Q2 2021 Hain Celestial Group Inc Earnings Call
[music].
Greetings and welcome.
She of second quarter, 'twenty 'twenty, one earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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And it's now my pleasure to introduce and Kate Heller of Investor Relations. Thank you you may begin.
Thank you.
And thank you for joining us on Hain celestial and second quarter of fiscal year 'twenty 'twenty One earnings conference call on the call today are Mark Schiller, President and Chief Executive Officer, and Javier and drove our 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 include.
Expectations and assumptions regarding the company's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from the actual events and those described in these forward looking statements.
Part of the Haynesville axial of annual report on form 10-K quarterly reports on form 10-Q, and other reports filed from time to time, and where does the securities and Exchange Commission and the press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied and any forward looking statements made today.
The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on the haynesville and it feels website under the investor relation and cutting. Please note management's remarks today will focus on non-GAAP or adjusted financial measures reconciliations of GAAP results and non-GAAP financial measures are available on the earnings release and the sides libraries.
Dentation accompanying this call.
As a reminder, beginning in Q1 of fiscal year 'twenty and 'twenty.
And he changed its segment reporting to focus on North America International and corporate which had previously been reported as the U S U K and rest of the World segment.
This call is being webcast an archive of it will also be available on the website I'd also like to note. The we're conducting our call today from our respective remote locations and such.
And there may be brief delays crosstalk or other minor technical issues. During this call and we thank you and advance for patients and the understanding.
And now I'd like to turn the call over to Mark Schiller.
Thank you and the Kate and good morning, I hope, everyone is safe and doing well and these turbulent times.
On today's call I'll give some color on our strong second quarter results and explain how we continue to position ourselves for sustainable profitable long term growth.
Let me start with the Q2 results.
On our last earnings call I stated for the second quarter. We expected continued mid single digit top line growth after adjusting for divestitures and discontinued brands several hundred basis points of margin improvement and adjusted EBITDA growth comparable to the 25% we delivered and the second half of fiscal 2020.
The reported that we have met or exceeded all of these projections and again delivered another very strong quarter.
For the fourth straight quarter of sales growth was up over 5% and constant currency, excluding divestitures and discontinued brands for the sixth straight quarter gross margin was up more than 200 basis points and for the fourth straight quarter. Adjusted EBITDA margin was also up more than 200 basis points.
Adjusted EBITDA dollars was up 38% and the quarter versus last year, while investing 15% more dollars on marketing that's the fifth straight quarter of double digit adjusted EBITDA dollar growth.
Both North America, and international delivered strong sales profit and margin expansion further demonstrating that our strategy is working across the globe and we have considerable momentum.
If we reflect back on the financial targets, we laid out on Investor day, two years ago, we are already delivering at or near the three year growth and margin targets. One year ahead of schedule and we are doing it while increasing our marketing investment.
When we started our transformation two years ago, we said that we would begin by showing the immediate progress on margins with lower sales as we eliminated unprofitable brands Skus and low ROI investments the bridge.
<unk> would be of smaller more profitable company that was ready to grow again.
No we have delivered and exceeded on those expectations were.
We also said that in order to restore sustainable profit growth. There was for things that we needed to focus on first we needed to be a more reliable supplier to our customers.
This meant and making it easier to do business with Hain, which we've done by simplifying our sales force and supply chain and to deliver improved service I'm pleased to report that our service levels have been strong for some time now and we've distinguished ourselves in this area throughout the pandemic.
Second we needed to provide the right sizes and price points to make our products more affordable and competitive by channel. We achieved this by doing things like downsizing and lowering the price on many offerings to be more competitive and the grocery channel.
<unk> the right multi packs for E commerce, and the club consumer and creating trial sizes to get our snacks on the front end of the store near of the cash Register.
Third we needed to improve our marketing and focus our dollars on the get bigger brands, which have the most growth potential.
Accomplish this we've consolidated marketing partners revamped all of our campaigns and refocused our spending on the channels. The show the most potential like E commerce.
And reallocated dollars from the get better brands to the get bigger brands.
And lastly, we needed to provide breakthrough innovation that would be margin accretive and attract incremental consumers and drive eating occasions for our brands and categories.
We've done that with products like sensible portion of the screaming Hot Veggie straws that brought the young males is the healthier snacking celestial seasonings tea with new category benefits like energy Probiotics, melatonin, and gut health and new formats, like K Cups and trial pack.
All of this work is ongoing the results so far have been terrific starting before the pandemic and continuing for the last year, we've seen strong sales growth across the get bigger portfolio and there are clear indications that those trends are accelerating and the <unk>.
This recent quarter of the get bigger brands, which represent two thirds of the sales in North America grew more than 10% for the fourth straight quarter, we gained market share again and snacks behind the continued strength of sensible portions restored growth on garden of Eden and stabilized performance on tariff free.
Greek gods yogurt again grew double digits and gained significant market share can you held share in measured channels, while growing almost 20% overall and personal care continued its double digit topline growth with particular strength in non measured channels.
And the most recent four weeks the get bigger brands of showing strong momentum with volume growth and share gains accelerating household penetration and buying rate grew close to 10% and the second quarter. That's the.
<unk> third straight quarter of growth as we continue to see new households, trying our get bigger brands and repeating at a high rate.
ACD distribution on the core get bigger brands grew last quarter and the average items per store grew by more than 10% and fact 11 of our 13 biggest brands and the U S gained distribution last quarter, demonstrating the breadth of strength across our portfolio.
Shelf space gains are largely being driven by our innovation, which has delivered strong velocities and high incrementals <unk> to our categories as customers begin resetting their shelves again, starting with snacks and baby later this quarter, we expect to see our space continue to grow materially and.
Importantly, we also have more innovation coming we just launched sensible portions of veggie pumps, which are so far turning fast as our veggie straws and again highly incremental.
Also have more tea yogurt personal care of launching launches happening next quarter.
So we expect to see GDP growth the a significant driver of growth as the pandemic wanes.
On the investments needed to profitably drive the sustainable growth. We also needed to continue eliminating complexity and cost from the organization.
That journey continues and there are quite of few sizeable initiatives underway first as you know we've been optimizing our portfolio by exiting businesses and Skus that have limited potential within hain and add unnecessary complexity.
Last quarter I told you we were and the process of selling our fruit business and in early January we were able to successfully complete that transaction is $140 million foodservice oriented business, which had been declining 25% to 35% during the pandemic with very complex and delivered no profit.
Selling it and we not only continue to simplify and focus our company. We also will see our go forward company wide gross margins expand by about 150 basis points and our EBITDA margins expand by roughly 100 basis points.
And the last 20 months, we have now sold or shutdown 17, non strategic businesses, which had collective sales in excess of $900 million.
But less and $15 million of EBITDA and.
And in doing so we've generated $430 million and proceeds of which equates to about 30 times. The EBITDA, we would use that money to reduce our debt to under two times and buybacks and stock.
Second as we've discussed previously we are currently executing our simplified pricing model, which encourages retailers the quarter and bigger quantities and fill up trucks. This will increase our capacity by freeing up dock doors, and our dcs, reducing administrative work for hain and our customers and reducing costs. In addition, this will also improve our carbon footprint at the <unk>.
<unk> orders means less trucks on the road.
And Q2, we began implementation of the simplified pricing model and have seen some terrific results the.
The average order size increased by almost 50% and cost of come down materially as we roll. This out of the rest of the customers and the current quarter. We expect to see continued material savings for both hain and our customers.
Third and both North America, and international we built a robust productivity capability and process and have identified almost of $150 million of additional cost savings initiatives that will bear fruit, starting this year and continuing over the next several years on them.
The biggest focus areas on the productivity lift is optimizing our manufacturing footprint and.
Q2, we made the decision to consolidate our terra and sensible portion of snack plants in North America, and expect that project to be completed before year end.
And doing so we will be investing and the significant automation further simplifying our operations and reducing costs and the U K. We're also simplifying our manufacturing operations and have taken steps to consolidate our manufacturing locations right sizing our remaining facilities and repatriating some of our co manufactured volume to drive absorption.
Option and efficiency.
And while there are many more initiatives underway hopefully these few examples gives you confidence and our ability to drive continued margin expansion, we built and accountable productivity capability and culture, we have the right team and tools and importantly, we have a robust pipeline of projects to drive further improvement over the next several years.
In summary, Q2 was another strong quarter for Hain and I'm very proud of the strong results. The team has delivered and the quarter and the profitable growth momentum on the business. Our transformation plan is clearly working and we continue to believe there is significant upside both in North America, and our international business with that let me now turn.
It over to Javier who will give you more color on our recent results.
Thank you Mark and good morning, everyone. There are five key aspects of the second quarter financial information that I want to highlight and today's call. The demonstrate continued strong performance from the execution of our transformation plan.
First we delivered strong top line growth versus prior year for the fourth consecutive quarter with adjusted revenue growth that was balanced across North America and international second our growth was supported by significant continued margin expansion.
Third we are generating much stronger cash flows force our balance sheet remains strong with excellent capital allocation flexibility and <unk>.
Finally, our basis is well positioned for continued success, so let's drill into each of these aspects starting with the top line keep in mind I will focus my discussion on our financial results from continuing operations.
Second quarter consolidated net sales increased 4% year over year to $528 million.
Modest the above internal expectations of foreign exchange benefited second quarter net sales by around 200 basis points, while divestitures and brand discontinuation of reduced net sales by 360 basis points.
After adjusting to exclude these factors net sales increased close to 6% versus the prior year period consistent with the previously provided guidance of mid single digit topline growth on on adjusted basis.
As mentioned during our last call we were anticipating some of the third quarter volume to move into the second quarter, particularly at the retailers built inventory largely and anticipation of potential disruptions from Brexit and the pending U K locked down.
Sales shift from Q3 to Q2 did materialize during the quarter.
On the profitability for the second quarter adjusted gross profit increased 20% versus the prior year period to $134 million.
Currency impact on gross profit was a tailwind of about $2 million.
Gross margin improved roughly 330 basis points, driven by a reduction and low trade on ROI trade investments are significant supply chain productivity initiatives and improved product mix from our SKU rationalization efforts and better overhead absorption and our plants.
Distribution and warehousing costs as a percentage of sales and improved versus the prior year period due to the consolidation of shipping locations and improved utilization of trucks contributing to improved gross margin despite higher freight costs in the U S.
SG&A came in at 16, 2% of net sales similar to the prior year period the <unk>.
Positive impacts to SG&A were driven by lower broker commissions reduced head count as we consolidated our North American operations into one business unit and reduce travel and.
And this improvement allowed us to increase marketing spending to support our North America get bigger brands and our UK Hain Daniels business, our marketing support for the North America get bigger brands was close to 7% of net sales and Q2.
Second quarter, adjusted EBITDA increased to $62 million compared to $45 million in the prior year period.
Presenting a 38% increase versus Q2 last year Curran.
Currency impact on adjusted EBITDA was a tailwind of $1 6 million.
Adjusted EBITDA margin of close to 12% represented a significant improvement of about 290 basis points from year over year, driven by gross margin improvements, while increasing marketing spending.
Our adjusted EPS of <unk> 34 was double the prior year period of 17.
And benefited from an adjusted effective tax rate of 24% compared to 27, 8% in the prior year period.
The lower tax rate was mainly driven by the company's ability to claim deductions and foreign tax credits on foreign taxable income.
Now to provide some detail on the individual reporting segments were both regions contributed with strong adjusted top line growth profit growth and profit margin improvement.
Starting with our North American business on the top line second quarter net sales increased five 5% versus the prior year period after adjusting for currency movements divestitures and brand discontinuation.
Without these adjustments net sales increased close to 1% year over year to 283.
The $283 million.
Foreign exchange the impact on the quarter was the small tailwind of 20 basis points.
From the profitability perspective, Q2 results were strong as we delivered year over year, adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar of expansion.
Specifically on North America business expanded adjusted gross margin by close to 380 basis points, resulting in adjusted gross profit of $81 million.
We're on increase of 16% versus Q2 last year.
This improvement was driven by a reduction from the low ROI trade investments and lower supply chain costs. As the result of our SKU rationalization effort productivity initiatives and efficiencies and our supply chain system.
Adjusted EBITDA increased to $40 million and 31% increase currency impact on adjusted EBITDA was minimal.
Adjusted EBITDA margin of 14% represented an improvement of about 330 basis points versus the prior year period, driven by gross margin improvements.
Looking into the components of the North American portfolio the gift.
Bigger brands, which represent the two thirds of of the North America net sales and labor sustained strong net sales growth of about 11% versus the prior year period.
The fourth straight quarter of double digit top line growth.
Notable brand growth callouts include celestial tea, sensible portions and garden of eating snacks, Greek gods, and the number of our personal care brands.
Adjusted EBITDA margins for the get bigger brands improved close to 100 basis points compared to Q2 last year, yielding a margin of <unk> of 15%.
This improvement and profitability, notwithstanding stronger investment and marketing activity to support innovation launches and core products as well as increased investment and E commerce.
And they get better brands, which I would remind you are being managed primarily for profit showed a net sales decrease versus the prior year period of about 3% after adjusting for currency movement brand discontinuation and divestitures.
Better brands and consistent with our portfolio will continue to show very robust adjusted profit and margin improvement.
Specifically adjusted EBITDA grew by more than 70% with an improvement of EBITDA margin of more than 600 basis points and margin slightly north of 12%.
This level of profitability is at the high end of our long term long term target of 10% of 12% for the get better brands.
Now, let me shift towards the international business, where performance for the quarter was a key contributor to the results of the total company.
Net sales versus prior year increased close to 9% on a reported basis and north of 6% after adjusting for currency movement and divestitures.
And exchange increased sales by 430 basis points, while divestitures reduced sales by 190 basis points.
Net sales growth was driven by the strength over non dairy brands, such as Georgia, and the tuning and Europe, most of our Hain Daniels business, including our leading market share and Linda Mccartney and harvest brands and the U K as well as our <unk> UK business.
Our fruit business was a drag on growth due to its foot service exposure.
Net sales versus year ago for our international segment, excluding the fruit business increased by close to 14% and constant currency. After adjusting for divestitures to note. The international Q2 growth was helped by the volume shift from Q3 to Q2, driven by customers and the inventory building.
Largely to avoid disruptions from Brexit.
As previously communicated we have successfully divested our fruit business as of mid January as the result will be adjusted out of our results for the balance of the fiscal year.
Given the adoption of the North American playbook, and our international business adjusted gross margin and dollars and adjusted EBITDA margin and dollars were all up considerably in the quarter versus the prior year period.
Adjusted gross margin improved by more than 300 basis points versus the prior year period, driven by a reduction and the ROI trade investments and lower supply chain costs as the result of productivity initiatives and efficiencies and our supply chain system and were implemented in our Hain Daniels and continental European businesses adjusted EBITDA grew by.
28% versus the prior year period to $38 million supported by and adjusted EBITDA margin improvement of close to 200 basis points, resulting in an EBITDA margin slightly higher than 13% driven by higher adjusted gross margin excluding.
Excluding fruit the remaining international business delivered an EBITDA margin of close to 16% up 150 basis points versus year ago. This level of profitability for the international business ex fruit is consistent with the long term target of 15% to 17% announced two years ago.
And Q2 due to the classification of our fruit business as an asset held for sale and the agreed to final purchase price. The company recorded on additional non cash impairment charge of about $24 million.
Our UK fruit business of trailing 12 months net sales of about $138 million with about negative $4 million and adjusted EBITDA.
Shifting to cash flow and balance sheet Q2, operating cash flow improved by 43 million to $64 million and operating free cash flow defined as operating cash flow minus capex was $46 million close to a 42 million of our improvement from the prior year period.
These improvements resulted primarily from stronger earnings and better working capital management.
At the end of Q2, our inventory was $312 million $19 million higher than the levels at the end of September 2020.
Was that intentional inventory deal to ensure high levels of customer service, while avoiding supply disruptions due to COVID-19 lockdowns and Brexit challenges that said, we expect inventory levels to decrease throughout the second half of fiscal 2021.
Our Q2 inventory and other working capital account usage resulted in the 55 day cash conversion cycle that was slightly higher than the prior quarter by one day of below our target of 60 day due to improvements in account and accounts payable days.
Cash on hand at the end of the quarter was $61 million, including the cash and the food business, while net debt stood at $234 million and gross debt leverage was only one five times.
Our balance sheet is the strongest he hasn't been in years and as the result, we have significant capital allocation flexibility given our healthy balance sheet as well as our expectations to continue to generate strong free cash flow, we remain well positioned to both the reinvesting the business and return value to shareholders.
And with our capital allocation principles and pursuant to the repurchase program authorized by the board and 2017 during the quarter, we bought back $29 $7 million of our shares at an average price of $32 15.
Leaving us with about $118 million of additional repurchases remaining under our 2017 program.
Looking ahead, given our strong Q2 performance and confidence and managing the controllable aspects of the business. We are reaffirming our fiscal 2021 out and looked at calls for gross margin and adjusted EBITDA margin expansion as well as strong double digit adjusted EBITDA and operating free cash flow growth as the.
And we moved into the third quarter, we expect to continue to deliver strong gross margin and EBITDA margin improvement as well as adjusted EBITDA growth and near 10%.
As Mark mentioned, the business is performing exceptionally well and has tangible topline momentum.
The reported top line results for Q3 will be impacted by the following the divestiture of the company carried out and putting fruit and Brexit volume pull forward of that was mentioned earlier and discussed on the last earnings call and the lapping of the personal care club program that we expect it to occur later this calendar year.
Excluding these factors, we expect top line strength that should be evident and the syndicated data.
As part of the second half outlook, we have assumed the following foreign exchange translation will continue to be of tailwind versus prior year cost of goods inflation of around 2%, which is being more than offset by our productivity initiatives capital expenditures between 4% and 5% of net sales and increase over prior year to drive multiple productivity projects and.
And to carry on projects that were delayed from last year due to COVID-19.
And adjusted effective tax rate between 24% and 25%.
In summary, the momentum in Australia and isn't the prior three quarters has continued into fiscal Q2, we exceeded expectations. Both on the top and bottom line and we continue to have the lease but we are well positioned to deliver continued strong earnings growth and margin expansion for the balance of the fiscal year.
And we'll now turn the call back to Mark.
As you can see we had another very strong quarter, while Javier just the outlines some timing headwinds that will impact the top line and Q3, we expect continued improvement and our business fundamentals and anticipate continued robust margin and profit expansion.
And on behalf of the board of Directors and management team I want to thank the global team and Hain celestial our number one priority is keeping employees safe and I'm proud of the way of the team has done so while continuing to execute and this dynamic operating environment, especially given the robust surge and demand that we've seen with that let me turn the call over to the operator for quest.
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Okay.
Our first questions come from the line of Ken Goldman with Jpmorgan. Please proceed with your question.
Hey, good morning, everybody.
I wanted to ask about your gross margin guidance for the third quarter.
The street's, you're obviously guiding to quote strong I think of the word you used and improvement year on year. The streets looking for about 150 basis points above a year ago period. This would be the smallest increase and a while but it's also of the hardest comparison. So I just wanted to get a little deeper if I can ask is that 150.
The basis point improvement is the kind of in line with what you are considering just on a rough basis for the third quarter.
Even if we didn't get any help there and of quantitative level of would be appreciated.
Okay and Mark if you want to go ahead.
I think the the <unk>.
Expectation for the quarter will be higher.
And on the gross margin basis.
Perfect.
And then my follow up on a related note.
Youre guiding I think you've previously guided the 2% Cogs inflation for the year I think today, you said, 2% Cogs inflation for the back half of this year.
And a bunch of companies talk up great.
Obviously some.
The corn and soybeans and other raw materials are up I know you have a quite a different.
<unk> portfolio of Cogs that you buy than a traditional food company, but.
Just wanted to ask is that 2% number relatively low lower than others, because you think that.
You've locked in a lot of of.
Of your key items or really on your commodities, even on a spot basis, just not up as much as the group in general just trying to get a sense of maybe the timing. If you do have a spike coming in and fiscal 'twenty, two or something like that.
I'll take that Mike and then you can add.
Yes so.
We have we have five months left to the year and so we have some good visibility as to what we think are the basket of different raw materials and finished goods just going to be for the rest of the year. So we.
We feel pretty comfortable about that 2% number.
Youre absolutely right on the freight cost increases we have seen.
Double digit.
Duration throughout the year and we expect that to continue through the second half of our fiscal year.
It's embedded within our assumptions of that overall, 2%.
And then on your second point, yes, Youre, absolutely right. Our basket of ingredients is slightly different than the average CPG. So we're not as impacted by.
Some of the the.
The inflationary backdrop that you.
And you can say is impacting on some of our competitors.
Great. Thank you Javier.
Thank you. Our next question is coming from the line of the Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone.
Good morning, good morning Alexia.
And so my question is really around.
The numbers coming through faster than income.
And that did relative to your guidance that you provided last quarter.
For example on an EBITDA a line on focusing on.
You came in at 38% growth year on year versus the 25% guidance last quarter.
What's the pie and a positive price.
And then as I think about the tender and Youre guiding chief of the third quarter, one of the puts and takes that what could go better or worse than expected and follow up.
Yeah. So on on Q2 I think.
And our execution was very strong both in terms of.
Service and promotion activity and we I think we're anticipating a little bit more.
<unk> competition than we saw which allowed us to get a disproportionate share of the merchandising events, which.
We wanted to do to try and bring more people into the franchise. So I think that was the positive and we continue to execute exceptionally well on our productivity agenda. So.
The projects that we have are coming to fruition theyre generating the savings that we anticipate and then some.
And in fact and Q2.
We had a headwind on freight that was more than we anticipated and so the fact that we were able to deliver a 38% EBITDA growth and cover that extra cost suggest again gives you confidence that our execution has been very strong.
As you move to Q3 I think.
Obviously, we have the COVID-19 overlap.
The surge in March, which is which is a headwind and we have.
Some of the timing that we took the Javier talked about in terms of some of the volume.
And the international moving from Q3 to Q2.
And as they built for Brexit and they built for the pending shutdown that they are now living under as well as the deferral of personal care program and the club channel because of Covid has been the.
It has been delayed as they're they're just getting back to merchandising and and they are behind schedule and so it'll happen later in the year. So some of those things obviously impact EBITDA because there is dollars associated with that volume that is some of which has shifted forward and some of which has shifted later on.
But all of that said, what I, what I would point to despite those timing adjustments. Despite the overlap of the surge.
And there is terrific momentum and the business that you see and the syndicated data we are picking up the GDP is at a very high rate.
And we're gaining market share, we're gaining new households, and and we continue to have a very robust productivity agenda. So we're confident that you will continue to see that 100 basis points of margin improvement that we talked about on the last call and the double digit EBITDA growth that we talked about so we.
And we feel pretty good about our ability to overlap we feel really good about the momentum that we've got and.
Hopefully, we can come in and deliver on another quarter with some upside.
Great and then as a quick follow up.
And the number of brands that you have divested recently.
How many of the lastly, and I think she started with 50 from the.
The last I heard you went down to 37 and it sounds as though of the core is really the 12 of 13.
The biggest most most of it's.
The strong brands across the portfolio.
Where are you in that divestment process and I'll pass it on.
Yes, so we continue to reshape the portfolio with the same criteria that we had on Investor day, the things that we think kind of mainstream potential.
The leading market share that are responsive to.
Marketing and innovation.
Those are brands that we're going to invest and for growth and and we continue to do so we've done a good job of shrinking and the tail, but I would still tell you that.
Outside of those 13 brands in North America, there are still more and the tail that we.
For the right opportunity look at exiting and we have a few and international as well so I wouldn't say that we're finished but.
But importantly, I would also say, we're now pivoting towards the conversations around acquisitions and trying to bulk up and the categories that we've prioritized and in some cases.
Like in Europe, where we are of very strong non dairy business and a very strong meat free business.
The potential to acquire capacity. So that we can continue to grow at the rates that we have and so it's going to be more balance going forward youll see some more divestitures, but hopefully you'll also seen from acquisitions as we move through the next couple of years.
Great. Thank you very much on the market.
Thank you. Our next question will come from the line of Andrew Lazar with Barclays. Please proceed with your questions.
America and Javier.
Hey, Andrew.
And I guess first off Mark it's obviously been evident for some time the progress of Hain is making on.
On the margin side of the business and in relation to the company's long term goal and on the topline there of course, there have been many many moving pieces I guess.
If we were to take the portfolio.
As it stands today.
<unk> announced divestitures and such and knowing the next few quarters are impacted by things like Covid comps and whatnot.
Steady state and what sort of growth rate do you think the portfolio and just sort of delivering right now and I guess, where and relation is that too I think with the long term goal was five to seven on the get bigger and maybe it was minus five to minus 10 on the get better and I'm trying to get a sense of kind of.
Doing all of the puts and takes and the the year over year laps and kind of of the divestitures, just where do you think this portfolio is now and.
And do you think theres more room to go from where it is today.
Yes, so if you look at the last <unk>.
Three quarters and you take out all of the divestitures and all of that noise from the entire portfolio, including international has been growing mid single digits.
About 5% to get bigger brands have been growing around 10 international has been growing around 10 the.
The get better brands have been flat to slightly declining although to your point. The the long term guidance. We gave was minus five to minus 10.
On those get better brands. So the business has been performing in line with what the long term guidance is that and now the question of course is.
How much of that is COVID-19 and how much of that is driven by the things that we are creating and the reason I'm bullish going forward is because if you go back to Investor day. Our main thesis on the get bigger brands was always that they had mainstream potential and that we were going to be able to drive.
Distribution and trial in the mainstream channels, where we were very underdeveloped and we've got a significant presence and the natural channel with many number one and number two share brand, but we were underdeveloped in the mainstream channels and what youre starting to see right now and the data is double digit growth and.
Terms of distribution points on those get bigger brands three straight quarters of very significant household penetration growth.
Innovation that is working and it's very incremental to the category and we just need these categories to reset and.
So as we start going through the calendar year 2021, and customers start resetting their shelves again, starting with with snacks and baby food at the end of this quarter and into the beginning of April you're going to see us pick up significant space and that's the gift that keeps on giving if you're bringing and things that are turning and that have earned their space.
Going to be very incremental in terms of our growth rate. So I think as Covid Wayne's youll see the.
And the distribution gains and the instrumentality of that space.
Bringing a new crew and consumers that will offset any losses that we have.
And coming from the waning of the pandemic. So we feel pretty good about where we are and we feel really good about the momentum we have on the core business and.
It's just a matter of us getting through the pandemic and seeing where we are on the other side, but all of the all the signs are very positive right now in terms of momentum on the business.
And thank you for that and I think you mentioned that.
The marketing as a percent of sales for the get bigger brands is currently at 7%.
I guess, where was that I'm, almost afraid to ask and where it was that win on the.
And get bigger brands, when you sort of first defined the get bigger sort of segment and.
And 7% do you think probably around the right number or is the reason for that to go higher of sustainably.
Yes, so we were and the 2% to 3% range.
When we started this journey and we have been adding marketing for I think four of five straight quarters and we also redeployed some of the marketing from the get better brands to the get bigger brands.
But we are around 7% I think that's generally a good number with the exception of personal care that tends to have a little bit higher spending levels. So we will look to increase and personal care as we start to build that mainstream distribution that I just talked about we're still very dominant and the natural channel, but not not as.
Penetrated in the grocery channel and you don't see it and the syndicated data the strength and that business that you see and the other ones because it's largely a on.
Non measured channel and natural channel business, so as personal care starts to get that distribution and we're seeing it now all Bud and the last I think six weeks is up about 4% on distribution as an example, and we have a lot of innovation coming.
That will be the catalyst for us to increase the spending there because we will have enough.
Of the footprint nationally to be able to make more meaningful investments there, but the rest of the business I think we're about where we need to be.
Great. Thank you so much.
Yes.
Thank you. Our next question is coming from the line of David Palmer with Evercore ISI. Please proceed with your question.
And congrats so far and the year.
On the kind of follow ups to those questions I'm wondering if we could maybe go out further we can talk about your targets, sometimes particularly with this COVID-19 related comparisons it's easier to talk about the longer term than some of the near term.
Violence quarterly comparisons and you guys are you mentioned you're up towards the higher end of your target is already on get better EBITDA margins you get bigger.
Including some marketing reinvestment and Covid related expenses, you're in the mid teens and I would imagine that personal care business is relatively higher margin or at least could be and that's being held back by COVID-19 related forces. So.
And I'm wondering if already internally youre thinking.
And that the high end of the 13 to 16 EBITDA margin target for fiscal 'twenty three is very much in sight.
Could you comment on that and I have a quick follow up.
Yeah, I think youre spot on right now we are delivering.
At the mid end of the.
Of the three year guidance at the end of year or two and we expect the we are going to continue to see margin expansion into F. 'twenty, two and beyond I mentioned and my comments that we have about $150 million worth of productivity initiatives in North America and international that were working on that will more than offset.
Inflationary costs and wage increases and other other costs coming our way plus we will also have the unwinding of some of the costs related to COVID-19, the cost of keeping employees safe and quarantining them.
And the like and so we expect that the margins are going to continue to expand and I will again remind you that we are at the low end of the industry in terms of where our margins are even with the 500 basis points of improvements that we've made so there's more to go we're not running out of ideas.
And I think between the momentum that we're starting to see on the top line and the continued momentum and the middle of the P&L.
I would expect that this is going to be a meaningful growth company going forward.
And just speaking more directly to the things the gives and takes with regard to margins as you lap this COVID-19 period.
Post vaccine and.
Herd immunity as we get into that zone.
How do you think about the legacy of this year in terms of margin and what I'm thinking about is you might have had some.
Some tailwind some of your at home products, but you have some headwinds with some of <unk>.
Perhaps the personal care you are COVID-19 related.
Of course.
So I'm wondering do you feel like you've maybe bar of Covid has given you a boost this year and your margin targets or is it of net.
Neutral.
Yeah.
It's a great question because of the direct cost of they're easy to calculate the indirect costs that are hard. So for example, we have amazing innovation and because customers have been reset we haven't got the full distribution. That's the headwind that it has clearly caused by COVID-19.
I can't put a put a dollar value too.
But look there are some tail winds here, we do have some absorption of that come with higher volume.
We do have.
And some competitive opportunities that of materialize, because we service the business better than others and we.
Ben promoting at times, when others that not that of allowed us to get more merchandising and more consumers into our franchise, but at the same time the the the headwinds there are meaningful and just even in this quarter. This personal care program that we mentioned that was very sizeable last year because of Covid. It is not going to happen till later in the year because.
The customers are behind on their merchandise and so I think and Q3, it's definitely a headwind between and the March surge and the timing on the personal care program and the pull forward of volume into Q2. Some of it is definitely a headwind.
In Q3, I think it was probably a little bit of a tailwind and the first half, but not nearly as much of it was when the pandemic started.
March through June of last year.
Thank you.
Thank you. Our next question is come from the line of Rob Dickerson with Jefferies. Please proceed with your questions.
Alright, great. Thanks, so much.
And the rest similar.
Mark.
As far the.
The touch on.
Pricing and obviously it sounds like your cross inflation is not as bad as others.
But then I also heard you before discuss just kind of plans to optimize pricing across sizes vary pack sizes and channel.
People still seem to be a little less price sensitive.
And the pandemic and then I think today I heard you say, maybe there's a little less price competition and maybe.
<unk> just.
Just a few months ago. So maybe if you could just touch on kind of how you're feeling.
About kind of the.
The the price.
Price competition within Youre, giving categories and if there really is the need for you to try to push on increases and list pricing outside of just the optimization and the mix factor and I hope.
Follow up thanks.
Yeah. So on the on the list pricing I think with the freight cost surge that everybody, including us and some of the commodity inflation.
And we'll see whether other start taking list price increases or not but.
We've been spending a lot of our time and energy again, making these products ready for mainstream channels and what I mean by that is we've done a lot of downsizing a lot of trial sizes.
And so when you look at the syndicated data you see that our prices are actually flat or down where others have been going up.
That's all within 10 and.
And it's all in the spirit of getting us the distribution and the trial and the channels that we think are going to be a big part of our growth going forward. We do have dry powder there as I as I said when we built the plan we've put aside some money for pricing if needed.
We don't want to be late to the party and Miss out on all of the opportunity if all of the sudden everybody stops dropping starts dropping prices, but I think given the pressure of that everyone is seeing on the cost side.
The the promotional environment is going to be a lot more subdued than it might be when you come into the overlap of the pandemic. There is cost increases the people are occurring at a higher rate than us and it's going to be hard for them to absorb those costs and dropped their prices too. So I think if anything we'll see prices continue to go up and we were.
Opportunistically look for ways to.
To do that but the good news is we have enough productivity to offset the vast majority of the cost increases that we're seeing anyway, and that's why you see such robust margin expansion.
Alright that sounds great.
And I just I guess just quickly just in terms of <unk>.
Cash flow allocation of current leverage right now right and obviously benign.
This hold true there was some news flow around <unk>.
The divestment potential of round, Earth's best and bottom line and generating decent free cash flow and excess cash of the divestments of buying back a little bit of stock not a ton and.
And then I heard you today, so it may be starting to focus a little bit more on the acquisition maybe that's.
More so in Europe relative to the U S. So just kind of Simplistically, we think kind of the.
The go forward cash allocation.
Is it what youre, saying clearly is look the instead of potentially paying the dividend, let's say we are focused more so on looking at some added.
The capacity and capability and some of our core brands will be remaining post divestments and Europe, not necessarily like leaning more into yogurt and the U S. Net.
Yes.
Let me take a quick shot and then I'll, let Javier and talk about our capital allocation.
We continue to reshape the portfolio you mentioned, the Earth's best and what I would tell you.
We're not going to comment on specific rumors and I wouldnt be distracted by and if there's something that we are actively trying to sell we will tell you. We did with fruit we did with HP.
The fact that there are some rumors swirling around things on our portfolio, we get we get contacted all the time and there is interest and lots of things that we that we have.
We would be more interested in selling off the.
And the tail outside of those core and <unk> brands that I've mentioned.
And as we generate more proceeds we have some optionality and one and I'll, let Javier and talk about how we've been deploying our capital and how we think about it going forward.
So on the on the capital allocation of upfront one of.
Of the things that we look at is where can the company get its highest adjusted return risk adjusted return.
Across the number of options and those options are internal investments and external investments and generally the external investments obviously deal with M&A.
There is a consideration about share repurchases and dividends and share.
Repurchases and looked at sort of the same lens.
Seek to invest our capital to its highest and best use and so if.
And if we think are.
Share price is below what we consider to be an and.
<unk> share value.
And then try to move and purchase some shares so.
Right now that's the lens through which we look at our capital allocation.
And if if there were to be the opportunity where after we've looked at internal and M&A activities and on.
Our shares are what we consider to be adequately priced we would consider.
And one time dividend.
But I don't think we're at that stage.
And and I don't think thats for the foreseeable future certainly not in the in here.
Near term that we would consider a permanent dividend at this point, so those would be sort of the choices and how we look at those choices.
And just wanted to ask and I would add.
Rob to your comment on the international acquisitions were looking at acquisitions, and North America as well so.
It's around bulking up and the categories that we think have the most growth potential and where we have a significant presence that would be the leadership brands here in North America as well as the categories that I mentioned the internal international.
Alright, great. Thanks, so much I appreciate it.
Thank you. Our next question is coming from the line of Michael elaborate of Piper Sandler. Please proceed with your question.
Good morning, Thank you.
Good morning.
I wanted to swing the pendulum back a little bit the other way from from David's question.
The the rest of the year or even the third quarter and obviously you gave pretty specific color on on EBITDA and gross margin but.
Just curious thinking about the top line how much should we expect maybe that would be up or not is it all driven by margin I know you've got the tough comps and the pen.
All of the Brexit pull forward, but just maybe some color on what youre thinking as you plan internally around where the topline lands.
Yes, so the reported number will be negative because first and foremost we have almost 1000 basis points of.
Overlap on divestitures that have to get adjusted out businesses that we sold the we're no longer selling.
And then on top of that we've got the Brexit slash UK locked down and pull forward and the timing of this.
Club program, which has some size to it so.
Net adds another 567 hundred basis points of drag on the top line. So we're looking at before.
And before you just get the out of the business performing between those timing issues and the.
And the overlap of divested and closed businesses.
It's.
560 to 100 basis points, so that's going to be pretty material and again versus the other quarters that we've been reporting and remember we just sold the fruit business, which is of $140 million. That's that's a meaningful.
Adjustment that has to be made on top of the things that we sold over the previous nine months and then you add the two things that are timing related.
It's going to look materially different on the top line that said the underlying health of the business, which you can see on the syndicated data is strengthening and so I don't want people to be distracted by.
Timing issues because of the data is going to really tell you what the health of the business looks like and we continue to grow share and tea snacks yogurt.
Now stabilized.
Garden of Eden, and Terra, which had been struggling previously we've got significant GDP expansion. We've got significant household penetration growth. So I think if you. If you strip that all out you've got a very healthy business underneath them and some very robust growth that we've seen in Europe as well so but the reported number is going to be negative and thats.
Art of why we're making the comments here. So the people are aware and adjusting their models accordingly.
No that's helpful and I'm, sorry, I meant the classify organic growth, but so you called out some of the the underlying drivers.
Organic revenue growth than it sounded like maybe.
At least around flat or perhaps slightly up.
Well the timing issues it would be in that mid single digit range again right. So we've for the last three quarters, we've been in the 5% to 6%.
Organic growth rate, but now you've got the Brexit timing and the club program that are kind of dragging us down by.
And five to 700 points so it will be.
Slightly negative to flat on a <unk>.
<unk> for divestitures, but.
Again, the timing, we're going to be in the mid single digits again.
Okay, Great really helpful and just a quick follow up you touched on some of this but.
And where you call out the uncertainties that limit the guidance being too specific.
Certainly there is the UK lockdowns and.
And just mobility of uncertainty that can can spring up thats, not yet and hands, but.
Anything else, maybe driving that are you past any absenteeism issues or is that of an uncertainty or what are some of the key variables that would that would you.
And you would call out that keep you from being more specific on the outlook.
Well, the Brexit number one and even though the Brexit has been signed it was signed in secret and then hand it over to business. After it was done just say and how you guys figure out what this means and we are seeing some delays at the border and we're seeing increased paperwork theres going to be some cost, but we think theyre manageable, but it's we're still.
Sorting through all of that number one.
And number two obviously.
On Covid and what the impact of Covid could be positive or negative right now.
It's more of a positive in Europe, because they are under very strict lockdown and you've got countries like Germany, the say theyre not even going to get close to Vaccinating all of there.
The citizens until the fall so I expect that it will endure longer.
There we have freight costs that are escalating at a very rapid rate and there are <unk>.
Significant challenges getting anything from China right now there's been a number of articles written on that the sports are our backlogs.
Luckily for us and preparation for the Lockdown, we went long on things like packaging.
And raw materials that come out of China, So that we would be ready for the surge. So we're in pretty good shape, there, but if that endures for a much longer period of time as the freight costs and door for a longer period of time those could be those could be headwinds as well, but so a lot of that and things. We don't really have control over we can just plans for.
As best as possible of the things that we control we feel really good about the.
And the execution the customer relationships the service of the business the quality of innovation.
All of those things that we control we feel of what we of tailwind on it and we will continue to see momentum and thus far we've done a really good job of managing some of these macro.
Of blockers, if you will.
Create headwinds there and.
On the face of the momentum that we're generating naturally so we feel pretty good about it but just hopefully that gives you some color around there's still a lot of volatility here.
Don't know how fast.
The vaccines get deployed here, we don't know how fast the consumer behavior changes.
And so it's just it's once we get through it will be much clearer, but theres still going to be some uncertainty I think over the next six months in terms of how this all plays out.
Very helpful. Thank you very much.
Thank you. Our next question will come from the line of Bill Chappell with true Securities. Please proceed with your question.
Thanks, Good morning.
Good morning Bill.
Okay.
Just two questions kind of one on the same line of questions.
Trying to understand what's your expectations are for category growth not necessarily what youre seeing.
And the the turnaround and and when I say that.
I've got to think that the conditions what are the comps for the spring or more favorable than you would've thought last.
You know July August when you were giving guidance and the more people are working from home more.
Schools are still.
And virtual.
And on that and Conversely, I mean, I've got to think that even though we had some postponement.
And as we go and look the next fall which of your fiscal 'twenty two.
<unk> got and expect the categories to drop back down as we somewhat returned to normal maybe is that not the way you're looking at it I mean, we're just.
We just had some kind of postponement of.
And of the drop off or are you really thinking that the.
And then grow of the categories will grow through the this is a permanent level.
After we get through the just the initial stock up of growth.
Yeah. So the first thing I would tell you is we.
We look at sub categories within the categories. So for example, and snacks, we share of ourselves against natural snacks not all snacks.
And we do that because thats, where we have the highest interaction indices and consumers who have made a decision to buy something organic or not as likely to buy something that's not organic as an example, so if you go back pre pandemic the natural.
Categories the categories that we're in.
That cater towards health and wellness, we're growing mid single digit high single digit and some cases.
And given that this has been of health and wellness crisis, given that we think the return to normal behavior is going to be.
Long tail because to your point I'm not sure anybody's going back to the office five days of week I think you will still have some level of working from home and other behavior changes that are going to not have this day, a light switch where all of a sudden everybody's vaccinated and we just go back to the way it used to day, so I would expect.
And that these categories will continue to be growth categories, even overlapping.
And what we've seen and it'll be a little choppy as we get through the fourth quarter, we saw a 50% surge and tea and the fourth quarter last year that will be difficult to overlap, but in general I think when you get to the back of this you're talking about categories that are going to grow because thats, where the consumer is heading.
You're talking about E commerce that is going to be here to stay which.
Over indexes on healthy products.
We're talking about.
Consumer behavior changes.
The lifestyle changes as well as where they work and how they travel and all of that that are going to lead to more in home eating occasions, and pre pandemic and so we feel like we're still on the right part of the market and that part of the market is going to grow and F. 22, again, it'll be a little choppy as we get through the next six months, but we expect that we'll be able to lap this and still see growth in the.
And the categories that we compete in.
Okay No I appreciate that and then just on your market share gains.
You said the come despite the.
The ability to to launch new products and and innovation. So I'm just trying to understand.
And.
Have most of your gains come because <unk> been able to service clients and your competitors smaller competitors havent and well.
And that flipped back as well.
The they get kind of the feed on interim and they also haven't been able to launch their new products. So I mean do you expect the competitive landscape for everybody to the kind of change over these next few months.
Yes, I mean, there's a couple of things that I think have led to us gaining share and number one we service the business really well as you said and for a company that historically had not serviced well.
The fact that we went from below average to above average as the pandemic hit.
<unk> has been a feather in our cap with retailers in terms of them.
Looking at us as a real player and partner that they want to work with number one number two we did launch of bunch of innovation, we just didn't get it and ubiquitous distribution because of the.
<unk> and where we have launched if the data is so compelling that when you take it to other retailers and say let.
And let me show you how energy T is 80%, 90% incremental to the category and how it's turning.
And the top half of the category on velocity of you've got to have this thing on your shelf. So I think we've got proof points and our innovation that others don't have because they didn't launch anything at all in many cases.
And so I think thats the second tailwind for US and then the third is we've done a really good job with our marketing dollars on.
And bringing new people into the franchise and so our our franchises are much bigger than they were before and we're not just bringing them in for one occasion and then they leave we're finding that those that have come in are becoming repeat purchasers and are staying with us and we are three plus purchase group of consumers continues to grow ever.
The quarter, because we were turning these people into loyalists. So I think we're very well positioned to do better than the rest and continue to grow share.
Theres no question that the competition is going to be different as the pandemic ways.
What range some of it will be on pricing some of it will be on innovations, but again I think it feels like.
We've been leaning and we're one step ahead of people and we intend to stay one step ahead.
With our customers and be the partner of choice and so we're we're pretty bullish and optimistic on our ability to continue to grow share.
Great. Thanks, so much of the color.
Thank you.
Thank you we have reached the end of the question and answer session I would like to hand, the call back over to management for any closing comments.
I appreciate everybody's time and engagement today I know, we ran a little bit longer had some technical difficulties at the beginning and started a bit late but.
Hopefully you get a sense that the things that we're doing are working.
And the results and hopefully we get the confidence in the future and the trajectory of the business and on.
I'll leave it at that and thank you guys and we look forward to the one on one conversations throughout the day. Thanks. Thank you.
Thank you that does conclude today's call.
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