Hain Celestial Group Inc (HAIN) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hain third- quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Anthes. Ma'am, you may begin.

Good morning, Katie, and thank you all for joining us today. Welcome to Hain Celestial's third-quarter FY16 earnings call. Irwin Simon, our Founder, Chairman, President, and Chief Executive Officer; John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial North America; Pat Conte, Executive Vice President and Chief Financial Officer; and Jim Meiers, our newly appointed Chief Operations Officer Worldwide, as well as several members of the Hain Celestial Management team are with us here today.

Our discussion today will include forward-looking statements, which are current as of today's date. We do not undertake any obligation to update forward-looking statements, either as a result of new information, future events or otherwise. Our actual results may differ materially from what is described in these forward-looking statements. And some of the factors which may cause results to differ are listed in our publicly filed documents including our 2015 Form 10-K filed with the SEC.

A reconciliation of GAAP results to non-GAAP financial measures is available in our earnings release, which is posted on our website at www.hain.com under Investor Relations. This conference call is being webcast and an archive of the webcast will be available on our website under Investor Relations. Our call will be brief. Approximately one hour, so please limit yourself to one question. If time allows, we will take additional questions and Management will be available after the call for further discussion.

Now, let me turn the call over to Irwin.

Thank you, Mary. Good morning, everyone. Welcome to our third quarter FY16's earnings call. We have a lot of exciting initiatives to report in addition to our financial results. We're pleased to report worldwide net sales up 13%, or 15% in constant currency with mid-single-digit organic growth.

Importantly, the US business returned to growth up 3% in constant currency versus a year ago. Our GAAP earnings for the third quarter were up 47%. Our adjusted earnings were up 9% compared to the prior year.

Health and wellness, transparency and sustainability continue to drive consumers' choices, not only here in the US but in other parts of the world. One of our customers in the UK cited eating healthy as the number three concern by consumers after both personal and financial insecurity. Hain has consistently been there at the forefront of all these trends and we will continue to be a leader in the industry as we take our business to the next level of growth.

It was great to have many of you join us at the Natural Products Expo West with record-breaking attendance of over 75,000 people. We continue to drive innovation with the introduction of over 100 new products which have been received enthusiastically by our retail partners. For example, Whole Foods Market recently recognized Terra as one of their top snack brands by awarding them the 2016 Supplier Award for best new product for Terra Chips in partnership with their (inaudible).

As a leader in the natural organic industry, Hain continues to evolve to address changes within this organic natural fast-moving market. As you know, early November, we began working on a project called Project Terra which focused on best practices of Hain and to confirm our growth opportunities and to simplify the business, identify cost-savings and to solidify our path which we're comfortable with to get to $5 billion by year 2020.

In order to fund this growth we are shifting investments toward our greatest brand potential and raising the total level of investment in our business through worldwide savings efforts of approximately $100 million. To that end, I felt this needed a leader and a project manager. Jim Meiers, our Chief Supply-chain Officer in the US, will become the Project Terra leader with a new role as Chief Operations Officer of Hain Celestial Worldwide and being responsible for supply chain, procurement, productivity and manufacturing.

Over the years, at Hain, Jim has got a lot of productivity savings which he will tell you about in a few minutes. Jim will share more of these areas with you, which he has done, as I said. Jim fields a great team in operations; we've begun an external search for Jim's replacement. Jim would like to think there is no replacement for him.

Our strategic review also helps us sharpen Hain's core platform for growth based on consumer habits and needs. Beginning in our FY17 in the US, our brands will be categorized under strategic platforms as we execute on a broader mission to create, inspire a healthier way of life. The grouping of brands was determined by common consumer needs, route to market or internal advantage to provide a strategic roadmap to continue our natural and organic leadership position which I began in 1993.

The new platforms will also let us look more closely at distinct channel strategies for our brands, ensuring that we continue to extend our advantage in the natural and to the [grow] in the new home market. These platforms will apply globally and represent distinct opportunities for incremental growth and margin improvement aligned with consumer demand. These platforms are Fresh Living, refrigerated food from the perimeter of the store with high growth potential brands like Greek Gods, Blueprint, our plant-based nondairy food and beverages as well as Hain Pure Protein, a robust growth business now expanding to higher-margin deli business.

Around the world, we have about $1 billion in the refrigerated fresh categories. Better-For-You-Baby, one of our global businesses in a high-growth category where Hain is a leader with Ella's being the number one baby food in the UK and Earth's Best going beyond baby food snacks to diapers to formula to meals and aging up with kids into more healthy products. Better-For-You snacking, high-growth healthy to go snacks anchored by Terra, Garden of Eatin' and (technical difficulty). Better-For-You Pantry, four consumer staples anchored by Celestial Seasonings, Spectrum and MaraNatha. And last but not least, Pure Personal Care.

Brands focused on providing consumers with cleaner, gentler ingredients where all the botanical is a star supported by Jason's Avalon Organics and [Cleanaleeb]. And just recently acquired Live Clean Products. Building these platforms means investing strategically in enhanced trade, marketing innovation and insights for the top 15 brands that we expect will drive our growth and improve our margins.

We will adjust and align pricing, rethink price tax architect, reallocate promotional spends based on our return on investment, invest in trade, marketing to build greater share and reprioritize our growth brand. In the US, this roadmap for growth not only focuses on our largest and fastest growing brands, but also sets us up to improve our margin structure in multiple ways. By investing for growth -- by investing in growth in multiple ways, advantage margins, for example, snacking and personal care, by divesting brands with disadvantaged cost structures.

We are also creating a venture unit which we are calling Cultivate Ventures which will have three purposes. To strategically invest in small brands that may be lagging in high potential categories like DeBoles, our pasta brands, Sunspire, our chocolate brand, and by giving them dedicated creative focus and resources. To incubate small acquisitions that would not be given sufficient attention in our core portfolio, like I did in 1993, version two of Hain. To invest in products, concepts and technologies in food and wellness space which align with our mission.

Cultivate Ventures will be run independently, funded and staffed with a dedicated team. Finally we're for packaging for sale several of our longtail brands representing approximately $30 million in net sales which no longer fit into our core strategy for future growth. We'll provide you more detail about Project Terra when we go into our FY17 guidance, along with our fiscal year-end report.

Now, to our recent results. Our operating segments posted very strong results, including the US business which I'll let John take you through in a little while. In our UK segment, net sales were up 22% in constant currency, including the acquisition of Orchard House which we did in December, which achieved double-digit growth. We achieved growth from our spreads business, Tilda performed extremely well around the world with strong sales and margins.

In our rest of the world segment, [Varg] who runs Europe and [Dina] who runs Canada did a great job with their business. Hain Celestial's Europe sales were up double digits in constant currency including double-digit brand growth from Danival, Dream, Joya Natumi, a strong nondairy business, and Celestial Seasonings as well as high single digits from our Lima brand. Gross margins also improved 200 basis points.

Hain Celestial Canada continued to perform well despite currency, up single digits in constant currency. Strong performance came from our meat-free Yves offering, Sensible Portions and Terra Chips. Our Hain Pure Protein business grew 37% over the prior year. Our Plainville Brand Farms grew 30%. Our FreeBird up 11%. Our Empire Kosher business was flat and that's due to a shift of Passover which happened in the fourth quarter this year.

Along with our venture group, we will continue to look at acquisitions. There is plenty of them out there. At the same time, we are quite excited about going into FY17 and returning to mid-single-digit growth in our US business along with achieving our 2015 margins. We also look to expand in many countries as today we sell in over 70 countries.

With that, I will turn it now over to Jim Meiers that will take you through his plans on how he's going to shore up $100 million in savings. Jim?

Thank you, Irwin, and good morning, everyone. You've heard me say before at Hain Celestial US, we have a proven productivity process with a track record that has consistently delivered cost savings year-over-year. We implemented this process 10 years ago and over the last three years have delivered over $100 million in cost reductions at a 13% CAGR.

Three years ago we rolled out our productivity process globally with not only a regional focus, but an increased focus on global opportunities. In FY16, we expect to deliver over $50 million in cost reductions globally.

As Irwin mentioned, we worked with BCG as a part of Project Terra to assist us in evaluating our supply chain to help us identify additional areas to drive savings, both tactically and strategically. BCG provided us with additional resources, proven tools and competitive benchmarking to further model opportunities that we expect to deliver upward of $100 million of cost savings globally over the next three years.

This is incremental to our current productivity process. Hain will use these savings to reinvest in our growth brands to drive consumption.

Let me provide more detail on the Project Terra supply chain areas that we will be focusing on to drive the $100 million of savings. There are five key buckets where we will drive cost savings. The first bucket is optimizing procurement and logistics. We will set up a procurement group in Lake Success that will focus on global purchases and cost reduction. Leveraging our global volume and spend will be key to identify areas of opportunity to reduce costs and complexities.

In the US, we're in the process of rebidding our freight lanes and revisiting our transportation routing guides. We will optimize our ocean freight by leveraging the 10,000 plus containers that we ship around the world annually.

The second bucket SKU optimization, where we are identifying low-volume SKUs to take out and replace with high-volume ones. That will help us to reduce complexity, take waste out of the system, and improve both internal and external supply chain costs.

The third bucket is optimizing our co-packing network by reducing the number of copackers, rebidding key categories, identifying joint purchases on ingredients and packaging with our vendors and suppliers, driving value engineering to reduce costs while maintaining, if not improving, quality.

The fourth bucket is facilities rationalization. We're evaluating make versus buy across our network of facilities. The fifth bucket, reducing spoilage and discards by reinvesting in systems, continuing to improve our SNMP process, which is sales, operations and planning, and reevaluate our spoils allowance and key is working lockstep with the SKU optimization process. In August, we will update you with more specifics on the buckets, the savings, and the FY17 timing.

So, let me tell you, I'm very excited about my new role. It's all about accountability. And having one person in charge of Project Terra and global operations will provide opportunity, bringing a consistent approach to optimizing our supply chain from a global standpoint and taking out costs.

With that overview, I'll now turn it over to John Carroll.

Thanks, Jim. Congratulations on your appointment to Chief Operations Officer of Hain Celestial. Believe me when I say there is not a better person Irwin could've chosen for this important role.

Good morning, everyone. I'm pleased to say that Hain Celestial US net sales returned to growth in Q3. Our Q3 net sales of $351.9 million were up 2.4% versus a year ago and up 2.7% on a constant currency basis. These increases represented a sequential improvement of over 500 basis points versus our Q2 results.

Q3's return to growth was achieved despite two challenges. First, Celestial Seasonings sales declined versus year ago; and second, we lost Sensible Portions display sales due to Walmart's clean floor policy. These two issues cost us approximately $6 million in Q3 net sales. Without these issues, our net sales would have been up 4% in Q3.

Q3 consumption for our top 13 brands, which account for over 80% of our MULO sales, was up 1% versus year ago. Our growth was impacted by soft Celestial Seasonings consumption trends, ex Celestial Tea, consumption for our top 12 brands was up 3.4%. We experienced double-digit or mid-to-high single digit Q3 MULO gains on several brands, including the Greek Gods, MaraNatha, First Best Frozen, Jason, Alba Botanica, Terra, Garden of Eatin' and Sensible Portions, Imagine Soup, Westbrae and Sunspire.

Now as I mentioned on our last call, MULO only accounts for approximately 60% of our consumption. For example, MULO does not include Ella's Kitchen UK, where we continue to be the number one baby food brand with double-digit consumption growth. MULO also does not include Amazon, which is our fastest growing top 10 customer and our number one baby customer. It doesn't include, quite frankly, any of our fast-growing e-commerce customers. And finally, MULO does not include Costco where we're seeing very strong year-on-year growth.

Moving on to the financials, Hain Celestial's US Q3 adjusted operating was $57.2 million, which was down slightly $1.8 million versus year ago. Our Q3 adjusted operating income margin was 16.3%, down 90 bps versus year ago. Year-on-year income in margin declines are due to Celestial Seasonings' lower sales [unstable] mix. However, despite that, our Q3 adjusted income margin of 16.3% was up 110 basis points on a sequential basis versus Q2.

During that last call, I identified four underperforming brands and outlined action plans to improve their performances. These brands were Sensible Portions, MaraNatha, Spectrum and Celestial Seasonings. I'll give you a brief update on how these plans are performing, starting with Sensible Portions.

As you may recall, Sensible Portions' consumption had slowed in the first half of 2016 due to a loss of displays at Walmart. We worked with Walmart on a plan to increase support of the brand with improved merchandising and resumption of displays which started in February. We also expanded distribution of our stackable chips into the grocery channel. These products are now available at Kroger, Publix, Albertsons Safeway, Meijer, Target, Giant Eagle and Sprouts, with more retailers to come.

Our Q3 results indicate the plan is working as Sensible Portions MULO consumption was up 9% in the latest 12 weeks. We are pleased with the results on Sensible Portions.

Next, a quick look at MaraNatha. We strategically lowered MaraNatha pricing in Q3 to reduce competitive price deltas. We funded the price reduction, in part, from reduced almond profits.

The response has been very strong. MaraNatha consumption and distribution are both up 10% in the last 12 weeks. The brand has also picked up some important new distribution wins at Walmart, Sprouts and Target.

We've also made progress rebuilding our private-label. We will begin shipping private label almond and our peanut butter, private-label peanut butter, to a very large retailer this month. So we're making good progress on MaraNatha.

Quick look at Spectrum. Just like MaraNatha, we also strategically lowered pricing on Spectrum coconut oil to reduce price deltas versus competition. Just like MaraNatha, this reduction was funded in part due to savings on the commodity coconut. The response to Spectrum's pricing action has, however, been mixed. Spectrum coconut oil sales trends are up in direct customers and they reflect the new pricing immediately.

Distributor supply customers did not reflect the pricing as quickly and have not seen the consumption gain. We expect this price decrease to be fully reflected across all key customers, direct distributor supplies, in the next 90 days.

Finally, a quick look at Celestial Seasonings. We invested in this year to drive consumer awareness of our new Celestial Seasonings package, this full-page [effasize], shelf signage in store, shopper marketing program, social media and reduced pricing. Response to all this activity, quite frankly, was disappointing as Celestial Seasonings' bagged tea dollars sales trends did not improve in Q3.

Our research and consumer contacts told us that our core consumers were confused by our new package and in some instances chose another brand of tea. We made a strategic decisions to relaunch Celestial Seasonings classic packaging, i.e., our previous package for the next tea season. We will transition to the classic package on shelf by September and reclaim our lapsed users with an impactful tea season support program. We will have more details on this program for you on our fourth quarter call.

The last initiative I want to discuss is our top SKUs focus. Consumption trends on our top [five 800] SKUs which account for -- at 800, account for 97% of our MULO consumption, are outperforming our total business by almost 500 basis points. As I said in the last call, we prepared for this year's category review season with an emphasis on driving those SKUs.

We've seen a 6% increase in our MULO distribution of the top 500 to 800 SKUs. We will continue to focus on driving these top SKUs' distribution across all channels. These SKUs provide the highest return for Hain, and improve our growth and margin profile.

To summarize, our Q3 performance reflected a return to growth for Hain (inaudible) the US. Our Q3 net sales were up 2.4% and up 2.7% on a constant currency basis. These increases reflected a sequential improvement of over 500 basis points versus our Q2 results. We had 3.4% MULO consumption growth on our top brands ex Celestial Seasonings.

We saw a double-digit or mid-to-high single-digit growth across a variety of brands in our portfolio. We drove 6% MULO distribution growth versus year ago on both our top 500 and our top 800 SKUs. We delivered 16.3% in Q3 adjusted operating income margin of over 100 basis points versus Q2.

We made a strategic decision to go back to Celestial Seasonings' classic package. We are excited about this decision, because we believe it will help us recharge our Celestial Seasoning business.

Finally, as Irwin mentioned, we're working towards delivering the FY17 growth at mid-single-digit levels, along with margins at FY15 levels. So, with that, I'll turn the call over to Pat Conte. Pat?

Thank you, John. Good morning, everyone. I will take you through our third-quarter financial highlights and guidance. Net sales for the third quarter were $750 million, compared to $663 million in the prior year's third quarter, a 13% or 15% increase on a constant currency basis. After adjusting for acquisitions, our net sales increased mid-single digits at constant rates.

The sales increase was primarily driven by strong performance by our US business, growing low-single digits in the third quarter. This is up from low-single digit decline in the first half of the year. We're extremely pleased with the third-quarter performance and expect these trends to continue in the fourth quarter.

Solid performance at our Hain Pure Protein segment, which produced high-single-digit organic growth when adjusting for the Empire acquisition. Our UK business delivered low-single-digit organic growth on a constant currency basis, after adjusting for the Orchard House acquisition. Our European business delivered high-single-digit organic growth on a constant currency basis, after adjusting for the Mona acquisition.

Our Canadian business was roughly flat organically at constant rates. The Orchard House, Mona Group, Empire, Kosher and Belvedere acquisitions represented $93.5 million of net sales in the quarter, as compared to $18 million in the prior year. Net income was $49 million compared to $33.4 million in last year's third quarter. We earned $0.47 per diluted share on a GAAP basis compared to $0.32 per diluted share in last year's third quarter.

On pretax non-GAAP adjustments, in the third-quarter of $2.3 million, related to the following: a $9 million gain associated with the fire at Tilda's rice milling facility. We purchased new capital equipment with our insurance proceeds and the new fair value of these assets resulted in a gain.

Acquisition, integration and restructuring-related fees and expenses of $5.7 million, primarily related to additional contingent consideration earned for the Belvedere acquisition, integration costs associated with the Orchard House acquisition, and severance costs; $2.7 million of costs associated with Celestial Seasonings packaging launch support; and $3 million of incremental costs associated with our chiller equipment breakdown at our Hain Pure Protein turkey facility, primarily related to labor associated with replacing the temporary chiller with the new chiller.

From here on, I will only be speaking to adjusted amounts. This quarter's net income was $50.6 million compared to prior year's third quarter of $46.5 million, a 9% improvement. Earnings per diluted share were $0.49 compared to $0.45 in last year's quarter.

As expected, net income this quarter was impacted by $1.3 million of unfavorable foreign currency or $0.01 per share. Gross margin was 23.5%, compared to 24.7% in the prior-year third quarter. This 120 basis point compression was principally driven by our sales mix in the US, mainly due to lower sales of tea.

However, we are pleased with the progress we've made in the US on a sequential basis, with margins improving almost 100 basis points, the impact of Project Castle, but here, we're forecasting to break even by fiscal year's end and the effects of US dollar purchases in our Canadian business, partially offset by increased sales of higher-margin branded products at both Hain Pure Protein and European segments.

SG&A expense for the quarter, excluding amortization of acquired intangibles, was 12.5% of net sales, which is in line with last year's third quarter. We continue to be extremely focused on proactively managing these expenses. Operating income increased 4% to $80.5 million compared to $77.5 million in last year's third quarter.

On a constant currency basis, operating income increased 6%. Operating margins grew across Hain Pure Protein, the UK, Europe, while the US and Canadian margins were compressed for the reasons I previously mentioned.

The effective income tax rates for the quarter were slightly below 31%. We generated $32.2 million of operating cash flow in the current quarter as compared to $15.9 million in the prior-year quarter and free cash flow of $15.4 million. Our cash conversion cycle was 69 days, which is consistent on a sequential basis.

Capital expenditures for the quarter were $16.8 million. We've achieved approximately $13 million of productivity savings for the quarter and expect to generate another $16 million of productivity savings in the fourth quarter.

Our balance sheet remains strong. At March 31 our cash balance was $125 million. Our working capital was $582 million with a current ratio of 2.6 to 1. Our net debt decreased to $792 million from $805 million as of the end of December. Our bank leverage ratio decreased sequentially from 2.5 to 2.38 times.

This past Monday we redeemed our $150 million, 10-year senior notes at 5.9%, by utilizing our current revolving credit facility at more favorable rates. Our strong balance sheet continues to provide us with sufficient liquidity to continue to pursue strategic accretive acquisitions.

Moving on to guidance. With our fourth quarter guidance, we are narrowing the range of our full-year FY16 guidance, with net sales expected to be in the range of $2.946 billion to $2.966 billion, and earnings per diluted share to be in the range of $2 to $2.04. We expect our fourth quarter 2016 net sales to be in the range of $756 million to $776 million, an increase of 8% to 11% year over year. We expect the fourth quarter 2016 earnings per diluted share to be in the range of $0.57 to $0.61, and as stated in our press release, our guidance is presented on an adjusted basis.

At this point, I'm going to turn the call back over to Irwin.

Thank you, Pat. What I'd like to do now is open it up for questions and, of course, answers.

(Operator Instructions)

Akshay Jagdale with Jefferies.

Thanks for all the details.

You've got to speak up. We can't hear you.

Is this better?

A little bit.

Can you hear me now? I'll do my best. I'm on a cell phone in Texas. You were very clear about margins in the US for 2017 getting back to 2015 levels, which is very useful. Can you help us understand, long term, the impact of Project Terra on margins?

So, specifically, is this project expected to be accretive to growth and margins? And your 5% growth number for the US next year, does that include any benefits from reinvesting some of those savings in the brands? Thanks.

Number one, the savings, absolutely, to support the business and grow the business. So there is benefit and we'd like to think, again, as we look at our growth, we look at some of the things we're doing with divestiture of brands, or carving out our venture group, absolutely. The savings will get us to those numbers and, hopefully, even better.

In regards to margins, as we said, Akshay, we'd get back to 2017. The other thing is, with 2015 margins back to 2017, but the other thing which we're looking at today, is not only just the US. We just recently bought Orchard House, consolidating some of our facilities, which we are in the midst of looking at now from a fruit and juice facility as we're looking at consolidating some of our soup facilities.

What Jim has said, also, in doing our Project Terra evaluation, we see there's a lot of similarities in purchasing and procurement, globally, whether we're buying pouches around the world for both Ella's and for Earth's Best, whether we're buying corrugate where we're buying fruits and vegetables with the acquisition of wellness, Orchard House, we see we're both buying a lot of fruits and vegetables in Costa Rica. It also allowed us to purchase on a lot of their programs that we saw we were paying higher prices.

From a standpoint we're not ready to come out and say here's where margins are. But, I've got to tell you, there is a good feeling today as we look at things around the world, and the opportunities from a procurement standpoint, the opportunities from looking at some plant synergies or closing some of our duplication of plants and fruits and vegetables. We'll be able to talk more about it over the next couple of months.

Okay. Just one for John, if I can. So, in the US, measured channel versus unmeasured channel, there seems to be obviously a disconnect that's favorable for your results. As for the unmeasured channels, Costco, Amazon, et cetera, and Ella's in the UK, growing much faster than measured.

Should we expect that gap to sort of remain the same for at least the next year or so? Or was there something specific going on in this quarter? Or does that move around quite a bit?

Akshay, you should expect this sort of separation between the measured and unmeasured. Because the initiatives that are driving the growth in the unmeasured will continue for at least the next 12 months.

A lot of the declines that are happening at MULO are grocery. It's moving over to e-commerce or moving over to the Costcos. Also, whether it's Trader Joe's, whether it's Whole Foods, Sprouts or a natural food markets. If you're seeing losses in MULO or seeing losses in grocery, that's where it's moving to.

Perfect. I'll get back in line. Thank you.

Scott Mushkin with Wolfe Research.

I really like the plans going forward. I did want to dive in to the brand investments and trying to create emotional ties with the consumer. Just get some initial thoughts. Obviously, you guys have done a ton of work on the cost side. As you look at your brand portfolio here, especially in the US, what are the three or four brands you're targeting for reinvestment and how do you think that's going to play out over the next 12 to 18 months?

Scott, I'll take a shot at that, and John can. As you come back and you look at baby today being one of our biggest categories, between Ella's and Earth's Best. And also we'll look at how we sell into different channels. Where Ella's belongs, where Earth's Best. We're not going to go in and compete with each other. We think there is a big opportunity; baby food, formula, diapers, meals, personal care products, and to expand that.

Snacks. We saw our snacks business grow double digits in this quarter and that will continue to be and we see a big opportunity, whether it's a convenience store and again going back to club, going back to e-commerce, our snack business, we see some big opportunities. Our personal care business, probably one of our fastest growing businesses today. We see some major focuses continuing on personal care.

In each of these there's one or two stars in there which we'll refer to. You heard John talk about MaraNatha and Spectrum getting back to some good growth. MaraNatha is back to its levels pre-recall, which is great to see. Protein being a big category, continues to be a big category for us.

The great thing within Hain is how diversified we are. The other thing, we'll look to do this around the world. You heard me say we have a $1 billion fresh business. You're going to see us in fresh soups; you're going to see us stronger with Kombucha with Blueprint.

You're going to see us looking at other fresh ideas that we are going to come into the US with what we're doing in the UK. As we look of these platforms, we look at them around the world. Today, we're the second-largest plant-based nondairy business in Europe. As we look at some of the innovation coming into there, how do we bring it here? John?

Scott, just want to jump in real quick on one thing. I agree with everything Irwin said. The only thing I would add --

(Inaudible) (laughter).

It's a big day. The only other thing I would add, is we certainly would invest in our tea business. A huge opportunity for us.

I left that one for John. That's the big one for us. We had a tough year with Celestial when it came to weather and we made some decisions on packaging which our consumers told us, hey, they didn't like it. As John said, we are going back. We listened to our consumers. Just getting back to flat on tea is a big move in our growth and we will invest in that and tea is a big category, an exciting category for us.

That's perfect. I appreciate the answer. I had one more kind of housekeeping item. When we look at these different strategic areas you've laid out here, I've got six of them. Are we going to anticipate some Management beef up there, like there's going to be someone running those silos? Or how should we look at it from a managerial structural point of view? And then I'll yield, thank you.

First of all, we don't have silos here, Scott. Actually, this allows us to run these platforms. And part of it is there will be senior brand managers, senior managers running these platforms, reporting into someone that reported to John, and there will be more that will go along with it from and R&D and innovation.

That's the way Hain was set up before, and some of the things got lost. The big thing is, there are 13 to 15 key businesses and brands here that they will focus on among six platforms. So it allows you to put the time, the energy and the dollars against it.

Platforms is a much better word. Thank you.

Thank you.

Rupesh Parikh with Oppenheimer.

I just want to go back to the commentary both, Irwin and John, you made about the US segment for the next fiscal year. Great performance this quarter and sounds like Q4 will also be strong for the US segment. What gives you confidence to be able to get back up to that mid- single-digit rate next fiscal year?

I come back and I say I see where our growth is now. Number one, let's step back from the category and the category growth and the consumer demand. Number two is, if you come back and look at our growth, and even go back and look at our first two quarters, some of this was self-inflicted with tea. Some of it was a change in retailers' behavior in regards to where they went to a clean floor strategy. Some of it was because of what happened at Albertsons and Safeway and the change over there.

Listen, we've got some great brands, we've got some great categories. We've got some major products that consumers want today and with that, we believe there is demand there. It's just how we're going to present to market it and sell it.

That's why we're confident and as we put the right dollars against it, and one of the things, going through Project Terra allowed us to focus on how we're spending trade and how we're going to get more effective trade dollars out of it. So, I am extremely confident that we'll get back to those growth numbers and then some. John?

The other thing I would add is, if you recall, when I was talking about our brands and we have several brands that are already at the mid-to high-single-digit or the double-digit level, as I talked about Greek Gods, MaraNatha, JASON, Alba, all of our snack brands. We're starting to see that we are getting more traction. More of our brands are starting to grow at the targeted level.

We're starting to see more distribution wins, particularly against our top 500 to 800 SKUs. We're resolving some of the issues that we had with retailers, for example, with the clean floor policy or with distributors as we had accounts shift. Last but not least, we're looking at smarter investments in trade and incremental investments in marketing on these businesses out of Terra. So we're pretty optimistic that we can drive the sort of growth that we are targeting here.

And I think last, but not least, is what our customers, our retailers are telling us. Our retailers want more and more health and wellness and I've never seen it like this from around the world. You heard me say before, one of our customers in the UK, when they did their survey, health and wellness was the number three thing on minds between security and financial health, was health and wellness. We've got a pretty good feel that's a category that consumers want today.

Okay. Great. Thank you.

Andrew Lazar with Barclays.

First off, Irwin, on the SKU rationalization program, am I right that is separate from the $30 million of sales that you're looking to divest?

Exactly, Andrew. We really have not announced the SKU right yet and that's something we'll continue and as we keep going through this what will be automatically discontinued. What will go away on its own. But there will be somewhere a small SKU [rad] that we will continue to focus on as we go into fourth quarter and next year.

Got it. That, I assume, is whatever the impact there may be on the top line from any SKU rationalization, that's incorporated in your expectation of getting Hain US back to mid-single-digit growth in FY17, is that right?

Exactly. As John always talked about, his tail out there, and what was the drag, that tail was a part of that and where we had SKUs selling $100 a week or $100 a quarter. And that, as Jim Meiers talked about, products going out of code and discards, that is where that went, too. We will continue to run that down.

The thing is, what you've got to really be careful when you get into a SKU rad, there's space that's in stores we still want to put other products in there. You announce that you have retailers send the products back to us. So it's managing it properly that, A, we can get the space for additional Hain products and that we don't have products coming back from retailers.

Got it.

Just to add to that, Irwin, and Andrew, this is Jim Meiers. The way we're looking at it in terms of optimizing the SKUs, it's really -- we're looking at it in phases. The first obvious phase is we have slow-moving SKUs there and what we want to do is we want to swap them out with higher volume SKUs, okay? That's kind of the first phase. The next phase, will eventually be we end up with a number of SKUs that we will have to deal with.

And, Andrew, the other thing which we're looking at is we're looking at certain channels. There is going to be certain brands that we don't want to see in the MULO channel and we want to see in the natural channel. There are some of that also that we are going to focus on and that allows uniqueness. The other thing that allows us, here, is to get pricing power and that's one thing we want to make sure we are able to keep within our brands.

Got it. Thanks for that. With respect to some of the reinvestment of the Project Terra savings as you go forward, is there any way to compartmentalize a little bit how much of that maybe goes towards some of the additional price point optimization that you need to do?

You mentioned MaraNatha, Spectrum, some specific price reductions to get you back in line with a price cap that was more appropriate and the brands are responding more than less. Are there other maybe specific brands of any size that you feel like you're not in the right range from price cap standpoint that you've got to get that in line with? Or is that a smaller amount of where the reinvestment goes and the bulk of it is more on innovation, ANC, things like that?

Andrew, this is John. There is about four key brands that we are addressing pricing on. We already talked about MaraNatha. We already talked about Spectrum. We know that there are some opportunities for us to address pricing on baby and obviously on tea.

Those are the four primary areas. As we look through the rest of the portfolio, we don't see any huge price delta issues. These are the four we are going to focus on and put into place some actions as we go into 2017.

Andrew, the other thing is non-dairy plant base. We see a big opportunity there and we are moving more into refrigerated and almond, so we're going to have to spend some money in regards to the nondairy business. Now we've got a refrigerated business and a refrigerated distribution system, we can go into that.

We're going to keep a leading position in Greek yogurt and we're going to look to move into other categories, into the whole Greek yogurt category. The personal care category is a pretty exciting category and continues to be with good margin. So how we put some more dollars against that to expand distribution.

Got it. Thanks. Very last thing, I promise, is just how many brands, more or less, are in the venture group? How do you see it at the start as a percent of sales? Thanks very much.

The venture group probably is somewheres around $20 million to $30 million of sales. Listen, we've got a great brand called Sunspire Chocolate, and you saw what Hershey paid for a chocolate business, there's a lot of things we can do in the chocolate with Sunspire and there's some great products there.

DeBoles pasta, which has been around a long time, the pasta (inaudible) is a great pasta. GG Crackers, which is a great snacking category. Boston Popcorn, Little Bear. And part of this is also going to have filled the ready to eat rice in there. Our meat-free product, Yves, our West Soy, (inaudible) tofu, tempe, so there's some great businesses that are going to be part of this that are going to get focus, love and attention where before they got lost in the first 15 brands.

It's interesting, as you look at valuations today and you look at what businesses are being bought for and what these are worth and get them on a growth trajectory, you know, there's some great businesses that we can really turn into something and they are all on trend categories, whether meat free, chocolate, high-fiber crackers, et cetera.

Thank you very much.

Bill Chappell with SunTrust.

Just one follow-up on the US channels to make sure I understand. If you do the math on the non-tracked channels, it had to do high- single-digit to double-digit growth to offset the track MULO channels. I understand the faster growth online and Costco and what have you. Can you talk about what's going on in the natural channel? I thought that was flat to down and that would have offset some of the growth.

This is John. I think your calls are right across the board. You know where the MULO is. We are seeing high single to double digit on the areas that I called out and we're not seeing a great deal of growth coming out of the natural channel at this point in time.

Not all-natural, some natural.

Absolutely. Sprouts is doing really well. There's a couple of others that are. By and large, that's how we roll up the pieces to get to the numbers that you saw this morning.

Okay. So you're still not seeing any real improvement or change in those channels?

As Irwin said, look, we're seeing some customers break out, led by Sprouts. Other than that, everything is still pretty much as it was.

Okay. As you look out to the next year, what are your expectations for a tea recovery? I say that just because it's been down for so long. You certainly had the misstep on the packaging. You know, there is some customers that have gone to other brands. How long does it take to get it back to even category growth and is just switching the packaging back that quick of a fix?

It's funny. I anticipated that I might get the question. Listen, a year ago, I was on the call and said I would win the upcoming soup season; we would get back to growth. Actually, we did win. We had very strong -- we had double-digit growth on soup this year.

We're going to do the same thing on tea. I'm not tell you double-digit growth on tea, but I'm telling you we will get the tea business back. Bill, it's not just the package. Package is just the starting point. It's reminding people why they buy Celestial Tea, the strong emotional relationship they have with the brand.

This is not just another brand of tea. When we talked to people about the package and the brand, they told us stories about the brand. How it was intertwined in their lives that could bring you to tears. We need to make sure that we get the package right, take that out of the problem and then, from there, market on top of it.

That's why what we are looking for is some of the Terra savings to be invested in here. I definitely believe we can bring the tea business back.

Bill, I don't think we are the first company to ever change back that the consumer didn't like and went back. So that's number one. A little company called Coca-Cola or Tropicana has done that in their lifetime. Nothing has changed about what was in the box or what's in the teabag.

Celestial Seasonings has been around since 1970 and there's only one Sleepy Time, one Red Zinger. Throughout this, which is interesting, we did not lose distribution and that's the big thing that we did. Retailers did not give up on us and when you're down some of those numbers, they come back and they will eliminate some SKUs. We didn't lose distribution.

I think with our right marketing program in place and going out to tell consumers, hey, we listened to you. You told us you want our old packaging back and that's why we didn't go for a packaging in between to introduce the third entry. We would have confused the hell out of them.

Now, it's going back; we listened to you and there's a lot of good PR and a lot of good marketing around that at how we listen to our consumers.

Got it. I'll turn it over. Thanks.

Amit Sharma with BMO.

Irwin, two questions. One for John. John, the tea discussion, I think, is very helpful. I also want to get your sense of if you're looking at 2016 operating margins in the US, somewhere 150 basis point margin contraction. How much of that you could ascribe to the softness in Celestial Seasonings teas this year? Then I will follow-up for Jim.

You are cutting in and out. I'm not totally sure. I didn't hear the last couple -- I didn't hear your last piece of your question.

Let me say that again. Also expected margin contraction in US. How much of that could be ascribed to Celestial Seasonings weakness on the margin line?

Then a follow-up for Jim. US opportunity is pretty clear. Jim, as you take responsibility for the global operations, you talk about UK and multiple operating structures in UK, and margins probably below where they should be. What's in the pipeline for improving margins there?

In regard to the lower operating income margins in the states, in this quarter and throughout the year, they have been 100% attributable to our Celestial Seasonings lower sales, as well as our unfavorable mix on that brand. When you think about what Irwin said before, if we got it to flat, we would make significant improvement in that area.

Got it.

Jim?

To address the question on the UK margin, just margins in general, look, project Terra is going to provide great opportunity in the US. Also, globally and, more specific, the UK. We currently do have quite a few initiatives that are going on. We plan to go through and do a warehouse network optimization.

We have some global activities as it relates to some of the procurement that we are doing. We buy bananas and use bananas around the world. We just, jointly, did a global purchase on bananas that throws very nice savings. Also, provided some regional benefits of being able to get them close to the end user.

Another one is flexible packaging. We identified a supplier for flexible packaging that we are using on our snack products. We currently implemented two brands throughout this year and we will do the balance of them. We are working globally to use this supplier, they have very high quality and we're seeing some very nice benefits.

Then there's factory rationalization. Look, going forward, we are going to make some big changes. We need to change the way we do business.

I think the big thing is, as we have looked at the US now, and again, going through this, it's amazing the crossover when you go across the pond. Like Jim said, we're buying close to 200 million pouches today around the world. We're buying corrugate, we're buying a lot of fruit around the world today. The warehouse companies that we own are third parties, are global companies today.

Even though they drive on the different side of the road, the freight companies we use today, as we ship by freightliners and that, I think it's 10,000 different freightliners that we're shipping products between India and that and there is tremendous savings as we bring all that together. Whether it's buying mangoes, buying oranges, buying coconut, buying pomegranate, it's how we do it together.

The other big thing that is going to come out of this, that has come out of it, is our ability to source and supply. And what keeps me up at night, is we need 99% of our products are GMO-free. Jim puts in centralized procurement, it's going to allow us, whether it's cashews, whether it's almonds, whether it's coconut, whether it's pomegram, to procure on a global basis and get supply for that and that's been some of our biggest challenge to date is getting supply.

I think, too, Irwin, basically this group will not only -- will help leverage pricing, volume and spend. But also, to Irwin's point about supply, we need to be ahead of the curve in terms of developing supply. There is a large percentage of our natural and organic products come from the US and we're developing other geographic areas.

Great. That's really helpful. Thank you very much, Jim, Irwin.

Thank you. Ken Goldman with JPMorgan.

I'll be quick. Pilgrim's Pride just announced a pretty major push into organic chicken. I think they say they'll produce about 20% of all the organic chicken in the US once that plant is converted. I'm curious, Irwin, to what extent you may view this as a threat longer-term to your protein business?

I get it, demand is expanding rapidly, but it's starting to attract some larger customers. For me, strategic or tactical perspective, is there anything Hain will be doing differently to combat against what may be a more competitive environment a couple of years from now?

Number one, Ken, we just open up a new protein facility that opened in February. Number two is, listen, I think the way we raise our birds, the way we grow our birds out, our birds today are totally vegetarian fed, where some of these other companies that got into the whole antibiotic free have not.

Again, you know, what's happening, also, Ken, the whole protein category is growing where you've got meat and pork declining and that's why Pilgrims has got into this, is because their other business are declining. The average consumer eats 88 pounds of chicken versus 20 pounds of turkey. You are seeing meat and pork decline. I think the market is moving more and more towards organic chicken and antibiotic free chicken and that's why Pilgrim is doing it.

Let me tell you, I think there's enough business out there that they want to deal with a smaller supplier. The whole thing, today, with organic is [gap], how it's raised. I think FreeBird has the right story behind it. It's something that we always do. It's where we get our feet from and that's a big part of the story. The important part is to get out there and tell the story.

Thank you, Irwin.

Alexia Howard with Bernstein.

Can I ask about the outlook for input costs? It seems to me the market for GMO-free and organic ingredients is tightening in the US. And that noise accelerates as this whole GMO labeling debacle kicks in, depending upon how that plays out. Are you starting to see very sharp increases in your agricultural input ingredients? Or does it all feel pretty good for now and how confident are you that it can stay that way? Thank you.

In the current quarter, basically, what we saw was we saw -- we actually on our top spend items we saw about a 1% improvement year-over-year. As we look forward, we have some key commodities like almonds, almonds have dropped over the last three to four months, and we expect that to settle out as we go into 2017.

Look, as we look -- at least as I look at 2017, we're not seeing any big spikes, but I would expect to see modest inflations, modest inflation in 2017 offset by productivity.

The big thing is also, everything we procure in Europe is GMO-free. So as we go around and look throughout the world today for both organic and GMO-free, we are finding more supply. In the US, there is absolutely some supply issues. We are also, today, working within Africa and looking to grow products there and starting up some farms there. A big part of it is, I think there could be some cost issues. But if you are planning it out and working with farmers, that's a big advantage, Alexia.

Great. Thank you very much. In the interest of time, I will pass it on.

One other thing I want to mention with that, is I hear about private labeling and, yes, private label is something that is out there. One of the things that is important within Hains is we are out there during our own sourcing. And out there doing our own deals with farmers and contracts. It gives us supply where I think the barrier to entry into this category becomes tougher and tougher to get supply.

Great. Appreciate it. Thank you.

Andrew Wolf with BB&T Capital Markets.

I will just ask a question with a follow-up attached to it. John, how is the price elasticity versus what you expected in terms of Sensible Portions and the MaraNatha direct -- sorry, the MaraNatha and the Spectrum direct?

Also, what does that imply as a broader question about the priorities for where you want to put the brand building on the net savings you are going to generate out of the global procurement and out of Project Terra? Is it a price driven? Or are you going to do other and also emphasize a lot of other aspects of brand building? Thank you.

Sure. You have two pricing examples. MaraNatha, the elasticity has proved even stronger than we expected. Spectrum, we don't have enough data yet to give you an answer on that. And then in regard to -- as we talked before -- we're going to invest against baby, tea, personal care and snacks as our core four areas with Terra savings. Only two of them, baby and tea, will see some price investment. By and large, the majority of the investment will be against brand building.

Next question.

Mitch Pinheiro with Wunderlich Securities.

Just a quick question. Irwin, on your path to the $5 billion revenue goal, how do you see that -- any change in how you see that breaking down between acquisitions and organic growth? Is Project Terra evenly spread? Is the benefits one-third, one-third, one-third over the next couple of years or is it a back-end loaded kind of benefit? How do you see that?

Listen, I see it one-third, one-third, one-third. Hopefully, the more comes up front because there is some low hanging fruit to get. I'll say one-third, one-third, one-third, but I think there's potentially more upfront at first.

In regards to getting to this $5 billion, it's growing mid-single digits and doing $100 million to $150 million of acquisitions and we've done, every year, $100 million to $150 million a year in acquisitions.

And the acquisition pipeline, how would you describe it compared to the (multiple speakers).

It's interesting. A couple of things, as we look at it today. We see a lot of interesting smaller stuff that we just either didn't have the time in integrating it would get lost within Hain and that's why we developed Cultivate and we'll work on that. At the same time, there is some bigger stuff out there.

We're not going out to do $1 billion deals, and the two $1 billion deals in this category that got done were things we looked at but didn't fit within us. But there's definitely $100 million to $200 million deals out there. The big thing is going out and finding these deals. It's not deals that are in front of your nose and that's how we're finding them.

Okay. Thanks for your time.

Our last question is from David Palmer with RBC Capital Markets.

A question about salty snacks and yogurt. I think this one would be for John. Obviously, two of your largest and best growth categories. It looks like you're getting really good growth from adding new items per store and also, to a lesser degree, getting new distribution. Velocity has been down in both in the last 12 weeks. Are you seeing this in your data? Is that concerning at all to you? Or do you see this velocity trend is somewhat temporary?

David, I'm not seeing declines in velocity in either space. What you may be seeing is the impact of Greek yogurt getting a significant increase in Sam's Club, which may be reflected in unit velocity but it doesn't address the number of ounces. By and large, we're seeing both good unit and dollar growth on both.

David, you wouldn't see it in the consumption of the sales because these are not long shelf life products for any of them. That's where I'm a little surprised you are seeing it there.

Yes. It's interesting how the contrast in the data. From the Nielsen data, I know you switched vendors, but the average number of items per store for baby food is in contrast to the other two big categories and that's yogurt and salty snacks. Baby food, it looks like you're losing a number of items per store and that includes Earth's Best and in the case of, for instance, Sensible Portions or Garden of Eatin' or Greek Gods, you're gaining significant amounts of new -- you're adding more items per store. It's interesting contrast and I was wondering if there is a story behind these.

Well, I think a couple of things on baby food. What you are looking at in the data is not -- our number one baby customer is not in that data. Number two is one of our biggest snack customers in club is not in that data. So, I don't know if that is -- if that's doing anything to your data.

Yes. We can take it off-line. Thank you very much.

We absolutely can. Thank you, David.

I'm showing no other questions at this time.

Thank you, everybody, for today's call. Again, here is a lot of great things happening here at Hain. If you step back today and you look at what we've been able to do over the last 20-plus years, as you see, yes, a lot of consumers want more and more healthy products.

You see the diversified portfolio that is within Hain today and many times when I'm in stores or at some of our facilities, I pinch myself and say, wow, we own that brand or we own that product. And it's more exciting, I pinch myself twice, when I see it in customers' carts and they are paying for it as they walk out through the cash register. This is an exciting category, absolutely attracting a lot of competition, as they see conventional categories decline. As Ken said before, Pilgrim's Pride, yes, is coming into the organic chicken category as consumption on conventional chicken continues to decline and you are seeing that in many, many categories.

I think what's important is we recognize how millennials want these brands, how millennials are very, very, very responsible in the foods they eat. We just saw with Johnson & Johnson and one of their talc powder, and that's something where Hain is, there are very few companies out there that can boast and say 99% of their products are GMO-free. Over 71% of our products from a transparency percent, our transparency have 13 ingredients or less. Over 40% of our products today are organic.

You hear a lot of these companies -- and I heard today -- 7-Eleven, by 2025 -- hopefully I'm alive then -- 2025, are going to cage-free eggs. That's eight years from today it's going to take them to get there. A lot of retailers, a lot of consumers want more and more health. Hain is there and Hain will continue to be there.

From a distribution standpoint and household penetration, a lot of these dollars will go out there to build our brands. A lot of these dollars will make more and more consumers aware of the Hain products. Last but not least, if we continue to go after distribution whitespace, the growth numbers we talked about will absolutely be achievable and then some.

Have a good Memorial Day, which is coming up. Eat our healthy snacks, our healthy products and I look forward to updating everybody on Project Terra, our FY17 in mid-August. I was saying to the guys last night, before we know, it will be here. Have a safe and enjoyable spring and summer. Thank you very much for your time today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.