Hain Celestial Group Inc (HAIN) 2024 Q1 法說會逐字稿

Greetings, and welcome to The Hain Celestial First Quarter 2024 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alexis Tessier. Thank you. You may begin.

Good morning, and thank you all for joining us on Hain Celestial's First Quarter Fiscal 2024 Earnings Conference Call. On the call today are Wendy Davidson, President and Chief Executive Officer; and Lee Boyce, Executive Vice President and Chief Financial Officer. During the course of this call, we may make forward-looking statements within the meaning of federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance.

These statements are based on our current expectations and involve risks and uncertainties that could cause actual results to differ materially from our expectations. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed from time to time with the SEC as well as the press release issued this morning for a detailed discussion of the risks that could cause actual results to differ from those expressly expressed or implied in any forward-looking statements made today.

We've also prepared a presentation inclusive of additional supplemental financial information, which is posted on our website at hain.com under the Investor heading. Please note that remarks made today will focus on non-GAAP or adjusted financial measures. Reconciliations of non-GAAP to the year's GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. This call is being webcast, and an archive will be made available on the website.

And now I'd like to turn the call over to Wendy.

Thank you, Alexis, and good morning, everyone. Thank you all for joining the call today. I will begin by reviewing our fiscal first quarter results. I'll then provide a high-level overview of our Hain Reimagined strategy, which we introduced at our Investor Day in September, followed by an update on the early progress we've made. Lee will then review our financial results in more detail, along with our outlook for fiscal 2024.

I'm pleased to report our first quarter results that deliver our second consecutive quarter of promises made, promises kept. Organic net sales were in line with our guidance of down low single digits, and adjusted EBITDA came in ahead of our expectations.

As we have said previously, with Hain Reimagined, we will invest as we go. So starting in quarter 2 and over the balance of the year, we plan to utilize the overdelivery from quarter 1 to invest back in the business. This is consistent with our stated plan to fund our strategy as we unlock fuel through accelerated growth and efficiency.

As we highlighted previously, the net sales decline in the first quarter was driven predominantly by Baby & Kids. On our last earnings call, we described headwinds that we expected to face in the first quarter, the largest being baby formula, but the entire industry has experienced supply constraints. While we are working closely with industry partners to accelerate availability and bring on additional supply, we are now expecting these challenges in supply to continue into the second quarter and to begin to recover sometime in the second half of the year.

Excluding the formula supply challenge, we are seeing progress across the business, driven by our strategic focus on brand building, channel expansion and innovation. We've leveraged our portfolio across better for new categories and gain distribution across platforms in grocery retail.

We are making notable progress in Away From Home channels like convenience, colleges and universities and the travel segment, which are [margin] to the portfolio and provide expanded brand visibility. I will provide more details on this in a few minutes. As we've mentioned before, it is important to note that some of the bright spots in our growth may not be as clearly visible to you if you only view U.S. syndicated consumption data.

As a reminder, approximately 40% of our business has been international. And in North America, 35% to 40% of our business is in an unmeasured channel. As we lean into our channel expansion strategy, this will become more pronounced.

I'll now review some of the positive momentum from the first quarter. In Better-for-You Snacks, our non-metric snack sales were up 18% in dollars in the 12 weeks ending October 8, led by Garden Veggie. We are driving growth in Garden Veggie primarily through strength in club as well as in e-commerce and Away From Home. As we execute on our strategy for channel expansion, we have gained incremental distribution in the Away From Home channel within segments like colleges and universities, travel, Hain community stores and Better-for-You Baby & Kids, Earth's Best continues to demonstrate robust growth of 12% in dollars in the last 12 weeks, excluding formula, supported by strong retailer partnerships and share gains in baby food and purees.

Innovation in snack and our investment in the brand building campaign, Good Food Made Fun are helping drive Earth’s Best snacks of low single digits in dollars on a 20% expansion of total distribution points.

Better-for-you Beverages, Celestial Seasonings bagged tea grew 1.3% in dollars in the latest 12 weeks in with both dollar and unit velocity pacing ahead of the category, and we gained share across both herbal and wellness segments. Our brand building investments are delivering as planned with the successful Magic in Your Mug campaign launched in the back half of fiscal 2023, and we have strong customer acceptance confirmed in innovation, including Sleepytime Melatonin and throat cooler.

Our international nondairy beverage business continues to gain momentum, building upon positive performance in June and growing 10.6% in the first quarter. The return to growth is being led by our private label business, but we are also seeing momentum in parts of our branded portfolio. Natumi was up 13% in the quarter.

As we mentioned on Investor Day, we believe our portfolio combination of strong brands and private label in this category is an advantage for Hain across Europe. Within Better-for-You Meal Prep, Greek Gods Yogurt continued its standout performance in the U.S., up 7% in dollars in the latest 12 weeks on increased velocity.

Gross internationally in Meal Prep was led by the U.K., where we continue to benefit from our portfolio, which spans both branded and private label. Private label is historically a larger mix in the U.K. with over 40% of unit share compared to mid-teen category share in the U.S. We are well positioned and seeing strong growth within discounters and private label internationally as a consumer response to the macro environment.

Our private label jams and spreads are both up double digits, gaining share in the latest 12 weeks. And on the branded side, our Hartley's jams and all of our marmalade brands also grew double digits in the latest 12 weeks and picked up share in their respective categories. Also in the Meal Prep category, our soup brands continue to perform well, up 15% in dollars in the last 12 weeks, gaining 200 basis points of share. Our Cully & Sully, Yorkshire Provender and New Covent Garden brand all grew double digits. As you may recall from our Investor Day, these brands, these 3 brands are the #1, #2 and #3 in the category in this market, and these results are well before we had the peak [2] season.

We are also seeing encouraging signs of stabilization in our global meat-free category. We continue to believe in the long-term growth potential of the global meat-free category as consumers are seeking veg forward flexitarian and vegetarian options to deliver on taste and convenience. As we see consolidation of the category, consumers are returning to leading brands in this space.

Our Yves brand, the #1 meat-free brand in Canada is gaining share despite category softness. We are up 270 basis points in fresh and 70 basis points in frozen in the last 12 weeks. In the U.K., our Linda McCartney brand has seen increased velocities in frozen of 20% in the latest 12 weeks, with distribution of 12%. We are excited about our upcoming meat-free innovation, Linda's Best Burger, which will hit U.K. supermarkets in the spring. In the Better-for-You Personal Care, we continue to focus on stabilizing this business. We are seeing some encouraging signs with our Personal Care business growing 6% in the quarter in the e-commerce channel.

In addition, Personal Care grew in the drug channel of 70% on total distribution point growth of 160% in the latest 12 weeks. Across the business, our performance trends are more favorable in unmeasured channels than measured channels, driven by strength in our Better-for-You Snacks portfolio. Given recent distribution gains, however, we are beginning to see measured channel trends also improve as store shelf resets begin to take shape for both snacks and tea. We are pleased to see the first quarter performance in line with our expectations, and we are reaffirming our full fiscal year guidance.

I'm now excited to share some of the early progress we're making in executing our Hain Reimagined transformation strategy. At our Investor Day in September, we introduced Hain Reimagined, our strategy to pivot the business to profitable growth, and it's wonderful to see so many of you there. Hain Reimagined represents a bold transformation of our business, and is built upon 4 strategic pillars: focus, grow, build and fuel. We are focusing our winning portfolio of brands around 5 consumer-centric global platforms: Snacks, Baby & Kids, Beverages, Meal Prep and Personal Care. And we will simplify our footprint in 5 core markets: the U.S., Canada, the U.K., Ireland and Europe. Our growth pillar will drive brand strength, share gains and channel expansion in 3 of our core Better-for-You platforms: Snacks, Baby & Kids and Beverages.

We are building and enhancing critical capabilities to execute our growth plans, including improving brand building, accelerating innovation and driving channel expansion, particularly in e-commerce and Away From Home, which has historically been underdeveloped at Hain.

And as we unlock efficiencies across our business, we are reinvesting those savings to fuel our growth plan while also expanding our margins. We are operating with an improved discipline in revenue growth management, executing initiatives against working capital and driving end-to-end operational efficiency.

Our plan is designed to deliver a compelling and achievable long-term financial algorithm with attractive shareholder returns. The plan represents a material transformation of our P&L, inflecting our top line growth and driving margin improvement. Our long-term financial algorithm seeks to achieve at least a 3% organic net sales growth CAGR through fiscal '27, with at least a low double-digit EBITDA CAGR, achieving at least a low double-digit EBITDA margin by fiscal year '27. As you heard us say on Investor Day, this is our commitment, not our aspiration. And I'm excited that we're already seeing encouraging early momentum from our Hain Reimagined strategy.

Under the build pillars, we have made notable progress on expansion in margin [and create] channels. We've enhanced our Away From Home capability with new and experienced industry leadership and dedicated expertise to drive growth in this important growing channel. We are pleased to share that our convenience store sales grew 14% in the last 12 weeks, driven by our Snack business, which was up 18% in dollars on 10% incremental total distribution points.

In addition, we have gained incremental placement with our snack brands in North America across travel, (inaudible) on-the-go retail, colleges and universities and convenience stores. We also have plans to expand Away From Home in the U.K., which is off to a good start with soup launching in a large restaurant chain in the first quarter.

E-commerce continues to be a growth area for us, accounting for nearly 10% of company sales in the first quarter. We have established a dedicated team to drive omnichannel and e-commerce and provide greater focus and support for expanding into this margin creative channel. We are making our brands more accessible to consumers away from home and online, increasing brand reach and visibility at the same time.

Hain's been a market leader in Better-for-You for over 30 years, so we understand the evolving needs for our consumers. As we mentioned on Investor Day, we are building out our innovation capabilities and pipeline working to develop breakthrough scalable innovation, leveraging key insights from our global platforms and across geographies. And we are improving both our launch capabilities and our support post launch. We now have better visibility into our innovation pipeline across our key categories and are excited about our Innovation Experience Center that we are building out at our new global headquarters location in Hoboken, New Jersey.

To that end, we are looking forward to introducing new disruptive innovation for our Better-for-You Snack platform in the third quarter. And while we can't share details quite yet, we will be supporting the launch by activating our agile and brand-building model designed to deliver fully integrated omnichannel campaigns that drive awareness, trial and repeat purchase, both on shelf and online.

A key part of our growth pillar is gaining incremental distribution in both existing channels and entering new channels. In addition to the Away From Home brand that I mentioned earlier, our Snacks, Baby & Kids and Beverage brands have earned incremental distribution across existing channels. The drug channel grew 5% in the latest 12 weeks and recent distribution gains support our confidence in our ability to grow share as we progress throughout the year.

As part of our focused pillars, we are simplifying our global footprint to 5 core geographies, the U.S., Canada, the U.K., Ireland and Europe and streamlining our manufacturing footprint to meet 5 markets with efficiencies in our owned production and our co-manufacturing network. We recently consolidated our meat-free manufacturing footprint in Canada and continue to look at improving our capacity utilization and our operations leverage across all of our geographies.

As we aim to unlock our full potential as a leading global Better-for-You, we are committed to implementing an operating model that should enable our teams to drive greater reach and scale across our core 5 platforms in our core 5 markets. To achieve our aspirations, we have recently established our global RDQ operating model, regulatory, R&D and quality, and made important shifts in our design work to further integrate our teams globally. These enhancements, which include progressing the development of our global centers of excellence across marketing, procurement and R&D to deliver on the evolving needs of our consumers and our customers are already creating demonstrated value to the business.

The last pillar is fuel, which will enable us to fund our growth and drive margin expansion. Our fuel program consists of 3 main levers: revenue growth management, working capital management and operational efficiency. We are on track to deliver against our planned fuel initiatives for the year with early momentum in RGM as reflected in trade efficiency and effectiveness. One of our key working capital opportunities involve bringing our payment turns in line with industry benchmarks. We have begun the process, and this initiative is on track to deliver working capital improvement in this fiscal year.

Productivity in the first half of the year is primarily being driven through packaging automation, enabling us to improve our throughput and reduce waste in the system. We are executing against identified initiatives across our 3 fuel levers to unlock value that we can re-invest in our business starting in the back half of this fiscal year.

Before I turn the call over to Lee to review our financial results in more detail, I want to thank the entire Hain team for their passion and their dedication to Hain Reimagined. This is a bold plan and transformation of not only what we do, but how we are organized and how we work. You are instrumental in delivering on our strategy, but more importantly, our purpose in inspiring healthier living, and I'm proud to work alongside you.

Lee, please go ahead.

Thank you, Wendy, and good morning, everyone. As anticipated, first quarter consolidated net sales decreased 3.3% versus the prior period to $425 million. Organic net sales for the first quarter are adjusted to exclude the effects of divestitures and discontinued brands decreased 2.9% versus the prior year period, consistent with our guidance of a low single-digit decline. The decrease was primarily due to lower sales in the North American segment, partially offset by sales growth in the International segment as expected.

We delivered first quarter adjusted EBITDA of $24.1 million versus $36 million in the prior year period. This came in ahead of our guidance range due to lower trade spend and marketing expenditures, and we expect to reinvest the beat into the business over the course of the fiscal year.

Adjusted gross margin was 20.5% in the first quarter and decreased by approximately 95 basis points versus the prior year period, driven by deleverage on lower sales volume and by cost inflation, partially offset by pricing and productivity savings.

SG&A increased roughly 3% to $77.2 million, representing 18.2% of net sales for the quarter. The increase was driven primarily by wage rate increases and inflation in other support costs, with marketing expenses roughly in line with the prior period as we deferred some incremental investments. As Wendy mentioned earlier, we have also begun to make progress in executing initiatives under the Hain Reimagined multiyear global growth and transformation program we announced during last quarter's Investors Day.

During the first quarter, (inaudible) charges totaling $9.7 million associated with early actions under the product, including contract termination costs, asset write-downs, employee-related costs and other transformation-related expenses. Interest costs for the first quarter rose 73% to $13.2 million due to the high interest rate environment, partially offset by a lower borrowing base. As a reminder, we have hedged our rate exposure on approximately 50% of our loan facility with fixed rates at 5.6%.

And as I'll come back to in a moment, we are key focused on driving down net debt over time. All of these factors combined to produce a net loss for the quarter of $10.4 million or $0.12 per diluted share compared to net income of $6.9 million or $0.08 per diluted share in the prior year period. Our adjusted loss per diluted share was $0.04 versus adjusted EPS of $0.10 in the prior year period.

Turning now to our individual reporting segments. In North America, reported net sales decreased 9.8% to $260.1 million in the first quarter. Organic net sales decreased by 9.3% versus the prior year period, due to a sales decline in Baby & Kids, which as we mentioned in last quarter, is a function of continued industry-wide challenges in organic formula supply. Second the timing shifts of a Sun Care program in our Personal Care portfolio. And third, optimization of promotional activities for tariff, as we aim to unlock a more profitable growth mix over the long term.

These temporary declines more than offset the bright spots of growth we achieved in other strategic platforms, such as packages with Celestial Seasonings bag tea and nondairy beverage and Baby & Kids, excluding formula.

First quarter adjusted gross margin in North America was 20.8%, a 190 basis point decrease versus the prior period that was driven by deleverage on lower sales of volume and cost inflation, partially offset by pricing and productivity savings.

Adjusted EBITDA in North America was $18.7 million, a 39.2% decrease versus the prior period, and adjusted EBITDA margin was 7.2%, a 350 basis point decrease from the prior year period. These year-over-year declines resulted from lower gross profit and margin on roughly flat SG&A spending.

In our International business, reported net sales increased 9.3% to $165 million in the first quarter, and organic net sales growth was also 9.3%. Our growth was mainly driven by meal Prep from private label grocery as well as soup as well as in nondairy beverages and Baby & Kids.

International adjusted gross margin was 20%, up 95 basis points year-over-year, driven by pricing and productivity, partially offset by inflation.

International adjusted EBITDA was $17.4 million, a 16.7% increase from the prior year period, driven primarily by pricing. Adjusted EBITDA margin was 10.6%, up approximately 70 basis points versus the prior year period.

Shifting to cash flow and the balance sheet. First quarter cash provided by operating activities was $14 million versus cash used in operating activities of $5.1 million a year ago or a $19 million improvement. The higher operating cash resulted from working capital management, including our accounts payable optimization initiatives, focused inventory management and an improvement in [AR] recovery. Paying down debt and strategically investing in the business continue to be our priorities for cash utilization. CapEx was $6.9 million in the quarter, and we continue to expect to be approximately $50 million for fiscal 2024.

Finally, we ended the quarter with cash on hand of $38.3 million and net debt of $776.7 million translating into a net leverage ratio of 4.3x, as calculated under our amended credit agreement. Note that we do expect leverage to increase and peak in the second quarter given the timing of restructuring and an anticipated seasonal increase in net working capital and other cash outflows before trending back down through the second half of fiscal year 2024. Consistent with our stated priorities for cash, we have reduced net debt by $70 million since the end of Q1 2023.

And as we have previously indicated, our long-term goal is to reduce balance sheet leverage to not more than 3x adjusted EBITDA.

Turning now to our outlook. While a number of the top line headwinds we faced in the first quarter were isolated to the period, the industry-wide challenges in organic baby formula supply will continue to adversely affect our sales volume in the near term. We are working hard with industry organizations and our co-manufacturers to ensure that consumers have access to organic formula, where we play a leadership role. We are maintaining our guidance for the full year despite adjusted EBITDA in the first quarter coming in ahead of our expectations.

Our Hain Reimagined strategy is designed to be self-funded and flexible. Starting in the second quarter, we expect to reinvest these dollars back into the business to drive profitable growth, adjusting the pace of investment as we progress.

For fiscal 2024, we continue to expect organic net sales to increase by 2% to 4% year-over-year, adjusted EBITDA to be between $155 million and $165 million and free cash flow of $50 million to $55 million. Our 2024 guidance assumes that currency exchange rates will not materially affect our performance.

At today's rates, the dollar is converting at around 2% more strongly than factored into our initial full year 2024 guidance. And if this trend continues, it would slightly dampen our overall revenue growth, but have very little effect on profitability. We also assume that pricing will recover most expected cost inflation. We have made good progress on a number of revenue growth management initiatives ranging from pricing to trade efficiency and mix. And lastly, we assume productivity will drive gross margin expansion and fuel investments.

And now I'll turn back to Wendy for closing remarks.

Thank you, Lee. I am proud that we delivered the seventh consecutive quarter of promises made, promises kept. We believe we have set a bold yet achievable plan, and we are laser-focused on executing upon it. Hain Reimagined was the result of a thorough evaluation of every aspect of our business to identify inefficiencies as well as key unlocks to drive our business. Now we shifted to execution, and I couldn't be more excited about the journey. Hain is a pioneer in Better-for-You, building upon 30 years as a market leader in natural, organic and Better-for-You Food, Beverages and Personal Care.

Our portfolio of beloved brands across global Better-for-You platforms, differentiates us from others in this space and provides us with a unique opportunity to capture life on consumers from infant to adults, both in-home and away. We have a clear road map to achieve our revenue and margin growth. We have a detailed fuel program that is strong and flexible, enabling us to invest in our plan to transform the business and deliver sustainable profitable growth. And the early results we are seeing reinforce our confidence in the strategy, can size, benefits of scale in global platforms, deep consumer focus, portfolio breadth and agility enables us to out small to big and out big to small. Thank you again for joining the call today. We appreciate your interest and continued support. Operator, please open the line for questions.

(Operator Instructions) The first question we have is from David Palmer of Evercore ISI.

I want to ask you about gross margin for North America and International, where we can keep it consolidated. But I'm wondering how do you see that gross margin building through the year from the 20.5% in fiscal 1Q? And do you see this year playing out with gross profit growth happening this year, offset partially by G&A.? So any thoughts about timing and progress in the components of EBITDA growth would be helpful.

Yes. So it's Lee here, yes. I mean, as we said, with Hain Reimagined, our productivity growth will build as we go through the year. And also just some of the benefits that come through Hain Reimagined as we flex and invest behind it. So we do see that continuing to build as we go through the year. The other thing is as well is we will get leverage on our top line as that deal sequentially, specifically as we get into the back half.

Yes. I'll add a little bit to that. As we said, when we outlined what the drivers were in quarter 1, there were 3 really discrete drivers for North America. That really change as we go through the year. That actually will help us from a mix standpoint. Then when you look in the fuel program around revenue growth management, there's quite a bit of work relative to net price realization and trade efficiency. We saw some of that trade efficiency play out in quarter 1 in North America. You'll see some of that as we continue to go through the year.

The next question we have is from Ken Goldman of JPMorgan.

I have a quick one and then a follow-up. In light of the delay in the formula supply recovery and also the decision to reinvest some of 1Q's over delivery, I'm just curious to what extent you're still expecting improved sequential organic sales growth and EBITDA growth in 2Q versus 1Q?

Yes. The challenges around formula, obviously, we outlined for quarter 1. They'll continue a bit as we go into quarter 2. We have secured supply as we go into the back half of the year. So that gives us confidence in that particular category. Offsetting that, we've looked at where we've got early momentum in distribution gains, channel expansion across the balance of the portfolio. And some of those are actually coming on faster than we would have expected. So we would expect to be able to deliver on our expectations for pivot to growth even in light of the challenges with formula.

Okay. And then for the follow-up, Wendy, in the first earnings call you joined after Q2 '23, you said that in the past few years, Hain has established a level of transparency, which you will continue. And I understand transparency comes in different forms. But historically, Hain's been one of the few public food producers to not disclose price and volume numbers. And now it's also, I think, deciding to include the impact of currency and bake that into organic sales growth, which I think is fair to say is even rarer.

So -- what I'm hearing from some investors this morning is a little bit of concern that this decision to become less transparent is not necessarily in the direction that people had hoped for and that it becomes a little harder to analyze your financials. And I just wanted to get your opinion and Lee's opinion on if those concerns that I'm hearing are unjustified in your view.

You're right in what we said earlier this year, the intent is to be transparent. I also want it to be accurate. And so you will see us, as we go forward, be more overt in disclosing price, volume and mix. This particular quarter, we weren't comfortable that we had the numbers exactly where we would want to feel confident in providing that to the Street.

But do we expect to provide that going forward? Yes, we do. As it relates to currency impacts, when it's material, we'll certainly be calling that out, but we didn't want to have quite a bit of adjustments in the numbers, but I'll let Lee provide a bit.

So currency was favorable in Q1, it was about $11 million favorable. The one thing I would call out, as you look on a year-to-go basis and kind of had any opening comments, it is a 2% drag versus what we had when we originally set guidance. However, there's not a material impact to EBITDA. So -- but we did want to put that in at that 2% headwind we're seeing, particularly on the pound sterling. But again, just for the first quarter just as context, it really is the top line impact, about $11 million, not a material EBITDA impact.

The next question we have is from Andrew Lazar of Barclays.

I think last quarter when you gave guidance for the first quarter in terms of organic sales growth in North America, you mentioned again the 3 discrete items that impacted North America sales, 2 of which I think we're supposed to be isolated specifically to the first quarter. It was the Sun Care timing shift and the promotional optimization at Terra. And I think at the time, you said those 2 collectively might be about -- or maybe it was all 3, I can't remember sort of a 10-point hit, if you will, to organic sales in 1Q.

So I'm just trying to get a sense of maybe if you could sort of quantify those. And really what I'm trying to get at is what underlying, right, North America sales would have been without those 2 sort of discrete items that I mentioned, and if that's what you think North America sales would -- organic sales would approximate in 2Q?

Yes. Let me unpack a little bit relative to the categories, just the broad buckets and then have Lee provide some follow-up specific to North America. You're right in that the 3 drivers we saw for quarter 1 that we had called in guidance would be formula, would be really the promotional optimization on Terra and then would be the timing on Sun Care. If you look in those categories, the -- certainly, the impact in snacks was Terra-driven, but offset by nice growth in Garden Veggie. So that gives us confidence as we go into quarter 2 that the Terra impact in the snack portfolio is a quarter 1 challenge.

On the formula side, in our Baby & Kids category, all of the decline in the baby category was driven by formula. And as we said in the opening remarks, offset by really continued strength in baby food and purees and especially in toddler snacks, both in the Ella's business in the U.K. and in Earth's Best in the U.S. So as the formula situation rights itself in the back half of the year, that gives us confidence because we have secured that supply, gives us confidence as we go forward in that category.

Personal Care, we've identified on Investor Day, we talked about this as a stabilized category. If you look at the brands underneath that, the Sun Care business in Alba is a timing issue and that really was a driver to the Personal Care piece, but we had strength in the Avalon brand, strength in Live Clean, which is a leading brand in Canada. So there's pieces and pockets of Personal Care that give us confidence as we go forward.

So I guess, a long way of saying, I think there are some -- those were discrete items. When we look at outside of baby formula, the balance of the categories we feel good as we go forward. And I believe our outlook for North America -- well, total company has a pivot into growth as we go into quarter 2, but I'll let Lee provide a bit more color relative to North America.

Yes. I mean, I think you covered kind of one of the big points obviously, in Q1, it was -- formula was kind of the largest drag on us. Going into Q2, we do see a continued drag on formula, probably around $10 million on the revenue side, but then pivoting back as we go through the balance of the year. So I think, again, we've outlined, I wasn't here, but we had outlined previously kind of the 3 drivers with formula being the largest one.

The next question we have is from John Baumgartner of Mizuho Securities.

First off, I wanted to ask about International. Had a nice recovery there in Q1. The plant and beverages category is bouncing back in Europe. And your comments, Wendy, they sound pretty positive for the larger portfolio in the region. So if I weigh that against the segment guidance for this year, I think it's up low single digits for organic revenue. How do we think about potential upside to that outlook? And what's holding you back from being more bullish for international sales this year?

Yes. I appreciate the question. So if you think about even what we outlined on Investor Day and what we guided in the last quarter, there were some very clear areas where we expected to see recovery in International. We expected to see recovery as nondairy beverage came back, and we got to greater capacity utilization in our nondairy beverage plants. We expected to see some recovery as we see consolidation in the meat-free category, and we expected continued strength in our jams and jellies business and our soups business.

So all of those things, we have seen play out. Those are, however, offset by the challenges we see in the marketplace. The European market has been more of the consumer more acutely impacted by inflation and the economy than what we've seen here in the U.S., is also a market that has more private label penetration than what we see in the U.S. and really in North America.

The benefit for us is that we play in both private label and brand, and that certainly was a benefit for us in the first quarter. We see that playing out as we go into the back half of the year.

But I would tell you that we've tempered our expectations based on consumer response to category, the challenges around some of the geopolitical conflicts that we're seeing, especially Ukraine and now in the Middle East. And so I think we've been appropriately prudent as we look at what the outlook is in the back half of the year.

Okay. And then one just follow-up. When we think about new distribution, the distribution growth you're getting in away-from-home channels, how do we think about the phasing there? Are there certain sell-in periods where the benefit can be larger than others where if you're loading for [K-12] or university business? Are there certain windows akin to shelf resets that retailers should be considering? I'm just trying to better understanding the lumpiness we can expect seasonally in Away From Home based on your targeted mix of new outlets.

Yes. Away From Home, it operates very differently, as you know, than a traditional retail environment. So there's very little sort of a set reset time period and it's much more contractual depending on the segments that we're leaning into. We will begin and we have begun to see incremental placements that start to generate -- that start to generate some sales momentum. It won't be as lumpy as what you would expect to see in some of maybe the other retail environment where there's a big load-in period or even what some people would see in, say, restaurant business where you might land a new item, you've got a significant increase in a particular time period, and then it comes off the menu or it's no longer on promotion.

The segments we're going after are largely where you would expect to see regular repeat business for the product being available. So think micro markets in the front end of hotels. They travel as you're going through airports, things like that in grab-and-go locations. Think about on-the-go convenience and think about college and university, which functions very much like a small city that have convenience stores and small retail outlets on campus. Those tend to be fairly run rate business. You land distribution and it slowly builds over time without the big inventory load-ins that you might see in a retail environment. So hopefully, that provides a bit more clarification.

The next question we have is from Michael Lavery of Piper Sandler.

Just was wondering how much more color you could give us on 2Q. I know you had 1Q guidance specifically and haven't done that this quarter for the second quarter. But I guess maybe partly just trying to understand the margin acceleration that you need to hit your full year numbers, but the additional spending you've called out for the second quarter. How second half heavy should our expectations be? Can you just give us some a little bit better feel for the trajectory of how you think the rest of the year plays out?

Yes. Let me start, and I'll turn a little bit over to Lee, so if he can provide more color. We said all along that the back half of '24 was where we were really going to see a lift. That's when we would see our fuel program start to really lean in. It's where we would start to see some of the early investments and channel expansion and innovation start to play out. So the shape of the year does very much have a quarter 3, quarter 4 lift compared to quarter 1, quarter 2.

While we don't have the discrete impacts in North America, all 3 of them, we will still have formula impact in quarter 2. So I would say you'll see a modest improvement in quarter 2, and then I think you'll see a more material improvement quarter 3, quarter 4.

Yes. I guess I would just build upon that. As we go through the balance of the year, as just Wendy mentioned, you start seeing distribution gains, specifically in snacks, tea, yogurt. The other thing is we've invested [for the] Hain Reimagined in revenue growth management. So we get the initiatives in a way there.

The other piece of it really is around innovation. So we see our innovation stepping up promotional improvements in the second half. We've got a dedicated team driving improved merchandising execution. So with all of those pieces and kind of a focus on driving fuel as well, we said we have a flexible program here. But as we unlock in and drive that fuel, you'll see that take traction as we go through the balance of the year.

Okay. That's helpful. And can I just add a follow-up on Garden Veggie in club. Just maybe understand a little better, is there still distribution gains to come, like, say, for at Costco, would you begin all of them already? Is that a permanent item? Obviously, we've seen with ParmCrisps or some other things? There's at least some volatility you can have there. How should we be thinking about that -- the club piece of unmeasured channels and how it looks over the next few quarters?

Yes, I would definitely say that and I think in general, you should never look at anything in club as a permanent item. It's not really the nature of how that channel works. We feel good about the distribution that we have across all of the club outlets. We are also leaning into incremental distribution to make sure the Garden Veggie is available in all the points of distribution where the consumer wants it to be.

And that's where we're seeing much more of our GDP gains, is driving channel expansion. And as we mentioned in our opening remarks, we have some very strong innovation coming in quarter 3 that actually had really great acceptance from broad retail environment. So we feel really good that we'll have new news for Garden Veggie to add to the core news as we drive really good shelf assortments and all the potential points of distribution.

Next question we have is from Andrew Wolf of CL King.

Wendy, sort of following up on your commentary on some innovation coming Veggie straws. I think you also used a word something disruptive. Is that something difference that you're referring to? And is that -- if I'm right, that it's different. Is that something that also has been sort of disclosed to the trade? Or is that still an internal program that you're not taking to market yet?

We are really excited as you know, Garden Veggie is a core franchise for us. We're excited to take Garden Veggie into disruptive categories. And so that's where you will see the innovation. It has been releases to the trade for normal customer conversations to drive acceptance for store resets. It will begin shipping in late December, and you'll see it on shelves starting in January. We have pushed marketing -- a bit of our marketing spend that you would have seen come out of quarter 1 and we pushed a later period so that we can invest appropriately behind that launch and sustained launch after it's placed in market, but we've had very strong retailer receptivity to it and the consumer research has been incredibly positive. So we're excited about it as a new platform of innovation under the Garden Veggie franchise.

Got it. And then on the 535 basis points gross margin expansion from price and productivity kind of lumped together. Is there any chance that can be a little bit unpacked and between the price and the productivity gains? And just a sense of how that's going to flow going forward. And lastly, just kind of how the conversations are going with the retailers on price given what -- maybe not so much for natural and organic, but for most companies, ingredients costs starting to normalize.

Yes. Let me start with your second question and have Lee provided a little color on margin expansion. We -- as we said earlier this year, we felt really good about the revenue growth management initiatives that have been put in place and that most of the, I call it maybe, blunt force instruments around pricing. Most of those large broad price actions has already taken place between International and North America.

You'll actually start to see more of that wrap around and price realization as we go forward. What you'll see more from us is a bit more surgical pricing, price pack architecture, trade optimization, market year end net price realization on shelf. And those initiatives are starting to play out as well. But our overall productivity program we feel is -- the pipeline is sufficient to offset any inflation that we have coming, so -- or that we sort of factored into the numbers without the need for us to take incremental price.

So just building on that. I mean, as Wendy said, we're very focused in on revenue growth management. We don't have any broad pricing planned in the near term. So -- but we continue to kind of evaluate the environment, manage pricing, looking at the margin profile. We do expect the pricing to largely cover the inflation. And we talked about an inflation range of 3% to 4%. And I would say without an exact number, but the majority of our pricing benefits have been communicated with our customers right now. And then from a productivity standpoint, the way you can kind of think about it is 3.5% to 4% of our cost of sales.

We're obviously looking to drive the outline upside there as we use that and invest the productivity also as fuel to drive our overall growth. So those are the kind of the 2 ways that you can think about it. Again, the inflationary environment from when we set the original guidance hasn't fundamentally changed. And we think the pricing that we got in place right now is appropriate. So those 2 pieces, again, factor into our overall margin expansion expectations.

And one thing I would add to, which -- so I think some of you actually subscribe to some of the data that comes from Circana and IRI, but we're starting to see a return to more accelerated growth in natural products and Better-for-You than conventional in quite a few of the categories that we play in. And that tells us a couple of things. One is that the consumer has gotten maybe a bit more socialized in the pricing that's been passed through, but we also see a little bit more [inflation] in those premium products to conventional, which is a great place for Hain because that's obviously the parts of those categories that we play in.

So seeing that consumer recovery in category and the growth of natural products outpacing conventional also gives us confidence as we go forward that we're well placed, and we'll continue to monitor our pricing versus both other players and category to ensure that we're covering inflation, but we're not passing too much on to the consumer.

The next question we have is from Jon Andersen of William Blair.

I was wondering if you could talk a little bit about where in the portfolio, and I'm thinking about categories and brands that you expect the most traction Away From Home. And if we think about the next several quarters, how that kind of will play out. Also on the question of Away From Home, can you just remind us of where you are kind of currently or Hain is currently in terms of penetration or mix of overall sales? And where you think that could reasonably go as you kind of execute your channel expansion strategy?

Yes. I appreciate the question. And as we talked about on Investor Day, channel expansion is a huge opportunity for Hain because we've been underpenetrated in points of distribution that makes it easy for the shopper to find our products along their journey. And Away From Home, in particular, in food service and convenience stores, we've said that we think the greatest opportunities for us from a category standpoint are going to be in our Snacks portfolio, is largely going to be in Beverages, a little bit in our Meal Prep around meat-free, especially in Canada and the U.K. And in yogurt, especially in our U.S. market. Those are areas where we would see great opportunity.

And as we mentioned, we've already begun to pick up soup business in restaurant chains in the U.K. So we see in the U.K. is a little bit different portfolio. In terms of where our business is at, and I think we disclosed this on Investor Day, a typical CPG company is going to have somewhere between 15% and 20% of revenues are going to come from Away From Home channel. And Hain is less than 2% of our revenues.

We've planned for a modest over the life of the strategy. And as we said before, Hain Reimagined is what we've committed to in the algorithm is our target. It's not our aspiration. If you were to do the straight-line math and assume 20% of our revenues would be in Away From Home, it would get you to a larger growth number and Away From Home than what we factored into Hain Reimagined, but we want to get some traction, get the proof points and begin to see that play out so that we can come back and commit to the Street a much larger number.

And are there any margin implications of the channel expansion positive, negative, neutral?

Yes. Away From Home tends to be very margin accretive. In fact, every place has worked, it's been margin accretive because the consumers [will perform] for the convenience factor of things on the go, and they're less price sensitive than what they would be paying for pantry loading, for instance, in a retail environment. What you need to make sure as a company is that you appropriately built in your cost to serve and that you've identified the end-to-end cost so that you make sure you capture either in trade efficiencies, mix management, price pack architecture, et cetera.

I feel very good that the team that we've put in place around Away From Home, both in the U.K. business and the team here in the U.S. I feel really good about the revenue growth management work that the team has done for what it will take with our portfolio to be well positioned to drive that distribution. And I feel really good seeing the early momentum that the team is driving in the points of distribution that they gained in Away From Home. So I feel like we will have some good news to share with you in the coming quarters.

Great. One last one. Just on capital allocation. I think, Lee, you mentioned you're targeting $50 million to $55 million of free cash this year. What's the -- what are the -- what's the priority set? I assume debt reduction, leverage reduction, but just talk about that and maybe more broadly the capital allocation priorities going forward.

Yes. So I think we said it's 2 things. It's leverage reduction overall. But then we also, as we free up cash, it's also to be fueled to push behind Hain Reimagined. So again, as we look, I mean, one of the key initiatives we talked about was payables, for example. I mean, we're making good progress in the payables area. We have kind of updated our internal processes, and we're working well through with our suppliers. So we're seeing traction there. We're also coming a little bit later, but focus is on inventory. But to answer your question, it's financing 2 things. It's the reduction of our leverage. And again, then using that fuel to invest behind the business.

The next question we have is from Alexia Howard of Bernstein.

So you started to talk about the state of the consumer. I believe it was in reference to the U.S. or the North American market. I'm just wondering if you can compare and contrast what you're seeing with consumer behaviors, channel shifting, trade up or trade down between the 2 regions? I'm just trying to get a sense check on whether consumer confidence is improving or deteriorating in each region.

Absolutely. So let me sort of broadly, we know that the European consumer has been more acutely impacted by overall inflationary environment. And in fact, inflation continues to be at a higher level there than what we're seeing in the U.S. market, in particular, it's also a market that has a larger concentration or larger penetration for private label.

And we've seen significant growth in discounters. So I would say, in the European market, we've seen a couple of things. We've seen consumers trade down to discount locations. We've seen them trade down to private label.

The good thing for Hain is that we're in categories that the consumer is wanting regardless of the economic environment, but they are buying it from different locations and they're going to private label and brands. We're well covered there because our portfolio is both private label and brand, and we see that play out in our growth. We're growing in private label faster than we're growing in the branded business to recover. And -- but the team is well positioned to have that in that marketplace.

The North American market is different. We've seen the inflation rate was lower than what we saw in Europe in the Better-for-You categories in particular. We did see the consumer adjust behavior and it's not moving to private label. So we haven't seen a growth in private label concentration, but we have seen consumers buy less units rather than buying at different locations, but we are starting to see that stabilize.

The most recent data from Circana showed 3 of the categories that we're in. We pivoted back to in the latest 12 weeks, growth of natural products outpacing conventional in those categories. The one category where we still see challenge is in the Snacks category, but there's significant promotional activity there on conventional products. And so we're not seeing the same move to premium at a greater rate than conventional snacking. But in every other category we play in, we are definitely seeing the growth in the category for Better-for-You items across all retail outlets to get back to what we would have seen 2 years ago in category dynamics.

Great. And as a quick follow-up, marketing spend. Can you quantify how much it was up this quarter? And now that you beat on EBITDA, how much you expect marketing spend to increase relative to the previous expectation because it seems clear that you're reinvesting in the business?

Yes. We -- so on a year-on-year basis, the marketing spend was a relative small amount because we spent quite a bit in quarter 1 last year. And as you recall, then we essentially went quiet. When you turned back on marketing in quarter 3 of fiscal '23, ramped it up in quarter 4, we're sustained at about that level because we held what was significant increased marketing spend to support the launches that will take place in quarter 2 and into quarter 3 for launch support. But our marketing spend is about where we had planned for it to be. We'll spend at the rate that we expected to for this year, which is a bit of a step-up from fiscal '23. I think what's more important is that you'll see us have sustained marketing investment quarter-on-quarter and should not expect to see that a place where we will save dollars.

So we'll drive efficiencies in our overall spend before we drive any reductions in those spend, which aligns with what we said, we will get better before we spend more and we're definitely seeing the team driving better analysis on return on investment of our marketing spend for better campaigns that are better tested to then be able to ramp up our spend in the back half of the year.

The next question we have is from James Salera of Stephens Inc.

I know a lot of questions have been asked on the Away From Home channel. But maybe if I could sneak in one more. Do you guys have a sense for which products you're replacing on the shelf in these end markets? Is it existing Better-for-You products? Or should we see this as your entry into those formats as really being kind of an expansion of their Better-for-You offerings on shelf?

That's a great question, and it would really depend on category and it would depend on segment. In the case of snacks, we see it as an and. And in many cases, our products are appealing to a consumer who otherwise doesn't have an option in those locations. So it's an incremental placement in those locations. In areas like beverage, especially in tea brands, is a replacement for something else and other brands because the Celestial Seasonings brand is the market leader in herbal teas. But in many cases, we've not been available where the consumer would expect to find us. So as the preferred brands, we're looking to drive distribution so that we're available to shopper when they're on the go.

As it relates to yogurt, it's either incremental because they've not been utilizing something in that location. So this is the team working with those customers on this as an add and why it is a good incremental add to their assortment. So it's really going to depend is it in restaurants, is it in C-store, is it an on-the-go retail and whether it's a binary purchasing decision or whether it's an add to the assortment.

Great. That's helpful color. And then maybe I could switch gears. If we look at the Circana consumption data for the tea bags category, it seems like the category is kind of [bbox] around basically flat consumption. But private label has been doing much better, especially over the last, call it, 12 months. Is there anything dynamic wise that you can do, whether it's with increased promotions or kind of more focus on that category to normalize that and get your piece going? Or is it just consumers are trading down and you just kind of have to wait for them to readjust to the shelf prices?

I'm not familiar with the trade down to private label and tea that's not consistent with the data that we're seeing. What we are seeing is, obviously, tea season, we're heading into that now. And we also know retailers are doing resets in preparation for tea season. So you wouldn't really expect to see a lot of tea growth at this particular point in time, but actually Celestial's done really nice. We would expect to see that ramp up as we go into tea season and as you start to see the assortments that we've already landed begin to show on shelf.

The next question we have is a follow-up question from David Palmer of Evercore ISI.

Just wanted to follow up on your comments on channel mix. U.S. measured channels is something obviously we all follow closely. And I'm wondering for us, Circana or Nielsen watchers, what should we be seeing that would be consistent with your guidance? I know FX and non-measured are going to be helped for the year, but should we still be thinking at least some growth, up low single digits or so in U.S. measured channels starting in your fiscal second half?

Yes. This is where things will be challenging if we're leaning into the areas of growth. So let me sort of dimensionalize it a little bit. In our business, 40% or so is International, which is relatively a black box, I guess, unless you buy the Nielsen data in the international markets. But we will try to provide a little bit of color as we go forward on where we're seeing category growth, where we're seeing channel growth, so you've got some visibility to that.

Then in the North American business, we call that 60% of our business, only about 65% or so of that business is in measured channels and where we'll be leaning in is going to be a non-measured. So we're also in the process of identifying how we provide some visibility to you in terms of tracked and measured, so that you've got visibility across channels and can expect that. But to your question on where should you expect to start to see growth. You will start to see some of our categories turn in the end market data in just those measured channels as we go into the back half of this year.

You'll see it in TDP gains and you'll see it in some of the velocities, especially in snacks and in tea. And then obviously, as the formula supply comes back, you'll see that play out in the baby category. If our baby category is muted and actually overall end market is muted because it includes that formula detail. So you really kind of have to click down into the categories to see where the growth is at, but we'll work on providing you a bit more visibility to where we see TDP gains and channel mix going forward so that you've got a feel of measured and non-measured.

That concludes the question-and-answer session. I would like to turn the floor back over to Wendy Davidson for closing comments.

Yes, I want to thank everybody for the time this morning. And as I said earlier, a huge thanks for the opportunity to be able to meet so many people on Investor Day and for your interest in support in Hain. We are very committed to returning the business to growth. We're very committed to Hain Reimagined and providing visibility to you as we proceed with the strategy. So with that, I look forward to further conversations later on today.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.