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

Good morning. Welcome to the Truist Securities Consumer Symposium -- mouthful -- Day 2. With us -- my name is Bill Chappell. I'm a senior equity analyst covering consumer at Truist Securities. And our next company presenting is Hain Celestial. Based in Lake Success, New York, Hain is a leading manufacturer and marketer of healthy food and personal care products. These products are sold through a wide variety of retailers, and their key brands such as Celestial Seasonings, First Beth, Garden of Eatin' and Spectrum, Maranatha, among others. Over the past 12 months, the company generated roughly $2 billion in sales and its current market cap is about $4.2 billion. This morning, we have Mark Schiller, CEO; and Javier Idrovo, CFO. And we'll kind of just walk through a fireside set of questions. And Mark, let's jump in if you're ready.

Sure.

One of the things you've said since you first came was your past experience at Pinnacle and other places really prepared you well for this opportunity. I'm just trying to understand that, in that Pinnacle, in particular, was a slow-growth, a 50-year-old brand, center of the store packaged food company that was kind of hitting its stride while you were there [indiscernible] improvement. Hain was a turnaround story. And it had previously been a fast growth. It was a niche category. It was in healthy natural. It wasn't necessarily all center of the store. So -- and it was -- as I said, kind of bring it back from -- to some extent, the aches. So how did your experience prepare you for this? What did you see that was similar that played a big game of concentration? How have you seen this card before and could turn it back over again? And help us tell that when you first joined the company.

Sure. So much of my career in CPG has been either resurrecting brands that have stagnated or turning around businesses that have been struggling. So I've always gravitated toward those kinds of assignments and have built skill in that area for many years. I think, at Pinnacle, you hit it on the head. It was a bunch of iconic brands that were tired and needed reinvigoration. Whereas here, we're in a higher-growth segment with the health and wellness portfolio that we have, but these also needed to be resurrected and turned around. And so there were some similar situations in both companies. Both needed operating -- an operating model and processes that would enable growth. Both needed segmentation of the portfolio and prioritization in a very complex portfolio around which ones had the most potential and where you wanted to put your resources. Both of them needed structural changes in terms of how we were organized and both needed talent changes to make sure that we had capabilities to grow. What I liked about Hain, yes, Hain is certainly more of a turnaround. But what was interesting about Hain is half the company is outside the U.S., and it was relatively stable. And half the company was really North America that had been struggling. And so I think a lot of the playbook that we applied at Pinnacle was relevant here. And so we simplified the portfolio. We segmented it into growth brands and brands that we were going to manage for profit. We've built the foundational capabilities, sales forecasting, our innovation capabilities, project management capabilities. Then we got maniacal control of our costs, which had gotten away from us, and made sure that we understood the ROI of everything that we were investing in and that we built a culture around productivity. And then it was really about resurrecting growth in a core set of brands that would really change the outcome for the company. So I think the playbook is similar. How you apply it here is certainly somewhat different. Some of the challenges were different. But I love the chance to be the leader of a health and wellness company that had such potential in my eyes. And I've really enjoyed the journey thus far, and we've made a lot of progress.

And talking about -- you set out the 3-year goal now, I guess, 2 years ago. And it seemed to be at least a year ahead. And so can you talk -- how much -- did you set the bar too low, I guess? And what -- and we've learned more of where there's a lot more we could do than we thought? And how much of it was the pandemic help? If you've got a lot of old SKUs or stuff that you're trying to clear out, I mean, that's certainly a -- how do you look at being -- nothing wrong with being ahead of schedule [indiscernible] being ahead of schedule.

Sure. So I think it's a disservice to our organization to say we set the bar too low when we've improved our gross margins and EBITDA margins almost 700 basis points in 2 years in North America. There's been a lot of heavy lifting and hard work to achieve that. But you're right, we are ahead of schedule, but it's certainly not for lack of effort. This has been a challenging environment and a lot of heavy lifting to get it done. Yes, the pandemic has helped. But honestly, all of the things that we are accomplishing were put in place before the pandemic. On the cost side, restructuring the organization, building the capabilities that I talked about, building a productivity culture where we have just taken tremendous cost out of the business and created a much more efficient operating company, has enabled the success that we've gotten during the pandemic. Before the pandemic, we had trouble just servicing the business because our supply chain was broken, and we fixed it and got it to a place where we were a reliable partner to our retailers. That again enabled some of the successes that we had when the pandemic hit. And on the top line, the first year of this journey was really about eliminating SKUs and selling brands that didn't have the potential or were losing money. And by kind of reestablishing that foundation and building innovation and marketing capabilities to drive growth, we were demonstrating that right before the pandemic hit. And then we got a little bit of a boost, if you will, from more eating occasions coming home. So I feel like we've driven the vast majority of the improvements that we've seen. Certainly, we've gotten some benefit from more in-home eating occasions. But when you look at things like continued market share growth on these priority brands, distribution gains on these priority brands, innovation that's performing in the top half of the category that's bringing new users in. There's a lot underneath the pandemic that you can look at to say we're driving it and we're in really good shape to come out the other end as a growth company.

And looking at the divestiture end, to some extent, the kind of walking away from business proposal. I mean, I understand -- let's take Tilda aside. Tilda was a good business that you got a great price for and probably didn't see that in Sobeys. But for everything else, you have businesses that the company paid 10x, 20x, 30x EBITDA for that you're selling for single digits, low double digits. And that's, to some extent, value disruption and certainly dilution. And then there are other businesses that were still profitable. I understand the unprofitable or -- but so profitable that you've walked away from or sold that you maybe could have rehabilitated. So how do you go through that process of -- a comfort level of a -- you just got to get -- this is too important to get -- to clean up the portfolio. I mean, help me understand your thought process there?

Sure. So what people have to understand is, when I got here, this was a holding company, not an operating company. You had 55 brands, 26 ERP systems, 5 different sales forces in the United States, 40 different locations that we were shipping product to customers from, an inability for customers to consolidate orders. They had to place different orders from different locations for each individual product. Dozens of ad agencies. Dozens of packaging agencies. It was not an operating company. So the first thing that we needed to do was simplify the portfolio. We were drowning in complexity and fighting fires versus really focusing on growth. And so in order to do that, we did a thorough assessment of the portfolio, and we said which brands have the most potential that we should be putting a disproportionate amount of our resources against, which brands are a drag and really don't have a lot of potential. And to your point, yes, maybe big numbers were paid for these things before I got here. But in the time that I've been here, we sold 18 businesses that have about $930 million of sales that had collectively $12 million of EBITDA across 18 businesses. So they were not contributing to our algorithm. And in fact, they were destroying our algorithm because of all the complexity associated with those businesses. And oh, by the way, that $12 million of EBITDA, we sold for more than $400 million of proceeds that we're generating. So we're getting a huge multiple on businesses that weren't performing, and we've built a much simpler and more efficient company to grow from. So I think that was largely the catalyst that enables us to pivot toward being a growth company. The ones that we focused on -- first of all, almost all of them are in high-growth categories. So when you look at snacks and personal care and plant-based meats and nondairy beverages, those were very high-growth categories. We were just losing share. So our strategy from day 1 was how do we turn ourselves back into a company that's not only sustaining share and keeping up with the growth rate of the category, but also driving the category. And what you've seen is we've been picking up share consistently in snacks. We've been picking up share consistently in yogurt. We've been picking up share consistently in tea and plant based. And so we've gone from kind of losing share to being a driver of those categories. And even in the categories that we picked like tea, that wasn't a growth category, we looked at the potential of the category and said, "This is ripe for innovation. It's ripe for leadership." And when you see a category where less than 5 of the top 100 SKUs were SKUs that were launched in the last 10 years, there was nobody driving the category. And yet, there's huge unmet needs that we felt we could bring to the category that would get existing people to consume more often and bring people in. And so tea with melatonin, tea with as much caffeine as a cup of coffee, tea that boost your immunity. Instead of this just being a women's brand that you drink at night for a calming moment at the end of the day, we've turned this into a category that appeals to a bunch of people and is bringing more people in and has created tremendous growth. So all that said, I think we've picked the right categories for growth. We've shed the ones that just add complexity. Some of them do have potential, to your point, Bill. But in a company with 55 brands, you can't nurture them all. You have to decide which ones you're going to focus on, where you end up spreading the peanut butter, so that then that you don't really make an impact on anything. So I think it was clearly the right strategy. You see it in the 500-plus basis points of margin expansion, and you see it in the top line growth that we're now generating that we made a lot of the right moves, and we have a lot of runway left.

Well, I'll come back to some more general questions since you kind of talked about tea. What is the confidence that it's just not an artificial lift because we're all locked at home and the cold winter and -- and because the tea category struggled for years, I mean, just not the same but the category, I mean, it's -- you couldn't really get out of the way of itself. And I think most investors forget that the name had been Hain Celestial versus you guys even had a few business. So kind of what gives you confidence that it's now on good footing as a category as we come out of the pandemic and that it could be a growth category for years to come?

Yes. So I mean the first thing I would tell you is the tea was almost the poster child category for the pandemic because you drink tea when you're sick and you drink tea when you're stressed. And boy, both of those things were kind of front and center during the pandemic. So no question that the category benefited from the pandemic, but a lot of new people came into the category. And the question becomes are they delighted by what they're seeing and going to stick with the category? Or do they go elsewhere? The other thing that I would tell you is, because of all this innovation that we've brought, tea in K-cups, tea with benefits that I talked about before, melatonin and immunity boost and probiotics and gut health, those are bringing new people in who are having a good experience and will trade back and forth among tea that they're just going to drink because they're stressed or because they're sick and tea that they're going to put in their everyday routine. The best example I could give you is tea with as much caffeine as a cup of coffee. There's a much bigger coffee category than tea category. A lot of people don't like coffee, but they drink it because they want the caffeine. I'm one of them. And my insight for myself was, "You know what, coffee is hard on my stomach. I don't love the taste, but I need the caffeine, and so I drink it. And if you could give it to me in something that I would enjoy more, I'd rather switch." I drink tea with caffeine, the Celestial product. I have several cups every single day, and it has become part of my routine and supplanted the coffee. And I think there are a lot of other people like me that, if you provide them with benefits that they're looking for, that they're happy to get it in the form of tea. If you think of the vitamins that you're taking, why can't I give it to you in a drinkable form? Why do you have to take a pill with fiber or a pill to help you follow sleep? I can give you tea with Melatonin and help you fall asleep. So I'm confident that we can innovate here. I'm confident that we can lead this category to a different place. And the best example I would give you is Pinnacle. There's no growth in frozen vegetables for 5 years before we reinvented that category with bird's eye. And so it can be done. You have to understand what consumers want. You have to provide them products that meet those needs. And I think you're seeing it with the high growth of the category, but also the incredible share growth that we're getting. Pretty much every single 4 week period, you're going to see increased TDPs on Celestial. You're going to see increased market share on Celestial. And we've had some amazing growth on a very high-margin business for us. So it's an important category. It's in our name, as you said, and we're very confident that we can turn this into a growth category.

No, I would say -- like you said [indiscernible] I don't think -- the company said it was an important category for the prior 10 years, even though it was part of the name. So it's nice to hear. Just kind of moving back to the general plan. But the other issue is on SKU rationalization, I mean, you kind of accelerated SKU rationalization on top of a SKU rationalization program that was going when you got there. And I'm always concerned when I see massive SKU rationalizations that, especially across multiple categories, that you don't -- you lose your block of space at a retailer, where all of a sudden you go from having 3 feet of blocks that consumers can't miss to 2 SKUs that they walk by on a regular basis. Or to the retailer, you go from the category captain or something equivalent to just a player and you lose your -- how do you manage that across so many categories? And how did the company become so successful and at least kind of holding share or holding mind share after doing that?

Yes. So the -- before I got here, the SKU rationalization was about eliminating SKUs that weren't growing because they were maniacally focused on growth at any cost. When I got here, we shifted that focus to profitable growth. And so we started looking at which SKUs are adding complexity, which SKUs are we only selling $10,000 a year on and not meeting minimum order quantities, which SKUs don't have the margin potential and really starting to say, "Look, we either got to price those SKUs or we got to get out." And an example I gave on a call earlier in this journey was we had 1 SKU at 1 retailer that did $1 million of sales and had a negative 50 in gross margin. And you've got to say to yourself, "I either need to get out of this or I need to take a massive price increase because this is not adding any value to Hain Celestial." And so some of those decisions, we said we're better off giving up the space than hanging on to something that is hemorrhaging cash like that example. And so we did proactively give up a lot of space at the beginning in the first year. We had too many SKUs in the bottom quartile of the category that weren't going to make it during the next reset anyway. And so by changing the lens, we were able to clean it up and build a much more stable foundation from which to grow from. And so year 1, we gave up a lot of space. But year 2, we now have innovation to put in the top of the funnel, and we've cleaned up a lot of the nonperforming SKUs that is now turning us back into a space gainer. And you see it in the syndicated data. In the second quarter, our Get Bigger brands in North America increased space by 10%. And that's before the category is even worked at. We have snacks and baby food we'll be resetting in March, April. You're going to see significant space gains for Hain because we cleaned up the foundation and we're bringing real incremental innovation that's going to drive growth in those categories. So yes, it was take a step backwards to take a step forward, but that step backwards was part of a huge margin expansion that you've seen in the numbers, and it was also about stabilizing the foundation from which to grow from. So it was the right decision. I think we got points with retailers by being proactive and addressing the things that weren't turning versus just trying to throw more on the top of the funnel to cover the stuff that's leaking out the bottom. So by addressing it, we earned some credibility. Now we're coming with real innovation that is driving category growth and bringing new people in and is very, very incremental. And customers are excited about it. And so we set ourselves up for growth, and we think that growth is here to stay.

And [indiscernible] takeoff is the wrong word, but I mean, 2, 3 years ago, the retailers -- hate would be too strong a word -- but your service levels are in the 70s. They can't trust you. They're delisting you. How does it change where they say, okay, we now [indiscernible] how much the pandemic in terms of that trust to get to where you're now adding space? Because I mean, it seems like a fairly short amount of time to going from hate to love.

Yes. It's a great question. So look, when I started -- you nailed it -- some of these categories, we had 70% service levels. We couldn't keep product on the shelf. And in talking with retailers that I have a relationship or that my Chief Commercial Officer has relationships with, they were telling us, "You guys are incredibly difficult to do business with. I can't consolidate orders and fill up trucks it's a ton of paperwork. You're tying up my dock doors. You're not servicing the business well." And so what we said to them is, "Look, we're going to fix it. It's going to take a little bit of time, but here's what we're going to do. We're going to clean up the mess, which includes eliminating SKUs proactively and getting to a place where we are a good operating company that can be a reliable partner for you. And then we're going to bring in innovation that's going to help you grow your categories." That was a kind of a show-me kind of conversation where they said, "Okay. That sounds interesting, but until you can service the business, I don't necessarily believe you. Prove it to me." And over the last couple of years, what we've been demonstrating to folks is that we can do what we say we're going to do. We've been reliably supplying. When the pandemic hit and other people were having trouble keeping up with demand, we did a really good job of supplying the business. And in fact, we created a hand sanitizer business out of thin air in 4 weeks when the country couldn't find hand sanitizer. And those retailers remember because they were begging us. Like "If you can find this, you're in." We sold $6 million, $7 million worth of hand sanitizer in the fourth quarter last year from thin air and fill the need for the retailers. And when we started showing the retailers that we cared about their growth, not just about our growth, it became a very different conversation. And so when I can bring them a piece of innovation, like tea with as much caffeine as a cup of coffee, and show them that it's 80% to 90% incremental to the category because it's bringing people in who haven't bought a single box in the last year, it's easy to get a yes out of them as long as you can supply them reliably. And so I think we've earned the seat at the table. We always can be better. We always have to be better. But look, if I'm a retailer and I want to win in health and wellness, I'm -- Hain is the logical company to partner with. We're in 30-plus categories. We are a pure-play health and wellness company. And when you're trying to figure out how much space to give to health and wellness or how to price it versus the mainstream offerings or what my assortment should look like, we're the logical partner. So I think people wanted us to win and wanted us to succeed. We just had to prove to them that we could do what we promised we were going to do. And now that we have, you're starting to see the wins that come with that. More space gains, better distribution, better eye placement in store and things that will continue to -- this virtuous circle we're in.

And certainly, Hain showed up during the pandemic and has gotten points that we -- do you think, conversely, that some of your smaller start-up -- because a lot of your categories in there are very, very small competitors that are kind of jumping in. That probably couldn't own manufacturing or production or logistics keep up their independence. Do you think take that they permanently lost points where -- that you gained and give you a stronger position?

Yes. I mean, look, we certainly benefited from some of the shortcomings of some of our competitors. And if you have a business that's solely reliant on co-packing, when a pandemic hit and there's a surge in orders, the co-packer is going to fill their biggest customer first and their smallest customer last. And so if you were the #7 brand for a co-packer, you didn't get product right away. You had to wait. And by the way, some of our smaller categories in our Get Better bucket, we had to wait. And in some cases, you had to wait for a while, and somebody else took that space. So it's important that you are able to secure reliable supply. Not only were we able to do that in our plants, but we also were able to do that by lining up secondary suppliers before the pandemic hit. The advantage of Hain is the pandemic hit Europe before it hit here. Remember, Italy and Spain. And a month before it got here, we saw it coming because we have a big business in Europe. And we were able to build up backup sources of supply to order extra materials to do the things that we needed to do for the surge. And again, we benefited from it, and others not as much. And that's certainly worked in our favor. No question.

Can you just switch a little bit to innovation? We talked about it on tea, but I think you guys at the cover was pretty bare when you got -- It's not -- obviously, it's built up. Is it more kind of your thought of how to build it up? I mean, on one hand, you can say you're in growth categories. You just need to have something new consistently every year. On the other hand, you can say, "Boy, we need to have some breakout." Like you did for tea, in every category to stay ahead of the pack and really gain share. How do you think about it when you're building back up?

Yes. So it really starts with the consumer, what consumer needs are not being met by this category. And I gave you some examples in tea, but I'll use the Screamin' Hot snacks items that we launched. We saw that millennial males and teen males weren't buying into health and wellness versus some of the other salty snacks that they could buy. What do they want? They want hot spicy flavors that give them badge value because they're in this thing that's hot. And hot salty snacks is a huge part of the category, but it was virtually nonexistent in healthy snacks. So we said, "Let's give it to them." We did it. We brought in millennial males into the franchise on Sensible Portions. Very successfully, very incremental. And we said, "You know what, now let's do a hot version of Terra chips. Let's do a hot version of Garden of Eatin'." Because those categories don't have hot offerings either. So it's an example of you start with the consumer, what needs do they have, what else are they buying in other places that they can't get in the healthier offering, and you fill those needs. In some cases, it's going to be as simple as a flavor like Screamin' Hot. In other cases, it's going to be a new platform. Or it's going to be us broadening our brand into white space that we see on sensible portions, we just launched Veggie Puffs to go with our veggie Straws. There's a big puff segment that we didn't play in, but we think our brand extends there nicely. And we can bring, again, some excitement to that part of the category with some great flavors and offerings. And it's just started shipping, and it's flying off-the-shelf. So we believe we've got the right model on innovation. Not every category is going to be the same. I'd say tea and snacks is where we've demonstrated the most progress thus far. But there's -- we've done well in yogurt. We've done well in personal care. More to come. But we're not of the philosophy of just throw a lot of stuff out there and see what sticks. We're trying to be very thoughtful and disciplined in terms of it. If it doesn't meet a consumer need, don't waste your time. And just because somebody else is selling a lot of something, for us to be the third guy in is not a recipe for success. The customer doesn't need a third version of a certain thing. We've got to go find something that they haven't seen yet. And again, so far, we're doing a really good job of it. And I think, as these categories reset, starting with snacks and baby in March, April, you're going to see significant space gains for Hain.

Yes, I'm not sure what it says about millennial males, which I'm not one of, that they need -- to get them to be healthy, they need to physically hurt themselves by eating something super hot. But yes, I guess it works. When I look at snacks -- well, one more on innovation -- in the past, also -- and various -- somebody feel like innovation is taking the brands into tangential categories. How important is that to extend the brand into other categories versus just riding the growth of the core categories they're in?