Hain Celestial Group 2027 Q1 Earnings Call

Thank you, Mike. Good morning, and thanks for joining the call. Today, we will provide an update on our strategic review before discussing the results for the quarter. On our last earnings call, we announced that we reached a definitive agreement to sell our International business to global private equity firm AURELIUS. Earlier this month, the final required regulatory approvals were received, satisfying the regulatory approval condition to closing. However, as previously noted, the transaction is conditioned upon entering into an amendment of our credit agreement by October 12, 2026. While this condition was not satisfied, we remain in discussions with AURELIUS, and we continue to pursue a path forward for completing the transaction. If completed, the transaction would result in a more focused North America business, allowing us to concentrate our resources behind our strongest brands and categories while using proceeds to reduce debt.

We also remain in discussions with our lenders regarding our capital structure, and we continue to evaluate and pursue all available paths to manage our financial position. We will provide an update as appropriate. During the quarter, we took actions to align our organization and cost structure with the scale and needs of the future North America business. We implemented approximately half of the targeted $16 million annual run rate of SG&A cost improvement. We remain on track and expect the majority of these actions to be completed during fiscal 2027, with full realization by the first half of fiscal 2028. Turning now to our performance. The first quarter results demonstrate progress against our strategy to simplify our portfolio and create a more focused business with stronger underlying economics.

Gross margin and adjusted gross margin improved by 330 basis points and 320 basis points respectively year-over-year, reflecting the benefits of portfolio simplification, including the sale of our North America snacks business. At the same time, we are concentrating our resources behind our core brands and the categories where we have the strongest positions and demonstrate the greatest potential. During the quarter, the performance in our core brands showed encouraging signs as our actions to accelerate renovation and innovation, implement strategic revenue growth management, and strengthen our digital capabilities gained traction. We saw continued growth in yogurt in North America and a return to growth for Ella's in international. These results provide tangible evidence of the progress we are making against our commercial priorities. Turning to North America, organic net sales declined 6% year-over-year, reflecting several headwinds that affected our reported results.

These included a temporary supply disruption in yogurt, unseasonably warm weather impacting the hot tea category, and the cycling of prior year pricing and customer inventory builds in tea. Despite the supply disruption, The Greek Gods grew by a mid-single digit percent versus the year-ago period while gaining market share. Supply constraints are now behind us, and we expect The Greek Gods to return to its historical growth trajectory. With consumer demand continuing to increase, our focus is on driving strong commercial execution and advancing innovation to support sustained growth in the category. In tea, broader category softness, warmer seasonal weather, and the comparison against prior year pricing customer inventory builds weighed on reported sales. Orders improved as the quarter progressed, while wellness tea remained a standout. Building on last year's launches and three new wellness innovations this year, we gained share to 18% of the category and continued to expand distribution.

In baby and kids, share and distribution losses in certain segments remained challenged in a highly competitive category. To address these challenges in our Earth's Best portfolio, we will prioritize investment in cereals, purees, and finger foods, where we have strong positions and see continued opportunities through innovation and improved execution. We are also prioritizing marketing investment behind our core brands and proven avenues for growth. Marketing work in the first quarter focused on strengthening the foundation of our brands, including advancing comprehensive restages of Celestial Seasonings and Earth's Best. These efforts are intended to sharpen each brand's consumer proposition, modernize packaging and communications, and create a stronger platform for innovation and distribution growth. The commercial benefits of this work are expected to build in future quarters. Our digital transformation is also demonstrating potential as a proven avenue for growth.

Across our largest pure play e-commerce customer, our core businesses are growing faster than their respective categories, with sales in tea and our priority, Earth's Best baby and kids platforms, growing more than 30% year-over-year. Turning to international, organic net sales declined 7% year-over-year, reflecting weakness in certain parts of the portfolio, specifically spreads and drizzles. However, a majority of our core brands maintained or grew market share in the quarter compared to the prior year period. Notably, Ella's Kitchen returned to growth, with net sales increasing by high single-digit percent, supported by innovation, new distribution, and improved wet food and finger food performance. We will look to build on this success through the remainder of the fiscal year. Innovation is making a measurable contribution.

The international segment's innovation renewal rate, which is a measure of the percent of net sales coming from new or relaunched SKUs in the last three years, reached 14%, improving for the ninth consecutive quarter, with 27 new SKUs listed during the quarter. Launches included Hartley's high-protein jelly and fruit spreads, Yorkshire Provender casseroles, and New Covent Garden's lunch pots. Retailer support for this innovation helped secure additional distribution. Inflation remains a challenge, with elevated energy, freight, and packaging costs continuing to pressure results. Energy costs, in particular, remain well above historical levels, although timing and pace of normalization remain uncertain. As we move forward, we are prioritizing volume recovery while applying pricing selectively across our international brands.

For the remainder of the second quarter, our priorities are straightforward: address the upcoming debt maturities, progress towards the anticipated close on our international sale, advance our SG&A cost realignment, and continue to improve execution behind our core brands. Our immediate priority remains our financial position and the December maturity of our credit facilities. As mentioned, we are engaged in discussions with our lenders regarding our capital structure and with AURELIUS regarding the international transaction. We will provide updates when we have material information to share. With that, I will turn the call over to Lee.

Thank you, Alison. During the quarter, we made progress towards the realignment of our cost structure to match the size of our North American business. We took actions that achieved $8 million of targeted $16 million of annual run rate SG&A cost improvement, incurring one-time charges of $1.5 million to achieve them. As Alison mentioned, we remain on track with previously stated targets and timelines. These actions are being taken to simplify our operating model and strengthen the financial profile of our North American business, implying pro forma gross margin of approximately 30% plus and low double-digit percent adjusted EBITDA margin once complete. We also completed all actions to remove the entirety of the $25 million in stranded overhead costs resulting from the sale of the North American snacks business. These actions were completed well ahead of our previously anticipated schedule. Turning now to our performance.

For the first quarter, organic net sales declined 6.7% year-over-year, comprised of an approximately 7% decrease in volume mix, partially offset by an increase in pricing. Adjusted gross profit margin was 22.8% in the first quarter. This represents a 320 basis point increase year-over-year. The year-over-year increase was driven primarily by the North American snacks divestiture, partially offset by higher international energy costs, coupled with lower year-over-year sales of higher-margin meal prep brands. SG&A decreased 6% year-over-year to $62 million in the first quarter, primarily driven by a reduction in employee-related expenses. We delivered adjusted EBITDA of approximately $18 million in the first quarter, compared to $20 million a year ago. The decrease was driven primarily by lower volume mix and cost inflation, partially offset by productivity savings.

Adjusted EBITDA margin was 6.8%, a 140 basis point increase from the prior year. Interest and other financing expense decreased 21% year-over-year to $12 million in the quarter, reflecting higher financing fees in the prior year period. Adjusted net loss, which excludes the effect of restructuring charges amongst other items, was approximately $7 million in the quarter, or $0.07 per diluted share, as compared to adjusted net loss of $7 million, or $0.08 per diluted share in the prior year period. Turning now to our individual reporting segments. In North America, organic net sales declined 6% year-over-year, primarily driven by lower sales in baby and kids, beverages, and meal prep. First quarter adjusted gross margin in North America was 33.5%, an increase of 1,080 basis points versus the prior year period.