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Hain Celestial Group Inc (NASDAQ:HAIN)
Q3 2021 Earnings Call
May 6, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Hain Celestial Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Anna Kate Heller. Thank you, Anna Kate. You may begin.

Anna Kate Heller -- Investor Relations

Thank you. Good morning, and thank you for joining us on Hain Celestial's Third Quarter Fiscal Year 2021 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, quarterly reports 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.

The company has also prepared a few presentation slides and additional supplemental financial information, which are posted on Hain Celestial's website under the Investor Relations heading. Please note management's remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. As a reminder, beginning in Q1 of fiscal year 2020, the company changed its segment reporting to focus on North America, International and Corporate, which had previously been reported as the U.S., U.K. and Rest of World segment. This call is being webcast and archive of it will also be available on the website. I'd also like to note that we are conducting our call today from our respective remote location. As such, there may be brief delays, cross talks or other minor technical issues during this call. We thank you in advance for your patience and understanding.

And now I'd like to turn the call over to Mark Schiller.

Mark L. Schiller -- President And Chief Executive Officer

Thank you, Anna Kate, and good morning. I hope everyone is doing well. On today's call, I'll give you some color on our third quarter results and explain how we continue to position ourselves for sustainable, profitable growth. Let me start with our Q3 results, which marks another great quarter for Hain. As we guided on the last quarter, we expected, first, top line to be down around 10%, which is where we came in. Second, we said we would deliver at least 100 basis points of margin improvement, we delivered a 317 basis point improvement in adjusted gross margin and a 400 basis point improvement in our adjusted EBITDA margin are ahead of our guidance. This marks the fifth straight quarter of adjusted gross margin and EBITDA margin improvement of more than 200 basis points. Third, we told you we would deliver around 10% adjusted EBITDA growth, in fact, delivered 22% year-over-year growth, making this the seventh straight quarter of double-digit adjusted EBITDA growth. Both North America and International delivered terrific results with continued profit and margin expansion, further demonstrating that our strategy is working across the globe.

And importantly, we have considerable momentum going into Q4 and beyond. I'd like to take a few minutes to dissect the results further, starting with our top line. You'll recall that the guidance we provided took into account several factors. First, International volume that retailers pulled into Q2 in anticipation of Brexit disruptions impacted Q3 revenue by about 4%. Second, the lapping of a sizable fiscal '20 customer hair care merchandising program that was moved from this year to next year due to COVID. This generated a 3% revenue headwind in the quarter. In addition to those items, after adjusting our sales for divestitures and currency, our sales would have actually been up slightly in the quarter versus last year. I should also mention that we were able to deliver our sales projection this quarter despite an unplanned slowdown in our Earth's Best brand, driven by a congressional report on the Baby food industry that temporarily impacted revenue. I say temporarily because volumes have rebounded significantly in Q4, with Earth's Best consumption up more than 30% in the most recent four weeks and share growing and sales also up significantly.

When we look by division, we see signs of strong underlying revenue growth. In North America, we grew share and measured channels again this quarter on our big brands like Celestial Seasonings, Sensible Portions and Greek Gods and we're seeing good MULO growth on personal care segments like Live Clean Body Lotion and Body Wash and Alba Body Lotions. Our Alba Sun Care program, which largely sells in unmeasured channels, was also up 8% in the quarter and has started Q4 even stronger. In fact, several customers have sold through their initial inventory and are already reordering much earlier than usual. In the e-commerce channel where Hain has a very strong presence. We had a 33% growth in consumption this past quarter with the Get Bigger brands up to 54%. The compared to 2019, which factors out the Hair care program entirely, the Get Bigger brands shipments were up 8% in Q3, even with our shipments lagging consumption this past quarter. In International, where our Q3 revenue was impacted by the Brexit volume pulled into Q2, consumption was up 12% in the quarter compared to 2019, far outpacing shipments.

Our seven biggest brands in our private label non-dairy business which represent more than 60% of our International sales, collectively delivered 8% growth in the quarter. The held or gained share in Linda McCartney plant-based meats, Hartley's jelly pots and spreads, all three of our superbrands enjoy a non-dairy beverage. So in conclusion, there was great underlying revenue performance in the business this past quarter, clouded by some nonrecurring events. I remain pleased with our progress and continue to be optimistic about the future. Switching to margins and EBITDA was an exceptional quarter. We were able to deliver industry-leading margin growth despite significant headwinds like additional Brexit costs, transportation challenges, no storms, and additional COVID-related costs, among other things. You'll recall that two years ago on Investor Day, we told you we expected to improve our adjusted EBITDA margins from about 8% to somewhere between 13% to 16% by the second half of next fiscal year. Some people were skeptical as to whether or not this was achievable.

Hopefully, the 15% EBITDA margin we just delivered a year ahead of projections, puts any doubts to rest. We have a great productivity and revenue management capability. And importantly, we expect continued progress on margins moving forward. In short, we're doing exactly what we said we would do during our Investor Day in 2019 and continue to execute our playbook in North America and now in International as well. Turning to the future. I continue to be very optimistic. We exited Q3 with strong momentum, which bodes well for Q4 as well as F '22 and beyond. There are four key reasons I believe that our best days are still in front of us: one, macro trends are in our favor; two, the Get Bigger Brands continue to strengthen; three, our International business has significant momentum; and four, our productivity opportunities are significant. Let me quickly take them one at a time, starting with the macro trends. When the pandemic hit, it caused a number of changes in consumer sentiment and behavior.

Specifically, consumers are far more concerned about their health. They're shopping more online, they're cooking more from home. We've discussed these items before, but as the pandemic wanes, we see evidence that these trends will remain elevated and that Hain will benefit. The second reason I'm bullish about the future is that our Get Bigger Brands, which represent more than 2/3 of our North America sales continue to strengthen. Compared with 2019, our consumption in Q3 was up double digits, and our categories grew almost 8%. So in short, we are gaining share in high growth categories. Customers are just now resetting shelves, and we have great innovation that's earning new distribution and bringing new consumers to our brands. Pre-pandemic launches are finally getting slotted by many more of our customers. And on top of that, we have great additional innovation like Sensible Portions, Veggie Puffs, Celestial Seasonings, K-cups and Cold Brew Tea, more mainstream flavors on Terra, and product improvements on several snack brands also hitting these resets.

As a result, total distribution points grew 8% versus prior year this past quarter, with the biggest gains coming on the brands that are innovating. Importantly, we're also seeing our strongest household penetration and loyalty gains in affluent households, which are less price-sensitive and with younger consumers who are more health and e-commerce focused. Both of these factors set us up well for the future. The third reason I'm optimistic about the future is that we have a tremendous International portfolio, and our performance is accelerating. We have the number one or number two share brands in 10 categories and are well positioned in some of the highest growth categories like plant-based need alternatives and non-dairy beverages. As I stated earlier, despite the Brexit volume pull forward, our six biggest brands in nondairy private label business collectively grew this quarter over 8% versus a year ago and more than 12% versus 2019.

These businesses also deliver more than 70% of the International EBITDA. Their collective profits this quarter were up double digits versus last year and more than 25% versus 2019. So clearly, we have many strong businesses demonstrating excellent growth on both the top and bottom line. And lastly, I remain excited about the future potential because we continue to have significant margin opportunities. In North America after generating significant productivity and revenue management over the last eight quarters, we're now pursuing sizable initiatives like plant consolidations, simplified pricing to fill up trucks. Price size architecture and product redesign, among others. In International, building off of the very successful North America playbook and processes we've also identified and are just starting to execute a robust productivity and margin management agenda.

In the most recent quarter, those initiatives helped delivered almost 500 basis points of margin improvement and there is a long list of projects that will ensure continued margin expansion momentum. Things like automation, lean manufacturing, organization redesign will all yield significant benefits starting now and continuing into the future. Unlike North America, as the savings materialize, we will begin reinvesting some of that money into increased marketing to reinvigorate the top line. So in conclusion, in the face of significant challenges, we've had another great quarter. We entered Q4 with a lot of momentum, and we're well positioned to accelerate performance from here. With that said,

Let me turn it over to Javier, who will provide more color about our Q3 performance and financial expectations for Q4.

Javier H. Idrovo -- Executive Vice President And Chief Financial Officer

Thank you, Mark, and good morning, everyone. There are four key aspects of the third quarter financial information that I want to highlight in today's call that demonstrate continued strong performance from the execution of our transformation plan. First, our performance was supported by significant continued margin expansion. Second, we continued to generate strong cash flows. Third, our balance sheet remains strong with excellent capital allocation flexibility. And finally, our business is well positioned for continued success. I will start with a discussion of our top line results, and then I will drill into each of these aspects. Keep in mind, I will focus my discussion on our financial results from continuing operations. Third quarter consolidated net sales decreased 11% year-over-year to $493 million. Foreign exchange benefited third quarter net sales by 320 basis points, while divestitures and brand discontinuations reduced net sales by 820 basis points.

The impact of the Brexit pull forward and the timing of the Hair Care Program represented a headwind of about 700 basis points in the quarter. When adjusting for all of these factors, net sales were slightly up for the quarter versus prior year. When comparing our performance versus Q3 2019, after adjusting for currency movements, divestitures and brand discontinuations, our sales increased by 2%. That said, when you further factor in the close to four percentage points of Brexit volume that was pulled into Q2 and the volume we proactively gave up when we started our 1,000-plus SKU rationalization program in Q3 of 2019, the underlying growth is more like 10% versus fiscal year 2019. Adjusted gross margin improved by 317 basis points, driven by our significant supply chain productivity initiatives, improved product mix from our SKU rationalization efforts and the sale of the fruit business. Distribution and warehousing costs as a percentage of sales increased versus the prior year period, largely due to higher freight costs in the U.S. and higher-than-planned inventory levels, partially offset by improved truck utilization as a result of our consolidation and efficiency initiatives.

SG&A came in at 15.3% of net sales, lower than the prior year period by 70 basis points. The positive impact to SG&A were driven by lower broker commissions, lower labor-related costs as we consolidated our North American operations into one business unit, lower third-party services and reduced travel. Third quarter adjusted EBITDA increased to $74 million compared to $61 million in the prior year period, representing a 22% increase versus Q3 last year. Adjusted EBITDA margin of 15%, represented a significant improvement of about 400 basis points year-over-year, driven by gross margin improvement and lower SG&A. Our adjusted EPS of $0.44 increased by 57% compared to $0.28 in the prior year period. We benefited from an adjusted effective tax rate of 23.5% compared to 28.8% in the prior year period. The lower tax rate was mainly driven by the elimination of the GILTI impact in the current quarter. Now to provide some detail on the individual reporting segments where both regions contributed with significant adjusted EBITDA growth and profit margin improvement.

Starting with our North American business on the top line, net sales decreased 10% year-over-year to $287.5 million, mainly due to the lapping of a prior year Personal Care club program and the COVID-19 pantry loading in March 2020. After adjusting for currency movements, divestitures and brand discontinuations, net sales decreased 8% versus the prior year period. Note that the lapping of the Personal Care program represented a headwind of about 550 basis points for the North America region. From a profitability perspective, Q3 results were strong, as we deliver year-over-year adjusted gross margin expansion and adjusted EBITDA margin and dollar expansion. Specifically, our North America business expanded adjusted gross margin by 208 basis points. Adjusted gross profit of $82 million was a decrease of 3% versus Q3 last year. Despite the decrease in gross profit, driven by a decrease in net sales for the reasons mentioned earlier, we improved adjusted gross margin driven by our strong productivity program, SKU rationalization efforts and efficiencies in our supply chain system.

Adjusted EBITDA increased to $49 million, a 13% increase. Adjusted EBITDA margin of 16.9% represented an improvement of about 350 basis points versus the prior year period, driven by gross margin improvement and lower SG&A. Looking into the components of the North American portfolio, they get bigger brands, which represented 2/3 of the North American net sales, showed a net sales decrease versus the prior year period of about 4%. This decrease was largely driven by the lapping of the prior year Personal Care club program that represented a gross headwind of about 850 basis points. Gross profit increased slightly due to the impact of our productivity initiatives partially offset by higher distribution and warehousing expenses.

Notable brand growth callouts include Celestial Teas, Sensible Portions and several of our Personal Care brands. Adjusted EBITDA margins for the Get Bigger brands improved close to 300 basis points compared to Q3 last year, yielding a margin of 17.5%. We achieved this improvement in profitability, notwithstanding lower sales and a stronger investment in marketing activity to support innovation launches and core products. To Get Better brands, consistent with our portfolio role, continue to show very robust adjusted profit and margin improvement. Specifically, adjusted EBITDA grew by 9% with an improvement in EBITDA margin of more than 400 basis points yielding a margin close to 16%. This level of profitability strongly exceeds our long-term target of 10% to 12% for the Get Better brand. As previously announced on April 15, the company completed the sale of its North American non-dairy beverage business. This business represented about $40 million in annualized net sales. This transaction improves the growth profile of the company without impacting its profit margin.

Now let me shift to our International business, largely because of the volume shift from Q3 to Q2 driven by retailers to minimize Brexit disruptions and the lapping of the pantry loading in March 2020, net sales versus prior year decreased 12% on a reported basis. Foreign exchange increased sales by 6.6% while divestitures reduced sales by close to 16%. After adjusting for currency movements and divestitures, net sales decreased 3%. When further excluding the adverse effect of the Brexit disruption of approximately 8%, net sales increased by about 5%. Our Hain Daniels and European businesses, excluding divestitures, delivered net sales growth driven by the strength of our non-dairy beverage business and our strong brands like Linda McCartney and Hartley's brands in the U.K. During the quarter, we also saw profit strength in this segment given the adoption of the North American productivity playbook in our International business. Adjusted gross margin improved by about 460 basis points versus the prior year period, driven by a reduction in low ROI investments and lower supply chain costs as a result of productivity initiatives and efficiencies in our supply chain system as well as the divestiture of the low-margin fruit business.

Adjusted EBITDA grew by 19% versus the prior year period to $37 million supported by an adjusted EBITDA margin improvement of more than 450 basis points, resulting in an EBITDA margin of nearly 18%, driven by a higher adjusted gross margin and lower SG&A. This level of profitability for the International business exceeds the long-term target of 15% to 17% we announced two years ago. Shifting to cash flow and balance sheet. Q3 operating cash flow was $42 million, a decrease of $5 million versus prior year, mainly due to inventory builds to avoid supply disruptions. Capital spending was $23 million, $6 million higher than last year to support multiple productivity projects. At the end of Q3, our inventory was $314 million, $2 million higher than the levels at the end of December 2020 to ensure high levels of customer service while avoiding supply disruptions due to COVID lockdowns. That said, we expect inventory levels to decrease in Q4 fiscal 2021.

Our Q3 inventory and other working capital account usage resulted in a 59-day cash conversion cycle that was higher than the prior quarter by four days. But below our target of 60 days. The increase in our cash conversion cycle was driven by higher inventory days, driven by the reasons stated earlier and lower net sales versus Q2 2021. Cash on hand at the end of the quarter was $53 million, while net debt stood at $203 million, and gross debt leverage was only 1.2 times. Our balance sheet remains incredibly strong. And as a result, we have significant capital allocation flexibility. Given our healthy balance sheet as well as our expectations to continue to generate strong free cash flow, we remain well positioned to both reinvest in the business and return value to shareholders. Consistent with our capital allocation principles and pursuant to the repurchase program authorized by the Board in 2017, during the quarter, we bought back $8.6 million of our shares at an average price of $41.86, leaving us with about $109.5 million of additional repurchase authorization remaining under our 2017 program at the end of the third quarter.

As we move into the fourth quarter, we expect our top line to decline 5% to 8% versus a year ago after adjusting for currency movements, divestitures and brand discontinuations. This guidance includes a 10% headwind from divestitures and brand shutdowns and an estimated 7% headwind from the year ago COVID surge. Partially offset by an expected foreign exchange benefit. Compared to 2019, revenues will be up mid-single digits, representing a sequential improvement relative to our Q1 through Q3 growth versus 2019 of 2% to 3%. We also forecast another quarter of at least 100 basis points of gross margin improvement and adjusted EBITDA growth near 10%. As part of the fourth quarter outlook, we have assumed the following: Cost of goods inflation of around 2%, which has been more than offset by our productivity initiatives, resulting in continued margin expansion.

We currently expect that the environment for fiscal year '22 would be more inflationary than fiscal year '21, but we plan to discuss that in more detail at the next call. Again, we remain confident in our ability to more than offset the inflation via pricing and productivity. Capital expenditures close to 5% of net sales, an increase over prior year to drive multiple productivity projects and to carry out projects that were delayed from last year due to COVID-19, an adjusted effective tax rate between 24% and 25%. In summary, our performance momentum has continued into fiscal Q3, as demonstrated by our increased profitability, and we continue to believe that we are well positioned to deliver continued strong earnings growth and margin expansion for the balance of the fiscal year.

I will now turn the call back to Mark.

Mark L. Schiller -- President And Chief Executive Officer

Thank you, Javier. As you can see, it was another strong quarter, and we remain excited and optimistic about the road ahead. On behalf of our Board of Directors and the management team, I'd like to thank our global team at Hain Celestial. Together, this team has done a terrific job of keeping one another safe while transforming our business in a challenging environment.

With that, let me now turn it over to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Michael Lavery with Piper Sandler.

Michael Lavery -- Piper Sandler -- Analyst

Thank you. Good morning.

Mark L. Schiller -- President And Chief Executive Officer

Good morning.

Javier H. Idrovo -- Executive Vice President And Chief Financial Officer

Good morning.

Michael Lavery -- Piper Sandler -- Analyst

I just wanted to touch on your thoughts for the fourth quarter. And I guess, just can you give us any sense of how conservative you may be thinking about some of your outlook there? Specifically, you gave a near 10% guidance for adjusted EBITDA growth for Q3 and obviously, well exceeded that. You have a little bit tougher comp but a little bit better top line guide. Can you just help us understand how much maybe cushion there is, how you're thinking about the moving parts and just put it all in the right context for us?

Mark L. Schiller -- President And Chief Executive Officer

Sure. The first thing I would tell you is obviously, the COVID situation is very hard to forecast. We know that it will be a headwind in Q4, but we don't know how much of a headwind it will be because we're not exactly sure yet what behaviors are going to be like after the pandemic wanes. So it's a little bit hard to give you a more precise number than what we have given you. Basically, if you -- on a reported basis, it will be in the minus 11% to minus 14% range. And then we have a significant adjustment for divestitures and some favorability in currency, which gets us into that 5% to 8% range. We believe that we're confident that we will deliver it. We see momentum in the business, very strong results in International. Some of the timing risks associated with Brexit that were in Q3 won't be there in Q4.

The Hair Care program in North America that was a headwind in Q3, won't be there in Q4 and we're seeing -- if you look at the sequential consumption data, the 4-week data is stronger than the 12-week data, and we're starting to see those distribution gains and things that we've talked about. So we're bullish. We are -- when you adjust these factors, which unfortunately is part of being -- part of a transformation where we've divested $1 billion worth of businesses, there's going to be some things that have to get factored out. But when you look at the underlying health of the business, even with that adjusted guidance of minus 5% to 8%, we're looking at mid-single-digit top line growth in Q4 versus fiscal '19, which is higher than we had in any of the first three quarters this year. So there is momentum built into that forecast. Hopefully, we can over-deliver it, but we want to be -- we want to give you guidance that we are confident we will deliver.

Michael Lavery -- Piper Sandler -- Analyst

That's very helpful color. And just on the distribution gains that you touched on, can you give us some status there? You mentioned that 8% GDP growth, but you've talked previously about expecting shelf resets in March and April. Did all those come through as you expected? Are there still some looming. Can you just give us a sense of how more shelf -- should we be expecting some more shelf resets and distribution gains ahead? Or is that mostly done?

Mark L. Schiller -- President And Chief Executive Officer

No, there's more to come. So March and April, the resets were Baby and Snacks for most of the retailers, although there are still some retailers that will reset those categories through the end of this fiscal year. And if you look at the numbers, you'll see that Earth's Best, as an example, on Baby, has picked up significant distribution. And we've taken a business that we basically SKU added a huge percentage of that business. We gave up 25% of the sales in that business to move the margins from 0 to 10% EBITDA margin. And now we're at a point where we're innovating and we're moving back toward growth on that business, and you certainly see that in the distribution numbers. In Snacks, we've had some very significant gains on Sensible Portions, not only getting fuller distribution on the things we launched last year, like the Screamin' Hot Veggie Straws, which did exceptionally well, but only got into about 15% of the ACV because of COVID. We're getting fuller distribution on that.

And we've also just launched Veggie Puffs, which extends the brand into a new segment. We had one customer that shipped early in the first quarter and at least preliminarily, it looks like the Puffs are turning at the same rate as Straws, which would be a huge incremental bolt-on to that business as we continue to drive distribution. So you're going to see very significant gains in Baby, very significant gains in Snacks, in particular, Sensible but also on Garden of Eatin', Terra are picking up some distribution. And as we get later into the year, you'll see the Tea category reset, the Yogurt category reset and the Personal Care categories reset in, I'll call it, June through August time frame. A lot of it doesn't start until the beginning of next fiscal year. But again, we're getting some kind of off-cycle wins on some of those businesses as well. So you will see continued momentum on TDPs on the Get Bigger brands and Earth's Best for sure.

Michael Lavery -- Piper Sandler -- Analyst

That's great. Thanks so much.

Operator

Our next question comes from Ken Goldman with JPMorgan. Please proceed with your questions.

Ken Goldman -- JPMorgan -- Analyst

Hi. Good morning and thank you.

Mark L. Schiller -- President And Chief Executive Officer

Good morning, Ken.

Ken Goldman -- JPMorgan -- Analyst

Hi. I wanted to ask if I -- I'm not sure I fully understand the organic sales growth guidance for the fourth quarter. So if you indulge me on some math here. I mean you talked about the third quarter's organic sales being hit by 7% by nonrecurring headwinds, right? The Brexit timing and lapping of promo. If we exclude these items then, your two-year stacked organic growth was 5% this past quarter, right? You had 4% last year, plus 1% this year, excluding that 7% hit. Your guidance is a pretty meaningful slowdown in this underlying two-year rate. My math would say that you're guiding to minus 2% to plus 1%. Again, just adding last year to your guidance. And this doesn't include the shift from Earth's Best from the third quarter to the fourth quarter, some of the stuff you talked about before, Mark. So first, is my math right there. I'm sorry to put math on to a live call here. But is it right? And second, if it is right, what's driving that two-year deceleration? I'm not sure I fully understand that.

Mark L. Schiller -- President And Chief Executive Officer

So we're guiding to mid-single-digit top line growth on a two-year basis in Q4, just as it was about 5% in Q3. But as you pointed out, there were some one-timers in Q3. The difference in Q4 is we have a much bigger overlap on COVID. We have two weeks of COVID overlap that surge in Q3 and the first two months of the quarter were overlapping non-COVID, fourth quarter was, by far, the biggest quarter in terms of volume impact from COVID as people were locked down in their homes. And so that is a headwind for the entire industry that's going to depress the actual reported numbers in the quarter. So the seven points of Brexit and the Hair Care program in Q3 becomes something similar in terms of COVID overlap in Q4, but we're still going to have underlying growth in the mid single-digit rate versus 2019.

Ken Goldman -- JPMorgan -- Analyst

Okay. I'll follow-up because I'm asking on the two year, maybe I'm not being clear. I'll follow-up on that offline, Mark. I don't want to tie you guys up here. I guess my second question would be, just a quick follow-up. You said last quarter that you'd expect fiscal '22's gross margin to be -- I think the quote was pretty darn close to 30%. The street is well below this number. I know you don't want to give too much detail at this time, but hopefully, it's a fair game since you brought it up last quarter. Are you still comfortable with that statement in that outlook, given some of the COGS inflation you've seen? I would guess the answer is yes, but I just wanted to poke around a little bit there.

Mark L. Schiller -- President And Chief Executive Officer

Yes. So we haven't given any guidance on '22 at this point. What I would tell you is we continue to see robust margin expansion opportunities. And while we will have more inflation, we're confident that we will more than offset them. So if you look at the kinds of margins that we are delivering now, getting close to 30% is certainly doable and reasonable. So -- and as I said before, I don't think we'll get all the way to 30%, but we'll get close. So we're at the 26 plus range now. On gross margin, can we tack on another 100 or more points of margin next year, maybe a little more, we're putting that plan together as we speak, and we'll give you more detail on that when we get to the summer.

Ken Goldman -- JPMorgan -- Analyst

Thanks so much.

Operator

Our next question comes from Anthony Vendetti with Maxim. Please proceed with your question.

Anthony Vendetti -- Maxim -- Analyst

Thank you. Just two questions. One on the non-dairy beverage brands that you sold in terms of annual revenue for that business and the adjusted EBITDA in that business? And then if you could just talk about the online business, how that fared this quarter in terms of growth year-over-year and then percent of revenues at this point?

Mark L. Schiller -- President And Chief Executive Officer

Yes. So on the non-dairy beverages, it's about $40 million in sales. We have not publicized what the EBITDA was. But I will say, after selling 20 brands that had about $1 billion of revenue, these are the first brand since the Tilda sale at the very beginning of this journey that were actually profit positive. So they had a couple of million dollars of EBITDA, but we haven't given an exact number. With regard to e-commerce, it's up to -- in North America, it's about 12% of our sales, much higher than the industry average. We had very robust growth in the quarter. In my opening comments, I gave the exact number. I think it was in the 30% range. And on the Get Bigger brands, in particular, it was in the 50% range, and that's on top of 100% growth last year for the business. So we continue to see a very robust business. Consumers have not stopped shopping online even as society reopens, and we expect that there will continue to be some elevated performance in e-commerce through the end of this fiscal year and into F '22.

Anthony Vendetti -- Maxim -- Analyst

And Mark, just really quick. Can you comment on the article that was published recently on Baby food arsenic levels and how you're addressing that at Hain?

Mark L. Schiller -- President And Chief Executive Officer

Sure. So I can only say so much because there's some litigation going on there. But what I will say is and the FDA has confirmed this, heavy metals are in everything we eat in the food supply. It's in the air, it's in the water. It's in the soil. And everything we are eating on this planet, it has some level of metals in them. The only regulations that we have from the government are arsenic levels in rice cereal, and we are 100% compliant with the levels that they have specified. In fact, we rejected 12% of the finished goods last year to make sure that everything we have is compliant. So we're confident that we're doing the right things. We would like to work with the FDA and some of the non -- NGOs who want to help us reduce them further. But there is no known way to eliminate metals altogether in our food supply. So we will work with the FDA. We will work collaboratively, both to get the metals down and to get regulations on the rest of Baby food, but it's really only rice cereal that has a regulation at this point, and we're totally compliant with that.

Anthony Vendetti -- Maxim -- Analyst

Okay, excellent. Thanks, thanks, I appreciate it.

Operator

Our next question comes from Eric Larson with Seaport Global Securities. Please proceed with your question.

Eric Larson -- Seaport Global Securities -- Analyst

Yeah. Thank you. Good morning everyone. So

Mark L. Schiller -- President And Chief Executive Officer

Good morning, Eric.

Javier H. Idrovo -- Executive Vice President And Chief Financial Officer

Good morning.

Eric Larson -- Seaport Global Securities -- Analyst

So the question I have, Mark, could you help us drill down a little bit more on the overall distribution potential that you have for your -- for, I guess, all your products. What sort of general ACV penetration do you have today? And I'm sure -- I know it varies by product. And what could those distribution ACV percentages go to? And over what sort of time frame?

Mark L. Schiller -- President And Chief Executive Officer

Sure. So on our Get Bigger brands our ACV ranges from about 30% to up to about 75% for things like Sensible Portions and Celestial Seasoning. Distribution is by far the biggest opportunity we have. If we can get these products ubiquitous in mainstream channels, the potential upside is hundreds of millions of dollars. Realistically, we're going to chip away at it every year. We've got to make these things must have items for the retailer. We've got to continue to drive more consumers to the brands. And we've had a great run over the last 12 months during COVID of increasing penetration and buying rate. We still see nice growth in penetration and buying rate on the Get Bigger brands. Some of the brands, I'll give you an example, Celestial Seasonings had more repeat buyers in the third quarter than our next four competitors combined.

So we are making good progress there. And as our velocities are strong, as our innovation is strong and bringing new people to the category, we're confident that we will continue to expand distribution. It's going to take a while, though. It's not like all of a sudden you turn on a light switch the brands that are 30% distribution are all of a sudden at 60%. It's going to be a few points here, a few points there. Every reset, we have to be net winners. And I think as you heard me say earlier, in the Get Bigger categories, we're confident that we're going to be picking up distribution across most of the categories that we compete in, in the Get Bigger segment.

Eric Larson -- Seaport Global Securities -- Analyst

Okay. Great. And then just a quick follow-up question. I think Javier said that your cost inflation is running about 2%. Right now, it will be a little bit higher in F '22 without quantifying that yet. But can you talk a bit about what pricing you are taking or have taken? Or is that something that's further down the road, given your ability to cover that with productivity?

Mark L. Schiller -- President And Chief Executive Officer

So what I would tell you on pricing is we've been taking pricing all along. And as I mentioned, I think, on previous calls that we haven't necessarily been taking it by a list increases. We've been taking it by a price size architecture. We've been taking it by revenue management, selling more of the things that are higher-margin and less of the things that are lower margin. We certainly SKU rationalize a lot of low-margin items out of our portfolio that has the rest of the portfolio netting incremental pricing. We look at the trade effectiveness that we have. So we have been getting pricing. And actually, if you look in the syndicated data, you'll see that, again, in the most recent four weeks, we're getting more pricing than the 12 weeks, which is more than we've gotten in the 52 weeks.

So that pricing is starting to materialize. But as I just said, not all of the pricing that we're taking is going to show up necessarily in the syndicated data, if it's coming out of things like price size architecture, which wouldn't be as evident. So we're confident that we can offset the inflation that's coming next year. Because we are taking selective pricing, but also because we have a very robust productivity agenda that we've talked about on previous calls, and that's not going to slow down as we exit this year and move into next year.

Eric Larson -- Seaport Global Securities -- Analyst

Okay. Then just a quick final question. Obviously, you had your big warehouse club promotion last year that you didn't have this year. And there were a lot of promotional events that either happened or didn't happen with COVID last year and the timing of those. Is there anything coming up that we should really think about in terms of a promotion you did do last year, either in the fourth quarter or the first half of next year, that you may or may not repeat, just to kind of lay out what we might expect from the drastic changes in promotional activity from everybody last year?

Mark L. Schiller -- President And Chief Executive Officer

The first thing I would tell you is the club program that we did not have this year because of merchandising constraints from the retailer. We do have confirmation that we're getting the program next year. So while it's a headwind this year in Q3, it will be a tailwind next year, probably late Q2 or Q3 of a similar magnitude. So that's good news for the F '22 algorithm. There's no unique sizable promotion like that, that we're going to lap anytime in the next six months. What I would tell you is last year, when the pandemic hit, there was less promoting going on because many people in the industry were having trouble servicing the business and keeping the shelf stock. So as people add back trade spending, you probably will see elevated trade spending as we go through the next six months of the year versus a year ago. In our case, our trade spending in the third quarter was up a little bit versus a year ago, but it's still down considerably versus what it was in F '19 when we started eliminating kind of uneconomic ROI activity. So you'll see more promotion activity going forward. But for us, it will still be less than it was two years ago.

Eric Larson -- Seaport Global Securities -- Analyst

Perfect. Thank you. I appreciate your comment.

Operator

Our next question comes from Scott Mushkin with R5 Capital. Please proceed with your question.

Scott Mushkin -- R5 Capital -- Analyst

Hey, guys. Thanks for taking my questions. So I know you, Mark talked about resets that are taking place, and you feel pretty good about them and gaining some shelf there. Just wondering what you're going to do to make sure that the sell-through is good at retail and kind of plans there. I mean, obviously, Hain before you guys joined, they would get on shelf. And then a year later, they were kind of getting off is maybe the support wasn't as great as it should have been. So what are you guys doing on that front?

Mark L. Schiller -- President And Chief Executive Officer

Yes. So a few things. First of all, we, for the last two years, have been increasing our marketing spending on the Get Bigger brands. Part of that came from moving money from to Get Better brands to Get Bigger. Part of it came from just increasing the absolute dollars. And we've also dramatically reduced the nonworking cost because when I got here, every brand had its own ad agency. So the amount of money that we're spending on agency fees is now being spent against the consumer. So the actual spending on these brands is much higher than it was previously. The other thing I would say is we're now doing real innovation. Instead of -- here's the 37 flavor of Sleepytime Tea, we're bringing new benefits to the category that are proving to be very incremental that are getting very high repeat. And our job, as you just pointed out now, is to get the trial. We got to get them on shelf, which is happening in these resets. We've got to get the trial. It's going to be a combination of shopper marketing that we do retailer specific to get on display, to partner in their e-commerce channel to get into their circulars. To do geo-targeting around their stores because, again, not all of this distribution will be ubiquitous.

So we'll be very surgical in terms of how we do that. And then the other part is digital, social, mobile, where we have been doing a lot and we will continue to do a lot to make sure that these products gain awareness among the target audience. And then e-commerce, which I just alluded to, is another great way to generate trial. You get on the shopping list in e-commerce and you stay on there for a long time. So there's a lot of our marketing dollars are focused in the e-commerce channel because that's where millennials are, that's where high income consumers are, that's where the health-conscious consumers are. And so we're putting a lot of our marketing dollars there to generate trial and awareness as well.

Scott Mushkin -- R5 Capital -- Analyst

Terrific. My follow-up question is regarding, I guess, something else that was kind of Hain's past being very opportunistic in making acquisitions. I know you guys have been divesting, but natural organic, kind of the way you play is always kind of a little bit food fashion. Specifically thinking about the Snacks business, but I guess, the entire business, is that something that's on your guys radar? Or is that something that's just not?

Mark L. Schiller -- President And Chief Executive Officer

No, it's absolutely on our radar. So while we still have a few more brands to shed, we are very much interested in looking for acquisitions in our core categories. Snacks would be one of them, for sure. What we need to do is find sizable assets. So what I don't want to do is repeat the past where we go and buy things that are $5 million in sales, $15 million in sales with the expectation that we're going to nurture them to $100 million. We already have too many brands. So what we need to do is find assets that have some scale. We've dramatically cleaned up the balance sheet, which allows us to have the flexibility to make a sizable acquisition if the right one comes along, and it's just a matter of finding them. We're ready when we find it.

Scott Mushkin -- R5 Capital -- Analyst

Terrific. Thanks for the color, guys.

Operator

Our next question comes from David Palmer with Evercore ISI.

David Palmer -- Evercore ISI -- Analyst

Thanks. Good morning.

Mark L. Schiller -- President And Chief Executive Officer

Good morning.

David Palmer -- Evercore ISI -- Analyst

Question on SKU rationalization versus the new products at certain points, I think you've talked about maybe fiscal '22 being a year when you get into a little bit more of a run rate where the new products coming in and the SKU rationalization sort of net each other, and you're not doing some of the heavy lifting type SKUs, but rather just the ongoing course of business type stuff. When do you think that transition happens?

Mark L. Schiller -- President And Chief Executive Officer

So I think we're there now. We were ready to be there last year, but again, the categories didn't reset. But now that we're getting this innovation and our internal requirement is for every item we launch, we're taking at least one item out. And so I don't expect that we will see significant SKU rationalization with the possible exception of Personal Care because there's just hundreds of SKUs across multiple segments. When you think about Personal Care, it's not really a category. It's a department. You've got Hair and Sun and Lotions and Deodorants and Shampoos and many, many, many segments. So what we will do there is probably look at some of the smaller things that aren't really contributing and just adding complexity and do some SKU rationalization there. But on the rest of the portfolio, we're at a place where we've really cleaned up the mess. We've rationalized 1,000 SKUs in the last couple of years, and that's why we're confident that we're going to see distribution gaining for the first time since I've been here, which will also eventually turn into top line growth as we lap all of these divestitures that we've been doing.

David Palmer -- Evercore ISI -- Analyst

Just a comment, I think it will be interesting to see you not have these COVID-related headwinds with regard to Personal Care and certain elements that I know your innovation was angling toward like Sunscreen, for example, which wouldn't be as much of a thing. And then also on the Snacks side, maybe if you have a comment there, but I wanted to ask you one more long-term one. And that is, when you've talked about some of these gross margin targets, maybe not targets, but you have comments about 30% type gross margins. What is the sort of EBITDA margin that goes with a 30% gross margin? And how should we think about the reinvestment that you'll be making alongside of gross margins like that?

Mark L. Schiller -- President And Chief Executive Officer

Yes. So if you go back to Investor Day, we laid out very clear kind of top line in EBITDA targets. We're well within that range, two years in, instead of three years in. We're certainly on pace to get toward the top end of that range by this time next year, which is what the three-year meeting had laid out. My intent is that we're going to continue to invest in marketing, while we are increasing margins. So it isn't just about to take all the margins to the bottom line. It is about reinvesting for growth in these great brands and the great innovation that we're generating. So as we continue to improve gross margin, you should expect some of it's going to go to the bottom line and some of it is going to go into supporting the business to propel future growth.

David Palmer -- Evercore ISI -- Analyst

Thank you.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mark Schiller for closing comments.

Mark L. Schiller -- President And Chief Executive Officer

Thank you. So look, it was certainly a terrific quarter for us, the top line came in where we said it would. There's a lot of puts and takes as we laid out on this call, but the underlying health of the business is strong. Get Bigger brands are growing and getting stronger. The International business, we told you when we sold the fruit business that you would start to see the strength of that business. And we are very bullish on the future. So we look forward to another great quarter and then laying out for you this summer, what the F '22 plan looks like. And I know we have a lot of one-on-ones today, so I'll answer any additional questions you have at that time. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Anna Kate Heller -- Investor Relations

Mark L. Schiller -- President And Chief Executive Officer

Javier H. Idrovo -- Executive Vice President And Chief Financial Officer

Michael Lavery -- Piper Sandler -- Analyst

Ken Goldman -- JPMorgan -- Analyst

Anthony Vendetti -- Maxim -- Analyst

Eric Larson -- Seaport Global Securities -- Analyst

Scott Mushkin -- R5 Capital -- Analyst

David Palmer -- Evercore ISI -- Analyst

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