Hain Celestial has lowered its full-year organic growth guidance due to ongoing struggles in the US company's baby-formula segment.
The downgrade to 1%, from a range of 2% to 4% - revealed in its second-quarter results - also comes amid continuing efforts by president and CEO Wendy Davidson to cut "lower margin" SKUs under her Hain Reimagine transformation initiative.
Hain Celestial's North America sales fell 5.2% to $267.7m compared to the prior year, primarily due to lower sales in baby formula “as a result of continued industry-wide challenges in organic formula supply”. However, despite the decline, the company noted the improvement from the 9.8% drop in the opening quarter.
Davidson described the baby-formula impact as “short-term” amid flat second-quarter group sales of $454.1m, compared to a first-quarter decrease of 3.3%.
“With formula supply recovery, distribution gains and innovation and channel expansion and continued momentum in our international regions, we have many reasons to believe in our outlook for a pivot to growth in the back half, in spite of the challenging macroeconomic environment,” Davidson said.
Snacks, including Garden Veggie and Terra brands, also contributed to the sales decline in North America as Hain Celestial “shifted our promotional strategy and optimised our channel mix for improved trade efficiency and profitability”.
Hain Celestial also lowered its guidance for adjusted EBITDA to $155-160m, from $155-165m, and cut the free cash flow outlook to $40-45m, compared to $50-55m.
The baby and kids sector, however, did see “strength” in baby food and purees, particularly in toddler snacks under Hain Celestial’s Ella’s Kitchen brand in the UK and Earth’s Best in the US.
The sector is one of five core focus areas introduced by Davidson under her Reimagined 2027 strategy for the branded and private-label business, along with snacks and meal-prep, which includes meat-free, beverages and personal-care products.
Hain Celestial’s key focus markets are now based around the US, Canada, the UK, Ireland and Europe.
“Hain Reimagined" is in its “foundational year”, according to Davidson, and we can expect to see “incremental investments in capabilities for the build pillar in the back half of the year to support accelerated growth”.
She continued: “Because we over-delivered EBITDA in quarter one and quarter two, it puts us in a position to both invest behind some of the brand building that we wanted to do.
"It allows us to accelerate the adding of some of the organisational capabilities that we want, think headcount in revenue growth management and in away-from-home on the commercial sales side of our business, but it also allows us to accelerate some of those simplification things in SKU and footprint that we may have planned in fiscal 2025 because we didn't think we'd be in a position to be able to do it.
“We're in a financial position to be able to do it in fiscal 2024. So, we're going to pull those forward into quarter four.”
Lee Boyce, CFO at Hain Celestial, said the company is “stepping up investment" in Q3, and that will drive a "sequential improvement in volume”.
Jon Andersen, an analyst at William Blair, wrote in a research note that he sees the results as "early signs of progress” and the initiatives taken so far “point to an inflection to positive organic sales and EBITDA growth in the second half of the fiscal year".
He added: “Business transformations are rarely linear and take time to accomplish. We believe that Hain is on the right track with its Reimagined strategy. Still, fiscal 2024 is the foundational year of this strategy and some puts and takes are to be expected.
"Nothing we saw in second-quarter results or the commentary on the conference call called into question the company’s ability to achieve its multi-year financial objectives.”
However, John Baumgartner at Japanese investment bank Mizuho Securities wrote that “the guidance reduction is disappointing as Hain cuts more ‘lower-margin’ stock-keeping units despite years of portfolio rationalisation that investors hoped had turned the corner.”
Hain Celestial’s shares fell as the company reported the results on Wednesday (7 February) in the wake of the growth downgrade and amid a reported second-quarter net loss of $13.5m, turning from a positive $11m in the prior year quarter.
Adjusted EBITDA fell to $47.1m from $49.8m, while the margin took a 60 basis-point hit to 10.4%.
