Good day, and welcome to the Hain Celestial Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Casey Turner, ICR. Please go ahead.

Thank you. Good morning, and thank you for joining us on Hain Celestial's Third Quarter Fiscal Year 2020 Earnings Conference Call. On the call today are Mark Schiller, President and Chief Executive Officer; and Javier Idrovo, Executive Vice President and Chief Financial Officer. During the course of this call, management may make Forward-Looking Statements within the meaning of the federal securities laws. These include expectations and assumptions regarding the Company's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Hain Celestial's annual report on Form 10-K and quarterly report 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. Please note management's remarks today will focus on non-GAAP or adjusted financial measures. A reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release. As a reminder, beginning in Q1 of this year, the Company changed its segment reporting to focus on North America, International and Corporate, which had previously been reported as the U.S., UK and Rest of World segments. The Company has also prepared a few presentation slides and additional supplemental financial information, which are put on Hain Celestial's website under the Investor Relations heading. This call is being webcast, and an archive of it will also be available on the website. I would also like to note that we are conducting our call today from our respective remote locations. As such there may be brief delay to cross talks or other minor technical issues during the call. We thank you in advance for your patience and understanding. And with that , I would like to turn the call over Mark Schiller.

Thank you, Katie. And good morning everyone. Let me start by saying these are very difficult and unprecedented times. As we all learn to adapt to the Coronavirus. My thoughts and prayers go out to those who have been negatively impacted by this pandemic. And I wish everyone safety and good health as we move toward a new normal. I appreciate that we are working in an essential industry and providing people around the world with much needed healthy products that they rely on to navigate this crisis. And I want to thank all our employees who have continued to come to work every day during this turbulent time. They have overcome numerous obstacles to produce and ship these products to stores every day and they are doing a fantastic job. On today's call, as I talk about our performance in Q3 and guidance raised for the full-year, I will give you details on the COVID pandemic, including how it has impacted our business, how we prepared for it, how we created new opportunities, and how we are setting ourselves up for the future. Let me start with our results and outlook. I'm proud to announce that after two strong quarters with significant profit growth, we did it again in the third quarter, with 24% year-over-year growth in adjusted EBITDA, and an EBITDA margin, which was the highest since fiscal 2018. In fact, we delivered against all the key metrics we discussed on our last earnings call gross margin dollars, gross margin percentage, as well as adjusted EBITDA dollars and margin were all up significantly. And while we didn't provide specific guidance on the top-line, Q3 was the first time we delivered net sales growth since fiscal 2018. Yes, we benefited from the current pandemic. But it is important to…

Thank you, Mark. And good morning everyone. I would like to echo Mark's comments in thanking our employees who have worked tirelessly to help our Company navigate through these global health crisis. I am extremely proud to work at Hain. I will focus my discussion on our financial results from continuing operations. The Company is presenting the results at Tilda and the Hain Pure Protein businesses within discontinued unit operations in the current and prior year period. Now on to the financials. Third quarter consolidated net sales increased 1% year-over-year to $553 million exceeding our expectations. Foreign exchange impact on the quarter was a headwind of 100 basis points. Divestitures, and skew rationalizations were an incremental headwind of about 400 basis points. When adjusting for these factors net sales increased 6% versus the prior year period. This growth has a tailwind of the COVID-19 impact. From a profit perspective as we had guided, Q3 delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar expansion. Specifically for the third quarter, we expanded our adjusted gross margin by 282 basis points, resulting in adjusted gross profit of $134 million, an increase of about 14% versus prior year. Supply chain cost reductions enabled by our productivity initiatives mainly drove improvements. Currency impact on gross profit was a headwind of about $1 million. In terms of productivity and efficiency, we have made significant progress in the quarter as demonstrated by the meaningful improvement in gross margin. The initial North America skew rationalization project has been implemented and is benefiting current consolidated gross margin. As retailers place greater focus on high velocity skews. We continue to evaluate our portfolio for further simplification to position ourselves for success in the current environment. In addition, distribution and warehousing costs as a percent…

As you can see, we have had a terrific quarter and have a positive outlook for the future. I want to thank the entire Hain team around the world for how they have performed during this transformation journey and how they have risen to help us thrive during this pandemic, and what they are doing to ensure our continued success. Together, we have created a scrappy entrepreneurial results oriented culture that is delivering exceptional results. And I really appreciate all they are doing to transform this great Company. With that, let me turn it over to the operator for question. Operator.

Thank you sir. [Operator Instructions] Thank you. We now take the first question from David Palmer from Evercore ISI.

Thanks, and good morning and congrats on this margin progression that you are pulling off here. Very impressive. I wanted to ask you about the guidance implied for the fiscal fourth quarter. Obviously, it shows a little bit less growth. And what you just saw from a EBITDA perspective, does that does that contemplate reinvestment and then what's the nature of that reinvestment as you prepare for fiscal 2021. And I have a follow-up?

Yes. So first thing I will tell you is obviously these are volatile times and as we start moving toward reentering and reopening our communities, some of the In Home consumption occasions are going to gravitate back out. What exactly that means, I don't know. But there will be some slowdown in the growth rate versus what we have been experiencing in the last six to eight weeks. That is implied in there. But we do expect that the quarter will be up in terms of sales overall. With regard to investment, yes, there is investment in there and marketing. As I said in the prepared remarks, we believe this is a great opportunity for us to lean in and be aggressive versus kind of sit back and wait to see what happens. So we have new ad campaigns, we have innovation coming out, because we will have some slotting fees with it if retailers take it. So there is an implied investment in those numbers.

And then, just conceptually for fiscal 2021. As you are thinking about those drags to your revenue from SKU rationalization and divestitures. I can imagine that the current environment might allow you to go pedal of the metal on those two things. You might find better prices for things you might want to sell. And you might find the tailwinds, giving you air cover for more aggressive SKU rationalization. So I'm just wondering how you are thinking about those things? Could we see those drags actually increase before they start really decreasing aside from the innovation list. Thanks.

Yes, so we are looking at additional SKU rationalization, although it will be less than what we have been doing because we have been at this for a while. We were doing this for the last couple of years in this company and we have taken out a huge amount of unproductive skews that add a lot of complexity. And that is part of why you see the margins, particularly on the get better brands improving so much. With regard to divestitures, we continue to work on shedding retail, as I said in the prepared remarks. We are evaluating the situation and some of things that we may have been looking to sell, we may change our perspective on given the surge in demand in this situation. But I would point out something that I think is pretty compelling, which is since January of last year, we sold about a dozen brands that has $750 million of revenue. The collective EBITDA of that $750 million of revenue was $16 million. So it was about a 2.5% EBITDA margin $16 million. We sold those assets for $400 million 27 times of EBITDA. So we have been getting very robust prices for what we have been selling. In many cases, we have been selling things that are losing money and getting, obviously cash for them. So I think we have been doing a pretty good job of getting extremely fair value for the things that we are looking to divest. And to your point in this environment, we will be thoughtful choiceful about what we sell, and how much are we willing to accept given that demand is up on most of the items that we sell?

Great, thank you.

Thank you. We now take question from [Indiscernible].

Yes. Thanks. I just wanted to talk about new customers market still able to get during this pandemic? Exactly how were you able to market to them? And specifically, do you think this is opened up the opportunity to pay customers with new products? And then just the follow up on these products in the pipeline, as you know as innovation forward during this pandemic or is it been a little bit of a slowing focus more on purpose.

Yes, good question. So first thing I would tell you is we have been increasing not marketing for several quarters in a row now. So we have been as part of the turning around of the Get Bigger brands for growth. We have been investing to bring trials in before we start. So the good news is, a lot of those messages were seated in people's minds when the pandemic hit, and obviously given supply issues from many people, there were a lot of brand switching going on where people are trying new brands, because potentially the one that they are used to wasn't there. So we have had some brands that have had household penetration increased by as much as 50%. So it is pretty significant in some cases. What we are doing now is marketing to those people specifically. So we put repeat coupons in some of our products where it is easy for us to do that. So if you try it for the first time, you have an incentive to come back and repeat. We are using shopper card data and digital social mobile marketing to go after the people that are most likely to be purchasers in this environment. We have changed some of our messaging to be more relevant and sensitive to the environment that we are in. So we are aggressively trying to continue to recruit people and for people we have to make sure that they are delighted and that we start to form a relationship with them. With regard to Innovation. You've heard me talk a few times on the last several calls about how we have been building the pipeline. And two of the bigger innovations that we had launched were Tea Well on Celestial and the Flaming and Hot…

Thank you very helpful.

Thank you. we now take the next question from Alexia Howard from Bernstein.

Great. Good morning, everyone.

Good morning.

Good morning.

So my first question is are you mentioning the challenges are that you may have in terms of keeping the supply going. Could you talk a little bit about which products that those challenges are most acute in what the problem is or what the potential problems might be. I know, everything's looking fine now. And then my follow-up is If you do run into challenges on being able to ramp up across supplies efficiently, would you consider pulling back on promotional activities to realize higher net price points? And to what extent might that happens? Thank you.

Yes. So the first thing I will tell you is because we are a global business. We saw this pandemic coming way before the government ever said. This is going to be a pandemic. And so we immediately started building inventory and creating backup sources of supply so that if something were to happen in one of our factories that we would have an alternative. And you have to also remember that we have a business been declining for a couple of years a year. So we have plenty of capacity, we don't have a capacity issue. We have backup supply on call at the top 80% of skews that make up the vast majority of our sales and profit. And we are well positioned there. What could happen obviously you could have an outbreak of the virus doesn't require us to shut down the plant for a period of time. And you could have challenges in the supply chain with suppliers not being able to supply ingredients on time. And again, that is where we have been very aggressive in finding backup sources, flexing formulas in case certain ingredients become hard to get etcetera. I would say we are in very good shape with the exception of there's a couple of categories where we use co-manufacturers and the industry capacity is tight. So some of our products are packing tetra packs, packaging, there's not a lot of tetra pack capacity out there. And baby food is another example there's a very limited number of manufacturers of baby formula Those are probably the two where I say we have the most risk. But that said, we have also built inventory so that if there is a short-term outage or short term plant shutdown on their side, that we have got…

Great, thank you very much. I will pass it on.

Thank you. We now take the next question from Mr. Mike Lavery from Piper Sandler.

Good morning. Thank you.

Good morning.

Good morning.

You mentioned at your Investors Day a little over a year-ago now that you see future steady state profile of top-line growth around 3% to 6% and spend 13% to 16% margins. Just as you progress since then, how far away do you think that might be? And is that still your thinking? Or have some portfolio moves gone differently than planned or is there anything in the current environment that may be picking us up think about that any differently now?

Yes. So you will remember we distinguish between the Get Bigger brands and the Get Better brands. The Get Bigger brands we said it would mid-single digit top-line growth and around 16% EBITDA and on the Get Better brands we said it would be high single digit declines on the top-line, with margins in the 10 to 12 range. In this quarter the Get Better brands had 11% EBITDA margins. So they are already there. And they are already within the top-line of what we described. The Get Bigger brands also grew but we continue to invest in marketing. So we haven't quite get to 16% EBITDA because we keep adding marketing to the equation. But we are very steady in the 14% plus EBITDA done margin on those brands as well. So we are well on our way to where we said we would be in North America. We have a little bit different circumstance in our international business, given the fruit business that I talked about given that we have 30% of our business there this by the label business. The margins there will be a little bit lower or they are more than those 13% range. But the strategy is coming from the margins are materializing. And yes, there is some benefit into short term top-line numbers from COVID-19. But we are really confident given the trial we are seeing, given the retailer response that we are seeing, given the huge margin expansion that we are seeing. And honestly, we have a lot more room in the middle of the P&L. We are doing some amazing things and you can see it in the numbers that we have got. But we still have probably 80% plus of our trucks that we shipped don't go out. If we can fill up trucks, which is part of what we are doing in this pandemic, if we can get standard bracket placing in place, we can get a lot fewer trucks on the road with a lot more efficiency in our cost structure. So we have made huge improvements. But there's a lot more runway. And so I'm bullish on the top line, and I'm bullish on the middle of the P&L. And I feel confident we will get there. Our original timeline was three years from Investor Day, we are halfway there in terms of time. We are about 16-months into the journey. I think the three year journey is intact. And hopefully we will get there a little early.

That really is helpful. And just the follow-up on your thinking about any economic stress just some of what you've seen in the past and how your consumer typically behaves and what is some of the ways there you might be able to adapt and adjust if necessary.

Adapt to how the consumers behaving over the recession? Got you. So the first thing I would tell you is because we have many organic type products, non-GMO, gluten free, etcetera. We tend to appeal to more afterwards consumer. So when you hear about the massive unemployment that we are experiencing, Those tend to be lower income workers and less of our target. So I think we are a little bit insulated in that regard. As long as the more affluent people feel like their income to secure the stock market's doing okay. And they are not too worried about their future. So, on the one hand, I think we are relatively insulated. The second thing I would say at least in Europe, we have 30% of our businesses in private label. So we actually will be a beneficiary of the lower income consumers who trade down. Because it is a significant part of our business there. The third thing that I would say is we have done an exhaustive review of all of our products here in the U.S. And where we think we have a price point that is to premium if you will. We are looking at alternatives sizes and price point. So I said before, for example on this call that our Garden of Eatin' Tortilla Chips business we offer considerably more products at a higher opening price points than everybody else. So you can get four more ounces or five more ounces, but you are going to pay $1 more for it. If the consumers cash strapped, they would rather pay $1 less. So we are already in the process of downsizing that offering and getting to a more competitive opening price point. We are doing that in a number of places. That work was already underway before the pandemic because we saw the issue in the opportunity. And so, I feel like we will be pretty well positioned position to compete in all of the categories that we are in and we should be able to weather recession relatively well.

Very helpful. Thank you.

Thank you. We now take the next question from Rob Dickerson from Jefferies.

Hi, good morning, it is [Indiscernible] on for Rob. Thank you for the question. I believe you said a majority of the margin improvement in the quarter was attributed to many initiatives that you had in place prior to COVID-19. So maybe not as much attributed to COVID-19 related operating leverage. Is that because the quarter was only partially impacted by the pandemic? And maybe you also give that you have a different co-manufacturing mix in some of your public company peers. And how does be perhaps more fragmented more manufacturing for print, given the history of the companies build up overtime play into that? Overall, I was trying to get a sense of how should we think about that contribution split for margin improvement over the next couple of quarters, which probably seem a more full COVID-19 operating leverage benefits. And then just a quick follow up on market household penetration comment. Give us a sense of how much of that 50% increase in household penetration for some brands or new households for the category. Perhaps like some consumers are buying in different categories for add on consumption than they were pre-COVID or is it mostly a brand new change related thing? Thank you very much.

Yes. So let me take the second one first. So with regard to household penetration, I think it is a combination of new category buyers and new brand buyers. In some of the categories, people come into the category through our brands, which is interesting, particularly in snacks, the Tortilla Chips brand and Sensible Fortune Brands. We tends to attract new users into the category, they have a good experience and then they stay in the category. So it depends on the category but in some cases we are we are seeing a little bit more of existing buyer in some cases, it is more existing buyers switching around. With regard to the first part of the question, remind me on the manufacturing side. So we have had a robust productivity set of initiatives going well before COVID. So we were making significant improvement in the middle of the P&L beforehand. You are right that the operating leverage the absorption benefit of producing significantly more products in our manufacturing locations really wasn't seen in the Q3 P&L, because you are those products are in the warehouse and they are shipping in Q4 for the stuff that you were making in the second half of Q3. So we will see that fixed overhead absorption benefit in Q4. There are some one timers in here that are helping the middle of the P&L. I would be candid and tell you that in this environment customers are relaxing, some of the fines are related to service. Because they just want products. That is a onetime benefit, I would say certainly obsolescence. We are able to sell through everything. So if we had some things that were aging that might have aged out before they are being sold to our obsolescence is down a…

Thank you very much for the detail.

Thank you. We now take our next question form Bill Chappell from SunTrust.

Hi, it is actually [Indiscernible] on for Bill. Thanks for taking the questions. Hope everyone staying well. Just had a quick one on the European business. You guys noted that you saw some early trends, kind of prepare you saw in the U.S. starting early in Europe. I was wondering if you've seeing anything as part of Europe starts to come out of there, social lockdown restrictions. Any early reads on shipping trends back to food service business. Anything on consumers destock that you may be able to use as you look to the U.S. business. Thank you.

Yes, so it is early that like us kind of sticking and telling the water here to open society. They are doing the same there. But what's interesting about Europe is it is so many different countries with so many different stances on this thing. But where they are opening what we are seeing is they are doing gradually. We are seeing consumers still have fear of going out in public. So just because the restaurant opens doesn't mean all of a sudden, everybody's walking to the restaurant. I think we are seeing that people want to get outside. So whether it is the beaches, whether it is in the mountains whether it is park. But first step is for people just to get comfortable leaving their homes, but they are still eating in their homes. It is not like a flock factor old behaviors and those eating occasions has rapidly migrated away from the home point. I think with regard to opening offices. We see fits and starts they open. They can they can figure out social distancing, they closed for a week, they try and revamp and adjust. So I think it is a trial and error process. I think everybody's doing it slowly. I think you are going to see the same thing here when I see and hear some states in the U.S. are opening malls and movie theaters and like. I have a feeling that they will end up needing to take a step back if they get too aggressive there. Because there's still fear of catching the virus and there's a lot to be figured out in terms of social distancing. And I think consumer psyche has changed. It is changed in Europe, it is changed here. And so I think it is going to be kind of a slow steady progression back to whatever the new normal is. The other thing I would say that I think is also interesting here is as you know, we have got a huge UK business. The UK is behind us, and Europe. Whereas, Austria and Germany and much of Europe is ahead of us. So, we have got a pretty big business in the UK and they are in lockdown. They have got ways to go. They got 30,000 deaths. They are in the midst of trying to bend the curve where we have bent the curve. So I think it will be a little bit slower returned to normal in the UK.

Okay, we now take the next question from Rebecca Scheuneman from Morningstar.

Good morning. Thank you for the question. So first of all, I'd love to get a sense of how much the pantry stacking contributed to the quarter's growth. Can you just share with us where growth was tracking before mid-March before the surge began?

Yes. So as we don't give over a very specific guidance on the top-line. But what I did say in my opening remarks were the Get Bigger brands we are growing in high-single digits in the first two and half months of the quarter before this happened. And we ended up in the low double digits afterwards. So you can put some math to that and get a general sense of how much the virus improves the Get Bigger brands. And we saw a similar trend on the Get Better brands. So the last three weeks of the quarter certainly added some volumes to what was already a business that was moving in the right direction. And you will remember on the last earnings call, we were very clear that we were going to end the trend on the Get Bigger brands and we are going to have a robust quarter and tracking in high-single digit growth. So we were doing that. In the case of Europe, again more of a mission mixed bag in some places like fruit, we saw a huge drop in demand. And in other places like private label, we saw an increase in demand. So it is a little bit more of a mixed bag there. I would say there was in aggregate almost no benefit in total in Europe because some were favorable and some were unfavorable, but here it was definitely a few hundred basis points of improvement on the top-line. What I would add though, as we go into April, one thing that is important to note consumption was ahead of shipments in March. And so we have an added benefit in fourth quarter of the shipments catching up to consumption, because there's demand surge was so massive in such a short period of time when that pantry loading behavior happened that, retailers couldn't keep product on the shelves. And we tend to have a little bit longer supply chain because much of our volume goes through third-party distributors. So April is a robot month. We are off to a good start in the quarter and our consumption continues to be steady at a much higher level than it was before the virus.

Okay, great. Thank you. And my second question is that obviously this current environment provides a great opportunity to increase trial. And I realized this early but do you have any initial repeat purchase data or anything to suggest that some of this benefits will be lasting.

Yes, it is too early to give you a repeat data. Our purchase cycles tend to be 60-days 90-days in the case of something like spectrum oil it could be six months between purchases. So it is too early to tell. What I would tell you as we have seen the most robust increase in trial on snacks on cheese has been exceptional trial on our oils business spectrum of soup business. Imagine soup. And so it is early. I mean we take something like soup were coming out of the cold weather. So the repeat cycle will be very long in the summer. But we don't have the data yet. It is just too fast for repeat purchases to be evident at this point.

Okay, thank you so much.

Thank you. It looks like there are no further questions at this time. So I would like to turn the call over back to you.

Yes. Let me just end by, again thanking all of the employees here for their hard work. This has been quite successful. I think a crisis is a good way to assess the quality of the organization and its ability to respond. We are very proud of what we have been able to accomplish. I'm very optimistic about the future. We are well positioned we are playing offense. We are thinking ahead versus reacting. And being very proactive. So I think the future is very bright. And I appreciate everybody's support. And we will talk to you later. Thank you all.

Thank you. This does concludes today's conference call. Thanks for your participation. You may now disconnect your lines.