Hain Celestial Group Inc Q4 FY2023 Earnings Call

Greetings, and welcome to The Hain Celestial Group Fourth Quarter Fiscal Year 2023 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 Alexis Tessier, Investor Relations for Hain Celestial Group. Thank you. You may begin.

Good morning, and thank you for joining us on Hain Celestial's fourth quarter fiscal year 2023 earnings conference call. On the call today are Wendy Davidson, President and Chief Executive Officer and Chris Bellairs, Executive Vice President and Chief Financial Officer. During the course of this call, we may make forward-looking statements within the meanings of federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations. Please refer to our 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 the 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 statement made today. We have also prepared a presentation, inclusive of additional supplemental financial information, which is posted on our website at hain.com under the Investors heading. Please note that 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 will be made available on the website. And now I'd like to turn the call over to Wendy.

Thank you, Alexis, and good morning, everyone. We appreciate you joining the call today. I'll start today's call by reviewing our fourth quarter results before discussing the steps we're taking to transform our business and the progress we're already seeing on the journey to return the company to sustainable, profitable growth. Then Chris will review our financial results in more detail along with our outlook for fiscal 2024, before I offer some closing remarks. I'm pleased to report that we achieved fourth quarter results, which were near the high-end of our expectations. Adjusted net sales on a constant currency basis were down slightly 1.5% year-over-year, consistent with our guidance. Adjusted EBITDA on a constant currency basis was $43.5 million at the high-end of our guidance. As expected, the net sales decline in the fourth quarter was driven by the North American segment, where a large customer promotion for snacks in the prior year period was not repeated, and by some softness in personal care. There were several bright spots in our results stemming from strategic actions we began taking in the third quarter for both our North American and International businesses. In North America, we are seeing bright spots in key snack and beverage brands, with Garden Veggie snacks and Celestial seasoning bagged tea, both returning to growth after a challenging third quarter. Garden Veggie snacks grew dollar sales by 4% in the 12 weeks ended July 16th, on 14% growth in TDP, and Celestial seasoning bagged tea grew dollar sales by 2% on 7% growth in TDP. Additionally, Greek Gods yogurt continued its standout performance, growing dollar sales 12% on a 20% increase in velocity and our Earth's Best baby and kids grew dollar sales 20%, excluding formula on 19% TDP growth, in part due to Earth's Best snacks innovation launched earlier this year. Formula continues to be a challenge, driven by industry-wide supply shortages. In the international segment, we continued the momentum from the third quarter to achieve another quarter of adjusted net sales growth. The growth was driven by the U.K. led by meal prep formerly called Pantry, particularly in private label, where we have a meaningful presence, as well as by snacks. We were also encouraged to see sequential improvement in meat free with our private label growing 9% in the quarter and gaining share, as the category continues to show signs of stabilization. Strength in the U.K. was only partially offset by softness in the non-dairy beverage business in Continental Europe. While non-dairy beverages were down year-over-year for the fourth quarter as a whole, we are encouraged by sequential improvement we've seen throughout the year, especially in our strong private label segment and by growth in both June and July. The recovery in non-dairy beverage is largely led by private label and appears to be gaining positive momentum. As a category leader in both branded and non-dairy private label, we believe our portfolio is well positioned to benefit from this development. During the quarter, we delivered improvements in gross margin across the business, through both pricing and productivity initiatives, including the consolidation of our meat-free manufacturing footprint. As we expect continued moderation in the inflationary environment in fiscal ‘24, still above normal levels, we see further opportunity to improve gross margin. We also made progress on our debt levels in the quarter paying down $28 million in debt. Debt repayment coupled with reinvesting in strategic business capabilities remains a top priority for free cash flow. Overall, we are pleased with the stabilization of many of our core categories as we finished the year. As you know, we've been undertaking a significant review of our company's strategy and reimagining our business to realize our full potential and return Hain to consistent profitable growth. We've begun taking meaningful steps to simplify our business and set the foundation for our transformation by focusing on enhancing our capabilities, optimizing our organization, strengthening our end-to-end supply chain, improving our productivity pipeline, optimizing our route to market and fueling our brand building initiatives. Early actions are bearing fruit, reinforcing our confidence in our strategy and future growth potential. Let me share a few examples. We spoke last quarter about our efforts to enhance our capabilities and expand into margin accretive channels such as immediate consumption and away from home. We believe there is significant opportunity for our brands outside of traditional retail and on-the-go consumption occasions within C-stores, airports, offices, and universities among others. These immediate consumption channels drive brand reach and visibility and are both price and margin accretive as shoppers are willing to pay more for convenience. Our portfolio is well positioned to take share in this channel, particularly our snacks and tea brands. Hot tea is one of the fastest growing beverages in food service, and we are seeing consumers adding to their morning and evening routines with snacking occasions away from home. Morning and evening snacking occasions are up 3% versus a year ago. We are enhancing our away from home capability and our go-to-market strategy as it requires a very unique sales process and a distinctive focused sales model, different from that used for traditional retail channels. While a new focus for Hain, this is a channel in which I have in-depth experience, and I'm pleased that we are already seeing progress against this effort with C-store sales growing double digits in the 12 weeks ended July 16th. Additionally, we are building out our revenue growth management capability to drive effectiveness and efficiency in price realization, brand building, and end market share growth. For example, we recently executed a successful SKU rationalization initiative within our international segment, which streamlined a brand's offering by nearly half. These efforts resulted in a highly productive core, which is now seeing double-digit growth and increased velocity, a win for both Hain and our retail partners. Furthermore, e-commerce continues to be a focus with increased support and optimization on marketplaces and retailer.com with updated content, expanded assortment, improved media efficiency, and increased spend on key brands. Garden Veggie snacks, Earth's Best, and Celestial seasonings are all experiencing increased consumption with double-digit increases in traffic online. We continue to focus on refining our operating model so that it is future-fit to drive effectiveness and efficiency, supported by Global Centers of Excellence. Earlier this month, we announced our new global headquarters in Hoboken, New Jersey. The space and location was thoughtfully selected to meet the evolving needs of our business. At nearly half the size of our footprint in Lake Success, our new headquarters will serve as the anchor to our hub and spoke flexible working model where teams will come together to collaborate at significantly less cost than our prior location. This approach aligns with our purpose of inspiring healthier living and serves as a competitive advantage in attracting and retaining top talent, regardless of where they are located. The headquarters will also serve as the home of Hain’s Innovation Experience Center, where team members, customers, and consumers will be able to immerse themselves in our products, explore consumer insights, and create innovative opportunities for the future. Our Centers of Excellence are designed to leverage global scale where appropriate, while enabling local execution for impact. Our first global center, which we announced earlier this year, was for supply chain. Through this COE, we have simplified our end-to-end planning and enhanced our productivity pipeline process, generating $34 million in productivity in the back half of fiscal ’23. When coupled with pricing, this has allowed us to offset record levels of inflation while maintaining average on-shelf availability fill rates ahead of the industry over the course of the fiscal year. We are in the process of establishing additional global Centers of Excellence in areas such as innovation, brand building, talent management, and technology. Our Baby and Kids businesses in North America and internationally have begun collaborating to share consumer and category insights, brand strategy, innovation, and creative assets across the Ella’s Kitchen and Earth's Best brands. This facilitated the launch of Earth's Best crunchy sticks in the U.S., which are similar to the best-selling Ella’s Kitchen Melti sticks in the U.K. This partnered innovation over-delivered expectations at launch, helping to deliver strong growth in Earth's Best snacks in the quarter, with expanded distribution and support in fiscal ‘24. Our strategic reinvestment in marketing and brand building is also beginning to yield positive results. As you may recall, the supply chain challenges we faced in fiscal ‘22 led to a temporary pullback in marketing efforts, which negatively impacted sales in fiscal ‘23. In quarter three, we began taking action and reinstated brand support and are encouraged by the positive momentum as a result. In the fourth quarter, we saw marked improvement in Celestial seasonings tea due in part to the Magic in Your Mug campaigns that we activated in fiscal quarter three. Celestial bagged tea grew 2.3% in the latest 12 weeks, while the category posted a mild decline resulting in Celestial gaining share. Tea also benefited from our work as a category captain with a large retail partner on the optimization of assortment and shelf set. Furthermore, we are seeing encouraging early results from Peppermint K-Cups and Sleepy Time with Melatonin, both new tea innovations supported by strong customer programming this summer. Also, launching in the third quarter was our Earth’s Best Good Food Made Fun campaign, which helped to drive Earth’s Best snacks growth of 8%, on 18% growth in TDPs in the latest 12 weeks. We have programming in place with our key retail partners focusing on 360 activation, including retail media, in-store events, digital coupons, and retailer website engagement. We will continue to deliver Good Food Made Fun across all consumer touch points in fiscal ‘24, including new packaging, websites, and public relations social media. In the fourth quarter, we launched our Crazy Delicious Vegetables media campaign for Terra Chips. The early results show campaign effectiveness, brand awareness, and purchasing intent, all surpassing industry benchmarks. The early success we are seeing across these areas of focus gives us confidence that we have the right comprehensive plan in place to build our brands and return the business to growth in fiscal 2024. We view fiscal 2024 as an inflection point, a year during which we will reset our foundation and pivot to growth. Consistent with what I shared on the last call, we plan to make brand building investments across key brands to drive growth, while also optimizing the effectiveness of our marketing dollars to work harder. We will begin to make investments to enhance our away from home and e-commerce capabilities. Two channels, which we expect will provide meaningful growth in the future. Before I hand the call over to Chris to share the financial details, I want to thank the entire Hain team for their commitment to our purpose of inspiring healthier living through better for you purpose driven brands. I recently completed my first seven months of visits to see all of our global sites, including manufacturing, distribution, and offices across the U.S., Europe, and Canada, which left me energized by our capabilities and our team's passion. I am encouraged by our potential to leverage our reach and scale to deliver sustainable and profitable growth as the leading better for you branded enterprise. With that, I'll turn it over to Chris.

Thanks, Wendy, and good morning everyone. Fourth quarter consolidated net sales decreased 2% versus the prior year period to $447.8 million, inclusive of a $1.3 million impact from foreign exchange. On an adjusted basis, consolidated net sales decreased 1.5% in the quarter, consistent with our guidance of low-single-digit decline. Adjusted gross margin was 22.7% in the fourth quarter, an increase of approximately 330 basis points versus the prior year period and an increase of 130 basis points from the third quarter of 2023. Driven by pricing and productivity, partially offset by inflation. Adjusted EBITDA on a constant currency basis was $43.5 million versus $35.4 million in the prior year period. This came in near the high-end of our guidance range of $40 million to $44 million. Total SG&A came in at 14.9% of net sales for the quarter, as compared to 15.5% of net sales in the prior year period, benefiting from cost management. Net loss for the quarter was $18.7 million or $0.21 per diluted share, compared to net income of $3 million or $0.03 per diluted share in the prior year period. This is inclusive of a non-cash intangible asset impairment charge, totaling $19 million, resulting in an impact of $14 million after tax. Adjusted EPS was $0.11 versus $0.08 in the prior year period. Turning now to our individual reporting segments. In North America, reported net sales decreased 5.1% to $281.8 million in the fourth quarter. Adjusted net sales decreased 4.3% versus the prior year period, an improvement from the rate of decline in the third quarter. The year-on-year decrease was primarily a function of previously discussed non-repeated customer promotions and softness in personal care. Q4 adjusted gross margin in North America was 22.7%, a 270 basis point increase versus the prior year period. Our margin performance reflects pricing and productivity, partially offset by inflation. Adjusted EBITDA at constant currency in North America was $27 million, a 1.8% decrease versus the prior year period. The decrease was driven by lower sales and increased marketing spend. North America's adjusted EBITDA margin was 9.5% on a constant currency basis, a 30 basis point increase from the prior year period. In our International business, reported net sales increased 3.7% to $166.1 million in the fourth quarter. When adjusted for the impact of foreign exchange, net sales increased 3.6%, compared to the prior year period. This represents the second consecutive quarter of growth in the segment and a significant improvement from decline in the first half of the year. Our year-over-year increase for International adjusted net sales reflects an 8.2% increase in the U.K. partially offset by an 8.7% decline in Continental Europe. The U.K. increase was driven by a benefit from the category recovery in private label and the diversification of our portfolio in both brand and private label. The year-over-year decline for Continental Europe was driven by non-dairy beverage performance, which, as Wendy mentioned, appears to be stabilized. International gross margin was 22.7%, up approximately 440 basis points year-over-year, as pricing and productivity more than offset inflation. International adjusted EBITDA at constant currency was $27.5 million, a 62.8% increase for the prior year period. On a constant currency basis, adjusted EBITDA margin was 16.6%, up approximately 600 basis points versus the prior year period and 400 basis points compared to the third quarter. Shifting to cash flow and the balance sheet. Fourth quarter operating cash inflow was $40.5 million versus an outflow of $18.9 million a year ago. The higher operating cash flow resulted from a strong improvement in net working capital. As we anticipate generating incremental positive cash flow in fiscal 2024, we expect resulting cash to be used to pay down debt while strategically investing in the business. CapEx was $6.4 million in the quarter and $27.9 million for fiscal 2023. Finally, we ended the quarter with cash on hand of $53.4 million and net debt of $775.4 million, translating into a net leverage ratio of 4.3 times as calculated under our amended credit agreement. Consistent with our stated priorities for cash, we have reduced net debt by $70 million since the end of the first quarter of 2023. Turning now to our outlook. As Wendy said, we view 2024 as an inflection point where we will reset our foundation and return to top line growth. In fiscal ‘24, we anticipate balanced growth across the portfolio within both our North America and International segments, achieving low-single-digit organic net sales growth. Fueled by productivity increases year-over-year, we expect to make brand building investments across key brands to drive growth and will also make modest investments in our away from home and e-commerce capabilities. We expect these investments, along with the refunding of our incentive plan, as compared to fiscal ‘23, will create an adjusted EBITDA drag of approximately $20 million as we invest for the future. As such, we are offering the following guidance for fiscal ‘24. We expect adjusted net sales to increase by 2% to 4% year-over-year. Adjusted EBITDA to be between $155 million and $165 million. And lastly, we expect to generate free cash flow of $50 million to $55 million. Our 2024 guidance assumes that currency exchange rates will remain near current levels, pricing will recover most expected cost inflation, and productivity will drive gross margin expansion and fuel investments in brand building, channel growth capabilities, and employee incentive compensation. Our full-year guidance is heavily back-half weighted. The first quarter of the fiscal year is typically our seasonally smallest quarter in terms of net sales and adjusted EBITDA. This dynamic will be enhanced in the first quarter of fiscal ‘24 as there are several headwinds that we expect to impact our North America business, which we don't expect to continue over the balance of the year. Because of these factors, we are providing guidance for fiscal Q1. On the top line, we are continuing to experience industry-wide supply constraints related to our Earth's Best organic baby formula business, which we are currently working through. In addition, we are optimizing promotional activity for Terra chips, resulting in a near-term revenue headwind, but we anticipate longer term the move will unlock a more profitable growth mix. Lastly, there has been a timing shift in a personal care program within a non-measured channel. On the margin front, carryover inflation in Q1 is expected to be higher than that in the balance of the fiscal year, and we expect pricing and productivity will begin accelerating in Q2. As such, we expect the following for the fiscal first quarter. Adjusted net sales to decline by a low-single-digit percentage year-over-year and adjusted EBITDA to be between $20 million and $21 million. We expect results to improve starting in the second quarter as fuel initiatives and pricing take hold with operating model improvements positively impacting the back half of the year. With that, I'll turn the call back to Wendy for closing remarks.

Thank you, Chris. Before I close out today's call, I would like to share the news that Chris will be stepping down as CFO of Hain Celestial on September 4th. Chris has played a key role with the company through a time of extensive change and has helped to build a strong finance team with deep expertise to deliver for the future. With that, I’m pleased to share that Lee Boyce, Chief Financial Officer of Hearthside Food Solutions will become Hain’s new CFO effective September 5th. Lee brings more than 30 years of experience in leading finance within organizations across the food and hospitality industries, including Hearthside, a leading contract manufacturer in the food industry's largest privately held bakery, with Company and with American Hotel Register. Prior to that, he spent more than 20 years at Mondelez and Kraft Heinz. Lee's extensive and broad experience will be a tremendous asset to Hain as we transform our business into a globally integrated enterprise. Chris will continue to serve as CFO through the transition; he will participate in Hain’s upcoming Investor Day event in September and will stay on into November to ensure a smooth transition. On behalf of the company, I want to thank Chris for his many contributions to Hain Celestial and wish him the very best. At this time, I'd like to turn it over to Chris to say a few words.

Thanks, Wendy. I want to thank you and the team for your partnership during my time at Hain. I look forward to seeing the new Hain Reimagined strategy take flight. And I'd like to thank everyone on the call. It's been a real pleasure working with you. You are in good hands and know I will be cheering Hain on from the sidelines.

Thanks, Chris. As mentioned previously we have examined really every aspect of our business to identify key unlocks to drive our business forward. Over the last several months, our team has been laser-focused on developing Hain Reimagined, our multi-year transformation strategy to return our business to predictable, profitable growth. We have identified where we will play, our right to win, and the building blocks to get there. We are simplifying a winning portfolio, and we have identified the right channel mix and geographies to drive our core, expand our reach, and gain share across our portfolio. As we lay out our strategy during Investor Day on September 13th, we'll share how we're building our future for growth through our commercial focus, where we're reshaping our market coverage and building capabilities and revenue growth management. You'll hear how we're reimagining our supply chain, where we're implementing new capabilities, expanding capacity in critical categories, and enhancing operating efficiency. We will share how we are transforming our end-to-end business planning process with new ways of working and focused investment in digital that is people led, technology enabled, and we'll share how we're redefining how we approach brand building to drive greater awareness and loyalty and to get our products into the hands of more consumers everywhere they shop. The same size, scale, and structure provide us with the unique opportunity to blend aspects of traditional CPG growth models with disrupted startups and use it as a competitive advantage. We are taking the best of both worlds, which enables us to reach small and large markets effectively. All of this, of course, is only possible through the talent and passion of our Hain teams, who are committed to our company purpose of inspiring healthier living and who live our values every day. It's an exciting time to be at Hain, and I am optimistic about the future of our business and unlocking the full potential of our brands. We look forward to laying out the details of our new strategy next month and introducing you to Hain Reimagined. Operator, please open the line for questions.

Thank you. Our first question comes from Andrew Lazar with Barclays. Please go ahead with your question.

Great, thank you. Good morning, Wendy and Chris.

Good morning.

Wendy, I know that you had initially described sort of the approach going forward regarding reinvestment as kind of a pay-as-you-go approach, and maybe as opposed to a large kind of one-time reset. And I guess, that's partly due to balance sheet flexibility and such. With the $20 million incremental investment and amended credit agreement. And now it seems like maybe a little bit less of a pay-as-you-go and maybe a little bit more of an upfront kind of reset. So if I've got that right, I guess, why the change in approach? And do you now believe this gets Hain to a more sustainable place on brand support? Or is more needed as you go forward, as more productivity comes through? And then I've just got a follow-up. Thanks.

Yes, I appreciate the question. The reality is that a large chunk of that $20 million is actually just refunding our incentive plans, on a year-on-year basis. So that's where a large amount of that is. As we look into the year and the investments around brand building, the bulk of it we won't actually put in place until the back half of the year. So I think we are building the shape, fairly prudently, to ensure that we're driving productivity and efficiencies in the front half of the year. And as Chris said, we'll begin to see pricing catch up with inflation, as we go into quarter two. That gives us a bit more flexibility to lean into some of those reinvestments around brand building. So while the full year we've built it into the shape, what you'll end up seeing is, a bit more productivity in the front half that gives us the freedom to lean into some of those investments in the back half.

Thanks for the information. Regarding the guidance for the fiscal first quarter, we anticipated a low single-digit year-over-year decline in adjusted net sales. Could you clarify what you expect specifically for North America in the first quarter? Additionally, what do you believe is causing the weaker trends we are currently observing in scanner data? Lastly, what gives you the confidence that we will see the necessary inflection to achieve the 2% to 4% full-year target?

Yes, there are a few factors to consider. In the first quarter, as Chris mentioned, there were some unique one-time impacts, the most significant being the availability of baby formula for Earth's Best in North America. We view this as a first-quarter issue, but we do not expect it to persist throughout the year due to new arrangements with suppliers. Additionally, we decided to improve margins within our snacks portfolio by reducing promotional activities that were affecting margins, which will ultimately enhance our brand presence in the market. The challenge lies in the impact of this shift on volume in the short term, but we anticipate better overall product mix results over time. The timing of Alba sun care shipments also plays a role, as we shipped later in the last sun season and earlier this year, affecting the quarterly comparison without indicating overall weakness. Much of this is related to timing in North America. Regarding end market activity, we are quite positive. The growth in TDPs is promising, our pricing strategies are effective without negatively impacting consumer engagement, and I feel particularly good about the success of our promotions. We resumed promotional activities late in the third quarter of fiscal '23 and recognized it would take time to see results. Now, we're performing promotions at industry standards and seeing their effectiveness, which supports our ongoing marketing and promotional strategy to enhance sales velocity in line with our TDPs, giving us confidence moving forward.

Andrew, the three headwinds that Wendy described are in aggregate about 10 growth points of headwinds for North America. So it is a material headwind in the first quarter. And specifically in the first quarter. And then additionally, if you go back and look at how fiscal '23 seasonality was for North America. Recall that the first quarter in North America was exceptionally strong last year. So it was a quarter that got the year off to a very good start for North America, whenever the anniversary. If you go back to two years ago, and adjust for those 10 growth points of headwinds versus two years ago actually, it looks like acceptable levels of growth in the first quarter for me. And then the balance of the year, North America will recover nicely.

Yes. Thanks for the clarity.

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

Thank you, Chris. Good luck to you. I appreciate your help over the last year or two. Just curious if you can help us a little bit and thank you for all the guidance for next year, including the first quarter. Just wondering if there are a few other line items for the full year that we could get a little bit of help with, including maybe just directionally how you're thinking about the gross margin. And then maybe some help on just below the line items for interest and tax. Is there anything abnormal there we should think about as we model the year?

Yes. So for gross margin we do continue to see improvement; we expect improvement throughout the year. Call it between 100 and 200 basis points of gross margin improvement throughout the year. It'll be a little lumpy, but that would be our full-year expectation. Interest expense will continue to go up modestly in fiscal ‘24, not nearly as much as the increase that you saw from fiscal ‘23 to from ‘22 to ‘23. And then the adjusted tax rate will continue to be competitive in that 23.5%, 24.5% range.

Thank you for that. I would like to ask if you can clarify how the incentive program functions. It seems from Wendy's comments that a significant portion of the $20 million is related to a reset of the incentive program. I understand this might influence EBITDA negatively next year. Could you explain what factors contribute to this reset and how it will yield benefits?

Yes. The structure is actually very comparable to what you see just across, really industry. It's 50% based on revenue growth, 50% based on EBITDA growth. The challenge we have in fiscal ‘23, is that for the majority of the business, they clipped on both net sales growth and EBITDA. And so, what was accrued to pay out in bonuses, essentially went back into profit. With the plans for fiscal ‘24, we're building top-line growth, we're also planning relatively flat EBITDA, even with the investments in the business, and so the combination of that in the refunding or the accruing for that bonus plan, that's what you see as an accrual phenomenon, more than anything else. And to be honest, I really hope that we maxed out in both revenue and EBITDA and pair our folks, based on the results that we plan to deliver next year.

And if you decompose the $20 million, about two-thirds of it is the bonus dynamic.

Great, thank you to you both.

You bet.

Thanks, Ken.

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

Good morning, everyone.

Good morning.

Hi, there. So, can I ask about what you're seeing with consumer dynamics here. Other more mainstream packaged food companies are saying that the lower income consumer is quite vulnerable here. I'm assuming that that's not a huge concern of yours, but I'm wondering if there's anything that you're seeing between measured and non-measured channels, or just consumer dynamics as they're evolving right now?

Yes, that's a great question. We've previously mentioned that our portfolio tends to sit at the higher end of the conventional range and at the lower end of premium products, which positions us uniquely. We're observing that consumers are interested in products integral to their routines and prefer established brands. They are also seeking different pack sizes. For example, our Greek Gods yogurt has seen significant growth, primarily offered in multi-serve rather than single-serve formats, as consumers look to reduce overall cost per serving. Internationally, the dynamics differ; consumers there are more price-sensitive and are increasingly shifting towards discount retailers. We are well-positioned in that market, as we cater to both large retailers and discount stores, engaging with both brand and private label offerings. In the non-dairy beverage and meat-free categories, over half of our sales come from private label instead of branded products. Particularly in the meat-free sector, we’ve noticed that private label has recovered more quickly than brand items. In the U.S., our products do not particularly attract a price-sensitive consumer, so we have not observed significant shifts in consumer behavior beyond the focus on multi-serve options.

Great, thank you very much. I'll pass it on.

You bet. Thanks.

Thank you. Our next question comes from the line of Jim Salera with Stephens Inc. Please proceed with your question.

Hi guys, good morning. Thanks for taking my question.

Good morning.

Wendy, I wanted to ask you got a lot of moving pieces here on the brand reinvestment side. Can you maybe give us an idea of rank order, which brands or kind of subcategories are the primary focus and maybe when some of those promotions come on?

You will see us continue the reinvestment efforts we started in the latter part of the third quarter and into the fourth quarter. In our U.S. business, we will focus on Snacks, Baby Kids, and beverages. The Celestial Seasonings Magic in Your Mug campaign was very successful, along with our new product launches. We will maintain our support for Celestial Seasonings and Snack brands, particularly Garden Veggie and Terra within the Snacks portfolio. In Baby Kids, we will continue to promote the Earth's Best campaign and support innovation. Our main goal is to ensure that these brands remain top of mind for consumers while also being readily available for purchase. Half of our brand-building efforts will focus on expanding distribution across channels to make our products accessible to consumers. The other half will support our innovations, as in the past, we've had great products but haven't maintained enough visibility to encourage ongoing purchases. For example, we've introduced Sleepy Time with Melatonin, which is now one of our top-selling SKUs with retailers, and Melty Sticks in Earth's Best, which is also a top seller in kids’ snacks. We are pleased with the performance of these new innovations and have more planned for the upcoming year, which we will support with our brand-building budget.

That's all very helpful. Maybe one more. Just on the way that you view in-store promotions and driving trial through in-store offerings, versus kind of more high-level brand marketing that somebody would see on social media or on television. Do you have a sense for which one you get more bang for your buck, or what the appropriate mix between those two is?

Well, it would depend on the brands, but I would say in general for Hain, and this is part of our desire to be disciplined in brand building from what you would see from a large CPG branded enterprise, but we want to make sure that we are also moving fast and nimble, in the way that you might see from a disruptor or startup. And our brands aren't going to be the time that we're doing mass media promotions and media spend. That's just not really effective spend for us, where we do get a lot of efficiency is in overall portfolio, but also in social media, but also in-store activation. And it really depends on the brands, but the team has implemented a pretty disciplined approach to marketing media mix, and using that modeling to then adjust on a quarter-on-quarter basis, channel-by-channel.

That's all very helpful color. Thanks Wendy. I'll pass on.

You bet.

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

Thank you. Good morning.

Good morning.

I would like to gain a clearer understanding of the brand spending and increased investments. When you mention that it's more concentrated in the second half, should we anticipate it continuing into fiscal '25? Although that's a ways off since we just completed '23, should we view it as you just getting underway in mid '24, or conversely, are you currently at a 6% EBIT margin and have a target for recovery? Perhaps we'll learn more about this at Investor Day, but could you share your thoughts on the balance between spending and profitability, as well as your expectations for the timing of the ramp-up in spending?

Yes, I'll begin and then pass it to Chris for more details. There are two main points to address. First, during Investor Day, we will clarify our long-term expectations and what we anticipate for each year ahead. The first year, as we indicated, is essentially a reset of our foundation. I see the first half of the year focusing on fueling investments in our business and enhancing productivity, while being very cautious about our investments in the latter half. You will notice some organizational investments to support our channel expansion and a modest increase in marketing spend year-on-year, but the majority of those investments will occur in the second half of the year. Therefore, the challenges we faced in the third and fourth quarters for some of our key brands will persist into the first half of this year, with noticeable improvements not expected until the second half.

Yes, Michael, the only thing I would add is, definitely questions as Wendy said, that we'll go into much more detail at Investor Day. But we, in the past have talked about the pacing of our investments and the pacing our investments will be determined by two things. The attractiveness of the investment and the amount of fuel that we were able to be generating over what period of time. So, yes, you get into the back half of the year as Wendy said, more generation of that productivity of that fuel that pays for the investments, and then better visibility into fiscal ‘25, to come in a few weeks.

Okay, that's helpful. Just to clarify about the club promotion for Alba, did I understand correctly that it was moved to the fourth quarter and that we shouldn't expect it to shift into the second quarter? It's out of the first quarter and behind us, is that correct?

Correct.

Okay, great, thanks so much.

You bet.

Thank you. Our next question comes from Matt Smith with Stifel. Please go ahead with your question.

Hi, good morning.

Good morning.

Wanted to dig in a little bit on productivity savings. I believe previously the company was targeting over $100 million of savings between fiscal '24 and fiscal '25. Can you give a little more detail as to the level you now expect to realize in fiscal '24? And then how much of the productivity savings that you expect for the year, do you expect to be used alongside pricing, to offset lingering inflation, versus fund investments in the business in the second half?

Yes, this is an area that I've been really pleased joining the company have to see how robust the team's productivity processes have been. And I think we've provided the detail that in fiscal '23 we actually over-delivered to expectations in productivity, and that combined with pricing allowed us to cover for inflation. For fiscal '24, you'll see that continuing. So we actually have a ramp up of productivity in fiscal '24, the traditional things that the team has in the regular pipeline, but there are some incremental to that, that will lay out in more specificity when we go into Investor Day. We've got some pricing as well. And the combination of both of those gives us the ability to invest back in the business without a significant step back, but I'll let Chris provide a little bit more color.

And continue to accrue gross margin, as I said earlier to Ken's questions. So if you think about kind of the combination of pricing, productivity, offset by inflation, we think the net of those three things is positive and you'll see that in gross margin improvement.

Thank you for that. In general, can you discuss the level of investment in the business for the second half of the year? How do you view that level in relation to the overall spending needed to advance the business? Last quarter, you mentioned the need to invest more in core brands to unlock growth potential. Do you feel you will reach a significant portion of that in the second half of the year, or do you anticipate that investment spending will continue to surpass sales growth beyond fiscal '24?

I wouldn't say that we. So we certainly don't get to the levels, that we would want to be able to support the brands in the out years. And you'll see some of that laid out. When we talk on Investor Day. But we also realize that there is a lot of cost in the business that we can drive out, that can help to fund that. And I think I've said this in the last couple of quarters, we definitely want to make sure that we are prudent in how we do that. So, I don't have a desire to take a giant step back, to be able to fund that overnight. I think there is an opportunity for us to drive efficiency and effectiveness of the spend we have today. In trade, how are we driving the efficiency of our trade spend, that's giving us the right reach and getting the right activity with the consumer. The reality is our spend levels are about where they need to be. But we probably need to do that a little different. In marketing, we'd like to step it up, but I'd also like our working non-working marketing mix to be improved before we just add more dollars to it. So the team's done a lot of work to actually drive marketing investments analysis. So what's the return on the dollars that we're spending? How do we shift it to working marketing rather than non-working? And how we are measuring the impact on household penetration, brand awareness? How is it helping us drive distribution and reach? So we'll do more effectiveness work in '24 before we drive incremental investment in the out years. I think we want to get better at using the dollars we have today before we just put more dollars to things.

Great, thank you for that. Wendy, I can pass it on.

You bet.

Thank you. Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thank you, good morning. Following up on Ken's question, he mentioned the assumption that the majority of the $20 million is related to incentive pay refunds rather than brand building. Can you confirm if that is accurate? If so, it seems there will be some changes in spending, particularly in areas like snacks, beverages, and baby products, which are significant investment focuses. You also want to ensure you have the promotional capacity to support previous innovations, which makes sense. Generally speaking, where do you see inefficiencies, and where might you be reallocating funds?

Yes, well, first to your first question, as Chris said, about two-thirds of that $20 million is refunding our incentive plans, and those are self-funding. So you would expect as we deliver on revenue growth, as we deliver on profit growth, that's what would trigger the payment of those, but they self-fund, but in the mechanics of it on a year-on-year basis is why you see it as an increase. The other third is a little bit of investment in capability. Revenue growth management, that we're driving trade efficiency and effectiveness of the spend we have today. Our push into away from home and enhancing our e-commerce capabilities. So you'll see a little bit of investment there around capabilities. From a where do we see inefficiencies in the business? If we just look at our cost versus the industry benchmark, and I think we've shared this before. I think actually in your fireside chat, in June, we talked about this. That, there's a fair amount of inefficiencies in number of distribution locations, number of manufacturing locations, effectiveness of our supplier spend and supplier base. The amount of inventory we have on hand in both raw and pack and finished. Our days it takes to pay, et cetera. So there's, as we think about this scrutinizing every part of the business end-to-end. There are pockets of cost that's just been baked in. I think largely because we were a company built on multiple acquisitions, that largely weren't integrated. So part of what we are leaning into is integrating where we can drive efficiencies, that allows us to push those dollars to support brand building, rather than just supporting the running of the business. And that's where you'll see us outlining on Investor Day, that pace of fuel delivery and productivity, the pace of operating model change that enables us to then lean in and fund how we want to support our brands and push them out into the marketplace.

That's great, and just if you had to say the biggest variables you'll be tracking, as you're heading into fiscal '24. I would imagine shifts in the spending and the response to those. But if you had to describe what are the big must-haves for this year, what would they be? Thank you.

Yes. The big must-haves. We've got to drive distribution growth and we've got to drive good velocity of our distribution. So, we want to be our customer's best partner, in the most highly productive offering on shelf, and ensuring that not only get it in on shelf, but we are in place to stay on shelf, because we're a highly productive SKUs. So those will be things that we look at it end market. From brand health, we'll look at basic brand health guide the household penetration and awareness of our brands. Making sure that the spending we're doing in our marketing dollars is getting us the return that we would expect. And then from a business standpoint, we're watching very closely our cash conversion cycle. So, days of inventory both in raw and pack, days of payables, days of sales outstanding, because every one of those days in our cash conversion cycle is money that's just tied up, that could be invested back into the business. So we'll be looking at the efficiency of how we use our working capital.

Thank you.

Thank you. Our last question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Thank you. Just in terms of the price increases, is that relatively the same across the board, or are there certain products where you can't take price? And then as a follow-up, obviously, you're talking about slight revenue decline in the first quarter and then low-single-digit growth for the full year. Organic revenue growth of 2% to 4%. I know we're not talking about '25 here, but as we move into the back half of the year and into '25, should we expect the growth in revenues to start to move towards mid-single digits as we move into the back half of '24 and into fiscal year '25? Thanks.

We will provide more details on those questions during Investor Day, including insights into our long-term strategy and the foundation that supports our confidence in its feasibility. Look for updates on September 13th regarding that. If I take a broader view of our categories, brands, and market potential, I feel assured that our brands have established their market presence and that we have the potential to expand our reach, which should lead to increased revenue and margins. However, it will require our active effort to realize these opportunities, and you will see our plans at Investor Day. Regarding pricing, the team effectively managed pricing on a holistic level last year. We will approach pricing differently now due to the current environment, as consumers and retailers are less inclined to accept broad price increases. Thus, our strategy will need to be more selective. This involves examining trade efficiency and effectiveness and really focusing on price-pack architecture. We need to assess whether we can adjust pricing on specific pack sizes in certain channels where consumers may be less price sensitive, such as those willing to pay more for convenience. In contrast, we may find that we cannot raise prices on bulk packs in channels where consumers are more price conscious. I believe you will see our team successfully identify opportunities to adjust prices without negatively affecting volume and reach, so it won't take the form of a wholesale price hike.

Okay, great, thanks very much looking forward to Investor Day.

Absolutely.

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

Hi, Good morning, everybody. Thanks for the question.

Good morning.

Wendy, you mentioned in the prepared comments, some work had been done rationalizing I think an international brand and resulting in kind of a core assortment on that brand that's been more productive on the shelf. Is there more kind of SKU rationalization that will be happening, as you move forward? Is that an opportunity, I guess, and to what extent? And then a bigger picture question on the portfolio is there additional kind of broader based pruning that you're evaluating I think about business like Personal Care, being a little bit outside the wheelhouse of better-for-you food and beverage. Thanks.

Yes. No. Great question. In terms of SKU rationalization, this should be a regular part of how we run the business, to be honest. And every one of our brand managers, every one of our portfolio leads, every one of the market leads, should be looking at the assortment of SKUs that they have, and make sure that is the hardest working assortment of SKUs. It also has an impact on innovation. We don't want to launch innovation just for the sake of innovation; it has to be truly incremental to the brand and incremental to the category. So we can go to a retailer, justify the space, and use innovation to create greater brand awareness back to the core. And it's an incremental sale, not just swapping now sales, otherwise, a lot of work and effort is very low return on that investment. So, the particular similar instance we talked about in the prepared remarks was actually in Europe in our non-dairy beverage business. The team rationalized a pretty large chunk of the portfolio, down to the hardest working assortment, and that had a positive impact in driving real volume, real business impact. That's an example to be used across lots of parts of our business. So, long answer to your question, but we absolutely see an opportunity for us to eliminate parts of the tail, it will help our supply chain to be more efficient. It will help our dollar spend to be more efficient, and it will help our relationships with our retail partners, because we're using our space wisely, to bring in more shoppers and keep the shopper in there longer. As we think about the overall company portfolio. I mean, obviously, we're always looking at the portfolio to shape it, but that's not going to be the primary strategy. So, you shouldn't expect to see Hain's future growth be just buying new businesses, or selling off businesses. We have to actually run the businesses that we have, and then we can make strategic choices around what does or doesn't fit in the portfolio. But then we are selling off healthy businesses. So our focus right now in particular with something on Personal Care is stabilizing that business, ensuring that against the right fighting core of brands and fighting core products, so then we then have optionality with that portfolio. I can't say what in our portfolio will exist with us in Hain in the next three years, but we have an opportunity to ensure that we are good stewards of the brands we have, so that if we choose to sell those off. We're selling-off a healthy business to somebody.

Thanks. That's really helpful. And I look forward to seeing you at Investor Day.

Absolutely, look forward to it as well.

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

Thanks, good morning. I wanted to follow up on Personal Care. I’d like your assessment of what you've done across the company's portfolio. It seems there is some softness, and based on what you just said, it sounds like you believe it requires rightsizing to align with your strengths, which you have demonstrated effectively. Have you identified any structural issues, either internally, such as whether the scale of operations is adequate, or anything externally, perhaps related to a different competitive landscape than in food, or do you view it as more of a traditional solution as you mentioned?

We are conducting a comprehensive review of the business. In the last earnings call, I mentioned that we have brought in new leadership to oversee this evaluation. It's typical for any business to assess where there are opportunities for growth in the marketplace, the strength of the brand, and the right categories for those brands. We also consider if we are achieving the right market pricing and the channel opportunities, particularly in personal care, which has a significant online presence compared to the rest of our portfolio. We are looking at what the future holds for our omni and e-commerce strategies, along with our distribution and manufacturing footprints to see if they can be optimized for efficiency, similar to our consolidation of meat-free operations in Canada. We are doing extensive work on our distribution centers across Hain. While everything in our portfolio is up for discussion, it's essential to understand how brands can effectively compete in their chosen categories. You can expect noticeable changes in the Personal Care sector over the next year. This will provide us with options, whether that means returning to growth or finding a suitable position for the business, but we want to ensure we're maintaining a healthy operation before making those decisions.

Thank you. I'd like to ask about addressing the away from home market, including convenience stores and other food service opportunities. Can the current brand and products be seamlessly integrated into that distribution channel, whether through distributors or directly? Or will there need to be significant changes in pack sizes or usage types for the products to fit this channel?

Yes, the primary products that we would see in brands that have application away from home. It's going to be our snack portfolio, it is going to be Celestial Seasonings tea and it's going to be Greek Gods yogurt. So the beauty of Greek Gods is it's already and multi-pack, in multi-serve, which is ideally suited for that space. Not taking into C-store, but taking it into back of house and contract management. Our Snack portfolio already has single-serve in the pack sizes that we need. It's a driving distribution and really pleased that we've picked up some very large distribution gains in both Garden Veggie and Terra in C-store in particular, that you'll see come through in fiscal '24. So, getting some early good green shoots, which is great. For tea, we have single-serve, and we actually have K-Cups for Celestial Seasonings, we don't have as many of the flavors, as we would like. Although we did just launch the Peppermint K-Cup. We just had really great receptivity; this is going to be one that's driving distribution reach. And we're in the process of putting together that go-to-market model, to ensure that we've got the right coverage to go after the right channels, but I feel very, very good about it and the opportunities in front of us, but won't require a lot of food change or product change, won't require a lot of packaging change, it is very much around commercial execution.

Great. Thank you.

You bet.

Thank you. Our final question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.

Good morning, thank you for the question. Wendy, considering the demographics for this category, Hain's reliance for several years has been on a highly affluent consumer while dealing with economic elasticity. However, looking at the broader natural organic category, growth has slowed from a larger base, and private labels are entering the market. Larger consumer packaged goods companies are also offering products at more competitive prices. I'm interested in how you plan to grow over the next few years - specifically, the channels and consumer demographics you want to target. How do you view the potential risk of focusing on your primary high-intensity consumers, who may eventually reach a limit, versus targeting middle-income households, which might offer more elasticity risk but also access to a larger market?

Yes, I think it's a great question and certainly historically, Hain's growth has been predicated on a highly affluent consumer who is shopping, largely in specialty retail. What we're seeing, the dynamics changed in the last few years is that our products and brands actually appeal to a wider consumer cohort than just that consumer and consumers are looking to buy the products in more places. So the two things that we need to do, is make them available in more places than just traditional specialty retail. But we also need to make sure that we've got the right pack configuration, so that we meet the consumer's price points in those particular points of distribution. So it's an opportunity, you can have and that's the opportunity for Hain we are under-indexed in lots of channels, and we are under-penetrated in a variety of categories, that's the opportunity. The great news is that when we look at consumer appeal of our brands, there's a love for the products. Greek Gods yogurt for instance, has almost a near cult following, and Terra Chips and Garden Veggie Straws. So there is an opportunity for us to make the brands that consumers love available in more places at a pack type and a size that they that meets the needs in that particular occasion.

Okay. Thank you.

You bet.

Thank you. That concludes our question-and-answer session. I will turn the floor back to Ms. Davidson for any final comments.

Yes, I really want to thank everybody for the time today and for interest in last quarter. And I want to especially again thank Chris for his partnership and Alexis in all of her work and preparation as we go into these earnings calls. I very much look forward to seeing everybody on Investor Day, in a few weeks. And thank you again.

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