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

Great. Thanks everyone. Welcome back to the Jefferies Virtual West Coast Consumer Conference. I'm Rob Dickerson, the food analyst at Jefferies. I'm honored to have President and CEO, Mark Schiller; and CFO, Javier Idrovo from Hain Celestial with us today. With Mark's direction since the beginning of last year, the company has definitely been able to impressively execute on a full-blown simplification and optimization turnaround, which I think a lot of people doubted, maybe from the start. So good job of kind of putting the naysayers in their place, so to speak, guys. And the stock has, quite frankly, been one of the best-performing in all of CPG within the U.S. over the past 12 months. So it's something to be proud of. So look, with that, Mark, I'll open it up to you for a few remarks, and then we can just jump into Q&A.

Sure. Well, thanks for having us. We're excited to be here. I just hit my 2-year anniversary with Hain this past week. And as you said, Rob, it's been quite a wild ride. There was work to be done. We laid out a great strategy. We built a great team and we've executed incredibly well, including through the pandemic, which is really a good test for the backbone and the culture of the organization and the fact that we've thrived in such a challenging environment is something I'm very proud of. And then recently, we just announced our first quarter earnings, and it really was the best quarter we've had in quite a few years with 70% EBITDA growth. So a lot of things are working. There's a lot of heavy lifting ahead. There's a lot of upside ahead, if we do our job, and we're just excited to talk to you today and answer a few questions. So thanks again for having us.

Yes, no problem. Thanks for coming. Look, I guess just to start, we're nearing the 2-year mark, right, since the Investor Day in terms of kind of -- or when you outlined your turnaround plan. Sales growth is starting to come through nicely, and then the margin expansion piece has been an ongoing or it's been ongoing expansion quarter-to-quarter. So I'm just curious, kind of, from when you penciled the plan until now, right, it's a big piece of that execution. So I'm just curious kind of where have you been the most pleasantly surprised? And then maybe some areas that have been a bit more complicated than you would have thought?

Yes. I think on the negative surprise side, when I got here, I expected that we would have more processes in place, and it would just be about refining and focusing. And so there was some pretty heavy lifting in terms of just getting basic capabilities and processes, whether it's forecasting or innovation or the like. But on the pleasant surprise side, this organization has been incredibly resilient and responsive. They were excited to go on the journey. They put in the hours and the time and sweat equity to make it happen, and I'm thrilled that they're seeing the fruits of their labor. I'd say almost 2 years into this journey, the pleasant surprise from an execution standpoint is we've been able to move much farther, much faster on margin enhancement than I originally had assumed. Those Get Better brands which were 50% of the portfolio on Investor Day and had a collective EBITDA margin of, I think, 2% or 3%, it's now 10% and we've seen 700, 800 basis points margin improvement there in 18 months' time, which is just amazing. And then obviously, the other big unforeseen thing was COVID. Nobody had anticipated that we were going to have a pandemic. And there certainly have been some benefits from that with more in-home meeting occasions, but many, many challenges around keeping employees safe, keeping up with demand, finding creative and scrappy ways to work around, umpteen issues that seem to crop up every day, changes in government regulation and direction, changes in the strength of the virus. So it's been a wild ride. But we've gotten through it in flying colors. We've serviced the business well. We've launched innovation in the middle of the pandemic that is doing well, where we've been able to get resets done. And so we feel like we've got a lot of momentum as we head into the second quarter here.

That's great. So look, I guess, a question that just continues to come up very quickly is just what's sticky, right? Consumer behavior has obviously changed over the past 8 months. There are now people who now ask, well, what happens if there's a vaccine, if you go back to restaurants? So I'm just curious, how do you view kind of Hain's overall positioning as we -- as society essentially kind of potentially reverts to the mean and maybe just kind of vis-à-vis your health and wellness tilt?

Yes. So I would say, let's first look at the things that we're doing to kind of change our trajectory, and then let's look at the macro environment. On the things that we're doing, when I got here, we said it would take a year to get innovation pipeline ramped up to get the marketing programs working. And those were all set to kind of come to fruition in our third quarter last year, which was January, right before the pandemic hit. And so we had been investing in marketing, we have readied innovation. And we launched through the pandemic. Didn't quite get the distribution levels that we would like, but where we've launched products, they've done very well. And third quarter last year, which was January right before the pandemic hit. And so we had been investing in marketing, we have readied innovation. And we launched through the pandemic, didn't quite get the distribution levels that we would like, but where we've launched products, we've done very well. And the proof points for us that a lot of this is going to be sticky is a couple of things. Number one, on these Get Bigger brands that we've prioritized, we've been gaining market share consistently through the pandemic. So it's not just that eating occasions have come into the home, but we're getting a disproportionate share of whatever consumption growth there is in our categories, which is a really good sign. Number two, our household penetration has accelerated through the pandemic. And you would think that society reopened in the first quarter of this year and eating occasions started to migrate back into the home. You would think it would have decelerated. But in fact, our household penetration growth in the first quarter was higher than the fourth quarter, and our repeat rate was higher in the first quarter than it was in the fourth quarter. So we -- the fact that it's accelerating is a second proof point that the things that we're doing are working. And then the third is we're starting to pick up space. So in the first year, we were doing a lot of SKU rationalization. We kind of culled the bottom tail of our portfolio in terms of things that weren't performing well or didn't have good margins. And we have strengthened the foundation for this innovation. And in first quarter, we saw our total distribution points on these Get Bigger brands go up 9% and our average items per store going up 8%. So those are a lot of proof points that at least we're influencing the outcome versus just writing the name of where the eating occasions go. And I think we'll find if that will -- that momentum will continue as more and more customers reset and we get more and more distribution on some of this innovation. On the external side, there's 2 big trends that really favor health and wellness in Hain in particular. Number one, this is really a health and wellness crisis. So unlike previous recessions or challenges that we've had, the dot-com bubble burst or the housing market collapse, 9/11, this is really about people being afraid of getting sick. They're worried about pre-existing conditions, and they're eating better and they're exercising more. And these are lifestyle changes that will be enduring. You don't -- once the pandemic is over, you don't go back to being unhealthy if you've converted to a healthy lifestyle and you've gotten your blood pressure down or your weight down. You're going to continue that journey. And so health and wellness products will benefit because of that. And given that we are almost exclusively health and wellness products, that serves well for us. The other is the emergence of e-commerce. And consumers have gotten over the mental barrier of buying food online. Originally, it was, well, I don't want somebody else picking out my bananas or my strawberries, I want to do it myself. But during the pandemic, a lot of people bought online for the first time. And again, that bodes well for Hain because, number one, we very heavily over-indexed e-commerce, and health and wellness products over-indexed e-commerce because you get much more assortment in an e-commerce environment than you will get in a traditional grocery store. And what we found during the pandemic is the people who came online and bought food online for the first time are now buying more than 50% of their groceries online. So it's not just that they came, but they found it convenient. They found to have better assortment. They found good service. And now they can sit on Teams calls or Zoom calls and just wait for the doorbell to ring versus having to brave the cold weather or the pandemic and go out and buy their grocery. So I think there's some stickiness to those behaviors. And I think, again, that benefits us as a company.

All right. So -- just -- a lot of great points. So I guess the first question I'd have is just the -- just marketing overall, right, and marketing to support vis-à-vis innovation and if there's like a need to kind of step-up that marketing support. I mean we've heard from a number of food companies saying, well, now, household penetration is up, so let's not wait for it to drift and then lean in. We should be leaning in more now to capture and to take that trial into repeat and having a loyal customer. So is there anything that you kind of foresee where you say, okay, in the near term, yes, we actually may need to ramp our marketing spend? Or do you feel like things are in a good spot, just given all the optimization in the past 12 months?

So on those Get Bigger brands that we've prioritized for growth, we've more than doubled our marketing spending since I started. So they're at about 6.5% of sales now. And that's a little bit deceiving because we also used to have 20 ad agencies when I got here, and we consolidated them all and took a lot of fixed cost out. So that 6.5%, a lot more of it is going in front of the consumer than just covering fixed costs and agency overhead. So the amount of money we're spending against the consumer has increased pretty dramatically. We will always look to add more where it makes sense. I mean we're not at the point where we're at saturation or people are getting sick of seeing our messages over and over. We still have plenty of opportunity to create awareness and trial. And so we've had 4 quarters in a row where we've increased our spending. We expect that we will increase it again this quarter. And we continue to make sure that as long as we've got things that are high ROI and that we believe will accomplish our objectives of awareness and trial on our brands. We'll continue to invest in them. And where we have done so, we've reaped the benefit with market share growth.

Okay. Fair enough. And then I guess your comment on the Get Bigger brands, right? Just in terms of that margin expansion, it's obviously material. A part of that, I would assume, would be coming from some of the improved volume leverage. As you think forward, call it 12, 18 months, what have you, right? Some of that volume pulls in, some of that margin would probably contract back, while at the same time, these aren't your core focused brands. But I've also heard you say, well, now that they're doing better, maybe we should rethink some of them. So I'm curious, it sounds like not all of them will kind of lean into that Get Bigger bucket, but are there some that you kind of keep a watchful eye on and say, well, we started with this bucket and get bigger. But hey, if you do well, you'd actually wind up in that bucket.

Yes. So to the first point, almost all of our Get Better brands are externally manufactured. So we don't get any operating leverage during the pandemic. We may not be seeing better sales trends unlike the Get Bigger brands, where we do get absorption benefit. The margin expansion that we've achieved has really been the work of all the productivity things that we've been talking about; SKU rationalization, eliminating core ROI spending, improvements in our distribution and warehousing, et cetera. And to get 700, 800 basis points of margin improvement in 18 months is something we're very proud of. To your point, on the second part, some of these brands are doing considerably better on the top line since the pandemic started. And so we are always looking at which of these brands have staying power, which of these brands have growth potential. And while some of them may be -- may have been on a list to sell before, certainly we now expect to generate a lot more for those sales because the business has generated significantly more EBITDA. But we're also starting to dabble more in innovation on those brands. So we have innovation on Earth's Best in snacking. We have innovation on Spectrum Oils coming, so -- Imagine Soup. So we're doing some things on those businesses to see how sticky we can make it, and maybe some of them do migrate into that Get Bigger bucket over time. So we keep the focus on the Get Bigger, but there's, I'll call it, a bucket of brands in the middle now that are worth us investigating what their long-term potential might be.

All right. Great. And then I guess next is I've heard you say recently consumers might -- or seem at least to be a bit less price-sensitive. And obviously, some of your products are a little bit more premium priced, not all but some. So I'm just curious kind of why you think consumers might be less price-sensitive, and obviously, why that plays to your benefit?

Yes. So interestingly, it's not just health and wellness. I think throughout the store, we're seeing consumers being less price-sensitive. There's less trading down to private label than we've seen in other recessions. We're getting less lift on freight spending and price reductions than we've gotten historically. So I think the consumer, again, is more focused on buying what they want and being willing to pay for it. And in health and wellness, which tends to be more expensive, if it really is a lifestyle and you're getting a plant-based diet or you're only eating organic foods or you're worried about GMOs, you're going to be willing to pay for that. And people who have migrated into those kinds of lifestyles are going to be less price-sensitive than people that are buying more of commodity-based kind of item. So it bodes well for us. I would tell you in the last recession, which there was a lot of trade down, health and wellness grew 8%, in the 2008 recession. So healthy food tends to be resilient because it tends to be a more affluent consumer. And given that we've got more and more people leading healthy, again, it's boding very well for our overall trends.

All right. That makes sense. Just back to your comment when you said you have seen less of a lift in some of the trade spend. It's not discussed much yet, right? Most -- I feel like most attention is focused on kind of the potential recovery effects of food at home. A few aren't speaking that much about pricing. Do you think -- at least the investment community. Do you feel like there's been any learnings through COVID with respect to the ability of food companies, let's say, in general, if you have good velocities and good brands, partner with the retailers to start to think about even improved revenue management ability and price pack architecture? And then also maybe just even a little bit of pricing, like, hey, if we can get, I don't know, 50 bps in Sensible Portions, maybe that goes a long way. Just curious how you think about that.

Yes. Look, I -- every time is a crisis. You always hope for rational behavior. Everybody does the right thing for the consumer and for the brands and for the customers. I do think there is clearly a pattern of pricing being passed through. You see it in meat and some of the categories that really had shortages at the beginning. People are willing to pay more for it. And I would much rather spend our dollars against the consumer, driving brand awareness and trial. And one of the things that we're doing with some of our trade spending, a lot of these -- the bigger retailers are starting e-commerce platform. You got the walmart.com and the target.com, kroger.com. I would much rather spend my money to help them drive a platform and make sure that we are prominently marketing to the consumer than just dropping the price to drive more loyalty over the long haul. And so my hope is that there's more rational behavior and that we all take the benefits that we've gotten from this pandemic, and we apply it to brand holding and things that are good for the retailer and good for us as manufacturers. But all it takes is one irrational player, forces everybody to follow. So we're prepared to drop price if we need to. We're not planning on leading it. And frankly, it's not a place that I want to go. But we've built into our algorithms some assumption that there will be some of that, that has to take place, and we'll just wait and see how the market unfolds.

Okay. Fair enough. So I guess, on your Q1 call, you suggested that there could be a little bit of an incremental inventory build in the second quarter, but maybe less so in the third quarter. But I'm curious kind of more generally speaking, if demand, let's just say, does remain elevated, like kind of through the winter months, is there a scenario that plays out that, hey, we'll see where we are with inventories, right? We might have to continue to build where we can, but lean into some of our co-mans and that's for you and maybe just the industry in general?

Yes. So we have about 25% more inventory than we did when the pandemic started. So we're in good shape for a surge. Now if it's an astronomical surge, all bets are off, but 25% more inventory is a lot of inventory. And we built it on the things that we struggled with during the pandemic. So things that are co-manufactured, things with a long supply chain, things that may only have one source of supply, and if they have workers that are sick and have to close the plant for a couple of weeks, how do we get supplied? So we were very strategic and thoughtful in terms of where we would likely have the biggest pressures on our supply chain, and we have built accordingly. So I feel like we're in really good shape. We are starting to see a little bit of shipments ahead of consumption as retailers are making sure that their warehouses are full and that their shelves are full. And we're seeing the same thing in Europe, not only from the pandemic but also Brexit, where it's coming to a head over the next couple of months. So I think we're in pretty good shape. And I think we've been very thoughtful and strategic in terms of how and where we've added the inventory.

Okay. Sounds -- that's a good answer. Okay. I guess just to -- I guess, shift gears a little bit in terms of incremental distribution potential, right? Obviously, you focus on a fewer brands, fewer SKUs, you go to the retailer with a better argument to hopefully secure pre-existing store distribution upside. But then also, if I think about club and other channels, I'm just curious kind of how you think about the incremental door distribution potential for Hain given its background or just given it -- kind of where it started and where it could go from here?

Yes. So -- I mean the first thing I would tell you is we don't have any billion-dollar brands, right? So we have a lot of distribution opportunity to make these products more ubiquitous. Even our best-selling brands like Celestial Seasonings is only in 75% of the ACV. We still have lots of stores that don't carry a brand yet. I think through great marketing and great innovation and really compelling retail data, we can go to the stores that don't have the brand or don't have certain SKUs within the brand and make our case as to why they ought to partner with us and expand our distribution. And certainly our ability to supply reliably through this pandemic has won us some points in terms of being somebody that they can rely on when there's an empty space on the shelf. And that's part of why we've been a recipient of space in the most recent quarter. So distribution is a key part of our growth agenda. Some of that will come in core item distribution, some of that will come in innovation. And then to your point on club and channels, we're very thoughtful by channel, what are the right SKUs, what are the right price points. What people are looking for in dollar channel is going to be very different than what they're looking for in the club channel, and making sure that we're conscious of price size architecture of channels as well as giving the consumer what he or she wants in the channel they're shopping in is very much a focus of how we think about planning and innovation.

All right. And then I guess just on assortment, right? We've heard a number of companies say, at least when pandemic hit, right? They were asked to reduce assortment size, right? You simplify. So I guess first question is just, do you think most of those assortments, overall, you look at the store, they all come back? Or you say, well, if we can survive with just a higher velocity, better SKUs, maybe that's better pricing power and better profitability, what have you, that maybe they don't all come back? And then for you specifically, it seems like you kind of in some odd just very convenient way, you're already doing that exactly when that got accelerated. So it doesn't seem like that affects you as much as others, but it seems like that theme will continue going forward.

Yes. I think you hit it on the head. So there's always kind of the bottom quartile of every category that really doesn't justify the space that it has. And those are the things that always get traded out when new innovation comes. So I think with a lot of them getting eliminated during the pandemic, just out of necessity because manufacturers had to focus more energy on fewer items, I don't think all of those will come back. I think some of them will, but I don't think they all will. But I don't think we're just going to have the high velocity SKUs because the consumer likes a treasure hunt. They like to try new things. It's how you keep brands vibrant. There has to always be innovation. And so I don't think that it goes away forever, but I agree with your point that it's not like all of a sudden when this is over, everybody is going to go back and put everything back on the shelf. In our case, we were doing it beforehand. We were doing it proactively because we knew we were going to lose the distribution anyway, and we knew that these things weren't meeting minimum order requirements, whether it was coming from a co-man or we couldn't do a whole shift of manufacturing because there wasn't enough volume. And so we're in better shape in terms of having already made those trade offs. And that's why we come with the innovation now. We're getting more incremental distribution out of it because we've kind of called the bottom tier, if you will. But I think that a lot of that won't come back and will get replaced by new innovation that I think people have been readying and we'll just decide when they want to launch it.