Earnings Call Transcript
Hain Celestial Group Inc (HAIN)
Earnings Call Transcript - HAIN Q2 2022
Operator, Operator
Greetings, and welcome to Hain Celestial's Second Quarter 2022 Earnings Conference Call. At this time all participants are in listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anna Kate Heller, Investor Relations. Thank you. You may begin.
Anna Kate Heller, Investor Relations
Thank you. Good morning, and thanks for joining us on Hain Celestial's Second Quarter Fiscal Year 2022 Earnings Conference Call. On the call today are Mark Schiller, President and Chief Executive Officer; Chris Boever, incoming Executive Vice President and Chief Financial Officer; and Javier Idrovo on his final earnings call as Executive Vice President and Chief Financial Officer of Hain. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Hain Celestial's annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hain Celestial's website under the Investor Relations heading. Please note, management's remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. This call is being webcast, and an archive of it will also be available on the website. And now I'd like to turn the call over to Mark Schiller.
Mark Schiller, CEO
Thank you, Anna Kate, and good morning. On today's call, I'll give some color on our Q2 performance and balance of year forecast as well as progress against the Hain 3.0 strategy we laid out on Investor Day. Joining me today on the call are Javier Idrovo and Chris Boever. I'd like to take this opportunity to thank Javier for his hard work, his contributions to Hain 2.0 and his assistance in smoothly transitioning all of his duties. I also want to welcome and introduce Chris, who officially begins his role as CFO starting tomorrow. I'm very excited to have Chris joining our company and team. He brings a wealth of CPG experience, a deep operating background, and exceptional leadership skills. I look forward to partnering with him on our Hain 3.0 journey. Let me briefly turn it over to Chris to say a few words.
Chris Boever, CFO
Thanks, Mark, and good morning, everyone. This is my third week at Hain and everything I've seen has confirmed the reasons I was so excited to join the company. Hain is a leading global health and wellness company, and we are exceptionally well positioned with great brands and a very talented team. I'm looking forward to helping to lead the Hain 3.0 journey and continuing to grow shareholder value.
Mark Schiller, CEO
Thank you, Chris, and again, welcome to the team. Let me start today's call by giving some color on our Q2 results. I'm pleased that we delivered top line performance at the high end of our original guidance and in line with our pre-earnings announcement in January. As I'll discuss in more detail, we're seeing strong consumption in our growth brands that is leading to accelerating top line growth for the company. With regard to profitability, our bottom line came in slightly below our original guidance, driven by continued and well-publicized industry-wide supply chain and labor challenges. While the team is doing a great job with pricing and productivity to offset almost all of these additional costs, late in the quarter, we did experience some incremental unforeseen costs, which led to about a $3 million miss to our original adjusted EBITDA guidance. I'll discuss those more in a minute. Digging deeper on the top line, net sales were down 2% versus a year ago when adjusted for currency and acquisitions, divestitures and discontinued brands. Compared with two years ago, before the pandemic, adjusted net sales were up 7%. Our growth brands, which make up almost 70% of our total company sales were up slightly in the quarter versus a year ago and up 12.6% versus two years ago. I'm pleased to report that net sales in the United States, our biggest market, were strong and continue to show material sequential improvement. Adjusted for divestitures, net sales in the United States were up 3.7% versus last year and 9.7% compared to the same quarter two years ago. And consumption last quarter for all US brands in measured channels was up over 10% compared to last year and 16% versus two years ago. This is a testament to the success of Hain 2.0 and gives us further confidence in our Hain 3.0 plan. Our US growth brands in snacks, tea, yogurt, baby and personal care categories, which make up 85% of sales at consumption growth of 14% versus last year and 22% versus two years ago. Household penetration on those growth brands was up again in Q2 on top of growth last year and up almost 10% versus two years ago. Snacks and baby food led the way with growth up more than 25% year-over-year. Celestial Seasonings gained more than a full share point and delivered high single-digit growth in the quarter, overlapping significant growth from last year. I'm also encouraged to see consumption stabilize on Greek Gods after significant supply chain challenges early in the quarter and solid consumption growth on Garden of Eatin' driven by a product reformulation and some terrific work on price size architecture. Unit velocities on the growth brands in the US were up mid-single digits even with retail prices increasing more than 7% in the quarter and average items per store also increased nicely despite supply chain challenges. So in summary, we're seeing tremendous momentum on the top line in the US and that growth has accelerated thus far in Q3. In International, adjusted net sales came in below a year ago as expected, driven by the overlap of customers stocking up last year in anticipation of Q3 Brexit disruptions and increased regulations on baby food imports in China. We expect both of those issues to continue into Q3, but have no long-term impact on our strategy and outlook. Relative to two years ago, our International net sales were up 8.5%. Within the quarter this year, we did deliver more than 20% growth and gained more than 3 share points in both baby and soup and also grew share in meat-free snacks, jelly and marmalade. Importantly, we also saw velocities improve more than 10% on our entire UK business. With regard to company-wide adjusted EBITDA, we came in a bit below our original guidance for the quarter and first half. While there was certainly continued pressure on costs, I'm pleased to say that we were offsetting most of these. The small miss can be primarily attributed to two things, which both happened in the back half of the quarter, giving us limited time to respond. First, we experienced significant increased energy costs in Europe, where prices in the quarter accelerated to as much as 10 times what they were last year. Yes, you heard that correctly, 10 times. Imagine for a moment, the impact on the economy of everyone's heating bill went from $200 a month last winter to $2,000 a month this winter. That's what we faced in Europe during the back half of Q2. Fortunately, while energy prices are still inflated, they have started to come down somewhat, and we have locked in energy contracts for the balance of the fiscal year, which are reflected in our revised go-forward guidance. Second, the emergence of the Omicron variant created additional global labor shortages and challenges throughout the supply chain, impacting both service and costs. The good news here is that we're seeing signs that Omicron appears to be peaking, which should result in some of the related short-term challenges abating later in the third quarter. Switching to margins. Like the rest of the industry, we experienced continued high inflation and supply disruptions during the quarter. To offset these costs, we continue to aggressively drive productivity projects and have taken significant pricing in the first half of this fiscal year, both here and internationally. We were very surgical in our pricing decisions, analyzing many variables, including price gaps and thresholds, brand velocities, consumer loyalty and brand momentum. So far, as you've heard earlier, our pricing has been very effective and unit volume impact has been minimal. In both North America and international, we're in the process of taking additional pricing in the second half of the year and are in discussions with our customers as we speak. Those increases will all become effective over the next 90 days. In total, we will have taken more than $100 million of price increases this year. Shifting gears to our updated guidance. We continue to expect low single-digit net sales growth for the year, adjusted for currency, divestitures, acquisitions and discontinued brands. That implies mid- to high single-digit growth in the second half, driven by North America, where we have consumption momentum, expect continued distribution expansion, have secured several large merchandising programs and have the benefit of additional pricing in market. On the margin front, we now estimate our total inflation to be around 10% for the entire company versus a plan of about 5% to 6%. We also expect a total of about $40 million to $50 million of additional out-of-plan costs this year related to the supply disruptions. These incremental costs emanate from a number of areas, including finding backup sources of supply and transportation on very short notice, air freighting materials, service-related fines, prolonged out of stocks and material shortages and production disruptions. While we expect solid growth on the top line and strong pricing and productivity, those gains are being offset by inflation and continued external industry-wide supply chain disruptions and labor challenges. While we anticipate that many of those costs will go away over time, we've lowered our EBITDA guidance for the year to reflect those realities. Javier will provide more details on our forecast in a few minutes. Elaborating further on our momentum and growth algorithm that we unveiled with Hain 3.0, we're very encouraged by the strong momentum on consumption in the US business with our growth brands now up more than 16% in the most recent four weeks ending January 23 and 31% versus two years ago. Our 3.0 strategy emphasized the importance of distribution expansion and innovation as key drivers of our top line acceleration. We have momentum in both areas driven by strong brand velocity and new products that are attracting additional customers and consumers to our categories. We also talked about investing in marketing to drive awareness and household penetration across our growth brands. While short term, our investments have been more limited this year due to cost pressures, we plan to further invest to accelerate growth for our strategy next year. Also recall that our 3.0 strategy highlighted our intent to continue reshaping the portfolio. This includes making acquisitions in high-growth categories like snacks. As you know, we recently acquired the That's How We Roll company, which included the high-growth ParmCrisps brand. This gives us another highly incremental scale snack business, which we expect will source volume from new competitors in categories like high-protein bars and beef, turkey. It also gives us access to additional segments in snacking, like Snack Mix, where ParmCrisps recently launched innovation. And like the rest of our growth brands, we also have significant distribution expansion opportunities in new and existing channels and geographies. On the margin side, while the short-term profit contribution will be nominal as we invest in the brand, pursue additional pricing and productivity and realize synergies. By next fiscal year, this should result in adjusted EBITDA margins in line with the company average, making this acquisition highly accretive on both the top and bottom line. So in summary, we're proud of how we're navigating a very challenging business environment and are encouraged by the strong top line momentum we are achieving and are extremely excited about our Hain 3.0 strategy. And importantly, we remain on track to deliver it. With that, let me now turn it over to Javier to discuss our financials in more detail.
Javier Idrovo, CFO
Good morning, everyone, and thank you very much, Mark. I also want to take this opportunity to thank the Board and the rest of my Hain colleagues. It has been an exciting journey, and I wish the company continued success. Now turning to the financials. Let me highlight a few key aspects of our second quarter results that demonstrate strong execution of our transformation plan and the building of a solid growth platform as we move into the Hain 3.0 journey. First, we delivered top line sales results at the high end of our original guidance and demonstrated resilience in a challenging operating environment. Second, despite the supply chain challenges and highly inflationary environment impacting the entire industry, our overall adjusted EBITDA margin improved versus the prior year, and our International business delivered another quarter of adjusted EBITDA growth. Third, our balance sheet remains strong with good capital allocation flexibility. And finally, we believe that we are well positioned to deliver on our updated full year guidance as well as the new long-term algorithm we laid out during our Investor Day presentation last September. I will start with a discussion of our top line results, and then I will drill into each of these aspects. As we overlap last year's COVID demand surge and a Brexit-related demand pull forward, second quarter consolidated net sales decreased 10% year-over-year to $477 million. Foreign exchange impact on the second quarter net sales was minimal, while divestitures and brand discontinuations reduced net sales by close to 8% compared to the prior year period. When adjusting for these two factors, net sales for the quarter were down 2% versus the prior year quarter. This translates to a first half sales decrease of about 1%, which is at the high end of the previously provided first half guidance of a low single-digit percentage decrease. The adjusted net sales decline was mainly driven by planned lower sales in international, partially offset by higher sales in the US. During the quarter, we experienced higher-than-planned inflation and continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues that we incurred to prioritize customer service, resulting in a small reduction in adjusted gross margin of about 70 basis points. The supply chain challenges also impacted our international operations with the added headwind of higher-than-expected energy costs that we are now forecasting to remain throughout the rest of fiscal year 2022. Despite these headwinds, we were still able to deliver adjusted gross margin expansion in our international segment of about 280 basis points when compared to Q2 fiscal year 2021. Total SG&A, including marketing, came in at 15% of net sales for the quarter, lower than the prior year period by about 100 basis points. The favorability was mostly driven by lower labor-related costs across all regions, including our corporate segment and lower sales broker fees. Marketing expenditure as a percent of net sales was reduced by about 40 basis points versus the prior year period, largely in North America, where we reduced spending on brands facing supply disruptions. In the second quarter, adjusted EBITDA decreased by 5% from a year earlier to $59.3 million, while the adjusted EBITDA margin improved by 66 basis points year-over-year to 12.4%, mainly due to the previously mentioned reduction in SG&A costs. Our adjusted EPS for the second quarter increased to $0.36 from $0.34 in the same period last year. We benefited from an adjusted tax rate of 19%, down from 24% the previous year, primarily because of deductions related to stock-based compensation from PSU vesting. Now, let's discuss the individual reporting segments, starting with our North American business. We continue to encounter industry-wide supply chain challenges, yet consumption remains strong. Reported net sales for the second quarter fell approximately 3% year-over-year to $275 million. However, after adjusting for foreign exchange movements, acquisitions, and divestitures, net sales rose about 1% compared to the same period last year. The impact of the acquisition for the quarter contributed less than 20 basis points to net sales growth relative to the previous year, considering the transaction closed on December 28. The turbocharge category delivered close to 20% net sales growth versus the prior year period and 23% growth versus Q2 fiscal year 2020, driven by the strong performance of our snacks business. In the targeted investment category, our tea and yogurt products delivered close to 10% growth versus a pre-pandemic Q2 period two years ago with our daily food products contributing to growth versus the prior year. From a profitability perspective, adjusted gross margin for our North American business decreased by 380 basis points versus the prior year period to 24.7%. However, this represented a sequential improvement of about 240 basis points versus the prior quarter. While the industry-wide supply chain challenges impacted the profitability of the quarter, our pricing actions and productivity initiatives contributed to a sequential improvement in margins. Adjusted EBITDA in Q2 decreased 16% to $33 million from the prior year period. Adjusted EBITDA margin of 12.1% represented a decrease of about 190 basis points versus the prior year period, but a sequential improvement of about 300 basis points versus Q1 fiscal year 2022. Now let me shift to our International business. Net sales for the second quarter versus the prior year period decreased 18% on a reported basis. After adjusting for currency movements and divestitures, net sales for the quarter were down about 6% versus the prior year period, driven by softness in our daily food exports to China and the lapping of the Brexit-related volume pull forward in Q2 of fiscal year 2021. Compared to Q2 fiscal year 2020, adjusted net sales growth increased around 9%. The growth during Q2 of fiscal year 2022 versus two years ago was driven by the performance of our growth brands, which in aggregate delivered constant currency growth of close to 18%. From a profitability standpoint, adjusted gross margin for our International business increased by about 280 basis points, driven by the divestiture of the food business and the impact of our productivity initiatives, partially offset by higher-than-expected energy costs. We grew adjusted EBITDA by close to 7% versus the prior year period, and adjusted EBITDA margin improved by 390 basis points to 17%, driven by higher gross margins and lower SG&A expenses from lower labor-related costs and third-party expenses. Shifting to cash flow and the balance sheet. Operating cash flow was $30 million for Q2 and $68 million for the first half of the year. While first half operating cash flows were lower than the prior year first half, the company benefited from a tax refund claim under the CARES Act during the first half of fiscal year 2021. Capital spending for the second quarter was $10.2 million or 2.1% of net sales, which reflected lower spending than expected given supply chain challenges and labor availability. For the full year, we expect capital spending to be between 3% and 3.5% of net sales. Cash on hand at the end of the quarter was $77 million, while net debt stood at $662 million. Net debt leverage as calculated under amended credit agreement was 2.7 times. Our balance sheet remains strong, and as a result, we have significant flexibility to reinvest in the business and return value to shareholders. Consistent with our capital allocation principles during the quarter, we repurchased 2 million shares or 2.1% of the outstanding common stock at an average price of $44.31 per share for a total of approximately $90 million, excluding commissions, leaving us with about $117 million of additional repurchase authorization with remaining under our 2021 program at the end of the second quarter. The company also announced today that its Board of Directors has approved an additional $200 million share repurchase authorization. Share repurchases under this authorization will commence after the company's existing authorization is fully utilized. Now turning to our outlook. We are reaffirming our full year net sales guidance and lowering our profit guidance a bit for fiscal year 2022. Compared to fiscal year 2021, we expect low single-digit adjusted net sales growth. With the as-reported net sales growth, lower than the adjusted net sales growth by about 200 basis points from divestitures and acquisitions, and 40 basis points from currency. Modest adjusted gross margin reduction and approximately flat adjusted EBITDA growth. Let me give you some color on our updated guidance. We expect our second half to deliver adjusted top line growth versus prior year in the mid- to high single-digit range, driven largely by the performance of our North American business. Mark explained the reasons for our optimism earlier in the call. Given the high inflationary environment that we are operating under, we have updated our adjusted gross margin and adjusted EBITDA guidance for the full year. Specifically, energy cost increases in international and actions that the company continues to take to overcome supply chain challenges have added additional costs to our P&L and are expected to continue for the rest of the fiscal year. Given our pricing actions and productivity initiatives along with the expectation that these extraordinary challenges will eventually lessen, we remain confident in achieving our Hain 3.0 profitability targets. For additional context to our financial performance in the second half of the year, the company expects sequential improvement to its adjusted EBITDA growth performance throughout the quarters of fiscal year 2022 with Q4 of fiscal year 2022 anticipated to deliver the highest adjusted EBITDA growth versus the prior year quarter given the full implementation of all pricing activity by that time and a prior year fourth quarter that was already impacted by the supply chain challenges that have continued throughout this year. In summary, we were able to deliver our second quarter results in an exceptionally challenging operating environment while making progress on our long-term initiatives. Hain has strong momentum and is well positioned to deliver our Hain 3.0 aspirations. I will now turn the call back to Mark.
Mark Schiller, CEO
Again, by thanking our thousands of employees around the world who have worked exceptionally hard in a very challenging environment. Their can-do attitude, scrappiness and teamwork have helped us to deliver solid performance throughout the pandemic, and their dedication and resilience will continue to serve us well as we work toward making our Hain 3.0 vision a reality. With that said, we'll now take your questions.
Operator, Operator
Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Anoori Naughton with JPMorgan. Please proceed with your question.
Anoori Naughton, Analyst
Hi, good morning.
Mark Schiller, CEO
Good morning.
Anoori Naughton, Analyst
I wanted to ask about your guidance for EBITDA growth. It suggests a significant increase in the second half of the year, and thank you for the update on the fourth quarter. However, I would appreciate a better understanding of the assumptions you are making. Are you confident that this new guidance is conservative enough given the current volatile environment?
Mark Schiller, CEO
Thank you for the question. We have been on this journey for quite some time. We expect productivity to come to fruition in the second half, along with volume acceleration that will positively impact EBITDA. Additional pricing in the second half will also enhance margins, as inflation is affecting us before pricing adjusts. We anticipate some mix improvements as well. Overall, we are confident that these factors will lead to significant improvement in our EBITDA. Additionally, we had a challenging fourth quarter last year, which we will overlap this year, aiding in driving EBITDA growth.
Javier Idrovo, CFO
Mark, if I may, I would also like to add that we have a quite strong visibility to our cost of goods going forward for the second half. So we are probably having more than 90% visibility for the spending. So we feel pretty good about the cost forces that we have embedded in the second half as well.
Anoori Naughton, Analyst
That's very helpful. Could you provide an update on the inventory reload and customer situation in the US that was anticipated for the second quarter? Additionally, what are your expectations for the second half?
Mark Schiller, CEO
Yes. Our inventories are generally strong across most of our brands, but we have experienced some supply disruptions due to industry-wide issues that are well-known. As a result, there are certain brands or segments within brands where there is still a gap between our inventory levels at customers and historical levels. We anticipate making some improvements in the second half, similar to what we achieved in the first half, although we do not expect these issues to be completely resolved. We are taking a balanced approach based on what we can see and what we have in place to address the challenges in those areas.
Anoori Naughton, Analyst
Great. Thank you.
Operator, Operator
Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Michael Lavery, Analyst
Good morning. Thank you.
Mark Schiller, CEO
Good morning, Mike.
Michael Lavery, Analyst
Just wanted to touch on the EU energy piece. It obviously sounds like a very significant move and obviously, speaking of cost to matter, but it sounds like you've locked that in. Can you just clarify, does that mean that it can't get worse or better, or is it options where if the cost pressure improves, you might potentially have some upside to your numbers?
Mark Schiller, CEO
No, it's pretty much locked in. We have visibility and clarity around what that will be. It's significantly inflationary compared to a year ago and our original plan, and even from our first quarter earnings. It has added about $10 million in costs, some of which occurred in Q2 and the rest will happen in the second half of the year. This increase in costs has added risk and explains the change in our EBITDA guidance. It's highly inflationary; it was up as much as 10 times what it was a year ago, although it has decreased slightly. We're locked in now, and while it is probably about 70% inflationary year-over-year, at least we have visibility and certainty regarding it at this point.
Michael Lavery, Analyst
Okay. Great. That's helpful. And just another one on pricing. You said you're in discussions with some customers. Can you characterize the nature of that? I guess it just feels like pricing has become almost automatic in this environment. Is there any real resistance or pushback, or is it more just sort of negotiating orders of magnitude and some tweaks around the edges? Can you just give us a sense of what the dialogue there is like?
Mark Schiller, CEO
Yes. The situation is somewhat different in the US compared to other parts of the world, so I'll address them separately. In the US, there is a clear recognition of inflation as it affects everyone, including customers who are facing labor and supply chain issues. Therefore, many understand that price increases are necessary. Every company is implementing these increases, and discussions around pricing are progressing positively. It’s always a negotiation since customers control shelf space, and there’s often some give-and-take involved. However, as we experienced in the first half of the year when we successfully implemented our pricing strategy, we expect similar outcomes moving forward. International presents some unique challenges, particularly due to our substantial private label business in Europe, where contracts make it difficult to adjust pricing. This leads to tougher discussions, as retailers there tend to resist price changes and can impose stricter measures. In the first half of the year, we did experience some impact and lost distribution in certain categories because of our pricing actions, but we successfully implemented those changes. As we approach the second half of the year, there is a widespread acknowledgment that pricing adjustments are necessary. The key question remains about the trade-offs involved in these negotiations. However, I remain optimistic that we will achieve our pricing goals by the end of this period.
Michael Lavery, Analyst
Really helpful. Thanks so much.
Operator, Operator
Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.
John Baumgartner, Analyst
Good morning. Thanks for the question.
Mark Schiller, CEO
Good morning, John.
John Baumgartner, Analyst
Maybe first off, just in terms of the outlook. Obviously, the supply chain environment has been tough to forecast here as we can see. But if we think about the reiteration of net sales for F 2022, can you just walk through the visibility and confidence into that target? I mean to what extent do you see risk, whether from COVID following Omicron or supply chain that shelf resets don't materialize or the innovation doesn't launch? How do you think about that for the next six months or so?
Mark Schiller, CEO
Yes. So for North America or US in particular, the confidence is very high. We've got consumption momentum. We've got distribution momentum. We're getting significant pricing in place and seeing our unit volume growing at the same time. We have some big merchandising programs that have been secured that we've talked about on previous calls. And so we will see a material acceleration in North America driven by the US business. In international, what's interesting in international right now is, in the UK, entire grocery store sales are down versus a year ago, the entire store. So some of our categories are down. And while we're gaining share in those categories, our expectation is, as we left the lockdown period from a year ago where everybody was in their home. And now as they've opened up the country and people are going back to work, we've lost some of the occasions that were in the house, so some the lunch occasion and the kids being home from school and the lack of travel. So it's affecting the entire store there, but again, we think that will be short lived. And as we get through the end of the third quarter, we expect that that will mitigate and that we will continue to see because our brands are gaining share. Our brands are seeing double-digit velocity growth. And so we have confidence in the fact that as long as the entire kind of store environment normalizes that our share and our volume will come with it.
John Baumgartner, Analyst
Okay, great. I'd like to discuss the ParmCrisps acquisition, which allows Hain to enter the deli section of the store, a new area for us. Mark, could you share your plans for these two brands? What do you think about the distribution opportunities and any potential for innovation? How do you see the brand contributing to the snacks business in the future? Also, what are your expectations for the EBITDA contribution from this business for the rest of the year? Thank you.
Mark Schiller, CEO
Starting with the second part of the question, the EBITDA contribution for the second half will be quite minimal because pricing adjustments have not yet been implemented to cover all the costs. They were in the midst of a process and preferred not to adjust prices during that time. We need to establish that pricing soon. Given that we have just acquired the business, we want our initial discussions with retailers to focus on other matters rather than raising prices, but we will address this in the second half of the year. Additionally, we have some major synergy and productivity initiatives that we believe will bring the business in line with the average EBITDA as we approach our fiscal 2023 plan, but the contribution in the second half of the year will be limited. We're very excited about the ParmCrisps business, which is experiencing high growth and significant distribution opportunities. Household penetration has increased by 33% compared to last year, and distribution is also up. We've introduced innovation that targets new segments, including a newly launched snack mix that aligns with our Hain 3.0 strategy. They are already making great progress in this area. Additionally, since these snacks are cheese-based, there are opportunities in food service as salad toppers or crouton substitutes. We have further innovative ideas that I won't detail here to maintain a competitive edge, but there are substantial innovation opportunities that will support our growth. Looking at our 3.0 strategy, distribution and innovation are central to our plans moving forward, and these are precisely where the opportunities lie for ParmCrisps. With our expanded customer relationships and resources supporting customer outreach, we believe we can assist in that distribution expansion. ParmCrisps is an exceptional snack option, offering high protein and low carbs. Compared to other high-protein snacks such as bars and beef jerky, it has lower sugar and carbs, while providing an equal or higher protein content. In comparison to other savory snacks, it also boasts a higher protein level, addressing a consumer need that is currently unmet. We are optimistic that this emerging category will grow significantly over time. On sensors, this aspect is part of the acquisition, but it isn't the main focus of our purchase. It’s a great little brand, though smaller in size. Most of the volume comes from ParmCrisps, but it is well positioned in cookies with no palm oils, no high-fructose corn syrup, and non-GMO ingredients. Therefore, we plan to manage that more with our fuel brands rather than our growth brands. Our primary focus and resources will be on ParmCrisps, where we see significant potential for growth.
John Baumgartner, Analyst
Great. Thanks. Appreciate it.
Mark Schiller, CEO
Yes.
Operator, Operator
Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Anthony Vendetti, Analyst
Thank you. Yes, we are all facing inflation challenges. Mark, I know you have successfully implemented price increases. What are your expectations for these going forward? Are we reaching the peak of this situation? Are you experiencing any resistance at this time? Additionally, regarding your supply chain costs, which remain problematic, do you foresee any signs of improvement or stabilization soon?
Mark Schiller, CEO
Yes. So on pricing, we have done a very good job of kind of offsetting our cost with pricing, but there are other pricing levers that we haven't fully utilized yet. So most of our pricing at this point has been list price increases. But we certainly are looking at trade spending, both depth and frequency of promotion, and we're also looking at weight outs, right? Because if you can keep the list price the same and take a few ounces out, that's another way to get pricing in. And then certainly, as we're encouraging customers to fill up trucks, that's also a way for us to get some of the costs out of the middle of the P&L that could also be beneficial on the cost side. So I think there is more pricing opportunity, but it's going to come in different ways. On the supply chain side, as I've mentioned in previous calls, we are managing the aspects we can control quite effectively. Our factories, distribution, and warehousing are fully staffed, and we have sufficient inventory to ship products. However, we face challenges with factors beyond our control, particularly with inbound ingredients. Currently, there is a global shortage of pouches, which affects our baby food business in both Europe and the United States. This shortage is caused by labor issues and the inability to meet global demand, impacting everyone in the industry. Additionally, we are experiencing issues like trucks not arriving to pick up orders, requiring us to source alternatives at a premium price to ensure we can clear our docks and deliver products efficiently. These challenges are driving our costs up, largely due to labor shortages throughout the supply chain, not just within our own workforce. As these issues ease, we expect conditions to improve. However, for now, we must continue to seek backup supply sources and adapt to ongoing challenges. The positive aspect is that as we approach the fourth quarter, we begin to compare our current situation to last year's fourth quarter when these issues began to arise, resulting in another quarter of elevated costs. These costs have remained relatively stable since last year's fourth quarter. Therefore, as we move past this period, discussions about additional costs should lessen. We also hope that as ingredient prices decrease, we will see some reduction in costs as we transition into the fourth quarter and into the next year.
Anthony Vendetti, Analyst
Okay. Just a quick follow-up. Is there anything else that you could do at Hain, such as investments in infrastructure or shipping? I know you outsource that, but is there anything that wouldn’t require significant capital expenses that could help address some of these concerns? Or do you believe that with just one more quarter of elevated costs, you can manage this, and everything should start to normalize, as you mentioned, beginning in your fiscal fourth quarter?
Mark Schiller, CEO
Yes. So we're certainly not resting. So even though our hope is that things kind of stabilize, we are aggressively automating in our plants, trying to take out the need to fill all these open jobs because, again, it's good for the cost, and it also alleviates some of the labor disruption. We're increasing our inventory levels on things where we've had issues with regard to service and supply. So we're doing things to try and mitigate and protect ourselves from further disruptions, but it's hard to predict disruptions that go on in somebody else's factory or in terms of crops. And so we're reacting quickly to the things that we can see and we're responding internally with things that we can do to kind of mitigate some of the challenges that we've seen. And so as those come to fruition, we would expect that, again, our costs will come down a bit as that productivity continues to hit the marketplace, and we can alleviate some of the bottlenecks.
Anthony Vendetti, Analyst
Excellent. Thanks for that update.
Operator, Operator
Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Alexia Howard, Analyst
Good morning, everyone.
Mark Schiller, CEO
Good morning, Alexia.
Alexia Howard, Analyst
Okay. So first of all, focus on the sales side. You saw 1% growth in North America, but the measured channel growth was very strong this quarter. Where was the shortfall? Because it must have been, I guess, outside of measured channels. And then in Europe, the negative growth that you saw this time, are you expecting that to improve going forward once we've lapped the stocking up that happened around Brexit and the China baby food phenomenon?
Mark Schiller, CEO
The gap between shipments and consumption in North America is influenced by a few factors. Firstly, there is a shift in channels. Last year, we experienced significant growth in e-commerce, which is still up 70% over two years, but saw a decline in the short term. The positive note is that our trends in e-commerce improved in the second quarter compared to the first, and are trending towards flat, though it has been a challenge affecting the difference. Secondly, in Canada, we are still seeing the impact of previous successes in sanitizer sales. Additionally, there is a noted slowdown in the plant-based market, which is one of our largest brands in Canada, and this also presents short-term challenges. There is some supply gap with a few brands as well. In Europe, I anticipate that as stores normalize, our sales will also normalize; however, the overall grocery sector is down. This is mainly due to the previous year's complete lockdowns, which were more stringent and lasted longer than what we faced in the US. People were restricted from going to work for an extended time, and now, as they return to offices, there has been a notable decrease in grocery store visits. The sentiment surrounding Omicron has shifted, with lower hospitalizations and deaths leading to a push for herd immunity, allowing people to resume more normal lives and reducing the number of eating occasions that take place at home. We will need to adjust for this during the end of Q3, as last year included significant increases in in-home consumption due to both Brexit and lockdowns. We just need to get through one more quarter of these comparisons.
Alexia Howard, Analyst
Great. I really appreciate it. Javier, all the best with the new role, and welcome to Chris. And I’ll pass it on.
Mark Schiller, CEO
Thank you.
Operator, Operator
Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
David Palmer, Analyst
Thanks. Good morning. I'm considering gross margins not only in relation to input costs and pricing timing but also regarding what will be seen as temporary COVID-related expenses. I wanted to ask about your long-term targets. Do you still believe that gross margins could reach around 30% in the long run from the mid-20s? As you reflect on this year and the COVID era, how much temporary friction do you see in total? Assuming we can move past these issues, do you anticipate that in fiscal 2023, pricing will stabilize and some of these COVID-related costs will diminish? I would love to hear your thoughts on this.
Mark Schiller, CEO
Yes, the Hain 3.0 strategy is set for 2025, so we have plenty of time to reach our goals. What’s encouraging is that our top line momentum, especially in the U.S., has significantly increased in terms of consumption, which is promising for our journey. As mentioned earlier, we are facing around 10% inflation along with an additional $40 million to $50 million in what I consider temporary costs. We have secured about $100 million in pricing and around $50 million in productivity to counter these factors. This explains why our gross margins, while slightly down, remain stronger compared to the industry average. Over time, I anticipate these costs will decrease, and I do not expect ongoing double-digit inflation. I believe the pricing will be sustainable since we are experiencing unit growth along with the pricing, which is very encouraging given our initial assumption of a potential volume decline that we are not witnessing; instead, volume is actually increasing. Therefore, we expect these costs to decline, which will lead to improved margins, provided we can maintain this pricing. Our productivity plans are in place for several years ahead. I remain optimistic about achieving our targets, although we are navigating a very volatile environment and need to see some relief in these areas for margins to improve.
David Palmer, Analyst
I'm sure it's challenging to separate what the pricing is covering in terms of temporary versus permanent costs. Do you feel that your pricing accounts for all costs except for the temporary ones? If that's the case, then when these temporary costs are eliminated, you would likely find yourself ahead of plan. How should we approach the way you are pricing for your costs?
Mark Schiller, CEO
Yes. Our model for 3.0 involves pricing to cover inflation, and we plan to reinvest the productivity into our brands to boost our bottom line. In the short term, we've set prices to address inflation and are using productivity to manage these temporary costs. Consequently, we are not investing as much in marketing and are directing more to the bottom line due to these temporary expenses. Looking ahead, as we progress through our 3.0 journey over the next few years, I anticipate we will maintain pricing that covers inflation. This productivity will provide us with the opportunity to significantly enhance EBITDA growth, although in the short term, these temporary costs are influencing that productivity.
Eric Larson, Analyst
Yes. Thank you, everybody and Javier, congratulations and good luck to you, and welcome aboard, Chris. So two quick questions. So if you look at where consensus estimates are right now for EBITDA for fiscal 2022 is at $268 million. And so you're guiding this year to sort of flat versus last year, that's $258 million. So if you kind of just wash out all of the puts and takes going on here, it seems like the entire adjustment to your EBITDA guidance for this year is the incremental $10 million of energy costs in Europe. Is that a fair way to kind of wash this all down to something that we can better understand?
Mark Schiller, CEO
It's a bit of an oversimplification, but fundamentally, that is what is contributing to the decline. Although we are experiencing additional costs, we also have increased pricing and productivity that are mitigating some of the temporary expenses. There are many factors at play in this situation, but at its most basic level, we are facing an extra $10 million in costs while reducing our guidance by the same amount. This explanation works at a high level, but I want to emphasize that there are many more complexities beneath the surface.
Eric Larson, Analyst
Yes. Yes, there's a lot of moving parts. I'm just trying to, again, simplify it to the best that we can to see what are the real incremental change was. So the second question is, you've got $100 million of pricing already taken this year. So just use a simple $2 billion revenue base, that's 5%. It seems that the price increases by other packaged goods companies are actually higher than that. Are you trying to maintain as much price competitiveness and use some of your productivity opportunities to maybe try to be more price competitive going forward through to this, or again, is that a little over a simplification of how I'm looking at this?
Mark Schiller, CEO
Well, so we look at pricing as a percentage of our cost, not as a percentage of our revenue. So as a percentage of our costs, it's significantly higher than the 5% that you said. And if you look at the retail data, you'd see that we're in the most recent 12 weeks, we're up about 7%, and that's before we take the second round of pricing. So I would expect, at the end of the day, you'll see about 10% increase in pricing at retail. And we do analyze this by segment, by category in great detail to make sure that our price gaps aren't getting any wider to make sure that our velocities aren't dropping. And like I said, in some cases, it's been way better than we thought, where we're actually picking up units and velocity despite a significant increase. Baby would be a good example of that, where we've taken double-digit increases and our velocities have picked up dramatically. And then there's other cases where you know what, we took pricing and our competitors haven't taken yet and we're seeing some velocity fall off, so we have to make adjustments. And that's what I meant before by my puts and takes comment. It's not all going exactly as planned, but on balance, it's going as planned, but you're going to see about 10% retail pricing at the end of the day.
Eric Larson, Analyst
Got it. Okay. Thanks. One more real quick question. If you like your stock price at an average price of $44 in the second quarter, I would assume you like it a lot at 36. Is that a fair observation?
Mark Schiller, CEO
See, I am not going to divulge. We got our internal strategy as relative to at what price we consider the stock to be of value, but it's a fair conclusion to say that if we like the stock in the mid-40s, we certainly like it in the mid-30s.
Operator, Operator
Thank you, everybody. I appreciate the time. Ladies and gentlemen, that is all the time we have for questions. I'd like to hand the call back over to Mr. Schiller for closing remarks.
Mark Schiller, CEO
I thank you guys for all your interest today. Obviously, it's a very challenging environment, as you've heard from everyone. I'm incredibly encouraged by the top line momentum that we're seeing in consumption in the United States. That has been one of the proof points that's been missing in our Hain 2.0 journey. We said that was to set up top line growth in 3.0, and the fact that it's accelerating, we're very excited about. So I look forward to the one-on-one calls later today. And again, thank you all for your interest.
Operator, Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.