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

Good morning, everybody. I am Jon Andersen, the consumer products analyst at William Blair that covers Hain. Thank you for joining us. I am happy to be here today in virtual fashion for the 2021 ICR conference. We're excited to have Hain's Chief Executive Officer, Mark Schiller; and Chief Financial Officer, Javier Idrovo. As you know, Hain is a leading organic and natural products company. The company participates in many important natural categories across the grocery store and has critical brands in this space that span categories such as snacks, yogurt and even personal care products. Products are sold in all major channels of trade in North America, and it has operations outside the U.S. as well, which we'll talk about a bit today. We're going to use a hosted Q&A format for today's session. I wanted to start by kind of turning things over to Mark and Javier, so that they can remind us of the journey that Hain is on and some of the key elements for the virtuous circle that make up the company's value-creation approach. So I'll hand it over to Mark to kind of give a big-picture introduction to the work that's going on at the company and has created such value over the past couple of years.

Thank you, Jon, and ICR for having us today. Yes, I was brought in about 2 years ago to help kind of reinvigorate the North America business that had been struggling. Over 25 years, this company had purchased 55 brands and really was more of a holding company than an operating company. And so we were struggling with the complexity of the portfolio and had seen our profits erode pretty dramatically prior to my arrival. Upon arriving, I spent the first 90 days or so trying to figure out what kind of strategy needed to be put in place, and we laid that out at Investor Day in 2019. And I'm pleased to report that since that time, we have turned the North America business from a business that was declining 40% to 50% each quarter to one that now is seeing EBITDA growth in the 40% to 50% range, I think, for the last 4 or 5 quarters. We have segmented our portfolio. We've simplified our portfolio. We've shown pretty significant margin expansion over that period of time. And then the pandemic hit, of course, and we've adjusted accordingly. But we are very optimistic about our future. We believe we're in the right consumer space and have stabilized the foundation and have great growth trajectory. So happy to talk about all that today.

Terrific. You have outlined 4 primary or core strategies, as you've defined them, to transform the business. The first is simplifying the portfolio in the organization. I think that's a good place to start. Talk to us a little bit about some of the organizational structural changes that you've made, changes to the divisions and functions that have been made in order to support the priorities of the organization.

Yes. Simplification has been a very multifaceted strategy that included exiting a number of brands. We've sold off a number of brands. But structurally, as you mentioned, there was a lot that needed to be done. In North America and the United States, we had 5 different sales forces. We have consolidated down to one. We used to ship product from 40 different locations to customers because none of the brands that had been acquired had integrated their supply chains. And so customers had to order one product at a time and receive product from multiple different distribution centers, which meant almost all of the trucks that they were receiving just had a couple of pallets of product on it. We've consolidated from over 40 shipping locations down to primarily 3, which allows everybody to consolidate orders, fill up trucks and take trucks off the road, which is great for the environment. Structurally, we have organized into business teams focused around the Get Bigger brands and the Get Better brands. We have a tea group. We have a snacks group. We have a personal Care group. And then we have a group that's focused on yogurt and the Get Better brands. We've integrated marketing and sales under one Chief Commercial Officer, so that there is a seamless transition and a collaboration going on between marketing and sales to ensure that we get maximum execution. So a lot of structural changes that have taken place. I would also add more recently in -- starting at the end of last fiscal year, we started to take some of the lessons learned from North America and applied them to our international business. And so when I arrived here, there were 5 different leaders of our International business. We've consolidated down to 2. And they are taking a lot of the playbook that has been so successful here in North America and starting to apply it there as well.

That's a great overview. I want to dig in a little bit more on some of the actions you've taken around the brands within your portfolio. I think over the past 18 to 24 months, there's been a real effort to optimize or clean up the portfolio. I think you've mentioned as many as 16 brands, representing upwards of $800 million of sales, have been consolidated or divested. What -- tell us a little bit about the criteria that you're using to make those decisions and where you stand today with respect to that optimization work. Is there more to come? I'm assuming it's a fluid situation. But are we 7 of 9 innings down the road? And if so, where are these additional opportunities?

Yes. So with 55 brands, and us trying to drive growth on all of them, we were a little bit of an inch deep and a mile wide. And we really weren't doing a terrific job on anything. So part of this journey was segmenting brands into Get Bigger brands, brands we were going to manage for growth; and Get Better brands, brands that we were going to manage for profit expansion to fuel the growth on the Get Bigger brands. The Get Bigger categories that we chose in North America were tea, snacks, yogurt and personal care. We went through a very robust analysis of both the strength of the brand, the loyalty of the consumer franchise, the responsiveness to marketing, the margin potential, a whole number of criteria to decide which ones we thought had the most potential. And we moved a disproportionate amount of resources over to those brands to create innovation, marketing programs, to work on distribution expansion, et cetera. For the remainder of the portfolio, which we've been managing for profit optimization, that's where we decided which brands needed to be divested. We've also eliminated close to 1,000 SKUs since the beginning of fiscal '19, again, all in the spirit of making us a stronger business with a stronger foundation. The criteria used for divesting brands or SKU rationalization was really, first and foremost, what things are we doing that lose money? And does it have a path to making money? And so there were brands that had negative 50% gross margins that we just said, "Look, this makes no sense. We're never going to make money at this." And so we eliminated some of those. Similarly, we had a lot of smaller brands that really needed to be nurtured in order to reach their potential. And in a company with 55 brands, they just were not going to get nurtured here. And so we did an assessment of whether these brands would be more valuable to someone else than they would be to Hain, given the fact that we were going to concentrate our limited resources. So as you said, we've divested 16 or 17 brands. The last big brand left to be divested that we've publicly talked about is our U.K. fruit business. And part of our criteria was also looking at complexity. And the fruit business is a great example of a lot of complexity. You're talking about hundreds of people cutting up watermelons and mangoes and sticking them in plastic jars. And then the products basically go stale or rancid in 3 or 4 days and have to get thrown out. It's a very different model, very short shelf life, very manual process. And it's just not core to who we are as a company. So we've talked about that business. It's -- it was about $200 million in sales before the pandemic. Since it's food service-oriented, it's now about $165 million. It makes 0 EBITDA. And so as soon as we divest it, which we believe is imminent, you will see a margin expansion across the whole company of more than 100 basis points of gross margin and EBITDA margin. And you will see our growth rate accelerate because this is a brand that has been a significant drag during the pandemic. So that's the next one to be eliminated. And to the last part of your question, Jon, we think we're pretty well down the road in terms of what we need to do to divest. I'd say seventh inning is probably a good analogy. There's still a few more small brands in that Get Better portfolio that really aren't strategic and likely won't get nurtured here. So if there is a buyer, we will pursue that. But we've made a lot of progress in a very short period of time.

Great. Very helpful. The -- we've noticed how well the Get Bigger brands have performed when you look at the consumption data. And it hasn't just been the surge around the time of the pandemic. It's been sustained strong consumption growth for many months now. So talk a little bit about how much of the performance of those Get Bigger brands has been driven by specific actions that you've taken at the company, innovation, additional marketing resources, more effective and efficient marketing distribution versus perhaps kind of the shift of away-from-home to at-home consumption. Obviously, that's playing a role. But I suspect, and I believe you see, that it's really about the role assignments and the resource allocations and the specific actions that you've taken to drive those brands that's having the lion's share impact.

Yes. So great question. The first year was really about stabilizing the foundation. And as I said, in doing that, we were eliminating uneconomic investments. We were reducing SKUs and short -- and building an innovation pipeline because we knew that we were going to need to be innovators and marketers to really realize the potential of these brands. So that first year of the journey was ended in December of '19. We had basically started to pivot toward growth right around the beginning of last calendar year before the pandemic started. And we had started to see those Get Bigger brands growing high single digit before the pandemic it. And then, of course, as the pandemic hit, we saw that accelerate because of more in-home meeting occasions. But what I would tell you is because of the things that we did before and to set ourselves up and because of the marketing and innovation that we had ready, we've seen these brands accelerate through the pandemic. Even as society was reopening and people were getting more comfortable leaving their homes in the late summer and into the fall, we've seen household penetration continue to grow on these Get Bigger brands. We've seen repeat rates continue to accelerate on these Get Bigger brands. And I was looking at the data yesterday, and just over the last quarter, what happened in the second quarter. And just to give you a flavor, some brands like Greek Gods and Alba, their household penetration last quarter was up more than 30% versus a year ago. So we've seen actually the growth accelerate through the pandemic, where others have seen kind of the growth abate a little bit as people have migrated back out of the home. We also have a terrific slate of innovation that is very incremental to the category. And because customers have not been resetting during the pandemic, resetting their categories, we still have huge distribution upside on these new products. And in the last 12 weeks, 11 of our 13 biggest brands, which represent more than 85% of our North America sales, 11 of the 13 biggest brands increased distribution over the last quarter. So we're starting to see the distribution expand again. We're starting to see household penetration grow again. We're seeing the repeat rates accelerate. And we're just very, very optimistic about taking these things that we've launched and getting them in complete distribution starting with the snacks category that resets in the March-April time frame, where customers are now starting to be ready to reset again. You'll see baby food and snacks reset in the spring. And then we'll see other categories start to follow. And we will be big recipients of space gains, we believe, in those resets.

And with respect to some of the innovation that you've talked about publicly, product brands like Sensible Portions, Greek Gods, TeaWell with Celestial, what has been the initial consumer response to some of that innovation? This is really the kind of the first wave post stabilization, to your point, that is kind of setting the tenor, in my opinion, for the brands going forward, whether it be household penetration, buy rate, future distribution opportunities. Talk a little bit about what you're seeing on some specific examples of innovation and whether the needles are moving in the right direction.

Sure. So innovation was not really a core capability of this organization a few years ago. Innovation to us was here's the 37th flavor of Sleepytime Tea, which is not going to be very incremental to the brand or the category. And as a result, we get very low distribution and just fragment our sales. We've built a terrific innovation capability, a brand-new team focusing on it. And so we started launching some of this big innovation last January, starting with Screamin' Hot Veggie Straws on Sensible Portions. We saw that there's a huge percentage of snacks in hot and spicy foods. There really wasn't anything in the healthy side of the category that was doing it. And when we launched this item, we started bringing in millennial males, 20-something males, into healthy snacking who were not previously buying in the category or buying the brand. So it's very incremental. The repeat rate, very much above the category average, and the velocities were very strong. As we migrated through the year, we got into other innovation on snacks. We took that Hot -- Flamin' Hot inside, the Screamin' Hot inside, and we brought it to Terra and Garden of Eatin'. We're seeing similar growth on those brands because of it. And on tea, in particular, we've been incredibly aggressive with innovation. We've been in herbal tea business for 50 years. And there's many other segments to tea. There's green tea, there's black tea that we were really not a big player in. And there's also wellness tea that was starting to emerge that we were not a big player in. So we launched Celestial Seasonings TeaWell. We have, in the last 12 months, introduced tea with melatonin to help you sleep; tea with probiotics; tea with vitamin C; a tea with a boost to your immunity, which is perfect for the pandemic that we're in. We also launched tea with as much caffeine as a cup of coffee. All of these things are very incremental to the category. And just to give you an example on the last one, the tea -- the energy tea, which is the tea with as much caffeine as a cup of coffee, it was 90% incremental to the category, meaning 90% of the buyers did not buy a single package of tea in the previous 12 months before we launched that item. So when you're bringing people into the category and helping the buyer grow his category, you're going to get incremental distribution. And as that category resets across all of the retailers, we expect to be a significant recipient of incremental space. We already know for the snacks reset that's coming up in the spring that we're going to be a significant recipient of incremental space. And new distributions, the gift that keeps on giving because once you have that space, you bring new people in. You transfer them between your new products and your existing products. And it just becomes this virtuous circle that you mentioned that feeds on itself and drives a lot of growth.

Great. That's helpful. One of the topics that's been so interesting this year is the volume migration that we've seen to e-commerce. Obviously, it's been going on for years, accelerated as a result of the pandemic. My sense is that Hain has a good story to tell with respect to its online positioning, both the placement, the contents, the kind of the quality of the brands and the way that they're represented online as well as perhaps the profitability implications. But let's get grounded in that. Where has Hain been historically with respect to its online presence? Where is it today? And how should we think about this going forward from a market share online/off-line perspective, the profitability that you can derive through e-commerce versus your more traditional brick-and-mortar business? That would be helpful.

So if you go back 10 years ago, people that wanted to eat healthy, they couldn't find healthy products in the grocery stores. You really had to go to Whole Foods or Sprouts or e-commerce to find healthy offerings. So our company kind of started and blossomed in the e-commerce channel well before anybody else realized its potential. And so our -- we sell about 12% of our sales in North America in e-commerce, and the average CPG is probably half of that. And during the pandemic, our sales in e-commerce have grown more than 50% every week since the pandemic began. I think in total, since the beginning of the pandemic, we're up about 75% or so versus what it was before. And remember, this is an unmeasured channel. You don't see in the IRI or Nielsen data. So the fact that we're growing so fast and it's such a meaningful part of our business is part of why you see nice robust growth rate from us relative to what you're seeing in Nielsen and IRI. We know how to win in this channel. We've been there a long time. We have deep relationships. We understand what success looks like to the retailer. And frankly, we understand how to market there. It's different marketing in e-commerce than it is marketing in other platforms. You have to understand how to get on the front page. You have to understand how to bundle products together and build basket size. You have to understand which vehicles will be more and -- or less effective. And so we've got a head start on everybody else in that regard. And the other thing that you mentioned is margin. For most CPGs, e-commerce is margin-dilutive. For us, e-commerce is margin-neutral. We improved the profitability of our e-commerce business at 1,000 basis points last year, particular emphasis on it. And really, it was about partnering with retailers to take the things out that we were doing that weren't making any money and replace them with things that were. An example I would give you, on Personal Care, we have a lot of products that sell with pump tops. And the retailer -- or the e-tailer was concerned that the pump tops would open up in the packaging and spray all over the place. So they made us wrap them in bubble wrap and put cardboard dividers between them. And there was just all this extra packaging and manual labor being put into keeping these pump tops from opening. And at the end of the day, the solve was, "Well, let's just take off the pump tops and make it a squeeze bottle." The consumer can have the same product with a different package with a much higher margin for us. Similarly, we were doing variety packs, combining things from free manufacturing locations and hand assembling them versus taking 3 items from the same manufacturing location and assembling them. So a lot of focus on where we not making the kind of return that we should and what do we need to do differently with cooperation and collaboration with our customer partners to get those margins up. So we're really excited that we've got strong margins. We're very excited about the growth. And again, we think we're very poised to continue to kind of outperform the marketplace when it comes to e-commerce.

As we look forward into the 2021 quarters, a portion of which will be your fiscal 2021. And then as we get into the back half, your fiscal '22. How are you thinking about the lapping of some of the pandemic-related demand? Do you have kind of enough going from an innovation, marketing, portfolio optimization, distribution standpoint that you think you can kind of push through that, maintaining a growth rate in line with your longer-term algorithm, which I think is 3% to 6% top line? Are there going to be -- is there going to be a period or a quarter where we all need to be aware that the comp is just such that we need to consider that, and that that's a transitory thing that you'll kind of work through?

Yes. So we [ haven't ] given guidance on the second half of the year. So I'm going to be a little bit cautious in my answer. What I will tell you, though, is we expect that we're going to continue to see margin expansion and profit growth in the second half of our fiscal year because we have so much going on in terms of both the innovation and the marketing, but also the productivity agenda that we have. I think on the top line, we are well poised to pick up a lot of distribution, as I mentioned, but we also have the overlap to consider. So when we get to our earnings announcement at the beginning of February, we'll go into that in some detail, but I'm going to dodge that question a little bit in the short term to make sure everybody gets the same information at the same time.

Fair enough. No. Well played. Well played, Mark. Let me shift gears now to one of the other core elements of the transformation strategy, that is expanding margins and cash flow. You just mentioned your confidence in continuing to kind of grow your margins given the various initiatives and levers that you can pull. You've been delivering outstanding margin expansion measured in the several hundred basis points on a gross and an EBITDA basis. Maybe it would be helpful to kind of understand the top 2 or 3 reasons for this. In your opinion, what's really driving that and where the opportunity is going forward? Is it doing more of the same, pulling those same levers? Does the emphasis need to change to other aspects of the operations or geography, perhaps outside the North America business? Give us a lay of the land with respect to that.

Sure. So by the end of fiscal '21, which we're in, we will have grown our EBITDA margin and gross margin dramatically in North America, about 700 basis points in 2 years. I would say that we're in an evolution of what the projects are that are driving that. Initially, it started with SKU rationalization and divesting businesses that were losing money and eliminating uneconomic investment. But it has, over time, morphed into things like filling up trucks that I talked about by consolidating some of the distribution locations. If you can get more pounds on every truck, you take trucks off the road, you lower your cost per ship case. We're doing that and focusing aggressively on that. We are redesigning products that are overengineered. There are many, many bells and whistles in these products that consumers have no awareness of. And when you ask them about it, they don't care and aren't willing to pay for them. And so there's an opportunity to reduce the cost of these products without changing the things that consumers love about them and the reasons why they buy them. We are automating in our plants now. We're using a lot of our capital dollars to automate the back end of the packaging lines. We've looked at our capacity, and we are rightsizing our infrastructure as part of the productivity initiative. So there's a very robust pipeline of things that we're working on that are different than the things that got us here over the first 12 months. The other thing I would point out is we've had so much success here that we're taking this playbook now to Europe and applying some of the same lessons. And in just a matter of 90 days or so, which is when we -- maybe 100 days since we started kind of working on the productivity agenda there, we have built a very robust list of productivity projects there. And we expect to see some pretty significant margin expansion in our European business as we [indiscernible] and go into next fiscal year. So that, by the way, is upside to our Investor Day case because we did not contemplate significant margin expansion in the international business. But it's a very similar playbook, right? Start with, do you have the right SKUs and products? Are you running your plants as efficiently as possible? Are we routing trucks sufficiently? Are we filling up the trucks? Are we automating where we need to? Do we have too much infrastructure in places we don't need? And again, we've got a very robust pipeline there as well. So I'm very optimistic and bullish on margin expansion going forward. And I would remind people, we are still significantly below the CPG average on gross margin and EBITDA margin. So there's every reason to believe that us implementing these things is real. It's going to happen. And we're not pioneering anything that hasn't been thought through before in other CPGs. We're just doing a lot of catch-up, which will create a lot of value.

You mentioned earlier the fruit business in the U.K. and also the fact now that you're bringing kind of the North American playbook, to some extent, to your European business. It begs the question, number one, to what extent do you view the non-North American business as core strategic to kind of Hain's overall footprint? And within the fruit business, assuming that you move forward on a sale, are there any implications there that we should be thinking about in terms of stranded costs, maybe short-term implications? Obviously, the sale is good from a long-term perspective, but near-term considerations. And I'll throw a third in there, not to try and make this too complicated, but since we're talking about Europe, its strategic importance to you long term, the fruit business. We have Brexit as another consideration that I'm sure you're all over. It would be great to hear a little bit about how you're thinking about it, what plans you're putting in place to kind of work through that to the extent that, that becomes an issue for the business.

Sure. So let me start with the strategic importance of International. We have a great International business that, quite frankly, I haven't spent enough time talking about because everybody was concerned about the transformation and recovery of the U.S. business. But now that we've got the U.S. and North America on the right track and continuing to grow robustly, you're going to hear us talk a lot more about that European business. Because we've got 8 #1 and #2 share brands. We have a leadership position in plant-based meat alternatives there with the Linda McCartney brand, and we have a huge nondairy beverage business in Europe. We have opportunity to take both of those brands across Europe. So the nondairy business is big in Europe but not in the U.K. And the plant-based meat business is big in the U.K. but not in Europe. So there's significant growth potential on brands and in categories that are already high-growth categories. But we've already got the products, we just have to bring them across geography. That was one of the reasons consolidating Europe under less leaders made sense because now it becomes much easier for us to get these things done across borders. So we're very excited about the business. Now we see significant margin expansion potential in the business as well as the growth potential having all these leading share brands. The fruit business is a nonstrategic business for us. It's very complex. Hundreds of people cutting up watermelons and mangos and sticking them in plastic containers. It was about a $200 million business when the pandemic started, but because it's so food service-oriented, it's down to about $165 million in sales. It has 0 EBITDA. So the minute we divest it, you will see the company's gross margin and EBITDA margins accelerate by more than 100 points, and you'll see our top line growth rate accelerate because this has been a 30% declining business for the last 3 quarters. So it's not strategic. Exiting it shows you the real power of the remainder of the International business, its growth potential. And so we're excited about that. We believe that the fruit business sale is imminent. It will be gone by the end of this quarter. And that will give us, again, a much cleaner portfolio going forward. With regard to Brexit, we're very pleased with the outcome. As you could imagine, we've done a lot of contingency planning over the first 2 years I've been here. And is it going to be a hard Brexit or a soft Brexit? Is it going to happen today? Or is it going to get extended? The fact that there's now more certainty around what's going to happen is terrific for us on. The fact that there isn't going to be significant tariffs is terrific for us. There will be some small incremental costs to added paperwork that needs to happen. But it will -- it's about the best outcome we could have hoped for. We're prepared for some short-term kind of interruption, if you will, associated with this paperwork and complexity at the border around what's needed to get product from point A to point B. But we built inventory before the end of the calendar year in anticipation that customers would buy out. They did. We talked about that on the last call that we thought some of the Q3 volume would shift into Q2. And because of Brexit in our International business, that certainly happened. Again, we'll talk about that on the earnings call. But we are, again, very bullish on the business. We're seeing terrific consumption, great market share gains, strong innovation and now on top of that, a robust productivity pipeline that gives us a lot of confidence in that business and makes it a very important strategic part of our portfolio.

One of the things that you have been working on is turning the company or transforming the company from a what could arguably be considered more of a holding company a couple of years back to fully kind of integrated, high-performing operating company. And you've touched on some of this already, but I think it's instructive to kind of understand what are kind of the most important capabilities that you've built or are continuing to build that are allowing you to operate in a more integrated, effective and efficient fashion? So not everything you're doing. You've talked about a lot of those. But what's really kind of core to helping you improve your performance? And what are you still working on? Where do you still need to make inroads?

So a lot of it was getting to a Hain operating model that everybody would follow. So when you have 55 brands and everybody's got their own supply chain and their own ad agency and their own sales force and -- it just became very hard for us to evaluate one program versus another because everybody was doing things differently. They were measuring things differently. They were interfacing with the sales forces differently and the supply chain differently. So a lot of the heavy lifting has been, let's get to one standard way of doing things. Let's consolidate our agency partners. Let's consolidate our distribution locations, consolidate our IT systems so we can look at data the same way. There's been a lot of heavy lifting behind the scenes. That was kind of the, I'd say, the first and most important thing to get started. Then beyond that, we had to look at what capabilities are we going to need to be a world-class CPG company that we don't have. Sales forecasting was one. We really had no standard way of doing sales forecasting. It wasn't consumption-based. And we needed to get everybody to do it the same way because we were throwing away a ton of product that was aging out because we couldn't forecast. Innovation. As I talked about a little bit before, we had really no real innovation capability before. We now have a robust process with very clear KPIs that have to be delivered around velocity and margin and incrementality and consumer concept scores, et cetera, that before, it was just kind of people sitting in a room and saying, "Why don't we launch this?" And it -- we didn't really have the rigor and the discipline. And on the marketing side, we've centralized all of the marketing spending, which allows us to almost have a shark tank kind of environment where the best idea wins. There is no entitlement to any marketing dollars. You got to earn. You got to show us you have something that's worth investing in and then show us that, that investment is going to get us a good ROI. So those are just a few of the examples of some of the capabilities that we've built in. I'd say project management would be another one. We were a very siloed organization. And getting a project management capability where we could take complex cross-functional projects and manage them efficiently and manage them in a consistent way and create continuous improvement was also another one of the capabilities we needed to build. So a lot of work has been done. But look, it -- this takes several cycles. You don't just wake up 1 day, flip a light switch and all of a sudden, you're great at sales forecasting or innovation. You've got to continuously improve. And at least by having a standardized process, you can go back, do a post mortem and say what worked and what didn't work and improve the process for everyone, which makes us a much more efficient organization going forward.

I'm going to bring Javier in, in a minute, I promise with a financial question. But another on the portfolio first. I've always felt like the baby business has been a -- would be considered kind of a Get Bigger core category for you with Ella's and Earth's Best. I think when you came in and took a look at it, perhaps Earth's Best had been over-proliferated, to your point, a mile wide, maybe an inch deep and needed some work. Give us an update there on that brand in particular and maybe more broadly and what kind of role it plays. And can brands transition from Get Better to Get Bigger over time? Would you anticipate that happening?

Yes. Great question. So when I got here, Earth's Best was our biggest brand, and it had a 3% EBITDA margin. It would be hard to invest at all in that business and make any money. So while it's a great brand and it had a great consumer franchise, we had extended the brand into over 40 different categories: diapers, wipes, pizza bites, chicken nuggets. I mean you name it. It was -- it became a catch-all brand. And we entered a lot of these segments, entering into frozen food, as an example. It's a different business model. It's a very expensive distribution system. We didn't have any scale. So we had to go back again and look at what is the core of this business that we want to be in. And I would say of all the SKU rationalization that we've done, we did more in baby than anything else. So we gave up a ton of space and sales to rightsize that business. That business now is about a 10% EBITDA margin from 3, 700 basis point improvement over a couple of years. And you are -- and now that it has a 10% margin, it's something that we're looking at investing in. So we've just launched some innovation in the snacking part of the portfolio, which is high-margin and a big-growth part of the business. And I expect that you will see -- if you start on January 1 of this year and you watch that business as we go through the year, it's going to see significant top line acceleration from where we started the year. Because, again, we've cleaned up the foundation. We've gotten rid of the things that don't make sense. And now we're investing in the parts of the business that are profitable and have a lot of growth potential. And so when that category resets around the end of the first calendar quarter, call it March, April, you're going to see us pick up significant distribution on our core. And this is going to turn back into a growth business, which, to your point, it then gives it potential to move into the Get Bigger bucket potentially over time. We'll see. But we're now starting to put some resources against growth here, whereas the first 2 years was really about rightsizing the foundation.

I'm going to try once more on kind of outlook. You exceeded guidance in fiscal 2020. You're off to a very strong start in fiscal 2021. I think the commentary has been quite constructive and positive here today. You have to be feeling solid about the performance of the business relative to fiscal 2021 expectations at this point. Fair?

Yes. And Javier, I'll let you chime in on this one as well. I mean again, we haven't given the results from the second quarter that just ended, and we haven't given guidance in the second half. But when we started the year, we said that we would deliver strong double-digit earnings growth, which we will. And we said that there would be significant margin expansion, which there will. And so you'll see very strong results in the first half. And then as we get into the second half with the lap that we talked about, you're going to continue to see good progress. I think our relative performance is going to be very strong. Our margin expansion is going to continue to be there. And we'll talk about the entire algorithm as we get into the earnings call. But hopefully, what you take away from the call today is we feel pretty bullish about what we're doing. We have lots of indicators that we're on the right track. And even when the pandemic ends, we believe that we've got the right brands with the right programs. And frankly, because there's been a health and wellness crisis, a lot of people have migrated to healthy eating that we think is going to continue after in fact, right? If you've been -- when you made the investment in buying a Peloton, you're not going to all of a sudden just stop being healthy when it's over, right? Same thing with food. If you've come into this -- and we're seeing the people that came in during the pandemic repeating 3 and 4x during the pandemic. They're now loyal to these categories and these brands versus, "I just came in briefly and then, oh, pandemic's over. I'm going to go back to my old behavior." So we feel really good about where we are, and you'll get more guidance as we go forward. But Javier, anything you want to add to that?

No. The only other thing that I would say is that we also talked about a strong double-digit growth in operating cash flow. And I -- we also think that we feel pretty good about that guidance that we gave for the year.

Javier, since I have you, can you -- you have the benefit of having a very sound financial position, a very sound balance sheet. I think your leverage ratio is in and around 1x, maybe sub 1x. A lot of the focus over the past couple of years has been about simplification and focusing the portfolio. Is there a point in time where you think about complementary acquisitions or adding to the portfolio in certain key areas, maybe it's plant-based, maybe it's nondairy alternatives? Just kind of curious about your thinking around that. And just more broadly, priorities for use of excess free cash going forward would be helpful.

No. Absolutely. So let me start with the overall capital allocation priorities. The company views its capital in a way that we seek to invest it to its highest and best use. So within that context, we look at internal opportunities. We look at M&A. We look at share repurchases. And from the perspective of where do we get our highest risk-adjusted return, that's where the money flows. And so we are spending a little bit higher than the average this year for our CapEx. I mean I think we're targeting around 4% of net sales. We did have some projects that didn't get completed last year as a result of the pandemic. And there is a need for automation, like Mark talked about, that is going to improve our growth and our profit margin. So that is a big place for our cash and our capital goes to. The other 2 areas, M&A and share buyback, those are evaluated on a regular basis. At the beginning of the journey Mark has talked about, the company was not operationally -- not having the foundation operationally to be able to take on M&A. I think we've come in long ways. And so M&A is clearly part of the growth algorithm. But then again, we look at it from that perspective of do we get -- are we going to get the right risk-adjusted return. And from the perspective of share buybacks, I think you have seen us be active in that dimension in the last 3 quarters or so. And we've gone into the market when we've seen our share prices to be what we consider good value and where we could actually get a good return if we are able to execute those buybacks at those prices. And so we're going to continue following up on that logic. In terms of the M&A and what categories we would be looking at, those would be consistent with what we've defined as the Get Bigger portfolio in North America. So I would say, snacks and tea would be the priority in terms of companies that we're looking at. And then in International, just like you said, the plant-based segment as well as the nondairy beverage segment is the areas where we will be looking at.

Thanks for that. I'm going to ask one more. And then if you have any kind of final comments, Mark, feel free. I talked to a number of companies, even a couple at the conference here the past couple of days that have seen some ongoing challenges within their supply chain related to the pandemic. Nothing like we perhaps saw in the spring with respect to the closedown of certain facilities, but higher absenteeism rates impacting throughput and OII in facilities. How would you kind of characterize Hain's overall efforts to ensure that kind of the safety of its employees, number one? Number two, the operations and maintaining high service levels for its customers? And is there anything there that we should kind of be aware of potentially having an impact on your ability to meet shipments or satisfy demand?

Sure. So first thing I would tell you is we have done an exceptional job since the beginning of the pandemic on customer service. And it starts with us having half of our business in Europe. They had the pandemic hit them about 3 weeks before it hit us. So we were pretty prepared and started ordering materials in advance knowing that a surge was coming, started working on backup sources of supply in case something has happened and started really thinking about and continue to think about employee safety. So we were doing social distancing, and we were buying masks before the government was telling us to wear masks because we saw this coming. And I think as a result of that, we were able to service the business very well through the pandemic. And part of the reason we are, I'll call it, a favored nation status, if you will, with retailers now is because we were a company that historically was unreliable on supply. And when the crisis hit and everybody else struggled, we actually were able to service the business exceptionally well. And when there were holes on the shelves, they were filling it with Hain product in many cases. And we created a hand sanitizer business from scratch in 4 weeks at the very beginning, when you couldn't buy a hand sanitizer and got it to customers who were very appreciative of the fact that we were able to find them supply when they couldn't get supply. So I think we've serviced the business very well. I think we've anticipated very well. I talked a little before about Brexit and preparing for a surge there. We also prepared for a surge if there were a lockdown coming in North America. We built $50 million of extra inventory at the end of last quarter in anticipation of a surge this quarter. And in fact, here we are middle of January, and we're seeing a lot more lockdowns happening and seeing, again, a robust surge in demand that we're well prepared for and servicing the business at close to 98% despite what's going on in the macro environment. So very proud about the team for that. I'm extremely proud of how we've kept employees safe. And one of the things I would say that is a differentiator for us, the communication that we've had with employees since day 1, I think, has been incredibly commendable, such that we're not seeing big absentee issues. We do a town hall every other week. I have a call every single morning since last March to go through the dynamics of the pandemic. How many illnesses do we have? What are we doing to quarantine people? What are we doing to keep them safe? The employees have a way to give us input and ask questions. Every single question, no matter what the question is, gets answered by me in a public forum. So they can ask me anything. And I think that transparency is giving people confidence and comfort that we are going to keep them safe, that it is our #1 priority. We've fired people over not exhibiting safe behaviors during this pandemic, just to give you an example of how serious we are. And so I think we've earned the trust of our employees. And as a result, we have not seen any meaningful issues in terms of output declining or accelerated absenteeism or the like.

I do have one other question -- a question from the audience, like, since we have a minute or 2, we might as well address. Broad question around ESG and your -- some of your major kind of focus areas with respect to ESG. Obviously, a large portion of your products are organic and the sustainable farming practices that go along with organic crops and organic products as part of that. But if you could maybe hit on a couple of highlights how you're approaching ESG, some of the more interesting initiatives, and we'll close it with that.

Sure. So this is a huge part of our DNA, ESG. And we really separate our Hain healthy platform into people, product and planet. You talked a little bit about the product stuff with non-GMO being 90% of our portfolio. Our organic products being 40-something percent of our portfolio. So that has always been in our DNA. What I would tell you is when I got here and we were in crisis in North America, we started talking less about it externally because we really needed to stop the bleeding and put the fire out in North America before we started getting on our front foot again and making public declarations around our goals on ESG. I think as we get through the next, call it, 6 months and start laying out the F '22 plan, you'll start to see much more public declarations around where we're going to focus our energy. But we haven't stopped that work internally. And again, I remind you, we were more of a holding company. So each entity has kind of been doing its own thing. We have 2 different entities that are B corp-certified in Europe. Canada was in the process of being B corp-certified, and then we integrated it with the United States, making it ineligible to certify a loan. But B corp is a big part of our DNA. We have done significant things in terms of reducing the amount of packaging and plastics that we've been using. I've talked a lot about filling up trucks and taking trucks off the road. When I got here in North America, our average truck went out with 2 pallets on it. Just think about that. You got a $1 billion business, averaging 2 pallets per truck. Think about how many extra truck [ off the ] road in that kind of environment. So a lot of initiatives have been about filling up trucks and taking trucks off the road and reducing our carbon footprint. So I give you those as examples. There's a lot of amazing things happening. We have very strict standards for our suppliers in terms of how they interact with the environment and how they interact with their employees. And I think going forward, you will hear us start to speak more publicly about what we're doing and set some real goals and milestones for the next 5 years that I think people will find pretty exciting.

Thank you very much, Mark, Javier. We appreciate all the perspective you've provided today and I look forward to chatting with you soon. Best of luck going forward.

Thank you. Thanks for the time, and thanks, everybody, for your interest. Take care and stay safe.