Greetings, and welcome to Hain Celestial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. This conference is being recorded. I would now like to turn this conference over to your host, Mr. Chris Mandeville, Managing Director of Investor Relations at ICR. Thank you. Sir, you may begin your presentation at this time.

Good morning, and thank you for joining us on Hain Celestial's fourth quarter and fiscal year 2022 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer; and Chris Bellairs, 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. 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 reports on Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission as well as 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 inclusive of 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. This call is being webcast, and an archive of it will be made available on the website. And now, I'd like to turn the call over to Mark Schiller.

Thank you, Chris, and good morning. On today's call, Chris Bellairs and I will give you some color on the Q4 fiscal year '22 performance and our fiscal '23 plans. Let me start by reflecting on the year we just ended. Without a doubt, it was certainly a difficult business environment. The year began with continued COVID challenges and progressed with extremely high inflation, substantial supply disruptions, and a war that materially impacted the global food industry, especially in Europe. Earlier in the year, we laid out our Hain 3.0 long-term growth strategy. However, as the macro issues emerged, we had to pivot quickly to address the unforeseen obstacles in our path. I want to thank the Hain team for their hard work and resilience over this past year. I also want to reiterate that despite the short-term volatility, we remain confident in our Hain 3.0 strategy, our brands, and our team. Several weeks ago, we communicated our Q4 results in a preannouncement, and our final audited financials are in line with that release. We outlined several key drivers of the shortfall. First, in international, softness versus year ago was driven by Forex, macroeconomic issues, and weaker plant-based categories. Second, in North America, we had supply chain disruptions and increased inflation costs. And third, we made a proactive decision to exit some unproductive brands and SKUs. We also highlighted the strength and momentum of our growth brands in the U.S. While we're certainly not content with our Q4 results, we remain confident in the underlying strength of our business. There are numerous examples of brand momentum, stronger customer relationships, a more nimble supply chain, and an intensified focus on our productivity agenda, all of which bode well for Hain's future. Let me unpack our results for you starting with North America. Within North America, sales in the quarter grew a very robust 17% overall compared to the same period in 2021. Excluding acquisitions, divestitures, and the impact of currency, our sales were up a solid 6%, and that's despite some significant supply chain disruptions. Consumption in the U.S. was particularly strong, up 11% in the quarter, well above the food industry average. You'll recall on Investor Day last fall, we identified six categories we're focused on that make up 80% of our company sales and profits: snacks, tea, baby, yogurt, plant-based, and personal care. In Q4, our growth brands in these categories in the U.S. delivered dollar consumption growth of 15% versus year ago. Velocities for these brands were up 18% in Q4, and we continue to gain significant share on top of share growth last year. Household penetration on these brands grew 5% in the quarter compared to last year, a very important metric given the size of our brands. We also increased our total Hain buyers by 6% versus just a 0.5% increase for the entire categories. Our most loyal consumers of these brands, who purchase more than three times per year, grew 11% in the past quarter. Importantly, the buying rate also increased 12%, indicating that as we bring in more consumers to our brands, they're also repeating at a very high rate. The number of buyers and household penetration grew across snacks, personal care, baby, and yogurt, and market share grew across many categories. Bottom line, our growth brands continue to perform well in North America and are demonstrating the potential we outlined during our Hain 3.0 Investor Day. Our challenges in North America were in the middle of the P&L where gross margins compressed, driven primarily by three factors. First, we experienced supply disruptions across many of our brands, including the sixth largest brands, which left us with increased costs and stranded overhead. The good news here is that many of these supply issues have been resolved, and we expect that most of the remaining material outages will be resolved by the end of Q1. Second, we incurred additional unexpected inflation and cost increases primarily from co-manufacturers and from purchasing ingredients at a premium when below-market contracts expired. To offset these additional costs, we've taken additional pricing in Q1 that's been accepted and is starting to be reflected in our retail prices. Third, we also proactively took the opportunity to write off some aging hand sanitizer that was produced early in the pandemic, and to also eliminate SKUs that incurred material inflation costs and had no clear path back to profitability. In summary, we believe that North America is positioned for a stronger fiscal '23, with continued top-line growth and improving profitability as more pricing hits the market in Q1, supply disruptions abate, and our renewed productivity agenda comes to fruition. Shifting to international, our top line was soft in Q4, down 9.5% adjusted for currency. To understand it better, let me break down the UK versus the rest of Europe. On the last call at the end of Q3, we told you that the entire grocery store sales in the UK were declining due to high inflation, eroding consumer confidence, and difficult overlaps from the COVID lockdown the previous year. We expected those trends to improve in Q4, and in fact, they did improve from down 7% in Q3 to minus 1%. But they were still down in units and did not improve as much as anticipated. UK consumption trends also improved 6 percentage points from minus 9% to minus 3% ending Q4. Excluding plant-based protein, a category which has softened globally, our UK consumption was up 1%, and net sales were up 4%, growing faster than the total store. Momentum in our remaining brands has improved, and we are seeing improved market share trends. Despite the improved momentum with pricing still lagging, inflation and units down further than revenue, we experienced deleverage in our factories negatively impacting our gross margins. On the positive side, we've just completed another round of pricing in the UK, which has been accepted without any shipment disruptions and will be implemented by the end of the first quarter. We're also aggressively increasing our productivity efforts and right-sizing our manufacturing resources to reflect the total store volume declines. This will result in improving EBITDA as the year progresses. Shifting to the rest of Europe, sales were also soft as we continue to operate in a very volatile and highly inflationary environment driven by the Russia-Ukraine war. As you know, our European business is primarily plant-based non-dairy beverages. We are a large co-manufacturer to many retailers and brands. We told you last quarter that we lost a significant co-manufacturing contract, and that we expected to have new contracts to replace 50% of those sales by the end of Q4. In fact, we did better than that; we now have contracts in place to absorb 65% of the lost sales. However, most of those contracts won't start until the first half of fiscal '23. So the future revenue and corresponding plan absorptions didn't benefit the most recent quarter. In addition, with all the macroeconomic challenges and uncertainties, the plant-based beverage category growth rate in Europe has slowed significantly in Q4, resulting in lower sales than expected from our customers. This, in turn, created additional stranded overhead further eroding our margins in the quarter. We're working diligently to reduce our cost structure, add new customers, but we now anticipate continued declining plant-based trends in fiscal '23 with some improvement as the year progresses. Let me now turn to fiscal '23. As we stated in the preannouncement several weeks ago, many open questions remain globally around the economy, consumer purchasing behavior, retailer actions, supply chain stability, and the impact of the war. Reflecting the challenges that we are facing today and what we can reasonably anticipate, we've guided to low single-digit top-line and EBITDA growth adjusted for currency. Chris will provide greater detail on all the plan assumptions in a few moments. With regard to our long-term strategy, you'll recall that fiscal '22 was a transition year between Hain 2.0, which entailed cost-cutting, capability building, and simplification of our business, and Hain 3.0, which focuses on higher growth predicated on driving distribution, creating category-expanding innovation, and increasing marketing on priority brands. As we enter fiscal year '23, we expect that transition to continue, particularly given the high inflation and continuing supply disruptions. We still have opportunities to simplify our portfolio, build capabilities and reduce costs, while at the same time increasing our momentum toward consistent stable growth. While the environment is clearly volatile and unprecedented, we believe we are well positioned for a successful year. Here are a few of the reasons why. First, we have strong top-line momentum and brand strength in North America which we expect will continue. Second, our innovation is performing well helping us further expand our distribution and share of shelf. Third, we've successfully taken significant pricing in Q1 in the United States and the UK, which should allow our pricing to catch up to inflation as the year progresses. Fourth, we're making solid progress in signing new contracts to replace the lost non-dairy beverage volume in Europe. Lastly, our productivity pipeline is full. In short, we are controlling the controllables and believe we have momentum that sets us up for improved performance in fiscal 2023, weighted towards the back half. Additionally, we see early signs that the macro environment is improving. Inflation in North America may begin slowing a bit, gas prices have started to come down, and total store sales in the UK appear to be stabilizing. This gives us further optimism that we may have potential tailwinds later in the year or at least have upsides to address any continuing volatility that may incur in Europe.

Thanks, Mark, and good morning, everyone. Consistent with our preannounced earnings, fourth quarter consolidated net sales increased 1.4% year-over-year to $457 million. Foreign exchange was a material headwind, reducing reported net sales by approximately 440 basis points. Strong momentum continued in North America with reported and adjusted net sales increasing 17% and 6%, respectively. Net sales in the international operating segments, however, were significantly below our expectations, falling more than 18% versus the prior year, including a 930 basis point currency translation headwind. In the UK where the entire grocery store declined in Q3, the recovery in Q4 was more muted than our forecasts, and our non-dairy beverage business in Europe was hindered by a rapid deceleration in category growth. Adjusted gross margin was 19.4% in the fourth quarter, approximately 630 basis points lower than the prior year period. In the quarter, we proactively eliminated unprofitable SKUs and obsolete inventory in our North American sanitizer business, resulting in an approximate $10 million reduction to gross profit. Excluding that write-off, adjusted gross margins would have been approximately 22%. Similar to net sales, international adjusted gross margins were below our expectations at 18.3%, 890 basis points below prior year. Our challenges were most pronounced in the non-dairy beverage category, with declining volumes resulting in significant deleverage in our manufacturing facilities. Total SG&A, including marketing, came in at 15.2% of net sales for the quarter, benefiting from continued aggressive cost management. Adjusted EBITDA in the fourth quarter was $35.4 million versus $68.1 million in the prior year. The year-over-year decrease was due to raw material and finished goods inflation, ongoing supply chain disruptions, and the approximate $10 million write-off, partially offset by price increases we've taken year-to-date and supply chain productivity. Our adjusted fourth quarter EPS of $0.08 decreased compared to $0.39 in the prior year period. Now, let me provide some detail on the individual reporting segments, starting with our North American business. On the top line, reported net sales of $297 million increased by more than 17% year-over-year. Adjusted for foreign exchange movements, acquisitions and divestitures, net sales increased about 6% versus the prior year period. Further, reported net sales growth versus the prior year in North America improved sequentially from the third quarter by approximately 400 basis points. Our growth brands in North America grew adjusted net sales by more than 8% in the fourth quarter, and finished the year with significant momentum, with adjusted net sales growing more than 700 basis points faster in the second half of the year versus the first half. Adjusted gross margin in North America during the fourth quarter was 20%. The approximate $10 million one-time write-off we took in Q4 resulted in an approximate 340 basis point reduction in adjusted gross margin for the period. Excluding the write-off, North American gross margins were roughly in line with Q3 and first half margin. Adjusted EBITDA in Q4 for North America was $27.5 million versus $34.8 million in Q4 of fiscal '21. Adjusted EBITDA margin was 9.3%. Excluding the write-off, adjusted EBITDA margin would have been approximately 12.6%, the highest quarter in fiscal year '22. Now, let me shift to our international business. Fourth quarter net sales were $160 million, 19% below the prior year, which includes a 930 basis point foreign exchange headwind. In the UK, adjusted net sales declined 0.9%. But that was a 60 basis point sequential improvement versus Q3 as the UK grocery store channel began to recover. Excluding plant-based proteins, which are declining as a category throughout Europe and North America, adjusted net sales in the UK would have been up approximately 4%. This reinforces the underlying strength of the UK business and highlights the challenges in plant-based, which is primarily a category issue. In Europe, adjusted net sales declined 25% in Q4, driven by the softness in the plant-based non-dairy beverage category and the lost co-manufacturing contract we highlighted on our Q3 earnings call. While we've begun to replace that volume and had a little benefit in Q4, that loss combined with lower overall category growth has created a short-term headwind. Beginning in the third quarter, when business conditions in Europe and the UK became materially more difficult, the international team has responded rapidly to the emerging challenges with significant price increases, a stepped-up aggressive productivity agenda and a rationalized SG&A cost structure. These initiatives will gain traction throughout fiscal year '23. Adjusted gross margin for our international business decreased by 890 basis points to 18.3%, driven by raw material inflation, increased energy costs, and fixed cost deleverage. Adjusted EBITDA in Q4 was $16.9 million, a 56% decrease from the prior year period. As a percent of net sales, adjusted EBITDA was 10.5%, 890 basis points below the prior year. Shifting to cash flow and the balance sheet. Operating cash flow was $80 million for the full year and negative $19 million in Q4. Low net income and higher working capital due to inflation resulted in negative operating cash flow in Q4. While fiscal year '22 operating cash flow was $117 million below the prior year, recall that the company benefited from a tax refund claim under the CARES Act of about $54 million during fiscal '21. Capital spending for the fourth quarter was $6 million with reduced spending to help mitigate lower net income and operating cash flow. Cash on hand at the end of the quarter was $66 million, while net debt stood at $823 million. Net debt leverage calculated under our amended credit agreement was 3.9x. Our balance sheet has become more highly leveraged over the past few quarters as cash flow underperformed versus our expectations. We are reacting to this by reducing CapEx, which doesn't increase revenue or productivity and launching initiatives to improve net working capital and our cash conversion cycle, with a focus on lowering inventory levels across Hain. During the quarter, we repurchased 0.5 million shares or 0.6% of the outstanding common stock at an average price of $26.13 per share for a total of approximately $13 million, excluding commissions. Now, turning to our outlook for fiscal '23. We expect adjusted net sales and adjusted EBITDA growth on a constant currency basis of minus 1% to plus 4%, full year adjusted gross margins that are flat to slightly down versus prior year and sequential quarterly improvement throughout the year, with margins and EBITDA in Q1 modestly below the fourth quarter of fiscal '22. Within net sales, we expect North America to deliver mid-single-digit growth similar to fiscal year '22, as we anticipate strong growth in the snacks portfolio and our other growth brands. We are taking a more cautious approach in the international operating segment where consumers are experiencing higher inflation and a more volatile operating environment. Similar to fiscal '22, pricing to offset ongoing inflation will be an important part of our net sales growth strategy. Unlike fiscal '22, where we took price increases at different points throughout the year, in fiscal '23, our planned price increases in the U.S. and UK are primarily in the first quarter. To date, based on expected inflation, almost 90% of those increases have been communicated to and accepted by our retail partners. Additional pricing will follow in Canada and Europe after Q1. With the cumulative effect of price increases in fiscal '22 and the first quarter increases this year, we have assumed modestly higher elasticity than fiscal '23 relative to fiscal '22, though still below historical norms. With the commodity markets and expectations for inflation here and in the UK and Europe evolving rapidly, our guidance assumes mid-teens inflation for the whole company, up from low double digits in fiscal '22. We expect first-half inflation to be higher than second-half when many of our commodity contracts expire, and we expect inflation to begin to abate. Regarding gross profit and SG&A, there is an approximate 600 basis point headwind included in our adjusted EBITDA growth rate as a result of overlapping very low executive compensation annual bonus payout in fiscal '22. We expect both top- and bottom-line growth will be more heavily weighted toward the second half of the fiscal year, with pricing taking effect during the first quarter, inflation continuing at elevated levels, the benefits from our productivity initiatives building throughout the year, and more challenging overlaps in the first half, with Q1 being our toughest quarter. Also, let me say a word about our assumptions and what is included in this guidance with regard to the volatile environment in Europe and the UK. A few days ago, you all saw that the Nord Stream pipeline was again shut down for maintenance. There had been recent reports regarding extreme low water levels on the Rhine River and numerous stories over the past few months that have assessed the likelihood of energy rationing this winter in both the UK and Europe. All of these events and more make it difficult to say with a high degree of certainty how consumers will behave, how our brands will perform, and what the outlook will be for input costs, particularly energy in the coming months. We have built our plan and this guidance assuming the current status quo; high inflation, rising interest rates, increasing unemployment, and switching to private label persist. Given daily volatility, especially in Europe, we have assumed neither the worst-case scenario nor a return to conditions as they were prior to the war in Ukraine. With regard to the balance sheet, our leverage ratio at 3.9x as of June 30, 2022, is near the top end of our stated 3x to 4x range, with more than a full turn of cushion relative to our 5x covenant. We expect free cash flow to be approximately in line with prior results with CapEx also similar to fiscal '22. Note that interest expense will be approximately $30 million higher year-over-year as a result of higher net debt and higher interest rates, creating a headwind for earnings per share. Finally, we're assuming an adjusted effective tax rate of approximately 24%. In summary, we were met with a number of challenges in the fourth quarter and throughout fiscal '22. Turning our attention to fiscal '23, we will continue the transition from Hain 2.0 to 3.0 and return the business to net sales and EBITDA growth. We are encouraged by the pricing actions we've already taken in Q1, the low elasticities we're seeing in the market, the evident strength of our growth brands, and the significant strides that our supply chain team has taken.

Hopefully, we've provided a better understanding of our performance and our go-forward plan for fiscal '23. We remain confident in our strategy, our brands, and our team and look forward to strengthening performance this year. Let me now turn it over to the operator so we can take your questions.

At this time, we will begin a question-and-answer session. Our first question comes from Andrew Lazar with Barclays. You may proceed with your question.

Thanks. Good morning, Mark and Chris.

Good morning, Andrew.

Good morning, Andrew.

Just to start off, I think when Hain preannounced 4Q results a couple of weeks ago, as you mentioned, you're looking for a low single-digit rise in constant currency adjusted EBITDA in '23. And then today, it's sort of minus 1% to up 4%, so you've widened a bit the range on both ends. I certainly appreciate it's a pretty tough environment to be forecasting a full year at this point, but I guess what changed in just the past few weeks that caused you to widen the range and be potentially more cautious on the low end?

Yes, I'll take that. Normally, we give a range versus just guiding to a low single-digit number. So we felt that was in line with what we had done historically and would have been unusual had we not given a range. I think whether you're looking at low single-digit or you're looking at minus 1% to plus 4%, I think the message is still the same. It's a very volatile environment in Europe, with a lot of moving parts that are going to make it challenging for us to forecast there. I think we have more confidence and visibility to what's going on in North America. So there's no message in there, Andrew, other than we were just trying to give you guys a range.

Got it. Thanks for that. And then others have talked about it taking longer these days in Europe to convert sort of dairy milk drinkers to plant-based options. Is that what the issue is for you as well, and that we're just seeing that this category is turning out to be maybe more discretionary than we might have thought? Or is there an issue really more specifically with your brands or business in the space? And if you could remind me, what percent of your business in Europe in plant-based is co-man for others versus sort of branded? Thanks so much.

Yes. So, Andrew, remember, we have both plant-based meat and non-dairy beverage. On the plant-based meat side, which is in the UK, it's obviously been a soft category for a while, and that's well publicized. Whether that is a phenomenon of kind of the ups and downs of COVID and recession is something we're analyzing. But we're performing in line with the category which has been struggling. In Europe, where it's almost all plant-based beverage, it's about three quarters co-man for private label and one quarter branded. The category had been growing mid-high single digits for the first three quarters of the year and dropped fairly considerably in the fourth quarter. We think some of that is a function of recession. We don't think that's a long-term change in the trajectory of the category. We still have confidence in the category. But it did create less orders coming in from customers than we had anticipated, and created some stranded overhead that was part of the softness that you saw in Q4.

Thank you.

Our next question comes from the line of Michael Lavery with Piper Sandler. You may proceed with your question.

Thank you. Good morning.

Good morning.

Good morning.

You mentioned that the pricing for fiscal '23 is more focused compared to fiscal '22 and you've implemented about 90% of it already. However, I recall that around this time last year, there were pricing adjustments that might not have been expected. So, I'm curious, when you say that, do you feel like you're approaching a limit on pricing, or currently, do you not have plans for additional pricing changes? If needed, would those changes be applied immediately?

Yes. So to clarify, we are about 90% covered in the U.S. and the UK. We're in the midst of negotiating Canada and the pricing in Europe, because again, we have private label and co-man contracts. Those expire in January. So we're actually negotiating those now for Q3. It's very hard to break a contract on private label, because if you do, you're going to lose that contract when it comes up for bid. So there's certainly been a lag on the pricing in the co-man part of the business. We feel that the pricing that we've taken covers the visible inflation that we know of right now in the UK and the U.S. So if inflation goes up from here, we'll take more pricing. If it goes down from here, we'll see what the market does in terms of whether we keep that pricing or we have to spend some of it back. What we're trying to do is cover the inflation that we know of. I'm actually very encouraged that we took two pretty sizable increases. You'll recall in the UK, we had to stop shipping for a while to get those increases through in Q3. They went through just fine in Q1, because again, when the energy costs going up and costs across everything going up, I think retailers have accepted the fact that inflation is here to stay and that we've got to all collectively pass some of that on to the consumer. It's not a question of us believing we've hit a ceiling; it's a question of us just trying to price to cover the inflation that we have.

Okay, that's helpful color. And then just on the UK consumer with total grocery down 7% and then down 1%, can you just help us understand what the consumer dynamics are there? I assume it's not more favorable from a price or a cost perspective for them to be eating out. But is it pantry deloading primarily? Are the Brits just losing weight? What's the consumer behavior that you're seeing that's behind all that?

Yes. So if you go back to our Q3 call, you'll remember that we had a very large COVID overlap. The overlap got easier in Q4. So we knew that it was going to get better, and it did as well. But they're still down. I think part of it is, we're sitting in the summer. People are overcoming the COVID lockdown from last year. As we get into a colder winter, people will spend a lot more time at home than they are now. You've got eating occasions that have actually left the house versus year ago now, which is part of the softness that we're seeing. But it is a very recessionary environment. We're seeing 10% inflation in the UK with projections that may go as high as 18%. So what does that mean? It means consumers will ultimately eat out less and eat more at home, which bodes well for the trend continuing to improve. But I think part of it, again, is just the dynamic of COVID overlap, and I'll call it just the relief of being able to go outside now whereas last year, you were locked up inside. It's volatile; it's going to change, but it should change for the better. Part of our expectation in '23 is that the store will continue to recover, and as pricing gets reflected across everything, dollar sales will go up. We're still watching unit sales very closely, because we self-manufacture almost everything. We are focused on whether or not we're going to have deleverage of units continue to decline, which was part of the issue in Q4.

Okay, that's really helpful color again. If the reopening bubble getting back out of the house gets popped by inflation, it sounds like some of that's your expectation. How big of a tailwind could that be? I know it's hard to forecast, and clearly, you reflect that with a wide range on guidance. So I know it's not very specific. But is the expectation that the grocery sales in total and, of course, yours accordingly start to really get some wind at their back coming into the school year?

I would expect more people eating at home. But I would also expect trading down to private label. Remember, in the UK, private label can be 30%, 40% of a category. It's much more developed there than it is here. It's much more accepted by consumers. Historical recessions, which suggest that consumers are going to trade down, in some cases that will benefit us where we may be the opening branded price point in a category and other cases, maybe not so much. It's going to be a positive in terms of more eating occasions at home. It may be a net negative in terms of people trading down. We'll do our best and watch that. But candidly, the widened guidance is more a function of energy costs that are exploding. In just the last 10 days, because of what's going on with Russia and then saying they're going to shut the pipeline for maintenance, which there's an expectation it may not come back up on time, because they're trying to make a statement to the West. Energy cost in the last 10 days has gone up 35% in Europe. There’s going to be a lot of volatility in costs that are going to make that total international algorithm volatile. We have more confidence in the top line in the UK. Obviously, the plant-based category and the energy are going to give us a lot of volatility in Europe.

Our next question comes from the line of Ken Goldman with JPMorgan. You may proceed with your question.

Hi. Thank you. It's Anoori on for Ken. Good morning. I wanted to ask about your outlook for inflation. So mid-teens is maybe a little bit higher than what we were expecting. So could you just give us the major buckets of what is driving that outlook and what level of visibility you have on that for the rest of the year?

Yes. So in North America, I'd say there are a couple of primary drivers, although everything is double-digit inflation. The biggest ones are vegetables and oils, which, because a lot of the sunflower oil comes out of Ukraine and demand is high, everybody that was making things with sunflower oil has had to switch to other oils. Again, it's supply and demand where we've seen 70%, 80% increases in oil prices. Vegetables are also highly inflationary. We're waiting for the crops to come in to see if those come down a bit. Those and co-manufacturers who are having their own challenges, and remember our North America model is almost half of our volume is co-manufacturer, we’re getting significant inflation from co-manufacturers. In Europe, the inflation is again primarily energy, which has skyrocketed; it's now, I think in the UK, 3x what it was a year ago. The good news on energy, which is important to our algorithm, is we are 100% locked in on energy in the UK for the entire year. We're locked in at about 60% below the current market price, which we definitely bought at the right time and we're very encouraged by that. In Europe, we're locked in for the first half of the year, and you cannot get contracts right now, because it's such a volatile environment. We are open on the second half of the year. With prices spiking up and down, there's going to be some fairly significant volatility in the back half until we can get locked in with a contract with defined prices. The other thing I would tell you in Europe is the government has now said that if you have a contract, the supplier of the contract can charge a surplus of 2.5% I believe is the number, regardless of what the negotiated contract price is, because they're worried about suppliers going out of business. It's just a very volatile dynamic. Even when you have a contract, the government is stepping in and saying that the provider can raise the cost of that contract. This will be the biggest wildcard and it’s obviously very related to Russia and the saber-rattling that's going on there. We'll have to just see how that plays out. If demand slows, as we get into a more recessionary environment, and Russia keeps the pipeline going, we would expect energy costs to come back down somewhat. This will be highly inflationary, but down versus where they are today. But that's going to create volatility in our algorithm.

Got it. That's very helpful. And then my second question is, in the past, you've talked about $50 million in annual productivity savings. Is this still a good range for fiscal '23? And lately, you've been using that productivity to offset supply chain disruptions and other costs rather than reinvesting in marketing, as was outlined in your Hain 3.0 strategy. So can you talk about what your expectations are for reinvesting in marketing this year, and your level of confidence in maintaining North America growth with higher pricing and perhaps lower level of reinvestment than you previously expected? Thank you.

Yes. So on productivity, we're still in that $40 million to $50 million range. We came in a little bit less than that last year, because of all the supply disruptions and having to reallocate resources to supply as opposed to productivity, but we have a pipeline of over $50 million. We expect we'll get $40 million to $50 million executed within the year, and we have put more resources against productivity. We are very focused on that, especially now that supply is getting better. Our intent in 3.0 is to invest that productivity in marketing. But until inflation comes down, it's going to be very hard to cover all of the inflation with pricing. We have to watch our price points versus our competitors. We have to watch thresholds. We have to watch consumer behavior. So we're passing on as much pricing as the consumer will accept. The rest we're going to cover with productivity. If inflation comes down, as I said, and we don't have to spend it back in trade, we will definitely start investing more in marketing. But our algorithm right now just assumes a modest investment year-over-year in marketing.

Please limit yourself to one question and one follow-up. Our next question comes from Brian Holland with Cowen & Co. You may proceed with your question.

Yes. Thanks. Good morning. I wanted to follow up on Andrew's question earlier about plant-based. Specifically, I believe you have plans to expand capacity in plant-based in Europe looking out into the future. I'm just curious in light of the deceleration, any change to that approach?

Yes. So we are not expanding capacity right now. When we lost that contract in Q3, it obviously freed up considerable capacity within our current network. So that has been put on hold for the short term. We will wait and see how the category unfolds over the next year or two, assuming it returns to growth and assuming that demand exceeds supply, which was happening and that's why we were investing in additional capacity, we'll revisit that decision. But right now, our CapEx year-over-year will be down because we're not making that investment in Europe right now.

Okay. Thanks. And then any update, and forgive me if I missed this on formula shortages in baby and maybe what's embedded in your guidance as far as any supply improvement over the course of the year?

Yes. So we had our six biggest brands in North America, all had supply disruptions in Q4, which is kind of a perfect storm. Despite 17% total sales growth and 15% consumption growth, we weren't able to supply all of that. Most of those have been rectified. And I'll come to your baby question specifically, but I wanted to give context to that. The ones that aren't resolved outside of baby will get resolved almost entirely by the end of Q1. We solved the pouch availability. We solved the aluminum shortage availability on sunscreen. We had some issues on sensible portions with oil availability and pellet availability. Remember, we're buying organic oil, which is a more niche part of the market. When there's shortages of supply, some of those ingredients get tougher to get. Within baby, we've had two issues: pouches and formula. The pouch issue has been resolved by the end of Q1. We brought on a third pouch supplier. We will be back in stock with our retailers in the second quarter, and that will be a tailwind for us versus what had been a headwind throughout the last three quarters of fiscal '22. On formula, there is just a worldwide shortage. We co-manufacture our formula. As you all have heard in the press, there isn't enough formula. The government has stepped in and is basically telling the manufacturers of formula what they need to make and who they need to sell to. They're prioritizing WIC customers first, which you would expect the government to do. So we're selling everything we can make. We will have a continued gap between the demand for formula and what we will be able to supply. We expect that to be a hand-to-mouth situation for much of the year.

I'll leave it there. Thanks.

Our next question comes from the line of David Palmer with Evercore ISI. You may proceed with your question.

Thanks. I guess I'm curious about your plans for growth. If this were six months ago, maybe you would have been thinking about fiscal '23 as leaning in on top-line growth initiatives, innovation, reinvestment in marketing. I'm wondering how you're thinking about that in light of the fact that you have some supply chain constraints and you mentioned some of the issues with regard to the consumer? Any quantification of marketing spend and innovation introductions in fiscal '23 versus fiscal '22 would be helpful.

Yes. As I said in the prepared remarks, we're going to consider this another transition between Hain 2.0 and 3.0 because of all the things that you just mentioned. Until inflation comes down, our ability to really make a significant investment in marketing is going to be somewhat constrained. That said, we do have a lot of momentum on these brands. We are continuing to support them. You see it in the consumption numbers that we're doing quite well in terms of the growth of the brands, particularly in North America. We are innovating. Our innovation continues to be really strong in terms of performance. The puffs that we launched on sensible portions are doing really well. The tea innovation is doing well. Remember, we went into black and green tea and our Tea Well with health and wellness teas. We just launched peanut butter and jelly bites under Earth's Best snacks, which is the highest distribution we've gotten on a new product since I've been here, and it's flying off the shelves where we have it in distribution. We have a men's line on Jason's that is off to a good start. We're not pulling back at all on innovation. Retailers are, some are taking more innovation, some are taking less. They're doing a lot of resets, as you can imagine, of shelf tags with all the pricing going on in the industry. But it's a bit choppy in terms of how many are taking innovation, but that's not stopping us from launching it. As I said, it's going quite well. One of the other parts of our 3.0 strategy was to start expanding some of this stuff across geography, and we are doing that. We're launching Earth's Best into Canada. Linda McCartney is in test in Europe. We're starting some of the channel expansion work that we talked about in the fourth quarter. We were up 80% in drugstores in North America. We were up 60% in convenience stores. We started to penetrate food service. We feel pretty good about our growth trajectory and the things that we were doing, or said we were going to do for 3.0, with the exception of that increased investment in marketing, all the things that we need to do to drive consumers to our brands and drive ubiquity in distribution across channels and geographies, that is still occurring, and that's part of our algorithm.

Regarding portfolio repositioning, you mentioned potentially focusing more on food and emphasizing plant-based offerings. I would like to challenge you on the plant-based aspect and ask how you are currently approaching this. Do these circumstances influence your long-term portfolio repositioning strategy in any way?

We definitely are going to continue to reshape our portfolio, as we mentioned on Investor Day last year, and there are active discussions on a number of things within our portfolio. It's a little difficult for buyers to get financing right now. But there's interest in certainly some of the tail brands that we wanted to sell. Regarding plant-based, it's been a very volatile two years with COVID and now recession. What we're doing is a lot of analytics around whether these changes are permanent or temporary. The plant-based beverage change just happened in the most recent quarter. It had been a very high growth category for a long time, and it's too early to make any conclusions around whether the short-term slowdown in Europe is a trend or is going to be a short-term issue. Plant-based proteins have been stopped for a while, and that's something that we're assessing in terms of its importance in our portfolio and whether that remains a turbocharged brand for us. The beauty of our portfolio, because we're in so many categories, when one thing performs a little bit worse than you expect, then you have other things that may perform better. While we've been softer on plant-based in North America, as an example, we've been much stronger on baby than we anticipated. Our snacks business has been strong. I think yogurt was up 20% for us in North America in the most recent four weeks. The complexity that we've been trying to simplify over time is that we have some things that offset others when challenges arise. We continue to assess it; we haven't drawn any specific conclusions relative to our plant-based specifically, but we continue to look to reshape the portfolio and the tail, in particular.

Good morning. Thanks for the questions.

Good morning.

Maybe first off, Mark, I'd like to get a better sense of the natural and organic consumer in the U.S. I guess given the eroding financial conditions we're seeing really across peers. I know your view is the consumer base skews higher income that limits some of the risks. But I think thus far in fiscal Q1, the Nielsen takeaways decelerated, elasticities have gotten a bit worse across a number of the categories. You mentioned the additional pricing here in Q1 as well. So do you think that maybe there's more risk to consumption than traditionally you've seen going back? Because even if there isn't a pricing ceiling, I guess per se, I'd imagine risks are growing where folks just sort of trade down to less expensive conventional foods that don't contain artificial ingredients. How do you think about the stresses there going forward?

Yes, it's a great question. Historically, in other recessions, health and wellness has held up nicely. In Q4, I can tell you our categories were up 12%, and we were up 15%. So short term, meaning the first seven weeks of this quarter, there’s a little bit of softening in both the categories and the units that we're seeing. It's hard to tell. What I would answer the question with is it's a much more affluent consumer who tends to have adopted this as a lifestyle as opposed to just this is something that I'm going to come in and out of. If you've decided to buy organic and pay the 30% premium, and you have a six-figure income, the likelihood that you're going to say, I've decided I don't want to eat organic anymore, would be lower than other trade-offs that people are going to make. During the pandemic, we had a lot of people come into the category. Our household penetration is way up; our buying rate is way up. We will monitor if all of those people stay. We're going to continue to do the things that we need to do to keep those categories and brands robust. The other good news is in many cases, even though we're in the premium segment, we tend to be the opening price point in the segment. If people do trade down, for example, in something like herbal tea, we're the opening price point. Organic baby food, we're the opening price point. If you decide within organic that you want to make a trade-off, they may come to us. If you decide you're going to leave organic altogether, which again, I think is less likely, then we may not benefit. But we'll have to see how that plays out. I won't draw any conclusions based on six weeks of data, but we are watching it closely.

Thanks for that. And just to follow up quickly, sticking with the U.S. Are you seeing anything different in terms of the merchandising of natural and organic foods? I guess presumably across many of these categories, private label is much more developed within NNO relative to the last downturn 15 years ago. Are you seeing anything on retail getting more aggressive promoting private label varieties or maintaining wider price gaps than historical? Just your comments there would be helpful. Thank you.

Yes. Most of our categories don't have a meaningful private label presence, and I can tell you we see no increase in private label share in our categories. I can speak for the categories that we're in. I can't speak specifically to the macro trends on private label. Thus far, certainly having listened to a lot of our competitors do their earnings calls, it does not yet appear that private label is making significant inroads. We'll just have to watch that again. I don't think the consumer in North America has changed their behavior as dramatically as the consumer in Europe is changing their behavior. Europe is much more used to private label than we are here. Historically, people trade down, and then when recession is over, they trade back up. We're watching Europe much more closely than we are here because here it's not a meaningful part of our categories.

Thank you for fitting me in. I have two quick questions regarding the fourth quarter. For the fourth quarter, your consumption growth for Hain growth brands was 15%, while your dollar sales increased by only 7%. Does this indicate a delay in pricing, or is there another explanation, as it seems unlikely that you over shipped in the first three quarters given the supply chain disruptions? Could you clarify this for us?

Yes, it's driven by supply chain disruptions. We could have sold $15 million more worth of formula if we could have gotten it. Of that 15% consumption growth, which was kind of the exhausting of our inventory at retail, we were not able to replenish all of that, as I mentioned. There’s going to be an ongoing gap for us between shipments and consumption. The good news is there may be an opportunity for us to replenish the retailer's warehouses and shelves with inventory as those supply challenges abate and come back on. The gap between the two is the supply disruptions.

As a quick follow-up, in the previous three quarters, you mentioned in Q3 that you made significant and costly decisions to ensure your customers were supplied because you have worked hard over the last four or five years to regain their trust as a reliable supplier. Did those extra expenses to keep your customers supplied continue into the fourth quarter? Are those potential cost advantages for 2023?

So they did continue in the fourth quarter. But you have seen gas prices come down since the beginning of this quarter that we're in now. We are starting to see some transportation costs come down, which is a good thing. They're still highly inflated versus a year ago but down versus Q4. Supply is slowly getting better. I expect that as the year progresses, the cost that we've been incurring to address the supply disruptions will be lower this year. It's hard to say what they will be. I don't think there will be zero because there are still supply disruptions. We kept our service rates in the low 90s in Q4. They're now in the mid-90s in Q1, so service is getting better, which means the disruptions are getting lower.

Thank you. Mark, could you discuss the raw material contracts you have? I understand you switched from sunflower oil in Ukraine to a different oil for your Terra chips. Can you share how many raw material contracts are expiring in the next six months? What alternatives are you considering or what price adjustments are you anticipating? Is this reflected in your current assumptions?

Yes, so it's a great question. We have supply contracts that cover us through the first half of the fiscal year for most ingredients. We're very crop-dependent on a number of things such as oils and vegetables. As those crops come in and we look at how robust the crops are as well as what the demand is, that will set the prices for us for the next 12 months starting around the middle of our fiscal year. The good news right now is it looks like some of those things are starting to come down in price versus what we have been paying. For example, in the UK, where we have a big fruit business, we're in jams and preserves, we're seeing a little bit of relief on raspberry prices and strawberry prices versus what we had paid historically. We're hopeful that we will see some relief. It's still inflationary, but not as inflationary as it was this past year. We won't have the answer on that until the crops come in. We're trying to convert our plants from natural gas to oil. We need steam to run our factories in Europe to make our plant-based beverages. We have bought all of the hardware to convert from natural gas to steam, which would give us insulation if the natural gas supply is cut off. That’s going to take a little while to get it in place, and that would be less inflationary than what we're seeing on natural gas right now. Oil prices are more stable. We can flex back and forth if sunflower oil becomes much less expensive than the other oils. Having that flexibility going forward gives us much more ability to control our costs than we would have had a year ago.

That's very helpful information. My last question is about the price increases. I know you've implemented a few already and there is an expectation of another. Is there an assumption in your top-line revenue that some customers might resist, even though most have accepted the changes at this point? Could you provide a bit more insight on that? Do you think there is a limit to how much further you can go with the increases?

Well, so there's a customer question and a consumer question. On the customer front to U.S. and UK, we've got all the pricing in that we expected. In the UK, we did not have to stop shipping like we did in Q3, so that's encouraging. In Canada, we're still negotiating, which is a tough market. In Europe, we're going to have to rebid for all of those contracts. We will get some pricing in versus what we've been paying. The second part is the consumer. It's too early to tell whether the consumer is going to change behavior, whether they're going to trade down. We're watching that closely. We also see competitors closely; if one of them drops their price $1 a unit, we can't be sitting out there $1 higher because people will switch from ours to theirs. We have to continue to monitor it.

Excellent. Thanks for all that color. I appreciate it.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Mark Schiller for closing remarks.

Thank you, all, for your interest. I know we have time set up with many of you later today, so I'll leave it there. We look forward to talking to you later. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.