Fresh into the chief executive role at Hain Celestial, Mark Schiller has this week outlined his business strategy for the US-based food manufacturer, which on the one hand incorporates elements from his predecessor but on the other contains new initiatives to get the listed business growing at a sustainable pace.
New York-based Hain reported a decline in first-half net sales on Thursday (7 February), along with a loss in bottom-line earnings and shareholder returns, results that Schiller described as “truly disappointing” and a performance investors took negatively by selling the stock down by more than 9% on the day.
The Nasdaq-listed firm also cut its full-year guidance, suggesting Schiller has his work cut out to achieve targeted cost-savings under Project Terra 2020, an initiative started by his predecessor and company founder Irwin Simon, the main thrust of which is to eliminate unprofitable SKUs from an overly-large portfolio.
Having only filled the CEO role on 5 November, Schiller is already stamping his mark on the business with a realigned focus on profitable growth at the expense of purely honing in on volume-driven gains. He is also embarking on what he called a “new approach”, translating to a smaller company with fewer SKUs and higher margins and profits.
“Going forward, we will address the long tail of unprofitable SKUs,” Schiller told investors and analysts on a follow-up earnings call on Thursday. “That’s a fundamentally different approach for Hain. In the past, we added tremendous complexity and drained profit in pursuit of growth at any cost. Going forward, we will be smaller, less complex and more efficient, resulting in higher margins and profits.”
To that end, he is whittling down Hain’s portfolio of brands into four categories described as “mainstream growth, sustainable contributors, incubation, and profit maximisation”. And Schiller is also implementing a “new strategic plan focused on simplification, capability building, cost reduction and mainstream growth”.
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He added: “These core four strategies will make Hain a much more disciplined and successful company, and one that will generate meaningful financial improvements going forward. What we spent a lot of time doing, and what I’ve done in the past in a similar situation, is identifying the roles of the brand; which ones have the most growth potential, which ones have the most profit potential, which ones should be managed for profit, and which ones do we need to incubate to better understand their potential and resourcing them appropriately so that we get the right kind of return?”
However, Schiller said the reduction in the SKU count is taking longer than the company expected, although inroads have still been made into doing that and have continued from where the former CEO Simon left off. And he envisages further progress in the second half of the year as the CEO’s new-found initiatives under Project Terra savings start to materialise.
Alexia Howard, a consumer goods industry analyst at Sanford Bernstein, was equally disappointed with the results and questioned which factors will have a bigger impact on the company going forward, whether it be positive in terms of SKUs, or negative from a competition perspective.
“The question from here is whether and how quickly the company can return to year-to-year sales and profit growth,” she wrote in a follow-up note. “If there is an opportunity to focus and simplify the portfolio down to a core set of ‘in demand’ brands, while shedding unprofitable brands and SKUs, the turnaround could be quick. On the other hand, if increased competition in the health and wellness space continues to pressure pricing and profit on these brands, there could be further downside.”
Hain’s finance chief James Langrock said US$21m in cost savings were realised during the second quarter. However, while he sees the trend continuing over the coming quarters, annual savings are expected to be at the lower end of the previously anticipated $90-$115m, he said, as “certain savings are taking longer to materialise, based on the complexities in the US business”.
The US is Hain’s largest market ahead of the UK but has witnessed a subdued performance of late and it was no different based on the current financials. That said, all three of the company’s three geographical reporting regions saw sales decline in the first half.
Net sales in the US fell 5.8% to $503m in the six months to 31 December, representing just under half of the group total of $1.14bn, which in itself was down 5% from a year earlier. The UK witnessed a 3.6% drop to $443m, while the rest of the world fared even worse, with sales decreasing a tad more than 6% to $197m.
“We’re not pleased with these results and are working systematically to restore profitable growth in the US, while continuing our profit momentum in our international businesses,” Schiller said. “While the transformation has begun, there’s a lot of work ahead.”
Schiller sought to explain the rationale behind reducing the number of SKUs, around 200 of which are classed as “core” and make up a “huge percentage” of sales, and yet “we only have distribution on those SKUs in less than 50% of the ACV” (all-commodity volume).
He said that was a result of launching too many lines in pursuit of growth at “any cost”, and in turn disregarding “good SKU’s for lower velocity and lower margin SKUs”.
“So what we need to do is go back and unwind some of those decisions and put more focus against that core set of SKUs that will really drive both velocity and profit for us, and for the retailer,” the CEO said.
He continued: “With regard to what’s left going forward, I would tell you, we still have somewhere around 35% of our SKUs sitting in the bottom quartile of the category on velocity. So obviously 25% would be fair share, we’ve got maybe 35%. So we’ve got more in the tail that needs to be rationalised.”
One way of reducing the portfolio count is to offload certain businesses, which Hain did by announcing the planned sale of its Pure Protein division in the US, which produces chicken and turkey and includes the brands Plainville Farms and FreeBird Chicken.
CFO Langrock said the disposal should finally materialise in the “next few months” having taken longer than originally expected, with “active buyers and some preliminary term sheets” lined up.
And getting that division finally off its books may help Hain revitalise earnings after reporting a first-half net loss of almost $104m, compared to income of $67m for the corresponding period a year earlier.
Meanwhile, adjusted operating income fell 3.4% to $50.7m, while adjusted EBITDA slumped to $78.9m from $121m.
Consequently, Hain expects its latest results to weigh on its full-year numbers and with some significant declines across the earnings metrics from the previous 12 months.
Annual sales are seen in a range $2.32bn to $2.35bn, which would represent declines of around 4-6%. Adjusted EBITDA is likely to come in 22-28% lower than last year at $185-200m, while a bigger drop in adjusted earnings per share is forecast. EPS is expected at 60 to 70 US cents, down 40-48%.
Nevertheless, Schiller said Hain is starting to “undo poor uneconomic decisions and build-in operational discipline”, but it looks like it may take time for him to get a true handle on the business, having only been in the job for so short a time. More insight might be given when the company holds its investor day on 27 February.
“As we take out uneconomic SKUs, we’ll see margins and profit grow as well, but it will come at the expense of some continued rationalisation on the top-line for the foreseeable future,” he said. “We’re creating an operating model focused on cross-functional decision-making that maximises financial returns.”