Hain Celestial Group Inc (HAIN) 2003 Q1 法說會逐字稿

Please stand by. We're about to begin.

Good afternoon and welcome to the Hain Celestial Group first quarter fiscal year 2003 teleconference.

Today's conference is being recorded.

Before we begin today, I would like to remind you the statements made on this call that are estimates of past of 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 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 now like to turn the call over to Mr. Irwin Simon, President and Chief Executive Officer of the Hain Celestial Group. Please go ahead, sir.

Thank you. Good afternoon, everybody.

I hope you've had an opportunity to read our press release that was released this afternoon. With me today is , our Chief Financial Officer, and , our President of Global Snacks. And David will be talking about some of our snack opportunities out there.

As you saw in our press release, our sales for the quarter were $96.4 million, versus 87.9 on a comparable basis, and that's a 10 percent increase.

Organic growth for our Brands Canada and our European growth was approximately six percent. Our gross profit was 32.4 million, versus 29.7, and net income was 18 cents, versus 16 cents, and this was adjusted for our Health Valley overhead in our facility.

This quarter we completed preparation for the October 21st launch of the new organic laws. These new standards offer U.S. consumers assurance that all food products labeled as organic in the U.S. are governed by consistent standards. The Hain Celestial Group will certify over 650 products -- 359 as organic with the USDA seal, and 189 made with organic ingredients. Brands with our portfolio poised for growth include: Garden of Eatin', Little Bear, Bearitos, Earth's Best, Arrowhead Mills, Celestial Seasons, Health Valley, Westsoy, Westbrae, and Hain Pure Foods. And we really believe these new standards are a milestone in the growth of natural, organic products in the U.S. And the USDA standard label for the entire industry and for consumers for the first time can identify true organic products.

And Hain Celestial plods these new regulations, and will continue to be innovative in this growing category to provide consumers with a greater range of organic choices, as many consumers are looking for them today.

Let me tell you about some of our businesses and some of our brands and what's happening. In Health Valley, we continue to dominate the number one position in the snack bar category. In natural and grocery, we were up significant growth -- 16.4 in grocery; we were flat -- 16.4 in natural; we were flat in our grocery.

Our soup category continues to show growth, both in natural and our grocery channel -- up three and a half percent, and over two percent in grocery.

Our cereal category remains a little challenged, but we think we have some new products. And I will talk about, in a few minutes, about our Health Valley plant. And with our new equipment coming in, we think we have some new products, and I will talk about in a few minutes about our Health Valley plant, and with our new equipment coming in, we think we can add a lot of new products to our Health Valley business.

Overall sales for the Health Valley business this quarter were up 9 percent. The Health Valley facility that we sold off to our closed on September 30th. Our new now is operating that facility, and we've already started to go through SKU rationalization of products. We're in the midst of looking at multiple new products in the cracker, cookie and cereal category, and also we're in the midst of looking at a lot of cost containment that is already happening. We're also in the midst of reducing inventories both on packaged and raw at our Health Valley facility.

You heard me talk about the organic laws; it already has shown some increased sales on Arrowhead Mills and DeBoles. Arrowhead Mills and DeBoles together were up 9 percent. Arrowhead Mills is a pioneer in organic baking mixes and flours, and has the number one position in natural, with a 24-percent share, and that was up over 8 percent. DeBoles is the number two brand in shelf-stable pastas with a 12-percent share, and that was up over 18.6 percent.

On Westsoy, our Westsoy refrigerated continues to show double-digit growth and is the category. Westsoy remains the number one brand in grocery, and has increased its dollar share to 36. Our next nearest competitor, , continues to lose share, and down to a 20 share, and a declining--has declined 21 percent. For the latest 12 weeks, the category has declined 8 percent while Westsoy has maintained share due to in-store , which we see to be very effective on the brand. Our latest four-week numbers, Westsoy growth is flat; our share is up 2 points while the category is down 5 percent. In Natural, Westsoy remains the number one brand, with a 39 share. Our next nearest competitor, , has lost shares, which is down to 21. Our plans are to be very innovative in this category. Our plans are to continuously introduce products, and this past Natural Food Show in Washington, we introduced some new Westsoy refrigerator products, and we introduced , which we've had tremendous success with, which I'll show you--which I'll talk about in a little while.

Our sales for Westsoy were flat for the quarter, and we think with a down category, that was pretty good.

First Best maintains its leadership position in Natural Foods with a 73 share, and continues to grow, up 10 percent in the latest 12 weeks, after several quarters of backing away in Grocery, and letting some of the other baby food companies participate in the spending wars, we are seeing that it has worked for us, and Earth's Best has shown in the last four weeks, up 13.9 percent, and we've seen Earth's Best this quarter up over 14 percent.

One of our disappointing brands in this quarter was Terra, and we did have some soft sales and you've heard me talk about it before. We think a lot of it had to do with timing of new products, timing on distribution, and not getting out and doing some of our promotions. We're still standing behind double-digit growth on this brand, and we're seeing some of the changes that are already in place that David has put in place, and he'll talk about them in a little while, being effective right away. So David will take you through what's happening on Terra.

We're still seeing great consumption and double-digit consumption and growth on our Garden of Eatin' brand.

In regards to Celestial Seasonings, it's great to see cold weather out there. Last year at this time, we were probably seeing 60, 65 ° weather; this year we're seeing in the low 40s and seeing a lot of snow and cold weather across the country. Sales for this brand we are up 1%, but what's important to recognize in this brand sales for green were up over 17%. Green tea is a high margin product and herbal tea. Profitability on this brand was up dramatically because of mix of products and selling a lot more into our grocery business and spending a lot less on trade. In food drug and ___ excluding Walmart and Walmart has become a good part of our business on Celestial, which continues to grow. What we see is a category growing and we were down 1 ½% but our granshare was 26%. One of the factors where we did see some decline effect us was private label, affected us in the tea category.

But as you heard me say we grew in green, we grew in black and wellness was one our biggest drops and I think that is attributed lot to the supplements. We have as we come into tea season right now we have advertising print campaigns which we will be launching as we speak and we have multiple new products that we will be seeing coming in from Celestial in the next three to six months. Our E___ brand was up 13% and East product continues to be the number one meat alternative in Canada. Driving the category with a 15% growth over the prior year in the U.S. we were flat, but we are in the midst of making many introductions of new products in the U.S. Our McDonnell business still continues to be quite strong in our Canadian operation. Some of the new business opportunities and some of our new distribution gains, IKEA has decided they want organic food and we put organic food into IKEA. British Midland now has t__ chips on their airplane.

Westsoy Original, which is our original soy milk is authorized an additional 900 stores which now you can buy Westsoy refrigerated in 5,500 stores. Our new lowfat refrigerated that we just introduced in Washington in a new unique packaging is now available in 1,600 stores. Soy Slender which is a low sugar, low carb soy milk, one of the first already all of our distributors have taken this product on and we are now in 3,000 supermarkets have authorized this product. In regards to Health Valley, you heard me talk about cereals, being a little soft, we just got authorized in a chain with 1,500 stores with 22 skews of cereal that will go into the cereal category.

That's priced competitively and in that category of competitive cereal category and already, we are seeing some pretty good results at that same chain, we are seeing our Westgrade Beans a five skews go into the bean section. So we are seeing some at some national chains. One of the other things, is what we are seeing is consumption trends at major natural supermarkets continue to be strong and we are excited about what we are seeing there, and again, as we head into our busy season we are excited about what we see in our cold weather. As you heard me continuously talk about you know part of our achieving our results in this fiscal year is cost containment, and we have put numerous in place. In this quarter we have been able to achieve results.

We have placed our third party management company at our ODC warehouse which was effective September 1 and we have seen tremendous progress there. We discontinued distributing Arrowhead and De___ out of our warehouse and consolidated back to Herford, which we saw tremendous cost opportunities there, and the same with Milespice, we distributed only out of one warehouse, we consolidated. We consolidate our of our soy milk out of our warehouse, out of our manufacturer, which ultimately will save us tremendous savings there, and we reduced the amount of storage at some of our warehouses across the country. So we are seeing tremendous cost savings coming out of our logistics activity and our manufacturing area.

In regards to people, we've made some changes in our organization. , who has spent many years at ConAgra and Nestle has joined us to become Vice-President of Operations.

who has spent 25 years at Bristol-Myers Squibb working in their Clairol division has joined us as Vice-President of Operations, Vice-President of Finance.

who has been with the company four years, who has a role in the, role as Vice-President of Finance and Vice-President of Operations will be leaving the company at the end of this calendar year.

In regards to Europe, we've had some great growth in Europe. Our sales were up almost 30 percent in Europe with our Lima and Biomarche acquisition as we continue to grow those businesses, as we continue to grow our Hain's Celestial products over there. We've seen some great growth in France and Belgium.

We've just introduced our new refrigerated soymilk over there, a product called , which is actually a soymilk and a juice combination.

In regards to our snack business in Europe, what we've decided to do, originally we announced that we would, we signed a letter of intent with , we decided to terminate that letter of intent as we felt the cost of entering Europe under the direction of what wanted to do would be a major drag on earnings for us.

So what we've decided to do is, we've now joined up with a major snack company in Europe, which we're in the midst of completing that deal and they will, they will distribute our product into the UK and Ireland and we'll do it ourselves in the continent. So we feel that we have a pretty good plan on that. And will talk about that in a little while.

In regards to acquisitions, we're continuously looking at acquisitions. There's numerous categories out there. In the fresh category, there's numerous categories, but there's numerous acquisitions in the frozen, opportunity for us that we're looking at and we think prices and multiples have come down and we're looking at numerous areas there.

We're continuously with our stock buyback program. We bought $2.8 million of stock in our last quarter and we will continue to buy back as I previously mentioned.

We are reconfirming our consensus number for the quarter and the year.

What I'd like to do is turn it over to and he'll take you through what we're doing on our snack business, and then will turn it over to Ira.

Thanks .

As you've just heard, our snack business had a soft first quarter and that was primarily driven by shortfalls on Terra, which was cycling a very strong year-ago period. And we've quickly reassessed our overall plans for fiscal year 2003. We've identified our strategic and executional gaps and we're moving forward with a sense of urgency to fill them. Part of that strategic focus will now be around Terra Original, which is our largest and most profitable in snacks. We're going to generate new news and excitement looking at a repositioning of the brand. We're going to improve our price value relationship, number one by converting over our bonus 7.5 ounce to a permanent time, which is 25 percent more product per bag and effectively a 20 percent per ounce price decrease to the consumer. And at the same time, we're introducing a four-ounce Terra original bag, which will give us an opening price point in key non-gross for your natural food accounts.

On the new products, we're going to move very aggressively on Terra and have two to three products keyed up for the second half of the year which will focus around new flavors and new brands.

And finally this should offer us the opportunity to increase our penetration into food service, drug, and mass merchandising in club accounts.

On Garden of Eden, we have some strong growth momentum currently. We're gonna continue to prime that pump and introduce new flavors and larger sizes.

We've just introduced Hain Pure Snacks, which has gotten an outstanding reception by our trade customers. And we're moving with new orders into those distributors right now, and should be reaching retail in the second quarter, and hitting our in the third quarter.

Finally, we're looking at overall better execution for our supply chain, as our facility is now up and running, and we've gotten through a couple of small bumps in the road on our new . And that now is running as planned.

As far as infrastructure to support these initiatives -- we've strengthened it with a very focused approach, both in R&D -- with a new R&D manager dedicated to snacks, new trade marketing manager dedicated to snacks, and we've just hired a new PR agency to help us get the word out and get a bigger bang for our buck around the new repositioning, which will soon be announced.

Irwin mentioned that the overall business model that we looked at in Europe really would not have paid out the way we were hoping that it would, and therefore, we are currently pursuing other initiatives with a major snack manufacturer and distributor in Europe. And as we finalize that deal, we'll be coming forward with more details.

So, a lot of good opportunities on snacks. We still feel very optimistic about the year. And again, with all these things happening, we feel confident that we'll be able to have another strong growth year on snacks in fiscal year 2003.

Thank you, David. ?

Thank you, Irwin. Good afternoon, everyone.

I'd like to take you through the first quarter results. As Irwin discussed, sales were 96.4 million for our first quarter this year -- up 10 percent over the prior year's first quarter sales on a comparable basis. Last year's first quarter sales included sales for the now discontinued supplements and Weight Watchers businesses. On a reported basis, sales were up seven and a half percent.

Our earnings per share for the quarter, before the certain previously announced items, were 18 cents per share. These items were first discussed in our last earnings call, and included certain Health Valley, costs, and certain start-up costs in Europe.

Reported net income for the first quarter was 4.7 million, or 14 cents per share on 34,382,000 diluted shares.

On September 30th, we turned over operation of the Health Valley, manufacturing facility to our co-packer after transitioning the operations of the facility throughout September. This completed our transaction with that co-packer.

During the first quarter -- leading up to the transaction -- we continued to incur the additional costs we've discussed in previous quarters. Unabsorbed overheads, coupled with the heavy promotional activity in certain products produced at the facility and designed to reduce inventories of those products, cost us approximately 1.7 million in the quarter -- an amount approximately equal to the previous quarter. This had a three cent impact on earnings per share.

As we discussed in the fourth quarter, we will incur certain additional restructuring charges related to the transactions, and these charges are expected to be incurred, in part, in the second and ensuing quarters this year. Our original estimate of $2 million in future charges, principally related to employee costs, severance, and related taxes, insurance and benefits, and certain other exit costs, will hold up.

During the just completed first quarter, approximately 400,000 was charged against the restructuring accruals that we set up at June 30th, and that 400,000 was both for Health Valley and the other businesses we discontinued at that time. During the first quarter, we continued to incur startup costs in Europe. These costs amounted to $500,000 in the quarter, and therefore reduced our earnings by a penny per share. Our reported gross profit for the first quarter was 30.3 percent as compared to 29.7 percent in the comparable period last year. Our improvement in gross profit this year over last year came in part from the mix of products sold, and reduced distribution costs offset by the lower gross profits earned by our recently acquired business in Europe. Our reported gross profit third quarter was additionally hampered by the capacity issues at the Health Valley manufacturing facility as we prepared it for sale, and by the excess manufacturing costs we incurred in Europe while waiting for the startup there. Had we not had these costs charged against our reported gross profits, our percentage of gross profit to sale this quarter would have been 32.4 percent.

SG&A in the first quarter this year was $21.6 million or 22.4 percent of net sales, compared with $17.6 million or 19.5 percent of net sales in last year's first quarter. The increase in dollars and percentages was a result of the additional costs in this year's quarter as compared to last year's. In marketing and advertising costs, in the costs associated with our recently acquired business in Europe, where we do not expect to achieve significant savings, and the startup costs associated with the new Hain business development in Europe. Additionally, we had higher costs for employee benefits and insurance.

Operating income as reported for the quarter was 7.7 million, or 8 percent of revenue against 9.1 million or 10.2 percent of revenue in last year's quarter. Without the charges I discussed earlier, operating income would have been 9.9 million, or 10.3 percent of sales. Our balance sheet continues to be strong; our working capital was 72.6 million and our current ratio was 2.4/1. Our days sales and receivables were 49 days at September 30th this year compared to 52 days at both June 30th, the recently ended fourth quarter, and last year at September 30th first quarter. Our days in inventory were 72 days this year versus 73 days last year.

Debt as a percentage of equity remains at a very low 3.4 percent, with our stockholders equity at 404 million. During the first quarter, as Irwin said, we acquired shares of our stock in the open market at a total cost of $2.8 million. At September 30th, we held a total of 462,000 shares in our treasury at a total cost of 6.2 million.

At this point, we'll turn it over for questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. We'll take as many questions as time permits. Once again, please press star one on your touchtone telephone to ask a question. We'll pause for just a moment to give everyone an opportunity to signal for questions.

Our first question today is from from Prudential. Please go ahead sir.

Well good afternoon everybody.

Hey John.

Herb is you will take out divestitures, technically you should take out acquisitions to get a kind of internal sales for the quarter. If you do that...

I did that John.

You will need six number or in the seven and a half number?

In the sixth number.

But wasn't the sixth number just for rocket brands, or the sixth?

Well the sixth number included Rocket brands, our Canadian business which we owned last year and the growth in Europe, not the full European business.

Okay the sixth number is a internal sales number taking out acquisitions and divestitures for the entire company?

Right.

Okay. And can we just go.

Well John, it probably represents close to 90% of our sales.

Well I want one representing 100% of your sales. Do you see what I am saying. Sorry for the line, can you hear me?

Yes.

I guess I want that sixth number, does that take out all acquisitions and divestitures to get an internal sales number?

The sixth number takes out yes. The sixth number includes John, Garden of Edens, Taro, Health Valley, Westsoy, Este, Celestial, Eves and any organic growth in (lima bio marche).

But what about the smaller brands that are still part of your organization.

And actually John to come back with those, if I actually added those in and actually if I took Taro out of here, our growth would have been up 9% because each of those brands other than Este were up in the high single digits.

Okay, so six is not a bad number for an internal sales number in the quarter.

Not at all, not at all. If you took Taro out of the number, it would be closer to 9.

I don't want to take Taro out of the number. I don't want to take any, I just want a clean number.

What I am saying, is if you put. If you put Hollywood Oil, which was up 5%, Westspray was up 17%. Arrowhead Mills De__ was up 9%. The only business that was basically down for us was our medically de___ business which was Este, which was down basically 23%, it was down $743,000. Everyone of our other businesses was up for the quarter.

Can we just go through to kind of get to the sixth number some of the bigger businesses, because you gave a lot of market shares and so forth, but just roughly what sales were up for the quarter for...what's I guess you have the team number at plus one.

Well I gave Health Valley up 9%.

Okay.

I gave Westsoy which was flat.

And these are sales for the quarter.

These are sales for the quarter.

Okay.

Celestial was up one percent. Erst Best was up 14.1%. Arrowhead Mills, De___ was up 9%. Hollywood Oil was up 4 ½%. Westspray was up 17%. Eves was up 14%. And lima bio marche was up 30%.

Okay, so in that Health Valley number is cereals and soups and the whole business.

The only thing that's not in the Health Valley number which we eliminated and which, we're in the midst, you know, just on our volume shortfall, a big part of that is private label, and what's gone away is for instance, we used to make Gatorade bars. We used to make LA Weight loss products. That is just business that's not there and it was just absorption of overhead business, but this is Health Valley brand, which includes cereals, soups, crackers, cookies, et cetera.

And Terra sales for the quarter, did you give that?

Sales, Terra sales were down about 16 percent for the quarter.

OK. And in terms of ...

Garden of Eden was up.

Great. And in terms of the earnings guidance, I did not see, did you give specific guidance for the December quarter?

Yes, well, we're, specific guidance is out there for December quarter and we are you know, in, with consensus.

So you're comfortable with consensus?

Yes.

And for the year?

And we are comfortable for the year .

So basically to the extent there's been some initial softness with Terra, you feel the offsets have been Health Valley, I'll let you speak to it.

Well I'll speak to it , there's a couple things. I think number one, our only softness in the quarter was Terra, and you know, Terra is a big part of our business and we feel very, very comfortable with Terra coming back. You heard talk about it, and also in the snack number as we introduce numerous new Hain's pure snack products, which we feel very comfortable with, we felt we had a great quarter, and even though Celestial was up one percent, what we saw is great grocery numbers, which are higher margin product, higher green key numbers, and we had a fabulous October, one of the best October's in tea, so we're seeing tea trends. We're seeing good Health Valley trends, really we're just introducing those cereals that I talked about. It's great to see cold weather. It's great to see Earth's Best growing at the numbers. It's great to see Arrowhead Mills. It's great to see Westbrae. So there's a lot of brands out there that we're seeing, you know, with the organic rigs coming in where some of our organic businesses were not growing as quick, you know, jumping in there.

OK. That's my last question. Just can you repeat again what percent of your products get certification, and I know there's different kinds of certification, but what percent of your products get either total certification or part certification?

Thirty-five to 40 percent right now, and you know, our objective is, you know, to do as many products as possible. As we introduce new products, you know, that's real important for us to have that USDA seal on it. So you know, right now we have over 650, you know, out of our 1,500, 1,600 products.

In Europe all our products are certified organic, which this doesn't apply to, but 35 to 40 percent and you know, we'd like to see it get up to 60, 70 percent.

And to the extent I go in stores, I don't see these labelings. Obviously it takes some time, but I do see it for some organic products, it's already on there, but not yours. Can you discuss that?

Sure. You know, there's, as anything and I think if you go back to 1994 and I think you were around then, when the new labeling laws came into play ...

I've been around too long.

You know, it's just running down packaging and you know, the USDA seal cannot be used until October 21st. So you know, there's a six-month grace period here, between running out packaging and getting the new seal on. So we couldn't print packaging on October 20th, and put the USDA seal on it. So anything that's manufactured or printed after October 21st has the USDA seal on it.

Great. Thanks a lot.

All right.

And we'll go next to from Capital Markets.

Yeah. On earnings guidance for the quarter, you want to -- now, you want to refer to the consensus, versus you previously published . Is that what -- is there sort of a shift, here?

Not at all.

No, there isn't a shift at all on that, . The differential is that I mentioned that we're gonna have continuing restructuring charges related to the Health Valley, transaction. And if you take a look at what we anticipate we'll hit, that will give you the differential.

All right. So, I guess I'm confused. You're saying they're gonna be higher than you previously expected, or last longer?

No. We announced in the fourth quarter that our continuing restructuring charges would come in at about $2 million. We're expecting that about a million of it, or so -- maybe two cents a share -- is gonna hit us in Q2. The transaction closed on September 30th. Most of the costs are gonna be related to employee costs for terminations and benefits and continuing severance pays, and so on.

Right.

Those charges could not be accrued at June 30th under the accounting rules. They have to be hit in the second quarter, and that's the approximate differential between the 27 that we had out there, and about two cents lower that's in consensus.

Yeah, but aren't those one-time? I mean, can we just -- even though, you know, under GAAP you can't take them below the line.

You're correct.

And would you change your guidance based on ...

Well ...

... take a lot of charges that you can't take below the line on GAAP. I mean, this sounds like a true on-time ...

It is a one-time charge, and it will reduce the guidance that we gave of 27 down to what the consensus is.

All right. Now, what about sales guidance? Could you talk a little about that -- sort of quarterly, or for the year?

We're sticking to, you know, our sales guidance, you know, for the year of 450 to 470 in the next quarter. And the only reason our sales guidance is -- say, 120 to 125, and that is more just private label business coming out of there.

OK. Good to hear. If you look at this, you know, missing the sales number this quarter -- which I think, you know, is sort of the only blemish -- was it ...

The sales number, , was just Terra. Terra and private labels -- about $5 million on our Terra number from budget.

Right.

1.5 versus last year, which you can see we had an aggressive budget. And there was approximately about $3 million on private label.

OK. And now, Westsoy -- were you budgeting for the category to be down eight percent?

We were budgeting for some growth on Westsoy. We were flat, but ...

Oh, flat overall. Right.

... we were flat versus last year. We were probably budgeting for a little bit higher in sales, but nothing like Terra and nothing like Health Valley private label.

OK.

And Health Valley private label -- it's more absorption of overhead than contribution margin.

Um-hmm. OK. Lastly, on -- well, last point on sales. You know, when is Terra budgeted essentially to turn back up?

We'll start seeing some product, Andy, in the second quarter, but as you and I discussed when we met last week, we'll really see the real momentum kick in in the third and fourth quarter.

Okay, but you think it won't be down, you know, in the teens necessarily, second quarter?

Actually no, second quarter, we're looking for the brand to be up versus last year, Andy.

Okay.

And again, we're already seeing consumption numbers come back. We're already seeing consumption numbers at retail come back at national natural foods supermarkets, so we saw--we've seen a good October.

Well that's good. Was part of the reason, you know, that Natural and Terra's been kind of on a decline until I guess, until this month, essentially, you know, when you didn't have enough capacity, you had to make a decision which channel to short, if you will, or not to put trade dollars against, or something in that--in that ...

No, I don't think that was the reason. I think it's, if you look at Natural Foods overall, and Snacks in particular, there seems to be a bit of a tradeoff in--both in Distribution, Grocery, and with it commensurate increased buying in Grocery. And you see a bit of a tradeoff there.

And Andy, you know, we, in essence, to some degree saw a lot of this coming, and one of the reasons you know, I went out to look for a head of Global Snacks, because I knew Terra was taken--you know, to a $50 million brand, had to be taken to the next level--had to be repositioned, had to have new products, had to have a new strategy, and you know David got here in July, and a lot has happened, in his four months here. So with that, you know a lot of the things that didn't happen, also not knowing when the plant would be up and running, promotions are scheduled six months out, so we were a little gun shy, and we didn't have a lot of the promotions planned for this quarter, but there's a lot of promotions out there for the second and third quarter, there's a lot of displays, a lot of new products coming, and a lot of excitement on Terra, and we think, you know, stay tuned for some of the exciting stuff coming there, because I've seen a sample of it, and have been pretty impressed.

Okay. Not to dwell, but just to summarize, do you--so you're saying you're pretty sure, you're pretty confident this quarter, Terra factory sales are positive? And what did you say about your numbers in October? Were--are they already positive, or are they just--they're just rebounding strongly.

They're starting to rebound, Andy.

And we're seeing a great--25 percent more on Terra. We're seeing some good increases there, and we saw consumption up in the month of October at our national natural food chains.

Our sales reported--you know, one of the key issues has been price value on Terra, and we're addressing that by, as I mentioned, converting over our 6 oz. to--permanently to the 7.5 oz., which was previously a promotional item only. Now it's going to be a permanent item. And where we've had 7.5 oz. replace 6 oz., we've seen 20 plus percent increases in sales per point of distribution, so we think we're on the right track, and the 4 oz. will certainly help complete that price value equation positively for us.

All right, so it sounds like the 7.5 oz. just in the recession or whatever, is getting you back to ...

Good move.

Getting back lost sales. Where are you at in terms of the percent of points of distribution that have it and those that don't, and when ?

We're still probably--in Natural, we're still probably about 20 to 30 points off where we need to be to get the full conversion over, but that is probably with a month or so lag. And in Grocery, we've probably only hit about half of our 6 oz. distribution, so we think, as we continue to accelerate the conversion to 7.5 ounce, it is only going to have positive impact on our business moving forward. There is still more to come on that from a positive standpoint. We are not really there yet.

So when do you think it will be completed?

I will say probably by the end of the calendar year, we will be into our fiscal third quarter.

Okay and does it have a material impact on earnings?

At this stage, I will probably say not, but we will start to see some positive impact in the second half.

Okay. Because you are getting enough of the sales pop to pay for the added ingredients.

Absolutely. We are exceeding our pay out requirements right now.

I just want to ask one last question. On the European distribution, I think you had mentioned that Barilla being a private company was willing to be very aggressive and burn a lot of money up front which you know will be dilutive to you, it might be terribly creative long term, but you know for a public company it might not be the best arrangement. Would that sort of the reason or one of your reasons for not going forward with them, or do you have the better situation now, and could you just sort of speak to the confidence that you are going to get something done in Europe in the intermediate term.

Well number one, as we step back, Barilla is an excellent baker, pasta maker and snacks was the category they looked to get into. During the time we started on this deal, they announced a major acquisition in Germany, which I think distracted them and Barilla's philosophy and anybody that knows Barilla in the U.S. is coming in here and spending heavy, heavy marketing dollars and invest in the business and we will wait for a two, three or four year payout. You know as a 50% partner we just did not want to invest that type of money and the other structure was to do a sales and marketing rate, but it was not the right arrangement. At the same time, a large company over there that has a half a billion snack company we started to talk to, and we felt that was just a better way to go on a sales and marketing distribution arrangement. At the same time with out strength to Lima and our ability to sell products into the continent, we would handle sales of the continent ourselves right now and concentrate with our new partner in the UK and Ireland. I think it will be a win, win and I think it will be the right deal for both companies.

So you are pretty close to having this agreement in the UK and Ireland, or you have it down?

We are working on it right now, we are negotiating right now.

And will that end up sort of being bigger and growing faster than the continental parts that you are handling yourselves?

Well the UK for Taro chips in Ireland you know, they like salty hard snacks. I mean kettle chips over there is probably a 30 to 40 million dollar business. You know things which this will grow if together it can be a 15 to 20 million dollar business or whatever. We are going to make money on it and that' what is important to us.

This is the last thing. When you say it a sales and marketing. Is this going to be a J & B, or something where they are marketing it for you or are you producing it?

We are still on discussions Andy.

Okay.

Thank you. Thank you.

We will go next to Barry Devans with Bear Stearns.

Good afternoon everyone. A couple of things, first of all, can you address, we talked about Taro earlier and I think it being down 16% down a shade worse than I thought it would be, but what kind of growth do you think is realistic for Taro for the year 03?

Barry.

Hey David how are you doing.

Yes, hey , how are you doing?

I think it's probably in the range of low double digit, probably in the 10 plus percent range.

Which is kind of down from what we had talked about earlier, being up in the 20's. Is this strictly a function of the first quarter, or was this something, you know, that you may have been thinking about as part of the plan all along?

No, there's as little bit of a trade-off, perhaps when we see good things happening on Terra, you're right, we were down a little more than we thought we would be in the first quarter, and obviously, we feel good about the plans and confident of the initiatives that we're bringing forward to positively impact the business and grow it as a strong double-digit rate moving out through the rest of the year, but that'll probably balance out to 10 plus points.

We are going to have our entry into the puff snacks category with Hain's pure snacks, and as I mentioned, that's had a very strong positive reaction from all of our key customers. And that will be gaining distribution in sales and compelling overall snacks as a group to a strong double-digit performance this year.

When does, when did the new puff snack hit?

We're just launching it right now. We introduced it formally to a lot of our customers down at the Natural Foods Expo in Washington last month.

OK. As you look at the margins on Terra, obviously, the, we should get some better gross margins there this year with fully up and running. What kind of margin expansion do you think is realistic on the Terra line?

last year, you know, with the startups and everything, I think there's substantial, you know, expansion on the Terra margin, and I think with that, also will give us the ability to spend more dollars against consumer advertising to grow this brand to where it should be growing.

So we're looking for margins, you know, in the high 40's, low 50's on this brand.

OK. Gross margins, obviously.

Right.

Garden of Eden, what do you think about a growth rate there?

The growth rate on that brand should be continue in the high 20's. We're seeing, tremendous, you know, great consumption there. So you know, that is right on track and we're not seeing any issues with that.

OK. Let me just, one thing I wanted to be clear on was the takes from, as we go from 18 down to 14, Ira, that was three cents for, can you go over that just quickly, how we get to 18 from 14 and where that comes out.

Yes, , in the fourth quarter release, we talked about the fact that we would continuing absorption issues at the Health Valley plant.

Yes.

We continue to operate that plant for the full first quarter, so even though we announced that we were going to have the transaction, it still was on our dime so to speak, during the first quarter.

And we had to keep everybody in place there and not terminate people and try and just keep momentum going and, at the same time, we were looking to reduce inventories in that facility. So that was the major part of it, and you know, that facility is gone. So that's ...

And that's three cents?

Yes.

Right.

And that equates to a pre-tax number of, how much was that pre-tax Ira?

Pre-tax was about a million seven.

And mostly in gross margin?

That's correct.

OK, and the other penny, that's the one I lost.

The other penny, also we announced in the fourth quarter, the start-up expenses that we were incurring, because of our manufacturing operations in Europe that had been wound down in anticipation of the new business opportunities or waiting for them to happen. And the start-up of business, the push Hain products through our new European infrastructure

And the start-up of business to push Hain products through our new European infrastructure at . We were incurring a lot of start-up costs there without revenues. We're still incurring that. Those two combined only added up to about a penny.

OK. And as you look ahead, one growth question on Westsoy. Irwin, you gave two numbers, there -- Westsoy and ...

Westbrae. One is ...

Yeah. Just describe the shelf stable soy business, if you would. How was that up or down?

Well, the category -- the category, -- we were flat for the quarter.

Um-hmm.

You know, the category was down on the latest four weeks; we were flat. Our share was up two points, while the category was down five. In natural, we remain number one ...

Um-hmm.

... with 39 share. And the category was down, and we were flat.

OK. Did you pick up -- you know, we had a little bit of an air pocket there with the United Natural issue back in the June quarter shifting over to Tree of Life. Did we pick up any, what you would call, "incremental business" in the September quarter?

Actually, not at all. If anything, I think you've heard about a lot of the other stocks are not getting products into warehouses.

Um-hmm.

I think it affect us. It did not at all help us.

OK. So, you think there's a little bit of a drag there, Irwin?

Well, there's definitely a drag. And, you know, there was tremendous amount of products that just never made it into, you know, the new distributor's warehouse for Wild Oats, and tremendous cuts, you know, as everybody has talked about.

So, there definitely is a drag, and by no means it helped us in the first quarter.

OK. And last but not least, just bring us up to date on the management out at Celestial. Obviously, Mo has been kind of visibly waning in influence out there, and I guess is kind of phasing out. How do you -- you know, kind of fill us in there on how you see the management at that unit going.

Right now, Steve , who was our Vice President of Finance ...

Um-hmm.

... who's been out there for the last three years, has been acting General Manager. And the management team of , , and the rest of the management team reports directly in to Steve. And, you know, they seem to be doing a great job out there, you know, from a growth -- from a profitability standpoint.

So, you know, we're looking at the situation, and we're expecting great things out of them.

Okey doke. Thank you.

Thank you, .

We'll go next to Scott from Adams Harkness.

Thanks.

A couple of questions. , a follow-up on question. Where was the half a million dollar -- the half a million dollars of European start-up costs? Was that in SG&A?

Yes, it's in SG&A. And it's in gross margins, as well. Part of the cost relates to a manufacturing facility. So, it's really in both places, with probably two thirds gross profit, one third SG&A.

OK. EBITDA for the quarter and the actual depreciation number?

EBITDA was just shy of 10 million. And gross -- excuse me -- depreciation was about two.

OK. You keep referring to the two million of additional restructuring costs that you talked about last quarter. But, that doesn't include the 1.7 you had this quarter, correct?

That is correct.

OK.

The 1.7 that we had this quarter does not appear on the financial statements as restructuring, because it's manufacturing related. It's in the cost of sales, therefore before the gross profit line.

So next quarter will there be any startup costs in Europe?

There may be some startup costs in Europe, but ...

But minimal.

Less in number, than the half a million.

So it's probably not something you'd even break out?

It may be low enough that we ignore it for purposes of disclosure, you're right.

So next quarter, the only thing we should have is what, $1.5 million for the restructuring of the Health Valley facility?

Well I--earlier in the call I said it would be somewhere in the $1 million range. It's not the same as the that we had this quarter in unabsorbed issues.

Okay. So, $1 million for that Health Valley facility?

Approximately correct.

Okay, and the guidance that--or your comfort with that 450 to 470 million of revenue for fiscal '03, does that include acquisitions in the back half of the year?

No.

Okay. All right, thank you very much.

You're welcome.

We'll go next to from Salomon Smith Barney.

Great, thank you. You mentioned a few of your targets; could you go through in terms of what you expect to do, in Soy for '03?

Greg, I can't hear you.

Can you tell us what you expect to do in Soy Milk in '03?

What do you mean, what we expect to ... ?

Growth in Soy Milk?

We're looking still for high, single-digit growth in the Soy Milk category.

No, for--I think in your last conference call you mentioned 12 to 14 percent growth for Soy Milk.

Including refrigerated.

Right.

Including refrigerated, we're still looking for that.

Oh, okay, so including refrigerated, it's 12 to 14 percent?

Right.

For some reason, I thought you mentioned without that. Okay. In tea, what do you expect it to be for '03?

Our tea growth is somewhere around 4 to 6 percent.

I thought you mentioned 5 to 7 percent last quarter. Last conference.

Well. If I mentioned 5 to 7, 5 to 7. But think it's actually 4 to 6 percent growth.

Okay. And Health Valley?

Health Valley, we're looking for somewhere around 9 to 11 percent growth.

Great, and Yves?

Yves, we're looking in the high double-digit numbers somewhere around 18 to 20 percent growth.

And what did you say last conference call?

Greg, I don't have it in front of me. I'll have to get back to you on it.

Have you--do you have a changed guidance on that? I thought it was a little bit higher, but maybe that's about the number. Just as a follow up, last conference call, Irwin, you mentioned that management was going to buy back shares. I'm just wondering where you are in that process.

I bought back some stock, and management will look at continuously buying back stock.

Great. What was the magnitude, and what do you sort of expect going forward?

I didn't hear your last question.

What was the magnitude, number of shares that you purchased, and you know, how much do you anticipate buying, going forward? Without giving a specific number, but sort of a rough, rough range.

Greg, I mentioned earlier that we bought back 55,000 shares during the quarter, and ...

I was talking about--is that management?

Well no I'm sorry that was treasury shares. Management will look at it individually as the market changes our opportunities present itself. I don't think that anybody in management has a specific number, and management will be opportunistic as it sees each individual doing what they want to do.

How much did ____ purchase after the last conference call?

I purchased 5,000 shares Greg.

Okay. Thank you.

We will go next to Jamie Hood from Kearn Capital.

Hey you guys, just about all of my questions have been answered, just a couple. International sales this quarter, what percentage of business?

International sales was probably 7 or 8% of sales of business Jamie.

If you include both Europe and Canada as international Jamie it's a little higher than that. We run in the low teens combined.

But you are not including Canada it is somewhere around 7 or 8%.

For the full year of 2003 would you expect those businesses to grow quicker than the U.S. business?

Yeah, because they are much smaller base. And I think we got a lot of new distribution, a lot of growth opportunities there,

So the percentage of total will be up?

Yes.

Lastly, are you are looking to take a charge next quarter on the packaging and the obsolete packaging?

No obsolete packaging for what though Jamie?

Just for children, the organic rice.

No, that was too far below our rate estimate, and that's what's part of why John might not see a lot of it in stores. We ran it down instead of...took a write off.

Okay, okay. Food service opportunities, you got yourself into McDonald's you are over about paying any opportunities with the Subway or Starbucks?

We have tremendous opportunities. We have tremendous one ounce opportunities with Taro chips. We have tremendous opportunities with soy. We have tremendous opportunities with tea and we are pursuing a lot of them and you know with Green Mountain Coffee, we just did something in regards to Celestial Seasons Tea, so as you heard me say Marine Midland, you see us on their airlines. Jet Blue continues to be a success, so we are looking at all of those opportunities.

Okay, good. I don't know if I am mistaken about saying things, but I thought I saw a veggie burger at McDonalds again am I wrong there?

Are you looking in Canada or the U.S. I wasn't in Montreal. This was in New York City.

Well, we don't sell our products into New York or into the U.S. yet, so.

You know what may happen sometimes, you know maybe a region by region gets the permission to sell it in the store or test market or something like that, that by no means have they done anything in the U.S. with this veggie burger or soy burger yet.

Okay, alright, well thanks guys appreciate it.

Thank you Jamie.

As I understand it two more people on the Q we would like to hit everybody, so let's go for the next person.

Our next question is from Eric Larson from the U.S.A. Corp. P___

Hi guys.

Hi Eric how are you?

Good, thanks I guess I have to be a little quicker with my finger to get my questions in. Did you in the natural category did you get any benefit in the quarter from the Tree of Life, the switch of the Tree of Life contracts from UNFI to Tree of Life for Wild Oats.

Eric, someone else thought that before, but not at all, I think if anything to some degree it probably hurt us because as Tree was going out and selling into the stores, there was some other stocks and stuff like that. It was not that buying that so-called everybody believed that was out there. So we are gradually see, as they continue to add products on over time, but it's not one big buy in by no means.

OK, and have you had to take any pricing on any of your products, you know, in the quarter?

Not at all. I mean the only thing that we're seeing right now, some pricing that we may have to take is on oil prices and that's the only place that we're seeing anything right now on pricing.

OK. And then finally, a question for Ira. Ira, your tax rate, you did get a little bit of a benefit from the tax rate. Should we use the first quarter as our ongoing rate for the rest of this fiscal year?

Yes you can, but I don't know that we got any additional benefit from it, . We used the same rate we had in the past three or four quarters.

OK. All right. I just see a 3., a 37.2 versus almost 38.

I think it was 37.7.

OK. OK. I'll just go back and check my numbers. That's all I had. Thanks guys.

Thank you.

And our last question today is from from RBC Capital Markets.

Hi, good afternoon gentlemen.

Hey .

Couple questions. First of all, with the adjustments that were made to get to the 10 percent internal growth rate, what were supplements last year, supplement sales for Celestial last year?

Supplement sales last year were between three and 500.

300 and 500,000? And then Weight Watchers, what was that?

Weight Watchers was a little over a million.

OK. All right. And then Lima, didn't that close in December?

Yes it did.

You said you accrued a little bit of Lima in the internal growth, why is that?

No, what we did is we said Lima's rate of sales prior to our buying it was x and we looked at the difference between their sales in their own quarter before we acquired them and the sales in this quarter and said that was internal growth.

Got you. OK.

The organic growth that we got when we owned the business.

Got you. OK, and then second, my question about just the guidance for revenue next quarter, 125 to 130 I think was the last published guidance for revenue?

Right, and we're, just because of Terra down a little bit ...

OK.

And private labels somewhere is revenue we took it down between five to $7 million and the majority of that is private label.

OK, and when you say private label, fill me in there.

We used to do a lot of private label at our Health Valley's facility.

OK, just co-packing?

It was just co-packing, absorbed overhead.

OK.

It was not any profit generating, so as we no longer have that facility it's a business that were exiting.

I'm trying to just take a step back and not focus too much on brands. I'm just trying to understand the, you know, kind of, if we get to that mid-point of the revenue guidance, you're comfortable with 17 percent growth basically for the year? You know, if you assume 460 with kind of this new, you know little bit of, missing this quarter in revenue, a little bit of a reduction in next quarter, but you're still comfortable with that 450 to 470? It comes out to about 16 percent sales growth.

Yes.

You know, , we're still on our 12 to 15 percent growth number and ...

OK, so we have to ...

No, and I think ...

, I think if you take the 450 over last year's sales it computes out to a 14 percent number, not 16. So I think you're using both, I think you're using the top end of the range to compute.

OK, so 14 percent, 12 to 14 percent is kind of your comfort range?

Right, we're still sticking to our, you know, our growth numbers.

OK. Thanks.

that does conclude our question and answer session. I would like to turn it back over to Mr. Simon for any closing remarks today.

Thank you everybody. As you see, we are excited about the future. I'm really excited in these tough economic times about the brands that we own, and as we head into these new regs that are coming out, I think there is tremendous benefit for the Hains Celestial Group. I think there is tremendous benefit being a diversified company and having multiple brands. You know, we have seen Terra Chips grow every quarter in major double digits, and brands don't grow every quarter in double digits, and brands need to take a step back to take a big step forward, and you know, that's what we're seeing in Terra. And, you know, we are still excited about having double-digit growth.

I think as you see in the food industry today, with consumption and most food companies flat or down, you know, still with these tough times - and you know, lets not surprise anybody that economic times do not effect every company out there today, as people look at price value. And that is something that is important to us. You have heard me talk about cost containment. You know, part of our - hitting our $0.80 to $0.84 this year is a major cost containment, and that is something that we are looking at. That is something that we watch every day. And that is something that Jay and Ira keep me up to date at - that we can look to see how we can effect this cost containment.

But more important is how we can absorb price increases that are past on to us, and not have to pass them on to our consumers. As a company, what's important to us is to get out there and market our brands and build brand awareness, and how do we make sure that we spend money on brands, bring it to the bottom line, and enhance infrastructure in this company. And that is something that we continuously try to do. As we sit back and look at some of our brands, and you hear me talk about our Rocket brands, I think what is important here is two functions; of profitability and growth. And yes, Celestial is seasonal. This quarter only had 1% growth, but we improved profitability tremendously as we improve mix, as we improve the way we went to market and sold in, and as we improved what class of trade we sold to.

We think there is tremendous opportunity in the super masses as I discussed, and that continues to be a growth vehicle for a lot of the super masses who have had flat sales or declining sales. And I am also real excited about the comp sales coming out of whole foods and wild oats, and I'm continuously excited about as we keep up to those comp sales and being a big part of their growth as they continue to open up more and more stores and they continue to grow. With that, I am also excited about the potential acquisitions that we are working on and the potential opportunities that we have both in Europe and Canada. With that I would like to thank everybody for their time and we'll speak to you soon.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.