Hain Celestial Group Inc (HAIN) 2004 Q3 法說會逐字稿

Good morning and welcome to the Hain Celestial Group Fiscal Third Quarter 2004 Financial Results Teleconference. Today's conference is being recorded. Before we begin today, I would like to remind you that statements made on this call that are estimates of past or future performance are based on a number of factors, some of which are outside of the Company's control. Statements made on this call with safety intentions, beliefs, expectation, 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 the filing of the Hain Celestial Group with the US 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 Irwin Simon, President and CEO of the Hain Celestial Group. Please go ahead sir.

Thank you very much. Good morning every body and welcome to Hain's '03 conference call. Hope everybody had an opportunity to see our press release. Let me introduce to you who will be doing this conference call with me this morning. Ira Lamel, our Chief Financial Officer, Steve List, from Boulder, Colorado after 4 years of owning Celestial and tremendous turnaround and tremendous growth at Celestial both under consumption and top line and new products, Steve will be talking to you about our Celestial business. John Carroll, who recently joined us in February as Executive Vice President Melville Business, his total responsibility is sales, marketing, operation, and financing in Melville and he'll tell you about what's happening in Melville, some of the issues that we had in the quarter and how we are addressing them. Maureen Putman, who is the General Manager of our Grocery business Maureen will tell you about all the exciting things that are happening in our grocery business and our current fit and Ellen Deutsch, our Chief Growth Officer, Ellen will talk to you about some of our new strategy, some of our growth in food service, and will talk about our Estee business, sugar-free, and what we see happen in the whole triglycerides and other carb area.

As you saw for the quarter, our sales were a 136.9 million versus a 129.2, up 6%. But I think what's important is two other things. Number one included -- not included in our sales now is food service, which we used to do through our Ontario plant and other private label business on soy milk, which we no longer do, which is excluded from this year's sales, which is in last year's sales. Our gross sales, which is important for me to give to you, is a 157.2 million versus a 144, which is up 9%. And sales without our soup, which we said is above $8 million and net, net, net California which is above $3 million, are sales for the quarter if you add up those two back would have been up about 17% comp for the quarter.

Our earnings per share 14 cents versus 23 cents. What I want to do is tell you about the quarter, but, you know, I have talked to a lot of people this week and let see what happened. As I referred to it and, you know, by no means so I take this lightly and, you know, we at Hain are very upset about a lot of the things that have happened in this quarter and there is no indication by the growth of our brands, the consumption, which we'll talk about, but it seems like we had the perfect storm hit us. As we were consolidated co-packers last year, as we were moving to our 30 in 3, we consolidated through one major soup co-packer, which was a soup co-packer for Hain for many, many years. Unfortunately, one of the principals of the company passed away and the vision, the strategy, direction, and the commitments made to Hain on volume were just not delivered. When we knew this, we put teams of people out in Denver and still we were not able to get the quantities of soup and [loan behold] at the same time with the cold winter that we had our soup consumption continued to grow a lot. Consumption grows and we just can’t deliver and any of you have visited stores and saw holes on the shelves, you would understand why because we just did not have our full 10 product.

At the same time, as most of our products are organic, it took us extra time to find the new co-packer and what I can tell you today, we do have two co-packers in place today producing canned goods, and you know what have we learned, while we revisit and John will talk about in a little while, all our major categories and, you know, fear was at price savings that we saw in combination combining the two that I'll tell you by being at the start and cutting the price that we would save definitely it was not material what it cost us. We have been through this before as you are well aware. We had issues on the Terra startup and I must tell you today that Terra could not be running better and the efficiencies coming out of that plant is incredible. We also had issues before with Health Valley. I must tell you today that Health Valley plant from production from new products, from margin enhancement could not be running better.

You know many people have asked me what will you do differently, I think John and his team you know will go back and re-evaluate all our co-packers. We will go back and re-evaluate to ensure where we have multiple co-packers on brands if we ever have this issue again. And, you know, I think I cannot sit here today and say we will never have an issue with the co-packer again, but I sit here and say, it has been an incredible and a painful learning lesson for all of us at Hain.

From the costs side, if anybody has had the opportunity to go a gas station lately, you know what the cost of fuel is and as of January hours and services affected us, John will take you through as 90% or 80% of our products are delivered today, why our freight rates have increased tremendously.

In regards to CarbFit, we see CarbFit as a big opportunity at Hain. I don’t know if some of you remember about 2.5-3 years ago, Hain spend $2 million with a certain customer on [slotty] and to win there -- and get distribution on Terra Chips. That customer today were doing at retail over $65 million a year. We expense [slotty], we expense all of our startup cost and these are definitely one-time costs that you know acquired against CarbFit and will see the results for it. It's -- you pay it upfront, you don’t see all the sales definitely at first but we feel very, very, very good about the opportunities at CarbFit. Remember, we created 80 new products, we were one of the first and we've been out there and with General Mills, with Kraft and other competitors coming out there we felt that it was very important for us to get a jump on everybody and to make sure we get distribution. And the difference between Hain CarbFit products and Maureen will tell you about it in a minute, we have no hydrogenated oils, we have no GMOs in our product and we are pretty good tasting too.

At Hain, we've instituted an price increase across all our businesses and we feel from our prices increases we will cover cost. This is the first time in probably 5-6 years that we ever really taken any major price increase. At the same time over those 56 years we have been absorbing you know increased healthcare cost, we have been incurring, you know, as a public company today Sarbanes cost that has been hitting us and multiple other costs that have hit our company and as a smaller company it probably hit us harder. So, you know with our price increase in place today for the first time we will be able to absorb a lot of these costs.

But let's go on just some better news and let's talk about the growth of our business and looking forward, which I feel pretty excited about. It was not too long ago on this call when I talk you about Terra. Terra this quarter was up 18%, Garden was up 18%. The snack category for this quarter, which means was up 18%. Terra consumption was up 18.3%, that means and that is in natural. So, 18.3% for the latest 12 weeks that means we are shipping what we are selling, and you know, normally there is inventory out there and that’s driven by our new products in, you know, our exotic vegetable chips and that is also driven by the new Kettle chip that we already have 33% ATV.

In regards to Garden of Eatin and this is a natural and you know the 18% was natural for Terra, our strong growth was 9% for the latest 12 weeks, we are outpacing the category, which is 6%, and again Garden of Eatin very strong brand, we've added numerous new products to the brand

In grocery, total Hain Snacks are up 11% for the last 12 weeks, Terra and grocery is up 6% for the latest 12 weeks and in the last 4 weeks its up 14% and again its been driven by new products and you know, Garden of Eatin, continues to be strong and grocery up 13% for the latest 12 weeks. So there you can see the strong demand, a strong growth for our Terra business and Adam and his group has just done a great job in turning Terra around and really getting the distribution out there and you know, last year on this call lot of people had asked us what about [Frieda] and natural and I said we need to get out there and get distribution, drive distribution. I think we’ve done a great job in doing that both on new products and growth and getting products on the floor.

In regards to Canada. Our Canadian sales which includes Yves, Hain products such as Terra, Earth’s Best, and Health Valley and actually we just introduced our low-carb line up there called Resolution. Our Hain sales were up 22% and you know, we feel pretty good about what's going on up in Canada. From an Yves standpoint on a consumption basis for 12 weeks ending 3/20, we are up 5% on a consumption basis. Imagine, which Rice Dream is one of the strong brands of Canada, the Rice Dream category was up 4% and Rice Dream was up 11%, the Soy category was up 4%, Soy Dream was up 14%. We’ve launched multiple new products on Yves; if anything we’ve changed the products where before the products were skewed for vegetarians we went after those people that want to reduce their meat intake and we will continuously see a lot happening with Yves. Ellen will tell you in a little while about all of the things that are happening on food service and all the things that are happening at McDonald's with these. And as you heard me say, you cannot use the name low-carb in Canada, Resolutions we'll be the brand that we will be using in Canada with the similar products that we have here in the US.

I just came back from Europe, and felt very good about our European growth and our European plan. Europe grew 36% for the Company. At the end of March or the middle of March, we announced an acquisition called Natumi and the Natumi brands over in Europe are Milkfree, which we think is a great brand. We also sell through Natumi, rice milk and oat milk. Natumi will give us the opportunity to produce Imagine, which is still produced here in Northern California and shipped over there and repackaged, which will give us tremendous savings.

We see ourselves with a Rice Dream brand of Imagine and our Milkfree brand, our rice milk, our oat milk brand, a tremendous opportunity of going after the whole non-diary category in Europe and there is one other major competitor there that we think we can see tremendous opportunity. In Europe, we've taken a lot of our products under the Lima name and have enhanced them, we’ve gone after the Biomarche, the whole fresh category, Grains Noirs, which we bought at the end of June last year. We see great opportunities there from the fresh side.

What are we going to do in Europe, well we have already moved to see a major margin enhancement and that is already in place. We are in the midst of consolidating sales as we’ve done multiple acquisitions over there, bring everything under one sales organization, and we’re in the midst of doing that. We see there is a big opportunity for a low-carb brand in Europe. We're continuously rolling-out our Terra brand in Garden of Eatin in Europe; if you go to the U.K. today, you will see Terra and Garden of Eatin and in the Netherlands and France you will start to see Terra and we are in the midst right now of looking in January to rollout our Yves brand in the European market. So, a lot planned for Europe and we look to see a lot happening.

With regards to acquisitions; this year in fiscal '03, we acquired Imagine in December of '02 and we've consolidated in 60 days, from July 1st of last year to July 1st of this year, our sales for Imagine will be down, but that’s purposely. We have cleaned up the line, we've discontinued a lot of SKUs, we have discontinued non-profitable SKUs, we have moved everything to one warehouse, and when we acquired Imagine EBITDA was probably running about 6-7 today, annualized though at the end of our fiscal year EBITDA will be in the 11-12 range, and I feel pretty good of what we have been able to do with Imagine and changes brand tremendously. Same with Walnut Acres, we acquired Walnut Acres last June. When we acquired Walnut Acres, Walnut Acres had a loss of approximately $14 million, again we've discontinued a lot of the line you know Walnut Acres, sales are down versus last year, but that’s on purpose and we have suffered probably about 40-50% of the stock rate with Walnut Acres as we acquired it. There was no commitment on ingredients and it took us a longtime to get Walnut Acres in stock. So with that being down -- a loss of $14 million, Walnut Acres will contribute $2-3 million of EBITDA to the Hain Celestial Group. So it's important to see we have done a good job of integrating, we have done a good job of cutting costs and what's been important is that we have done a good job in limiting SKUs that do not makes sense within the line. We will continue in the acquisition front. There is a lot of good acquisitions out there for us in the frozen side, we are looking at other categories and acquisitions will be a major part of our strategy going forward.

In regards to Q4, as you had an opportunity to see your press release, you are aware we have brought our numbers down in Q4, and what's important is to be on the conservative side, until our price increase goes into effect July 1, we still have a freight and fuel, we still have other commodity costs that will still affect us. Even though, we have fixed our soup and co-packers, it's important for us to get our shelves built at retail and we are doing that right now as there are many, many holes. It's also important for us and I was asked this question many times to protect next year's soup season. So, where it makes sense, we will spend and we will make sure that every distributor out there has ample amount of inventory and is ready for next year's soup season. We are looking, you know for this quarter to grow somewhere between 9-11% top-line growth.

In regards to fiscal '05, we are pretty excited about fiscal '05. We feel good about our price increase in place to protect us on the cost side. We definitely are -- feel good about the growth opportunities, and I think hearing from everybody today, you will feel pretty good for them too and with John and his group working on cost operations, -- and we have not forgot at all above 30 in 3. We are definitely looking at a lot for fiscal '05, and we are also looking a lot on the acquisition front.

In regards to a stock buyback, at opportunistic time, with our balance sheet today, we have the ability to buy back lots of stock and we always feel a lot of stock is one of the best buys out there in acquisition and from an integration standpoint one of the easiest. So with the $300 million line and approximately $47 million drawn down on it and $20 million of cash, we have a lot of capacity to buy back stock in the Company. What I would like to do is turn it over to Ira Lamel, he will take you through the financials and then we'll turn it over the operator here. Thank you very much.

Good morning everyone. As Irwin discussed, our sales this quarter reached a $136.9 million, up 6% over the prior year's third quarter sales of a 129.2 million. On a gross sales basis or top line, our sales increased by 9%. This means that we spent more in the trade in this year's quarter than in the prior year period. Our earnings were 5 million in the third quarter this year or 14 cents per share on 36,804,000 diluted shares. Again 7.9 million of net income last year or 23 cents per share on 34,887,000 diluted shares. As discussed in our release last week, our earnings in the third quarter this year were reduced by investments related to the launch of CarbFit, manufacturing issues at our soup co-packer and higher commodity ingredients and transportation costs. In total, these items impacted our net earnings by approximately $4.5 million or 12 cents per share. Gross profits for the third quarter as reported was 28.2% as compared to 30.7% in the third quarter last year. However, after considering the items, I just described and their impact on the quarter, gross profit percentage was flat this year compared to last year. Our SG&A in the third quarter this year was 29.5 million or 21.6% of sales compared to 25.9 million last year or 20% of net sales.

Our dollar spending on advertising, marketing and promotions included in SG&A was higher in this year's third quarter than it was in last year's by $1.3 million. That represents 17% of the net sales increase we had in the quarter. We had more aggressive programs aimed at consumers including consumer coupons charged against net sales and we had $800,000 increase in the total cost of these coupons in the third quarter this year compared to the prior year. As with our gross profit percentage this quarter after considering the items discussed above -- or discussed earlier there -- and their impact on the quarter SG&A as a percentage of sales was flat this year versus last year.

Operating income for the quarter was 9 million or 6.6% of revenue versus 13.8 million or 10% of revenue last year. In this year's third quarter interest expense and other expenses net saw a lower interest expense at $497,000 this year versus $642,000 last year. Net income for the first quarter was $5 million or 3.7% of revenue against 7.9 million or 6.1% of revenue in the prior year. EBITDA for the third quarter this year was 10.9 million versus 15.3.

Our balance sheet continues to be strong. Our working capital was $108.4 million with the current ratio of 2.4-1 at March 31st. We had 47 days in trade this year -- trade receivables that is this year versus 45 days sales in trade receivables at the same time last year. Inventories are at 70 days compared to 60 days at the same time a year ago. The increase in inventory comes from the necessary build up of inventory for CarbFit, new products at Celestial Seasonings including the recently introduced Zingerade’s, inventory board on by acquired businesses, and in the case of Walnut Acres a change in our buying practices effective January 1, after terminating an arrangement with the previous ingredient broker for Walnut Acres and bringing that purchasing and the inventory in house.

Our stockholders' equity is now $484.8 million, our debt as a percentage of equity remains at a very low 13.5%. We finished the quarter with $21.1 million in cash. As we released last week, we have a new credit agreement with the same lead banks in the consortium providing this with a $300 million credit facility. Our previous facility was renewable each year, this facility has a full 5-year term and provides us with better terms on a working basis than the agreement that replace this. I’d now like to turn the call over to Steve List, our Celestial Seasonings General Manager.

Thank you Ira. Good morning. Today I’ll be discussing our Celestial Seasoning business. Q3 saw a continued strong performance by the Celestial Seasonings business. Sales grew by 6% versus year ago with net sales after EITF growth of 4%. The difference is primarily related strong coupon redemption versus the year ago period, which benefited consumption. This marks the sixth consecutive quarter of growth on the brand and reflects strength open base business as well as new tea and beverage product that have surpassed expectation. The Q3 in grocery, drug and mass excluding Walnut, Celestial Seasonings more than double category growth of 5.5% in units behind strong gains in green and black. Share versus a year ago held on a 52-week basis for gains on a 12-week measure. In groceries, our largest channel, Celestial grew 4% in the latest 12 weeks, surpassing all major competitors. This positive momentum is especially encouraging since Celestial had been disproportionately affected by the LA strikes.

Celestial holds the dominant share in drug stores, a channel that has been a positive growth driver for the brand. I am also happy to say that Celestial continues to meet our high growth expectation in super mass despite increasing competition during the last year.

In natural foods, where we have been challenged in recent years, Celestial paced the category growth driven largely by the success of our new products. I think it is noteworthy to say that in grocery, drug and mass excluding Walnut, we are the only brand in the top 4 to hold share on the last -- in the latest 52 weeks. These four brands represent approximately 75% of category sales. In the latest 12 weeks, we are the only brand in the top 6 to gain share. These six brands represent about 80% of category sales. Our success can be attributed to our new tea bag product as well as our successful integrated trade and marketing campaign.

In their first season, our four new hot teas have sold more than $3 million and has been successful in expanding overall distribution for the brand. We are now in the process of building on this success with the variety of new hot teas focused in emerging segments of the category. New beverage items introduced over the last few years' Natural Ciders and Teahouse Lattes and Chais continue to meet or surpass expectation complementing our core business.

In Q3, we introduced new Zingerade, blends of herb tea, juice and lemonade in to test markets. Zingerade, which are available in 364 out flavors have only just hit the shelf, book for these items in the Northeast in the refrigerated juice section.

We're expanding our successful line of Holiday Teas this year with several new items including two limited edition Children's Holiday Tea. Each will feature well know characters as we are in the process of signing a licensing deal. This is another way in which we hope to bring new consumers to the category.

We have made strides internationally over the past year. Canada represents our largest international market where we currently are the third largest specialty tea. In the second quarter of this year, we terminated our old distributor and moved most of the business to new a strategic partner and went direct to several retailers. In this past quarter, we gained some distribution and had the most successful promotions in over a year in various accounts. In Europe, we have made some adjustments to the way in which we go to the market. We have forecast FY '05 as our first year of growth in this market after several years of declines. I believe that this brand has the opportunity to succeed around the world as evidenced by our distribution in over 55 countries. We continue to focus on growing in this important channel.

Since the acquisition of Tea four years ago there has been a lot of discussion on how best to integrate this business. We have been -- done a good job of balancing the integrating where it makes sense and remaining focused where necessary. At this time we have a dedicated tea sales team in both grocery and international. In natural foods and fruits service, where the Hain side of our company had more experience we shared resources to leverage our whole product line. We have utilized the Boulder-based special channel team to help expand other Hain Celestial businesses into these channels.

Over the last few weeks many of you had asked about the Tazo-Kraft partnership. While any major shift in the competitive set is a concern as experienced in the case that any push to extend awareness of specialty teas benefits the entire category. As a leader, this will benefit Celestial as well. Celestial already deals with several formidable competitors, many of which are part of big multinational companies. We've been competing with them for years and continue to lead the category and outpace these larger companies. Our focus, dedicated resources on tea as well as our strong brand equity and positive consumption momentum, combined to put us in a good position to meet competitive challenges. We currently have the largest pipeline of new tea bag products ready to roll out in several years. With our success this past year of gaining distribution, we feel confident that we can gain distribution of these new items.

Our plans for Celestial Seasonings is to grow the base business by a range of 4-6% annually. Combined with the growth of new businesses such as Lattes and Chais, Cider and Zingerade the plan for Celestial Seasonings business unit is projected to be 6-7% in the coming year. The release last week noted that several of our businesses are looking into the possibility of taking the price increase to offset rising cost. Celestial Seasonings is also seen its fair share of the rising cost and we are in process of formulating a modest price increase, which will become effective during the summer months. We think growing the brand consistently while continuing to reinvest in the business, this continues to be our model for the future.

One of the keys to our success has been the cohesive management team at Boulder. Four years, ago almost all members of this team were new to their position. Since that time, the turnaround on new business has been a credit to this team's effort as well as the exemplary support from the corporate office in New York.

Specialty tea continues to experience above average growth. It seems that everyday there is a new article on health benefits of tea. The ongoing worldwide trends towards healthier eating and to the brands strong health and flavor equity, Celestial Seasonings is well positioned to continue to capitalize on it's growth. This time I would like to turn the call over to John Carroll.

Good morning. As Irwin said, I am now the Executive Vice President in charge of the Melville business, which includes our non-dairy and grocery businesses. My last position, prior to joining Hain Celestial, was as the Managing Director for Hain Frozen Foods. I will talk to you today on three topics, I'll give you some more details regarding our soup supply issue including its impact on third quarter results, how we are fixing the issue, and the lessons we learned going forward. Secondly, the rise in cost, we like many other manufacturers are facing and some of the initiatives that we are taking to address this. And then third, I'll talk to you about the Melville business opportunity and our approach going forward to capitalize on it.

Regarding the soup supply issue, its impact was multifaceted. Although our natural channel consumption was up, we were only able to ship 60-70% of our Q3 soup orders. We incurred significantly increased freight costs from less than truckload shipments and redeployment. We lost promotions due to our inability to fill customer orders and we had to cancel our grocery channel soup distribution drive because we weren't able to fill orders. Net-net as Irwin said, this issue cost us over $8 million in third quarter sale. We implemented to fix to our soup supply issue. This was top priority that Irwin signed me when I joined the Company. We immediately applied a team against the issue that resolved our key problems that inhibited our new co-packer's ability to supply soup and we identified and qualified a second source of supply in about 45 days, which is a pretty difficult thing to do in a production of natural and organic product.

Our current status is that we now have two co-packers producing our soup. We are seeing significant improvements in soup order fulfillment rates in May, and our inventories are being replenished both internally and at the store shelf. Now, we'll spend the balance of the fourth quarter working to rebuild our inventories and the confidence with the trade to position ourselves for a significantly better FY '05 soup season. There are many lessons we have learnt from this experience, from the need to build an ample lead time to get co-packers up to running as well as the key being the need for a reliable second source of supply in core category. In fact, going forward, we will forego some potential vendor consolidation savings to ensure a secured source of supply in our key category. So, to summarize our soup supply situation, it was a tough lesson -- it cost us $8 million in Q3 and there is still impact on Q4. We now have two co-packers producing soup for us. We are currently rebuilding inventories and trade confidence to position ourselves for the FY '05 soup season, and we will if possible maintain a qualified secondary source of supply in all key categories.

Now, to move onto the cost side of our business; Q3 saw significant fuel and freight increases, fuel charges increased 9% versus the previous quarter. Our accessorial charges doubled, driven by new federal regulations in the trucking industry. And finally, our outbound freight was up 29% due to increased LTL shipments from our soup problem and as we're extending our customer base to shift to more customers requiring delivery versus pick-up. We also saw an in Q3 increased pricing across several key natural and organic ingredients and components. For example, natural and organic vanilla and cocoa was up 60-70% versus year ago, various oils were up 10-40%, various vegetables were up 20-70% and key packaging components were up 3-5%. Quite frankly, our Melville margins today are simply not robust enough to absorb these issues. To address this, we've launched a system-wide margin improvement initiative. Three key elements of this initiative are as Irwin mentioned, the Melville business will take a 4-5% price increase, which was released this week and will be effected in July. We are also renegotiating our supply contract with our supply contracts with our leading co-packers.

Finally, we have also retained NFI interactive logistics, help us identify savings throughout our distribution and warehousing network. It was just a few of the initiatives crucial to rebuilding our margin, offsetting increasing costs, and most importantly beginning to realize like what I call the Melville business opportunity. I believe there is an un-tapped opportunity with the Melville business and here is why. We participated in on-trend, natural and organic categories. We have tremendous innovation and speed to market capability, -- all you have to do is look at what we do on CarbFit to recognize that. We have significant growth platforms right in front of us, including new products and categories, the momentum of the natural channel, and channel expansion opportunities in grocery, mass, drug and other channels. But I’m not blind to our biggest impediment to growth, i.e. execution on a day-in and day-out basis. All you all have to do is look at our soup issue to realize we have ways to go in that area.

Our objective is to build the Melville business that delivers what it promises and that’s defined as consistent, and dependable top-line and bottom line growth, improving margins, innovative products with unsurpassed quality and speed-to-market, flawless execution and constantly raising the bar in that area, improve returns on invested capital, and finally a result-oriented top level management team. The meaning of the action plan we have implemented since February includes the following initiatives. As Irwin said, we’ve aligned Melville as one business. All functions according to me no [stylus], no finger pointing when things don’t happen, -- one set of objectives for all functions. We have instituted laser-like focus on improved execution, -- it is our top priority, with flawless execution as our goal, and measurement and accountability process for all functions. We are attacking our margin issue with the price increase, NFI logistics, the leading co-packer renegotiation, and other elements of the 30 in 3 program. We've refocused our marketing, sales, and new product efforts solely against our high-growth, high-margin Melville categories -- baby food, non-diary beverages, soup, cereals, cookies and bars, and low-carb. We are driving to expand our presence in new channels and geography and finally we are upgrading our talent base in Melville. The rules are simple, it's like what we said. Deliver what you promise, increased accountability, looking to build a top flight organization that can grow the business organically and through acquisition.

I believe the glass is half full with the Melville business, I see positive signs everyday. For example, we recently extended our aseptic soy and rice beverage category leadership to the super mass channel. Maureen Putman will make an important announcement on May 20 of a new strategic alliance with a major children’s brand for an exciting new product launch. We are working on a aseptic breakthrough innovation in the upcoming soup season, and we continue to have strong consumption and share trend in most of our categories.

So to summarize, we firmly believe in the Melville business opportunity. We have strong potential for top-to-bottom line growth for the company. The key to realizing this opportunity is to align ourselves as one business, have a laser-like focus on improved execution, to focus our efforts against our key business categories, to attack and improve our margins, to expand our presence in new channels and geography, and to upgrade our talent base so we can begin to deliver what we promised. With that I am going to turn it over now to Maureen Putman to review our latest consumption and share trends of the business.

Thank you John. Good morning. Today I am very happy to report that the total growth per business unit grew 18% with strong growth seen across all of our organic brand including Arrowhead Mills of 16%, Earth's Best of 24%, and Imagine of 57%. This growth can also be seen in consumption across all core categories. Looking at consumption despite our recent co-packer issues, Health Valley and Imagine Soups continue to hold the number one and two positions in natural channel with a 32.5 share and one and fourth position in grocery with a 34.5 share. Health Valley continues to show strong growth in natural, up 10% for the latest 12weeks while grocery declined 12.5% as John mentioned we postponed our distribution drive during the transition to a new co-packer.

Imagine continues to show strong growth across this [inaudible] up 16% in grocery and 11% in natural. This growth is being driven by core items and will accelerate as we continue to roll out new products. In baked goods, the launch of cookie creams, mini cookies, and premium chunk cookies continue to feel strong growth in Health Valley, up 75% natural gaining 2.5 share points and 59% in grocery gaining 3.5 share points. The ready-to-eat cold cereal category remains extremely competitive to Health Valley holding the number 5 in natural and number 7 position in grocery. With the launch of our new cereal Heartwise, Slender, and Enpower, we have seen a double-digit consumption decline slow to single digits, down 1.5% in grocery and 5% in natural. This will improve as we introduce new cereals like [Bone Light] this month.

As the USDA rolled out across the Arrowhead brand, we continued to see strong growth in all of its key categories. Baking is up 27%, beans and rice are up 37%, hot cereal is up 12%, cold cereal is up 6.5%, and nut butters are up 27%. The Hain brand also sees strong growth in consumption with oils up 27%, crackers up 25%, and cookies up 47%. Earth’s Best continues to lead the category in National foods as the number one baby food brand of 28%. Helping to drive this growth was the launch of our new line of products especially formulated for toddlers. In grocery, Earth’s Best has shown tremendous growth, up 16% for the latest 12 weeks, 30.5% for the latest four weeks, which is significantly outpacing category growth of just 3.5%.

Moving on to the non-dairy business units, despite significant share growth, shipments for the non-dairy business declined 16% in Q3. This decline was primarily driven by three major events. First, the California strike, a strong market for the non-dairy business. Second, a strategic business decision not to repeat on the unprofitable start up private label business, and third, discontinuing Rice Dream refrigerated line and limiting distribution of the refrigerated Soy Dream line to just strong regional markets. Our focus going forward is expanding channel distribution of our profitable aseptic business and a national focus on the growing Rice Dream brands.

Looking at Soy consumption, the Hain Celestial Group remains the market leader in aseptic with over 50 share in both channels. Soy Dream, a smaller piece of our non-dairy business as it concentrates on rice was a brand most significant impacted by the strike experiencing 22% decline in sales in grocery and 9% in naturals while Westsoy, the number one brand of aseptic soy continues to grow in a declining aseptic soy segment in both grocery and natural channels. In natural, the category is down 1%, Westsoy is up 2%. In grocery, where the category is declining 8.5%, Westsoy is up a 1%.

On the Rice side of the business, Rice Dream continues to dominate with a 85 share gain in expected growth category, up 14% in natural and up 1% in grocery. Refrigerated Rice Dream command 65% share in grocery, up 9.5% and 76% share in natural, up 7.5%. And last, but not least, I am delighted to report that our significant investment in CarbFit has paid off this strong performance. In some cases becoming a leading brand in their segments in just the 12-week period. CarbFit, Cookies and Health Valley moved up to the number one, low-carb cookie brand in just 12-week selling. With a lower ATV percent than competitors CarbFit Pasta from Deboles has captured the number one position in low-carb pastas and CarbFit Snacks in Hain now rank number three in the snacks category with the fraction of the distribution. We are very pleased with the result of CarbFit launch. It is apparent that the distribution increases and our new product hit the shelf, CarbFit will be a dominant force in the low-carb category. And now I would like to introduce Ellen Deutsch, Chief Growth Officer, to tell you about some of our exciting new business opportunities.

Thank you Maureen. Good morning. One of our growth opportunities food service, we began to address just three years ago, it is a very strong growth opportunity for us in terms of achieving increased sales, strong margins and new opportunities for consumer product trials. We are focused on those brands like Terra Chip, Yves Veggie Cuisine and Celestial Seasoning for which we'll all -- put our own production facility and our world recognized brands including Health Valley as part of our food service initiative and the most fruitful segments there are those that really give us a lot of brand exposure, restaurants, travel and leisure and of course the, full market that we are all concerned about due to the childhood obesity issue.

So here's a few quick examples of our most exciting initiatives. First McDonald's. In just 12 months, we introduced our co-brand of Yves Veggie Burger in approximately 20% of McDonald's restaurants in U.S. and Canada and our distribution has primarily been in the Western half of the country and now we are looking to expand East with a major test market this summer. Second Cisco, we approached the largest [broadband] food service distributor in North America with the opportunity to be first to market with a new generation of stated protein product needs. This is an opportunity with critical math and mainstream appeal with Soy [inaudible] trend and within 90 days of our first meeting we launched 7 new products under the numerous vegetarian brand name marketed by Cisco. Our Cisco's independent operating company make individual buying decisions and introductory results have been very favorable and we will be introducing more new products with Cisco throughout the year and this will also help our brand relationship.

In travel and leisure, Terra continues to be the official chip of JetBlue Airways, one of Terra’s largest customers and we are also now in American Airlines, Alaska and Northwest Airlines and Terra continues to be featured on the menus of many fine hotels and of course we are continuing our initiatives into [sea stores] of 7-11 launching new products in the third quarter and we had [inaudible] plan.

So, in keeping with our ambition we are going to change the way the world eats out of home as well as in home. I just want to make a couple of quick comments about our Estee brand. We have just returned it to our management after 3.5 years. This market opportunity has grown with obesity driving escalation of Type 2 diabetes in children and adults and consumers today as witnessed by the booming low-carb are more concerned than ever about sugar related issues including triglycerides and glycemic index. So, we are committed to turning this brand around through repositioning and lots of exciting new product innovation to really meet the needs of this market and because merchandising and distribution [doubles up] with CarbFit, we had a great focus from our sales team and through our supply chain efficiency. This concludes our management presentation and I will now turn this back over Irwin.

Thank you, Ellen. Sorry, we took so long, we just had a lot of great exciting things to talk about. What I'd like to do know now is open up for question and answers.

Thank you. if you would like to ask a question, you may do so by pressing the "*" key followed by the digit "1" on your touchtone telephone. If you're using a speakerphone, please make sure you're mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question. Again that is "*" "1" for questions and we’ll pause for just a moment to give everyone an opportunity to signal. Our first question comes from Terry Bivens with Bear Stearns.

Good morning everyone.

Hey Terry.

Irwin, on I guess on the numbers would be my first question, what quarter looked a little bit lower then I was expecting, can you kind of run through the major impacts that took that down?

I think Terry what we want to make sure, number one, our price increase is effective July 1. We’re being on a conservative side to make sure we don’t get hit by any other prices and the other thing is we just want to make sure that you know, we got every bit of soup out there even though we have two co-packers and if we have to invest right now to make sure we have soups space for next year, we will. And that is you know, we’re the major is coming from but you know, we think you know, these are conservative numbers and we will be out there just you know, selling a lot of soup and selling a lot of product.

Our next question comes from John McMillin with Prudential.

Well its nice to see you Irwin on the conservative side.

Thank you John.

Some people listening might disagree.

That I am conservative or I am on the conservative side.

Well I won't get into your political tendencies. You know, the 6% sales increase you had two small acquisitions, the European acquisition and Walnut Acres, what did they add -- I had them adding a little less then 10 million to 5 million, numbers looks without the acquisitions you’re flat in the quarter.

Not at all John, I think if you come back on the quarter and that’s why you heard me say before, Walnut if you come back and take out our private label business and are discontinued or basically washed. And on the 6%, we’re basically much higher trade spending both in Celestial and here and that’s why it was important for us to give gross sales, because on a gross sales basis that which -- can basically show what our organic growth was.

Which means added about what.

Excuse me.

Roughly --

If you took our private label business.

I know, I am just kind of looking for a rough numbers; the 5 million that they added 7 million that they added, just a rough number what -- what the size, because we gave this size of Walnut Acres and Grains Noirs, when you bought them and so I can just kind of --

Walnut Acres today, and basically this is a lower quarter for Walnut Acres, it is probably about a $18 million business.

And --

And then -- right and we’ve discontinued numerous products there. In regards to the other acquisitions, there is approximately $1 million for Grains Noirs and Natumi.

Our next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Did John get cut off?

I am sorry just for a moment.

Okay.

Yeah. Can you hear me?

John.

Well Andrew might do a better job in getting numbers. But I -- so basically it added about $5 million, is that about right?

No it added about $3 million.

Great. I'll let Andrew go from here.

And John that was a wash the acquisitions with a change in private label business.

And John, don’t forget please, that the acquisition we made on the Natumi was only in one month, in the current period.

And as long as someone can go through the increase again in the $3.6 million increase in SG&A, what were the components of that, and then I will let go -- I'll let you go?

Well most of the increase in the SG&A comes from the advertising marketing and promotional spending that I pointed out during my remarks, there was about 1.3 or so million over the prior year, just on that one line. There's a little bit of an increase in G&A in the quarter, albeit very, very small, because the Natumi acquisition is in no way integrated with any of the other units in Europe at the moment so it has its own platform. That added a little bit as well, and then there's some sprinkling throughout. I think the most important thought of what happened to the G&A is not so much that the dollar spending is up because there is a lot of variable in it with regard to broker commissions and things of that nature, but had we been able to achieve what we expected in terms of soup sales and a couple of other issues, the SG&A as a percentage of total net sales would have remained absolutely flat.

Okay thanks a lot.

Thank you.

I do apologize for that, we'll go back to Andrew Lazar with Lehman Brothers.

Good morning.

Hi Andrew, good morning.

Just two quick things Irwin, one I am trying to get a sense of what you internally are thinking about as your base from an earnings perspective, that you know you are going to start to peg your growth off of going into fiscal '05, and then the second thing you know I think one can make an argument given some of the execution issues that you and John talked about and John Carroll [in that] argument perhaps, even though you have got you know, a very strong balance sheet, perhaps the focus should be less on the acquisition side, and more on inward type focusing and sort of getting the core and base business right, because you know as you already talked about your in-categories that are growing, that are inherently growing, and I think you want to make sure you are doing what you have to do to make sure you are taken the advantage to that growth in a profitable way. So I am just curious on your comments on that as well. Thanks.

In regards to the acquisition and the future acquisitions; you know number one, you are right, we will focus on our current -- current balance sheet will focus on our current businesses. Number one, if you come back and look at Celestial lot of great things happening there, Terra a lot of great things happening there, Canada a lot of great things happening there, Europe a lot of great things happening there, and our you know snack business. You know John's focus today is on two pieces of Melville and Andrew, you have seen our grocery business grow nicely and from a non-dairy standpoint, you know from a consumption, it is growing if you come back and take out some of the discontinued business it is probably flat. John with his team are just totally, totally, totally focused on it, and you know he will bring the right attention to it. When John came in here, he now owns 4 or 5 direct reports that used to directly report to myself. So there is a person which is, you know is living on it. From an acquisition standpoint, we will focus on acquisitions that strategically makes sense, but if we are not right we are not going to go there and do among this acquisitions. In regards to the base for next year, you know I've always said these are one-time events for us and our soup season, California strike and our price increase, so internally we will reset our base and add a lot of these things back and that’s what management and myself will be charged with. What I will do is come back at the end of our fiscal year and give a full overview of fiscal '05, which we feel pretty good about and having our price increase out there, Andrew to cover a lot of the cost. John and his group will look to take out a lot of costs out of his side of the business and a lot of expansion into other classes of trade, the super masses and you know, food service and a lot of things are happening in Boulder. And I know, we've heard the story before, but, you know, I must tell you 4 out of the 5 wheels are working real well here and out of that fifth wheel, the business side is working well. You know, there is just a couple of operational things that jumped up in front of us and one will be the expense side and it's amazing how much impact John and his group have made in a short period of time.

Our next question comes from Andrew Wolf with BB&T Capital Market.

Hi, I have two questions that essentially follow-on in a sense, first is when you look at what the streets out has for next year, do you think you -- at this point two things, on what people are looking for next year and do you think you can hit anywhere in the range of -- looks like the low of bucket you are up to about a plus 16 or so? And the other thing is people are -- myself included, are looking for first quarter earnings, you know, to be positive given the effect of your price increase and, you know, looks like most of your contract expenses are behind you offset by I guess it has a tendency to recommit to get conservative but do you think you can what’s your response to those questions?

Well, number one Andy, you know, next year and I think as I said looking back out there but there is a range out there today from a $1.08-$1.15 and I think you know as I said we are not coming off on changing, there is nothing -- we are not concerned about the top line growth of our business, we are not concerned at all about all the business is that I talked about, about sales and growth numbers and contribute to the bottom line. We have a full year of CarbFit in front of us next year. You heard John talk about a lot of new soup pieces, we had been dealing with the other stocks on soups into the December quarter. Fortunately, we built up inventory. So, I feel very, very, very good about next year and you know, I feel good where some of the analyst indications are next year and we will deal with it and come out with complete review of next year. So, by no means are we concerned with our operations top line for next year. In regards to first quarter, you know, I am not ready to give anything yet on first quarter, but price increases will definitely be behind us and it's another 60 days that John and his group will have in front of them of fixing some of the other operational issues that he is dealing with. So, I am pretty excited about next year and, you know, pretty excited about where we are going.

Our next question comes from Carole Buyers with RBC.

Hi, good morning.

Hi Carol.

How are you guys doing?

Good.

Just two questions one is more or just for the sake of discussion, when you look at the low-carb line you're seeing lots of competition at the mass market, I guess why wouldn’t management just kind of take a step back and say let's be the leader in natural. I mean, it is usually the best way to go in this industries kind of establish your route to natural with a good low-carb line that has natural ingredients and then later come into the supermarket with a differentiated product to compete rather then spend in an expensive supermarket channel?

Carole two reasons, number one I think we’ve made a major impact already in natural. Number one, we today are the only natural low-carb products out there, we are the only one that’s no hydrogenated oil out there today, and if agree to whole fruits or wild oats [are most] natural food stores you’ll see some pretty good displays and that’s number one we are first.

What's your average SKU talent at the natural channel?

Our average SKU talent at the natural channels probably in the 40-50 range of SKUs. But what's important Carole, is this here, you have a lot of companies coming out with products today and I think to get the Hain mean out there you know, when Kroger and Safeway and large accounts come to you and want it and want to do pilot displays, it is very hard to walk away from that business and they also recognize this here. They’re recognizing the advantage of Hain low-carb products versus mainstream because their concern is that here you take out low-carb, if you take out carbs and you replace it with something that’s bad does this make sense. So there has been a big buy end, you know, back in December we shifted -- that large super mass on our pasta and has done quite well there. So, we'll pick and choose and you know I've said before that CarbFit can be a 10 million to 100 million business, I backed off that and basically what we would like to see is a good, solid, profitable, $20-30 million business and support it there. So that’s where we are and I think its pretty phenomenal that we could take a brand with any year, start it from scratch and create $20-30 million of sales out there and with that invest $2-3 million in the brand; we’ll get some pretty phenomenal returns. We are not going to take this brand and run across every single supermarket with it. We’re not going to take this brand and run across every super mass, but we’ll look to grow to $20-30 million and continue to invest in that and our number one focus is definitely to be the biggest in natural food because there is no one else there.

Our next question comes from Mark Chekanow with Sidoti.

Good morning. Certainly its good to see a price increase to offset some of these costs, but when you look across your business lines what are the most sensitive to the price increases that might get ahead a little bit from a more volume or competitive standpoint?

You know, I guess Mark -- we went through our price increases and we looked at competitors out there, and we really did not break any major barriers on our price standpoint. We had not taken any major prices in 5 years Mark. So, if you come back and look at the difference between mainstream products and price, you know we go back and start to look at for instance, [oils] and our sandwich cookies and some of our products, we were pretty close to mainstream products. So, you know we had the -- we never had, really had the ability before to take pricing and from our standpoint I think from retail we are in pretty good shape from that standpoint and from competitive stand point, you know competitors are going -- competitors are going to take pricing also. You know we saw, you know, yesterday a major soy competitor has gone out with a 4-6% price increase, so we are not the only one here in Melville that are paying $2.20 a gallon and paying the kind of rates that we are for, you know vanilla and cocoa and stuff like that. So we'll start to see it across the border.

Our next question comes from Greg Badishkanian with Smith Barney.

Hi, Greg Badishkanian, just have a question. I am trying to reconcile through your internal budget with the street estimate for the third quarter, sort of following from a previous question and the First Call estimate was 29 cents. You gave lower guidance of 5-7 million in EBIT, which is about 9-12 cents that should come out to be about 17-20 cents and I guess I am just trying to understand where that difference is between your internal budget and where the original street estimates were, you know where that gap is?

Hi Greg.

Hi.

Greg one of the things that I think is very important to take into consideration here is that when we gave our guidance going out, you know we said we'd be between 20% and 30% over the prior year's GAAP numbers, that didn’t mean to imply that every quarter was going to be 20% or every quarter was going to be 30. You know we did have internal targets that we were shooting for. We got impacted by the items that we have discussed I think that the approximate 12 cents differential that we talked about is the reconciling item for what was approximately our internal bottom line. There are a couple of smaller items that impacted the quarter, which we haven’t discussed because we did not want to load on every 2 cents of a penny here or 2 cents of a penny there and with that 2 or 3 of those other items you've got pretty close to what our internal budget would have been using that initial guidance from the full year.

And due to the time constraints this does concludes today’s question-and-answer period. I would like to turn the conference back over to our speakers for any additional or closing remark.

Well, thank you very much everybody. And as we step back, we are definitely not happy about what we contributed to our bottom line, but if we step back we feel very good about what we are doing from a top-line stand-point; we feel very good about growth in categories. We feel very, very good where we are today in our development of products and just as everybody else there, you know is frustrated with Hain by the $7 million in hits definitely affect us you know it's also frustrating when you see a 17% potential growth number on a top-line that is sitting there for us, and we turn away. But I can reassure you we have learnt a lot. We have a lot of people that are working here, and it's important to you to realize there is a lot of a good things working here. You know four years ago today, or four years ago June first, we acquired Celestial and with the headrooms, and headway they have made there has just been tremendous. And I continuously say tea is going to become just a major part of people's consumption and one of the reasons Kraft is going out to sell it because they know people are going to drink more and more tea.

In regards to Terra Chips, I just think it's a phenomenal brand. I've said that some of the new stuff coming on 18% growth and there is a lot of carbs in Terra Chips, so I guess people like spicy carbs and we continue to see that. Great things happened in Canada and great things happened in Europe. We all feel good to have John here to help us to [melt] those challenges and so far, I know we're seeing a lot of results happening. I appreciate you hanging in there with us and supporting us. And thank you very much for your time this morning.

This does conclude today's teleconference. We would like to thank you for your participation. You may now disconnect.