Q2 2020 Earnings Call
[music].
Greetings and welcome to the Hain Celestial group second quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during.
The conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Rachel Perkins from I see our thinking you may begin. Thank you. Good morning, and thank you for joining us on Hain celestial second quarter fiscal year 2020 earnings conference call.
The call today, our Merck Schiller, President and Chief Executive Officer, and Javier drove all executive Vice President and Chief Financial Officer. During the course of this call management may make forward looking statements within the meaning of the federal Securities laws. These 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 <unk> annual report on form 10-K, 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. Please note.
Management's remarks today will focus on non-GAAP or adjusted financial measures a reconciliation of GAAP results and non-GAAP financial measures is available in the earnings release.
A reminder, beginning in Q1 of this year the company change it segment reporting folks on North America International and corporate which had previously been reported out the U.S. UK.
And the rest of world segments.
Nobody has also prepared a few presentation slides and additional supplemental financial information, which are posted on Haynes lost Hills website under the Investor Relations heading this call is being webcast and an archive of that will also be available on the website and now I'd like to turn the call over to Mark filler.
Thank you Rachel and.
Good morning, everyone nearly one year ago. Shortly after joining hain celestial I introduced our transformational strategic plan and shared key deliverables and milestones aimed at restoring credibility and confidence among our shareholders and customers.
As I reflect back on the hard work of our entire organization I can't help but be proud of that.
Resilient tenacity and passion of our employees that has resulted in strong and consistent performance. While we still have a lot of work ahead I'm extremely pleased to report that we're executing and delivering on the plan, we communicated and our financial and operational results demonstrate that our strategy is working in fact since we started our strategy last year.
Our gross profit dollars gross margin EBITDA margin and EBITDA dollars have all grown considerably.
Remind you at Investor Day last February I laid out for clear strategies that would guide our journey.
Our one simplify the portfolio and organization to strengthen our core capabilities three expand.
Margins and cash flow and for reinvigorate profitable top line growth and of course set up high potential brands.
Well many initiatives have contributed to these results I'd like to highlight highlight a few that really capture the breadth and depth of the transformation.
On simplifying the portfolio over the last year Hain has divested non.
A strategic brands with almost $750 million in sales in all we've divested seven businesses and we expect there will be additional non core brands sold in the future.
In addition, as previously stated we're also likely to shutdown other brands, if there isn't a clear path to stable profitability or a logical buyer.
On simplifying.
Our operations, we've consolidated manufacturing sites office locations and shipping locations around the world. The integrated five sales forces in the United States to one we've eliminated over 30 brokers in the United States and more than 30 co manufacturers.
On strengthening capabilities, we've hired a new senior leadership team in north.
America as well as brought on several new directors, who bring significant industry experience and expertise to our board.
We have improved forecasting resulting in almost five percentage point improvement in service and then almost 50% reduction in customer fines and penalties in the U.S., we've enhanced the organizational training in areas like project management.
Our planning and innovation processes.
On expanding margins and cash flows we've eliminated almost $50 million of low ROI spending in North America discontinued approximately 500 skews worldwide that had low to negative gross margins reduced inventory by over $80 million since its peak in August of 2018.
Reduced our cash kinzer couldn't conversion cycle more than 14 days eliminated $380 million of debt, resulting in leverage of roughly three times EBITDA.
Ria vigor invigorating topline, we filled the innovation pipeline with ideas itself consumer problems and will expand their categories.
We've developed new creative.
Campaigns for a number of brands, we strengthened consumer insights selling capabilities and customer relationships.
Impact of these efforts are just beginning to show up in our results and we will be more evident as the negative sales impact of SKU rationalization and spending reductions abate in the second half this year.
In summary, we've made significant progress.
And we've transformed much of this business in a very short period of time.
That said, we continue to see further significant opportunities to simplify the portfolio and organizational structure reduce cost and improve capabilities and our initiatives to reinvigorate topline growth are just beginning our momentum is accelerating and I truly believe our.
Best days are in front of us.
Let me now shift to our Q2 results.
When we laid out the plan for F. 20, this past summer you'll recall I promised you three things one the topline trend for the first half would be similar to what we reported in the second half of last year and that the negative trends would begin to abate in the second half of F 22.
<unk> gross margins and profits would grow versus year ago in every quarter three EBITDA dollars in margins would grow versus your or go in each quarter as well.
I'm pleased to report that our second quarter results delivered on all key metrics and demonstrate another quarter of year over year improvement against our strategy and financial commitments.
Continued the momentum we started last winter and we remain right on track to achieve our fiscal 2020 operational and financial objectives importantly, while delivering a double digit increase in EBITDA in the quarter. Our marketing spending was also up 8.2% as we reinvested some of our profit growth back into our highest potential.
Central brands.
Now to provide a little more detail on the individual reporting segments. Let me start with our North America business to refresh your memory, we guided that our first half net sales growth would be comparable to the second half growth rate from year ago. When we started eliminating poor ROI spending and reducing unprofitable skews.
Last year's second half declined 8.7% Q2 of this year declined 8.1% versus prior year. So the results are right in line with our projections. It's also important to note that the 8.1% decline is not reflective of the underlying health of the ongoing business embedded in that number is a 2% decline.
Line due to the lost sales from divested assets, a 4% decline due to skew rationalization and a 1% decline due to the reduction in low ROI investments. So in reality the ongoing business is down only about 1%.
Turning to margins adjusted gross margin improved 480 basis points versus year ago to.
24.7% driven by continued improvement in our costs and better pricing and mix. This is the highest adjusted gross margin that we've had in any quarter since Q3 of 2018.
Adjusted gross profit dollars improved 14% versus year ago, adjusted EBITDA margin for North America was up 300.
Third 70 basis points from prior year. This was the third consecutive quarter of year over year improvement and was the highest EBITDA margin quarter since fiscal 2018.
Adjusted EBITDA dollars were also up a very strong 41% versus year ago.
While we're pleased with our progress we're far from finished and have identified.
Multiple opportunities to continue to improve our margin structure and overall profitability in North America. In fact, we are in the process of consolidate in Canada, and the United States into one North American operating unit, a move which is expected to generate $5 million to $8 million of additional cost savings over the next 12 to 18 months.
Breaking the portfolio North America down further we delivered continue improvement on the get bigger brands sales declined 3% in the quarter, which was slightly improved versus the minus 3.5% trend in the second quarter last year. As a reminder, the declines were driven by eliminating on economic spending SKU rationalization and distribution losses in personal care.
Relating to service issues from a year ago, and we didnt expect to overlap them until the second half importantly, despite these factors consumption on the get bigger brands was up 1% in measured channels get bigger velocities and the HCV continue to grow and the average items carried which was down 5% last quarter was down only.
2% this quarter, so thats another favorable sign that our distribution is stabilizing and the new innovation coming.
And that and the trend should continue to improve.
We've gotten questions in the past regarding the margins of the get bigger brands and whether our long term guidance of 16% to 18% was achievable.
To that end in the quarter.
For one year into our journey I'm pleased to report that our EBITDA margins for the get bigger brands have exceeded 14% and for the last five quarters. In Q2, we again delivered a mid teens EBITDA margin, including 150 basis point investment in marketing. This should further reinforced that as we guided on.
Yesterday, we can drive profit growth and reinvest in these brands at the same time.
On the get better brands, which are being managed for profit.
Our gross margin improved 690 basis points from a year ago, and our EBITDA margin improved 750 basis points. That's a huge improvement in a very short period of time.
Now, let me shift to our international business, where our results for the quarter. We're also very consistent with our expectations net sales were down 1% for the quarter and flat in constant currency Forex represented a 2 million dollar headwinds.
We saw strong double digit sales growth and plant based proteins and beverages, which was offset by SKU rationalization and.
Plant consolidation in fruit and increased trade and so in some competitive segment's adjusted gross margin percentage in dollars and EBITDA growth margin.
Were also down slightly in the quarter. The results were in line with our plan and include a significant investment in marketing in the quarter.
All in all given the difficult business and.
Our men in Europe unrest in Asia and uncertainty in the UK surrounding Brexit our team worked diligently to deliver quarterly results that were in line with our plan Importantly, we also expect stronger trends in the second half of the year.
The moment Javier is going to provide detail on the outlook for hain in the second half of fiscal 2000.
In in 20 before he does I wanted to provide some perspective on the topline expectation for North America.
As you'll recall from the Barclays Conference. We told you to expect declining net sales in the first half with a negative trend abating in the second half as we lap the elimination of uneconomic spending and SKU rationalization as well as service.
Related distribution issues and personal care.
Today I want to reiterate that we expect the North America topline trend to improve as planned.
In addition to lapping things that dragged down the first half results were also driving growth by launching new innovation, and snacks, and yogurt, increasing marketing spending and executing better.
On key programs like Sun care.
While we don't normally give guidance by quarter in the spirit of transparency I wanted to give you a heads up that we expect Q3 to be particularly strong on the get bigger brands.
In addition to all things mentioned, which would yield strong results. We also exited some less profitable club.
Grants from H one.
While these programs were dilutive to our first half growth rate, they're being replaced by more profitable events that will occur in the third quarter, helping improve our overall third quarter growth rate. While these programs are more in and out than permanent they provide further evidence of our momentum and continued strong relationships with our customers.
In summary, our quarterly results and expectations for the second half continue to demonstrate that our business transformation is working well have a terrific team in place and our confidence continues to grow that we will not only deliver our strategic and financial metrics, but also restore hain to its rightful place as a premier CPG company.
With that.
I'd like to turn the call over to new CFO Javier drove a will provide more detail on our Q2 financials and fiscal 2020 guidance.
Thank you Mark and good morning, everyone. It is my first earnings call as CFO Hain.
I'm truly excited to be here to help drive the transformation.
Turning to the financial results today.
I will focus my discussion on our financial results from continuing operations as you'll recall the company's presenting the results of Tilda and the Hain pure protein businesses within discontinued operations in the current and prior year period.
Second quarter consolidated net sales decreased 5% year.
Our year to $507 million inline with our expectations.
During exchange impact on the quarter was a headwind 40 basis points.
When adjusted for currency fluctuations divestitures, and SKU rationalization net sales decreased 1% versus the prior year period.
From an.
Profit perspective, as expected Q2, we delivered year over year, adjusted gross margin and dollar expansion and adjusted EBITDA margin in dollar expansion.
Specifically for the second quarter, we expanded adjusted gross margin by 220 basis points, resulting in adjusted gross profit of 100.
$12 million.
Fish and trade spending and supply chain cost reductions into us as well as other productivity savings drove the improvement.
Currency impact on gross profit was minimal.
In terms of productivity and efficiency, we have made significant progress during the quarter as demonstrated by the.
For the improvement in gross margin.
For instance, as discussed in our Q4 earnings call in North America skew rationalization project is ongoing and benefiting current consolidated gross margins. In addition in the us distribution and warehousing costs discards and.
Refines and fees have decreased over $12 million versus the prior year period.
SDMA as a percent of net sales was 16.2% up from 15.2% in the prior year period, we increased marketing spending by 8%.
In dollar terms, excluding marketing expenses.
SGN Nay was roughly flat to last year, mainly driven by a decrease in brokered trade funds.
Adjusted EBITDA increased to $45 million compared to $37.9 million into prior year period.
Currency impact was minimal.
Adjusted EBITDA.
And improved 180 basis points year over year, driven by gross margin improvements.
We reported adjusted EPS of 17 cents based on an effective tax rate of 27.8% compared to 12 cents in Q2 last year with an effective tax rate of 31.7.
The lower tax rate was mainly driven by lower guilty impact netting to prior year period.
Thanks, Mark covered much of our segment reporting highlights, let me transition to our cash flow and balance sheet.
Operating cash flow for Q2 was $20.7 million, an improvement of about $1 million.
Versus the prior year period increased spending in our transformation initiative was a headwind on cash flows this quarter.
Our inventory is $16 million lower than the levels at the end of June 2019, mainly driven by the divestitures carried out year to date and improved inventory management.
Capital expenditures into quarter were $16 million compared to $19 million for the prior year period.
Operating free cash flow defined as operating cash flow less capex was $4.6 million an improvement of about $4 million from the prior year period, driven by higher operating cash flows and lower cap.
As of December 30, Onest, our cash balance was $37 million and net debt was $289 million.
We have reduced Haynes gross debt leverage ratio to 3.1 as of December 30, Onest compared to 4.2 at the end of fiscal 2019, as we used a majority of proceeds from the sale of.
To pay down debt.
Before turning to the full year outlook, let me briefly discuss the second half of fiscal 22020.
For the second half we continue to expect diminished negative sales trends at the total company and at the North America levels as we lap the headwinds that.
Mark mentioned and we launch new innovation in snacks in yogurt increased marketing spending and improve execution of key programs like Sun care season.
As Mark also said Q3 will be particularly strong throughout North America get bigger brands given day initiatives, just mentioned and the reintroduction.
Some of our rotational promotional programs in Q3.
While these programs where originally planned for the first half they will now drive volume growth in Q3.
For international we expect that the sales trends will also improve in the second half based on the continued growth of our non dairy business.
In our lapping of headwinds, we experienced last year, such as the SKU rationalization service disruptions related to the fruit planned consolidation in England and warm weather during last year's soup season.
Now, let's turn to the full year outlook as a reminder, our guidance excludes tilda, which contributed.
Currently $200 million, the net sales and $26 billion in adjusted EBITDA for fiscal 2019.
For fiscal 2020 on a reported basis, we now expect adjusted EBITDA to be in the range of $177 million to $192 million an increase of 7%.
And to 16% as compared to adjusted EBITDA of $165 million in fiscal 2019, a strong improvement from last year and reflective of our continued momentum and confidence in our plan.
Constant currency, we now expect adjusted EBITDA to be in the range of 100.
Third $79 million to $194 million.
On a reported basis adjusted EPS is expected to be 62 cents to 72 cents with an effective tax rate of 26% to 28% compared to adjusted EPS of 60 cents for fiscal 2019, an.
Cost of 3% to 20%.
Constant currency adjusted EPS is expected to be 64 cents to 74 cents.
Our annual guidance assumes an exchange rate of $1.28 per British pound as compared to $1.30 in fiscal 2019.
Is translating to a second half exchange rate of dollar 29 per British pound.
The full year foreign exchange headwind on EBITDA is estimated at about $2 million compared to fiscal 2019.
Interest and other expense are expected to be approximately $21 million relatively.
Compared to the prior year.
Depreciation amortization and stock based compensation expense are expected to range between 65 and $70 million compared to $55 million in fiscal 2019.
We anticipate cash flow from operations to be at the low end of our earlier guidance or around 100.
$10 million, given higher than expected costs associated with of transformation initiatives.
This represents a $70 million improvement from the prior year.
We expect to 15 day reduction in our cash conversion cycle from 75 days to 60 days driven by ongoing inventory reduction efforts.
And the sale of Tilda, which was a cash intensive business.
As of the end of the second quarter, our cash conversion cycle is down to 61 days.
We expect capital expenditures of $60 million to $70 million a decrease from earlier guidance given reprioritization of investment projects for the rest.
Most of the year.
From a cadence perspective, we expect that the rate of sales decline into second half of this year should improve compared to the first half primarily driven by momentum into get bigger brands from assortment optimization promotional activity innovation and marketing.
From a profit perspective, we expect to continue to deliver adjusted gross margin in adjusted EBITDA margin expansion each quarter versus fiscal 2019, and adjusted gross margin dollar and adjusted EBITDA dollar growth each quarter as compared to fiscal 2019.
Our operational and financial.
Fault demonstrate that our transformational strategy is working and we're confident in our plant and ability to further progress throughout fiscal 2020.
With that I will turn the call back to Mark.
Thank you Javier in summary, we are executing at a high level and gaining increased confidence in our strategic objectives for the results we are.
Operating every day, our team remains committed to delivering strong consistent results for our stakeholders with clarity on how we achieve them and the continued path ahead I'd like to thank our team our customers and our investors for their continued support of Hain celestial.
With that we're now happy to take your questions operator.
Thank you at this time, we will be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation from the indicate that your line is in the question Q.
You May press Star too if you would like to remove your question from the Q.
For participants evening speaker equipment and may be necessary to pick up your.
Handset for pressing the star keys.
We will we pull for questions.
Thank you. Our first question comes from Andrew Lazard with Barclays. Please proceed with your question.
Good morning, everybody.
Morning, Andrew Good morning, either.
Two for me first would be can we talk a little bit about Wayne.
Hain expects to lap the pulling out of the on economic spend and the S.K. you read in North America, specifically as we go through the back half and then second Mark as you think about to get bigger brands in general.
Our other ones where.
Turn to sort of the the topline growth piece or.
Building velocity and distribution with retailers has gone more quickly than.
Then you might have thought and somewhere maybe it's taken longer than you would have thought and if so trying to get a sense of why that would be on either end. Thanks. So much.
Yes, So let me take both of those so on the first question remember that we.
In third quarter last year announced that we were going to start removing on economic spending and do another round of skew rats of that that will finish up by the end of Q4 might bleed the little bit into Q1, but it will mostly be done by the end of the year because it really didn't start till the end of Q3 of last year.
With regard to the second.
A question on the get bigger brands yeah. Its.
It's a mixed bag there are some customers that have very quickly and aggressively gotten behind us and said, we like what you're doing we like where you are and we're going to.
Doubled down on you and there are others given service challenges in some of the the.
Issues that we've had over time of were in more of a prove it to the mode. So.
The top line improvement is going to be a little bit choppy by customer and by brand for that reason, but what I would tell you is.
A year into this journey, we are in a much better place than we were a year ago in terms of customer relationships, we're having.
Annual planning sessions versus just coming in with rates and dates on the the next trade deal that we need to execute we're coming with innovation that is surprising and delighting them in terms of it being real innovation versus just here's another flavor of something or another.
Other line extension.
We are bringing marketing programs shopper marketing programs using their shopper card data as well as digital social mobile outside of the store to drive people into the stores. So we've repositioned ourselves as a growth company and.
Again, it's going to take some time in some places we have more momentum in some less and.
In some categories, we have more momentum as we've talked before personal care in particular, which was saddled with some service problems for an extended period of time.
We have more of a wait and see mode on on from customers on that one.
Got it thanks very much.
Thank you. Our next question comes from Alexia Howard with Bernstein.
Dan. Please proceed with your question.
Good morning, everyone.
Corn and good morning.
Okay.
The timing and any idea of order of magnitude is.
New product launches.
When do you expect those really it sounds as though it going to be next quarter.
That you expect that gets bigger brands to really start benefiting from that is a lot about jackpot, Jeff Saleen.
New product that they go on the shelves.
And do you imagine that Youre new products represented sales either over the last year over the last three years.
I'm, just sort of quantify Larry Monte.
When you start my Youre, hoping it's going to Catsix, Thank you and I'll pass it on.
So innovation is going to vary by customer and by category. So they don't all reset at the same time.
In some cases, a retailer may have to reset windows for category than they have one.
Summary.
In the spring summary set in the fall so theres no.
Point in time, where you will see a dramatic step up it will be kind of slow steady.
Improvement as we bring products out so in the first half to remind you.
We expanded our distribution on T., well, which is doing well.
The incrementality of that item is very high so the retailers that have it are excited about it we need to do more work on the trial side.
Degenerate awareness, but for those that are that are carrying it the repeat rate in the incrementality to the category has been terrific. We also talked about bringing a bunch of innovation in personal care.
Sure.
Which is also off to a good start again because of the relationship.
And service issues that I mentioned before.
Our acceptance on that has been modest.
But that was expected knowing that we had some proving to do to people, but we have a cannabis this cityville line.
In.
Users and.
In body wash on Jason that is doing very well, we have a hydration sensation line on all but thats doing very well so.
The stuff that we've launched is performing pretty well, we need to get the HCV up we need to continue to drive trial et cetera in the back half of the year, what's happening is we're bringing our.
Okay and snacks innovation, we just started shipping.
Something called Scream and hot.
Gee straws on sensible portions if you look at the salty snack category, a very significant percentage of volume has done in hot skews for the Flaming Hot kind of skews that some of our competitors having the.
Our mainstream offerings Nobody's done it in the healthier offerings that started shipping a week ago pretty good solid acceptance of that item and preliminarily for the.
10 days of data that I have on velocities, it's turning very well.
And on yogurt.
I believe I talk to you before about we were bringing.
Four packs to market because we compete only in the multi serve tubs and that's only 30% of the category 70% of the category is in single serves and Multipacks. So we brought that.
Towards the end of last quarter distribution on that one was spotty, because it's less incremental to the category and.
We are incremental to us we realize that we're we're solving our problem there and there's there's other category competitors, who have that item, but we're also coming back in the beginning of the fourth quarter with another piece of innovation on yogurt that we'll be very incremental the category that we're getting good response on so long winded answer but it takes.
Time.
The pipeline is full we're having much more robust kind of annual planning conversation. So we're showing retailers innovation thats coming next fall and next winter. So that they can decide how aggressively they want to get behind it and so I'm much more optimistic going.
That will continue to show momentum there with regards the second part of your question, which was just how do we track at.
I'm used to having a three year renewal rate that looked at what percentage of your sales. This year comes from innovation over the last three years to be perfectly candid given that we threw out a bunch of line extensions that came and were gone a.
Were later, our innovation as a percentage of sales is tiny.
And Thats one of the reasons why our Tdps had been declining because we're not bringing new things to replace the underperforming things in our portfolio as well as to replace competitive items. If theyre just another flavor of something they already have the acceptance is going to be spotty and the incrementality.
He is going to be very very low. So we're now really pivoting to real innovation I told you last year, we take about a year to get that pipeline started we're seeing that come to fruition.
In the second half of this year and it will be much more robust as we get into the first half of next year, but.
I feel really good about where we are and the fact that it will become a much more.
I think we'll piece of our sales going forward.
Great. Thank you very much all positive.
Thank you.
Thank you. Our next question comes from Ken Goldman with Jpmorgan. Please proceed.
Hi, good morning, and thank you.
Morning, Good morning.
Two for me.
First I just wanted a little clarity if I could you.
I mentioned that you're operating cash flow will come in little lighter than maybe what you expected and you talked about costs related to transformation initiatives being higher. So I guess my first question is can you elaborate a bit on what those costs are.
And then my second question is you talked about some brands.
You're still looking to divest some maybe still looking too.
Potentially review some for just shutting down can you sort of update us on where you are in this.
I guess asset optimization process are you still negotiating with Counterparties I guess, we're trying to get or I'm trying to get a sense of when you think this process will sort of I guess hit the leader innings so to speak.
Heavier once you take the first part I'll.
Take the second so Ken on the operating cash flow I think one of the things that is impacting the operating cash flow is our transformation cost I will highlight we have had some.
Hi, unexpected severances and that has been driven by some of the consolidations that we've done in our manufacturing facilities and also.
Some turnover that we have had India in the managerial ranks.
And so we've also we've done some SKU rationalization, so the adjustments to the inventory values have hit the Biennale. So thats also.
Another driver for some of those.
Some of those costs.
And on the divestiture.
A question Ken So we've said very publicly that the brands that are in the get better.
Bucket, we're going to try and manage for long term stable profitability, if we can't stabilize them generate more profit or if they're more valuable to somebody else than they are.
Yes, we will look to divest or shut those businesses down.
We've made a bunch of divestitures I mentioned in.
Script that there was seven.
Including Arrowhead Mills and Sunspire in the second quarter, we are in active conversations on others that may be more valuable to someone else and we.
Continue to.
Assess some of the businesses that we have that we may not see a path to profitability. So I would expect over the course of the second half of this year you will see more activity there.
I never want to say that were done because once you make changes you have to go look at the portfolio, you'll have left and Resegmented again.
So this is going to be reshaping of the portfolio over time, but.
Certainly the percentage of business that isn't that tail is smaller today than it was a year ago. It was roughly 50% of sales a year ago. It's now about 39% of sales, but the good news is a year ago that tail was about 10% of our.
And is now about 20% of our profits so its smaller and much more profitable which is great.
So that if we do keep those things you can expect more profitability out of them, but again, we have a lot of complexity and our intention is to continue to consolidate to of course set of assets that are going to make the most sense in terms of growth potential long term.
Very high.
Well thank you.
Thank you. The next question comes from Rob Dickerson with Jefferies. Please proceed with your question.
Great. Thank you so much.
Yes, a bit of a follow on I guess to Ken's question is just in terms of that cash.
Even if there is some.
Or theres been some near term.
Headwind on the cash this year.
The trajectory year over year still obviously positive.
And maybe dig assume expect that cash to continue to grow positively into next year. So.
No if EBITDA is going up in this is I guess so similar question.
That we could have asked at your Investor day, but of EBITDA is going up in the margin profile is improving.
Continues to improve sequentially.
Do you do you still view de leverage as our main focus right if you're around three times or no at some point, especially if you look to potentially sell other.
Or at some point.
Do we hear the message that will now we are generating decent cash flow. We think the optimization pieces. There are plant footprint was in line.
Now we'll be want to do with this cash is this and it's not de leverage that's all out.
Yes so.
Rob.
Youre absolutely correct, we are going to generate healthy operating cash flow relative to last year.
No in terms of capital structure, I think that we are still targeting our three to four times.
Debt to EBITDA ratio.
If we work to get below that number.
The prioritization of our investments our internal growth opportunities.
In a as they present in sales and as we find them to be.
Viable.
Then I think third would be returning cash to shareholders.
The share buyback and I think we've also talked about.
Throughout the.
Transformation dividends will not be part of the consideration set but after that that certainly can come into play.
Okay great.
Three times I think our debt is where it needs to be.
And as we sell off other assets I think Javier hit it on the head we will either look to.
Acquiring again much more strategically in the of the priority categories that we've discussed.
And or.
Buying back shares to improve our earnings per share.
Okay perfect. Thank you.
Thank you in the next question comes from Anthony Vendetti with Maxim Group. Please.
Proceed with your question.
Thanks.
Just mark on the on the get bigger brands that are going to be stronger this quarter, with which which ones are these brands or.
Working I guess and which ones.
Our not working as well I guess because.
Theres going to be is going to be stronger overall as a.
Are there particular brands to do you putting marketing spend behind it that are growing faster now.
Yes so.
We've got a number of brands that are performing very well sensible portions.
Which is.
Our biggest North America brand is growing double digit.
We.
Have nice low single digit growth in tea yogurt.
Terra chips is a solid business, where we where we've really struggled the most is in personal care and that's where you're going to see the biggest jump in trajectory in Q3 for two reasons, one last year during Sun care.
Season, because we Couldnt service the business, we basically we're a very small participant in Sun care and that is a big portion of our personal care business now that the services back we're going to have a very robust sun care season, So you're going to see some pretty significant momentum driven by that.
In addition, the what as I referenced some first half club programs that were less profitable that have been transformed into third quarter programs that are more profitable are those are also primarily in the personal care space a little bit in the snack space as well, so that's where you'll see more of the momentum.
As we get to Q3, but most importantly, and this has been the big drag on that group of get bigger brands has been personal care and with improved execution, we're getting much more confidence from customers to get behind those businesses and I expect that we'll see good momentum on personal care in particular in the.
Second half.
Okay, Great just as follow up on the T. So.
So T is also.
He is also stronger now right.
Yes, she is doing well we've got we've got the key well innovation that I talked about how we have some new marketing that hitting the market on t., we have a very.
Very robust pipeline on T. and are very optimistic and excited about.
The next 12 months on that business as we are now talking to customers about.
Multiple pieces of innovation that they're excited about so we actually had several years worth of innovation and as we show it to people there like can you just bringing it all at once.
So.
We're going to go pretty big on T. I suppose huge category, that's craving leadership and real innovation and we think we've got the guns loaded to really be successful. There. So we're coming toward the end of tea season. So the momentum that we have now will continue as we get into the fall and bring this.
Patient to life.
I am looking forward to very robust growth on t. going forward.
Thanks, very much I'll pass it along thanks.
Thank you. Our next question comes from Stephens Strycula with CBS. Please proceed with your question.
Hi, good morning, and Mark Congratulations on all the hard work that you're doing in the first.
Yep.
Thank you.
So my first question would be just limited a clarification on the revenue outlook for the back half the year can you help us understand how the SKU rationalization steps down Directionally in magnitude I think it's a four point track now what does that look like in the back half and Mark are you trying to.
No that the third quarter will be a better growth rates in the fourth quarter because of some of these.
Seasonal club ones.
You want take first yes, so in terms of the.
Skew rationalization and the outlook for the second half the second half will have a sales decrease that is a lower rate than the first half and.
We shared with you in the remarks.
In terms of the SKU rationalization.
I would say that were largely complete with that effort. There is about 90% of those skews that the company is no longer manufacturing and I would say only 20% of that dollar value associated with those skews.
Flow through the PM now.
This quarter, so for the second half of the quarter.
Or for the second half of the year.
The the impact of the SKU rationalization will not be as large as he has been for the first two quarters.
Congrats guys as you can assume two thirds.
80% of it is behind us and the other 30% or so we'll be in the second half of the year.
With regard to.
The question around Q3 versus Q4.
Both of them will be better quarters than we had in the last four quarters, but Q3 will be particularly robust. So yes, I am signaling that Q.
He is going to be likely stronger than Q4 because of these onetimers now I want to also point out that part of the drag in the first half was us not repeating these club initiatives that generated significant volume. So if you look at the negative trends in the first half hour, we had some pretty meaningful volume programs that we.
Repeat which dragged down the year to date results. So.
We've now moved those to Q3 and they're going to be a tailwind in that particular quarter. So part of the reason I Didnt guide on the topline is because of that the choppiness of moving stuff between quarters and the choppiness of pulling out on economic spending and SKU rationalization.
Not going to be as linear as you would expect in a normal state, but if you take away the club programs, you're still going to see improvement in the underlying trends of the business as we forecast at all along so second half will be better than the first half with or without these club programs, but with that extra boost in Q3 it will be.
Particularly robust on the get bigger brands in North America.
Okay.
Mark can you give any color on the baby business I didn't really hear a lot of that discussed on todays call and have some good brands. There. So just want to know strategically what are you seeing there in the marketplace from a competitive standpoint from retailer demand and then a quick accounting question.
Yes, I notice that there is a $4 million add back for SKU rationalization. This year, the EBITDA bridge, but there wasn't one last quarter. So just curious as to why it was an issue now for an add back but not in Q1. Thanks.
Yes, so the baby business, you'll remember as a sustainable contributor which means we're going to manage it for.
More stable topline and more robust EBITDA margins. It is a big business, it's an outstanding brand, but it's not one of our more profitable brands and in order to move it into the get bigger bucket that we would invest in from a marketing standpoint, we need to do some transformation of the PML. So what we have done.
One is a fairly significant part of the SKU rationalization that we announced.
Last year is in baby, because we had spread that brand into 30 or 35 different categories. We were doing chicken Nuggets, and pizza bites in diapers and wipes and lotions and.
We had just spread this very thin.
And weren't making a lot of money in some of the ancillary categories. So part of the the first half skew rationalization drag is in baby food.
We have significantly improved margins of that business. We are innovating in categories that have higher margins. So that we can and again continue to.
Drive those margins as well as restore the topline to more stability now that the SKU rationalization is winding down so theres a lot of work going on in baby food, but we've got to get it to a double digit EBITDA margin business before it's something that we would really invest in in a bigger way. So we've got more work there, but significant progress has been made.
Let's take the second yes, so on the adjustments to EBITDA.
I would say that the things that are different between this quarter in last years.
Second quarter would be the productivity and transformation costs and I alluded to those drivers in the earlier question.
Then the other item would be the SKU rationalization that is also impacting.
This quarter more so than the prior years second quarter, so that will be the other items that would drive the differences.
Thank you. Our next question comes from John Baumgartner with Wells Fargo. Please proceed.
Good morning, Thanks for the question.
I want to.
Mark obviously the focus this year is really on calling the low return trade programs, but I'm curious as you lap. These actions going forward can you speak a little bit as to how you're thinking about what a normalized trading environment looks like when you think you get there and then I guess also how you're thinking about reinvesting from here.
No I assume there isn't much noise of traditional advertising given the size of your brand. So we think about it as in store sampling in store displays you, how you're thinking about connecting these new products with with the consumers. Thank you.
Yes, so on the first part.
So not all of the.
Elimination of uneconomic spending is trade I don't want to to be per.
Save that we're just looking at trade we had a lot of marketing spending that was very inefficient. Our we've looked at resources and how we've deployed them and a lot of that was inefficient. So when I say elimination of uneconomic spending I'm talking across the entire pay in outlets as the first point I would make with regard to trade specifically, what we're doing is.
Hello, ROI events, and replacing them with higher ROI events. So that the club example that I was just talking about is a great example of that we had a big club program last year that lost significant money and we said, we're not going to do it again, because what we were doing is taking three different components from three different manufacturing locations shipping them to one.
Place Repacking them, and then shifting them out to the customer and by the time you at all that cost we couldn't make any money at it. So we replaced that program with one that is more profitable for us that makes sense in the second half. So it isn't just about ripping out trade, it's about redeploying it into places, where we can get a higher higher ROI return I think.
Once we get toward the fourth quarter, we will have basically taken out all the inefficient trade that we need to take out and as I said, we're trying to redeploy that ways that are more productive.
With regard to investing in the brands.
We have added marketing spending in the.
Second quarter, we will add marketing spending in the second half of the year as well so as we make the shift toward growth again now that we have the innovation and new marketing campaigns, you'll start to see us taking some of our profitability to the bottom line some of it going back into the brands our philosophy in terms of how we're going to activate these things given.
That.
Our history has been we start in the natural channel and then we gradually migrate into a food and mass.
These are not national brands right, so you're not going to see in most cases.
We don't have more than 50% HCV and we've got probably.
10% or less household penetration on most of these brands, so you're not going to see national television on these businesses, it's going to be much more surgical much more scrappy and we start from the store and worked out so if customer ex gets behind screaming Hot sensible portions as an example, we start with how do we activate that in store that.
Can be with displays that can be with shopper marketing vehicles than we would go to their shopper card data and say how do we leveraged the target consumer with their shopper because we know we have distribution there than we would geo target around their store locations. So anybody that live within five miles of a store how do I make sure they see.
A digital or or social or mobile ad.
And so it really it really emanates from the store outward, which is very efficient.
And very targeted versus something that you're hitting the whole marketplace when only half of the stores in the marketplace carriers. So it really is a reward the retailers that get behind it.
Business and activate with them versus just spray the market with a lot of spending that we'll have a lot of inefficiency in it.
Great very helpful. Thanks, Mark.
Thank you. Our next question comes from David Palmer with Evercore ISI. Please proceed with your question.
Thanks, Good morning.
King and great job on your shift to a more profitable core this year.
Thank you.
Just a question on on T. I had been thinking t. could have been little bit more of an improvement in up low single digits. I was wondering if you saw whether it's been an impact there and we're also questioning whether the.
We are looking as rates it looks like T wells distribution.
Something like 20% in them in a measured channels, but maybe you can talk more broadly about how that has been accepted this year and how this general year for Ti has gone versus your expectations I have a quick follow up on on snacks.
Yep so.
Whether is definitely not helping us on T. This has been a.
Very warm winter so both are soup business and our T. business.
Suffer a little bit when it's not sub 32 and in the northern part of the country.
So yes, that's a factor on T. well the distribution is in the mid 20.
The range, so your numbers or not.
In an incorrect again, what I would tell you historically this has been a natural channel company that.
Doesn't have as much as much presence in the measured grocery channels and so we're breaking down those barriers.
And we're making progress there.
Well.
Because it's.
Its new and it's different.
The sell in has taken some time.
What I like to be further ahead than 25% distribution yes.
Some of those that have taken it are they pleased with the results yes.
So we're going to continue to.
Push that and take the examples of success, we have in the marketplace to the people that didnt take it and show them why are they need to get behind it but it that's why I say, our innovation process is going to be a little bit more of a gradual.
Improvement versus what you may be used to in.
Some of the $10 billion plus CPG businesses that just come with big slotting checks and they get very high distribution very quickly. These are because their health and wellness items and because the the mainstream grocers and and mass channel customers are just kind of figuring out how they want to play in health and wellness.
It takes more more calls it takes more visits to.
To explain why this is going to be incremental and why even though it's going to turn slower than the non healthy versions of things that it's going to be much more incremental to their category. So as the leader in health and wellness. We've got a lot of work to do in terms of educating and partnering with retailers on the potential of health and wellness and.
How they should position themselves to win.
But at the end of the day, what I would tell you as well is doing well if we will continue to see momentum build on that and.
It will be an important part of our business going forward.
And then just a follow up on another investment category and snacks. It looks like sensible portions is killing.
There was a day back in I think it was in 2015 when.
Walmart really ruin the year, you know clean store initiatives and whatever and that brand was like the only like standing for Hain back then.
But I feel like I, just so I just want to make sure that you feel like you can maybe broaden the.
Gross within snacks, and you're not overly dependent on promotions in the near term with one retailer and such that you've just feel good about the stacks business in general continuing to be the growth driver that it's been.
We'll take that for granted and I'll pass it on thanks, Yes, no as we.
Really very strongly in our snacks portfolio, we have a terrific set of brands I'd say on top of sensible portions Terra is a very unique and differentiated brand as well, we're seeing very significant growth on sensible portions outside of Walmart. So we are not as Walmart dependent they were definitely a big factor in our step backwards.
Yeah.
But again a lot of this was self induced in terms of our own service problems right. So now that that is old hain and it's behind us.
We have the confidence of the retailers those products are not as.
Not relying solely on as dropping price from being trade dependent theyre good brands with goods.
Consumer franchises and what I love about our snacks portfolio is it has huge potential across into the mainstream because we're not.
Unlike our personal care items that may sell at 10, or 15, or even $20 a bottle everybody can afford our snacks items snacks are impulse purchases. There. There you can always get people to buy more snacks.
It's been a perpetually growing category forever. So we're very excited about snacks, we continue to drive margins there because it's not our highest margin business, but it is one with tremendous potential and it will be a very very critical part of our growth initiative going forward.
Thank you.
Thank you.
It appears we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding comments.
Thank you thanks, everybody for all your questions and support hopefully your takeaway is.
The journey that we laid out at Investor day year ago is materializing exactly as we had planned.
We're very excited about the second half and what we have to come and as I mentioned between the marketing and the innovation and.
Assortment optimization and the things that we talked about a year ago that would ultimately be the drivers of topline.
That those are starting to come true fruition as well and so we thank you for your support.
So we look forward to the future and continuing the dialogue with you. Thank you. Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. I can we thank you for your participation and you may disconnect. Your lines at this time.
[music].