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

Welcome to day 2 of the Jefferies Consumer Conference. I'm Rob Dickerson, the U.S. analyst at Jefferies. I'm honored to have with us today from Hain Celestial, President and CEO, Mark Schiller; and CFO, Javier Idrovo. With Mark's direction since 2019, Hain has executed impressively on its all-inclusive simplification and optimization turnaround plan, which has led not only to impressive growth and margin performance, but also best-of-breed CPG stock performance since 2019. And with that, I'll keep it short. I'm going to turn it over to Mark for a couple of opening remarks, and then we can just jump into Q&A. So go ahead, Mark.

Thanks, Rob. I appreciate you having us, and I'll keep my comments brief as well because I know you have a lot of questions. I just want to thank all of our employees for just an incredible run during the last couple of years in amazingly challenging times. I didn't expect COVID and Brexit and inflation and keeping people safe and quarantining. And it's been a heck of a ride, been a lot of fun. We've had a good run, and I look forward to talking to you about it more today. So I'll turn it back to you, Rob.

Super. Thank you.

So I guess maybe just to kick it off, Mark, if you could touch on kind of where you are now, right, relative to your original targets you laid out for fiscal '22. Obviously, they're a bit ahead of plan, they seem, especially North America, you've made some divestments. But if you could just walk through kind of some of the core drivers that have allowed you to hit those targets a bit ahead of plan, that would be great.

Sure. So this whole journey has been about turning us from a holding company into an operating company. And I think the key drivers of our performance being a little bit ahead of schedule is a couple of things. One is build the right team for the journey to become an operating company. So taking the best of old name, but building it with a lot of new talent that can bring capabilities and processes, and know how a great company operates has been very instrumental in this journey. I'd say second and most important was simplification. We were just drowning in complexity. So shedding 20 brands, discontinuing 1,000 SKUs proactively before the pandemic and really simplifying the way we operate so that we could be a good operating company, I think, was the second big driver. And then just creating this productivity machine that has allowed us to really remove a lot of costs from the system and set us up with a stable foundation for future growth is really what's gotten us this far.

Super. And look, I've heard you speak about, I guess, let's say, the next phase, right, of the broader strategy, which is -- sounds like a bit of -- hinges a bit more on improved international margins, right? But at the same time, North America doesn't seem as if it's done, right? I think you laid out targets for North America internally, at least. And it seems like you're a bit ahead of plan, but at the same time, you continue to talk about all the drivers that can kind of push you even further. So maybe if we could spend a minute on where the North America business is now relative to the original plan, but then also, what takes it further, which could actually potentially take it above that original plan, I would argue.

Sure. So starting with kind of the middle of the P&L, and then I'll come back to the top. The productivity capability that we've built has certainly borne a lot of fruit. And I would say we picked the lowest hanging fruit. So discontinue SKUs, eliminate bad investments, consolidate your operations so that every brand doesn't have its own ad agency and package design agency and take out a lot of those nonworking costs, that's been what's gotten us this far. But now we're a little bit higher in the tree with what I would characterize as more complex projects, but certainly, very meaningful in terms of their potential impact. Consolidating plants. We're in the process of consolidating 2 snack plants in North America and exiting our almond butter plant because it was very underutilized, and we actually save money by going to a Coeman. Automating the plants so that we move from a manual system to an automated system. Redesigning products that are overengineered, which takes some time. You've got to work down the inventory of the old stuff. You got to get the new formulas tested and into market. Lean operating principles within our manufacturing facilities to improve yield and reduce waste and improve first-class past quality. Those are all big opportunities for us that we're pursuing. So there's a lot more runway ahead of us. It's just the projects are a little bit more complex and will take a little bit longer to execute. But the pipeline is very robust in North America. There's plenty of fruit left to harvest.

Super. I like that. And then on the international side, I think you already hit your EBITDA margin target in Q3. Now that was obviously driven partially by divestment mix benefits. But it also seemed like you're fairly early innings, right, of that segment's improvement. So in reality, you've learned sounds like so much around the North America side of the business. Would you also say there could be potential upside to those original targets on the international side, just given kind of what the -- no pun intended, the fruits of the divestments have given you on top of all of the operational excellence and the turnaround strategy just within the segment going forward?

Yes. So we're taking a lot of the lessons and projects that have been so successful in North America, the capabilities, and we are bringing that to Europe. What I would say is 2 things. Number one, it was a much more stable business than the U.S. business was. So the low-hanging fruit, I would say, was already harvested before I got here in international, but they're -- similarly, we're consolidating our soup plants as we speak. We're repatriating volume from Coemans, same thing on the lean operating practices. There is more margin expansion opportunity there. But like North America, as we generate more productivity, we need to reinvest it back in marketing. So they're grossly underspent on the marketing side. So while we will improve gross margin there, I expect that we will invest a good portion of that back into the top line and into accelerating the top line. And I didn't say it when we talked about North America, but when you take the Get Bigger brands here, and there's a core 8 brands in Europe, which combined, make about 2/3 of our total company sales. On a 2-year stack basis, these brands are growing double digit, which gives us a lot of confidence that we have a very strong foundation to build from both in North America and Europe. And now it's about investing in those businesses to really realize their potential. And so as we take margin out of North America, as we've been doing, we'll continue to add marketing dollars and same thing in Europe, so that we're striking the right balance between kind of top line expansion and margin expansion at the same time.

Perfect. So I guess a follow-up just to what you said in terms of reinvesting in the business and the double-digit 2-year stack trend you've seen within the non-U.S. piece of the business, mainly Europe. Again, if we go back to those original targets, this is all from memory, so excuse me if I'm a bit off. I thought top line for Europe was more low single digit. Now sometimes, I feel like investors or just people in general think, well, Europe kind of always grow a little bit more slowly than the U.S. in certain categories. It's not always as fast. The business is obviously growing very quickly. There probably -- there have been some tailwinds to that just given the pandemic. But if you step back now relative to where you were 2 years ago, would you say -- I mean, obviously, the goal would be to have that segment grow as much as it can, but it doesn't sound like getting to the low single-digit sustainable growth in Europe is really a stretch. It could be higher, but we'll see.

Yes. I am very pleased with how the international business is operating. I do think we'll -- we gave a range of 1% to 3% on the top line. I would expect we'll be at the top end of that range by this time next year. And I think shedding the fruit business has done a lot to really reveal the strength of the underlying set of brands there because it was a huge part of our international business. It had very low gross margins and negative EBITDA margin. And when you pull that out, and you see it in the adjusted earnings numbers that we gave in Q3, and you'll see it certainly for the next several quarters as we're lapping that divestment, there's a great business underneath there. We've got a leading plant-based meat business in Linda McCartney. We've got a great nondairy business in Continental Europe. We are the #1, 2 and 3 soup brands. We've got the Ella's baby food business, which is -- sells at 3x the price of private label and has grown share 15 years in a row. So we've got some room and sort of businesses to invest in there. And to your point, I think that will put us probably at the high end of the 1% to 3% range. If we keep investing in those businesses, maybe we can do even a little better than that. So -- and I would say right now, the international businesses on the top line are actually performing better than the U.S. businesses, partially because we lost a year in the U.S. with all our innovation because of COVID. But it's not really a commentary on the U.S. It's more of a commentary on the strength of what we have there and what we can build off of.

All right. Great. And then I guess a good segue back into North America is what you just said, right? You essentially lost a year of innovation and shelf resets, which was, upfront, a core piece of the strategy, right, to invigorate the growth on the top line after the SKU rationalization period. So just curious now, as you look forward to the back half of the year, right, when we traditionally see some of the larger resets at retail, kind of how the conversations are going with retailers. How you think about not just replacing old SKUs with new SKUs in existing stores, but also potentially gaining incremental distribution either in existing stores or in new retailers?

Yes. So distribution has always been the biggest opportunity for us as a company because, again, we started in the natural channel in e-commerce, and we've never really fully penetrated the mainstream channels. And our vision has always been to mainstream health and wellness and make it accessible and affordable to everyone. So there's a lot of distribution opportunity both in terms of ACV, just getting into more stores with these brands, as well as getting more items per store, and getting into new channels. So if you start with the first, we've had resets so far of the snacks category and the baby category. We picked up considerable space in both. And we expect, as yogurt and tea and personal care set over the summer, we will also pick up space. And that's because when we did the SKU rationalization, we eliminated the SKUs that were underperforming. So we have a much more stable core of SKUs that are -- have earned their space, if you will. And we're bringing great innovation that really is adding new benefits to the category. So instead of here's the 37th flavor of Sleepytime tea, we're bringing tea with energy, tea with melatonin, tea with probiotics and gut health and immunity and things that are much more incremental in the category, cold brew tea, K-cups, things that really are going to help the retailer grow their category and therefore, earn their space. And so we are seeing both in TV. So even my biggest brands like Celestial Tea or Sensible Portions are only in about 70% of the ACV. So we are picking up store. I just picked up a big account in the Northeast. It didn't carry Sensible Portions even though it's the #1 veggies draw. And Greek Gods just picked up a big account in the Southeast. So we are increasing ACV. We're increasing average items per store. We're up about 7% on our Get Bigger brands versus a year ago. And on a 2-year stack basis, it's up about 13%, which means we have greater shelf presence because we've got more items. It's easier for the consumer to find our businesses. And then as I said, we're now starting to also explore incremental channels. How do I get my snacks into convenience stores and in delis? How do I get my tea into hotel rooms and all of this into airports as people start to return to travel? So there's a lot of upside on distribution. We are just starting that journey started, starting with kind of clean up the tale, build a strong foundation and then bring great things that are going to earn their space. And right now, that playbook is working really well. We just lost a year during the pandemic when nothing got reset.

Yes, that's great. It's all logical, too, executing well. So look, I'd say through the pandemic, at least for some companies that have maybe a bit broader portfolios, there were or there have been certain brands that have done maybe a bit better, right, than they would have expected without a pandemic. Again, you go back to 2019, you sat down. You bucketed the brands. You have your very well-defined buckets that we'd always discuss. I'm just curious, would you say nothing's changed? Get better, get better. Get bigger, get bigger. Given that loss year of innovation, now we're circling back. Innovation is going to be more pushed likely and get bigger. But I don't know, maybe there are some brands that are starting to emerge or popped up or either way, right? Some brands that are doing a little bit better than you thought that could slip into the Get Bigger or maybe there are other brands that haven't done as well, so you're just reallocating the capital. Just curious as kind of what's the marked to mark -- the mark-to-mark update on the buckets, that would be great.

Yes. So we're going to have another Investor Day this fall and kind of lay out the next 3-year strategy. And part of that will be articulating what the Get Bigger brands are in international, but also if there's a rearticulation in North America. I would tell you, there's brands that we've included that are on the bubble, and there's brands that we didn't include that are on the bubble in terms of whether they become Get Bigger brands or not. And really, it's just a moniker for where are we investing our resources and our time for growth. I would say, certainly something like Earth's Best, which was the biggest brand in the company when I got here, but we proactively got out of hundreds of SKUs to rightsize it. We were in 40 different subsegments and an inch deep and a mile wide. We've now shrunk that business. It's still 1 of our 4 or 5 biggest brands, but it's not the biggest anymore. But it's gone from an almost a 0 EBITDA margin to a low-teens EBITDA margin. Now it's more investment grade. And so is that a brand that we want to put in to Get Bigger bucket? I will tell you we're doing some innovation there that's working. We've picked up a lot of space. If you look at the consumption data, it's growing double-digit now. But it's also in a category where the birth rates are way down, and there are some challenges there. So we're kind of wrestling with those kinds of questions. Is this a brand we want to bet on for the long haul? Or do we want to continue to kind of manage it for stability and more margin expansion? We're evaluating that on a number of businesses. But Earth's Best is a good example of one that you know what, maybe we'll put that in to Get Bigger bucket or maybe we'll do more selective innovation and investment in it than we've done in the past couple of years because we're starting to see some momentum there. So it's less about the moniker and really more about how we're using our time and our resources.

Fair enough. I guess back to e-commerce for a minute. I've heard some companies say that the channel could decelerate, right, as mobility increases, kind of the overall exposure to e-comm now for most food companies is just double, let's say, or up a lot relative to pre-pandemic levels. So I'm just curious, you have great positioning online. I think your kind of average shopper demographic likes to shop online. You've spoken about your strength in e-comm historically. I'm just curious how you think about kind of e-comm more broadly and the potential for deceleration coming out of the pandemic, although other parts of the portfolio could help offset if that were to occur.

Yes. So we had a great year last year. We grew 97% in e-commerce. And as you said, we're very overdeveloped relative to the industry because again, 15 years ago, if you wanted healthy food, you had to go to a natural channel or e-commerce to get it. And we do, as a result, have a fairly affluent consumer who is less price sensitive, and you tend to pay more when you shop online. I think the trend is here to stay for 2 primary reasons. Number one, those who bought online during the pandemic, and there were a lot of people who bought online for the first time, have realized the convenience of buying online. So whether that's, "I can just pick it up on the way home from work with click and collect," or "if I'm working from home, I could have somebody deliver it to my door," or "I just don't want to run through the store with my screaming 2-year old because it's just not a pleasant experience." There's a lot of people who have bought during the pandemic who are saying they're still going to buy significantly post-pandemic. And I do think once you had the convenience of buying from Amazon as an example, you don't necessarily have to go to the department store to get the things that you want. And so I think that trend is going to stay. The second is -- and I was looking at a study yesterday that said even a year from now, 50% of employers expect that more than half of their employees will be working the majority of the time from home, even a year from now. So this return-to-work 7 days a week, at least for now, is not in the cards. And that means there's more eating occasions at home. That lunch that you used to eat at the office, the travel that you used to do, there's going to be, even post-pandemic, more in-home meeting occasions than there were before. And again, if I'm sitting at home on the computer, buying from e-commerce is a very convenient way for me to continue to get the products that I need and do it easily and conveniently versus having to go to the store. So I think there's trends that favor e-comm. I think consumers have had a great experience there. I think they're finding more variety there. And so it won't grow at the kind of rates that it did last year, but I expect that we'll continue to see growth for the foreseeable future.

All right. Great. So I guess, I have to ask about COGS inflation, right? Everyone's talking about cost inflation. I think on the Q3 call, I think you pointed to COGS inflation maybe around 2% for the year. I don't know. I can't say every food company I've spoken with since then has said transportation and labor costs continue to creep. So some companies are going to point to maybe a little bit higher inflation than they had originally expected. So I'm just curious if there's any incremental color as to kind of maybe where you sit today, what you're seeing relative to just even a couple of months ago.

Yes. So it's a great point. We're no different than others in that regard. The commodities were locked in and hedged for the balance of the fiscal year, but freight continues to go up, and labor has been a real challenge. We have lots and lots of openings, and we're raising wages to fill those openings. But even after you raise wages, we still have a lot of openings. And that ends up impacting your sales because you're not cranking as much product out of the plants and your -- you don't have as many people loading trucks in your distribution centers. So it's a real headwind for the industry. It's not just our industry, I think anybody with hourly employees. You see it in of hotels and restaurants, and everybody's got a shortage. Our hope is that when the stimulus checks end, there will be a significant group of people that return back to work. Because even when we're hiring people now, we're finding nearly 4 days later because somebody down the street is offering $0.50 more an hour. And so I do think we've got to get some stability back there. But hopefully, that's short term. As we look to next year, we're going to see more inflation than this year, no question. It will be mid- to high-single digits in North America. It will be low-single digits in Europe, which bodes well for us. And we are planning on taking significant pricing. We're talking with retailers now. But how much of that ultimately gets passed on to the consumer is going to depend on does the retailer accept those increases? And does the competitor follow those increases? And what's the consumer behavior that goes with that? So while we've got elasticity assumptions around all of these things based on historical data, the amount of inflation is a little bit unprecedented, and what the competitive and consumer environment is going to be relative to those decisions is TBD. But we're going to plan on taking enough pricing to offset our inflation. And then if we have to spend some of that back, like I said, just to stay competitive, we will do so. But it's going to put pressure on margins that we had this year. And as I've said before publicly, we do expect continued margin expansion on this business because we have a robust productivity agenda. But it will probably be a little bit more muted in '22 than it has been in the last couple of years. But as we look long term, the top line prospects are terrific in this company. The middle of the P&L prospects are terrific. And so we're still very bullish on the long term. We've just got some of these short-term challenges to work our way through.

Yes. Fair enough. I think you and pretty much everyone else. So just to come back to what you said in terms of the retailers accept it, stay competitive, elasticities, what have you. I mean, listening to some of the retailers, at least publicly, you come away from some of those conversations and calls. And I think, though, it doesn't really sound like there's going to be that much inflation forthcoming, at least it's passed through to the consumer. You speak to a food company, it's happening. It's done. It's fact. Everybody is taking pricing. So it seems like -- I mean, obviously, consumers shift a little bit, even if it's sticky at home, working from home to some extent, there'll be some roll off back to away from home to some extent. And then retailers have to be careful in how they're pricing and how they want to remain competitive, what have you. I'm just curious kind of what that feel is right now, right? Food company says, 100 out of 100 food companies say, "Hey, you look at where our costs are, we need to take pricing. And we're not even factoring in transportation or labor. We're just talking about this." And historically, retailers says, "Yes, sure, get it. This is what we'll pass through, and then we'll pass that through to the consumer." Do you think there's any kind of difference now versus history how the retailers are reacting? Or if we go back, let's say, the past 2 inflationary cycles, it's not that much different?

No, I think it's significantly different because of the magnitude of inflation. We haven't seen this much inflation across the board on everything in such an incredibly condensed period of time. We weren't talking about inflation 3, 4 months ago at all, other than freight inflation, which has been around for a while. But all of a sudden, it's just exploded. And I look at the commodity graphs that my team provide, it just went from 0 to 60 like over. And so I think what's different now is before, if I wanted to take pricing, you'd have to go in and really negotiate hard with the retailers. And you never want to be the first one because you got your butt handed to you. And so as always, let somebody else do the heavy lifting and I'll come in later. Now it's everything is going up in every category. And the retailers are facing it, too. They've got the labor challenges. They have got the freight challenges. They're buying private label products, and they see that the costs are going up. So it's a different conversation. It's really about how do we balance everybody's need to take pricing with not alienating the consumer. And certainly, every retailer wants to still have some competitive advantage versus the rest of the retailers. And so it is a negotiation. Categories where we have strength, categories where we're the opening price point, taking pricing is easy. Because even if I take a price increase, I'm still going to be the opening price point. If I'm a premium brand and I'm not performing well, it's a tougher conversation with the retailer because they're saying, "Look, your business isn't all that healthy to begin with." So it really is category by category, buyer by buyer, but they all know that we're coming with pricing, and it is -- it's a negotiation and a conversation around what's in the best interest of the retailer and the consumer, not just what's in the best interest of Hain. And so it does take time to get that all locked in. You got to give them advanced notice. So some of our increases will start July 1. Some of them will be kind of layered in throughout the first quarter. And then like I said, we'll see where the consumer ends up and we'll decide whether we need to make some adjustments, and I'm sure we will. But that's the dynamic environment we're in, and I think it's going to be a moving target for the next 6 months to really see where this all settles out. And hopefully, over time, we get to a more sane environment and things settle back down. And as we plant crops, hopefully, they come in strong, and that takes some of the pressure off as we -- over time, freight always sorts itself out, it's supply and demand. If there's more demand, we'll have more drivers over time and it will settle then. So I think we just got to get through the next 6 months and see how it all comes to fruition.

Yes. And then hopefully, prices will be a little bit higher. You don't have to give as much back, right?

Yes. That would be nice. That would be nice.

There is the cycle. All right, so just a couple of minutes left. So I want to cover 2 quick other questions, just capital structure. You said from the start a couple of years ago, priority was managing the leverage and then you look at other opportunities. And I know more recently, you've said to look at maybe some smaller acquisitions, right, in areas of focus. But at the same time, your leverage ratio right now is pretty darn well, right. So you could do a bunch with the capital that you're generating. I'm curious is that -- first question is just where would you be the most interested in acquiring if your valuation agnostic, so to speak? And then are there other areas of capital allocation that you would still consider like an ongoing dividend, maybe a special dividend? I don't know if you want to buy your stock back, just kind of the canned answer, so to speak, Mark.

Sure. So I'll let Javier talk about capital allocation. But in terms of acquisition targets, we're focused on those Get Bigger categories. We'd like to be a bigger fish in fewer ponds at the end of the day. So snacks, tea, yogurt, personal care in North America and outside of North America, plant-based meats and nondairy beverages. Those are the hunting grounds for us. Those are high-growth opportunities for us. We have strength already. So that's where we are looking and we are actively looking, as I've said before, because I think we're now at a point where we're ready to invest in growth. And there are some very attractive brands with terrific potential. But with that, there are other uses of capital. So Javier, why don't you give them the capital allocation speech?

Yes. So Rob, I think you've probably heard me say this before, but the way we look at capital allocation is through the lens of where does the company get its highest risk-adjusted return. And so through that lens, we look at internal investments, we look at M&A, we look at share buyback. You have seen us be active in the share buyback front. Those times, we've considered our share price to be at good value. So that's why we've gone in and made some repurchases. But that's really the lens through which we look at how we deploy capital. So your question about dividend, either special or permanent, that's more of a long-term question. And I would say, given the growth opportunities that we see in front of us, I think that's probably not in the cards for us in the short to medium term. Maybe we will evaluate, obviously, as time goes by. But I think right now, our 3 primary sources of where we put our capital are internal opportunities, M&A and share buybacks.

Fair enough. All right, look, we're out of time. So Mark, Javier, thank you as always for participating. Really appreciate it. I look forward to the Investor Day later this year, next -- or the next stage.

Thanks for having us. We appreciate it.

All right. Thank you. Bye-bye.