Hain Celestial Group Inc Q4 FY2020 Earnings Call

Greetings and welcome to The Hain Celestial Group Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Anna Kate Heller for opening remarks.

Thank you. Good morning, and thank you for joining us on Hain Celestial’s fourth quarter and fiscal year 2020 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer; and Javier Idrovo, Executive Vice President and Chief Financial Officer. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These include expectations and assumptions regarding the Company’s future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. These statements are based on management’s current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Hain Celestial’s Annual Report on Form 10-K, quarterly report on Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The Company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hain Celestial’s website under the Investor Relations heading. Please note management’s remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. As a reminder, beginning in Q1 of fiscal year 2020, the Company changed its segment reporting to focus on North America, International and Corporate, which had previously been reported as the U.S., UK and Rest of World segments. This call is being webcast, and an archive of it will also be available on the website. I would also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, cross talks or other minor technical issues during the call. We thank you in advance for your patience and understanding. And now, I’d like to turn the call over Mark Schiller.

Thank you, Anna Kate, and good morning, everyone. Before we begin, I want to express my gratitude to our global team for their collaboration, agility, and compassion during the pandemic. We are operating in a dynamic environment, with the health and well-being of our employees, customers, and consumers being our top priority. During today’s call, I will talk about our strong fiscal 2020 results, how COVID-19 impacted us, our preparations for sustainable long-term growth, and our expectations for fiscal 2021. Let me start with our full fiscal year 2020 results. We met all planned metrics outlined in our guidance at the beginning of the year and ended with adjusted EBITDA at the high end of our revised guidance range, which we had increased at the end of Q3. For the year, net sales decreased by 2.4% as reported, but grew by 3% in constant currency when excluding divestitures, discontinued brands, and SKU rationalization. We finished the year with two consecutive quarters of total company sales growth after experiencing eight quarters of declining top-line. Gross profit, margin, and adjusted EBITDA margin in dollars grew every quarter, consistent with our fiscal 2020 guidance from last summer. Notably, our adjusted EBITDA dollars increased by 21% while our marketing spending rose. The North America business saw successful transformation, resulting in an over 400 basis points improvement in adjusted gross margin and 380 basis points improvement in adjusted EBITDA margin, with adjusted EBITDA dollars growing by 43.2%. In North America, our Get Bigger brands saw a 6.4% growth for the full year, aligning with our Investor Day guidance, and this was a marked improvement from the planned decline in the first half of fiscal 2020, with modest improvement during the second half. Our Get Better brands, managed for profit, increased adjusted EBITDA dollars by 214% and adjusted EBITDA margin significantly rose by 600 basis points to 8.4%. As a reminder, this set of brands previously had an EBITDA margin of just 2% on Investor Day last year and is now making a significant contribution to our overall success. The International business had nearly flat sales in constant currency for fiscal 2020, along with modest improvements in gross margin and adjusted EBITDA margin. We achieved these results despite the notable decline in our large foodservice-oriented fruit business due to COVID in the second half. Adjusted earnings per share grew by 40% year-over-year, exceeding our expectations. While the business performed exceptionally well, over-delivering our plan, the pandemic did accelerate results in the second half of the year. COVID-19 contributed an additional $20 million in net sales primarily in Q3, with about $10 million to $12 million of adjusted EBITDA for the year split between Q3 and Q4. North America benefited more than that, although the International fruit business faced drawbacks. Overall, it was a remarkable year for Hain, with impressive results both before and during the pandemic, leaving us with strong momentum as we move into fiscal 2021. Now, let’s talk about Q4 specifically. Javier will provide more details soon, but again, our team achieved all of our key profit metrics and hit the top end of the raised guidance we issued at the end of Q3. Gross margin, adjusted EBITDA dollars, and margin all increased over 200 basis points. This marks the seventh consecutive quarter of improved adjusted EBITDA dollars and the fourth straight quarter of growth. In the divisions, North America gross profit increased by 20% in the quarter, and adjusted EBITDA grew by 46% compared to a year ago. Our Get Bigger brands, which account for two-thirds of our North America sales, were expected to show second-half top-line improvement compared to low single-digit growth in the first half. Following strong double-digit growth last quarter, our Get Bigger brands delivered an even stronger performance in Q4. We grew sales across all Get Bigger categories and observed stable double-digit consumption growth over the last five months of the pandemic, following the initial surge in March. Additionally, EBITDA margins for the quarter approached 18%, including marketing investments during the quarter. With the Get Better brands, we maintained our focus on profitability, and in Q4, our gross and adjusted EBITDA margins improved by 300 and 360 basis points, respectively. Sales for the Get Better brands nearly reached flat after adjusting for divestitures and discontinued brands, propelled by a strong performance from our center of store cooking brands. For the International segment, we experienced slight negative top-line growth in constant currency, accompanied by modest margin improvements in adjusted EBITDA. Within International, several of our leading brands grew well in constant currency, and our non-dairy beverages continued to show double-digit growth from last year. However, our foodservice-oriented fruit business, which makes up 20% of our International sales, saw substantial declines. If we exclude the fruit business, International net sales would have increased by over 10%. Clearly, the remainder of our International business is performing well. The fruit business was a 270-point drag on International adjusted EBITDA margins in the fourth quarter due to stranded overhead and input costs. We implemented significant reductions in SG&A during Q4 to alleviate this impact, and we anticipate reaping the benefits of these changes in future quarters. While we are pleased with much of our International results, we believe there remains significant opportunity to concentrate resources, enhance margins, and share best practices. Consequently, we are adopting much of the U.S. playbook and have streamlined our operations from five divisions down to two since I joined Hain in late 2018. This organizational simplification is expected to create significant opportunities that will begin to influence our financial performance later this year. For the quarter, COVID had virtually no net effect on the overall company's top-line performance, although there were clear benefits in North America, offset by the fruit business decline in the UK. In terms of adjusted EBITDA, we delivered a total impact of about $4 million, equating to $5 million to $6 million in the fourth quarter. In Q4, we also made progress in simplifying our business, selling or discontinuing four brands including Rudi’s, BluePrint, Fountain of Truth, and DeBoles. These brands contributed $27 million in sales while incurring a loss of approximately $1 million in adjusted EBITDA. Additionally, last month, we sold our Danival business in Europe after the quarter had ended, which generated $22 million in sales and had $1 million in adjusted EBITDA. This showcases our ongoing success in divesting or exiting small, non-strategic brands that disproportionately consume management time and complicate our supply chain. Removing these brands enables us to focus our resources on larger growth opportunities, further enhancing our results. We are proud of the robust quarterly and annual results we have achieved. As highlighted on Investor Day, our transformation plan is effectively working, particularly in North America. Our strategies for simplification, capability building, cost containment, and profitable growth have led to excellent execution during the pandemic. Numerous initiatives that commenced before the pandemic have accelerated our performance in the quarter, including innovation, marketing, and assortment optimization, which have already begun to drive top-line growth. Consolidating the U.S. and Canada into one North America operating entity, automating our plants, and eliminating low-margin SKUs have all contributed to lowering our costs. Though, like most CPGs, we have benefited from COVID thus far, we believe that the improvements made before and during the pandemic will continue moving forward. The Get Bigger brands, which are central to our growth strategy, have shown exceptional strength and maintain significant momentum that we believe will persist into the future. Since the pandemic began, approximately 2.5 million new households have tried our Get Bigger portfolio, marking a 10% increase in household penetration. Buying rates also improved, with an 18.6% increase in repeat buyers compared to last year. We have excelled in all four of our priority Get Bigger growth categories, with Celestial Seasonings tea seeing a 37% increase in household penetration and a 25% increase in repeat buyers since the pandemic began, both outpacing the category. In the most recent 12 weeks, Celestial Seasonings gained a full share point, with velocity growing over 40%, again outpacing the category. Our TeaWell innovation continues to broaden its distribution and performs well. Additionally, we are launching 14 new SKUs this fall with new category benefits. In snacks, Hain was growing new buyers and repeat rates before the pandemic, and during COVID we continued to attract new buyers while repeat purchases rose by 8%. Sensible Portions led the charge, gaining share significantly and achieving double-digit top-line growth on top of double-digit growth from last year. Our Screamin’ Hot innovation has shown strong velocities, and we are continuing to expand distribution, with further innovation planned for Garden of Eatin Terra later this year. In yogurt, Greek Gods has attracted more buyers and improved repeat rates more than any other leading yogurt brand in the category. We have also gained share, increased TDPs, and boosted velocity significantly above the category average. Our advertising initiatives have been effective and reinforce our brand's unique position, with our keto yogurt addressing major barriers to trial. In personal care, which faced challenges at the onset of the pandemic due to consumer self-isolation, we have also seen much success. Much of our business targets measured channels like e-commerce, parts of club, and the natural channel where we generate significant sales; considering all channels, our personal care portfolio is experiencing a growth rate 30% faster than what's observable in the 12-week MULO data, with consumption for both Alba and Live Clean brands growing more than 40%. We have introduced several new products, including our hemp line, which has also started strong. In summary, our Get Bigger portfolio has demonstrated significant strength in Q4. Sales, share, velocity, household penetration, new buyer repeat rates, and margin are all improving. Consumers have tried our products for the first time during the pandemic and continue to return to them. Our marketing and innovation strategies are delivering results, we’ve refined our pricing, and our supply chain and retail execution are on point. Given the exceptional results we just delivered, our strong performance during the pandemic, and the momentum we are carrying into 2021, we are poised for a great year and have full confidence in the aspects we can control. However, as we approach fiscal 2021, consistent with many of our peers, we have chosen not to provide specific guidance. On my first day, I committed to fostering a culture of credibility. While I have complete confidence in our team, our brands, and our business plans, the unprecedented volatility and uncertainty posed by COVID’s effects on consumers, customers, and the economy present many unknowns that complicate providing specific guidance. Nevertheless, we have enough insight into our plans to share some directional information. First, we anticipate continued growth in gross profit dollars and margins for fiscal 2021. Additionally, we expect robust double-digit growth in adjusted EBITDA dollars and further expansion in EBITDA margins. Given the ongoing trends in at-home eating and their influence on our top-line, we are looking forward to a stronger first half of fiscal 2021 for both top-line and bottom-line results, with the second half anticipated to show moderation in eating-at-home trends. We expect top-line growth in the first half when adjusted for divestitures and discontinued brands, with the Get Bigger brands in North America growing double digits, sustaining the momentum from the previous year’s second half. Although we foresee a slowdown in growth during the second half of fiscal 2021, the outlook remains uncertain based on macro factors and the need to compare against the pandemic-driven growth. However, compared to the second half of fiscal 2019, prior to COVID, we expect substantial growth in gross profit dollars, gross margin, EBITDA dollars, and EBITDA margins. Typically, we would not share updates within the ongoing quarter, but since we are not providing specific guidance for the year and are already two-thirds of the way through the quarter, we have some directional insights for Q1. For the quarter ending September 30, we expect mid-single-digit top-line growth after accounting for divestitures and discontinued brands, along with margin improvements and adjusted EBITDA growth on par with what we achieved in the latter half of fiscal 2020. When I joined Hain, I promised to improve transparency and to follow through on my commitments. Therefore, I want to ensure I continue to provide as much detail as I can reasonably forecast at this time. Now I will turn it over to Javier for more details on our financial performance and fiscal 2021 expectations.

Thank you, Mark, and good morning, everyone. There are five key aspects of the fourth quarter financial information that we will review today that demonstrate significant performance from the execution of our transformation plan. First, we delivered top-line growth versus prior year for the second consecutive quarter. Second, our growth was supported by continued margin expansion. Third, we are generating much better cash flows. Fourth, we have built a healthy balance sheet with excellent capital allocation flexibility. And finally, our business is well-positioned for continued success. So, let’s drill into each of these aspects, starting with the top-line. Keep in mind, I will focus my discussion on our financial results from continuing operations. Fourth quarter consolidated net sales increased 1% year-over-year to $512 million, in line with our expectations. Foreign exchange impact on the quarter was a headwind of 150 basis points; divestitures, brand discontinuations, and SKU rationalizations were a further headwind of about 430 basis points. When adjusting for these factors, net sales increased 7% versus the prior year period. From a profitability perspective, as we have guided, Q4 delivered year-over-year improvement in both, adjusted gross profit and EBITDA and adjusted gross margin and EBITDA margin. Specifically, for the fourth quarter, adjusted gross profit increased 13% versus the prior year period to $129 million. Currency impact on gross profit was a headwind of about $2 million. Gross margin improved 260 basis points, driven by top-line growth, improved product mix, better overhead absorption in our plants and significant supply chain productivity initiatives. Distribution and warehousing costs as a percentage of sales improved versus the prior year period, driven by the consolidation of shipping locations, resulting in fuller truckloads. The North America SKU rationalization that started last year also helped fuel our quarterly consolidated gross margin. As regular business practice, we continue to evaluate our portfolio for further simplification to position ourselves for success in this dynamic operating environment. For Q4 SG&A, as a percent of net sales was 16.9%, right in line with the prior year period. This performance was achieved by consolidating our North America operations into one entity and COVID-related reductions in travel offset by increased marketing spending of about 9% and increased incentive compensation accruals to match our stronger performance. Fourth quarter adjusted EBITDA increased to $62 million, compared to $49 million in the prior year period. This represents a 26% increase versus Q4 last year. Currency impact on adjusted EBITDA was a headwind of about $1 million. Adjusted EBITDA margin of 12% represented an improvement of about 240 basis points year-over-year, driven by gross margin improvement. We reported adjusted EPS of $0.32 based on an effective tax rate of 26.1% compared to $0.19 in Q4 last year, with an effective tax rate of 27.5%. The lower tax rate was mainly driven by our lower yield inclusion than in the prior year period. Now, to provide some detail on the individual reporting segments, let’s start with our North American business where we saw net sales and profit growth as well as profit margin expansion. Starting with the top-line, fourth quarter net sales increased 5% year-over-year to $299 million. Foreign exchange impact on the quarter was about 50 basis points. Divestitures, brand discontinuations and SKU rationalizations were a further headwind of about 800 basis points. When adjusting for these factors, net sales increased 13% versus the prior year period. From a profitability perspective, Q4 delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar expansion. Specifically for the fourth quarter, our North America business expanded adjusted gross margin by about 350 basis points, resulting in adjusted gross profit of $83 million or an increase of 20% versus Q4 last year. This improvement was mostly driven by our stronger top-line, product mix towards the higher margins Get Bigger brands and productivity initiatives and efficiencies in our supply chain system. Adjusted EBITDA increased to $44 million, compared to $30 million in the prior year period, a 46% increase. Currency impact on adjusted EBITDA was minimal. Adjusted EBITDA margin of 14.7% represented an improvement of about 420 basis points over the prior year period, driven by gross margin improvement. Our North America region has delivered great results thus far. And as Mark mentioned, we believe we are well-prepared for further improvement in fiscal 2021. Our team remains focused on executing against multiple opportunities that we have identified for further improvement of our margin structure. Looking into the components of the North American portfolio, the Get Bigger brand experienced 18% net sales growth. The tailwinds from COVID-19 that we experienced in Q3 continued in Q4, as Mark described earlier. This growth primarily came from several product lines, tea, our snacks product line, driven by Sensible Portions, yogurt and personal care lines such as Alba and Live Clean. The adjusted EBITDA margin for the Get Bigger brands improved 340 basis points, compared to Q4 last year, yielding a margin of 17.9%. But, it is only one quarter that is the high-end of the EBITDA target range that we communicated during Investor Day in 2019. The Get Better brands which are being managed primarily for profit showed an adjusted EBITDA margin improvement of 360 basis points from Q4 last year, yielding a margin of 8.3%. Now, let me shift to our International business where results for the quarter were consistent with our expectations. Net sales decreased 3% and were roughly flat when adjusted for foreign exchange, compared to Q4 of last year. Foreign exchange represented a $7 million headwind. Similar to Q3, the impact of COVID-19 on results for the quarter were mixed. Our non-dairy product line with brands such as Joya and Natumi delivered strong growth during the quarter. The Linda McCartney and Hartley’s brands with leading market share positions in the UK also experienced robust growth. In contrast, as Mark stated, our food business with large exposure to the foodservice channel experienced decreases in revenue, although this was in line with our expectations. Nonetheless, adjusted gross margin and dollars and EBITDA margin were all up in the quarter versus the prior year period. Now, shifting to cash flow. Fourth quarter operating cash flow improved by $72 million to $93 million; and operating free cash flow, defined as operating cash flow less CapEx, improved by about $79 million from practically zero in the prior year period. For the full year, operating cash flow improved by $118 million to $157 million and operating free cash flow improved by $132 million to $96 million. These improvements resulted primarily from stronger earnings, a decrease in cash using working capital and a decrease in our capital expenditures. At the end of Q4, our inventory was $51 million lower than the levels at the end of June 2019, mainly driven by divestitures, a reduction in the number of shipping locations in our network and the COVID-19 surge in demand for our products. Throughout the quarter, we have been replenishing inventory, while maintaining our service levels. And we expect to be at normalized levels as we enter the second half of 2021. Our cash conversion cycle was consistent with the prior quarter of 53 days. This is below our target of 60 days, driven by the decrease in inventory levels just mentioned. Capital expenditures in the quarter were $14 million compared to $21 million for the prior year period due to COVID-related delays in receiving equipment from suppliers. As a result, for the fiscal year, CapEx was approximately $61 million compared to $76 million in fiscal ’19, at the lower end of our guidance. So, we closed the fiscal year on June 30th with a cash balance of $38 million, net debt of $245 million and gross debt leverage of 2.1. This is a healthy balance sheet with excellent capital allocation flexibility. Given the decrease in leverage due to the Company’s strong performance, we are investing in all attractive internal opportunities, and we have also executed share repurchases at attractive market price. In fiscal 2020, the Company used $60 million to repurchase 2.6 million shares with 2.4% of our outstanding common stock. This leaves us with $190 million of additional repurchases authorized under our 2017 share repurchase authorization. Now, let’s turn to our final key aspect of our financial results, our outlook for the business. As Mark mentioned, we have tremendous confidence in our team’s ability to manage the controllable aspects of our business, but given the ongoing uncertainty related to COVID-19, including the magnitude and duration of the pandemic and its impact on consumer shopping behaviors, we have decided not to provide specific guidance for fiscal ’21. Also, Mark already covered the Company’s perspective for the first quarter and first half of ’21, I would like to discuss the full year in more detail. Because of the divestments and brand discontinuations, $60 million have been removed from the fiscal year 2021 days. For the full year compared to prior year, we anticipate the following: gross profit dollar and margin expansion, strong double-digit growth in adjusted EBITDA with continued margin expansion and strong digit growth in operating free cash flow. In addition for 2021, we expect capital expenditures to be around 4% of net sales. This is an increase from fiscal 2020, which will be used to accelerate several large productivity projects across our supply chain. Our cash conversion cycle is expected to be consistent with our target of 60 days. In summary, we made a tremendous amount of progress in fiscal 2020. We delivered top-line growth versus the prior year in the two consecutive quarters. We delivered profit margin expansion versus the prior year every quarter. We improved our cash flow generation, and we have built a healthy balance sheet. We believe Hain Celestial remains well-positioned for long-term growth even as we continue to navigate through the pandemic. We remain confident in our transformational strategic plan and our ability to make further improvements in fiscal ’21 and beyond. I will now turn the call back to Mark.

As you can see, we had a tremendous year. Hopefully, you got a good understanding of our results, momentum, and expectations for fiscal 2021 this morning. We will provide more detail around the fiscal 2021 plan, key drivers, and outlook in the coming months, starting at the Barclays conference in two weeks. On behalf of our Board of Directors and management team, I’d like to thank our global team at Hain Celestial for how well they have embraced our transformation journey and executed against our goals, particularly in this evolving and dynamic environment. What we’ve collectively achieved in fiscal ’20 is just the beginning of the success that we believe lies ahead for the Company. With that, let me turn it over to the operator for questions.

Our first question comes from the line of David Palmer with Evercore ISI.

Thanks. Good morning. Question on gross margin, you reached over 25% in the second half of the fiscal year, which was great. I know you’ve targeted 30% gross margins over time. When do you think Hain can reach that sort of a gross margin? And to-date, a lot of the gross margin expansion has resulted from divestitures and other rationalization. Of course, you had that boost regarding COVID during this period, which will continue into the next fiscal year. So, how should we think about the pace of improvement from here? And maybe you want to break that down also into the Get Bigger versus Get Better portfolio. Thanks.

Yes, I’m happy to address that. We are going to see ongoing steady progress on margins. This year, we achieved several hundred basis points of margin growth, around 250 points in the fourth quarter. Frankly, if it weren't for the challenges in the fruit business, we would have seen an additional 170 points of margin expansion on top of the 25% we delivered. We clearly have issues in the fruit business to resolve. However, excluding that, we are already close to 27%, and we expect to gain several hundred more basis points on top of that. The Get Bigger brands are already reaching a 30% margin level, and we anticipate moving them into the mid-30s; we're well on track for that. A key factor in achieving this is top-line growth since most of these products are self-manufactured, allowing us to benefit significantly from absorption as we utilize our plants. Additionally, we have strong automation programs in place, some consolidations still to carry out, and opportunities to reduce SKUs and unnecessary spending. We firmly believe there's substantial room for further margin improvement within the Get Bigger brands. Also, mix plays a significant role in these businesses. Regarding the Get Better brands, remember they were 50% of our sales and nearly zero profit at Investor Day. They now account for about 33% of our North American sales and 20% of our profit, so they have markedly improved their margins by 600 basis points this year, with further improvements expected. They are undergoing similar processes, such as design to value, eliminating unnecessary features consumers won't pay for, and reducing costs, alongside better management of distribution and warehousing costs, leading to less waste and customer penalties. There is also a mix benefit in this category because some high-margin businesses, like our oil segment, are experiencing double-digit growth. In summary, after a couple of hundred basis points of margin improvement this year, we anticipate seeing a similar increase next year, and by the time we reach the fiscal 2022 plan, we should be very close to delivering the promised 30% margin.

Thank you. That’s helpful. Just a quick follow-up, if you were to think about fiscal year beyond the COVID period, fiscal ‘22 is probably the first clean year, is the EBITDA for that in your own internal planning, EBITDA for that year higher after versus say six months ago, either as a result of COVID itself and some of the factors you see playing out, or just internally what’s running in parallel in terms of your own portfolio management? How do you think about your post-COVID EBITDA reality versus six months ago? Thanks.

Yes. It’s a great question. Very hard to forecast that given that nobody knows at this point what post-COVID looks like, and how much of these incremental triers that we’ve got are going to remain. So, it’s hard for me to answer the question. What I would say though is, we were transforming the business before the pandemic. I had promised that you would see the top-line starting to bend on the Get Bigger brand beforehand. I think, in one of the charts that we put in with the earnings today, you’ll see that there was I think 8% growth on the Get Bigger brands the month before the pandemic started. So, we had already started to turn it. And right now, all of our Get Bigger brand categories we’re seeing growth in. If we can sustain that growth, we will have a very robust profit picture when we come out of COVID. Obviously, there’s a lot of the game to be played between now and the end of COVID. But, I think given how we have performed during COVID, given our scrappy entrance into things like hand sanitizer, the amount of innovation that we’re bringing out right now at a time when others are pulling back on innovation, the addition of marketing at a time when others are pulling back on marketing, I think all of that sets us up for a very good exit from COVID. But, it’s premature right now to say what that looks like in terms of the P&L.

Our next question comes from the line of Ken Goldman with JP Morgan.

Good morning. This is Anoori Naughton for Ken. I have one question and then one follow-up. The first question is, within personal care, you’ve benefited from strong hand sanitizer sales in the fourth quarter. So, to what extent are you guys expecting sales in this category to continue to remain strong into the first quarter and beyond?

So, the hand sanitizer opportunity was obviously a once-in-a-lifetime opportunity that came in front of us. We did have a business in Canada. We quickly expanded into the U.S. We had a strong fourth quarter in hand sanitizer. But, if you go to the store now, you’ll see pretty much every store in America has got a lot of hand sanitizer in it. So, the good news is, we are picking up permanent distribution on sanitizer. So, whereas a lot of these others are kind of in and out, and there have been many instances where people are using the wrong kind of alcohol and had to recall their sanitizer. So, we think we’re going to have a nice steady business for the long haul. We don’t anticipate that sanitizer sales are going to be as elevated as they were during the beginning of the pandemic. But, it’s a very nice incremental business that we didn’t have before, and it makes a great addition to the personal care portfolio that was growing very nicely beforehand and continues to grow very nicely through the pandemic.

Okay, great. Thank you. And then, for a follow-up, I just wanted to ask a little bit about, are there any brands or categories that’s maybe lagging your expectations or areas that you’d call out where you could improve in fiscal ’21?

Yes. From a pandemic perspective, the two categories that have been most affected are fruit and baby food. During self-isolation, many mothers began making their own baby food, mashing bananas, carrots, and other items they would normally purchase in packaged formats for convenience. We have seen some recovery in this category, but we have been disappointed with the results in baby food over the past five to six months. However, we have a strong brand in the UK, Ella’s, which is a leading super-premium brand that has consistently gained market share during the pandemic, even though sales have faced challenges. In the United States, we have Earth’s Best, another excellent brand. Earth’s Best had a mere 2% EBITDA margin during our Investor Day, so we have been actively working on SKU rationalization to improve its profitability significantly. Now, our focus is on achieving low single-digit growth in the top line, which requires further efforts. We have some upcoming innovations, particularly in snacking and baby food, which offer higher margins compared to formula and pouches. We are optimistic that this will help improve our top-line performance and continue expanding profitability.

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

You had mentioned that for the quarter, COVID had virtually no net impact on the top-line at the total company level, and obviously you called out some puts and takes between fruit in the UK and then the upside in the U.S. But, you still have at the total Company level where in around a mid-single digit range. So, would we hear you correctly that that’s your expectation for a normalized top-line growth run rate?

Yes. So, what we did was looked at what was our expectation for the quarter before COVID happened and what did we actually deliver? So, we delivered pretty much to the penny what we thought we were going to deliver on the top-line. What’s important again, to note is we had a $25 million drag from the fruit business. So, that business by itself had a big impact on the overall COVID results. We saw some nice bump in the results in North America. We saw some nice bump in the grocery business in Hain Daniels. I would tell you that the European non-dairy business has been growing high teens for several years and frankly we’re capacity constrained. So, it has nothing to do with COVID with the fact that that has been growing as rapidly as it has been. But the $25 million drag from fruit offset the $25 million of gain that we had in those other parts of the business, netting up to basically zero for the quarter. I know, it sounds hard to believe, given COVID that there was no impact. But, the math basically says, we were up 25 and then we lost it all on fruits.

Yes, I think the mechanics you’ve laid out really nicely. So, I just want to understand maybe the thinking on a normalized pace and just if you plan was for the same, arguably good top-line level, is this depending on which way you measure kind of 3 to 7, call it mid-single-digit growth rate what we should expect in a normal world is a little bit what I’m trying to get at I think.

Yes. What we indicated on Investor Day was a mid-single-digit growth in revenue for the Get Bigger brands. Currently, we haven't fully reached that goal. In the first half of the year, we experienced a decline of 1% to 2%, but we are beginning to see a transition to low-single-digit growth at the start of the third quarter. Our International business has been growing at around 1% to 2%, which we believe would have been its usual rate excluding COVID impacts. For the Get Better brands, which had been declining in the mid-teens, we aimed to reduce this to a decline of 5% to 10%, and we were approaching that range before the pandemic hit. Overall, if we look at it without external factors, we were close to our long-term goals for the top line of the Get Better brands and the International segment, while we still need to make progress on the Get Bigger brands. We've seen significant improvement in the Get Bigger brands, but our momentum has been constrained by the pandemic, especially since our ability to introduce innovations has been limited while customers are not restocking their shelves. In summary, we expect low-single-digit growth for the Get Bigger and International segments, while the Get Better brands are projected to decline in the mid to high-single digits, reflecting our performance before the pandemic and what we would likely see without COVID.

Thank you for the information. I have a quick follow-up regarding margins. You mentioned the several hundred basis-point increase expected for the first quarter. Can you provide some insight on this? Historically, this quarter has been seasonally lower. I understand your portfolio has changed. Is that still the case, or is your margin stability improving throughout the year? I'm trying to understand how high this might reach.

Yes. Q1 is typically our lowest margin quarter. You remember, we’ve got a big tea business and soup business. And so, we tend to skew more heavily to the winter. The only business we really have that is summer oriented is sun care, and you sell all of that in the spring. And then, the retailers see how much they sell through during the hot months. So, really, it is our lowest volume quarter, and therefore because we have less absorption in the plants where it tends to be our lowest margin quarter. That said, we’re exiting ’20 with very strong momentum. We are two-thirds of the way through the quarter. And I’ll tell you we’re off to a very good start. And then, the guidance that I gave around the quarter, we feel pretty confident that you’re going to see some nice margin expansion within the quarter.

Thank you. Our next question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Hey. Looking at the bigger picture, it's clear that you have strong momentum in North America, even aside from COVID. I’d like to know if your retail partners are aware of this. As you consider the upcoming planogram reset and the new innovations, do you think this will translate into shelf space gains? Or is the current chaotic environment making it difficult for retail partners to identify the successful products? I'm aware the spring planogram reset is still a ways off, but there are some changes happening in the fall. What are your thoughts on this?

Yes. So, our relationships with customers have dramatically improved in the last 18 months for several reasons. First and foremost, we were not servicing the business 18 months ago. We had 70% service in personal care for nine months as an example. We couldn’t keep the shelf stocked, so just our ability to keep the shelf stocked has improved our relationships, number one. Because any conversation with a retailer when you come in and talk about promotions or innovation or whatever, their first response is I don’t even want to talk to you until you can service the business. So, we’ve checked that box. Second, we came into the pandemic where other people really struggled with the surge in capacity, and we really serviced the business nicely through the pandemic. So, we have again also kind of won some grounding points, if you will, around our ability to service the pandemic and things like the scrapping is on hand sanitizer when nobody could get it, and we were able to go to customers and provide them with something they desperately needed. All those kinds of things improved the relationship. Then, on top of that, we are now bringing a ton of innovation at a time when other people are pulling back their marketing and pulling back on their innovation, because they’re just trying to service the business. So, for example in tea, where we’ve been growing 30% plus for the last five months, we’re introducing 14 new items in tea. And they’re not just here’s another flavor of Sleepytime tea, it’s energy, it’s probiotics, it’s melatonin, it’s a whole bunch of things that really didn’t exist before within the category that are being very, very well received by customers. So, we’re bringing innovation at times when others aren’t and we’re bringing real innovation versus line extensions. And that is going to bode well in terms of us picking up space. And then, the last thing I would just say is, you got to remember, over the last 18 months, we’ve been reducing SKUs and eliminating uneconomic spending. So, as you’re pulling money away from people and cutting back on the push with the retailer to grow the category, now that we’ve pivoted toward growth again, we are getting a very good reception from people and they are excited about what we’re bringing. So, I believe that we are very well set up to be a net winner during the pandemic and a net winner coming out of the pandemic because of all the factors that I just mentioned.

Got it. That’s extremely helpful. As a follow-up to the gross margin question earlier, it seems that some of the gross margin advantage comes from high utilization rates. While we are unsure what consumption will look like after COVID, it is expected to decline somewhat. Therefore, how crucial is the increase in CapEx over the next year for maintaining those gross margin gains? Do you believe this investment will not only help you retain the margins you have but also allow for further improvement?

I believe that this will build on what we currently have. One of the key ideas presented during Investor Day was that the margin growth we’re seeing in our expanding businesses is largely due to plant absorption. With the recent surge in demand, we are observing significantly strong margins in these brands. For instance, in the fourth quarter, we achieved EBITDA margins of 18% in our expanding sector while investing in marketing, which reflects robust margins. Even if there's a slight decrease in COVID-related factors, our marketing innovations will help maintain growth in the mid to high single digits for these businesses, ensuring that absorption continues into the future. Additionally, the productivity initiatives we've implemented for fiscal 2021 involve a considerable amount of automation on the backend of our production lines, which are still quite manual. The introduction of automation will further enhance our margins. We are also making improvements in operational efficiency, such as optimizing truck loads. Previously, there were no volume minimums or tiered pricing, meaning we charged the same rate regardless of whether we shipped one or multiple pallets. As a result, there was little incentive to fully load trucks, which led to unnecessary costs for transportation when trucks were underfilled. Now, we've improved this so that trucks are loaded with an average of half a load, and we aim to move towards full loads. Therefore, there are still ample opportunities to enhance our margins through these internal improvements, and we anticipate that any gains will build upon our existing achievements.

Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Hey. Good morning. It’s Matt on for Rob. Congrats to you and the team on the solid execution this year, all things considered. And thanks very much for the question.

Thank you.

So, as you’ve pointed out before, your 60-40, North America-International split allows you to compare trends and share strategy successes between the two segments. So, while the International business is trying to look more like the North America business from a top-line acceleration and margin expansion perspective, relative to peers without significant international exposure, you’re getting a more hands-on education on pandemic trends abroad, and potentially future trends here in the U.S. So first, just generally, what are simply the key differences that you’re seeing between where that the U.S. consumers with COVID and perhaps the macroeconomic situation versus European and Rest of World markets? And in your opinion, are the European consumer behavior changes post-lockdown still the best guess for what’s to come down the pipe for the U.S.?

Yes, that's a great question. What's interesting about our international business, primarily in Europe, is that it behaves similarly to different states in the U.S. Some areas are still in lockdown and moving slowly to reopen, while others act as if everything is normal. We see this in Europe as well. The UK is still heavily locked down, with restaurants closed and many people working from home. The impact there feels more like the early days of the pandemic here. In contrast, in Continental Europe, such as Germany and Austria where we have factories, it’s business as usual. Those places have been operating normally throughout the pandemic, with open societies, minimal restrictions, full restaurants, and people not wearing masks. The situation varies significantly depending on the specific location. Overall, I believe Europe is managing the situation better than we are, which is evident in the strengthening of their currencies against the dollar. They have successfully contained the pandemic while keeping their economies moving, unlike here where it's often one or the other. There are lessons we can learn from their approach, and I think we are heading in that direction, getting closer to how Continental Europe is managing things. However, the UK seems to be lagging behind us in terms of reopening society and returning to normal business operations.

Okay. Yes, that’s very helpful. And I guess on that topic. Do you have any visibility into the International businesses, household penetration repeat rates in isolation, or how would they compare to North America trends, and would that even be a fair proxy for North America trends directionally going forward?

Yes. I don’t have as much visibility into like the panel data that we get here. In the Europe business, which is largely driven by our non-dairy beverages, a good portion of that is private label. So, we don’t even buy the syndicated data. We have some good brands there. They grow 20%. Like I said, we’re more constrained by capacity than anything else. We could grow faster if we could get capacity faster, which has been our kind of relentless rally cry here. I think, in the UK where we have a lot of number one and number two share brand, I think the surge from the pandemic was smaller than we saw here. And so, I’m seeing high-teens growth on the Get Bigger brands here. I’m seeing more like 10% growth on the brands there. But, I don’t have great visibility into panel data in terms of increased households and repeat rates. But, I do see similar center of store growth. I do see growth in more of the cooking brands, like we see here in the United States. So, I think the consumer trends are similar. It’s just a little bit more of a muted surge and certainly a slower reopening of the economy.

Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Can you provide more details about the productivity improvements related to this year's capital expenditures? You've mentioned the types of projects, but what specific cost savings do you expect to achieve and over what timeline? I have a follow-up question after that.

Yes. We look at the internal rate of return and net present value for all our projects, and on average, we expect a payback of two to three years on our capital. This year, we have approximately 25% more capital available than last year, which means we have a significant number of productivity projects underway. The implementation of these projects will be spread throughout the year. Some have already started, while others will occur in the middle or later in the year. Additionally, with the integration of various international divisions, similar to what we've done in the U.S. with Canada, there are numerous productivity projects nearing finalization that will begin to launch towards the end of the fiscal year, yielding substantial benefits as we move into fiscal year 2022. Therefore, I anticipate we will see several hundred basis points of margin expansion this year from productivity, along with a rapid acceleration of productivity projects carrying over into the fiscal year 2022 plans, influenced by the timing of our spending this year.

Great. And as a quick follow-up, how much do you expect your marketing spend to be up this year, and how much was it up in fiscal ‘20?

Do you know how much it was up in ‘20? Javier is looking up the exact number. I knew it grew in three of the last three quarters of the year, but we’ll get you that number while I answer the other question. What’s interesting right now on marketing is, if you think about it, airlines aren’t marketing, cruise lines aren’t marketing, hotels aren’t marketing. So, the cost of marketing has dropped dramatically. So, for flat spending, I can get 25% to 30% more bang for the dollar than I did in previous years. So, the amount that I’m going to spend this year, Alexia, is going to be dependent really on the cost, right? So, if I can get 30% more impact for the same spending, I probably won’t increase my marketing very much this year. But, I’ll get a hell of a lot more for what I’m spending. If the economy comes back and everybody starts to spend at more normalized levels and the costs go back up, then we’ll have to evaluate whether we need to add more spending or not. So, it’s a little bit of a dynamic number, depending on the cost per impression relative to what I’ve been paying historically. And this year, Javier?

Yes. So, for this year, Alexia, our overall marketing spending grew about 5%, that’s 2020 versus 2019. And for 2021, the total dollar amount will be consistent with how we grew the marketing in 2020.

Yes. The good news Alexia, just one last comment is, we’re getting close to 5% of sales on marketing in North America, but it’s higher for the Get Bigger brands and lower for Get Better. So, we’re in a pretty good place on our spending. The one category, we’re probably still a little light on is Personal Care, because it’s more of a fashion business, if you will and tends to have higher spending levels. But, across the rest of the brands in North America, I think our spending levels are pretty good. So, it really comes down to improving the effectiveness of what we’re spending, putting more into working dollars instead of non-working dollars. We’ve done a lot of agency consolidations to get more of those dollars working, and then, what’s really the cost of what I’m buying relative to what I paid historically.

Thank you. Our next question comes from the line of John Baumgartner with Wells Fargo.

Mark, I wanted to revisit the strength in international sales excluding the fruit business. Last quarter, we discussed how private label in Europe was benefiting from consumer trade out. I'm curious why you think private label is experiencing this trade out in Europe but hasn't been seen in the U.S. yet. Do you think this is solely due to differences in government stimulus, or is there something else happening in retail that explains this difference?

Yes. So, in Europe, private label is a much, much, much bigger percentage of sales than it is in the U.S. The development of private label is double what it is here. You’re looking at categories with 30%, 35%, 40% private label, whereas here, it’s a much smaller number. So, consumers are very used to buying private label. They consider those brands as good as the stuff coming from the manufacturers that are branded. And so, it’s a very different dynamic. So when I tell you, we’ve got a big private label non-dairy business in Europe, that is important because 40% of the category is private label. So, even if you want to be a branded player, you probably have to provide some level of private label to get your foot in the door on the branded side. So, it’s not surprising to me that in a pandemic where people are cash-strapped, they’re worried about their future that they are trading down to private label. Here, I don’t think people are as cash-strapped because of all the stimulus that we’ve put in place and private label is less accepted here and used in normal life than it is over there. So, we’ve not seen a very big impact at all for private label thus far in our categories. And we don’t anticipate that that’s going to change very much as we go through the pandemic, particularly given that this is a virus and people are very worried about health and wellness. They’re worried about immunity. They’re worried about staying healthy. So, being at the core of health and wellness, which is where our Company is situated, I think, we’re very well positioned for this pandemic relative to other people that we compete against.

Okay, great. Thanks for that. And then, just a follow-up on cash usage. I mean, leverage is in a very good place right now at 2 times, as you mentioned. But, there wasn’t much activity in terms of share repurchase in Q4 as the stock moved higher. How do you think about the order of importance from here? I mean are buybacks still the top of your list? Is M&A still at the bottom? And in terms of M&A, with all the moving parts on restructuring right now, at what point will the activity be complete where you feel like you can bolt on, integrate new assets. When do you have that bandwidth, if you don’t have it already? Thank you.

Yes. I will address the first part, and then Javier will discuss our capital allocation strategy. We are actively reshaping our portfolio and will continue with further divestitures. However, we have already accomplished much of this task, having eliminated nearly $800 million in sales over the past two years. Although there are still some remaining assets, as evidenced by the four brands we divested in Q4 and the earlier divestiture of Danival, the bulk of the heavy lifting has been completed. Nonetheless, we still need to address the fruit business at some point in the future. We are prepared for acquisitions if a suitable opportunity arises. Now that our debt situation is stable, we are exploring several options to return value to our shareholders. I'll turn it over to Javier to discuss our capital allocation strategy.

I would agree with what Mark mentioned. I wouldn’t necessarily say that share repurchases take precedence over mergers and acquisitions. We first assess all of our internal opportunities and we are neutral about where to allocate our funds. We evaluate merger and acquisition opportunities, and if they appear promising, we explore them further. Otherwise, we consider share repurchases. Ultimately, it’s about determining the most attractive option for our investment.

Thank you. Our next question comes from the line of Anthony Vendetti with Maxim Group.

Thank you. Just a quick follow-up, Mark, on the fruit business. I know, you’re aggressively trying to address that. Do you have a timeframe on when you expect to reach a decision on that? And then, just a follow-up on the online business, what have you seen there during this quarter?

We are currently evaluating options for our fruit business, recognizing it is a non-core asset with a different skill set, low margins, and it has been significantly dragging down our overall performance. This situation is overshadowing some strong results in our International segment. We'll provide more information on this in the future, but we are actively exploring options. As for our online business, it remains a crucial part of our operations, accounting for over 10% of our sales and consistently growing nearly 100% since the pandemic began. Our company has its roots in the natural channel and e-commerce, and we have established solid relationships in that area. A notable growth area has been Instacart, which has become an important component of our e-commerce strategy. We've consistently performed well on Amazon, where Sensible Portions ranks as one of the top food brands, alongside strong sales in personal care and baby food. With the resurgence of platforms like walmart.com, target.com, and Kroger, we are experiencing robust growth overall, which has remained steady after the initial surge in March, stabilizing at roughly double our pre-pandemic levels.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Schiller for any final comments.

Thank you all for your time today. Obviously, we are coming off a very strong year and feel very bullish on the year ahead. I hope you all have an opportunity to attend Barclays in a couple of weeks. We’ll bring some more color to our plan for F21. But, thank you for your time today and we look forward to continued dialog. Have a great day.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.