Here's How Hain Celestial Group Inc. Returned to Growth

Hain Celestial Group Inc. (NASDAQ: HAIN) released its fiscal 2018 first-quarter results on Nov. 7, reporting 4% sales growth and solid increases in gross margin, operating income, and earnings. In general, the company posted improvements in just about every important metric.

And while the quarter didn't match the double-digit growth the company has delivered in the past, and earnings are still well below 2015's peak levels, it offered some evidence that the restructuring efforts under the company's Project Terra initiative could be paying off. Let's take a closer look at the results and unpack what management says to expect going forward.

Here's what drove top- and bottom-line improvements

Hain's first-quarter results:

Metric Q1 2018 Q1 2017 Year-Over-Year Change
Revenue  $708.3 million  $681.5 million 3.9%
Net income  $19.8 million  $8.6 million 130.2%
Earnings per share  $0.19  $0.08 137.5%
Operating income  $31.5 million  $13.8 million 128.3%
Gross margin 18.6% 16.1%


The first notable thing was Hain returned to revenue growth in the quarter, after reporting a 2% sales decline in the sequential quarter and a 1% drop in revenue for fiscal 2017 (which ended in June). Two things that took bites out of revenues last year include a $60 million charge against sales related to the company's inventory realignment, and the change in foreign currency exchange rates, which reduced reported sales by $124.3 million. Combined, these two items reduced last year's GAAP revenue by 6.5% -- and help explain the company's return to sales growth in Q1. In the just-completed first quarter, foreign exchange only had a $4.14 million negative impact, less than a 1% reduction in reported sales.

Net income and operating income also came in sharply higher versus last year. The biggest driver behind the income improvements was a boost in margins. As the chart above shows, gross margin increased sharply, lifting gross profits by $21.7 million, 20% higher than last year's fourth quarter.

Hain's operating expenses increased $4 million, up 4.2% year over year. In last year's first quarter, Hain had $6 million in expenses, related to an accounting review that covered several years' results, that didn't recur. However, selling, general, and administrative expenses increased $5.8 million, and $5.8 million in acquisition, restructuring, and integration-related charges and expenses more than offset the nonrecurring items from last year.

This $5.8 million in expenses, however, is partly tied to the company's Project Terra initiative to lower costs, improve efficiencies, and drive sales growth. Management credited the project with much of the profit improvement. On the earnings call, founder and CEO Irwin Simon said Project Terra delivered over $16 million in savings in the quarter. After increasing marketing investments and higher freight and commodity costs were factored in, $7 million of that total went to the bottom line, according to Simon. That means 35% of the quarter's net income was directly related to Project Terra improvements.

Looking ahead

While Project Terra will continue to result in higher expenses for Hain over the next couple of quarters, it's already starting to deliver incremental cash flow growth through margin improvement. As promised, management is putting a portion of that cash to work to grow sales. This includes reducing the reliance on outside brokers and increasing the company's inside sales force; the hiring of a senior vice president of digital engagement and e-commerce, Julie Bowerman, to oversee the company's digital strategy; and the addition of Steve Liedtke as chief information officer.

It's still early in the process and Hain has a long way to go to reach the goals management has set for the full fiscal year. But apparently enough progress has been made for Simon and his team to remain confident the company's execution will only improve. Full-year guidance remained unchanged from last quarter, with expectations of net sales between $2.967 billion and $3.036 billion, a range 4% to 6% higher than 2017's result; adjusted EBITDA of $350 million to $375 million, up 27% to 36% year over year; and adjusted earnings per share of $1.69 to $1.80, or 34% to 48% higher than last year.

The company delivered $708 million in sales, adjusted EBITDA of $59.5 million, and adjusted EPS of $0.23 per share in the first quarter, so it has a long way to go to reach its goals. Still, its biggest sales quarters are ahead of it, and management says the benefits of Project Terra will accelerate as the year progresses. That needs to happen for Hain to reach management's guidance this year, but the early results offer some evidence that progress is being made.

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Jason Hall owns shares of Hain Celestial. The Motley Fool owns shares of and recommends Hain Celestial. The Motley Fool has a disclosure policy.