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

Good morning and thanks, everyone, for joining us today. It's our privilege to have Mark Schiller, President and CEO of Hain Celestial; and Javier Idrovo, EVP and CFO. Since Mark joined as CEO in November 2018, there's been an impressive turnaround, especially on the margin side, seeing a dramatic improvement in efficiency. Fiscal year-to-date EBITDA margins are up an average of over 300 basis points. It's been pretty fascinating to watch it come together so nicely.

Just would love to start with a little bit of thoughts on the margin side, especially with now some inflation that's clearly changing the landscape for food manufacturers. Can you just give us a sense of what some of your different levers are for margin expansion? And how much you could see further growth from here?

Sure. So thanks for having us. We're excited to be here. We've got a pretty robust productivity agenda that started a couple of years ago. We've got a really very clearly defined process, and you've seen the results we've been able to deliver in North America and now we're taking that same playbook over to Europe and starting to see the gains there as well. What I would characterize it as -- if you think about it as a tree, we start with the fruit that's on the ground and the easiest to pick up, and then we work our way up the tree to some of the bigger and more complex projects. So I would certainly say, at this point, we picked up the stuff that's on the floor that's relatively easy. But we're now into more complex projects that are worth significant amounts of money, plant consolidations, automation of factories, changing our manufacturing principles and operating methodologies, adopting more Lean Six Sigma practices to get throughputs up and waste down and some of the core metrics that you would see as a world-class operator, redesigning products that are overengineered relative to what the consumer is willing to pay for. So there are lots of levers left for us. And I would certainly say, in North America, we're maybe in the fifth or sixth inning in terms of our productivity agenda. We're probably in the third inning when you get to international because we really only started it this year. And as I've said on a previous earnings call, we have somewhere between $150 million and $200 million of productivity ideas that we are going after. And so we expect that we'll continue to see good margin expansion. Obviously, in a high inflationary environment, you'll probably get a little less margin expansion next year than you did this year. But we're confident that we'll be able to continue to ramp our margins up over time and reinvest some of that back in the business to drive growth.

So you touched on the European piece. Obviously, it's a little bit later start. How significant is that opportunity relative to North America? And is it correct that your initial plans at the Investor Day a couple of years ago didn't even include some of that as part of the initial planning so that would be upside from some of your initial targets?

Yes. I think when we started, given the state of North America, we were looking at international is more of an annuity, pay the bills while we go through the transformation that's going on in North America. But given the success here and the principles that we've used, we certainly have an opportunity to apply it there. And the first thing that we've done is -- when I arrived, there were 6 CEOs in international. We're down to 2. And so there's a lot of consolidation going on. Just as we consolidated the United States and Canada, we're doing something similar between Europe and the U.K. and the International Far East business, all under one leader. And so there's some back-office work going on there. There's certainly some plant consolidation work. We just consolidated our soup factories. We have some repatriation opportunities. So there's meaningful opportunity there. It was certainly not broken as the U.S., I think, had more things to fix. But it's really been run more as a holding company just as we were here. And so the synergies of combining some of those things and finding best practices is going to certainly yield some fruit for us over the next several years. So we're pretty optimistic. And as you said, it was not really part of the original Investor Day case. We said our long-term or our 3-year goals for EBITDA margin for International were 15% to 17%. We were north of 17% last quarter. So I think you'll find that we'll end up at the high end of that range, for sure, and that's certainly upside to what we originally promised.

And can you touch on the current environment and some of the inflation headwinds? What in particular is affecting you the most? How much -- how manageable is it? Have you seen ways that you can offset incrementally some productivity or efficiencies apart from some of the more restructuring things specific to managing these higher costs?

So we're seeing more inflation in North America than we are in Europe right now. We will have significantly more inflation in F '22 than we did in '21. Freight and packaging are mid-single digits or higher in terms of inflation. That's pretty significant. On the commodity side, I think it really depends on the commodity. Oils, cooking oils that we use certainly for frying some of our salty snacks as well as our oil business and some of the vegetables that we purchase have been fairly inflationary and some of the chemicals that we purchase for our personal care products have been inflationary. And then we're also seeing wage inflation. There's a lot of people who right now would rather stay home than work. We expect that, that will end as the subsidies end, and that -- we'll see that come back down a bit going forward. In terms of how we think about offsetting it, really, our goal is to take enough pricing to offset the inflation and use the productivity to reinvest in our brands as well as take some to the bottom line. Whether we'll be able to offset all of it or not with just pricing, to be determined. We're being very disciplined and thoughtful and choiceful in terms of how we go after pricing. There are multiple levers there. You could certainly take a list price increase, but wait-outs is something that you can do. Managing your mix of channels and SKUs is something that we can do. Redesigning products is something that we can do. So we're using different levers depending on the brand. Where we are opening price point in the category, we probably will be more aggressive in terms of taking pricing. If we're at a significant premium to the category, we probably want to see the category go up before we would go up on our own. So we're going through all of that now and determining exactly how and where we will take the pricing, but we'll get pretty significant pricing into this algorithm. And then we will have the productivity, as I mentioned, which gives us confidence there will be some margin expansion next year for sure.

And so I just want to come back to a couple of pieces of that. And you mentioned you expect inflation next year to be more significant than this year and that will surprise no one. But can you give a sense of where fiscal '21 looks like it's coming in as far as what that comparison will be too? Where do you look like you're landing on fiscal '21?

Yes. Javier, do you want to take that one?

Yes. So for fiscal year '21, I think we've communicated that we probably experienced about 2% inflation in our COGS, and we were able to offset practically all of it obviously and then show some substantial margin improvement as a result of the productivity initiatives that we had laid out for next year. Mark alluded to this, but we're likely going to see inflation in North America is north of 5%. And just one point of clarification on the freight. While our forward-looking freight inflation expectation is around 5%, that's on top of almost 25% inflation that we saw in the current year. So freight has been a real sort of standout inflationary item for us in fiscal year '21, and it's likely to continue to be in fiscal year '22.

So 2 follow-ups to that. One is if you're talking about a 25% lift in fiscal '21, obviously, that's still -- at a total COGS level, it rolls up to the -- as part of the 2%. So it was one of your worst headwinds, no question this year. How much is that -- when you reference those numbers, is that the rate or the total spend? I guess what I'm getting at there is how much benefit are you getting from managing your capacity and running more full trucks or some of the efficiencies in how you operate as in terms of an offset to the freight costs?

Yes. So we've had more inflation on the inbound and outbound on freight. And no question, filling up trucks is helping us offset those costs. And our entire productivity agenda is obviously helping us offset those costs. And we did get some fairly significant pricing into our [ album ] this year. Again, it wasn't necessarily list prices. But we did do some wait-outs. We have done some managing of our SKU mix and our customer mix. And so we're doing a pretty good job of finding ways to offset the costs. Obviously, that's a big number. I think it was driven by people being home and a lot more packages being delivered. And certainly, the growth of something like Amazon, it's leading to significant transportation tightening. My expectation would be as the economy reopens and some normalization of behavior occurs that some of that will abate. We're building a plan on the assumption that it doesn't because it's always better to plan for the worst and hope for the best. But I think as we go through the fiscal year, some of the things that are significant headwinds will ease up a bit. Obviously, commodities are dependent on crops. I would assume they've planted more knowing what the demand is. And so we'll see what the harvest looks like. Some of the packaging inflation that we've seen were a result of the power outages down in Texas. Again, as they get their stocks back up, I would expect some of those to normalize. And as people go back to shopping live, whether that be in malls or in grocery stores, I think some of the freight inflation will abate a bit as well. But we're preparing for the fact that it is what it is, and a lot of our contracts expire at the end of our fiscal year. So starting July 1, our costs increase. And as I said before, we're working on ways to mitigate that with pricing and then that productivity will be something that we can use to take to the bottom line and invest in our brands.

One more follow-up before just touching on pricing a little bit further. You've mentioned the wage inflation. There are now 25 states, I believe, that are going to be dialed down or to take out the elevated unemployment benefits. How does any of those states compared to your operating footprint? Is that potentially one factor that may add a little bit of relief in terms of your labor costs?

Yes. Look, my expectation over time is they're all going to get to that place. And if the data bears out and shows that by eliminating the subsidies, more people are going back to work, I think everybody will very quickly follow. It's situational for us. In some places, we're seeing very little inflation. Other places, we're seeing more significant inflation. I would say, the Northeast, quite frankly, is where we're seeing more wage inflation. And the Northeast is also where they've been slower to change some of the subsidies and were hit hardest at the beginning of the pandemic, so are much more cautious on some of the reopening things that are going on in other parts of the country. But I would expect that will normalize over the coming months, but it has been a challenge. We've raised wages in some places and in some places, even after raising wages, there's still a labor shortage. And so we're doing the best we can with the cards that we've been dealt. And so far, we're faring pretty well, but it is definitely putting pressure on the P&L.

And just on the pricing power piece, it's a difficult thing to measure with any precision, but you skew towards e-commerce and also in natural and organic consumer. How much does that insulate you and facilitate pricing? Whether it's list or otherwise, have you seen that progressed pretty smoothly? And obviously, looking ahead, what would be the implication? Do you think that further pricing for an elevated level of inflation next year would be pretty manageable as well?

So we definitely have a more affluent consumer who is less price sensitive and that's why you don't see a lot of private label and in healthy offerings. It's just -- the consumer -- if they've made a decision that they're going to buy almond butter for $14 a jar instead of peanut butter for $3 a jar, they're going to be less elastic and more flexible when it comes to the cost that we charge for things. That said, we do have a competitive environment. We don't want to be the highest priced almond butter in that example because we want to be competitive with the other people in the industry. But it definitely favors our portfolio being with a higher-end consumer. And people have been trained over time. You pay more for health and wellness. So whether that was organic food or non-GMO or some of the benefits that get added to healthier products, people know that there's a cost to that, and they've been willing to pay it. And as long as the economy is doing fine and we don't go into a deep recession, I don't expect that you're going to see a significant move away from health and wellness, particularly given the pandemic we just went through. People are afraid of being sick. They see how people with preexisting conditions fared relative to people who are healthier. So actually, the consumer is gravitating more toward what we sell, and they know that there's a cost associated with that. So I think we're in a tough inflationary environment. We're relatively well positioned from a pricing standpoint. And as I said, we expect we'll offset the vast majority of it.