Hain Celestial Group Inc (HAIN) 2003 Q2 法說會逐字稿

Welcome to the Hain Celestial Group second quarter 2003 teleconference. Today's conference is being recorded. Before we begin today, I would like to remind you that statements made on this call 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 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's 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 SEC. Copies of these files may be obtained by contacting the Hain Celestial Group or the SEC. I would now like to turn the call over to Irwin Simon, chairman, president and chief executive officer of the Hain Celestial Group. Please go ahead, sir. .

Thank you, everybody. Good morning, everybody. I hope everybody has had an opportunity to see our press release on our earnings this morning. With me this morning is Ira Lamel, chief financial officer and David Yale, our global president of snacks, we will talk about our Terra chip business.

As you saw in our press release, sales for the quarter were $123 million versus $105 million last year for the same period, which was a 17 percent increase. Organic growth was 9 percent, and sales from acquisitions that we acquired was 8 percent, which made up the 17 percent growth.

Our gross profit for this year was 40.3 versus 32.5, an increase of 1.9 -- 1.9 points. EBITDA for the quarter was $16 million versus $11.7 million, which was a 36 percent increase. Net income for the quarter was $8.2 million, versus $5.2 million, a 57 percent increase. EPS for the quarter was 25 cents versus 15 cents and that was a 54 percent increase.

I'm very proud of these numbers and the job that our team is doing here at the Hain Celestial Group and considering today's economic times, consumers watching on price value, and our customers out there today watching inventory and everybody in the midst of trying to reduce inventories.

About our growth, with close to 30 brands, 2500 sku's, we're looking to consolidate our businesses and brands. With that, this will help our consumer trade spending, this will help us in the way we go to market with our customers, and this will help us save money on sku rationalization.

With this, our brands so far look as our Celestial Seasonings business was up 9.3 percent, I will talk more about Celestial in a little while. Our Melville business which include Hain, Health Valley, Snacks, Arrowhead Mills and our Imagine business was up 8 percent. Our Yves business, includes some Canadian business, was up 19 percent and our Europe business was up 8 percent.

Let me talk about some of these businesses and why they are up and some of the great things that happen. Celestial had a record quarter, close to 2 million cases in shipments from a Nielsen standpoint, specialty teas up were up 13.8 percent on grocery, Celestial Seasonings was up 13.3 percent. We posted strong gains on herb, black and green. Herb being up 15 percent, black being up 21 percent and green being up 31 percent. Our holiday teas continue to deliver incremental growth year after year and each of these teas bring 1, 2, 7 in overall velocity. I hope a lot of you heard our advertising print campaign, 'Make any moment a Celestial', ran in November, December, and along with the cold weather helped increase sales.

In our first quarter, Celestial inpact over 6 million samples of new product, which we sent out to people and a lot of first-time users of Celestial. In Q2, we began implementing the new diamond promotion featuring a chance for consumers to win one of the 500 karat diamond necklaces and radio support behind it.

In our non-dairy business, we now combined the Imagine and the Westsoy business together. This exciting acquisition of Imagine and combining the Imagine brands and the Westsoy brands we now have a 52 percent share of aseptic, soy and grocery and in natural the brands have a 57 percent share.

Hain Celestial has strengthened its position in refrigerated soy as well as holding a combined share of 4.4 percent outpacing category growth with a 36 percent share. Rice Dream, the only refrigerated rice milk out there in the grocery category grew 40 percent with a 91 percent share and natural has a 74 percent share and grew at a 65 percent rate.

In aseptic, the, in aseptic rice, both brands hold a combined share between Westsoy and Rice Stream of 84 percent in natural and 88 percent share in grocery. We think today there is tremendous growth opportunity in the rice milk category.

Right now with both brands we are going through strategic and business reviews. We are looking at where it makes sense for us to have the Westsoy and the Rice Dream or the Soy Dream name. We are look being at high-low strategies, we are looking for at new products and we are looking to consolidate where it makes sense to consolidate.

Westsoy refrigerated as itself continued to show double-digit growth up 19.5 percent. Our Westsoy remains a number one aseptic brand in grocery and has dollar share of 35.4 percent. Our nearest competitor, Edensoy continues to lose dollar share down 2.5 share points.

For the latest 12 weeks, the category on soy milk is down 6.3 percent and Westsoy was down 8.5 percent. In natural, Westsoy remained the number one aseptic brand with a 38 share. The category and Westsoy were both down for the last 12 weeks. Imagine continues to outpace the category in refrigerated soy and grocery up 50 percent, and is the number 2 brand in natural up 7 percent. In aseptic soy, Imagine is pacing the category in grocery but also outpacing the natural category.

We are continuously doing tremendous amount of advertising with our Westsoy, participate in multiple in-store coupon, in-store sampling, multiple programs with a lot of the natural chains around the country.

On Health Valley, our strong position in the ready to eat soup category and cold weather has even further enhanced and has been further enhanced by the Imagine line. Health Valley and Imagine brands hold the number one and two position in ready to eat soups and grocery, with a combined share and continued growth, Health Valley is up 8.3 percent, and Imagine is up 25.8 percent in the grocery category in soup.

In natural, Health Valley and Imagine represent the number one and number four position. Each brand outpacing category growth with Health Valley up 10.5 percent, Imagine up 15.5 percent. Health Valley continues to dominate the number one position in snack bar with a 51 percent dollar share in natural and 61 percent in grocery. Our ready to eat cereal category remains competitive. Health Valley ranked number 4, in natural channels Health Valley was down 15.9 percent and in grocery we were down 10.6 percent and I'll talk about that later when I talk about Health Valley on some of the plants and what we're doing.

Health Valley will continue to introduce with Imagine, many new soups and many new products. Hain pure foods has come back to our cracker category, where we have had to withdraw because of manufacturing issues. We have seen triple-digit growth up 150 percent. We continue to be the number two brand on specialty oils and condiments and up strong in our sugar, mayonnaise and other grocery products.

Our Earth's Best business, which has tremendous and exciting opportunities, maintains its leadership position in natural foods with a 75 percent share. And continues to show strong growth up 18 percent for the last 12 weeks. The category, organic category in grocery was down 1.7 percent, Earth's Best was down 3.6 percent, but we see tremendous upside on that business with multiple new products and multiple new distribution coming at us. David will talk about the snack business and the Terra business in a few minutes.

On our Yves side, Yves Canada up 22 percent. We have a 85 percent market share on Yves in Canada, and we're looking at multiple new frozen products, meals products and cheese and going into that market. We're also looking at the combination of Imagine and Yves together in the soy category and other vegetarian products.

In Canada, the Loblaws Group, the Sobe Group continue to enhance natural food sections. Terra, Garden of Eatin', Earth's Best, Imagine, Health Valley, Arrowhead Mills and Celestial are all products sold throughout the Canadian retailers. Our objective right now over the next two years is to grow our Canadian business to $100 million business.

Yves U.S., we were up 9 percent on natural, we were flat in grocery. We see a big opportunity in the grocery market as Yves fresh products are merchandised in the produce section of supermarkets. The produce section of supermarket are looking for higher margin products to bring in there and along with introducing the good lunch, which is a great meal for kids, we will also be introducing refrigerated meals made of our Yves products coming in March.

McDonald's Canada continues to be strong for us and we look at other opportunities on the food service business and other fast food chains who are looking to add other menu items to their products. Europe was up 8 percent and that was fueled by Lima and BioMarche, with Europe suffering like the U.S. with a tough economy, we think that's pretty good. We're in the midst of launching snacks with a partner in the U.K., and we will do it ourselves in the continent. The Imagine business has a 8 to 9 million dollar non-dairy business in the U.K. and other parts of Europe right now. We think there's a tremendous opportunity in launching aseptic soy and fresh soy in Europe under the Soy Dream name and with the Imagine base as our business to spring off, we think that can be easily done.

With the growth of soups in the U.S., we think there's a big opportunity for aseptic soups also in Europe. We're also in the midst of introducing numerous sandwich spreads into Europe which will be launched very shortly. We're also in the midst of right now looking at manufacturing Yves in Europe and we see tremendous opportunities for that. Our tea business continues to grow in Europe, so between Lima, BioMarche and other businesses we're looking to Europe to grow to $100 million business.

We completed the first quarter of the divestiture of the Health Valley plant. And we're quite excited on what we see. Our co-packer has been working well and we have been working well with our co-packer on reducing costs. We have also done a great job in reducing inventories which Ira will tell you about in a little while. We have also done a great job in improving product quality and we're also quite excited about the many new products that are coming out. We in the midst of right now of launching, getting ready to launch many new cereal items with new equipment in the plant, where before we were restricted in making a lot of the cereals that we wanted to do. So from a Health Valley standpoint, stay tuned for a lot of new products and we're quite excited about all the things happening there.

The first time I have had an opportunity to talk about Imagine since we closed on that acquisition December 2. What a great acquisition, what great brands, what great products. We're quite excited about the rice milk category, we see tremendous growth, tremendous opportunities and there's a lot of people out there today that are allergic to soy, a lot of people out there today that are lactose intolerant that look for rice milk, a lot of children today look to rice milk and can't drink soy. We think that's a big opportunity to expand to the rice product line in to different sizes and different products. We think the Soy Dream name is a great brand as you heard me say before in the aseptic category, Soy Dream outpacing the growth of the category. Soy Dream today not available in the amount of grocery stores that Westsoy, we think there's tremendous growth opportunity and enhancement of distribution for the Soy Dream name.

We think the combination of Rice Dream, Soy Dream and Westsoy will give us a good entree in to the refrigerated category. As we look today with our Yves products and our rice and soy products, that we are able to put together a good refrigerated business as we think a lot of growth overall will come from refrigerated products.

Imagine also has a good frozen business, which gets us into frozen deserts, which we think is a great growth category. You heard me say before the growth of Imagine soup business. We continue to see this theme in the evolving business for us and putting this together with our Health Valley business, our Hain business and our Westbrae business and Imagine soups, we think the soup business can become over $100 million business combined. And right now we're in the midst of investing tremendous dollars in to this category and we look for a lot of new technology that's coming to market in regards to packaging and product.

As you heard me say before about Europe, we think there's a great opportunity for us to expand Soy Dream, both in aseptic and fresh in Europe, we also think there's a great opportunity as Rice Dream is a very popular drink right now in Canada, and we think there's a big opportunity to expand our refrigerated and aseptic in to Canada.

Also along with this deal came good people that will help us with some of our other brands and will help us with our soup and aseptic products. So far we have done a lot, as you heard me say before, we closed this deal December 2, by the end of January, we have integrated sales and marketing, some of the operations, customer service and billing. And we're looking for two to $3 million in savings coming in fiscal '04. In regards to new distribution, there's multiple new distribution coming towards us at the Hain Celestial Group.

We are looking for good growth at Whole Foods and Wild Oats, looking for mass market continuously opening up more and more natural food sections. We're looking at the supermarkets enhancing natural food sections. From a convenience store standpoint, we're looking for more and more convenience stores to put in healthy snack sections, matter of fact, we're working with the largest convenience store chain today in putting in a major snack section.

And other retailers like Bed Bath & Beyond, Home Depot, IKEA, Barnes & Noble are looking to enhance their food section and looking to bring in natural organic products, which will offer their consumers other choices. We're also from a company on a major cost containment. We have done a reverse auction, which saved us well over $1 million just so far in packaging, in the midst of consolidating warehousing which we see tremendous savings. We're in the midst of consolidating whole freight and distribution, our whole distribution, the way we go to market, which we see tremendous savings.

We're also consolidating all the procurement of our raw ingredients which we're seeing tremendous savings. Right now at Hain, a major cost containment program in place. We're also in the midst of really putting our first real defined strategic plans together as we lay these plans out for the next three to five years, we will see major cost containment coming from our strategic plans and plans that we put in place.

We feel good about our company, we feel good about the future. We think our stock is cheap right now and we're looking to buy up to a million shares, which has been approved by our board and our lenders. Looking forward, for fiscal '03, the quarter that we're in now, consensus as we are reaffirming our 22 to 23 cents and fiscal '04, we are reconfirming 19 - we are upping our guidance 19 to 20 cents. What I would like to do is turn it over to David Yale and he will talk about all the great things that are happening on snacks.

Thank you. As you have seen in the press release, Terra was down 5 percent and sales for the second quarter, which is an improvement off the negative 16 percent trend we saw in the first quarter, we're not yet where we want to be but we'll be getting there and turning the corner into positive growth in Q3 and picking up growth momentum in to Q4.

I would like to update you on the progress of the key growth initiatives behind Terra that I outlined in the previous call that we had first quarter results. They were in the areas of new positioning, price value, new products, line extensions, new distribution, and international.

First, in the area of new positioning - we gained some very strong insights from our consumers as to what makes Terra tick and we'll be incorporating those insights into a new positioning that will in turn provide us with a new advertising campaign that will start to air mid-calendar year. We're very excited about that.

Moving forward, we have also converted as of December our six ounce Terra original line into the 7.5 ounce size as a permanent item and remember that that was offered as a bonus bag. It represent as 20 percent per ounce price decline to the consumers and we have already seen pickups in business where those products, with the 7.5 ounce size have been placed.

The area of new products and line extensions, we are now on schedule to ship our first major original base line extension offering two new flavors - Zesty Tomato and Mediterranean and we have already received outstanding reception in preliminary presentations to our major customers. And these will also provide Terra original brand with strong built-in merchandising partners and will also margin up the business in to the higher margin levels that we enjoy on Terra original.

Now, as part of this initiative, we have also improved our classic packaging with more appetizing product shots and simplified verbiage. The areas of new channel and distributions: Irwin had mentioned previously that we are looking at new areas of distribution in mass, drug and convenience stores as well as non-traditional channels where we will be making some penetration into Barnes & Noble cafes, Hudson Newstands and at the same time a major initiative in convenience stores with 7-11, which plans to offer better for you products to its customers and they have selected Terra chips and Garden of Eatin' to offer to their stores, we're very pleased and excited about that.

Finally on the international front, we're making good progress in moving forward with a partner in Europe, as Irwin mentioned and I also would like to mention that we have partnered with Kalbi, largest snack manufacturer in Japan to run a test market with Terra products that will commence in February, later this month. So again, good things happening on the international front as well.

And I would be remiss if I didn't mention from the overall snacks perspective, that we continue to see strength and I would say significant strength in our Garden of Eatin' brand with shipments up 16 percent and consumption up 22 percent over the past quarter. And we will keep the pressure on Garden with new line extensions coming out in the second half. Now will turn it over to Ira Lamel.

Thank you, David. Good morning, everyone. I hope you all have seen our press release by now, I would like to take you through it. As Irwin discussed, our sales reached a record 123 million dollars for the second quarter this year. Up 17 percent over the prior year's second quarter. Our organic revenue growth was 9 percent, and our growth from acquisitions amounted to 8 percent in the second quarter, coming from the sales base we acquired in this year's quarter from Imagine foods and last year's quarter from our Lima business in Europe.

On a reported basis, our earnings were 8.2 million dollars in the second quarter this year, or 24 cents per share on 34,467,000 shares. Earnings per share for the quarter amounted to 25 cents before deducting the expected restructuring charges associated with severance payments at former Health Valley manufacturing facility. These payments amounted to 440,000 dollars in the quarter, or 1 cent per share. In our previous two quarterly earnings releases we discussed that there would be certain continuing charges related to this restructuring that could not be accrued under generally accepted accounting principles at the time of the disposal.

Our gross profit for the second quarter was 32.8 percent, as compared to 30.9 percent in the comparable period last year. Our improvement in gross profits versus last year resulted from a better mix of products sold, particularly with a higher proportion of our sales this year from tea. As well as reduced distribution costs as percentage of sales, offset by the lower gross profits earned by our acquired business in Europe.

Our selling general and administrative expenses in the second quarter this year was $26.5 million, or 21.6 percent of net sales, compared with 22.5 million or 21.4 percent of net sales in the prior year's second quarter. While SG&A as a percentage of sales remained flat year over year, we increased consumer advertising and spending in the second quarter versus last year, by approximately $3 million, with the remaining dollar increases from the additional infrastructure costs we now carry for our business in Europe and the added costs of bringing on the Imagine foods business where we could not in the short time after the acquisition implement any savings.

Operating income as reported for the quarter was $13.4 million, or 10.9 percent of revenue versus 9.9 million dollars or 9.5 percent of revenue in last year's quarter. Without the charges I discussed earlier related to the Health Valley restructuring, operating income would have been $13.8 million or 11.2 percent of sales. Net income for the first quarter was $8.2 million, or 6.7 percent of revenue versus $5.2 million or 4.9 percent of revenue in the prior year's quarter. EBITDA for the second quarter this year amounted to $16 million, a 37 percent increase over the prior year, 11.7 million in the quarter.

Our balance sheet continues to be strong and is getting stronger. Our working capital was $83.3 million with a current ratio of 2.4:1 at December 31 this year. The $38.3 million of working capital represents an increase of almost 11 million dollars over the prior December 31st and more than 12 million dollars over the working capital level at our most recent year-end of June 30, 2002.

Our accounts receivables turning at 8.3 times with only 44 days in receivables at December 31st this year, compared to 49 days at last year's December 31st. Inventories are turning at six times, with days in inventories down to 60 compared to 72 days at the same time a year ago. We carried $57.7 million of inventory at the end of this year's second quarter, December 31st, compared to 62 million at the end of the prior year's quarter, a 4.3 million dollar decrease net despite the addition of Imagine's approximately 7 million in inventory brought on just prior to quarter end.

These improvements are in part the result of the reduced working capital needs after the sale of the Health Valley manufacturing facility and in addition to managing our numbers more closely. Our stockholders equity is now at 420 million dollars, our debt as a percentage of equity has increased as the result of our borrowings for the acquisition of Imagine Foods but remains at a very low 14 percent.

Earlier, Irwin gave you guidance for Q3 and Q4 this year. We expect to earn 22 to 23 cents per share on 123 to $128 million in sales in Q3. And we expect 19 to 20 cents per share on 113 to $117 million in sales in Q4. This will take our full-year guidance to 80 to 82 cents given the 14 and 25 cents we earned in the first two quarters of the year. With, that I would like to open it up for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press star 1 our touch tone phone. We'll take as many questions as time permits and proceed in the order you signal us. In the interest of time, we ask that you limit your questions so we may take as many questions as possible, once again, that is star 1 if you would like to ask a question. We'll pause for just a moment to assemble our roster. Our first question will come from Terry Bivens with Bear Stearns.

Good morning, everyone, congratulations on a good, clean quarter.

Thank you.

Irwin, you made a couple of references there to the natural food channel and I wonder, you know, there were clearly numbers there you probably would have liked to have seen better. Can you give us a quick update on what you see happening there with the particularly with regard to Whole Foods, Wild Oats and certainly United Natural (ph) and Tree of Life (ph)? If you can give us an idea how that's evolving right now.

Yeah, actually I think from a comp standpoint we're seeing good growth at retail, but what we are seeing continuously is inventories coming out of the system and I think I will not speak for United but we have seen it. We have seen our inventories go down dramatically as United lost the Wild Oats business and at the same time, you are also seeing the same thing happening at Tree of Life, inventories going down.

So we saw major effect and, you know, United Naturals and Tree of Life being our two biggest customers, you know, its effect on sales which shows we made it up in other areas. So inventories are definitely coming down at warehouses and distributors.

Would you have a number you're comfortable with just in terms of what deloading might have done to your top line in the quarter?

Terry, from a deloading standpoint, I would say somewhere the number is probably 5, $6 million, that is a number is that probably really on the conservative side.

Okay. Thanks very much. .

Our next question will come from John McMillan (ph) with Prudential Securities.

Good morning.

Good morning, John.

It's been awhile since I said congratulations. But congratulations.

We'll take it, John.

Just in terms of the tea gain, I think, just to be argumentative, one could argue Celestial up 9 this year, was down 9 last year, it's cold this year and warm last year. Net-net the business isn't really better. I don't know if I believe that, but can you just discuss it?

Well, thanks for the congratulations.

You're welcome.

And then taking it away, John. I have to commend the group out at Celestial, the job they're doing, up 9.3 percent, John, you see the category up 13.8, we're up 13.3. From a consumer spending standpoint, we have spent a lot more money as you heard Ira say in this quarter, and we're seeing it working. We're also, you know, our trade spending is down out there, so it's not, we're out there buying cases, we're selling cases. A lot of our new products are working as you heard, herb is up tremendously and that's our biggest percentage of business, green tea sales up 33 percent, a lot of new products coming out. So we were calling the business for this quarter up somewhere around 4 to 6, 5 to 7. You know, we also have good even quarters out there where October, November and December are basically a third, a third, a third of the business.

And the other thing, which I come back to you, we have had a great January, which, you know, is reflective, yes, on the weather. But we also shipped, John, close to 1.8 million, or I'm sorry, almost 2 million cases, which would be the biggest shipment of cases in the history of the company. So seeing that, I like what I see, I like the profit growth, I like the innovation coming out of there, and I like what I see at retail, on Celestial.

But it's more than just weather?

It's more than just weather. It's products, it's program, it's management, it's execution and most important of all, it's consumer take away.

Okay. Someone asked me a week or so ago why is it that someone who participates in this area, like, you know, Wild Oats or like Whole Foods, whose stock can do so well the last couple years while Hain has done so badly and, you know, I think there is increased private label penetration in some of these retailers. Can you discuss it and whether it's impacting your business at all?

Well, just, I would like to address when you say Hain has done so badly and Whole Foods has done so well, I mean, you know, Wild Oats has been around, Whole Foods has been around for 25 years and you go back and look at the first ten years or the first 15 years, I would take that challenge on any day of Hain stock versus Whole Foods.

But I will come back and private label is a part of every retailer that's out there today and I think Whole Foods do a great job with their 365, as a matter of fact we make some of it for them. But consumers today in this industry and we have done our testing, we have done our focus groups, want brands when it comes to natural organic foods. And, you know, I think, yes, I do find private label a competitor, anybody that sells a product in their stores is a competitor. But I think at the end of the day, you just have to believe in brands and ultimately brands will be the one that will suffice. On commodity type products, on pricing, you know, private label a lot of times will beat branded product. But I don't think we're in a lot of the commodity pricing and products that 365 is.

My last question deals with this whole non-dairy category and some of the declines, which is clearly going to refrigerated. Do you expect that rate of decline to abate? You know, I guess you're seeing some down 6 numbers.

We see, John, we see the aseptic category being a very important category out there, and last week we had strategic planning meetings on how we put Westsoy and Imagine together. And there are certain high-low strategies on pricing we will have, there are certain products that we'll do on Imagine that we don't do on Westsoy but we think there's a lot of share as there are three, four, other competitors out there to go after. And from the refrigerated standpoint, our competitor Silk (ph) has done a great job but we still think there's a good opportunity for a number two out there and having the rice milk, which nobody else has out there, is a great anchor for us.

One thing we will not do in the refrigerated category, we will not go to the refrigerated category unless we can make money and we'll look at it geographically from a shipment point of plants, where it makes sense. Number one, is to focus on and grow and grab share in aseptic because it's a very profitable category. Number two, go in to the refrigerated category and look for a strong number two position, where it makes sense geographically and makes sense that we can make money and we think there's an opportunity there.

Just to answer Terry's question one more time, your basically saying -- you're basically saying your three-month take away trends to the extent you can measure them are running, ran up about 14 percent in the quarter? Your organic --

No, our organic growth, John, overall was 9 percent. We were up 17 percent, 8 percent of that came from acquisitions.

I got that. But those are shipments, those are sales.

They're sales shipment.

I'm trying to measure what your take aways were.

We don't, you know, it's hard to say what our take aways are because Celestial was 9.3, you know, up 9.3, 13.3 excluded Wal-Mart, but Wal-Mart we were up 31 percent. You know, on soups we were up 11.8 --soups we were up 11.8 percent. We don't buy IRI (ph) or spins (ph) data for all our products but where the products that we do buy in our major categories other than soy milk we were up either double-digits or high single digits.

Okay. Congratulations again.

Thank you, John.

And I mean it. .

U.S. Bancorp Piper Jaffray's Eric Larson has the next question.

Eric Larson Good morning, everyone.

Good morning.

Could you give me a little more clarification on guidance? I went back, I believe your guidance started the year '78 to -- 78 to 84 cents, and if you use a 18 cent quarter in your first quarter, that was excluding all the one-times. If you just use 22 and 19 cents for the third and fourth quarters, the bottom end of your guided range, you get 84 cents. I believe you said 80 to 82 for full-year. And then your acquisition was going to add 2 to 3 cents, the Imagine acquisition this year. Can you help me see where either the numbers are going? Are you increasing advertising? How are you deploying those earnings?

First thing, Eric, is when we put together the guidance of 80 to 82 cents and we counted the first quarter, we thought that all of you and your come patriots might think 14 cents it was first quarter earnings so we counted it that way so that's 4-cent difference right there between the 18 cents that we discussed in the first quarter and the 14 cents that was reported on our P&L.

Okay, fair enough.

That really is going to reconcile that difference. Then of course you're right, we added the 2 to 3 cents in for Imagine.

Okay. And then for your tax rate for the year, I noticed in the quarter it was down about a point and a half. Are you not looking for maybe a 37 1/2 percent tax rate going forward? Sort of equivalent to your first half rate.

Well, our tax rate in the quarter is 37.75, and that's a consistent rate that we have used for the last number of quarters.

Okay. It's not down.

It's not down at all.

I guess maybe it's just how we put the numbers together on the restructuring and that sort of thing.

Well, the restructuring gets taxed or tax benefits so it's all included in the rate. If you just look at the pre-tax number and the tax, it should come out to 37.75.

Okay. Thank you.

Thank you.

Next is Andrew Wolf with BB&T Capital Markets.

Good morning, congratulations on the quarter. My take on the stock price at least in part has a lot to do with how your acquisitions have been, the valuations you paid and certainly when we look at Imagine, valuation is good and your body language, the way you talk about it sounds good. So could you, given that, talk about basically you increased your guidance in the fourth quarter, does that have to do with core business or realizing greater or more early realization of synergies out of the Imagine? You gave guidance, at least I think it was 2 to 3 cents this year, 8 to 11 in '04 out of Imagine. I don't know if you have an update on that.

We do, Andrew. Number one, the two cents in the fourth quarter two cents will come from Imagine. Approximately 2 cents and the rest is just coming from new business that you heard myself and David talk about. You know, some savings coming from Health Valley. Some additional growth coming from Terra and some of the new distribution that we're looking for out there. So a piece of it is coming from Imagine and a piece coming from cost savings and a good piece is coming from new distribution.

And any change on the outlook for what Imagine could do next year, the 8 to 11 cents? Or is it too early?

It's a little too early but we're encouraged and we like what we see and we have done a lot of things quicker than we thought we would, but we still got some co-pack contracts we have to deal with and we feel good about rate growth and great opportunities on soups, we feel great about the rice category, soy category in Europe and Canada and the frozen. So we feel real good about the opportunities for Imagine for next year.

Last question, on the Hain pure snacks roll out of kettle chicks and some other stuff, I don't think David mentioned that, I haven't seen it in stores yet. Could you give us sort of the update? I think you're pretty close or maybe it's rolling out now, what kind of distribution you got and what the expectations might be there?

Go ahead. David will talk about it, but we got to get you in to the right stores. I think actually it's doing quite well out there and also taking some market share away from pirate's beauty that has seen tremendous growth and seeing market share coming away in regards to our soy snacks. So David, why don't you tell him where he can go shopping.

Andrew, thanks for the question and right now we're building distribution, moving from our distributor warehouses in to shelf level and internally we're meeting sales expectations, which is very encouraging. Right now from a natural food standpoint we're gaining distribution in various whole food region, divisions, same thing with Wild Oats, locally Mrs. Green's markets if you're in Westchester and grocery major accounts like Giant, Stop n Shop (ph), et cetera. So it's rolling and so far the initial indications are that it's going to meet our expectations for this year and gain some strong momentum going to fiscal '04.

Have you talked about what those expectations are? And are, is anybody trying to get any kind of shelf or kind of placement costs out of you?

Right now I would say on the natural trade it hasn't been significant and quite frankly on the grocery side I would say that based on how we move to market in the natural sets, the cost of placement has been within our budgetary guidelines and not really impactful on our P&L.

So again, it's a positive story and I should mention that taking a look at any of the spin (ph) data, one category that is really exploding within snacks is the soy subsegment and we feel that our soy munchy (ph) products, which are great-tasting and low in fat are, and not GEI will really make a major impact in that high growth segment. So that is looking good as well.

Thank you. I will close, take one last swing at seeing if you will give us a look at your budget, although I'm not too hopeful. But congratulations on the quarter. [Laughter] .

Thank you, Andrew.

Up next is Ed Aaron (ph) with RBC Capital Markets.

Good morning, nice quarter. A few questions. First, I was hoping to elaborate on growth trend throughout the quarter. Rumblings out there that industry growth decelerated during the December quarter, I just wanted to know if you saw that at all. And then I was hoping you could talk a little more about what you're seeing in the soy category. First of all, if you could say what your soy beverage business as a percentage of sales and then maybe' elaborate a little more our distribution opportunities particularly with refrigerated, where you think you can take ATV (ph) there and any changes you might have seen on the competitive front in regards to the advertising and promotional activity.

Your first question, hopefully I can remember them all. Number one in regards to the December and softness, you know, I think what's important out there, we are very diversified business, you know, we participate in about 14, 15 categories, we sell to convenience stores, food service, Europe, Canada, so grocery stores, mass market, so we are able to, you know, if we see a category that's soft and you heard me talk about before, inventory shifting in natural, there's other places to go make it up.

So that's when sometimes if spins numbers or IRI numbers come out doesn't give a true, accurate picture of our business. What we're doing out there is you heard me say before, whether it's Bed bath & Beyond, Ikea, Home Depot cafes, we're going after every bit of business that we can out there and the good news for us, retailers out there of non-traditional foods looking for new avenues to bring consumers in, are looking for other retail dollars and we're getting a lot of calls.

Our food service people are tremendously busy, looking for other snacks, you know, JetBlue, Midwest Airlines have brought our snacks on as they continue to sell snacks. So with that, we look at multiple new categories but multiple new avenues of trade for us that we never sold to before. Club stores, we sell minimum product to Club stores, big opportunity for us.

So our growth opportunities are just a tremendous, you know, business for us and just closing distribution voids on that is worth a lot of dollars. So yes, there was softness and I think a lot of the softness out there still has to do in the natural food trade of what you're talking about, is still the consolidation and still the switchover from distributors at, you know, Wild Oats and reducing inventories.

And, you know, I think we're all, we all know we're in an economy here where people are looking for price value. In regards to soy and rice, a percentage of our business today, it's somewhere around 15 percent of our business and you know, again, where do I see opportunities?

You heard me say before in regards to refrigerated soy, you know, Westsoy and Imagine have small ACVs (ph) out there. Rice Dream we think there's a major opportunity for Rice Dream to be a natural brand and having now both Yves selling, bringing Rice Dream refrigerated, big opportunity, we have an important, big refrigerated group now to sell the product.

We see tremendous opportunities, you know, in the super masses and the mass market today that do not have soy sections and we know they're looking at it. We're seeing a lot of opportunities right now in food service that are looking to sell soy and, you know, the other big opportunity, yes, we think there's a lot of share still to be taken out there in the aseptic soy category. So we think is there growth both on aseptic and on the refrigerated category for us.

Great. Actually one more question for you. If you could just talk a little bit about your advertising spending. Where do you see that line falling out for '03 and how does that compare to '02? What categories are you really focusing on with your consumer directed advertising? I know tea is one of them but if you could elaborate more on that.

You heard Ira say we spent $3 million more this quarter than last quarter. In the next six months we'll spend an additional $3 million more, the next six months than we did last year, and don't forget last year this time we also did a major advertising campaign on Celestial where we spent a lot of money on TV. So consumer advertising is something that's very, very important for us. And one of the things that is we go through our strategic plans right now, that's kind of what we're looking at.

Do we take more dollars from one category and spend it towards another category where we will get the growth? So from a dollar standpoint, I think soy is important for us, snacks is real important for us, soups is very important for us, tea business definitely very important for us, and we're seeing major impacts when we do the right consumer advertising and I'm not sure that TV is the right consumer advertising for us, but sampling and coupon and advertising in the right books and magazines, the in-store coupons are things that work for us and get us a lot of trial and repeat.

Thanks, congratulations.

Thank you.

We'll move on to Scott Van Winkle (ph) with Adams Harkness & Hill (ph).

Scott Van Winkle Congratulations as well, guys. First question, Irwin, you mentioned $100 million target for Canada for Europe, for your soup business. Can you give us an indication where you are now in some of those businesses?

Well, we're probably a little more than halfway there on both of those, on Canada and Europe, Scott? .

Okay.

On the soup business, including Imagine, we're a little less than halfway there.

Okay.

So we think there's a major growth opportunity in the aseptic category on soups. We think freshness is something people look for today. You heard me say earlier, which I can't go in to now, we're working on some pretty unique innovation from a soup standpoint, packaging and product and if you haven't tried Imagine soups, do so because they're probably one of the best-tasting soups on the market today. And from a Health Valley standpoint, they're some of the best soups and healthier soups from a sodium on the market today. If you just recently saw Campbell's talk about their soup business, they feel they're losing market share and share to the organic soup category.

So we continuously see big opportunity in the organic soups. You heard me talk about Canada, I came back from there last week and the Loblaw (ph) chain, which is a major chain is committed to putting more and more natural food stores, Whole Foods is opening up new stores. The whole GMO organic from a Canada standpoint is very important.

So we see combining all our businesses today as you heard me see, we have a very healthy Celestial business, we're the number one specialty tea in Canada, from a Terra chip business we're seeing tremendous growth on Terra chips and Garden of Eatin'. We have a nice Earth's Best business up there. We really today have no soy milk business, so we see tremendous growth in the soy milk opportunity there, we have a nice rice milk business.

You heard me say about Yves having a 85 share on meat analogue product, we think there's a big opportunity with Yves name to go to the frozen category on vegetarian type products and with Yves and Soy Dream together, we think there's a tremendous opportunity there.

In regards to Europe, very similar situation, there are certain things we can do with Lima where it can expand to, but, you know, we think there's some growth of Lima by bringing it in to the U.K. and to supermarkets. We think there's a big opportunity with the Soy Dream over there, Rice Dream as gone quite well over there. Celestial, we think there's a big opportunity, we think there's a big opportunity with snacks and Yves and we'll limb it to those products and brands. And if there was an acquisition in either of those countries, we would look at that also. And you know, hopefully I answered your question on soup.

You did. Some of the new initiatives you have, brand consolidation talking about cost-cutting, Health Valley facility divestiture and really your improved performance both absolute terms and relative to street expectations, how much of that is really a reflection of the management team's additions you have made over the last six, 12 months?

Well, a lot of it. It takes people to do this and not robots or machines so initiatives have to come from people. So, you know, we're looking at our business today in every aspect and you heard Ira talk about, you know, capital, inventories and how much our inventories have come down, divesting of plants and so a lot of it has to do with people and it's a big difference.

Scott, when you double the size of your business and bringing people in that have done this before and that's what we have done here and we're continuously looking where it makes sense to upgrade the management team and probably changes have not stopped here in upgrading the management team.

Great. Congratulations again.

Thank you, Scott.

We do have time for one more question, that comes from Bill Leach (ph) with Bank of America Securities.

Good morning.

Good morning, bill.

I have two questions. I was wondering if you could update us on your relationship with Heinz post their recent restructuring and interest expense, given your debt is five times as high as year end, why is that account down so much?

Bill, in regards to relationship with Heinz, you know, it continues to be a very good relationship. You know, other than us working with them on certain projects, we continue to still work together on club stores, you know, we continue to work with them on other purchasing opportunities and, you know, we have the ability to go to them for resources and opportunities. So, you know, nothing has changed and nothing has been added and I think it's a good working relationship and a very friendly relationship and I hope that continues that way. In regards to the interest expense, I will turn it over to Ira and he will address that.

Hi, Bill. At December 31st, we had a higher level of debt of course than we had at any time in I guess about three years. And that was directly related to the borrowings we took down on the Imagine acquisition. That was outstanding only for a short period within the quarter, so the impact on interest expense in the quarter was very low, plus we are borrowing at a very low 2.43 percent rate at this moment. So in the quarter the interest impact was only about a 80 or $90,000 effect. Prior to the Imagine borrowing, we were a virtual zero borrower except for a few mortgages on buildings that we own.

Is there something else in that account that accounted for the positive swing, then?

Well, you are probably looking at the other income line where last year we had a close down of a plant when we closed our Brooklyn facility and that's included in that line, what the cost was on that. Excuse me, our Brooklyn facility.

There was a charge there a year ago?

Yes.

I see. Okay, thanks.

Thank you.

That does conclude the question and answer session, I would like to turn the call back over to you, Mr. Simon.

Thank you very much. I would like to thank everybody for listening to our call. As you can tell, I'm excited about our business, I'm excited about the future, as you heard today, we're looking at our business very differently, we have a lot of brands, a lot of growth, a lot of opportunities. Brands, with great growth in a lot of distribution channels, brands with great growth among themselves. And we'll continue to look at this and we'll look as you heard me say before, at Canada and Europe which we think are a lot of opportunities for us.

You heard me talk about our people, how people make a difference and we're seeing the results from that and myself and all the people here are being measured on those changes and, you know, sales is a part of it, margin is a part of it, but our working capital, gross profit, reducing inventories, improving working capital, are all major objectives that we have as a management group today.

We have also put in place strategic planning with the help of Fran Daley (ph), we started in October, had our first meeting, our second meeting in early December, we have our third meeting next week, and we feel good about the strategic plan of how we build Hain to become that billion dollar and the world's largest natural organic food company. I look forward to coming on these calls and delivering these types of results that we have today, I know we have been challenged out there, but the purpose, you know, myself and my management team have tried to build in these tough times a good, strong company with a good, strong foundation and with, that we will be able to deliver the results that we commit to. Thank you for your time and have a good day.

Once again, thank you all for joining us today. That does conclude today's presentation. .