The Hain Celestial Group, Inc. (HAIN) Q4 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Hain Celestial Group Fourth Quarter and Fiscal Year 2021 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. I'll now turn the conference over to your host, Ms. Anna Kate Heller, Investor Relations for Hain Celestial Group. Thank you. You may begin.

Thank you. Good morning and thank you for joining us on Hain Celestial’s fourth quarter and fiscal year 2021 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 include expectations and assumptions regarding the company’s future operations and financial performance. These statements are based on management’s current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Hain Celestial’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 could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hain Celestial’s website under the Investor Relations heading. Please note management’s remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. This call is being webcast and archive 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 across thoughts 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.

Thank you, Anna Kate and good morning. I hope everyone is doing well. On today's call, I'll give some color on our fourth quarter results and provide details on the F 2022 plan. Starting with Q4, as you've heard from many other companies, the past several months have been filled with challenges, including high inflation, labor shortages, and significant overlaps from the COVID lockdown period a year ago. I'm pleased to report that despite these headwinds, we were able to successfully navigate the choppy waters and deliver both the revenue and adjusted EBITDA guidance that we outlined on our last call. Specifically, first, topline was expected to be down 11% to 14%. We came in at 11.9%. Second, we said we would deliver at least 100 basis points of margin improvement. We, in fact, delivered significant continued margin expansion with a 296 basis point improvement in adjusted EBITDA margin and continued expansion in adjusted gross margin. This marks the sixth straight quarter of adjusted EBITDA margin improvement of more than 200 basis points. And importantly, for the year, we delivered our Investor Day targeted EBITDA margin one year ahead of schedule. Third, we told you we'd deliver around 10% adjusted EBITDA dollar growth in Q4. We came in at 9.6% growth, again, in line with the guidance. When compared to two years ago, which was pre-pandemic, our Q4 results were very solid. Total revenue grew almost 9% when adjusted for divestitures and discontinued brands and our 10 biggest businesses, which now represent almost 70% of our global sales and 80% of our profits, grew revenue 12.5%. In addition, adjusted gross margin and EBITDA margins were up over 300 and 500 basis points, respectively, and adjusted EBITDA dollars were up almost 40%. In summary, we've delivered another quarter of strong results with significant continued momentum compared to the pre-pandemic period. This performance reflects the overall strength of our portfolio, that our strategies are working as intended and that we are executing well. Now let me talk a little bit about the reporting segments. In International, we delivered terrific results in Q4. Adjusted net sales were basically flat versus a year ago and up 13% versus two years ago. That's very strong performance when considering the COVID overlap, Brexit, labor challenges and higher than normal inflation. We saw significant strength in many of our brands with strong share gains, household penetration growth and TDP gains. Consumption grew double digit versus two years ago in meat alternatives, chilled soup, jam, baby food and toddler snacks. And our nondairy beverage business, marmalade and dessert businesses also grew nicely in the quarter. Adjusted gross margin and EBITDA margins were up more than 500 basis points, and adjusted EBITDA dollars were up almost 28% aided by our aggressive productivity agenda. That's great results, which achieved our Investor Day targets a year ahead of schedule and also included a marketing investment of almost 100 basis points within the quarter. So clearly, we're seeing strength in our International business and have navigated the macro challenges very well. Shifting to North America, we had a more challenging quarter driven by the same issues facing the entire industry. As we discussed on the last call, inflation was significant, and labor shortages throughout the supply chain affected sourcing, internal manufacturing and distribution of goods to customers. As a result, these headwinds and the COVID overlap impacted margins and profitability within the quarter. While these overall results were below the robust growth we've been consistently delivering, EBITDA was still up 16% versus pre-pandemic Q4 F ‘19 with over 300 points of adjusted EBITDA margin expansion. And for the entire year compared to a year ago, our adjusted EBITDA in North America was up 15% on adjusted sales of minus 1%, with adjusted gross margin and EBITDA margins up 155 and 268 basis points, respectively. Shifting to our go-forward outlook for North America, we remain very bullish on our future and our F ‘22 plan for many reasons. First, we've taken pricing to cover the inflation. Our tea pricing has already hit the market, and we've seen minimal volume impact thus far. We've also taken increases in virtually every other category as well, and I'm pleased to report that customers have accepted our increases and the pricing will be in effect starting next month. Second, we've made terrific progress on our sourcing, manufacturing and distribution headwinds and expect most of these to be fully behind us over the next few months. As evidence of our progress, our services improved quarter-to-date. And last week, we had one of the best shipment weeks we've had over the past several years. Third, our Get Bigger brands continued to perform extremely well in Q4, with strong household penetration gains, buying rate and velocity increases on all four Get Bigger categories versus pre-pandemic. Consumption in the recent quarter was up 14% versus 2019. That's a four-point improvement from the two-year stacked growth rate we delivered in Q3. These brands also grew market share almost a full point in the quarter in measured channels, reinforcing their continued strength and momentum. Fourth, the expected distribution gains on our innovation have materialized, driving accelerated consumption. For the Get Bigger brands in Q4, total distribution points were up 7% versus a year ago and 10% versus two years ago. The gains were across many brands compared to a year ago with Celestial Seasonings tea distribution points up 12% in the quarter, Sensible Portions up 21% and Alba up 16%. Many other Get Bigger brands like; Terra, Garden of Eden and some of the larger Get Better brands like Earth's Best and Maranatha were also up in the quarter. Fifth, on the Get Better brands, where we proactively eliminated a significant number of slow-moving SKUs pre-pandemic, velocities were up 7% versus 2 years ago, setting us up for stronger top line trends as we lap the pandemic. Also noteworthy, Earth's Best, our largest Get Better brand, grew sales, TDPs, velocity, household penetration and buying rate in the quarter versus a year ago. Sixth and lastly, our total US consumption exceeded shipments by 4% in the quarter, suggesting customer inventories are lower than normal, and we will need to be replenished in coming quarters. So, in conclusion, despite the challenged macro environment, the North America business has significant underlying momentum and health as we exited the year. Shifting gears, let's now move into F '22 and give a brief nod to our Investor Day. While Javier will give you more details on the algorithm for fiscal '22 in a few minutes, we are expecting another strong year with total adjusted net sales growing low single digits and adjusted EBITDA growing mid to high single digit with continued robust margin expansion even in this challenging environment. Our F '22 plan is built on 4 key assumptions. First, we're forecasting inflation to stabilize and not increase nor decrease considerably from here. If it does increase, we will price accordingly using the revenue management tools at our disposal. If it drops, we'll evaluate whether to spend some of it back or take it to the bottom line. Second, we expect our pricing and productivity to more than offset inflation, resulting in an algorithm that has both investment in marketing and robust margin growth. As stated, we've taken pricing in almost every category and have built relatively conservative elasticity assumptions into our plan. In addition, we have a robust productivity program, which has delivered over 700 basis points of gross margin improvement since 2019. We have many active projects to continue our momentum in both North America and International. Our third key plan assumption is that our innovation is successful, and we'll continue to gain space on both a relative and absolute basis in our core growth categories. And lastly, we've assumed minimal short-term impact from the COVID Delta variant and that society gradually gravitates back to the pre-pandemic mix of in-home and out-of-home meeting occasions by the end of the calendar year. With regard to phasing of the plan, we expect a softer first half and a much more robust second half. First half sales are expected to be below a year ago on an absolute and adjusted basis, but up mid to high single digits on an adjusted basis versus 2 year ago and profits in the first half will be flat versus a year ago, but up considerably on a 2-year basis. There are 3 drivers of the H1 performance expectations. First, we're overlapping the peak periods of COVID in the first half of the fiscal year. Remember that last year, we delivered 50% plus EBITDA growth in the first half. So, while top line and bottom line growth will be muted, the comparison versus pre-pandemic will continue to be strong. Second, while high inflation is hitting us now the North American pricing we've taken to offset it, won't be fully in place until the end of Q1 and International pricing won't hit the market until early Q2. Third, we expect to deliver gradual and steady improvement in labor and supply challenges previously discussed. As we get to the second half, you'll see top line accelerate to mid to high single-digit growth on an adjusted basis. Our plan assumes continued robust distribution gains and strengthening trial on our terrific innovation that continues to hit the market. Several significant incremental volume generating programs that are already confirmed with customers and easier overlaps for COVID and the softer Q4 performance in North America this quarter. So in conclusion, in the face of significant macro challenges, we had a good year and a solid quarter. We exited Q4 with a lot of momentum and are well positioned to accelerate performance from here. On September 28, at our Investor Day, we look forward to elaborating further on the F 2022 plan and showing you a strategic plan and algorithm that delivers robust top line and bottom line growth. We believe we have terrific momentum, the right brands in high-growth categories and an exceptional team to really unlock the potential of this company. With that said, let me turn it over to Javier, who will provide more color about our Q4 performance and financial expectations going forward.

Thank you, Mark, and good morning, everyone. Let me start by highlighting four key aspects of our fourth quarter results that demonstrate continued strong performance from the execution of our transformation plan. First, we again delivered solid operating results in line with guidance, including continued profit margin expansion in the face of inflation and other industry headwinds. Second, our International business delivered excellent performance, while our North American operations managed through a challenging macro environment. Third, our balance sheet remains strong with excellent capital allocation flexibility. And finally, our business is well positioned to deliver a strong fiscal year 2022. I will start with a discussion of our top line results, and then I will drill into each of these aspects. As we overlap the COVID volumes surge from last year, fourth quarter consolidated net sales decreased 12% year-over-year to $451 million, well within our guidance range of negative 11% to negative 14%. Foreign exchange benefited fourth quarter net sales by 470 basis points, while divestitures and brand discontinuations reduced net sales by 900 basis points. When adjusting for these two factors, net sales decreased by 8% year-over-year. When comparing our performance versus pre-COVID Q4 2019, after adjusting for currency movements, divestitures and brand discontinuations, our net sales increased by 5%. This was also consistent with our guidance on a sequential improvement relative to our Q3 net sales growth versus 2019 of about 2%. When further factoring in the volume, we proactively exited, as part of our SKU rationalization program started in 2019, our Q4 underlying growth was around 9%. Adjusted gross margin for the quarter improved by 49 basis points compared to the prior year period, driven by our supply chain productivity initiatives and the sale of the fruit business, partially offset by higher labor inflation and higher delivery and warehouse expenses in the US. While our international business delivered strong margin expansion, our US business faced an industry-wide labor shortage that resulted in higher manufacturing and warehouse labor costs from wage increases and overtime pay, reduced shipping capacity in our warehouses and limited freight carrier availability, resulting in increased costs and disrupted service. Despite these challenges, we were still able to deliver adjusted gross margin expansion in the quarter versus last year and more than 300 basis points versus Q4 2019. SG&A came in at 14% of net sales, lower than the prior year period by 190 basis points. We drove savings from productivity initiatives and other spending reductions across several cost categories, including broker commissions, labor, third-party services and travel. Fourth quarter adjusted EBITDA increased 10% versus a year ago to $68 million. Adjusted EBITDA margin of 15% represented a significant improvement of about 300 basis points year-over-year, driven by lower SG&A and gross margin improvement. Combined with Q3, we delivered 15% adjusted EBITDA margin in the second half of the fiscal year. This represents the high end of the guidance range we gave at our 2019 Investor Day, a year ahead of schedule. Our adjusted fourth quarter EPS of $0.39 increased by 22% compared to $0.32 in the prior year period. The adjusted effective tax rate for the quarter was 23.9%. Now, to provide some detail on the individual reporting segment. Starting with our international business, where we delivered strong overall results. Net sales for the fourth quarter versus the prior year period decreased 7% on a reported basis. Foreign exchange increased sales by 9%, while divestitures reduced sales by close to 16%. After adjusting for currency movement, divestitures and discontinued brands, net sales for the fourth quarter were close to flat versus the prior year period. And compared to the fourth quarter of 2019, sales were up 13% behind the growth of our Linda McCartney meat-free brand and our non-dairy beverage and chilled soup businesses. During the quarter, profit growth accelerated, driven by 540 basis points adjusted gross margin expansion. Gains were generated from the implementation of the North American productivity playbook, as well as the divestiture of the low-margin fruit business. We grew adjusted EBITDA by 28% versus the prior year period and adjusted EBITDA margin by more than 530 basis points to 19%. This level of profitability for the international business during the last two quarters exceeds the long-term target of 15% to 17% we announced on Investor Day two years ago. Now, let me shift to the North American business. On the top line, reported net sales for the fourth quarter decreased 15% year-over-year to $253.3 million, mainly due to the lapping of elevated at-home food consumption in the prior year period due to COVID-19. After adjusting for currency movements, divestitures and brand discontinuations, net sales decreased 12% versus the prior year period. To note, the overlapping of strong hand sanitizer sales in the prior year period represented a headwind of more than 300 basis points. When comparing our performance versus Q4 2019, after adjusting for currency movements, divestitures and brand discontinuations, our North American sales decreased by less than 1%. Excluding the volume reduction from our SKU rationalization efforts, the underlying growth of the North American business versus Q4 2019 was around 6%. From a profitability perspective, adjusted gross margin for our North American business decreased by 313 basis points, but was still up versus Q4 2019 before the pandemic. As mentioned earlier, the decrease in margins was largely driven by labor shortages in the U.S. Despite these recent challenges, North America had a strong full year performance, improving adjusted gross margins by 155 basis points versus fiscal year 2020, driven by our strong productivity program and solid revenue management. Adjusted EBITDA in Q4 decreased 20% to $35 million. Adjusted EBITDA margin of 13.7% represented a decrease of 92 basis points versus the prior Notably, adjusted EBITDA was still up 16% compared to pre-pandemic fourth quarter of 2019 with over 300 basis points of adjusted EBITDA margin expansion. Looking into the components of the North American portfolio, the Get Bigger brands, which represented 71% of North American net sales, showed a 9% fourth quarter net sales decrease versus the prior year. When comparing our performance versus Q4 2019, after adjusting for currency movements, divestitures, and brand discontinuations, our Get Bigger brand sales increased by 6%. If we further exclude the volume reduction from our SKU rationalization effort, the underlying Get Bigger brands growth versus Q4 2019 was around 9%. The Get Better brands, consistent with our portfolio role, continue to show robust adjusted profit margin improvement. Specifically, adjusted EBITDA margin of close to 11% increased by about 270 basis points versus Q4 of the prior year, enabled by our productivity initiatives. This level of profitability was consistent with our long-term target of 10% to 12% for the Get Better brands. Shifting to cash flow and balance sheet. Q4 operating cash flow was $50 million, and full year 2021 operating cash flow was $197 million, an annual increase of 25% versus the prior year period, consistent with the full year 2021 annual adjusted EBITDA growth of 29%. Capital spending for the fourth quarter was $18.5 million and $72 million for the full year, resulting in annual spending of about 3.6% of net sales. At the end of Q4, our inventory was $285 million, a decrease of about $29 million from the end of Q3 2021, given improved inventory management. Cash on hand at the end of the quarter was $76 million, while net debt stood at $155 million and gross debt leverage was only 1.1 times. Our balance sheet remains incredibly strong 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. The company's capital allocation philosophy is to deploy capital to its highest and best use. We, in conjunction with our Board, continue to evaluate all opportunities to create value with our cash and balance sheet capacity. All investment opportunities, whether internal or external, 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 and pursuant to the repurchase program authorized by the Board in 2017, during the quarter, we bought back $27.2 million of our shares at an average price of $40.41, leaving us with about $82 million of additional repurchase authorization remaining under our 2017 program at the end of the fourth quarter. During fiscal year 2021, we repurchased 3.1 million shares or 3% of the outstanding common stock at an average price of $34.87 per share for a total of $107.4 million, excluding commissions. In addition, our Board of Directors have approved an additional $300 million share repurchase authorization. Share repurchases under this 2021 authorization will commence after the existing 2017 authorization is fully utilized. Now let's turn to our outlook. For fiscal year 2022 compared to fiscal year 2021, we expect low single-digit adjusted net sales growth, reflecting a 50 basis point benefit from currency and a 600 basis point headwind from divestitures and brand discontinuations, continued adjusted gross margin expansion and mid to high single-digit adjusted EBITDA growth. Relative to 2019, the most recent pre-pandemic period, we expect high single-digit full year adjusted net sales growth with adjusted EBITDA dollars and margin growth of at least 65% and 500 basis points, respectively. As part of the full year outlook, we have also assumed the following; cost of goods inflation in the mid-single digits, which has been more than offset by our pricing actions and productivity initiatives, resulting in continued margin expansion, capital expenditures of about 3.5% of net sales, an adjusted effective tax rate between 24% and 25%, and around mid single-digit operating free cash flow growth, defined as operating cash flow minus CapEx with higher cash flow generation in the second half versus the first half. Given the timing of the price increases hitting the market and confirmed incremental volume generating events in the second half of fiscal year 2022, we expect fiscal year 2022 first half sales and profits to be lower than in the second half. Also, because of the elevated demand during the first half of fiscal year 2021 from the COVID-19 pandemic compared to fiscal year 2021, adjusted net sales are expected to be down by low to mid single digits in the first half of fiscal year 2022, and up by mid to high single digits in the second half, and adjusted EBITDA to be close to flat in the first half of fiscal year 2022, and up by high single digits to low double digits in the second half. For the first quarter of fiscal year 2022, we expect net sales to be down low to mid-single digits on an adjusted basis, but down low double digits on a reported basis compared to the first quarter of fiscal year 2021, net sales to be up by mid to high single digits on an adjusted basis compared to the first quarter of fiscal year 2020 due to the most recent pre-pandemic period, adjusted gross margin expansion compared to the first quarter of fiscal year 2021, and a mid to high teens adjusted EBITDA decrease compared to the first quarter last year, but still up more than 40% from fiscal 2020. The year-over-year declines are driven by the overlap of 70% adjusted EBITDA growth from last year, lower sales due to divestitures, a highly inflationary environment and the timing of our pricing actions. In summary, we were able to deliver a strong fiscal 2021 and execute on the guidance we outlined previously, even in the face of significant challenges. As we look ahead to fiscal 2022, we believe that we have strong momentum and are well-positioned to deliver top line and EBITDA growth and robust margin expansion. I will now turn the call back to Mark.

Thank you, Javier. As you can see, it was another strong quarter, and we are excited and optimistic about our F 2022 plan and the road ahead. On behalf of our Board of Directors and management team, I'd like to thank the entire global team at Hain Celestial. The last few years have been very challenging, yet this team has delivered exceptional results and done a terrific job of keeping one another safe, while transforming our business in a very challenging operating environment. With that, let me now turn it over to the operator for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thanks. Good morning. Question about cost inflation and the benefit of year-over-year productivity in the first half and second half of fiscal '22. How do you see that comparing to what you experienced in fiscal fourth quarter, the productivity side and the cost inflation? And I have a follow-up.

Yes. So on the – good morning. On the productivity side, as we've talked about in previous calls, we have a pretty steady stream of productivity. That's a combination of automation and filling up trucks and redesigning products that are overengineered, and consolidating plants. So that's a pretty steady stream that's going to continue at a similar pace to what we have seen historically. So I don't think you should expect much change there. With regard to inflation, I don't expect the first quarter inflation or second quarter inflation is going to be materially different than what we saw in the fourth quarter other than we had a bunch of our commodity contracts to roll off at the end of the fiscal year and have new contracts that go into effect in July. And those are inflationary, as you can imagine because we lock them in well in advance and as the year went on last year, costs went up. So, we will see higher inflation in fiscal '22 than we saw in the fourth quarter. That's been in our previous guidance, and we've told you that it will be around mid-single digit. But importantly, between the pricing that we've taken and the productivity that we're generating, we still expect that we will have robust margin expansion.

When it comes to how we're thinking about – and you gave 2 halves to your guidance for fiscal '22, pricing net of commodities is obviously a big dynamic thing. And you obviously have some acute labor shortages impact on some of your costs, which I would imagine would be difficult to forecast. And I guess at this point, you talked about the retailers taking pricing, but there's going to be the consumer reaction to that pricing, too. Could you just give us a sense of how much pricing you're taking, when that will be realized and how you're thinking about the labor shortages impact in particular. And I'll pass it on.

Yes. So on the – we haven't given a specific number on the pricing, but we've taken more pricing at a gross level than our inflation, meaning that we're expecting that the net pricing, given elasticities, consumer reaction, competitive environment, but not all of that will stick. But there's robust pricing in our plan, and then you've got productivity on top of that, which should more than cover it. With regard to the labor shortages, we got hit so quickly by surprise, and I think the whole industry did in the in the fourth quarter that our ability to react fast it took a little bit of time for us to get control of it. So, we had some labor shortages in our distribution centers that inhibited our ability to get all of the orders out, which is why our consumption in the fourth quarter was actually 4 points higher than our actual shipments. We've rectified that situation. We've got plenty of labor in our distribution centers, and they're operating well. Within our manufacturing facilities, remember that part of our robust productivity agenda is that we have been consolidating manufacturing facilities. Doing that in the middle of the labor crisis has elongated some of that consolidation, some of that productivity benefit that comes from that consolidation. But again, we've made really good progress in that regard. And we've got backup sources of supply in place to make sure that the product continues to flow. And then further upstream, sourcing becomes the other place where there's challenges on labor where, whether it's [cup] (ph) manufacturers or ingredient suppliers, upstream are having labor issues as well. And obviously, we're out there finding backup sources of supply for those as well. So you'll see in the first quarter that we've done a much better job of managing the labor shortage. It's not -- we're not totally out of the woods. We've got -- we still have customers who are having challenges getting drivers to pick up the orders, and so we are flipping them to shipping. So there's -- it's a pretty dynamic situation, but it is much better now sitting here at the end of August than it was sitting in the middle of last quarter.

Thank you.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Hey, good morning. It's Matt Fishbein on for Rob. Thanks for the question. Just first on the overall health of the supply chain, just to follow up, I guess. The -- what categories are you still experiencing capacity constraints? And if any, it sounds like your supplier fill rates are expected to improve from here. And I know you said that the labor situation has pretty much stabilized from an internal distribution point of view, but curious to know how that looks for your distributors and if that is ruining fill rates to retailers right now.

Yes. I don't want to go into specific brands and categories where we're struggling. But what I will say is, I'd say right now from a distribution standpoint, our biggest challenge is on the pickup side, getting trucks that are scheduled and appointed to pick up orders to show up on time, which would suggest again that our partners are having similar challenges on the transportation side. The transportation has been very inflationary, and it's been hard to get trucks. So we have products staged at the dock door, the truck doesn't show up, then we've got to buy a truck on the spot market to flip and ship that product to them, which adds costs. So that's where a lot of the focus and the energy has been. We're getting further ahead to make sure that the trucks are scheduled that they are going to show up on time. If they're not going to show up in time, that we've got a backup plan in place to be able to find a more economic solution to the shortages that everybody in the industry is facing. So it's definitely better in Q1 than it was in Q4, but it's not completely over yet. We're going to continue to see some level of labor shortages. But my hope is as the stimulus checks go away and some of the things that may be contributing to the labor challenges, that the environment will get better.

Okay. That's fair. And in terms of the fullness of the trucks heading out of your distribution centers, I know an area of opportunity for you prior to the pandemic was sending those trucks out, maybe less frequency, but fuller that way, that there was some margin improvement there. How do you feel about that opportunity going forward? Obviously, it would need to be pushed out a little bit to account for the current supply chain situation. But beyond, let's say, labor kind of becomes a stabilized issue and the pandemic consumption rates are normalizing, is there still an opportunity to work with retailers to fill those trucks up more, or is that situation kind of been changed by the pandemic? And if I can squeeze one related question in there, too, just for clarification, are you expecting Q1 shipments to outpace consumption, given the low inventories at retail? Thanks.

Yes. So on the filling of trucks, actually, the -- we're now at a place where more than 50% of our shipments are full truckloads. Remember, when we started this journey in 2019, we were averaging two pallets per truck. So the fact that half of the trucks are now full is a good thing. And quite frankly, the labor shortage is helping us because we can go to retailers and say, 'Let's consolidate your orders, so that we don't have to schedule as many trucks.' If they're having trouble getting trucks and the market is tight, the fuller the trucks are, the less trucks that have to be on the road. So it actually -- it's an enabler, and our bracket pricing that's in place now gives everybody an incentive to sell those trucks up. So I think we will see continued progress there. And frankly, the labor shortage is a catalyst to create more urgency around that happening. Second part of your question again, remind me?

It was just Q1 shipments, are they expected to outpace consumption?

Yes. So we definitely have pent-up demand. What's interesting -- what's an interesting dynamic right now is, as many manufacturers are taking pricing, retailers are buying in extra inventory in advance of the pricing, so they get the lower price before the prices go up. So retailers' warehouses are pretty full. And so, we actually are at a low point in terms of inventory in customer warehouses. And so, we do expect that, that will bounce back. Whether it bounces all the way back in the first quarter or whether that happens in the second quarter after retailers work down some of the inventory in their warehouses, it will happen. It's -- I can't tell you exactly when, but we're seeing -- at some customers, we're starting to see those orders exceed shipments. At others, it hasn't happened yet.

Thank you. Our next question comes from the line of Anoori Naughton with JPMorgan. Please proceed with your question.

Hey. Good morning, guys.

Hi.

I'm wondering if you can help clarify why EBITDA will be down so much year-over-year in the first quarter. I do appreciate some of the headwinds you mentioned, namely divestitures, the timing of pricing versus cost. But I don't think divestitures will be much more punitive to sales in the first quarter than they were in the second half of 2021, unless I'm missing something. And you said the slight inflation and the pricing lag, your gross margins will still be up. So I'm just trying to better build the EBITDA bridge, if possible.

Yes. So remember that we're lapping 70% EBITDA growth last year. That's the primary reason that it will be challenged. Revenue will be lower. And while gross margin will be up, its lower revenue, which means gross profit dollars will be lower, and that's how it translates into lower EBITDA. But the underlying health of the business is terrific. I mean, we're seeing acceleration in consumption. We're seeing our innovation performing well. We're seeing TDP growth. And so, all of the underlying elements of strength are there. It's just we have a massive overlap, and we have COVID overlap, which are going to depress the top line.

Anoori, the other thing is that, we do expect to spend more in marketing. So there's an embedded marketing growth -- marketing spending growth that it's also impacting the EBITDA line.

Okay, great. Have you given any -- can you quantify how much you'll be spending in terms of marketing for the quarter or the year?

We haven't given a specific number, but we are investing in our brands. And in the short term, both in Q4 and Q1, we're international business, where we have terrific momentum in -- and quite frankly, we've underinvested in International to fund the turnaround of the North America business. Now, that the North America business is in significantly better shape than it was two years ago when we started the transformation, we're starting to put more investment back into the brands in International. And an example I would give you is the Ella's business, that is a wonderful business. It's now growing high teens because we put the investment back behind the business, and that's generating some of the terrific results that we're seeing in International.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Good morning everybody.

Hi Jon.

Good morning Jon.

I wanted to ask first about just in general kind of innovation and distribution on that innovation. Can you give us a little bit more detail around the level of distribution gains that you've achieved? Are you seeing strong retailer acceptance? Have the shelf resets that have happened or are going to happen coming in according to your plan? Because I know a year ago, a lot of that got delayed with COVID. So, just an update there on what you're seeing relative to your expectations as we move into fiscal 2022.

Sure. So, the good news is if you look at innovation that was pretty non-existent a few years ago, I think last year, it was 2% of our sales in North America. In third quarter, it was 4% of our sales. In fourth quarter, it was 9% of our sales. So, innovation is playing a very important role in our growth. Our TDPs were up considerably. In the fourth quarter, they were up 7% versus a year ago. On the Get Bigger brands, they were up 10% versus 2019 pre-pandemic. And then when we look at the most recent four-week data into the first quarter of this fiscal year, it's up even more than that. So, we're seeing continued distribution gains. To remind you, the snacks category and the baby category reset in the spring, the yogurt category is resetting now. The tea category is starting to reset now. People want to get all the tea items on the shelf for the colder weather. And Personal Care is a little bit of a hodgepodge because it's really 20 different categories, right? You've got mouthwash and sun care and body lotions and the like. And so they're all sitting at different times within Personal Care. But we've got good momentum. We're getting in the neighborhood of our Bigger launches. We're getting 30%-plus ACV, which isn't bad for brands that have 40% to 70% ACV in total, but we expect that, that will continue to build. And we're seeing very high incrementality and repeat rates on the innovation, and we just need to continue to generate the trial of the ones that are doing particularly well, the stream and hot veggie straws, which we've talked about, the innovation on Celestial between the K-Cups and the black and green innovation with the Energy Tea and the tea with immunity benefits. Earth's Best, we had some innovation with protein pouches and we actually launched some of the snacks innovation in a toddler format in both straws and puffs. Sensible Portions puff is another one we launched this year. That's off to a great start. We just launched the men's line on Jason, which is very incremental, obviously, for us and a terrific set of products that's getting good traction. So, there's a lot of innovation. It appears to all be performing very well. The flavor innovation, obviously, less so than the more game changing category expanding innovation. But we're very pleased with what we're seeing. The velocities are good. We're -- we've got a lot of excitement from the retail community. And we expect as the year goes on, that we're going to continue to build distribution behind this innovation.

Thanks. That's helpful. Two quick points of clarification. You referenced SKU rationalization several times in the prepared comments. Is that because of the comparisons to 2019, or is there still SKU rationalization going on, kind of, what's the overall status of that? And then the second question I have is you also mentioned good line of sight to incremental volume programs in the second half of the year. Could you provide some more perspective on that? Just want to make sure I understand what those programs might be, and are they kind of locked and loaded? Thanks.

Yeah. So on the SKU rationalization; remember that in fiscal 2019, right after Investor Day, we eliminated 1,000 SKUs proactively with no innovation to put in its place because these were underperforming SKUs that were losing money and to simplify the company that was an important part of our strategy. So when you look back and compare versus 2019, that's a significant drag in our overall growth rate on a two-year stack basis. But when you look at it on a one-year stack basis, that SKU rationalization is behind us, and it's -- there's been minimal rationalization going on in the last three or four quarters. We are continuing to always refine our portfolio. So as we bring in new innovation, we look at things that are underperforming, and we'll proactively rotate out things that are performing worse with things that are new and we think will perform better. But it won't be a drag on the overall algorithm like it was versus 2019. On the incremental programs in the second half, we talked before about the Hair Care Program that we had in club in 2019 that we didn't get in 2020 because of the pandemic. That is confirmed again for this fiscal year. It's about $15 million to $20 million incremental. It's locked and loaded. The other place where we've got significant gains is on Sun Care. You may have heard there was reports recently about benzene in many sunscreens. Benzene is a cancer-causing agent. Retailers have required all sun manufacturers to provide analytics and testing data. I'm proud to say that we have no benzene in any of our Sun Care. And so as a result, retailers are consolidating the number of vendors that they have in sun care, and we're going to be a very significant recipient of incremental programs and space. That, again, is confirmed with many big retail customers. So those two things by themselves are going to generate significant growth in the back half of the year versus the trajectory that normally we would have. And as I said, we've got momentum on the rest of the business with forward consumption better than Q4 and Q4 better than Q3. And so we expect, by the time we get to the second half, you're going to see mid to high single-digit top line growth on this business, very consistent with what we talked about on Investor Day.

Thanks so much.

Thank you. Our next question comes from the line of Eric Larson with Seaport Research Partners. Please proceed with your question. Mr. Larson, your line is live.

Yeah. I was on mute. I'm sorry. Thanks for the question. So this is a very specific question. I think you said that your distribution points for Celestial Tea were I think up double digits. I might be mistaken on that number, but is that related to maybe some seasonal sell-in already here and maybe other issues, but I think distribution points were up strongly there, too. So can you talk a little bit about the tea business?

Yes. So the Tea business – remember, in the last 2 years, we've launched K-Cups, Old Brute Tea, Black and Green innovation, where we're with Energy and immunity properties; tea with melatonin, tea with probiotics. We launched TeaWell. So, we've had a ton of innovation. We really -- we've launched 2 years' worth of innovation in 1 kind of year with the retailer because many of them didn't reset last year. So, we're picking up significant distribution at the expense of our competitors because historically, this has been a pretty sleepy category without a lot of innovation. And the fact that we're bringing things that are highly incremental to the category that bring new benefits, that bring different consumers, in again, think about energy tea didn't exist before in this category. And the fact that you can now get tea with as much caffeine as a cup of coffee, that's going to bring coffee drinkers into this category who don't like the stomach upset or the flavor of coffee. So, we're getting a great customer reaction, and we're picking up a lot of TDPs. And I would say really the places where we picked up the most are certainly on Tea and Sensible Portions as the other between the screaming hot and the puffs and some of the things that we've done on Sensible. We picked up a ton of distribution there as well. And then we're picking up modest distribution across many other categories, as I mentioned in the prepared remarks.

Okay. And generally, when you talk about grabbing distribution is generally a journey as opposed to a sprint. So far out to your runway that you think is available to you for gaining distribution? Is it several years? I mean how should we think about that?

Yes. So we have many years of distribution potential in front of us, and I say that for 2 reasons. Number one, none of these brands in this portfolio are ubiquitous. When I worked at bigger CPGs, I'm used to having brands with 90%, 95% ACV. Our biggest brands only have 70% ACV. So there's opportunities even on the biggest, fastest-growing brands that we have that are $300 million in retail sales, we still don't have ubiquity yet. So that's one opportunity. Second opportunity is obviously with innovation for us to get more items per store on each of these businesses, which you're starting to see with the TDPs that we're gaining. And then the third opportunity for us is channel expansion because we really haven't penetrated many channels. We're not in convenience and gas in any big way with our snacks. We're not in drug with our Personal Care businesses. We're not in the Dollar channel in any big way. So, there's significant distribution potential here, and that was always part of the thesis on Investor Day. It got derailed a little bit with the pandemic where nobody was resetting shelves. But now as retailers are starting to set those shelves again, as we had anticipated, we're starting to be significant recipients of space. We've got great brands. They've got terrific momentum. The innovation we're bringing is category expanding. And so we expect that we will be – and I said it in the prepared remarks, that we will be continued gainers of space as we go through this year and into the future.

All right. Thank you very much for the additional detail. Appreciate it.

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

Mark, you mentioned that the product innovations have had nice growth here in the last couple of quarters. Is there any specific product that has really gained traction? And then just in terms of the pipeline of new products that you're looking to introduce, is there anything in particular that you're excited about?

I don't want to telegraph too much what's coming because I don't want to give my competitors the knowledge before it hits the market, but we are excited about our future pipeline. But in answering the first part of your question, the Screamin' Hot Veggie Straws has done exceptionally well. That was, you'll remember, launched right before the pandemic started, and we had not fully gotten distribution across the retailers. That's now approaching 30% ACV and continues to build. The K-Cups that we've launched on Celestial Seasonings has done terrifically. The Sensible Portions puff that we launched going into -- from straws into puffs has done very, very well. And again, that's just hitting the market this past spring. So we're just continuing to ramp up there in terms of distribution. Obviously, last year, we had a blockbuster win with Sanitizer, which is now a blockbuster headwind, but that was a very successful innovation for the pandemic. And then we -- as I mentioned earlier, we've taken some of the innovation that we have and the formats that we have in snacks, and we've launched toddler versions of them. So there is now a Earth's Best Sesame Street version of veggie straws and of the puffs that are also performing very, very well. And so we've got a pretty darn good performance across the things we've launched. We have others that I'd say have performed modestly, but it's more because we haven't generated the trial yet, not because the items aren't terrific. The repeat rates we're seeing on many of these things are outstanding. We just got to get more trials. So things like the black and green teas, which have very high repeat rates, we just got to make more people aware of them and get them into their mouths. But we're very optimistic on the things that we've launched. And you see it in the data, where, again, we're seeing the momentum pick up, the velocity pick up, the TDPs pick up. And again, we expect that to continue throughout the year.

Okay. Great. And then just real quickly on the product resets. It sounds like all of those resets are happening. Is there any still drag on that from COVID? And then if you could just talk about any other impacts other than the labor shortage that COVID or the stimulus or unemployment insurance is having. Or are you expecting that to work itself out over the next couple of months?

Well, we're hoping that it works itself out, but we're certainly not -- hope is not a strategy. So we are doing everything in our power to make sure that we address the labor issues because even when stimulus checks go away, there's still going to be a labor shortage. I'd say the incremental issue that comes with COVID is people getting sick. So we have had and continue to have people that are out with COVID, people that are being quarantined because they were in contact with people that have COVID. And so you take a labor shortage and you exacerbate it with the people getting sick, that magnifies the labor shortage. So Again, I expect as more people get vaccinated, as we get further through this pandemic and we get the Delta variant under control, we will have less COVID-related labor shortages. And it just comes down to filling all of the open positions that exist within the supply chain. Within the things that we control, as I mentioned, distribution centers, we've fixed our labor problems within the manufacturing facilities. We've made great progress on our labor situation. We found backup sources of supply where we feel our internal source of supply has been impacted or may be impacted for an extended period of time. We're finding alternate sourcing locations for various ingredients and packaging material, where, again, it's taking a very long time to get containers over from China at a very inflated price. So we're working on, kind of, working around the problem, if you will. We're not waiting for it to go away. There's a lot of activity going on, and we've made terrific progress.

Okay, great. I’ll turn back to the queue. Thank you.

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you. Good morning.

Good morning.

Good morning, Michael.

Just on the buybacks. Can you give us a sense of the magnitude that you might expect? And if this is any indication that you may have trouble finding attractive acquisition targets?

Yeah. So, Javier, I'll let you discuss the buybacks, but let me first discuss the acquisition target. So we are actively in the market looking for acquisitions. As I mentioned on previous calls, now that we've simplified the organization and stabilized it, we're very well positioned to make acquisitions. We're in active conversations with people. And so that, I expect, will be part of our strategy going forward, that you'll see a continued reshaping of the portfolio with us getting bigger in certain categories and continuing to shed certain parts of the tail. But the important thing to note on the tail is, whereas on Investor Day, half of the tail was losing money, every brand that we have now is profitable. And so, we're fine keeping those businesses. We're fine divesting those businesses, if the right opportunity comes along. But we want to be acquirers, and part of our capital allocation strategy is focused there. With that, Javier, why don't you talk about the buybacks?

Yeah, Michael. So we look at all of our investment opportunities through the lens of where does the company get its highest risk-adjusted returns. So that includes internal opportunities, external opportunities. Like Mark said, it also includes evaluating whether investing in our shares through share buybacks are yielding the company a good return. And so, when you see us be active in the marketplace through share repurchases is because, we think that the share prices are attractively priced. And so, you have seen that happen in the fourth quarter. As it relates to, is this a little bit of a signaling as to one -- you're going to trading one versus the other, what I would say, no, we have a very low debt. Our net debt is less than 1. It's actually 0.7 with how we closed the year. So we do have a lot of flexibility to actually do M&A and to do buybacks if the opportunities present themselves. So I don't think that you should take that as being a sort of a signal that we don't have good investment opportunities that -- where we can put our capital to use.

Okay. That's really great color. Thank you. And just a follow-up on the margins. And certainly, the inflation pressure is clear, but maybe specifically to first quarter, can you help us understand maybe a little bit how it differentiates by segment? I know there's the accretion on the margin side from the fruit divestiture in the International business, but it sounds like that pricing is also coming later. Would it be right to hear you that sequentially, both segments probably have margin declines, but that in the absolute, the International business could still be up just given what a lift it is to get rid of that fruit business -- with your base?

Yes. So, we don't expect margin declines. We expect margin expansion. The rate of expansion is going to be obviously dependent on the amount of inflation, the pricing that we're taking and the reaction to that pricing. Part of the reason that the pricing is later in International is because as the crops are coming in, some of the crops are coming in short and some of the crops are coming in long, and we had some significant inflation come from some of the crop shortages that hit International. So, as we got that information, we take the pricing. It takes a little bit of time for us to present it and have the retailer accept it. So, that will hit at the beginning of Q2. The pricing that we're taking in North America was related to the inflation that we saw in the fourth quarter. And as I said, we've already taken pricing on tea. And in fact, we already took pricing on Baby before all of this inflation hit. If you look at the consumption data, you'll see about a 10% increase in our Baby pricing, which is part of what's driving almost 20% growth on that business as we've got significant pricing and velocity improvements at the same time. So, we're optimistic that as the rest of the pricing hits in September, that we will see relatively modest elasticity because if everybody is going up, it's different than if you're the only guy who's going up and people are going to see that your relative price has changed significantly. So, we're optimistic that the impact from the pricing will be nominal. We also, in health and wellness, have a very premium price set of products to begin with and a much higher income consumer who's much less elastic anyway. And so as I mentioned in the prepared remarks, we've been pretty conservative in terms of what our assumption is, in terms of volume falloff, but I'm optimistic that we're going to see relatively low elasticity when all of this pricing gets to market and everything settles out.

That's helpful color. Can I just make sure I recall what you said correctly? You said you don't expect margin declines. That's on the full year, right? The first quarter with the mid- to high-teens EBITDA declines there -- I would think there has to be some margin decline there, right?

Javier--

The gross -- yes, at the gross margin level is what Mark was referring to. There will be some margin decline at the EBITDA margin level.

Makes sense. Okay. Thank you very much.

Thank you. Our last question this morning comes from the line of Rebecca Scheuneman with Morningstar. Please proceed with your question.

Good morning. Thanks for squeezing me in. So, a few times on this call, you had mentioned the need to drive trial. And I was just wondering if you can kind of elaborate on what your plans are there. And if COVID restrictions are still prohibiting in-store sampling? Thank you.

So, we don't typically do in-store sampling, but we do have a lot of our trial generation is around merchandising events in store, which there are no restrictions around us getting display programs or working with customers on -- with their shopper card data, et cetera. But it's a combination of in-store activity, like I just mentioned, as well as digital, social mobile marketing and geo targeting outside of the store. And then on some brands like tea, we have the ability to impact samples of tea in our herbal tea, so that people can see all the other things that we have in the portfolio. So there's some inbox sampling that's occurring. But most of the marketing is going to be digital, social mobile and in-store activities, shopper marketing with the customer.

Okay, great. Thank you so much.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Schiller for any final comments.

Thank you. Well, I appreciate everybody's time and look forward to conversations later today and over the coming days with folks. I hope we left you with our optimism and enthusiasm for this business and the fact that we while the industry is facing some challenging headwinds in the short term, we think the underlying health of this business is outstanding, and we're very optimistic. So thanks for your time, and I look forward to talking to you all later. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.