Hain Celestial Group Inc Q4 FY2024 Earnings Call

Greetings. Welcome to Hain Celestial’s Fiscal Fourth Quarter 2024 Earnings Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I’ll turn the conference over to Alexis Tessier, Investor Relations. Alexis, you may now begin.

Good morning, and thank you for joining us for a review of our fourth quarter results. I’m joined this morning by Wendy Davidson, our President and Chief Executive Officer; and Lee Boyce, our Chief Financial Officer. Slide 2 shows our forward-looking statements disclaimer. As you are aware, during the course of this call, we may make forward-looking statements within the meaning of federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations. 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 SEC, as well as the press release issued this morning for a detailed discussion of the risks. We have also prepared a presentation inclusive of additional supplemental financial information, which is posted on our website at hain.com under the Investors heading. As we discuss our results today, unless noted as reported, our remarks will focus on non-GAAP or adjusted financial measures. Reconciliations of non-GAAP financial measures to GAAP results are available in the earnings release and the slide presentation accompanying the 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. I'll start by reviewing today's key messages, the progress we've made on our Hain Reimagined strategy, and reasons to believe in our pivot to growth in fiscal 2025. I'll then turn the call over to Lee, who will provide additional detail on our fourth quarter and full year results and our outlook for the coming year. I'll start by saying that I'm pleased that we delivered on our updated guidance with organic net sales growth ahead of our guidance and adjusted EBITDA at the upper end of our guidance with continued progress in adjusted gross margin expansion. Importantly, we exceeded our free cash flow expectations based on strong delivery from our fuel initiatives, especially in working capital, revenue growth management, and operational efficiency. This enabled us to further pay down debt and improve our leverage position. Approximately 85% of our business grew in fiscal year ‘24 with organic net sales growth of plus 3%, and we have initiatives in place to stabilize the remaining 15%. I believe we are well positioned as we head into fiscal year 2025 to pivot to growth. Building upon this solid foundation and momentum, we are pivoting our focus to stronger commercial execution to deliver top and bottom line growth in fiscal '25. We remain committed to the Hain Reimagined algorithm we outlined last year, though we are now using fiscal ‘24 as the base for our organic net sales growth. We are confident in the strength of our diversified portfolio and geographic footprint, the benefits of scale in our operating model, and our ability to deliver sustainable growth. Let me now discuss the progress we've made on the four pillars of our Hain Reimagined strategy starting with focus. In fiscal ‘24, we made tremendous progress under the focus pillar to drive our five core categories and five core geographies while transforming the company into an integrated enterprise. We consolidated our global manufacturing footprint to reduce complexity within our supply chain and drive synergies and scale. We exited non-strategic categories, geographies, and brands, including the divestitures of Queen Helene and Thinsters, and we are creating a winning portfolio of brands with stronger velocities and gross margins. Importantly, we integrated the business globally to operate at scale and establish a clear Hain culture based on performance and value. Our supply chain team is a strong example of the strides we're making in building a performance-driven culture. Across our global Hain manufacturing operations, we've achieved world-class safety levels, and the team continues to embed the processes, systems, and recognition to ensure we are focused on the safety of our people, our plants, and our equipment as we generate fuel and build our brands and our business. Hain today is markedly different from the company we were just one year ago. We are leveraging insights and expertise across global categories, driving synergies across functions, and capitalizing on areas of scale in our supply chain, positioning us to pivot to growth in fiscal ‘25. In this first year, our team delivered strong progress in our fuel pillar with end-to-end operational efficiency generating $65 million in savings for the year, ahead of our $61 million target. Our robust productivity pipeline for fiscal 2025 gives us confidence in our ability to deliver another strong year of fuel. We continue to drive better net price realization and promotional effectiveness through revenue growth management. In fiscal '24, we enhanced RGM capabilities across the organization with a key emphasis on trade spend efficiency, contributing to a 50 basis point improvement year-over-year in trade rates. These capabilities will enable continued progress and delivery in RGM for net price realization, freight efficiency, and mix in fiscal year ‘25. Within working capital management, investments in digital technology and improved processes enabled improved forecast accuracy to drive inventory levels down by three days. Additionally, we extended days payable outstanding by 15 as we drive towards our Hain Reimagined goals. Our successful fuel initiatives in fiscal ‘24 facilitated material debt paydown, reduction in leverage, investments in the business, adjusted gross margin expansion, offsetting inflation and volume deleverage, and delivery of our updated guidance. As we head into fiscal year '25, we believe that significant opportunities remain in working capital on our path to deliver the $165 million we outlined on Investor Day. This year, we launched our agile and amped brand-building model and rolled out a number of campaigns to drive greater awareness, reach, household penetration, and share on key brands such as Celestial Seasonings, Ella's Kitchen, and Earth's Best. We will continue to drive brand campaigns that leverage the scale of a larger company with the consumer focus of smaller challenger brands as we strive to out-small the big and out-big the small. We continue to progress our channel expansion strategy with a particular focus on ensuring our products and brands are available where the shopper is shopping. In this first year, we leaned into away-from-home and e-commerce where we have established focused teams to drive reach and growth in these margin-accretive channels. In fiscal 2024, away-from-home revenues grew low double digits in both North America and International as we grew our C-store count by 42% in the U.S., expanded our route to market with distribution partners, and expanded food service in both North America and International. Garden Veggie and Terra, in particular, saw strong growth in C-stores, with Garden Veggie dollar sales up 49% and Terra up 48% this year. Within e-commerce, we saw growth in North America from key strategic brands, including Garden Veggie, up low-single digits for the year, and Celestial up mid-single digits, as well as double-digit growth in snacks and pouches for Earth’s Best. In the U.K., our online branded business grew low-single digits and is outperforming the overall market growth. We expect both e-commerce and away from home to be meaningful drivers of growth in fiscal year '25 and beyond. We enhanced our innovation processes and pipeline with strong performance from Celestial Seasonings, Sleepytime with Melatonin and Throat Cooler. In fact, Sleepytime with Melatonin broke into the top 100 SKUs in the entire tea category in its first year. We are particularly pleased with the launch of our Garden Veggie Flavor Burst, which is the number one new product in the better-for-you snack category. And we are excited about the upcoming openings of our innovation experience center at our headquarters in Hoboken, where we will be collaborating to develop leading innovation that meets better-for-you consumer demands. And we look forward to sharing our new fiscal year ‘25 planned launches at the appropriate time. The final pillar of our Hain Reimagined strategy is grow, where we see the greatest opportunity for improvement as we head into fiscal year ‘25 and where we are laser-focused on commercial execution. While the grow pillar did not progress as much as expected in fiscal year ‘24, the 85% of the business comprised of our grow and maintain brands did grow in fiscal year ‘24 with organic net sales up 3%. Double-digit declines in the 15% of the business targeted for stabilization more than offset that growth. However, the foundational work we did this year, including portfolio shaping, placing new leaders in key positions, and customer and channel prioritization is already making a difference with new distribution and shelf assortment. These changes have positioned us well to deliver sustainable growth going forward as we shift our focus to accelerated commercial execution. Let's now review each of our categories, the drivers of improved momentum, and more reasons to believe in our pivot to growth in fiscal year 2025. In snacks, our momentum built throughout the year on the success of the Garden Veggie Flavor Burst innovation as well as improvement in Terra Chips. In fact, snacks organic net sales growth was positive in North America in the fourth quarter, up low-single digits. As I mentioned, Flavor Burst is the number one innovation launch in the better-for-you salty snack category this year and drove Garden Veggie consumption up mid-single digits in the quarter. The improvement in Terra is being driven by better mix and price pack architecture, improving service levels and marketing support. On the last call, we mentioned we were launching our first ever national multi-brand snack promotion, Savor Your Summer. Savor Your Summer is driving positive sales across brands with shipper and pallet sales up 28% over the last summer at key customers. The program received particularly strong merchandising support across natural and grocery channel customers and is on track to exceed all of our targets for consumer metrics with impressions, consideration and engagement all coming in better than expected. We expect momentum in snacks to accelerate into fiscal 2025. Building upon the Flavor Burst success, we'll have new flavors, pack sizes, and have already secured expanded distribution in the coming year. Additionally, our new Garden Veggie Masterbrand campaign, YUMbelievably Delicious, launched this month, and we have additional initiatives in flight to expand snacks distribution across food, drugs, mass, and away-from-home channels with key customer events occurring in fiscal 2025. Finally, our channel strategy on Hartley's in the UK positions us for a strong back-to-school season where we are looking to double our feature space with an additional 800 shippers, a big win for Hartley's, which is our key better-for-you snack brand in the market and the number one jelly brand in the U.K. In Baby and Kids, organic net sales growth was slightly positive for the year, excluding infant formula, which as we've mentioned previously was impacted by persistent supply disruption. For infant formula, we delivered on our expectations for the fourth quarter and expect formula to be a key driver of growth in fiscal 2025. We are back in supply, though not yet in full for all formulations and sizes. We expect supply to be fully recovered by the end of the first half and should have significant formula growth in the back half of the fiscal year with healthy supply on all items. To support this, we have planned incremental marketing support to recruit new families into the brand. While we have work to do in order to earn back distribution loss due to the supply challenges, the Earth's Best brand remains strong, where we have full distribution, velocities are back to where they were before the supply disruption. In the balance of the category, we saw strength in Earth's Best snacks driven in part by geographic expansion with the successful launch in Canada, where Earth's Best plus snack was named winners of the Canadian Grand Prix new product awards in 2024. Distribution in Canada is continuing to build. And later this year, we are rolling out our three top flavors of Earth's Best smoothies, which have received strong retailer acceptance. Ella’s Kitchen, which was again voted the most loved baby brand in the U.K., outperformed the market in volume this year. During the quarter, we continued the rollout of our mono-material pouches, which are fully curbside recyclable in the U.K. Our target is to have over 70% of our entire pouch range converted by the end of this calendar year. This is a strong point of distinction in the category and the driver of brand preference. Recruitment into the Ella's Kitchen brand continues to accelerate with 53% of all first-time parents in the U.K. signing up to join the Ella's Kitchen community through our Become a Friend program, our highest recruitment attainment ever. And we continue to look for opportunities to partner with our customers for brand activation. Ella's recently launched an in-store partnership with Tesco to encourage more little ones to eat their five portions of fruit and vegetable today and the brand is well positioned for growth in fiscal 2025. The Beverage category was our strongest category this year with mid-single digit organic net sales growth. This growth was primarily driven by strength in our European non-dairy beverage business. The European non-dairy beverage market continues to grow mid to high-single digits led by our own label, where Hain has a leading role. Premium brand Natumi also saw strong growth this year. We expect to continue to drive growth in non-dairy beverage in fiscal year '25 with new secured contracts and innovation in the oat category, building upon the success of our Zero Sugar Oat launch. Celestial Seasonings also grew in fiscal 2024 with low-single digit organic net sales growth outpacing the category and gaining share. We will be launching a new master brand campaign ahead of the hot tea season with a focus on taste and continuing to reinforce the sustainability benefits of the plastic overwrap removal from our packaging. We expect the campaign and the expansion into black and green tea to contribute to accelerating growth Celestial Seasonings in fiscal 2025. Meal Prep delivered low-single digit organic net sales growth in fiscal 2024. We saw strong growth in branded soup in the U.K., where we outperformed the market and gained share. We expect to build upon our leading position in the U.K. with distribution gains coming ahead of the next food season. Within plant-based meat-free, the Yves brand in Canada continues to outperform the category and gain share despite significant category headwinds and some supply service challenges in the back half of the year during our plant consolidation. While the Linda McCartney food brand in the U.K. saw double-digit decline, 60% of the portfolio is gaining or holding share. We have made portfolio changes, exiting the refrigerated segment and rightsizing our operations capacity to address the softer market and improve our overall competitiveness as the category consolidates in the U.K. And finally, Personal Care, our smallest category had a 20% organic net sales decline in fiscal 2024. As outlined last quarter, we are executing our plan to simplify, prioritize, and focus our business around a core set of brands and Personal Care categories. We remain hyper-focused on this strength to grow plan to stabilize personal care and enable a strategic review of the brands and business for optionality. Looking ahead, fiscal 2025 will be a critical year as we pivot to growth, continue to drive further margin expansion, and generate significant free cash flow to reduce net debt, improve leverage and invest in our brands. We will build upon the momentum in the grow and maintain businesses through commercial execution in channel expansion, distribution gains, innovation launch support, and disruptive brand support. The 15% of the business in the stabilized bucket was a significant headwind in fiscal 2024. We have line of sight to full recovery of formula supply, which we expect will drive growth in formula this fiscal year, and we are aggressively working to stabilize Personal Care and plant-based meat-free. Fiscal 2025 will also see continued evolution of our global operating model centered on our commercial route to market and into end wiring across the organization to improve speed to shelf and customer focus. Lastly, we'll continue to capitalize on the progress made in our fuel initiatives through revenue growth management, working capital management, and productivity. We remain confident in the Hain Reimagined algorithm and our ability to pivot to growth in fiscal 2025. With that, I'll turn it over to Lee to discuss our financial results and fiscal 2025 outlook in more detail.

Thank you, Wendy, and good morning, everyone. As Wendy discussed, strong progress in the focus and fuel pillars of Hain Reimagined enabled us to deliver upon our updated guidance for the year. In fact, top line results were ahead of our guidance, and adjusted EBITDA results were at the high end. Approximately 85% of the business grew in fiscal 2024, and we have made progress towards and are continuing to focus on stabilizing the balance. Our free cash flow generation drove gross margin expansion, net debt reduction, and improvement in leverage, all while enabling us to invest in developing competencies to pivot to growth. We are excited to build upon this strong foundation in fiscal 2025. Let's look at the results in more detail. For the fourth quarter, we saw a negative organic net sales growth of 4% year-over-year. The decrease was driven by lower sales in both North America and international segments. For the full year, organic net sales growth was ahead of our updated guidance at down 2%, driven by 4% growth in international, more than offset by a 6% decline in North America. Net sales growth also reflects a 1 percentage point benefit from foreign exchange. We delivered fourth quarter adjusted EBITDA of $40 million compared to $44 million a year ago. Adjusted EBITDA margin was 9.4%, representing a 30 basis point decrease versus the prior year. For the full year, adjusted EBITDA was at the high end of our updated guidance at $155 million compared to $167 million in the prior year. Adjusted gross margin was 23.4% in the fourth quarter, increasing approximately 70 basis points year-over-year. The increase was driven by productivity and pricing on the success of fuel and revenue growth initiatives, partly offset by deleverage on lower sales volume and cost inflation. For the full year, adjusted gross margin increased 30 basis points year-over-year to 22.4%. SG&A increased 8% year-over-year to $72 million, representing 17.3% of net sales for the quarter as compared to 14.9% in the year ago period. The increase was primarily driven by legal expenses as well as personnel costs due to the timing of bonus accrual release versus the prior year. For the full year, SG&A was flat year-over-year at $290 million, representing 16.7% of net sales as compared to 16.1% in the year ago period. During the quarter, we took charges totaling $10 million associated with actions under the restructuring program, including contract termination costs, asset write-downs, employee-related costs, and other transformation-related expenses. Of these charges, $3 million were non-cash. For the full year, we took $63 million in charges associated with the transformation program, which is comprised of $60 million of restructuring charges and $3 million of expenses associated with inventory write-downs. Of these charges, $27 million were non-cash. As previously discussed, the total transformation program charges are expected to be $115 million to $125 million, inclusive of potential inventory write-downs of approximately $25 million related to brand and category access. The balance of the restructuring charges is expected to be $90 million to $100 million. Restructuring charges are excluded from adjusted operating results. Interest costs fell 1% year-over-year to $14 million in the quarter, driven by lower outstanding borrowings, partially offset by the higher variable interest on the unhedged portion of our debt. As a reminder, we have hedged our rate exposure on more than 50% of our loan facility with fixed rates at 5.6%. We continue to prioritize reducing net debt over time. Adjusted net income, which excludes the effect of restructuring charges amongst other items, was $11 million in the quarter or $0.13 per diluted share compared to $10 million or $0.11 per diluted share in the prior year period. Full year adjusted net income was $30 million or $0.33 per diluted share compared to $45 million or $0.50 per diluted share in the prior year. Now turning to our individual reporting segments. In North America, we delivered negative 5% organic net sales growth year-over-year. The decrease was primarily driven by lower sales in infant formula, which was a 260 basis point drag, and a decline in the Personal Care business, which represented a 170 basis point drag on North America sales. This was partially offset by growth in Snacks. Fourth quarter adjusted gross margin in North America was 22.6%, a 20 basis point decrease versus the prior year, driven by cost inflation and deleveraging on lower sales volume, partially offset by productivity and pricing on the success of fuel and revenue growth management initiatives. Adjusted EBITDA in North America was $21 million compared to $27 million in the year ago period, and adjusted EBITDA margin was 8%, a 150 basis point decrease year-over-year. The year-over-year decline resulted primarily from deleverage on lower volume. In our International business, organic net sales declined 4% in the quarter. As Wendy mentioned, beverages demonstrated strong growth in the quarter, though this was more than offset by continued softness in plant-based meat-free, a stabilized business in our Meal Prep category, as well as Snacks. International adjusted gross margin was 24.8%, up approximately 210 basis points year-over-year, driven by productivity, partially offset by inflation. International adjusted EBITDA was $27 million, consistent with the prior year, as productivity gains offset the impact of inflation. Adjusted EBITDA margin was 17%, up approximately 40 basis points year-over-year. Shifting to cash flow and the balance sheet. We generated $31 million in free cash flow in the quarter compared to $34 million in the year ago period. For the full year, we generated $83 million in free cash flow compared to $39 million in the prior year. The increase was driven by working capital initiatives. Our days payable outstanding improved to 52 from 37 in fiscal year '23, and our days inventory outstanding improved to 79 from 82 in fiscal year '23. We are pleased with the progress we are making towards our Hain Reimagined targets of 70 plus days payable outstanding and 55 days inventory outstanding by fiscal year 2027. CapEx was $9 million in the quarter and $33 million in fiscal 2024. Looking ahead to fiscal 2025, we expect expenditures to be approximately $50 million. Finally, we closed the quarter with cash on hand of $54 million and net debt of $690 million, translating into a net leverage ratio of 3.7 times as calculated under our credit agreement. We drove leverage lower than expected due to better cash flow on the momentum from our fuel initiatives. We continue to expect our net leverage to tick up modestly in the fiscal first quarter driven by seasonality before ending fiscal 2025 in the mid to high-3s. We are comfortable that we have sufficient headroom under our existing covenants. Paying down debt and strategically investing in the business continue to be our priorities for cash, and we have reduced net debt by $86 million since the beginning of the fiscal year. Our long-term goal remains to reduce balance sheet leverage to 3 times adjusted EBITDA or less, as calculated under our credit agreement. Turning now to our outlook. We expect to pivot to growth in fiscal 2025. We expect organic net sales growth to be flat or better, adjusted EBITDA to grow by mid-single digits, gross margin to expand by at least 125 basis points, and free cash flow of at least $60 million. While we don't intend to provide quarterly guidance, we want to share some commentary on the shape of the year. From an organic net sales perspective, we anticipate that year-over-year growth will improve as the year progresses as follows: in the first quarter, we expect negative organic net sales growth at a similar rate of decline year-over-year as in the fourth quarter of fiscal 2024. We expect flattish year-over-year growth in the second quarter and accelerating growth in the back half of the year. Factors contributing to the cadence of the year include promotional activity in snacks that have shifted into the fiscal third quarter from the fiscal first quarter, which will be a headwind in the first quarter, but not impact the full year. As we mentioned on our last call, our portfolio simplification initiatives will have a year-on-year impact predominantly in the first half. As Wendy mentioned, our infant formula supply will be recovering over the first half of the year, with full supply supporting our Earth's Best business growth in the back half. Finally, adjusted EBITDA growth for the full year will be driven by growth in the back half. Please note that we are updating our definition of organic net sales growth for fiscal 2025 to exclude the impact of foreign exchange. We do not expect foreign exchange to be a key driver of variance in 2025. Finally, as Wendy mentioned, we remain committed to the algorithm outlined in Hain Reimagined: organic net sales CAGR of 3% plus, 400 basis points to 500 basis points of adjusted gross margin expansion to get us to 26% plus and adjusted EBITDA margin of 12% plus by fiscal 2027. However, the baseline from which we are growing will be adjusted to fiscal 2024 organic net sales. Now I hand it back over to Wendy.

Thank you, Lee. We are one year into Hain Reimagined and we're making strong progress in the four pillars of the strategy. Our progress in driving focus, resetting our global operating model, kicking off our fuel program, and investing in key capabilities to enable growth position Hain stronger than we were a year ago. While our pivot to growth in some areas has taken longer and resulted in a reset of our starting point, we are now positioned to deliver on our promise and remain committed to our Hain Reimagined algorithm. Our work in the fuel pillar has exceeded expectations. Momentum is building across the business as evidenced by the 85% of the business that is in growth, and we are hyper focused on the commercial execution to deliver top and bottom line growth in fiscal 2025 and beyond. Our strong free cash flow generation has enabled accelerated reduction in net debt, improvement in our leverage ratio, gross margin expansion, and investment in our brands and in key commercial capabilities, all giving us confidence in our ability to deliver on our Hain Reimagined outlook. We are a markedly different company today than we were just one year ago, as we began to capitalize on our diversified portfolio, our market reach and global scale, and we will be even stronger a year from now. I'm excited for the year ahead as we pivot to growth and begin to realize our full potential as One Hain. Before we open it up for questions, I want to thank all of our team members for their passion and commitment, which are critical drivers to all that we have accomplished together in this first year and will accelerate our delivery of Hain Reimagined. Operator, please open the line for questions.

Thank you. At this time, we will be conducting a question-and-answer session. And our first question will be coming from the line of Jim Salera with Stephens. Please proceed with your questions.

Hi. Good morning, everybody. Thanks for taking our question.

Good morning, Jim.

Yeah. I appreciate the color on kind of the shape of 2025. If we think about what would be an incremental driver from the flat guidance to the better than flat, can you maybe just walk through, would incremental outperformance come from sales in Snacks in the back half from formula in the back half? If you could maybe just touch on each category and if we were to expect it to be in the better part of the guidance, where that incremental outperformance would come from?

Yeah. So it’s a good question. So I'll start, and maybe Wendy can weigh in. But just to kind of give some more color to the second half to the first half. So we've got three drivers in there. The one you just mentioned is formula and then what we're lapping. We do anticipate seeing formula build up as we go through the year. The second piece of it, and we mentioned it actually, as we went through before, is the promotional shift. And it's in Garden Veggie Snacks, we've got an event shifting from Q1 to Q3. I'd say the other item is Greek Gods, where we have broader geographic distribution expansion that takes place during the year. So that's kind of what is weighing in the first quarter. So we moved to flat in the second, and then we're seeing significant growth as we go through into the balance of the year.

Yeah. And I'll just add to that. There's the known headwinds that we have in the front half, which is, as we said, promotional activity that's just timing shift. It's also, as we build up our inventories around all formulations and sizes in infant formula. There's the unknown opportunities that I think to your point become potential over drivers. We're actually back in inventory in most of our formulations, not all sizes, but most of our formulations. So our team is leaning very heavily into regaining our distribution in infant formula. Happy to say that where we do have distribution, our velocities are back to where they were two years ago. So we know that parents want the brand, and we feel really good that, that could be a potential over driver. We also have some incremental distribution that the team have landed in our snacks portfolio in C-store alone, we have another 48 or I think we have a total store count now of 48,000, that's an incremental 13,000 stores that were picked up in the last quarter. So as we begin to have those distribution points realize their velocity, those become additional overdrives as we go into the year.

Great. And Wendy, I’m glad you finished on C-stores because I actually have a follow-up question there. Are you able to see, I know still maybe early days with some of the new stores, but are you able to see incremental purchases in traditional mass channels that are in the areas where you're getting distribution in C-store? And maybe another way to ask that is, for the consumers that shop at C-store, are those new households that are then buying your portfolio in other channels or are you just driving incremental purchases with existing households?

Well, that's a great question. One of the reasons why we believe in away-from-home is an opportunity for us in brand building is, as our team calls it first to find and first to mind. Having our brands available in more places where the shopper is on their journey raises brand awareness beyond what you're spending and pay to advertising. So we know that that's an opportunity. Absolutely, having our brands in multiple points of distribution, we know generates awareness that then drives trial in the other places where they're shopping. I’d hesitate to not point out that in the last quarter, actually Garden Veggie and Terra were the fastest-moving better-for-you snack products in the C-store channel in the industry. So we feel really good that as we grow distribution, we have brands that the consumer wants. We’re putting them into places where the consumer wants to find them.

Great. Thanks for the color, guys. I’ll hop back in queue.

Our next question is from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Thank you. I wanted to explore the roadmap to 2027 a bit more. I appreciate that you're reiterating the basic path today, including the advancement of the base year to 2024. However, reflecting on last year's Investor Day, there were some key points mentioned. You mentioned a 3% top line CAGR and 10% EBITDA growth, along with a potential increase in gross margin by about 500 basis points. I'm curious if we might hear more about those underlying drivers this year and if they are still being emphasized, as the slide discussing that plan lacked detailed numbers. I’d like to understand more about what’s going on beneath the surface.

Sure. I can start, and then Wendy can add if there's anything more to discuss. Ken, in response to your question, we are committed to the underlying algorithm and the structure of the P&L. Specifically, we aim for a gross margin expansion of 400 to 500 basis points, which we've seen some positive momentum with, reporting 70 basis points in Q4. We are also focused on an EBITDA margin of over 12%, and we remain committed to that target. Additionally, our net working capital stood at $165 million, showing strong progress, with over a third achieved in this first year. We also aim for a 3% compound annual growth rate in organic sales, starting from the organic base of 2024. However, we have identified some areas that developed differently than we initially expected, particularly regarding the formula and Personal Care segments. We've made strategic choices in Personal Care regarding our winning portfolio, but remain committed to the 3% growth target using 2024 as our base year.

I would like to add that we have made significant progress on the sub-elements of Hain Reimagined. When we discuss rebates, we are considering the business exits we executed in fiscal '24. As a result, our organic revenue starting point has changed compared to a year ago due to portfolio simplification and some divestitures. We are committed to achieving the three percent growth, but this will be based on a new revenue base.

Okay. To follow up on that, as we consider how to reach those '27 figures, should we think of '23 as a year where unusual challenges occurred that are unlikely to continue into the latter part of '24 and into '25? Is it reasonable to recalibrate expectations for '24 because those challenges shouldn't be seen as persistent? The main question I am receiving this morning is how Hain anticipates achieving a significant acceleration in top line growth and gross margin growth in '26 and '27, which seems to be on a tighter timeline now compared to earlier projections. I just want to gain a clearer understanding of where that acceleration will come from in the next couple of years.

Yeah. I think it's exactly to your point. There are some unique elements around our focus pillar, really the portfolio simplification in fiscal '24 that we fundamentally exited whole categories. Take, for example, what we said in the last quarter that we were reducing over 60% of the SKUs in the Personal Care portfolio that related to about 30% of the overall revenues. The fact of doing that actually rebases your overall revenue. We also had some divestitures with Queen Helene and Thinsters. So we've pulled that out as well, just to get to an equal starting point, but we've not reset each one of the categories. We’re essentially taking into account at the total where we’ve exited whole categories.

Our next question is from the line of Matt Smith with Stifel. Please proceed with your question.

Hi. Good morning. Thank you for taking my question. I wanted to follow up on the impact of SKU rationalization and business exits. There’s a portion of that impacting sales that isn’t classified as organic sales when you completely exit a business. Can you help me understand with the flat organic sales outlook for the upcoming year? Does that account for the usual headwind from simply rationalizing SKUs, not just exiting businesses, but also reducing the SKU count within your current portfolio, or is that all categorized outside of organic sales?

No, I'll begin, and then Lee can provide additional details. You're absolutely correct. A part of our portfolio simplification involves exiting entire categories. For instance, we discussed last quarter that we had Personal Care brands in categories where we didn't find it necessary to remain. Exiting toothpaste and deodorants are examples of these category exits. However, there is also some routine portfolio maintenance that occurs which doesn't count as organic growth. We still have some of that activity happening this year, and we are accounting for it in our guidance for the first half of the year, which is why our outlook has been cautious for that period. As we move into the second half of the year, this issue will have less impact.

Yeah. So I think you got it. I mean, we're obviously coming out in '24, we had Thinsters and Queen Helene. And then to Wendy's point, I mean, what's being treated is really transformational winning portfolio, part of our transformational winning portfolio strategy. So whole categories that we shouldn't be in. And that's why we actually gave the 2024 number. We want to kind of really make sure we provide clarity. So as you saw on one of the slides, we actually gave that adjusted baseline 2024 number.

Thank you for that, Lee. As a follow-up, the fiscal '24 organic sales base number you provided indicates a reported sales decline of about 3%, assuming organic sales remain flat year-over-year. Is that indicating the impact of the business exits reflected in the divestiture line?

Let us get back to you on that because I want to make sure that we give you an accurate number on that. But there are elements of business exit and divestiture that play into that. But I want to make sure that we give you the exact number.

Yes, there are several factors to consider regarding the organic sales performance, including Thinsters, Queen Helene, and the exits in the PC category. We will follow up with you on this.

Thank you, Lee. I’ll leave it there.

Thanks, Matt.

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

Good morning, everyone.

Good morning.

Hi there. So am I right in thinking that as we rotate into fiscal '25, you're going to start breaking out price and volume independently? And if that's still a case, is there any color you can give on how the organic sales growth breakdown for 2025 is going to shape up? I'm assuming pricing will be fairly flat and then volume will improve through the course of the year as you described with the organic sales growth. Is that a reasonable way to think about it?

So you are correct. We will be breaking out. I know that's kind of long promised, but we have put the systems in place. So as we get into Q1, we will break out the price volume mix, and you're also right. I mean, there is a piece of pricing, but it is primarily driven by volume mix as we go into 2025.

Perfect. Thank you very much.

There's a little bit of wrap around pricing from fiscal '24, but not substantial incremental pricing. And then obviously, with the sales of formula and a few other categories, we will see the mix improve as we go into the year as well.

Got it. Okay. That's very clear. Thank you. Could you talk a little bit about the sourcing of the organic lactose that has been dragging on for some time? Are you moving to a dual sourcing strategy? How are you creating resilience in that area because I know it's been something that's been with us for a little while here? Thank you, and I’ll pass it on.

Yeah absolutely. Infant formula, as you know, has been a pain point, certainly since I joined the company. I feel very good about where we are in supply. We do across our formula, we have multiple supply options and toddler formula, and we've got some location redundancy in our infant formula. We're also, which you would see play out in a little bit of our days of inventory. We're actually holding a little bit more inventory of our core SKUs in infant formula as they become available so that we give ourselves a little bit of cushion as we go forward as well. We know that as we rebuild our infant formula business with our retail partners, that assuring them that we can have supply on shelf consistently is paramount. We also need to make sure that we are investing behind the brand to create awareness with parents. So both of those are things that we're taking very seriously as we go into the front half of this year, you'll see some incremental marketing in the back half, but you’ll also see us have a step up a little bit of inventory to make sure that we’re holding enough to sustain in the event that there’s a hiccup.

Perfect. Thank you very much. I’ll pass it on.

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

Thank you. I wanted to follow up on the outlook and the timing for the year as a whole. Could you provide some insights regarding the two segments? From my analysis, it appears that many of the developments you're highlighting are more focused on the North American market, and it seems that the changes and timing are primarily influenced by that segment. I would appreciate your thoughts on this.

Yeah. There is obviously some very large buckets that impact North America in the front half, and there are tailwinds as we go into the back half. International actually has a little bit of that as well. So you will see a little bit suppressed, especially in the Hartley's snack business, as we build up in the front half of the year, and then some contracts in our own label, both in the U.K. in spreads and drizzles, and in the European market in non-dairy beverage, those begin to play out as we go through the back half of the year. Hartley’s, for example, is a leading brand in snacking, single-serve snacking, but it is a high impulse purchase. We've changed our promotional strategy to really support feature and display, which is critical for that brand, and we've also converted to a more recyclable packaging, which retail partners really want. The combination of those two things and a high-low pricing strategy, we feel really good about. I think we even mentioned, then we've got about 800 shippers in Hartley's that goes out in the front half of this year, getting incremental feature display, and we have another plug of features that comes in the back half of the year as well with additional shippers. We feel good that both regions have reasons that are driving some of the softness in the front half, which we've appropriately called into our guidance. But we have lots of bright spots as we go into the back half that are actually already known. It's simply a timing.

And the front-end softness in International, is that more the meat-free declines or is it more some of this private label stuff?

No. It's largely in meat-free. So you still see the meat-free softness in the category. I think we also mentioned that we exited the refrigerated segment in meat-free and focused on frozen. So you'll have a little bit of that portfolio simplification that impacts in the front half as well as we really rightsized to the fighting core of what we want to have in the meat-free category.

Thank you. I wanted to ask a strategic question regarding the salty snacks portfolio in North America. Can you share your thoughts on the scale of that business as you target the mass market with three brands, two of which are niche with distinct brand identities? Is this sufficient to secure optimal shelf space? I've observed that you've gained some shelf space in certain regions, but I'm curious about how you view its positioning within such a concentrated national category.

Yeah. We actually feel very good about our snacks portfolio and especially around the three primary brands that we're leaning into. All three have a very unique position in the space, but they're really leading in better-for-you. For instance, in Garden Veggie, we know that where we have the right shelf assortment, our velocity is actually turn better than brands that have a higher ACV. Our teams actually successfully use those data points with our retail partners, and you will see some fairly large incremental ACV with some very large retail partners that begins to ship in September, where we go from, I think, on Garden Veggie, Terra, and Garden of Eatin from an ACV at a particular retailer somewhere in the mid-20s to somewhere in the mid-70s picking up about 6,600 new stores in the marketplace. We find that the data tells us that the brands do resonate with consumers. They’re looking for them to be available more often, so the brands are loved. We just make it kind of hard for you to find it. We are driving incremental distribution. We’re very focused on our promotional spending, supporting velocity because we know that’s critical. This year, you’ll see – I think we launched it about three weeks ago is the first-ever master brand campaign on Garden Veggie. That’s the first time we’ve actually promoted the entire portfolio of Garden Veggie. You’ll see us really lean into brand support around the snack portfolio.

Got it. Thank you. That’s it from me.

You bet. Thanks.

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

Thank you for the insights on the fiscal year timing, which certainly relates to the data we're currently observing for Garden Veggie. As we analyze MULO plus data, do you believe it closely reflects the organic sales we can expect from North America? The most recent quarter showed a strong correlation. Do you think this will continue, or are there non-visible areas, such as Canada and other unmeasured channels, that might lead to discrepancies between the data we will see?

That's a great question. There's a lot of movement around the available data sets, so let me break down our business visibility. Overall, 40% of Hain's business is international while 60% is in North America, which means you can't see the international segment in the North American numbers. About 10% of our business is in Canada, which is also not visible. Of what's left, around 85% is represented in the new Circana MULO+C data, so in total, you can see about 45% of our overall business in that Circana data. We might encounter some fluctuations in the Circana data over the next few months for a few reasons. If we consider total Hain, including Personal Care and Food and Beverage, the Personal Care segment will negatively impact the end market data due to portfolio exits, as we've moved away from certain categories and SKUs. Focusing just on Food and Beverage, as mentioned earlier, we had significant promotional activities in the first quarter last year, which are occurring this year but have moved to the third quarter. This won't impact us for the full year, but will be noticeable in the first quarter. However, we've also gained additional ACV from large retail partners and convenience stores, and we expect to see improvements in year-over-year comparisons as we progress through the first quarter and certainly into the second quarter.

Thank you for all that. That's very helpful. A question on baby formula. Right now, that is about only 2% of your sales or so. When capacity is where you want it to be and maybe you can let us know when that will be. Where do you think that mix can go? How much higher do you think that business, how much bigger can that business get when it's unconstrained?

Yeah. So we feel very good about the capacity and capability that we have. It's been running very strong since early June, where we started with a limited number of formulations and limited sizes just to get full run rate. We are beginning to add the full formulation mix, so gentle, sensitive, dairy, etc., and we're beginning to add the full sizes. We will be in all sizes and all formulations that we need as we get into, call it, late quarter two. So the back half, we feel good about. As we look at the size of that business, Earth's Best was the number one infant formula in better-for-you up until two years ago. We now are number five or six. Our goal is to get back to that number one position. We have ample supply to do so. We're investing behind the brands. We were sort of the original organic baby formula, the OG in the space, and we intend to recapture our leadership position in that way. We'll be leaning into that. So how big that can be? The category has actually grown in the last couple of years, so it should be bigger than it was for us a couple of years ago, but we're going to be leaning very heavily into that.

Got it. We'll take a look at that. Thank you.

Thank you. The next question is from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.

Good morning. Thanks for the question.

Good morning.

Wendy, good morning. You seem more optimistic about snack distribution for the upcoming fiscal year after some challenges last year. What are your thoughts on the risks and visibility regarding potential underperformance from the phasing again? Are there any significant promotions from larger brands that could pose an issue? Could there be fluctuations from shelf resets in new outlets you are entering? As you consider the ramp-up, what potential challenges could lead to deviations from the plan?

I believe the main reason our snacks portfolio didn't meet expectations was due to our execution. It wasn't because we lacked competitive brands or suitable products and sizes. The issue stemmed from not having the core assortment distributed where it was needed. We had products scattered in various locations, which hindered our ability to effectively promote or run impactful marketing campaigns. We are concentrating on placing the right products in the right locations and sizes because we know that leads to strong sales velocities. We are maintaining our promotional levels which are currently below the industry average. While we don’t need to over-promote, we understand that effective promotions for our brands are not solely about price discounts; they focus on features and displays. Our goal is to ensure our products are accessible to consumers and create awareness. This summer, we launched our first multi-brand program called Savor Your Summer, featuring all three of our better-for-you brands during peak snacking season. We recognize that consumers in this segment want options, and we aimed to support our retail partners by making our products available. We distributed 13,000 shippers for this initiative, and sales during Savor Your Summer surpassed our expectations. We are confident that when we combine the right products, placement at the right price, and effective promotional efforts without over-promoting, while also partnering with retailers to increase awareness, we have competitive brands. The biggest challenge has been our own execution rather than competition.

Okay. And then on the tea business, that's been an area of material innovation for you. And looking at the Nielsen data, at least, the baseline volumes have been softer there, both in Q4 and in Q1 through mid-August. I know it's sort of off season, but have there been any other factors in marketing or merchandising having an impact? Just curious if you can elaborate on the retail takeaway there and any kind of merchandising for FY '25, we should be thinking about?

We feel very positive about Celestial Seasonings, but there are several factors to consider. We have converted all of our packaging to eliminate the overwrap on the boxes. As we have been introducing the non-overwrap packaging on the shelves, it has created some challenges with shelf assortment and availability while we focus on the core assortment of all the non-overwrap products. Additionally, we reduced our promotional and marketing spending in the fourth quarter in preparation for two key developments. We will launch a major master brand campaign for Celestial Seasonings in early October, and we also have new innovations on the way. We opted to allocate our budget for these efforts during the hot tea season instead of over-promoting during the off-season. We believe these challenges are temporary and are optimistic about the assortments we have planned. Two new innovations are coming: a beauty wellness tea with Biotin and a lemon tea, both set to be introduced in fiscal '25. With the master brand campaign and a clear shelf assortment leading into hot tea season, we feel confident as we approach the latter half of the year.

Thanks, Wendy.

You bet.

Thank you. At this time, we've reached the end of the question-and-answer session. Now I'll turn the call over to Wendy Davidson for closing remarks.

I want to reiterate what I said earlier and really thank our teams. I especially want to thank the group that we have in finance and supply chain for the incredible work that they did in delivering fuel in this first year, that has really positioned us to make the investments we want around the business but also to be able to pay down debt. I want to really thank everybody as we’re going through this first year and especially, for the time this morning and look forward to further conversations.

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