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

Thanks. Good afternoon, everybody, and thanks for being with us during the Evercore ISI Summit. Thanks also to Hain Celestial for joining us for this fireside chat. With me here today is Mark Schiller, President and CEO of Hain Celestial; and Javier Idrovo, who is the Chief Financial Officer. Prior to joining the firm in November 2018, Mark was Chief Commercial Officer at Pinnacle Foods, where a lot of us on The Street got to know him and obviously, was very successful in that role. He served in various leadership roles at numerous packaging food companies, including Frito Lay, Quaker Oats and others. Javier is CFO. And before joining the firm, he was at Hershey, where he was Chief Accounting Officer. Hain is a company well ahead of schedule and a lot of initiatives, and it was a tremendous transformation that's in progress. Over -- it was an overly complex company, over 130 co-packers, thousands of SKUs, and a lot of doubters back then. Coming into this, it seemed to be a lot of heavy lifting, and we've seen a lot of progress here, getting rid of a lot of SKUs that didn't generate any profit. It had razor-thin gross margins as a result of this. And -- however, under this -- under Mark and Javier's leadership, the company has made a number of divestitures of unprofitable businesses such as the U.K. foodservice business line lately. And they've been on a pace to deliver the EBITDA margin improvements they originally set forth a few years ago ahead of its fiscal '22 goal of 13% to 16% EBITDA margins for the company. And of course, I'm sure they believe that there's a lot more to come after that. And last but not least, we're dealing with one heck of an interesting time here coming out of COVID. So welcome to Mark and Javier, and thanks, again, for joining us at the summit.

Thanks for having us. We appreciate it.

So Mark, you're approaching 3 years into your journey into The Hain transformation. Can you kick us off by describing how it's going, tell us how the strategy has perhaps changed during the course of this, particularly during the COVID period?

Yes. So it's been going very well. We laid out a 3-year strategy. We've really hit the financial goals or started to hit them earlier than anticipated, which we're very proud of. And quite frankly, doing it in an unprecedented environment. It's hard enough to do a transformation, let alone do it as a public company. And then you throw in having to figure out how to work from home and how to keep people safe during COVID and had labor challenges as we're quarantining people and now inflation challenges. It's been kind of unprecedented. And the fact that we've performed so well during that period of time, we feel really, really proud of. And the colleagues have worked exceptionally well. In terms of changing priorities, I think we've discovered a few things along the way that have been positives that we probably didn't originally contemplate. Originally, we had a nice international business that was very steady, and we had a North America business, particularly the United States, that was in somewhat of a free fall. And so the mandate was really create a strategy to turn around the U.S. business, in particular. And in creating that strategy, I think we've found that there are lots of lessons to be learned from what we've done here that can be applied to the International business. And quite frankly, I don't think anybody internally or externally fully appreciated the strength of that portfolio. And we've got 10 #1 and 2 share brands there that are growing really nicely in terrific categories. And so I think that provides upside to the algorithm that we originally provided. You're on mute, David.

Just reflecting on the last year, particularly the COVID period, could you give us a sense of -- well, and even beyond this, what are some examples of things that are going better or worse than you would have thought and some of that might be related to the COVID period?

So the fact that we've been able to really move from a holding company to an operating company in just a couple of years' time, we thought it would take longer, and we've made faster progress in terms of doing that. I think our ability to certainly weather the storm of the pandemic, which has created lots of distractions and side excursions that needed to be taken at the expense of the original journey yet still continue to kind of perform well during the journey, I think, is also a positive. And so I think we've shown a lot of resilience and scrappiness and adaptability that I would say, when I got here, I would have questioned whether we had the stomach for it and the talent for it. And we've certainly done exceptionally well there. I think in terms of things that are -- I don't think there's necessarily anything that's worse. I think some of the things that we originally intended to do have been slowed because of the pandemic. So some of the productivity projects where you couldn't get equipment from a manufacturer because of COVID or in one case, we were in the process of consolidating manufacturing plants and the installers from the equipment supplier all got COVID. And we had to quarantine the whole plant because they were coming in contact with everyone. Those kinds of things, obviously, were never anticipated and created some extra complexity and even just the current labor shortage, which is very challenging in terms of producing what you need to produce and shipping what you need to ship. I'd say a lot of curveballs have been thrown at us that have made this more challenging and slowed down some of the progress versus what we might have been able to achieve otherwise.

It's a fascinating point because some of this just speaks to timing. I mean you set forth these long-term goals. And to the degree that you have productivity programs that are slowed down, it doesn't mean you're not going to get them by, say, fiscal '23.

Correct.

In other words, you had an artificial goal, and you might have blown away that goal and -- but yet, this might be the gift that keeps on giving in terms of productivity in the plan. Could you maybe speak to that a little bit about what -- does it feel like maybe some of this plan is getting stretched out another fiscal year and the benefits of that might be?

I think that's spot on. I mean, look, last year, right before the pandemic, we had readied a ton of innovation that was really compelling, and then nobody reset their categories. That was the catalyst to accelerate the top line. We lost a year there. Now we're picking up a lot of distribution now. And I think we're well on track to where we need to be. But that's one example. And then some of the productivity projects being slowed, I think, is another. So the good news with that, while we've still delivered some pretty impressive numbers along the way, there's a lot more to go. We're still a relatively low gross margin business. We are still generating lots of productivity ideas. And so I'm very bullish on kind of the next 3 years of this journey and what that looks like as well.

Yes, I was going to reflect on that a bit. You wanted to get to a 3% to 6% sales growth and 13% to 16% EBITDA margin business. And as we come out of this year, it feels like you're going to be almost at really at the bottom end of that target range on the EBITDA margin already. It seemed like you're relative in a back stroke well up into that target range. But now here we are, we're zone where we're now wondering about near-term pinches on cost. Could you maybe just give us a sense of how you're generally thinking about that? And then, obviously, EBITDA breaks down into gross margins and your overhead. So maybe give us a sense of that journey.

So we'll end the year around the 13% EBITDA, as you said. And in the second half, it will be more like 15% EBITDA. So versus the guidance that we gave 3 years ago, we've gotten there really in 2 years instead of 3. And while the top line is choppy for lots of reasons that I explained on all the earnings calls between the -- you got to factor out the divestitures and you got to factor out the SKU rationalization and other things. At the end of the day, the underlying health of the Get Bigger brands and really the core 8 big brands in Europe, they're all growing double-digit in aggregate when you compare it to 2 years ago. So I feel like versus prepandemic, we've made a lot of progress. In terms of some of the margin and productivity opportunities, there's as much opportunity in International as there is in North America. Remember, International started from a better place. So I'd say the first 2 years of the journey were maybe just the U.S. catching up to some of the margins that we have in the International business. But there's still lots of opportunity for both. Most of it will be in the productivity line as opposed to SG&A because remember, we've divested 20 businesses that are about $1 billion in sales. We've been rightsizing our SG&A to keep our SG&A flat as a percentage of sales. So with $1 billion of sales coming out, you can imagine, we've taken some pretty significant steps on SG&A. So there's a little bit more to be had there. But most of the margin expansion is going to come either through price mix or through productivity projects in the gross margin line.

When you think about the gross margin line, 26-ish. In the past, we've talked about this gross margin line, the peer set might be well into the 30s. And I think your sort of interim goal was like we should at least get to 30, something like that. Are you still thinking that way about gross margins? And how do you think about the next leg versus the legs that are behind you on that gross margin journey?

So we started at 19 or 20 gross margin. We're now at 25, 26. 30 is certainly achievable over the next several years, obviously, put inflation aside for a second, some of the things which I'm sure we'll talk about later in this call. But we still have a very robust list of productivity projects, everything from consolidating or purchasing. Every -- remember, we were a holding company. Everybody is buying corrugate, but we have never consolidated that purchase. We have a baby food business in Europe. We have a baby food business in North America. We've never found the synergies between those businesses in terms of packaging, in terms of formula. So there's definitely purchasing opportunity. Automation is a big opportunity for us. We have a lot of manual processes in our plants because, again, they were bought from entrepreneurs and underinvested in. Automating our equipment in our facilities will yield some significant productivity. Being a world-class manufacturer with lean, Six Sigma practices and making improvements in yield and throughput and first-pass quality. And what are basics to the big CPGs, we're still in the learning curve. We're still kind of progressing on that path, and that yields a lot more cases with the same overhead. Redesigning products that are overengineered is another. We have a lot of bells and whistles in these things that people don't know about and aren't necessarily willing to pay for. And then we've talked a lot on other calls about filling up trucks. When I got here, every brand basically had its own supply chain. And so the average order went out with 2 pallets on a truck. So just think about you're paying for the driver and the gas and the maintenance, and the truck's 80% empty. Now we're getting closer to half a truck with us consolidating all of our products into mixing centers, so you can put multiple products on the truck. But we have opportunity to get it closer to a full truck. There's a lot of money in there. So I give you those examples. There's still plenty of low-hanging fruit. It's not as low-hanging as it was before, maybe it's not sitting on the floor. Like when I got here, we picked those pieces up, we're a little higher up in the tree. But there's still plenty of opportunity.

I wonder how you're thinking about this. I want to talk about some of the key questions about inflation and the like, and maybe we can start to talk about it when we talk about the different segments. But it feels like the U.S. has some of these issues more than maybe the Europe. And meanwhile, you're already increasingly leaning in, getting the most improved award on margins in Europe already. So can you give us a sense of where those -- the dichotomy there in the journey and where each stands in terms of the inflationary environment?

So we're definitely seeing more inflation here than we're seeing in Europe. We haven't given specific numbers in terms of our '22 planned guidance. But they're not having the labor inflation. They're not having as much packaging inflation. A lot of our packaging inflation came out of the power outages and the snowstorms that hit Texas so hard. They're having similar commodity inflation. But really, when you look at things like packaging, labor, freight, it's much worse here than it is there. And so we will have very robust margin expansion in '22 there. We haven't given a number yet, but we will continue to see very good margin expansion there. And in the U.S., obviously, we have much higher inflation. It's in the mid-single-digit range, which is probably relatively good versus the rest of the industry. We think we have pricing power to offset it. We are in the process of having those conversations with retailers because our goal is always to price to cover inflation and then keep the productivity to reinvest in the brands and take to the bottom line. And so we'll see how it all plays out. Obviously, customers have to accept it. Consumers have to accept it and not switch from your brand to somebody else's. But I think given that everybody seems to be going up, by taking an increase, you're not putting yourself at a competitive disadvantage as you might in a more normalized pricing environment.

I ask this next question not just to Mark, the CEO of Hain, but just also the person with a lot of experience in the CPG space. One of the things that we saw from our macro team, fascinating survey. Consumer staples companies said in the score, the overall score of pricing power or professed pricing power by these consumer staples companies was at the highest level since 2006, basically in the life of it was reaching all-time high levels. I thought it was a fascinating response or score, given the fact that we saw recently a food company has some pretty tough gross margins that they reported. So it's not -- and of course, you know that there's some company-specific stuff all over the place. But you wonder, what are we going to see from the food space? Are we going to see at least some temporary disruption? So how -- what is your sense about the pricing power at Hain Celestial? How are you feeling about this environment in general? Like will it be different this time in terms of the price or gross margin preservation?

So the first thing I would say is that the inflation came so fast from so many places that there is a lag between us taking pricing in the market and us seeing it in the P&L. We're seeing inflation hit much faster than we can take pricing. And so there will be some short-term margin impact from that, but it's short term. With regard to the other part of the question, we feel confident in our ability to get the pricing for a couple of reasons. Number one, health and wellness has always been primarily catering to a more affluent consumer. If you wanted organic food or you wanted food that had different benefits in it, there -- it costs more, and we've always charged more. And so we tend to have less elasticity than products that are more commoditized. I think during the pandemic, given that there hasn't been this migration to private label, there's also kind of a, I'll call it, maybe a little bit of naive euphoria around the consumer is not going to trade down. And I think once the stimulus checks stop and inflation rears its ugly head, we'll see whether consumers continue to purchase as they do normally or whether they start changing some of their purchasing behavior. But in a health and wellness segment, we think we will fare well. In a business that over indexes in e-commerce, which -- where consumers are much less price sensitive, they're paying for the convenience of somebody dropping the product at their front door, I think we will fare very well. And that's why my expectation is that we will be able to pass most, if not all, of this pricing on.

The organic sales numbers, of course, one of the things we try to do, in fact, imperfectly because your measured channels don't cover your entire business is trying to figure out how your organic sales trends are going. Now we're even trying to do so on a 2-year basis and given all the changes you've made. So could you give us a sense of -- I think you've said 700 basis points of SKU cuts. But on a 2-year basis, what are we looking at right now? And how -- what are some watchouts that you would present to us about looking at the IRI data and some of the multichannel realities that you're seeing?

So in North America, you've got visibility to about 60% of our sales in the syndicated data. Everybody has access to the same data in Europe, but most don't buy it. So I have visibility to most of my sales and measured channels in International as well. What I would tell you is if you look at our 2-year stacked growth, most recent 12 weeks, the Get Bigger brands are up 12% on a 2-year stack basis. The categories are up 10%. So we're growing share in a nice high-growth environment, and that includes us. Remember, last year, we launched a hand sanitizer business and sold $6 million in the fourth quarter. And I promise you, I'm not selling a lot of hand sanitizer. So that's -- but you add in things like that or the SKU rationalization, which is also a headwind versus the '19 comparison. I feel pretty good about 12% growth. And by the way, those top 8 brands in Europe are growing about 15% on a 2-year stack basis. So I've got 2/3 of the company sales that are growing double digit on a 2-year stack basis, which, again, that's probably 3/4 of the profit of the company. So we feel really good about that. Now within that, some brands are doing better. Some brands are not doing as well. You never have every brand, all of a sudden, growing double digit. And so our job is to keep driving the ones that are performing and figure out on the ones that aren't what you got to do to make them perform better. But in aggregate, I think you're seeing a lot of momentum. And encouragingly, for me, there are some big brands in North America, like Alba, like Earth's Best that were not growing as rapidly on a 2-year basis, but on a 1-year basis. Earth's Best is up 18% in a category that's up 8%. And so we've got more legs on the stool than we had before as well. And that's not even the Get Bigger brand, but it's a good example of there's some strength in other parts of the portfolio on some sizable businesses as well.

One of the parts of your portfolio that -- of the Get Bigger brands that's in North America is Sensible Portions. That brand has surprised me in its strength. And I think you've leaned in with the spicy hot launch, but that's such a horse. And it seems like a tough space. And in a way, it kind of makes me respect Hain and their merchandising and selling capabilities that you've been able to kind of compete with the big boys in that space. Could you talk about what you're doing right with that snacking business?

So look, our challenge is always to try and make these into must-carry brands for retailers. I don't have any billion-dollar businesses. So we're always fighting to be something that they have to have. And in the case of Sensible Portions, it's a combination of great merchandising; great innovation, which includes the Screamin' Hot version that you talked about, but we also just launched Sensible Puffs into the puff category on top of the straws, which is very incremental and doing very well; and marketing. I mean, one of the big things that we are doing now that we weren't doing previously is we're talking to the consumers. We're letting them know about this brand in an environment where people are worried about pre-existing conditions and want to lose weight. You get 30 trips to the mouth for a relatively few calories, which is attractive to people. And I know, by the way, it's got some veggies sprinkled in there, too, which makes you feel good about eating it. And there are other Veggie Straws out there, but ours seems to always win in taste test. So when you got a better product and you got the right marketing and innovation and merchandising, right pricing, you're going to do well.

Maybe we can touch on a couple of others that are doing relatively well, Celestial Tea and Greek Gods. But I would say Greek Gods maybe more recently not quite as well as it's done in the long term. So maybe you could touch on Celestial Tea first. What -- you've had the launch of the sub-brand there. It seems that you're doing 2-year trends north of 20%. What's going right there? And what's -- it's not obvious to me that, that would just fade after COVID. What's the outlook for that brand?

So one of the reasons we are so excited about tea is it was a very sleepy category a couple of years ago. There -- I think in the last 10 years, there's only 3 items that are in the top 100 of the category that were innovation. It's had no innovation for many years, there was no sustaining innovation. And so we said, look, there's a huge opportunity to disrupt this category, and we've done it with a lot of innovation, K cups, cold brew tea, tea with energy, tea that -- with immunity boosters, tea with melatonin to help you sleep. I mean we've really looked at the landscape of what people need. And we've provided all kinds of different benefits that have brought new users into the category. And I've got coffee drinkers now drinking tea because they can get the same amount of caffeine without some of the stomach churn that comes from drinking a couple of cups of coffee. And so I think we're doing a nice job of bringing new people in. We're being rewarded with more space as a result of it. And we're helping turn this back into a growth category, which is pretty exciting.

Is there a reason why the yogurt business would have slowed a little bit lately? At one point, it was holding up better than the single -- one of the things that was actually working in its favor or so I thought was it's a little bit more of a multi-serve packaging. Is your outlook that, that should be doing much better post COVID than it's been doing here?

I mean some of this, again, we're in the, I'll call it, the first 10 weeks of COVID overlap. And so some of this is timing. Remember, the category resets in July, June, July. And so we're expecting that we're going to pick up some distribution as a result of our performance through the pandemic, and I think you'll see that growth rate pick up a little bit going forward.

And what are your best -- what is your best foot forward from here from a distribution gain perspective? And where do you see your energies in terms of innovation over the next year?

So one of the great things about being at Hain is there's distribution opportunities everywhere. I mean, even my must-have brands. So my 3 biggest brands are Celestial, Sensible and Earth's Best. They are all at 60%, 65% ACV. So I don't even have ubiquity in my core channels on my biggest brands. That's a huge opportunity, particularly when you have a brand like Sensible growing 40% on a 2-year stack basis. I have a lot of data to go to the retailers that don't carry it and say, "You guys need to have this thing." So there's certainly a penetrate new customers and core channels opportunity across all of our businesses. Second, on the big brands, there's an opportunity to increase the amount of items per store. With all this innovation on tea, I should have more items in store than I had last year, and we're seeing that starting to materialize. The second opportunity is for us to take these brands to new channels. How do I get snacks into vending machines and convenience stores? How do I get tea into the hotel rooms when you go and have an overnight somewhere? So there's a [ channel ] opportunity. Certainly, snacks and delis and sandwich shops, a food service opportunity that's never been really pursued here. So there's a channel opportunity. And then the last is there's a geographic opportunity where we have things that are selling well in one geography that we can take to another, particularly in Europe, when you start looking at we've got a leading share plant-based meat business in Linda McCartney in the U.K., yet it's not well penetrated in Europe yet. I have a leading nondairy beverage business in Europe. We've never taken it into the U.K., and it's again because we have different GMs running the businesses. And we were a holding company. So you're going to start to see some of that geographic expansion opportunity as well.

I want to circle back to International. Two things. First, you mentioned how we underappreciate or just we may need education about how strong the brands are, where the positioning of the brands are. And I think part of the reason for that even for people that covered it over a long period of time as we have, it was pieced together over time through several -- and the first steps, to be honest were like awkward subscale steps. And so they add some of the better management people later, for example. Could you give us a sense of where the business stands today in terms of its capabilities to support these brands? What are the best foot forward brands? And then the productivity, how early is it? And how far behind the U.S. is that business?

So there -- when I got here, there were 6 international CEOs, and we're now down to 2. So a lot of this has come through consolidation, take the best operators and give them more geography to manage and take the lessons learned from one geography into another. We have some terrific brands, the Hartley's brand, which is kind of like a Jell-O type line with 10 cal offerings is doing exceptionally well. The Linda McCartney brand, as I mentioned, is in a high-growth category doing well. We have several nondairy beverage brands in Europe and a huge private-label business, which normally scares people, but in this case, there's way more demand than there is supply. And so we're making terrific margins and have a lot of pricing power because the growth has been so dramatic in that business. We have the #1, 2 and 3 share suit businesses in the U.K., which, again, gives us a lot of opportunity to segment the category and pricing power. And so it's a great portfolio. We have 10 #1 and #2 share brands that as leaders, we should be leading. The opportunity there is to invest more in the brands. As we're now generating productivity, we are going to take some of that and put it back into marketing, just as we did here in the U.S. We have a pay-as-you-go model, right? So you generate the productivity, we put it back in the brands. That's very motivating to the employees because they want to invest in the brands. But the learning and the message in there is you got to generate the money to be able to pay for the investment. And that puts a lot more interest and excitement in productivity than you might have otherwise where people don't -- they're less interested in cutting than they are in growing. I think in terms of where we are on the journey, I think we started from a better place in International, but we really only started the productivity projects at the beginning of the fiscal year. So we've seen a lot of productivity this year. You see it in some pretty big margin expansion numbers that we've given in the last couple of quarters. That will continue as we move into F '22.

And maybe we can ask one broad one. We're coming up on 4 minutes left here. The balance sheet seems pretty clean. We only are looking at, I think, net debt to EBITDA of around 1.5x. The company is always sort of even preceding you had an aversion to debt. So it's not a levered company. But what are your thoughts about usage of cash, where the balance sheet should go? And what are your thoughts about M&A going forward and the opportunities you see out there?

So Javier, why don't you take the first crack, and I'll come over the top.

Yes. So in terms of -- David, in terms of uses of cash, the way we look at capital allocation is that we evaluate every investment opportunity from the perspective of where do we get the highest return on a risk-adjusted basis. And so we're looking at internal opportunities, M&A, share buybacks as sort of the 3 key areas where we can invest our capital. So that from a perspective of cash usage. In terms of leverage, clearly, we have a lot of flexibility, and we'd like to be in this position. But from a long-term, I would say, leverage perspective, I think we would like to be closer to where the average CPG company is, which is between 3 and 3.5 debt leverage. Now we don't want to force getting to that level. We want to get there the right way either because we think there's a right investment opportunity that we want to go and pursue or there might be other great internal opportunities that we want to go after. But it's not necessarily something that we're going to push ourselves into that level if there's not really the -- that attractive opportunity that's going to give us the right return.

Just on the M&A comment, we are very interested in moving toward acquisitions to bulk up in the categories we prioritize. It's a matter of finding the right seller at the right price. There's some inflated expectations right now given the COVID overlap and is that EBITDA real or not real, and some of the inflated prices we've seen in some of the categories. But we're talking to a lot of people. When we find the right one, we're ready. And when we buy something, we'll likely look at the tail and see whether there's more things that we want to shed at the same time to continue to move that portfolio more toward growth.

And maybe you could be delusional in selling some of your Get Better brands at a high multiple at these inflated -- do you think there's more...

Everything is always for sale at the right price. So it wants to pay me in obscene multiples or something, I'm certainly willing to entertain the conversation.

But big picture, though, the significant asset sales in North America are behind you in your opinion?

We've done most of it. There's still a few things in the tail that were there from the beginning, the MaraNathas and Imagine soups of the world, but we would be amenable to parting with if we got the right price. And again, I have to be very conscious of stranded overhead. So I want to make sure that if we are shrinking that we've also got an ability to shrink our SG&A, so we don't derail the EBITDA growth. But buying something would certainly enable us to look more closely at selling something as well.

Well, thank you, Mark. Thank you, Javier. Great conversation. Thanks, everybody, for joining.

Thank you, David.

We appreciate it. Thank you.

Thanks. Bye-bye.