Q2 2022 Hain Celestial Group Inc Earnings Call
Okay.
Greetings and welcome to Haynesville axial second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host advocate Heller Investor Relations. Thank you you may begin thank.
Thank you good morning, and thanks for joining us on Hain celestial second quarter fiscal year 2022 earnings conference call on the call today are Mark Schiller, President and Chief Executive Officer, Chris Scully, our incoming executive Vice President and Chief Financial Officer, and Javier job out on his final earnings call as 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.
<unk> 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 annual report on Form 10-K quarterly reports on Form 10-Q , and other reports filed from time to time with its trade 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.
First or implied in any forward looking statements made today.
The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hain Celestials 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.
This call is being webcast an archive of it will also be available on the website and now I'd like to turn the call over to Mark Schiller.
Thank you Anna and good morning on today's call I'll give some color on our Q2 performance and balance of your forecast as well as progress against that three point strategy, we laid out on Investor day.
Joining me today on the call are Javier drove growing crystal Ayers I'd like to take this opportunity to thank Javier for his hard work his contributions to him to point out and his assistance in smoothly transitioning all of his duties.
I want to welcome and introduce Chris who officially begins his role as CFO , starting tomorrow I'm very excited to have Chris joining our company and team. He brings a wealth of CPG experience deep operating background and exceptional leadership skills I look forward to partnering with him on our Hain three point O journey, Let me briefly turn it over to Chris to say a few words.
Thanks, Mark and good morning, everyone.
This is my third week it hanging in everything Ive seen has confirmed the reasons I was so excited to join the company.
As a leading global health and wellness company, and we are exceptionally well positioned with great brands and a very talented team I'm looking forward to helping to lead the Hain Threet auto journey and continuing to grow shareholder value.
Thank you, Chris and again welcome to the team.
Let me start today's call by giving some color on our Q2 results.
Pleased that we delivered top line performance at the high end of our original guidance and in line with our pre earnings announcement in January as I'll discuss in more detail, we're seeing strong consumption in our growth brands that is leading to accelerating topline growth for the company.
With regard to profitability or bottom line came in slightly below our original guidance driven by continued and well publicized industry wide supply chain and labor challenges, while the team is doing a great job with pricing and productivity to offset almost all of these additional costs late in the quarter. We did experience some incremental unforeseen costs, which led to about a 3 million.
Miss to our original adjusted EBITDA guidance I will discuss those more in a minute.
Digging deeper on the top line net sales were down 2% versus year ago, when adjusted for currency and acquisitions divestitures and discontinued brands.
Paired with two years ago before the pandemic adjusted net sales were up 7%.
Our growth brands, which make up almost 70% of our total company sales were up slightly in the quarter versus year ago, and up 12, 6% versus two years ago.
I'm pleased to report that net sales in the United States. Our biggest market were strong and continue to show material sequential improvement.
Adjusted for divestitures net sales in the United States were up three 7% versus last year, and nine 7% compared to the same quarter two years ago.
And consumption last quarter for all U S brands in measured channels was up over 10% compared to last year and 16% versus two years ago. This is a testament to the success of paying 2.0.
Gives us further confidence in our Hain three point out plan.
Our U S growth brands in snacks, tea, yogurt baby and personal care categories, which make up 85% of sales and consumption growth of 14% versus last year and 22% versus two years ago.
Household penetration on those growth brands was up again in Q2 on top of growth last year and up almost 10% versus two years ago.
Snacks and baby food led the way with growth up more than 25% year over year celestial seasonings gain more than a full sharepoint and delivered high single digit growth in the quarter overlapping significant growth from last year. I'm also encouraged to see consumption stabilize on Greek gods after significant supply chain challenges early in the quarter.
And solid consumption growth on our garden of Eden driven by a product re formulation and some terrific work on price size architecture.
Unit velocities on the growth brands in the U S were up mid single digits, even with retail prices, increasing more than 7% in the quarter and the average items per store also increased nicely despite supply chain challenges.
So in summary, we're seeing tremendous momentum on the top line in the U S and that growth has accelerated thus far in Q3.
International adjusted net sales came in below year ago as expected driven by the overlap of customer stocking up last year in anticipation of Q3, Brexit disruptions and increased regulations on baby food imports in China. We expect both of those issues to continue into Q3, but have no long term impact on our strategy and outlook.
Relative to two years ago, our international net sales were up eight 5%.
Within the quarter. This year, we did deliver more than 20% growth and gained more than three share points in both baby and soup.
And also grew share in meat free snacks jelly and Marmalade importantly, we also saw velocities improved more than 10% on our entire U K business.
Regard to companywide adjusted EBITDA, we came in a bit below our original guidance for the quarter and first half. While there was certainly continued pressure on costs I'm pleased to say that we were offset offsetting most of these.
A small miss can be primarily attributed to two things, which both happened in the back half of the quarter, giving us limited time to respond.
First we experienced significant increased energy costs in Europe , where prices in the quarter accelerated to as much as 10 times. What they were last year, Yes, you heard that correctly 10 times imagine for a moment the impact on the economy. If everyone's heating bill went from $200 a month last winter to $2000 a month. This winter that's what we.
Faced in Europe during the back half of Q2.
Fortunately, while energy prices are still inflated they have started to come down somewhat and we have locked in energy contracts for the balance of the fiscal year, which are reflected in our revised go forward guidance.
The emergence of the Omicron Varian created additional global labor shortages and challenges throughout the supply chain impacting both service and cost. The good news here is that we're seeing signs that omicron appears to be peaking which should result in some of the related short term challenges abating later in the third quarter.
Switching to margins like the rest of the industry, we experienced continued high inflation and supply disruptions during the quarter to offset these costs, we continue to aggressively drive productivity projects and have taken significant pricing in the first half of this fiscal year, both here and internationally.
We're very surgical in our pricing decisions analyzing many variables, including price gaps and thresholds brand velocities consumer loyalty and brand momentum.
So far as you've heard earlier, our pricing has been very effective in unit volume impact has been minimal in both North America and international we're in the process of taking additional pricing in the second half of the year and are in discussions with our customers as we speak those increases will all become effective over the next 90 days in total we will have taken more.
And then $100 million of price increases this year.
Shifting gears to our updated guidance, we continue to expect low single digit net sales growth for the year adjusted for concert currency divestitures acquisitions and discontinued brands that implies mid to high single digit growth in the second half driven by North America, where we have consumption momentum expect continued distribution expansion have secured several long.
Merchandising programs and have the benefit of additional pricing in market.
On the margin front, we now estimate our total inflation to be around 10% for the entire company versus a plan of about 5% to 6%.
We also expect a total of about $40 million to $50 million of additional out of planned cost this year related to the supply disruptions.
Incremental costs emanate from a number of areas, including finding backup sources of supply and transportation on very short notice air Freighting materials service related fines prolonged out of stocks and material shortages and production disruptions.
While we expect solid growth on the top line and strong pricing and productivity those gains are being offset by inflation and continue to external industry wide supply chain disruptions and labor challenges, while we anticipate that many of those costs will go away over time, we've lowered our EBITDA guidance for the year to reflect those realities Javier will provide more details on our forecast in a few minutes.
That's.
Elaborating further on our momentum in growth algorithm that we unveiled with 83 point out we're very encouraged by the strong momentum on consumption in the U S business with our growth brands now up more than 16% in the most recent four weeks ending January 23rd and 31% versus two years ago.
Our three point strategy emphasizes the importance of distribution expansion and innovation as key drivers of our top line acceleration, we have momentum in both areas driven by strong brand velocity and new products that are attracting additional customers and consumers to our categories.
We also talked about investing in marketing to drive awareness and household penetration across our growth brands, while short term our investments have been more limited this year due to cost pressures, we plan to further invest to accelerate growth per our strategy next year.
Also recall that our three point strategy highlighted our intent to continue reshaping the portfolio. This includes making acquisitions in high growth categories like snacks.
As you know we recently acquired the that's how we roll company, which included the high growth Parm, Chris brand.
This gives us another highly incremental scaled snack business, which we expect will source volume from new competitors in categories like high protein bars and beef jerky. It also gives us access to additional segments in snacking like snack mix or apartment breasts recently launched innovation and like the rest of our growth brands. We also have significant distribution expanse.
<unk> opportunities in new and existing channels and geographies.
On the margin side, while the short term profit contribution will be nominal as we invest in the brand pursue its just additional pricing and productivity and realized synergies by next fiscal year. This should result in adjusted EBITDA margins in line with the company average, making this acquisition highly accretive on both the top and bottom line.
So in summary, we're proud of how we're navigating a very challenging business environment and are encouraged by the strong top line momentum we are achieving and are extremely excited about our hain three point O strategy and importantly, we remain on track to deliver it.
With that let me now turn it over to Javier to discuss our financials in more detail.
Good morning, everyone and thank you very much Mike I also wanted to take this opportunity to thank the board and the rest of my Hain colleagues. He has an exciting journey and I wish the company continued success.
Now turning to the financials, let me highlight a few key aspects of our second quarter results demonstrate strong execution of our transformation plan and the building of a solid growth platform as we move into Haynes three point O journey.
First we delivered topline sales results at the high end of our original guidance and demonstrated resilience in a challenging operating environment.
Despite the supply chain challenges and highly inflationary environment impacting the entire industry. Our overall adjusted EBITDA margin improved versus the prior year and our international business delivered another quarter of adjusted EBITDA growth.
Third our balance sheet remains strong with good capital allocation flexibility and finally, we believe that we are well positioned to deliver on our updated full year guidance as well as the new long term algorithm, we laid out during our Investor day presentation last September .
We'll start with a discussion of our topline results and then I'll drill into each of these aspects.
As we overlap last year's Covid demand search and a Brexit related demand pull forward second quarter consolidated net sales decreased 10% year over year to 477 $477 million.
Foreign exchange impact on the second quarter net sales was minimal while the.
Divestitures and brand discontinuation reduced net sales by close to 8% compared to the prior year period.
When adjusting for these two factors more sales for the quarter were down 2% versus the prior year quarter.
Translates to a first half sales decrease of about 1%, which is at the high end of the previously provided first half guidance of a low single digit percentage decrease.
The adjusted net sales decline was mainly driven by planned lower sales in international partially offset by higher sales in the U S.
During the quarter, we experienced higher than planned inflation and continued industry wide distribution and warehousing cost pressures driven by neighbours shortages freight carrier availability and other freight freight cost issues that we incurred to prioritize customer service, resulting in a small reduction in adjusted gross margin of about.
70 basis points.
The supply chain challenges also impacted our international operations with the added headwind of higher than expected energy costs that we're now forecasting to remain throughout the rest of fiscal year 'twenty two.
Despite these headwinds we were still able to the neighbor adjusted gross margin expansion in our international segment of about 280 basis points when compared to Q2 fiscal year 'twenty one.
Total SG&A, including marketing came in at 15% of net sales for the quarter lower than the prior year period by about 100 basis points.
Favor ability was mostly driven by lower labor related costs across all regions, including our corporate segment and lower sales broker fees.
Marketing expenditure as a percent of net sales was reduced by about 40 basis points versus the prior year period, largely North America, what do we reduced spending on brands facing supply disruptions.
Well second quarter, adjusted EBITDA decreased 5% versus a year ago to $59 $3 million.
Adjusted EBITDA margin increased by 66 basis points year over year to 12, 4%, primarily driven by the previously mentioned reduction in SG&A costs.
Our adjusted second quarter EPS of <unk> 36 cents increased compared with 34 cents in the prior year period.
We benefited from an adjusted tax rate of 19% compared to 24% in the prior year period.
Mostly driven by deductions related to stock based compensation from PSU vesting.
Now, let me provide some detail on the individual reporting segments, starting with our North American business, where we continue to face the industry wide supply chain issues. We have discussed before but are seeing continued momentum in consumption.
On the top line reported net sales for the second quarter decreased about 3% year over year to $275 million. However, after adjusting for foreign exchange movements acquisitions, and divestitures net sales increased about 1% versus the prior year period.
The impact of the that's how we've all acquisition for the quarter was less than 20 basis points of net sales growth versus the prior year period, given the transaction closing date of December 28.
The turbocharged category delivered close to 20% net sales growth versus the prior year period, and 23% growth versus Q2 fiscal year 'twenty driven by the strong performance of our snacks business in there.
Targeted investment category, our tea and yogurt products and they were close to 10% growth versus the pre pandemic Q2 period 10 years ago, with our baby food products contributing to growth versus the prior year.
Yeah.
On a profitability perspective, adjusted gross margin for our North American business decreased by 380 basis points versus the prior year period to 24, 7%. However, this represented a sequential improvement of about 240 basis points versus the prior quarter.
While the industry wide supply chain challenges impacted the profitability of the quarter, our pricing actions and productivity initiatives contributed to the sequential improvement in margins.
Adjusted EBITDA in Q2 decreased 16% to $33 million from the prior year period.
Adjusted EBITDA margin of 12, 1% represented a decrease of about 190 basis points versus the prior year period, but a sequential improvement of about 300 basis points versus Q1 fiscal year 'twenty two.
Now, let me shift toward international business.
Net sales for the second quarter versus the prior year period decreased 18% on a reported basis.
After adjusting for currency movements and divestitures net sales for the quarter were down about 6% versus the prior year period, driven by softness in her baby food exports to China, and the lapping of the Brexit related volume pull forward in Q2 of fiscal year 'twenty one.
Compared to Q2 fiscal year 'twenty adjusted net sales growth increased around 9%.
The growth during Q2 of fiscal year 'twenty two versus two years ago was driven by the performance of our growth brands, which in aggregate delivered constant currency growth of close to 18%.
From a profitability standpoint, adjusted gross margin for our international business increased by about 280 basis points driven by the divestiture of the food business and the impact of our productivity initiatives, partially offset by higher unexpected energy costs.
We grew adjusted EBITDA by close to 7% versus the prior year period, and adjusted EBITDA margin improved 390 basis points to 17%.
Given by higher gross margins and lower SG&A expenses from lower labor related costs and third party expenses.
Shifting to cash flow and the balance sheet operating cash flow was $30 million for Q2 and $68 million for the first half of the year well.
Well first half operating cash flows were lower than the prior year first half the company benefited from a tax refund claim under the cares act during the first half of fiscal year 'twenty one.
Capital spending for the second quarter was $10 2 million or two 1% of net sales, which reflected lower spending than expected given supply chain challenges on labor availability.
For the full year, we expect capital spending to be between three and three 5% of net sales.
Cash on hand at the end of the quarter was $77 million, while net debt stood at $662 million.
Net debt leverage is now calculated under our amended credit agreement was two seven times.
Our balance sheet remains strong and as a result, we have significant flexibility to both reinvest in the business and return value to shareholders.
Assistant with our capital allocation principles during the quarter, we repurchased 2 million shares or two 1% of the outstanding common stock at an average price of $44 31 per share for a total of approximately $90 million, excluding commissions, leaving us with about $117 million of additional repurchase authorization remaining.
Under our 2021 program at the end of the second quarter.
The company also announced today that its board of directors approved an additional $200 million share repurchase authorization share repurchases under this authorization will commence after the company's existing authorization is fully utilized.
Now turning to our outlook.
We are reaffirming our full year net sales guidance and lowering our profit guidance a bit for fiscal year 2022 .
For fiscal year 2021 we expect low single digit adjusted net sales growth with the as reported net sales growth lower than the adjusted net sales growth by about 200 basis points from divestitures and acquisitions and 40 basis points 40 basis points from currency.
Modest adjusted gross margin reduction in.
And approximately flat adjusted EBITDA growth.
Let me give you some color on our updated guidance.
Specced, our second half to deliver adjusted top line growth versus prior year in the mid to high single digit range driven largely by the performance of our North American business.
Mike explained the reasons for our optimism earlier in the call.
Given the highly inflationary environment that we're operating under we have updated our adjusted gross margin and adjusted EBITDA guidance for the full year.
Specifically energy cost increases in international and actions that the company continues to take to overcome supply chain challenges have added additional costs to our P&L and I expect it to continue for the rest of the fiscal year.
Given our pricing actions and productivity initiatives, along with the expectation that these extraordinary challenges will eventually reverse we remain confident in achieving our Haiti, three Borneo profitability targets.
For additional context to our financial performance in the second half of the year. The company expects sequential improvement to adjusted EBITDA growth performance throughout the quarters of fiscal year 'twenty two.
Q4 of fiscal year, 'twenty, two anticipated to deliver the highest adjusted EBITDA growth versus the prior year quarter, given the full implementation of all pricing activity by that time in the prior year fourth quarter that was already impacted by the supply chain challenges that have continued throughout this year.
In summary.
We were able to deliver our second quarter results in an exceptionally challenging operating environment, while making progress on our long term initiatives Hain has strong momentum and is well positioned to deliver against the chain three point L. Aspirations I will now turn the call back to Mark.
Let me end by thanking our thousands of employees around the world who have worked exceptionally hard in very challenging environment.
Their can do attitude scrapping isn't teamwork and helped us to deliver solid performance throughout the pandemic and their dedication and resilience will continue to serve us well as we work towards making our Hain three point a vision a reality with that said we will now take your questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the Q4.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star King. Our first question comes from the line of note of Anoro Naughton with J P. Morgan. Please proceed with your question.
Hi, good morning.
Good morning, Thank you good morning.
I wanted to ask about your guidance for EBIT that crap and it implies a pretty significant ramp in the back half and thank you for providing that cadence update quite at that top box, but it would be helpful for us to understand a little bit more about you know what are the assumptions, you're making them. They give you Scott.
Enough confidence that that's the new guidance is conservative or not for today, it's volatile environment.
Yeah. Thank you for the questions. So you know we have been obviously on this journey for quite some time, we have productivity that's coming to fruition in the second half we have volume acceleration that we were expecting in the second half that will drive some of that EBITDA. All we have more pricing coming in the second half.
That will also improve the margins because again the inflation is hitting before the pricing catches up.
So we and we expect some mix improvements in the second half as well. So I think you put all that together and we're confident that we will have.
The significant improvement in our EBITDA and remember last year. We also had a challenging fourth quarter, which we get to overlap. This year, which will also be helpful. In terms of driving that EBITDA growth.
Mark if I may I would also like to add that you know we have a quite strong visibility to our.
Cost of goods going forward or for the second half so.
We are probably more than having more than 90% visibility for the spending so we feel pretty good about.
The the cost forecast that we have embedded in the second half as well.
Great. That's Super helpful. And then can you just update us on you know I think in the second quarter, you expect it to Keith and inventory reload and customers in the U S. Can you just update us on where you stand and what's embedded in your assumptions for the back half.
Yeah, So we or our inventories are relatively strong across most of our brands, but we have had some supply disruptions.
You know related to the industry wide issues that everybody is familiar with it. So there are a couple of brands or segments within brands, where we still have.
Some gap in terms of our inventory levels are at customers versus what they've been historically, all we expect that we will make some improvement on that in the second half just as we did on the first half, but we havent assumed that.
It was issues completely go away.
So again I think we're taking a balanced approach in terms of what we have visibility to and what we have in place.
Can you help us kind of filled the pipeline on those places where we have challenges.
Great. Thank you.
Our next question comes from the line of Michael Library with Piper Sandler. Please proceed with your question.
Good morning, Thank you.
Good morning.
Just wanted to touch on the EU energy piece of it obviously it sounds like a very significant.
Huge move and obviously, a big enough cost of matter.
But it sounds like you've locked in can you just clarify does that mean.
Did it can't get worse or better.
Is it where is it options, where if the cost picture improves you might potentially have some upside to your numbers.
No it's pretty much locked in so it's a it is we we have visibility and clarity around what that will be it's significantly inflationary versus year ago.
And versus our original plan and even the first quarter earnings it's added about $10 million of cost some of which happened in Q2, and the rest of which will happen in the second half of the year and that you know at the risk of slightly over simplifying that explains completely the change in our EBITDA guidance.
It's highly inflationary like I said it was up.
As much as 10 times, what it was year ago.
And its now come down a bit we locked in and wallets again, probably 70% inflation or inflationary for us year over year.
At least we have visibility and certainty to it at this point.
Okay, Great. That's helpful. And then just another one on pricing you said you're in discussions with with some customers can you characterize the nature of that I guess, it just feels like pricing has become.
Almost automatic in this environment is there any real resistance or pushback or is it more just.
Sort of negotiating orders of magnitude and in some tweaks around the edges can you just give a sense of what the dialogue there is one.
Yeah, I think there's a so it's a little bit different than in the U S versus the rest of the world. So let me take those separately.
In the U S. There's certainly general recognition around the inflation, because everyone's feeling it including customers with their labor challenges in there their supply chain challenges.
And so I think there's a general recognition that pricing is needed.
Every company is taking in and those conversations are going very well, it's always a negotiation because again they control the shelf space.
And often there's a gift for for the gap, but as we saw in the first half where we largely got our pricing through as expected, we anticipate that will happen here.
Here as well.
International is a little bit of a different story on a couple of fronts number one.
We have a much more significant private label business, particularly in Europe .
Where it's you have contracts and it's very difficult to change pricing when you have contracts. So.
Those are going to be much more challenging conversations.
And the retailers are just much more resistant to pricing there.
And can be more punitive now we got it in the first half we had some impact from that we lost distribution in a couple of categories. As a result of that pricing action, but we did get the pricing in and as we are having conversations now for the second half of the year again, there's a general recognition that that pricing.
Needs to happen. It's just a question of what's the gifts where they get that we continue to negotiate but I do expect that pricing will all get in before the end of the day.
Really helpful. Thanks, so much.
Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.
Good morning, Thanks for the question.
Morning, John .
Maybe first off just in terms of the outlook, obviously the supply chain environment has been tough to forecast here, we can see but we think about the reiteration of net sales for F. 'twenty. Two can you just walk through the visibility and confidence into that target me to what extent do you see risk whether from Covid, you'll following omicron or supply chain that in your shelf resets.
T realize or the innovation doesn't launch how do you think about that for the next six months or so.
Yeah, so for for North America.
In particular.
The confidence is very high we've got consumption momentum, we've got distribution momentum.
We were getting significant pricing in place and seeing our unit volume growing at the same time, while we have some big.
Our merchandising programs that have been secured that we've talked about on previous calls and so we will see a material acceleration in North America, driven by the U S business.
In international what's interesting in international right now is in the U K entire grocery store sales are down versus year ago. The entire store also some of our categories are down.
And you know, while we're gaining share in those categories.
Our expectation is as we lap the.
The lock down period from year ago, where everybody was in their home and now as they opened up the country and people are going back to work. We've lost some of the occasions that were in house. So some you know the lunch occasion, and the kids being home from school and the lack of travel so it's affecting the entire store there, but again, we think that will be.
Short lived and as we get through the end of the third quarter, we expect that that will mitigate.
And that we will continue to see growth because our brands are gaining share are granted our brands are seeing double digit velocity growth.
And so we have we have confidence in the fact that as long as the entire kind of store environment.
Normalizes that our share and our volume will come with it.
Okay, great and just to touch on the Parm Crisp acquisition.
That sort of gets you into the deli part of the store, which is a newer area for Hain. So can you market can you speak to your plans for these two brands here, how do you think about the distribution opportunities or any ideas for innovation.
You know what and how do you see the brands contributing to the snacks business going forward and then also you know what is your assumption for the EBITDA contribution from that business for duration of this year. Thank you.
Yeah, So starting with the second part of the question. The EBITDA contribution for the second half is going to be pretty nominal because they haven't taken pricing yet to offset all of these costs that we're going through a process and didn't want to take pricing in the middle of that process. So we're going to need to get that pricing in place. Obviously, we just bought the business and so you don't want your first conversation with a retailer to be where.
You know, we're taking a price increase but we will get that.
Through the through the second half of the year and we will also we have some significant synergy projects and productivity projects that we think will get.
To get this business to be kind of EBITDA averages, we get to the F. 'twenty three plan, but it will contribute nominally in the second half of the year.
On the on the top line, we're very excited about the Perm Chris business. It is very high growth. It's got huge distribution opportunities. It's got a lot of momentum.
You know there is the household penetration is up 33% versus year ago. The distribution is up.
We've got innovation that gets us into new segments. They just launched the snack mix.
Which is one of the segments, we identified and hate to three point O strategy that we wanted to look at their already in it and they're off to a great start with that Theres also because these are really cheese base snacks. They also have other opportunities in foodservice.
With this product as a salad topper or a replacement for crew times.
And they have additional innovation ideas that well I'm not going to go into on this call because I don't want to tip My hand.
<unk> too early but there's some pretty significant innovation opportunities that will drive growth as well. So when you think about our three point O journey Ah.
And the things that we said, we're going to drive that distribution and innovation are really core to our strategy going forward and that is exactly where the opportunities are for farm, Chris and given them. We have a much bigger footprint in terms of customer relationships across the board in resources, calling on customers. We think we can help them with that.
Distribution expansion.
Chris I would just add is a terrific kind of differentiated snack because it's very high protein and very low carb, so versus other high protein snack bars and beef jerky as an example, it has much lower sugar and much lower arbs, but the same amount or even higher protein and versus.
Oh.
Savory snacks, if you will its much higher in proteins. So.
It's meeting a consumer need that isn't met and are again, we think that bodes very well for this kind of nascent category to become much bigger over time.
On same stores, which was part of the acquisition, but not really the thrust of our purchase it's a it's a terrific little brand. It's much smaller most of the volumes in farm, Chris, but it's well positioned in cookies with no palm oils, no high fructose corn syrup non GMO.
And so we're going to manage that more are more likely what are fuel brands as opposed to our growth brands, but farm Christian is really where we see the upside and we're putting most of our resources and attention.
Great. Thanks, a lot appreciate it.
Yeah.
Yeah.
Yeah.
Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Thanks, Yeah.
Obviously, we're all dealing with inflation.
And Mark I know you've been able to.
Push cross price increases.
Do you, what's your expectation and you've been able to take them in.
Going forward. It is is this are we hitting sort of the peak of that are you getting any pushback at this point and then in terms of your supply chain costs.
They continue to be an issue.
Do you see at this point of time, where you think theyre going to start to abate or at least level out.
Yeah, so on pricing.
We have done a very good job of kind of offsetting our cost with pricing, but there are other pricing levers that we haven't fully utilized yet so most of our pricing at this point has been list price increases.
But we certainly are looking at trade spending both depth and frequency of promotion.
And we're also looking at weight outs right because if you can keep the list price the same and take a few ounces out that's another way to get pricing in and then certainly as we're encouraging customers to us.
Fill up trucks, that's also a way for us to get off some of the costs out of the middle of the P&L.
That could also be beneficial on the cost side. So.
Do you think there is more pricing opportunity, but it's going to come in different ways and on the supply chain side, you know as I've said on previous calls.
The things that we control we're doing a really good job with the output in our factories.
Distribution and warehousing.
Its fully staffed we've got inventory, we're able to ship. It's the things that we don't control in the supply chain, which is where we're having most of the challenges inbound ingredients Theres things for example, like a worldwide shortage on pouches, right now, which impacts both our baby food business in Europe as well as the United.
Rates.
There just aren't any pouches and that's because there's labor shortages and theres, an inability to keep up with demand globally, which is affecting everyone. So those are the things that those kinds of things trucks, not showing up to pick up orders and ship them to customers, which require us to you know.
Find something on short notice at a very premium price to make sure we can clear our docks and get the product out the door. Those are the things that are driving our costs I think a lot of it is driven by labor shortages throughout the supply chain not our labor shortages, but global labor shortages.
And I think that as those abate, we will see things normalize but right now all we can do is find backup sources of supply and continue to react to kind of the challenges that we've that we've been facing the good news is as we get to the fourth quarter. We start to lap. This that started really fourth quarter of last year. So we have one more call.
Order.
Kind of elevated costs, they've been relatively stable in terms of their elevation since fourth quarter of last year. So I think as we start to lap. This it will be less of a conversation about the incrementals are those costs and hopefully as a ingredient costs come down and some of these things normalize we'll start to see some of the.
Costs abate as we get into the fourth quarter and into next year.
Okay, and just a quick follow up today.
There anything else that you could do it again.
Whether it's investments in infrastructure.
Shipping.
I know I know you outsource that but is there you know is there anything that doesn't require too much of a capital expense.
That could that could help alleviate some of these concerns are basically at this point with only one more quarter of elevated cost.
Do you think you can ride this out and everything should cause somewhat normalized like you said starting maybe the your your fiscal fourth quarter.
Yeah. So we're certainly not resting on laurels, so even though.
Our hope is that things kind of stabilize we are aggressively automating in our plants.
I'm trying to take out the need to fill all these open jobs because again, it's good for the cost and it also alleviates some of the labor disruption, we're increasing our inventory levels on things, where we've had issues.
Issues are with regard to service and supply.
So we're doing things to try and mitigate and protect ourselves from further disruptions.
But it's hard to predict disruptions that go on in somebody else's factory or in the or and in terms of crops and so we're reacting quickly to the things that we can't see and we're responding internally with things that we can do to kind of mitigate.
Some of the challenges that we've seen and so as those come to fruition.
We would expect that again, our costs will come down a bit as that productivity continues to hit the marketplace and we can alleviate some of the some of the bottlenecks.
Excellent. Thanks for thanks for that update.
Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Good morning Alexia.
Okay.
First of all focus on the sales side.
You saw 1% growth in North America, but the measured channel growth was very strong this quarter.
Where was the shortfall because it must have been I guess outside of measured channels and then in Europe . The negative growth that you saw this time are you expecting that to improve going forward. Once we've lapped the stocking up that happened around Brexit.
And the Chinese babies.
Phenomenon.
Yeah. So.
The gap between shipments and consumption in North America is really driven by a couple of things number one there is channel shifting going on I remember last year that we had.
No massive growth in E Commerce, as an example, and while it's still up 70% on a two year basis, it's been negative in the short run now the good news is our second quarter trends in e-commerce were better than our first quarter trends and it again it seems to be moving back towards flat, but it has been a it has been.
A headwind that is part of the difference and second as part of North America is Canada and in Canada. We are still overlapping we've now completed it but we were overlapping the sanitizer a success from previous years.
And there is a slowdown in the plant based business that's been well publicized that is one of our biggest brands in Canada. That's also got some some short term headwinds so between that and again a little bit of.
On some of the supply on a couple of the brands that's really the difference between the shipments versus consumption in.
In Europe , I would expect as the store normalizes that our sales will normalize, but as I said the entire grocery store is down.
And again, it's driven by the overlapping of complete Lockdowns last year remember they had much more severe lockdowns for a prolonged period of time versus what we've experienced here in the U S. People were not allowed to go to work for a long period of time and those occasions have now left and.
And gone out of the house as people go back to work in the office and they they've made the decision that <unk>.
Micron is while people are still getting sick that the hospitalizations and deaths are much much lower than they were previously and theyre going for her immunity, which means that people have gone back to a more normalized life and a very significant number of eating occasions.
Left the grocery store again that kind of laps are.
At the end of Q3.
Where they started to exit last year, but last year last year, we had Brexit and we had the lockdown, which led to kind of significant in home consumption acceleration. So we just have to lap that for another quarter.
Great I really appreciate that and have you all the best with the new role and welcome to Chris and I'll pass it on.
Thank you.
Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
Oh, Thanks, Good morning, I I'm just thinking about.
Gross margins in light of not just input costs and pricing timing, but also what will be viewed as transitory COVID-19 costs and I just wanted to.
Checking with you about your long term targets or do you still think that longer term gross margins around 30%.
Could be achieved from the mid twenties.
And as you're thinking about this year and maybe just the Covid era, how much transitory friction is there in total as we can think about you know God willing we'll get past these things and in fiscal 'twenty. Three for example, we will start.
<unk> is having the pricing stick and some of these COVID-19 Eric friction costs go away so I'd.
I'd be curious about your commentary and all of that.
So remember that the Hayne three point out strategy with a 2025 destination and so we've got lots of time to get there I think what's encouraging is our top line momentum.
Particularly in the United States has accelerated dramatically in terms of consumption, which I think is bodes very well for that journey.
As I said in the prepared remarks, we've had about.
10% inflation, plus another $40 million to $50 million of what I would call. These transitory costs and we've got about $100 million of pricing and about $50 million of productivity to offset those things and so that's why you've seen our our gross margins, while down slightly they've been pretty solid relative to.
You know the rest of the industry.
I do expect over time that these costs will go down I don't expect that we're going to continue to see double digit inflation.
And I do expect that this pricing will stick because we're seeing unit growth on top of the pricing, which again is very encouraging to us that you know when we originally planned we had assumed that there would be some volume falloff.
And we're not seeing that in fact, we're seeing volume accelerating so.
We expect over time these costs will come down and as that happens obviously, our margins will go up assuming we can hold onto all of this pricing.
And we still have productivity that you know is planned out for several years. So I'm optimistic that we will get there.
We're in a very volatile environment right now and we need to see some relief on some of these things in order to see those margins go back up.
I'm sure it's tough to disentangle what is the what pricing is covering in terms of transitory versus non transitory do you feel like.
Hmm.
Really your pricing for.
But everything but the transitory costs and.
Because of your pricing for transitory plus traditional input costs than you would obviously have a situation where you would be ahead of plan and after these transitory costs go away I mean, how do you how should we think about how your pricing for your costs.
So our model has been and our model for three point hours, we're going to price to cover inflation and then we're going to use the productivity to reinvest in our brands and accelerate the bottom line short term with price to cover inflation.
And the productivity is being used to cover these transitory costs. So we're not investing as much in marketing, we're taking as much to the bottom line because of all these transitory costs. So.
As again I over the next several years as we get into this three point O journey I expect we'll continue to price to cover inflation and.
And so that productivity becomes our opportunity to significantly increase the EBITDA growth, but short term. These transitory costs have sucked up that productivity.
That's helpful. Thank you.
Our next question comes from the line of Eric Larson with Seaport Research. Please proceed with your question.
Yeah. Thank you everybody and have your a good congratulations and good luck to you and welcome aboard Chris. So two so two quick questions. So.
If you look at where consensus estimates are right now for EBITDA for fiscal 'twenty, two is that $268 million.
And so you're guiding this year to sort of flat versus last year, that's $258 million.
You kind of just.
You know kind of wash out all of the puts and takes going on here. It seems like the entire adjustment to your EBITDA.
Guidance for this year is the incremental $10 million of energy costs. In Europe is that is that a fair way to kind of you know.
Wash this all down to something that we can better understand.
Yeah.
It's a little bit of an oversimplistic simplification as I said, but right at its core that is what's driving the decline we do have incremental costs, but we do have incremental pricing we'd have incremental productivity, that's covering some of the transitory costs. So there's there's a lot of puts and takes in this environment, but the at its simplest level.
Yeah, We've got 10 million more fast and we're taking the guidance down $10 million. So those those.
And that can explain it at 30000 feet.
But I certainly would tell you underneath the water there's a lot more puts and takes in there there are some things that have been.
Negative surprises and there are some things that have been positive surprises.
But it all washes out to basically about a 10 million dollar change.
Yeah, Yeah, there, there's a lot of moving parts I'm just trying to I'm just trying to again simplify it to the best that we can to see what are the real incremental change was so the second question is you've got $100 million of pricing already taken this year. So just use a simple 2 billion dollar revenue base, that's 5% it.
It seems that you know.
Price increases by other packaged goods computer actually higher than that.
Are you trying to maintain as much price competitiveness and use some of your product your great productivity opportunities to maybe try to be more price competitive going forward through this or again is that it will be a simplification of how I'm looking at this.
Well, so when we look at pricing as a percentage of our costs not as a percentage of our revenue so as a percentage of our costs, it's significantly higher than the five <unk> that you said.
And if you look at the retail data you'd see that where our most recent 12 weeks, we're up about 7%.
And that's before we take the second round of pricing. So I would expect at the end of the day, you'll see about 10% increase in pricing at retail.
And we do analyze this by segment by category in great detail to make sure that our price gaps aren't getting any wider to make sure that our velocities arent you know aren't dropping.
And like I said in some cases, it's been way better than we thought where we're actually picking up units and velocity. Despite a significant increase baby would be a good example of that where we've taken double digit increases in our velocities are picked up dramatically.
And then there's other cases, where you know what we took pricing and our competitors haven't taken yet and we're seeing some velocity fall off so we have to make adjustments and that's that's what I meant before by my puts and takes comment it's not it's.
It's not all going exactly as planned but on balance it's going as planned.
But youre going to see about 10% retail prices at the end of the day.
Got it okay. Thanks, one more real quick question. If you like your stock price at an average price of $44 in the second quarter I would assume you'll like it a lot at 36 is that a fair observation.
Yeah, I'm not going to divulge what our internal strategy is relative to our you know at what price.
We consider the stock to be.
Value, but it's it's a fair conclusion to say that if we like the stock in the mid Forty's and we certainly like it in mid Thirty's.
Thank you everybody appreciate it.
Our next question comes from the line of Rebecca Schuermann with Morningstar. Please proceed with your question.
Good morning, and thank you for the question. So yeah, I think I'd like to start with if you could kind of provide a little update on the staffing levels you might have mentioned that instantly staff, but you know that could have just been and the warehouse I believe last quarter. You said the warehouse had returned to full staffing, but there were still some short.
Just in the manufacturing plants.
It could provide a little update there and also give me a picture of what its like at your retail customers and its shortages there aren't hearing your ability.
To launch new products.
Yeah, so within our factories with the exception of one plant that has been kind of a perpetual challenge for us since last spring.
Were pretty fully staffed and our turnover is very low and so we.
We feel great about that we do have one plant and I've said it previously we did a consolidation of two different snack plants into one.
Right before the labor challenges hit and it's a very competitive marketplace, where wages have gone up considerably and while we are getting much more output out of that plant than we were six months ago for sure are we still do have some labor challenges in that one plant.
Europe , we don't have labor challenges, we have COVID-19 challenges with high absenteeism has as they've moved everybody back to work.
Seeing increased cases of Covid and therefore, we have against short term. Some people are going out for five days and coming back and that's disrupting.
Disrupting production, a little bit, but we don't expect that to be a long term issue.
With regard to retailers.
And even suppliers they are seeing labor challenges just as you know the rest of the world has seen labor challenges, whether that's in our industry or other industries, and that's where the disruptions come in it can be that a customer is supposed to come and pick up in order and their truck doesn't show up because they couldn't get a driver it could be an ingredient that.
Doesn't arrive on time, because theyre, having challenges are it could be a co man, who has 10 customers and has to take the volume that they havent split it among 10 people, even though their output may not be at the level that it was previously so.
As I've said before internally I think we've got good control of our labor.
Externally those are the things that are driving these trends are transitory cost increases that we're facing and we're doing the best we can to offset finding backup sources of supply air freighting materials.
Finding a truck to pick up the order if a customer wasn't able to get it dropped again, all those things come with extra cost.
And that that $40 million to $50 million that I said in my prepared remarks, and so far we're doing a really good job because our service levels are above average for the industry and we know that because again customers are giving us more distribution, they're offering us merchandising programs that other people have dropped out of and they wouldn't be doing that.
Our service levels were in good so well.
Well, it's adding cost we're doing a pretty good job of keeping the customer service at the end of the day and that's that's the priority because for us to be a growth company, we have to be a reliable supplier.
And short term, we may have to eat those costs and find productivity to offset it.
Yeah.
Our next question comes from the line of Scott My skin with our five capital. Please proceed with your question Hey.
Hey, guys. Thanks for taking my question.
You said earlier about Europe that people have gotten back more to normal eating out or eating out more.
So the thought process can we get this from our clients because as we get to the second half of calendar 'twenty two.
As things cycle, the price increase the cycle and then you know maybe we're seeing some volume hiccups, how do you think the business performs through that.
These would be your.
Astellas, but also maybe.
Competition, if we start to see a ramp up in <unk>.
Promotions, and maybe even retailers asking for price decreases.
Sure.
Right.
Now, we're going to obviously watch the consumer right. If the consumer is willing to accept the increases.
Then we're going to keep the increases in there if the consumer is trading down or we see that competitors are lowering their prices were going to have to be responsive to that.
But I do expect as you just pointed out that things will normalize as we start to lap people going back to work and it was a very you know unlike here, where some people are working at home I think I saw a study recently, 38% of people are back to the office, 100% of the time, another 35% or.
Kind of half and half out and another 30 or so percent of our home, it's a little bit of a mixed bag here there they kind of swung the pendulum all the way to the left and then swung it all the way to the right. So we are overlapping complete lockdowns for a period of time.
That are driving occasions out of the home as that normalizes and we lap that I do expect that volume will normalize within the grocery store and I do expect that double.
Double digit inflation.
Everybody is working to get that inflation down and as that materializes. We will just have to watch the marketplace in terms of what does that do to retail prices and consumer behavior, and we will certainly lead in categories, where we our share leaders and will follow in categories, where we may not be the leader, but we've got a very robust kind of pricing team both here.
And in Europe that are watching these things exceptionally closely and you see it so far and the data that we've done a really good job of responding.
In two people that haven't moved when we have our people who have moved more or less and we have and we're watching the promotional environment just as closely to see.
Where prices are going down we've got a we've got to stay within certain gaps in people so that our consumers don't trade to other brands.
So we're on it we're watching it but yes I would expect these things are going to normalize as we get into F. 'twenty three.
Certainly better than some of the challenges we've been having now because we're gonna be overlapping those challenges pretty soon.
That is all the time, we have for questions I'd like to hand, the call back over to Mr. Schiller for closing remarks.
I think you guys for all your interest today, obviously, it's a it's a very challenging environment as you've heard from everyone I'm incredibly encouraged by the top line momentum that we're seeing.
And consumption in the United States that has been one of the proof points that's been missing in our Hanes 2.0 journey. We said that was to set up top line growth and three point out and the fact that it's accelerating we're very excited about so I look forward to the one on one calls later today and again. Thank you all for your interest.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.