The Hain Celestial Group (NASDAQ:HAIN) Q1 2021 Earnings Call

0:00 Greetings and welcome to the Hain Celestial first quarter fiscal year 2021 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 keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anna Kate Heller, for my investor relations. Thank you. You may begin.

0:32 Thank you. Good morning, and thank you for joining us on Hain Celestial's first quarter fiscal year 2021 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer, and Javier Drogo, Executive Vice President and Chief Financial Officer. During the course of this call, management may make forward-looking statements within the meeting of the Federal Securities Laws. These include expectations and assumptions regarding the company's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. 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's 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 and its press release issued this morning for a detailed discussion of the risks that can cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hain Celestial's website under the investor relations heading.

1:44 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. As a reminder, beginning in Q1 of fiscal year 2020, the company changed its segment reporting to focus on North America, international and corporate, which had previously been reported as the U.S., U.K., and rest of the world segment. This call is being webcast and an archive of it will also be available on the website. I'd also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalks, or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now, I'd like to turn the call over to Mark Schiller.

2:31 Thank you, Anna Kate, and good morning. I hope everyone is safe and doing well in these turbulent times. On today's call, I will give some color on our first quarter strong results, explain how we continue to position ourselves for sustainable long-term growth, and provide some context around our expectations for the rest of fiscal 2021. Let me start with our Q1 results. On our last earnings call, I stated that for the first quarter, we expect mid single digit top line growth after adjusting for divestitures and discontinued brands, several hundred basis points of margin improvement and adjusted EBITDA growth comparable to the 25% we delivered in the second half of fiscal 2020. At Barclays investor conference later in the quarter, I told you that adjusted EBITDA would likely come in above that. I'm pleased to report that we have over-delivered on all of these projections and turned in our best quarter in several years.

3:27 Sales growth for the quarter was 5.2% in constant currency, excluding divestitures and discontinued brands. Gross margin was up 326 basis points from last year, while adjusted EBITDA margin was up a very strong 435 basis points and adjusted EBITDA dollars was up 71% versus last year. That's the fifth straight quarter of double-digit EBITDA dollar growth. Clearly, our transformation strategy continues to work, and as I will discuss, there's plenty of opportunity for growth in our core brands and for further margin improvement. Looking geographically, North America sales, excluding divestitures and discontinued brands, grew 10% versus a year ago. Adjusted gross margin percentage grew almost 350 basis points. Adjusted EBITDA margin percentage grew over 500 basis points. And adjusted EBITDA dollars were up a very strong 63%.

4:25 That's on top of 55% growth in Q1 last year. Our Get Bigger brands, which represent nearly two-thirds of North America's sales, delivered strong top-line growth of almost 16% this quarter, and we expect continued strong double-digit growth in the current quarter. Our consumption grew double digits in the get bigger category and has been relatively stable at that level over the last eight months after the initial stock upsurge last March. We've picked up market share in tea, snacks, yogurt, and continue to deliver strong double-digit consumption growth and personal care, inclusive of unmeasured channels where it's harder for us to assess market share gains. Within the quarter, sensible portions, celestial seasonings, Greek Gods, Alba, and Live Clean were all particularly strong.

5:13 Sales on the Get Better brands adjusted for divestitures and discontinuances grew slightly in the quarter. Importantly, as you'll recall, our goal for these brands is to drive increased profitability, and in Q1, adjusted EBITDA dollars and margins doubled versus the previous year. Turning to international, net sales grew 4%, adjusting for the sale of the Donovan business, with several hundred basis points of Forex contributing to our growth. We had strong growth in most of our number one and number two share brands with our non-dairy beverages and plant-based proteins growing more than 20%. As we saw last quarter, our food service-oriented fruit business continued to struggle in Q1 as many offices and restaurants remained closed or had limited service.

6:00 Excluding the $16 million decline in the fruit business, Q1 international sales delivered solid double-digit top-line growth and constant currency. So clearly the remainder of our international business is performing well. International adjusted gross and EBITDA margins improved almost 300 basis points compared with last year. Those are both significant improvements compared to our second-half performance last year and the largest margin increases in the last several years. Adjusted EBITDA dollars excluding the Danabal divestiture also grew a very strong 33%. As mentioned at the Barclays Conference, we're now executing the North American playbook in our international business. The opportunity is significant and we've already started restructuring and identifying a robust list of productivity initiatives that will continue to drive margin expansion later in 2021 and 2022 as our productivity initiatives come to fruition.

6:57 Within the quarter, The fruit business was also a 270 basis point drag on total international adjusted EBITDA margins. As we've discussed on previous calls, we're in the process of selling the fruit business. There are many interested parties currently doing due diligence, and we expect to have it sold well before the end of the fiscal year. Excluding fruit, the remaining international businesses delivered 15% adjusted EBITDA margins in the quarter, up 290 basis points versus a year ago. I'm very proud of the strong results the team has delivered in the quarter and the growth momentum of our business. Our transformation plan is clearly working, and we continue to believe there is significant upside both in North America and our international businesses. Now let's shift to discussing how we've set ourselves up for continued growth going forward.

7:47 There's two primary factors that give us confidence in our ability to continue driving robust growth. One, we've strengthened the foundation and made investments in our brands. and two, the consumers made behavioral changes which favor our brands. Starting with our actions, remember that our transformation started well before the pandemic when we made the decision to eliminate money-losing SKUs and poor ROI investments, even if it meant giving up top-line growth. Importantly, those decisions and actions are behind us and we now have a strong foundation to grow from. We also increased marketing spending and readied significant innovation on the Get Bigger brand before the pandemic to accelerate our performance in the second half of the year. Since COVID began, we've continued investments in the Get Bigger brand and have driven 11% increase in household penetration and 17% increase in repeat rate. In Q1 this year, those numbers were even stronger with household penetration up 15% and repeat rate up 20%. Depth of repeat, which is the number of times a buyer makes repeat purchases, also grew materially Thank you for joining us.

9:21 With sensible portions, celestial seasonings, Greek gods, and live clean, particularly strong. With regards to the second driver of future growth, we believe that macro trends created by this pandemic are permanently driving people toward our brands and categories. First, people are more aware of and concerned about their health. As a result, they're making significant lifestyle changes by exercising more and eating better. Since Hain is clearly focused on healthier eating, we expect to disproportionately benefit. Second, consumers have become less price sensitive during this pandemic. Unlike other recessions, consumers are willing to pay more for brands they know, love, and trust, and are trading up to products that meet their physical and emotional needs. Since our products have many health attributes, like being organic, non-GMO, and preservative-free, our products often cost more. That cost barrier has become less important, resulting in strong trial for our categories and our brands.

10:17 Third, consumers have significantly increased food purchases online. Given its increased convenience and assortment, we expect this trend to endure even after the pandemic. This, too, should benefit Hain since healthy offerings are highly developed in this channel, and we have a much higher percentage of our sales online than most CPGs. We have a strong understanding of what the consumer wants and how to engage them, and as a result, have delivered consistent online sales growth above 50% throughout the pandemic. In summary, we're doing the right things to drive the top line, and the marketplace trends demonstrate Hain is well positioned for where the consumer is headed. The disruption of the market caused by the pandemic, along with our proactive management focus on what matters to our retailers and consumers, has enabled us to gain shelf space, capture new consumers, and increase market share.

11:07 As a result, we expect our momentum to continue going forward. Now let's spend a few minutes discussing our margins and why our transformation playbook and productivity culture will continue to drive margin expansion regardless of the macro environment. In North America, where we've delivered several hundred basis points of margin improvement every quarter since we began our transformation journey, we still have plenty of opportunities ahead. For the next two years, we will be focusing on many sizable initiatives, including automation in our plants, rightsizing of our infrastructure, redesigning over-engineered products, Thank you for joining us today. redesigning products, and right-sizing our infrastructure.

12:16 In Q1 this year, we delivered almost 300 basis points of adjusted gross EBITDA margin improvement in our international business, and we fully expect to see continued strong profit growth as we build capabilities and increase focus and execution around these initiatives. As we turn to look ahead for the remainder of 2021, consistent with most of our peers, we've elected not to provide specific guidance for second half. Given the unprecedented volatility and uncertainty of COVID's impact on consumers, customers, and the economy, as well as Brexit and foreign currency exchange, there are too many unknowns that make it difficult to provide specific guidance. Having said that, I have complete confidence in our team, our brands, and our business plans such that we can provide you with confidence in some additional direction.

13:01 For the second quarter, we plan to again increase marketing spending and reduce non-working dollars to drive continued mid-single-digit adjusted top-line growth. of note, we do expect some of the third quarter volume to move into second quarter as retailers build inventory in anticipation of the potential COVID resurgence and Brexit disruption in the UK. In Q2, we also expect several hundred basis points of gross margin improvement and adjusted EBITDA growth comparable to what we delivered in the second half of last year. Despite the many unknowns in the second half of the year, we expect to continue to excel at marketing, innovation, supply chain execution, and productivity, and our scrappy entrepreneurial culture is second to none. So for the year, we continue to reaffirm our expectation of strong double-digit EBITDA dollar and double-digit operating free cash flow growth with solid margin expansion.

13:54 With that, let me turn it over to Javier who will give you more details on our financial performance and fiscal 21 expectations.

14:03 Thank you, Mark, and good morning, everyone. There are five key aspects of the first quarter financial information that I want to highlight in today's call that demonstrate continued strong performance from the execution of our transformation plan. First, we deliver strong top line growth versus prior year for the third consecutive quarter with double digit adjusted revenue growth in North America. Second, our growth was supported by significant continued margin expansion. Third, We're generating much stronger cash flows. Fourth, our balance sheet remains strong with excellent capital allocation flexibility. And finally, our business is well positioned for continued success.

14:48 So let's drill into each of these aspects, starting with the top line. Keep in mind, I will focus my discussion on our financial results from continuing operations. First quarter consolidated net sales increased 3% year-over-year to $499 million, modestly above internal expectations. Foreign exchange benefited first quarter net sales by around 200 basis points, while divestitures and brand discontinuations were a 380 basis point headwind. After adjusting to exclude these factors, net sales increased a little over 5% versus the prior year period, falling right in line with previously provided guidance.

15:34 On profitability, for the first quarter, adjusted gross profit increased nearly 20% versus the prior year period to $120 million. Currency impact on gross profit was a tailwind of about $2 million. Exceeding our guidance, gross margin improved roughly 325 basis points, driven by our significant supply chain productivity initiatives, improved product mix from our skew rationalization efforts, and better overhead absorption in our plans. Distribution and warehousing costs as a percentage of sales improved versus the prior year due to the consolidation of shipping locations and improved utilization of trucks contributing to improved gross margins.

16:21 SG&A came in at 16.4% of net sales, 100 basis points lower than the prior year period as we lowered broker commissions, reduced headcount as we consolidated our North American operations into one entity, and reduced travel. These improvements were partially offset by higher marketing spending to support our North America Get Bigger brands and our UK businesses. First quarter adjusted EBITDA increased to $55 million compared to $32 million in the prior year period, representing a 71% increase versus Q1 last year. Currency impact on adjusted EBITDA was a tailwind of just over $1 million.

17:07 Adjusted EBITDA margin of 11% represented a significant improvement of 435 basis points year over year, driven by gross margin improvement and lower SG&A. We more than triple our adjusted EPS to $0.27 based on an effective tax rate of 23.4% compared to $0.08 in the prior year with an effective tax rate of 27.4%. The lower tax rate was mainly driven by the company's ability to claim deductions and foreign tax credits on foreign taxable income. Now, to provide some detail on the individual reporting segments and starting with a North American business where net sales, profit growth, and margin rate expansion all exceeded expectations.

17:54 On the top line, first quarter net sales increased 3% year-over-year to $281 million. Foreign exchange impact on the quarter wasn't material. Once adjusting for divestitures and brand discontinuations, net sales increased 10% versus the prior year. From a profitability perspective, Q1 results were strong as we delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar expansion. Specifically, our North America business expanded adjusted gross margin by nearly 350 basis points, resulting in adjusted gross profit of $76 million, or an increase of 19% versus Q1 last year. This improvement was mostly driven by a stronger top line and lower supply chain costs driven by our skew rationalization effort, productivity initiatives and efficiencies in our supply chain system.

18:53 Adjusted EBITDA increased to $39 million, a 63% increase. Currency impact on adjusted EBITDA was minimal. Adjusted EBITDA margin of 13.9% represented an improvement of over 500 basis points versus the prior year period Driven by both gross margin and SG&A improvements. Now, let me shift to our international business, where results for the quarter were also ahead of our earnings expectations. Net sales increased 4% on a reported basis, but declined 1% when adjusted for a $10 million foreign exchange tailwind compared to Q1 of last year. Strengthening our non-dairy brands, such as Joya and Natumi, as well as most of our Hain Daniels business including our leading market share Linda McCartney and Harley's Brands in the UK were largely offset by continued weakness in our fruit business due to its food service exposure.

19:52 Net sales for our international segment excluding the fruit business increased by 10% in constant currency versus a year ago. That said, the year-over-year decline in fruit sales was a little less pronounced than last quarter's decline even improve return to office work patterns and more favorable weather conditions. Given the adoption of the North American playbook in our international business, adjusted gross margin and dollars and adjusted EBITDA margin and dollars were all up considerably in the quarter versus the prior year period. Adjusted gross margin improved by almost 300 basis points versus a year ago, driven by lower trade spending and productivity measures that were implemented in our Heine-Daniels and continental European businesses.

20:39 Adjusted EBITDA grew by 35% versus a year ago to $27 million, supported by an adjusted EBITDA margin improvement of about 290 basis points driven by a higher adjusted gross margin. In Q1, due to the classification of our fruit business as an asset held for sale, the company recorded a non-cash impairment charge of about $33 million. Shifting to cash flow and balance sheet, Q1 operating cash flow improved by $44 million to $41 million. And operating free cash flow, defined as operating cash flow minus capex, was $29 million, a $45 million improvement from the prior year period.

21:26 These improvements resulted primarily from stronger earnings, a decrease in cash used in the working capital accounts, and a modest decrease in our capital expenditures because of timing. At the end of Q1, our inventory was $45 million higher than the levels at the end of June 2020 to ensure strong service as customers build inventory in anticipation of a COVID surge and potential supply disruptions due to Brexit. That said, we expect to be at normalized levels as we enter the second half of 2021. The Q1 inventory replenishment resulted in a 54-day cash conversion cycle that was slightly higher than the prior quarter but below our target of 60 days due to improvements in accounts receivable days outstanding.

22:15 Cash on hand at the end of the quarter was $28 million while net debt stood at $262 million and gross debt leverage was 1.7 times. Consistent with our efforts to simplify our business, and as previously communicated, in Q1, we sold our Ganaval business in Europe, a $22 million net sales business with about $1 million in adjusted EBITDA. Also in Q1, we sold Better Bean in the United States, a small brand with about $2 million in annual sales. Our balance sheet is the strongest it has been in years, and as a result, we have significant capital allocation flexibility. Given our healthy balance sheet, as well as our expectations to continue to generate strong free cash flow, we remain well positioned to both reinvest in the business and return value to shareholders.

23:09 The company's capital allocation philosophy is to deploy capital to its highest and best use. We, in conjunction with our board, routinely evaluate all opportunities to create value with our cash and balance sheet capacity, all investment opportunities, are benchmarked against each other on a risk-adjusted basis, as well as against the value of investing in our company through share repurchases or distributing capital through dividends. Consistent with our capital allocation principles, during the quarter, we bought back $42 million of our shares at an average share price of $32.81, leaving us with about $148 million of additional repurchases remaining under our 2017 program. Finally, as it relates to guidance, given our strong Q1 performance and confidence in managing the controllable aspects of our business, the company is reaffirming its fiscal 2021 outlook that calls for gross and adjusted EBITDA margin expansion as well as strong double-digit adjusted EBITDA and operating free cash flow growth.

24:18 As part of this full-year outlook, we have assumed the following. will continue to be a tailwind. Cost of goods inflation of around 2%, which has been more than offset by our productivity initiatives. Capital expenditures of approximately 4% of net sales, an increase of a prior year to drive multiple productivity projects and to carry out projects that were delayed from last year due to COVID. Close to 75% of our planned capital expenditures are targeted toward capacity improvements for profit improvement projects, and adjusted effective tax rate between 24% and 25%. In summary, the momentum illustrated during the second half of 2020 has continued into Q1. We exceeded expectations both on the top and bottom line, and we continue to believe that we are well positioned to deliver on another strong year.

25:15 I will now turn the call back to Mark.

25:19 As you can see, we had another very strong quarter. On behalf of our Board of Directors and management team, I'd like to thank our global team at Hain Celestial for how well they have continued to execute, especially in this dynamic operating environment. We're pleased that we've achieved terrific results in the quarter of fiscal 21 and have strong confidence in our plan, our team, and our future progress. With that, let me turn it over to the operator for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

26:12 Thank you. Our first question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

26:19 Good morning, everybody.

26:21 Good morning, Alexia.

26:23 I hope you can hear me okay. So I guess a question on the top line. You didn't mention the skew rationalization this quarter. Does that mean that that's largely behind you now? And can you quantify what proportion of the sales headwinds, the divestments, and the discontinuances and is there more of that to come? Do you think you're going to be getting rid of more of those smaller brands, particularly in the U.S. going forward?

26:52 Yeah, so let me take the first part, Javier. You can address the drag from the divestitures. So on SKURAD, look, it's an ongoing process for us to continue to refine our portfolio and remove SKUs. The difference now versus last year was we had no innovation last year, so when we were taking out SKUs, There was nothing going in its place. It was a smart move because those were money-losing SKUs with low velocities. But now as we see underperforming SKUs, we replaced them with innovations such that it's no longer a drag on the algorithm. So there was some slight headwind from SKU rationalization in the first quarter, but it was more than offset by the innovation that replaced it. Relative to brand divestitures, we continue to reshape the portfolio. We continue to look at The Get Better part of the portfolio and say, are these assets better in somebody else's portfolio than ours?

27:50 But we're very pleased with the margin expansion that we've been able to generate in that Get Better portfolio. In the quarter, we doubled the profitability from a year ago and we had mid-teens EBITDA margins for the Get Better brand. So I think because of the pandemic, we're being much more choiceful. In terms of which assets we want to shed, but we are still in conversations with people. There are still some very small brands in there that add complexity without really adding a lot of benefit and certainly won't get nurtured in a company of our size. So there will be some more rationalization going forward, but the vast majority of it has been done. Javier, do you want to take how much of the drag comes from divestitures?

28:30 Yeah, for the quarter, it was about 380 basis points. That was their headwind from divestitures and brand shutdowns.

28:40 Great. Thank you very much. And then as a quick follow-up, you've obviously been expanding margins very rapidly over the last year, more than a year at this point. What innings are you in on that? You lifted a lot more levers going forward, but are we sort of, is it going to slow down at some point in the foreseeable future or is there still quite a lot more to go?

29:04 There's still quite a lot more to go. What I would say is that we have captured the lowest hanging fruit on the tree and that the things that we're going after now are more complex. So whether it's automation within the plants or consolidating all of our orders to fill up trucks, which requires us to work with our retail partners, The initiatives that we're going after now, I would say, are bigger, but certainly more complex. So they take longer to execute. They take more resources to execute. But we are still in the middle of the ballgame in terms of margin expansion, and we believe that you will continue to see 100 basis point plus margin expansion for the next several years every quarter.

29:52 Perfect. Thank you very much. I'll pass it on. Our next question comes from the line of Bill Chappell with Truist. Please proceed with your question. Hi, this is actually Grant on for Bill. Thanks for taking the question. Sure. I've had one on the distribution gains that you noted in the quarter and then a little bit more on the outlook going forward. Just a question on those. Was some of that maybe delayed from shelf resets in the spring or were they really and more in the fall here. And then looking out going forward, how would you expect distribution to trend? I don't know if you have any early reads on spring resets next year right now.

30:34 Yeah, so you'll recall that we spent the first 15 months of the journey rationalizing underperforming SKUs and really looking at Things that had velocities in the bottom quartile of their category and were exiting those SKUs such that now when we come out with innovation, it's very likely to go in incrementally because we don't have too many underperforming things left on the shelf. So the gains that you've seen, which are really primarily tea, snacks, yogurt, where we've had the most innovation, that's where we're seeing the biggest gains. And I would expect that as customers reset more and more and as We continue to see distribution gains continuing for the foreseeable future. That's great, thanks. And then one on the margin profile in those Get Better brands, obviously doubled margins this quarter.

31:53 Could you maybe bridge some of those improvements there, cutting tail skews versus operational improvements, and where do you see that going from here on those Get Better brands? Thank you.

32:06 Yeah, so most of the Get Better brands are co-manufactured, so the gains that you're seeing are not really driven by manufacturing improvements. They're driven by elimination of poor-performing SKUs, elimination of poor ROI investments, reformulating products that are over-engineered relative to what the consumer is willing to pay for. or what the consumer values, improvements in our distribution and warehousing system, which benefits all brands, improved forecasting, which reduces old age discards and customer fines from poor service, which again benefits all of our brands, reallocation of marketing dollars to the get bigger brands, has been part of it as well.

32:52 So there's a lot of elements that have contributed to that margin expansion. I would tell you we continue to see opportunity going forward. There's pricing opportunities in quite a few of those brands. There's opportunities to continue to reformulate, as I mentioned. and to make sure that the things that we are spending money on are generating higher ROIs. So we expect that we'll continue to see margin expansion there going forward. Thanks. Very helpful. I'll pass it on. Our next question comes from the line of David Palmer with Evercore. Please proceed with your question.

33:34 Thanks. Just a cleanup question on consumption. How are trends changing? In your consumption beyond what we see in the measure channel, and then relatedly in this measure channel data, we see the growth contribution is largely coming from sensible portions and celestial tea. I'm wondering, just thinking through your portfolio, if you're going to see a broadening of growth contribution, and I have a follow-up.

34:03 Yeah, so the first thing I would tell you is six weeks into the second quarter, every single Get Bigger brand is is growing quarter to date. So it's much more universal than just a couple of brands that you see with really high growth in the IRI data. As far as the channel part of the question, remember that we are very overdeveloped in e-commerce and we're seeing 50% plus growth in that channel. Our personal care business in particular skews very heavily in the e-commerce channel and unmeasured channels like TJ Maxx and Sally Beauty and up and down the street accounts that you don't really ever see in the data. We have a very large club business that has performed exceptionally well throughout the pandemic. And then obviously we have the Natural Channel and Whole Foods, which has performed very well for many of the brands also.

34:59 So unfortunately, you're only going to see about 60% of the data When you look at the measured channels, and we are doing very well outside of that such that the growth rates are higher than what you're seeing in the measured channels alone.

35:15 And do you have a sense about what that consumption is versus the mid single digits that we're seeing in IRI lately?

35:26 I'd have to aggregate it for you. It's higher in e-commerce and club. It's a little bit lower in the natural channel. primarily because, again, a lot of the skew rationalization was done in the natural channel where we were very over-proliferated. But I'd have to aggregate it for you. I don't know off the top of my head.

35:45 Yeah, no problem. And I guess the big picture question, longer term, there's so much COVID-related noise in the data right now, and obviously it's keeping you from giving guidance for the second half of this fiscal year even. But looking ahead to fiscal 22 and 23, the street's more or less saying that you're going to get to the low end of your long-term targets, both in terms of your organic revenue growth. They're thinking the low end of the 3% to 6%, and they're also expecting the low end of your 13% to 16% EBITDA margin. So I guess my question is, what's the big picture for you as far as how you feel like you're going or tracking against Those long-term trends, do you think that the high end could be more at play?

36:33 Thanks.

36:35 Yeah, obviously I'm just going to stick within the range that we gave. I would tell you I think one of the upsides versus the original range is what's going on in international right now with them adopting the North America playbook. I think that's going to deliver some higher outcome in the international business than what we originally contemplated. I think for the North America business, We're really right on track with what we said we were going to do. We're a little bit ahead on the margin side. We're obviously proving our way on the revenue side, and we've got a lot of momentum there given the share gains and the distribution expansion and some of the things that we've talked about. We feel good about where we are. One of the key variables, remember, is that we had assumed in the original algorithm that the Get Bigger brands were about 80% of the volume in North America, and the Get Better ended up being about 20%. It started at 50-50.

37:30 We're now at two-thirds, one-third. So we've got more to do in terms of growing the Get Bigger brands and shrinking the Get Better brands. And that's why Alexia's question earlier around, is there still some things that we want to shed in that tail? Yes. But as the Get Bigger gets bigger and the Get Better becomes a smaller percentage of the total, we feel good about our ability to deliver what we laid out on Investor Day.

37:54 Thank you. Our next question comes from the line of Anthony Vendetti with Maxim. Please proceed with your question.

38:03 Thanks. Mark, I was wondering if you could elaborate a little bit more on the product innovations, what you have in the pipeline, have the retailers been receptive to some of the innovations that you're talking about? And I know you talked a little bit about the resets, but have any of those been delayed because of COVID or not really impacted?

38:27 Yeah, so no question, all resets have been impacted by COVID. And so we have terrific innovation that's being very well received. And actually, where we have it in market, it's performing exceptionally well. I'll give you a couple of examples in a second. But what has happened is customers have delayed resets. So for example, Sensible Portions Screamin' Hot Veggie Straws, which brought kind of heat to healthy products and brings in a lot of millennial males and people that normally weren't buying our sensible portion business. It's been 90-plus percent incremental to the brand. It's got velocities in the top quartile, but we only have 25 percent distribution because many are not resetting the category until March. So it's a little bit slower build than we would have liked, but the good news is where we have it, the innovation is performing well.

39:21 T-Well is performing well. We just launched Keto Yogurt on Greek Gods. We have a robust pipeline on snacks coming, including more hot items on some of our other snack items. And so we feel pretty good about what we're doing. We're getting the incremental space. It's turning well. It's incremental to the category. So everybody is winning. We just need the resets to happen. And so that'll take a little bit longer than we originally planned, but we'll use the results from the places where we have it. to drive further distribution at the places that don't because they're pretty compelling results.

39:59 Mark, just really bigger picture, can you talk about the amount of inefficiencies that you discovered when you came in and whether that has surprised you or is this sort of the pace you expected and just sort of where you're at? Do you think you're ahead of schedule? or just talk about the general big picture of where you're at with

40:28 your role. Yeah, so the headline is this was really a holding company when I got here. We had acquired many brands over 25 years and never integrated any of them. And so there really were no processes. We had 20-something IT systems. We had five different sales forces. It was just complexity on top of complexity. What we've been trying to do over the last 18 months and what we'll continue to do is turn this into an operating company. And that means putting an efficient structure in place, having the right leaders leading the change initiatives, making sure that we are prioritizing and focusing our resources in the right places, that we're building capabilities to be a world-class operator. And so I would say that we've come a very long way very quickly. I'm actually very proud of the amount of margin enhancement that we've been able to generate in a very short period of time and I'm equally optimistic about how much is still in front of us. We have a huge amount of productivity initiatives and a very robust pipeline that will serve us well for the next several years.

41:39 I think on the top line, we really weren't doing much in terms of marketing and innovation. We were just buying brands and moving on to the next one. And so some of these brands had been passed over by other brands and companies that had been more aggressive in terms of understanding and meeting consumer needs. So we were playing a little bit of catch up on the marketing side. But you're now starting to see that with the innovation that's coming out, the market share gains that we're starting to achieve. The robust trial and repeat data that I articulated in the script and the fact that it's accelerating. So we feel like all the guns are blazing and that we're moving in the right direction. And I think really everything that we have within our control, we feel like we're executing very well right now.

42:27 Excellent.

42:28 Keep up the great work. Thanks, Mark. Appreciate it. Thank you. Our next question comes from the line of Ken Goldman with J.P. Morgan. Please proceed with your question.

42:38 Hi, good morning. Good morning. Just a very quick one. I heard you mention that you sold a brand. I didn't hear which brand it was. Do you mind just repeating that quickly?

42:48 Yeah, it was Better Bean. It's a small brand. It's about $2 million in sales. So that was sold in Q1 of this year. Got it. Thank you.

42:58 and then Mark, just a quick clarification on something. Obviously, things are going great for you guys. It's good to see. You were talking about online maintaining its strength. Obviously, that's an advantage for you given you're over indexed to that channel per se. But over the next year, if we have a successful vaccine, if consumers shift back to brick and mortar a little bit, is that a potentially temporary Thank you for joining us.

43:49 and many more. Presidents for Christmas or food, and you have a good experience, you tend to repeat it because it's a lot more convenient and you have a lot more assortment. So I don't anticipate that it's going to change dramatically. I think what we've seen is a turbocharging of the inevitable migration to e-commerce that people have been saying was going to happen, but it was going to take 10 years to happen. And it happened very, very quickly, and I think it's here to stay.

44:38 Makes sense.

44:39 Thanks so much. Our next question comes from Michael Lavery with Piper Sandler. Please proceed with your question.

44:49 Thank you. Good morning. Good morning. Just to follow up on the e-commerce piece, you over-indexed there. I believe your margins are roughly comparable. Can you confirm if that's the case? And where you've pointed to some of the levers for more margin momentum broadly, how much upside can you also see on the e-commerce side of the business? Is that one where there's similar levers to pull as well.

45:15 Yeah, so e-commerce is margin neutral for us, which is a good thing because for many companies it's margin dilutive given that you end up doing a lot of case picking as opposed to, you know, shipping full truckloads of individual products like you do to a retailer. There is margin potential in everything that we do. And I would say in e-commerce, one of the reasons that we had 1,000 basis points of margin improvement last year was working with retailers to take out SKUs that were unprofitable and replace them with SKUs that were more profitable. And so the example I gave before was in personal care, We have pump tops on some of our lotions, and the e-commerce retailers were concerned that the pumps were going to open and that the lotion would spray all over the case and they'd end up having to throw it out.

46:08 So they were requiring us to put a massive amount of packaging, imagine almost bubble wrap, around every individual unit to make sure that it didn't open. That adds tremendous complexity and cost, and the solve was we just took the pump tops off and put regular tops on. and so dramatic improvement in margin. The consumer is still happy. They get a product that they love. And it was, you know, again, it's just having the right conversation with the retailer to say, you like this item, but we've got to figure out how to solve this incredible cost issue based on your needs. And we did. And so we're doing a lot of that. We're doing that in club as well, where, again, we had a lot of lower margin customers programs that have been replaced by higher margin programs just by working with the retailer and saying, how do we configure this differently to meet the needs of your consumer as well as the needs of us as your supplier?

47:02 Helpful color. And then on the buybacks you did in the quarter, can you just give us a sense of some of your thinking there and why that was the best use of capital? Is there M&A still on your radar or should we construe this to mean that maybe there's not a A deal brewing and you want to simply buy back some shares or how do we think about your capital allocation?

47:25 Yeah, so let me take a shot at it and then, Javier, you can chime in. You know, what I would tell you is we are generating a lot of cash. Obviously, as the company gets stronger, our EBITDA gets better. Our debt level is extremely low. And so as we assess how to best Thank you for joining us. So it really is just continuing to monitor the marketplace and decide how to best utilize the available cash. Javier, you want to add anything there?

48:22 So the only thing that I would add is that I wouldn't view share repurchases on M&A as mutually exclusive. I think we have a strong balance sheet, and so if the right opportunity were to come along, we would evaluate that opportunity based on what return we think we can get out of that opportunity. So that's how we would think about M&A versus share repurchases versus internal investments.

48:46 Okay, great. Thank you very much. Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.

48:57 Hey, guys. Thanks for taking my questions. And I know we already talked about the get better versus get bigger. I was just wondering, do you guys anticipate that there will eventually be a transition of the get better brands to balancing revenue growth and profit growth, or is that just not something we should think about? And then I actually have one more question.

49:19 Yes, so within the Get Better brands, you know, obviously given the surge in at-home cooking, there's a number of those brands that have performed considerably better during the pandemic than they were previously. And so we are looking at, you know, the Get Better bucket, if you go back to Investor Day, was really an amalgamation of sustainable contributors, as well as brands that we were going to manage for profit. So we are doing some rebalancing between which of these brands do we think can be sustainable contributors long term, where the margins are good, where we think there's top line potential, but not necessarily the same kind of margin or top line potential to get bigger brands. And so some of those brands will likely be retained for the long haul and managed for stable, consistent profit growth. But there are still others in that portfolio that likely don't have a role for Hain long term.

50:14 So we are reevaluating that. Similarly, within the get bigger brands where initially we just positioned them as, hey, they've all got to get bigger and we've got to grow the heck out of them. There are some brands within there that also need to continue to focus on margin expansion. And so we're getting a little bit more targeted in terms of the role of individual brands and we're constantly reevaluating the portfolio based on the competitive marketplace and the changes in the consumer dynamics and our performance overall.

50:45 That's terrific and I think I may have lied and misspoke it a little bit. I actually had two more which I'll roll into one. So I know we talked about this already but how confident are you in the back half of 2020 We have been reinvesting

51:26 in marketing, and we will continue to reinvest in marketing. Our get bigger brands in the quarter, I believe our marketing expenditure was 6.5% of sales, which is almost double what it was when I got here. So we will continue to reinvest in brand growth, and we believe that we will continue to expand margins that will allow us to do so. With regard to the second half question, Regardless of the pandemic, we have such a robust pipeline of productivity that we are confident in the margin expansion. We gave lots of examples in the script, but I'm telling you, we have a very robust domestic and international productivity agenda, and those things are within our control.

52:11 If you're going to automate your plants, if you're going to reformulate your products, If you're going to consolidate warehouses and fill up trucks, a lot of that is within our control, whether the pandemic occurs or not. The thing that's harder to call is the top line because there are many things that we don't have control over. When does a retailer reset the shelves? That's something we don't have control over. How does the consumer behave? Are they eating at home or are they eating out of restaurants? That's something we don't control. So we haven't given guidance because of the volatility on the top line, but we've continued to reinforce that you're going to see robust margin expansion and you're going to see strong double-digit EBITDA growth. because we have so many of the margin things within our control and we're executing very well against them.

53:02 Perfect, guys. Thanks for the clarity on those answers. Really appreciate it. Yeah. Thank you. We have reached the end of the question and answer session. Mr. Schiller, I would now like to turn the floor back over to you for closing comments.

53:18 Again, on behalf of the board and the company, I thank everybody in this organization who's working exceptionally hard under very difficult circumstances to achieve outstanding results. We are confident in our team, we're confident in our plan, and we look forward to continuing to deliver robust numbers as we go forward. So thanks, everyone, and look forward to talking to you all later today.

53:43 Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.