Good day, and welcome to the Hain Celestial Third Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Casey Turner, ICR. Please go ahead..

Thank you. Good morning, and thank you for joining us on Hain Celestial's Third Quarter Fiscal Year 2020 Earnings Conference Call. On the call today are Mark Schiller, President and Chief Executive Officer; and Javier Idrovo, Executive Vice President and Chief Financial Officer.

During the course of this call, management may make Forward-Looking Statements within the meaning of the federal securities laws. These include expectations and assumptions regarding the Company's future operations and financial performance, including expectations and assumptions related to the impact of the COVID-19 pandemic.

These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements.

Please refer to Hain Celestial's annual report on Form 10-K and quarterly report on Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission and its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Please note management's remarks today will focus on non-GAAP or adjusted financial measures. A reconciliation of GAAP results to non-GAAP financial measures is available in the earnings release.

As a reminder, beginning in Q1 of this year, the Company changed its segment reporting to focus on North America, International and Corporate, which had previously been reported as the U.S., UK and Rest of World segments.

The Company has also prepared a few presentation slides and additional supplemental financial information, which are put on Hain Celestial's website under the Investor Relations heading. This call is being webcast, and an archive of it will also be available on the website.

I would also like to note that we are conducting our call today from our respective remote locations. As such there may be brief delay to cross talks or other minor technical issues during the call. We thank you in advance for your patience and understanding. And with that , I would like to turn the call over Mark Schiller..

Thank you, Katie. And good morning everyone. Let me start by saying these are very difficult and unprecedented times. As we all learn to adapt to the Coronavirus. My thoughts and prayers go out to those who have been negatively impacted by this pandemic. And I wish everyone safety and good health as we move toward a new normal.

I appreciate that we are working in an essential industry and providing people around the world with much needed healthy products that they rely on to navigate this crisis. And I want to thank all our employees who have continued to come to work every day during this turbulent time.

They have overcome numerous obstacles to produce and ship these products to stores every day and they are doing a fantastic job.

On today's call, as I talk about our performance in Q3 and guidance raised for the full-year, I will give you details on the COVID pandemic, including how it has impacted our business, how we prepared for it, how we created new opportunities, and how we are setting ourselves up for the future. Let me start with our results and outlook.

I'm proud to announce that after two strong quarters with significant profit growth, we did it again in the third quarter, with 24% year-over-year growth in adjusted EBITDA, and an EBITDA margin, which was the highest since fiscal 2018.

In fact, we delivered against all the key metrics we discussed on our last earnings call gross margin dollars, gross margin percentage, as well as adjusted EBITDA dollars and margin were all up significantly. And while we didn't provide specific guidance on the top-line, Q3 was the first time we delivered net sales growth since fiscal 2018.

Yes, we benefited from the current pandemic. But it is important to note that we were on-track to deliver promised improvements based on our performance in the first two and a half months of the quarter before the pandemic really changed behavior.

This is further evidence that our strategy is working and we continue to deliver against our goals and guidance. Further, we exited the third quarter with significant momentum.

And as we have forecast going here, we continue to expect growth versus year-ago in gross margin dollars in percentage, and adjusted EBITDA margin and dollars in the fourth quarter as well. As a result, I'm pleased to inform you that we have raised our earnings and EPS guidance for the year considerably.

Now let me provide some color on both for North American and international businesses. Starting with North America, you will recall we had embarked on a transformational journey to turn around our performance and have made significant progress to improve our margins and restore profitability.

[Indiscernible] Continued in Q3 with gross margin improving over 18% and adjusted EBITDA margin improving over 36% compared with last year. Importantly, for the first time in the last 10 quarters, our top-line in North America also grew. You are probably wondering what the impact of the virus is on these results.

As I stated earlier, while our performance benefit is late in March from COVID-19, we were delivering home Improved metrics on top-line gross margin and adjusted EBITDA before the virus impacted us late in the quarter. That said there were some positives and negatives impacting the P&L driven by the virus.

On the positive side, there were more in-home eating occasions and pantry loading trips in March, which drove increased sales. We were able to send out trucks with more products on each thereby reducing our distribution costs. SG&A costs were lower due to less travel and unfilled open positions.

On the negative side, we incurred increased costs to keep our employees safe and our supply chain running like frontline crisis pay, extra sanitation and expedited freight.

In terms of categories and brands, we saw similar improvements in both the get bigger and get better groupings of brands, but within them, individual categories vary significantly. Of our get bigger portfolio, tea and the Celestial brands are the biggest improvement.

Tea is often used when one in six for a relaxing mini moment on a hectic day or for winding down at night, so it is well positioned for growth in these turbulent times. Right now the category and brand continue to grow about 40% year-over-year every week.

Hand sanitizers, which is a relatively small part of our personal care portfolio also benefited greatly in this environment with sales doubling, we have added capacity to keep up with growing demand. Outside of soaps and sanitizers, personal care categories have seen a small decrease in sales overall.

As we discussed our last earnings call, we ran a big hair care program early in the quarter that created significant growth. We were also poised to have a record sun care season but it is off to a slow start, given the consumers are isolating and not yet traveling.

The snacks categories did well in March and April, but had stabilized with low-single digit growth as many snacking occasions like parties and lunch boxes have gone away temporarily. And to get better portfolio baby food saw immediate significant stock options in March but baby food consumption is not expandable.

And as a result, orders have dropped considerably in April, as consumers used up what they bought. The remainder to Get Better brands which includes things like canned goods, almond butter, soup and salt have benefited from pantry loading and increased cooking from home. In almost every category we have seen our buying rate improved.

Alcohol penetration has also increased most significantly in tea, snacks hand sanitizer, and some center store categories like oil and canned goods. In terms of customers, we saw significant increase in big box retailers during the initial surge and our business at large grocery chain continues to show strong mid-single digit growth in April.

As consumers began isolating, we experienced a significant increase in e-commerce where we have been investing for many years and have significant sales. Our growth which peaked at over 100% each week in late March has settled back for around 50% growth per week versus year-ago.

We expect the e-commerce channel to continue to grow material and Hain is well positioned to lead here. In North America, we don't do much business and small format or food service. So our sales have mostly benefited from the pandemic and are expected to continue to grow modestly in Q4 when factoring out the businesses that we have accepted this year.

Let me give them a little more color on how they Get Bigger and Get Better segments performed within the quarter. On the Get Bigger brands we had guided to Q3 which start to show improvement in top-line trajectory in North America where we were focused on restoring growth. For the quarter our Get Bigger brands were more than 10%.

Again, it is important to note that our Get Bigger brands were growing high-single digits before the demand surge in March, which should gives you confidence that the improvement expected had in fact materialized before the crisis.

Adjustment EBITDA margins for the Get Bigger brands were over 14% something we have accomplished in five of the last six quarters. Those results are even more impressive given we increased our marketing investments by 120 basis points versus year-ago. On the Get Better brands and continue to focus on improved profitability.

I'm pleased to report that our EBITDA dollars and margin more than doubled versus year-ago in the quarter, despite the anticipated shrinking top line.

These profitability improvements and corresponding sales declines are the result of aggressive productivity initiatives, skew rationalization, reduction in low ROI spending, and a product redesign that we have been working on since Investor Day last year.

In our continued simplification journey we were also able to sell two low margin non strategic businesses within the quarter, Europe's Best and Casbah. In late last week after the quarter ended, we also sold our Rudis business.

These businesses collectively had about $30 million in sales and EBITDA of only about a $1 million, but they consumed a disproportionate share of management time and added supply chain complexity. In addition, we have also started shutting down several brands and lack scale and profitability.

These brands including the De Boles, Little Bear and Gluten Free Grocery had approximately collected annual revenue of $4 million in adjusted EBITDA to zero. Between the divested and discontinued brands, we have eliminated approximately 200 skews, 10 full manufactures, our only direct store delivery system and one manufacturing site.

This fits with our continuing plan to simplify the business and improve our margins and growth potential going forward. Turning to international we had a solid quarter with flat sales, expanding gross margin and double-digit EBITDA growth in constant currency.

While most of the trends we saw in North America are similar here, there are two important differences. One, we have a scale of fruit business that makes up approximately 20% of the international sales. It has a large foodservice component and those sales have dropped to almost zero in late March, and the trend continues in Q4.

In addition, while still supplying the grocery side of the business, we have significant stranded overhead and input costs that are further impacting profit. Excluding the fruit business, about 30% of our international sales are private label.

These businesses have done quite well as consumers who are concerned about their personal finances trade down for lower priced items. Given those two factors somewhat balancing out we are pleased that we delivered flat sales overall and strong margin expansion.

It is further evidence that we have solid businesses and strong management teams behind them. One other important point that I want to draw your attention to is how we manage excess capital in the quarter. On previous calls you will recall that we paid down debt to lower interest expense for the year.

In March when the stock market dropped markedly, we believe that our shares were significantly undervalued and consistent with our strategy. We utilize capital to buy back shares. We deployed approximately $60 million to acquire 2.4% of our outstanding shares at a price of about $23.60.

While that purchase had minimal impact on the average share count in the quarter, and you will see its impact on EPS in Q4 and beyond.

Given our strong results and outlook, let me spend a couple minutes explaining how we prepared for COVID-19 with the goal of giving you confidence that we are also well prepared for the future as this pandemic continues.

From the beginning, our leadership team had a focused agenda that one, take care of our employees and to ensure business continuity and continued success. With regards to our employees, we ensure that they were safe and could provide for their families.

We were early adopters of all recommended actions to prevent the spread of the disease, and in many cases adapted them before the government directed us to do so. We have also consistently met or exceeded all government guidelines for directly addressing those employees who can track the virus.

In addition to crisis pay for all frontline workers, we also recently established a program to help employees who suffered severe economic hardship during this crisis, with free financial grants from the Company to help ensure that they and their families are safe and have food on the table.

Our second priority was ensure that we kept the Company on track to deliver plan and meet consumer and customer needs. We learned early in the pandemic from our European business, that there would be supply disruptions. So we quickly focused on ensuring supplies skews that made up the majority of our sales and profits.

Where needed we ordered extra material, built inventory, created formula flexibility and begin qualifying secondary suppliers and co-manufactures. In our plants we added temporary labor quickly to create backup coverage and sanitized common areas continuously.

To meet surging demand, we have consolidated shipping orders to get more product on fewer trucks, resulting in service levels in the mid-90s and significantly reduced distribution cost. In short, we were well prepared to meet the rapid increase in demand and help ensure continued strong performance as the crisis progresses.

As the situation unfolded, we also created new opportunities to drive growth and set up the future. For example, we have a small Canadian hand sanitizer business that grew exponentially. We quickly added capacity to meet demand and expand into the United States further strengthening our relationship with key retailers.

While others have been cutting their marketing, we have been increasing ours in Q3 with new advertising on some brand, impact coupons to encourage repeat purchases from new triers and increase market research to set ourselves up for future success.

We also quickly developed scrappy innovation on some cooking brands to complement the strong pipeline on our Get Bigger brands. We are also partnering with customers in new ways to solve their issues and help them grow resulting in stronger relationships for the future.

As we look forward, our focus has shifted to the reopening of the economy and its quest for a new normal. While we anticipate some eating occasions will migrate back out of home as economies open, we are focusing on several important trends that will help us continue to grow.

These include e-commerce growth, where we have tremendous strengths and relationships, new triers for many of our new products, cash strapped consumer seeking better value, increased cooking at home, and new consumer sentiment and value.

As discussed on Investor Day, we will also continue to assess our portfolio and recategorize brands as appropriate. While the current environment has impacted our original plan for some projects requiring some adjustments.

Our overall strategy and its four pillars, simplification, capability, building, cost control and top-line acceleration remains intact now more than ever. We know we have much work left to do but even more new opportunities in front of us. Our future continues to be very bright.

With that, let me turn it over to Javier, who will give you more details on our financial performance..

Thank you, Mark. And good morning everyone. I would like to echo Mark's comments in thanking our employees who have worked tirelessly to help our Company navigate through these global health crisis. I am extremely proud to work at Hain. I will focus my discussion on our financial results from continuing operations.

The Company is presenting the results at Tilda and the Hain Pure Protein businesses within discontinued unit operations in the current and prior year period. Now on to the financials. Third quarter consolidated net sales increased 1% year-over-year to $553 million exceeding our expectations.

Foreign exchange impact on the quarter was a headwind of 100 basis points. Divestitures, and skew rationalizations were an incremental headwind of about 400 basis points. When adjusting for these factors net sales increased 6% versus the prior year period. This growth has a tailwind of the COVID-19 impact.

From a profit perspective as we had guided, Q3 delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and dollar expansion.

Specifically for the third quarter, we expanded our adjusted gross margin by 282 basis points, resulting in adjusted gross profit of $134 million, an increase of about 14% versus prior year. Supply chain cost reductions enabled by our productivity initiatives mainly drove improvements.

Currency impact on gross profit was a headwind of about $1 million. In terms of productivity and efficiency, we have made significant progress in the quarter as demonstrated by the meaningful improvement in gross margin. The initial North America skew rationalization project has been implemented and is benefiting current consolidated gross margin.

As retailers place greater focus on high velocity skews. We continue to evaluate our portfolio for further simplification to position ourselves for success in the current environment. In addition, distribution and warehousing costs as a percent of sales improved by about 50 basis points versus prior year.

The increasing volume allows the Company to ship for the truckloads leading to a reduction in distribution costs. SG&A as a percent of net sales was 16%, up from 15.2% in the prior year period.

This was largely driven by increased marketing spending of about 9% versus prior year and increased incentive compensation accruals to match our higher guidance. Adjusted EBITDA increased to $60.7 million compared to $49.1 million in the prior year period. This represents roughly a 24% increase versus prior year.

Currency impact on adjusted EBITDA was a headwind of about $1 million. Adjusted EBITDA margin over 11% representative improvement of 200 basis points year-over-year driven by gross margin improvements. We reported adjusted EPS of $0.28 based on an effective tax rate of 28.8%, compared to $0.19 with Q3 of last year, with an effective tax rate of 28.4%.

The higher tax rate was mainly driven by a higher guilty impact, than in the prior year period. Now to provide some detail on the individual reporting segments. Let's start with our North American business. Third quarter net sales increased 1.9% year-over-year to $320 million exceeding our expectations.

Foreign exchange impact on the quarter was minimal. Divestitures and skew rationalizations were an incremental headwind of about 700 basis points. When adjusting for these factors net sales increase about 9% versus the prior year period. This growth also had the tailwinds of the COVID-19 impacts.

From a profit perspective, Q3 delivered year-over-year adjusted gross margin and dollar expansion and adjusted EBITDA margin and/or extension.

Specifically for the third quarter, our North America business expanded adjusted gross margin by 350 basis points, resulting in adjusted gross profit of $84.5 million or an increase of about 18% versus the prior year.

This improvement was mostly driven by our productivity initiatives and efficiencies in our distribution system given the increased volumes that we experienced. Adjusted EBITDA increased to $42.9 million, compared to $31.5 million in the prior year period. This represents roughly a 36% increase versus prior year.

Currency impact and adjusted EBITDA was minimal. Adjusted EBITDA margin of 13.4% represented an improvement of 340 basis points year-over-year, driven by gross margin improvements. We are very pleased with the progress that our North America region has accomplished thus far, but we are not finished.

We have identified multiple opportunities to continue to improve our margin structure, and we plan to begin to execute one we return to more normal operating conditions.

Looking into the components of a North American portfolio, the Get Bigger brands experienced a growth in net sales of 12.7%.While COVID-19 was a clear tailwind, these brands were growing high single-digits before the mid-March as Mark stated earlier. This growth primarily came from several product lines.

Our personal care line driven by Alba and [One Step] (Ph), our Canadian hand sanitizer brand which we also introduced into U.S. in April under the Live Clean brand name. Our snacks product line vary by sensible portions, as well as our tea and yogurt lines.

The adjusted EBITDA margin for these brands improved 50 basis points versus prior year, yielding a margin of 14.8%. Get Better brands which are being managed primarily for profit, short of gross margin improvement of 480 basis points, and an EBITDA margin improvement of 660 basis points versus prior year yielding margins of 21% and 11% respectively.

This 11% EBITDA down margin from the Get Better brands is in-line with our long-term guidance of 10% to 12% providing on Investor Day last winter. Now, let me shift to our international business where results for the quarter were very consistent with our expectation. Net sales were flat to prior near and up by 2.2% in constant currency.

Foreign exchange represented $5 million of headwind. The impact of COVID-19 on performance was mixed. Our continental European business through each non-dairy product line benefited from continued high demand throughout the quarter. Our UK business experienced mixed results.

On the one hand, parts of the UK portfolio such as Ella's Kitchen, Linda McCartney and our soup business experience healthy growth. On the other hand, our food business with large exposure to the food service channel experienced decreases in revenue. Nonetheless, adjusted gross margin and dollars and EBITDA margin and dollars.

were all up in the quarter versus prior year. These results were in-line with our plan. Now, let me transition to our cash flow and balance sheet.

Third quarter operating cash flow improved by $29 million to $47 million and operating free cash flow defined as operating cash flow less CapEx improved by about $25 million to $29 million versus the prior year period. These improvements resulted primarily from stronger earnings and a decrease in cash using working capital.

Our inventory $61 million lower than the levels at the end of June 2019, mainly driven by the sale of the [Indiscernible] business, reduction in the number of shipping locations in our network and the high demand from entry loading district place in March.

Our cash conversion cycles during the quarter decreased to 53-days compared to 61-days in the prior quarter. This is below our target of 60 days, driven by the decrease in inventory levels just mentioned. Capital expenditures in the quarter were $18 million compared to $14 million for the prior year periods.

Also, as highlighted in today's earnings release and in Mark's comments, the company used $16 million to repurchase shares in March and April 2020. That leaves us with $190 million of additional repurchases authorized under our 2017 share repurchase authorization.

So, we closed the quarter on March 31st with a cash balance of $42 million, net debt of $324 million in gross debt leverage of 3.3 times. Now, let's turn to the full-year outlook. As a reminder, our guidance excludes Tilda which contributed approximately $200 million in net sales, and $26 million in adjusted EBITDA for fiscal 2019.

We now expect all profit metrics for the full-year ending June 30, 2020 to be higher than the ranges we previously provided, driven by our strong business fundamentals and higher at home food consumption. As a result, we are now raising our range of full-year guidance.

It is important to note that the magnitude and duration of increased demand remains uncertain. And that a challenge we face there are ability to maintain the level of supply needed to keep up with increased demand. Outlook we are providing assumes that our supply chain continues to operate with minimal disruption for the remainder of fiscal 2020.

We now expect adjusted EBITDA to be in the range of $190 million to $200 million an increase the 16% to 21% as compared to adjusted EBITDA of $165 million in fiscal 2019. In constant currency we expect adjusted EBITDA to be in the range of $195 million to $205 million. An improvement of $16 million versus the low end is a range of earlier guidance.

Adjusted EPS is expected to be $0.75 to $0.82 with an effective tax rate of about 28% compared to adjusted EPS of $0.60 for fiscal 2019. An increase of 25% to 37%. This forecast as a benefit of a share repurchase. In constant currency adjusted EPS is expected to be $0.78 to $0.85.

Our annual guidance assumes an exchange rate of $1.23 per British pounds and $1.09 per Euro for Q4. The full-year foreign exchange headwind on EBITDA is estimated at about $5 million compared to fiscal 2019.

Interest and other expense are expected to be approximately $18 million a decrease of about $5 million compared to the prior year, mostly driven by lower interest rates. In addition, in April 2020 the company sought to reduce future interest rate volatility and enter into several floating to fixed rate swaps in U.S. dollars in cross currency.

These swaps had the added benefit of lower interest rates than given existing variable rates and lower than prior year rates. Depreciation and amortization and stock based compensation expense are expected to range between $65 million and $70 million compared to $55 million in fiscal 2019.

We expect cash flow from operations to be around $110 million consistent with the previous guidance. This represents a $70 million improvement from the prior year. We were targeting a 15-day reduction in our cash conversion cycle from 75-days to 60-days. We exceeded targeting to three.

And as a result, we now expect an increase in inventories as we seek to replenish existing levels and create some contingency in case demand surges again in the quarter. In addition, we expect capital expenditures of $65 million consistent with our earlier guidance.

As we look ahead, we believe that our business models well positioned for long-term growth even with the uncertainty of how long COVID-19 will influence at home food consumption. The ability of our team to come together and adapt to changing conditions has become evident more than ever this quarter.

And we are confident in our plan and ability to further progress throughout the remainder of fiscal 2020 and beyond. I will now turn the call back to Mark..

As you can see, we have had a terrific quarter and have a positive outlook for the future. I want to thank the entire Hain team around the world for how they have performed during this transformation journey and how they have risen to help us thrive during this pandemic, and what they are doing to ensure our continued success.

Together, we have created a scrappy entrepreneurial results oriented culture that is delivering exceptional results. And I really appreciate all they are doing to transform this great Company. With that, let me turn it over to the operator for question. Operator..

Thank you sir. [Operator Instructions] Thank you. We now take the first question from David Palmer from Evercore ISI..

Thanks, and good morning and congrats on this margin progression that you are pulling off here. Very impressive. I wanted to ask you about the guidance implied for the fiscal fourth quarter. Obviously, it shows a little bit less growth.

And what you just saw from a EBITDA perspective, does that does that contemplate reinvestment and then what's the nature of that reinvestment as you prepare for fiscal 2021.

And I have a follow-up?.

Yes. So first thing I will tell you is obviously these are volatile times and as we start moving toward reentering and reopening our communities, some of the In Home consumption occasions are going to gravitate back out. What exactly that means, I don't know.

But there will be some slowdown in the growth rate versus what we have been experiencing in the last six to eight weeks. That is implied in there. But we do expect that the quarter will be up in terms of sales overall. With regard to investment, yes, there is investment in there and marketing.

As I said in the prepared remarks, we believe this is a great opportunity for us to lean in and be aggressive versus kind of sit back and wait to see what happens. So we have new ad campaigns, we have innovation coming out, because we will have some slotting fees with it if retailers take it. So there is an implied investment in those numbers..

And then, just conceptually for fiscal 2021. As you are thinking about those drags to your revenue from SKU rationalization and divestitures. I can imagine that the current environment might allow you to go pedal of the metal on those two things. You might find better prices for things you might want to sell.

And you might find the tailwinds, giving you air cover for more aggressive SKU rationalization. So I'm just wondering how you are thinking about those things? Could we see those drags actually increase before they start really decreasing aside from the innovation list. Thanks..

Yes, so we are looking at additional SKU rationalization, although it will be less than what we have been doing because we have been at this for a while. We were doing this for the last couple of years in this company and we have taken out a huge amount of unproductive skews that add a lot of complexity.

And that is part of why you see the margins, particularly on the get better brands improving so much. With regard to divestitures, we continue to work on shedding retail, as I said in the prepared remarks.

We are evaluating the situation and some of things that we may have been looking to sell, we may change our perspective on given the surge in demand in this situation. But I would point out something that I think is pretty compelling, which is since January of last year, we sold about a dozen brands that has $750 million of revenue.

The collective EBITDA of that $750 million of revenue was $16 million. So it was about a 2.5% EBITDA margin $16 million. We sold those assets for $400 million 27 times of EBITDA. So we have been getting very robust prices for what we have been selling. In many cases, we have been selling things that are losing money and getting, obviously cash for them.

So I think we have been doing a pretty good job of getting extremely fair value for the things that we are looking to divest.

And to your point in this environment, we will be thoughtful choiceful about what we sell, and how much are we willing to accept given that demand is up on most of the items that we sell?.

Great, thank you..

Thank you. We now take question from [Indiscernible]..

Yes. Thanks.

I just wanted to talk about new customers market still able to get during this pandemic? Exactly how were you able to market to them? And specifically, do you think this is opened up the opportunity to pay customers with new products? And then just the follow up on these products in the pipeline, as you know as innovation forward during this pandemic or is it been a little bit of a slowing focus more on purpose..

Yes, good question. So first thing I would tell you is we have been increasing not marketing for several quarters in a row now. So we have been as part of the turning around of the Get Bigger brands for growth. We have been investing to bring trials in before we start.

So the good news is, a lot of those messages were seated in people's minds when the pandemic hit, and obviously given supply issues from many people, there were a lot of brand switching going on where people are trying new brands, because potentially the one that they are used to wasn't there.

So we have had some brands that have had household penetration increased by as much as 50%. So it is pretty significant in some cases. What we are doing now is marketing to those people specifically. So we put repeat coupons in some of our products where it is easy for us to do that.

So if you try it for the first time, you have an incentive to come back and repeat. We are using shopper card data and digital social mobile marketing to go after the people that are most likely to be purchasers in this environment. We have changed some of our messaging to be more relevant and sensitive to the environment that we are in.

So we are aggressively trying to continue to recruit people and for people we have to make sure that they are delighted and that we start to form a relationship with them. With regard to Innovation. You've heard me talk a few times on the last several calls about how we have been building the pipeline.

And two of the bigger innovations that we had launched were Tea Well on Celestial and the Flaming and Hot Straws on sensible portions. The Tea Well repeat rate is exceptionally high. But the trial is a little bit lower than we had like before the pandemic. So we are actually going to do some downsizing to get to more of an opening price point.

It was a little bit of a high price barrier for trial, but those would try at repeat rate was very high. So we are very confident in that one. And on the Flaming Hot, it is already performing in the top half of the category in terms of velocity, so that one's going to be a winner as well.

We have additional innovation coming out on yogurt, and a ton of innovation coming out on tea. And right now we are trying to partner with retailers to get that onto the shelf. My expectation would be that we may have a little bit lower ACV than we initially had hoped, because some of the customers are not resetting right now.

And they may either postpone the reset for a year or delay the reset. But it is also an opportunity for other retailers right now who are trying to differentiate themselves from their competitors.

And so we are finding there are quite a few retailers that are very excited about innovation want to use it to show their consumers that they are different form everybody else, and that they are bringing new and exciting things to the market. So we are going forward with our innovation plan. It is some of the best stuff we have ever had.

And we continue to believe that is going to be an important part of our growth going forward..

Thank you very helpful..

Thank you. we now take the next question from Alexia Howard from Bernstein..

Great. Good morning, everyone..

Good morning..

Good morning. .

So my first question is are you mentioning the challenges are that you may have in terms of keeping the supply going. Could you talk a little bit about which products that those challenges are most acute in what the problem is or what the potential problems might be. I know, everything's looking fine now.

And then my follow-up is If you do run into challenges on being able to ramp up across supplies efficiently, would you consider pulling back on promotional activities to realize higher net price points? And to what extent might that happens? Thank you..

Yes. So the first thing I will tell you is because we are a global business. We saw this pandemic coming way before the government ever said. This is going to be a pandemic. And so we immediately started building inventory and creating backup sources of supply so that if something were to happen in one of our factories that we would have an alternative.

And you have to also remember that we have a business been declining for a couple of years a year. So we have plenty of capacity, we don't have a capacity issue. We have backup supply on call at the top 80% of skews that make up the vast majority of our sales and profit. And we are well positioned there.

What could happen obviously you could have an outbreak of the virus doesn't require us to shut down the plant for a period of time. And you could have challenges in the supply chain with suppliers not being able to supply ingredients on time.

And again, that is where we have been very aggressive in finding backup sources, flexing formulas in case certain ingredients become hard to get etcetera. I would say we are in very good shape with the exception of there's a couple of categories where we use co-manufacturers and the industry capacity is tight.

So some of our products are packing tetra packs, packaging, there's not a lot of tetra pack capacity out there. And baby food is another example there's a very limited number of manufacturers of baby formula Those are probably the two where I say we have the most risk.

But that said, we have also built inventory so that if there is a short-term outage or short term plant shutdown on their side, that we have got enough inventory to weather the storm. So far our service levels have been in the mid-90s. Very high relative to I think what others are experiencing. Our stock levels at retail have been much lower.

And so I feel pretty good about the ability to supply. With regard to this the part of the question around promotional activity, a fair number of our competitors pulled all of their promotional spending, which alienated retailers. We have not done that as yet.

If we get in a situation where we have more demand than supply, we would certainly look at something like that. But we are trying really hard to use this as an opportunity for us to partner with retailers to meet their needs. If they want to promote we are going to promote.

If they don't have the resources to change the shelf fast and don't want to promote then fine. We are happy not to promote. So this is a great opportunity for us to become a supplier of choice. And whether it is distracting innovation I talked about or whether it is tailoring our programs.

What's their specific needs are dropping trucks specifically at stores versus in their distribution centers. We are being incredibly flexible here and trying to further cements our relationship. So I think we are in good shape, Alexia. And I think we will be malleable depending on what the circumstances require..

Great, thank you very much. I will pass it on. .

Thank you. We now take the next question from Mr. Mike Lavery from Piper Sandler. .

Good morning. Thank you. .

Good morning..

Good morning. .

You mentioned at your Investors Day a little over a year-ago now that you see future steady state profile of top-line growth around 3% to 6% and spend 13% to 16% margins.

Just as you progress since then, how far away do you think that might be? And is that still your thinking? Or have some portfolio moves gone differently than planned or is there anything in the current environment that may be picking us up think about that any differently now?.

Yes. So you will remember we distinguish between the Get Bigger brands and the Get Better brands. The Get Bigger brands we said it would mid-single digit top-line growth and around 16% EBITDA and on the Get Better brands we said it would be high single digit declines on the top-line, with margins in the 10 to 12 range.

In this quarter the Get Better brands had 11% EBITDA margins. So they are already there. And they are already within the top-line of what we described. The Get Bigger brands also grew but we continue to invest in marketing. So we haven't quite get to 16% EBITDA because we keep adding marketing to the equation.

But we are very steady in the 14% plus EBITDA done margin on those brands as well. So we are well on our way to where we said we would be in North America. We have a little bit different circumstance in our international business, given the fruit business that I talked about given that we have 30% of our business there this by the label business.

The margins there will be a little bit lower or they are more than those 13% range. But the strategy is coming from the margins are materializing. And yes, there is some benefit into short term top-line numbers from COVID-19.

But we are really confident given the trial we are seeing, given the retailer response that we are seeing, given the huge margin expansion that we are seeing. And honestly, we have a lot more room in the middle of the P&L. We are doing some amazing things and you can see it in the numbers that we have got.

But we still have probably 80% plus of our trucks that we shipped don't go out. If we can fill up trucks, which is part of what we are doing in this pandemic, if we can get standard bracket placing in place, we can get a lot fewer trucks on the road with a lot more efficiency in our cost structure. So we have made huge improvements.

But there's a lot more runway. And so I'm bullish on the top line, and I'm bullish on the middle of the P&L. And I feel confident we will get there. Our original timeline was three years from Investor Day, we are halfway there in terms of time. We are about 16-months into the journey. I think the three year journey is intact.

And hopefully we will get there a little early..

That really is helpful. And just the follow-up on your thinking about any economic stress just some of what you've seen in the past and how your consumer typically behaves and what is some of the ways there you might be able to adapt and adjust if necessary..

Adapt to how the consumers behaving over the recession? Got you. So the first thing I would tell you is because we have many organic type products, non-GMO, gluten free, etcetera. We tend to appeal to more afterwards consumer.

So when you hear about the massive unemployment that we are experiencing, Those tend to be lower income workers and less of our target. So I think we are a little bit insulated in that regard. As long as the more affluent people feel like their income to secure the stock market's doing okay. And they are not too worried about their future.

So, on the one hand, I think we are relatively insulated. The second thing I would say at least in Europe, we have 30% of our businesses in private label. So we actually will be a beneficiary of the lower income consumers who trade down. Because it is a significant part of our business there.

The third thing that I would say is we have done an exhaustive review of all of our products here in the U.S. And where we think we have a price point that is to premium if you will. We are looking at alternatives sizes and price point.

So I said before, for example on this call that our Garden of Eatin' Tortilla Chips business we offer considerably more products at a higher opening price points than everybody else. So you can get four more ounces or five more ounces, but you are going to pay $1 more for it. If the consumers cash strapped, they would rather pay $1 less.

So we are already in the process of downsizing that offering and getting to a more competitive opening price point. We are doing that in a number of places. That work was already underway before the pandemic because we saw the issue in the opportunity.

And so, I feel like we will be pretty well positioned position to compete in all of the categories that we are in and we should be able to weather recession relatively well..

Very helpful. Thank you..

Thank you. We now take the next question from Rob Dickerson from Jefferies..

Hi, good morning, it is [Indiscernible] on for Rob. Thank you for the question. I believe you said a majority of the margin improvement in the quarter was attributed to many initiatives that you had in place prior to COVID-19. So maybe not as much attributed to COVID-19 related operating leverage.

Is that because the quarter was only partially impacted by the pandemic? And maybe you also give that you have a different co-manufacturing mix in some of your public company peers.

And how does be perhaps more fragmented more manufacturing for print, given the history of the companies build up overtime play into that? Overall, I was trying to get a sense of how should we think about that contribution split for margin improvement over the next couple of quarters, which probably seem a more full COVID-19 operating leverage benefits.

And then just a quick follow up on market household penetration comment. Give us a sense of how much of that 50% increase in household penetration for some brands or new households for the category.

Perhaps like some consumers are buying in different categories for add on consumption than they were pre-COVID or is it mostly a brand new change related thing? Thank you very much..

Yes. So let me take the second one first. So with regard to household penetration, I think it is a combination of new category buyers and new brand buyers. In some of the categories, people come into the category through our brands, which is interesting, particularly in snacks, the Tortilla Chips brand and Sensible Fortune Brands.

We tends to attract new users into the category, they have a good experience and then they stay in the category. So it depends on the category but in some cases we are we are seeing a little bit more of existing buyer in some cases, it is more existing buyers switching around.

With regard to the first part of the question, remind me on the manufacturing side. So we have had a robust productivity set of initiatives going well before COVID. So we were making significant improvement in the middle of the P&L beforehand.

You are right that the operating leverage the absorption benefit of producing significantly more products in our manufacturing locations really wasn't seen in the Q3 P&L, because you are those products are in the warehouse and they are shipping in Q4 for the stuff that you were making in the second half of Q3.

So we will see that fixed overhead absorption benefit in Q4. There are some one timers in here that are helping the middle of the P&L. I would be candid and tell you that in this environment customers are relaxing, some of the fines are related to service. Because they just want products. That is a onetime benefit, I would say certainly obsolescence.

We are able to sell through everything. So if we had some things that were aging that might have aged out before they are being sold to our obsolescence is down a little bit because of COVID. So look the vast majority of the benefit as being a more efficient operator. And things like filling up trucks is something that we have been on a journey to get.

We don't have standard bracket pricing like everybody else. So there's no incentive for people to fill up a truck. We are working on that. We are going to make that change in F'21. But this was an opportunity where people needed product for us to say, look, we only have so many days in each one of our distribution centers.

We have got to send you a fuller truck and got to consolidate all your orders because we have got so many orders. So it was a catalyst to change the behavior on the side of the manufacturers.

It is been very beneficial to us and we will now make that a permanent change and tell them what we have to order at least a half a truck or whatever it was whatever the minimum number is that they were allowed to buy before will be raised as a result of this. And that will be a permanent change that will benefit us.

So it is a balance of some benefits that we are getting naturally, and some benefits that we are getting from COVID. But I want you to know, there's just huge productivity. Automation has been a big part of our agenda. [B&W] (Ph) cost that I just mentioned has been a big part of the agenda.

Getting rid of the low margin skews and complexity which is resulting in less changeovers in the plant has been a benefit. So a lot of this is our hard work. It is not just a windfall from COVID..

Thank you very much for the detail..

Thank you. We now take our next question form Bill Chappell from SunTrust..

Hi, it is actually [Indiscernible] on for Bill. Thanks for taking the questions. Hope everyone staying well. Just had a quick one on the European business. You guys noted that you saw some early trends, kind of prepare you saw in the U.S. starting early in Europe.

I was wondering if you've seeing anything as part of Europe starts to come out of there, social lockdown restrictions. Any early reads on shipping trends back to food service business. Anything on consumers destock that you may be able to use as you look to the U.S. business. Thank you..

Yes, so it is early that like us kind of sticking and telling the water here to open society. They are doing the same there. But what's interesting about Europe is it is so many different countries with so many different stances on this thing. But where they are opening what we are seeing is they are doing gradually.

We are seeing consumers still have fear of going out in public. So just because the restaurant opens doesn't mean all of a sudden, everybody's walking to the restaurant. I think we are seeing that people want to get outside. So whether it is the beaches, whether it is in the mountains whether it is park.

But first step is for people just to get comfortable leaving their homes, but they are still eating in their homes. It is not like a flock factor old behaviors and those eating occasions has rapidly migrated away from the home point. I think with regard to opening offices. We see fits and starts they open.

They can they can figure out social distancing, they closed for a week, they try and revamp and adjust. So I think it is a trial and error process. I think everybody's doing it slowly. I think you are going to see the same thing here when I see and hear some states in the U.S. are opening malls and movie theaters and like.

I have a feeling that they will end up needing to take a step back if they get too aggressive there. Because there's still fear of catching the virus and there's a lot to be figured out in terms of social distancing. And I think consumer psyche has changed. It is changed in Europe, it is changed here.

And so I think it is going to be kind of a slow steady progression back to whatever the new normal is. The other thing I would say that I think is also interesting here is as you know, we have got a huge UK business. The UK is behind us, and Europe. Whereas, Austria and Germany and much of Europe is ahead of us.

So, we have got a pretty big business in the UK and they are in lockdown. They have got ways to go. They got 30,000 deaths. They are in the midst of trying to bend the curve where we have bent the curve. So I think it will be a little bit slower returned to normal in the UK..

Okay, we now take the next question from Rebecca Scheuneman from Morningstar..

Good morning. Thank you for the question. So first of all, I'd love to get a sense of how much the pantry stacking contributed to the quarter's growth.

Can you just share with us where growth was tracking before mid-March before the surge began?.

Yes. So as we don't give over a very specific guidance on the top-line. But what I did say in my opening remarks were the Get Bigger brands we are growing in high-single digits in the first two and half months of the quarter before this happened. And we ended up in the low double digits afterwards.

So you can put some math to that and get a general sense of how much the virus improves the Get Bigger brands. And we saw a similar trend on the Get Better brands. So the last three weeks of the quarter certainly added some volumes to what was already a business that was moving in the right direction.

And you will remember on the last earnings call, we were very clear that we were going to end the trend on the Get Bigger brands and we are going to have a robust quarter and tracking in high-single digit growth. So we were doing that. In the case of Europe, again more of a mission mixed bag in some places like fruit, we saw a huge drop in demand.

And in other places like private label, we saw an increase in demand. So it is a little bit more of a mixed bag there. I would say there was in aggregate almost no benefit in total in Europe because some were favorable and some were unfavorable, but here it was definitely a few hundred basis points of improvement on the top-line.

What I would add though, as we go into April, one thing that is important to note consumption was ahead of shipments in March.

And so we have an added benefit in fourth quarter of the shipments catching up to consumption, because there's demand surge was so massive in such a short period of time when that pantry loading behavior happened that, retailers couldn't keep product on the shelves.

And we tend to have a little bit longer supply chain because much of our volume goes through third-party distributors. So April is a robot month. We are off to a good start in the quarter and our consumption continues to be steady at a much higher level than it was before the virus..

Okay, great. Thank you. And my second question is that obviously this current environment provides a great opportunity to increase trial. And I realized this early but do you have any initial repeat purchase data or anything to suggest that some of this benefits will be lasting..

Yes, it is too early to give you a repeat data. Our purchase cycles tend to be 60-days 90-days in the case of something like spectrum oil it could be six months between purchases. So it is too early to tell.

What I would tell you as we have seen the most robust increase in trial on snacks on cheese has been exceptional trial on our oils business spectrum of soup business. Imagine soup. And so it is early. I mean we take something like soup were coming out of the cold weather. So the repeat cycle will be very long in the summer.

But we don't have the data yet. It is just too fast for repeat purchases to be evident at this point..

Okay, thank you so much..

Thank you. It looks like there are no further questions at this time. So I would like to turn the call over back to you..

Yes. Let me just end by, again thanking all of the employees here for their hard work. This has been quite successful. I think a crisis is a good way to assess the quality of the organization and its ability to respond. We are very proud of what we have been able to accomplish. I'm very optimistic about the future.

We are well positioned we are playing offense. We are thinking ahead versus reacting. And being very proactive. So I think the future is very bright. And I appreciate everybody's support. And we will talk to you later. Thank you all..

Thank you. This does concludes today's conference call. Thanks for your participation. You may now disconnect your lines..