Hain Celestial Group Inc (HAIN) 2002 Q4 法說會逐字稿

Good day everyone, thank you for your patience. Welcome to the Hain Celestial Group fourth quarter 2002 teleconference. Today's conference is being recorded.

Before we begin today's conference, I would like to remind you that statements made on 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 on 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 are contained from time to time in filings of the Hain Celestial Group in 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 now like to turn the conference over to Irwin Simon, President and Chief Executive Officer of Hain Celestial Group. Please go ahead.

Thank you. Good afternoon. With me during this call today is Ira Jacobs -- Ira Lamel, our Chief Financial Officer, and Gary Jacobs, our Vice President of Operations, who will talk about our Health Valley divestiture of our plant, which you have seen in the press release. Hopefully, most of you had an opportunity to see our press release today. And I will talk about 2002, which fiscal year ended June 30, and our outlook for 2003.

Our revenue for the quarter was 95.4 million versus 79.1 versus a year ago, up 21 percent. Our organic growth was 8.4 percent. Income from operations before restructuring and non-recurring was 11 cents versus 8 cents. As you see, we made some significant changes in our business, in structure, business, brands and strategy and people.

As we look back at 2002, it was a challenging year. We had 9/11 that approached us in early September. We had economy slowdown, and we had a long winter. We had had a longer anticipated Terra plant on its opening. And with that, a lot of those things are behind us, and we have emerged as a much stronger company. We've had a lot of accomplishments. We acquired a great brand in in that fast-growing analog business. We acquired , which gave us a good infrastructure to lead into the high-growth organic market in Europe.

As a company that's emerging into the super mass market, and moving into other classes of trade, we've gone in and upgraded our systems on customer service and our deduction area. We've upgraded our sales organization to enable us to go out and sell to those super masses. We brought in new people that will bring the experiences we need to take this company to our next level.

It all took time and it all took money, but with that, we've emerged as a much stronger company. And throughout all this, we've emerged with a very strong balance sheet, which I'm very proud of.

Over the past 5, 6 years, we have built many brands, like Terra, that's gone from a $12 million brand to a $50 million brand. Garden of Eatin' has gone from a $9 million brand to a $40 million brand. Westsoy has gone from a $20 million brand to a $65 million brand. And Health Valley, when we acquired it, was a declining brand. And this year past quarter, we'll show it growing at six percent. It took a lot of effort, a lot of time, a lot of energy, to move these brands to these levels. And of course, Celestial Seasonings. We've now owned it two years, and in the two years a lot has happened with Celestial to allow it to come out and grow -- to grow in the high single digits it should grow, and to take Celestial away from the businesses that it should not have been focused on.

As we move into the super masses, our business model has changed. We now have to become much more efficient low-cost producers and low-cost logistic shippers. And as we do that, this will enable us to get Terra to $100 million, Garden of Eatin' to $100 million, Westsoy to $100 million, Health Valley to $100 million, and that high double digit growth that we're expecting from Celestial. And that's just to name a few brands that I will speak about.

Ira will take you through our financials in a second.

Let me first talk to you about some of the changes and the restructuring charges that we had talked about in our press release today. We've made some good business decisions for the future. In regards to supplements, this was a losing proposition for us, and it took us two years, due to to eliminate this business. Our Weight Watcher brand, because of a change in ownership with the Weight Watcher brand and higher costs, we felt it was more important for us to build our own brand.

In regard to Health Valley - what a great opportunity for us to partner with a . They run plants for a living. We do not. They have another bakery that's 10 miles away. In fiscal 2002, we had unexpectedly eight to $10 million in cost from unabsorbed overhead and higher cost that hit us on that plant. That risk is gone from that operation. And more important, Health Valley, one of the best known brands that is out there -- our new will allow us to go into many new categories with many new products. We have not been able to grow in our cereal category because we have not been able to be competitive on price. With our new we will be able to do that.

We were at a stage where we had to either divest of this facility and join up with a co-packer or put a tremendous amount of capital in this facility, and our strategy is to build brands, invest in our brands and not necessarily into plants.

What I'd like to do is turn it over to Ira now, and he'll take you through the financials, and I will then take you through the rest of our brands. Thank you.

Thank you, Irwin. Good afternoon, everyone. I'd like to take you through our fourth quarter and full-year results.

We reported today that our fourth quarter operating earnings totaled 11 cents per share before deducting restructuring and one-time items that I will talk about in a moment. This 11 cents per share comes off a quarter which showed strong sales growth of 21 percent over the prior year's quarter with sales reaching 95.4 million this year versus 79.1 million last year. Irwin will talk later about the performance of our brands.

Our fourth quarter includes restructuring and one-time items related to our supplements business, our Weight Watchers business, and our Irwindale, California manufacturing facility.

In June, we announced that we had discontinued our supplements business at Celestial Seasonings and that we would not renew our license to sell certain Weight Watchers products. In connection with these discontinuances, our fourth quarter includes charges of $7.9 million or 14 cents per share related to supplements principally for inventories, packaging, and trade items.

Of the $7.9 million charge, 6.2 million had the effect of reducing our gross profit in accordance with accounting rules. The charge for the non-renewal of the Weight Watchers license amounted to 2.1 million principally for inventories, packaging, and trade items as well of which 700,000 reduced gross profit.

Sales of our Weight Watchers brand in the fourth quarter were lower than originally planned to limit the issues we might have with the trade, an amount we estimate to have been about $750,000 to $1 million in that fourth quarter.

The aggregate cost of Weight Watchers amounted to approximately five cents per share. Of the total charges for supplements and Weight Watchers, 8.7 million are non-cash items. We do not anticipate that there will be any restructuring charges related to these items in future periods.

In addition to the restructuring charges just discussed, we also have charges this quarter relating to our Irwindale, California manufacturing facility. We have entered into an agreement relating to the sale of this manufacturing facility to one of our high-quality co-packers.

As we have previously discussed, this facility is operated at levels far below its practical capacity. As a result, we have faced cost issues for some time, particularly in the area of under-absorbed overhead. In the fourth quarter, these under-absorbed overhead amounts and other production-related issues reduced our profitability by some $1.6 million.

By transferring the operation to the co-packer, we expect to achieve greater predictability of our product costs and have opportunities for lower product costs in the future as the co-packer, a well-experienced and efficient operator, anticipates lowering our product cost while increasing volumes through the facility, all of which will contribute to future savings for us.

Under the agreement, the co-packer is to acquire all manufacturing assets located at this facility and is to assume the lease on the property. The co-packer will manufacture products for our Health Valley, Breadshop, Casbah, and Nile Spice brands.

In connection with this agreement, we have recorded a charge of $4.4 million in the fourth quarter to reduce the manufacturing assets to their realizable values under our agreement and have further recorded reserves of $7.6 million to reflect reduced values of inventories of raw materials and packaging, certain lease obligations, and other items. Of this 7.6 million of charges, our gross profit was reduced by 5.5 million charged to cost-of-sales as required by accounting rules.

We anticipate that there will be continuing charges in future periods for potential severance liabilities and related employee costs. These charges are expected to be approximately two million and the lion's share of these amounts will more than likely fall in our fiscal 2003 second and third quarters. In all, charges for the fourth quarter for these items aggregated 12.9 million or 24 cents per share, and the future charges of $2 million should impact future earnings by approximately four cents per share.

Non-cash items included in these charges, both fourth quarter and future, amount to approximately 9.2 million.

As we discussed in our current and prior press releases, we have been active in the new business development area. We are continuing our discussions with regarding a joint venture for the launch of our Terra Chips brand in Europe, using very strong market presence and expertise.

We are also continuing our discussions with in Japan regarding the roll-out of Yves soy-based products to the Japanese markets. Also in the last few days of June the company's Yves brand became the supplier of veggie burgers to McDonald's restaurants in Canada. Further, at our new European base in Belgium and Lima, activities have begun to launch the sale of Hain Celestial products from the United States into Europe.

In connection with many of these startup activities we incurred fourth quarter charges of approximately $1.8 million or three cents per share, which could not be deferred under accounting rules to future periods.

Net income for the full year was three million or nine cents per share on a reported basis. For the full fiscal year our net sales were 396 million, up 14.5 percent over the prior year's net sales of 345.7 million.

Our gross profit for the fourth quarter, after adjusting for the restructuring and one-time items discussed earlier, was 28.8 percent as compared to 26.7 percent in the comparable period last year. Last year's gross profit was negatively effected by approximately 2.8 percentage points due to unusual coupon and marketing expenses in that quarter, which have not been reclassified as a reduction of sales under the newly ITF rules adopted in the third quarter.

Therefore, gross profit in this year's quarter was seven-tenths lower versus last year, in part because of the lower gross profits earned by certain of the businesses recently acquired, coupled with a higher expense base for warehousing and distribution including the added cost of the warehousing and distribution network brought on with our acquisition of Yves in Canada and Lima in Europe, each subsequent to last year's fourth quarter.

Our inventory levels at June 30th, 2002, were at 53.6 million compared to the 49.6 million at June 30th, 2001. The increase since that time comes from the approximately two million of inventories added when we acquired companies this year and from planned increases to reduce stock-outs. We had 61 days in inventories at June 30th this year compared to 76 days at the prior year's June 30th.

Our SG&A in the fourth quarter was 22.8 percent of net sales compared with 19.3 in the prior year's fourth quarter, with the prior year's figure adjusted to exclude amortization of goodwill. The major differences from year-to-year results from the reclassification of additional advertising and marketing expenditures last year, which now have been reclassified under the new rules, as well as additional costs associated with the international acquisitions that we have made where we do not expect significant G&A savings. Operating income for the quarter, after adjustment for the restructuring and one-time items discussed earlier, is 6.1 million versus 4.3 million in last year's quarter.

This quarter we incurred interest expense net of 300 thousand as compared with 343 thousand of interest income net in the prior year's quarter. As we've discussed in the past, in last year's comparable quarter we had a higher level of investible cash earning the higher rates available at that time. Since then, we have used cash to make our Yves and acquisitions and we have made significant capital expenditures, particularly in our new Terra facility.

The effect of currency transactions this quarter was minimal, providing income of 62 thousand as currency rates fluctuated somewhat in our favor through the quarter. Adjusted net income for the fourth quarter was 3.7 million. EBITDA for the fourth quarter adjusted for the restructuring and one-time items amounted to 8.4 million. With our added capital assets, our depreciation expense in this year's quarter was $400 thousand higher than last year's comparable quarter.

As Irwin stated, our balance sheet continues to be very strong. Our working capital was 70.9 million and our current ratio was a healthy 2.3 to 1. Equity is at 403.8 million. During the quarter, we acquired 150 thousand shares of our common stock for our treasury at a cost of approximately $2.5 million. At year-end, we had 48 days sales in receivables compared with 56 days outstanding at June 30 of the prior year. These day sales outstanding calculations have been adjusted to reflect the new sales numbers under the accounting rules adopted in the third quarter. Our debt, as a percentage of equity, remains a very low 2.9 percent with virtually all of our $240 million credit line available, with only $4 million of it used for Europe.

With that, I'd like to turn it back over to Irwin.

Thank you, Ira. What I'd like to do is talk about a few of our brands. After two years of major strides, Celestial Seasons, our largest brand and one of our most profitable brand, is well-positioned for six to eight percent growth. After a warm winter last year, we feel with many new products in our herb category, we saw Green finish strong this year and we've seen a real vitalization overwhelm Estee. We have strong interest in our holiday teas and we just completed, with our iced teas, our new Cool Brews introduction and saw some great results from that.

In the quarter, excluding WalMart, , Celestial Season's Brew, 2.3 percent. And what's good to see, the key category's rolling again, it was up over 10 percent and, as you remember back in March, we as a Company spent about $4 million on T.V. advertising and we felt it was important to invest back in the category and we've continuously seen some results .

In our Terra brand, Terra is the number one brand in specialty snacks, up 17.3 percent ending July 13. And again, what we're emphasizing now are our original brand, high-margin products, high-dollar products, and stay tuned for some new original type of products coming out. We introduced a Bonus Bag. We just had great reception from consumers. And those of you that love , we will have new sweet potato hitting the market in September.

The good news is that we now have capacity, and with capacity we can go and build distributions, we can go to new customers. Those of you that fly JetBlue and see us on their commercial right now, that has contributed some pretty significant volume numbers to Terra, and some pretty significant P.R. efforts. With that, we will be making some major distribution drives in the food service area, and in the super mass market.

Our Garden business was up 36.2 percent, with many new products there, and we've had to add a third plant to fill the capacity of our Garden products.

Health Valley -- you will see lots of change, and you heard me talk about it with our new , and I'm quite excited to see all the new products that are gonna come out under this product, and I think we're gonna nickname it "Little Nabisco." But snack bars were up 25 percent. Our soup products were up 19 percent. Our cereal business was down, but with our new and new equipment, we think we'll be able to make some major changes there. We plan to expand major into the cracker area, the cookie area, and other snacking categories with Health Valley.

Westsoy, from a strategic standpoint -- one thing that's important is we continue to focus on category. The category is not getting anywhere near the growth of refrigerated, but very high-margin product, good shelf life. And there is other players out there that we can take share away from, and each share is worth a million dollars for us. Our internal plan next year is to grow 12 to 14 percent, and we're looking for sections in a lot of the super masses that are moving into this category, and realize it's an important category.

We're also coming up with a lot of new packages on shakes and smoothies, and other ancillary products and sizes that have done well under category. In the meantime, we will be introducing some sugar-free products and some low-cal products under the category.

What's important: by now means are we abandoning the refrigerated category, which is a high-growth category. We're in the midst of coming up with our new packaging and some new products that will be out in the October period for our refrigerated.

Our Earth's Best Baby Food -- you've heard me talk before where we've retrenched and stuck to our natural food business, where we've seen our share grow 13.2 percent, and we had somewheres like an 80 share. And we've allowed the other major baby food companies that wanted to spend a lot of money battle it out. Well, the good news is those companies have not seen successes, and where Earth's Best was eliminated in stores, we're now being asked to -- consumers are asking for Earth's Best.

We also have introduced some new lines of Earth's Best Kids, as we think eating healthy among the kids' category is just a big opportunity for us.

Yves -- we now own this business for one year. What a great company. What a great brand. We've seen some great growth. You heard Ira talk about McDonalds. We're seeing some great success from that, and we expect to see other opportunities with McDonalds around the world.

We will be introducing Yves in Japan come October with a joint venture with , and we're pretty excited about the opportunities there.

Our Canada business was up 23 percent, and our U.S. business was up 12 percent. And again, Yves gave us the to introduce other Hain products into Canada. And with the new Whole Foods that opened up in Toronto, they're doing extremely well. And and that are putting natural food sections in the store is pretty important for us to ensure that we have a good presence in the Canadian market.

In regards to Europe, our contract should be finalized this quarter. We've done some testing in Italy and Sweden this summer, and we've seen some good results and good demand for the product over there. We made some business decisions to hold off on expanding Terra until our deal is done. And we believe, and the market study that we've done with , that we think it can be over $100 million in the next three to five years working with the product and working with sales organization.

In regards to Lima, many new products coming into play. Lima will be entering the U.K. market, entering supermarkets. And what's important in Europe, the soy claim that has happened here two years ago has now just been approved for the U.K. market and us making some major moves with soy in Europe is high on our priority list. Right now we're pretty strong in the rice category with our Lima brand.

Our business, which is our organic produce business and has a fresh business, has introduced for and we have a great distribution system there. We are working with a major U.K. company to introduce many meat analog products similar to the Yves type of product, but they will be skewed towards the eating customs of the European market. We'll also be introducing many Hain products as you heard Ira talk about the infrastructure that we have in place to introduce Hain products into Europe and refrigerated soymilk through the system.

Right now, we're reviewing a lot of our brands and our strategy. We're looking at what brands make sense within the company and as we look at all our brands today, all our brands do make money, but which brands are going to grow in that double-digit, it doesn't make sense for us to divest brands. Fran Dailey, who has joined us about 30 days ago - he has taken on that project and he'll be coming back to me and looking at where we should be streamlining brands and categories.

In regards to people, besides the great team that we've had in place here at Hain, we've brought in some additional experience with , who is President of our Snack Group who came out of Nabisco, has 20 years experience. Fran Dailey - you heard me just mention Fran - Fran, who was the CFO of Heinz North America for 25 years, left two years ago and has joined us as Vice President of Business Development and Strategic Planning. And Fran will be our liaison with Heinz on working with Heinz and trying to develop opportunities with our Heinz share - with Heinz as our shareholder. As you read in the press release, after two years, has - is leaving the business. came back for two years and has a great - has done a great job of integrating both businesses working with myself and we're in the midst right now of looking for a new general manager at Celestial.

I'm excited about 2003, our tenth anniversary. We've accomplished a lot, we've done a lot, and a lot will continue to happen. Throughout this - throughout the year, we've continuously emphasized the importance of maintaining a strong financial position. As you heard from Ira, we have a very, very strong balance sheet. And this will allow us to go into 2003 to be able to build our brands, invest in brands, invest in people, invest in infrastructure.

Finally, let me say a few words on an external issue that is critical for all corporate America and corporate governance and integrity our shareholders and employees have placed their trust in Hain and Celestial. I'm determined to maintain that trust. We have the highest standards of corporate governance - always have and always will.

And, of course, we comply with regulation and proposed guidelines in terms of board composition and independence. And both Ira and myself will certify financials going forward. We've always stood by our financials and are pleased to do so by further by affixing our name to the results.

On expensing options you already know that in our annual report on 10-K we provide a breakout of how our options would effect earnings. We decided to discontinue disclosing our option expense and wait for FASB or the SEC to mandate expensing. And as further efforts are made to bring - to bring back transparency and trust to the macro economic system, you have my personal word that we will act quickly to adopt any new regulations and continue providing Hain Celestial investors with the transparency and trust they deserve.

And one other thing, we believe in our business, we believe in our stock, we will initiate a stock buyback of a million shares.

What I'd like to do is turn it over for any questions right now.

The question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit one on your telephone. We'll take your questions in the order that you signal us and we'll take your questions - again, if you would like to ask a question, please press the star key, followed by the digit one. And again, we'll pause for just a moment.

Again as a reminder, it is star-one to ask a question. Again, we'll pause for just a moment to assemble our roster.

One moment please.

Our first question comes from with Salomon Smith Barney.

That was a good one.

If you could give us some color on guidance. You gave out the revenue guidance of 450 to 470 million I believe in your last press release, and 78 cents to 84 cents in terms of gross margin. And SG&A, can you just give us a little bit of help there?

The revenue growth for the first quarter should be in line with what we said it will be for the entire year, Greg.

OK.

And I think margins we should discuss - well, actually we don't discuss margins on calls like this.

OK.

So let's pass on that.

OK. All right, fair enough. Could you also, just in terms of the share buybacks, you said $1 million. Is that - is that for the company or is that management?

No, Greg, it's one million shares for the company.

One million shares for the company.

And management, including myself, will, you know, look to buyback shares.

Oh, great. What would be the potential timing on that? Is it like six months?

Well ...

Do you have to wait a few months or ...

No. We can actually start within the next 72 hours.

Oh, great. Great. Well, I'll just - I'll put myself into the queue and let some other people ask some questions. Thanks.

Thank you, Greg.

Moving on now to Andrew with Lehman Brothers.

Good afternoon.

Hi, Andrew.

Hi. Couple things, first just to finish off on the share buyback. Once you can start how aggressive do you think you'll be on that? I mean, I'm trying to get a sense of, you know, at current levels, you know, how much of an opportunity do you think it is? I realize there are issues around the float and other things, but, you know, one million shares seems like a reasonable amount that you can do at current levels. I would think you would be pretty aggressive.

Well, Andrew, it's Ira. We will be opportunistic with regard to buying back shares based upon the prices that we see the stock at in the marketplace. And we will also have to comply with the various rules that constrain us ...

Right.

... in terms of daily volumes that we can buyback. So we will be watching that as time moves along and just reacting to it as we see our opportunities present themselves.

This isn't meant to be a, you know, an authorization over, you know, a long period of time, I mean, I just want to try and decipher whether this is, "Hey, we still like this as a good buying opportunity here", based on what you see in fiscal -- coming out in fiscal '03, or it's just kind of over time we'll buy that stock.

The board has rushed the timeframe to do this open and, as I said, when we see that the opportunities are present that give us the right, you know, pricing, etcetera, that's when we will be buying shares. Irwin?

Andrew, with our strong balance sheet and our drop in our stock price we think today one of the best investments out there is our stock. And we've continuously bought back stock. As you heard, we bought back 250 thousand shares in the middle of May to the beginning of July, we bought shares back in September, October, so, you know, hopefully that we can buy back today up to a million shares and, you know, that's what our program is in place today.

OK. And then finally ...

... I just wanted to ...

... 250 thousand shares we mentioned ...

... we spent 2,500,000 on 150,000 shares.

Got it. Right. OK. More importantly I guess, trying to get a better sense again for the earnings progress that you've put out for fiscal '03, and I'm really trying to get a better sense for , you know, probably a lot more prudently going-forward in this year and you've built it up from the bottom up, but I want to get a better sense for the amount of flexibility you have in what's built into the plan. And by that I mean there's two aspects. One, there are some, you know, one-time costs and things that impacted you last year. Did you go through some of those, at least some of the bigger pieces there that you would think won't be around this year? And, more importantly, of all the various new, sort of, ventures you're talking about, whether it's, you know, , in the U.K., things of that nature, what of those things are not built into your plan for fiscal '03, yet might see some, you know, level of earnings coming out of them as the year goes on which would just, again, enhance the flexibility around the earnings number? I think you kind of see where I'm going with this?

Yes. What affected us in 2002 were three major things. Number one, carrot chips in regards to extra start-up costs and running the two plants, delayed timing margins, and not having capacity to fill our Terra needs and that hit us -- the margin hit us in revenue which was approximately $5 million. In our Celestial Season's budget, you know, with a warmer winter that we couldn't control and some products that didn't come out in time and even though Celestial had a good year from a profitability standpoint, we, you know, we missed our targets and there was about a $4 to $5 million miss there. But we decided also to invest in the business from an advertising.

The other big area, and it's not from a savings at Health Valley, Health Valley cost this Company in operating profits almost $8 to $10 million last year from unabsorbed overhead in our Health Valley facility. We had higher costs on products that we produced to keep the overhead in-line that went out of code and we had higher cost in Workmen's Comp, insurance and earthquake insurance. So, from a standpoint, I think we've dealt with three major ones. I mean, are you always going to have bumps along with the way and can you deal with them? But when you have, you know, 3 or 4, $5 million bumps that hit you, you fall into a big hole and I think we've taken care of every one of those.

So, I feel very good about, you know, the 78 to 84 cents this year, because we swarmed around those.

Right.

In regards to growth, there's nothing in our budget this year for McDonalds. There's nothing in our budget this year for expansion of McDonalds business. There's nothing in our budget for the joint venture. There is nothing in our budget in regards to expansion of a lot of the Hain products and soy products in Europe.

From a new products standpoint, Andrew, there's nothing in our budget from new products. There's nothing in our budget from refrigerated soy.

OK.

And, you know, what's just as important from us is a cost side. We've just gone through a whole logistics study on cutting costs in warehouses. And, you know, we've been put in front of us where there's a potential $6 million in savings in our whole logistics study, which is not in our budget either.

OK. Got it. So, it's fair to say you feel, perhaps, more flexibility's been built into the plan this year? Am I putting words in your mouth, relative to years past, or not?

Not at all, and we enter into super masses, you know, one of the questions if you're not gonna ask, someone's gonna ask me, "how does that affect your margins?" And, you know, the big thing as a company, as I've built infrastructure, and customer service built infrastructure and deduction and sales, we could not service those accounts before. And you don't go to the super masses unless you can service them from a customer service standpoint, from a distribution standpoint, and that's us becoming that low-cost producer, and going from 17 warehouses to three. That's from us eliminating plants and let someone else make the product for us, and we are in the midst of doing and have done. .

OK. And then, last thing, just real quickly. Did you mention the tea category was up 10, and Celestial was up 2.3?

Yeah. I did mention that in the quarter ...

I'm just trying to get a sense of how that works, particularly given the incremental advertising that you did over the past ...

Well, the thing is, you really can't look, you know -- the thing is, what we decide to do as a company, we spend our money in the tea season, and, you know, I'm not sure, right or wrong, but that's where we put our money is when we believe that people are buying tea. Our competitors out there have been aggressive in the tea category from May until now, and have done "buy one, get one free's," dollar ninety-nine, and that's why we've been down in share, and that's why they've been up. So, we will continue to spend, and we have an aggressive program in place starting in September for tea season.

But the good news is the tea category's growing. Prior, the tea category was down.

Right. OK. Thanks a lot.

You're welcome.

Moving on now, we'll take our next question from Andrew with BB&T Capital Markets.

All right, a couple of questions. First, in the press release you mentioned that you got some major distribution gains in super mass. Could you give us some color on who you got there, if anybody's new, or who you expanded your relationship with? And then you identified Wild Oats changing distributors, sales by three to $4 million. Can you give us some color, you know, what was that all about, as well?

In regards to the super masses, Andrew, what we've done is expanded into super markets with additional soy sections and additional products, and that's in regards to the super masses where we expanded. And as we continue, it's all the Safeways, the Krogers of the world, the Albertsons, and that's where we continue to expand products. So, we've enhanced our product portfolio in all those accounts.

So, it's more product into existing customers. It's not like you up Wal-Mart, Target, or somebody new like that.

More products into existing customers and at the same time, you can - our business model and our business with Whole Foods and Wild Oats has continued to be very strong as you see what their comps are. So, it's all around the horn of all the customers.

In regards to Wild Oats, the announcement came in the last two weeks of the quarter, and what happens is as they buy in for different programs, they reduced inventories and actually what we see happen now is the new distributor of Wild Oats has about 330 new items that they were not carrying before that they will pick up to bring into Wild Oats. At the same time, they will go sell these items to other customers other than Wild Oats. So from our standpoint, it's - you know, it's a pickup , and we wouldn't see it all in the first quarter because that transition doesn't happen in - until the end of August - first of September, but we will see it come back over the next six months.

In other words, Wild Oats is paring its SKU count from you as well as everyone else?

Well, no. What happened - no, no, no, not - what I said is Wild Oats carries a lot more SKUs than a - than a new distributor was carrying. So we're going to see increased buying from this new - from this distributor because he didn't carry all the items that Wild Oats has in their stores. So we're going to see this come back, plus we should see additional revenues come back from new items that this distributor will go out and sell to other natural food customers.

OK, and is it fair to say United Natural Foods had, I guess, maybe extra stuff and that's why there's a delay in ordering ?

I don't think they had extra stuff. I think when it happened, everybody watched their inventories. And, you know, it's a - just like us, our inventories are down to 61 days. And that also included an acquisition. So I think, when that happened, United Natural smartly brought down their inventories, and that's what it was.

Two more questions - we have some spends data through May that has pretty impressively backed up your organic growth number - matched it, more or less. But the only thing in there that I thought was a little troubling, I guess, I just wanted to ask you about directly was looks like their measurement of the Terra Chip sales in natural was actually down somewhat substantially. Is that something that's planned? Is that a lost distribution or was that related to or anything else like that?

There's two things that happened there. Last year at this same time, we introduced and we gave it to Whole Foods first. So there was a big spike-up in volume last year. At the same time and the second thing that's happening is you see natural foods being down, you see tremendous growth in grocery, and what's happening is Terra Chips is now just more widely available than natural food stores.

Yes, we saw that. I mean the - certainly the growth in mainstream was more than enough to make up for that. So this - you're saying most of the natural was more of a spike last year?

Right.

We should normalize that and see some growth going forward in natural, as well?

Exactly.

And my last question probably more for Ira is, did I understand that you - against the 70 to 82 cent guidance, you're going to have four cents a share of charges? Is that it or is there going to be more - 78 to 84 - excuse me. Or could there be more that is yet to be enumerated?

No. We will, in all likelihood, incur charges as I identified, that four cents, you are correct, as it relates to certain continuing charges for items we could not take in the fourth quarter.

We will also, as we said at the end of the press release, continue to have through at least the first quarter, until the effect of the new co-packer takes over, continuing unabsorbed overhead issues that are likely to reduce that number in the first quarter as well.

We will now be separating from our regular numbers the impacts that we have at Health Valley.

But you think - so if it's roughly similar to the 1.6 you had this quarter - first that's a question, will it be roughly equivalent to that? Second, will it be - when do you think it'll be cleaned up so that we won't have that as sort of an adjustment?

We shouldn't have it going forward beyond the second quarter. And I think your characterization of the 1.6 is probably a good ballpark estimate of what might continue for that - for that first quarter.

And then the second would be whatever, half, some fraction of that and then that by the second half of the year ...

No. Once we turn the operation over to the co-packer predictability comes back into our product costing out of that facility and we should be able to be far more lined up with what it is that we will incur. The closing on the transaction is expected to take place in September, should not be later than the end of our first quarter. So it should theoretically end at that point.

Last point on that, I mean, should we take - once the one point, you know, once it's cleaned up, is that 1.6 annualized or per quarter? Should we take that straight to the bottom line or should we net out some profit for the co-packer? Or is that already netted ...

Well, clearly, you have to put some profit into the co-packer. There's no question about that. But the savings that we expect to get off of this agreement will come in the future. They won't come immediately. We will benefit from predictability. We will benefit from reduced working capital investment because our inventory investment will go down. And as the future moves along and this co-packer takes the practical capacity fills up in that building, which we had been unable to do - he can bring in additional product that's not ours, he can also take in product from our other brands that we don't currently produce there. And he will lower his effective overhead that's applied to all of the products that are manufactured in that building. We will get a savings in our product costs from that reduced overhead application. That's a major plus for us.

But I think, Andrew, couple things, which is more important, you know, than the savings is what else we can do with this brand and the new categories that we can go after. And you get spins and you see cereal and the types of cookies that we can go after in the biscuit category. So none of that's in our revenue number and none of that's in our operating number so there's tremendous upside on new products that we think that we can have quickly for the Health Valley brand.

And in essence we've been a - we've been a plant slave with the Health Valley brand and made products that only could be made in that plant to absorb overhead.

So, you know, we're quite excited about that where we think Health Valley can be taken.

Moving on, let's take a question from with Prudential.

Good afternoon, everybody.

Hey, .

Hi, .

I got cut off a little bit, I'm a little out of range here. So I apologize if any of these questions are repetitive. If so, I'll call on the outside.

You know, Irwin, in your prepared remarks you talked about in the cereal dropping and the reasons why, but you didn't mention or increased private label. What impact have they had on your business? Your cereal business?

You know, you see our cereal business down, , about 10 percent and we've been, you know, as I've said before, plant slaves because we never had the extruder, never had the investment in capital and we think that will change dramatically. We have new equipment coming into that plant that should be in within the next 90 days and we're working on multiple new categories for cereal. So, you know, we've had a lot of new entries into the cereal category and some of the big food companies just came out with an organic cereal product that is not doing that well, so by no means, you know, at all feel that we're not getting our fair share. But we think we can do a heck of a lot better in the cereal category in organic cereal. You know, private label is coming out there and there always will be private labels, but we think we've just got to have good products, unique products, and better tasting products. And what we feel with our new co-packer, , we'll be able to be very, very price competitive because of cost difference.

And what kind of growth did you build into cereal for this year's plan?

Basically, the whole Health Valley plan, we only built in about 6 percent overall growth for the whole brand. And that was not including coming out with our whole bake line of products, not coming out with our biscuit products, not coming out with additional cereal products.

The growth that you seem to be targeting for aseptic soy, if I heard right it was, you know, low double-digit. Seems a little bit aggressive for this year. Is that the number you're targeting?

That's the number we're targeting and, , that's going into other classes of trade, that's going into the super masses, that's coming out with new ancillary type of products and we've seen some great results coming out with our shakes, our smoothies, you know. So we feel that people are still buying aseptic, people are looking for new products and we feel there's a lot of players out there and we can take share away from them and, you know, you've got to spend money out there. The category is still a very strong category. You look in the stores, there's still somewhere between a six to eight foot section in there. And what the stores are doing are consolidating the category and only want two or three players so we're seeing ourself getting some more space.

But, is not the overall aseptic category, you know, relatively lackluster?

The overall aseptic category, yes, it is lackluster. But, I come back and say it's a very, very high margin category, it's a category by no means that is going to go away and, you know, it's the same product in aseptic that is in refrigerated. For the refrigerated category, very high competitive, very high slotting, much lower margins, and you're dealing with something called a high spoilage rate. By no means, , are we not going to go into the refrigerated category and you're seeing us going to come out with new packaging and some unique products. But, you know, I wanted to re-emphasize we are not, at all, going to walk away from a 40 share in a category where we think there is still growth and we see high margins.

Yes, I think got a good price, though. Just in terms of, you know -- the year was brutal from a stock standpoint, and I'm glad to see some share repurchase, but, you know, I guess the 150 thousand shares seems to me more...

It's a million shares, .

Oh, I said a -- so you bought back a million shares.

No, no ...

, we bought back 150 thousand in the quarter. We've announced, and maybe that is possible that it was at the time you were cut off the phone, as you said.

OK. I'm sorry.

That's all right. We announced that we are going to go on a buyback program in an opportunistic manner for up to a million shares, as I said, in as opportunistic way as we can in the market -- depending on prices, and our allowable limits per day that we can buy.

Well, ever since you started giving conservative earnings guidance, and doing the guidance, and ever since you started talking about share repurchase, the stock has kind of kept going down and down. So, I don't know what could present a better opportunity. I guess that was more of a comment than a question. Thanks.

Thank you, .

We'll now move on and take a question from with Adams Harkness.

Thanks.

Ira, could you give me -- in your adjusted number to get to 11 cents for the quarter, could you give me the actual operating income number you get, excluding those charges?

Excluding all the charges, we would be at an operating income of 6.1 million.

OK. And your guidance next year of 78 to 84 excludes any costs for new business development. Can you quantify those? And then, Ira, I'm kind of wondering why you think you can exclude those from your operating results.

You're talking about in the future?

Correct. Any new business opportunity. I think ...

We're not suggesting we will be able to exclude those from our operating results, but we've taken the view that until those actual business opportunities are finalized and concluded, we've chosen not to take the position that they belong in our guidance for the future. When we talk about having discussions with , as an example, or , as another example, we're in discussions with those companies. We've not yet concluded those agreements, and we think it would be a bit foolhardy on our part to try and include the results of the transactions that have not been completed.

We've also taken a bit more of a conservative view toward what will happen with new product introductions through the year. Our experience in the past is we've been successful with bringing out new product, but there are times when they're delayed. We want to wait and see how they materialize in a more substantive way as we go forward.

And Scott, at the same time, we have not put in the revenues either. So, I think one should offset the other, and that's where we've been conservative on there's no McDonalds revenue, there's no revenues. There is no revenue. So there's nothing in there from a revenue standpoint.

Well, Ira, if you had to guess, I mean, how would ballpark that, or could you? I mean, what those costs would be over the next four quarters?

Which costs, Scott? I'm sorry.

New business costs.

I'm sorry, I misunderstood a bit of what you were saying. I would think that the new business costs over the next couple of quarters could run very similar to what we ran this past quarter. A lot of it will be dependent upon the timing of the deal, because we're incurring some costs in Europe. We're waiting that deal to take place in a plant that we operate there.

And the management restructuring this quarter of a penny a share, I believe is the number, what was that?

Hey, Scott, as we've tried to enhance our management team and we moved people around and we added people and and recruiting. That's basically what it was.

OK. And last question - just a number - what was the depreciation - the actual depreciation number for the quarter?

About 2.1 million, .

Thank you.

Let's move on now. Take a question from , with .

Hi, good afternoon. Most of my questions have been answered.

Just hoping you could talk a little bit more about Terra Chips and what you're seeing in terms of margin improvement there, and maybe where gross margins are tracking right now and where they were a year ago at this time, and also, once you kind of grow those sales even more, where the - where the margin on that business can go.

And then just one other small thing - if you could give us the revenue number as it was - as if it would have been reported prior to the adjustment.

, in regards to Terra Chips, you know, what our objective is is to have margins in the low fifties for Terra Chips - high forties, low fifties. We saw a lot different margins than that this year. And, you know, as we now have capacity and as we now bring up our vacuum fryer, and that should be starting up now, you know, that will ultimately offset a lot of unabsorbed overhead in that facility, too.

So our objective is to see our margins in the high forties, low fifties from that facility. We're not there yet, but we'll get there.

In regards to revenue before , , we can get back to you on that.

OK, thanks.

Any other questions?

We have a question from with U.S. Bancorp.

Hi, guys. How are you?

Good. Hi, .

I have just a few questions. I think I wrote this down correctly. Your organic growth in the quarter was 8.4 percent. Is that correct?

Yes.

OK, so the whole difference in your reported revenue is all acquisition. Was there any pricing changes in there on any of your product lines - any price reductions that you could share with us?

The only price reductions - there is some price reductions in regards to some net pricing that we've done on certain brands. But in regards to price increase, we wish - no, none at all.

Yes, OK. So, essentially the whole difference there is just - it's acquisition revenue, then?

Acquisition and organic growth. And like I said, there is some there ...

OK.

... for some brands that we went to net pricing .

OK. OK, good.

And then, Ira, could you run the exercise on your fourth - I think your fourth quarter , but could you give us the full-year 2001 - either your operating profit number and/or your EPS number if you excluded the charge - the one-time items in '01?

Are you talking about '01 or '02 ?

'01 - I'm trying to - I'm trying to get - I'm trying to get an apples-to-apples comparison here.

Well, if you want to go back to the prior year, why don't I get that to you offline. That's ...

Oh, OK.

... not with us right now.

OK. I'm trying - I'm trying to get a - I'm trying to just get a - you know, a flavor for your guidance versus what was an actual number in 2001. And it seems like you guys, you know, probably could, you know - it looks like it's a conservative guidance. Do you think there's execution risk? In all the stuff that you've got going on, is there execution risk yet in this year in getting implemented all your stuff?

No, I - , you heard me answer before when I was asked the question by , and I think, you know, of anything I think we could be accused of is being a little aggressive and I think this year we take a step back ...

OK.

... and being conservative. And I think we've got a lot of good things happening. You know, we've gone into a lot of new distribution areas. As you heard me say before, we've grown a lot of business to a level that we've had to put infrastructure, people and systems in place to take it to the next level and we're ready to do that. So we think there is the upside definitely to do that.

OK. And I would assume you'll get continued margin benefit from all of these things, you know, into the next fiscal year as well. This isn't - you won't get the whole thing?

Not at all. It doesn't happen beginning. It's going to continue and there's a major plan, you know, in cutting costs, improving logistics, and improving margins dramatically throughout the company.

OK. Thank you, guys.

Thank you.

That does conclude today's question-and-answer session at this time. I'll turn the conference back over to Mr. Simon for any additional or closing remarks.

Thank you. I think a lot has been accomplished in 2002 as you head us talk through all the achievements that we have had. I'm also quite excited about 2003. In today's day and age eating healthy not a fad, not a trend. It's an important part of our lives. The new organic regs coming into place the end of October are going to be something that's very important in food regulation and very important in the future of food.

Soy continues to be an important ingredient and aspect in our diet and it's something we're heavily emerged in. Snacking, eating on the run - healthy eating on the run, feeding kids are something very important in our diets. Today being the largest natural organic food company, not only do we answer to the highest standards of governance on our numbers, but we as a company answer to the highest standards on labels and ingredients that go into our products from organic to GMO free to natural to being Kosher to being able to call our products vegetarian or . So from a standpoint our standards all throughout this company are extremely high.

I'm proud of what we've accomplished in our nine years of being in business. I'm proud of what our people have done as a team. And I'm excited about the future of 2003 and what we can accomplish. Thank you for your support and thank you for listening today. Bye-bye.

That does conclude today's conference call. Thank you for your participation.