Hain Celestial Group Inc. (NASDAQ:HAIN) released its fourth-quarter and fiscal-year 2017 results on Aug. 29. And while the company reported that revenue declined 2% from the year-ago quarter, a closer look at the results -- particularly details about what management has already started doing to improve both sales and profits -- indicate that the future could be looking up.
Let's take a deeper dive into Hain's fourth-quarter results, as well as the steps management has taken to improve things.
Hain's financial results
Here is Hain's top- and bottom-line results for the fourth quarter:
|Metric||Q4 2017||Q4 2016||Change (YoY)|
|Net income (loss)||$0.3||($88.6)||N/A|
|Earnings (loss) per share||--||($0.86)||N/A|
Hains' full-year 2017 results:
|Net income (loss)||$67.4||$47.4||42.2%|
|Earnings (loss) per share||$0.65||$0.46||41.3%|
On the surface, Hain's profitability looks as if it improved significantly from 2016 to 2017. However, this is where it's good to get beneath the surface of the financial results, and not just the GAAP results. That's particularly true of Hain right now.
As most of you are aware, Hain's June earnings covered three quarters and had details of adjustments to reported results going back as far as 2014. And while the adjustments to prior reported periods were non-material, the company incurred significant financial expense to perform the audits and to implement new financial controls.
Hain is also in the midst of major organizational changes which have resulted in significant non-recurring items. By breaking these items out, investors can get a more clear picture of what is happening with the company.
A deeper look at the details
As Hain's international sales grow, foreign exchange in playing a bigger role in its results, and to some extent is masking its growth. Adjusted for currency impact, Hain's global sales were up 2% in the fourth quarter and 3.2% for the year. Here's a look at constant currency revenue changes by region for the full year:
|United States||United Kingdom||Canada||Europe|
The company also was forced to divest a portion of one of its U.K.-based businesses to acquire Yorkshire Provender in 2017. If we remove sales related to the divested businesses from the U.K. segment and adjust for sales from the acquired business, full-year sales were up 6%, not 12.9%.
Hain also reported a breakdown of expenses related to its adjusted earnings calculations. Here are some key ones:
- $29.6 million in accounting review expenses.
- $10.3 million in acquisition, restructuring, and integration expenses.
- $40 million in asset impairment expenses.
The company also said that its steps to realign its inventory (it eliminated 20% of its U.S. SKUs) resulted in a $60 million reduction to sales for the full year. This wasn't an expense, but was treated as cost of sales, affecting revenue and gross profit dollars.
So as you can see, all of these generally non-recurring items had a significant impact on Hain's top- and bottom-line results. But again, it's important to keep these adjusted results in proper context. For instance, Hain took more almost $128 million in impairments in fiscal 2016, which is why its GAAP earnings results that year were so poor. On an adjusted basis, 2016 was far more profitable, with adjusted $1.85 earnings per share, versus $1.22 adjusted EPS in fiscal 2017.
Furthermore, essentially all of the 2016 impairment charges were non-cash, while a significant portion of the items Hain management separated from its adjusted results in 2017 were cash expenses. Yet even with this reality, the company still generated better cash flows in 2017. Cash from operations was $217 million, up $10 million year over year. However, working capital (current assets minus current liabilities) decreased about $9 million.
It's been a strange year and change for Hain investors, and one that's required a lot of patience. Before the company went silent and took several quarters to get its books in order, sales were growing, but there were some signs that troubles were brewing, particularly in the U.S. Fast-forward to today, and the company is well on its way to implementing the strategy outlined in its Project Terra initiative.
One big step was the SKU rationalization. Management says that by eliminating these products, it will have more resources to focus on its top 500 SKUs, which drive some 95% of sales and generally are growing faster than overall sales. This and other aspects of Project Terra are expected to reduce manufacturing complexity, planning expense, and deliver faster top-line sales growth.
And all of these things should result in better operating leverage, which would mean earnings and cash flow growth at a faster rate than sales.
In all, management expects $350 million in savings over the next three years, and plans to dedicate $50 million of that to lower costs, more marketing, and other "investments in the consumer," as CEO Irwin Simon described it.
For fiscal 2018, management expects to return to solid growth, with sales between $4.97 billion and $3.04 billion, up 4%-6% from the just-ended year. Adjusted earnings before interest, tax, depreciation, and amortization are expected to increase 27%-36% to $350 million to $375 million, with $100 million of that coming from Project Terra-related savings. This is expected to help drive adjusted earnings of $1.63-$1.80 per share, compared to $1.22 adjusted EPS in 2017.
Cash flows are also expected to improve, with cash from operations between $235 million to $270 million, and capital expenditures of $75 million. That would leave the company with $160 million to $195 million in free cash.