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

Hello, everyone. Thanks for joining us today. My name is Brian Holland, Sustainable Food and Healthy Living analyst here at Cowen. Not many companies in our universe embody natural and organic better than the Hain Celestial Group, which has been doing this as a -- originally a portfolio company 30 years ago. It's streamlined into an operating company over the last 2, 3 years. under the stewardship of CEO, Mark Schiller, joined by him and CFO, Chris Bellairs, today. So happy to have you both with us.

Why don't we just get started right away? Why don't we start with Hain's back story? What brought you to the company in 2018, Mark, and your background, and then how that meshes together, what your skill set is with what you think the company needed at that point in time?

Sure. So first of all, I love that it was a health and wellness company. There's been a clear trend toward health and wellness and have spent some of my career earlier, managing things like Quaker Oats and really like kind of the difference between that and center of store food. That was one. Second and importantly, much of my career has been taking either stagnant businesses or troubled businesses and crafting a turnaround, and this one clearly needed it. It was -- had quite a bit of complexity and had some performance issues. And so I saw a lot of opportunity to kind of create a strategy and build the company from there. And then I like the fact that it has international component to it, which was both an incremental opportunity for me relative to having managed mostly North America business, but also I thought it had a lot of interesting opportunities there that we're worth pursuing.

Yes. We'll dig into those in just a moment. Given the theme of this conference, why don't we start by talking about Hain's relationship with the consumer. I'm interested both what that looks like today and how we can think about that looking out to the future. We're obviously all monitoring closely demand elasticity and cost inflation. Can you talk about how your portfolio is positioned into that backdrop, both upstream and downstream?

Yes. So the good news about being in the health space of food is it's much more inelastic. You have a more affluent consumer. It's more of a lifestyle choice to buy things that are organic or things that have specific health benefits. So we feel like we're pretty well insulated from some of the macro challenges related to inflation and potentially people trading down. There's a lot less private label in the segments that we're in. So we feel like we're in a really good space. We have a very broad portfolio. Some would argue it may be too broad, and we've done some carrying over time. But the strength of the portfolio, you don't have to have all the pieces moving in the right direction at any one time. And so the combination has positioned us well for growth. And we have terrific brands that have a lot of upside potential. They have distribution opportunities. They have innovation opportunities. They have marketing opportunities for us to get closer to the consumer. And our strategy really is about reaching the potential of each of those vectors and turning this into a high-growth company.

So how do you do that, right? Because you've got many brands that have been around for several years. And if I think about legacy Hain, I sort of thought they had a path to the consumer. And the consumer either adopted or didn't adopt. They had some execution issues. But these aren't new brands. Now if you look at scanner data today, you're growing double digits in the U.S. That's pretty impressive when you think about how long the brands have been around. How are these -- where are these brands kind of in their time line? You look at them relative to the opportunity. I know you and I were talking before we got up here about household penetration and what that looks like. And so one, help quantify what that looks like, where you are today versus where you could be and then what the path is to get there. How do you reach those incremental consumers?

Yes. So the first thing I'd tell you is none of these brands are ubiquitous. Even our biggest brand, which is our sensible portion of Veggie Straws. We're only in about 70% of the ACV in our core channel. And then when you think about all the places where people consume snacks or buy snacks, convenience and gas, sandwich shops, et cetera, we're not in any of those places. So there's huge distribution potential despite the fact that, that brand has grown 70% over the last 2 years. So we're seeing massive growth, and I would say we're in the third or fourth inning of the growth potential of the business. Still only has about 7% household penetration. And so when you think about all of the people that are interested in health and wellness, all the places where people shop for snacks, the expandable consumption potential of snacks, there's just massive upside. And so when we laid out Hain 3.0 strategy, we talked about the distribution opportunity that not only exists in core channels, but in new channels in core geographies as well as new geographies because the other advantage of being a global company that we're now starting to take advantage of is the synergies that we can create either between the U.S. and Europe or between the U.S. and Canada, and all of those create lots of upside for us. So we really have a lot of opportunity potential, and it's really for us to focus on the right ones at the right time and build these brands from a distribution standpoint and then engage the consumer in that journey. And a lot of that is about our innovation. It's about our marketing. It's about our shopper marketing in store and how we make our brands visible and how we create kind of love marks for people that they really want to stick with over time.

So when we talk -- you talked about Hain 3.0 sort of glosses over the tremendous lift that Hain 2.0 was. And within that process, you've obviously put forth a lot of compelling data points that I think Hain 3.0 is sort of set up to amplify. So I'd be remiss if I didn't mention your past experience as I want to from Pinnacle Foods. And the genius of that platform I always thought was that they did the simple stuff really, really well, great focus on simplification. How do you get people to eat frozen cauliflower, you add Buffalo sauce, right? That's my prime example. But that's applicable here as we look at Hain, and you're doing some versions -- you're doing some versions of that. So I want to talk about how you -- the one thing that Hain has is this broad portfolio of capabilities that it's acquired over time could be argued they had too many, right? But there's a lot of capabilities and there's a lot of really compelling brands and sometimes they're mismatched, really good capabilities, but maybe not the brands -- but you have other brands that you could maybe tie those 2 together. And that's where, I don't want to say, a disproportionate amount of growth from, but you've had a really compelling green shoots coming out from that. So maybe you could give us some examples of where that's happening.

Yes, sure. So just quickly on the simplification, there was 55 brands when I started, and we sold 23 of them that had about $1 billion of sales but about $15 million of EBITDA. We sold those for $0.5 billion and used that to pay down debt and to position us well to buy back stock and make acquisitions and things that would set us up for the future. But in terms of the synergy part that you were referencing, let's take the sensible portion of Veggie Straws, where we saw a big opportunity with young males who were not really eating healthy snacks. And we look to the big brands in the category that were attracting the males, and we said we need a scream and hot version of our snacks, which will be appealing to that audience. We put it on. We launched it. Did about $20 million in the first year, highly incremental to the category, highly incremental to the brand. Then we started looking at the platform that we had, which were these light snacks, low in calories, melts in your mouth, and we said, we've got a baby food business, why can't we do snacks for infants and toddlers. And so we took the same platform with different seasoning on it, launched it for a much younger audience, smaller bags, much higher price per ounce, much higher margins. And that was a big part of the turnaround on the Earth's Best business, which was the biggest brand in the company when I got here. It was in 40 subcategories. We shrunk it and got exited about 25% of the brand sales that was just adding complexity and not adding any profit, and then proceeded to add things like the version of sensible portion. It was much higher margin, much more incremental. And now we have a business that's back to the same size it was when I started, but instead of having a 2% EBITDA margin, it's now in the high teens in terms of EBITDA margin. We took the success there, and we applied it to our baby food business in Europe, our Ella's Kitchen brand, and brought the snacks over there. So it's a good example of taking a platform and applying it to different brands. And really, we have the infrastructure, we have the manufacturing capability. We have the expertise. And you're just making 1 plus 1 plus 1 equals 5 at the end of the day and doing it in a very synergistic and simple kind of way.

If I could take a step back, this obviously predates your tenure with the company, but I trust you and your team have looked at how Hain's business performed during the Great Recession. So -- and you certainly lived through it, and I think you were at PepsiCo at the time. What learnings can you share that might be applicable over the next 12, 24 months?

Yes. So the first learning was health and wellness did very well during the last recession. Again, it tends to be more affluent consumer and tends to be more of a lifestyle purchase. So even when times are tough, when you've got a 6-figure household income average for your consumer who wants to eat healthier, who's made the choice to eat organic or want certain health benefits in the food that they're eating, we tend to be fairly insulated. We also -- because of the size of our business, we don't have any billion-dollar brands. And so there's a lot less private label in the categories that we compete in. And so there's much less opportunity for people to trade down to something significantly cheaper in our category. So we're pretty well insulated in terms of the space that we're in, which is one important learning. I think the second important learning is relative price matters to us more than it does, looking at people trading from healthy to non-healthy or from organic to nonorganic. I have to look at the other organic players if I have an organic piece of business and say, what is my relative price versus other organics and how do I make sure that I position myself well in this kind of environment. And the good news again for us is we are the opening price point in organic baby food. We are the opening price point in herbal tea. We -- our sensible portion of the Veggie Straws business is very competitively priced versus more mainstream snacking alternatives. So we're in a really good place in the premium spaces that we're in, which, again, I think, positions us well. If the consumer does decide to trade down in organic, as an example, they're going to trade to us, which positions us nicely for whatever that may come in the macro environment.

So we use that as a setup. One thing me and my colleagues are asking of all the companies we're hosting this week is how would you rate the health of the consumer on a scale of 1 to 10, 10 obviously being the strongest. And sort of how that would compare to whatever numeric grade you might give them 6 and 12 months ago.

Yes. So I think there's a difference in how I would grade the U.S. consumer versus the European consumer. I think the European consumer is much more stressed about what's going on in the world. They're talking about mid-teens inflation kind of numbers hitting there. They're talking -- they've got a war going on in their backyard. They've got Russia threatening to cut off their gas supply. Energy price is up tenfold. And so there's much more kind of anxiety and stress there, and it changes in behavior. There is changes where people are trading down to private label. In some cases, we were there last week, and we actually heard, in some cases, people are skipping the meal to try and figure out how to economize. That's a very different place than we are here. I would say the consumer here is more, I'll call it, a fix, meaning they haven't really changed their behavior significantly yet, but they're starting to be concerned. And with that concern will come changes. Will they eat out less often and eat more at home? Will they trade down? Will they give up buying a new purse or going on a vacation, which all have kind of impacts on the economy? I think people are talking more about it here than doing it here. We all have pent-up energy from COVID. We're getting into the warm month. Everybody is craving, going out to a concert or a restaurant. And so I think that behavior is going to stay here for a while. But if the economy doesn't get better, I think if the weather gets colder and we get into the fall, we'll start seeing some of those trade-offs here as well.

Since you brought up Europe, I'll move ahead and jump on that theme for a minute. So I think one of the issues weighing on the stock over the past month or so, as you reported March quarter results, the international business came in softer than expectations were. There were a few transitory specific factors that you sort of talked about a pack back to normalization there, but the other side of it was obviously U.K. grocery being soft. So you gave a little bit of the lay of the land of what that looks like and how that's manifesting with the consumer behavior. When we think about moving into fiscal '23, do we think this gets worse from here? You obviously start to lap, as you made reference to on the call, easier compares. So how do we think about the setup for your business looking out to fiscal '23 qualitatively? I appreciate that you haven't given guidance yet, but just directionally, how do we think about the setup?

Yes. So in the last quarter, the U.K. business, the entire grocery store was down about 7%, which is a pretty staggering statistic. Now some of that is overlapping complete lockdown from COVID a year ago. And now you've got people back to work and kids back in school. And so some of those eating occasions have left the home. But that was by far the worst quarter in terms of overlap, and it does get easier, as you said, going forward. I think we are in an environment where we have a cautious consumer, and I think they are being more thoughtful and choiceful in terms of how they spend their time and their money. I don't expect that the store is going to continue to decline for the long haul, but I do think we've got a couple of quarters of it. And we do expect that there will be kind of continuing progression and momentum as we get into the next fiscal year. And the other piece is, look, all manufacturers are taking pricing now. And that wasn't the case when we took pricing earlier. And a lot of it is, again, driven by the Russia-Ukraine war where energy prices have skyrocketed, the immigrant labor is not as available. And so they've got some of the same challenges that we have on the supply side, and everybody is taking pricing. It was much harder to get pricing in the beginning of our fiscal '22. And we anticipate that, that will be easier going forward that at least will generate some sales momentum.

And I should have clarified your June fiscal year. So that's why I'm asking about the context actually about fiscal '23. I do want to ask about the pricing relationships. So there's a couple of things, right? One, you guys halted shipments in the -- in your fiscal third quarter, so your March quarter, amid pricing negotiations in Europe. You and I were talking and Chris before we got up here about how you manage pricing and what you're looking at. How do you think about price points both relatively and absolute? When we're thinking about consumer sensitivity, how much does that matter? Does none of that matter at all in this environment because of the magnitude of pricing? What are you watching for as far as demand elasticity or trade down risk from an absolute or price -- what is more important to manage?

So I'll give a macro comment and then I'll make it a Europe-specific comment, because private label is such a much bigger part of the business over there. For us, again, given the more affluent consumer, we're much more interested in relative price point and price threshold than we are price relationship versus private label as an example. So we know who we interact most heavily with, who we source volume from, who sources volume from us, and we watch those price gaps very closely. So if before pricing, we were $0.20 cheaper and we went up more than our competitor, and now we're at the same price, we watch to see what that elasticity is. And if we have to adjust, we'll drop ourselves back to $0.20 below where we were before. And in some cases -- in many cases, we've been leading on pricing. And so we go out first, and then you have to wait and see what others do. And I would target from 2 rounds of pricing in this fiscal year. In some cases, we took too much. We went up and competitors didn't. In other cases, we didn't take enough, and so you adjust on the fly. And so there is a very dynamic pricing group within our company that this is all they do is every day, they're analyzing the data and saying at this customer on this brand, we have a pricing problem, we have to make an adjustment. And on this one, we didn't take enough. So when we go to the next round, we should take up more to get back to where we want to be. I mentioned Europe only because in Europe, you've got 40% of the categories, in some cases, are private label. So there really is a bifurcation of the consumer, those who buy private label and those who buy branded. And there tends to be a very wide gap between the two. So our Ella's Kitchen Baby business, as an example, it's 3x the price of private label. So if you've made a choice that you want to buy Ella's Kitchen, you're going to buy Ella's Kitchen. You're -- we don't really compete with private label. And so again, washing versus the other branded players, where do we want to be. And in many cases, we are positioned kind of as the opening price point of the branded side of the business, which insulates us pretty well in an environment like this. So we just want to retain that relationship as they go up and we go up. We don't want to disrupt the fact that we may actually be in an advantageous position right now.

And again, maybe going back to the upstream part of this conversation. What are you seeing there? I think you framed it as double-digit inflation is what you're dealing with right now. What are you looking for over the next 6 months from a macro standpoint? Where are you looking for potential slack or cracks that might ease some of this cost inflation. I mean one of the examples that another company I spoke with earlier today on was what we're hearing out of Walmart is demand was in the discretionary items starting to pull down because people had to spend up for food. What that ultimately means though is, right, we've got elevated inventories across the retail landscape. So for instance, maybe we start to see some spot rates come down on transportation because you don't need to move as many trucks. Now that may exacerbate the move into a recession because maybe the less labor you need, the more unemployment goes up. But as demand starts to soften, that can set up for some ease on the cost inflation, whether it's commodities or transportation, whatever. I'm just curious whether you would concur with that and any other further color you might add there as we think about this going forward, because I think there's an interesting combination here of being somewhat insulated, and I don't think any of us are hoping for a recession. But you do, as you mentioned, had some installation on the top line side, but maybe we also get some cost release too.

Yes, so I think we're seeing some stabilization of labor costs, which were -- there's still a competition for talent. But I think that we're starting to see the labor shortage easing a bit. I think we're starting to see the transportation shortage ease a bit as well. And as companies like Amazon report that sales are slowing, they've got a lot of drivers and they'll consolidate drivers that will free up drivers to drive for our industry. And so I do expect that while gas prices are inflated and we'll still see that in our freight numbers, I think the availability of trucks has again somewhat stabilized. Where we are not seeing any relief is on ingredient shortages. There's just constant other shoe dropping almost every week of something that you ordered that didn't come in, a supplier who can't get it. And so part of what I think distinguishes us and part of why we've done really well in terms of servicing the business during both the pandemic and the shortage is we've got a very nimble, scrappy culture. And so our ability to find backup sources of supply quickly, we've done a really nice job. I mean, in some cases, we have 1 source of supply. We may have 4 sources of supply and some of the things that we buy now. But we buy thousands of ingredients, and we have 100-something co-manufacturers. And so we still are a pretty complex business, which means that we're still going to get surprises. And so we've got a whole team that works on that. We're adding resources in that area to be able to react more quickly. But I'd say the biggest headwind and challenge for us right now is ingredient shortages, packaging shortages, ingredient shortages, many of which have been exacerbated by the Russian invasion of the Ukraine. Ukraine is the vast majority of the world's sunflower oil. There is no sunflowers being planted or harvested in the Ukraine. Indonesia, which is 60% of the world's palm oil, has said they're not exporting anymore. They're hoarding all of their palm oil. So if you need oil to fry your chips in, there's going to be a shortage, right, which means prices are going to go up, and there's going to be competition for limited inventory. And so getting ahead of those things and having backup sources of supply doesn't work. Formula flexing, so you can switch from one oil to another and your packaging ingredient statement is already set up for you to do that. Those are the kinds of things that get you through these kinds challenges, but it's challenging. I mean there's a lot of surprises that are happening all the time.

I do think Indonesia ease those export bans on Friday...

Okay, they may have. That's news to me. Good.

Yes. But I'm here to be the bearer of good news wherever I can. But let's get to the fun stuff in our last few minutes, which is Hain 3.0. That was really the fun of the diligence process was, I should mention, we initiated coverage on Hain and outperform yesterday morning. But the fun in the diligence process was actually looking now that we're 3 years into your tenure and seeing distribution SKU numbers go down, SKU productivity go way up. So we're seeing the strategy bear fruit. But what I was struck by, you hosted an Investor Day in September of 2021, so about 9 -- 8, 9 months ago now. And I was struck by the fact that for a $2 billion business, you're still targeting mid- to high single-digit adjusted sales growth. So that would be net of currency, net of divested potential future divestitures, et cetera. Help us understand what the path is to get there.

Yes. So there's really 3 pieces of growth in this business, distribution expansion, which I talked about, which is not only core channels, but new channels as well as new geographies. I mean there's lots of examples where we have started that process. The second is innovation. There are -- our job and our mission is to take things that people love and just make a healthy version of it and make it affordable and available where people shop. And if we do that, we have tons of big brands that we can source volume from by just giving something that's a little bit better, and you're still competitively priced. And so our track record on innovation has been very good. It's driving incremental space. It's driving new users to the category. Things like energy tea, where he can buy tea with as much caffeine as a cup of coffee. People don't like to drink coffee in the afternoon. Some people would upset their stomach. Some people don't like the taste. Nobody was going to tea for caffeine. Well, now they can. And so things like that or the stream and hot Veggie Straws that I mentioned, we're bringing new people in, which is -- and we're getting rewarded by retailers who are giving us more space because we're bringing new users into their category. And then the third vector is marketing, and we do need to invest more in these brands because there is relatively low awareness and relatively low household penetration. Job 1 is to get them on the shelf and make them available. But job 2 is to make sure once they're there, they get noticed. And so those are the 3 vectors that drive the top line, and it gets funded through a very robust productivity program. I mean we are -- prior to this year, we were about a 26% gross margin business, up from about 19% when I started. But the industry average is mid-30s. So we've got a long way to go before we even average in terms of our margins. And a lot of low-hanging fruit on automation, on filling up trucks, on reformulating products that are overengineered, getting the price value right. And so if we get that productivity and can apply it back to the brand, whereas now we're applying it for all the firefighting we're doing to get those backup sources of supply and their operating ingredients and other things related to the supply disruption, but if we can apply that back into the brand, it's going to drive even more growth for our business.

And so if we go back to some of the prior comments about the concerns on the cost side, whether it's raw material procurement, packaging, et cetera, you obviously also gave EBITDA targets at the time, if I'm not mistaken, like 9% to 11% or 10% to 12%. So it implies margin expansion on top of the top line growth. A lot happened since then as it seems to be the case every single day, right? As we think about some of those long-term targets below the top line, is there still a path to achieve that, mindful of what we're dealing with? Have you had to rethink any of that? Or how do you put into -- how do you frame sort of the disruption that we're seeing right now? Is there just an assumption that disruption ends? Or do you think there's other paths to get there even if maybe this doesn't level off for some period of time?

So we still have lots of productivity opportunities. So the good news is as costs normalize, that productivity will drive significant margin expansion. But right now, as I said, instead of us just using that productivity to invest in the brand and expand the EBITDA margin, a lot of it's being offset by applying it back into the business. I don't know when this crisis is going to end and the challenges that we have. It may elongate the timetable a little bit to get to where we need to be because, again, we'd like to be investing more of that money the brands right now. But at the end of the day, we still got 1,000 basis points of margin expansion before were average for this industry. So we're just doing things that other people did 20 years ago, like automating our packaging line. If you went into one of our factories, you'd see hundreds of people putting bags and boxes by hand. There's a lot of money there that we will get to over time, and that will expand the margins. It just may take a little bit longer than originally contemplated.

A renewed muscle for Hain is M&A. I think you acquired the ParmCrisps brand towards the end of this past year. Prior to that, I don't think Hain bought anything for over 4 years. Part of that was -- there was a lot of other things that needed to be tended to. But can you just share your plan to explore inorganic sources of growth? So again, interested in what internal capabilities you can leverage against? And then specifically, how does ParmCrisps fit into that strategy?

Sure. Do you want to take this one?

Yes. So the capabilities today, we're kind of rebuilding those volumes because, as you said, haven't done them for a while. So we're using ParmCrisps and the Thinsters acquisition, not just to leverage those great brands to drive the synergies that, right now, we think are actually above the synergies that we quoted in our investment case, but to rebuild the skills within the company so that we can keep doing it. And it's a great case study for where we want to go. The sweet spot for us is right in that kind of $50 million to $150 million of top line. It's big enough to matter for us, but not so big that we'll be competing with other people who can always with deeper product a bit of. So I think it's just the perfect model for, as we see opportunities like that to bring in the right kind of brand, to make ourselves a bigger fish in the pond that we want to play in. It does still represent a significant opportunity for us as part of the screen data algorithm.

Yes. And I would just add, there's top line synergies in that. It's a snack brand. We get lots of displays on our Veggie Straws and Terra Chips. We can put that right on the same displays and drive awareness. And then there's huge cost synergies. It's a very manual operation. They buy pre-grated cheese, we can grate the cheese ourselves. We could put their product on our trucks, and they could basically ride for free versus having their own trucks selling out that are partially filled and us having trucks going out that are partially filled. There's a lot of synergies synergy opportunities. And as Chris said, we want to get bigger in these turbocharge categories that we've identified, snacks being one of them. And this is a very incremental brand because it sources volume from beef jerky and protein bars, which is very different than the snacks portfolio we have today. So we're excited about it. So far, it's ahead of our investment case, and we expect we'll do more.

And we put the balance sheet in a place where we can do more.

Yes.

In closing, let me try to squeeze in two here. In the international business, you have plant-based. You don't do plant based in North America. I'm curious if that's a commentary about capabilities internally versus the consumer and their receptivity to plant-based meat and beverages in North America. And then secondly, and we'll close with this international paid the bills during the North America turnaround. Playbook's all about simplicity, the international business at a macro level as anything. But is there a thought that ultimately that wouldn't be part of the portfolio? You can take those in either order.

Yes. So the reason we're not in plant based in North America, it's just -- here in the U.S., it's a very crowded space. So we have the number one chilled brand in Canada called the Yves. It does very well. We've looked at -- coming into the United States, there are so many brands in such a crowded space, and we have so much opportunity on the things we already sell here that we deprioritized that in the short term. So we have Linda McCartney in the U.K., which we're bringing into Europe and we have the Yves brand in Canada. It's not a commentary on our capability or the potential of the opportunity, it's just we have to be choiceful in terms of where we focus. The second part of the question in terms of Europe. Well, Europe has been a great business for us as we were turning around the U.S. We have 9 #1 and #2 share brands there. We believe we're very well positioned for growth. But to your question, look, we're always open. We're a public company. Anybody could bid on anything we have at any time. We will do what is in the best interest of shareholders always, but it is not part of our strategy right now to think about exiting the European business.

Excellent. We'll leave it there. Mark, Chris, thank you so much. Thank you all for joining us today. I hope you had a great day 1 at the conference. Thank you.

Thank you.