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

Good afternoon, everybody, and thanks for joining us. At its Investor Day last year, Hain laid out its 3-year business transformation plan that ultimately will result in Hain becoming a smaller, yet faster-growing and higher-margin company. Roughly halfway through this process, Hain is on pace with or even slightly ahead of the targets its set out. For sure, while Hain has done some heavy lifting so far as its rationalized low-margin SKUs, took out uneconomic trade, eliminated co-manufacturers and divested or discontinued less or noncore brands, among other actions, there's still plenty of runway to go with Hain in the middle innings in terms of the middle of the P&L. With us this morning to discuss these future opportunities is Hain CEO, Mark Schiller. Thanks for being here, Mark. And we'll just pause briefly for safe harbor remarks and then throw it to you to kick off the presentation.

Please note, during the course of this presentation, management may make forward-looking statements within the meaning of the federal securities laws. Please reference the company's annual report on Form 10-K as well as other filings with the SEC. In addition, the company may make references to non-GAAP or adjusted financial measures. A full reconciliation of these non-GAAP financial measures is available in the appendix of today's presentation.

Thank you, Kate. I'm pleased to have the opportunity to speak with you all today and provide you some more color on our progress and plans for fiscal '21. I'd like to start by reminding everyone of the journey that we're on. Our goal is to create a virtuous cycle by building a simpler business with an efficient operating model that drives up margins and cash flow. We use these funds to reinvest in innovation and marketing to grow our brands, thereby creating a stronger company that generates attractive returns for our shareholders. Given that context, there are 4 things that I'd like you to take away from today's presentation: our transformation journey is on track, we performed extremely well in fiscal '20 exceeding guidance, we believe Hain's COVID gains are likely to sustain and fiscal 2021 is expected to be another strong growth year. Starting with the first one. The agenda we laid out on Investor Day required a robust transformation of our company. With regard to North America top line growth, when we started this journey, the Get Bigger brands were declining 2%, and we said we would get up to 5% to 7% growth by the second half of 2022. But the Get Better brands, which were declining 12%, the target was to slow the decline to 5% to 10% while significantly reducing SKUs and low ROI spending. For International, the goal was to go from about 1% top line decline to 1% to 3% growth resulting in a new total Hain algorithm that moved from 4% top line decline to a range of 3% to 6% top line growth. As for profit margin, the Get Bigger brands adjusted EBITDA margins would grow 300 to 500 basis points while investing in marketing. The Get Better brands, the adjusted EBITDA margin would go from 2% to 10% to 12%. In International, the adjusted EBITDA margin [Technical Difficulty] basis points to 15% to 17%, resulting in a total Hain algorithm moving from 8% to 13% to 16% margins. All in all, while it was a very ambitious plan that would create tremendous shareholder value, we had visibility to how we would get there and confidence in our ability to execute well to achieve it. In a few minutes, I'll show you the significant progress we've made to date. But first, let me walk you through the building blocks of the transformation. As you'll recall, we have 4 transformation-enabling strategies. Since I've discussed the first 3 in some detail in previous calls, today, I'll just give the highlights on those 3. Starting with simplify. We made tremendous progress on simplification since Investor Day by focusing primarily in 4 areas: organization structure, where the divisions and functions have been streamlined and reorganized to support our priorities; commercial team, where we've consolidated repetitive activities and greatly reduced the number of external partners; supply chain, where we've consolidated shipping locations, co-manufacturers and are shipping fuller trucks to our customers; and fourth portfolio where we've eliminated over 500 unproductive SKUs and have also sold or shutdown 16 brands in the last 18 months. And with the exception of Tilda, all of these brands were small, nonstrategic and added unnecessary complexity. In total, we shed over $800 million of sales with only $30 million of adjusted EBITDA and use the proceeds to significantly improve our balance sheet. The second strategy is strengthening our capabilities. We focused on hiring new talent to all levels who bring different skills and perspectives, have standardized ways of working to move from a holding company to an operating company, and increased training to ensure everyone knows their processes and can deliver the new organization expectation. The third strategy is expanding margin and cash flow. We've made fantastic progress here as evidenced by our consistent margin expansion. We've built a productivity culture focused on improvements in 4 key areas: manufacturing, distribution and warehousing, price/mix and formulation and sourcing. While results today have been significant, we have more upside in each of these areas going forward. A great example of how these productivity's initiatives have come to life on the Get Better brands where we've been managing for profit. On Investor Day, these brands made up almost 50% of U.S. sales, but only 2% of U.S. profits. Today, we have far fewer brands that represent 1/3 of our U.S. sales and deliver 25% of our profits, and virtually every brand is now profitable. The last strategy, and the one I want to spend more time on today is how we turn the Get Bigger brands into profitable growth drivers. You'll recall on Investor Day, we said it would take about a year to get the innovation and marketing programs needed to improve the growth trajectory on these brands. As we guided last year in the first half, the Get Bigger brands had modest net sales decline because we were eliminating poor ROI investments and SKUs. But in the second half, we were adding marketing and innovation which we said would improve our trajectory. In fact, the top line did improve as planned, with high single-digit growth in the first 2 months of the quarter before the pandemic and continued growth throughout the pandemic. There's been 3 primary drivers of the top line trajectory improvement with considerable upside here. The first area of marketing focus is renovation. Armed with consumer insights, we've been improving packaging to better communicate our brand benefits and create a brand block that really pops off the shelf. In addition, we've been looking at our price size architecture to ensure we are offering the right value proposition for our brands. In many cases, we found that our opening price points were too high and have introduced smaller sizes to attract new users and smaller households, which make up almost 2/3 of the households in America. Another key driver we focused on is consumer communication. The marketing spending on our Get Bigger brands has almost doubled in the last 18 months by redeploying marketing dollars from the Get Better brands as well as adding incremental investment. On Celestial Seasonings tea, we focused on how tea can help keep you healthy and de-stress you during the pandemic. On sensible portions, we focused on value and increasing our brand recognition. On Greek Gods, we focused on great taste that makes our yogurt standout from its competitors. The last focus area of marketing is innovation. We've spent the first 12 months of the transformation building a robust pipeline of new products that are focusing on unmet consumer needs and are incremental to both the brand and the category. Let me give you a couple of examples. On Sensible Portions, we launched Screamin' Hot Veggie Straws. Seeing the trend toward Hot and Spicy, we created a Better-for-You offering. To date, trial on this item is 3x the new product average for the category and our repeat rate is 16% above category average and brand incrementality is above 80% Based on our success here, we're bringing out other hot and spicy offerings in different parts of our snack portfolio later this half. On Celestial Seasonings, we launched TeaWell, a line of wellness teas to complement our herbal flavor-oriented teas. These products have achieved repeat rates that are 30% above the category average and are also 70% incremental to our brand. Another example is our Live Clean hand sanitizer brand, which I talked about on our Q3 earnings call. We were able to use some excess capacity to create a business from scratch in the U.S. in just 4 weeks, providing retailers with a much needed product that was in short supply. We've sold over $6 million of this margin-accretive item in the first 4 months. It's a great example of our scrappy entrepreneurial culture and ability to pivot quickly to capitalize on trends in the market to help retailers grow. These are just 3 examples of our innovation capability, and we have a lot more coming. This slide just shows you just a little of the first half launches with more innovation that we can discuss on future calls coming later in the year. Given the pandemic and delayed recess from customers, our distribution build will likely be slower than normal, but these products are likely to succeed because they have strong velocities and are helping customers grow their categories. So we're confident that over time, we'll earn solid retail distribution here. You may be wondering on all of these marketing initiatives, how are they working? I'm pleased to report that we're seeing tremendous growth in our Get Bigger brands. In tea, snacks and yogurt, we are growing and have been gaining market share consistently. And in personal care, which SKUs to nonmeasured channels, making it hard to assess our overall market share, we're seeing consumption growth of 25% led by Alba and Live Clean. Now that SKU rationalization is largely behind us, we're bringing -- and we're bringing innovation that justifies incremental space, we're also starting to see improved distribution and our velocities are growing as well with almost 3 million new households buying our brands since the pandemic began and existing consumers buying more often. All these data points give us confidence we're on the right track and that the gains that we're seeing are not just COVID related and should endure during the pandemic. Now that we've covered the transformation, let's look at how it's impacted our performance in fiscal '20. As stated on the earnings call 2 weeks ago, it was an exceptional year. We delivered against every metric that we provided guidance on. We restored adjusted top line growth for the company for the total year, led by the Get Bigger brands in North America, which grew 16% in constant currency for the second half and 7% for the year. Adjusted gross margin improved every quarter versus fiscal '19 and was up 260 basis points for the year. Adjusted EBITDA also grew robustly every quarter and was up 190 basis points for the year. Adjusted EBITDA dollars also grew every quarter, resulting in the first year-over-year improvement since 2015. And importantly, adjusted EBITDA dollars, adjusted earnings per share and operating free cash flow all exceeded our guidance and met or exceeded the revised guidance, which was raised at the end of Q3. Clearly, it was a strong year with terrific results. And I want to take a second to thank the thousands of employees at Hain who made it all possible. They executed exceptionally well before the pandemic and are continuing to deliver during the pandemic resulting in these outstanding numbers. So now that fiscal 2020 is behind us, let's look at where we are relative to our Investor Day algorithm. At the halfway point of the transformation, we've made huge progress and in many cases, are already active at or close to our 3-year targets. On sales, we are growing the top line in North America in line with the top end of the 3-year algorithm. In International while we're still a bit short of the 3-year target without the COVID-impacted food service-oriented fruit business, sales would have grown 7%, which is well ahead of the 3-year target. And the total company growth would have been 4% without fruit well within our Investor Day guidance. With regard to adjusted EBITDA, we've also made significant progress. North America was within 200 basis points of the Investor Day target for the year and at the high end of the Investor Day target range in second half. In International, we were also well within -- we were also within a few hundred basis points of the target. But in the second half, excluding fruit, we would have had margins that were within the 3-year guidance range. So not only are we on track to deliver the F '21, F '22 targets, but in several places, we're already there and working to stretch beyond our initial expectations. Now let's talk a little bit about COVID and why we think our performance is sustainable. Starting with the numbers, there have been clear improvement in the total company top line performance in the second half of the year with nice growth after slightly declining in the first half. We're experiencing continued double-digit growth across brands, geographies, categories and need states. And given our leadership in many of these areas, we believe these gains will continue well into the future. In North America, the Get Bigger brands are growing rapidly, and that growth has remained consistent since the start of the pandemic. It's important to remind you that the Get Bigger brands were starting to improve on top line before the pandemic but then saw a significant acceleration during the pandemic. The marketing investments and innovation programs we put in place were driving growth pre-COVID and even higher consistent growth during COVID. We're also seeing gains in household penetration and buying rate, which further supports our belief that the momentum will continue after the pandemic. We also believe that our consumption growth is sustaining because consumers are more concerned than ever about health and wellness. People are actively trying to stay healthy and avoid getting sick. As a result, consumers are eating even healthier. They're searching for products to keep them fit that address their underlying health condition and help them manage stress during the pandemic. That bodes very well for Hain because we are a health food company. We have products that boost your immunity, products that improve gut health, products that help you with stress. We're seeing sustained growth because consumers are gravitating to our categories and spending more of their dollars here. We believe this change in eating habits will continue to be more permanent in nature because it's a sustainable lifestyle change. And in addition, during the last recession, health and wellness brands outperformed the market reinforcing that healthy eating is a lifestyle choice and not something people sacrifice in hard times. This would again suggests that Hain is well positioned to thrive going forward. The crisis has also changed consumer shopping behavior. As you know, consumers are doing more shopping online and healthy product sales SKU heavily online. This also benefits Hain. Before the health and wellness went mainstream, you could only buy healthier food offerings in the natural channel and online. As a result, Hain has always had a significant percentage of its sales online. We started here and our sales over-indexed here. So we have strong relationships and strong growth that has exceeded 30% before the crisis and is now running consistently between 50% and 100% every week. And importantly, we know how to sell profitably in this channel. In fact, our margins in e-commerce improved 1,000 basis points in fiscal 2020. Between the strong performance before the pandemic and the excellent performance during the pandemic, we exited fiscal 2020 with significant momentum. And as a result, we expect that, that fiscal 2021 will be another strong year for Hain. Let's spend a few minutes talking about the drivers of our plan, starting with North America. We still have plenty of opportunity to continue executing the things that have worked so well in fiscal 2020. But in addition, we have several new areas of focus that give us confidence our momentum will continue. In fiscal 2021, our simplification efforts will focus on continuing to optimize the portfolio as well as our assortment. This means getting more distribution on the high-margin, top-selling items, thereby improving our manufacturing efficiency and product margin mix. On strengthening capabilities, our primary focus is on continuing to integrate our Canada and U.S. operations into 1 organization with 1 set of processes and priorities. We began this consolidation in Q3 last year and expect that by the end of fiscal 2021, we will have saved more than $10 million. On improving margins and cash flow, in addition to continuing the initiatives started in fiscal 2020, our focus this year will be on 3 areas: the first is automation within our plants, which will drive margins on the Get Bigger brands; the second is on restructuring our manufacturing footprint by adding or reducing capacity where needed; and the third is implementing bracket pricing to encourage customers to continue ordering fuller truckloads. On reinvigorating top line growth. As I stated earlier, we'll continue to accelerate our innovation launches and marketing support. We are also improving our insights and analytical tools to make sure we're improving the ROI on our spending. As stated on our earnings call 2 weeks ago, we expect these initiatives to deliver continued top line growth in North America with several hundred basis points of margin expansion and importantly, these initiatives will get executed and improve the P&L regardless how the pandemic plays out. Turning to International. We just started the consolidation of Europe, Hain Daniels in the U.K. and our Middle East divisions into 1 operating unit. Our intent there is to replicate the North America playbook by simplifying the business, building an efficient and effective organization, creating a productivity culture and turbocharging growth on many of the #1 and #2 share brands. Replicating the improvements made in the U.S., the potential profit to the P&L over the next few years to be $20 million or more. So you can be sure we're going to go after this opportunity very aggressively. Let me just highlight a few of the primary opportunities that we plan to focus on. Within the simplification strategy, we'll segment the portfolio into Get Bigger and Get Better brands. This will help us reallocate resources and skills to the right places just as we did in the U.S. In addition, as you know, we have a large fruit business that's been negatively impacted by the pandemic. That said, it's complex. It's a manual operation, sold in different channels primarily with virtually no synergies to the rest of our business. While we made significant improvement in the P&L before the pandemic, this business is better suited in someone else's portfolio. As such, today, I am formally announcing that we are putting this business up for sale and hope to have it sold well before the end of the fiscal year. With regard to capabilities, we'll harmonize best practices across geographies as we are doing here in North America. In addition, we'll create a productivity culture and set up a project management oversight team to ensure we resource the biggest ideas and have strong plans to ensure execution. On margins and cash flow, we'll focus in on our plans since almost everything we make is self-manufactured, we'll upgrade capabilities and optimize our capacity. On accelerating profitable top line, we certainly have an opportunity to spend more money on fewer high potential brands. We have 8 #1 and #2 share brands in Hain Daniels, and thus far, we have made very little effort to bring them across geographies. Two of our fastest-growing businesses are plant-based beverages and plant-based meat substitutes, which are in high-growth categories throughout Europe. By making these products more ubiquitous across Europe, we believe we can create tremendous value for Hain. In summary, I'm very optimistic about the potential of our International business. And now that we have North America firmly moving in the right direction, I plan to spend more of my time on that business. Last of all, I want to reinforce some of the F '21 directional guidance. After a strong year in fiscal 2020, where we exceeded our guidance, fiscal 2021 is shaping up to be another great year. While the total top line is less clear due to the uncertainty around COVID-19, we expect several hundred basis points of margin expansion, strong double-digit profit growth as well for the year. For the first half, we said we would deliver mid- to single-digit top line growth and profit growth similar to what we delivered last year in the second half. I'm pleased to report that Q1 is shaping up to deliver even better profit growth than we delivered in the second half, further reaffirming the momentum I've discussed throughout today's presentation. As the external environment gets clearer, we will certainly update you on our expectations for the remainder of the year, but thus far, we are off to a very strong start. I've shared a lot today. I hope I've answered many of your questions. And you take away that our strategy is working, we are winning, we're delivering the results we promised on Investor Day, we have momentum and we believe we will deliver continued progress on our transformation journey this year, resulting in another year of strong double-digit EBITDA growth. I want to again thank my team and our Board for the tremendous collaboration and execution that will continue to propel us forward. With that, let me turn it over to Andrew to address a few questions.

Thanks so much, Mark. Really appreciate the remarks. We've got a couple of minutes for some questions. Maybe we'll start with one, you did cover a couple of these things in the prepared remarks, but I was hoping for a little bit more perspective. Really, it's what gives Hain the confidence that its COVID-19 gains can be sustained? I get the sense from talking to a lot of investors here, there's still a decent amount of skepticism among the investment community, not Hain specific, right? But broadly around the group as to how many of these consumers, whether they be new to the portfolio or returning lapsed users really do hang around once things "normalize," whatever that looks like?

Yes. Great question. So I'd say there's 2 primary things that give me confidence. Number one, as I mentioned, this is a crisis where people are changing their lifestyle, and health and wellness is much more important than it was previously to many people. We see them gravitating to healthier brands. We see them gravitating to more exercise. They're concerned about getting sick. And so we're seeing just a lot more interest in health and wellness in general. And for a company like Hain that only does healthier products, that bodes well for us going forward. Because in many cases, over the last 6 months, those behaviors have become habits and lifestyle versus just something that you kind of move in and out of and then go back to the way you used to do things. The second thing I think that's important here is that we're gaining market share in our Get Bigger categories. That was one of the big proof points that we needed to deliver in the second half last year was that we could get those bigger brands growing again. And obviously, we had them growing before the pandemic at the beginning of the third quarter that accelerated during the pandemic, but importantly, we're gaining share. And what that says to me is that the marketing programs, the innovation, the things that we were doing to change the top line trajectory are working, and the consumer is voting more for Hain in those categories than other brands as a result giving us share gains. So I think those 2 things bodes well for us. Certainly, we're picking up TDPs and households and repeat purchases like others. But I think the combination of gravitation to healthy eating and market share gains gives us a lot of confidence.

And then how is the transformation of the international business different from the one in North America?