The Hain Celestial Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 13 speakers on the call.

Operator

Greetings. Welcome to the Hain Celestials Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I'll now turn the conference over to your host, Alexis S.

Operator

EA, Vice President of Investor Relations. You may begin.

Speaker 1

Good morning, and thank you for joining us on Hain Celestial's Quarter Fiscal Year 20 24 Earnings Conference Call. On the call today are Wendy Davidson, President and Chief Executive Officer and Lee Boyce, Executive Vice President and Chief Financial Officer. During the course of this call, we may make forward looking statements within the meaning of federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations.

Speaker 1

Please refer to our annual report on Form 10 ks, quarterly reports on Form 10Q and other reports filed from time to time with the SEC as well as the press release issued this morning for a detailed discussion of the risks that could cause our results to differ from those expressed or implied in any forward looking statements made today. We have also prepared a presentation inclusive of additional supplemental financial information, which is posted on our website at haines.com under the Investors heading. Please note that remarks made today will focus on non GAAP or adjusted financial measures. Reconciliations of non GAAP financial measures to GAAP results are available in the earnings release and the slide presentation accompanying this call. This call is being webcast and an archive will be made available on the website.

Speaker 1

And now, I'd like to turn the call over to Wendy.

Speaker 2

Thank you, Alexis, and good morning, and thank you all for joining us today. I will begin today's call by first reviewing our 2nd quarter results and then provide an update on the progress with our Hain reimagine strategy to return the business to profitable growth. Lee will then review our financial results in more detail along with our outlook for the year. We are pleased that our 2nd quarter delivered sequential improvement from our Q1 as anticipated in revenue, gross margin and adjusted EBITDA. Our International Business segment continued its strong growth led by pricing, distribution and currency benefits and our North America Business segment improved revenue trends compared to our Q1.

Speaker 2

Adjusted EBITDA for the first half came in ahead of our plan, but was down versus prior year due to lower volume and increased investments in marketing and SG and A, offset by both pricing and productivity. Lee will provide greater detail in his remarks. We are making continued progress on the 4 pillars of our Hain reimagined strategy, focusing our business in our 5 core categories and our 5 core geographies progress in building our organizational capabilities to scale our brands and gain share, driving growth through innovation and channel expansion and progress in generating fuel through working capital management and productivity savings to expand our margins and transform our business for sustained performance. This momentum contributed to the sequential improvement in both our top and bottom line trends and is expected to drive growth in our second half. As we outlined on Investor Day, fiscal 2024 is the foundational year of our year transformation strategy.

Speaker 2

In the first half of the year, we prioritize execution against the focus and fuel pillars of our strategy, which will enable us to fund incremental investments in capabilities for the build pillar in the back half of the year to support accelerated growth. Let's look now at some highlights across the business for the Q2. Our snack category dollar growth trends have improved since the start of the fiscal year And I'm pleased with the momentum we are building. This improvement in trend occurred despite the first half strategic changes we made in our promotional strategy and channel mix, which resulted in short term impacts on our overall snacks category trends. Our largest snack brand, Garden Veggie Snacks Grew dollar sales more than 3% in the 2nd quarter across all customers measured and non measured.

Speaker 2

And Terra chips grew dollar sales 8% in the quarter and grew unit 5% and gained share. With channel expansion a key growth lever for our Snacks brands, we are pleased see our non measured trends outpacing measured channels and both non measured and C store sales continuing to grow double digits. We are excited for our Flavor Burst innovation launch in the Garden Veggie brand that should further drive our revenue growth in the second half, which I'll elaborate on more shortly. In the Baby and Kids category, industry wide organic formula supply shortages persisted from quarter 1 into quarter 2. We continue to work with industry supplier partners and I'm happy to report we have secured supply commitments that we expect to support double digit year over year growth during the second half and improved end market consumption by the Q4.

Speaker 2

Excluding formula, our overall global baby and kids category continues to perform well. Earth's Best Snacks and Baby Food are outperforming the total category driven by pricing and distribution gains with expansion into Canada this year. And our UK based Ella's Kitchen branch grew net sales year on year, gaining share in e commerce by optimizing online visibility and enhancing customer planning. In our beverage category, we grew net sales year over year. Celestial Seasoning, the number one bagged herbal tea brand in North America, grew dollar sales in the most recent quarter and gained share, driven by success in both brand building with our Magic in Your Mug campaign and with innovation with the continued performance of both Sleepy Time Melatonin and Throat Cooler.

Speaker 2

In the international segment, we grew nondairy beverage net sales for the 2nd consecutive quarter driven by both private label and brand growth across our Lima and Netume brand. Our meal prep category grew net sales year over year led by Spectrum Oil, Marinatha Nut Butters and Imagine Soup in North America and branded soups, heart leaf jams and jellies, as well as our private label grocery business in international. Spectrum oils grew dollar sales by mid single digits driven by strong velocity and our branded soup portfolio continued its momentum with mid single digit year over year growth ahead of the category and gaining share. Our 3 international brands, New Covent Garden, Yorkshire Provender and Cully and Sully are the number 1, 2 and 3 leading fresh soup brands in the UK. Private label spreads showed continued strength, growing dollars by double digits and gaining share.

Speaker 2

In the Plant based category, the overall category continues to be challenged. However, it returned to growth in the UK in the latest quarter in frozen where the majority of our plant based meat free sales come from. We have 2 leading meat free brands, Eves, the number one brand in Canada and Linda McCartney Foods, the number 2 brand in the UK. EASE is performing better than category, resulting in both distribution and share gains, And we are seeing recovery in both branded and private label in the UK. Lastly, we continue to concentrate on stabilizing our personal care business.

Speaker 2

While we acknowledge we still have progress needed, we delivered year over year net sales growth overall led by Alba Sun Care, Avalon Organics and in LizClean, a leading personal care brand in Canada. We're seeing growth in e commerce and other non measured channels leading to non measured growth for our overall portfolio and we've made progress optimizing our manufacturing capacity utilization for improved efficiency. As Lee will outline, we will be pulling forward some of the Hain reimagined initiatives originally planned in fiscal year 2025 that will result in a top line drag to the personal care portfolio in the back half of this fiscal year, but enable us to accelerate key business mix improvements. Overall, we continue to be encouraged by the bright spots we're seeing across our 5 categories and our 5 geographies. Turning to our Hain reimagine progress, as we've said, fiscal 2024 is the foundational year of our strategy.

Speaker 2

We're making great strides towards focusing our business, resetting our global operating model, enhancing critical capabilities across brand building, channel expansions and innovation and in implementing our fuel program. Our 2nd quarter results demonstrate a marked improvement sequentially in year over year trends. This improvement is even more pronounced if you exclude the short term impact of baby formula. This reinforces confidence that our Hain Reimagined strategy is on track as we begin to deliver on our promise of returning our company to profitable growth. As a reminder, Hain Reimagined is built upon 4 strategic pillars: focus, grow, build and fuel.

Speaker 2

Starting with the focus pillar, we've made great progress in simplifying our business and aligning our global teams and functions to support a high performance culture. We recently welcomed a new Chief People Officer, Amber Jefferson, to our global executive leadership team. Amber will be instrumental in building out our people strategy to enable our high performance culture and a strong pipeline of talent to help us deliver on our full potential. During the quarter, we also made strong progress on streamlining our footprint as well, opening our right sized headquarter in Hoboken, New Jersey, consolidating our sales offices in Europe and continuing to optimize capacity utilization in our manufacturing facilities across both meat free and personal care. The rollout of our agile working model to leverage our hub and spoke footprint is delivering on our high performance culture objectives.

Speaker 2

In the past 12 months, our applications are up 300% on fewer job openings and applications are up 500% with women. Our turnover remains below industry average and our engagement scores improved by 8%. Looking ahead to the balance of the year, We will be pulling forward several focus pillar initiatives designed to establish a winning portfolio of SKUs, streamline our operations and simplify our geographic footprint. These initiatives are an important step towards eliminating complexity in our business, allowing us to concentrate our resources more effectively on the areas where we have the greatest right to win. Under our growth pillar, Our goal is to drive share gains across our core snack, baby and kids and beverage platforms.

Speaker 2

These platforms have gained incremental distribution across mass and grocery channels, reinforcing our confidence that this momentum will continue to build throughout the year and support our pivot to growth in the back half. Our build pillar is centered on brand building, channel expansion and innovation. As we mentioned previously, we're driving improved marketing efficiency Through a reshaping of working and non working media and leveraging both paid and earned media to drive brand awareness and reach. We launched our Hain Agile and Amped brand building model globally and began to ramp up brand campaigns in the first half of the year For Celestial Seasonings with Magic in Your Mug and the beloved Sleepy Time Bear and targeted marketing on Greek Gods Yogurt. We've begun to leverage global platform insights and campaigns for our leading baby and kids brands, 1st Best with Good Food Made Fun in North America and Eat Play Fun for Ella's Kitchen in the UK.

Speaker 2

Our improved effectiveness in our brand building spend will drive more from our core products and brands and also support new innovation launch success. For innovation, we continue to enhance our capabilities and pipeline, Working to leverage key insights to develop breakthrough scalable innovation. Our recent launch of Garden Veggie Flavor Burst Tortilla Chips is a prime example, Created from consumer research highlighting a gap in the better for you snacking segment, Flavorburst fills the better for you tortilla chip void by combining the craveable flavors of nacho cheese and zesty ranch with wholesome ingredients including non GMO corn and colorful veggies with no artificial flavors and no artificial preservatives. Consumer testing results have been outstanding and we've received nearly 100% retailer acceptance in both the U. S.

Speaker 2

And Canada. Flavor Verse will hit the market with strong initial ACV And we expect distribution to build based upon retailer commitments, setting Flavor Burst up to be the strongest innovation launch in recent company history. We are supporting the launch through a robust omnichannel activation, leveraging our Agile and Amp's brand building model to drive awareness, trial and repeat purchase, both on shelf and online. Flavorburst Tortilla will be a strong driver of our year on year second half growth in the snacks category. To support the strong launch, you will see a sequential increase in marketing investment in quarter 3.

Speaker 2

In addition to innovation, we are our channel expansion capabilities in both away from home and e commerce. As our new teams scale up, we are pleased to see our C store sales up 15% in the quarter driven by our Snacks business, which was up 18%. Further, in January, we expanded Snacks distribution to more than 10,000 C Stores, increasing our store count in this margin accretive channel by double digits. And Garden of Eatont has had several significant wins in commercial restaurants, helping drive both revenue and reach. On the e commerce side, we are pleased to see digital sales penetration at our unified commerce retailers growing and outpacing grocery category averages.

Speaker 2

Brand building, innovation and channel expansion are key drivers of our pivot to growth in the back half of the year. Our last pillar is fuel, which is designed to unlock efficiencies across our business to fund our growth and drive margin expansion. Our productivity pipeline as measured by cost savings initiatives in our manufacturing operations is robust and on track to deliver our targeted savings to offset inflation within the year. Our revenue growth management initiatives are on track for fiscal 2024 expected savings, Largely in trade and non trade efficiencies, net price realization and price tag architecture, our working capital initiatives are also on plan to reach fiscal 24 targets. We have approximately 80% of our payables target committed to date and our raw and pack inventory is over 20% lower than a year ago Our finished goods remain below the expected seasonal build for the first half, better than we projected on the last earnings call.

Speaker 2

We are continuing to unlock value through our fuel program, which will facilitate reinvestment in the business and the return to growth in the back half of the fiscal year. I'm excited that we've made strong progress in our fuel initiatives and for our plan to deliver continued sequential improvement in our business year on year growth in quarter 3 and quarter 4. With formula supply recovery, distribution gains and innovation and channel expansion and continued momentum in our international region, we have many reasons to believe in our outlook for a pivot to growth in the back half in spite of the challenging macroeconomic environment. Before I hand the call over to Lee, I want to thank the entire Hain team for their dedication, their passion and their hard work. As we've reimagined Hain Celestial and redefine the future of better for you purpose driven brands, our global team has played a pivotal role and putting new plans into action, coming together to grow our brands, our business, our impact in our people.

Speaker 2

I want to thank them for their commitment to lead with purpose, deliver our Hain values and to demonstrate possibility thinking. With that, I'll turn the call over to Lee.

Speaker 3

Thank you, Wendy, and good morning, everyone. Q2 delivered a sequential improvement in both top line and bottom line performance versus Q1. This was driven by the focus and fuel pillars of Hain Reimagined and establishes the pathway to continue to deliver sequentially improving growth rates as we move through the balance of the year. Consolidated net sales for the Q2 were flat versus the prior year period at $454,000,000 an improvement sequentially from the 1st quarter decrease of 3.3% year over year. Organic net sales for the 2nd quarter adjusted to exclude the effects of divestitures and discontinued brands increased 0.2% versus the prior year period, an improvement sequentially from the 2.9% year over year decrease in the 1st fiscal quarter.

Speaker 3

Organic net sales growth in the 2nd quarter reflects an approximately 2 percentage point benefit from foreign exchange. The increase in organic net sales was driven by sales growth in the international segment, offset by lower sales in the North America segment. As expected, formula was a 2% drag On organic net sales growth in the quarter, we delivered 2nd quarter adjusted EBITDA of $47,000,000 versus $50,000,000 in the prior year period. Adjusted EBITDA margin was 10.4% as compared to 11% in the prior year period. Adjusted gross margin was 23.5% in the 2nd quarter, an increase of approximately 60 basis points versus the prior year period.

Speaker 3

The increase was driven by pricing and productivity savings, partially offset by deleverage on lower sales volume and by cost inflation. For full fiscal year 2024, we anticipate gross margin to show an improvement of 50 to 100 basis points versus the prior year. SG and A increased 2.2 percent year over year to $74,000,000 representing 16.3% of net sales for the quarter. The increase was driven primarily by higher marketing expense and people related expenses on the reinstatement of bonus accrual as expected. Looking ahead, we expect to ramp up marketing spend in the 3rd quarter in support of our Flavor Burst launch and additional programming in the back half of the fiscal year on our priority brands.

Speaker 3

During the Q2, we took charges totaling $31,000,000 associated with actions under the restructuring program, including contract termination costs, asset write downs, employee related costs and other transformation related expenses. Of these charges, dollars 21,000,000 were non cash. Interest costs for the 2nd quarter rose 49% to $16,000,000 due to the higher variable interest on the unhedged portion of our debt, partially offset by lower outstanding borrowings. As a reminder, we have hedged our rate exposure on approximately 50% of our loan facility with fixed rates at 5.6% and remain keenly focused on driving down net debt over time. All of these factors combined to produce net loss for the quarter of $14,000,000 or $0.15 per diluted share, compared to net income of $11,000,000 or $0.12 per diluted share in the prior year period.

Speaker 3

Adjusted net income, which excludes the effect of restructuring charges amongst other items, was $11,000,000 or $0.12 per diluted share versus $18,000,000 or $0.20 in the prior year period. Now turning to our individual reporting segments. In North America, reported net sales decreased 5.2% year over year to $268,000,000 in the 2nd quarter. Organic net sales decreased by 4.8% versus the prior year period due to a sales volume decline in baby and kids, which is a function of continued industry wide challenges in organic baby formula supply as previously discussed and lower sales in Snacks as we shifted our promotional strategy and optimized our channel mix for improved trade efficiency and profitability. This was partially offset by growth in Beverages.

Speaker 3

Formula was a 3% drag on organic net sales in the quarter. Adjusted gross margin in North America was 24.8%, a 40 basis point decrease versus the prior year period, driven by deleverage on lower sales, volume and cost inflation, partially offset by pricing and productivity savings. Adjusted EBITDA in North America was $31,000,000 an 18.9% decrease versus the prior year period and adjusted EBITDA margin was 11.7%, 190 basis point decrease from the prior year period. These year over year declines resulted from lower volume, inflation and marketing investments, partially offset by productivity. In our international business, reported net sales demonstrated continued strength increasing 8.5 percent to 186 $1,000,000 in the 2nd quarter.

Speaker 3

Organic net sales growth was also 8.5%. This reflects 5.8 percentage points of growth from FX. As Wendy mentioned earlier, Our growth was primarily driven by meal prep, including private label and branded jams and jellies, private label meat free and our branded soups brands and non dairy beverage growth. International adjusted gross margin was 21.6%, up approximately 2 60 basis points year over year, driven by pricing, partially offset by inflation. International adjusted EBITDA was $26,000,000 a 35% increase from the prior year period, driven primarily by pricing, partially offset by lower volumes and inflation.

Speaker 3

Adjusted EBITDA margin was 13.9%, up approximately 2 70 basis points versus the prior year period. Now shifting to cash flow and the balance sheet. We generated 2nd quarter cash from operating activities of $21,000,000 versus $3,000,000 a year ago. The higher operating cash resulted from Tenured working capital management, including our accounts payable optimization and inventory management initiatives tied to the fuel pillar of Hain Reimagined. CapEx was $6,000,000 in the quarter, And we now expect expenditures to be in the mid-40s for fiscal 2024.

Speaker 3

Finally, we closed the quarter with cash on hand of $54,000,000 and net debt of $756,000,000 translating into a net leverage ratio of 4.2 times as calculated under our amended credit agreement. We drove leverage lower than we had previously projected due to better cash flow on momentum from our fuel initiatives. Paying down debt and strategically investing in the business continue to be our priorities for cash utilization. Consistent with our stated priorities for cash, we have reduced net debt by $91,000,000 since the end of Q1 2023. And as we have previously indicated, our long term goal is to reduce balance sheet leverage to 3x adjusted EBITDA or less.

Speaker 3

Turning to our outlook. We are making early progress against Hayne Reimagined, especially in the delivery of fuel as planned in this foundational year of the restructuring program. We have accelerated initiatives outlined in the focus pillar, primarily portfolio and channel mix improvements. This is expected to create a near term revenue headwind as we rationalize lower margin SKUs and sales. As a result, we believe it is prudent to take a more conservative view of the balance of fiscal 2024.

Speaker 3

In addition, we expect less of a tailwind from foreign exchange than when we initially provided guidance in August. Considering these factors as well as performance year to date, we are adjusting our guidance for the full year. On the bottom line, we delivered better results versus expectations through Q2 year to date. However, as previously stated, a tenet of Hayne we imagined is to link our brand building, innovation and channel expansion investments to the supporting generation of investment fuel. Consequently, The over delivery in the first half of fiscal year twenty twenty four will be utilized in the second half to step up investments to drive longer term volume growth and margin expansion.

Speaker 3

Our revised fiscal 2024 guidance is as follows. We expect organic net sales growth of approximately 1% or more year over year, Adjusted EBITDA to be between $155,000,000 $160,000,000 and free cash flow of $40,000,000 to $45,000,000 which now reflects 2024 costs associated with Hain reimagined. Our 2024 guidance assumes that first currency exchange rates will not materially change from today's rates, resulting in an approximately 1 point net sales benefit from foreign exchange. This compares to an approximately 2 point net sales benefit when we gave guidance in August. 2nd, net pricing will recover most of the expected cost inflation as we continue to make progress on revenue growth management initiatives.

Speaker 3

And finally, the productivity will drive gross margin expansion and fuel investments. Lastly, we're now projecting the annual effective income tax rate to be 32% to 33%. This is primarily as a result of a shift in the geographical mix of earnings, the associated impact related to global intangible low taxed income and limitations on certain deductions. While we are not providing specific guidance for the fiscal Q3, We do want to provide some color on the shape of the balance of the year. In keeping with our expectation of momentum building throughout the year, We anticipate organic net sales growth in the 3rd fiscal quarter to be greater than that in the fiscal second quarter and organic net sales growth in the fiscal 4th quarter to be greater than that in the fiscal third quarter.

Speaker 3

Similarly, we expect continued sequential improvement in adjusted EBITDA growth rates. Now I'll turn back to Wendy for closing remarks.

Speaker 2

Thank you, Lee. Amid our company's transformation, We remain committed to driving positive change for people, communities and the planet through better for you brands. Making a positive impact on the world around is core to our Hain Company purpose. To that end, we're proud to share that we will soon be publishing our annual Global Impact Report, which outlines the progress we are making towards our goals for healthier people, healthier products and a healthier planet. You will be able to strategy.

Speaker 2

As we outlined on Investor Day, our approach will be to pay as we go to generate fuel and reinvest in the business to deliver profitable growth and margin This is a multi year strategy to transform the business and we'll continue to balance the pacing and prioritization to deliver steady progress to our goals. We are pleased to see the Q2 demonstrate our progress made and the momentum in our business. The accelerating trends Coupled with recent innovation and distribution gains across growth categories give us confidence that we will pivot to growth in the back half of the year. And the progress we're making in our fuel program will enable us to reinvest in the business to get the flywheel spinning and to realize our potential as a growth leader and better for you brands. We firmly believe the best is yet to come and appreciate you joining the call today.

Speaker 2

Thank you for your interest and for your continued support. With that, operator, please open the line for questions.

Operator

Thank you. And at this time, we will be conducting a question and answer session. We also ask all participants asking questions to limit themselves to only one question and then one follow-up question. I'll let everyone in the queue have enough ample time. Our first question comes from the line of Jim Solara with Stephens Inc.

Speaker 4

Good morning, Wendy. I wanted to double click a little bit on the snacking growth. It seems like This data that we have visibility in with the track channels don't really capture the full picture. And so if we think about the back half of the year, can you just maybe break out how much of the growth you expect to come from recovery in tracked channels from what we can see versus distribution gainslast just organic sales growth in untracked channels?

Speaker 2

Yes, I appreciate the question. And as we said, When we leaned into Hain Reimagined on Investor Day, we were going to be driving disproportionate growth in our snacks category. It's important to remind there were 2 big drivers in the snack category in the front half of the year. In quarter 1, we had an impact in Terra because we made some decisions in optimizing promotion spend and in channel mix. And so that was a quarter one impact.

Speaker 2

Pleased to say that we actually saw Terra in growth in quarter 2, in both dollar sales as well as unit growth. In Garden Veggie, it was the opposite. We had good growth in quarter 1. We made some choices in promotional shift and again some optimization around promotional spend in our RGM initiatives that impacted Garden Veggie Straws or the Garden Veggie brand in quarter 2. Really pleased that the distribution gains we've had in non So we mentioned in the earlier remarks that we now have our Snacks brands in 10000 C Stores starting in January.

Speaker 2

We obviously have the Garden Veggie Flavor Burst launch that takes place right now. And we're beginning to see some momentum even in our measured channels in the latest 4 weeks. So I think the combination of cleaning up our promotional activity, leaning on our channel mix And the work that we're seeing on TDPs as well as velocity combined with innovation and channel expansion in the back half give us confidence in the snack portfolio.

Speaker 4

Great. And maybe a follow-up on the channel expansion. As you guys enter A channel where you've been under penetrated in the past, is it kind of a you have to prove that the products can work And so you come in with 1 or 2 SKUs and then give the retailer a trial period to see if they want to add more? Or should we think of There's already kind of a plan in place that we should see distribution ramp in on track channels as you guys introduce new products and get the promotional thing right sized?

Speaker 2

It's a great question. And the thing that I think, we have felt all along, We know that we have beloved consumer brands. They're just not able to find them everywhere. So the opportunity for us is improving the viability of the products or the viability of the brand, it's making them more available to the consumer where they're shopping. We've had great retailer take rate in alt retail, in food service and in C store.

Speaker 2

We're up double digits in high double digits in all three of those away from home non measured channels gives us a lot of confidence as we go forward. But I don't think that this is a need to prove it. It's a need to make it accessible and available to the consumer.

Speaker 4

Okay, great. Thanks guys. I'll hop back in the queue.

Operator

Thank you. Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Speaker 5

Great. Good morning, everybody.

Speaker 2

Good morning.

Speaker 6

So Wendy, I guess I'd love to get a better sense or maybe I'm just not clear yet on sort of what changed or what you're seeing in the market that's leading you to want to accelerate some of these focus pillar actions And sort of what specific actions are really being accelerated? So are there certain parts of the business brands or categories where you're accelerating the sort of SKU

Speaker 2

Well, remember, well, good morning, Andrew. But remember what we said on Investor Day that we would need to pay as we go. So as we unlock fuel, we would be able to lean into investments, but also some of the simplification work that we knew would be needed. Things like the work that was done with Joya last year in international, we eliminated 50% of the SKUs in the Joya portfolio and the brand grew double digits. So a harder working core assortment in the Joya brand, We're taking a similar approach across the entire portfolio, where we have a tale of SKUs that are both adding complexity into our Indian supply chain.

Speaker 2

It has added inventory both in raw and pack and in finished, But it also adds maybe unproductive SKUs in the assortment for our retail partners. So but that obviously when you do That kind of SKU rat, it's a top line drag and it can also be a bottom line drag. So we knew we were going to need to pace that a bit. Because we over delivered EBITDA in quarter 1 and quarter 2, it puts us in a position to both invest behind some of the brand building that we wanted to do. It allows us to accelerate the adding of some of the organizational capabilities that we want, Think headcount in revenue growth management and in away from home on the commercial sales side of our business, but it also allows us to accelerate some of those Simplification things in SKU and footprint that we may have planned in fiscal 'twenty five because we didn't think we'd be in a position to be able to do it.

Speaker 2

We're in a financial position to be able to do it in fiscal 'twenty four. So we're going to pull those forward into quarter 4.

Speaker 3

And so maybe I can just build upon that a little bit. I The other thing is we do distribute products into 75 markets. As we simplify our focus, It is on 5 key markets. So it is an opportunity for us as well just to simplify where we've got physical assets. So that's coming to account as well.

Speaker 3

Again, we will continue to distribute into kind of broader markets, but really focus on 5 key markets.

Speaker 6

Got it. That's helpful. And then Lee, just a follow-up for you. I think you said in your prepared remarks that 4Q organic sales growth would be greater than what we see in 3Q. And I'm just looking at it and just last year, Right.

Speaker 6

The comparison in 3Q in terms of organic growth is far easier than in 4Q. So I'm just curious what are some of the things maybe you can remind us that still expected to dampen organic sales growth in the 3rd quarter that would make the 4th quarter organic sales growth better? Thank you.

Speaker 3

Yes. I mean, so a couple of things. I mean, we obviously got the ramp up of our new product Part of it is also just the pacing of our investments. So we're investing with stepping up investment in Q3. And then that will kind of drive and the focus in is driving that sequential improvement in volume.

Speaker 3

So part of it is tied into kind of the pacing of our investments. And just as kind of as a reminder overall, we said we'd have a pay as you go model. So what we've delivered from an EBITDA perspective through the first half, That's given us the ability to then invest, increase that investment in Q3 and then we'll see that starting really coming through into the 4th quarter.

Speaker 2

And let me add to that, some of those distribution gains that we said that are coming certainly in this month, think C Store In some of the away from home, it takes time and even flavor burst launch, it takes time for that to ramp up. So we've assumed that we would fully realize some of that velocity in quarter 4, but it takes some build time in quarter 3. So you see some of that around the timing of those as well.

Speaker 6

Great. Thanks so much.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Andrew Wolf with CL King. Please proceed with your question.

Speaker 7

Thank you. Good morning. On the North American Snacks business, Could you unpack for me the changes in the velocity or just the total sales for Garden, Veggie And Terra, it seems to go in the opposite direction sequentially between distribution changes and promotional cadence. So I'm trying to like Tara, like just observationally I saw being promoted pretty heavily, least at Whole Foods. So I'm trying to get a sense of, is there a non promotion aspect to this versus off promotion previously?

Speaker 7

And also with Terra, I mean with Garden Veggie, there's so much of it sold through Or at least appreciable amount sold through the club, is there a change in any big change in the club distribution?

Speaker 2

Yes. Well, as we mentioned in actually in some of the guidance that we gave going into the fiscal year, quarter 1 would have some very specific drags, one of which would be Terra, because we were making a decision to reduce the depth and frequency of large promotions, particularly in the club channel on Terra, and that was going to have a quarter one impact That allows us to have a much more stable distribution, but also promotional activity. And I would say, and I mentioned earlier, we've seen unit volume growth as well as dollar growth in Terra in quarter 2. And in the latest 4 weeks, we've seen double digit dollar growth, as well as our sales on promotion are about flat to where they've been. So we've stabilized the promotion frequency and depth to be right sized, I would say for Terra and we can build from there.

Speaker 2

Garden Veggie is a bit different, less so in channel mix, but much more around the promotional depth in quarter 2. We didn't pace the same promotions that timing that we did a year ago. So some of that you see as a year on year drag. Going into quarter 3, Strong distribution gains on Garden Veggie, both in measured and non measured. But what we're most excited about obviously is innovation news coming in Garden Veggie that actually creates overall brand news for the entire franchise of Garden Veggie.

Speaker 2

So it gives us confidence as we go into the back half. What you saw in the front half is a little bit of some of the cleanup in our revenue growth management initiatives impacting both timing and depth of volume that's just a timing issue year on year.

Speaker 7

Okay, Wendy. Thank you. That's very clarifying. And just a follow-up is also Actually with the veggie burst launch, it sounds like the acceptance was strong. Did it was the acceptance you expected or was it actually a little better?

Speaker 7

And if it was better, did that affect your marketing plan or was it pretty much spot on and Your marketing plans, Hussein, just for the with respect to the launch?

Speaker 2

Well, I would say and I encourage you to order the product, you're going to love it. So once we tasted the product and we saw the consumer research, we were very excited about it. To be honest, we expected to have large retailer acceptance. But I would say we are, we have almost 100% retailer acceptance across both Canada and the U. S.

Speaker 2

That gives us a lot of confidence as we go in. We've got a little bit more feature activity because of the strength of the launch that's Probably a bit more than we planned. So what we did was, as Lee said, we're leaning into the omnichannel Marketing activity and that actually has us ramping up our investment in brand building in quarter 3, which will be it is sort of the outlook that we have in the balance of the year because we want to make sure that we're appropriately supporting the innovation for a successful launch both for our retail partners and for us.

Speaker 7

Okay. Thank you.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan Chase. Please proceed with your question.

Speaker 8

Hi, thank you. With the understanding that the data that we get, especially from some syndicated providers, it does not really Tell the whole story on Hain. Some of the numbers we're looking at would suggest perhaps that the lifts that Hain is getting on some of its promotions may not be quite as strong as the company had hoped. I was just curious if you could comment on that, A, is that valid? And if not, I'd love to hear it.

Speaker 8

And B, if it is valid, Can you talk a little bit more about the decision to kind of invest more in the business, understanding also that not all those investments are of the promotion type, of course?

Speaker 2

Yes. Good morning, Ken. And that's a great question. And we're seeing the same data that you're seeing in measured channels. And I would say it depends on the brand.

Speaker 2

So Terra has a very effective response to promotional activity. And that is allowing us to more effectively invest our trade behind Terra, both on feature and merchandising as well as discounting of promotions that actually gets lift. So feel very good about the plans that the team have on Tara and the response to that. Garden Veggie is a bit different. And what we're finding is that the frequency of our promotions is more important than the depth of those promotions.

Speaker 2

And having feature activity, both in our snack portfolio in the UK and feature activity in the U. S. Are really important in the snack category. So as a part of our revenue growth management initiatives, the team is now using some really good data analytics to evaluate trade effectiveness To make those adjustments and then move forward, I feel better now because of those analytics that will allow us to increase the spend in the right way to move in the direction we need to rather than a peanut butter approach across the trade. And that's what you'll see us reflecting as we go into the back half is leaning into some of those ROI effectiveness decisions rather than just leaning more dollars.

Speaker 8

Great. Thank you. I'll pass it on.

Speaker 2

Okay.

Operator

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Speaker 5

Thank you. Good morning.

Speaker 2

Good morning.

Speaker 5

Just wanted to come back some of the channel expansion and could you put the 10,000 new C stores in context? I guess, is that Just the low hanging fruit and you feel like there's some more wood to chop. Have you kind of made the rounds and that's likely Kind of the extent of the upside, how do you think about what the runway looks like there? And then you've touched on foodservice in the past, maybe can you give an update of somehow that might be progressing as well?

Speaker 2

Yes, absolutely. Well, as we said on Investor Day and before, one of the reasons why we are very bullish on away from home and non measured channels, Especially for brands like ours is we know that they're beloved by the consumer, but they're not available on that on the consumer sort of everyday shopping journey. It's making them more available and accessible. So putting them in within arm's reach of the consumer. To put it in numbers, There's about 160,000 C Stores.

Speaker 2

So putting it into 10,000 C Stores is a good move for us, but it's a starting move for us. In a retail environment, there's about 28,000 points of distribution for retail. For foodservice, there's about 2,000,000 points of distribution. The dollars per point of distribution might be smaller, but they are then mentally available to the consumer. They're building the brand because you see them everywhere you're going.

Speaker 2

That's our goal is both to have it available when the consumer is in a big retail environment, but also to have it more aware as they're moving throughout their day, throughout their week. So C Stores is a growth vehicle. We're seeing great growth, Double digit growth in the U. K. As well as double digit growth in the U.

Speaker 2

S, up 18% in Snacks in the U. S. Alone in quarter 2. In food service, we're up high double digits as we're getting some placements of brands like Garden of Eaten with commercial restaurant chains. We're getting some of our yogurt products and some of our Celestial Seasonings tea placed where they're on the consumers sort of moving throughout their day journey.

Speaker 2

So we feel really, really good that we're getting early momentum in our away from home efforts.

Speaker 5

No, that's helpful. And just to follow-up on some of the second half moving parts on the top line. Can you give a sense for the SKU cuts or some of the geographic rationalization, just what either the timing or magnitude of that might look like? And Similar for the flavor burst launch, just when we think about modeling in some of the pipeline fill and just to help us capture those pieces?

Speaker 3

Yes. So probably you're not breaking out all of the pieces specifically, but if you just think about kind of the adjustments that we made, we said, for example, For the original guidance we gave, there was a percentage point pull down due to FX. So that's one piece. Then The other pieces in there, obviously, the kind of the focus initiatives, as those are broken out, And I would say there is a kind of a bit of a third element in there is we did see some Kind of year to date performance deleveraging a little bit on some of the volume. I don't think we're going to break out these pieces specifically, but you got a percentage point and then you can see the Focus initiatives in the pull forward is the other kind of the key element there.

Speaker 2

And if you thought in terms of timing, I think was your question, We will see ramp up in Flavor Burst in quarter 3 and really hit stride as we get into quarter 4. On the simplification initiatives, I think you will see the majority of that hitting in quarter 4. And as Lee said, if you looked at our original guidance of 2% to 4%, you figure out a point of that that we pulled back is from FX, that's different than what we originally planned. And I'd call it a point or 2 around the simplification, is about how you'd look at that. I hope that helps.

Speaker 5

That's really helpful. Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Matt Smith with Stifel. Please proceed with your question.

Speaker 9

Hi, good morning. Wendy, I wanted to ask a follow-up to your previous response about the impact from the Focus pillar actions, the rationalization of SKUs and channels. You were talking about the predominance of the 1 point reduction of top line guidance beyond the FX adjustment is being tied to those focus initiatives and those being concentrated in the 4th quarter. So should we think of that as a mid single digit headwind to revenue growth as we look out into fiscal 2025 as you annualize the Q4 impact into next year? And should we think about SKU rationalization than hitting a normal cadence or should there be incremental focus pillar actions in fiscal 2025 as well?

Speaker 2

Yes, I wouldn't look at it That way, we will feel it more discreetly in quarter 4, but it won't continue to carry out into fiscal 2025. These are things that we had actually built in and layered into Hain reimagined. And if you recall on Investor Day, we said that As we generated fuel, we would throttle forward and back because we'd be in a position to be able to do so. As we saw the effectiveness of brand building, we would also throttle forward and back. This is allowing us to just pull forward some of the things around, Think of cleaning up inventory, stranded inventory of raw and pack of SKUs that no longer need to exist in the portfolio, Getting rid of some inventory finished goods in some of the SKU rat is working it through the trade.

Speaker 2

At the same time, we would expect similar to what we saw in Joya that harder working core to grow better. So it shouldn't be a straight one for one that carries on into the next year. It's something you'll feel discreetly in the quarter. And then you've got a better working core as we go into fiscal 2025.

Speaker 3

Sorry, Just to build on that, I mean, I think that is a key point. Just as a reminder on the algorithm overall, that was presenting, hey, reimagine it was 3% plus, but to Wendy's point, part of that is streamlining with this winning portfolio. So as you make some of these SKU It will be flow back to some of our existing products.

Speaker 5

Great. Thank you very much. I appreciate the detail and I'll pass it on.

Speaker 2

Thanks.

Operator

Thank you. Our next question comes from the line of John Baumgartner with Mizuho Securities.

Speaker 10

Good morning. I wanted to come back to your comments in the prepared remarks about headwinds in the macro environment. And I think historically Hain typically leaned on a notion The portfolio skews to higher income households, so it's more insulated from the macro. Is something changing in the environment either with more among higher income households or are you seeing maybe less trade up from mainstream consumers even? Just trying to better understand the context the impact of these macro headwinds for you?

Speaker 2

Yes, that's a great question. If you would have recalled maybe a year ago when I first joined, we were talking about the historically you would have expected That natural and organic as a category tended to outpace conventional. All of that flipped upside down during COVID When people gravitated back to conventional products and in some cases supply chains made conventional more readily accessible, We were waiting to see that consumer behavior really revert back to expectation. Really pleased you'd see this in the data that we're beginning to see, I think in the middle of last year, calendar year, we started to see the consumer revert back to historical behaviors. What changed was they still wanted natural and organic products, but they want them available in more places.

Speaker 2

So they're not just going to specialty retail anymore. They're going to Food and mass and away from home, that's a great opportunity for Hain. But we also have been evaluating the move from brand to private label. Happy to say in the U. S.

Speaker 2

Market, we don't see that. Europe is a different story. We've seen the consumer much more impacted economically in Europe and that's affected consumer behavior both in number of shopping trips, but also the size of the basket. We've also seen private label recover Faster in our international business in the industry than the brand. That benefits Hain because we actually are both private label and brand and we're seeing the recovery in our private label business faster than our branded business, but still outpacing category.

Speaker 2

That's why you see such strength in the international business, while North America is beginning to recover. And it actually, I think is a great example of the value of our geographic diversification in our business because it gives us a geographic hedge as the consumer behavior start to normalize.

Speaker 10

So I mean, if I build on that and look at your salty snacks business in the U. S, I can appreciate the shift from promotional timing and innovation you're ramping now, but I mean baseline volumes have been down for the portfolio since like mid-twenty 22. Is this Building on those comments, is this a situation where some of that baseline volume and consumption has gone from Nielsen channels into non measured? And that sort of explains, I guess the absence of more prominent velocity growth and baseline of volumes in the portfolio or is there something else in salty snacks in addition to innovation and promo that needs to be tweaked to get better same store sales in the Olson data?

Speaker 2

Yes. I would tell you that If I look back at the early observations when I joined the company and what really led to some of our focus around Hayne Reimagined, One is that you actually we need to have a harder working core. We need to have an always on support around our brands. We need to make sure that we've got the right products on shelf and available where the consumer is shopping. And when you have really meaningful innovation that we support both at launch, we continuously support.

Speaker 2

What's different now than I think what you would have seen in 2022, some of the challenges were financially the wasn't in a position to continuously support with marketing and trade. We also had some significant supply chain disruption during that year, which pulled back a lot of promotional activity and it also had our fill rates to the trade really below average. I'm really pleased to say that our rates and on shelf availability in snacks is in top tier and has been for the last 12 months. We are in an always on promotional support and marketing support behind the brands, but we've invested in really good consumer and category insights to make sure that our campaigns are meaningful, our price pack architecture is accurate, And then our innovation is meaningful to take to the marketplace. So I think what you should see from us is, I think national organic products, the consumers wants those products and they love our brands.

Speaker 2

We are putting ourselves in position to be better able to run the portfolio and to drive the right kind of growth, not just episodic growth quarter on quarter, but to have some good momentum. And as I mentioned earlier, we're seeing actually really good dollar growth in Garden Veggie in the latest 4 weeks In measured channels, if you add in non measured, it's even better. Terra chips is actually really improved, especially in the latest 4 weeks, But we had unit movement in quarter 2. So I feel good about the Snacks recovery and pivot to growth, But you would have seen a lot of historical noise in that. Thank you, Wendy.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Speaker 11

Thank you. Good morning, everybody. Two quick ones. There's been a ton of discussion, rightly so, about the Snacks business. Wondering if you could talk a little bit about a couple of the other focus areas, baby and kids and beverages, Whether that be second half recovery, but when the maybe remedy of the formula shortage, which you referred to in the prepared comments more broadly around perhaps innovation and channel expansion, some of the demand driving initiatives that are part of Hayden Reimagined?

Speaker 11

And then second, on gross margin for the year, I think you provided an updated outlook for 50 to 100 basis points of improvement. Could you remind us is that a little, I think a little less than what you previously anticipated and what some of the puts and takes around that change are? Thank you.

Speaker 2

Yes, I'll cover the categories and then flip it over to Lee. From a category standpoint, as you mentioned, so our snacks category was off, call it mid single digits, in quarter 2 total company and that was really tracing to some of this move in promotional activity. Feel very confident as we go into the back half of the year because of what we're seeing in the latest 4 weeks. The baby category was off double digits in total for the organization. If you take out formula, The baby kids category was actually in growth, but formula was a significant drag.

Speaker 2

We have secured supply as well as incremental supply partners to ensure our availability to have that product in the back half. It will result in double digit growth year on year in the back half of the year in the formula part of baby kids and get that entire category back to growth. The beverage category was up high single digits between both North America and international. International was led by non dairy beverage. That's actually a great category for us to be in and we're a leader in both private label and brand with a really powerful portfolio there that continues to perform.

Speaker 2

You would have heard us talk a year ago about some of the capacity utilization in our plants. All of that has been addressed and we're running a solid operations 5 days a week, really good capacity utilization with the ability to support our customers and a much more diversified customer contract base. Meal prep was up high single digits across both markets In North America led by Spectrum and our nut butters and our soups and in international by soups as well as jams and jellies. So that's a portfolio that continues to deliver. And then personal care was actually up almost 2% year on year as a total category.

Speaker 2

And that was led by both by Alba, Avalon Organics and then Live Clean, which is a leading brand in Canada. So we're seeing really good bright spots at a category level. I feel good that we know what's driving both snacks and baby kids and those are short term acute that we see improving trends as we've started quarter 3 that give us confidence in the back half. Lee?

Speaker 3

Yes. So just answering your question on margin, We are seeing good margin improvement. But as you point out, we had previously indicated 100 to 200 basis points. We've now refined that $50,000,000 to $100,000,000 So a couple of elements there. We are seeing some plant cost deleveraging on the lower volumes versus our initial expectations.

Speaker 3

I'd say on the flip side, again, we are and we've talked about this a number of times, we are seeing sequential improvements driven by a Hain reimagined initiatives, but again, a bit lower than our initial expectations. I'd say the second element is really some of the mix impact that we've seen. And a prime example of that is formula. We originally thought Formula would only impact Q1, but it did also bleed into Q2. We have secured supply in the second half, but again, the full year is not in line with our initial expectations.

Speaker 3

I think more kind of on the positive side, we are seeing the benefits of pricing come through, and the focused RGM initiatives, When do you talk to a number of those? So those are driving strategic pricing opportunities. Overall, also our Productivity pipeline is delivering. And then I'd just say the third thing and it does tie in a bit with RGM as well is we continue to evolve our trade strategy. So we are seeing a step up in ROIs versus history.

Speaker 3

But again, the kind of what has changed as we've looked And within this current year is kind of just the expectations on the volume and then some of the mix. We will see that improve as we move forward. And again, as we make these investments and we get that sequential improvement in the top line.

Speaker 12

Thanks so much.

Speaker 2

You bet.

Operator

Thank you. And our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Speaker 12

Thank you. Yes, most of the questions most of my questions have been answered. But I guess, other than supply chain concerns or issues with baby formula, are there any other brands or SKUs that are dragging down just overall organic growth? And if so, are any of those brands or SKUs being are you considering jettison them or shutting those down or selling those at this point or are you still in the evaluation stage for some of those other brands that are maybe

Speaker 2

Yes, thank you. I appreciate the question. We feel very good about the 5 categories of focus and Five geographies. What I would say is, as Lee mentioned earlier, in the 5 geographies, we want to make sure that that's where we are focusing Our most efficient assets and footprint will still distribute beyond those 5, but we really want to streamline where we've got footprint. In the 5 categories, we feel very good about the categories we're in that they are repertoire categories for the consumer where they're looking for better for you brands and products to support healthier living, but it does mean that there's opportunities for us to ensure that we've got the hardest working portfolio in those 5 categories.

Speaker 2

So we will continuously be looking at, right skews, right assortment, right brand support That's going to deliver on that company promise and it should be a regular part of portfolio hygiene in our business and then we should be running and driving growth across the portfolio.

Speaker 12

Okay, great. Thank you so much.

Operator

Thank you. We have reached the end of the question and answer session. I'll now turn

Speaker 2

us today. We are pleased, as we said, with the progress that we're making in this foundational year of our strategy And the sequential improvement, we feel really good about the momentum that we have going into the back half and the fuel that we've generated in the front half to enable us to be able to pull forward some of our initiatives as we go into the back half of the year. Quarter 2 demonstrated sequential improvement and that's what we were looking for. We're excited to pivot to growth in the back half. And again, I want to thank everybody for joining us, but also thank our Hain team for their passion and commitment.

Operator

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Hain Celestial delivered sequential improvement in Q2 with flat net sales, a 60 bp gross margin expansion, and $47 M adjusted EBITDA, driven by strong international growth and improving North America trends under its Hain Reimagined strategy.
  • Snacks momentum strengthened with Garden Veggie Snacks up over 3% in dollar sales and Terra chips up 8% in dollars and 5% in units; the upcoming Garden Veggie Flavor Burst launch and C-store distribution into 10,000 outlets are expected to fuel H2 growth.
  • Baby & Kids category faced a 2% drag in Q2 from formula supply shortages but secured new commitments to support double-digit growth in H2, while Earth’s Best and Ella’s Kitchen drove pricing and distribution gains.
  • International segment net sales rose 8.5% year-over-year, led by meal prep, branded soups, non-dairy beverages and private label gains, whereas North America declined 5.2% due to formula headwinds and promotional shifts.
  • Fiscal 2024 guidance was revised to ~1% organic net sales growth, $155–160 M adjusted EBITDA and $40–45 M free cash flow, with a sequential pivot to growth expected in Q3 and Q4.
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Earnings Conference Call
The Hain Celestial Group Q2 2024
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