Hain Celestial is down 55% since my bearish call – what next? (NASDAQ: HAIN)

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Introduction

Almost two years ago, at the end of 2020, I turned bearish on Hain Celestial (NASDAQ: HAIN). Although the global economy rebounded as consumer confidence levels rose on the back of positive vaccine news, I wasn’t sure Hain deserved to trade at around 40x free cash flow level. Although I believe in the demand for healthy food products, Hain did not deserve the premium valuation and its stock price has fallen more than 50% since my previous article.

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Fiscal 2022 didn’t even come close to bullish 2020 expectations

Fast forward to September 2022. The company released its full-year results for the 2022 fiscal year that ended in June, and the financial results didn’t even come close to what was expected based on the longer-term outlook. long term provided two years ago.

Margins fell again in 2022, with revenue down about 4% to $1.89 billion, while COGS fell less than 1%. That dropped gross profit from nearly $492 million to $427.4 million, nearly 10% lower than in fiscal 2020, a year that hasn’t impressed me yet.

income statement

Hain Celestial Investor Relations

Despite this disappointing gross margin development, operating income was down only a few million dollars compared to fiscal 2021, mainly due to the absence of impairment charges and lower maintenance costs. transformation. Excluding these two items, fiscal 2021 operating profit would have been $180 million while fiscal 2022 operating profit would have been $117 million. Thus, the rather small decline in operating income in the 2022 financial year is not due to the fact that Hain was able to limit the damage, but to the fact that 2021 was a difficult year with many impairment charges excluding Treasury.

Net income was $78 million or $0.84 per share, as earnings per share was slightly boosted by a lower number of shares: the average number of shares outstanding decreased by approximately 7 % and, as of August 18, the effective number of shares was an additional 4% less.

As the company’s income statement contained quite a few non-cash items in fiscal 2021 that weighed on net income, I believe it is fairer to judge Hain Celestial based on its performance as free cash flow as these calculations do not take impairment charges into account.

As you can see below, Hain reported operating cash flow of $80.2 million in fiscal 2022, but this was negatively impacted by a continued accumulation of fund items. rollover that absorbed approximately $64 million in cash. We are seeing a strong build up of inventory and hope that Hain will be able to monetize it in the current fiscal year.

Cash flow statement

Hain Celestial Investor Relations

Total capital expenditures decreased to just under $40 million (excluding acquisition-related cash flow), resulting in adjusted operating cash flow of $104 million or 1. $16/share. Not as bad as feared, but the company clearly didn’t come close to generating $122 million in free cash flow in fiscal 2021.

We also find that the company has spent over $400 million on stock buybacks and another $260 million on acquisitions. That’s a pretty high expense bill for a company that generated just over $120 million in adjusted free cash flow and only $40 million in reported free cash flow (including working capital investments ). The cash flow statement clearly shows that the company added quite a bit of debt to its balance sheet as it paid off just under $400 million in debt but raised $1.06 billion in new debt.

At the end of June, the company had $66 million in cash, but nearly $890 million in debt, translating into net debt of more than $830 million. While we should see a positive contribution to EBITDA from the assets acquired this year, I am a bit cautious when I see a level of net debt above 5x EBITDA and even above 4x adjusted EBITDA.

Calculation of adjusted EBITDA

Hain Celestial Investor Relations

In addition, the majority of the new debt on the balance sheet came from a variable interest rate revolving credit facility. A 2% increase in interest rates will increase interest expense by almost $12 million, and even on an after-tax basis, free cash flow would decrease by about $9 million.

Debt evolution

Hain Celestial Investor Relations

The outlook for the current fiscal year is not really helping

Despite acquisitions and continued streamlining of operations, Hain should not be expected to do better this year. According to official guidance, the company expects both adjusted revenue and adjusted EBITDA to move in a range of minus 1% to plus 4%, and sees how inflation continues to impact business expenses. exploitation at the producer level and how it continues to erode. consumer confidence, we probably shouldn’t be surprised if the company is at the lower end of the forecast.

Guidance for FY2023

Hain Celestial Investor Relations

Add to that the fact that interest charges will rise, not only because of rising interest rates, but also because this will be the first full year that Hain will have to deal with the rising level of debt. gross, and I’m not even sure Hain will be able to keep his free cash flow unchanged. This will depend on the evolution of the restructuring expenses in cash.

Investment thesis

It will be interesting to see how the company evolves over the next few quarters. Since it sells a premium product, it is not unlikely that consumers will switch to cheaper products, as only “hardcore” health-conscious consumers will stick to premium products. It looks like Hain Celestial is trying to “redeem” itself from its lackluster performance, but despite spending over a quarter of a billion on acquisitions, EBITDA growth will be quite weak.

Had it not been for the much higher net debt level and anticipated increases in interest charges, I would have been optimistic for Hain based on the current valuation. But buying back shares at an average above $38/share wasn’t the smartest move, especially not when you plan to spend $300 million on capex and acquisitions.

At this point I switch to a “neutral” at best. Hain seems to have set the bar quite low for this year, and if he fails to clear the hurdle, the market is unlikely to react well. I’m still on the sidelines, but no longer very bearish.

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