Hain Celestial Group Inc (HAIN) 2002 Q3 法說會逐字稿

The Hain Celestial Group third quarter 2002 teleconference. Today's conference is being recorded.

Before we begin today, I like to remind that statements made in this call that are estimates of past or future performance are based on a number of factors, some of which are outside of the Company's control. Statements made in this call that state the intentions, beliefs, expectations or predictions of The Hain Celestial Group and its management for the future are forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained from time to time in filings of The Hain Celestial Group with the U.S. Securities and Exchange Commission. Copies of these filings may be obtained by contacting The Hain Celestial Group or the SEC.

I would like to Irwin Simon, President and Chief Executive Officer of The Hain Celestial Group, please go ahead Sir.

Good afternoon everybody and welcome to our third quarter conference call.

I hope by now each of you had seen our press release.

Sales for the quarter were $120 million versus $103 for the same period a year ago. Net income was $5.1 million versus $4 million. EPS was $0.15 per share versus $0.12 a year ago.

Let me give some consensus number on the business. As our business has all been changed and the retail product now directly into our customers warehouses. It is important to us to look at consensus in follow through. Celestial Seasonings 5 percent growth before we ended March 23. Our Westsoy aseptic category was down, but we where flat. So we all the paced the category. Westsoy refrigerated grew by 500 percent approximately diluted with the ACV gains. Health Valley increased by 7.2 percent in consumption. Our Quality grew 5 percent. Terra Chips up 32 percent, Garden of Eatin' up 38 percent and our Yves meat alternative product up 5 percent.

So from consensus standpoint, which means consumers are buying our product. Let me say about some of the brands. Terra remains the number one snack in special snack. Our share grew to 16.8 percent, which grew 32 percent in March. Garden of Eatin' was up 38 percent in grocery and before consensus was up 35 percent in March. Our original Terra which is been around the was up 33 percent grocery and in amazing to see the same staying power of that product and Natural, which Terra first introduced, the brand was still up a double-digit growth up 13 percent. Our Terra facility is running efficient now, and some of the problems that are coming out of here and with that we feel it is now time grow and start spending money on advertising and add the size. We also launched to bonus tag to allow our consumers to have 25 percent more of the Terra original. We also do emphasis on our Garden of Eatin' time with in the midst of introducing now that we have capacity, multiple new products and stay tuned for lot of new products both on and Terra Originals. And this past quarter we introduced from the Garden of Eatin' standpoint organic chips and this is the first time we introduce chip category for Garden of Eatin'. We also introduced a line of new mini-Tortilla Chips.

For our Terra facility, in December we were running 8000 pounds a day, for the month it was about 79,000. From the month ended April 30th, the average day was about 18,000 pounds, for the month we produced 476,000 pounds. If you want to compare that fact in book, in book we are averaging 11,000 pounds a day, which was 188,000 pounds per month. The good news is the upside in May, we looked an average of 20,000 pounds a day, with 485 for the month and we expected to do this in June also. So now we have the capacity and we have the opportunity to grow there and really start there, introduced there, and we have tremendous opportunities.

In regards to Westsoy, Westsoy aseptic is the number one aseptic show note with the 34 percent . The category in aseptic was down. The good news is Westsoy was flat and what we are doing is taking share away from our competitors. And we actually took four points away from our competitors. And why we have introduced a lot of new products, I will talk with Strawberry sachet, smart and live, and we also went to the six pack, which our customer wanted to have a six pack versus a 12 pack. I am quite excited about, what I feel on the Westsoy refrigerated. We achieved 18 percent ACV and we are in the midst right now of introducing some new products in refrigerated, new packaging, and we are also in the midst of bringing on some new co-package to allow to us to meet demand. We are continuing to support our advertisement with The Magazine and we can emphasis that lot of this will happen within the fourth quarter.

In regards to tea, every time I turn to morning show on, I hear about preventing heart disease by drinking tea. So even though I drink a little coffee, I continue to drink more and more tea. And tremendous amount of resource that continues to come out with the shows, you have heart disease and drinking a lot of tea. It is extremely preventive for the disease. I am not going to talk about the weather because I know how warm it was in the past quarter. But take drug and and this excludes almost, slow week ending at March 23rd. Celestial was up 5 percent. This category was up 3.5 percent. Our share grew to 29 percent. And Celestial Herb, you remember my commitment has been to grab the first category. And that was the category we basically control. We did our 50 percent share of that, and our Green and Black are doing well. What we have heard about Celestial as a volume in the past quarter were slightly down. Even though we were quite profitable, Celestial Wellness Tea made up about supplement and that continues to be a weaker category for us. We are now launching repackaging. Lot of those products that are , and some of the others doing slightly difficult products. We are re-launching under our Earth tea. So we look forward for some new package and new products and new innovation, and new ways on the Wellness and supplement category that hide into the Wellness tea.

Our advertising as we talked about in the Celestial in Q3 ran a wide ray of TV campaign and with that we saw some great results. Volume was up over 10%. When we ran TV, volume fell, when didn't run TV. So what we saw the TV definitely worked in this quarter and as we run, it is important for us to spend, the money we talked about is running on Celestial. We also continued to partner with Tiffany, we partnered with Amazon with over 7 million at the end of our . We also send in times, send in papers. We ran a sampling of herb and we received. We introduced , which was in Wal-Mart and King Super and that is the food. And what is important to us is the black. You heard me talk about 50 percent of share in herbal teas, you heard me about having our major share in green teas. We have not been a major player in the black tea category. We just introduced new flavors for the black tea in January with wide flavors and we think this one of the biggest opportunity next year, with the category growing, you know in low digit numbers, we think we don't have to show and we don't have to share in the black category, there is a big opportunity for us.

Health Valley was up high single-digits. share grew up 7 percent. Cookies up 6.3 percent and Bar was up 6.2 percent. Our big challenge in where we got had some flatness and decline in the conservative categories and we are in the midst of launching multiple new products on cereals and stay tuned for the coming June, July, a lot of new things are happening. We have also started to major distribution drive on Health Valley. Today Health Valley has only 50 percent of ACV. It is probably one of the best know names within the natural food category and grocery and probably one of the most product of Hain. So we feel big opportunity and a big opportunity for Health Valley is to get out there and bring distribution. We felt brand has a lot of awareness and brands is well known and well liked.

Yves continues to just to be a solid performer for us, the brand grew double digit. Yves has a 31 percent share in meat alternative category. We introduced products like The Good lunch, which is a like lunch more type of product. We also introduced new products like Chicken Snugget, New Bols and getting good response for those. We will do advertising in this quarter and go into the next quarter with and SSI.

Europe continues to prove us. There was good news going to move into the European operations, Lima and Biomarche are moving quite well along. This is providing the infrastructure to introduce Hain products and Terra products into Europe. And we have spend most of the time with their brand managers and our brand managers, deciding on what products to launch and heading on the right time and we will be launching products in the fourth quarter and first quarter, so what is important is the launch product that is rescued towards the European taste. Prince and Westsoy in Europe, west means cigarette in Europe, and it wouldn't be smart of us to introduce Westsoy in Europe, so we will be introducing under the Yves name as we introduce a complimentary line of vegetarian product. I recently just conducted in Japan, and as you saw in the press release we have just announced the first Asian deal with company called Shin-shin, which is about a 200 million dollar food company in Tokyo and we will be doing a joint venture first on Yves products. We will be manufacturing Yves products in our Canadian plant, shipping them in bulk to Japan and they will be repacking them once again to the Japanese taste and it will be a 50:50 joint venture where we will form Yves-Shin-shin Japan and both has ownership and both will be able to run the company, which will give us other opportunities of rolling other same products in the Japanese market. We see tremendous opportunities. This past quarter we consolidated people, we consolidated function and one of the important things that I have already said, and we are in the midst of 16-process year. Customer service has gone to new levels. We are all in the midst of doing a network re-design of our plants and distribution centers, which will bring down our cost significantly. We are also in this fourth quarter move to headquarters, which gives us a lot of space and gives us the ample opportunity to expand and growth.

With that we are going to do a lot in the fourth quarter. Now that we have the Terra facilities that allows us to work there and gain distribution. Further we have gone in cost cutting which is a major program, which is called a 10-program, which we with the time. We couldn't do that last quarter, because we do not have capacity. We could not do that last year, because we didn't have the capacity. We are now going after all our supermarket chain. We had depot promotions and stock promotions and we had multiple promotions start of with this quarter and next quarter, because now we can supply Terra. So basically what we can say is we are re-launching Terra and going after distribution, going after promotion, doing multiple sampling, now that we have the product to supply. We are also in the midst of getting ready to new product in June or July. We will able to increase our product.

We are introducing product, we are going to introduce the same product in Canada and Europe and it is important that the Canadian market for natural food has been extremely aggressive. which is the major chain, has made the major efforts to introduce products in that market. So we are introducing and converting multiple Hain products to the Canadian regulation and even packaging. At the same time, we are introducing core multiple products of Hain in Europe. We are going into a major distribution drive and introducing new cereals and will be introducing new Cookies, at the same time, a major distribution drive on refrigerated products and this is depending on this quarter and beginning of next quarter, when our new co-packing opportunity is to come on.

Guidance for the fourth quarter which I have not given before, $79 million versus $90 million to $94 million and that is net, which is a 14 and 18 percent increase, and that is range of 9 to 13 percent. In regard to fiscal 2003, we are in the midst right now of completing our fiscal 2003 plan and what I like to do right now is get the top line objective for the next year and in the next month or so, we will giving a final fiscal 2003 objective. And we are looking for 11 to 13 percent growth in the Hain brand, 6 to 8 on Celestial, on Yves 18 to 20, and Lima 15 percent growth, which is 14 to 16 percent overall.

What I am going to do is turn over to Ira Lamel for the future comments on our financials. Thank you.

Good afternoon, everyone.

As Irwin discussed sales were 105.6 million for our third quarter this year up 21.3 percent over the prior year's third quarters sales of 87.1 million. Net income for the third quarter was 5.1 million or 15 cents per share on 34, million 908 thousand shares. For the nine months through March 31, our net sales were 300.5 million, up 11.7 percent over the prior year's nine months period net sales of 269.1 million. Net income for the nine months was 15.8 million dollars or 45 cents per share on 34 million 808 thousand shares. The net sales we have discussed reflect the adoption of emerging issues task force consensuses related to the classification of certain promotional allowances and other sales incentives as reductions of revenue rather than as selling expenses, as has been the predominant industry practice in the past. The revenue amounts for the 2002 periods are in conformity with the EITF consensuses, which were adopted on January 1. In order to provide comparability of information, prior year periods have been restated by reclassifying promotional allowances and other sales incentives of 16.8 million dollars, approximately 16 percent of our top line revenues, prior to the restatement in the third quarter of the prior of 2001 of selling expense to revenues. Similarly, 44.5 million dollars or approximately 14 percent of top line for the nine months ended March 31, 2001 were reclassified in the same manner.

Promotional allowances and other sales incentives treated as a reduction of net sales in the third quarter of 2002 under this newly adopted EITF consensus were more in line with the rate of promotional spending in the nine months period of the prior year at approximately 13 percent. Our gross profits for the third quarter was 30.7 percent as compared to 29.8 percent in the comparable period last year. Last year's gross profit was negatively affected by approximately 2 percentage points due to an inventory charge when we consolidated warehouses at that time. Therefore on a comparable basis, gross profit has been reduced from approximately 32 percent last year to the 30.7 percent this year. Gross profit was lower this year versus last year, in part because of the lower profits earned by certain of the businesses recently acquired, coupled with a higher expense base for warehousing and distribution, an area we have discussed on previous calls. Also impacting our warehousing costs this quarter were the increase in costs from carrying the higher inventories we had coming into the quarter. Those inventories have now been reduced from their 62 million dollar level at December 31, 2001 to the current 57 million at March 31, 2002. Our inventories in the prior March; March 31, 2001 were 46.5 million dollars. The increase since that time comes from approximately 5 million of inventories added by our acquired companies, and the planned increases in inventories to help reduce stock . Going back to the gross profit changes, we also have higher costs in the third quarter this year as compared to the comparable quarter of the prior year, as we had the added cost of the warehousing and distribution network brought on by the acquisition of these in Canada and Lima in Europe, each subsequent to last year's third quarter.

Our SG&A in the third quarter this year were 22.6 percent of net sales compared with 20.5 percent in the prior year's third quarter, with the prior year's figure adjusted to exclude the amortization of goodwill. The major differences from year-to-year result from the additional advertising and marketing we incurred in this year's quarter as well as the additional cost associated with the International acquisitions we have made where we do not expect significant G&A savings.

Operating income for the quarter was 8.5 million or 8 percent of revenue versus 6.5 million or 7.5 percent of revenues in last year's quarter. This quarter, we incurred interest expense net of 300 thousand dollars as compared with 752 thousand dollars of interest income net in the prior year's quarter. As we have discussed in the past, prior year's comparable quarter, we had a higher level of cash earning the higher interest rates available at that time, and we had not yet entered into our new credit line agreement, which has added some carrying costs. Since that time, we have used cash to make our Yves and Lima acquisitions, and we have made significant capital expenditures, particularly in our new Moonachie facility for terra chips, as well as in our information systems. The effects of currency transactions this quarter was minimal as rates stabilized.

Net income for the third quarter was 5.1 million dollars or 4.9 percent of revenue. EBIDA for the quarter was 10.5 million dollars. With our added capital assets, our depreciation expense in this year's quarter was 400 thousand dollars higher than in last year's comparable quarter. Our balance sheet remained strong. Our working capital was 75.9 million dollars and our current ratio was 2.3 to 1. Equity reached 414.8 million dollars. Our day sales and receivables was 48 days in March 31, 2002 compared with 54 days at March 31, 2001, and these DSO calculations have been adjusted to reflect the sales numbers under the new EITF accounting pronouncements. Our debt as a percentage of acquity remains at a low 3.2 percent. As Irwin stated earlier, our revenue for Q4 is expected to be in the 90 to 94 million-dollar range, net of the EITF changes with earnings at 9 to 13 cents per share.

At this point we can open it up for some questions.

Thank you gentlemen. The question and answer session will be conducted electronically. If you do have a question, signal us by pressing * 1 on your touch-tone telephone. Once again, if you do have a question, please press * 1 now, and we will pause for just a moment to assemble our .

We will take our first question from Terry Bivens with Bear Stearns.

Good afternoon, everyone. On the acquisition front, how much in the quarter did you get as a contribution from Yves and Lima, Irwin?

Terry, within sales or.....?

Yeah, sales.

About 12 million dollars.

With regard to, I guess, Wild Oats came in with a very nice same-store sales number yesterday of 7.3 and now we are obviously intent on moving a lot of business in to the super market channel. Could you talk a little about how you see the natural food side of things evolving over the next couple of quarters?

Well, It's good to see Wild Oats growing because they previously had flat comps and negative comps at the same time, you know foods had had some good comps, and you know at the same time, we are seeing super markets continuously move to natural food growth and natural food sections. So, I like the trends in the category. You know, I think people out there are more and more aware of health trends as Irwin said before, of the awareness brought on by and prevention of heart attacks. So, I like what I see in the industry. I like the awareness of the industry. There is new coming out of organic as people today who are quite aware of our organic. As Wild Oats opens up more stores Terry, there is more places to get our products before opens up more stores. There are more places to get our products in Trental. This past week, our foods opened up their first store, and what people tell us, the product was totally was sold out over the store over the weekend which forces other retailers up there to bring products in. So, I feel good about the industry.

Okay, and just lastly two earnings related questions. Your range for the Q4 is a shade lighter than what I was looking for. What do you think, I mean, as you would look at Q4, what were the key determinants that gets you more towards the tough end of that 9 to 13 range?

Well Terry, the reason the range is, you know, 4 cents and we just got a lot of efforts going on, and a lot of pieces. We have spent a lot of money Terry to re-introduce that, where we had a promoted. Core where we have introduced that into Wall Mart. We are spending a lot of money on , to go after that category. So, we are Health Valley, which is an important brand to us in regards to manufacturing. So, we are going after a lot of distribution initiatives because, we just see the category that has tremendous opportunities. So, we do not want to miss any of the opportunities that they would in category.

So, it is going to be...., the delta is going to be more spending on the distribution side?

Yeah. That's, you know, we are hoping, you know, as you certainly say 14 to 18 percent on the revenue side, and that is what we are expecting to do, to see the revenue grow up there.

Okay, and just one last question on your . You have given pretty detailed guidance on the revenue side, do you feel you are just not prepared to give bottom line guidance now. Is that the situation was ?

Terry, as you are well aware, we want to be able to put numbers up and hit them, and we are going through this year, probably the most intense detailed budgeting process that Hain has ever gone through. With that, we are not just ready yet, and we will be ready within the next month to be able to back with the bottom line number.

Okay, fair enough. Thank you, very much.

Thank you.

And maybe now we will take the next question from Andrew Lithire with Lehman Brothers.

Good afternoon.

Hi, Andrew.

You know, I realize you are now ready to put out sort of numbers on the earnings line for fiscal 03 and you got it all, all settled in, but just as a way of getting a sense in terms of fitting expectations. The numbers that are kind of currently out there would obviously assume a big kind of downs from fiscal 02. In other words you know, some additional cost and one , that might have affected you in 02, essentially kind of go away, and not using 02 as a sort of a base year. Is that thinking make sense or should we really feel, you know sort of more erratically that the number you do in 02, that is a new base, we should sort of use that as the base off of which we grow earnings, given all the re-investments and subsidy you got to do, which I assuming will go into 03 as well?

Andrew, I think we were working on that and I hate and come out say right now, you know last quarter Moonachie, cost us 3 to 5 cents and that has gone away, so add that back in. On the other hand, you know, Moonachie, we heard the coming out of there and there is the possibility, that Moonachie, that 3 to 5 cents definitely has gone away. So, what I would like to be able to do is, to be able give you and everyone else, a good road map when I come out with fiscal 03, of the add backs, and the new additional costs in promotion that we will spend to give a good number, instead of giving it now.

And then as you make this shift pretty aggressively from aseptic to refrigerated and soy . What type of mix shift do you have to overcome from that transition, you know from the margin perspective? You know, did you do an extra head win on the margin line, so I am thinking about where margins can go next year, and if you are successfully and aggressively going after the refrigerated side, did that hurt or help you on the margin side?

Well, you got to remember, it is all new volume for us, so do we think our refrigerated and we are hoping it is not going to cannibalize our existing aseptic. So, I think there is, you know, margins opportunity here...

Would the aseptic hold relatively kind of flattish, let us say as category, then maybe you can continue to gain some share, but obviously your refrigerated looks continuous to really sort of take off. Even though obviously, you go after the volume, you go after where the growth is, that all, we understand that. But does that come just as a same steady state, you know, refrigerated versus aseptic. Is the margin structure, you know, how much different is it?

Margins are a bit lower on the refrigerated side.

We are not talking anything necessarily sort of mass directionally?

Not at all.

Okay. All right, thank very much.

And you know, from our refrigerator, you heard me say before, what we think we are in the midst of doing is introducing some new and unique refrigerated type of products from a packaging from a product stand point. You know, that is going to help you drive down costs.

Okay. Thanks, very much.

You are welcome.

And maybe now we will take the next question from John McMillin from Prudential Securities.

Good afternoon, everyone.

Hi, John.

The market shares that you gave were for the quarter?

What we ending March 23rd, March 30th.

Okay I saw you gave a revenue number that start off at a 120 million. Did I hear wrong, your first comment 120 versus 103, was that all the revenue accounting?

That was old revenue accounting.

Okay. Interestingly it is the last percentage increase, but I guess it is just the fact taking the promotion out of it. These should be complimented for doing your revenue target, just in terms of you know in kind of where we stay and now versus two years ago before you bought Celestial and you had four quarter earnings of 96 cents per share and I guess in some kind of another way. You earn 96 cents per share in the four quarters before you bought Celestial. Obviously a lot has happened. Do you view this as a kind of a base to kind of slowly get to where you were two years ago. I guess that is what the stock discount, but is that the level of earnings that you think you can get to in a reasonably short amount of time?

That is a great question. I think to come back and look at our business, if you look at it two years ago 70 percent of our business was in natural foods and you know from the cost structure from the distribution structure and from an infrastructure standpoint we did not have that. So from today you know we have 17 warehouses. We are probably going to get down to three to five and much bigger warehouses, much more efficient warehouses. Our Terra facility was 19,000 square feet and had 15 percent margin. So what we had to do was to supply the super market change and to supply the mass market where the big demand is coming from. We had increased infrastructure, had to increase cost of marketing, but I think you know where they are seeing the demand come in from both natural and super markets and you know whole foods and wild oats today are both different change having a 125 stores growing at 89 percent comp also. So what I have been doing still in the business is putting infrastructure and drive tremendous amount of cost and back to what you said it is my objective next year to get it back to those levels of earnings.

And in terms of accounts receivable going up and I guess it did not go up more than the sales increase, but there was no kind of loading at the end of the quarter?

The receivables held well, the DSO's show that nicely John. The receivables DSO went down versus last year at the same period which of course is coming out of the season. John I think it was important today with anything and I am sure you have heard this from a lot of your other companies you follow. Everybody is trying to take inventory system and I mean everybody if some of the super market retailer get down to one week they will and our business has changed a lot where before 90 percent of our business went to distributors. That is not the way any more. So you know there is probably each quarter that we talked about. There is probably a weaker consumption, a weaker sales coming out of our numbers. As we sell direct into a super market warehouse now versus the distributor warehouse. They are buying weekly whether it is tea whether it is Soy etc. So our business model has changed the standpoint to as we sell into different classes of trade.

You made a statement in the press release regarding share repurchase I know you did not say it in the conference call, you know assuming the stock stays at the same level, you know how active do you anticipate being?

Quite active. I think you know one of our best investments as you know are strong balance sheet and the company that is going on the acquisition trail one of the best acquisitions, one of the decisions is buying right now, we will be quite aggressive in purchasing our own stock.

Okay congratulations on the quarter. I do not think any of us are thrilled with the June quarter guidance, but I guess you are kind of keeping the foot on the accelerator and tried to grow and you did.

Well I think it is important to keep it on the accelerator with opportunities out there and demand and on the other hand I want to make sure that we are doing it now and I will be ready for next year John to get those types of earnings that you and everybody else think we should be. At the same time driving cost out of the system is something that is happening around here quite effectively and quite quickly.

It looks more professionally Irwin, just thank god for 142 for that base would be even more. Thanks John.

Carol with RBC Capital Markets has the next question.

Good afternoon everyone.

Hi carol.

How are you doing? just a few questions I was wondering with respect for the 90 to 94 million revenue number and then 9 cents to 13 cents that were coming for fourth quarter, what do you plan on spending for the EITF number?

Somewhere it is around 15 to 16 percent Carol.

Okay and then kind of backing on third quarter number, I am trying to get my answer around, how will you get to the 14 to 16 percent growth for 2003. The trend has been about 5 percent Celestial about 3 to 5 percent and to get to that 14 to 16 percent growth I know Yves and Lima will add to the equation, but is it mostly distribution that you are thinking?

Well a couple of things. I think you step back now we got capacity going upto Terra. Number two Garden of Eatin' continues to be a strong growth brand. Number three major emphasis on refrigerated Soy. Number four major distribution drive right now you have heard me say Health Valley, you know Health Valley when we acquired it was an declining brand and we are seeing growth on that brand, but something like 10 share points it is worth 10 to 15 million dollars in revenue. So major distribution drive on Health Valley and we have got hurt on cereals, and cookies and couple of other brands and we are coming up with new things there. So we have really got major distribution drive on Health Valley and you are going to see us relaunch in a big way Hain. Hain has been a flat category and you are going to see a tremendous amount of new snacks Soy type of snacks come out under Hain and other new products on Hain. We got hurt a bit on Arrowhead with warehouse consolidations were we had tremendous amount of stock and we lost some growth there and we are finally introducing Arrowhead into the super market channels. So I feel good about the growth of those brands. So there is going to be a big growth next year and we feel good about the 11 to 13 percent in the growth number. In regards to Celestial right now we are calling 6 to 8 percent growth. We are going to have a cold winter next year that is one thing we are going to do and we are going to put a major effort on black tea. We think we will pick up some business with our tea and our big thing is we really got hurt on wellness teas this year. We were really down a 100 to 150,000 cases and one thing wellness tea is the highest case cost running at the 27 dollar case cost. So from a standpoint we are repositioning wellness tea, repacking it and we think we will pick up some ground there.

Okay and then thinking as far as spending for 2003 are you thinking that we are going to spend on similar levels the kind of the 16 to 18 percent level?

Carol you know when you say it starts to happen in this quarter. One of the things Hain has put as you heard me say putting process in place here. We just did not have some of the processes in place on trade spending and you know ultimately we are putting a lot of things in place here where you spend money or better have the performance or you are not going to get the money that we spend and we just had our national sales meeting two weeks ago and we brought in a new head of trade development and have put tremendous process in place to control spending for next year.

So you are thinking as a percentage of sales, you think spending will come down?

As a percentage of sales the spending will come down and we will continue to spend somewhere in the 3 to 5 percent on consumer spending. It is important to build brand equity and important money towards our brands. More important is our brands continue to spread in the main stream. On the Yves side we just think that is just on fire that category right now and the demand for that both domestically and internationally we got some exciting new products coming up with Yves and some exciting new introductions and some exciting new places where Yves will be sold and in regards to Lima we feel very good about that and feel very good about having that base in infrastructure. So we will have Hain products in Europe next year.

I guess what I am trying to go with this is I am just trying to understand actually in margins, I know you do not want to give specific guidance for 2003 and outlining the growth on the top line. I am just trying to understand if we are going to see margins turn I think the biggest factor will be spending?

We are going to see margins turn as you heard me say before you know we are going to whole redesign of our plants in distribution centers. So we are going to drive cost down and we have brought on a consulting group to do that is working with us and we are looking at every plant every distribution center. You know I started this company and was not the way of Hains that was important for us to reinvest money in brands not just have big distribution centers in big plants.

And then one last question on Earth's Best any comments on that brands?

Earth's Best is a great brand, we are 5 percent share in natural doing very well with the natural making a lot of money in natural and we had Beech tender and private label just battling away with grocery with nobody making money and with that we decided to back away and let everybody battle and we will make more money by not battling and when it is time to go back into grocery we will do it. Our big effort for Earth's Best is going out of Earth's Best Kids.

Okay thank you.

Thank you Carol.

Question from Greg with Salomon Smith Barney.

Okay thanks. Just a clarification question on refrigerated soymilk, do you say that ACV was roughly 18 percent?

We have grown our ACV yes upto to 18 percent.

Is that all in your geographic markets?

That is just grocery.

Okay good. In the other if you could help out in terms of doing the math with the gross outlook and the gross target, what percentage of your sales come from Hain, Celestial, Yves and Lima?

Greg, we have to do that offline. We do not have that right now. So I will do that offline with you.

Okay. It is not a problem. One more question related to the organic regulation I guess that comes into place I believe on the fall in October, How many of your products are actually organic and do you anticipate continuing with playing organic label on your products?

Greg being organic and being GMO-free is an important part of this company both upon that and continuously moving in that direction is going to be something very important for us and that is going to be important part of our growth and this is actually very good for us. These new organic loss.

So you do not anticipate using any labeling right now that you currently have?

Not at all. If there is anything I think there is more opportunities for us to convert products to organics.

How many products or may be you can quantify how much your product is actually organic right now?

About one-third and our objective would be to move as many as we can do it. In Europe they all are.

Great thank you very much.

And we will now move on to Scott Van Winkle with Adams Harkness.

Thanks there are a few questions. First of all Irvin any progress I think you are looking for some senior management? Is that still the case?

You know the important Scott is we are growing this company and people and brand and right now we are realigning people, and we are continuing on that road map and there is a lot of progress there.

Okay. And there is lot of products coming out. I am wondering about the competitive situation. I know that is launching an aseptic product. There can be a lot of natural chips springing up here and there. Do you see any change in the competitive landscape?

You know good competition is good and I think you know, being a step ahead and having good quality products, you know I feel great today. Having a Terra Chip plant where we can win and do lots of different things and be the first of market. That's the key to us, is being first to market and being different and unique and I think you are going to see some things on refrigerated. That is great stuff coming out of the aseptic Soy. I mean the aseptic category is not growing and may be we'll focus on that. It gives us an opportunity to give some share from the refrigerated scope, but there is competition out there and but my challenge to our marketing groups are product development group, is we need to be first, we need to be innovated, not come out with meat products and I think you know I will spend some time with you in expo and you saw some of our new and innovated products. I think we can be very proud of some of things that we come out with.

You gave an ACV number of 50 percent for Health Valley in grocery, how many SKU's does that represent, you know you went 50 percent with two SKUs and what are the products that lead the charge?

The products that lead the charge, if we can come back and look at the Health Valley today, it is Soups, cereals, cookies, crackers, and bars that are the pillars of Health Valley, and when I say 50 percent of ACV, I really you know I am not saying with one of those products Scott, I am saying with four or five of the pillars.

Okay and last, I think, what was the fourth quarter of 2001sales figure on a comparable net basis?

79 million.

Thank you.

Thank you Scott.

Then we will move to Andrew Wikes with BB&T CApital Market.

Hai. Just want to my calculation of your internal growth for the quarter. I check your 120 per numbers to got the 12 millions from these and compare 104 last year to 108 to roughly get 4 percent. Can you give more exact numbers? Should I see that as an estimate?

No. I think what I said is that as I said in the press release Hain grew at approximately high single digits 8 to 9. Celestial was slightly down from last year. So you know that is the range of ended.

Okay. I guess also using the same methodology for the fourth quarter, taking the midpoint of your guidance of 92 million and I think you said you have spent 16 percent.

Right.

16 percent against that, so on an increase that by 16 percent and again taking out the 12 million for these. That is how you are getting the 95 million again pre ETIF compared to 99 million last year. So that is like your budgeting sight down 4 percent internal sales for the fourth quarter and just again if you could give us any color on that?

Sure. Hain brand expect to be in the 10 percent range. Celestial will be down in the fourth quarter and the remaining will come from the Yves.

Okay. Can you quantify your Celestial or something ?

When you say quantify, it is broken out, I am not sure.

How much it turns about third quarter and budgeted for the fourth?

Our third quarter, it was down a couple of million dollars and fourth quarter it will be down approximately the same 2 to 3 million dollars.

Okay.

And a lot of that you know which are need to go back and clarify Andrew is the mix also in regards to and others of about 70 dollars, which is a 30-35 percent difference selling price. Celestial versus .

Quickly on your passive business with Safeway, I think you budgeted that $10 million out of that relationship, you know would be very accretive going you know, how is that goal?

Our business with Safeway has a chain and it has been very good and you know they have tremendous amount of opportunities and efforts to grow their natural business and we feel very very very good about our business and our growth and future growth potential there.

Are you in similar you know discussions with or with out the sliding fee you know some of the other big supermarket chains? And my last question is on the refrigerated soymilk, Could you translate the 18 percent number to the number of stores are in?

In regards to the discussions for other supermarket change, we really belong in the 15 to 20,000 supermarket and with that you today have Safeway making up you know a major amount of those stores and just like are doing just a great job in a category, everybody sees the growth opportunity in a category. Everybody has seen the higher margin opportunity and people are seeing that and good foods are important for you. So I don't think there is any supermarket out there today that has the right demographics that are not jumped on this category and regards to how many stores that we are in today, you know we are in probably somewhere around 2000-2500 stores. In refer to any . Andrew. Hello.

Okay. Can you hear me?

I can hear you. Can you hear me?

Sure.

I said 2000- 2500 stores are refrigerated stores that were .

Just a step back. I guess I have made specific, I was really asking about the Terra chips business with Safeway and was your answer is regards the you know the broad product line or just Terra specifically?

It was broad Terra, it was broad product line, but what I will say you is we are still in Safeway, we are doing quite well or whole back with Safeway and everybody else this year, we could not promote the product, because we want to promote, we could not supply an now that we have capacity that is changing.

Now I mean, I guess my point is you know I you know these things have to go into conventional supermarket instead of obviously a perfect fit. I am just trying to get to you you know the next big order comes in as it is going to come whether with a slotting fee?

Again you know slotting fee is a great expense. If you get distribution, and you get growth and you know as they said before spending what ever it is on a slotting, there is a 50 percent chance of success, because you are going to get consumer as a trial and I think you have an up components in your products, which we do, when you get the type of market share, pay and slotting something important. If you don't pay you don't get in there. You don't grow. On the other hand, when you got the kind of growth numbers that we have you don't necessarily have to pay with types of slotting either.

Andrew I just want to clarify one thing that you talked about the beginning of your Q&A, When you talked about and numbers one of the things that we have to adjust for or you would have to adjust for as we the sales that we had for in the fourth quarter, because we did that acquisition mid June. So we had two to three million dollars of sales probably in June of that quarter. So you have to adjust your number for that.

Okay. Fair enough and I guess chips in that rate.

That is correct.

Okay. Thank you.

You are welcome.

And next we have George Dalman with US Bancorp Piper Jaffray.

Yes good after noon.

Hai George.

Three questions for you. The first one is that expand a little bit more on the competitive environment. What are you seeing that is and the competition and spend a little more and make sure that is your maintaining your market share and secondly as it is fair to say that your spend that you are going to have for 03 will probably be more front-end loaded and third that do you anticipate rationalizing within your product offerings as you go forward into 2003?

Three good questions. Number one regards competition. You know I think Soy has been a tough competitor, but Westsoy has merge as number one and I think have been the awareness in Soy that we have and having the brand equity, because of the good opportunity going to refrigerate in refrigerated categories. So Soy has you know some competition, a definite in competition in snacks. I think it is definite in competition of cereal categories. But again you know we have to be a low cost producer and an innovative company on those products and we need to be out there ahead of the competition ahead of the trends. George, what is important for Hain is this year. We wake up in the morning. We think about natural organic foods and yes you know some bigger companies are doing some products. I don't think your neighbors are up in many apples rate right now or concern about their organic cereal line and I don't think some of the other guys are concerned about that. When I wake up, that is my number one concern. SO you know there is competition, but I don't know that is the number one priority. In regards to front-end spending next year, most of that will be in the front-end, but on the other hand hopely we offset that with costs coming down happened in the first two quarters also. So we want to make sure we do is the worse spending money that we will fund in that internally. Okay.

Okay.

And last but not least, we are going to SKU rationalization continuously and we are also looking at to at certain brands together and not seeing that we will do Hain fairly brands or trends brought you by Hain and and we are looking at that and you know one of things that we want to make sure as we don't give up shares to somebody else when you take the brand away, but that is some thing that we are continuously doing George.

Okay. Thank you very much.

Last question.

We will take the last question from Susan with Salomon Smith Barney Asset Management.

Hai guys.

Hai Susan.

Believe it or not, my questions have been answered.

Okay. Thank you Susan.

Thanks Susan.

Since that was answered, one more question.

Sure. We will take the last question then from Steve with US Bancorp Piper Jaffrey.

Just sort of a concept ional question for you. How have you seen the environment change, you know in terms of how you go to market in the various channels, whether it be or promotional hours that you are expected to put behind the product, and even as you start moving to Canada and Europe, I mean, how is it that the dynamics changed?

You know, it has happened from numerous things. You know we become a bigger company, so, number one, and we are more in to the spot light. Again as we look at our business, what is important to us is consumption and how people are buying our product. What is important to us is partnerships with our customers or with our distributors. So, from a stand point, before the natural food industry, you know the way of doing business before was stack it high and watch it fly and give it a good price. That is how natural food business was built. That has changed today. You got to have a good product, good quality product, and got to have whether it is organic or got to be natural, got to be GMO-free. So, there has got to a lot of benefits to it. Just as important, you got to get out there and tell the consumers about it because there are a lot of other people out there telling the consumers about it. In regards to moving into Canada and moving into Europe, we used to sell a lot of product in Canada and this year's quarter, we probably dropped you know 2 to 3 million dollar in sales in Canada, because we used to stick our products going up to Canada, and then you just a sticker on it. You no longer can do that. You know it is illegal to things like that. So, we are investing you know, kind of money and going to bilingual pact, going to metric packaging, and also there is a ingredients in Canada that are not allowed here in States, in different can sizes. Our soup can has to be a 14-ounce can in Canada, where here it is 15 ounce. So, we have to retrofit towards country. Regards to Europe, there is different taste in Europe, you have me heard me say before in Western Europe means cigarette. It would not be too healthy to put on . So, we have had to go in there and do research. We have had to go in there and look at trends, we have had to go in there and adapt to taste, and that's whether it is Europe or whether it's Japan. So, our business model has changed tremendously. Our cost of doing this has changed tremendously. But you know, my objective is to grow Hains, you know, to that billon dollar business and for us to become that global company, and right now, you know for the first time, Hains is doing business in the Americas, Canada, Europe, and now Asia, and we definitely have become that global company.

That is very interesting. The market definitely has changed. If I can just ask one quick follow up. Where would the terra chips fall on the scale on the organic standard labeling?

Terra chips right now will not be organic but Garden of Eatin' chips will be.

Okay, thanks.

Thank you.

Well, that wraps our call for today. Thank you for your time. I am quite excited about the category. I am quite excited about all the accomplishments that we have made at Hains. As Ira has said before, we are a company of eight years old and we are seeing a lot of things move in the right direction. We have seen a lot of consolidation. We have seen a lot of efficiencies happening. What is important for Hains is to make sure that we service every customer the same, whether a natural food store, whether Wild Oaks or super markets. Our customers and consumer to us is important, as they will pay a premium price for Hains.

I continue to feel good about the health trends that are happening out there, and people wanting to buy healthier products, and people willing to pay higher price. Our brands, you heard me talk before about some of the brands where we are a leader in 13 of the top 15 categories in grocery, and we will continue to invest in our brands. What you heard me say is, we wake up in the morning thinking about natural organic foods. We are involved whether it is in the loss, GMO-free, whatever it is, Hain isn't showing that it is there, to put its step front for, to make sure we effect in our effective here.

With regards to integration, I think we have come a long way in the last six months of integration. Gary and his group have done a great job working with consultants in regards to integrating distributing systems centers, looking at cost, and stripping that from scratch, from top to bottom, and looking for every opportunity. Ira with his group has put together a good infrastructure in the financial area, and is bringing a lot of those controls in place that Hain needed for that billion-dollar company.

Kevin and his group from sales side have really put together first organization from the sales side and are seen with and her marking .

In regards to Celestial, we have made some major efforts in Celestial. has put together an excellent team out there to be able to get us growing again, and clean off some of the issues that we had while we acquired Celestial. We have also made some major headway in our customer service area, recruiting people from our HR with modern and as I keep going around, Hains is made up of a team, and we will continue to raise the bar and enhance this team, and bring on new people where we definitely need peoples new ideas and new infrastructure, and that is a big, big, big move within Hains.

I would like to thank you for time and support. Thank you.

And that does conclude today's program. Thank you everyone for joining us.