The Hain Celestial Group, Inc. (HAIN) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Hain Celestial Group Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Rachel Perkins from ICR. Thank you. You may begin.

Thank you. Good morning and thank you for joining us on Hain Celestial's second quarter fiscal year 2020 earnings conference call. On the call today are Mark Schiller, President and Chief Executive Officer; and Javier Idrovo, Executive Vice President and Chief Financial Officer. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. 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 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 could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note management's remarks today will focus on non-GAAP or adjusted financial measures. A reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release. As a reminder, beginning in Q1 of this year, 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 World segments. The company has also prepared a few presentation slides and additional supplemental financial information which are put on Hain Celestial's website under the Investor Relations heading. This call is being webcast and an archive of it will also be available on the website. And now I'd like to turn the call over to Mark Schiller.

Thank you, Rachel, and good morning, everyone. Nearly one year ago shortly after joining Hain Celestial, I introduced our transformational strategic plan and shared key deliverables and milestones aimed at restoring credibility and confidence among our shareholders and customers. As I reflect back on the hard work of our entire organization, I can't help but be proud of the resilience, tenacity, and passion of our employees that has resulted in strong and consistent performance. While we still have a lot of work ahead, I'm extremely pleased to report that we're executing and delivering on the plan we communicated and our financial and operational results demonstrate that our strategy is working. In fact, since we started our strategy last year, our gross profit dollars, gross margin, EBITDA margin, and EBITDA dollars have all grown considerably. To remind you at Investor Day last February, I laid out four clear strategies that would guide our journey. They are; one, simplify the portfolio and organization; two, strengthen our core capabilities; three, expand margins and cash flow; and four, reinvigorate profitable topline growth in a core set of high potential brands. While many initiatives have contributed to these results, I'd like to highlight a few that really capture the breadth and depth of the transformation. On simplifying the portfolio, over the last year, Hain has divested non-strategic brands with almost $750 million in sales. In all, we've divested seven businesses and we expect there will be additional non-core brands sold in the future. In addition as previously stated, we're also likely to shut down other brands if there isn't a clear path to stable profitability or a logical buyer. On simplifying our operations, we've consolidated manufacturing sites, office locations, and shipping locations around the world. We integrated five sales forces in the United States to one. We've eliminated over 30 brokers in the United States and more than 30 co-manufacturers. On strengthening capabilities, we've hired a new senior leadership team in North America as well as brought on several new directors who bring significant industry experience and expertise to our Board. We've improved forecasting resulting in almost five percentage point improvement in service and an almost 50% reduction in customer fines and penalties in the U.S. We've enhanced the organizational training in areas like project management, customer planning and innovation processes. On expanding margins and cash flows, we've eliminated almost $50 million of low ROI spending in North America; discontinued approximately 500 SKUs worldwide that had low to negative gross margins; reduced inventory by over $80 million since its peak in August of 2018; reduced our cash conversion cycle more than 14 days; eliminated $380 million of debt resulting in leverage of roughly three times EBITDA. On reinvigorating top line, we filled the innovation pipeline with ideas that solve consumer problems and will expand their categories. We've developed new creative campaigns for a number of brands. We strengthened consumer insight selling capabilities and customer relationships. The impact of these efforts are just beginning to show up in our results and will be more evident as the negative sales impact of SKU rationalization and spending reductions abate in the second half this year. In summary, we've made significant progress and we've transformed much of this business in a very short period of time. That said, we continue to see further significant opportunities to simplify the portfolio and organizational structure, reduce costs and improve capabilities. And our initiatives to reinvigorate top line growth are just beginning. Our momentum is accelerating and I truly believe our best days are in front of us. Let me now shift to our Q2 results. We laid out the plan for F 2020 this past summer. You'll recall I promised you three things: one, the top line trend for the first half would be similar to what we reported in the second half of last year and that the negative trends would begin to abate in the second half of F 2020; two, gross margins and profits would grow versus year ago in every quarter; three, EBITDA dollars and margins would grow versus year ago in each quarter as well. I'm pleased to report that our second quarter results delivered on all key metrics and demonstrate another quarter of year-over-year improvement against our strategy and financial – continued the momentum we started last winter and we remain right on track to achieve our fiscal 2020 operational and financial objectives. Importantly, while delivering a double-digit increase in EBITDA in the quarter, our marketing spending was also up 8.2% as we reinvested some of our profit growth back into our highest potential brands. Now to provide a little more detail on the individual reporting segments, let me start with our North America business. To refresh your memory, we guided that our first half net sales growth would be comparable to the second half growth rate from a year ago when we started eliminating poor ROI spending and reducing unprofitable SKUs. Last year's second half declined 8.7%. Q2 of this year declined 8.1% versus prior year. So the results are right in line with our projections. It's also important to note that the 8.1% decline is not reflective of the underlying health of the ongoing business. Embedded in that number is a 2% decline due to the lost sales from divested assets, a 4% decline due to SKU rationalization and a 1% decline due to the reduction in low ROI investments. So in reality, the ongoing business is down only about 1%. Turning to margins. Adjusted gross margin improved 480 basis points versus year ago to 24.7%, driven by continued improvement in our costs and better pricing and mix. This is the highest adjusted gross margin that we've had in any quarter since Q3 of 2018. Adjusted gross profit dollars improved 14% versus year ago. Adjusted EBITDA margin for North America was up 370 basis points from prior year. This was the third consecutive quarter of year-over-year improvement and was the highest EBITDA margin quarter in fiscal 2018. Adjusted EBITDA dollars were also up a very strong 41% versus year ago. While we're pleased with our progress, we're far from finished and have identified multiple opportunities to continue to improve our margin structure and overall profitability in North America. In fact, we are in the process of consolidating Canada and the United States into one North American operating unit, a move which is expected to generate $5 million to $8 million of additional cost savings over the next 12 to 18 months. Breaking the portfolio in North America down further, we delivered continued improvement on the Get Bigger brand. Sales declined 3% in the quarter which was slightly improved versus the minus 3.5% trend in the second quarter last year. As a reminder, the declines were driven by eliminating uneconomic spending, SKU rationalization, and distribution losses in personal care relating to service issues from a year ago and we didn't expect to overlap them until the second half. Importantly, despite these factors, consumption on the Get Bigger brands was up 1% in measured channels. Get Bigger velocities and the ACV continue to grow and the average items carried which was down 5% last quarter was down only 2% this quarter. So, that's another favorable sign that our distribution is stabling and the new innovation coming and the trend should continue to improve. We've gotten questions in the past regarding margins of the Get Bigger brands and whether our long-term guidance of 16% to 18% was achievable. To that end, in the quarter, one year into our journey, I'm pleased to report that our EBITDA margins for the Get Bigger brands have exceeded 14% in four of the last five quarters. In Q2, we again delivered a mid-teens EBITDA margin including 150 basis point investment in marketing. This should further reinforce that as we guided on Investor Day, we can drive profit growth and reinvest in these brands at the same time. On the Get Better brands which are being managed for profit, our gross margin improved 690 basis points from a year ago and our EBITDA margin improved 750 basis points. That's a huge improvement in a very short period of time. Now, let me shift to our International business where our results for the quarter were also very consistent with our expectations. Net sales were down 1% for the quarter and flat in constant currency. ForEx represented a $2 million headwind. We saw strong double-digit sales growth in plant-based proteins and beverages which was offset by SKU rationalization and plant consolidation in fruit and increased trade in some competitive segments. Adjusted gross margin percentage in dollars and EBITDA growth margin were also down slightly in the quarter. The results were in line with our plan and include a significant investment in marketing in the quarter. All-in-all, given the difficult business environment in Europe, unrest in Asia, and uncertainty in the U.K. surrounding Brexit, our team worked diligently to deliver quarterly results that were in line with our plan. Importantly, we also expect stronger trends in the second half of the year. In a moment, Javier is going to provide detail on the outlook for Hain in the second half of fiscal 2020. Before he does, I wanted to provide some perspective on the topline expectation for North America. As you'll recall from the Barclays Conference, we told you to expect declining net sales in the first half with the negative trend abating in the second half as we lapped the elimination of uneconomic spending and SKU rationalization as well as service-related distribution issues in personal care. Today, I want to reiterate that we expect the North America topline trend to improve as planned. In addition to lapping things that dragged down the first half results, we're also driving growth by launching new innovation in snacks and yogurt, increasing marketing spending and executing better on key programs like Sun Care. While we don't normally give guidance by quarter in the spirit of transparency, I wanted to give you a heads up that we expect Q3 to be particularly strong on the Get Bigger brand. In addition to all things mentioned which would yield strong results, we also exited some less profitable club programs from H1. And while these programs were dilutive to our first half growth rate, they're being replaced by more profitable events that will occur in the third quarter helping improve our overall third quarter growth rate. While these programs are more in and out than permanent, they provide further evidence of our momentum and continued strong relationships with our customers. In summary, our quarterly results and expectations for the second half continue to demonstrate that our business transformation is working well. We have a terrific team in place and our confidence continues to grow that we will not only deliver our strategic and financial metrics but also restore Hain to its rightful place as a premier CPG company. With that I'd like to turn the call over to new CFO Javier Idrovo to provide more detail on our Q2 financials and fiscal 2020 guidance.

Thank you, Mark, and good morning, everyone. It is my first earnings call as CFO of Hain. I am truly excited to be here to help drive the transformation. Turning to the financial results, today I will focus my discussion on our financial results from continuing operations. As you recall, the company's presenting the results of Tilda and the Hain Pure Protein businesses within discontinued operations in the current and prior year period. Second quarter consolidated net sales decreased 5% year-over-year to $507 million in line with our expectations. Foreign exchange impact on the quarter was a headwind of 40 basis points. When adjusted for currency fluctuations, divestitures and SKU rationalization, net sales decreased 1% versus the prior year period. From a profit perspective, as expected, Q2 delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar expansion. Specifically for the second quarter, we expanded adjusted gross margin by 220 basis points resulting in adjusted gross profit of $112 million. Efficient trade spending and supply chain cost reductions in the U.S. as well as other productivity savings drove the improvement. Currency impact on gross profit was minimal. In terms of productivity and efficiency, we have made significant progress in the quarter as demonstrated by the meaningful improvement in gross margin. For instance, as discussed in our Q4 earnings call, the North America SKU rationalization project is ongoing and benefiting current consolidated gross margin. In addition, in the U.S., distribution and warehousing costs discards and customer signs and fees have decreased over $12 million versus the prior year period. SG&A as a percent of net sales was 16.2%, up from 15.2% in the prior year period. We increased marketing spending by 8%. In dollar terms, excluding marketing expenses, SG&A was roughly flat to last year mainly driven by a decrease in broker trade funds. Adjusted EBITDA increased to $45 million compared to $37.9 million in the prior year period. Currency impact was minimal. Adjusted EBITDA margin improved 180 basis points year-over-year driven by gross margin improvement. We reported adjusted EPS of $0.17 based on an effective tax rate of 27.8% compared to $0.12 in Q2 last year with an effective tax rate of 31.7%. The lower tax rate was mainly driven by lower TLC impact than in the prior year period. Since Mark covered much of our segment reporting highlights, let me transition to our cash flow and balance sheet. Operating cash flow for Q2 was $20.7 million, an improvement of about $1 million versus the prior year period. Increased spending in our transformation initiative was a headwind on cash flows this quarter. Our inventory is $16 million lower than the levels at the end of June 2019, mainly driven by the divestitures carried out year-to-date and improved inventory management. Capital expenditures in the quarter were $16 million compared to $19 million for the prior year period. Operating free cash flow defined as operating cash flow less CapEx was $4.6 million, an improvement of about $4 million from the prior year period, driven by higher operating cash flows and lower CapEx. As of December 31st, our cash balance was $37 million and net debt was $289 million. We reduced Hain's gross debt leverage ratio to 3.1 as of December 31st compared to 4.2 at the end of fiscal 2019 as we used the majority of proceeds from the sale of Tilda to pay down debt. Before turning to the full year outlook, let me briefly discuss the second half of fiscal 2020 -- 2020. For the second half, we continue to expect diminished negative sales trends at the total company and at the North America levels as we lap the headwinds that Mark mentioned and we launch new innovation in snacks and yogurt, increase marketing spending, and improve execution of key programs like Sun Care tea. As Mark also said, Q3 will be particularly strong for our North America Get Bigger brands given the initiatives just mentioned and the reintroduction of some of our rotational promotional programs in Q3. While these programs were originally planned for the first half, they will now drive volume growth in Q3. For International, we expect that the sales trends will also improve in the second half based on the continued growth of our non-dairy business and our lapping of headwind we experienced last year such as the SKU rationalization, service disruptions related to the fruit plant consolidation in England, and warm weather during last year's soup season. Now, let's turn to the full year outlook. As a reminder, our guidance excludes Tilda which contributed approximately $200 million in net sales and $26 million in adjusted EBITDA for fiscal 2019. For fiscal 2020, on a reported basis, we now expect adjusted EBITDA to be in the range of $177 million to $192 million, an increase of 7% to 16% as compared to adjusted EBITDA of $165 million in fiscal 2019, a strong improvement from last year and reflective of our continued momentum and confidence in our plan. Constant currency, we now expect adjusted EBITDA to be in the range of $179 million to $194 million. On a reported basis, adjusted EPS is expected to be $0.62 to $0.72 with an effective tax rate of 26% to 28% compared to adjusted EPS of $0.60 for fiscal 2019, an increase of 3% to 20%. Constant currency, adjusted EPS is expected to be $0.64 to $0.74. Our annual guidance assumes an exchange rate of $1.28 per British pound as compared to $1.30 in fiscal 2019. It's translating to a second half exchange rate of $1.29 per British pound. The full year foreign exchange headwind on EBITDA is estimated at about $2 million compared to fiscal 2019. Interest and other expense are expected to be approximately $21 million relatively flat compared to the prior year. Depreciation, amortization and stock-based compensation expense are expected to range between $65 million and $70 million compared to $55 million in fiscal 2019. We anticipate cash flow from operations to be at the low end of our earlier guidance or around $110 million given higher-than-expected costs associated with our transformation initiatives. This represents a $70 million improvement from the prior year. We expect a 15-day reduction in our cash conversion cycle from 75 days to 60 days, driven by ongoing inventory reduction efforts and sale of Tilda, which was a cash-intensive business. As of the end of the second quarter, our cash conversion cycle is down to 61 days. We expect capital expenditures of $60 million to $70 million, a decrease from earlier guidance given reprioritization of investment projects for the rest of the year. From a cadence perspective, we expect that the rate of sales decline in the second half of this year should improve compared to the first half, primarily driven by momentum to Get Bigger brands from assortment optimization, promotional activity, innovation and marketing. From a profit perspective, we expect to continue to deliver adjusted gross margin and adjusted EBITDA margin expansion each quarter versus fiscal 2019. And adjusted gross margin dollar and adjusted EBITDA dollar growth each quarter as compared to fiscal 2019. Our operational and financial results demonstrate that our transformational strategy is working and we're confident in our plan and ability to further progress throughout fiscal 2020. With that I will turn the call back to Mark.

Thank you, Javier. In summary, we're executing at a high level and gaining increased confidence in our strategic objectives through the results we are generating every day. Our team remains committed to delivering strong consistent results for our stakeholders with clarity on how we achieve them and the continued path ahead. I'd like to thank our team, our customers and our investors for their continued support of Hain Celestial. With that we're now happy to take your questions. Operator?

Thank you. At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from Andrew Lazar with Barclays. Please proceed with your question.

Good morning, everybody.

Good morning, Andrew.

Good morning.

Hi, there. Two for me. First would be can we talk a little bit about when Hain expects to lap the pulling out of the uneconomic spend and the SKU rat in North America, specifically as we go through the back half? And then second Mark, as you think about to Get Bigger brands in general, are there ones where the return to sort of the topline growth piece or building velocity and distribution with retailers has gone more quickly than you might have thought? And somewhere maybe it's taking longer than you would have thought? And if so, trying to get into of why that would be on either end? Thanks so much.

Yes. So, let me take both of those. So, on the first question, remember that we in third quarter last year announced that we were going to start removing uneconomic spending and do another round of SKU. So, that will finish up by the end of Q4; might bleed a little bit into Q1, but it will mostly be done by the end of the year because it really didn't start until the end of Q3 of last year. With regard to the second question on the Get Bigger brands, yes, it's a mixed bag. There are some customers that have very quickly and aggressively gotten behind us and said we like what you're doing. We like where you are and we're going to double down on you. And there are others given service challenges and some of the issues that we had over time who are in more of a prove it to the mode. So, the topline improvement is going to be a little bit choppy by customer and by brand for that reason. But what I would tell you is a year into this journey; we are in a much better place than we were a year ago in terms of customer relationships. We're having annual planning sessions versus just coming in with rates and dates on the next trade deal that we need to execute. We're coming with innovation that is surprising and delighting them in terms of it being real innovation versus just here's another flavor of something or another line extension. We're bringing marketing programs, shopper marketing programs, using their shopper card data, as well as digital social mobile outside of the store to drive people into the store. So, we've repositioned ourselves as a growth company. And again it's going to take some time. In some places, we have more momentum, in some less, and in some categories we have more momentum. As we've talked before, personal care, in particular, which was settled with some service problems for an extended period of time, we have more of a wait-and-see mode on -- from customers on that one.

Got it. Thanks very much.

Thank you. Our next question comes from Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone.

Good morning.

Good morning.

So, can I ask about the timing and any idea of order of magnitude of the new product launches? When do you expect those to really -- it sounds as though it's going to be next quarter that you expect the Get Bigger brand to really start benefiting from that? Is a lot of that step-up just the selling of these new products as they go onto the shelf? And do you measure your new products as a percent of sales either over the last year or over the last three years to be able to sort of quantify where it might have been historically and where you're hoping it's going to get to? Thank you and I'll pass it on.

Yes. So, innovation is going to vary by customer and by category. So, they don't all reset at the same time. In some cases, the retailer may have two reset windows for a category, they may have one. Some reset in the spring, some reset in the fall. So, there's no point in time where you'll see a dramatic step-up. It will be kind of slow steady improvement as we bring products out. So, in the first half to remind you we expanded our distribution on Tea Well which is doing well. The incrementality of that item is very high. So, the retailers that have it are excited about it. We need to do more work on the trial side to generate awareness. But for those that are carrying it, the repeat rate and the incrementality to the category has been terrific. We also talked about bringing a bunch of innovation in personal care, which is also off to a good start, again because of the relationship and service issues that I mentioned before. Our acceptance on that has been modest but that was expected knowing that we had some improvement to do to people. But we have a cannabis the Sativa line in moisturizers and in body wash on Jason that is doing very well. We have a hydration sensation line on all but it's doing very well. So the stuff that we've launched is performing pretty well. We need to get the ACV up. We need to continue to drive trial, et cetera. In the back half of the year what's happening is we're bringing yogurt and snacks innovation. We just started shipping something called Scream and Hot veggie straws on sensible portions. If you look at the salty snack category very significant percentage of volume done in hot SKUs or the flaming hot kind of SKUs that some of our competitors have in the more mainstream offerings. Nobody has done it in the healthier offerings. That started shipping a week ago, pretty good solid acceptance of that item and preliminarily for the 10 days of data that I have on velocities it's turning very well. And on yogurt, I believe I talked to you before about we were bringing four packs to market because we compete only in the multi-serve tubs. And that's only 30% of the category. 70% of the category is in single-serve and multipacks. So we brought that towards the end of last quarter. Distribution on that one was spotty, because it's less incremental to the category and more incremental to us. We realize that we're solving our problem there and there's other category competitors who have that item. But we're also coming back in the beginning of the fourth quarter with another piece of innovation on yogurt that will be very incremental to the category that we're getting good response on. So long-winded answer but it takes time. The pipeline is full. We're having much more robust kind of annual planning conversations. So we're showing retailers innovation that's coming next fall and next winter so that they can decide how aggressively they want to get behind it. And so I'm much more optimistic going forward that we'll continue to show momentum there. With regard to the second part of your question, which was just how do we track it? I'm used to having a three-year renewal rate that looks at what percentage of your sales this year comes from innovation over the last three years. To be perfectly candid given that we threw out a bunch of line extensions that came and were gone a year later, our innovation as a percentage of sales is tiny. And that's one of the reasons why our TDPs have been declining, because we're not bringing new things to replace the underperforming things in our portfolio, as well as to replace competitive items. If they're just another flavor of something they already have, the acceptance is going to spotty and the incrementality is going to be very, very low. So we're now really pivoting to real innovation. I told you last year would take about a year to get that pipeline started. We're seeing that come to fruition in the second half of this year and it will be much more robust as we get into the first half of next year. But I feel really good about where we are and the fact that it will become a much more meaningful piece of our sales going forward.

Great. Thank you very much. I’ll pass it on.

Thank you.

Thank you. Our next question comes from Ken Goldman with JPMorgan. Please proceed.

Hi. Good morning and thank you.

Good morning, Ken.

Two for me. First, I just wanted a little clarity if I could. You mentioned that your operating cash flow will come in a little lighter than maybe what you expected. And you talked about costs related to transformation initiatives being higher. So I guess my first question is, can you elaborate a bit on what those costs are? And then my second question is you talked about some brands. So, you're still looking to divest some maybe still looking to potentially review some for just shutting down. Can you sort of update us on where you are in this, I guess, asset optimization process? Are you still negotiating with counterparties? I guess, we're trying to get or I'm trying to get a sense of when you think this process will sort of I guess hit the later innings so to speak?

So, Javier why don't you take the first part and I'll take the second?

So, Ken on the operating cash flow I think one of the things that is impacting the operating cash flow is our transformation cost. I will highlight we have had some higher-than-expected severances and that has been driven by some of the consolidations that we've done in our manufacturing facilities and also some turnover that we have had in the managerial ranks. And so we've also -- we've done some SKU rationalization, so the adjustments to the inventory values that hit the P&L. So, that's also another driver for some of those costs.

And on the divestiture question Ken, so we've said very publicly that the brands that are in the Get Better bucket, we are going to try and manage for long-term stable profitability. If we can't stabilize them, generate more profit, or if they're more valuable to somebody else than they are to us, we will look to divest or shut those businesses down. We've made a bunch of divestitures. I mentioned in the script that there were seven including Arrowhead Mills and SunSpire in the second quarter. We are in active conversations on others that may be more valuable to someone else and we continue to assess some of the businesses that we have that we may not see a path to profitability. So, I would expect over the course of the second half of this year, you will see more activity there. I never want to say that we're done because once you make changes, you have to go look at the portfolio, you have left and re-segment it again. So, this is going to be a reshaping of the portfolio over time. But certainly the percentage of business that is in that tail is smaller today than it was a year ago. It was roughly 50% of sales a year ago. It's now about 39% of sales. But the good news is a year ago that tail was about 10% of our profit and it's now about 20% of our profit. So, it's smaller and much more profitable which is great. So, that if we do keep those things, you can expect more profitability out of them. But again we have a lot of complexity and our intention is to continue to consolidate to a core set of assets that are going to make the most sense in terms of growth potential long-term.

Very helpful. Thank you.

Thank you. The next question comes from Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thank you so much. So, a bit of a follow-on I guess to Ken's question is just in terms of that cash even if there is some -- or there's been some near-term headwind on the cash this year, the trajectory year-over-year is still obviously positive. And I assume expect that cash to continue to grow positively in the next year. So, if EBITDA is going up and this is, I guess, a similar question that we could have asked at your Investor Day, but if EBITDA is going up and the margin profile is improving -- continues to improve sequentially, do you still view deleverage as a main focus, right, if you're around three times? Or at some point -- especially, if you look to potentially sell other brands or at some point do we hear the message that will now we are generating decent cash flow, we think the optimization piece is there our plant footprint is in line and now what we going to do with this cash? Is this – and it's not deleverage. That's all I have.

Yes. So Rob you're absolutely correct. We are going to generate a healthy operating cash flow relative to last year. In terms of capital structure I think that we are still targeting our three to four times debt-to-EBITDA ratio. If we were to get below that number, the prioritization of our investments our internal growth opportunities, M&A as they present themselves, and as we find them to be viable. And then I think third would be returning cash to shareholders via share buyback. And I think we've also talked about throughout the transformation, dividends will not be part of the consideration set. But after that that certainly can come into play.

Yes I think at three times I think our debt is where it needs to be. And as we sell off other assets I think Javier had hit it on the head. We will either look to start acquiring again, much more strategically in the priority categories that we've discussed and/or buying back shares to improve our earnings per share.

Okay. Perfect. Thank you.

Thank you. The next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

Thanks. Just Mark, on the Get Bigger brands that are going to be stronger this quarter, which ones of these brands are working I guess and which ones are not working as well I guess, because there's going to be it's going to be stronger overall as a group? Are there particular brands that you're putting marketing spend behind that are growing faster now?

Yes. So we've got a number of brands that are performing very well. Sensible Portions which is our biggest North America brand is growing double-digit. We have nice low single-digit growth in tea, yogurt. Terra chips is a solid business. Where we've really struggled the most is in personal care. And that's where you're going to see the biggest jump in trajectory in Q3 for two reasons. One, last year during Sun Care season, because we couldn't service the business, we basically were a very small participant in Sun Care and that is a big portion of our personal care business. Now that the service is back, we're going to have a very robust Sun Care season. So you're going to see some pretty significant momentum driven by that. In addition the – what – as I referenced some first half club programs that were less profitable that have been transformed into third quarter programs that are more profitable, those are also primarily in the personal care space, a little bit in the snack space as well. So that's where you'll see more of the momentum as we get to Q3 but most importantly and this is been the big drag on that group of Get Bigger brands has been personal care. And with improved execution, we're getting much more confidence from customers to get behind those businesses. And I expect that we'll see good momentum on personal care in particular in the second half.

Okay, great. Just as a follow-up on the tea. So tea is also stronger now, right?

Yes tea is doing well. We've got the TeaWell innovation that I talked about. We have some new marketing that's hitting the market on tea. We have a very robust pipeline on tea and are very optimistic and excited about the next 12 months on that business as we are now talking to customers about multiple pieces of innovation that they're excited about. So, we actually had several years' worth of innovation. And as we show it to people they're like can you just bring it all at once? So, we're going to go pretty big on tea. It's a huge category that's craving leadership and real innovation and we think we've got the guns loaded really successful there. So, we're coming towards the end of tea season. So, the momentum that we have now will continue as we get into the fall and bring this innovation to life. I'm looking forward to very robust growth on tea going forward.

Thanks very much. I'll pass it along.

Thank you. Our next question comes from Stephen Strycula with UBS. Please proceed with your question.

Hi, good morning and Mark congratulations on all the hard work that you're doing in the portfolio.

Thank you.

So, my first question would be just a little bit of a clarification on the revenue outlook for the back half of the year. Can you help us understand how the SKU rationalization steps down directionally in magnitude? I think it's a four-point drag now. What does that look like in the back half? And Mark are you trying to signal that the third quarter will be better growth rates than the fourth quarter because of some of these seasonal club wins?

Do you want to take the first one?

Yes. So, in terms of the SKU rationalization and the outlook for the second half, the second half will have a sales decrease that is lower rate than the first half and we shared that with you in the remarks. In terms of the SKU rationalization, I would say that we're largely complete with that effort. There's about 90% of those SKUs that the company is no longer manufacturing and I would say only 20% of that dollar value associated with those SKUs flow through the P&L this quarter. So, for the second half of the quarter or for the second half of the year, the impact of the SKU rationalization will not be as large as it has been for the first two quarters.

I think you can assume two-thirds, 70% of it is behind, the other 30% or so will be in the second half of the year. With regard to the question around Q3 versus Q4, both of them will be better quarters than we had in the last four quarters, but Q3 will be particularly robust. So, yes, I am signaling that Q3 is going to be likely stronger than Q4 because of these one-timers. Now, I want to also point out that part of the drag in the first half was us not repeating these club initiatives that generated significant volume. So, if you look at the negative trends in the first half, we had some pretty meaningful volume programs that we didn't repeat which dragged down the year-to-date results. So, we've now moved those to Q3 and they're going to be a tailwind in that particular quarter. So, part of the reason I didn't guide on the topline is because of that the choppiness of moving stuff between quarters and the choppiness of pulling out uneconomic spending and SKU rationalization. It's not going to be as linear as you would expect in a normal state. But if you take away the club programs, you're still going to see improvement in the underlying trends of the business as we forecast it all along. So, second half will be better than the first half with or without these club programs. But with that extra boost in Q3, it will be particularly robust on the Get Bigger brands in North America.

Okay. And Mark can you give any color on the baby business? I didn't really hear a lot of that discussed on today's call and you have some good brands there. So, I just wanted to know strategically what are you seeing there in the marketplace, from a competitive standpoint, from retailer demand? Then a quick accounting question. I noticed that there's a $4 million add-back for SKU rationalization this year in the EBITDA bridge, but there wasn't one last quarter. So I was just curious as to why it was an issue now for addback but not in Q1? Thanks

Yes. So the baby business you remember is a sustainable contributor, which means we're going to manage it for more stable top line and more robust EBITDA margins. It is a big business. It's an outstanding brand but it's not one of our more profitable brands. And in order to move it into the get bigger bucket that we would invest in from a marketing standpoint, we need to do some transformation of the P&L. So what we have done is a fairly significant part of the SKU rationalization that we announced last year is in baby because we had spread that brand into 30 or 35 different categories. We were doing chicken nuggets and pizza bites and diapers and wipes and lotions and we had just spread this very thin and weren't making a lot of money in some of the ancillary categories. So part of the first half, SKU rationalization drag is in baby food. We have significantly improved the margins of that business. We are innovating in categories that have higher margins so that we can again continue to drive those margins as well as restore the top line to more stability, now that the SKU rationalization is winding down. So there's a lot of work going on in baby food but we've got to get it to a double-digit EBITDA margin business before it's something that we would really invest in in a bigger way. So we've got more work there but significant progress has been made. Do you want to take the second?

Yes. So on the adjustments to EBITDA I would say the things that are different between this quarter and last year's second quarter would be the productivity and transformation costs and I alluded to those drivers in the earlier question. Then the other item would be the SKU rationalization that is also impacting this quarter more so than the prior year's second quarter. So that will be the other item that would drive the differences.

Thank you. Our next question comes from John Baumgartner with Wells Fargo. Please proceed.

Good morning. Thanks for the question.

Good morning.

Mark, obviously the focus this year is really on calling low return trade programs. But I'm curious as you lap these actions going forward, can you speak a little bit as to how you're thinking about what a normalized trade environment looks like when you think you get there? And then I guess also how you're thinking about reinvesting from here? I mean I'll assume there isn't the way of traditional advertising given the size of your brand. So should we think about it as in-store sampling, in-store displays? How are you thinking about connecting these new products with the consumers? Thank you.

Yes. So on the first part, so not all of the elimination of uneconomic spending is trade. I don't want to be perceived that we're just looking at trade. We had a lot of marketing spending that was very inefficient. We've looked at resources and how we've deployed them. And a lot of that was inefficient. So when I say elimination of uneconomic spending, I'm talking across the entire P&L. That's the first point I would make. With regard to trade specifically, what we're doing is eliminating low ROI events and replacing them with higher ROI events. So the club example that I was just talking about is a great example of that. We had a big club program last year that lost significant money and we said, we're not going to do it again because what we were doing is taking three different components from three different manufacturing locations, shipping them to one place, repacking them and then shipping them out to the customer. And by the time you add all that cost, we couldn't make any money at it. So we replaced that program with one that is more profitable for us that makes sense in the second half. So it isn't just about ripping out trade. It's about redeploying it into places where we can get a higher ROI return. I think once we get toward the fourth quarter we will have basically taken out all the inefficient trade that we need to take out. And as I said, we're trying to redeploy that in ways that are more productive. With regard to investing in the brands, we have added marketing spending in the second quarter. We will add marketing spending in the second half of the year as well. So, as we make the shift toward growth, again, now that we have the innovation and new marketing campaigns, you'll start to see us taking some of our profitability to the bottom-line and some of it going back into the brand. Our philosophy in terms of how we're going to activate these things given that our history has been we start in the natural channel and then we gradually migrate into food and mass, these are not national brands, right? So, you're not going to see in most cases we don't have more than 50% ACV. And we've got probably 10% or less household penetration on most of these brands. So, you're not going to see national television on these businesses. It's going to be much more surgical much more scrappy and we start from the store and work out. So, if customer X gets behind screaming hot Sensible Portions as an example, we start with how do we activate that in store. That can be with displays, that can be with shopper marketing vehicles, then we would go to their shopper card data and say how do we leverage the target consumer with their shopper because we know we have distribution there? Then we would geo-target around their store locations. So, anybody that lives within five miles of a store, how do I make sure they see a digital or social or mobile ad? And so it really emanates from the store outward which is very efficient and very targeted versus something that you're hitting the whole marketplace when only half of the stores in the marketplace carry it. So, it really is a reward the retailers that get behind the business and activate with them versus just spray the market with a lot of spending that will have a lot of inefficiency in it.

Great, very helpful. Thanks Mark.

Thank you. Our next question comes from Dave Palmer with Evercore ISI. Please proceed with your question.

Thanks. Good morning and great job on your shift to a more profitable core this year.

Thank you.

Just a question on tea. I had been thinking tea could have been a little bit more of an improvement than up low single digits. I was wondering if you thought weather has been an impact there. And we're also questioning whether the data we're looking at is right. It looks like TeaWell's distribution is something like 20% in the measured channels, but maybe you can talk more broadly about how that has been accepted this year and how this general year for tea has gone versus your expectations? And I have a quick follow-up on snacks.

Yes. So, the weather is definitely not helping us on tea. This has been a very warm winter, so both our soup business and our tea business suffer a little bit when it not sub minus 32 in the northern part of the country. So, yes, that's a factor. On TeaWell, the distribution is in the mid-20 range. So, your numbers are not incorrect. Again that I would tell you, historically, this has been a natural channel company that doesn't have as much presence in the measured grocery channels. And so we're breaking down those barriers and we're making progress there. TeaWell, because it's new and it's different, the sell-in has taken some time. Would I like to be further ahead than 25% distribution? Yes. Of those that have taken it are they pleased with the results? Yes. So we're going to continue to push that and take the examples of success we have in the marketplace to the people that didn't take it and show them why they need to get behind it. But that's why I say our innovation process is going to be a little bit more of a gradual improvement versus what you may be used to in some of the $10 billion-plus CPG businesses that just come with big slotting checks and they get very high distribution very quickly. These are – because they're health and wellness items and because the mainstream grocers and mass channel customers are just kind of figuring out how they want to play in health and wellness, it takes more calls. It takes more visits to explain why this is going to be incremental and why even though it's going to turn slower than non-healthy versions of things that is going to be much more incremental to their category. So as the leader in health and wellness, we've got a lot of work to do in terms of educating and partnering with retailers on the potential of health and wellness and how they should position themselves to win. But at the end of the day what I would tell you is TeaWell is doing well. We will continue to see momentum build on that and it will be an important part of our business going forward.

And then just a follow-up on another investment category in snacks. It looks like Sensible Portions is killing it. There was a day back in I think it was in 2015 when Walmart really grew in the year, clean store initiatives and whatever and that brand was like the only leg standing for Hain back then. But I feel like, I just want to make sure that you feel like you can maybe broaden the growth within snacks and you're not overly dependent on promotions in the near term with one retailer and such that you just feel good about the snacks business in general continuing to be the growth driver that it's been. I don't want to take that for granted and I'll pass it on. Thanks.

Yes. No. We believe very strongly in our snacks portfolio. We have a terrific set of brands. I'd say on top of Sensible Portions, Terra is a very unique and differentiated brand as well. We are seeing very significant growth on Sensible Portions outside of Walmart. So we are not as Walmart dependent. They were definitely a big factor in our step backwards. But again a lot of this was self induced in terms of our own service problems, right? So now that that is old pain and it's behind us, we have the confidence of the retailers. Those products are not as – not relying solely on us dropping price and being trade dependent. They're good brands with good consumer franchises. And what I love about our snacks portfolio is that it has huge potential across into the mainstream because we're not – unlike our personal care items that may sell at $10 or $15 or even $20 a bottle, everybody can afford our snacks items. Snacks are impulse purchases. They're – you can always get people to buy more snacks. It's been a perpetually growing category forever. So we're very excited about snacks. We continue to drive margins there because it's not our highest margin business but it is one with tremendous potential. And it will be a very, very critical part of our growth initiative going forward.

Thank you.

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to management for any additional concluding comments.

Thank you. Thanks everybody for all your questions and support. Hopefully, your takeaway is the journey that we laid out at Investor Day a year ago is materializing exactly as we had planned. We're very excited about the second half and what we have to come. And as I mentioned between the marketing and the innovation and assortment optimization and the things that we talked about a year ago that would ultimately the drivers of topline that those are starting to come through fruition as well. And so we thank you for your support, we look forward to the future, and continuing the dialogue with you. Thank you.

Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.