Q4 2021 Hain Celestial Group Inc Earnings Call
Celestial group. Thank you you may begin.
Thank you good morning, and thank you for joining us on the Haynesville <unk> fourth quarter and fiscal year 2021 earnings conference call on the call today are Mark Schiller, President and Chief Executive Officer, and Javier and drove the 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. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward looking statements.
Please refer to Hain celestial <unk> annual report on Form 10-K quarterly reports on Form 10-Q, and other reports filed from time to time, but this is crazy and exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
The company has also prepared.
Presentation slides and additional supplemental financial information, which are posted on Hain celestial website under the Investor Relations heading. Please note management's remarks today will focus on non-GAAP or adjusted financial measures reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call.
If he's listening webcast an archive of it will also be available on the website.
I'd also like to note that we're conducting our call today from our respective remote locations as.
Such there may be brief delays crosstalk or other minor technical issues. During this call. We thank you in advance for patients and understanding and now I'd like to turn the call over to Mark Schiller.
Thank you Anna and good morning, I hope everyone is doing well.
On todays call ill give some color on our fourth quarter results and provide details on the F. 'twenty two plan.
Starting with Q4 as you've heard from many other companies the past several months have been filled with challenges, including high inflation labor shortages and significant over.
It's called the Covid Lockdown period, a year ago.
I'm pleased to report that despite these headwinds we were able to successfully navigate the choppy waters and deliver both the revenue and adjusted EBITDA guidance that we outlined on our last call specifically.
Specifically <unk> topline was expected to be down 11% to 14% we came in at <unk> 11.
Last 9%.
Second we said we would deliver at least 100 basis points of margin improvement. We in fact delivered significant continued margin expansion with a 296 basis point improvement in adjusted EBITDA margin and continued expansion in adjusted gross margin.
This marks the sixth straight quarter of.
Now the EBITDA margin improvement of more than 200 basis points in.
And importantly for the year we.
We delivered our Investor day targeted EBITDA margin one year ahead of schedule.
Third we told you really deliver around 10% adjusted EBITDA dollar growth in Q4, we came in at nine 6% growth again in.
Adjusted guidance.
When compared to two years ago, which was pre pandemic. Our Q4 results were very solid total revenue grew almost 9% when adjusted for divestitures and discontinued brands and our 10 biggest businesses, which now represent almost 70% of our global sales and 80% of our profit.
Aligned with our new 12, 5% and.
In addition, adjusted gross margin and EBITDA margins were up over 300, 500 basis points, respectively, and adjusted EBITDA dollars were up almost 40% in summary, we've delivered another quarter of strong results with significant continued momentum compared to the pre ban.
Through Red area.
This performance reflects the overall strength of our portfolio that our strategies are working as intended and that we're executing well.
Now, let me talk a little bit about the reporting segments and international we delivered terrific results in Q4, adjusted net sales were basically flat versus year ago and up 13%.
<unk> versus two years ago, that's very strong performance when considering the COVID-19 overlap.
Excess labor challenges and higher than normal inflation.
We saw significant strength in many of our brands with strong share gains household penetration growth and TDP gains.
<unk> grew double digit versus two years ago and.
<unk> alternatives chilled soup Jam baby food and toddlers snacks, and our non dairy beverage business Marmalade and dessert businesses also grew nicely in the quarter.
Adjusted gross margin and EBITDA margins were up more than 500 basis points and adjusted EBITDA dollars were up almost 28% aided by our aggressive.
And meet our activity agenda, that's great results, which achieved our investor day targets a year ahead of schedule and also included a marketing investment of almost 100 basis points within the quarter.
Clearly, we're seeing strength in our international business and have navigated the macro challenges very well.
Shifting to North America, we had a more challenge.
Crescive border driven by the same issues facing the entire industry as we discussed on the last call inflation was significant and labor shortages throughout the supply chain affected sourcing internal manufacturing and distribution of goods to customers. As a result, these headwinds in the cobot overlap impacted margins and profitability within the quarter.
<unk> of these overall results were below the robust growth we've been consistently delivering EBITDA was still up 16% versus pre pandemic Q4, EF 19 with over 300 points of adjusted EBITDA margin expansion and for the entire year compared to a year ago. Our adjusted EBITDA in North America was up 15% on adjusted sales.
Just 1% with adjusted gross margin and EBITDA margins up 155, and 268 basis points respectively.
Shifting to our go forward outlook for North America, we remain very bullish on our future and our F. 'twenty two plan for many reasons first.
We've taken pricing.
A mind, where the installation or T pricing has already hit the market and we've seen minimal volume impact thus far we.
We've also taken increases in virtually every other category as well and I'm pleased to report that customers have accepted our increases and the pricing will be in effect starting next month.
Second we've made terrific progress.
<unk> manufacturing and distribution headwinds and expect most of these to be fully behind us over the next few months as evidence of our progress our services improved quarter to date and last week, we had one of the best shipment weeks, we've had over the past several years.
Third our get bigger brands continued to perform extremely well in Q.
On our surf with strong household penetration gains buying rate and velocity increases on all four get bigger categories versus pre pandemic.
Consumption in the recent quarter was up 14% versus 2019, that's a four point improvement from the two year stacked growth rate. We delivered in Q3. These brands also grew market share almost.
<unk> in the quarter and measured channels reinforcing their continued strength and momentum.
Fourth the expected distribution gains on our innovation have materialized driving accelerated consumption.
Bigger brands in Q4, total distribution points were up 7% versus year ago, and 10% versus two year ago.
Full games, where across many brands compared to year ago, with celestial seasonings tea distribution points up 12% in the quarter.
<unk> portions of 21% and all are up 16%.
Many other get bigger brands like Terra garden of Eden and some of the larger get better brands like Earth's best and Maranatha were also up.
Hey, Chris.
Fifth on the get better brands, where we proactively eliminated a significant number of slow moving skus pre pandemic.
<unk> were up 7% versus two years ago, setting us up for stronger topline trends as we lap the pandemic.
Also noteworthy Earth's best our largest get better brand grew sales.
In the course, Tdp's velocity household penetration and buying rate in the quarter versus year ago.
And lastly, our total U S consumption exceeded shipments by 4% in the quarter, suggesting customer inventories are lower than normal and we will need to be replenished in coming quarters. So.
So in conclusion.
Sale like the challenged macro environment, the North America business has significant underlying momentum and health as we exited the year.
In gears, let's now move into F. 'twenty, two and give a brief nod to our Investor day.
Well Javier will give you more details on the algorithm for fiscal 'twenty two in a few minutes, we are expecting another strong.
<unk> for the total adjusted net sales growing low single digits and adjusted EBITDA growing mid to high single digit with continued robust margin expansion even in this challenging environment.
Our F. 'twenty two plan is built on four key assumptions first we're forecasting inflation to stabilize and not increase nor decrease.
Long year terribly from here.
Does increase we will price accordingly, using the revenue management tools at our disposal. If it drops will evaluate whether to spend some of it back or take it to the bottom line.
Second, we expect our pricing and productivity to more than offset inflation, resulting in an algorithm that has both investment in marketing and robust margins.
<unk> <unk>.
As stated we've taken pricing in almost every category and have built relatively conservative elasticity assumptions into our plan.
In addition, we have a robust productivity program, which has delivered over 700 basis points of gross margin improvement since 2019.
We have many active projects to continue our momentum in.
Margin in North America and international.
Our third key planning assumption is that our innovation is successful and will continue to gain space on both a relative and absolute basis in our core growth categories and lastly, we've assumed minimal short term impacts from the Covid Delta variant and that society gradually gravitates back to the pre pandemic mix.
Both new in home and out of home eating occasions by the end of the calendar year.
With regard to phasing of the plan, we expect a softer first half and a much more robust second half first half sales are expected to be below year ago on an absolute and adjusted basis.
Got up mid to high single digits on an adjusted basis versus two year ago.
And profits in the first half will be flat versus year ago, but up considerably on a two year basis. There are three drivers of the H one performance expectations first we're overlapping the peak periods of Covid in the first half of the fiscal year remember that last year, we delivered 50% plus EBITDA growth in the first half so while topline and bottomline.
Some line growth will be muted the comparison versus pre pandemic, we will continue to be strong.
Second while high inflation is hitting US now the north American pricing, we've taken to offset it wont be fully in place until the end of Q1 and international pricing won't hit the market until early Q2.
Third we expect to deliver gradual and steady.
Steady improvement in labor and supply challenges previously discussed as.
As we get to the second half Youll see topline accelerate to mid to high single digit growth on an adjusted basis. Our plan assumes continued robust distribution gains and strengthening trial on our terrific innovation that continues to hit the market.
Several significant.
Incremental volume generating programs that are already confirmed with customers an easier overlaps for COVID-19 in the softer Q4 performance in North America this quarter.
So in conclusion in the face of significant macro challenges, we had a good year in a solid quarter, we exited Q4 with a lot of momentum and are well positioned.
To accelerate performance from here.
On September 28 at our Investor Day, we look forward to elaborating further on the F. 'twenty two plan and showing you a strategic plan an algorithm that delivers robust topline and bottom line growth. We believe we have terrific momentum the right brands and high growth categories, and an exceptional team to really unlock the potential.
Potential of this company.
With that said, let me turn it over to Javier who will provide more color about our Q4 performance and financial expectations going forward.
Thank you Mark and good morning, everyone. Let me start by highlighting four key aspects of our fourth quarter results that demonstrate continued.
Strong performance from the execution of our transformation plan.
First we again delivered solid operating results in line with guidance, including continued profit margin expansion in the face of inflation and other industry headwinds.
Our international business delivered excellent performance.
While our.
Our north American operations manage through a challenging macro environment.
Third our balance sheet remains strong with excellent capital allocation flexibility and finally, our business is well positioned to deliver a strong fiscal year 2022.
We'll start with a discussion of our topline results and then I will trailing to each of these aspects.
As we overlap the cobot volume surge from last year fourth quarter consolidated net sales decreased 12% year over year to $451 million.
Well within our guidance range of negative 11% to negative 14%.
Foreign exchange benefited fourth quarter net sales by 470.
Basis points, while divestitures and brand discontinuation is reduced net sales by 900 basis points.
When adjusting for these two factors net sales decreased by 8% year over year.
When comparing our performance versus pre Covid Q4, 2019 after adjusting for currency movements.
These divestitures and brand discontinuation.
Net sales increased by 5%. This was also consistent with our guidance on a sequential improvement relative to our Q3 net sales growth versus 2019 of about 2% when.
When further factoring into volume, we proactively exited as part of our SKU rationalization.
Nation program started in 2019, our Q4 underlying growth was around 9%.
Adjusted gross margin for the quarter improved by 49 basis points compared to the prior year period, driven by our supply chain productivity initiatives and the sale of the fruit business, partially offset by higher.
Higher labor inflation, and higher delivery and warehouse expenses in the U S.
While our international business delivered strong margin expansion, our U S business faced an industry wide labor shortages that resulted in higher manufacturing and warehouse labor costs from wage increases and overtime pay.
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Shipping capacity in our warehouses and limited freight carrier availability, resulting in increased costs and disruptive service.
Despite these challenges we were still able to deliver adjusted gross margin expansion in the quarter versus last year and more than 300 basis points versus Q4 2019.
<unk> SG&A came in at 14% of net sales lower than the prior year period by 190 basis points, we drove savings from productivity initiatives and other spending reductions across several cost categories, including broker commissions neighbor third party services and travel.
Fourth quarter, adjusted EBITDA increased 10% versus a year ago to $68 million.
Adjusted EBITDA margin of 15% represented a significant improvement of about 300 basis points year over year, driven by lower SG&A and gross margin improvement combined.
Combined with Q3, we deliver 15%.
<unk> EBITDA margin in the second half of the fiscal year.
This represents the high end of the guidance range, we gave at our 2019 Investor day, a year ahead of schedule.
Our adjusted fourth quarter EPS of <unk> 39 increased by 22% compared to 32 in the prior year period.
The adjusted effective tax rate for the quarter was 23, 9%.
Now to provide some detail on the individual reporting segments.
Starting with our international business, what do we delivered strong overall results.
Net sales for the fourth quarter versus the prior year period decreased 7% on a reported basis.
Foreign exchange increased sales by 9%, while divestitures reduced sales by close to 16%.
After adjusting for currency movement divestitures and discontinued brands net sales for the fourth quarter.
Most to flat versus the prior year period, and compared to the fourth quarter of 2019 sales.
13% behind the growth of our Linda Mccartney meat free brand and our non dairy beverage and <unk> businesses.
During the quarter profit growth accelerated driven by 540 basis points adjusted gross margin expansion gains were generated from the implementation of the North American productivity playbook.
We're out as well as the divestiture of the low margin <unk> business.
We grew adjusted EBITDA by 28% versus the prior year period, and adjusted EBITDA margin by more than 530 basis points to 19%.
This level of profitability for the international business during the last two quarters.
It's the long term target of 15% to 17%, we announced on Investor day, two years ago.
Now, let me shift to the North American business.
On the topline.
Net sales for the fourth quarter decreased 15% year over year to 253.
It's $3 million, mainly due to the lapping of elevated at home food consumption in the prior year period due to COVID-19.
After adjusting for currency movements divestitures and brand discontinuation net sales decreased 12% versus the prior year period.
Note the overlapping.
A strong hand sanitizer sales in the prior year period represented a headwind of more than 300 basis points.
When comparing our performance versus Q4 2019 after adjusting for currency movements divestitures and brand discontinuation, our north American sales decreased by less than 1%.
Excluding.
Excluding the volume reduction from our SKU rationalization efforts the underlying growth of the North American business versus Q4 2019 was around 6%.
From a profitability perspective, adjusted gross margin for our North American business decreased by 313 basis points, but we're still up.
Versus Q4 2019 before the pandemic as mentioned earlier, the decreasing margins was largely driven by labor shortages in the U S.
Spite this recent challenges North America had a strong full year performance, improving adjusted gross margins by 155 basis points versus fiscal year.
Year 2020, driven by our strong productivity program and solid revenue management.
Adjusted EBITDA in Q4 decreased 20% to $35 million.
Adjusted EBITDA margin of 13, 7% represented a decrease of 92 basis points versus the prior year period.
Notably adjusted EBITDA was still up 16% compared to pre pandemic fourth quarter of 2019 with over 300 basis points of adjusted EBITDA margin expansion.
Looking into the components of the North American portfolio, the get bigger brands, which represented 71.
Percent of North American net sales showed a 9% fourth quarter net sales decreased versus the prior year when comparing our performance versus Q4 2019 after adjusting for currency movements divestitures and brand discontinuation or get bigger brand sales increased by 6%.
If we further exclude.
Exclude the volume reduction from our SKU rationalization efforts the underlying get bigger brands growth versus Q4 2019 was around 9%.
Get better brand is consistent with our portfolio role continued to show robust adjusted profit and profit margin improvement.
Specifically adjusted EBITDA.
<unk> margin of close to 11% increased by about 270 basis points versus Q4 of the prior year enabled by our productivity initiatives.
This level of profitability was consistent with our long term target of 10% to 12% what do they get better brands.
Shifting to cash flow and balance sheet Q4.
For operating cash flow was $50 million and full year 2021, operating cash flow was $197 million, an annual increase of 25% versus the prior year period consistent with the full year 2021 annual adjusted EBITDA growth of 29% cap.
Capital spending for the fourth quarter.
Quarter was $18.5 million.
And $72 million for the full year, resulting in annual spending of about three 6% of net sales.
At the end of Q4, our inventory was $285 million.
Decrease of about $29 million from the end of Q3 2021 given improved.
Inventory management.
Cash on hand at the end of the quarter was $76 million.
While net debt stood at $155 million.
And gross debt leverage was only one one times.
Our balance sheet remains incredibly strong and as a 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 reinvest in the business and return value to shareholders.
The company's capital allocation philosophy is to deploy capital to its highest and best use.
In conjunction with our board routinely evaluate.
Eight all opportunities to create value with our cash and balance sheet capacity, all the investment opportunities, whether internal or external benchmark against each other on a risk adjusted basis as well as against the value of investing in our company through share repurchases or distributing capital through dividends.
System with our capital allocation principles and.
Pursuant to the repurchase program authorized by the board in 2017 during the quarter, we bought back $27.2 million of our shares at an average price of $40.41.
Leaving us with about $82 million of additional repurchase authorization remaining under our 2017 program at the end of the.
The fourth quarter.
During fiscal year 2021, we repurchased three 1 million shares or 3% of the outstanding common stock at an average price of $34.87 per share for a total of $107.4 million. Excluding commissions. In addition, our board of directors has approved.
An additional $300 million share repurchase authorization.
Share repurchases under the 2021 authorization will commence after the existing 2017 authorization is fully utilized.
Now, let's turn to our outlook for fiscal year 2022 compared to fiscal year.
2021, we expect low single digit adjusted net sales growth.
Selecting a 50 basis points benefit from currency and a 600 basis point headwind from divestitures and brand discontinuation.
Continued adjusted gross margin expansion and mid to high single digit adjusted EBITDA growth.
Relative.
Just to 2019, the most recent pre pandemic period, we expect high single digit full year adjusted net sales growth.
Adjusted EBITDA dollars and margin growth of at least 65% and 500 basis points respectively.
As part of the full year outlook. We have also assumed the following cost of goods inflation.
In the mid single digits, which is being more than offset by our pricing actions and productivity initiatives, resulting in continued margin expansion.
Capital expenditures of about three 5% of net sales and.
And adjusted effective tax rate between 24% and 25% and around mid single digit operating free cash flow growth.
Defined as operating cash flow minus capex with higher cash flow generation in the second half versus the first half.
Given the timing of the price increase is hitting the market and confirm incremental volume generating events in the second half of fiscal year 2022, we expect fiscal year 'twenty, two first half sales and.
And profit will be lower than in the second half.
Also because of the elevated demand during the first half of fiscal year 2021 from the COVID-19 pandemic compared to fiscal year 2021, adjusted net sales are expected to be down by low to mid single digits in the first half of fiscal year 2022 and up by mid.
So high single digits in the second half and adjusted EBITDA to be close to flat in the first half of fiscal year 2022, and up by high single digits to low double digits in the second half.
For the first quarter of fiscal year 2022, we expect net sales to be down low to mid single digits on an adjusted basis.
But down low double digits on a reported basis compared to the first quarter of fiscal year 2021.
Net sales to be up by mid to high single digits on an adjusted basis compared to the first quarter of fiscal year 2020 is the most recent pre pandemic period.
Adjusted gross margin expansion compared to the first quarter of fiscal year 2021.
One in the mid to high teens, adjusted EBITDA decrease compared to the first quarter last year, but still up more than 40% from fiscal 2020.
The year over year declines are driven by the overlap of 70% adjusted EBITDA growth from last year lower sales due to divestitures, the highly inflationary environment and the.
Timing of our pricing actions in summary.
We were able to deliver a strong fiscal 2021 and execute on the guidance. We outlined previously even in the face of significant challenges as we look ahead to fiscal 2022, we believe that we have strong momentum and are well positioned to deliver topline and EBITDA growth.
And robust margin expansion I will now turn the call back to Mark.
Thank you Javier as you can see it was another strong quarter and we are excited and optimistic about our F. 'twenty two plan and the road ahead.
Half of our board of directors and management team I'd like to thank the entire global team and Hain celestial the last few years have been very challenging.
Yet this team has delivered exceptional results and done a terrific job of keeping one another safe while transforming our business in a very challenging operating environment.
With that let me now turn it over to the operator for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one.
100 telephone keypad.
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You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
To allow for as many questions as possible. This morning, we ask that you each keep to.
One follow one question and one follow up.
Our first question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
Thanks, Good morning.
Question about cost inflation and the benefit of year over year productivity in the first half and second half of fiscal 'twenty two.
How do you see that comparing to what you experienced in fiscal <unk>.
Fourth quarter.
Productivity side and the cost inflation.
Follow up.
Yeah. So on the good morning.
On the productivity side as we've talked about in previous calls we have a pretty steady stream of productivity that's.
Termination of automation in filling with trucks and redesigning products that are over engineered and consolidating plants. So that that's a pretty steady stream that's going to continue at a similar pace to what we have seen historically, so I don't think you should expect much change.
Regard to inflation I.
I don't expect the first quarter inflation or second quarter inflation is going to be materially different than what we saw in the in the fourth quarter. Other than we had a bunch of our commodity contracts roll off at the end of the fiscal year and have new contracts that go into effect in July and those are.
There with as you can imagine because we locked them in well in advance and as the year went on last year's cost went up so we will see higher inflation.
In fiscal 'twenty, two than we saw in the fourth quarter and Thats.
<unk> been in our previous guidance and we've told you that it will be around mid single digit, but importantly between the pricing that we've taken.
Scenario activity that we're generating we still expect that we will have robust margin expansion.
When it comes to how we're thinking about and you gave two halves to your guidance for fiscal 'twenty two pricing net of commodities is obviously, a big dynamic thing.
And you obviously have.
The acute labor shortages impacts on some of your costs, which I would imagine would be difficult to forecast and I guess at this point you talked about the retailers, taking pricing, but theres going to be the consumer reaction to that pricing too could you just give us a sense of how much pricing, you're taking when that'll be realized and how youre thinking about the labor shortages.
Have some impact in particular and I'll pass it on.
Yes, so on the we haven't given a specific number on the pricing, but we've taken more pricing at a gross level then our inflation, meaning that we're expecting that the net pricing given the elasticity as consumer reaction competitive environment, but not all of that will.
We'll stick, but theres robust pricing in our plan and then you've got productivity on top of that which should more than cover it.
With regard to the labor shortages.
We got hit so quickly by surprise, but I think the whole industry did in fourth quarter that our ability to react.
It took a little bit of time.
For us to get control of it so we had some.
Labor shortages in our distribution centers that inhibited our ability to get all of the orders out which is why our consumption in the fourth quarter was actually four points higher than our actual shipments we've rectified that situation, we've got plenty of labor in our distribution centers and they're operating well.
Within our manufacturing.
<unk> facilities remember that part of our robust productivity agenda is that we have been consolidating manufacturing facilities doing that in the middle of the labor crisis has elongated.
Some of that consolidation and some of that productivity benefit that comes from that consolidation, but again, we've made really good progress.
In that regard and we.
Got backup sources of supply in place to make sure that the product continues to flow and then further upstream sourcing becomes the other place where there's challenges in labor, whether it's called manufacturers or ingredient suppliers upstream are having labor issues as well and obviously we're out there finding backup sources of supply.
<unk> for those as well so you'll see in first quarter that we've done a much better job of managing the labor shortage. It's not we're not totally out of the woods. We've got we still have customers wherever your challenges getting drivers to pick up the orders and so we're flipping them to shipping so there's it's a pretty dynamic situation.
Situation, but it is much better now sitting here.
At end of August than it was.
In the middle of last quarter.
Thank you.
Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Hey, good morning, its Matt Fishbein on for Rob Thanks for the questions.
First on the overall health of the supply chain just to follow up I guess.
<unk>.
What categories are you still experiencing capacity constraints and if any it sounds like your supplier fill rates are.
<unk> to improve from here.
And I know you said that.
Just labor situation has pretty much stabilized from an internal distribution point of view, but curious to know how that looks for door distributors and if that is ruining.
Fill rates to retailers right now.
Yes, I don't want to go into specifics.
Big brands and categories, where we're struggling but what I will say is.
I'd say right now from a distribution standpoint, our biggest challenge is on the pickup side getting trucks that are scheduled and appointed to pick up orders to show up on time, which would suggest again that our partners are having similar challenges.
On the transportation side transportation has been very inflationary.
And it's been hard to get trucks. So we have products staged at the dock door a truck doesn't show up then we've got to buy a truck on the spot market to flip and ship that product to them, which adds cost. So that's where a lot of the focus and the energy.
Energy has been we're getting further ahead to make sure that the trucks are schedule that theyre going to show up on time, if they are not going to show up on time that we've got a backup plan in place to be able to find a more economic solution.
To the shortages that everybody in the industry is facing so it's it's definitely better than Q.
One than it was in Q4, but it's not completely over yet we're going to continue to see some level of labor shortages, but my hope is is that the stimulus checks go away and some of the things that may be contributing to the labor challenges that the environment will get better.
Okay, that's fair and.
In terms of.
That's the the fullness of the trucks heading out of your distribution centers I know an area of opportunity for you prior to the pandemic was sending those trucks out maybe less frequency, but fuller that way.
That.
There was some margin improvement there.
How do you feel about that opportunity going forward obviously.
It would need to.
We pushed out a little bit too.
Account for the current.
Supply chain situation, but beyond let's say labor kind of becomes a stabilized issued a pandemic.
Consumption rates are normalizing is there still an opportunity to work with retailers to fill those trucks up more or is that situation kind of been changed by the pandemic and if I can squeeze one related question in there too just for clarification are you expecting Q1 shipments to outpace consumption.
Well given the low inventories at retail thanks.
Yes, so on the filling up trucks they actually.
We're now at a place where more than 50% of our shipments are full truckloads remember when we started this journey in 19, we were averaging two palettes per trucks. So the fact that half the trucks are now full is.
Good thing and quite frankly, the labor shortages, helping us because we can go to retailers and say, let's consolidate your orders. So that we don't have to schedule as many trucks, if theyre, having trouble getting trucks and the market is tight.
Fuller the trucks are the less trucks that have to be on the road. So it actually is it's an enabler and our bracket pricing that's in place now.
Sumption I'll give everybody an incentive to sell those trucks up so.
I think we will see continued progress there and frankly, the labor shortage is a catalyst.
Great more urgency around around that happening.
Second part of your question again remind me.
It was just Q1 shipments are they expect.
Expected to outpace recession.
Yes, so we definitely have pent up demand what's interesting, though what's an interesting dynamic right now is as many.
Our manufacturers are taking pricing retailers are buying an extra inventory in advance of the pricing so they get that lower price before the prices go up so.
Retailers.
Warehouses are pretty full and so we actually are at a low point in terms of.
Inventory and customer warehouses, and so we do expect that that will bounce back whether it bounces all the way back in the first quarter or whether that happens in the second quarter after retailers worked down.
Inventory in their warehouses. It will happen is I can't tell you exactly when but we're seeing at some.
Some customers were starting to see those orders exceed shipments at others it hasn't happened yet.
Yeah.
Thank you. Our next question comes from the line.
<unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, guys.
I'm wondering if you can help.
Clarify why EBITDA will be down so much year over year in the first quarter.
Appreciate it.
You mentioned, namely divestiture is the timing of pricing.
But I don't think divestitures will be much more punitive to sales in the first quarter than they were in the second half of 'twenty, one unless I'm missing something.
You said despite inflation on the pricing lag your gross margins will still be up.
So I'm just trying to better build the EBITDA branch if possible.
Yes, so remember that we're lapping 70% EBITDA growth last year. That's the primary reason that it will be challenged revenue will be lower and while gross margin will be up it's lower revenue, which means gross profit dollars will be lower and that's how it translates into lower EBITDA.
The underlying health of the business is terrific I mean, we're seeing acceleration in consumption. We are seeing our innovation performing well, we're seeing GDP growth.
And so all of the all of the underlying elements of strength are there. It's just we have a massive overlap and we have COVID-19 overlap, which.
Which are going to depress the topline.
The other thing is that would you expect to spend more in marketing.
So there is an embedded marketing growth marketing spending growth that it's also impacting the EBITDA line.
Okay, Great have you given any.
Can you quantify how much you'll be spending in.
In terms of marketing for the quarter of the year.
Okay.
We haven't given that number but we are investing in our brands.
And in the short term both in Q4 and Q1, we're investing in particular in the international business.
Where we have terrific momentum in and quite frankly, we've underinvested in.
National too.
Fund the turnaround of the North America business now that the North America business.
In significantly better shape than it was two years ago, when we started the transformation.
We're starting to put more investment back into the brands.
International and an example, I would give you is the <unk> business that.
Okay.
Wonderful business is now growing high teens, because we put the investment back behind the business and that's generating some of the terrific results that we're seeing in international.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.
Hello, Good morning, everybody.
Hi, Joe and John.
I wanted to ask first about <unk>.
Just in general kind of innovation and distribution on that innovation can you give us a little bit more detail around the level of distribution gains that you've achieved are you seeing.
Our strong retailer acceptance have the shelf resets that have happened or going to happen coming in according to your plan because I know a year ago, a lot of that got delayed with Covid. So just an update there on what youre seeing relative to your expectations as we move into fiscal 2022.
Sure so.
The good news is if you look at <unk>.
Innovation that was pretty nonexistent, a few years ago I think our last.
Last year, it was 2% of our sales in North America, and third quarter. It was 4% of our sales in fourth quarter. It was 9% of our sales. So innovation is playing a very important role.
In our growth or GDP.
Pes were up considerably in.
In the fourth quarter, they were up 7% versus year ago on the get bigger brands. They were up 10% versus 19 pre pandemic.
And then when we look at the most recent four week data into the first quarter of this fiscal year, it's up even more than that so.
Continued distribution gains to remind you.
The snacks category in the baby category reset in the spring.
The yogurt category.
Resetting now the tea category is starting to reset now people want to get all the items on the shelf for the for the colder weather and Paris.
Personal care is a little bit of a hodgepodge, because it's really 20 different categories right, you've got mouthwash in Sun care and body lotions and.
And the like and so theyre all setting at different times within personal care, but we've got.
We've got good momentum, we're getting in the neighborhood of our bigger launches we're getting 30.
Yes.
<unk> percent, ACB, which isn't bad for brands that have.
40% to 70% ACB in total.
But we expect that that will continue to build and we're seeing very high incrementals and repeat rates on the innovation and we just need to continue to generate the trial of the ones that are doing particularly well.
The screaming hot.
Veggie straws, which we've talked about the innovation on celestial between the K cups, and the black and Green innovation deep with the energy T in the tea with with immunity benefits.
We had some innovation with protein pouches, and we actually launched.
Some of the snacks.
Innovation and a toddler format in both straws and puffs.
Sensible portions puffs is another one we launched this year that's off to a great start we just launched the men's line on Jason.
Which is very incremental obviously for us in a terrific set of product that's getting good traction so theres a lot of innovation.
Appears.
To all be performing very well.
The flavor innovation, obviously, less though than the more game changing category expanding innovation, but we're very pleased with what we're seeing the velocities are good.
We've got a lot of excitement from the retail community and we expect as the year goes on that we're going to continue to build.
Distribution behind this innovation.
Thanks, that's helpful. Two quick points of clarification.
You referenced.
SKU rationalization several times in the prepared comments.
Is that because of the comparisons to 2019 or is there.
Still SKU rationalization going on kind of what's the overall status of that and then the second question I have is you also mentioned.
Good line of sight that incremental volume programs in the second half of the year could you provide some more perspective on that just want to make sure I understand what those.
Their scams might be and are they kind of locked and loaded.
Yeah. So on the SKU rationalization remember that in fiscal 19, right. After Investor day, we eliminated a thousand skus proactively with no innovation to put in its place because these were underperforming skus that.
Program, we're losing money and to simplify the company that was an important part of our strategy. So when you when you look back and compare versus 19, that's a significant drag.
Our overall growth rate on a two year stacked basis.
But when you look at it on a one year stack basis that.
SKU rationalization is behind us and it's there's been many.
That rationalization going on.
In the last three or four quarters, we are continuing to always kind of refining our portfolio. So as we bring in new innovation, we look at things that are underperforming and we will proactively.
Rotate out things that are performing worse with things that are new and we think will perform better but it.
It won't be a drag on the overall algorithm like it was versus 19.
On the incremental programs in the second half we talked before about the hair care program that we had in club and 19 that we didn't get in 'twenty because of the pandemic that is confirmed again.
For this fiscal year, it's about 15.
<unk> to $20 million incremental it's locked and loaded the other place where we've got significant gains is on Sun care. You may have heard there was reports recently about benzene in many sunscreens benzene is a cancer, causing agents.
Retailers have required all some manufacturers to.
Cloud analytics and testing data.
I would just say that we have no benzene in any of our Sun care and so as a result retailers are consolidating the number of vendors that they havent Sun care and we're going to be a very significant a recipient of incremental programs in space that again is confirmed.
Many.
Big retail customers. So those two things by themselves are going to generate significant growth in the in the back half of the year versus the trajectory that normally.
We would have and as I said, we've got momentum on the rest of the business with.
Four week consumption better than Q4, and Q4 better than Q3, and so we expect.
By the time, we get to the second half Youre going to see mid to high single digit topline growth on this business very consistent with what we talked about on Investor day.
Thanks, so much.
Thank you. Our next question comes from the line of Eric Larson with Seaport Research Partners. Please proceed with your question.
Yes.
Mr. Larson your line is live.
Yes, I was on mute I'm sorry, thanks for the question.
So.
This is a very specific question I. Thank you.
<unk> said that your distribution points for celestial tea, where I think up double digits I might be mistaken.
And on that on that number but is that is that related to maybe some seasonal sell in already here.
Uh huh.
And maybe other issues, but I.
I think distribution points were up strongly there too. So can you talk a little bit about the key business.
So the team business remember in the last two years, we've launched.
K Cups cold brewed tea.
Black and Green innovation, where we're at with energy and immunity properties teed, it with melatonin D with probiotics, we launched T. Well. So we've had a ton of innovation we really.
We've launched two years' worth of innovation, and one kind of year with the retailer because many of them didn't reset last year. So we are picking up significant distribution at.
At the expense of our competitors because historically this has been a pretty sleepy category without a lot of innovation and the fact that we're bringing.
Things that are highly incremental to.
The category that bring new benefits that bring different consumers and again think about tea energy T didn't exist before in this category.
And the fact that you can now get T with as much caffeine has a cup of coffee, that's going to bring coffee drinkers into this category who don't like.
The stomach upset or the flavor of coffee.
So we're getting a great customer reaction.
And we're picking up a lot of <unk> and I would say really the the places where we've picked up the most are certainly on tea and sensible portions is the other between the screaming hot in the pumps and some of the things that we've done on sensible, we picked up a ton of distribution there as well.
And then we're picking up modest distribution across many other categories as I mentioned in the prepared remarks.
Okay. Thank you and Scott and generally when you talked about.
Grabbing distribution is generally a journey as opposed to experience so.
Yes.
Oh.
How far out do your one way.
You think it's available to you for gaining distribution as it several years I mean, how would you.
How should we think about that.
Yeah. So we have many years of distribution potential in front of us and I say that for two reasons.
Number one.
None of these brands in this portfolio are ubiquitous when I worked at bigger Cpg's I'm used to having brands with 90, 95% ACB our biggest brands only have 70% ACB. So there's opportunities even on the biggest fastest growing brands that we have that are three.
Million in retail sales, we still don't have ubiquity, yet so thats one opportunity second opportunity is obviously with innovation for us to get more items per store on each of these businesses, which youre starting to see with the TD piece that we're gaining and then the third opportunity for US is channel expansion, because we really haven't penetrate.
$300, many channels were not in convenience and gas in any big way with our snacks, we're not in drug with our personal care businesses. We're not in the dollar channel in any big way. So there is there are significant distribution potential here and that was always part of the thesis on Investor day, It got derailed a little bit with the pandemic where nobody.
Penetrating setting shelves.
But now as retailers are starting to set those shelves again as we had anticipated we're starting to be significant recipients of space.
Got great brands, they've got terrific momentum the innovation, we're bringing is category expanding and so we expect that we will be.
Nobody was added in the prepared remarks that we will be continued gainers of space as we go through this year and into the future.
Alright, Thank you very much for the.
Additional detail I appreciate it.
My pleasure.
Our next question comes from the line of Anthony Vendetti with Maxim Group.
Please proceed with your question.
Thanks.
Mark you mentioned that the product innovations have had have had nice growth here in the last couple of quarters.
Is there.
Any specific product that is really gain traction and then just in terms of the pipeline.
New products such as.
Looking at <unk>.
And I guess is there anything in particular that you're excited about.
So I don't want to telegraph too much what's coming because I don't want to give my competitors.
Knowledge before it hits the market, but we are excited about our future pipeline.
In answering the first part of your question the.
The screaming Hot Veggie straws is doing exceptionally well that was youll.
Youll remember launched right before the pandemic started and we have not fully.
<unk> gotten distribution across the retailers, that's now approaching 30% ACB continues to build the K cups that we've launched on celestial seasonings has done terrifically.
<unk> the sensible portions puffs that we launched going into from straws into puffs.
<unk> has done very very well and.
And again Thats, just hitting the market.
Past spring so we're just.
Continuing to ramp up there in terms of.
Distribution.
<unk>.
Obviously last year, we had a blockbuster win with sanitizer, which is now a blockbuster headwind but.
That was a very successful innovation tour.
For the pandemic.
And then we as I mentioned earlier, we've taken some of the innovation that we have and the formats that we have in snacks and we've launched toddler version.
So.
There is now a Earth's best Sesame Street version of Veggie Straws and of the pumps that are also performing very very well.
And so we've got a.
Pretty darn good performance across the things we've launched we have others that I'd say have performed modestly but it's more.
Because we haven't generated the trial yet not because the items are terrific. The repeat rates. We're seeing on many of these things are outstanding we just got to get more trial, so things like the black and Green teas, which.
<unk> have very high repeat rates.
Gotta make more people aware of them and get them into their mouth, but we're very optimistic on that.
The things that we've launched and.
You see it in the data, where again, where we're seeing the momentum pick up the velocity pick up the GDP pick up and again, we expect that to continue throughout the year.
Okay, Great and just real quickly on the product reset it sounds like.
All of those resets are happening.
Is there any still drag on that from from Covid and then if you could just talk about any other impacts other than the labor shortage.
Colgate.
Stimulus unemployment insurance is having.
Or are you expecting that.
Key to work itself out over the next couple.
Well, we're hoping that it works itself out, but we're certainly not I hope is not a strategy. So we are doing everything in our power to make sure that we address.
The labor issues, because even when stimulus checks go away there is still going to be a labor shortage.
The the incremental.
Issue that comes with.
It is.
People are getting sick. So we have had.
And continue to have people that are out with COVID-19 people that are being quarantine because they were in contact with people that have COVID-19 and so you take the labor shortage and you exacerbate it with.
But people are getting sick.
That that magnifies.
Covid the labor shortage so.
Again, I expect as more people get vaccinated.
We get further through this pandemic and we get the Delta variant under control, we will have less.
Covid related labor shortages and it just comes down to.
Filling all of the open positions that exist.
Within the supply chain.
Within the things that we control as I mentioned distribution centers, we fixed our labor problems.
Within the manufacturing facilities, we've made great progress on our labor situation, we found backup sources of supply.
There, where we feel our internal source of supply has been impact.
Or may be impacted for an extended period of time, we're finding alternate sourcing locations for various ingredients and packaging material, where again, it's taking a very long time to get containers over from China at a very inflated price. So.
We're working on kind of working around the problem if.
Pack, we're not waiting for it to go away, there's a lot of activity going on and we've made terrific progress.
Okay, Great I'll turn it back to the queue. Thank you.
Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Thank you good morning.
Good morning, good morning.
You will.
Just on the buybacks can you give us a sense of the magnitude that you might expect and if this is any indication that you may have.
Trouble finding attractive acquisition targets.
Yes, so Javier I will let you discuss the buybacks, but let me.
Michael that's the acquisition targets. So we are actively in the market looking for acquisitions as I mentioned on previous calls now that we've simplified the organization and stabilized it.
We're we're very well positioned to make acquisitions, we're in active conversations with people.
And so that I expect will.
First part of our strategy going forward that you'll see a continued reshaping of the portfolio with us getting.
Bigger in certain categories and continuing to ship.
Certain parts of the tail.
But the important thing to note on the tail is whereas on Investor day half of the tail was losing money every brand that we have now is profitable and so.
Be well.
Keeping those businesses, where final divesting those businesses at the right opportunity comes along but we want to be acquirers and part of our capital allocation strategy is focus there.
With that Javier why don't you talk about the buybacks.
Yes, Michael So we look at all of our investment opportunity.
Through the lens of where.
Or does the company get its highest risk adjusted return so that includes internal opportunities external opportunities.
Mark said it also includes evaluating whether.
Investing in our shares through share buybacks are yielding the company a good return and so when you see us be active in the marketplace.
Attunity share repurchases, because we think that the share prices are attractively priced.
And so you have seen that happen in the fourth quarter.
As it relates to is this a little bit of a signaling is two one.
Youre going to trading one versus the other what I would say no we have a very low debt.
Net debt is less than one is actually seven with how we closed a year.
So we do have.
A lot of flexibility to actually do M&A and to do buybacks. If if the if the opportunities present themselves. So I don't think that you should take that as being a.
It sort of a signal that we don't have good.
Good investment opportunities, where we can put our capital to use.
Okay, that's really great color. Thank you.
Just a follow up on the margins.
Certainly the inflation pressure is clear, but maybe specifically to first quarter.
Can you help.
Understand maybe a little bit how it differentiates by segment.
There's the accretion on the margin side from the fruit divestiture.
In the international business, but it sounds like that pricing is also coming later.
Would it be right to hear you that sequentially both segments probably have margin.
Margin declines, but that in the absolute the international business could still be up just given what it lifted it is to get rid of that fruit business.
Leisure leader basis.
Yeah. So we don't we don't expect margin declines we expect margin expansion.
The rate of expansion is going.
Obviously dependent on the amount of inflation.
The pricing that we're taking and the reaction to that pricing part of the reason that.
The pricing is later and international is because as the crops are coming in some of the crops are coming in short from some of the crops are coming along.
And we had some significant.
Gonna be relation come from some of the crop shortages that hit international So as we got that information we take the pricing.
It takes a little bit of time for us to present, it and have the retailer accept it so.
That'll hit at the beginning of Q2, the pricing that we're taking in North America was related to.
The inflation that we saw in the fourth quarter and as I said.
We've already taken pricing on T and in fact, we already took pricing on baby before all of this inflation hit if you look at the consumption data youll see about a 10% <unk>.
Increase in our baby pricing.
As part of what's driving almost 20% growth on that business as we've got significantly.
Again pricing and velocity improvements at the same time.
We're optimistic that as the rest of the pricing hits in.
In September.
That we will see relatively modest elasticity, because if everybody is going up it's different than if youre. The only guy who is going up and people are going to.
See that youre relative prices changed significantly so we're optimistic that the impact from the pricing will be.
Nominal we also in health and wellness have a very premium price set of products to begin with and a much higher income consumer who is much less elastic anyway, and so as I mentioned in the prepared.
<unk> remarks.
We've been pretty conservative in terms of what our assumption is in terms of volume fall off but I'm optimistic that.
We're going to see relatively low elasticity when all of this pricing gets to market and everything settles out.
That's helpful color can I just.
Sure I caught what you said correctly.
You said you don't expect margin declines that's on the full year right.
First quarter with the mid to.
High teens EBITDA declines there but.
I would think there has to be some margin decline there right.
Javier Whats the gross profit at the gross the gross margin level is what mark was referring to.
There will be some larger and there will be some margin decline at the EBITDA margin level.
It makes sense, okay. Thank you very much.
Thank you.
Our last question. This morning comes from the line of Rebecca Shen with Morgan Stanley. Please proceed with your question.
Hi, Good morning, Thanks for squeezing me in.
So a few times on this call you had mentioned.
The need to drive trial and I was just wondering if you can kind of elaborate on what your plans are there and if COVID-19 restrictions are are still are prohibiting in store sampling thank him.
So we don't we.
Typically do in store sampling, but we do have a lot of our trial generation is around merchandising events in store, which there are no restrictions around us getting display programs are working with customers on with their shopper card data et cetera, but it's a combination of in store activity like I just mentioned as.
We don't have digital social mobile marketing and Geo targeting outside of the store and then on some brands like T. We have the ability to impact samples of tea in our herbal tea. So that people can see all the other things that we have in our portfolio. So there is some some inbox sampling that's occurring but most of the.
The marketing is going to be digital social mobile and in store activities.
<unk> marketing with the customer.
Okay, great. Thank you so much.
Thank you ladies and gentlemen. This concludes our question and answer session I will turn the floor back to Mr. Sherman for any final comments.
Thank.
Well I appreciate everybody's time and look forward to conversations later today and over the coming days with folks I Hope we left you with.
Our optimism and enthusiasm for this business and the fact that we.
While the industry is facing some challenging headwinds in the short term.
We think the underlying health of this.
Is outstanding and we're very optimistic so.
Thanks for your time and I look forward to talking to you. All later take care. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.