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

Good afternoon, everyone, and thank you so much for being at our Strategic Decisions Conference for 2021. It's the end of a very long day and a very busy day, but I hope you've all learned a lot, and I certainly have. So it's both my very great pleasure to round off today to have the leadership team of Hain Celestial deal with us. Mark Schiller took over as CEO of Hain Celestial in November of 2018. Prior to that, he was the Chief Commercial Officer for Pinnacle Foods, having worked at Pinnacle since 2010. With him, we have Javier Idrovo, who's the CFO, who joined the company in November of 2019, and Javier was the Former Chief Accounting Officer at the Hershey Company. In February 2019, the company laid out a bold turnaround plan, dividing the portfolio and the Get Bigger and Get Better brands with plans to improve margins, rationalize SKUs and underperforming brands. Now margin improvement has certainly been a very impressive -- on a very impressive trajectory as the company has undergone this transition, with the company hitting its goals well ahead of schedule. Joining the dots on the underlying sales trends also looks promising, despite the near-term pressures from lapping the onset of the pandemic last year.

So with that, let's kick off the questions. And Mark, you're coming up on your 3-year anniversary at the helm of Hain at this fall, and the business has certainly undergone a marked turnaround since you took over. What have been the key milestones for you and the company over the past few years?

Thanks for having us, Alexia. Yes, it's been an incredible journey. And I would say, obviously, the first milestone was getting a strategy that would resurrect the performance of the North America business, followed by get the right team on the bus, which became the second most important step as we had the strategy. And then it was really about simplifying the business through a combination of shedding underperforming assets and SKUs as well as simplifying our model so that it was easier for customers to do business with us. And that took a good kind of year to get everything set and simplified and the foundation strength and which brought us to the current milestone and journey that we're on, which is resurrecting profitable growth now that we've got a solid foundation. So lots more work to do, lots of work has been done. Proud of the team in terms of what we've accomplished, and our best days are still in front of us.

Perfect. And I just want to say to everybody that's listening in, if you want to ask Mark or Javier a question, then please use the live Q&A link that's at the right-hand side of your screen, you can type something in there, and we'll try to get to as many of the question as possible. So how did the company pivot its operations to adjust to the challenges and opportunities presented by the pandemic over the past year?

Well, a lot of it, again, started with having a clear strategy and enrolling people in that journey. And with the right strategy and the right visibility to the milestones that need to be achieved, then it's really about giving people the tools to be successful and to get up the mountain. And it's been a very complex multi-faceted strategy. We've had some fits and starts along the way, but really, as we've gone through the journey, I think that the chains and the length -- the lengths in the chain have gotten stronger, and we found that, along the way, the bottlenecks kind of moved from one place to another and we had to reassess whether we have the right capabilities, whether we have the right processes. And so it has been a journey about resilience and flexibility and continuing to modify and tweak, all in pursuit of us moving from being a holding company to a great operating company.

Thinking about how consumer behavior has shifted over the past year, because obviously, we're seeing many, many dimensions of change, which of those changes do you think may end up being more structural changes in consumer behavior that we brought about by the pandemic that may well stick with us over time, and which do you think might just revert to pre-pandemic life?

Yes. So the 3 primary changes that I think have some legs to them and will be somewhat sticky are, first and foremost, people are interested in a healthier lifestyle. This pandemic has forced people to reassess their health. People are worried about pre-existing conditions. They see how quarterly those with pre-existing conditions fare during the pandemic. And so there's been a lot of people changing their lifestyle, to eat healthier. They bought the Peloton, they're exercising more. And when it's a lifestyle change, it tends to be more enduring versus kind of I'll do this for a little while, and then I'll go back to the way that I was. So I think that's here to stay, and it certainly benefits a company like Hain that only does health and wellness. I think the second thing that will be somewhat sticky is e-commerce. Prior to the pandemic, people bought a lot of things online, but food was kind of the last mile because I don't want somebody picking out my bananas or my tomatoes, I want to kind of touch and feel and do it myself. But when we were all locked down at home, I think people had no choice but to consider the alternative of purchasing online. And I think people found a couple of benefits from that. One, there's a much greater assortment online than you get in a bricks-and-mortar environment. And secondarily, it's incredibly convenient. Whether you're going to work and you can order from work and have it sitting on your doorstep when you get home, or whether you want to avoid the hassle of having a screaming 2-year-old as you're going up and down the aisles and can just order it and click and collect it on your way back from whatever activity you're doing, I think people really appreciate the flexibility and the time-saving that comes with shopping online. And so I would expect that, that behavior will continue. And again, that's something that Hain is very overdeveloped in e-commerce, and that bodes well for us as a company as well. The third one that has occurred during the pandemic is people have discovered cooking from home. Part of that was from necessity, restaurants were closed. But I think a lot of people have figured out that they like cooking, they enjoy it, they know what ingredients are going into the products that they're making. And so I would expect that while there are certainly people who will go back to restaurants and their old behaviors, I think for some, particularly millennials, I think a lot of them have learned the joys of booking, if you will, and some of that behavior will be sticky as well. We also have some pantry center of store brands. We have cooking oils and soups and condiments and things like that, that I think will also bode well for us going forward. The last trend that has occurred, that I'm not sure how sticky it will be is people have become pretty inelastic on price. And whether that's because of government subsidies or whether that's in an environment of uncertainty, they want to gravitate to brands they're familiar with. I think private label has not fared as well during the pandemic. Whether or not that remains, I'm not sure. I think part of it we'll see as the stimulus checks end and inflation rears its ugly head. We'll see whether people become more price-sensitive or not. But at least for right now, there seems to be a migration to brands, which we'll see if that continues long term.

That makes sense. So at present, many investors are looking at sales growth on a 2-year basis, given the abnormally high sales growth rates that happened in the early months of the pandemic. But Hain has undergone a fairly meaningful SKU rationalization process in recent years, and that's making yourselves look weaker on a 2-year basis. So how can we as investors join the dots to assess the underlying growth of the business these days? How shelf resets playing out at retail and enabling the company to grow distribution?

Yes. It's a great question. So as you point out, we've been going through a transformation, shedding brand that were losing and eliminating more than 1,000 SKUs over the course of this journey. And in so doing, initially, we were getting rid of complexity and SKUs that were losing money, and we didn't have the innovation foot in its place. So we actually gave up 7% of our sales in SKU rationalization. And so when you're doing a comparison of our volume in '21 versus '19, you have to really add back the 7% that we proactively discontinued with nothing to put in its place. So I think that will put us more in the center or top half of the pack in terms of our actual growth rate, underlying growth rate versus 2019 when you factor that in. And I'm also pleased to say when we look at our performance versus '19, those Get Bigger brands that we've talked so much about setting up as the future growth of the company, the most recent 12-week IRI data that just came out yesterday, we're up 12%. That's before you even factor in the SKU rationalization. So those big brands are growing nicely versus '19. We have a similar set of brands in Europe that are growing even faster than 12%, if you take the top 8 brands in our European business. So we've got a nice underlying foundation of businesses that are showing pretty strong growth. With regard to the second part of the question around distribution, as categories are starting to reset and as we proactively shed the underperforming SKUs, we've really got a very stable foundation to grow from. And as categories are resetting with all the innovation we have, we're finding that we are picking up significant incremental space. So far, the baby category and the snacks category have reset. And starting this month and through kind of the end of September, we'll see tea and personal care and yogurt and some of the other categories reset as well. And again, given our momentum, given the strength of the SKUs that we have and the innovation that we're bringing, we expect that we'll continue to pick up space, which bodes well for our future growth.

Right. And it's really helpful to hear that underlying sales growth story because from the outside here, it's really rather hard to piece it all together. So going forward, what do you see as the biggest avenues for growth for Hain by region, brand and product category?

So I think the [indiscernible] categories that we [indiscernible] at Investor Day are the ones that we're focused on in North America. And I would remind folks that we have a massive distribution opportunity on these businesses. Even though these are our priority brands, we still have some of them only have 50% ACV in distribution. So there's significant distribution to be gained in existing channels. There's many channels that we don't compete in at all, or very marginally, dollar channel, foodservice channel, convenience and gas channel. And then there's also geographic opportunities for us to take some of these brands across borders between the U.S. and Canada. Similarly, when I look at Europe, the big priority categories for us over there are plant-based meats and nondairy beverage where we have significant strength and scale. And again, similar opportunities for us to bring products that are big in the U.K. and to Continental Europe. Products in Europe and to the U.K. And so I think distribution will be a big part of our story going forward. And as I said, we see opportunities, both here and internationally for both business to be high-growth businesses over time.

Right. So your margin expansion in the past couple of years has been extremely solid, I think that was understatement, based on streamlining the portfolio and improving productivity. Is there more room for margin expansion here? And what innings are we in, in your margin turnaround? What are the new drivers of margin improvement from here? And obviously, there's the near-term input cost pressures as well that you're juggling at the moment.

Yes. So we've got a very robust productivity agenda and a terrific process that has served us very well. We're a little bit further along in North America than we are in Europe because we just took that playbook to Europe at the beginning of this fiscal year. So I would say maybe we're in the third inning in the international business, and we're more in the fifth or sixth inning in the North America business. But there is still plenty of opportunity for margin expansion. I remind the team all the time that our margins are still 800 to 1,000 basis points lower than everybody else's gross margin. And there's opportunities for automation. There's opportunities for reformulation for things that are overengineered. We've made great progress on filling up trucks. We've got 42% more product on each truck we're shipping in North America, but our trucks are still only half full. We can fill up the trucks and take cost out. We've got opportunity in terms of pricing and mix management, part of which we will take advantage of during the current inflationary environment. And so there's really no shortage of ideas. We actually have more ideas than we have resources to execute them. And we've got several hundred million dollars in the pipeline. So we've got several years of robust productivity that will allow us to continue to expand our margins. Some of that will get reinvested back into marketing. Some of that will be taken to the bottom line. And certainly, in the short term, in a higher inflationary environment, some of that may go to cover some of our inflation. But I would expect, as we get into '22, even in the high inflationary environment, you're still going to see some good margin growth out of our company.

Perfect. Well, it's encouraging that there's still a bit to go. And it does sound as though the room for further streamlining of the logistics, the supply chain automation in the plant, there's a lot them, that work still has to be done. That's helpful. So what are the main priorities for innovation over the coming years? You've obviously really only started to get going with innovation in the last couple of years, and a lot of it was disrupted last year because of the pandemic. But are there game-changing new developments that could create outsized benefits if they come to fruition, or how are you thinking about the whole pipeline?

So our vision from day 1 was to make health and wellness mainstream. And what I mean by that is if we can take things that people love and make them a little bit healthier, we can capture a huge part of the mainstream market. And so what we've been doing is looking at the segments in the categories that we're in that are very sizable that don't have a health and wellness presence, and we've created offerings that are healthier. An example I would give you is in snacking, spicy, salty snacks is a big area within the category, but there was really nobody doing it in a healthy way. We did it with Sensible Portions. It's been very, very successful. We've since subsequently extended spicier offerings into Terra and Garden of Eden as well. And so we look at kind of where is the volume and where is the opportunity for us to bring health and wellness. The other thing we always look at is where is health and wellness succeeding in other parts of the store but hasn't been brought to the categories that we're in. So when you look at tea, as an example, things like bringing tea with as little caffeine as a cup of coffee to the tea aisle is going to bring new people over into the aisle. Tea with melatonin to help you sleep at night. Tea with probiotics that you see in the yogurt category, but didn't exist in the tea category. How do I bring things that are resonating with consumers elsewhere but haven't been brought into the categories that we compete. And the combination of those things is yielding highly incremental innovation that's helping grow the categories. And when you help grow the category, the retailer is going to give you the space and get excited about supporting you. And so we're in a pretty virtuous cycle with regard to our innovation. We have, again, a very robust pipeline of ideas that will last us for several years. And I would expect, with the momentum we'll generate from these things that we're launching now, that retailers will be craving the next things that are coming a year from now, and we'll build on the success from today.

Perfect. How is the company changing its approach to marketing? And are spend levels likely to increase over time?

So it's always been our desire as we [indiscernible] margins to invest more in marketing. Now we've -- in North America, we've been doing that over the last couple of years. We're spending about 50% more on the Get Bigger brands than we were several years ago. Part of that came from reallocating money from to Get Better brands. Part of that came from reducing nonworking costs as every brand had its own ad agency a few years ago, and we've consolidated that nonworking cost. And part of it is around just adding money again as we've taken some margin out. I would expect, as we continue to take cost out and improvement our margins, that some of that will get reinvested. And certainly, as we look to international, which really had not had significant margin expansion until this year, they're underspent on marketing, they're only spending about 2.5% of sales on marketing. So we need to invest more in those businesses, and as we improve the margins of that part of our portfolio, some of it will go to the bottom line, and some of it will go to be reinvested in marketing. With regard to how we spend the money, all of our focus is on digital advertising. Because we don't have brands with 98% distribution, you're not going to say yes on an elevation model. You're going to see us doing much more targeted, scrappy marketing, whether that's geo targeting within a 5-mile radius of the stores that carry the product, or whether that's a focus on e-commerce, where we have particular strength, and we know how to get our products on the front page when you type in healthy snacks, and we know how to build basket size and the like. It's very, very digital-focused, a little bit of influencer marketing in there as well that will attract millennials. But we've got very good ROI metrics, and we know that we're continuing to get more efficient as we go.

Super helpful. So how is the company handling the current high inflation rates in raw materials, packaging and freight? I know it's something that's coming up in every consumer base meeting today.

Yes. It's very inflationary. I know, by the way, I throw in wage inflation on top of what you just mentioned. It's hitting all parts of the business. We will definitely see more inflation in '22 than we did in '21. That said, we will find ways to offset that inflation with pricing, and there's lots of ways to take pricing. You can take a list price increase, which we will do and have done in some cases where either we're the leading brand in the category or we're the opening price point, and we think that, that's the right thing to do relative to the brand elasticities. You can do it through wait-outs, we've done some of those as well, which is less noticeable by the consumer because they tend to shop more on absolute price than price per ounce. You can do it through the mix of products that you sell, you can do it through optimizing your trade spending. We can build it into programs like our simplified pricing model as well. So there's a lot of avenues for us to find ways to pass on that pricing, some of which the consumer will see, some of which they may not see, but you've already been enjoying some of those actions in the margin expansion that we've been delivering. Even though it may not show up in the syndicated data, it doesn't mean that we aren't finding ways to take pricing along the way, and we'll continue to do that as we get into F '22.

That makes sense. So how do you think retailer dynamics have evolved for you during the course of the pandemic? And how are the different channels now adapting to lapping the onset of the pandemic? And obviously, they're facing tough comparables. And then we're starting to see a real reopening as people get their vaccines. I mean that was a lot of pressure on retailers. What are you seeing in terms of their behavior shifting now?

So we're getting back to a more normalized environment. I think yesterday, Costco said they're going to bring back the demos in their clubs. We are seeing categories being reset again after a year of the focus being more on how we keep the shelves full. We're seeing a reinstatement of fines for not being on time and in full. So I think the retailers are striving to get back to a more normalized environment. And certainly, that puts a premium on us upping our game and making sure we deliver against all the things that we need to. The promotional environment varies by category. Some categories, we're seeing more promoting taking place. In other categories, not so much yet. I think from a supply standpoint, some categories are fully back in stock and others are still struggling to fill the shelves. So it is an evolving process, if you will. But I think everyone is moving back to what I'll characterize as the new normal. It may not be exactly like the old normal, but it will be normal-like. And as we all need to now start lapping the increased in-home meeting occasions that we've enjoyed, I think you'll start to see some pricing and you'll start to see some interesting dynamics on the promotional front that we'll just see how those play out over the course of the year. But we're in good shape as a company. We've serviced the business well through the pandemic. We've partnered with retailers in lots of ways, helping them build their e-commerce capabilities, helping them understand how to win in health and wellness. And you're seeing that play out in things like the distribution growth that we're enjoying right now.

Great. So e-commerce, you're obviously more exposed to e-commerce than many of the other larger packaged food companies were at the start of the pandemic. How has your e-commerce strategy developed over the last year? Can you tell us sort of growth rates, how big it is now, maybe for some of the different types of products that you stock or maybe...