Hain Celestial Group, Inc. — Q2 FY2023 Form 10-Q
Business context and period: The company markets organic and natural food, beverage and personal-care products in more than 75 countries, through North America and International segments. This unaudited report covers the quarter and six months ended December 31, 2022; comparisons are to the periods ended December 31, 2021 unless noted.
Financial performance
| Metric | Q2 FY2023 | Six months FY2023 |
|---|---|---|
| Net sales | $454.2 million, down 4.8% | $893.6 million, down 4.1% |
| Gross profit / margin | $103.9 million / 22.9% (prior: 24.6%) | $198.2 million / 22.2% (prior: 23.9%) |
| Operating income / margin | $27.4 million / 6.0% (prior: $32.0 million / 6.7%) | $43.2 million / 4.8% (prior: $57.6 million / 6.2%) |
| Net income | $11.0 million; diluted EPS $0.12 (prior: $30.9 million; $0.33) | $17.9 million; diluted EPS $0.20 (prior: $50.3 million; $0.52) |
| Adjusted EBITDA (non-GAAP) | $49.8 million, down 15.9% | $85.8 million, down 19.5% |
| Cash from operations | Six-month outflow of $2.7 million (prior: $68.0 million inflow); operating free cash flow, a non-GAAP measure, was negative $16.7 million (prior: positive $40.0 million). |
Balance sheet and liquidity: At December 31, 2022, cash was $43.4 million, total debt was $878.4 million, and working capital was $357.4 million. Debt declined $10.2 million from June 30, 2022. The credit agreement had $206.2 million of availability, subject to covenant compliance; the company reported compliance with all covenants. Borrowings carried a 5.59% weighted-average interest rate. The credit facilities mature December 22, 2026.
Changes and management commentary
- Reported sales were pressured by currency translation and portfolio changes. Excluding foreign exchange, acquisitions, divestitures and discontinued brands, sales declined 2.4% in Q2 and 1.7% for the six months.
- North America sales rose 2.7% in Q2 and 5.6% for the six months as reported; on the company’s adjusted constant-currency basis, growth was 0.7% for the six months. Pricing and productivity supported segment operating income.
- International sales fell 14.9% in Q2 and 17.5% for the six months as reported; adjusted constant-currency declines were 3.2% and 4.8%, respectively. Lower European and UK sales, energy and supply-chain costs, unfavorable mix and manufacturing under-absorption weighed on results.
- Higher interest rates and debt drove financing expense up to $10.8 million in Q2 from $2.6 million, and to $18.5 million for the six months from $4.4 million. Last year’s comparison also included an $8.7 million gain on sale of undeveloped land.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or other quantitative full-year guidance. Management expects elevated input costs to continue, with pricing actions expected to partly mitigate them; higher interest expense is also expected to continue. Management says supply-chain disruption has largely eased, but further disruption remains possible.
- Inflation, rising rates, consumer shifts toward lower-priced products (particularly in Europe), the Russia-Ukraine war, foreign exchange, supply availability and customer-order disruptions are identified as business pressures. Some supply constraints have affected baby-food formula and pouches.
- The company sold the Westbrae Natural brand in December for $7.5 million cash and recognized a $3.4 million pre-tax gain, as part of portfolio simplification. It recorded a $0.3 million impairment on a US facility held for sale. A lease modification generated a $3.4 million gain.
- CEO Mark Schiller transitioned out effective December 31, 2022; Wendy Davidson became CEO on January 1, 2023. Schiller’s severance was $4.7 million, with related costs recognized in Q2. In February 2023, the company eliminated the COO position; the filing states the former COO is entitled to contractual severance, but does not provide a clear amount.
- Earth’s Best baby-food heavy-metals litigation includes consumer class actions, personal-injury suits and a New Mexico enforcement action; the company denies the allegations. A securities class action is also pending. No liability was recorded for the disclosed matters because the company said a loss was not probable and reasonably estimable at period-end; adverse outcomes could nonetheless result in substantial costs or damages.
Important facts for investors to verify
- Whether pricing and productivity can offset inflation and restore gross margins, particularly in International.
- Whether negative operating and free cash flow, elevated inventory and receivables, and variable-rate debt affect liquidity and covenant headroom.
- Progress and outcomes in baby-food and securities litigation, including any future accruals, settlements or uninsured costs.
- Whether the new CEO and management restructuring change strategy, operating performance or cost expectations.
- How much reported sales movement reflects underlying demand versus currency, portfolio changes and customer inventory adjustments; also review the company’s non-GAAP reconciliations and exclusions.