did a lot of this before the pandemic, where a lot of companies now are just really having to figure out how do they change their portfolio.

You mentioned innovation a little while ago, and you have plans to launch a pretty big raft of new products this season, but retailer uptake has understandably been dampened because of the slowdown in shelf resets due to the pandemic. So can you share any of the new items that are coming to market now and how the rollout is being affected?

Yes. So the bigger innovations that we had coming in the first half of the calendar year, the back half of our fiscal year was the Screamin' Hot Veggie Straws. We looked at salty snacks and saw that the Flamin' Hot segment, if you will, was big and growing double digit, and there was nobody in the health and wellness space that had a hot spicy offering. That's done very well in terms of velocity and the places that took it, it's performing very, very well. But as COVID came and people stopped resetting, we didn't finish the play there. So we're going to go back and take the data that we have to the retailers that didn't take it and show them that they're missing an opportunity. The other big one that launched in our -- in this quarter that we're in right now, which was dampened by the pandemic is we have a keto yogurt, low in sugar. People love our Greek Gods Yogurt, but one of the [ nots ] says, it's a little bit high in sugar. So we generated a low-sugar version that's keto-friendly. That, again, has been very well received by retailers. But because of the environment we're in, we've had more limited success in terms of resets. But again, I think the ones that haven't reset at some point later in the year, as things return to more normal on their end, they're going to have to decide which categories get reset this year and which ones don't. And the ones that will get reset are the ones that have more innovation, like snacks, like yogurt. Those categories are going to get reset. And other ones like oils, for example, probably won't get reset. They don't have as much innovation -- or pancakes or some of those things. So I think those categories will ultimately get reset in the back half of the calendar year. And the good news is we're well positioned there. The last one that we're selling in now that I'm not going to tell you specifically what it is because we haven't shipped it yet, but we have a very significant amount of innovation in tea category. It's probably about 15 different SKUs. They're all very incremental to the category and are being exceptionally well received. So that tends to reset in the back half of the summer as we go into the colder weather. So we're optimistic that that's all going to get reset on time. And we are very excited on how we're positioned in tea.

Alexia, I would also -- and Mark, you might want to say something about our service levels have been very, very high through the pandemic. And I think that's resulted in really improved customer relationships that is going to pay big dividends as we do move into a more normal environment and as shelves start to get reset. And so, Mark, it's probably worth talking about that because I do think it's something that Hain has not been strong at before. And I think we hit the ball out of the park here over the last few months.

Yes. I would tell you when I got here, our relationship in the natural channel was pretty good but in mainstream grocery was not good at all. We had continuous service challenges and we're not really a reliable partner in terms of doing what we said we were going to do. So we spent a lot of time over the last year proving to people that we could do what we said we were going to do: getting the service right, executing on the things that we promised, helping them take costs out of the system and talking to them at more of a portfolio level than a brand level because we were -- we have this great portfolio that we never really leveraged at the top of the house with retailers. So a lot of that dialogue had started before the pandemic. I think that what we have done really well because we have a significant European business where the pandemic hit really before the U.S., we learned a lot from what was going on there. We built inventory. We made sure we have backup sources of supply. We did the things that we needed to do to ensure that our service level was going to be high, and it's been really quite exceptional relative to our peer set. And as a result, customers start to rely on you because they know you can deliver. And when it came to hand sanitizer, as an example, where people were saying, I need hand sanitizer desperately. Can you help me find some? We had a business up in Canada that we had never launched here. And we said we will figure out how to get you hand sanitizer. Give us 3 weeks, and we will get you a hand sanitizer. And literally, in 3 weeks, we were shipping to customers in the United States. I think we'll sell about $6 million, $5 million of hand sanitizer in the fourth quarter in the U.S. from 0. And those that asked us to help them that we helped, they're going to remember that. They're going to look to us as a partner to say, here's what I need next. And for us to go to them and say, here's what I need from you and have it be a real win-win [ relationship ]. So I agree with Glenn. I think we set the table for very productive performance going forward because some people are disappointing retailers, and some people are delighting retailers. And I think we've been on the higher end of the spectrum in terms of our performance thus far.

Are you concerned that demand for more expensive health and wellness products could taper off in a recessionary environment?

Yes. I mean that's always a risk, right, as people trade down. Some people will trade from branded to private label. Some people will trade from premium to less premium. We've looked at that closely. We do have a premium portfolio. It does skew to a higher-income consumer, which I think is going to be more insulated. Those are not, by and large, the 30 million Americans that are out of work right now. But we have looked at, for example, where we play in tea, if you're going to drink herbal tea, we are the opening price point of the premium segment. So if you're going to buy the premium segment, people may trade down to us. Now if you're going to buy budget tea, we may not be the right brand for you. We're positioned pretty well in these categories. Same thing in baby. Earth's Best is the lowest-priced organic brand. So if organic is important to you and you're a little bit worried about money, we actually may be a beneficiary in some of those categories. In other places where we felt our price points were too high, we are redoing our price size architecture. So in some cases, we're taking ounces out and dropping the everyday price point to make it more affordable. And then obviously, we always have trade spending as a lever, and we can adjust on the fly where we feel like our price is not as competitive as it needs to be. So it's a risk. We're all over it. We think we've made the right moves to set us up for success. We watch the data incredibly closely. I get daily retail consumption data on many customers. So I can see by category, by retailer, how we're performing. And where we have an issue, we can adapt pretty quickly. I think part of this culture that we've been talking about is a really nimble, scrappy entrepreneurial culture that should allow us to move really quickly when we have issues. And I think the fact that we're monitoring it and all over it should enable us to move quickly if needed.

So as you reach the end of the Project Terra cost savings at the end of this fiscal year, which I think was about $350 million in savings over a 3-year period, do you expect a similar or slower rate of cost savings going forward? What's the opportunity there?

Yes. There is still several hundred basis points of margin to be had in the middle of the P&L for sure. We don't even have the standard bracket pricing that everybody else has, where you get an incentive to fill up a truck. We charge people the same whether they order a pallet or they order a full truck. Because again, every brand was doing their own thing and distributing from their own distribution centers. As we've now consolidated to 3 primary shipping locations, customers can now fill up a truck, and we can create bracket pricing that encourages people to trade up and fill up a truck. That means less trucks on the road, which means lower costs for us and better pricing for the retailer. So there's a lot of opportunity still in transportation. Because of our core forecasting processes when I arrived here, we had been throwing away a lot of old-aged product or deeply discounting it at the end of its shelf life. As we continue to make improvement there, our discard level should go down. We have huge opportunities in terms of mix, again, managing the growth businesses with the high margins and shedding businesses that are low margin or shedding SKUs that are low margin. So I'm pretty optimistic there's still a significant amount of room on margin in the middle of the P&L. We have roughly -- our gross margin is about 25% in North America. The industry average is in the low to mid-30s. So we've got plenty of runway left. We know what we need to do. We know where we're deficient. And I think you'll see continued margin improvement for the foreseeable future.

Sticking with margins, is there also still a big opportunity to rationalize unprofitable trade spending, so not in the middle of the P&L but above the line?

Yes. A lot of the first year's margin improvement was in the trade line. So I think we've -- there's always room for improvement now that we're really measuring every deal and looking at the ROI, we will continue to refine. But we've made a lot of progress there. I think there's some customer mix opportunities. As you start to look at customer P&Ls, you see which customers are more profitable and which ones are less. And so we may reallocate some of the spending between customers as appropriate. So there's still more room there. And I think the other opportunity in the pricing arena is -- we don't have standardized pricing across all of the customers, whoever pays a different price and then gets a different trade rate on that price to net them back to a common place at the end of the day. We've got to fix all of that and get people to standardized price list. That will also help us pull some money out of the trade line as we do that. So there's opportunity there, but we've made pretty good progress there as well.

Alexia, just a comment about that, that if you go back 3 or 4 years ago or before Mark got there, the -- I think the word on the street on Hain was we didn't have data and that the business was run very intuitively, but people always use to -- investors and analysts used to ask a lot about, but you really have visibility in the business. And what I can tell you is when we got here, the visibility was very limited. And it's not because the company didn't have data. It's just because the right questions weren't being asked, and the right data wasn't in the right places. And so hopefully, what you're hearing from Mark is this has become a very data-driven organization. The data has always been there. It's just now being put in a place where people can make decisions off of it.

Makes sense. We had a question that's come in from the audience, and this is to you, Glenn. Why has Engaged Capital trimmed their Hain stake over the past months or so?

Yes. Great question. So we trimmed our stake -- 2 things happened over the last month. One, one of our LPs had the ability to -- that was in a co-invest that we had established early on had the ability to take their shares on to their own balance sheet. And they did that. And so they actually own a bunch of Hain on their own balance sheet to begin with, and they just decided that they -- for their reasons, they wanted to have the shares on their balance sheets instead of ours. So you saw that as a part of our reduction. And then the second reduction, we sold in one of our funds Hain because the performance of the business has been so strong over the last few months since the pandemic happened relative to, obviously, a lot of the other names in our portfolio. Hain became just an outsized position for us such that we needed to trim it because it wasn't healthy for the rest of the portfolio to have one name that was the size of that Hain had become. And so we trimmed a little for risk management purposes. And that's what you saw. We still own almost 16% of the company. We have no intention of trimming anymore. Obviously, if the company continues to perform and it becomes an even larger piece of the portfolio, in the future, we may trim for risk management purposes again. But this is our largest position by far. In fact, we have more capital invested in Hain than all of our other positions combined.

Great. We're coming towards the end of our time here but just a couple more at the end. As you think through -- probably for Mark, as you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to cutting costs or increasing the level of investments?

Yes. So I think the strategy that we have in place will endure in the sense that we will continue to invest in marketing on those brands that we think have the most growth potential, and we will continue to be maniacal about controlling costs across our entire portfolio. I think where you may see some shifts is some of the brands that we had in the Get Better bucket are growing exceptionally well and may end up moving in terms of whether we want to invest in them going forward. And we're certainly seeing changes in behavior, the e-commerce change, the more cooking at home. And so there's opportunities in our portfolio to take advantage of some of those things. And so you'll see some shift in terms of where we may spend the investment, maybe more in e-commerce than in other digital and social, mobile kinds of marketing. You'll see the content of our marketing change to be more sensitive to how people are feeling right now. But the strategy that we have in place is the right strategy, and we just tweak it and adapt it to the environment that we're in to continue the progress we've been making.

And then finally, for Glenn, at what point will you feel that your work here is done? I mean what's the ultimate vision for you here? Is there an exit strategy of some sort?

So look, not necessarily. Look, we have 2 goals with every investment. One is to deliver great returns for all shareholders and our investors. And the second is to leave every company in better shape than when we arrived. And certainly, Hain is already in way better shape than when we arrived, but we have a lot more work to do. As Mark was talking about, we're in the fourth or the fifth inning. And so we've got a lot of operational work that Mark's talking about that's going to happen in strategic where it's going to happen over the next months and years. We haven't created nearly enough value yet. And if you -- I think if you look at management's long-term incentives that we put in place when Mark and the team started, the -- all -- 100% of management's long-term incentives were front-end loaded to pay management a portion of the value that they create over the -- over a 3-year period. That 3-year period ends in the fourth quarter of 2021. And those incentives don't kick in until the stock is just about $40 a share. And so we're not there yet. I think we all feel very confident that we're going to get there. We've got plans in place that will get us there. And then we'll look at where we go after that. But right now, the focus is on making sure that we're at least at that place 16 months from now.

Great. Thank you so very much for your time today. I really appreciate you getting all the technology sorted out to be able to be with us. Also, I want to thank everybody listening in. I certainly learned a lot. I mean I really keep coming back to this idea that defining a strategy is really about where are you allocating your resources, what are you choosing not to do. And I think that point really sort of came across to me in terms of what you're trying to accomplish here. [Operator Instructions] And once again, thank you ever so much to both Mark and Glenn. And thanks to everybody for listening in. We'll wrap it up there. Cheers.

Thank you. Stay safe.

Thank you.

Thank you.