Q1 2023 Hain Celestial Group Inc Earnings Call
[music].
Greetings and welcome to the Haynesville lateral first quarter 2023 earnings conference call.
All participants are in a listen only mode. A brief 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 its now my pleasure to introduce your host personal line to the managing director of Investor Relations at ICR. Thank you Chris you may begin.
Good morning, and thank you for joining us on Haynesville actual first quarter fiscal year 2023 earnings conference call.
On the call today are Mark Schiller, President and Chief Executive Officer.
Crispell, Ayers executive Vice President and Chief Financial Officer.
During the course of this call management may make forward looking statements within the means of the federal Securities laws.
Include expectations and assumptions regarding the company's future operations and financial performance.
These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward looking statements.
Please refer to Hain celestial annual report on Form 10-K quarterly reports on Form 10-Q.
The reports filed from time to time with the Securities and Exchange Commission as well as its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Company has also prepared a presentation inclusive of additional supplemental financial information.
Which is posted on Hain Celestials web site 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 a slide presentation accompanying this call.
This call is being webcast and an archive will be made available on the website and now I'd like to turn the call over to Mark Schiller.
Good morning, and thank you Chris on today's call I'll give you an overview of our Q1 performance and outlook for the balance of the year.
Pleased to report that we exceeded our constant currency margin and EBITDA guidance in Q1 and showed material sequential improvement.
As a result, we are reaffirming our annual profit guidance with the continued caveat that we expect Europe to be unusually volatile and that our anticipated total fiscal year profit growth is skewed to the back half.
Let me now dig into the Q1 results in more detail on our last earnings call in August we laid out our annual plan expectations, you'll recall that our guidance for the year with constant currency given the expected volatility in foreign exchange rates while.
While we didn't give specific guidance on revenue in Q1, our total sales growth in constant currency was in line with the Q4 sales growth as expected.
Unadjusted gross margin and adjusted EBITDA, we guided that Q1 would be modestly below Q4, that's that our adjusted gross margin, which is normally the lowest in the first quarter due to seasonality came in much better than we guided up considerably from Q4, our adjusted EBITDA dollars and margin also improved versus Q4, which is better than we got it.
To understand our progress better let me now pivot to the operating units.
In North America, net sales were up eight 6% versus year ago.
This is less growth than we achieved in Q4 much of the softening was expected.
First as expected we pulled back on promotional spending on brands that were experiencing supply disruption as a result on the growth brands. Our non promoted consumption was up an impressive 17% at six points higher than our total consumption revenue growth for these priority brands.
As expected on our last earnings call most of the supply disruptions are now behind us.
Second as expected after a huge surge in baby formula demand in second half last year due to well publicized industry wide shortages.
Less supply in Q1.
Third we had some significant club programs on personal care and farm Christmas in Q4 and locked those rotations for fiscal 'twenty three while this was not anticipated much hard work is being done to get those back in second half later this year.
Digging in a little deeper on the revenue side, our growth brands in North America continued to gain share in both units and dollars. We gained aggregate market share again on our growth brands for the eighth quarter in a row and 23rd time in the last 24 months.
Philosophies were up a solid 11% versus year ago.
Within snacks sensible portions consumption continued to grow double digit as it has for the last three years, despite some supply disruptions in the quarter.
Terra where we've had extended supply disruptions, which are now substantially resolved net sales grew 27% in the quarter the highest quarterly growth on the brand in almost four years. In addition household penetration on Terra was up more than 60% in the quarter versus year ago.
In the middle of the P&L North America, adjusted gross margin grew modestly versus year ago after being down considerably last quarter and was also up 270 basis points sequentially versus what we delivered in Q4.
Margins were higher for three primary reasons first we have greatly improved the performance of our internal supply chain factories are running better with greater throughput less waste and fewer changeovers. In addition, we continue to add more productivity as resources are freed up from fighting supply issues.
Second we've done a good job of addressing longstanding supply issues on our largest brands as evidenced by the strong consumption and shipment data while some supply disruptions are expected to continue on several of our pantry brands Baby Formula most of our big issues have now been resolved as a result, the cost of these disruptions is expected to drop significantly.
Third we also took more pricing in North America in Q1, thereby strengthening overall margins, thus far elasticities remain relatively low and in line with our planning assumptions with regard to profits in North America. The improvement in gross margin has flowed through to the bottom line adjusted.
Adjusted EBITDA dollars and margin were up in Q1 versus Q4.
Total EBITDA dollars were also up 28% versus Q1 last year restoring growth after multiple quarters of decline.
In summary, we have continued optimism in North America, our growth brands that performed well in our overall profit performance has improved considerably. We expect continued momentum skewed to the second half of the year.
Shifting now to international we also made some sequential improvement however, given the volatile volatile European environment. The financial progress was modest as expected foreign exchange has had a material impact on our reported results.
Constant currency our year over year sales trend in Q1 improved 280 basis points versus the Q4 year over year trend.
As previously mentioned our plant based businesses continue to struggle along with the categories offsetting the progress on the rest of the international business.
Our adjusted gross margin percentage improved versus Q4, which is noteworthy given that Q1 is historically, our lowest margin quarter.
Year over year adjusted EBITDA growth has also improved modestly compared to the Q4 growth rate.
In the U K with very high inflation and political turmoil consumer confidence is at a multiyear low as a result consumers are trading down to private label and shifting shopping patterns from traditional grocery toward discounters.
You'll recall that the entire U K grocery store sales declined in Q3 and flattened in Q4.
Q1, total U K store sales continued to rebound as expected our business. There also modestly improve sequentially on a constant currency basis from a net sales decline in Q4 to 3.5% growth in Q1.
We continue to grow share and deliver solid growth from several of our largest brands baby jelly and soup categories.
While sales trends for the industry and our U K business are benefiting from continued price increases like the rest of the industry. Our units are declining. This has created significant plant deleverage, which our team has aggressively addressed by stripping out cost.
The nation of additional pricing mid quarter and these aggressive cost controls have led to a 140 basis point improvement in adjusted gross margin versus Q4.
Continental Europe , where our business is almost entirely a plant based beverages. Our overall P&L performance was very similar to what we delivered in Q4, while we continue to make progress in replacing the volume from the large co manufacturing contract. We lost in Q3 as consumers shift to private label declines from our higher margin brands and branded customers is offset.
Those games.
As with the U K, we've been aggressively taking out costs by reducing labor streamlining, our org structure and adding productivity.
Chris will give you more details in a moment, let me turn to our go forward out.
As discussed many times, we live in a volatile world and there are many sources of potential upside and downside based on things outside of our control.
The challenges include currency fluctuations consumer behavior recessions inflation, the Russia, Ukraine War just to name a few.
As a result, we expect continued volatility as we move through the year, especially in Europe that said, we're doing a good job controlling the controllable and now have more visibility than we did just a few months ago and are optimistic that we'll begin to see some normalizing.
Q2, we expect modest sequential improvement in total company profit performance.
Pricing hits the market cost stabilize somewhat we continue to drive efficiency and productivity.
That said, we do expect some softening in the North America topline in Q2, driven by three things.
First we expect continued shortages on baby formula with less inventory to sell in Q2 than we've had in previous quarters.
We were not successful in renewing the club hair care program from last year, and we'll start overlapping those shipments in Q2.
And third we expect a softening of the tea category due to warmer weather and overlapping the omicron COVID-19 surge from last year.
We're working with our retail partners on how to best improve the shelf set and merchandise the category to optimize the upcoming season.
As we stated when we released annual guidance, we do expect continued improvement in our return to profitable growth in the second half of the year driven by several factors first we expect the strengthening of the overall sales globally North America, we have good momentum on our growth brands in the U K, we expect the entire store and our brands to continue to improve as we lap COVID-19.
Realize the recently taking price up.
In Continental Europe , we anticipate restoring growth on our non dairy beverage business as we win more private label and co manufacturing contracts.
We have more pricing coming we will start to realize the full impact of our Q1 U S and UK price increases in this quarter and in Canada. We've said so successfully negotiated new pricing, which begins now with the full quarter benefit realized in the second half.
Dental Europe , despite high inflation, we have not been able to take pricing on negotiated annual contracts. Since last January we're optimistic that we will get some inflation priced into the new dawn dairy beverage contracts starting in Q3 third productivity ramps up as the year progresses, and we expect more than half of our $40 million to $50 million of productivity.
<unk> in the second half or the input costs are starting to crest and while we expect second half inflation to still be up double digits. It should be lower than what we experienced in the first half.
We have planned for some pricing relief in the second half and it covered about 75% of our tradable ingredients at prices in line with our plan assumptions.
On energy Continental Europe has announced their intention to subsidize the cost just as the U K is done you'll recall that we currently have no coverage in the second half of the year in Continental Europe . The government subsidies will give us some welcome relief.
Fifth we expect less supply disruptions as global demand eases. In addition, we now have secondary supplies for suppliers for most of our co manufacturers and multiple suppliers for most major ingredients.
And lastly, given the softer performance in the back half last year, but withheld shipments in the U K, a dirty pricing negotiations and the 10 million dollar write off in Q4, we have easier overlaps.
In summary, our business is improving and there are signs that the macro environment is beginning to stabilize we continue to believe that our brands and our strategy and our teams are doing well as a result, we expect continued progress, especially in the back half of the year. Let me now turn things over to Chris to provide more color on our financial performance and outlook.
Thanks, Mark and good morning, everyone.
Mark discussed our first quarter results were better than the guidance we provided in August .
Question on improvements in gross margin and bottom line growth versus the fourth quarter of fiscal 'twenty two.
<unk> performance in North America, driven by continued strength of our growth brands.
Performance in our supply chain and productivity initiatives.
And the volatility in results from our international business, including a large swing due to the strengthening of the U S dollar versus the pound and euro.
In the first quarter consolidated net sales decreased three 4% to $439 $4 million consistent with recent driving foreign exchange remains a material headwind in the quarter on a constant currency basis consolidated net sales decreased less than 1%.
Long dollar resulted in a $27 million net sales headwind in Q1.
We reported an adjusted net sales growth in North America, with 9% and 3% respectively.
And our international operating segment constant currency adjusted net sales growth improved sequentially versus the fourth quarter.
Q1 International reported net sales decreased 20%, but the decline on a constant currency basis was only 7% an improvement of approximately 280 basis points versus Q4.
Adjusted gross margin was 21, 5% in the first quarter decreasing approximately 240 basis points versus the prior year period.
However sequentially versus the fourth quarter of fiscal 'twenty two adjusted gross margin increased approximately 210 basis points due to the impact of pricing catching up to him playful and strong operations performance offset somewhat by seasonal there.
This means better performance than our Q1 guidance of a modest decrease in gross margin versus the fourth quarter.
Total SG&A, including marketing came in at 16, 8% of net sales for the quarter.
Adjusted EBITDA on a constant currency basis was $38 $6 million versus 47 3 million in the prior year.
Including the impact of foreign exchange adjusted EBITDA was $36 million raw material and finished goods in place and foreign exchange was the primary driver of lower year over year adjusted EBITA.
First quarter adjusted EPS was <unk> 10 versus 25 cents in the prior year period.
Now turning to our individual reporting cycle in North America reported net sales increased 9% $288.4 million adjusted for foreign exchange movements acquisitions, and divestitures net sales increased more than 3% versus the prior year.
Adjusted gross margin in North America. During the first quarter was 22, 7%, which is a 270 basis point improvement versus Q4, and a 40 basis point improvement versus the prior year.
Notably as our pricing is now catching up with inflation and with ongoing improvement in supply chain performance. This is the first year over year increase in gross margin since the third quarter of fiscal 2021.
The sequential momentum we are seeing in North America.
Adjusted EBITDA at constant currency, North America was $39 million at $6 8 million or 28% increase versus prior year. Adjusted EBITDA margin was 10, 7%, which is 160 basis points higher than prior year.
International business Q1, adjusted net sales declined 7% on a constant currency basis from the first quarter of fiscal year 2022.
Foreign exchange reduced net sales by an additional 14 percentage points to reported 21% decline versus 2022.
In the U K constant currency adjusted net sales increased three 5% versus prior year, which continued the sequential improvement that we saw in the back half of fiscal 'twenty two.
Continental Europe constant currency adjusted net sales declined 27% in Q1 compared to the prior year period driven.
Driven by the softness in the plant based non dairy beverage category and the loss of co manufacturing and contract that we have discussed previously.
With an aggressive push on operations productivity International gross margin in the first quarter at 19, 1% with 80 basis points higher than Q4.
However, with continued high raw material inflation increased energy cost and fixed cost deleverage Q1 gross margin fell approximately 700 basis points versus prior year.
Adjusted EBITDA at constant currency in Q1 was $17 5 million a 46% decrease from the prior year period.
As a percent of net sales adjusted EBITDA with 9.9% 720 basis points below prior year.
Shifting to cash flow and the balance sheet first quarter operating cash flow was negative $5 1 million versus 37 6 million year ago.
Lower operating cash flow resulted from a reduction in net income and use of cash for working capital as inflation has continued to increase the value invested in inventory.
Favorable versus year ago.
We made $7 $2 million in Capex investments in the quarter approximately $11 million less than during Q1 of 2022 as we are continuing to experience long lead times for certain assets, while we prioritize growth and productivity projects.
Finally, we closed the quarter with cash on hand.
Net debt stood at 847 million.
Net leverage of four one times as calculated under our amended credit agreement.
Now turning to our outlook for the remainder of fiscal 'twenty three.
Mark said earlier, we are reaffirming our full year guidance of minus one to plus 4% adjusted net sales and adjusted EBITDA growth at constant currency.
Skewed towards the second half of the year.
Assuming dollar exchange rate against the pound and euro at $1 13, and 98, respectively for the full year. We now expect currency exchange to result in a headwind of approximately $110 million and $14 million for adjusted net sales and adjusted EBITDA respectively.
In the second quarter and then the second half we expect that as we have discussed for the first quarter.
Improvement across the income statement and balance sheet will continue due to top line and margin momentum in North America 2023 price increases offsetting mid teens inflation.
Improvement in our supply chain fewer disruptions and robust productivity.
And uncertain, but improving retail environment in the U K, a new non dairy beverage contracts in Europe .
In the second quarter, we expect consolidated adjusted net sales growth at constant currency will be similar to Q1.
Is the overlap becomes more modest we expect accelerating constant currency adjusted net sales growth in the back half.
Foreign exchange headwind will also moderate and H two as we begin to overlap the strengthening of the U S. Dollar that began earlier this calendar year.
Constant currency adjusted net sales in North America in the second quarter, but is expected to be approximately flat versus prior year due to the law of the fiscal year 2020, Q Q3 clubs in hair care program.
Shipping in Q2 last year.
The ongoing well publicized shortage of baby formula and unseasonably warm weather and an overlap of a year ago, Covid Omnicom third, creating a headwind for our tea and soup brands.
We anticipate the international constant currency adjusted net sales growth will improve sequentially over the next three quarters as we replace the lost non dairy co manufacturer contract and called it out here.
And we see continued improvement in total UK store sales.
With the pricing that we took in Q1 in both the U S and the UK fully in effect in Q2, adjusted gross margin is expected to be flat to up modestly versus the first quarter.
We expect further sequential improvement in <unk> as we benefit from pricing in the European non dairy beverage segment, and a robust productivity agenda, where the benefits are more heavily weighted towards the back half.
Matt we should anticipate a year of 2023, having recovered a significant percentage of the inflation driven gross margin decline that we experienced in fiscal year 2022.
Below gross profit, we anticipate that Q2 marketing and SG&A as a percent of net sales will be consistent with the first quarter and that rates should improve at age two.
Benefit from top line growth and fixed cost leverage.
The full impact of places in North America, and the U K and proven international top line.
Robust productivity.
Out will contribute to continued sequential improvement adjusted EBITDA at constant currency.
Second quarter and the back half.
While still below fiscal 2022 levels due to constant currency adjusted EBITDA is expected to increase versus the first quarter and adjusted EBITDA margin in the second quarter should improve modestly compared to Q1.
And it's too as we overlap the onset of the war in Ukraine.
The loss of the non dairy co manufacturing contract in Europe , numerous ongoing supply disruption for 40 year high inflation.
The one time write off in Q4 last year, we anticipate a return to constant currency adjusted EBITDA year over year ago.
And in Q4.
As I noted on our last call in August the environment in Europe , and the UK remains volatile and therefore difficult to forecast.
The ongoing effects of the war in Ukraine continue to ripple through the global supply chain with many ingredient costs still up 50% or more versus a year ago.
In the midst of a cost of living crisis, and with three prime ministers in less than two months.
Consumer confidence in September was at the lowest level since the measure began in 1974.
And last week, both the ECB and the bank of England about 75 basis point rate increase.
In the U K it was the largest hike in 33 years against this backdrop, our international team continues to respond rapidly to changing customer and consumer priorities.
As we've continued to focus on improving our cash conversion cycle and be selective in the timing of certain capex projects, we expect full year free cash flow to be in line with the prior year.
With leverage now slightly above our stated target three to four times range. You can expect for the next several quarters to just apply our free cash flow primarily toward debt reduction.
In summary, the momentum that the business gain in Q1 was material and consistent with our expectations. We continue to control the controllable unexpected results throughout the balance of the year will continue to improve.
I will now turn the call back to Mark.
Thank you, Chris if I can close by thanking our entire global team for their resilience flexibility and tenacity during these turbulent times.
Their hard work and collaboration and look forward to continued progress together, let me now turn it back to the operator, so we can answer your questions.
Thank you.
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One moment, please while we poll for questions.
Okay.
Thank you. Our first question is from Brian Holland with Cowen. Please proceed with your question.
Yeah. Thanks, good morning.
I wanted to ask about Europe .
Europe non dairy beverage business, you mentioned new contracts there.
How about how has the progress of recouping the customer volume.
Last last year versus expectations, just given that the category softness that you've referenced do you still think you'd get back as much of that do you anticipate that at the time, we lost it.
Yeah.
So the first thing I would say we recoup.
Recouped about 70% of the lost volume from that contract or have commitments for 70% ethanol started shipping yet but.
But we're making good progress in bringing on new customers to replace that volume on the flip side. However, as the economy gets weaker and we see people migrating to private label branded part of the category is softer than it was.
Months ago and so.
Most of the contracts that we have added our branded players that were co manufacturing floor and so their volumes have come down a little bit versus what we had anticipated so while we're gaining volume by bringing on more customers.
The size of that volume and the size of the orders from existing customers has abated a bit kind of offsetting one another.
With regard to future contracts, which is the process. We're in now for private label annual contracts that.
Become effective in the third quarter were in the midst of the bidding process now and I would say and you know in an environment, where there is more capacity than.
And demand those contracts are going to be very competitive and we're going to certainly try and get inflation built into those contracts, but how much we'll be able to get into and how many of them are when time will tell we'll have a much better idea on the next conference call.
I appreciate the color Mark and then.
You've talked about last couple of quarters now about to just and you just referenced here some of the softness in plant based demand and the impact on the business I'm wondering more broadly just given some of your peers that are more heavily weighted towards indulgent snacking and I've called out strong demand.
You play obviously in the better for you space. So if we strip aside plant base, what's the interplay between indulgent and better for you are you seeing any impact here of consumers being less focused on on the type of products that you sell and maybe pivoting more towards indulgence.
Given macro sensitivities anxiety et cetera.
Yeah, So I'm not sure if that's a a Europe question or a north American question, but I'll answer it both ways.
North America, you can see that the consumption on our growth brands, which are all health and wellness brands is very hot excluding promoted volume because we have to pull back on promotions due to supply challenges on some of the brands are consumption in North America or in the U S was up 17%. So we're not seeing any softening in.
In particular on the adult.
Healthy snacks, we're seeing very robust growth every single quarter for the last three years and that continues to be very robust in the U K. Our portfolio is a bit different we do have some center of store things like jams, and jellies preserves and soups.
That are somewhat they're all health and wellness oriented, but they're different than some of the.
The categories that we have here in North America, so less organics and those kinds of things, although we do have fresh soups and we do have.
Ella's kitchen, which is an organic baby food and some brands that are like that in Europe , we're seeing much more trade down from branded to private label and that's not there's no difference between indulgent products and health and wellness products people are just trading down you have 15% inflation.
They have a lot of turmoil politically as you know and so people are nervous and they're trading down the good news for US is we are in the private label business in the U K as well as in Europe , albeit a smaller part of our business in the U K, but we do have somewhat of a.
Of a built in hedge.
If people do trade down and so we're.
We're seeing that trade down on all categories, it's not unique to health and wellness or indulgence.
I'll leave it there thanks.
Yeah.
Thank you. Our next question is from Andrew Lazar with Barclays. Please proceed with your question.
Great. Thanks, good morning, everybody.
Good morning.
Mark I think I think.
You laid out a couple of discrete factors that are going to cause North America adjusted sales growth to slow some in the fiscal second quarter.
But I seem to remember on I guess on last quarter's conference call. There was some concern raised about here from investors about sort of slowing or slightly slowing trends of consumption trends broadly and in North America and it doesn't sound like.
That necessarily played out right because you talked before about the strong consumption, you're seeing broadly in North America right. Now so could you talk a little bit more about what you're seeing in North America around consumer habits.
What do you see elasticity remains pretty manageable as you've said in the prepared remarks.
Your products tend to be right at premium price points, and maybe those are a little bit more.
Protected.
From certain consumers in this type of environment, but what are you seeing around North America and anything there that makes you.
Incrementally concerned right around consumer behavior in North America going forward.
Yeah, Great question, so part of it again, but the difference between that consumption and the shipments in Q1.
It's the supply disruptions that we've talked about so we had some of our biggest brands like yogurt and sensible.
Sensible portions and others that formula and baby food that because we didn't have supply we pulled back on trade and so some of the slowdown that people are seeing in the total consumption numbers. If you just hold back the onion and look at non promoted versus promoted volume you'll see that our non promoted volume was up 17%. So that's why you.
I have seen some sequential slowdown in the total number the good news is we've fixed most of those issues and we are back fully promoting in Q2 on those brands, but there are still disruptions on things like formula and some of the pantry brands.
Looking oils as an example, given the Russia, Ukraine War, where we will still see some supply disruptions in some gap between shipments and consumption with regard to the broader question. Our elasticity are in line with what we expected or a unit declines are smaller than the rest of the categories that we're in we're not seeing evidence of consume.
<unk> trading down there isn't a lot of private label and the healthy part of the category, but even if you look at the unhealthy part of the category. The indulgent part of the category, we're not seeing a big significant pick up in private label share in consumption relative to branded products. So there is a real bifurcation between them the way that consumers behaving.
Europe , and the way that consumers behaving here and so while there are a couple of factors that I articulated in the prepared remarks on why Q2 will slow a bit at.
At the end of the day our growth brands are doing what we said they would do they.
They continue to grow double digit and we feel optimistic that that momentum is still there for the long haul.
And then in North America with the pricing that you've taken and are in the process of taking.
Have you found that generally the competitive environment.
Round price points and such.
Consistent with what Youre doing such that you know.
You don't anticipate necessarily gaps opening up in a in a way that is.
That could be problematic. Thank you.
Yeah. So we've we have taken more pricing in the U S. The hit in Q1 are the Canadian pricing is heading as we speak and.
And it was high single digit pricing. So it's significant additional pricing in the algorithm, we watch very closely Andrew what our price gaps are versus our competitors our thresholds by the velocities.
And he elasticities are changing and so theres a lot of adjusting going on.
By customer brand by brand.
I haven't taken enough or if we've taken too much because we do.
Want to stay at a certain kind of gap to our to our competitive set I don't anticipate any major changes versus the pricing that we've taken we've not seen a significant changes in the trajectory of our business again, there may be a segment here are our segment. There are a customer here or there that we have to make some adjustments, but I expect relatively minor tweak.
Thank you.
Thank you. Our next question is kind of a Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Good morning.
Can you talk a little bit more about exactly.
When the pricing is expected to come through I know you have some this quarter that you were expecting to have some is it both Europe and the U S.
Yes. It is planning to have more as we roll through the year or is the Q1 pretty much it.
So the pricing in the U S occurred in the middle of the first quarter. So it's it's in place we will do some minor pricing in the second half that maybe more by Oh wait outs or adjustments to trade depth as opposed to list price increases, but there won't be some some minor.
Weeks here and there in the second half of the year in the case of the U K the pricing hit at the end of the first quarter. So it really fully started getting reflected in market in October .
And I'm pleased that we got all of that pricing through without having to stop shipping anywhere during the negotiations and again, thus far it appears like the elasticities are holding up well in Canada. The pricing is hitting now in the second quarter. So there was very little pricing in the first quarter.
And in.
Europe .
Non dairy beverage.
Contracts that we're negotiating that pricing will hit in the second half of the year as we bid on.
Contracts to replace the lost co manufacturer.
Contract that we had in the third quarter, we've obviously been bidding at what we think the market will bear on those things and they're there.
We're getting some of the inflation built into the contracts, but it's it's challenging in an environment, where there is more supply than demand. So all that said I think most of the pricing with the exception of the private label non dairy beverage contracts is in the market now you'll see the full impact of things like Canada next quarter, you only get a partial impact this quarter.
And we will continue to look at inflation and the rest of the market. It's inflation goes up from here, we will have to take more pricing as inflation goes down from here than we've probably taken enough. So.
We continue to monitor our performance and we continue to monitor inflation and the consumer but right now I think the vast majority of our pricing has already been taken.
Great. Thank you and just as a quick follow up and I know you talked about the gap between the measured channel data and the reported numbers and a lot of that stay with supply chain constraints, but could you talk about channel shifts and what's happening in measured channels such as E. Commerce is cloud that's just the natural channel.
Are you seeing a trade down so naturally still very weak e-commerce, maybe it's still down year on year. That's what we've been hearing from others I'm just curious about those channel dynamics, Thank you and I'll pass it along.
Yep. So e-commerce has somewhat flattened in terms of growth the natural channel is still declining a bit.
What I would characterize as emerging channels for us drug convenience foodservice those are growing very rapidly for us I can't speak to the channel in total, but I can speak to our business, which again part of our three point strategy was to continue to drive distribution and in additional channels and make these products more ubiquitous.
I think we were up 25% in the quarter and drug and something about 60% and convenience. So we're making good progress there I think the biggest delta.
Delta that we've had is in club and I've mentioned in the prepared remarks that we lost some rotations on both.
That's how we rolled the farm crisp business as well as our hair care program.
On personal care and so we are going to see some softness in the club channel.
Relative to the rest of the business, but we're working hard to get those back and we've been showing a lot of innovation to that channel, but quite frankly, there's some.
It's a pretty good enthusiasm on and we have one of those pieces of innovation and that's how we roll hitting the market late this quarter.
So we're optimistic that we'll get some of that back but right now it's a little bit of a hole in our in our plant.
Great. Thank you very much I'll pass it on.
Thank you. Our next question is from David Palmer with Evercore ISI. Please proceed with your question.
Oh thanks.
You were always very willing and able to focus on long term targets in the past and that was because you're making real changes at the company in terms of mix and internal functions I wonder how much has really changed in your terms of your long term views based on everything that's happened in the last 18 to 24.
<unk> I mean, how do you view hain today versus.
Back in later one in late 'twenty one.
I think back then you were talking about it being an 8% to 11% EBITDA grower and getting gross margins up into the high Twenty's. So any thoughts about how things have really changed for you and I have a follow up.
Yeah, I mean, what's what's good about having a portfolio is you know you get the Yin and Yang well some things are performing better than you expect other things not quite as much I think given all the noise, it's COVID-19 and inflation.
The Russia, Ukraine War, it's hard to tell whether some of these things are more permanent changes are more transitory changes and when we get back to whatever new normal is how.
How did those behaviors change, but what I would say is there's categories like salty snacks that continue to perform exceptionally well and become a bigger and bigger part of our business.
And then there's other pieces that have ebbed and flowed she had a huge surge during COVID-19.
And it has the overlap with baby had a huge negative during COVID-19 when people were at home, making their own baby food and then our society reopened it got much stronger. So there is there is kind of come back and forth. There. The only the only place where I would say anything has fundamentally changed is that the gap between supply and demand.
Non dairy beverage is different than it was pre.
Pre pandemic there was much more demand than there was supply and now it's the other way around so.
What we need to do is keep right sizing infrastructure and make sure we can get back to the margins that we used to enjoy on that business.
And get back to the lost volume that we talked about last year. So that's the one that we're watching closely but other than that I don't think there's any material fundamental changes that we would call long term.
And the other one I had back back then you were pretty clear about your M&A priorities, maybe becoming more of a fast growing pure play food company a lot of that was the plant based direction you were trying to go.
I Wonder how much you just mentioned.
The.
Not none dairy beverages are plant based and of course, there's also been a tougher environment with higher interest rates that might make M&A harder. How are you really shifting your view there about M&A and your ability to affect the shift in your portfolio.
And I'll pass it on.
So we are always looking at M&A, both on the buying side and the selling side.
It is more challenging in this environment with high interest rates for people to get financing.
There is interest in some of our non priority assets, but I'm getting those deals done has been challenging and obviously given our current leverage we're less likely to be doing any buying right now until.
Until we do some selling in and there is still a tail here that we've talked about <unk> three point out that we would like to over time.
Exit so all I would tell you that those conversations.
Conversations continue our desire to continue to simplify the portfolio and reshape it is still there, but the marketplace is going to somewhat dictate what we can and can't do in this environment.
Thanks.
Thank you. Our next question is from Michael Library with Piper Sandler. Please proceed with your question.
Good morning, Thank you.
Good morning, I, just wanted to come back to plant based.
You called out you broke down the European growth in international and show that down 9% is that how much of that was driven by the loss contract.
I guess as you look ahead, you talk about the competitive pricing for.
Kind of fill that capacity and renew some existing contracts.
Can you just touched on right sizing infrastructure as well how much is potentially rationalize rationalizing some of that capacity on the table or is the expectation that theres enough demand.
That sort of shape that shake out.
Yeah. So we have multiple manufacturing plants for plant based and I think depending on where we net out on <unk>.
Contracts that we're going after and have a better visibility to what.
The volume is going to be we will certainly continue to look at do we have the right infrastructure to support that I mean, we have been aggressively taking cost out since we lost that contract and part of the reason you see some progress on on margin.
It's because we haven't been aggressively taking out costs eliminating overtime.
Taking longer holidays around you know national holidays.
Looking at the non manufacturing labor that we have in the plant and so we will continue to rationalize the infrastructure to whatever the demand is and vice versa. If demand goes up considerably. We also look at adding capacity and this is all part.
Kind of our productivity culture, where we're constantly evaluating where do we need more capacity, where do we have too much capacity in some places around the world. We're repatriating volume from our co manufacturers into our facilities and in other places where <unk>.
Rationalizing that capacity that we have so it's an ongoing conversation, but given that we're at an inflection point on replacing that volume from last year, we're not going to do anything until we have better visibility to what that looks like.
Okay, great and just on.
The.
Sales momentum can you give a sense of the declines you called out how much is driven by.
Lost contract versus in market or.
Pressure on demand.
Yeah. So I I don't have a specific breakdown on the pieces, but there are there are a few components. One is obviously that loss contract and second is the softness in the category and people trading down to private label. So a lot of our.
Plant based beverage volume branded our own brands and co manufacturing for other brands. So as the branded side of the equation has lost I think five share points in the last.
12 to 18 months in that category.
On the branded volume has also declined and so that's that's a chunk of it as well and again.
Again, I don't know what the relationship is whether it's 50 50 or 60 40, but they're both contributing at a fairly meaningful level.
Okay, great. Thanks, so much.
Thank you. Our next question is from Ken Goldman with Jpmorgan. Please proceed with your question.
Hi, Thank you.
I guess my question is in our my first one in light of the first quarter's reported figure and I know you updated guidance for two Q did.
Does your outlook still assume that North America organic sales growth will grow mid single digits for the year.
You said that I missed it I'm just curious if some of those maybe unique headwinds and <unk>.
Conspiring to drag that down a bit for the for the whole year.
Yeah, so and and Chris feel free to chime in but we haven't changed our guidance for the year there are.
Puts and takes on any given quarter in.
There is some new news with.
The continuing shortage on formula and some of the the.
The softness in the club channel that I mentioned, but we have not yet changed our guidance for the long haul because theres a lot of programs that we're also adding in the second half of the year. So.
At this point I'd say, we're still holding our guidance, but there's a there's definitely some puts and takes in that.
Yes exactly.
Okay.
Total guidance, but also within North America to your question specifically, we do still expect mid single digit adjusted net sales growth in North America.
Sure.
Got it perfect and I guess, the easy follow up to that is does that still apply to your gross margin guidance. I think previously it was for flat to slightly down again I didn't hear you update that should be just assume that that's still there.
The outlook.
Yes, that's what I'm, saying.
Okay.
Great I'll pass it on thank you.
Thanks, Ken.
Thank you. Our next question is from Rob Dickerson with Jefferies. Please proceed with your question.
Oh, great. Thanks, so much.
I got a follow up on the gross margin piece.
I thought I heard you say in the prepared comments.
You may be able to recover.
Sure balance.
Profitability margin loss.
You get through the year just tripping bye.
Yes.
Potentially some supply chain improvement can also be incremental pricing coming up.
So what I just wanted to make sure I heard that correctly was that for total company and then if we think about kind of how you exit the year in 'twenty three like how much.
Should we be expecting some of that gross margin to recover as we go sequentially Q2 to Q4. Thanks.
Yes, but the thought there was the exit rate by the time, so so sorry to begin again.
It's a consolidated total hain and as we exit the year. The Q4 run rate for total Hain. We believe we'll begin to look a lot like what it did.
A year ago or before we took a step.
Backwards.
Okay got it.
And then just another clarification.
Clarification question on FX I thought you said, maybe for the full year the drag could be like 14 to 110 million and that was for sales and EBITDA.
So just curious I might have missed it.
Have you said kind of what that drag was in Q1.
And how we should be thinking about the trajectory in absolute terms as we get through the year not yet touched.
Yeah.
The prepared remarks, we said 110 million net sales full year headwind.
$14 million of.
EBITDA full year headwind.
In Q1, the net sales headwind was $27 million and the EBITDA headwind rose to an average of 2.6 okay.
So the the trajectory it kind of stays the same in total dollars, even though theres puts and takes within that so we expect in the back half of the year will overlap at the beginning of the strengthening of the dollar from last year. So the the rate effect goes down a little bit but as sales grows then thats been offset and so the quarter by <unk>.
Quarter impact ends up looking pretty similar throughout the year, even though there's there's more.
Changes with the details.
Alright, that's all I have thank you so much.
Thank you. Our next question is from John Baumgartner with Mizuho Securities. Please proceed with your question.
Good morning, Thanks for the question.
Good morning, Mark.
I wanted to ask about farm Christmas. The Q1 sales contribution was much lighter sequentially and I think you mentioned some distribution losses can you quantify the impact from those losses. How are you thinking about regaining those and then I guess aside from distribution how is the underlying volume holding up given what looks like to be you've raised prices theyre not double digits.
The Layla on farm, Chris would be appreciated thank you.
Yeah. So in.
In Q4, we had some significant club activity that we did not have in Q1.
And so there was a.
Definitely less of a contribution from that is how we will in Q1 than there was in Q4.
You know a good portion of that business is skewed toward non measured channels.
And a lot of that is rotations that.
They're in and out kind of.
Distribution and so we've lost some of that was in the first half of the year and we're working to.
And confirm those for the back half of it so I don't have on an annual basis what.
The impact of that will be but certainly we are we did have.
GAAP between Q1 and Q4 on the measured channel side, we continue to gain market share.
But it is a.
High priced snack relative to other mainstream snacks and it is a relatively low.
Awareness and household penetration category because it is somewhat nascent category. So a loyalty are still loyal but the trial when you'd have to go to the store now in your pocket book is somewhat constrained are you going to try a snack with $5 or you can try snacks, it's $3.
So we're having we've got more work to do to generate more trial in.
In the measured channels, but we are certainly continuing to gain share there which is encouraging.
Okay, and then on the inflation outlook, Chris I think you mentioned, 75% covered the.
Inflation is a little bit better than H, two now relative to what you thought a couple of months ago is that just largely a reflection of the volatility of energy complex or is there anything else on the ingredients side that had gotten materially better I guess marginally better that that you think can stake. Thank you.
Yeah, we're seeing.
Oh go ahead sorry.
We're seeing some of the ingredients.
Some of the packaging some of the raw materials are our moderating a little bit either versus versus where are they where you expect them to be in the first half or moderating a little bit versus our expectations. What we what we put in the plan, but but.
On a few select places, we're beginning to see a little bit of a softening versus.
Versus where we had been and to your point a piece of it also was definitely the energy complex whether its the.
The trends or some of the programs that have been discussed in both the U K.
In Continental Europe .
To provide some some subsidies some caps.
Okay. Thanks for your time.
Thank you. Our next question is from Andrew Wolf with C. L. King. Please proceed with your question.
Great. Thank you.
I wanted to ask about the U K and the fact that there was some sales growth in the market. Despite.
For Hain, Despite you know the consumer confidence being at because you mentioned a record low.
So could you kind of unpack that like you know how is the company able to achieve that in regard to price versus volume was price driven or.
Turn up promotions.
Some of it was made well I'm not sure where some of it any your fill rates just having.
Able to fill the orders at a higher percentage I mean, it's a pretty nice result, and in regard to or was it just comparisons just help us understand you know.
That improvement versus market conditions.
Yeah, I'd say, there's two drivers there one is certainly pricing.
We've been aggressive on pricing in the U K from day one.
And had gotten pricing into the market faster than others, which is help the other which I alluded to is.
About 20%, 25% of our sales in the U K is private label private label is growing double digits, but that part of the business is growing much faster.
Then the branded side for the entire store and so having a presence there, which we've talked in the past about how.
That helps us in terms of relationships with customers, but certainly in a recessionary environment. We're.
In the U K the pattern has been to trade down short term and then when the inflation abates to trade back to brand. It it's a little bit of a natural hedge for us.
We're certainly benefiting from that has helped the results as well.
Okay.
Okay.
Most of that private label within the category, where just the structure of the market is nascent manufacturer to also make the private brand or is it truly incremental.
And in <unk>.
Different categories.
So this is really about.
Uh huh.
Maximizing your overhead absorption in your factories, so 92% I think of our U K sales are self manufacture, which is very different than North America, where it's a little more than 50% and so we've got lots of plants with lots of overhead and longtime ago. A decision was made to use that.
Stranded overhead to get into private label and partner with retailers and so.
It really is us expanding our distribution in categories that we're already in.
There is no kind of unique private label manufacturing or categories that we don't have brands.
Okay and I just wanted to also revisit or follow on on the.
The plant based business in them in the international segment.
And I guess I want to also kind of unpack it obviously beverages have a.
A specific event that happened, but I also want to add.
What about you know entrees, Linda Mccartney brand.
Food ingredients I mean from time to time.
Inorganic product categories, just kind of slow because they do.
It seemed to happen here in the U S.
Is there something structurally happening in these categories in your guys view in in Europe or is or do you just think it's more of a event driven and and and and.
And the macro driven in terms of the demand side.
Yes, the win when the pandemic hit and animal protein was difficult to get because of lots of.
Issues within the manufacturing facilities, and Covid outbreaks and alike, a lot of people tried plant based.
Proteins for the first time and some data and some left.
So part of this is just overlapping a COVID-19 surge.
And that's why the categories of soft the other dynamic in the U K is.
The growth migrated from frozen to shell.
We are the number two player in frozen were very small player in shell so that impacted our short term results a bit but actually in the most recent quarter, we've seen tilled start to slow and.
Frozen and start to pick back up again, I think because of spoilage and shorter shelf life consumers, who are interested in plant based or more likely to fill their freezer.
And know that they're not gonna have to throw something out because it expires, which as you know the risk with short shelf life products. So it's it's a dynamic category.
You know the the softness globally as well documented we like our positioning we.
We feel like we have a great brand with a lot of potential but it's again, there's kind of the ebbs and flows of Covid and some of the shifts between segments that has.
Driven some short term volatility.
Yeah.
Okay. Thank you.
Thank you. Our next question comes from Anthony Vendetti with Maxim. Please proceed with your question.
Thanks, Yeah, just a quick question on the E.
E Commerce side.
Is that continuing to.
Grow significantly.
You just talk a little bit about the quarter results on that side.
Yeah. So it was more flattish this last quarter I think as people were out and about much more this summer than they were in previous quarters.
Blast.
The cold weather and the Covid Lockdown that happened last winter, we we've seen some of that volume slow a bit it's still about a little bit less than 11% of our total volume in North America. It's a very small percentage of our volume in Europe and quite frankly, it's never really.
The entire food businesses never really taken off in Europe to the extent that it did here in North America.
It's stable, we're well positioned there are certain categories like baby like personal care.
Where it's a pretty significant portion of our business. So we watch that closely you know people don't want to.
They get a lot more variety on the internet than they would in a store, particularly on health and wellness brands. So it's important for a company like ours, given the amount of choices, we can give people online relative to brick and mortar, but it if it's stable it's not a it's not declining but it's not growing double digit like it was at the beginning of the pandemic.
Okay. Thanks, Chris.
Got it.
Thank you. Our next question is can Rebecca Schueneman with Morningstar. Please proceed with your question.
Hi, Good morning, Thanks for squeezing me in so most of my questions have been answered, but I just have one left.
I'm wondering if the current environment.
As in any way hampering your ability.
To launch our new products are you now set the stage for meeting our long term growth objectives.
In terms of you know.
Mortgages or in terms of the economic environment. Thank you.
Yeah, Great question. So we continue to launch new products that were being much more selective primarily because we were very proactive during the pandemic when everybody else stopped innovating, we kept innovating with things like veggie puffs and screaming Hot Veggie straws.
Wellness teas, and other things that we never got full distribution on even though they are performing very well and so we've made the choice to make sure we fill out the distribution on the winners before we start bringing more in but that said there are things like we just launched peanut butter and jelly bites under Earth's best they've got 50% ACB and is off to a terrific start.
We've had some seasonal things on yogurt that did very well, so we're being more selective and trying to finish the play on the big ideas that we launched over the last couple of years, but we have a nice robust pipeline retailers are accepting innovation.
They're resetting categories and we expect that we will continue to use innovation as a major part of our growth strategy.
Okay, great. Thanks for the color.
Thank you there are no further questions at this time I would like to turn the floor back over to Mark Schiller for any closing comments.
Thank you everyone. We appreciate your interest and your time today, we're around for the rest of the day and look forward to additional conversations. Thanks, so much.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.