Q3 2021 Hain Celestial Group Inc Earnings Call
[music].
Greetings and welcome to the Hain celestial third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
From 10-Q in other parts of off from time to time with the Securities and Exchange Commission and it's gradually issue. This morning for a detailed discussion of the rest of that could cause actual results the differ materially from those expressed or implied in any for the the statements made today the.
The company has also prepared if your presentation five an additional supplemental financial information would you of person on him. So I feel the website under the Investor Relations heading. Please note management from Arts today will focus on non-GAAP or just the financial measures reconciliations of GAAP results. The non-GAAP financial measures are available in the earnings release and the.
Slide presentation of accompanying the call.
As a reminder, beginning in queue line of fiscal year of 2020, the company changed the segment reporting to focus on North America International incorporate what you'd previously been reported as the U S E K and rest of all of.
This call is being webcast an archive of that will also be available on the website I'd also like to note the weird conducting a call today from our respective remote location of such there may be three of two ways crosstalk or other minor technical issues. During the call. We thank you in advance of your patience and understanding and now I'd like to turn the call over to Mark sure.
Thank you indicated on good morning, I hope everyone is doing well.
On today's call I'll give you some color on our third quarter results and explain how we continue the position ourselves for sustainable profitable growth let.
Let me start with our queue three results, which marks of another great quarter for him.
As we got it on the last quarter, we expected first top line to be down around 10 per cent, which is where we came in.
That can we said we would deliver at least 100 basis point of margin improvement. We delivered of 317 basis point improvement in adjusted gross margin and the 400 basis point improvement in our adjusted EBITDA margin are ahead of our guidance.
The smartest the fifth street corner of adjusted gross margin and the EBITDA margin improvement of more than 200 basis points.
Third we told you we would deliver around 10 per cent adjusted EBITDA growth in fact delivered 22 per cent year over year growth, making.
Making this the seventh straight quarter of double digit adjusted EBITDA growth both of them.
North American International delivered terrific results with continued profit margin expansion further demonstrating that our strategy is working across the globe and importantly, we of considerable momentum going into the queue for and beyond.
With the get bigger brands up 54%.
<unk> 2019, which factors out the hair care program entirely the get bigger brand shipments were up 8% in Q3, even with our shipments lagging consumption this past quarter.
And international where our Q3 revenue was impacted by the Brexit volume pulled into Q2 consumption was up 12% in the quarter compared to 2019 far outpacing shipments.
Our seven biggest brands on our private label non dairy business, which represent more than 60% of our international sales collectively delivered 8% growth in the quarter.
The held or gained share in Linda Mccartney plant based meats Hartley.
<unk> jelly pop from spreads all three of our soup brands and joy of non dairy beverage. So in conclusion, there was great underlying revenue performance in the business this past quarter clouded by some nonrecurring events.
I remain pleased with our progress and continue to be optimistic about the future.
Switching to margins and EBITDA was an exceptional quarter, we were able to deliver industry, leading margin growth. Despite significant headwinds like additional Brexit costs transportation challenges no storms and additional COVID-19 related costs among other things.
You'll recall the two years ago on Investor Day, We told you we expected to improve our adjusted EBITDA margins from about 8% to <unk>.
Eight per cent. So in short we are gaining share in high growth categories.
Customers are just now resetting shelves and we have great innovation, that's earning new distribution and bringing new consumers to our brands pre pandemic launches are finally getting slotted by many of many more of our customers.
And on top of that we have great additional innovation like sensible portions veggie costs celestial seasonings, K cups, and cold brew tea more mainstream flavors on terror and product improvements on several snack brands also hitting these reset.
As a result of total distribution points grew eight per cent versus prior year. This past quarter with the biggest games coming on the brands that are innovate.
Importantly, we're also seeing our strongest household penetration and loyalty games and affluent households, which are less price sensitive and with younger consumers or more health and E. Commerce focus both of these factors set us up well for the future.
The third reason I'm optimistic about the future that we have a tremendous international portfolio and our performance is accelerating.
We have the number one of our number to share brands in 10 categories and are well positioned and some of the highest growth categories like client base need alternatives and nondairy beverages as.
As I stated earlier, despite the Brexit volume pull forward or sixth biggest brands of non dairy private label business Electively grew this quarter over 8% versus year ago, and more than 12% versus 2019.
These businesses also deliver more than 70% of the international EBITDA. Their collective profit this quarter were up double digits first and the last year and more than 25 per cent versus 2019. So clearly we have many strong businesses demonstrating excellent growth on both the top and bottom line.
And lastly, I remain excited about the future potential because we continue to have significant margin opportunities in North America after generating significant productivity and revenue management over the last eight quarters, where now pursuing sizeable initiatives like plant consolidations simplified pricing to fill up trucks price.
Third quarter consolidated net sales decreased 11% year over year to $493 million foreign.
Foreign exchange benefited third quarter net sales by 320 basis points, while divestitures and brand discontinuation of reduced net sales by 820 basis points the.
The impact of the Brexit pull forward on the timing of the hair care program represented a headwind of about 700 basis points in the quarter.
When adjusting for all of these factors net sales were slightly up for the quarter versus prior year.
When comparing our performance versus Q3 2019 after adjusting for currency movements divestitures and brand discontinuation of our sales increased by 2%.
That said when you further factor in the close to four percentage points of Brexit volume that was pulled into Q2 and the volume we proactively gave up when we started on 1000 plus SKU rationalization program in Q3 of 2019, the underlying growth is more like 10% versus fiscal year.
<unk> 2019.
Adjusted gross margin improved by 317 basis points, driven by our significant supply chain productivity initiatives improved product mix from our SKU rationalization efforts and the sale of the fruit business.
Distribution and warehousing costs as a percentage of sales increased versus the prior year period, largely due to higher freight costs in the U S and higher than planned inventory levels, partially offset by improved truck utilization as a result of our consolidation and efficiency initiatives S.
SG&A came in at 16, 3% of net sales lower than the prior year period by 70 basis points the <unk>.
Positive impacts to SG&A were driven by lower broker commissions lower labor related costs as we consolidated our north American operations into one business unit lower third party services and reduce travel.
Third quarter, adjusted EBITDA increased to $74 million compared to $61 million in the prior year period, representing a 22% increase versus Q3 last year.
Adjusted EBITDA margin of 15% represented a significant improvement of about 400 basis points year over year, driven by gross margin improvements and lower SG&A.
Our adjusted EPS of <unk> 44 cents increased by 57% compared to 28 in the prior year period.
We benefited from an adjusted effective tax rate of 23, 5% compared to 28, 8% in the prior year period the law.
All of our tax rate was mainly driven by the elimination of the guilty impacting the current quarter.
Now to provide some detail on the individual reporting segments were both regions contributed with significant adjusted EBITDA growth and profit margin improvement.
Starting with our North American business on the top line net sales decreased 10% year over year to $287 5 million.
Mainly due to the lapping of the prior year personal care club program and the COVID-19 pantry loading in March 2020.
After adjusting for currency movements divestitures on brand discontinuation net sales decreased 8% versus the prior year period.
Note that the lapping of the personal care program represented a headwind of about 550 basis points for the North America region.
From a profitability perspective, Q3 results were strong as we delivered year over year adjusted gross margin expansion and adjusted EBITDA margin and dollar expansion specifically on North America business expanded adjusted gross margin by 208 basis points of.
Adjusted gross profit of $82 million was the decrease of 3% versus Q3 last year. Despite.
Despite the decrease in gross profit driven by a decrease in net sales for the reasons mentioned earlier, we improved adjusted gross margin driven by our strong productivity program SKU rationalization efforts and efficiencies in our supply chain system.
Adjusted EBITDA increased to $49 million, a 13% increase adjusted EBITDA margin of 16, 9% represented an improvement of about 350 basis points versus the prior year period, driven by gross margin improvements and lower SG&A.
Looking to the components of the North American portfolio of they get bigger brands, which represented two thirds of the North American net sales showed a net sales decrease versus the prior year period of about 4%.
This decrease was largely driven by the lapping of the prior year personal care swap program that represented a growth headwind of about 850 basis points.
Gross profit increased slightly due to the impact of our productivity initiatives, partially offset by higher distribution and warehousing expenses.
Notable brand growth callouts include celestial tea sensible portions on several of our personal care brands.
Adjusted EBITDA margins for the get bigger brands improved close to 300 basis points compared to Q3 last year.
Yielding a margin of 17, 5%.
We achieved this improvement in profitability notwithstanding lower sales on a stronger investment in marketing activity to support innovation launches and core products.
They get better brands consistent with the portfolio role continued to show very robust adjusted profit and margin improvement specifically adjusted EBITDA grew by 9% Who's on improvement in EBITDA margin of more than 400 basis points, yielding an margin close to 16% this level of profitability.
On the exceeds our long term target of 10% to 12% for the get better brands of <unk>.
Previously announced on April 15, the company completed the sale of its North America non dairy beverage business. This business represented about $40 million of an annualized net sales. This transaction improves the growth profile of the company without impacting its profit margin.
Now, let me shift to our international business largely because of the volume shift from Q3 to Q2, driven by retailers to minimize Brexit disruptions on the lapping of the pantry loading in March 2020, net sales versus prior year decreased 12% on a reported basis foreign exchange increased sales by six six.
While divestitures reduced sales by close to 16% after adjusting for currency movement and divestitures net sales decreased 3%.
When further excluding the adverse effect of the Brexit disruption of approximately 8% net.
Net sales increased by about 5%.
Our Hain Daniels on European businesses, excluding divestitures delivered net sales growth driven by the strength of our non dairy beverage business and our strong brands like Linda Mccartney and hartebeest brands in the U K.
During the quarter. We also saw profit strength in the segment given the adoption of the North American productivity playbook in our international business.
Adjusted gross margin improved by about 460 basis points versus the prior year period, driven by a reduction of low ROI investments and lower supply chain costs as a result of productivity initiatives and efficiencies in our supply chain system as well as the divestiture of the low margin <unk> business.
Adjusted EBITDA grew by 19% versus the prior year period of $237 million.
Supported by an adjusted EBITDA margin improvement of more than 450 basis points, resulting in an EBITDA margin of nearly 18% driven by a higher adjusted gross margin and lower SG&A.
Level of profitability for the international business exceed the long term target of 15% to 17%, we announced two years ago.
Shifting to cash flow on balance sheet Q3, operating cash flow was $42 million.
The decrease of $5 million versus prior year, mainly due to inventory builds to avoid supply disruptions capital spending was $23 million $6 million higher than last year to support multiple productivity projects at the end of Q3, our inventory was $314 million $2 million higher.
On the levels at the end of December 2020 to ensure high levels of customer service, while avoiding supply disruptions due to COVID-19 Lockdowns that said, we expect inventory levels to decrease in Q4 fiscal 2021.
Our Q3 inventory and other working capital accounts usage resulted in a 59 day cash conversion cycle that was higher than the prior quarter by four days of below our target of 60 days the increase in our cash conversion cycle was driven by higher inventory days driven by the reasons stated earlier and lower net sales versus Q2.
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Cash on hand at the end of the quarter was $53 million, while net debt stood at $203 million and gross debt leverage was only one two times.
Our balance sheet remains incredibly strong and as the results we have significant capital allocation flexibility given our healthy balance sheet as one of 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 consistent with our capital allocation principles and pursuant to the.
The repurchase program authorized by the board in 2017 during the quarter, we bought back $8 $6 million of our shares at an average price of $41 86.
Leaving us with about $109 $5 million of additional repurchase authorization remaining under our 2017 program at the end of the third quarter.
As we move into the fourth quarter, we expect our top line to decline, 5% to 8% versus a year ago. After adjusting for currency movements divestitures and brand discontinuation of.
This guidance includes the 10% headwind from divestitures and brand shutdowns and an estimated 7% headwind from the year ago, COVID-19 search, partially offset by unexpected foreign exchange benefits.
Compared to 2019 revenues will be up mid single digits, representing a sequential improvement relative to our Q1 through Q3 growth versus 2019 of 2% to 3%.
We also forecast another quarter of at least 100 basis points of gross margin improvement on adjusted EBITDA growth near 10%.
As part of the fourth quarter outlook, we have assumed the following cost of goods inflation of around 2%, which is being more than offset by our productivity initiatives, resulting in continued margin expansion. We currently expect that the environment for fiscal year 'twenty, two will be more inflationary than fiscal year 'twenty, one, but we plan to discuss that in more detail of the net.
Call again, we remain confident in our ability to more than offset the.
On the inflation via pricing and productivity.
Capital expenditures.
Close to 5% of net sales an increase over prior year to drive multiple productivity projects and to carry on projects that were delayed from last year due to COVID-19.
And adjusted effective tax rate between 24% and 25 per cent.
In summary, our performance momentum has continued into fiscal Q3 as demonstrated by our increased profitability.
And we continue to believe that we are well positioned to deliver continued strong earnings growth and margin expansion for the balance of the fiscal year I will now turn the call back to Mark.
Thank you Javier as you can see it was another strong quarter and we remain excited and optimistic about the road ahead.
Half of our board of directors on the management team I'd like to thank our global team of Hain celestial together. This team has done a terrific job of.
Keeping one another safe, while transforming our business in the challenging environment with that let me now turn it over to the operator for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate that your line is on the question of tick the request of our Tokyo like sort of move your questions from the queue.
The participants using speaker equipment, they may be necessary to pick up your handset before pressing the star two.
One moment of players, while we pull for questions.
Thank you. Our first question comes from Michael Lavery with Piper Sandler. Please proceed with your question.
Thank you good morning.
Good morning on them.
I just wanted to touch on your thoughts for the fourth quarter and I guess, just can you give us any sense of.
How conservative do you may be thinking about some of your outlook. There specifically you gave of near 10% our guidance for adjusted EBITDA growth for for Q3, and obviously well exceeded that you of a little bit tougher comp, but a little bit better.
Line Guide can you just help us understand.
You know how much cushion on there is how youre thinking about the moving parts and just put it on all of them the right context for us.
Sure you know the first thing I would tell you is obviously the COVID-19 situation is very hard to forecast.
We know that with the it will be of headwind in Q4, but we don't know how much of a headwind of it'll be because we're not exactly sure yet.
What behaviors are going to be like after the pandemic.
And of Wayne's, so it's a little bit hard to give you a more precise number than what we have given you.
Basically if you're.
On a reported basis it'll be in the minus 11 day minus 14 range and then we have a significant adjustment for divestitures and some favorability in currency, which gets us into that 5% to 8% range.
We believe the we're confident that we will deliver it we see momentum in the business.
Very strong results in international some of the the timing risks associated with Brexit that were in Q3 won't be there in Q4, the hair care program in North America that was a headwind in Q3 won't be there in Q4, and we're seeing if you look at the the sequential consumption data on the four week data is stronger than the 12 week data.
And we're starting to see those distribution gains and things that we've talked about so we're bullish.
You know when you adjust for these factors, which unfortunately is part of being part of the transformation, where we've divested of $1 billion worth of businesses, there's going to be some things that have to get factored out, but when you look at the underlying health of the business, even with that adjusted guidance of minus 5% to 8% we're looking at.
You know mid single digit top line growth in Q4 versus fiscal 19, which is higher than we had on any of the first three quarters. This year. So there is momentum built into the forecast hopefully we can over deliver it.
But we want to be we want to give you guidance that we are confident we will deliver.
That's very helpful color. Thank you and just on the distribution gains that you touched on.
Can you give us some.
The status there you mentioned, the 8% GDP growth but.
You've talked previously about expecting shelf resets in March and April.
All of those come through as you expected or are there still some looming can you just give us a sense of of how the the more shelf should we be expecting some more shelf resets and distribution gains ahead or is that mostly done.
No there there's more to come so March and April of the resets were baby and snacks for most of the retailers. Although there are still some retailers that will reset those categories.
Through the end of this fiscal year and if you look at the numbers, you'll see that Earth's best as an example on baby has picked up significant distribution and we've taken of business that.
You know, we we basically SKU rat it a huge percentage of that business. We gave up 25 per cent of the sales on that business to move the margins from zero.
The 10% EBITDA margin and now we're at a point, where we're innovating and we're moving back towards growth on that business and we certainly see that in the distribution numbers and snacks. We've had some very significant gains on sensible portions not only getting fuller distribution on the things we lost last launched last year like.
The screaming Hot Veggie, straws, which did exceptionally well, but only got into about 15% of the C V. Because of COVID-19, we're getting full of distribution on that and we've also just launched veggie pumps, which extends.
Extended the brand into a new segment.
<unk> had one customer that shipped early in the first quarter and at least preliminarily. It looks like the pumps are turning at the same rate of the straws, which would be a huge incremental bolt on to that business. As we continue to drive distribution. So youre going to see very significant gains in baby very significant gains in snacks in particular sensible.
<unk>, but also on garden of Eden, the Terra picking up some distributions and as we get later into the year Youll.
Youll see the tea category reset the yogurt category reset and the personal care categories reset in the I'll call of June through August timeframe, a lot of it doesn't start till the beginning of next fiscal year, but again, we're getting some kind of off cycle wins on some of those businesses as well. So you will see continued momentum.
On the GDP is on the get bigger brands and Earth's best for sure.
That's great. Thanks, so much.
Thank you. Our next question comes from Ken Goldman with J P. Morgan. Please proceed with your question.
In Q3 on the first two months of the quarter were overlapping non COVID-19 fourthquarter was by far the biggest quarter in terms of volume impact from COVID-19 as people were locked down in their homes and so that is the headwind for the entire industry. That's gonna of depressed you know the actual reported numbers in the corner so the.
Seven points of Brexit and the hair care program in Q3 become something similar in terms of COVID-19 overlapping cute for but we're still gonna have underlying growth in the mid single digit rate versus 2019.
Okay, I'll follow up because I I'm I'm asking on the two year, maybe I'm not being clear I I'll I'll follow up on that off line, but uhm Oh type of catch up here Uhm I I guess my second question would be yeah. Just a quick follow up you said last quarter that you'd expect physical 22 is gross margin to be I think the quote was pretty.
Darn close to 30 per cent Uhm. The street is is well below this number you know I know you don't want to give too much detail at this time, but.
Hopefully it's fair game since you brought it up last quarter of you still comfortable with that statement on that outlook given some of the cause of inflation you've seen I I would guess the answer is yes, but I just wanted to poke around a little bit there.
Yeah. So we haven't given any guidance on on 22 at this point of what I would tell you as we continue to see robust margin expansion on opportunities and why we will have more inflation. We're confident that we will more than offset them. So if you look at the the kinds of margins that we are delivering now you know getting close to the third.
30 per cent is certainly doable and reasonable so I as in and as I said before I think we'll get all the way to 30, but we'll get clothes. So we're at the 26 plus range now on gross margin can we tack on another you know of hundred or more points of the margin next year, maybe a little more we're putting that plan together as we speak from a.
We'll give you more detail on that when we get to the summer.
So much because there's there's some litigation going on there, but what I will say is.
And the FDA has confirmed this heavy metals are in everything we do in the food supply and the air it's in the water in the soil.
And everything we are eating as a on this planet has some level of of metals in them.
The only regulations that we have from the government are arsenic levels in rice cereal.
And we are 100% compliant with the levels that they have specified in fact, we rejected 12% of the finished goods last year to make sure that everything we have is compliant. So we're confident that we're doing the right things, we would like to work with the FDA and some of the non G.
N G OS who want.
I want to help us reduce them further but there is no known way to eliminate metals altogether on our food supply. So we will work with the FDA, we will work collaboratively both to get the metals down on to get our regulations on the rest of of baby food, but it's really only rice cereal that has the regulation at this point and we're totally complying with that.
Okay excellent. Thanks. Thanks appreciate it.
Thank you. Our next question comes from Eric Larson with Seaport Global Securities. Please proceed with your question.
Yeah. Thank you.
Good morning, everyone. So I'm wondering on.
So of my question I have you know Mark could you could you help us drill down a little bit more on the overall distribution potential that you have for your four.
The I guess all your products.
What what sort of you know.
General ACB penetration do you have today.
So I'm sure I'm sure I know it varies by product and what could those distribution you know the ACD percentages go too.
And.
And over what sort of timeframe.
Sure So our aren't on our get bigger brands are our HCV ranges from about 30%.
To up to about 75% for things like sensible portions and celestial seasonings.
Distribution is by far the biggest opportunity we have if we can get these products ubiquitous in the mainstream channels.
On the potential upside as part.
<unk> of millions of dollars realistically, we're going to chip away at it every year, we've got to make these things must have items for the retailer. We've got a continued to drive more consumers to the brands.
And we've had a great run over the last 12 months during COVID-19 of increasing penetration of buying rate, we still see nice growth in penetration of buying right on the get bigger brands.
Some of the brands and I'll give you an example.
Celestial seasonings had more repeat buyers in the third quarter than our next of where competitors combined.
We are making good progress there and as our velocities are strong as our innovation is strong and bringing new people to the category. We're confident that we will continue to expand distribution, it's going to take a while but it's not like all of the sudden you turn on the light switch and the brands that are 30% distribution of our all of a sudden it 60, it's going to be a few points here.
A few points there every reset we have to be net winners and I think as you heard me say earlier in the get bigger categories. We're confident that we're going to be picking up distribution across most of the categories that we compete in and the get bigger segment.
Okay, great. Thanks, and then just a quick follow up question.
I think Javier said debt your cost inflation is running about 2% right now it'll be a little bit higher in F. 'twenty, two without quantifying that yet but.
Can you talk about what pricing you are taking or have taken or is that something that's further down the road give us the your ability to cover that with productivity.
So what I would tell you on pricing as we've been taking pricing all along and as I mentioned I think on previous calls that.
We haven't necessarily the taking of buyer list increases we've been taking it via price size architecture, we've been taking it by.
The revenue management selling more of the things that are higher margin in the west of the things that are lower margin. We certainly SKU rationalize a lot of low margin items out of our portfolio that has the the rest of the portfolio netting of incremental pricing.
You look at the trade effectiveness that we have so we have been getting pricing and actually if you look in the syndicated data you'll see that again in the most recent four weeks, we're getting more pricing than the 12 weeks, which is more than we've gotten in the 52 weeks. So that pricing is starting to materialize, but but as I just said not all of the pricing that we're taking is going to show up.
Fairly in the syndicated data if it's coming out of things like price size of architecture, which wouldn't be as evident so.
We're confident that we can offset the inflation that's coming next year because of where you are taking selective pricing, but also because we are of very robust productivity agenda that we've talked about on previous calls and that's not going to slow down.
As we exit this year and move into next year.
We're going to lap anytime in the next.
Six months.
What I would tell you is you know last year when the pandemic hit there was less promoting going on because many people in the industry, we're having trouble servicing the business and keeping the shelf stock so as as people add back.
<unk> spending you probably will see elevated trade spending as we go through the next six months of the year versus year ago in our case, our trade spending.
In the third quarter was up a little bit versus year ago, but it's still down considerably versus what it was in EF 19, when we started eliminating kind of uneconomic ROI of activity. So youll see youll see more promotional activity going forward.
But for us it will still be less than it was two years ago.
Perfect. Thank you I appreciate your comments.
Yes.
Thank you. Our next question comes from Scott, Michigan with <unk> Capital. Please proceed with your question.
Hey, guys. Thanks, Thanks for taking my questions.
I know you Mark talked about resets that are taking place and you feel pretty good about them and gaining some gaining some shelf. There I was just wondering what youre going to do to make sure that the.
The sell through is good.
At retail and kind of plans there I mean, obviously hain before you guys joined they would get on shelf and then a year later they were on.
Getting off as maybe the support wasn't as great as it should have been so so what are you guys doing on that on that score.
Yeah. So a few things first of all we for the last two years have been increasing our marketing spending on the get bigger brands part of that came from moving money from the get better brands to get bigger part of it came from just increasing the absolute dollars and we've also dramatically reduced the non working costs because when I got here every brand.
On AD agencies of the amount of money that we're spending on the agency fees is now being spent against the consumer so the the.
The actual spending on these brands is much higher than it was previously the other thing I would say is we're now doing real innovation. Instead of you know here's the 37 flavor of sleep. The time T. We're bringing new benefits to the category that are proving to be very incremental are that are getting very high repeat and our job is.
You just pointed out now is to get the trial, we got to get them on shelf, which is happening in these resets.
Got to get the trial, it's gonna be a combination of shopper marketing a.
Of that we do retailer specific to I'll get on display to partner in their ecommerce channel to get into their circulars.
Do geo targeting around their stores because again not all of this distribution will be ubiquitous. So we'll be very surgical in terms of how we do that and then the other party of digital social mobile.
Where we have been doing a lot and we will continue to do a lot to make.
Make sure of these products gain awareness among the target audience and then e-commerce.
Which I just alluded to is another great way to generate trial you get on the shopping list and E Commerce and you stay on there for a long time. So there's a lot of our marketing dollars are focused in the E Commerce channel.
Because that's where millennials are that's where high income consumers are that's where the health conscious consumers are.
And so we're putting a lot of our marketing dollars there to generate trial and awareness as well.
Terrific. Thanks for the color on my follow up question is regarding I guess something else that was kind of the hanes past being very opportunistic in.
Making acquisitions I know you've been kind of been divesting, but natural organic kind of the where you place of which kind of little bit food fashion and a.
Specifically thinking about the snacks business, but I guess the entire business.
Is that something that's on your Guy's radar or is that something that's that's just not.
No it's absolutely on our radar so.
While we still have a few more brands to shed we are very much interested in looking for acquisitions in our core categories of snacks would be one of them for sure. What we need to do is find sizable assets, though what I don't want to do is repeat the.
In the past, where we go on buy things that are $5 million of sales $15 million of sales with the expectation that we're going to nurture them to 100 million, we already have too many brands. So what we need to do is find assets that have some scale, we've dramatically cleaned up the balance sheet, which allows us to have the flexibility to make the sizable acquisition if the right one.
It comes along and it's just a matter of finding them, we're ready when we find them.
Terrific. Thanks for the color guys.
Yeah.
Yeah.
Thank you on our next question comes from David Palmer with Evercore ISI.
Please proceed with your question.
Thanks, Good morning.
On a scale.
Morning, guys a question on SKU rationalization versus the new products.
Debt at certain points I think you've talked about maybe fiscal 'twenty two being a year when you get into a little bit more of a run rate, where the new products coming in and he SKU rationalization sort of.
The net each other and youre not doing some of the heavy lifting type of skus, but rather just the encore going course of business type stuff. When do you think that transition happens.
So I think were there now and we were ready to be there last year, but again the category has been reset.
But now that we're getting this innovation in our internal requirement.
As for every item we launch we're taking at least one item out and so I don't expect that we will see.
The significant SKU rationalization with the possible exception of personal care, because theres just hundreds of skus across multiple segments. When you think about personal care, it's not really a category of the department, you got care, and Sun, and lotions, and deodorants and shampoos and.
And many many many segments of what we will do there is probably look at some of the smaller things that arent really contributing and just adding complexity and do some SKU rationalization there, but on the rest of the portfolio. We're at a place where we've really cleaned up the mess with.
Rationalize the thousand Skus in the last couple of years and that's.
That's why we're confident that we're going to see distribution gaming for the first time since I've been here.
Which will also eventually turn into top line growth as we lap all of these divestitures that we've been doing.
Thanks.
You know just a comment I think it'll be interesting to see you not have these COVID-19 related headwinds with regard to personal care and certain elements of that I know your innovation was angling towards like Sunscreen for example, which wouldn't be as much of a thing and then also in the snacks side.
Maybe if you have of comment there, but one of the I wanted to ask you one more long term one and that is when you've talked about some of these gross margin targets, maybe not targets that you have of comments about 30% type gross margins.
What is the sort of EBITDA margin that goes with a 30% gross margin and how should we think about the reinvestment that you'll be making alongside of gross margins like that thanks.
Yes. So if you go back to Investor day, we laid out very clear kind of top line and EBITDA targets were well within that range two years instead of three years and we're.
We're certainly on pace to get towards the top end of that range by this time next year, which is what.
The three year meeting had laid out.
You know my intent is that we're going to continue to invest in marketing, while we are increasing.
Increasing margins. So it isn't just about take all of the margin to the bottom line. It is about reinvesting for growth in these great brands and the the great innovation that we're generating so.
As we continue to improve gross margin you should expect some of its kind of go to the bottom line and some of it is going to go into supporting the business to propel future growth.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Bart <unk>.
The closing comments.
Yeah.
So look it was certainly a terrific quarter.
For us the top line came in where we said it would there's a lot of puts and takes as we laid out on this call, but the underlying health of the business is strong the get bigger brands are growing and getting stronger the international business. We told you when we sold the fruit business that you would start to see the strength of that business.
And we are very bullish on the future. So we look forward to another great quarter, and then laying out for you. This summer what the F. 'twenty two plan looks like and I know, we have a lot of one on once a day. So the answer any additional questions you have at that time. Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation of a wonderful day.
Yeah.
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Hum.