Earnings Call
Hain Celestial Group Inc (HAIN)
Earnings Call Transcript - HAIN Q1 2024
Operator, Operator
Greetings, and welcome to The Hain Celestial Group First Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexis Tessier. Thank you, you may begin.
Alexis Tessier, Host
Good morning, and thank you for joining us on Hain Celestial's first quarter fiscal year 2024 earnings conference call. On the call today are Wendy Davidson, President and Chief Executive Officer, and Lee Boyce. During the course of this call, we may make forward-looking statements within the meanings of federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time to time with the SEC, as well as the press release issued this morning for a detailed discussion of the risks that could cause actual results to differ from those expressed or implied in any forward-looking statement made today. We have also prepared a presentation, inclusive of additional supplemental financial information, which is posted on our website at hain.com under the Investors heading. Please note that remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of non-GAAP to the nearest GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. This call is being webcast and an archive will be made available on the website. And now I'd like to turn the call over to Wendy.
Wendy Davidson, CEO
Thank you, Alexis, and good morning, everyone. Thank you all for joining the call today. I'll begin by reviewing our fiscal first quarter results. I'll then provide a high-level overview of our Hain Reimagined strategy, which we introduced at our Investor Day in September, followed by an update on the early progress we've made. We will then review our financial results in more detail, along with our outlook for fiscal 2024. I'm pleased to report our first quarter results deliver our second consecutive quarter of Promises Made, Promises Kept. Organic net sales were in line with our guidance of a low single-digit decline, and adjusted EBITDA came in ahead of our expectations. As we said previously, with Hain Reimagined, we will invest as we go. So starting in quarter two and over the balance of the year, we plan to utilize the over-delivery from quarter one to invest back in the business. This is consistent with our stated plan to fund our strategy as we unlock fuel through accelerated growth and efficiencies. As we highlighted previously, the net sales decline in the first quarter was driven predominantly by baby & kids. On our last earnings call, we described the challenges that we expected to face in the first quarter, the largest being baby formula; however, the entire industry has experienced supply constraints. While we are working closely with industry partners to accelerate availability and bring on additional supply, we now expect these challenges in supply to continue into the second quarter and to begin to recover sometime in the second half of the year. Excluding the formula supply challenge, we are seeing progress across the business driven by our strategic focus on brand building, channel expansion, and innovation. We've leveraged our portfolio across better-for-you categories and gained distribution across platforms in grocery retail. We are making notable progress in away-from-home channels, like convenience stores, colleges and universities, and the travel segment, which are margin-accretive portfolio and provide expanded brand visibility. I will provide more details on this in a few minutes. As we've mentioned before, it is important to note that some of the bright spots in our growth may not be as clearly visible to you if you only view U.S. syndicated consumption data. As a reminder, approximately 40% of our business is in international markets, and in North America, 35% to 40% of our business is in unmeasured channels. As we lean into our channel expansion strategy, this will become more pronounced. I'll now review some of the positive momentum from the first quarter. In better-for-you snacks, our non-measured snack sales were up 18% in dollars in the 12 weeks ending October 8, led by Garden Veggie. We are driving growth in Garden Veggie primarily through strength in clubs as well as in e-commerce and away-from-home sales. As we execute our strategy for channel expansion, we have gained incremental distribution in the away-from-home channel within segments like colleges and universities, travel, and convenience stores. In better-for-you baby & kids, Earth’s Best continues to demonstrate robust growth of 12% in dollars in the last 12 weeks, excluding formula, supported by strong retailer partnerships and share gains in baby food and purees. Innovation in snacks and our investment in the brand-building campaign 'Good Food Made Fun' are helping drive Earth’s Best snacks up low single digits in dollars and a 20% expansion at total distribution points. In better-for-you beverages, Celestial Seasonings bagged tea grew 1.3% in dollars in the latest 12 weeks, with both dollar and unit velocity pacing ahead of the category, and we gained share across both herbal and wellness segments. Our brand-building investments are delivering results with the successful 'Magic in Your Mug' campaign launched in the back half of fiscal 2023, and we have strong customer acceptance confirmed on innovation, including Sleepytime melatonin and throat cooler. Our International non-dairy beverage segment continues to gain momentum, building upon positive performance in June and growing 10.6% in the first quarter. The return to growth is being led by our private label business, but we are also seeing momentum in parts of our branded portfolio. Natumi was up 13% in the quarter. As we mentioned on Investor Day, we believe our portfolio combination of strong brands and private label in this category is an advantage for Hain across Europe. Within better-for-you meal prep, Greek Gods Yogurt continued its standout performance in the U.S. growing 7% in dollars in the latest 12 weeks on increased velocity. Growth internationally in meal prep was led by the UK, where we continue to benefit from our portfolio, which spans both branded and private label offerings. Private label is historically a larger mix in the UK, with over 40% of its unit share compared to mid-teen category share in the U.S. We are well-positioned and see strong growth within discounters and private label internationally as the consumer responds to the macro environment. Our private label jams and spreads are both up double digits, gaining share in the latest 12 weeks. And on the branded side, our Hartleys jams and all of our marmalade brands also grew double digits in the latest 12 weeks, picking up share in their respective categories. Also in the meal prep category, our soup brands continue to perform well, growing 15% in dollars in the last 12 weeks, gaining 200 basis points of share. Our Cully & Sully, Yorkshire Provender, and New Covent Garden brands all grew double digits. As you may recall from our Investor Day, these brands, these three brands, are the number one, number two, and number three in the category in this market, and these results are well before we hit the peak soup season. We are also seeing encouraging signs of stabilization in our global meat-free category. We continue to believe in the long-term growth potential of the global meat-free category as consumers are seeking veg-forward, flexitarian, and vegetarian options that deliver on taste and convenience. As we see consolidation in this category, consumers are returning to leading brands in this space. Our Yves brand, the number one meat-free brand in Canada, is gaining share despite category softness. We are up 270 basis points in fresh and 70 basis points in frozen in the last 12 weeks. In the UK, our Linda McCartney brand is seeing increased velocities in frozen of 20% in the latest 12 weeks with distribution of 12%. We are excited about our upcoming meat-free innovation, Linda's Best Burger, which will hit UK supermarkets in the spring. In the better-for-you personal care segment, we continue to focus on stabilizing this business. We are seeing some encouraging signs with our personal care business growing 6% in the quarter in the e-commerce channel. Additionally, personal care grew in the drug channel by 70% on total distribution point growth of 160% in the latest 12 weeks. Across the business, our performance trends are more favorable in unmeasured channels than measured ones, driven by strengths in our better-for-you snacks portfolio. Given recent distribution gains, however, we are beginning to see measured channel trends also improve as store shelf resets begin to take shape for both snacks and tea. We are pleased to see the first quarter performance in line with our expectations, and we are reaffirming our full fiscal year guidance. I'm now excited to share some of the early progress we're making in executing our Hain Reimagined transformation strategy. At our Investor Day in September, we introduced Hain Reimagined, our strategy to pivot the business to profitable growth. It was wonderful to see so many of you there. Hain Reimagined represents a bold transformation of our business and is built upon four strategic pillars: focus, growth, build, and fuel. We are focusing our winning portfolio of brands around five consumer-centric global platforms: snacks, baby & kids, beverages, meal prep, and personal care. We will simplify our footprint in five core markets: the U.S., Canada, the UK, Ireland, and Europe. Our growth pillar will drive brand strength, share gains, and channel expansion in three of our core better-for-you platforms: snacks, baby & kids, and beverages. We are building and enhancing critical capabilities to execute our growth plan, including improving brand building, accelerating innovation, and driving channel expansion, particularly in e-commerce and away-from-home, which has historically been underdeveloped at Hain. And as we unlock efficiencies across our business, we are reinvesting those savings to fuel our growth plan while also expanding our margins. We are operating with improved discipline in revenue growth management, executing initiatives against working capital, and driving end-to-end operational efficiency. Our plan is designed to deliver a compelling and achievable long-term financial algorithm with attractive shareholder returns. The plan represents a material transformation of our P&L, influencing our pipeline growth, and driving margin improvement. Our long-term financial algorithm seeks to achieve at least a 3% organic net sales growth CAGR through fiscal 2027, with at least a low double-digit EBITDA CAGR, achieving at least a low double-digit EBITDA margin by fiscal year 2027. As you heard us say on Investor Day, this is our commitment, not our aspiration. And I'm excited that we're already seeing encouraging early momentum from our Hain Reimagined strategy. Under the build pillar, we have made notable progress on expansion into margin-accretive channels. We've enhanced our away-from-home capability with new, experienced industry leadership and dedicated expertise to drive growth in this important channel. We are pleased to share that our convenience store sales grew 14% in the last 12 weeks, driven by our snack business, which was up 18% in dollars on 10% incremental total distribution points. Additionally, we have gained incremental placement with our snack brands in North America across travel, restaurants, on-the-go retail, colleges and universities, and convenience stores. We also have plans to expand in away-from-home in the UK, which is off to a good start with soup launching in a large restaurant chain in the first quarter. E-commerce continues to be a growth area for us, accounting for nearly 10% of company sales in the first quarter. We have established a dedicated team to drive omni-channel and e-commerce and provide greater focus and support for expanding into this margin-accretive channel. We are making our brands more accessible to consumers away-from-home and online, increasing brand reach and visibility at the same time. Hain has been a market leader in better-for-you for over 30 years, so we understand the evolving needs of our consumers. As we mentioned on Investor Day, we are building out our innovation capabilities and pipeline, working to develop breakthrough, scalable innovation, leveraging key insights from our global platforms and across geographies. And we are improving both our launch capabilities and our support post-launch. We now have better visibility into our innovation pipeline across our key categories and are excited about our innovation experience center that we are building at our new global headquarters location in Hoboken, New Jersey. To that end, we are looking forward to introducing new and disruptive innovation for our better-for-you snacks platform in the third quarter. While we can't share details quite yet, we will be supporting the launch by activating our agile and amped brand-building model designed to deliver fully integrated omni-channel campaigns that drive awareness, trial, and repeat purchase, both on-shelf and online. A key part of our growth pillar is gaining incremental distribution in both existing channels and entering new channels. In addition to the away-from-home wins mentioned earlier, our snacks, baby & kids, and beverage brands have earned incremental distribution across existing channels. The drug channel grew 5% in the latest 12 weeks. Recent distribution gains support our confidence in our ability to grow share as we progress throughout the year. As part of our focus pillar, we are simplifying our global footprint to five core geographies: the U.S., Canada, the UK, Ireland, and Europe, and streamlining our manufacturing footprint in these markets with efficiencies in our production and our co-manufacturing network. We recently consolidated our meat-free manufacturing footprint in Canada and continue to look at improving our capacity utilization and our operational leverage across all of our geographies. As we aim to unlock our full potential as a leading global better-for-you company, we are committed to implementing an operating model that should enable our teams to drive greater reach and scale across our core platforms in our core markets. To achieve our aspirations, we have recently established our global RDQ operating model, regulatory, R&D, and quality, and made important shifts in our design work to further integrate our teams globally. These enhancements, which include progressing with development of our global centers of excellence across marketing, procurement, and R&D, deliver on the evolving needs of our consumers and customers, creating demonstrated value for the business. The last pillar is fuel, which will enable us to fund our growth and drive margin expansion. Our fuel program consists of three main levers: revenue growth management, working capital management, and operational efficiency. We are on track to deliver against our planned fuel initiatives for the year, with early momentum in RGM as reflected in trade efficiency and effectiveness. One of our key working capital opportunities involves bringing our payment terms in line with industry benchmarks. We have begun the process, and this initiative is on track to deliver working capital improvements in this fiscal year. Productivity in the first half of the year is primarily being driven through packaging automation, enabling us to improve our throughput and reduce waste in the system. We are executing against identified initiatives across our three fuel levers to unlock value so we can reinvest in our business starting in the back half of this fiscal year. Before I hand the call over to Lee to review our financial results in more detail, I want to thank the entire team for their passion and dedication to Hain Reimagined. This is a bold plan and transformation of not only what we do but how we are organized and how we work. You are instrumental in delivering on our strategy, but more importantly, our purpose in inspiring healthier living, and I am proud to work alongside you. Lee, please go ahead.
Lee Boyce, CFO
Thank you, Wendy, and good morning, everyone. As anticipated, first quarter consolidated net sales decreased 3.3% versus the prior period to $425 million. Organic net sales for the first quarter adjusted to exclude the effects of divestitures and discontinued brands decreased 2.9% versus the prior year period, consistent with our guidance of a low single-digit decline. The decrease was primarily due to lower sales in the North American segment, partially offset by sales growth in the International segment, as expected. We delivered first quarter adjusted EBITDA of $24.1 million versus $36 million in the prior year period. This came in ahead of our guidance range due to lower trade spend and marketing expenditures, and we expect to reinvest the beat into the business over the course of the fiscal year. Adjusted gross margin was 20.5% in the first quarter and decreased by approximately 95 basis points versus the prior year period, driven by the leverage on lower sales volume and by cost inflation, partially offset by pricing and productivity savings. SG&A increased roughly 3% to $77.2 million, representing 18.2% of net sales for the quarter. The increase was driven primarily by wage rate increases and inflation in other support costs, with marketing expenses roughly in line with the prior period as we deferred some incremental investments. As Wendy mentioned earlier, we have also begun to make progress in executing initiatives under the Hain Reimagined multiyear global growth and transformation program we announced during last quarter's Investors' Day. During the first quarter, we took charges totaling $9.7 million associated with early actions under the program, including contract termination costs, asset write-downs, employee-related costs, and other transformation-related expenses. Interest costs for the first quarter rose 73% to $13.2 million due to the higher interest rate environment, partially offset by a lower borrowing base. As a reminder, we have hedged our rate exposure on approximately 50% of our loan facility with fixed rates at 5.6%, and I will come back to that in a moment. We are keenly focused on driving down net debt over time. All of these factors combined to produce a net loss for the quarter of $10.4 million, or $0.12 per diluted share, compared to net income of $6.9 million, or $0.08 per diluted share in the prior year period. Our adjusted loss per diluted share was $0.04 versus adjusted EPS of $0.10 in the prior year period. Now to our individual reporting segments. In North America, reported net sales decreased 9.8% to $260.1 million in the first quarter. Organic net sales decreased by 9.3% versus the prior year period due to a sales decline in baby & kids, which, as we mentioned last quarter, is a function of continued industry-wide challenges in organic formula supply. The timing shift of a sun care program in our personal care portfolio and optimization of promotional activities for Terra led to this decline as we aim to unlock a more profitable growth mix over the long term. These temporary declines more than offset the bright spots of growth we achieved in other strategic platforms, such as beverages, with Celestial Seasonings bagged tea and non-dairy beverage, and baby & kids, excluding formula. First quarter adjusted gross margin in North America was 20.8%, a 190 basis point decrease versus the prior period that was driven by a deleverage on lower sales volume and cost inflation, partial offset by pricing and productivity savings. Adjusted EBITDA in North America was $18.7 million, a 39.2% decrease versus the prior period, and adjusted EBITDA margin was 7.2%, a 350 basis point decrease from the prior year period. These year-over-year declines resulted from lower gross profits and margin on roughly flat SG&A spending. In our International business, reported net sales increased 9.3% to $165 million in the first quarter, and organic net sales growth was also 9.3%. Our growth was mainly driven by meal prep from private label grocery as well as soup, and a strong performance in non-dairy beverages and baby & kids. International adjusted gross margin was 20%, up 95 basis points year-over-year, driven by pricing and productivity, partially offset by inflation. International adjusted EBITDA was $17.4 million, a 16.7% increase from the prior year period, driven primarily by pricing. Adjusted EBITDA margin was 10.6%, up approximately 70 basis points versus the prior year period. Shifting to cash flow in the balance sheet, first quarter cash provided by operating activities was $14 million versus cash used in operating activities of $5.1 million a year ago, or a $19 million improvement. The higher operating cash resulted from working capital management, including our accounts payable optimization initiatives, focused inventory management, and an improvement in accounts receivable recovery. Paying down debt and strategically investing in the business continue to be our priorities for cash utilization. Capital expenditures were $6.9 million in the quarter, and we continue to expect to be approximately $50 million for fiscal 2024. Finally, we ended the quarter with cash on hand of $38.3 million and net debt of $776.7 million, translating into a net leverage ratio of 4.3 times, as calculated under our amended credit agreement. Note that we do expect leverage to increase and peak in the second quarter, given the timing of restructuring and an anticipated seasonal increase in net working capital and other cash outflows, before trending back down through the second half of fiscal year 2024. Consistent with our stated priorities for cash, we have reduced net debt by $70 million since the end of Q1 2023, and as we have previously indicated, our long-term goal is to reduce balance sheet leverage to not more than 3.0 times adjusted EBITDA. And now to our outlook, while a number of the top headwinds we faced in the first quarter were isolated to the period, the industry-wide challenges in organic baby formula supply will continue to adversely affect our sales volume in the near term. We are working hard with industry organizations and our co-manufacturers to ensure that consumers have access to organic formula, where we play a leadership role. We are maintaining our guidance for the full year, despite adjusted EBITDA in the first quarter coming in ahead of our expectations. Our Hain Reimagined strategy is designed to be self-funded and flexible, supporting growth while adjusting the pace of investment as we progress. For fiscal 2024, we continue to expect organic net sales to increase by 2% to 4% year-over-year; adjusted EBITDA to be between $155 million and $165 million; and free cash flow of $50 million to $55 million. Our 2024 guidance assumes that currency exchange rates will not materially affect our performance. At today's rate, the dollar is converting at around 2% more strongly than factored into our initial full-year 2024 guidance. If this trend continues, it would slightly dampen our overall revenue growth but have very little effect on profitability. We also assume that pricing will recover most expected cost inflation. We have made good progress on a number of revenue growth management initiatives, ranging from pricing to trade efficiency in the mix. Lastly, we assume productivity will drive gross margin expansion and fuel investments.
Wendy Davidson, CEO
Thank you, Lee. I am proud that we delivered a second consecutive quarter of Promises Made, Promises Kept. We believe we have set a bold yet achievable plan, and we are laser-focused on executing upon it. Hain Reimagined was the result of a thorough evaluation of every aspect of our business to identify inefficiencies, as well as key unlocks to drive our business. Now we shift to execution, and I couldn't be more excited about the journey. Hain is a pioneer in better-for-you, building upon 30 years as a market leader in natural, organic, and better-for-you food, beverages, and personal care. Our portfolio of beloved brands across global better-for-you platforms differentiates us from others in this space and provides us with a unique opportunity to capture lifelong consumers from infant to adult, both in-home and away. We have a clear roadmap to achieve our revenue and margin growth. We have a detailed fuel program that is strong and flexible, enabling us to invest in our plans to transform the business and deliver sustainable, profitable growth. The early results we are seeing reinforce our confidence in the strategy. Hain's size, benefits of scale in global platforms, deep consumer focus, portfolio breadth, and agility enable us to out-small the big and out-big the small. Thank you again for joining the call today. We appreciate your interest and continued support. Operator, please open the line for questions.
Operator, Operator
Thank you. Please keep to one question and one follow-up question. The first question we have is from David Palmer of Evercore ISI. Please go ahead.
David Palmer, Analyst
Thanks. Good morning, Lee and Wendy. I want to ask you about gross margin for North America and international, where we can keep it consolidated. But I'm wondering how do you see that gross margin building through the year from the 20.5% in fiscal 1Q? Do you see this year playing out with gross profit growth happening this year, offset partially by G&A? Any thoughts about timing and progress, and the components of EBITDA growth would be helpful?
Lee Boyce, CFO
Yeah, so it's Lee here. As we said, with Hain Reimagined, our productivity growth will build as we go through the year, and some of the benefits that come through Hain Reimagined as we flex and invest behind it. So we do see that continuing to build as we go through the year. The other thing is, as well, we will get leverage on our top line as that builds sequentially, especially as we get into the back half.
Wendy Davidson, CEO
Yeah, and good morning. I'll add a little bit to that. As we said, when we outlined what the drivers were in quarter one, there were three really discrete drivers for North America that really change as we go through the year. That actually will help us from a mixed standpoint. When you look in the fuel program around revenue growth management, there's quite a bit of work relative to net price realization and trade efficiency. We saw some of that trade efficiency play out in quarter one in North America, and you'll see some of that as we continue to go through the year.
Operator, Operator
The next question we have is from Ken Goldman of JP Morgan. Please go ahead.
Ken Goldman, Analyst
Hi, I have a quick one and then a follow-up, and thank you. In light of the delay in the formula supply recovery and also the decision to reinvest some of 1Q's over-delivery, I'm just curious to what extent you're still expecting improved sequential organic sales growth and EBITDA growth in 2Q versus 1Q?
Wendy Davidson, CEO
Yeah, good morning, Ken. The challenges around formula, obviously, we outlined for quarter one. They'll continue a bit as we go into quarter two. We have secured supply as we go into the back half of the year. So that gives us confidence in that particular category. Offsetting that, we've looked at where we've got early momentum in distribution gains, channel expansion across the balance of the portfolio. Some of those are coming on faster than we would have expected. We would expect to be able to deliver on our expectations for pivot to growth, even in light of the challenges with formula.
Ken Goldman, Analyst
Okay, thank you for that. And then for the follow-up, Wendy, in the first earnings call you joined after Q2 ’23, you said that in the past few years, Hain has established a level of transparency, which you will continue. I understand transparency comes in different forms. Historically, Hain's been one of the few public food producers not to disclose price and volume numbers. Now, it seems you are deciding to include the impact of currency and bake that into organic sales growth. I think it is fair to say that this is even rarer. Some investors this morning expressed concern that this decision to become less transparent is not necessarily in the direction that people had hoped for, and that it becomes a little harder to analyze your financials. What's your view on those concerns?
Wendy Davidson, CEO
Yeah, you're right in what we said earlier this year; the intent is to be transparent. I want to ensure it is also accurate. You'll see us be more overt in disclosing price, volume, and mix going forward. This particular quarter, we weren't comfortable that we had the numbers exactly where we would want to feel confident in providing that to the Street. Do we expect to provide that going forward? Yes, we do. Regarding currency impact, when it is material, we'll certainly call that out. We didn't want to have numerous adjustments in the numbers, but I'll let Lee provide a bit of policy there.
Lee Boyce, CFO
So currency was favorable in Q1. It was about $11 million favorable. The one thing I would call out, as you look at the year-to-go basis and kind of had it in the opening comments, it is a 2% drag versus what we had when we originally set guidance. There is not a material impact to EBITDA. We wanted to mention that the 2% headwind was seen particularly on the pound sterling. For the first quarter, it was a top-line impact of about $11 million, but not a material EBITDA impact.
Operator, Operator
The next question we have is from Andrew Lazar of Barclays. Please go ahead.
Andrew Lazar, Analyst
Great. Thanks. Good morning, everybody.
Wendy Davidson, CEO
Good morning.
Andrew Lazar, Analyst
I think last quarter when you gave guidance for the first quarter in terms of organic sales growth in North America, you mentioned again that the three discrete items that impacted North America sales, two of which I think were supposed to be isolated specifically to the first quarter. It was the sun care timing shift and the promotional optimization at Terra. Those two collectively might be about, or maybe it was all three, I can't remember, a sort of a 10-point hit, if you will, to organic sales in 1Q. I'm trying to get a sense of if you could quantify those? What underlying North America sales would have been without those two discrete items, and if that's what you think North America sales would approximate in 2Q?
Wendy Davidson, CEO
Let me unpack a little bit relative to the categories. You are right in that the three drivers we saw for quarter one were formula, promotional optimization on Terra, and timing on sun care. If you look in those categories, certainly the impact in snacks was Terra driven, but offset by nice growth in Garden Veggie. This gives us confidence as we go into quarter two that the Terra impact in the snack portfolio is a quarter one challenge. On the formula side in our baby kids category, all of the decline in the baby category was driven by formula. As we said, the strength in baby food and purees, especially in toddler snacks, gives us confidence for the future. Personal care was identified as a stabilized category during Investor Day, and we had strength in the Avalon brand and Live Clean, which is a leading brand in Canada. While those were discrete items, outside of baby formula, we feel good as we go forward.
Lee Boyce, CFO
I think you covered all of the big points there. In Q1, formula was the largest drag on us. Going into Q2, we anticipate continued drag on formula, probably around $10 million on the revenue side, but then pivoting back as we go through the balance of the year. We've outlined the three drivers with formula being the largest.
Operator, Operator
The next question we have is from John Baumgartner of Mizuho Securities. Please go ahead.
John Baumgartner, Analyst
Good morning, thanks for the question.
Wendy Davidson, CEO
Good morning.
John Baumgartner, Analyst
First off, I wanted to ask about the international segment. Had a nice recovery there in Q1, with the plant-based and beverages categories bouncing back in Europe. Your comments, Wendy, sound pretty positive to the larger portfolio in the region. If I consider the segment guidance for this year, it's up low single digits for organic revenue. How do we think about the potential upside to that outlook? What's holding you back from being more bullish for international sales this year?
Wendy Davidson, CEO
I appreciate the question. If you think about what we outlined on Investor Day and what we guided in the last quarter, there were some very clear areas where we expected to see recovery in International. We expected to see recovery as non-dairy beverage came back, and we got to greater capacity utilization in our non-dairy beverage plants. We also talked about seeing some recovery as we see consolidation in the meat-free category. We expected continued strength in our jams, jellies, and soup business. However, all those positives have been offset by challenges in the marketplace. The European market has been more acutely affected by inflation and the economy than what we've seen here in the U.S. It's a market that has more private label penetration than we see in North America. While we play in both private label and brand, we see that growth in private label faster than our branded business, and we see that play out in our growth.
John Baumgartner, Analyst
Okay. And then just a follow-up, when we think about the new distribution growth in away-from-home channels, how do we consider the phasing there? Are there certain selling periods where the benefits can be larger than others? For instance, if you're loading for K-12 or university business, are there certain windows akin to shelf resets that retailers should be considering? I'm trying to understand any lumpiness we can expect seasonally in away-from-home based on your new outlets.
Wendy Davidson, CEO
Away-from-home operates very differently than a traditional retail environment. There’s very little of a set reset time period; it's much more contractual depending on the segments we are leaning into. We will begin to see incremental placements that start to generate sales momentum. It won't be as lumpy as what you would expect in some other retail environments where there's a big load-in period. The segments we're targeting are those where you would expect to see regular repeat business for the product being available, such as micro-markets in hotels, travel through airports, or on-the-go convenience. Those tend to be fairly run-rate business. You land distribution, and it slowly builds over time without the inventory load-ins you might see in retail.
John Baumgartner, Analyst
Yeah, thanks, Wendy.
Wendy Davidson, CEO
You bet.
Operator, Operator
The next question we have is from Michael Lavery of Piper Sandler. Please go ahead.
Michael Lavery, Analyst
Thank you. Good morning.
Wendy Davidson, CEO
Hey, good morning.
Michael Lavery, Analyst
I was wondering how much more color you could give us on Q2. I know you had Q1 guidance specifically and haven't done that this quarter for Q2, but I guess partly just trying to understand the margin acceleration you need to hit your full-year numbers and the additional spending you've called out for Q2.
Wendy Davidson, CEO
Let me start and I'll turn a little bit over to Lee for additional commentary. We indicated that the back half of fiscal 2024 would reveal stronger performance. That's when we expect our fuel programs to begin to take full effect, and we will start to see some of our early investments in channel expansion and innovation start to yield results. The shape of the fiscal year does indeed have a quarter three, quarter four lift compared to quarter one and quarter two. While we don’t have the discrete impacts in North America, all three of them, we will still have formula impact in quarter two. You'll see a modest improvement in quarter two, and then a more material improvement in quarters three and four.
Lee Boyce, CFO
I would just build upon that. As we progress through the year, with distribution gains specifically in bagged tea and yogurt, we'll see our innovation ramping up in the second half. Our team is dedicated to driving improved merchandising execution, and as we unlock and drive that fuel, you'll see traction in the second half of the year.
Wendy Davidson, CEO
I would definitely say that generally in club, you should never consider anything as permanent. It’s not the nature of how that channel works. We feel good about the distribution across all club outlets. We are also leaning into incremental distribution to ensure Garden Veggie is available in all points of distribution where the customer wants it to be, which is where we are seeing a lot of our total distribution point gain. Additionally, we are excited about innovative news coming in quarter three that has generated significant retail acceptance. So we feel really good about new announcements for Garden Veggie alongside core news across all potential distribution points.
Michael Lavery, Analyst
Okay, thanks so much.
Wendy Davidson, CEO
You bet.
Operator, Operator
The next question we have is from Andrew Wolf of CL King. Please go ahead.
Andrew Wolf, Analyst
Thank you. Good morning, Wendy. Following up on your commentary about innovation coming in Veggie Straws, I believe you also use the term disruptive. Is that something different you are referring to? Is that disclosed to the trader, or is it still an internal program?
Wendy Davidson, CEO
We are thrilled, as Garden Veggie is a core franchise for us. We plan to take Garden Veggie into disruptive categories, and we'll see that innovation introduced. It's been released to the trade for normal customer conversations to drive acceptance for store recess. It will begin shipping in late December, and you'll see it on shelves starting in January. We've reallocated some of our planned marketing expense from Q1 to later to support this launch adequately while sustaining the momentum after it hits the market. We’ve received very strong retailer receptivity to it and incredibly positive consumer research.
Andrew Wolf, Analyst
Got it, thanks for the color. On the 535 basis points of gross margin expansion from price and productivity, can you break that down between price and productivity gains and elaborate on how that's going to flow moving forward? Also, how are the conversations with retailers regarding price given that ingredient costs are starting to normalize?
Wendy Davidson, CEO
Certainly. As we said earlier this year, we felt good about the revenue growth management initiatives already in place. Most of the broad price actions had already been taken between International and North America. You will see more of a wraparound and price realization as we move forward. We’ll also implement more surgical strategies, performance-based pricing, trade optimization initiatives, net price realization, and shelf management. Our productivity program pipeline is robust enough to offset any inflation that arises without needing to take additional pricing.
Lee Boyce, CFO
Building on Wendy's point, we continue to focus on revenue growth management without any broad pricing planned in the near term. Pricing should largely cover the inflation, and we expect it to reflect a 3% to 4% inflation range. We maintain a strong line of pricing benefits communicated with our customers currently. Our productivity efforts could drive an increase of 3.5% to 4% on our cost of sales. We are looking to ultimately leverage this and invest in overall growth.
Wendy Davidson, CEO
I would also like to point out that some of you may subscribe to data from Circana and IRI. We are beginning to see a return to accelerated growth in natural products over conventional products in several categories we serve. This indicates that consumers appear more accustomed to the pricing changes made but also reveals insulation for premium products in comparison to the conventional options, which positively positions Hain in the market as we focus on these premium categories.
Andrew Wolf, Analyst
Thank you.
Wendy Davidson, CEO
You bet.
Operator, Operator
The next question we have is from Jon Andersen of William Blair. Please go ahead.
Jon Andersen, Analyst
Hey, good morning, everybody. Thanks for the question.
Wendy Davidson, CEO
Hey, good morning.
Jon Andersen, Analyst
Wendy, could you talk about which categories or brands you expect to see the most traction in away-from-home sales, and how that will play out over the next several quarters? Can you remind us of Hain's current penetration in overall sales for away-from-home, and where you think it could go with channel expansion?
Wendy Davidson, CEO
Channel expansion is a huge opportunity for Hain, as we've been under-penetrated in points of distribution for easy consumer access to our products. Away-from-home, especially in food service and convenience stores, presents opportunities in our snacks portfolio, beverages, meal prep around meat-free categories in Canada and the UK, and yogurt in the U.S. These categories have significant growth potential. As previously discussed on Investor Day, typical CPG companies see 15% to 20% of their revenues from away-from-home channels; at Hain, it’s less than 2%. We target gradual increases as we progress, and our long-term vision is that Hain Reimagined is not just an aspiration but our target. If we were to achieve around 20% of our revenue from away-from-home, it would indicate a higher growth number, which we want to prove through results and traction over time.
Jon Andersen, Analyst
Are there any margin implications with channel expansion?
Wendy Davidson, CEO
Yes, away-from-home tends to provide margin-accretive opportunities. In all my past experiences, this segment has been favorable in terms of margins since consumers are willing to pay a premium for convenience, making them less price sensitive. Hain's focus on revenue growth management will ensure we are well-positioned to maximize this growth area, and I'm excited about the early momentum we're seeing across our distribution points.
Jon Andersen, Analyst
Great. One last one: Lee, you mentioned you’re targeting $50 million to $55 million of free cash this year. What are your capital allocation priorities? I'm assuming debt reduction is one, but would love to hear more broadly on your allocation priorities going forward.
Lee Boyce, CFO
Yes, the priority is balancing leverage reduction alongside growth investments. As we continue to improve cash flows, we'll direct funds towards reducing debt and fueling Hain Reimagined. We are particularly focused on accounts payable and improving internal processes, which is yielding good results. We are also reviewing inventory, and our capital allocation strategy will balance these priorities: leveraging cash for debt reduction while simultaneously using spare cash to invest in our business.
Operator, Operator
The next question we have is from Alexia Howard of Bernstein. Please go ahead.
Alexia Howard, Analyst
Good morning, everyone.
Wendy Davidson, CEO
Good morning.
Alexia Howard, Analyst
You started to discuss the state of the consumer, specifically in reference to North America. Can you compare and contrast consumer behaviors and trade preferences between the two regions? I want a sense check on consumer confidence in each region.
Wendy Davidson, CEO
Certainly. Generally, the European consumer has faced a more acute impact from inflation compared to North America. Inflation rates continue to be higher there. Additionally, private label shares are more significant in Europe, and we have observed growth in discount retailers. Hence, in Europe, consumers are trading down not only to discount locations but also to private label brands. Hain benefits because we operate in categories that consumers prioritize regardless of economic conditions, enabling growth in both private label and branded segments. Meanwhile, in North America, we've seen consumers adjusting behaviors rather than shifting to private label as inflation has eased. We've observed consumers purchasing fewer units rather than opting for private labels, but we are in a position showing signs of stabilization. The latest data indicates that natural products are returning to growth rates outpacing conventional items, which illustrates consumer demand for our portfolio remains strong.
Alexia Howard, Analyst
Thank you. For a quick follow-up: Can you quantify how much marketing spend increased this quarter and how marketing spend expectations might change relative to previous expectations now that you have beat on EBITDA?
Wendy Davidson, CEO
Our marketing spend was up a relative small amount from this quarter as we invested heavily last quarter. We turned back on marketing in Q3 of fiscal '23 and ramped it up in Q4. We've sustained that level to support launches in Q2 and Q3 while holding our marketing spend similar to our plans for this year. Going forward, we’ll sustain investment across quarters rather than expect drastic cuts. We'll focus on improving efficiency in overall spend before reducing any investments.
Alexia Howard, Analyst
Makes sense. Thank you.
Wendy Davidson, CEO
You bet. Thanks.
Operator, Operator
The next question we have is from Jim Salera of Stephens Inc. Please go ahead.
Jim Salera, Analyst
Hi everyone. Thanks for squeezing us in. I know a lot of questions have been asked on the away-from-home channel, but maybe if I could sneak in one more. Do you have a sense of which products you’re replacing on the shelf in these channels? Is it existing better-for-you products, or is this entry into these channels really an expansion of better-for-you offerings?
Wendy Davidson, CEO
Great question. It really depends on category and segment. In the case of snacks, we perceive it as an 'and' situation. Our products appeal to consumers who may lack options in those areas. In beverages, specifically tea brands, we might replace other brands, as Celestial Seasonings is a market leader in herbal teas. In many other cases, we find that we haven't had offerings available in those channels, making us a preferred brand.
Jim Salera, Analyst
Great, that's helpful color. I will follow up on the tea bags category, which seems to be relatively flat in consumption. Given that private label has been performing better, is there a dynamic that you can execute, whether it's increased promotions or a focus on that category, to improve its position, or is the only solution to wait for consumers to adjust to prices?
Wendy Davidson, CEO
I'm not familiar with the trade downs of private label in tea, as that is inconsistent with the data we're seeing. We anticipate recovery as we enter tea season, and we're aware that relevant retailers are conducting resets in preparation for that season. Therefore, a noticeable increase in tea growth is expected as we enter that period.
Operator, Operator
Thank you. The next question we have is a follow-up from David Palmer of Evercore ISI. Please go ahead.
David Palmer, Analyst
Thanks for the follow-up. I wanted to revisit your discussion about channel mix. In U.S. measured channels, what should we expect to see that aligns with your guidance? I know FX and non-measured may contribute positively, but should we still anticipate some growth, at least a low single-digit, in U.S. measured channels starting in your fiscal second half?
Wendy Davidson, CEO
This area will remain challenging as we lean into growth. In our business, 40% is International, a relatively unknown segment unless you have Nielsen data. We’ll provide clarity as we proceed regarding where we see category and channel growth. In our North American business, only about 65% is in measured channels. Our category growth will begin to appear in end-market data towards the latter half of the year. You'll see it in TDP gains and velocities, particularly in snacks and tea. As the formula supply returns, you can also expect that to reflect in the baby category. If our baby category appears muted, it may affect overall end-market performance due to the formula aspect.
Operator, Operator
Thank you. That concludes the question-and-answer session. I would like to turn the floor back over to Wendy Davidson for closing comments.
Wendy Davidson, CEO
Thank you for your time this morning. Huge thanks for meeting with so many of you during Investor Day and for your interest and support in Hain. We are committed to returning the business to growth, and we will maintain transparency as we execute Hain Reimagined. I look forward to further conversations later today.
Operator, Operator
This concludes today's conference. Thank you for joining us. You may now disconnect your lines.