The Hain Celestial Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to the Hain Celestial Fiscal Third Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Alexis Tessieff, Vice President of IR.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us on Hain Celestial's 3rd quarter fiscal year 2024 earnings conference call. On the call today are Wendy Davidson, President and Chief Officer Lee Boyce, Executive Vice President and Chief Financial Officer and Chad Marquardt, President, North America. 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 10 Q 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. We have also prepared a presentation inclusive of additional supplemental financial information, which is posted on our website athayne.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 the nearest GAAP results are available in the earnings release and 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. Thank you all for joining us today. At Investor Day in September, we laid out the 4 priorities underpinning our Hain reimagine strategy: 1, to focus and simplify our portfolio and footprint 2, to deliver cost savings via fuel to expand margins and invest in our business 3, to build the capabilities needed to drive scale and 4, to grow in our core categories and brands. Today, you'll hear about the progress we've made on the focus and fuel pillars of our strategy, which have been our first priorities in this foundational year, unlocking efficiencies in our P and L. Under the build pillar, you'll hear how we are investing in capabilities to accelerate our return to growth.

Speaker 2

And under the Grow pillar, you'll hear more detail about how each of our categories are performing. You'll also hear that our starting point in some areas was less developed than we initially anticipated, requiring a heavier lift and causing the pivot to growth to take longer than expected. While we are disappointed in top line results in the quarter, we are pleased to deliver continued margin expansion and momentum in adjusted EBITDA delivery, free cash flow and net debt reduction. The proof points that I am sharing today reinforce our confidence in our ability to achieve the financial algorithm outlined with Hain Reimagined in September. Under the focus pillar, we said we would focus on 3 initiatives to simplify our business creating a winning portfolio, consolidating our footprint and integrating our global operating model.

Speaker 2

1st, as we shared last week, we have removed underperforming SKUs representing 6% of items in our global portfolio. This includes the previously announced sale of the Fensters brand in snacks, the streamlining of our plant based meat free portfolio in meal prep and additional refinements in baby and kids and beverages as part of ongoing brand maintenance. The largest portfolio reduction is in personal care, where we are removing underperforming SKUs representing 62% of items or 30% of net sales in the category, enabling us to focus on driving stronger velocities within the core assortment, reducing unnecessary complexity and delivering margin expansion. 2nd, we have streamlined our operating footprint to leverage synergies across the business and drive scale as we focus in our 5 core geographies. We announced the consolidation of our personal care manufacturing footprint, reducing our number of Haines facilities from 2 to 1 and eliminating 60% of our co manufacturers from the personal care network.

Speaker 2

We also announced that we ceased all production within our non strategic joint venture in India and will be servicing the EMEA market via a distribution model. These focus initiatives will drive increased capacity utilization and lower costs. And third, we have made tremendous progress on our global operating model, transforming the company into a truly integrated enterprise. Historically, Hain has operated as a collection of siloed entities without a common operating model, systems or processes and without leveraging global capabilities. Over the course of the year, we have created the foundational building blocks that will result in a more proactive and resilient growth driven company.

Speaker 2

We have established functional centers of excellence across end to end supply chain, procurement, R and D, quality, IT, HR and finance to both drive synergies and leverage scale and we are beginning to see results. Our work in end to end supply chain effectiveness has resulted in improved reliability and service levels. For the Q3, paying in stock rates were over 94%, increasing 130 basis points from quarter 2 and 400 basis points better than our peer set. This is a significant improvement and positions us better to partner with our customers, expand distribution and ensure reliable supply to invest in promotional and customer support. Moving on to our fuel pillar, where we have made significant progress in unlocking cost savings through revenue growth management, working capital management and operational efficiency.

Speaker 2

Our revenue growth management initiatives across both regions have unlocked 70 basis points of trade spend efficiency, driving better net price realization and promotional effectiveness. We are beginning to see this progress show end market in the U. S. With our promotional lifts improving in quarter 3 over the prior quarter in salty snacks and meal prep, in particular yogurt, soup and nut butters. On working capital management, we have leveraged new digital technology and improved processes to reduce inventory levels by nearly 10% year to date and extend days payable outstanding by 9 days.

Speaker 2

And we are driving end to end operational efficiency through sourcing and productivity initiatives, putting us on track to deliver $61,000,000 in productivity for the year. These efforts have enabled us to expand margins and deliver strong cash flow, while both offsetting inflation and in capabilities to enable our pivot to growth. When we announced our transformation strategy, we highlighted our 5 focus categories where our leading brands have an opportunity to drive greater awareness, reach, household penetration and share. And we said we would drive more effective mix of working versus non working investment to get better before we increased our marketing spending. The Q3, we increased our marketing slightly as a percent of revenue with a priority focus on snacks, beverage and baby with continued support for the soup category in particular to support sustained category leadership in the UK.

Speaker 2

Our brand building investments in the Celestial Seasonings Tea brand are driving household penetration, share growth and velocity gains in our top retail and e commerce partners. And we are seeing momentum with successful innovation launches including Garden Veggie Flavor Burst and Celestial Seasoning Sleepy Time with Melatonin and Throat Cooler and the new Earth's Best Immunity Boost Toddler Purees. In addition, we are progressing our channel expansion strategy in margin accretive channels. Year to date, away from home revenues have grown 13% in North America and 8% internationally. And as you see on the slide, in the Q3, we drove dollar share shift in channel mix to food, convenience, mass and e commerce.

Speaker 2

As for the grow pillar, in the last call we said we expected to pivot to growth in the overall business for the back half of this fiscal year and 85% of our business has grown over 3% year to date in line with our Hain reimagined growth algorithm. Offsetting this growth are double digit declines in the remaining 15% of our business, which is targeted for stabilization including baby formula. Specifically, in the Q3, softness year over year was driven by the U. S. Region, primarily by the personal care category, where we recently announced significant portfolio and manufacturing footprint simplification as a part of the stabilization plan.

Speaker 2

In addition, we face continued challenges in our infant formula supply driven by Perrigo's operational shutdown to ensure their ability to meet FDA guidelines for safe and assured supply. You'll recall that in February, we stated that we had received a commitment to rebuild our formula supply in the second half of fiscal twenty twenty four. While we understand Perrigo's interventions and investments to drive quality controlled and reliable manufacturing, these actions and corresponding allocation of supply have had a material adverse impact on our business. We have been working closely with Perrigo to ensure we recover as quickly as possible to meet the needs of the consumers who love our Earth's Best brand. They are committed to a full recovery beginning in the second half of twenty twenty four.

Speaker 2

We believe these two issues are short term in nature and are working swiftly to correct them. Let's review our brand and category performance. As I mentioned, in aggregate, our grow and maintain brands excluding formula, which together account for approximately 85% of our revenues year to date are growing. Net sales were up 1% in the 3rd quarter. Our stabilized brands along with formula are the source of the softness with net sales down 25% in the quarter.

Speaker 2

As a reminder, the Grow category should expect to receive disproportionate investment and deliver better than category growth and share gains. Maintain businesses are an important core of our portfolio, but do not require outsized investments to enable their growth. And those businesses ring fenced and stabilize are both underperforming and require focused effort to stabilize and provide optionality. Once stabilized, we will determine where and if they fit within the Hain portfolio. In snacks, net sales for the Q3 were essentially flat year over year, which is an improvement from the Q2.

Speaker 2

The main driver of the improvement was strength in Garden Veggie and the successful Flavor Burst innovation launch, which is still ramping up. Offsetting Garden Veggie strength was softness in Terra as it is taking longer than expected to expand our channel mix outside of prior concentration in a low margin channel. As we build upon the brand, we know the Terra consumer loves this product and the brand is without a clear substitute. Our investments in supply chain capacity now put us in a comfortable position to leverage that brand love with expanded distribution. Driving distribution expansion remains a key strategy for growth in snacks.

Speaker 2

We have identified significant fair share opportunities by driving the core assortment of our products and we believe we are in a position to fix our mix to unlock both distribution and velocity across our brands. This summer we will leverage our better for you snacks portfolio brands in our Savor Your Summer snacking promotion, excluding formula. Despite the challenges with formula supply, we continue to see strength in our baby business where we have leading brands in Earthfast and Ella's Kitchen. In fact, Earthfast grew dollar share in the quarter in natural cereal, pouches and toddler snacks and distribution was up double digits versus a year ago. In the U.

Speaker 2

K, Ella's Kitchen is the clear leading brand and we have had success leveraging our global baby category team to share insights, innovation and commercial strategies across both of our brands with a robust opportunity pipeline for fiscal 2025. The beverage category continued its positive momentum with 3rd quarter net sales up high single digits year over year, our 4th consecutive quarter of growth. Growth is being driven by both Celestial Seasoning Tea and nondairy beverage. Within Celestial Seasoning, we are outpacing the category and gaining share due to velocity gains and brand building. And in market data shows our promotional lift on tea is outpacing the category in the quarter.

Speaker 2

Non dairy beverage has continued to deliver growth led by own label and the Natumi and Joya brands in Europe are focusing on innovation. The non dairy beverage market and our core geography is an attractive space with strong consumer demand and overall category growth, up mid single digits in value and low double digits in volume, and we are adding shifts to meet new contracts and increase demand. Our success in nondairy beverage is an example of progress from the end to end rigor applied to our stabilized brands from supply chain reliability to portfolio optimization, brand building, innovation and channel expansion. This coordinated effort is enabling us to shift the nondairy beverage business from the stabilized category and into maintain, and we are well positioned in branded and owned label to drive growth. Meal prep net sales declined low single digits in the quarter, primarily driven by plant based meat free.

Speaker 2

While the overall plant based meat free category is still struggling in the market, the Yves brand in Canada continues to outperform the category and gain share. For the Linda McCartney Foods brand, we have made both portfolio and operations changes to reduce costs and increase efficiency. In contrast, soup continues to be one of our best performing categories with strong growth in our branded soups in both the U. K. And in North America.

Speaker 2

And finally, net sales in personal care, our smallest category declined over 30%. Our brands have struggled with over proliferation of SKUs across many subcategories that simply haven't been productive for either our retail partners or Hanes. We are hyper focused on the execution of our stabilization plan. This shrink to grow turnaround plan is expected to add 11 points to gross margin and provide overall business optionality going forward. While stabilization is taking a bit longer than initially expected, it does not change our near term strategy.

Speaker 2

As you can see, we have taken a number of actions to deliver progress towards our Hain reimagine goal. We set a high bar for change for ourselves when we announced our strategy in September. And while we may not be where we expected to be at this time, we are confident in our end goal and have a clear line of sight to get there. To that end

Speaker 3

And what attracted me to Hain was twofold. The strength of our brands and growing categories and Hain's portfolio uniquely focused on better for you. In my 1st month, I've been focused on learning the business, meeting the team members and visiting our facility. I've also had the opportunity to meet with some of our largest customer partners to understand what is working and what we need to improve upon to enhance our strategic partnerships. I've seen the strength of our brands with consumers that we need to make them more available whenever and wherever they are shopping.

Speaker 3

And we need to drive household penetration with messaging and marketing that is disruptive and delivers on our potential as a challenger in our category. As our brands grow, we will help our retail partners grow through insight led solutions and the creation of stronger partnership and performance. I'm incredibly excited for the opportunities we have before us. We are an organization that can drive the capabilities and power of a scale enterprise, but with the agility and creativity of challenger brand companies. Our teams are focused on driving first to mind, first to find in all that we do to drive awareness and expanded distribution.

Speaker 3

We will bring the magic of Hain to life for our consumers who love our brand and with our customers who will help us meet the needs of making better for you available and within arms reach of our shoppers. To unlock our team's full potential, we have already initiated several new work streams designed to accelerate our performance, continue our productivity efforts with RGM and elevate our engagements with our consumers and our customers. I am thrilled to be a part of the Hain reimagined journey and I look forward to sharing our success with you into the future. And now I'll turn it over to Lee.

Speaker 4

Thank you, Chad, and good morning, everyone. Despite strong progress in the focus and fuel pillars of Hayne Reimagined, Q3 results fell short of our expectations. While the pivot to growth is taking longer than anticipated, we are pleased with our free cash flow generation, gross margin expansion and improvement in leverage as we continue to prioritize the reduction in debt. Let's look at the quarterly results in more detail. Consolidated net sales for the 3rd quarter were down 3.7% year over year to $438,000,000 Organic net sales for the 3rd quarter adjusted to exclude the effects of divestitures and discontinued brands also decreased 3.7%.

Speaker 4

Organic net sales growth in the 3rd quarter reflects a 1.3 percentage point benefit from foreign exchange. The decrease in organic net sales was driven by lower sales in the North American segment, partially offset by sales growth in the International segment. Key factors driving the decline in North America were Personal Care and Baby Formula, as Wendy discussed, representing drags on consolidated organic net sales of approximately 310 basis points and 50 basis points respectively. We delivered 3rd quarter adjusted EBITDA of $44,000,000 up 17.5% year over year. Adjusted EBITDA margin was 10%, representing 180 basis point increase versus the prior year.

Speaker 4

Adjusted gross margin was 22.3% in the 3rd quarter, increasing approximately 90 basis points year over year. The increase was driven by productivity and pricing on the success of fuel and revenue growth management initiatives, partially offset by deleverage on lower sales volume, mix and cost inflation. SG and A decreased 11.1 percent year over year to $67,000,000 representing 15.2 percent of net sales for the quarter as compared to 16.5% in the year ago period. The decrease was driven by a reduction in the accrual for our incentive program. Excluding the reduction, SG and A as a percent of net sales would have been roughly flat year over year as cost optimization and the realization of operating model savings offset inflation.

Speaker 4

During the quarter, we took charges totaling $10,000,000 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 2,000,000 were non cash. Year to date, we have taken $50,000,000 in charges, including $26,000,000 in non cash charges of the expected $90,000,000 to $100,000,000 total for the restructuring program. These charges are excluded from adjusted operating results. Interest costs rose 5.3 percent to $14,000,000 due to the higher variable interest on the unhedged portion of our debt, partially offset by lower outstanding borrowings.

Speaker 4

As a reminder, we have hedged out 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. These factors combined to produce net loss of $48,000,000 or $0.54 per diluted share compared to a net loss of $116,000,000 or $1.29 per diluted net share in the prior year period. Adjusted net income, which excludes the effect restructuring charges amongst other items, was $11,000,000 or $0.13 per diluted share versus $7,000,000 or $0.08 in the prior year period. Turning now to our individual reporting segments. In North America, reported net sales decreased 6.5% year over year to $268,000,000 The decrease was primarily driven by a decline in the Personal Care business, which represented a 480 basis point drag on North America sales and lower sales in baby formula, which was a 70 basis point drag.

Speaker 4

This was partially offset by growth in beverages. 3rd quarter adjusted gross margin in North America was 22.2%, a 40 basis point increase versus the prior year period, driven by productivity and pricing on the success of fuel and revenue growth management initiatives, partially offset by cost inflation and deleverage on lower sales volume. Adjusted EBITDA in North America was $28,000,000 a 2.5% increase year over year and adjusted EBITDA margin was 10.4%, a 90 basis point increase. The year over year improvement resulted primarily from lower SG and A, partially offset by lower volume and inflation. In our international business, reported net sales grew by 1% to $170,000,000 Organic net sales growth was also 1% in the quarter.

Speaker 4

This reflects 3.4 percentage points of growth from FX. As Wendy mentioned, Beverages demonstrated growth in the quarter. This was offset by continued softness in plant based meat free, a stabilized business in our mill prep category. International adjusted gross margin was 22.4%, up approximately 180 basis points year over year, driven by pricing and productivity, partially offset by deleverage on lower volume. International adjusted EBITDA was $25,000,000 a 15.4% increase year over year, driven primarily by pricing and productivity, partially offset by lower volumes.

Speaker 4

Adjusted EBITDA margin was 14.4%, up approximately 180 basis points. Shifting to cash flow and the balance sheet. We generated 3rd quarter cash from operating activities of $42,000,000 versus $29,000,000 a year ago. The increase resulted from working capital management initiatives. Our days payable outstanding improved to 46 from 37 in fiscal year 2023 and our days inventory outstanding improved to 77 from 82 in fiscal year 2023.

Speaker 4

While we still have a long way to go to reach the targets set out in Hayne reimagined of 70 plus days payable outstanding and 55 days of inventory on hand by fiscal year 20 27, we are pleased with the progress we are seeing. CapEx was $12,000,000 in the quarter, and we continue to Finally, we closed the quarter with cash on hand of $50,000,000 and net debt of $728,000,000 translating into a net leverage ratio of 3.9 times as calculated under our amended credit agreement. We drove leverage lower than expected due to better cash flow and momentum from our fuel initiatives. We expect our net leverage to tick up modestly in the Q4 and the Q1 of fiscal year 2025 before ending fiscal 2025 in the high 3s. We are comfortable we have plenty of headroom under the existing covenants.

Speaker 4

Paying down debt and strategically investing in the business continues to be our priorities for cash and we have reduced net debt by $47,000,000 since the beginning of the fiscal year. Our long term goal remains to reduce the balance sheet leverage to 3 times adjusted EBITDA or less. Turning now to our outlook. We have made solid progress under Hain Reimagined, particularly in the focus and fuel pillars. However, the pivot to growth, which we are actively addressing, is taking longer than anticipated.

Speaker 4

The largest driver in our outlook revision is the fact that our infant formula supplier did not deliver upon their commitment. In addition, while our performance in the snacks categories continue to improve sequentially, execution in snacks distribution expansion has been short of expectations. Lastly, stabilization in Personal Care is taking longer than expected, and we are aggressively taking action to simplify our portfolio and operating footprint. Taking these factors into consideration, along with performance to date, we are adjusting our guidance for the full year. Our revised fiscal 2024 guidance is as follows: We expect organic net sales to decline approximately 3% to 4% year over year adjusted EBITDA to be between $150,000,000 $155,000,000 gross margin expansion of up to 50 basis points and free cash flow of $40,000,000 to $45,000,000 And now I hand it back over to Wendy.

Speaker 2

Thanks Lee. In my first year with Hain, we've spoken with a lot of investors and we've heard some very clear things. Your belief in the potential of our business, your desire for more visibility into drivers and your need for more clarity on where we believe Hain can win, the potential of our brands and the actions we're taking to accelerate our performance. We hope that by providing details on category performance this quarter has helped with visibility. In addition, we plan to report price, volume, mix and currency elements of sales growth starting in fiscal 2025.

Speaker 2

While our year 1 progress in driving improvement in our top line is behind our expectations, we have made significant headway in the focus and fuel pillars of our Hain reimagine strategy. We have focused our business by creating a winning portfolio, simplifying our global footprint and building a more effective and efficient integrated operating model, which extends far beyond how the business is structured to how it's managed, reported and wired across common functions. This will enable greater focus on execution, a reduction in costs and improved control of our business from end to end. And we're generating fuel by leveraging our scale and driving operational efficiencies in our supply chain, unlocking working capital and strategically focusing on revenue growth management. We will continue to build our capabilities by investing in brand building and innovation and driving channel expansion in underpenetrated markets.

Speaker 2

Ultimately, this will enable us to reliably grow our business through focused investments and innovation in snacks, baby and kids and beverages, while continuing to pay down debt. Hain is a leader in better for you brands across key developed markets and we are uniquely positioned with the better for you consumer to deliver sustained category growth in natural and organic. Our work in building our end to end supply chain capacity and in brand building puts us in position to partner with our retail customers to win with the consumer. We have ample distribution wide space and we have begun to ramp up our channel expansion with an improved core assortment to ensure we have the right products at the right price in the right place to meet consumer demand. We set a high bar for the pace of change and we are just 8 months into our multi year strategy.

Speaker 2

And while much of the progress we shared today is not as visible outside the walls of pain, internally, we are fundamentally a very different company than we were 1 year ago. Our teams are stronger, our capabilities are more robust and the team is working together more effectively as a global enterprise, a true transformational step change in Haines 30 year history. And now we're doubling down on execution. The progress we're making already fortifies our confidence in the strategy and in our ability to drive reliable and sustainable growth. We remain confident in our ability to achieve the full potential of Hain Reimagine.

Speaker 2

Before we open it up for Q and A, I would be remiss if I didn't thank all of our team members who are committed to our strategy, to our brands and to our purpose of inspiring healthier living through better for you brands and to harnessing the power of performance as one Hain team. Operator, please open the line for questions.

Operator

I will take our first question from Jim Zallera with Stephens Inc. Please go ahead.

Speaker 5

Hi, guys. Good morning. Thanks for taking my question. I wanted to drill down a little bit on the execution in Snacks distribution, Lita, you mentioned. Is that part just due to kind of the overall consumer backdrop and maybe retailers being more sensitive on price and wanting to expand some private label offerings?

Speaker 5

Or is there anything that you guys can give us detail on that you can help to improve execution on Snacks in the near term?

Speaker 2

Yes. Good morning, Jim. Great to hear from you. Snacks is actually sort of a tale of 2 cities. So if you look at Garden Veggie, for instance, we've actually had very strong execution and very strong performance.

Speaker 2

In fact, some of our data now shows that Garden Veggie core SKUs actually turn at a greater velocity on shelf than some of the leading brands in the better for you space that have more distribution. But in the past, you would recall that we had some supply chain challenges that made assured supply a bit of a challenge. We are in a better position to earn our place on shelf with greater distribution because we have really a stronger supply chain. The Garden Veggie core is performing very well. We've actually picked up incremental distribution.

Speaker 2

I think in the last quarter, we talked about the incremental distribution in C store, somewhere north of 10,000 stores on Garden Veggie. And then obviously the successful launch of Flavor Burst, which is actually still in fairly limited distribution is just now starting to ramp up broader distribution, but the terms of flavor burst are better than we expected and north of 80% is incremental to the category. So we feel very good about innovation. We feel very good about brand building and very good about channel expansion on Garden Veggie. And we haven't even begun the master brand campaign that starts this summer.

Speaker 2

Tara, if you recall last year, well probably the last 18 months or so, we had some significant supply chain challenges. We've capacity and capability on Terra. We're less dependent on additional outside manufacturing to support Terra. So we've right sized our operations footprint to assure supply under our control. Counter to that, we also were very concentrated in the club channel and that meant that we didn't have the ability to expand distribution in other points of distribution.

Speaker 2

So the combination of a more stable supply chain, better consumer, better on shelf availability and the work that's taking place around channel expansion will help Terra in the long run. And we'll see some of this play out as we go into this summer because this summer will be the 1st multi brand snack promotion that we will have ever done as a company and will be the Savor Your Summer multi brand merchandising program where we've had really good pickup in secondary placements.

Speaker 5

Great. I appreciate all the details, Wendy. But maybe just as a follow-up on that,

Speaker 3

can you just comment on

Speaker 5

how sensitive retailers are to price gaps between stacking SKUs and private label just again given that we've seen consumers be more value seeking in certain sub segments channels?

Speaker 2

Yes. Sorry, I missed that part of your question. Actually what we've seen in some of the consumer data is actually in the snack category, the consumer is less private label sensitive probably of all the food categories. I think something less than 15% of the category is actually penetrated by private label. 2nd to that, when we look at our brands in the research that we've done, for instance, I'll talk Terra.

Speaker 2

Terra has no natural substitute. And the consumer, what we've learned is the consumer loves the brand. We've made it hard for them to find it. But they don't see another substitute for the Terra brand. So our opportunity is to actually take that brand love and make it available to the consumer in more places.

Speaker 2

But where we are premium, we're not super premium. We're at an affordable premium to conventional categories. And thus far, we've not seen either retail push to us or consumer pushback relative to price, but we've probably been a bit more surgical in our pricing and have focused instead on net price realization through our revenue growth management initiatives.

Speaker 5

Okay, great. Appreciate all

Speaker 2

the color. One thing I would one thing I would add to that as well, we've been tracking promotional spend. And in snacks, we're promoting at about the same level as the category, but we're seeing a greater lift than category. So I think our promotion effectiveness has been more productive for us in the last year since we've invested around revenue growth management.

Speaker 5

Thanks for that Wendy. I'll pass it on.

Speaker 2

Thanks Jim.

Operator

Our next question comes from Ken Goldman with JPMorgan. Please go ahead.

Speaker 6

Hi, thank you. First, just a quick one. On infant formula, you mentioned that the issues with the supplier are short term, but at the same time you relegated formula to the stabilized bucket. I'm just trying to reconcile these two items if the issues are primarily short term, why relegate?

Speaker 2

Yes, fair question, Ken, and good morning. The issue that we face is and so Perrigo is our primary infant formula supplier. You would have heard Perrigo speak to some of their supply chain shutdowns on their earnings call this week as well. We believe that the issues are relatively acute, but to be honest, we've had challenges over this last year with Assured Supply. So we're taking a prudent approach in setting it in stabilize, realizing 2 things.

Speaker 2

One is we need to ensure that we have stable supply that's reliable. The other is because we've been off shelf for a while, we have to re earn that space on shelf with our retail partners. We've had to rationalize and focus our distribution with a few customer partners. And we need to go back and make sure that we are in a good solid position there. So that's really the reason for putting it in that category.

Speaker 2

I would say that the guidance that we gave for a quarter for the balance of this year includes all the inventory we have on hand. So we don't have a supply risk to our outlook and forecast for the balance of this fiscal year. But I think we're taking a prudent approach as we go into fiscal 2025 around supply availability, how we drive customer reach and how we make sure that we've got a balance between supply and where we're on shelf. As you know, infant formula is how we recruit the consumer into our Earth's Best brand. And I think it says a lot about the strength of the brand that we've continued to grow baby food, puree and toddler snacks when we're not able to recruit people in at the infant stage.

Speaker 2

So we're excited about the work to be able to do to re recruit while we leverage the strength that we've got in baby food and purees.

Speaker 6

Okay. Thank you for that. And then shifting topics, I appreciate you haven't given guidance for 2025 yet, but given that we're only 7 weeks away from the end of 'twenty four, I'm hoping you might be in a position to speak directionally. And I guess to cut to the chase, consensus is looking for low single digit sales growth next year despite some fairly clear headwinds in personal care and meals, etcetera. But obviously, some excellent growth in the majority of the business, at least what you're seeing today.

Speaker 6

So do you think it's reasonable for the Street to model low single digit growth at this point or is it just too soon to say for sure?

Speaker 2

We're really not in a position yet to give guidance for next year. But I think that you're appropriately looking at where we think some of the growth areas would be and where we think some of the weaker areas as we aggressively drive stabilization. So more to come.

Speaker 4

So I would just build upon that. I mean a couple of things we talked about formula getting stabilization of that moving forward. So we've got some things that obviously negatively impacted us in the current year. Personal Care, we've obviously got that in stabilized. We're making some actions on that in terms of the SKU pruning.

Speaker 4

So some of those things again have been headwinds in the current year that we should cycle against as we move forward.

Speaker 6

Okay. Thank you.

Speaker 2

Thanks, Ken.

Operator

Our next question comes from John Anderson with William Blair. Please go ahead.

Speaker 5

Hey, good morning, everybody. Thanks for the question.

Speaker 2

Good morning.

Speaker 5

I know it's a smaller part

Speaker 7

of the business, but on

Speaker 5

the personal care front, can you talk a little bit about where you are in terms of the full efforts on SKU rationalization? And maybe more important, how you think about that business longer term? Is that core to the Hain portfolio? How much kind of management time and financial resources do you want to kind of apply to that on an ongoing basis? Thanks.

Speaker 2

Good morning and appreciate the question. So relative to personal care, it's the smallest part of our portfolio. It is the one category where, unfortunately, I think I mentioned this in the prepared remarks that we've got an over proliferation of SKUs. To be honest, we took some of our brands into every possible personal care category where we really didn't have a right to play or a right to win. That just creates a lot of complexity in the business and a lot of excess inventory all the way around.

Speaker 2

So it's just very inefficient. And those were highly unproductive SKUs both for us, but also for our retail partners and they just sat on shelf and so not a good place to be. We actually ring fenced the personal care business. So there is a separate team that's focused on personal care stabilization with the goal of getting that business stabilized, so then we have optionality and to decide then where and if it falls in the Hain portfolio. But we do need certainly for to do the best thing for our shareholders is to get that business stabilized for the best options.

Speaker 2

We've made some very aggressive decisions that were a part of Hain Reimagined, but we've pulled them forward into fiscal 2024 really to stabilize that business more quickly. So rationalizing our supply chain from 2 Hain locations down to 1 will improve our capacity utilization at the core facility. We've reduced our co mans by 5, which is about 60% of the co manufacturers on the personal care business that takes a lot of complexity out of managing that network, and reduces what's on shelf. We are streamlining the SKUs and the categories that we're in by brand. You'll see a chunk of that flow through in quarter 4 and then it'll begin to really play out in quarter 1 and quarter 2 as we really get that to be a right sized portfolio.

Speaker 2

All of those decisions help us get to an improvement of 11 margin points on the personal care business, but more importantly puts us in position to make some decisions about that business, but also to better manage that business because it'll be a much simpler portfolio. There are some strong brands in that portfolio, but we've not allowed them to actually really be able to be successful because they were really buried in lots of subcategories that we really shouldn't be in. So I think we'll be in better position to make some decisions. But to your question around distraction of management's time, there is a dedicated team focused on personal care. So and it is the smallest portfolio.

Speaker 2

So it really doesn't take a lot of everybody's time.

Speaker 5

That's super helpful. Switching to, I guess, your largest business, meal prep. Could you talk, Wendy, a little bit about what you're seeing in that business? I think that grew last quarter. It was down a little bit this quarter.

Speaker 5

What maybe has changed over the past few months there and what your expectations or focus areas are for that part of the business going forward? Thanks.

Speaker 2

Yes. The meal prep category actually took a bit of a step down really driven by the plant based meat free category. And that's not unlike what others are seeing in the space with a lot of the industry consolidation taking place. So it really was driven by meat free in the UK with the Linda McCartney brand and in Canada with the Yves brand. Ironically, because the category is consolidating, we're actually gaining share.

Speaker 2

In fact, we gained share with the Yves brand in Canada. So we are declining less than the category and picking up distribution and gaining share, but we are still seeing some of that category contraction. In the UK business, we made a bit of an aggressive move in really rightsizing both what our manufacturing capacity was, but also rightsizing the SKU mix that we have in the Linden McCartney brand to get to the hardest working core. And so you see some of that SKU reduction playing into the meal prep data in the quarter, but that, but I feel like we will have a much more productive, overall mix there. Offsetting that in meal prep is the continued strength of the soup category that's just on fire and it's actually in both regions.

Speaker 2

So the Imagine Soup business in the U. S. Grew double digits in the quarter and in the UK and Ireland, we have the number 1, number 2 and number 3 soup brands with Cully and Sully, Yorkshire Provender and New Covent Garden and are by far the share leader, especially in the refrigerated soups category. So, feel really good about the soup part of the portfolio. In Greek Yogurt, you would have heard us talk about that as growth in the past.

Speaker 2

We've done some reset of our retailer relationships and the assortment on shelf. And so you will see the Greek Gods business return into growth as we go forward. We feel very good about that brand.

Speaker 5

Great. Thanks so much.

Operator

Your next question comes from Michael Lavery with Piper Sandler. Please go ahead.

Speaker 7

Thank you. Good morning.

Speaker 8

Good morning.

Speaker 7

Just want to come back to the portfolio and you demoted formula, you touched on that just a minute ago, but also promoted the non dairy beverages to maintain and touched on some of the execution improvement there. But I guess a couple of things. Is that a reflection of a definitive commitment to it? You've characterized stabilize as a little bit of a get it fixed and figure it out, at least obviously for personal care. Does it reflect stronger consumer demand?

Speaker 7

What are all the right pieces of the context there to understand how that shift took place?

Speaker 2

Yes, that's a great question and good morning. When we look at what's in stabilize, we actually ask ourselves a bit wider of a question. Is it a category that is large and growing? Is it a space where we have a brand that can compete? Do we have capabilities that make us unique and distinctive?

Speaker 2

Is it the right place to be? And can we make money at it? So can we grow and can we make money at it? When we look at the non dairy beverage category in the markets where we play, it is a very large and growing category. We have a wonderful position in both private label and brand.

Speaker 2

But the issues that we had in the past were because we were highly concentrated with a particular partner. So our manufacturing capacity was eaten up in that way. We weren't running the plants, in a normal 5 day work week. We were running a lot of overtime, so they were inefficient in our operations. And we weren't really investing behind the brands with a core assortment to be able to win in the markets we were in.

Speaker 2

So when you check the boxes of, is it a category we want to be in? Is it a category that's large and growing? Are we unique and distinctive? Can we compete and win? All of those check the boxes.

Speaker 2

So then it became an internal end to end fix. How do we need to right size our operations? How do we make sure that they're well run? How do we make sure we're investing around the right brands? You would have heard us, I think in the last quarter talk about the SKU portfolio work that we did in nondairy beverage, where we reduced about 50% of the SKUs in one of the brands and got to a much harder working core that grew velocities double digits.

Speaker 2

So driving right assortment in the brand on shelf was better productivity for us and for our retail partners. So all those things combined now is delivering a business that quarter on quarter is up double digits and driving great margin. So it's a place where we want to be. Yes.

Speaker 4

And we've had 3 straight quarters of growth on that business. So and as Wendy said, I mean, we've had improving profitability, positive outlook for the growing category. So it fits in all the criteria.

Speaker 2

But to your question on baby formula, the reason why we set that into stabilize is, again, we look at the same especially in the organic baby food category. So those all check the box. But the challenge we have is stable and reliable, consistent, high quality supply and that's what needs to be stabilized. So it doesn't mean that the business necessarily is an area where we feel the need to stabilize, but we definitely need to acknowledge that we've got to have a much more consistent available supply of baby formula.

Speaker 7

That's great color. Thank you. And just a little bit of a follow-up. For the brands that aren't on the page for, I think it's Slide 12, for example, How do we think about those? They're almost all quite small.

Speaker 7

There's 10 maybe at least I think I can come up with that aren't listed. What's their future look like? And is there a buyer for any of those? Is there just brand discontinuations that make sense? How do they fit in?

Speaker 2

In the ones that we have mapped out on grow, maintain and stabilize?

Speaker 7

The ones that aren't shown, yes, like a Farmhouse Fair or a Hollywood or Health Valley or Lima or any of those that are just a bit smaller, obviously, quite a lot smaller, I think.

Speaker 2

Yes. I would tell you that those the things that aren't on the slide are what I would refer to as sort of bits and bobs in the portfolio and doesn't necessarily mean anything other than they don't require a substantial amount of investment or time and they don't represent a large percentage of the sales. Pretty common in most of the companies I've worked, there are some brands that just don't really ever pop to the top, but I wouldn't read anything into it other than that.

Speaker 7

So just as you're looking at things like SKU rationalizations, there wouldn't be a risk of

Speaker 5

sort of

Speaker 7

a cleaning house where there's a hit from those getting reconfigured somehow?

Speaker 2

I would say that our view of portfolio simplification in the focus pillar will always include a review of brands, categories, SKUs, footprints, all of those things. So I wouldn't put it off the table that we're not taking a hard look at every brand to make sure that they are a brand that is worth us spending both time and resources against.

Speaker 7

Okay. That's helpful. Thank you.

Operator

We're almost next with Andrew Wolf with C. L. King. Please go ahead.

Speaker 9

Thank you. I'd like to start with kind of a softball question for you. Did the business kind of pivot to growth if you exclude personal care and baby infant formula?

Speaker 2

Well, certainly, as we said in

Speaker 9

the prepared room Also less than expected. That's what I'm really getting at.

Speaker 4

So the one thing we did I mean we did say and that's how we broke out the portfolio, 85% of the portfolio on a year to date basis was up over 3%. And if you go back to Hain Reimagined, the 3% was our long term algorithm. So that's why we kind of isolated the 2 pieces. But yes, 85% of the portfolio year to date was up over 3%.

Speaker 9

And were the attendant profit expectations reasonably close to what you would have expected or were some of the supply chain issues impacting that as well or to get to

Speaker 4

No, I would say they were in line with what we've expected. I mean, one of the big things as part of the Hain reimagined was fuel. As we looked at our supply chain initiatives, and not necessarily just on the P and L, but on the cash flow side, in terms of net working capital delivery, both of them being positive ahead of our expectations.

Speaker 9

Okay. Let me ask you about guidance before I get back to Wendy with the disc, the more of the operation side. Could you kind of parse out the guidance reduction between, I think you said Q3, even though versus the Street it was an upside was below your internal expectations. So between versus internal the Q3 mess and the what you took down Q4, just to get a sense of where you think the momentum in the business is versus your expectations?

Speaker 4

So in terms of guidance, just and again, we kind of as we went through, I mean, in terms of guidance change, the three elements, obviously, were Personal Care. So as we said, 85% of the business was growing, but Personal Care, pace of stabilization there didn't deliver against our expectations. So that was one piece and obviously we're making overall changes, simplifying the portfolio and the operating footprint. The second piece, and Wendy had kind of gone through this, was really around formula. And based on the commitment from Perrigo, we expected to have more stable and dependable formula to meet the demand.

Speaker 4

So that was the other large element. And then the final piece that we've touched upon is really just kind of the execution in Snacks. Snacks is growing, but it was not it was short of our expectations. So those are the three elements that changed in the quarter that impacted our full year guidance.

Speaker 9

Thank you. So just I'd like to follow-up on 2 of those. So Wendy, on the labor burst, did that also get impacted by supply chain? And do you mean like your co packers were you were shorted?

Speaker 2

No. So Flavor Burst yes, Flavor Burst has been an outstanding launch. In fact, our production attainment is right at 100% of where we expected to be. So feel very good about the supply on FlavorVerse. We've begun the distribution.

Speaker 2

We were in limited distribution really inside quarter 3. You'll see that ramp up in quarter 4 and it'll be available in lots of locations. So I'm expecting you to buy it everywhere that you see it. And then you'll see it featured as a part of our summer of snacking promotion, with multi brand

Speaker 6

The common theme, I guess, through this call or through the recent months has been on supply chain issues, whether it's veggie or Terra or Infant. And so I'm just wondering, is there something different at the core of maybe how the infrastructure was set up earlier or how you're changing it? Because it just you seem to be relying on what might be a fragile supply chain and many of the issues are linked to a lack of supply. So I'm just curious if there's anything we should know about in terms of just maybe the like operating philosophy that used to exist versus what how you're approaching it now? Thanks.

Speaker 2

Yes. I guess, let me clarify. We have one category where we have challenges in supply chain and that would be in formula. The others are legacy supply chain issues that began during COVID that actually gave clarity around and visibility to issues that we had in our end to end supply chain. The work the team's done in the last 18 months has been to create a much more reliable and sustainable supply chain and it's everything from planning, production and delivery.

Speaker 2

We have best in class safety in our facilities in the last year. We have best in industry availability on shelf as measured by Surcona better than our peer sets. And we have a much more predictable and reliable work that the team's done all while reducing inventories and days on hand. So when we said that we've had a lot of supply chain work in this 1st year of Hain Reimagined as a foundational year, we did focus on fuel and that was both delivering productivity savings, but it was also ensuring that we have the foundations of the company to be able to enable consistent reliable growth. I feel very confident in our supply chain and whether that's co manufacturers excluding formula, but whether it's our co manufacturer partners or our own manufacturing, the team that's been put in place to manage our supply chain, including our co mans is best in class.

Speaker 2

And I'm very excited about what that will do for us being able to go out to our customers and walk them through the reasons why we should have more shelf space of our core brands because they're highly productive and we can assure them reliable supply on shelf.

Speaker 6

Got it. Giselle. Thank you.

Operator

We will move next with Anthony Vendetti with Maxim Group. Please go ahead.

Speaker 10

Okay. Thanks. So just, Wendy on the 6% SKU reduction and I know a lot of the SKU reduction is in Personal Care, I guess you said 62% there. Is that 6%, is that more than the normal view rationalization as you look at the portfolio? And if it is, where is it more than personal care, which I know is the significant portion of the SKU reduction?

Speaker 10

And then the second part is, if it is more, how is this differing differ from sort of when Mark Shillitz took over for Irwin Simon, he put in a multi year SKU rationalization. Have things changed significantly since then that's requiring further SKU rationalization. I was just wondering if you could put that whole thing in context.

Speaker 2

Yes, great question. I would say it's 2 things. So is 6 percent more than we would expect in the average? Absolutely. And certainly the 62% of personal care is much more than you would expect in any portfolio.

Speaker 2

I would view this less about pure SKU rat and much more around portfolio rationalization. So in terms of SKUs, we talked about the sort of regular brands portfolio maintenance. That's going to be in baby and kids, a little bit in snacks and some of what's taking place in the beverage category is much more around that portfolio maintenance where you just you have underperforming skews in the tail, you move those out as you bring in innovation and sort of this normal ebb and flow. Personal care and plant based meat free are much more significant. And those are us recognizing that there are subcategories we really shouldn't be in that aren't productive.

Speaker 2

So it's less about SKU pruning and much more about category pruning that's more significant. I'm not familiar with the work that was done by Mark and team in the prior strategy. I've seen some of it, but I'm not sure what it was predicated on, but hopefully that helps explain some of the things that we're driving here.

Speaker 10

Yes. And then maybe this is more for Chad. Chad mentioned first to mind, first to find. And then Wendy, you mentioned that Terra Chips is hard to find. How do you fix that or what's the strategy to fix that since it's obviously one of

Speaker 7

the brands you're focused on?

Speaker 2

Yes, let me start and then I'll flip it over to Chad, giving him credit for only being here for 4 weeks. But on the so with Terra in particular, the challenges that we had, it's a beloved brand that people see as unique and distinctive. But because of the supply chain issues 2 years ago, the company rationalized where they were selling it because they couldn't keep it on shelf everywhere because of some of those supply chain issues. So it made it very limited in distribution, which is why I mean it's beloved but hard to find. We've worked really hard in the last 18 months to invest in capital to add capacity and capability on Terra that will allow us to control our destiny on the brand.

Speaker 2

And we've made investments around the brand campaign to support Terra as we go forward. All of that combined puts us in position to take that brand love and make it available to the consumer where they're shopping. But I'll let Chad talk about the work that he's driving and driving distribution expansion.

Speaker 3

Sure. So I think first and foremost, Anthony, I think as Wendy mentioned, I think we're now taking that story external in terms of helping them understand what we've done different as Hain in terms of our investments into our supply and that consistency of supply. In my 1st month, I've already been a part of now 3 specific snack meetings externally with key customers and they're very excited about the future of Terra. Now it's us working together on what that distribution build looks like based on their timeline, but we're very excited for that future. And as Wendy mentioned earlier, we also will have a new campaign starting in 2025, really to start reinvigorating that brand love to a broader audience of consumers.

Speaker 10

Okay. Thank you. That was great color. I'll hop back in the queue.

Speaker 11

Next meeting you.

Operator

Your next question comes from Matt Smith with Stifel. Please go ahead.

Speaker 11

Hi. I wanted to ask a follow-up question on guidance. The implied 4th quarter EBITDA margin takes a step back sequentially and year over year. Can you talk about the level of investment in the 4th quarter? Is that stepping up?

Speaker 11

Or is it the margin performance more a reflection of volume deleverage and maybe less benefit from pricing and productivity? Just trying to get a better understanding of margin exiting the year as we look ahead to fiscal 'twenty five?

Speaker 4

Yes. So a couple of things. As you go through, there is the margin deleveraging, there is volume deleveraging, there is the mix impact of formula. Just year over year in Q4 though, we are lapping a benefit that we had in international in the prior year as well. So that actually increased the margin percentage in Q4 of the prior year.

Speaker 4

It was a one time impact. So we're lapping that as well. So we continue to feel good about the margins overall. I mean we talked about the productivity delivery, the $61,000,000 that we're seeing through. From an inflationary expectation, I mean, we continue to see some moderation there from commodity inflation.

Speaker 4

So again, I think for the Q4, again, year over year is kind of this lapping of this prior year benefit that we saw.

Speaker 11

Thank you, Lee. And just a follow-up on the Personal Care discussion. Can you talk about the cash costs associated on a go forward basis? And then the 11 point increase in margin that you're targeting from the rationalization, Does that timing line up with the SKU rationalization that Wendy discussed 4th quarter, Q1 and Q2 upcoming or is there a longer tail to realize that margin benefit?

Speaker 4

No, I mean the margin benefit is going through into the second half of twenty twenty five. So I think those pieces align. And then just kind of on the cash costs overall, I guess I would just tie back to the overall restructuring costs where we talked about the 90% to 150% of that being cash and non cash. I mean nothing fundamentally changed on that overall profile. And that's what we've seen kind of year to date.

Speaker 4

If you think about it, it's $90,000,000 to $100,000,000 We've had $50,000,000 year to date, half of it being cash, non cash. So everything falls within that kind of overall envelope.

Speaker 11

Thank you. I'll pass it on.

Operator

And our next question comes from Alexia Howard with Bernstein. Please go ahead.

Speaker 8

Good morning, everyone.

Speaker 2

Good morning.

Speaker 8

Okay. So I just have one question around the marketing spending. I remember when you laid out Hain Reimagined, there was a relatively modest increase in the plan for increasing marketing spending company wide. And the idea was to reallocate and really focus on the areas where you could get a decent return on that. Are you rethinking that given the disappointment on the organic sales growth side?

Speaker 8

Did you need to up the marketing spending? Where are you in terms of where you think the appropriate long term level might be? Thank you and I'll pass it on.

Speaker 2

Yes, I appreciate the question. And you're right, we said early on that when we turned back on marketing as a company, we wanted to make sure we had an always on pressure to support our brands, but that we wanted to get more efficient before we simply spent more. And you'll see that reflected in the numbers. On a consolidated basis, we'll be up slightly this year versus last year, but we're also more weighted to the back half of this year than we were to the front half because we wanted to make sure we were supporting some of the big launches and some of the key seasons like soup season in the UK, like the celestial seasonings tea season in the winter and then supporting the flavor burst launch with appropriate support. We've seen a sequential improvement in our working to non working.

Speaker 2

So the shift is working. We're also gaining and growing brand awareness and growing household penetration across our core brands. And as Chad mentioned, we're driving incremental reach with some of our distribution gains, all of those things focused on share. The issues we're seeing in the top line are really very acutely tied to a couple of things. It's tied to personal care and it's tied to baby formula.

Speaker 2

Spending more money against those would have both been bad spends because I would have spent against baby formula and not had available supply. I would have spent against personal care subcategories that we really shouldn't be in. So I'm not concerned with where the team chose to spend the dollars because I think where we've spent it when we evaluate marketing effectiveness, we are seeing promotional lifts, we are seeing household penetration gains, we are seeing the share gains and we are seeing a grow in awareness where we've invested our dollars. Our goal is to get those that 15% of the business that needs to be stabilized to stabilize, so that where we're investing for growth, we're seeing that deliver all the way through the consolidated numbers and not just in the 85% of the business.

Speaker 8

Thank you very much. I'll pass it on.

Operator

Thank you. And I will turn the call back to Wendy for closing remarks.

Speaker 2

As we said earlier, we're very pleased with the progress that the team's made around focus and fuel initiatives because it's allowed us to expand our margins, it's allowed us to deliver strong free cash flow and importantly to reduce our debt, which we know are all things that are very important to the investment community. And I feel very proud of the work the team has done in our end to end supply chain and the overall business. We're investing, I think appropriately around brand building and around the building our capabilities. And we look forward to more than 85% of our business pivoting to growth as we go forward. But again, I want to thank everybody for your time this morning and for your belief and confidence in Hain as we reimagine our future.

Operator

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
The Hain Celestial Group Q3 2024
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