Hain Celestial Group Inc (HAIN) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Hain Celestial Group fourth-quarter and full 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 that state the intentions, beliefs, expectations, or predictions of the Hain Celestial Group and its management for the future are forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained from time to time in filing of the Hain Celestial Group with the U.S. Securities and Exchange Commission. Copies of these filings may be obtained by contacting the Hain Celestial Group or the SEC. I would now like to turn the conference over to Mr. Irwin Simon, President and Chief Executive Officer of the Hain Celestial Group. Please go ahead, sir.

Thank you very much and good afternoon, everybody, and I hope everybody has had the opportunity to review our press release that was released at 4 p.m. today. Let me take you through our Q4 sales and our full year, our Q4 sales as you see is 137 million versus 117.8, up 17%. In that $137 million is approximately $4 million of acquisition sales of Jasons and Ethnic Gourmet and Rosetto that happened within the first week of the year -- the first week -- what happened in June. EBITDA for the quarter was 10.6 million versus 12.9 a year ago. Net income, 5 million 80 versus $6.7 million. Our share outstanding for the quarter was 36 million 937 versus 35 million 151. Our earnings per share for the quarter were 14 cents versus 19 cents a year ago. In the quarter, we continued to spend more dollars on marketing and trade. We spent $2.5 million more in this quarter versus a year ago. So let's look at the full year. 544 million versus 466 million. And, again, that's up 17% versus a year ago. Our EBITDA, 55 million versus 54 million a year ago. Our earnings per share was 74 million versus 79 million and shares outstanding, 36.3 million versus 34.7. So total operating income, and just to look at how share counts change, $46 million this quarter -- this year versus $46.2 million a year ago.

Let me talk a couple things about the quarter, I'll talk about the year, talk about some of the things that happened with our brands and businesses. First of all, it is a quarter that we all remember. We told you, in May of last -- of last quarter -- May of last quarter about our third quarter, we told you that we would fix our soup business. We have. We are now delivering all orders, we are 100% in stock and John will talk about that in a little while. We told you that we were putting a price increase into effect. The price increase went into effect, effective July 1, and, you know, we feel that our price in increase, you know, has -- has taken and is standing. From a cost control, we are well underway to controlling costs. You're going to hear a word throughout this conference call, you're going to hear a word, and if I could wear a pin around here, margin enhancement, is a major way of life around here. And we're definitely under a major way, getting our costs under control. In order to facilitate a lot of these costs and to make our business a lot less complicated, we're going to something called a turn-key operation with our co-packers, which would mean we will buy a product from them at a finished-goods price. And that's something that's underway. And, you know, a lot of times people talk about our business having a lot of co-packers. Probably about seven or eight of our co-packers make up about 70% of our business. So there's a major effort out there with John and Benji Brecher to reduce our cost and to get our co-packers to a turn-key operation.

In regards to our Carb Fit, and I've heard a lot of you wondering what's going on in the whole low-carb area, you know, and I've come out there with different projections and different numbers. You know, Carb Fit for us was a defensive mode as people looked to reduce their carbs. As people come back and start eating more and more carbs, it's actually better off for our business and a perfect indication is the way our snack business is up and the growth of our snack business. We've invested in Carb Fit. We feel we still have a big opportunity in the whole low-carb area, as a lot of the new entries will not make it or will go away. We'll continue to focus on Carb Fit. And with a lot less entries in there, we think there's a real place for Carb Fit. And we're looking for somewhere's between 500 to $1 million a month in sales as we've invested into it and it's not our intention to continue to invest in Schlotty (ph) but it's our -- it's our -- you know, objective to continue to push the brand where there is opportunities and we continue to see opportunities. Our snack business in Carb Fit continues to do well our cookie and pasta business, our products and we'll look to do some SKU rationalization on our Carb Fit line where that makes sense.

In regards to some of our brands and our businesses, let me talk about our snack business first. Shipments for that division were up 16%. Terra shipments for the quarter were up 17%, so people out there are eating carbs again. Terra consumption which in Natural was up 22% for the latest 12 weeks and that's period ending July 10. Terra consumption in grocery was up 14% for the 12 weeks. And that is actually driven by our new exotic flavors, which were up almost 43%. And a lot of the growth is coming from these new Kettle blends, which already have a 55% ACB in Natural and only a 10% ACB in grocery, so what an opportunity for us. A whole new channel, a whole new opportunity where we've just got back into and really gone after aggressively is our Club Store channel and our new 15-ounce size and anybody out there for Labor Day weekend, go get them, you know, at BJ's or Costco because they're there and we're seeing a lot of good growth and a lot of good take-away on those products. Garden of Eatin' for the quarter was up 8%. And consumption in Natural continues to outpace the category. Category is flat on Tortilla chips but we're up 4.3%, and in grocery we're up 10%. So, you know, we're seeing a lot of good things happen in our snack area.

Some of the focuses that we're doing in our snack area, we're focusing more and more on direct-store delivery. And, you know, we're partnering up with DSD Distributors. You've heard Adam Levit talk about pounds on the floor and we are really going after displays and pounds on the floor. And you've heard us talk about other channels and, you know, Club is just one to mention, but with our small bags or one-ounce bags and we put some new equipment in our plant, we're really going after that one ounce. Ben Brecher and his group have done a great job in regards to plant. Our costs have come down substantially in that plant. And just in the month of June, with approximately 13-less people, they have produced over 260,000 more pounds in that plant. So basically, the plant today is running close to capacity. We're in the midst of investing some more capital in regards to Friars to get some more capacity out of that plant, but we feel very, very good about where our snack business is going and what's going on with the Terra and Garden of Eatin' brand.

In regards to Celestial, our case sales grew over 4% for the quarter. And if you look at Celestial -- it would look flat, but basically we spent more this quarter versus last year, more on trade, but Celestial continues to be strong on our new teas in the quarter we launched some new products, which I'll talk about in a second. In Food & Drug, for 12 weeks ending 8/7 we gained 1.2% in units outperforming against a flat category. Our brand share was over 24%. And Celestial posted solid gains in Black, up 21%, which is not actually one of our strong categories and Green, up 4% outpacing the category. Our herb tea fell a bit, down 1.7%. Our consumption in other mass merchandisers, was up 20.2%, and against a category growth of 28.1. We continued to introduce our Tea House Lattes and our Chise (ph) and for our seven week -- for our 7/10 we posted a 3.2% share. We continue to support our Cool Brew ice tea and, you know, will continue to support that and build upon that for next year. We've introduced a lot of new flavors. Rubossem (ph) teas, White teas, Chi teas and Black teas and actually a lot of our growth has come from our whole new tea category.

In April we introduced for the first time refrigerated Zinger aids in a unique blend of herb tea juices and it was basically introduced in the northeast and a lot of good response and we'll look to roll this out, into more areas, but feel good about that. And also, you know, as we look at some new entries with the Celestial categories. So a lot of good things happening out in Boulder. From a sales standpoint, from new products, from margin enhancement, and, you know, taking tea into other areas and it's been a great year for new products for those guys out there. In regards to some of our other things, we're about to launch our new exciting partnership with Sesame Street and we've created about 10 new products. And these are, you know, tod's products, kid's products. We've shown them to a lot of the mass merchandisers, a lot of the grocers out there, and, you know, everybody's pretty excited. Where we've presented it so far, everybody has accepted it. It's co-branded, Earth's Best Sesame Street. And we'll start shipping in the month of September and we're pretty excited about some of the things happening on that.

As you heard me say, Health Valley, is back in stock, John will tell you about some of the other products that we're -- what's going on there and some of the other products that we're doing and some of the new exciting things. Health Valley cereals, we're back growing again in grocery, after double-digit decline in some of the new products that we've come out with there, which Slender Heart-wise, which I happen to have for breakfast every morning. On our non-dairy, our last quarter we had some challenges in our non-dairy. I'm proud to tell you our Westsoy business in the quarter was up 17%, our Rice Dream business continues to be strong. And, you know, we have some work to do on Soy Dream, a septic, but that is the smallest part of our business and we'll continue to move and push hard on our Rice Dream refrigerated business. So good to see our aseptic soy business back growing. A lot of new distribution, the guys have got, and a lot of good exciting things are coming from that business. Our Canadian business was up 8% for the quarter. And our meat alternative business, we've made some major changes on packaging, adding dairy to some of our products to enhance the taste as we found out that vegetarians were not the main consumers of our product, it was people that looked to reduce our -- looking to reduce their meat intake. So new product just rolled out, we've changed some sizes there, and I think what -- it's too early to see what -- what acceptance would be, but, we're out there pushing all the new products coming out of Yves.

We also saw in Canada I'll just introduce Resolutions, which is our Carb Fit line and we also were introducing some of the other new Hain products and some of the other new Rice Dream. Rice Dream, our Earth's Best products, are doing real well in Canada. A matter of fact our Hain business in Canada for the quarter was up 32%, our Imagine business, which is our Rice Dream business, was up 28% in Canada for the quarter. So a lot of good growth coming out of our Canadian market. Those of you that live in New York City or work in New York City or -- are probably not near New York City this week, but on September 14, we'll begin a 50-store test in Manhattan with McDonald's and it's a -- McVeggie Burger that's being manufactured exclusively for McDonald's by Yves and we're pretty excited about this and we look to continue to roll this out into the whole of New York and tristate area but there will be 50 stores that will have this product. We continue to roll out Yves products, you know, with Cisco and other food service, so we see some good things happening with Yves in regards to McDonald's and Food service. We also see a lot of happening in other Food Service, whether it's United Airlines, Sadexo, Marriott, some things with 7-11 with Yves, we continue to roll some things out in regards to our Food Service business, which is a whole new area, a whole new business for us.

Europe for the quarter was up 23.4%, we really have seen a lot of good things coming out of Europe. And one of the things that's happening, Jim Lemski, who's been with us since the acquisition of Westbrae is moving to Europe. Is head of sales, marketing, and operations for Europe, which will help European operation, which will help Phillippe quite a bit. And we'll actually be able to integrate a lot of the things together. Jim will bring a lot of knowledge of our US business, so we feel pretty good about that. We're seeing some good growth coming from Lima, Biomarche. We acquired at the end of the last quarter Natamy which is our soy milk business, I spent some time there and we really have -- when I say a national European soy strategy in place, because we have Rice Dream. We have Natamy, we have milk-free and we have Lima and we are really pulling together a major national soy strategy in Europe, both on the septic and fresh so I'm pretty excited about that. We also are rolling Terra Chips out in Europe and with some new authorizations and some new things happening there and Jim will, with Phillippe will take care of that. In the first week of June, we closed on the Jason's acquisition and the Ethnic Gourmet and Rosetto, I'll let John tell you what he's doing with Ethnic Gourmet and Rosetto as -- his frozen business, John gets very passionate about frozen, but, let me tell you about what's going on with Jason 's. What a great acquisition for us. I spent a couple days there in July, spent some time, you know, during focus groups, really understanding the brand, boy do we have potential with this brand. And we are seeing some great growth already from Jasons and we made a lot of management changes out there.

With the founder, Jeffrey Light, Andy Jacobson has moved out to Jasons to be the general manager of that business. We brought in a new head of marketing a new financial person and two other -- two new salespeople so we've invested already in management in there and we're seeing results already in the first quarter. And we should see a lot of -- you know, good growth and some good contribution from this business coming in the back half of the year. So we feel pretty good about what's happening on our Jason's side of the business and feel it was a -- just a great acquisition for us. Our fiscal '04 is behind us and, you know, we've accomplished a lot. We rolled out our Carb Fit. We had almost 100 new other products. And, you know, we'd like to be first out of there, whether it's transfat, whether it's low-carb, and whether it's vegetarian, whether it's gluc-free. And I think we've done a great job of being one of the first out there with a lot of those new products, new flavors, new packaging.

We've integrated Imagine and Walnut Acres and I think on the last conference call you heard me talk about the costs that we've taken out of Imagine and also we've done a tremendous SKU rationalization on Imagine. If you look at Imagine this year over last year, you know, sales are down but we've cut a lot of SKUs in that brand and the same with Walnut Acres. We've negotiated a new bank line which gave us a new $300 million facility which you've heard us talk about. We secured the license for Sesame Street for food. We've instituted a lot of new procedures here for Sarbanes and with that, corporate governance has been a key focus for us. We've upgraded personnel, which I'll talk about in a few minutes, in the last month of the quarter we acquired Jasons and our frozen business. We've reduced costs, we've increased volumes at our Terra Chip facility. We've done a tremendous job on spending on brand development. We've enhanced tremendously our European growth, our European profitability. You know, three years ago we had no business in Europe. Today Europe is a -- almost an $80 million business for us, which we started from scratch. And, you know, last but not least, we had a California strike and we had a soup issue this year which, you know, was somewheres -- you know, between 15 and $20 million of sales that, you know, we had to overcome and, you know, it's behind us.

So -- and from a financial standpoint, our cash at the end of the year is $27 million versus 11, you know, our cash is up almost 150%, but our net debt is $83 million for the year, and that is acquiring two businesses. So it shows you, you know, we're turning our cash. And last year we had $57.3 million of debt, but again we acquired two businesses. Actually, three businesses, two in the U.S. and one in Europe. Our CapEx this year was 11.2 million versus 9.8. And we spent this year -- and which is important to recognize and realize, the reason we're getting 17% growth numbers is we're spending on our businesses, we're investing in our businesses, telling consumers and investing with the trade as our partners. We spent over $12.5 million more this year versus last year on both consumer and trade. And, you know, it would be wrong for me not to mention how much more we've spent on health costs, our health costs are up $1 million more this year versus last year. So that's some of the things that happened in '04. In '05, what do we have to look forward to? What's so exciting and why do I feel good about going into '05 and with our numbers, with our accomplishments, and even still some of the challenges out there.

Well, I feel that we've had -- we have today the best management team, both top and bottom, that we've ever had in this company. And, you know, the way we have it structured with John Carroll running our grocery business, which includes our non-dairy, our grocery, and our frozen business, and John having his total responsibility for that, John has just recently brought in Jim Green to run the sales organization. Jim was at Celestial prior to that, and Jim moved into the position as head of sales at Celestial. Let me tell you something. Jim has never missed a number when he ran sales with Celestial, so Jim with Cydney Horne and Maureen Putman, what an excellent sales and marketing team and brand management team in running that business. John will also tell you about some of the things he's doing in frozen and some of the management team that he's bringing in there. John was also going to work with Fran Daily to help us on some of the operations side of the business and, I just see a tremendous team there. Steve List and the Boulder group has done a great job in building, growing, streamlining cost in Boulder and we should expect that next year.

Even still with Tozal coming out with their new tea line and rolling it out and being a much more expensive product than we are, these guys are ready for and I think this year they've done a great job with Twinings, Bigelow, Tozal coming after them and being prepared. Adam Levit and his group, you know, along with Benji have done a great job in regards to snacks, growing that -- growing those numbers and getting the costs out of the business and we feel pretty good about what will go on with snacks. Dave Latella, who's running our Canadian business, who joined us in October, has enhanced his team with the new head of sales and new head of marketing and we're looking for growth out of Canada next year and increased profitability. And Phillippe Woitrin running our European business, which basically -- our European business this year was one of our biggest growth businesses and we look to grow Europe and with Jim over there working with Phillippe we see a tremendous growth coming out of the European business. We're going in with three great acquisitions, with great growth potential. We really have a great detailed road map of margin enhancement, and, again, we are focused on margins this year and focused on cost control. We're looking to decrease our working capital as a percent of sales, and that's something we're really focused on. We're looking at growing our distribution in a lot of new classes of trade. And especially with John and his group, but all across the company, we're looking at better control of our -- of our trade dollars and meaning that we need to get performance for our trade dollars, trade dollars are just not off invoice for buying products from us, and that's something that we've put into place, a better trade-management group, better systems, to really track this.

We are upgrading our co-packers, and you heard me say about going to turn-key. We do not want to get ourself in a situation that we got ourself into last year with soups and Wellness and (INAUDIBLE) and we are all over our co-packer relationships, our contracts, and the co-packers that we will do business with. We feel good with the Sesame Street license and the partnership there. This year, we're looking -- you know, in the second half of the year to do accretive acquisitions, and right now we feel we've got enough on our hands and we will not look at any acquisitions until after January as we look to digest what we have. We're looking at our free cash flow next year of 40 to $45 million, which allows us to pay down debt, buy stock, do acquisitions and with our debt level, we have a lot to do -- a lot of, you know, opportunities with our cash. We step back, we're evaluating our businesses. We're looking at major SKU rationalizations. We're looking at major brand rationalizations. And you've never heard me say this before, but where it makes sense, we'll -- we will divest brands or businesses that either don't fit any longer into our strategy or will not be able to live up to our margins and our expectations, and that's something that we're looking at and evaluating right now. In the first and second quarter, as we look at our overhead, we look at our headcount, we're looking to eliminate 1 million to $1.5 million of cost, which will cost us three to five -- 300 to $500 thousand in severances, which will run right through our P & L. So we're looking at costs from every which way here. What I'd like to do is turn the call over to John Carroll and John will take you through some of the things that he's doing and some of the new initiatives that he has enacted upon in his business. Thank you.

Good afternoon. I'd like to review with you the key FY '05 Hain grocery and frozen strategic priorities. Just by way of description, Hain grocery and frozen is the largest unit in the company with approximately $340 million in sales. We compete with some scale in seven core categories. Soup, non-dairy beverages, baby food, cereal, cookies and bars, ingredients, and frozen. I'll lead off by first discussing Hain grocery. Where the issue is not top line growth, but rather it's execution, i.e., our third-quarter soup, supply, and customer service issues and most importantly, margins, where our margins in grocery run 10 points below the Hain Celestial corporate average. We've made progress in fixing our soup supply and customer-service issues. It was a key executional focus in the last quarter, and we're seeing improved results. We've got two co-packers on board consistently producing high-quality soup. As we walk into soup season, we've got a million cases of inventory, or double what we had a year ago. In addition, across the board, not only for soup but across all of our brands, we're shipping at a 97% order-fill rate for the last three months. And quite frankly, we don't want to go any higher than that because I don't want to have the higher costs of carrying the inventory.

And then the last thing is, the soup supply issue has taught us that we need to make sure that we have secure sources of supply in key categories, and it's driven us to make sure that in core categories we not only have one good supplier, that quite frankly we have two. And where we would look previously to consolidate suppliers, we have decided to stay with two. Moving into FY '05, our Hain grocery strategic priorities are focused on fixing our business model, reducing complexity, and driving improved performance. Key strategies are: First, drive out costs and rebuild margins; second, drive profitable growth in core categories and, third measure and reward improved performance and execution. So it's real focused, three key strategies. Again, drive out costs and rebuild margins. Drive profitable growth in core categories and measure and reward improved performance and execution. We've begun making progress in each of these areas and I'll start first with the priority of driving out costs and rebuilding margins. Key initiatives in this area have been the following: First, we took a 4% grocery price increase. We announced it July -- April 16, and it was effective July 1 and it has been received with very little pushback. So we have passed through a 4% price increase.

In addition, as Irwin alluded to previously, we have begun contracting renegotiation with our top-six co-packers and with the focus of turning them to a turn-key operation as opposed to how we currently work with them, to drive costs out of the -- out of the program. The third thing is, this is something we talked about in the previous quarter, we have initiated a project to optimize our distribution and warehousing network with a group called NFI and in addition we're also looking at reverse auctioning our key distribution lanes to drive additional costs out of that. The fourth thing we're doing in this area is we've really put the clamps on our FY '05 spending, specifically in the areas of trade, marketing, and G & A. The key here is getting more bang for our buck. And the trade is a real key piece of that. We need to get more bang for our buck in trade via better trade funds management, processes and systems, reduced or eliminate spending on non-core categories; and increased focus on performance tracking. The last thing that we're -- we're undertaking in the area of margins and reducing costs is as Irwin talked about a SKU/brand/category reduction. Now, we're looking to knock out a minimum of 20% of the SKUs we currently have. And ultimately, what we're looking to do is to target to have five to seven umbrella grocery brands that encompass the entire business. If we do what we're trying to do on SKU and brand reduction, that will not only improve margin, but it will also reduce working capital because we will not have to carry nearly as much inventory as we do now.

Our second strategic priority is to drive profitable growth in our core categories. Hain grocery currently competes in over 20 categories. But there's six grocery categories, the ones that I mentioned earlier, soup, non-dairy beverage, cereal, cookies and bars, baby food, and ingredients that account for over 70% of the sales and even more of the profit. So our key initiatives for this area are first to refocus our spending and our innovation against profitable growth in the six core categories. So, for example, what you'll see in soup this year is our strongest consumer and trade promotion program and new product introductions in years to recapture the lost share from last year's supply issues. In baby food, another core category, as Irwin said, we're going to launch 10 SKUs behind our Sesame Street introduction and we're going to continue to aggressively support Earth's Best, which was up 24% last year. In the area of non-dairy beverages, we're going to have renewed spending and innovation focus on rice milk. If you look at our rice milk product, it's a proprietary product where we have a lion's share of the category, so let's keep pushing that one, as well as an aggressive category management and promotion program against our aseptic soy to build share in that market. And then finally just to mention on cereal, you'll see continued expansion of our innovative functional cereals, including cereal -- Slender, Heart-wise, Empower, and our newest entry that we're going to introduce later this year, Immune-wise. Those have done a great job in turning around our health value cereal business and we're going to continue to push across that platform.

In addition to the initiatives of focusing against the core categories, we're also going to aggressively seek expanded distribution for our core categories in new geographies and channels. I just want to talk to you quickly about a couple of recent successes. In the area of new geographic distribution, we recently broke through with 100 new SKUs at Roundings a key chain in the mid-west. This is -- this is the kind of thing we need to do. Not just one season or two season in the chains we're already in, but break new ground in grocery where we're not there already. In addition to that there's new channel distribution. For example, we now have a 13-SKU set of soy and rice milk in Wal-Mart Super Centers. We have a Costco test of our Slender cereal, and we have expanded distribution of our products in Trader Joes. So it's -- the key piece is driving profitable growth against our core categories and by driving expanded distribution in new geographies and channels. The third strategic priority is measuring and rewarding improved execution of performance. And as Irwin alluded to before, the first thing we've done here to drive change is to upgrade our management talent. We have -- we switched out four out of our five key V.P.s in this company, Irwin talked about Jim Breen joining us from Celestial to drive our sales function. We've brought in Fran Daily to help us drive operations, to drive improved performance. We've brought in some additional support to help Jay Lieberman and the team and finance by bringing in a woman named Rose Zing from Estee Lauder. We have consolidated our marketing group down to one head and that is Maureen Putman and then lastly, we also added Matt Cooper to come in drive our frozen business.

So as we've upgraded our management set here, we've also now said, look, let's go on to our next level of management , the directors and below, and let's make sure we optimize that and right size our organization. We're also improving -- implementing improved practices and processes to drive improved results and most importantly we're developing a pay for performance culture here that rewards good performance and identifies and manages out weak performers to continually upgrade our talent. So those are the key initiatives that we're undertaking against the grocery business. Turning very briefly to our frozen business, we feel that we have created a terrific growth platform in frozen for Hain. Just by way of background, we purchased the Rosetto frozen pasta and Ethnic Gourmet frozen meal brand from Heinz at the end of May. The rationale for this purchase was that frozen is a high-growth area of the national organic market. And our model in doing this was our Earth's Best purchase, which we purchased from Heinz about 3.5 years ago. It was a neglected brand for Heinz, but by leveraging the strengths of Hain, we were able to make that a 24% growth brand in the last year. We brought in Matt Cooper, as I mentioned before, to be the frozen GM, we've also a dedicated -- we have a dedicated sales force and financial group to support it. Our objective in frozen is to do the same thing that we did with Earth's Best, to reinvigorate it with increased focus and innovation, excuse me, and to leverage Hain's strength in the natural organic market. And we're -- we're on our way in this business.

Our first two months of this business were right on plan and significantly better than year ago and we've got some significant innovation coming through on Rosetto with a launch of organic and low-carb products as well as a targeted expansion into the national channel. And with Ethnic Gourmet where we're also launching some new organic products as well as some new variety and piggy-backing on our grocery distribution and trying to push more grocery distribution for EGF. An added benefit of our frozen acquisition is that it's created a platform for all of our Hain frozen businesses. If you recall, we have also a frozen business in Imagine, Rice, and Soy Dream novelties as well as our Kineret kosher line. We now have a $50 million portfolio of frozen and the -- the benefit here is that our sales force is now dedicated against these other products because we have a dedicated sales force for frozen and importantly in the case of the novelty business, this is counter-seasonal to our meals and our pasta business. The last benefit of this is it will allow us to expand Hain into new categories. For example, with our brand names, for example, Health Valley Kids' meals is an area we're very interested in. So to close on frozen, we're very pleased with our frozen acquisition to date and it's on plan.

I'm just going to summarize here. That Hain grocery and frozen is focused on driving improved performance and Hain's Celestial shareholder value. Our new frozen acquisition is on plan, creates platform for all of our frozen businesses and we're doing what we said we would do to fix our grocery business and improved performance. We've got our service levels up on soup and we're ready for the soup season. We've got our three FY '05 strategic priorities against driving out costs to rebuilding margins, we've talked about the initiatives there. Driving profitable growth in the core categories, again we talked about where we're going to focus there and last but not least measuring and reporting improved -- rewarding improved execution and performance. And ultimately upgrading our management and fulfilling a pay per performance culture. So with that I'll now turn it over to Ira Lamel.

Thanks, John. Good afternoon, everybody. I just want to go over some of the financial numbers with you to review some of the things that Irwin discussed earlier. Our sales in the quarter this year reached 137,351,000, up 16.6% over the prior-year's fourth-quarter sales of $117,809,000. Net income in the quarter was 5,080,000, or 14 cents per share. We had 36,937,000 shares outstanding on a weighted average diluted basis. Against 7 -- excuse me, 6,761,000 in net income last year, or 19 cents per share on 35,151,000 shares. Gross profit in the fourth quarter this year was 27.3% as compared to 28.1% in the prior-year quarter. As we discussed in the third quarter this year, we've experienced increases in the costs of in ingredients, freight, and fuel charges, each of which continued into the fourth quarter this year. We also began to make trade investments ahead of the soup season in order to secure our positions with customers in response to the issues we faced during the previous soup season. These investments were treated as a reduction of sales and therefore they reduced gross profit. Also, the price increases we announced in May have -- excuse me, in April, have not gone into effect through June 30, and went into effect in our first quarter.

Also contributing to a slow in gross profit percentage is the impact of the lower proportion of overall sales contributed by Celestial Seasonings as we acquire additional business that operate at lower margins than Celestial. Celestial Seasonings came in at 2.1 percentage points lower as a percentage of our total consolidated sales in the fourth quarter this year, as compared to the fourth quarter last year. Our SG&A this year, was 29 million, or 21.1% of net sales compared with 22.7 million or 19.3% of net sales in the prior-year's quarter. As Irwin said, we spent more dollars on consumers in the fourth quarter this year by approximately 1.6 million. This spending was for such things as print and broadcast advertising, direct-mail programs, and other consumer-related marketing activities. Our G&A has increased, with the acquisitions of frozen and the body-care unit, with G&A, of those units coming ahead of the sales. Our G&A also increased with some of the management changes that we've made during the second half of the fiscal year. We have also begun our efforts to implement the required provisions of the Sarbanes-Oxley Act, and in the fourth quarter this year, these expenses were more than a $0.5 million as compared to zero spending on Sarbanes-Oxley in the fourth quarter of fiscal '03.

In all, our G&A spending increased by over 3.5 million in this year's quarter as compared to last year. Operating income for the quarter was 8.5 million, or 6.2% of sales, compared to last year's 11.3 million or 9.6% of sales. Operating income last year included a credit for the reversal of a restructuring charge that had been set up in 2002. And that was included in last year's operating income. In this year's fourth quarter, interest expense and other expenses totaled 417,000 against last year's 435,000. EBITDA this year was 10.6 million or 7.7% of fourth quarter revenue, compared to 12.9 million or 10.9% in last year's quarter. In looking at our release, you might see that the fourth-quarter effective income tax rate came in about 1 percentage point lower than in last year's fourth quarter. The impact on the fourth-quarter tax provision was only $80,000 as a result of this and did not change either the basic or the diluted earnings per share in the quarter or the full year. We had provided taxes through the nine months at just under 38% and our actual rate for the full year came in at, two-tenths of a per cent lower.

Looking forward on taxes, to fiscal '05, we do anticipate that there will be an in increase in our estimated effective tax rate as we expect income outside the United States to become a higher proportion of our consolidated income and the countries which we have entered doing business in have higher tax rates than the current effective rate that we incur. Further, the many states we have entered with the acquisitions we have made have higher rates than our current effective state rate and we anticipate changes in the allocation percentages between the various states and overall this will increase our tax rate by 1 to 2 percentage points into the '05 fiscal year. In reviewing the full fiscal year of '04, our revenues were up 16.6% to 544 million, increasing from last year's 466 million. Our gross profit percentage for the year was 29.5 versus 30.3% last year, a reduction of only eight-tenths of a point in the face of all the increased costs and challenges we face during the year. SG&A was 21% this year versus 24 -- excuse me, 20.5 last year. Operating income was 45.9 million versus 46.2 million. EBITDA for the year was 55.1 million versus 53.8 last year. Depreciation and amortization expense for the full fiscal year totaled 9.5 million this year versus 8.5 million last year and our capital expenditures during fiscal '04 aggregated 11.2 million versus 9.8 million last year. Our full-year earnings per share on a GAAP basis was 74 cents on 36.3 million shares this year versus full-year '03 earnings per share of 79 cents on 34.7 million shares. We continue to operate with a strong balance sheet. Our working capital at June 30, was $130 million and a current ratio of 2.9 to 1. Our receivables are turning at 47 days this year compared to 49 days at the same time last year. Inventories are at 75 days, which is higher than last year's 68 days.

And then looking at the June 30, 2004 balance sheet compared to the balance sheet of the same date last year, inventories are up over $17 million coming from acquisitions, the bringing on of Carb Fit and other new products inventories and increasing our soup inventories -- that John discussed earlier, soup inventories are $3.5 million in value higher than they were at June 30, last year. In addition, in our tea business at Celestial Seasonings, our inventory is $1.7 million higher than it was at the same time last year, and this was a planned increase by Celestial Seasonings for both new products and to build inventory while certain equipment was installed to replace equipment that had been used for older products, we're changing equipment to do new kinds of products at the Celestial facility. Our stockholders' equity at the end of the year was $497 million, our debt as a percentage of equity was 22.4%. That's as a result of all the borrowings we did for the three acquisitions we made during the year. And as Irwin stated in his remarks earlier, our cash balances, when deducted from debt, result in a net debt of 83.6 million versus 57.3 last year, an increase of only $26 million despite having borrowed $52 million during the year for acquisitions. As we stated in the release you received earlier today, we are looking forward to fiscal year '05 and are providing earnings guidance for the full year at 92 cents per share to $1.01 per share on anticipated revenues of 650 to $670 million. With that, I will turn it over to Irwin for closing remarks.

Well, for questions.

For questions. Okay.

We'd like now to open it up for any questions that are out there.

Thank you. The question-and-answer session will be conducted electronically. If you do wish to signal for a question, you may do so by pressing the star key followed by the digit one on your touch-tone phone. Once again, that is star, one on your touch-tone phone to signal for any questions. And if you are using a speakerphone today, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, star, one on your touch-tone phone for questions. And we'll pause for a moment to assemble our roster. Our first question today will come from Greg Badishkanian with Smith Barney.

Oh, great. Thank you. And good results, guys. I had a question about the organic sales growth. I mean, it seemed, very -- very strong. Is it -- is it 4 million or $6 million in acquisition growth? Do we include a -- by Natumi, frozen and Jasons, or, you know, what's included in that $4 million?

4 million is from the acquisitions, Greg. All our acquisitions.

Oh.

And the rest has come from, -- in the quarter, additional growth from additional soup business, additional snack business, and just, you know, new distribution. So, I know consensus was at 123, 128.

Uh-huh.

And we're about $10 million more, $9 million more, so about five of it is from additional sales.

Right. I mean, I'm calculating, like, a 13.5% internal generated revenue growth using that number, is that sort of --

It's not that high. It is double digits but it's a little less than that.

Okay. Yeah. How are -- you have the price increase went through July 1, I assume some people maybe did a little bit of forward buying in June. How were July and August sales trends?

Actually, number one, you know, the price increase did go through and there's nothing in the fourth quarter in regards to a price increase, I just want to make that clear.

Right.

You know, one of the things inventory today, I think everybody watches their inventory. I think some people might have bought forward on can goods and soups where there is a longer shelf life. But in regards to our baked goods, our snacks, you know, we really did not see a major buy-in. But we've seen a good strong, you know, solid July and August. And, you know, an interesting observation, just on Celestial, we had a price increase effective August 2, on Celestial and they had a very, very strong July and, you know, Celestial, yes, you could buy in for the price increase, but they had even a stronger August. So, you know, in showing you some of the consumption numbers that we've talked about before, you know, we feel good about the business and the trends. And, you know, next year, you know, I'm looking for, you know, 8 to 10, 8 to 11% organic growth coming from our business and that's what we look to see to continue.

Great. Yeah. It was really strong this quarter. And --

And then I think a big thing in the quarter, too, Greg, which we come back, is our Westsoy number being up 17%, you know, that's -- that's a big help. And our Earth's Best number being up, you know, 16%, you know, our Carb Fit new business in the quarter. So we -- you know, Terra, Garden of Eatin'. Health Valley was up strong, and again that comes back up 16% and that comes back from your soup. So -- and then, you know, Europe had some good, strong growth. So we got it from all over the place.

Great. And just a question for -- for John. I mean, you mentioned -- you have a 90 -- I believe a 97% in-stock rate right now in terms of your service levels. I'm just wondering, what was it, say, when you got here -- or maybe a year ago, if you could sort of talk to that, how it's improved?

Yeah. It was -- it was in the 91 to 92% range.

Uh-huh.

And previously, they've run in the 95 to 97% range.

Right.

I mean, that was John -- Greg, one of our biggest issues, you know, was out of stock and if you take, you know, 5, 7%, you know, we'll never be 100% but some of our SKUs -- that's what will force us to go through major SKU rationalization to get to 98, 99%. But, you know, I think in the first half of this year, we are running at 91, 92% out of stock rates and in our third -- in our fill rates in our third quarter we were probably running at a 18% fill rate on some of our soup business. So -- and that just drives your costs up because the deals that are out there that you are still paying for, that you have freight out there that you're paying for trucks. So John and his group have just done a tremendous job on their net of stocks.

Great. Thanks for answering my questions and, you know, good results. Take care.

Thank you, Greg.

And our next question will come from John McMillin, Prudential Equity Group.

Good afternoon, everybody.

Hey, John, how are you?

I'll admit to being one of those outside of New York City, Irwin. I guess this is a comment, I'm thrilled to hear the -- the SKU reductions and the -- and the start of divestitures, I mean, a lot of this Irwin, just to make a small joke here, if your billion dollar sales Gold and we fear a billion SKUs, so just kind of see a little more focus is appreciated. I'm just trying to get a little like Greg to that -- to that base sales number, I mean your guidance range was 1.27 to 1.30, that didn't have acquisitions in it, right? So this base number of 1.33 was slightly above your -- the targeted number you gave us three -- three months ago.

Exactly, John.

And the lower margins, I mean we've -- you look at margins in this quarter down to -- you know, operating margins in the sixes, you used to have operating margins, you know, well into the double digits. Where -- you know, as you kind of see the next couple years, where do you think you can get your operating margin to?

John, this is Ira.

Hi.

Sorry to hear you're not in New York with all the excitement in Manhattan. The operating margins, the first thing I would say is to go back and look at whether or not the operating margins from quite a number of years ago are in the double digits were as the result of reporting sales before EITF adjustments so that the top line was the higher number. And certainly if we were to make a comparison today, by adding back the kinds of adjustments that reduce sales under the accounting rules and then striking our operating margins, you know, we might have a different result to compare what it was, you know, year-over-year from four years ago or whenever. Where do we think operating margins are going to get? We think operating margins are ultimately going to get back up into double digits. We think it's going to take some time over a continuum as we go through, the SKU rat that we're talking about looking at, as we go through, taking a real fresh look with John Carroll in his role and -- and Fran Daily in his new role, bringing in a lot of discipline into the sales group with Jim Breen and his role. And just pulling a lot of efficiencies through. We think that there's a lot of room for improvement there. Please remember that some of the challenges we faced in the '04 fiscal year certainly had a direct impact on our margins when Irwin mentioned earlier that we went through the year with challenges such as the California strike and some of the soup issues that we faced, you know, we think that those are going to help us grow those margins back to where they should be and then ultimately beyond, you know, over a period of time. In addition, I made a comment during my remarks about the margins with Celestial Seasonings. I -- you know, it sounds like it's a small difference when I say Celestial dropped 2.1 percentage points out of our consolidated sales. Certainly Celestial is growing and there's no denying that Celestial is growing at its pace and it's providing very good profitability. But as a percentage of the total, as we continue to add to the sales base and other parts of our company, as we continue to make acquisitions, Celestial as a contributor just becomes a smaller piece of the pie and the margins are diluted because of that.

And John, I think what's important. I mean, the 17% growth numbers and yes some of that is acquisition, but double digits, you have to visit a lot of food companies out there. I think the difference that Hain has to establish ahead of every other food company, everybody's on the health band wagon today, whether it's Nabisco, whether it's Kraft, whether it's Frito, the difference that we have to be out there with is we need to be organic, natural and go after so-called niches whether it's glutin free and soy. Our costs are higher. As I always say, we answer to the highest, highest authority, in vegetarians. You know, we're one of the ones out there pioneering in regards to natural organics, so we are definitely spending a lot more. And the thing is, as we get to a certain level of sales, you know, our co-packers, unfortunately, you know, for us to do certain runs, it costs us a lot more, but as volume gets there, our costs are gonna come down substantially. Now, what we're gonna see, just on our non-dairy business, with the combination of soy purchases for both Westsoy and Soy Dream and purchases for Rice and going to, you know, somewhere's between 4 to 8 million cases, our costs are going to come down substantially and could be $1 to $2 a case. So, you know, the direction of us has been, number one, if we grow top line, we'll be able to drive it to the bottom line. And, you know, we're not one of those companies where we know we're going to sell a million cases every year, year-in and year-out. Our big emphasis now is natural organic is catching on more and more mainstream and as a company, driving costs out of this business, whether it's personnel, whether it's spending, whether it's ingredients, we're going to do it. And, you know, this year we spent $12.5 million more. On trade and consumer than we did last year and that's why we got the growth. So, -- and now we've brought in the personnel that has done this before at major packaged goods companies to help us drive some of these costs out of this business. So where -- what's my objective, John, over the next two years? I'd like to see us at a 16 to 18% EBITDA levels and net income of somewhere's around 9, 10% over the next two years.

And just my last question. I know you don't give official quarterly guidance, and I know your business, you know, is slightly skewed, you know, to the winter when soups and tea consumptions, even though the weather this summer's been almost like the winter in parts. But can you just give us, you know, some kind of -- you know, idea in terms of how you expect this 92 to $1.02 to SKU, I mean obviously more of it will be in the December quarter, but, you know, is -- is that September quarter likely to be, a low -- a low point in the four quarters?

Well, I think, John, if we step back, our big quarters are our Q2 and Q3. But some of that's gonna change, in regards to -- you know, now with our Jason business and Sun Care business and that in the fourth quarter and that's some of the things as we look to, you know, change our business, we -- we look to -- you know, even out the quarters and be well-diversified. So in regards to it, you know, I think John what we want to do is be able to -- you know, you've used the word, to me be conservative. What I can sit and say to you today, Q2 and Q3 will be our big quarters. And, you know, Q1 and Q4 hopefully we can, you know, basically get some good growth in those quarters, too.

Great. Okay. Well, thanks a lot.

All right. Thank you, John.

And our next question will come from Andrew Wolf, BB&T Capital Markets.

Hi, good afternoon.

Hi, Andy.

Wasn't there a little -- on the -- on the base sales issue here, wasn't there a little bit of Walnut Acres and Grains Noirs that was still additive, I guess, to the sales here.

We had Walnut Acres for a piece of the fourth quarter in fiscal '03. Grains Noirs was full fourth quarter, just about full fourth quarter but that was early May in fiscal 3. Grains Noirs is very, very small the impact is--

Grains Noirs we acquired at June--

Walnut Acres is --

Grains Noirs was actually -- Grains Noirs was May 15t, Andy, and it was a $2 million business. And we closed on --

That was 2 million annually, not for the year, quarter.

I'm sorry, I'm not nit picking, I just wanted -- could you tell me what the additive part of the -- your sales were great. Just what was the additive part of the Walnut Acres so we can tighten up the model?

Probably not even a million dollars, John -- or Andy.

Okay. Great. Thanks. Could you quantify for this quarter -- tell me anything. For this quarter what the -- you know, last quarter, you know, you said you had about 12 cents or 7 million pre-tax and a lot of costs from ingredients to fuel to soup to, the strike to launching Carb Fit. Is there -- you know, can you give us sort of an analogous number for this quarter?

Well, when you say an analogous number, Andy, I think you are talking about --

Partially analogous.

Let me talk to it a little bit. You know, we faced very specific soup issues in Q3. Those issues gave us some, issues in -- in April and May as we were building up our fill rates, we got very close to 100% fill rates in June, and we did some spending against it, but we're not going to specifically quantify it because we didn't have the same kinds of issues that we had in Q3 where it hurt us deeply. I would tell you that our freight rates, which was one of the other issues that we faced in Q3, are principally running at the same rates in Q4, nothing is changed on that, the issues in terms of higher fuel costs have not lessened. The issues in terms of how we deliver products to our customers have principally flattened to the changes that were made in Q3. And I think it's fair to say that the impact on Q4 was principally the same as it was in Q3. These are the kinds of things that we looked at in bringing down our guidance for Q4. In addition, as I mentioned, items such as Sarbanes-Oxley costs were anticipated by us, and they just got factored into that guidance.

Okay. It looks like, though, I mean, just to use a very round number, looks like about 10 million of, you know, charges -- of costs that either won't be repeated or will be covered by your price increase this year. So if you add that back to what -- you know, your 46 million in EBIT, you know, you get to over a 10% margin, sort of adjusted, and your guidance for this year, frankly is a lot lower than that. You know, it's about 9% margin. So just trying to reconcile that.

You know, I think Andy, what we, you know, basically are coming back and are saying, you know, we will continue to invest, continue to take out costs. And, you know, if there's additional opportunities there and additional income, you know, there is -- either we invest it back in the businesses, we grow it, and, -- or, you know, I think Hain has -- you know, we want to make sure that we could hit numbers and achieve numbers and, I think these are numbers that, you know, we put out there.

And -- I appreciate, you know, it's fine to be conservative. But, you know, when do you plan to get -- or when would -- you know, do you have a three-year plan to get to a 16 to a 18% EBITDA margin, given that your '05 EBITDA margin sort of backs into about 11%?

Andy, we have a five-year strategic plan and as we, you know, build upon our five-year strategic plan, you know, we plan over the next -- as I said before to John over the next two to three years, to get to that. And, -- but in the meantime, we need to continuously invest in our people. I mean, you know, $1 million in healthcare costs just, you know, happens. And, you know, 2 to $3 million in Sarbanes costs happen. As we continue to, you know, upgrade our -- whether it's the sales organization, you know, something we put in place this year was a whole trade development group, you know, of seven people to track our trade dollars and to make sure they're spent more effectively. So I mean there's a lot of costs that just keep creeping into our business and, you know, it's a smaller company. As a $700 million company we keep absorbing them.

And two housekeeping items. The 417,000 of interest expense and other, is that just interest expense?

Yes.

And lastly, does the guidance -- assuming the guidance includes the 300 to 500 thousand that you're going to incur in severance?

Yes.

Okay. Thanks. Congratulations on the quarter.

Thank you.

And our next question will come from Carole Buyers.

Carolyn. A couple questions. I was wondering, when we look at '05, what -- first what are your expectations from Ethnic Gourmet, Rosetto and Jason, has anything change from kind of those initial numbers that we discussed?

Not at all, Carol. I think, you know, what I can say is we like what we see. And it's only, you know, two months of really -- two to three months really of operating them.

Uh-huh.

And we see some great growth potential, both in -- you know, all three businesses. And actually we see some great growth potential from, you know, our Natamy business over in Germany, but we're too early yet to really come out and comment on, you know, the real, real growth factors there. But we -- it's very promising, that's all I'll say.

And then just a couple more clarifications on the numbers. When you were talking about Celestial earlier you said that shipments were up 4% but you spent more on trade so it would look flat are those the difference between a preEITF number and a -- and a net number, or was it up 4%?

It's 4% on case sales.

Okay.

And EITF, you know, when you look at -- what I said, you look at dollar sales, it would look flat because we spent a lot more on EITF--

Got you.

EITF.

Okay. And then, -- and then on non-dairy, you had a strong growth number there, you mentioned 17% shipments.

Yeah.

First, what drove that growth this quarter specifically? And then did you give the consumption numbers as well for that category in national and grocery?

Well, a big one was a major mass merchandiser.

Uh-huh.

And consumption to grocery was up. And if you can, I don't have them right here, I'll get back to you on the consumption numbers.

Okay.

Consumption numbers -- if you come back and look at grocery.

Uh-huh.

Consumption numbers on soy were not, but again consumption numbers do not include Trader Joe's, do not include Wal-Mart.

Uh-huh.

You know, in those businesses.

So in non-dairy, did you -- did you increase your distribution greatly in those two retailers?

We increased our distribution greatly in a lot of retailers and I think our -- is our strategy is to go after, you know, to go after, share and someone just handed to me in aseptic -- our Westsoy continues to gain share in grocery. We were up 3.7%.

Uh-huh.

In share. So that's what shows you where we've driven a lot of growth for the 39.7 share and that has been driven a lot by these new products that we came out with, Soy Slender and on Sweeten SKUs and our Soy Slender line has grown I think what is it, 214% with already a share of seven. So, -- and our Sweeten and Natural has been very strong.

Got you. And then how many -- how many SKUs do you have overall and what's the goal as far as your SKU reduction strategy for the next 12 months?

How many --

Totals? What's your total SKU count today?

In the whole company?

Yep.

Somewhere's around 2,000.

Okay.

And, you know, I know Maureen Putman and John have mentioned to me, you know, we have two to three hundred that we would -- you know, are looking at right now to, rationalize. We're looking at certain brands, do we focus on (INAUDIBLE BACKGROUND NOISE) you know, another brand. So, you know, we're looking at multiple pieces there.

Okay. Great. Thanks a lot.

Thank you.

Now we'll take our next question from Mark Chekanow with Sidoti.

Good afternoon. Could you talk a little bit about some of your key ingredients and where those prices have been headed recently and kind of what assumptions are going into your forecast for next year?

You know, some of our key ingredients like soy, Mark, I mean right now until the crop comes out of the ground, I mean, you know, we're -- look at it still going higher, you know, we still look at Vanilla and some (INAUDIBLE) going higher. You know, one of the products, you know, -- in Terra Chips that come from the Dominican, Yucca, because of all the rain and that. So, you know, corrugate, glass, you know, (INAUDIBLE) is higher. So I mean we have forecast, -- you know, we all sit here and -- and read the same weather forecasts and the commodity reports that you do and just hopefully it's gonna be a good crop season to benefit us. So, -- and we're out there, you know, bidding, we're out there looking for, you know, a lot of cost reductions and I think our guys have done a great job on that. I mean, the big -- I'd have to say the biggest unknown today is fuel -- fuel is a wild card because fuel affects so many pieces. And, you know, everybody -- you know, Hain is not the smartest company out there that grabs a price increase. Everybody out there right now is trying to grab price increases on every which way. The good news is, you know, back in April or early May, I think we were out there, one of the first ones with it, jumped upon it, took us 60 days, and got it through with every one of our accounts because our costs didn't go up. But hopefully we could get some -- you know, decreases and hopefully, you know, we can maintain costs or drive costs out of other areas to offset them.

So fair to say you wouldn't -- you wouldn't need to see a lot of relief on these raw materials radius ingredients to hit your numbers there, it at least assumes a somewhat inflationary environment still?

Right. Unless something totally whacky happens out there in the world, Mark, we feel that we have covered on commodities prices.

Okay. You mentioned -- I think it was 40 million in free cash? I just want to be -- was that 40 million free cash after CapEx you're expecting in '05.

That's correct.

I said 40 to 45, Mark, yeah..

Free cash, 40 to 45, okay. And, one last thing. Is there -- is there anything you're seeing yet with integration issues? You're into two new categories in frozen and in body care. Anything on the horizon that is -- you know, is kind of the top priority that might be of concern to you that you're addressing now and either you're kind of getting into these expanded areas?

I'm going to let John talk about frozen but I'll talk about our Jasons Whole Body. You know, we are leaving that-- And we are -- we are letting that -- hello?

Yes.

We are letting that run as a totally separate business, so we're not integrating that within Hain. We'll share some resources, whether it's -- you know, a trade -- marketing and some other opportunities, but we will not integrate that at all. In regards to frozen, we've integrated the Melville business and I'll let John talk to you about our frozen integration.

Sure. In regard to frozen, frankly we have kept the sales, marketing and financial support separate. We've integrated all of the back-room functions to really get some synergies here without losing focus on driving the business. The -- the additional piece that we've found on frozen, which was something we hadn't built into our thinking up front was that it really is a nice platform to capture the other Hain frozen brands as the -- as I said, they're counter-seasonal to what the rest of our frozen business is and gives us increased focused against those businesses. So the net is the frozen integration is going well, as planned. And we found an added benefit in our Hain businesses that we could drive against.

Okay. And just a last question. Your assumptions for -- for fiscal '05, you care to give us any kind of color on what the (INAUDIBLE) gross margin would be in that assumption?

With the what?

The lift in gross margin, did you say, Mark?

The gross -- the gross margin I guess and then how it trends -- we can see how it trends into operating margin but I guess what kind of gross margin assumption round abouts are you using in your -- in your fiscal '05 guidance.

Only a few tenths of a point.

Okay. Thank you.

Thank you, Mark.

And we'll take our next question from Terry Bivens with Bear Stearns.

Hi, good afternoon, everyone.

Hi, Terry.

If you -- I guess, Irwin, if you look at the sales guidance for next year and kind of take the midpoint, we're looking at somewhere around 21% sales growth. How would you break that down? I mean, I guess there's some acquisition in there, you got, what, three or four points of price. But as you look at your core businesses, how do you expect them to grow? What's that component?

Well, organic growth, Terry, is somewhere around 8 to 11%. You probably have in there, you know, maybe 2 to 3 on price as you average that across all our businesses, and then you probably have the remaining on acquisitions.

Acquisitions that are already in the books, or ones that you think you will make?

Acquisition that is are already on the books. We do not count anything that could be potential or only what we have, we own today.

Okay. And do you think -- you know, you mentioned this year you got nice sales growth there of 17% but it did entail $12 million more and I guess if I understood you correctly, trade and consumer support.

Uh-huh.

Does that level need to go up to drive the kind of sales you're talking about here?

I hope not. And, you know, one of the things that was in that number this year was a big investment in Carb Fit. You know, was a big investment into a lot of the new -- you know, Terra introduction. You heard me say before, we introduced 100 new products, you know, on the grocery side. So a lot of the investment has already been made. So I would hope that we don't have to spend another $12.5 million to get the same type of lift.

So you think you're pretty much at a steady state now, as it were?

We're at a steady state. The other thing that we're looking at this year, we're ratcheting back our new product introduction. We think over the last couple years, we've introduced a lot, our big new thing this year is distribution gains and, you know, part of our -- and the stock problem has caused us to lose share, has caused us to lose some distribution voids, but, you know, we're going to be heavily focused on, you know, growing our non-dairy business into all classes of trade. We're going to be heavily focused, you know, with our Terra Chip business and if you look back -- you know, going back to your question. In this quarter, just in high double-digit growth, Westsoy was up 17%, Earth's Best was up 16%, Health Valley was up 16%, Terra was up 17%. There's something -- you know, imagine soups, there's some of the areas that we just look at high-growth potential businesses, you know, Arrowhead Mills, 5 to 7%, so that's where you're going to see us put our dollars towards, is four or five key categories and, you know, some of the other business it's going to be just a milk strategy for us and I don't mean, you know, get milk from them, we will milk them and use the money from them to spend towards the growth of the key products that I just talked about.

Okay. And the sales target, then, I guess presumably takes in some kind of subtraction on the top line for your SKU rationalization, right? Is that factored in as well?

It really is not factored in because, you know, I guess Terry there's always products come in, products come out, you know, it's a SKU rationalization right now that we want effective today, there's an 8 to $10 million.

Yeah.

But we do not factor that in. That's why, you know, we have the range out there that we have. So we to not factor in SKU rationalization.

Okay. Well, I guess my concern, I mean as you look to your biggest category, certainly tea, you know, you've got Tozal in there pushing now and, you know, if Dean Foods holds to form, eventually they're going to come after you in the shelf-stable area of soy. But I guess, you know, you're feeling pretty good that the level of marketing you have now is enough to kind of withstand that?

Well, I think the thing is, the level of marketing, you know, you heard a question before, why aren't you -- you know, putting everything out out on the table that you're marketing? And I think, you know, one of the things as you sit here and you look at your business today, you know, we are looking at cost reduction that if we have to spend more we will, we will not give up share, we will not give up -- we will not give up space. And, you know, we're -- we always factor in the competition is -- is going to come after us some way, somehow. So hopefully we've built enough into the budgets. If we don't, you know, we're going to have to find, you know, additional monies to spend somewhere else.

Okay.

But, you know, competition, you know, is definitely -- is definitely out there, but we think, you know, is Dean Foods going to concentrate on self-refrigerated versus eight continent in that category versus the aseptic category that's not growing and hopefully we'll be able to take share from, you know, three or four of the other people out there and also looking at a lot of other channels that nobody's doing anything with today.

Uh-huh. Okay. Well, thank you very much.

And due to time constraints we have time for one further question and that will come from Eric Larson with Piper Jaffray.

Hi, everyone.

Hi, Eric.

Terry kind of got a little bit to the -- to the sales and the growth margin rationalization for the year, so the one question that I have is -- and maybe this is all kind of thrown out with John Carroll coming on board, but can you put all your cost savings and skew-reduction initiatives in context of the 10/10/10 program or is that really kind of out until you kind of relook through the whole process again?

Well, no. And a good question, Eric. It's 30 and 3 and, -- when I sit here and tell you today, 30 and 3 is still a major initiative within Hain. It may not be 30 and 3 it may be 30 and 4 or may be 40 and 5. But, you know, 30 and 3 is what we started. And one of the things with 30 and 3, you know, we can quantify and there was quite a few million dollars in savings last year that offset some of the additional increases that we had to absorb. I mean, last year increases just come at us every which way, and you can see that by our margins. So 30 and 3, which we've branded last year, is still here. My only thing is it could be 40 and 4, 40 and 5, or 30 and 4, and 30 and 5.

Yeah. Okay. I guess I was thinking New York, you know, 10,10 wins. But, you know, that -- that makes sense. But in the rising costs room I would assume that the bulk of your Sarbanes costs are behind you, I think that it was 2 to 3 million you said. But given the health care costs issues probably won't abate. You probably have to aspire to a higher number than that, I would suspect.

Well, number one, Sarbanes is not behind us because you just start and continuing and, you know, a lot of things got delayed on 404 and, -- so we'll continue to spend, you know, that 2 to $3 million that we've thrown out there with, you know Sarbanes, and that does not include increase in Odysseys' and everything else out there today that we all have to protect ourselves against. In regards to healthcare costs, you know, we all live in a world today where anybody who works in the Company you know what your health care costs have gone up. So when you hire employees say at $100,000 a year it's no longer $100,000 a year. So that is something that is just part of doing business today that we have to absorb in here. And I think one thing that's very important is, you know, in regards to severances, in regards to reductions in force, we are taking those through the P&L and absorbing those through. And we've done some of those in fiscal '04 that we just ran through the P&L and, you know, we're not getting any benefit for and it was a good-sized number. So, the costs of doing business out there today, as everybody knows, has increased dramatically, and that's why we need to drive margins through -- you know, drive our costs through our business. Because we can get top-line growth, there is no problem with us getting top-line growth. There is major demand out there for our product and the charge to this -- to myself and this management team is driving costs out of the business.

All right. Thank you, everyone.

Thank you, Eric. I'd like to thank everybody that's still on the call. As you heard me say before, we have done a lot in '04, we are not -- you know, happy with the results, we would have looked for increases. Unfortunately, you know, the soup issue that affected us and increased costs were beyond our control. And at the end of the day, from an operating income, you know, Hain's still made $44 million last year, and, you know, put out a lot of new products, did a lot of good acquisitions for the future. And has built a good solid company for growth. You know, I hear everybody's comment out there about driving costs out of our business and, you know, what I've said to a few of you, in the bigger companies, when you have to drive your costs out or something comes up, you're able to cut back on trade spending or consumer spending, and be able to soften the blow of that. Unfortunately, even though we spent $12.5 million, you know, 3-$4 million in a quarter for us is still not a lot. And we have out there six to nine months of very hard for us to pull back on trade dollars and consumer dollars, so we feel the bump a lot harder than a bigger company has. What I can tell you is you have a hard-working management team here that is truly trying to and is doing a great job of managing this portfolio of brands. We feel very, very good from an innovation standpoint. There is great growth in the category. I really sit here and tell you this year, I keep hearing about trends, whether it was Carb Fit, fat-free, organic is what's here to stay, natural, you know, you hear about the new pyramid that's coming out and processed flour, processed sugar, and processed foods are just gonna be a no-no out there, and that's something that we live by. So with the new food pyramid and everything coming out, with the new labeling coming out there with transfats and no hydrogenated oil is the way that we live by. So we are really, really positioned for the future. You know, from the Jasons acquisition one of the things is toxins and health and beauty care and what goes into -- or put on our body is something that hurts us. So the awareness level is just tremendous and I think we're well positioned and we are one of the leaders that jumped out in front of that category. So we have great brands, we have a great management team. We have a great strategy in place. And the question asked before about our three to five-year forecast and strategic plans, we have some good strategic plans out there for three- to five-year. In regards to SKU rationalization and margin enhancement, financial performances, this's how we're all rewarded upon and that's how we want to see our shareholders rewarded as we put our performance out there and we see stock appreciation, that's something that 's very, very important for us. So I'd like to thank everybody for their support and listening to today's call. Thank you very much.

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