The Hain Celestial Group Inc. Q3 2023 Earnings Call
Greetings and welcome to the Hain celestial third quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Key pad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Alex Kelsey a head of Investor Relations. Thank you you may begin.
And thank you for joining us on Haynesville Fpl's third quarter fiscal year 2023.
On the call today are Wendy Davidson, President and Chief Executive Officer, and Chris <unk> Executive Vice President and Chief Financial Officer during.
During the course of the call management May make forward looking statements within the meaning of the federal Securities laws. These include expectations and assumptions regarding the company's future operations and financial performance.
These statements are based on management's current expectations and involve.
Risks and uncertainties that could cause.
Could cause actual events to differ materially from those described in these forward looking statements.
Please refer to Haynesville at field.
Annual report on Form 10-K quarterly reports on Form 10-Q, and other reports filed from time to time with the Securities and Exchange Commission as well as the press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
The company has also prepared a presentation inclusive of additional supplemental financial information, which is posted on haynesville. It feels website under the Investor relations heading.
Please note management's remarks today will focus on non-GAAP or adjusted financial measures reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. This call is being webcast and an archive will be made available on the website and now I'd like to turn it over to Wendy.
Thank you Alexis and welcome we're excited to have you on board as our new head of Investor Relations for Hain celestial.
Good morning, everyone and thank you for joining the call. Today. This is my first full quarter with Hain celestial in the past four months I've had the opportunity to visit many of our locations across North America, and the U K to explore our operations and connect with our local teams I've learned about the market potential of our brands and the growth potential in our category.
Right.
Conducted a robust review of our current performance and outlook with it with the team and while the third quarter and end of year results will fall below our initial expectations. We understand the key drivers and are taking the necessary actions to address them.
Importantly, despite these results I remain confident that we have a strong portfolio and as I look ahead I expect to see continued growth opportunities within our key categories and stabilization in some of our more challenged categories looking back at our Q3 performance topline came in weaker than expected down nearly six person.
Rent year on year on an adjusted basis. However, we did see several category and brand bright spots across both North America and international.
In North America, two of our largest brands Greek gods and Earth's best both grew with double digits. Unfortunately, these highlights were eclipsed by softness in the snacks tea and personal care categories.
Within snacks, the primary driver of our weaker than expected topline results in the quarter with sensible portions the sensible portions brand has been trending up double digits fiscal year to date, but trend slowed within the quarter due to competitive spending in brand building and promotion.
You will recall in 2022, we pulled back on brand building given supply chain impacts on service levels with the supply chain challenges largely behind US. We are now just beginning to reinvest in brand building and innovation and in store promotions and are confident in the long term growth outlook for this brand there.
The recovery in service levels supported a strong quarter for the Terra chips brand growing dollar consumption, 17% and gaining share.
The Parm Crisp brand performance was down year over year as expected as it was impacted by a significant loss of distribution, resulting in an impairment, which Chris will discuss in detail later.
Recent dollar consumption data indicates we have seen an inflection point and returned to growth in many of our categories and particular in tea celestial seasonings is growing dollar consumption, 8% and gaining share.
Greek gods yogurt continues to perform very well in the latest 12 weeks. The brands dollar consumption grew 21% gaining share reflecting double digit growth and velocities.
Earth's best dollar consumption grew 4% despite cycling a year ago formula surge and industry wide supply issues, excluding formula The brand group grew dollar consumption, 13% with velocities up double digits.
Or is that snacks dollar consumption was up nearly 50% driven by growth in total distributions and strong velocity.
Overall Hain snap dollar consumption grew two 5% in the quarter driven by Terra chips and sensible portions total distribution for the overall snacks portfolio was up 8%, reflecting continued distribution gains and new margin accretive channels, such as convenience and drug stores. This is an important part of our.
Future growth strategy.
Our personal care brand portfolio has been challenged and we have taken significant steps to stabilize and return the business to profitable growth in the most recent quarter, we brought in new leadership to turnaround the strategy for the business and look forward to sharing more on this in the future.
More recent data shows Alba Botanica dollar consumption is improving and we have a strong sun season planned with robust merchandising advertising and earned media to support the promotion of the album Mineral line, While North America performance was challenged international continues to stabilize and improve primarily in the better for you.
Snacking business and the U K led by heart lease and then the non dairy business in Europe , and the U K, our dollar consumption growth accelerated and we gained share in several categories with fresh soup consumption dollar consumption up 18%, gaining two share points in the quarter and four points in the latest four weeks and our bet.
Or for you ingredients, such as jams, and marmalades delivering double digit dollar consumption growth in the quarter.
Now I'd like to spend a few minutes talking about our fiscal 'twenty three year over year projections as it sets the stage for the more strategic conversation as to where our longer term growth will come from.
I'll start with North America, our overall snacks portfolio for fiscal year 'twenty three is projected to grow high single digits year over year with the exception of parm Crisps and sensors, while we have seen a slowdown in the second half and it's been driven by the pullback in marketing and brand building spend in the prior year as well as customer.
Programs that were not repeated this year.
We are addressing this with reinvestment support within the quarter as mentioned on our last call and we anticipate seeing the benefits begin to materialize in the back half of this calendar year I am pleased to report that we have programs in place for a significant increase in distribution on some of our key brands with some of our major customers for the next year the.
Best business, despite lapping the demand surge last year and ongoing supply challenges and formula is projected to be up high single digits. We are very excited about our Earth's best business, which continues to resonate with consumers and is demonstrating strong growth and total distribution and velocity. The recently launched good food made.
On brand campaign is delivering above expectations and driving brand awareness and preference.
Our Greek gods brand is projected to finish with mid teens year over year growth and we are excited going forward because of the service level of recovery from a year ago and the strong unit growth in response to the reinvestment in media and promotions.
Our tea business is projected to finish down high single digits due in part to the pullback in marketing and brand building support and the overall category weakness as it lapped pandemic related demand surge in the prior year.
As a leading brand in the category celestial seasonings was impacted as well to counter this impact and return the brand to growth we activated media with our magic in your mug campaign in quarter, three and continue to engage with our retail partners on optimizing the assortment and shelf set.
We're beginning to see recovery in the brand returning to growth in the most recent weeks and the outlook includes new innovation launches and improved distribution in some of our largest customers as we head into fiscal 'twenty four.
Turning now to international the International segment performed broadly in line with our expectations, while also improving sequentially across all key metrics. Our business continues to strengthen due to the stabilizing macro environment our participation in both branded and private label as consumers seek out value execution of our.
<unk> pricing distribution gains and improving service.
We're encouraged by the stabilization and improvement in the better for you snacking business and the U K led by pricing and velocities and in the non dairy beverage business in Europe .
The meat free category is beginning to reset from the accelerated category grows in the past two years and the entrance of new players, we're beginning to see stabilization with private label in meat for you returning to growth in.
In addition, we continue to see improvements in the efficiency initiatives underway across our business. Despite significant inflationary headwinds a combination of price actions operational cost management and robust productivity programs prevented significant margin erosion, while protecting core distributions.
I will now turn the call over to Chris to share greater detail around the quarter and disk and to discuss our full year guidance after which I will share some of the actions we are already taking to drive towards successful outcomes and as promised I will share some of our thinking about our future direction and our focus.
Thanks, Wyman and good morning, everyone.
Third quarter consolidated net sales decreased 945% versus the prior year period to $455.2 million inclusive of a $17 million impact from foreign exchange.
The basis consolidated net sales decreased five 8% in the quarter.
Adjusted gross margin was 21, 4% in the third quarter.
The increase of approximately 160 basis points versus the prior year period.
Driven by greater pricing and productivity more than offset by inflation.
Deleverage, resulting from lower volume as well as negative mix.
Adjusted EBITDA on a constant currency basis was 39 $43 billion versus $58 7 million in the prior year period.
This came up short of our guidance largely due to the top line softness in the quarter accompanied by negative mix and increased trade spend.
Including the impact of foreign exchange Q3, adjusted EBITDA was $37 $3 million.
Total SG&A came in at 16, 5% of net sales for the quarter.
Net income for the quarter was a loss of $115 $7 million or negative $1 29 per diluted share compared to $24 5 million or 27 cents per diluted share in the prior year period.
The loss was primarily related to a noncash impairment of park gross and then sensors intangible assets.
Due to the underperformance of the brands, we conducted a quantitative analysis, which resulted in an impairment totaling $156 million, resulting in an impact of $117 million after tax.
Adjusted EPS was <unk> 87 versus 33 cents in the prior year period.
Increased interest expense accounted for approximately 10 cents of a year over year decor is rising rates as well as a higher outstanding debt balance translated into an incremental $10 $2 million in interest expense compared to the prior year quarter.
Now turning to our individual reporting segments.
In North America reported net sales decreased 12% to $286 $6 million in the third quarter adjust.
Adjusted net sales decreased by 10, 8% versus the prior year period.
The year on year decline was a function of previously discussed lost customer promotional programs baby Formula requires as you asked a prior year of demand surge for the category.
As well as softer than expected results, mainly in snacks and Chi.
Because when he mentioned the slowdown in the grocery <unk> snacks was largely a function of a pullback in marketing and brand building support and continued challenges with partners, while the cheese category continued to show softness and we underperformed versus the category.
Q3, adjusted gross margin in North America was 21, 9%, a 180 basis point decrease versus the prior year period.
Our margin performance reflects inflation.
Unfavorable volume and mix and increased true, partially offset by pricing and productivity.
While our supply chain performance has greatly improved versus prior year, the lower volume. Additionally drove plant deleverage.
Adjusted EBITDA at constant currency, North America was 27, and $44 million, a 9.9 billion or 26.5% decrease versus the prior year period.
North America adjusted EBITDA margin was 95, 5% on a constant currency basis.
200 basis point decrease from the prior year period.
In our international business reported net sales declined four 9% to $168 $6 million in the third quarter.
Adjusted for the impact of foreign exchange of $15 million net sales increased three 5% compared to the prior year period, representing a 670 basis point sequential improvement from the last quarter.
Our year over year increase for international adjusted net sales reflects an eight 6% increase in the U K offset by an eight 4% decline in Continental Europe .
The U K increase was driven by strong jams, marmalade and soup performance and a continued benefit from the ongoing shifts toward private label due to our diverse offerings.
The year over year rate of decline for Continental Europe moderated once again I'm going back a further improvement in the non dairy beverage category performance, new customer acquisition and private label mix shift within the category, where we have a meaningful presence.
International adjusted gross margin was 26% up approximately 160 basis points sequentially, our recent pricing actions productivity and positive mix on.
On a year over year basis, adjusted gross margin compression continues to moderate meaningfully with the rate of decline less than half of what we experienced in Q2.
Inflation remains elevated however, we are seeing signs of stabilization in recent energy subsidies are providing relief as well.
International adjusted EBITDA at constant currency was $23 $1 million, a 12, 6% decrease from the prior year period as a percentage of net sales on a constant currency basis. Adjusted EBITDA was 12, 6% down 230 basis points versus the prior year period, yes.
Oh 140 basis points compared to the second quarter demonstrating continued improvement.
Shifting to cash flow and the balance sheet third quarter operating cash flow was $29 million versus $31 2 million a year ago.
The lower operating cash resulted from a reduction in net income and use of cash for net working capital.
As we anticipate generating incremental positive cash flow and the balance of our fiscal year, we would expect resulting cash to be used to pay down debt.
Capex was $744 million in the quarter, approximately $1 4 billion higher than Q3 2022.
Finally.
We ended the quarter with cash on hand of $44 million and net debt of 813 million translating into a leverage ratio of four six times as calculated under our amended credit agreement.
System with our stated priorities for cash we have reduced net debt by $40 million since the end of the first quarter of fiscal 2023.
In light of our Q3 results and updated expectations for the fourth quarter. We are revising our full year outlook for both adjusted net sales and adjusted EBITDA on a constant currency basis as follows.
Adjusted net sales decline to be minus four to minus 3%.
Adjusted EBITDA is required to be minus 15 to minus 13%.
For the fourth quarter, we now expect on a consolidated basis.
Adjusted net sales to be down low single digits versus the prior year period.
Adjusted gross margins to be up year over year and sequentially as we continued to benefit from our pricing actions and recognized a ramp and savings for our productivity agenda and supply chain improvements.
Adjusted EBITDA at constant currency expected to be approximately $40 million to $44 million driven by lower sales volume and increased brand building organizational capability investments in the quarter.
<unk> supply chain disruptions plateauing inflationary pressure and greater benefits realized from planned pricing actions as well as increased productivity.
Turning to our segment outlook for.
For North America in the fourth quarter, we expect adjusted net sales to decline versus the prior year period, but at a lower rate than Q3, as we realized continued top line softness in Congress and personal care, while the ramp up in our brand building investments takes hold.
We do expect to see sensible portions returned to growth in the high single digits. So palm Chris continues to decline versus prior year.
Creating a material drag on North American top line results.
North America adjusted gross margins are expected to show improvement when compared to the prior year period.
And lastly constant currency adjusted EBITDA with declines versus the third quarter and when compared to the prior year period.
As we continue to accelerate brand building investments, which will support our future growth, while limiting EBITDA growth in the near term.
For International we expect the following for the fourth quarter adjusted net sales to deliver growth versus the prior year, but at a slower pace versus the third quarter due to new pricing actions net of U S cities as consumers shift between brands and private label.
Our diversified portfolio is a significant supplier in both the brand and private label space provides sustained opportunities for growth.
Continuous improvements in adjusted gross margins, both versus the third quarter and the prior year period, as we benefit from increased pricing and productivity.
Offset by challenges due to stranded overhead and mix impacts continued improvements in adjusted gross margin both versus the third quarter and the prior year period, as we benefit from increased pricing and productivity offset by challenges due to stranded overhead and mix impacts.
And lastly, adjusted EBITDA on a constant currency basis to grow well versus the third quarter and the prior year period with margins improving over 500 basis points versus the fourth quarter of 2022.
With that allow me to turn it back to them.
Thank you Chris.
While the rest of the year is not where we would like our detailed review of the business has me optimistic about the future and I'm focused on setting the company up for future success.
We have already started to invest behind our brands and are in the active stages of our strategy assessment and development I continue to have confidence in the future potential of our brands in our portfolio and our ability to return to profitable growth.
Although our starting point is lower than previously believed and we have work to do to transform the business. We have already made progress building capabilities to drive operating improvements and efficiencies I'll share a few examples.
We're working to simplify and globalize, our organizational structure to drive both efficiency and effectiveness in February we implemented our new global leadership structure, and we'll be driving alignment and synergies across the organization.
We've enhanced our international commercial resources to improve distribution and end market performance we.
We simplified our end to end supply chain under a global center of excellence.
We have a number of productivity projects underway with a focus on cash flow and balance sheet improvements through improved forecasting and inventory reduction.
We're optimizing our office footprint and leveraging a more robust hub and spoke model to better enable our hybrid working model as a result, we exited our headquarter lease in lake success and are in the process of finalizing our smaller work space more closely aligned to our needs and future vision.
And we are focused on culture and talent as you can see by the changes we've made to our leadership team.
As I mentioned in our last earnings call. We have begun a strategic review of the Hain three point out strategy.
Process to confirm our where to play choices and clearly defined the how to win but building blocks is well underway and progressing as expected.
While the company has simplified its portfolio of brands over the last few years to categories with tremendous potential we have yet to leverage our scale and our reach to enable the investment in capabilities and brand building necessary to generate sustained performance.
We are committed to building a clear path to predictable achievable and sustainable top and bottom line growth and we see an opportunity for hain to blend aspects of traditional CPG growth model with those are smaller disruptive brands to enable the growth of our better for you portfolio.
While harnessing the power of our operational scale.
You've heard me refer to this as out smelling, the big and out begging a small.
We have several core assets to leverage to achieve our potential including a strong portfolio of brands two thirds of which are number one or number two in their categories. We're in attractive categories and geographies with better for you tailwind and a committed organization that is aligned to our purpose to inspire a healthier living.
The key to unlocking more value for our shareholders is based on a few core tenants.
Taking a consumer centric approach to driving growth.
Executing with commercial and operational excellence, expanding our reach to be where the consumer is shopping generating the fuel needed within the organization to invest for growth and building a high performance growth mindset culture.
Importantly, we will work to balance the pacing and sequencing of investments needed in capabilities categories and brands with the growth in margins and deliver performance.
As we work to pivot the company from shaping the portfolio to accelerated growth our efforts will center on clarifying our focus with a balance between short term urgency and long term capability.
And as we live our company purpose to inspire a healthier living we are committed to grow our people grow our brands grow our business and grow our impact. These tenants will underpin our strategy and our long term growth framework, which we look forward to sharing early fall at our Investor day.
Now I'd like to turn it back to the operator to open the line for questions.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
We ask that you limit your questions to one and a follow up so that others may have an opportunity to ask questions for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from Andrew Lazar with Barclays. Please proceed with your question.
Great. Thanks, good morning, everybody.
Good morning.
Hi, when do you mentioned, just before balancing the pacing and sequencing of sort of reinvestment spend.
And I guess I'm, just trying to get a sense of whether you think that the the lower 23 base.
Allow him to grow profitability at a maybe a more normal cadence in fiscal 'twenty four or do you think profitability you know should our expectation be profitability is still likely somewhat more muted in 'twenty four given you know some of the reinvestment you need to do and the timeframe sometimes around you know the business.
Bonding to reinvestment takes a bit more time I guess, what I'm getting at is is 24 potentially also a likely a somewhat of a transition year.
Yeah I appreciate the question and I know there were some questions in the last conference call about what I meant by reinvestment in the brand. So let me let me frame it for 'twenty three and then provide a little outlook on what I think that means for longer term in 'twenty. Three we mentioned that we pulled back.
Spending in 'twenty two in 'twenty, three we actually didn't spend much marketing or promotional dollars and quarters, one or quarter. Two so we back loaded our actual year on year spending in marketing in 'twenty three is about equivalent it's actually slightly below what we totally with the with the entire spend was in.
Fiscal 'twenty, two but it's back loaded into fiscal 'twenty three so on a year on year basis, you'll see it relatively flat, but we expect to start seeing in fact, we have in recent weeks. Some response in market to some of the new campaign activity and some of the distribution gains are intent in this page.
Seen in sequencing is that we're able to invest as we go rather than investing with the hopes that it will start to bear fruit six months later, that's what we mean by this pacing and prioritization. My intent is that we arent, taking a giant step back in margin.
But that we're actually able to funded going forward and we feel good about what we have in the productivity pipeline in this year, we actually delivered more than the productivity pipeline than we planned. Unfortunately, it went to offset deleverage in the plants from the volume that came out and so we will sort of balance that as we go into.
Two into the next year I hope that that helps clarify.
Okay. Thanks, so much appreciate it.
You bet.
Okay.
Our next question comes from Ken Goldman with J P. Morgan. Please proceed with your question.
Hi, Thank you.
When do I realize you want around for the acquisition of Parm, Crisps and sensors, but today Hain wrote down over half the purchase price. So it wasn't that long ago.
Just taking a step back and you know hindsight's always 2020 of course, but as you see it you know what do you think.
The error was made or if there was one from hain or was it just the case of bad timing you know private label taking share in this category as prices Rose I'm, just trying to get a sense of you know what do you see in hanes internal processes for future M&A. So that the next deal whenever it does take place and I imagine, it's a little farther down the road.
It was a little more successful than the last one we just saw.
Yeah. Good morning, Ken Let me you know, it's always tough to Monday morning quarterback and look back on decisions that were made but we have spent a fair amount of time scrutinizing. The assumptions that went into the acquisition and what has what has happened and transpired sense, Here's what I will tell you that we believe we got right.
We believe in the better for you Snacking category, absolutely and this was a play in better for you snacking certainly in high protein. So all of the consumer trends from that standpoint were correct.
Where we potentially got it wrong and we're probably in two ways. One is the reliance on keto as a diet relative to parm crafts and the subsequent decline in the keto category that gave some consumer headwinds that probably weren't as acutely anticipated.
At the time of the acquisition the other is customer and channel concentration, which I believe was I was actually I know internally. It was outlined I think the thought was that the pacing of channel expansion would happen faster than the potential risk of channel concentration.
And those two things were actually opposite so what you're seeing right now is a factor of them sort of recognizing where the brand sits today, but.
But I would also say take out where those or resetting the base for parm crests, our outlook and actually our growth outside of that customer concentration has been good and so we feel good about the brand going forward were just resetting a new starting point.
Rather than I'm anticipating recovery of that large customer concentration from before I hope that helps.
That's very helpful. Thank you and under what was I ask a quick follow up you mentioned that you're starting to see some brands react nicely.
Some of the investments, which is which is great to hear.
How do we think about what to look for in terms of the data that we get.
In terms of you know.
Syndicated information on I'm like what are they asking for should we really expect to see some kind of uptake or acceleration in consumption or at least visible consumption or is it a case, where hey, maybe that doesn't measure quite enough of Haynes U S business to be meaningful.
Yeah. So I would say a couple of things that you'd be able to see in the syndicated data. If you look at the drags in quarter three in North America in particular, you'd see a year on year drag in some of the categories or some of the brands inside personal care you'd see.
See a drag year on year in our that's how we roll you can see those those data points you'd also see the growth and terra you'd see the growth in sensible across the the measured channels.
Would look at the total distribution points, because where we're actually seeing some improvement in the brand's responding to the reinvestment is picking up distribution and assortment and market. Then you can look at the velocities and you'll start to see where the consumer the shopper is responding to the investments in that in Iowa.
<unk> activation, so I actually from a from a food drug mass I'm, a little bit inconvenience, you'll be able to see where you'll see some of that recovery.
Thank you.
Yeah.
Our next question comes from Michael Lavery Piper Sandler. Please proceed with your question.
Thank you and good morning.
Good morning.
I just wanted to come back to the spending color a little bit I know you just touched on this but you mentioned in the release that you've predominant reinvesting.
I guess, just mindful of the timing within the year and normal budgeting cycles can you help us understand it sounds like maybe there's some AD hoc adjustments and you've you've added some spending perhaps.
Is it right to think that with the fiscal 'twenty for budget.
Or you know Youre, starting July one, but it could be a different country or I guess I want to understand a little bit of the invest as we go versus laying out a roadmap that that covers the spending you think probably as needed for next year.
Yeah. Thanks for the question I would say we have sufficient view.
You all inside the P&L today to be able to invest behind the categories and the brands of focus what you see as a as.
Is the driver in fiscal 'twenty three is a move from almost no spending in the front half of the year to all of the spending in the back half of the year, but it isn't just in absolute dollars. It's also the quality of the investment we've taken a hard look at and marketing for instance, our working marketing spend versus our non working and the.
Those ratios were a bit upside down in the past so we're leaning more into working marketing in working media on the trade side. We're also doing the same thing on our shopper programs and our trade activation working trade rather than nonworking trade, so using it to drive distribution using it to drive velocity.
Of the core brands and categories as we and I think we talked about this actually in our investor conversation a few months ago. This channel expansion as we lean into channels of growth those are margin accretive channels. So those points of distribution actually generate more fuel than other maybe more.
Our traditional hain channels, a focus so the combination of how we use the dollars. We have today as well is where we drive growth to generate fuel going forward. The pacing of that should enable us to invest around our growth.
Okay. That's helpful. Thank you and just a follow up on farm Chris the.
The difference between what we see in the scanner data and the shipment number certainly seems to be partly related and were very much related might be to that to the distribution loss, but can you just give us a sense of timing and basically is there three more quarters of this that we should be modeling in when we think about the North America topline.
Yeah, that's exactly what to think about it Michael.
We got into this year.
We we had an okay first quarter on firm grasp and then things turned more challenging. So so as you say, we're a couple of quarters into that as we sit here today and a couple more quarters to go.
Okay, great. Thanks, so much.
You bet.
Our next question comes from Matt Smith with Stifel. Please proceed with your question.
Hi, good morning.
Good morning.
I wanted to ask a question about the increased level of investment in the second half of the year I realize some of that is facing relative to the prior year.
When we look at the gross margin performance in the quarter.
Rising in productivity was not enough to offset inflation again, just here in the third quarter. So when we think about margin going forward with this increased level of investment do you expect pricing and productivity to the contribution there to increase and you get to a place where you're offsetting inflation and therefore margins are expanding or.
Or perhaps your inflation is starting to taper and theres less inflation as we move forward just a little color there would be helpful.
Yeah, I'll start and then have Chris add a little bit of color when we look at quarter three versus prior year.
The pricing actions that we took across the business were fairly sufficient to cover what we saw in inflation. The challenge. We had was while the elasticities who are below one there were still were some volume impacts and that came out of our plants and as Chris mentioned in his remarks led to some delever.
Rich.
That deleverage drove some incremental costs that had to be absorbed and that's really where our productivity ended up being used instead of being able to be used as fuel to support the growth of the business, which was sort of the original intent as we look forward well.
While raw material inflation may subside a bit on the energy side, we still see labor rates and I think you've probably heard that from others as well that still elevated and so we'll have those two things as offsets, but we think that the where we're seeing the volumes come back around Wil.
See less of a price elasticity impact and it will allow the productivity pipeline to be able to be used for growth.
So Matt a couple of a couple of data points first recall, we did see the good gross margin progression in the first half of the year, So second quarter better than first quarter.
It drives the third quarter gross margin as being a little bit of an anomaly. There were some some non working trade things that hit in the third quarter, we had negative mix that we didn't anticipate as the tea business was a little softer than was our original guidance. So the gross margin that you saw in the third quarter a bit lower than we would've expected of course.
And then we do see a pretty nice recovery in gross margin in the fourth quarter. So so yes, I mean I think at the end of the day. The gross margin progression will step back up again, and you'll start you'll see that as a very healthy.
Healthy opportunity for us to offset the investment increases that that we're gonna make.
Okay very helpful detail, there I'll pass it on.
Thanks.
Our next question comes from Jon Andersen with William Blair. Please proceed with your question.
Oh good morning, Thanks for the question.
When you you mentioned, you kind of pivoting or working through the strategy to pivot from simplification of the portfolio to kind of a reacceleration.
Profitable growth I'm wondering though.
You also.
Looking at the Port fault, taking a step back and looking at the portfolio in aggregate and are there.
You know bigger picture decisions around core, perhaps noncore businesses and more work potentially in the future in terms of restructuring.
You know either larger or smaller parts.
Of the business on a category by category basis or brand by brand basis that are that are also in play. Thank you.
Okay.
You bet.
We're approaching the strategy work.
Like everybody, probably does where you began with where we play and specifically where we have a right to win and what it will take to bring that to life I liked the categories that we're in and I liked the geographies that we're in both offer opportunities for upside without the need.
For incremental acquisitions to be able to fuel the growth that said, we're not set up to fully realize the potential of what we could do in those categories and that's the work that we're undertaking is looking at how do we leverage our reach and scale.
To be able to get our fair share in the higher growth parts of the better for you categories.
How have we invested behind the things that customers and channels would expect us to have around insights and consumer focus how robust is our innovation pipeline are we able to leverage innovation across our markets. So that we're not doing those in isolation. So I think in the past Hain was structured.
Largely by brand by category and didn't allow you to leverage synergies or scale and reach that's where we're really looking is less about overall company portfolio shaping and much more around operating model and organizational shaping that I believe can unlock efficiencies.
He can and invest behind growth.
That's helpful.
And you mentioned a number of of changes that you've already made from the I guess, the new global leadership structure to see some commercial resource enhancements in the international business and our global C O E for supply chain.
Just in aggregate.
Yeah.
What are your expectations regarding productivity say on an annual basis. It seems like that's going to be a key part of to your point, providing the fuel for the reinvestment that you're planning to do with demand generation activities. So I think historically hain has talked about maybe $50 million a year in productivity.
Is are you willing or able at this point to kind of give us some context around that thanks. So much.
Yeah, absolutely I would say that that that $50 million number is about right for what you would expect in ongoing run rate productivity that can offset inflation offset cost impacts those things what we're actually looking at over the next couple of years that will roll out in Investor day. This.
Fall is probably much more of a large scale into and restructure that.
Will help us unlock some bigger buckets inside the P&L that will that will enable us to get to a margin structure that can sustain continuous investment behind the brands. What we've found if you look back over the last couple of years is some of our brands had no investment and some had very little.
Or it was episodic we need in some of our categories to have more of an always on sustained support but to do that we need to make sure that we are sweating the middle of the P&L. So to speak so that we're able to free up those kinds of that kind of fuel both to pay down debt, but also to be able to reinvest back in the foundations of.
The company.
Makes sense. Thank you.
You bet.
Yeah.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Well good morning, so can I ask about the plans for bringing down the leverage I mean, given the.
The downgrade of guidance. This time, it looks as though it's going to be well above four times probably are in the higher end of that that sort of four to five range. How quickly do you think you can start to turn the corner on that as we get into fiscal 'twenty, four and I assume that that repaying that is the main priority for us.
Does the cash at the moment.
Indeed, it is as we've said on this call on the last call Alexia remains our priority and you saw you saw in my prepared remarks, the progress that we have made since earlier. This year. So so the plan is to hold we're going to continue to focus on EBITDA growth and that helps a part of the calculation and then we're going to continue to focus on net debt.
<unk>, both through free cash flow and through continuing to improve our working capital position. We've got we've identified opportunities within working capital we have.
Got work plans in place today to take significant.
Amounts of inventory out of the system and that of course will go directly to to reducing that debt and so as I've said before my forecast has always been that leverage was going to peak in the third quarter of this year and then as we get into into more favorable overlap on the EBITDA side of the calculation and continued to renew.
Net debt, we will begin to see leverage come down over the next several quarters and in.
I'm wondering add a little bit of color around that as we looked at some of the investments that we've made around our operating model I think we mentioned in the last call that we've made some investments around end to end forecast and forecast management.
But last year, we had significant supply chain issues and service level problems. We went into this year with a focus on fixed service level first fix inventory later and that's part of what Youre seeing in that working capital number as we're sitting on more inventory than we're comfortable but we wanted to make sure that we were assuring.
Fly in the marketplace that we could recover from the service levels of a year ago and actually and in the recent data that we've seen from IRI, we actually have top tier service levels across our categories and our channels are focused so we're delivering on our customers' expectations that allows us to now focus on demand forecasting.
Models and room, reducing both raw and pack, but also finished goods inventories. So we can get that working capital down and as Chris said, we've got active work teams focused against that now.
Great. Thank you and maybe as a follow on question to that.
One theory is that because you have smaller brands in your more sort of focused in the higher end that the supply chain and service level disruptions you guys harder than companies with the more mainstream CPG with bigger brands et cetera.
Are you through a lot of that service level and supply chain disruption what sort of innings are we in in terms of getting back to normal is that all pretty much now behind us at this point.
Yeah, it's pretty well stabilized we still have a couple of hot pockets that were working on them. I guess is the way I would say we've talked about this before I think industry wide around formula in the baby category continues to be a challenge for everyone in the space and there's a few areas, where we want to make sure that we've got <unk>.
<unk> suppliers of packaging materials, and redundant contingency production locations to assure supply without some dependency on a few so some of that work is still in play, but it's not affecting our service levels other than really on the formula side.
Great. Thank you very much I'll pass it on.
You bet.
Our next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.
Oh, Yeah I was just wondering when do you if you could talk a little bit about pricing it.
With the.
Lower sales you think some of the pricing in this environment finally started to catch up and then on the gross margin side was that just.
Increased input cost supply chain cost or was it just a result of lower sales.
I'm trying to cover them the same fixed cost.
Yeah, So I'll start and talk through pricing and let Chris cover the margin question in a bit more detail because some of that has to do with mix, but relative to pricing. We feel like we've actually taken the right amount of pricing to cover for what I would say is more permanent inflation rather than transitory.
Well, we wouldn't want us to take so much price that we didn't have to trade back or we have to pull ourselves back and we actually feel very good with where we're at I think you've probably heard us mentioned in the past prior to my joining what what's great for Hain as we tend to be in categories, where the consumer is shopping but we also tend to be in the pre.
And part of those categories, but at the entry point price point of that so a little less price sensitive consumer and we tend to be the entry price point for somebody who wants a better for you option to traditional categories. So it's actually a really great place for us to be and I think the team's been really smart and thoughtful.
All about pricing to take as much as was needed but not to take too much that it would cause future challenges to be able to sustain.
So Anthony on the gross margin question.
The shape of the curve is actually consistent with our original plan. We did expect that the third quarter would step down a little bit from the second quarter in our original plan for the year now it's stepped down a little bit more than what we had anticipated and largely due to three reasons I bet. You name two of them. So so there was lower volume, which led to some de leverage them across the <unk>.
System.
There was negative mix as I mentioned earlier and then the third one I think I mentioned this earlier to an earlier question as well there were some non working trade items that hit in the third quarter that we don't expect to repeat going forward. So so all of those things conspired to drive gross margin in the third quarter a little lower.
And then what were you expected and then subsequently we do see it recovering pretty nicely in the fourth quarter.
Okay. Thank you very much I appreciate it.
You bet.
It appears there are no further questions at this time I would now like to turn the floor back over to Wendy Davidson for concluding comments.
I want to thank you all again for joining us today to review, our third quarter performance and updated fiscal year outlook and these first few months I've seen firsthand the capabilities of our supply chain and the attention to quality service and safety the strength and potential of our brands the passion of our people and the opportunity for scale.
And our business is impressive and exciting I'd like to thank the entire hain team for their energy and their engagement and I look forward to seeing and speaking with many of you in the coming weeks and the Investor day in the fall take care.
Yeah.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
[music].
Yeah.
[music].
Okay.
[music].
Okay.
[music].
Okay.
Hum.
[music].
Okay.
Yeah.
Okay.
[music].
Okay.
Okay.
Yeah.
[music].
Yeah.
[music].
Yeah.
Yes.
[music].
Yes.
[music].
Yes.
Mhm.
Yes.
[music].
Okay.
[music].
Okay.
[music].
[music].
Yes.
Yes.
[music].
Hum.
Okay.
Hum.
[music].
Yes.
[music].
Hum.
[music].
Sure.
[music].
Okay.
[music].
Hum.
Okay.
Yeah.
Yeah.
Okay.
Yeah.
Uh huh.
[music].
Yes.
Uh huh.
Uh huh.
[music].
Yes.
[music].
Uh huh.
[music].
Okay.
[music].
Uh huh.
Yeah.
Yeah.
[music].
Hum.
[music].
Okay.
Hum.
Hum.
Hmm.
Hum.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
Okay.
Yeah.
Mhm.
Yeah.
Yeah.
Okay.
[music].
Yes.
Okay.
[music].
Okay.
Okay.
Yeah.
Thank you.
Yeah.
Okay.
Yeah.
Yeah.
Okay.
[music].
Oh.
Yeah.
Hum.
[music].
Okay.
[music].