Finding a successor to Hain Celestial founder and chief executive Irwin Simon could prove tricky in light of the pressure from activist investor Engaged Capital to sell the US business. But what might the options be for an incoming CEO faced with a product portfolio bloated by acquisitions and with ‘Big Food’ companies and retailers fast encroaching on its organic roots? Simon Harvey investigates.

The operating landscape has changed a bit since Irwin Simon founded Hain Celestial 25 years ago to fill what he saw as a gap in the US market for organic and better-for-you foods.

While Simon’s ideals were perhaps deemed as visionary back in 1993, other food industry players have slowly caught up as consumer appetite for more healthy-eating options ballooned. And ‘Big Food’ manufacturers and retailers are increasingly embracing the natural food trend, either with their own innovative products or by snapping up smaller start-up enterprises, with the added competition ultimately putting pressure on prices and margins across the category.

And New York-based Hain is now reportedly facing pressure from US activist investor Engaged Capital to sell-off the Nasdaq-listed firm to increase shareholder value. Or at the very least, a piecemeal disposal of a product portfolio fattened by acquisitions and numbering in excess of 57 brands, including Earth’s Best baby food and Terra snacks in the US, as well as from deals done across the pond such as Tilda rice and Linda McCartney veggie foods.

So it may not have surprised some market watchers too much when Simon announced late in June he plans to step down as Hain’s president and CEO, with a search for his successor already underway. He will become a non-executive chairman of the board for a transitional period once a replacement has been appointed.

“When I founded the company 25 years ago, one of my goals was to educate and change the way the world eats and lives through a relentless focus on providing organic, natural and better-for-you products to consumers,” Simon commented in a statement announcing his departure. “I firmly believe that some of our greatest opportunities lie ahead, and I am confident now is the right time for our next generation of leadership.”

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Zain Akbari, a consumer packaged goods analyst at Morningstar, believes streamlining the portfolio and building brand recognition will be key for Hain’s as-yet-unnamed incoming CEO in light of the limited opportunities for further acquisitions, given the company is still struggling to absorb all of its brands, while at the same time finding itself immersed in increased competition in the marketplace.

However, Akbari says Hain will have to also have to find time with investing in the brands that do remain.

“The competitive dynamic is much different for Hain today than it was five years ago”

“The competitive dynamic is much different for Hain today than it was five years ago, and it is getting harder for a firm that does not have a strong innovation pipeline or well-established brands to fend off its rivals,” Akbari tells just-food. “Hain’s SKU rationalisation, optimisation efforts, and attempts to streamline the portfolio are critical to freeing up resources, but the next management team will have to balance those initiatives with brand-building investment for the remaining portfolio, particularly as Hain can no longer rely on effectively buying an R&D pipeline through small-scale acquisitions economically.”

But how much of a free hand will the incoming chief executive be given to pursue his or her own agenda and map out an independent course with Engaged Capital watching closely from the sidelines? Or will the incumbent CEO be tasked with seeing through the sale of the business, for which speculation has batted around markets for at least a year? Swiss food giant Nestle and private-equity funds have been touted as potential suitors.

Alternatively, the new chief could stay the course with the Project Terra 2020 strategic review set in motion by Simon with the goal of cutting costs and reducing the SKU count. But such a strategy comes with the risk of ensuring sales revenues and profits are maintained, which perhaps suggests a piecemeal sell-off might be the preferred option.

Victor Martino, a California-based food industry consultant, says the new CEO should continue with the rationalisation programme of Hain’s over-sized product portfolio and sell or discontinue poor-performing brands, while at the same time targeting “new wave” brands.

“A family of brands like Hain is less relevant today because there are so many emerging brands competing in the same space”

“In terms of Big Food, Hain is actually the largest by total sales volume in natural-organic,” Martino says. “I see the challenge being from the numerous emerging brands in natural-organic. A family of brands like Hain is less relevant today because there are so many emerging brands competing in the same space.”

California-based Engaged Capital snapped up a 10% share in Hain last summer and then tightened its grip through a “mutual cooperation” agreement in September, which saw the appointment of six new directors including Glenn Welling, the hedge fund’s founder and CEO.

Talk of a potential sale of the business refuses to go away and the announcement of Simon’s departure is rekindling such murmurings. In January, The New York Post reported sources as saying Hain was struggling to find a buyer because it owns too many brands, none of which were said to be big enough to attract a potential suitor.

While it is unclear if Simon is, or was, a willing party to a sale, he came out to say in May that Hain was undertaking “strategic brand-building improvements” in its top 500 SKU categories. Those rationalisation comments might be interpreted as a means to soothe the concerns of any prospective buyers and open the doors to a possible buyout.

But Morningstar’s Akbari says if there was a potential suitor hanging in the wings then they would have emerged by now, leaving Hain’s new CEO with the objective of continuing to dissect the business, with perhaps a final goal of attracting a buyer once the portfolio has been downsized and the company shows signs of a turnaround.

“The next leader of the firm will speak from the same playbook as Engaged Capital”

Akbari adds: “I think a sale will remain something that the company tries to accomplish. Engaged Capital will, I believe, be intimately involved in selecting a successor, and so at the end of the day I think the next leader of the firm will speak from the same playbook as the fund.”

Andrew Lazar, a New York-based senior packaged foods analyst at Barclays, has a balanced view on what Hain’s future might hold but does not think Simon’s departure is necessarily the catalyst for a full-blown sale of the business.

“Given leadership changes can often run parallel to broader strategic thought processes, we can understand how some investors might view this news as indication that Hain may be particularly open to a sale of the entire company,” Lazar said in a June commentary.

“To us, however, Hain has long been open to alternative paths to value creation. That is, even though CEO Simon was the founder, we do not believe he would have been an impediment to a sale process – particularly given the presence of an activist investor on the board. That said, we recognise that today’s news [Simon’s exit] could perhaps bring buyers back to the fore.”

With Hain’s share price down more than 27% this year, some potential investors might consider the company an attractive valuation prospect, while others may view the magnitude of the decline from the perspective of a company in trouble.

The latter might be borne out in Hain’s latest set of financial results which were once again hit by a slowdown in the US, its largest market ahead of the UK. But still, annual sales have been relatively stable on a monetary basis, hovering around the US$2.8bn mark for the past three years.

Morningstar’s Akbari says Hain’s markets in the UK and Europe are in a better position than the US because its brands are “somewhat more established”, citing baby food as an example. However, that did not stop the company’s UK subsidiary from selling a New Covent Garden Soup Co. production facility in June.

“I’d argue that reviving US sales should require extracting savings through their streamlining and optimisation efforts for reinvestment into brand building, with the SKU reduction and sales of non-core assets hopefully allowing for a much more intense concentration of resources on the company’s most attractive products,” Akbari says. “We do not believe that Hain’s brands in the US are sufficiently strong as to constitute a durable competitive advantage, and so the need to build toward that over time should be a priority.”

Delving into the numbers, sales dropped 1% to $2.85bn in the year to 30 June 2017, sliding from an annual growth rate of almost 11% in the previous 12 months and increases of more than 20% in 2015 and 2014.

However, net income surged 42% to $67m, after declining 71% the previous year. Even so, bottom-line earnings were way off the pace of 2015 and 2014, when they were well over $100m.

And it looks like 2018 will be another difficult year if Hain’s figures from the first three quarters are any measure of what is to come in the final results. The US market continued to be weak in the third and second quarters as sales dropped 2.9% and 3%, respectively.

According to food industry consultant Martino, the new chief executive should better embrace the digital age and boost its presence in the direct-to-consumer market through its key brands. However, the key challenge will be keeping an edge over competitors in the evolving natural and organic sphere.

“The chief challenge for organic CPG in general is maintaining growth in the 6% to 10% annual range,” says Martino. “This growth trend over the last decade has helped raise the tide for all brands in the natural and organic space.”

That said, Hain is in the process of disposing of its Pure Protein division, which produces chicken and turkey and includes the brands Plainville Farms and FreeBird Chicken. And Morningstar’s Akbari sees the Tilda rice brand as another potential offload target to make the company a more attractive proposition.

“The sale of the protein business should help – there are very few packaged food firms out there that a) would be comfortable with owning a small meat processor, and b) would be willing to take on a turnaround project like Hain,” the Morningstar analyst adds. “While the stock price drop could make the firm more attractive, I think that Hain will first have to exit the protein unit and further simplify the business in order to make it a more natural fit with a potential acquirer.”

With that in mind, Simon lowered the 2018 sales guidance in May to a range of $2.43bn to $2.5bn (from $2.97-$3.04bn including Hain Pure Protein), while the outlook for adjusted EBITDA was cut to $250-$260m ($340-$355m).

Barclays’ Lazar believes the time is ripe for Hain to adopt a more “operational” approach, particularly given the fast-moving trends in the food industry and the ability to adapt to the developing landscape.

“On timing, frankly, it is never a good time for a CEO announcement of this nature,” Lazar says. “While we recognise the vision needed and heavy-lifting done to build a $3bn health and wellness-oriented portfolio, at this stage, we can understand how a fresh set of eyes and deep operational skill set could be viewed as a positive by investors in order to take Hain to the next level.”