Q3 2022 Hain Celestial Group Inc Earnings Call
Greetings and welcome to Chaim stainless steel third quarter 2022 earnings conference call.
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Over to you. Thank you good morning, and thanks for joining us on Hain celestial third quarter fiscal year 2022 earnings conference call on the call today are Mark Schiller, President and Chief Executive Officer, and Crystal 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.
[noise] 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 the Haynesville Ostial annual report on Form 10-K quarterly reports on Form 10-Q, and other reports filed from time to time in the Securities and Exchange Commission and its press release issued this.
Morning for a detailed discussion of the risks that could cause actual adult differ materially from those.
Baxter imply that any forward looking statement.
The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on the Haynesville I feel blessed site under the Investor Relations Petter. Please.
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 a 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, Chris and I will give you some color on the Q3 performance, our Q4 outlook and what we're doing to enable the heel three point O strategy that we discussed on Investor Day last September .
Q3 was very challenging quarter as additional unexpected inflation supply disruptions ingredient and package shortages and eroding European consumer confidence primarily caused by the Russia, Ukraine conflict had a significant impact on our business and financial performance.
While these disruptions led to softer than anticipated results in the quarter strong consumption and market share gains leave us confident in the underlying business health and long term trajectory. Let me explain why we feel this way first.
First consumption in sales in North America are exceptionally strong and we expect that momentum to continue into Q4 in fact, while I don't have a complete archive of the Companys reported earnings history. We do know that this quarter was the highest net sales growth quarter in North America in the last seven years.
In a moment I will share with you some impressive details behind these sales and what that means for our future growth.
While our topline was soft in international most of the revenue issues within the quarter were driven by short term factors that we believe will improve in Q4, although we expect short term inflation and consumer confidence challenges to continue internationally.
It's worth noting that we have nine number wanted to share brands that are well positioned for growth as conditions normalize.
Third since.
Since we don't know when the inflationary pressures we are all facing will ameliorate. We do expect it to continue and are taking actions to reduce our ongoing cost basis, while passing on significant additional pricing.
To date, we've taken two rounds of pricing both here and in Europe , and thus far we've seen only a marginal impact on our unit growth.
Our primary priority has been and will be to continue servicing our customers. Even if this impacts short term profit to allow us to further build consumer trial and loyalty as well as strengthening customer relationships. Despite industry wide supply challenges, we're maintaining service levels and the 90% range, which is exceeding most.
Of our competitors and allowing us to take share. This was and is a conscious decision and one that we are confidence strengthens hain for sustainable long term profitable growth.
Digging into the reporting segments in North America, we saw strong momentum on the top line with consumption in the U S up 11% in the quarter well above the industry average of less than 5% for branded food.
In the quarter grew 13% overall, excluding acquisitions and divestitures, our sales were up a very strong 9%.
Call that on Investor day, we identified six categories, we're focusing on for growth.
Base snacks tea baby yogurt in personal care our growth brands in these in these categories, which make up about 80% of our volume and profit delivered dollar consumption growth of almost 16% versus a year ago more than double the rate of their respective categories.
Paired to pre pandemic consumption on these growth brands is up 23% with velocities up 20% underscoring the strength of the brands and its relevance.
In aggregate our growth brands led by snacks Baby and T gained share again this quarter and in fact, we've grown aggregate market share of these growth brands every single four week period.
More than a year.
Household penetration on these brands also grew 10% in the quarter, a very important metric given the size of our brands.
The growth brands also delivered strong unit velocity growth of 6% compared to a 4% decline in unit velocity for all food companies more impressive unit growth was up 4%, while average food companies declined 4%.
And that strong Hain unit growth was delivered with double digit pricing versus year ago, indicating that we're gaining users and loyalty.
In fact, we increased our buyers 11 per cent compared to less than 1% increase in our categories and our heaviest buyers who purchased more than three times a year grew 14% in the past quarter.
Category and brand level snacks, and baby were particularly strong this past quarter, our snacks portfolio share grew 1.3 points with consumption up over 25% on a one year basis, and almost 40% versus pre pandemic levels household penetration was up 17% versus last year and 40% compare.
To pre pandemic levels sensible portions, which is the company's biggest brand has grown household penetration of 23% versus a year ago and 70% since the beginning of the pandemic.
Our Earth's best Baby Food brand was also particularly strong with consumption up 35% in household penetration up 17% versus the same quarter last year.
<unk> market share grew one nine points and unit consumption was up double digits, while pricing was also up double digits for.
For personal care total channel consumption inclusive of a club and E. Commerce was up 25% in the quarter and total P. C. Net sales in the quarter were up double digits, driven by strong programs and club on all the hair and Sun products. Both of these club initiatives will continue into Q4.
Garden of Eden, and Terra, which struggled with supply challenges in the first half of the fiscal year, both returned to growth in the quarter. A great example of how well we're addressing some of the macro challenges and a very positive indicator of the underlying strength of these businesses. So bottom line our growth brands are performing exceptionally well in North America, and showing the growth potential.
Central that we outlined in Hain three point out.
In the middle of the P&L gross margins compressed materially as we continue to face unexpected challenges with ingredient shortages rising fuel costs and increased labor expense, adding additional disruption costs.
Offset these costs, we took more pricing in the quarter the pricing, however, lagged inflation, thereby contributing to the margin erosion in the quarter.
Expected impact of these price increases will be fully reflected in Q4 and as part of our go forward guidance.
Shifting to international our issues were predominantly driven by top line softness sales in constant currency, excluding divestitures were down 8% well below what was expected there were.
Three primary drivers of the revenue decline, which we anticipate will improve in Q4 first consumer sentiment in Europe has dropped significantly since the start of the Russia, Ukraine conflict wages aren't keeping up with inflation people are concerned about their future and therefore are making trade offs and their consumption in the quarter total grocery sale.
Across the entire store were down almost 7% with units down 9%. This affected all food brands and categories, including a wrong looking.
Looking forward the overlap versus year ago get significantly easier and we expect total store declines to mitigate going forward.
Second we had a major customer cancel plant based beverage orders in Europe , a year earlier than planned as a result, we lost close to $8 million of sales in the quarter versus last year.
The good news here is that the category is still growing nicely and we've already started selling the excess capacity to new and existing customers and expect to have.
Placed 50% of the lost volume by the end of the fourth quarter.
Third we took a hard line and chose to stop shipping products to those retailers, who initially resist that our price increases. The good news is we eventually prevailed and got the increases accepted.
But the longer term benefit came at a short term cost we lost four to five weeks of sales on several brands at multiple retailers during the negotiations hurting both our short term sales growth and share performance within the quarter. We're now shipping fully to all customers and therefore this is not going to be a headwind in Q4.
In the middle of the international P&L margins were eroding versus last year, driven almost entirely by price increases lagging inflation increased energy costs, which we discussed on our last earnings call and stranded overhead costs driven by the lower volumes with pricing now in place in volume expected to improve in Q4, we.
The margins will increase sequentially.
As we look to Q4 for the entire company, while we were lowering our guidance to reflect the impact of the issues that hit us in Q3, we expect sequential improvement and continued strong topline growth in North America, Chris will give you more details on the forecast in a few minutes.
Pivoting to our Hain three point O strategy, we remain excited and optimistic about our direction.
Recall that our strategic pivot to growth is predicated on driving distribution, creating category, expanding innovation and increasing marketing and a core set of growth categories and brands.
While we expect to invest are broke robust productivity improvements into more marketing overtime in the short term we've been using those dollars to help offset unprecedented inflation and drive brand growth through strong service and high in stock levels at shelf strong services, both enabled us to pick up significant trial and gain incremental merchandising and distribute.
<unk> opportunities as a result, despite the many macro headwinds, we're seeing clear signs of sales momentum and brand strength in North America across our growth brands and we expect that momentum to continue.
While international growth was certainly more challenged in Q3 as I mentioned earlier I would remind you that we have nine number one and two share brands in our portfolio and are well positioned for future growth brands like Ellas kitchen, which has grown share for 15 straight years and increased sales more than 30% in the recent quarter shows the strength of our portfolio and how well we.
We are positioned for the future.
Short term, we have to navigate the consumer angst over the Russia, Ukraine conflict and some of the lost plant based co man volume, but we remain confident that our brands are strong and our future is bright.
As part of the heating three point growth strategy. We also made the acquisition of that's how we roll to bulk up our presence in the high growth snacks category I'm pleased to report that the business grew 20% in the quarter and the integration is going very well we've identified more synergies than originally assumed and fully expect these brands to deliver consistent double digit E.
EBITDA margins over time.
Just this week, we started co mingling its products at our D C, allowing customers to order everything on one hand, invoice and receive all ambient hain products on one truck.
Takes trucks off the road, which is great for the environment and allows the that's how we rolled products that basically ride for free on our trucks.
You mentioned earlier that we're intensely focused on reducing our ongoing costs as we look forward and deal with short term cost pressures and long term growth opportunities. We're embarking on a restructuring to set us up for the future.
Part of that restructuring, we're reassessing, our org design and resource allocation with the goal of accelerating growth increasing efficiency and effectiveness in reducing costs.
Among the changes already underway, we are one increasing resources within supply chain and our purchasing co manufacturing and productivity teams to deliver additional cost reductions.
Two adding additional resources on capacity planning to support key growth categories, three eliminating the chief commercial officer role elevating other sales leaders to report directly to me.
For integrating the that's how we roll brands into Hain, eliminating many redundant roles and redeploying many of their teammates to fill critical open positions at Hain and five right sizing our infrastructure in Europe to reflect some of the short term headwinds there.
Al will provide more detail about the complete restructuring on the next call. We're confident these changes will make us leaner and more agile to address the short medium term inflation, we are seeing and more effective in driving our eight three point of the strategy with that let me now turn it over to Chris to provide more details on our performance and go forward guidance.
Thanks, Mark and good morning, everyone. As Mark said Q3 was very challenging given the unprecedented environment that we and other companies are facing industry wide.
Now turning to the financials, let me highlight a few key aspects of our third quarter results that demonstrate strong execution of our transformation plan and the building of a solid growth platform as we move into Haynes three Dato journey.
First.
While total Hain Q3 reported net sales increased 2% versus the prior year period reported net sales in North America were up more than 13% and 9% excluding M&A.
Second our growth brands in North America grew approximately 12% in the third quarter more than 900 basis points higher than the growth rate in the first half of the year.
Third our balance sheet remains strong with good capital allocation flexibility and finally as we look forward to the fourth quarter. We are encouraged by the sequential top and bottom line improvement we are already seeing across hain.
Let me start with a discussion of our topline results.
Third quarter consolidated net sales increased 2% year over year to $503 million driven by strong consumption growth in the U S. Partially offset by declines in the international business unit, resulting from soft total store sales in the U K the loss of sales from a large non dairy co man.
On account and the decision we made to temporarily halt shipments on select brands during price negotiations.
Foreign exchange reduced third quarter net sales by approximately 150 basis points, while acquisitions divestitures and brand discontinuation benefited net sales by 210 basis points. After adjusting to exclude these factors net sales increased by one 5% versus the prior year period.
During the quarter, we experienced higher than expected inflation and continued industry wide disruption and warehouse cost pressures driven by labor shortages, great carrier availability and other freight cost issues that we incurred as we chose to prioritize customer service.
<unk> and a reduction in adjusted gross margin of about 400 basis points are.
Our international operations were negatively impacted by lower sales in the U K grocery channel compared to prior year period. The previously mentioned loss of a large non dairy co man customer the price negotiation shipment hall and fixed cost deleverage.
Total SG&A, including marketing came in at 15% of net sales for the quarter in line with the prior year period.
Third quarter, adjusted EBITDA decreased compared to year ago to $58 $7 million, primarily driven by accelerating raw material and finished goods inflation and ongoing supply chain disruptions, partially offset by price increases we've taken year to date and supply chain productivity.
Our adjusted third quarter EPS of <unk> 33.
Decreased compared to 44 cents in the prior year period.
Now, let me provide some detail on the individual reporting segments, starting with our North American business, where as Mark said earlier, we are continuing to gain share and see strong momentum and consumption.
Top line reported net sales for the third quarter increased by more than 13% year over year to $326 million adjusted for foreign exchange movements acquisitions, and divestitures net sales increased about 9% versus the prior year period.
Gross brands delivered close to 12% net sales growth versus the prior year period, driven by exceptional performance on the snacks brands, we expect growth brands to continue their strong momentum in Q4.
From a profitability perspective, adjusted gross margin for our North American business during the third quarter decreased by 480 basis points versus the prior year period to 23, 7%.
While the industry wide supply chain challenges impacted the profitability of the quarter, but year to date pricing actions, we have taken and our robust productivity pipeline are beginning to catch up with inflation, which was 740 basis point headwind versus the prior year period.
Consistent with the pressure on gross margin adjusted EBITDA in Q3 for North America decreased 23% to $37 million from the prior year period.
Adjusted EBITDA margin of 11, 4% represented a decrease of 540 basis points versus the prior year period.
Now, let me shift to our international business net.
Net sales for the third quarter versus the prior year period decreased 14% on a reported basis driven by mid single digit declines across the UK grocery store channel.
Loss of a major non dairy beverage customer and the impact of shipment halt during the price increase negotiations with certain customers in the UK.
Currency movement was that 360 basis point headwind in the quarter.
From a profitability standpoint, adjusted gross margin for our international business decreased by 310 basis points, driven by increased energy cost and fixed cost deleverage adjusted EBITDA in Q3 decreased 28% to $26 million from the prior year period.
Adjusted EBITDA margin of 14, 9% represented a decrease of 300 basis points versus the prior year period.
Shifting to cash flow and the balance sheet operating cash flow was $31 million in Q3, and 99 million for the first nine months of the year.
While year to date operating cash flow.
Was lower by $47 million versus the prior year. The company benefited from a tax refund claim under the cares act of about $54 million. During the first nine months of fiscal 'twenty one.
Capital spending for the third quarter was $6 million, which reflected lower spending than expected given supply chain challenges and labor availability.
We expect in Q4 to return to levels in line with our three to three 5% of net sales target.
Cash on hand at the end of the quarter was $58 million, while net debt stood at 778 million net.
Net debt leverage is now calculated under our amended credit agreement was three three times.
Our balance sheet remains strong and as a result, we believe we have significant flexibility to both reinvest in the business and return value to shareholders.
Consistent with our capital allocation principles during the quarter, we repurchased three 6 million shares or three 8% of the outstanding common stock at an average price of $36.48 per share for a total of approximately $130 million, excluding commissions, leaving us with about 180 <unk>.
$1 million of additional repurchase authorization under our 2022 program at the end of the third quarter.
Now turning to our outlook for the fourth quarter, we expect low to mid single digit adjusted net sales growth with as reported net sales growth of approximately 500 basis points higher than the adjusted net sales growth rate, mainly driven by the acquisition of that's how we roll.
This implies continued sequential improvement in Q4, adjusted net sales growth versus Q3 and significant growth versus the first half of the year sales in North America are expected to grow double digits behind continued strong consumption and international should be less negative as we get the full benefit of pricing sell some of the loss.
Co man volume and see sequential improvement in total store sales.
Modest adjusted gross margin reduction with sequential improvement versus Q3 the.
The improvement is driven by additional absorption in our plants from higher volume pricing taken throughout Q3, and additional productivity projects coming to fruition.
Q4, adjusted EBITDA low to mid single digit declines, including an approximate 300 basis point currency headwind.
Also note that we expect fourth quarter SG&A dollars to grow approximately $12 million versus prior year due to the addition of that's how we roll overhead.
Lower Q4 fiscal year 'twenty, one people related costs higher brokerage commissions and normalized expenses with return to office.
This implies full year results of approximately flat net sales versus the prior year.
Modest adjusted gross margin reduction and low double digit adjusted EBITDA decline.
Our updated full year guidance reflects the impact of the pricing actions, we've already taken in North America, the U K and the EU offset by the highly inflationary environment that we're operating under.
Ongoing supply chain disruptions and soft, but improving grocery store trends in the U K and EU.
In summary, we are navigating a very challenging business environment and remain encouraged by the strong top line momentum we are achieving and are on track to deliver our hain three dato strategy.
I will now turn the call back to Mark.
Thank you, Chris while Q3 was certainly a challenging quarter, we're encouraged by our North American top line momentum I'm optimistic about improving international trends ahead and are laser focused on reducing our overall cost basis as we navigate current macro headwinds and importantly, we remain confident in our heat three.
Point out strategy and significant potential over the long haul on.
On behalf of the Hain executive team and the board of directors I want to thank all our teammates for their hard work tenacity and nimbleness with that let me turn it back to the operator, so we can take your questions.
Thank you.
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The request to all the participants to limit yourself to one question and one follow up.
One moment, please while we poll for questions.
The first question comes from the line of David Palmer with Evercore ISI. Please go ahead.
Hi, good morning.
Mark you made a comment there in your prepared remarks about the pricing and that that was going to be part of your ongoing guidance.
It reminds me that we're at a kind of an interesting time coming out of the fiscal year into a new fiscal year. So I'm wondering.
What do you what do you mean by that I mean, what sort of.
What sort of ongoing performance.
Performance are you expecting here, what sort of margin reclaim.
Are you expecting from them from these pricing actions that you're taking.
Yeah, Good morning, David.
The comment in the script was basically that we took.
Pricing in the middle of the third quarter. So we will have the full rehabilitation at pricing in Q4.
But that said look we do expect that we're going to need to continue to take pricing in this environment inflation, but we're certainly hopeful that it.
Ameliorate and.
Comes down a bit.
We're planning for it not to happen and are already preparing additional increases both here and in Europe .
We will be surgical in those increases just as we have been and that's part of why our unit volume has held up so well in the face of double digit pricing.
And we have multiple levers in terms of how we will take that pricing, whether it's list pricing changing our trade strategy in terms of depth and frequency are looking at the weight of products et cetera, and and so we expect that we will over time take enough pricing to cover the costs, which is our intent and where are you.
Using the productivity that we generate to really cover the vast majority of these supply disruptions that we're facing.
And I'll just ask a long term when you in the past you've talked about.
That aspirational gross margin target of 30% by fiscal 'twenty five.
You know these are new times were nominal top line is higher and sometimes the gross margins may not be.
May not be keeping up over the long term, if you're pricing for for a gross profit dollar but.
You might be able to leverage that better down to the EBIT margin EBITDA margin line. So I'm wondering how are you still thinking that gross margins are 30% are achievable fiscal 'twenty five.
Yeah. It's a great question, obviously 25 is a long way away. So we have lots of time between now and then and I would certainly expect that inflation will come down dramatically between now and then and so.
If we can keep this pricing.
And it sticks overtime as costs come down and moderate we expect that we will see significant margin expansion over time short term. Obviously, we've got the same headwinds that everybody else does and we're.
Were making the conscious decision to prioritize service over margin in the short term because we have relatively small brands in the scheme of things with relatively low household penetration and our ability to service the customer and keep the shelves full is getting us tremendous trial.
Where there are lots of holes on the shelf for many who are struggling with supply. So short term, we will continue to see some pressure, but we are confident in our ability to expand margins over time.
Okay. Thank you.
Thank you. The next question comes from the line of Michael Library with Piper Sandler. Please go ahead.
Yes.
Thank you and good morning.
Good morning.
I realize you certainly don't want to get into too much detail on 2023, yet, but can you give some sense of just how maybe you're thinking has changed or if this quarter, especially in the international had some unexpected pressures what should we be expecting there.
Flow through.
Specifically, maybe are you planning on the sentiment headwinds there being being a headwind for you know maybe most of the next year.
It is the energy cost outlook.
We should keep in mind, but just any any breadcrumbs you can offer for for how Youre thinking about the next few quarters would be great.
Yes, it's obviously early for us to talk too deeply about 'twenty three and we're in a very volatile environment, where things are changing all the time and I'd remind folks that when we gave our guidance for Q3 of the Russia, Ukraine War had not started yet and it has obviously changed things pretty dramatically.
Both here and in Europe , and in terms of global supply challenges. So it's a little bit early for us to give any kind of real guidance around 23, what I would say, though is we are planning for inflation to continue we are taking additional pricing to cover it we are ramping up resources in restructuring.
As I've mentioned in the prepared remarks remarks too.
<unk> increased our productivity.
And to ensure that we've got supply locked up and so that we can service the business well and so we're navigating the short term headwinds by being very aggressive.
In terms of how we handle the headwinds I. It's it's too early to talk about what's going to happen six 912 months from now because we're going to learn a lot over the next few months about the Russia, Ukraine, or we're going to learn a lot about consumer sentiment and whether there are trading down or not and so.
It's pretty early for us to kind of put a stake in the ground at this point.
That's helpful color, though and can I just follow up on the on the pricing I.
I guess dispute that you mentioned in the international segment.
It sounds like it was a few brands I think in a few retailers.
I guess, just would love to understand that situation a little bit better.
It seems like it's kind of unusual event can you maybe just catch us up on what played out there and and what if any residual impact there is going forward.
Yeah. So.
The European retailer market in Canada, and the Canadian market for that example arm for that aspect.
Aspect are much more consolidated than they are here you have.
Fewer bigger retail.
And so negotiations on pricing has always been more difficult there than it is here.
That said, we started presenting our price increase again or.
Grain and it looked like things were stabilizing and so we were getting some pushback on retailers as to whether or not.
Energy costs were going to.
We're going to continue whether our cost we're going to come down and so in that negotiation. We made the tough decision to say if youre not going to accept our price increases were not going to ship your product.
The good news is after a couple of weeks of back and forth and us not shipping we were able to get all of the retailers to accept the price increases and those are now firmly in place. So a lot of it is really what's the macro environment and what's the retailer's perspective on whether the the inflation is transitory or not I think we clearly learned from.
This war that inflation is getting worse, it's not getting better and supply challenges are getting worse, not getting better and so we were we stuck to our guns. We're trying to make sure that we're passing on our costs and we were successful in doing it now again, we're going to we're going to take more increases going forward and we will serve.
Reflecting go forward guidance any anticipated disruptions associated with that but.
There's no question that the inflation is significant in that.
That has to get passed on ultimately to the consumer.
Well it sounds like ultimately getting the policy and reflects the consumer demand too so thanks.
Thanks for that question and thanks for the questions.
And it also reflects the strength of the brands right with nine number one and two share brands the retailers need our products we.
We have the number one two and three shared chilled soup brands as an example, which is a very short shelf life. So whatever we lost during that period of not shipping is lost we're not going to it's not like inventory is depleted and it comes back it's very short shelf life product, but when you have the top three brands in the category.
The retailers category suffered dramatically if theyre not accepting product from us so.
We think we're in a good position to negotiate it certainly a partnership.
And we worked hard to make sure that we're appeasing the retailers, but also covering our cost.
Okay, great. Thanks.
Yes.
Thank you. The next question comes from the line of Alexia Howard with Bernstein. Please go ahead.
Thank you good morning, everyone.
Good morning.
Okay. So can I ask about the the competition as the input costs and freight.
<unk> you.
You have on slide 14, the 740 basis points of headwind from inflation in energy and supply chain disruption is it possible to break that down to let us know how much of it was input cost ingredient related and packaging how much of that was right.
And how much of that was supply chain.
It's robin.
Likely what changed most dramatically from when you gave guidance last quarter and just said we have a feel for.
Where the big pressure tests that have shifted over the last couple of months.
Yeah, So we're seeing double digit inflation across almost every thing alexia so packaging ingredients freight.
Labor costs have gone up dramatically so.
That certainly changed considerably versus when we wrote the original plan and gave the original guidance back last summer we have about double the inflation that we originally had planned for with regard to the the question within the quarter.
Certainly gas prices have gone up dramatically, which impacted freight.
We're seeing a knock on effect of oil prices on things like packaging going up and while we have contracts on all of our ingredients. When there are supply shortages, our ability to get those ingredients becomes challenged and we have to find alternatives often at a premium cost and so.
With as an example, with 75% of the world's sunflower oil coming from Russia, and Ukraine, and 60% of the Palm oil coming from Indonesia wishes said, they're not going to export any of it.
There is a supply demand issue with regard to to oils, which affects our spectrum business, which affects our snacks business and so we seek to find alternatives are in a very.
Constrained environment and that comes at a cost and so that was a big part of.
What changed versus what was originally planned.
When we gave the guidance for Q3.
Thank you and then as a follow up I'm, just trying to get at the.
The short term factors that pressured sales in Europe , and I know that you outlined.
Quality Kelly are you able to quantify things like that you know.
How much the several weeks.
Not shipping to those retailers.
<unk> top line in Europe , and they said what other factors like the co manufacturing piece you know how much.
How much of it was short term, but it's the overall decline that we saw this quarter. Thank you and I'll pass it on.
Yeah. So the first thing I would point out is.
Total store softness, which in the U K was down 7% that's total store every category.
Food was down 7% and units were down 9%. So in an environment, where the store is consolidating at that kind of a rate even if we're gaining share.
Volumes are going to be down it's hard to distinguish.
How much was caused by the soft store versus how much was caused by stopped shipping as an example, but in.
In the charts that we provided it was roughly a third we're attributing to the store declines a third to the stop shipping and a third to the last comment volume and and just a quick color on the co man.
You know the the non dairy beverage market still is extremely robust and the fact that one of our major customers decided to repatriate. The volume is a sign of the strength of the category. Unfortunately for us that that repatriation, which we knew was coming him a year earlier than we had planned for.
And so we will resell that volume led to private label.
Gained seven share points in plant based beverages in the last 18 months and that's largely where our volume is so replacing that volume over time, it's not going to be an issue. We just have to wait for existing contracts.
To expire for us to replace it and as I said in the prepared remarks, we expect we'll have half of that replaced already by the end of the fourth quarter. So.
We're confident we'll get all that volume back and you look at another chart that was in there you also see that the overlap from the consumer softness in the U K also gets better as we get into the fourth quarter. So we've got a lot of reasons to believe that.
The trends are going to improve from here.
Great. Thank you very much I'll pass it on.
Yeah.
Thank you. The next question comes from the line of Ken Goldman with JP Morgan. Please go ahead.
Hi, Thank you so much.
Mark I wanted to follow up on your comment about.
Perhaps you need to take or think about taking more pricing in the EU.
You know as you as you consider what happened in the third quarter with shipments withheld in you know understanding that's not super uncommon in the EU. It's obviously not something we see a lot in the U S. But how does that affect how much pricing you might consider for the next round you did emerge victorious.
By your words, but not without some short term pain. So I'm just curious how you balance some of those factors in your and your thought process there.
Yeah, So first and foremost.
Retailers are our partner so we work with them to make sure we're meeting their needs and our needs are in the negotiation just had.
Went out with some pricing we had to give a little in some cases to get the pricing and but at the end of the day. It was a win win for both we're going to continue to pass on whatever inflation, we have that we can't cover with productivity. We do it surgically we look at our price gaps versus our competitive set we look at price thresholds, we look at the.
Elasticity data that we have.
And so we're not just randomly throwing out pricing or taking kind of.
Cross the board X percent pricing, it's very surgical it's very pinpointed.
Some of it will be enlist some of it will be in trade. Some of it may take the form of weight outs as I mentioned and.
And we will do it in a way that.
Meets our needs, but also meets the retailers' needs and so while the negotiations may be challenging and difficult and that's just part of the nature of price increases in Europe at the end of the day, we need the retailers and the retailers need us and we will find a way for us to get pricing pass through in a way that works for both parties.
Thank you and then quick follow up you've been fairly aggressive with share repo. This year is it fair to assume that this pace will you know maybe cool off a little bit now that you may not drive quite as much free cash flow as you previously anticipated or as the stock you know heading toward a valuation level that as Jim just too attractive to ignore as you say it.
Yeah. It's a it's a great question I'm not going to give a specific answer because that's a conversation between us and the board and it also depends on what other uses for capital or for cash that we have so part of our productivity agenda.
It includes a lot of automation, so there'll be some needs for capital.
There is acquisition opportunities that we're still pursuing and then of course share buybacks as another so we look at all of these things through the same lens and decide where we're going to get the best and highest return for shareholders. Some quarters that may be repurchasing as other quarters. It may be capital or it may be M&A. So it's hard for me to give you.
With specific answer until we've made those specific decisions.
Understood. Thanks.
Yeah.
Thank you. The next question comes from the line of Eric Larson with Seaport Research Partners. Please go ahead.
Yeah. Thanks, everybody. Thanks for the question so.
Mark obviously, a lot of moving pieces here.
But in your prepared comments you also talked about <unk>.
Tumors in in Europe trading down.
No I think maybe their situation over there is little more dire than maybe what we might have in the U S. But one of the concerns were.
We're seeing now is consumers in the U S are getting pretty stretched and.
You know.
Is there a possibility of of trade off or maybe slowdown in.
And you're a very strong consumption growth rates in North America is as this inflation becomes.
Even more problematic here as well.
Yeah. So first.
Thanks for the question the.
First I would say in the U K just know that we are also a private label supplier, so as as consumers change behavior and trade down.
We benefit on one side of the equation, where we may lose on another but where it's not an all or nothing equation for us there and in North America. What I would tell you is if you go back to the last recession.
Healthy food grew 8% at a time when the store declined that's during the housing crisis since 2007 and eight.
Because we have a much more affluent consumer.
Tend to be much more in elastic now I'm certainly not going to suggest that it isn't possible that we'll see some trade down.
And we're watching that exceptionally closely obviously, we just took some pricing we're going to assess what the impact of that pricing is but I would I would argue based on history.
People are much more affluent and used to paying a premium for healthy food and that.
We'll continue even if the economy gets softer and people are more strapped in their wallet because it's not really the affluent consumer that is affected as much as kind of the middle income and lower income consumer we do watch that said, however, we do watch our price gaps versus our competitive sets.
So if you've made a decision to buy organic where do we fit versus other organic products. As an example, we want to be very cognizant of those price gaps and and watch those closely and we've learned from the first two rounds of pricing, where we took too much pricing relative to our competitive set where maybe they didn't go up at all we had to adjust back down and in other cases.
We didnt take enough right theres opportunity to take more of them because these are.
Very dynamic times, we have a very robust pricing capability to watch it that closely.
And we expect that with the inflation that we're seeing and the words that we've heard from others on their earnings calls, we expect that others are going to take more pricing as well.
And we will watch our gaps very closely.
Okay. Thanks, and then and then by my final question here or a follow up question is can.
Can you can you give us a little bit more color on maybe the timing of productivity.
And one of your your big.
Your big positives for the last three years, obviously, some setbacks here with cost inflation et cetera, but could.
Could you give us an idea of you know of.
Yeah.
This is the ranges of.
Our guidance for long term productivity that you've had and.
What we might start seeing some of that incremental productivity show up in the P&L.
Yes, we've been generating about $40 million to $50 million of productivity, a year, which is around 4%.
And we expect that we will continue to do that what I would tell you though is in the last three to six months some of our productivity resources have shifted to things like re formulations as opposed to just capital automation projects and things like that so.
In an environment, where certain ingredients are going up dramatically and other ingredients haven't gone up at all we are we are looking at our formula is very closely.
And and flexing those formulas in a way that minimizes our cost that's a big a big source of.
Productivity for us going forward.
And you've already seen that in certain brands like garden of Eden, where we did a complete reformulation dramatically lowered the cost.
And we're actually able to lower the price of the products such that we are now growing high single digits and very well positioned for the future. So it is it's a combination of projects as I mentioned in the prepared remarks, we are adding resources in productivity because we have so many projects and people are.
Spending a fair amount of time, you know fighting the various supply challenges that we have and I don't want to lose any momentum on productivity. As a result, so I expect we'll still be in that $40 million to $50 million range.
It's materializing in the P&L today, you just don't see it given the magnitude of the inflation and the disruption costs, but we are generating good productivity and we have a very robust pipeline of ideas that we're continuing to work.
Alright, thank you.
Thank you. The next question comes from the line of Anthony Vendetti with Maxim Group. Please go ahead.
Thanks.
Just two questions. So the first is on the.
The top line.
Obviously, you've been taking price increases in and been successful and Youre going to continue to do that where where you can but in this particular quarter.
What was was volume.
With volumes down year over year.
Because since the price increases it looks like may have accounted for for.
Most if not if not all of the revenue growth and then and then.
Just a quick follow up is on you know you mentioned, obviously, there's been increased costs throughout whether it's.
Ingredients packaging cost freight labor and and how much how much of the increased raw material costs would you contribute to the to the war in Ukraine.
Yeah. So on the on the volume question volume was up in North America, but it was down in international.
Given the top line softness that we mentioned, but not shipping product is the weak consumer volume was definitely down in our international business, but it was up and in North America and in the prepared remarks, I talked about how our unit growth is mid single digits in an environment, where we're taking double digit pricing. So.
It's we feel really good about the strength of our brands and the fact that.
We're gaining households, and gaining units at a time when our categories are not on our competitors aren't necessarily either so.
It really is a tale of two cities with regard to that question.
On the raw materials, you know what I would tell you is the war has impacted.
Pretty much everything and what I mean by that is obviously gas prices have gone up you'll see it at the pump.
The derivatives of oil things like packaging are going up because there's a because of the war and in particular I'm.
Mentioned earlier oils.
Cost of oils are going up exponentially, because both Indonesia hoarding, what they have and duquesne not planting or harvesting anything.
Theres, just going to be a shortage of oils relative to the supply that's out there now the good news for US is we have contracts that extend all the way through the end of the calendar year, but just because we have contracts doesn't mean that the supplier has supply right and so.
They are honoring the prices that they have when they have supply, but if they don't have it we have to go find alternate sources and that comes at a premium cost.
Because there just is more demand than there is supply right now so I'd say oil is a big piece trade is a big piece packaging is a big piece and even in Europe a lot of the.
Our manufacturing employees the people that pick the crops a lot of them come from the Ukraine and those those people are not available. So there's also wage inflation pressure as well as a result of the war.
Okay, Great. That's helpful. Thanks, Mark.
Yeah.
Thank you.
Ladies and gentlemen.
Due to time constraint I would request all the participants to just limit your question to one question.
The next question comes from the line of John Baumgartner with Mizuho Securities. Please go ahead.
Good morning, Thanks for the question.
Hi, John .
Mark I'd like to revisit the subject of productivity given the increasing importance there and offsetting cost push as we think through the next phases for contribution and you just discussed this a bit in terms of the ingredients, but whats been on the board I think is lean manufacturing automation regional integration when you sort of rank order your.
X for F. 'twenty three to what extent is that you know call. It 40 to 50 million of savings contingent on outside parties may be vulnerable to ongoing disruptions to the supply chain I guess, I'm really asking more about the mechanics of the activities and what could potentially get delayed rather than just the straight dollar contribution.
Yeah, Great question. So the two big biggest productivity areas, which I just mentioned a few questions ago is re formulation and.
Capital automation projects with.
So those are the projects are the ones they are subject museum.
Yeah Douglas.
Sorry, the capital projects are the ones that are.
Subject to potential disruption because we're we're reliant on other people having the labor.
And the materials to be able to provide us the capital.
On time, and so we're seeing that in some cases, some slippage in the timing of the receipt of those materials.
But at the end of the day, there is a lot of projects and productivity automation of packaging design and.
In the case of that's how we roll, which we just bought.
Grinding our own cheese versus pre ground cheese.
There is also capacity projects that are capital dependent where we've grown so fast in some categories that we are adding capacity.
So those are the things that that rely on third party equipment manufacturers. Those are the ones that are somewhat at risk but.
So far so good those seem to be on track and we will watch this closely.
Yeah.
Thank you.
The next question comes from the line of Rebecca Schueneman with Morningstar. Please go ahead.
Oh, great. Thank you so my first.
Question is I was just wondering if you could set a little bit of light on the soft volumes in other down per cent.
The 9% fall in volumes in Europe .
No I would think that with.
You know them.
Sure.
The problems in the end that a consumer concerns over there that this would be very resilient can you explain why this is more discretionary than I would've expected.
Well so part part of it is certainly driven by the Russia, Ukraine more than just people's the angst around their own finances and.
What the implications of the war are going to be going forward right. So Russia is cut off supply to Poland on certain things being threatened Finland people are anxious about kind of what's coming which is affecting purchases and and certainly we're seeing some trading down as a result.
With it but the other thing that's also very relevant here is if you look at the overlap.
And there is a chart that we provided in the with the earnings.
That shows that we had a very elevated volume period.
Last year, which was because Europe was incomplete locked down and unlike the United States, where we have red states and Blue States and some were locked down and some werent.
There was complete locked down a year ago and now that they're completely open for lunch occasion has left the home as people go back to work and kids go back to school and so some of this is an overlap issue that again, if you look at the chart that was included that overlap gets much easier going forward. So I do expect that it will get better.
From an overlap perspective alone and I think at the end of the day people have to eat and so you can't have a perpetual declines in end unit sales within grocery over an extended period of time, unless everybody's eating out of home and and I don't think our restaurants are going to be a beneficiary of consumer angst I think people are more likely.
To eat more at home not less at home over time. So I think some of it is just a short term reaction to the magnitude of the disruption there and the overlap, but I do expect it will get better overtime.
Thank you.
The next question comes from the line of Scott Muskegon with RBC capital. Please go ahead.
Hey, guys. Thanks for taking my questions.
So I guess I wanted to maybe you said this already and I missed it but how much of the the inflation is reflected already on your shelf price.
Do you think so.
So our.
Our pricing lagged inflation and so what was built into the <unk>.
Third quarter pricing that we just took was the inflation that we saw coming in the second quarter, we've not fully reflected in the cost of the Ukraine War because again, we we're out selling the third quarter increases in December January before the war started so hence the need for additional pricing and we want to.
First read the impact of the pricing, we just took before we.
<unk> come out with the next round of pricing so that we understand the elasticities and where our brands are resilient and wear brands may.
See a negative impact from that pricing, so there's more coming it does lag.
Certainly we have more pricing in Q4 than we did in Q2 because of the pricing that we just took but it's not sufficient to totally cover all of the inflation, which is why we've guided to some margin.
Erosion continuing into Q4, not as not as significant as it was in Q3, but still there will be some erosion.
Now so that's good I just want make sure I understand so its all like if I went and bought a central point or whatever on by one of your products here in the U S.
It's extra Ukraine is all of that now reflected in the price through the second quarter.
The inflation or is it still we have some in the second quarter to kind of drip through and then we're going to have another big price increase at the shelf I just wanted to make sure I understand.
Yeah, so the the pricing was.
Taken in the third quarter reflects all of the known costs through the end of the second quarter.
But obviously part of it.
The part of the earnings announcement today, we've seen additional costs in Q3 that will be reflected going forward and also you have to remember our fiscal year ends in June and we have contracts that are on a fiscal year basis. We have some that are on a kind of annual year basis, so as contracts roll off.
They are likely to be inflationary versus what we are contracted for a year ago before all of these cost increases materialized. So inflation is going to continue.
And we need to again make sure that we pass that on and do it in a very disciplined way.
And then one final one and then maybe you said this too already if I missed it I apologize.
Price increases coming because of Ukraine warm, what's going on in commodities, which is just obviously they have all taken off quite a bit.
Versus what we've seen thus.
Thus far.
I'm sorry, I missed part of your question you cut out say one more time, sorry, so basically the size of the future price increases given what's going on with the commodities and labor versus what we've already seen and if you just said that already I apologize, but I must have missed it if you did.
No I I I didn't set the first increase we took was in the 7% to 8% range. The second one we took was in the 4% range. This will probably be somewhere in the middle of those two.
Alright, guys perfect.
Yeah.
Thank you.
The next question comes from the line of Jon Andersen with William Blair. Please go ahead.
Thanks, Good morning, everybody.
I'm struggling here to come up with a question after all of those but.
Let's see.
Let's ask about I'll ask about the co man in Europe .
<unk>.
You had a shift in that business with with one of your customers.
It would be helpful to kind of understand I guess how much.
Oh Man you do in Europe and.
You know what kind of visibility you have into that business and maybe how much kind of turns over.
On an annual basis, it's really just the question is.
Is it likely or unlikely that.
You could be surprised with.
With a customer repatriating.
You don't want to on a regular basis or if this is a unique situation. Thanks so much.
Yeah. So we are the number three supplier of plant based beverages in Continental Europe .
Both co manufacturers for branded companies as well as private label all of those.
Relationships have the annual contracts.
And so we have one large customer you could guess, who it is who has decided to repatriate the volume.
It was intended to happen a year from now that was the direction, we were giving and we were given and we were somewhat surprised by the timing of it but it does speak to the.
The health of the category and the continued growth potential so over the last three or four years.
<unk> has outstripped supply and so it doesn't shocked me that one of the biggest.
Players in the category has decided to repatriate some of that volume, but theres plenty other volume out there to be had most of our contracts are at least 12 months in length. We don't have any expiring in the immediate term most of them expire at the end of the calendar year, if they expire at all in our multi year and so.
Well, we're picking up some volume here and there as I mentioned, we'll have half of the volume already recaptured by the end of the queue of Q4 and I would expect by the end of the calendar year, we will have all of it recaptured so.
Look at private label and co man is a bid business. We are a low cost supplier, we've actually been making plant based beverages for 30 years and we're really good at it and so we can be very competitive on cost and still make good margins for ourselves. So I'm not overly worried about any long term disrupt.
Is it possible that there are short term ones maybe.
But this was a bit of a unique circumstance given the size of the customer here.
Thank you.
Ladies and gentlemen, we have reached the end of question and answer session and I would like to turn the call back to Mark Schiller for closing remarks.
Thank you everybody for your time today, obviously, we'll be available throughout the day to answer continued questions I'd just reiterate we're extremely proud and excited with the growth that we're seeing in North America, and we do believe that some of the pressures that we saw in Q3 will will improve as we go forward. So our.
This is intact our team is strong.
Our execution is good and we're very optimistic about the future with that I. Thank you.
Thank you. This concludes today's conference call you may disconnect. Your line at this time. Thank you for your participation.