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

Thanks everyone for joining us. Michael Lavery, the Food Analyst at Piper Sandler. I'm pleased today to have Mark Schiller and Javier Idrovo, CEO and CFO, at Hain with us. Go ahead and jump into some questions, fireside chat [ some ] style. [Technical Difficulty] Mark, you've driven a big transformation in Hain's portfolio these last couple of years, can you talk about how your recently closed deal for the ParmCrisps and Thinsters brands fits into that and what you're looking forward to with those?

Sure. So -- and thanks for having us. Part of Hain 3.0, we segmented the brands into turbocharge investment for growth, simplify and fuel; and in the turbocharge segment, which is really the place where we expect the most growth going forward, we said, one of our objectives would be to become a bigger fish in those categories, then being snacks in the U.S. and Canada, and plant-based and non-dairy outside of the U.S. And so ParmCrisps, in particular, fits perfectly with that vision. It gives us another leg on the stool. In snacks, it's a mid-teens growth business which will have mid-teens EBITDA margins next year once we get some of the synergies in place and get some of the pricing in place. They haven't taken pricing yet to cover the inflation and so it fits really nicely. It also is very incremental to what we have today. So if you remember back to the 3.0 presentation, one of the things we showed was, there is a lot of segments of snacking that we're not in. Snack mix was one of them and ParmCrisps [ does ] a great snack mix brand, that's a segment that's doing exceptionally well. And because it's a high protein, low-carb snack, it sources from beef jerky and protein bars, and things that our current portfolio doesn't source from. So it really fits nicely with our growth strategy and being a bigger player in the fast-growing healthy food space.

Now that sounds like a great addition. How would you characterize the status of the portfolio in terms of being optimized? Do you anticipate further steps ahead that investors should be looking forward to?

Yes. So we will continue reshaping but being very focused in terms of how we do it, so again, those turbocharge categories and the targeted investment categories is where we would like to get bigger. We talked about personal care maybe, at some point being a candidate for divestiture, and we also have that simplified portfolio, which is things like Hain salt and Westbrae beans and a hot dessert business in the U.K., that probably don't fit very well with our strategy going forward. So I expect there will be some more divesting of the tail and potentially personal care, but the good news is all these brands are profitable. So we're not -- we're not going to give them away. We want to make sure we get fair value from them and meanwhile, we will continue to be acquisitive and looking for new things to add into those core categories that we prioritize. So I would expect there'll be more reshaping, the pace of it is not totally within our control, but we're still looking for opportunities.

Sounds great. Let's dig into the Hain 3.0. You've really done quite a bit of transformation with the 1 and 2.0 initiatives. Can you just help us understand some of the growth opportunities now and how they unfold, and specifically, you've identified over $1 billion of potential just driven by the tailwinds in health and wellness that your brands enjoy, but how much of these, do you feel like you have specifically identified, when should we expect to see them materialize? How long does it take to realize some of those opportunities that you can identify?

Yes. So we identified more than $1 billion worth of opportunities. And if you just look at our algorithm, we've got a $2 billion business that we expect we will get into the 6% to 9% top line growth space per year, so that's about $150 million a year if you will, and we said it would take us a couple of years to get there. So I expect that you'll see a little bit of choppiness but you'll see us moving toward higher growth as we go forward, starting in the second half of this year. We've publicly said that we expect that we will have much higher growth in the second half of the year than the first half. That was before we even bought ParmCrisps and Thinsters, and it was really on the backs of very strong distribution gains that we know we've got on things like sun care and snacks that are coming as well as a big hair care program and club that we've talked about. And if you look at our consumption, it's up double-digit right now in North America, and our consumption has exceeded our supply in the first half. So at some point, there is also going to be a replenishment of inventory that will boost sales in the second half and with continued innovation, and the expectation that we're going to both improve distribution and average items per store as we go through the next set of resets, I expect that you're going to see that growth trajectory start to materialize. Now again, some of the things I just articulated are more point in time versus enduring, like the hair care program is a -- once a year event that we hope to [ lap ] every year, but the distribution gains are permanent and we will keep building on those and I expect that you'll see this business very quickly turn into a growth business.

Sounds great. You touched on the distribution piece, you obviously mentioned some innovation as well, between some of the different buckets, there is $350 million or more of innovation opportunity that you've identified. Can you give a sense of what the pipeline for that looks like today? You talked about some of the shelf resets, are there still some pending ones that have been held up from maybe COVID disruptions and how steady of a stream of -- how sustainable of -- more from here do you feel like you have ready to go?

Yes. So I'd say, the distribution and the innovation are somewhat inextricably linked as part of our strategy because we expect that we'll get the innovation in incrementally. So far, all the categories that have reset in North America in the first half of the year, we have been space gainers and I would expect in Q3, we've got baby and snacks will reset, and we already have indications from retailers that we will be gaining space there as well. So I think the pipeline is strong and the things that we've launched are doing well, such that we're getting more things on top of that as opposed to replacing things that didn't perform well. And we've got a really robust pipeline across tea, snacks, personal care. We've got a terrific yogurt innovation coming, when that category resets in June, July timing. So I expect you're going to continue to see momentum and that will do a couple of things. It will increase average items per store. But it also is going to get us into some new accounts that we may not be and depending on what the innovation is. Again one of the things I like about ParmCrisps is it's going to get us access to new occasions and in some cases new channels that may not be as prevalent for our business today for example that can used as a salad topper because it's basically cheese and it's a healthy version because it's very clean label and again high protein, low-carb and we don't play well in -- big in the food service arena as an example. So there is a lot of opportunity to both increase the accounts and the channels that we serve, but also an opportunity to get fair share of space in the channels that we're in. And remember, historically, we proactively discontinued more than 1,000 SKUs and we just gave up space because we had things that were not meeting the minimum order quantity or we're losing money, and so we are under spaced relative to our share right now and that's why getting this innovation in becomes very important for us regaining our fair share of shelf.

That's great color. You touched on the strength of demand versus for certain brands especially, how difficult of a challenge has it been to keep up with supply and service the customers, and where do you see the current status of that and how you expect it to unfold?

Yes. So the things that we control internally, we're doing really well at. So manufacturing, making sure we're staffed up, that we're producing what we need to produce and that we have the labor in place to fill the trucks and get them out the door. Where we're struggling, which is where everybody is struggling is the external things that we don't control, right, so inbound materials whether they're coming in or not, truck showing up on time, co-mans who are having their own labor problems that may not be able to keep up with demand and have to choose among many people that they supply in terms of how they divvy out what capacity they have. So that's where we're spending most of our energy. The internal things we have pretty well under control. And the solution to all that is we just have to keep nimble and scrappy. We have to find backup sources of supply. Sometimes that comes at a premium price but that's necessary right now. In some cases, we've moved from one co-man to another or from one distribution partner to another because we just didn't believe that we were going to be able to get where we needed to with the current partner. So there is a lot of kind of renegotiation and rejiggering of the supply chain to make sure that we can continue to service the business well. And I've said on other calls, relative to the industry, we have done a good job and I know that because retailers are calling us with cancel merchandising events from someone else that they have available or open slots on the shelf that somebody is having trouble filling and so where we've done a good job. We're getting rewarded for that, and that's why, again, going back to the innovation conversation, that's why I have confidence in our ability to get that innovation in, because there is -- there's holes on the shelf. There's people that are struggling, and we have a couple of categories where we struggle, we're not perfect either, but we've done relatively well and we're getting a lot of the ties that we wouldn't have gotten a few years ago because we weren't as reliable as supplier.

You said that relative to peers, it's -- you've compared quite well, what about against your expectations? Has it played out about how you might have expected or has some of these disruptions been adding inefficiencies or how does it compare to just what you anticipated?

Yes. To be honest, I don't think anybody anticipated the magnitude of the supply chain disruption that we're all facing. I think, we did a good job in building inventory and trying to prepare ourselves for whatever this pandemic would bring, but it -- today, it feels like every other day. There is another shoe drop somewhere, and I've said previously, it's kind of 2 steps forward, one step back because you just can't anticipate -- we had a supplier that had a cyber security attack. We had a distribution partner who had half his labor force walk out on him. Those kinds of things you just can't anticipate. And so you just got to be scrappy and nimble and find a quick back up, albeit sometimes, and many times, at a premium cost and so that's part of the pressure that we've got on gross margins. But you know, look, we're still servicing the business in the low 90s. We're used to servicing the business in the high 90s, 98% range, that's been kind of the standard for the industry for a long time, but the fact that we're still in the 90s in North America feels really good. It's a little bit lower in Europe, where, quite frankly, the transportation challenges are much more severe than they are here. Brexit made things more complicated, particularly in England, where we have a meaningful sized business. But again, relative to peers, we've done very well.

Now that I am not sure there's anyone else talking about the 90s. So that's great for you. Obviously, those inefficiencies and disruptions add costs, maybe not inflate, they may not be typically characterized as inflation [ per say ], but total cost picture, including input cost inflation, how has it evolved since you last presented to investors, is it still getting worse?

Yes. So we had, we've had a couple of I'll call it negative surprises since the last earnings call. One is the massive energy inflation in Europe. Right now gas and electric are running somewhere between 5 and 10x the cost of a year ago, and as our contracts roll-off, we're experiencing some of that inflation. And the other is obviously absenteeism because of Omicron and both suppliers and internally, we've had more people calling out sick and that has some impact on supply as well. Those are probably, and on cost. Those are probably the 2 new things that have cropped up. We've said on previous calls that we had about $25 million more inflation since we wrote the original plan, but that doesn't factor in the last 2 things that I just mentioned. So we're continuing to see costs going up. I will say on things like commodities and transportation things, they seem to be stabilizing at a very high level. But as you pointed out, just because transportation costs have stabilized, the truck doesn't show up and you got to get something on an hour's notice and the lane that you haven't negotiated, you're going to pay a premium for that. So there is hidden cost on top of just the normal inflation the way it's calculated that we as an industry continue to face, and as I've said previously, we're prioritizing service over cost because as a challenger company, we don't have $1 billion brands, the retailer can live without some of our products. We've got to keep fighting for space and prove to them that we're hungry and we want it and that we're going to be reliable and that's served us very well in 2.0 in terms of rebuilding kind of the reputation of the company and for us to be a growth company, we've got a -- we've got to keep those relationships strong. So it's some short-term pressure on the P&L, but we feel very, very bullish on the medium and long-term.

And I just want to make sure I understood it correctly. The energy piece sounds specific to Europe, but the absenteeism, is that both sides of the Atlantic, or is that more pronounced over there?

No, it's both, I mean we see it in our factories. Not that, we haven't shut down any factories. But your ability to get people to work overtime, your ability to have your shifts fully staffed, there has been some impact there. But the bigger issue again becomes the things outside of our control, ingredient suppliers, packaging suppliers, co-manufacturers who are making products for them. They're having their own set of challenges that sometimes leads to shortages that impact our service.

And you mentioned pricing you've been taking to help cover these additional costs. At the last earnings call, the elasticities, though in sort of early days seemed like they were probably better than expected. Has that continued to be the case? And any update on just what the consumer response looks like?

Yes. So for round one of pricing, which we took both in North America and Europe, the elasticities were very low and we saw very little volume fall off. There's a couple of brands that were struggling before the pricing that -- the pricing didn't necessarily help, but on the brands that were growing, the brands that were stable, we've seen very little fall off in volume. We are now taking a second round of pricing to cover all that out-of-plan inflation that I just talked about. And it will hit end of third quarter and into the fourth quarter and we're trying to take it on different brands and different channels, because we didn't -- if a brand was having supply problems as an example in wave one of pricing, we didn't take pricing, we're not supplying the business well, so we're going back to those brands. Now that we fixed those supply problems and taking pricing there for the first time and we're taking some channels for the first time. So it's -- we're trying very hard to avoid taking second and third pricing on the same brands in the same customers and so far, we've done a pretty good job of that. Again, what's interesting is some of our competitors have taken pricing, some of them haven't, which is surprising this far into the challenges we've got. We see a number of competitors who just haven't moved yet and whether or not they'll move, we'll see. But so far, our volume hasn't fallen off, so we watch the gaps closely and as long as the consumer is still buying our products at the same rate, we're going to hold the line.

And so it's super interesting that your volumes are holding up despite that. Has there been a market share impact or are those brands not taking pricing often ones that are in a preferred brand and maybe don't think they can afford to, what's the market share dynamic been around some of those?

Yes. So where we've taken pricing, our consumption is up 11% overall, over the last 12 weeks. We're picking up share. There are some categories where we're picking up more than others. You've got brands like Sensible Portions that's up 45% versus a year ago, and 65% versus 2 year ago. That's been gaining share at a very, very aggressive and fast pace, but some of the brands that are more stable are picking up share as we've taken pricing and some of our competitors haven't, right? So if the volume stays the same and you're now getting 6% more for every transaction, and others haven't taken the pricing, that bodes well for our shares. So we're seeing our overall share growing in many of the categories.

Well, that's great. And it's probably hard to quantify it, I'd love to know if there is ways you come at this, but with natural and organic, and better-for-you brands and a heavy presence online, I think last we heard, it might have been 12% of sales. I don't know if that's gone even higher, but would it be fair to say that those add up to a typically less price-sensitive consumer, and how do you see that play out, especially with something like online, for example?

Yes. So you hit it on the head. We have a more affluent consumer, if you think pre-pandemic and you wanted to buy healthy products, organic or non-GMO, or gluten-free, you pay a premium for those things. And so the average consumer didn't necessarily gravitate up to those higher-priced offerings. What's been working in our favor is a couple of things. Number one, this is a health crisis and so people are worried about their weight, pre-existing conditions, their mental stress and so a lot of people have made lifestyle changes and are gravitating toward healthy products, which bodes well for us. And we have a consumer, on average, that $100,000 plus household income and so they're going to be less elastic and the more affluent consumers have done quite well during the pandemic, with the stock market going up and real estate values going up and so they're just less impacted by the inflation than some of the less affluent consumers. And so if you go back to the last recession, the housing crisis of 2007 and '08, health and wellness grew 8% while the rest of food declined, and it just shows you again that the most affluent consumers are going to be less price-sensitive. The online consumer, to your point is less price-sensitive. And so I think, we're very well-positioned relative to the rest of the industry in terms of where our price elasticities will settle out and our ability to take pricing.

And do you have, I know with some things like click and collect, you may not have as much direct visibility. Maybe it's an estimate, but do you have a sense of what percent of sales is online? I think a quarter or 2 ago, it was 12%, I don't know, has that changed, and as far as the online behavior, do you have a sense for, does that automatically reduce the amount of comparison shopping or how much stickiness in the basket you get, what are some of the dynamics there?

Yes. So it's -- we're about 11% I think right now. It might be down slightly from 12% just because we're seeing some other channels grow faster than e-commerce, which last year was growing much faster than the rest of the industry. The consumer, there is less price-sensitive. They -- particularly if you want health and wellness, there's so much more variety online than you will ever find in store, because of the limited space and the fact that the retailer is going to give more space to the higher velocity things that are typically not the health and wellness offerings. So a health and wellness shopper likes to go online to treasure hunt, to find variety, to find flavors they can't find in the store. And a lot of people came in during the pandemic for the first time, some of those as societies open back up, starting last summer, some of those have gone back to their old behaviors but e-commerce is still huge and a very significant part of the industry that has very long-term -- has very good long-term growth prospects. So we're glad that we are well developed there. We know how to make money in that channel, which is also a struggle for a lot of people because there is a lot of customization that has to go on, mixed pallets and things that are difficult for some that have a less flexible supply chain. And so again, we think, we're well-positioned. We've got great brands in the right part of the market where the consumer is gravitating to and I think, you're seeing it in the consumption there.

No, that's great. And maybe one more just touching on the balance sheet, even after the deal, you've just closed still a good amount of dry powder with, even if they're typically fairly small, some of these potential divestitures you mentioned, even potentially more. Can you just give a sense of capital allocation priorities and how to think about that?

Yes, Javier, you want to take that one?

Yes. So Michael. By the time we finished the second quarter, there were few transactions that were somewhat meaningful for us. One, obviously was the acquisition of That's How We Roll, that was about $259 million. We also participated in the secondary offering and that was about $76 million. So just to put a little bit of quantification to the dry powder statement that you made, we'll probably be finishing the quarter at around 2.6x net debt over EBITDA. So we said that we were going to -- that we wanted to be in the 3 to 4x range. And so we still have some dry powder to do -- to evaluate where to invest our capital. From a priority perspective, we continue to apply the same lens we have been applying to capital allocation since you know for the last 2 to 3 years, which is where does the company get the highest risk-adjusted rate of return to the investment opportunities that we evaluate. And so from that perspective, we really look at internal, external and share buybacks through the same lens and it really all depends on where those values are at the time in which we are seeking to invest our capital. So I would say in summary, we do think that we still have enough capital to do additional M&A and to do some share buybacks if the right price for our shares is sort of what we see in the marketplace.

Yes. And I would just add, we generate a lot of cash, right. So that 2.6x, it'll be down relatively quickly if we don't do anything with our balance sheet flexibility. So we are not stopping our search for new acquisitions or evaluating other uses of the capital, we still got plenty of firepower, plenty of capacity left.

No, that's great. Well, great update today. Great color. Thanks so much for sharing your time and for all your thoughts.

Thanks.

Thank you, Michael.

Take care.

Take care.