Hain Celestial Group Inc (HAIN) 2005 Q1 法說會逐字稿

Good morning and welcome to the Hain Celestial fiscal first quarter 2005 conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the meeting over to Mary Anthes, VP of IR.

Thank you, operator. Good morning. I'm Mary Anthes, VP IR of the Hain Celestial Group. I'm pleased to be with you this morning to introduce our first quarter 2005 conference call with earnings that were released earlier this morning.

We have several members of our senior management team here today to talk to you about our results. They include Irwin Simon, our President and CEO; Ira Lamel, our CFO; and John Carroll, President of Grocery and Frozen.

Our discussion today will include forward-looking statements. Our actual results may differ from those predicted and some of the factors which may cause results to differ are listed in our publicly filed documents, including our 2004 10-K. We are undertaking no obligations to update publicly any forward-looking statements, either as a result of new information, future events or otherwise.

This conference call is being webcast and an archive of the webcast will be available on our website at www.hain-celestial.com under investor relations. Our call will be limited to an hour this morning, so please limit your questions accordingly. Management will be available throughout the day to address additional questions.

Now let me turn the call over to Irwin Simon, our President and CEO.

Thank you, Mary. Good morning, everybody. I hope everybody is wide awake after spending all night and most of the morning watching election with no outcome.

With higher cost of business and, you know, all the head winds that are out there in some business today, I feel that we're off to a very good start to hit our objectives this year. I hope most of you have had the opportunity to review our press release that was put out this morning.

For our first quarter of fiscal '05, our sales were $137,604,000 versus $127,053,000, up 8.3 percent. Our gross margin in the quarter was 28.2 versus 29.2. SG&A 20.4 versus 20.3. Our EBITDA $13.6 million versus $13.8 and a pretax income of $10.1 versus $10.5.

Shares outstanding in the quarter, 36,855,000 versus 35,356,000, 1.5 million additional shares, which is about .7 of a penny effect on the quarter. Quarterly earnings, 17 cents per GAAP, 18 cents for a one-time charge in regards to compensation, which I talked about on our last call in regards to some terminations and some compensation.

As you're quite well aware, we do not give quarterly guidance, so feeling pretty good about what happened in the first quarter. Let me talk about the first quarter.

Sales from acquisition in the first quarter were approximately $10 million and, you know, most of our growth in this quarter definitely came from our acquisitions.

We've talked about certain strategies on the way we want to go to market where we've wanted to go to pricing our products at retail and where consumers would have the ability to buy our products off the shelf. We have a great story to tell about Hain, a great story to tell about our products and go-to-market strategy was more towards the consumer than the distributor. So with this we have, you know, repositioned the way we spend money. At the same time, our distributors, and two of our major distributors, took down their inventories. So in the effect of the quarter, there was $12 million of inventory that was taken out of the quarter by both of our largest distributors.

Price increase -- and I have asked, you know, been asked a lot about this, our price increase in the quarter was about $1 million to $1.2 million of contribution and the price increases definitely stuck. If we would have got the full benefits of the price increase -- and what I mean, the full benefits of the price increase, there was definitely price protection our there throughout the quarter. Certain customers had promotions out there and books already published that sporadically, you know, came in throughout the year-- throughout the quarter. Total price increase contribution would have been about $3 million for the quarter, which ultimately would have given us about a point, 1.5 points additional margin contribution there.

And in the quarter we had about $750,000 of commodity cost increase and about $1.5 million in fuel and freight.

So if we back up from the quarter, we took our inventories down between the way we go to market and distributors taking down inventory of about $2 million and that is about 20 percent in contributions, which was about $2.4 million. Higher fuel of $1.5 million and higher commodities of $750,000, which is about $4.6-$4.7 million, which is about 7.5 cents, 8 cents in the quarter that affected us from those couple areas, which we feel that the commodities, the fuel/freight with some of the things that we're doing and, in regards to inventories coming down, in regards to the way we go to market again, which is important for us to look at the year. It will spread out over the year and where it affects us now it will, you know, help us in some of the other quarters. So some of the decisions that we've made and some of the decisions that distributors made in taking their inventories down ultimately smoothes itself out.

You've heard me talk about margin enhancement, margin enhancement, margin enhancement. And that is a word that's used around here. Number one, I'm happy to announce that in the quarter our service levels ran about 98 percent, probably the highest service levels that we have run in this company and, number one, you know, last year at the same time we were probably running at 94-95 percent service levels. Number two is, it helps move product. It helps with the freshness of products and service levels and, you know, the operations group has done a good job of making sure we service our customers.

We are out there today with one of our biggest challenges, which everybody is, in reducing, you know, our freight charges. And freight is-- we move a lot of freight basically from our co-packers, our manufacturers, to our warehouses and from our warehouses, you know, to our customers and with the shortage of equipment out there and a lot of the-- a lot of people competing for the same routes, we have done numerous things to look to reduce our freight and we are out there in regards to doing some bids, we are out there doing some reverse auctions. I'll talk about in a few minutes, we are working with Heinz on some things. So we are making some major initiatives to reduce our freight and Fran and John and the group here have some great things in place to do that.

You heard me talk about moving to turnkey with one of our major suppliers on non-dairy and there's a major plan in place that help-- will reduce costs tremendously and in regards to soups and some of our other products, we have plenty of soup out there, so bring on the cold weather. We're continuously going through a SKU rationalization, as John will talk about. We've identified a number of SKUs. We're looking at consolidating brands. You heard me talk about that the last quarter and that is something that's high on our priority list and there's a lot of effort and initiatives on that.

We also are going through a consolidation of co-packers and also elimination of co-packers. Elimination of co-packers will also happen with SKU rationalization. As we get rid of SKUs, we'll be able to get rid of certain co-packers at the same time.

What's important to us is speed to market and, as we do SKU rationalization and we look to bring down inventories, what's important is consumers getting good, fresh products. You know, if you step back, other than soy and soup, with 12-month shelf life, most of our other products, because, you know, no additives, no stabilizers, being all natural, most of our other products only have like three to six months self life on there, so it's important that we keep turning our inventories and put good, fresh product out there.

Our trade spend -- we spend a lot of time talking about trade dollars and looking for performance and looking for more effective ways to spend our trade dollars. If I had to come back and look at where do we spend the most money in this company, it's within our trade dollars. And, you know, especially within John's group, they're really looking at performance spending, the way we go to market and how we make sure we're getting something for our trade dollars and we're working with both our distributors and we're working with both our retailers on how this happens.

In regards to people, you heard me announce on the last call that we made some changes. They're in place, working well. We did make some cuts in the last quarter and-- which, you know, cost us about $500,000 in severances. We will have some more in this quarter, but we are now looking at the next level of people where we enhance in regards to, you know, stronger sales organizations and some of the changes in the operations group and a lot of good things happening there.

About our brands, Celestial for the quarter was up 5 percent and a good quarter for us for Celestial. We were expecting Celestial to be a little higher. Shipments in the quarter were delayed, especially to the South, and these shipments will go in October. The shipments that were delayed were about $2-$3 million, which would have brought the business up somewhere around 9-10 percent, double-digit growth, and these were delayed because of the hurricane.

But a lot of good things happening. Celestial we're now coming into our holiday season, our holiday teas, our cold weather and the rumor is those people who don't have a flu shot, if you drink a lot of tea, it's not necessary to get a flu shot.

Snack business -- Adam Levit and his group had an excellent quarter in our snack business. Overall snack business, which is Terra and Garden predominantly, but some Hain snacks and some other snacks, were up 13 percent. Terra was up 25.8 percent for the quarter, 26 percent, and Garden was up a little over 10 percent for the quarter and this is coming from new products and expansion of distribution through a DSD network, what Adam is continuously doing.

We're also expanding into other classes of trade. We've-- are moving into 75 stores in super-masses. You're also seeing us move more and more into convenience stores and food service. So a lot of good things happening in snacks.

In regards to our European business, European business was up over 21 percent. We're seeing a lot of good things happening with Natumi and that was our soy business, an expansion throughout Europe. Our rice drink business is growing nicely over there. Our Lima business was up over 8 percent and our Biomarche business in Europe was up also. So we're seeing a lot of good things happening in Europe.

In our Canadian business, our Canadian business was off about $.5 million in sales for the quarter, mostly attributed to Yves and what we've done on Yves, we've switched to a smaller pack size to prevent spoils and we've changed a lot of the product where we've gone after more the mainstream instead of the vegetarian. So we know some of the things we need to do there, some of the changes we've done in sales.

Not concerned about what's happening with Yves. We see some big opportunities. You heard me, you know, talk earlier about going into New York City with McDonald's and that continues to go well. So Yves a lot of good opportunities.

Our Hain sales in Canada were up 31 percent and that's with Terra, Health Valley and Earth's Best. So looking for some good things out of Canada.

Our JASON's business was up high double digits. The integration has gone well. Management changes has gone well there. We are in the midst of overhauling and upgrading the label, the product, and we are now going into Duane Reade with a major test, Rite-Aid, Walgreen's. JASON's is strong into oral care, shampoos, skin care and deodorants and we're pretty excited about what we see in that category and the growth in that category.

John will take you through some of the things that he's doing on his grocery side of the business and I'm seeing a lot of good things happening there. We have plenty of soup for the season, which John will take to you about. One of the exciting things we're seeing is our frozen business, which we acquired from the Heinz Group at the end of May. We saw some great growth results from our frozen businesses on the Rosetto and the Ethnic Gourmet and we have plans in place to move frozen into many areas, whether it's kids meals, whether it's Health Valley snacks. But frozen for us is going to be an important growth vehicle and we're in the midst of looking at consolidating plants and some of the things coming from that are some pretty good growth opportunities for us. And John will take you through his business in a couple of minutes.

Most-- some of you saw in the press release of our initiatives to work with Heinz and we're pretty excited about that. Five years ago, as we set out to do many things with Heinz, a lot of things have happened and I've got to tell you, I've had many meetings with Heinz over the last month and a half and there's a major initiative and major commitment from Bill Johnson, Art Winkleblack and two of the Heinz board members to work with us. We've identified multiple cost savings that are not in our numbers that we will work on together and whether it's freight, warehousing, purchasing a product to tie in to theirs, whether it's purchasing of Nielsens, office supplies, health care, whatever it is, we have complete opportunity to tie into them.

Dave Gertner (ph), who has been with Heinz over 25 years, is the point person. Dave spends three days a week here and the other two days he's back in Pittsburgh, doing his job there. But he is a point person that is bringing the Heinz-Hain working relationship on these opportunities together and it's been in place now for about 30 days and I'm quite comfortable and quite excited about the opportunities that we have here.

Ira, in a few minutes, will talk to you about our free cash flow and we are putting a major effort into play there. We will work hard on that. We will have weekly calls on that and we see a tremendous opportunity to accumulate cash in that area and that will be a major focus of every operation in this company to ensure that we do that.

I want to go out and reconfirm our guidance for the full year. We feel very good about where we are and very good about the guidance that is out there for our fiscal 2005.

What I'd like to do is turn it over to John Carroll to take you through our grocery and our frozen business. Thank you.

Good morning. I'm going to review with you our Q1 progress against the FY '05, Hain Grocery and Frozen strategic priorities that I laid out for you in our last call. Just a reminder, Hain Grocery and Frozen is the company's largest unit with approximately $340 million in sales. We compete with scale but not particularly high margins in seven core categories -- soup, non-diary beverage, baby food, cereal, cookies and bars, ingredients and frozen.

Our FY '05 strategic priorities are focused against fixing our low-margin business model, reducing complexity and driving improved performance. Key strategies I reviewed in our last call were, first, drive out costs and rebuild margins; second, drive profitable growth in our seven core categories; and finally, to drive and reward improved performance and execution.

We're making progress in all three of these areas, starting with driving out costs and rebuilding margins. Our two most important initiatives in this quarter in this area were that we first, implemented our Q1 4 percent price increase in the grocery side. This was key to offsetting our increasing commodity and distribution and warehousing costs that we began to experience in the second half '04. We also-- we executed this with minimal push-back by the trades and all accounts are on board for this. We began to realize a minimal impact in Q1, but we'll begin to realize the full impact in Q2 and the second half as we were unable to realize it in Q1 due to previously published promotions.

We also began to change our go-to-market promotional strategy with the trade. This is step one in changing our selling model, as Irwin discussed, from a distributor-push model to a retail or consumer-pull model. At the end of the first quarter, which was our first chance available, given the long lead times for publishing deals in this industry, we changed our trade deal levels, our trade scope and our trade timing to be more performance-driven and reduce inefficient trade forward buying.

These two initiatives -- the price increase and the trade go-to-market change -- coupled with the distributors' inventory reduction that Irwin alluded to earlier, drove Q1's grocery sales below year-ago. However, we're beginning to see shipments come back very strongly as October orders were up 20 percent versus year-ago.

More importantly, these changes are key to driving improved performance in the Grocery and Frozen unit as they'll enable us to more closely align our shipments with consumption, which will ultimately drive increased efficiency and savings across the supply chain. It'll allow us to put fresher products on the shelf, as Irwin discussed before, which will enhance consumer satisfaction and reduce retailer reclamation costs and it will improve our margins via supply chain and trade spending savings, enabling us to invest against growing our core brands and improving our bottom line.

In addition to the price increase and the go-to-market trade strategy change, we also made progress in other cost improvement areas, including we began to work directly with Heinz on opportunities in distribution, procurement and baby food product production. We also retained AlphaSource to conduct a reverse auction of key freight lanes as rising freight costs continue to be our biggest challenge in costs.

We continue to move towards more turnkey production with our top co-packers to drive better pricing and more cost certainty and we developed a brand and SKU reduction plan that eliminates a minimum of 20 percent of our SKUs. This plan will be presented to Irwin and the board in this quarter.

So we're continuing to focus on driving out costs and rebuilding margins. Many of the initiatives that I've just talked to you about are just beginning to take hold and we'll see increased benefit from them in the second half.

Our second strategic priority is driving profitable growth in our core categories. Our biggest news in that area is, as Irwin talked about before, we're well positioned for growth in the upcoming soup season. We all know about what happened in the last soup season where we were unable to ship our product. We'll walk into this season with one million cases of canned soup in inventory and shipping at 97-98 percent order fulfillment level. Quite frankly, we don't want to be a whole lot higher than that, because that will mean we'll carry more inventory than we need to.

We also have Q2 and Q3 support programs that are considerably stronger than last year. We've got exciting new products shipping. We've got organic stocks and broths, which are the fastest-growing segments in the natural organic category and we've got improving consumption, led by Imagine organic soups, which are up 20-plus percent.

We also continue to be the category leader in aseptic non-dairy beverage. Rice Dream aseptic has an 85 percent-plus share, with growing consumption and that will be bolstered by our latest introduction, which is a rice horchata, which is a traditional Mexican rice beverage. Think about it as almost a drinkable rice pudding that's getting strong trade response, particularly in Southern California.

Our WestSoy grocery share is up almost 2 points to 39 percent and we're seeing continued strong growth in alternative channels not reported by Nielsen, i.e., we have our non-dairy beverage set at Wal-Mart, we see growth in Trader Joe's, et cetera.

In addition to those positive trends, we also see that our Earth's Best baby food continues to show strong growth. Natural channel sales are up 25 percent in the last 12 weeks to where we now have over a 65 percent share. Grocery channel sales were up 15 percent and we now have-- and our organic share there is up 4 points versus a year ago.

Most importantly, we continue to add distribution on this fast growing business. We-- in the next quarter we're going to add 320 Ralph's stores with 17 SKUs, 120 Raley stores, 47 northeast Babies R Us stores, et cetera. We're adding distribution. And then finally, we're building distribution with our recently launched Sesame Street line extensions, including accounts such as Kroger, Fred Meyers, King Soopers, Fry's and others, without slotting.

Our frozen business, as Irwin discussed before, has performed well in our first quarter of Hain ownership. Ethnic Gourmet consumption was up almost 15 percent in the last 12 weeks. Rosetto continues to be the number one brand of frozen pasta and the frozen pasta category declines have slowed considerably as we're moving beyond the carb craze of the last few quarters. We're preparing to leverage traditional Hain strengths with the launch of a line of organic ravioli products in December, which will be Rosetto's first entry into the natural organic segment.

Finally, in the area of driving growth in our core categories, we're now moving our focus to really ramping up product innovation in our core categories. We're initiating extensive new product exploratory in our core categories and we're looking to bring forward some exciting innovations at the Expo West show in the spring.

Our third and final strategy is to drive and reward improved performance and execution and we're making real progress here and a couple of things I'll point out. First of all, our frozen integration was executed on time, without business interruption and is delivering above-budget savings. Our Q1 price increase was executed on time and without any major push-back.

Additionally, our new management team has been in place for a quarter and is moving to upgrade the talent and the business processes, as well as raise the performance standards for the next level of management. An example of some of the processes we're putting in is the first Hain grocery sales and operations planning process has been implemented. That will be a key process for driving improving forecasting, production planning and ultimately supply chain savings. We also will be restructuring our grocery sales force this quarter in conjunction with the addition of some new key sales leaders to drive better sales execution across all channels.

So to summarize, we're focused and we're making real progress in the Grocery and Frozen business unit against our three core strategies. We're driving out costs and rebuilding margins, we're driving profitable growth in our core categories and we're driving and rewarding improved performance. We have many important initiatives underway across all these three strategies and we expect to see continued improvement in Grocery and Frozen's performance, particularly in the second half.

I'll now turn it over to Ira Lamel.

Thank you, John. Good morning, everyone. Just to go through some of the things that Irwin talked about earlier in the call, our sales this quarter reached $137,604,000, up 8.3 percent over the prior year's first quarter sales of $127,053,000. Our sales this quarter were impacted by the reduction of inventories at distributors by approximately $12 million and, interestingly, our October orders are up 10 percent over last year when looking at brands that we owned last year and continue to own this year.

Our net income was $6.2 million in the quarter this year or 17 cents per share, after compensation charges totaling about $600,000 that had the impact of reducing earnings by approximately 1 penny per share. We expect in the second quarter to have charges of about $750,000 for the same items. John mentioned certain changes in his group and we will incur costs of about $500,000 for those, plus non-cash compensation of about $250,000. In the prior year, our net income was $6.5 million or 19 cents per share.

During the first quarter, we had 36,855,000 average diluted shares outstanding, which was 1.5 million shares over last year's quarterly average diluted shares of 35,356,000. As Irwin mentioned, that had the impact of reducing our earnings on a year-to-year basis about three-quarters of a penny.

Gross profit in the first quarter this year was 28.3 percent as compared to 29.2 percent in the comparable period last year. We have continued to incur the higher freight costs in the first quarter this year that we began to incur beginning in the third quarter of our '04 fiscal year. These additional freight costs amounted to approximately $1.5 million this year. Also, the higher cost of ingredients, higher personnel and benefit costs this year negatively impacted gross margin versus last year.

These higher costs were offset, in part, by the effect of the price increase we implemented beginning July 1. That price increase improved sales and gross profit by approximately $1 million in the quarter.

Our SG&A in the first quarter was $28.2 million or 20.5 percent of net sales compared with $25.8 million or 20.3 percent of net sales in the prior year's first quarter. Operating income for the quarter this year was $10.8 million or 8 percent of revenue, as compared to $11.3 million or 9 percent of revenue last year.

In this year's first quarter, interest expense and other expenses totaled $655,000 versus $791,000 last year. Our interest expense was $400,000 higher this year, reaching a million dollars for the quarter versus last year, principally the result of higher average borrowings we carry this year after our recent acquisitions. We had $200,000 in net foreign exchange gains in this year's first quarter versus the $100,000 of net foreign exchange losses we incurred last year, giving us a favorable swing, which offset the higher interest costs.

As we discussed in our last quarter call and in this morning's release, our estimated annual tax rate increased to 39 percent this year and was used in this year's first quarter. Last year's rate was 1 percent lower at 38 percent.

The increased rate is the result of income outside the United States in countries with higher tax rates, which is becoming a higher proportion of our consolidated income. Further, the states we have entered into with our recent acquisitions have higher rates than our past effective state rates.

Our EBITDA amounted to $14.3 million or 10.4 percent for the first quarter this year versus $13.8 million or 10.9 percent last year. Depreciation and amortization in this year's quarter was $3.1 million, up from $2.7 million last year.

Our balance sheet continues to be strong. Our working capital was $128 million with a current ratio of 3.01. Our receivables are turning at 47 days and total inventories reached a higher-than-expected level at September 30th this year due to the lower-than-anticipated sales with distributors. That caused an increase in inventory at the end of the quarter of approximately $8 million.

Also at quarter end, inventory increases of $13 million came from acquired companies since last year's first quarter and $2 million came from our Celestial Seasonings business where we have built inventories for new products, related packaging and the increased business it has. Our soup inventories are also higher in addition to the sales not shipped to distributors as John's group planned to have higher inventories as we really get ready for the soup season that's right in front of us.

As we stated in our release this time, we've started working with H.J. Heinz on various operating initiatives. Already kicked off is the implementation of certain operating cash measurement criteria used successful at Heinz. We are now focusing our attention on maximizing our operating free cash flow and reducing the number of days in our cash conversion cycle. Each day we reduce in our cash conversion cycle will be worth approximately $3 to $4 million of accelerated cash flow.

Each of our operating units will be responsible for performing more efficiently in this area and will be measured against targets we will set. I personally will be responsible for driving our consolidated performance in this initiative and each unit will be accountable for achieving targets. I will be leading the weekly call that Irwin mentioned earlier and, beginning with our second quarter, we will report to you our quarterly operating free cash flow and the number of days in our cash conversion cycle and we will give you comparative reporting on the progress we make each quarter.

At the end of the first quarter this year, our stockholders' equity reached $508 million. Our debt as a percentage of equity remains at a very low 20.6 percent and during the first quarter we reduced outstanding debt by $6.5 million.

At this point, I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) Carole Buyers, RBC Capital Markets.

Just a couple questions. I was wondering if you could, first on the soy milk category, what was the soy milk growth this quarter versus last quarter and then I think-- did you give us retail data, as well?

Actually, we didn't give retail data, Carole, and the reason why, it was not-- we didn't get some of the most recent stuff, so it didn't change much from what I gave you at the end of August, first of September.

OK.

But here's what-- if you take fourth quarter sales-- if you take our first quarter sales and you take October, our non-dairy business today would be about flat.

OK. OK.

So, you know, was there some buy-in before the price increase? Probably. Was there-- as inventories came out of the system, was there some effect on non-dairy? Yes. But what I must say is non-dairy in the month of October sales have been extremely, extremely strong for our non-dairy business. It's up over 20?

It's up 20 plus.

In the month of October, our sales are up over 20 percent for our non-dairy business. So I think that's what's important to look at is fourth quarter, first quarter and our second quarter, how that comes in and the first month is a good indication on that.

And then you were talking about the shift in spending in marketing. Is there any way to quantify this, you know, versus-- if we looked at consumer and trade and separated it out and looked at it this year versus last year?

Well, I think there's a couple things. There's two things and I'll let John jump in here and talk about it. Number one, increase our consumer spending, which means more towards coupons at the shelf, more towards consumer, meaning advertising within different books and magazines.

The other thing is, which we're looking to do, Carole, you know, there was times Hain had line drives where everything in the company was, you know, 10 percent off. And did it increase our sales at all? No. Did it increase our trade spending? Absolutely. So what we're looking to do is go to a lot fewer promotions and actually look at promoting throughout the full quarter, not the last month of a quarter and ultimately ensure that this is passed on at retail, that way we get performance for it. And retailers are actually looking for that today, too.

Is there any way to quantify it or is this a number that you just don't give out?

Well, it's tough to quantify. I think the big thing on the trade promotion piece, we are not looking to reducing the trade promotion, by no means. What we're looking to do to get benefit for it at retail. We're not increasing trade promotion; we're not decreasing trade promotion. If we spend a dollar, we $1.05 of performance for the consumer gets passed on. And, you know, we feel in order to grow our brands to where we need to grow our brands we have to do this because the competition is doing it out there and we need to do it to support our brands at retail and this money needs to be spent towards that.

In regards to consumer advertising, we as a company today probably spend somewhere around 5 percent on consumer advertising. I'd love to see this increase about 2 to 3 percent and that's got to come from margin enhancement and other areas. It's not just-- you know, we're going to take it away from trade.

OK and then just one last question. On the full year after this quarter, to make your number you're going to have to grow earnings about 30 percent over the next three quarters.

We're very comfortable with the year. You know, as you heard me say before, if I step back for a second and get the full benefits, you know, of a price increase, you know, continuously working on margin enhancement and, you know, as we move into this here quarter, I mean, it's soup and tea season. This is a major quarter for us, our third quarter is, and then I feel we're-- you know, we'll only seeing minimal benefits right now of our JASON's business, of our frozen business and, you know, we're also-- you know, California's strike where we were up against last year.

So, you know, we feel we have a lot of good things in front of us as we move into the next three quarters. And, you know, moving into this quarter, I was very clear on the last conference call, you know, again, as you heard me start off, there was a lot of head winds blowing in our face in this quarter and I think with all those, you know, I feel very, very good of where we are today and the start that we're off to.

Andrew Wolf, BB&T Capital Markets.

Irwin, can you tell us what-- or, Ira, what the acquisitions added to the sales dollar amount?

I said that, Andy. Andy, it was about $10 million.

I'm sorry about that. I guess I'm also a little fatigued. On the October sales, I think Ira said it was up 10 percent in total. Was that a volume or a dollar number?

Well, it includes the price increase, Andy, but it is really a volume-based number, principally, because the 10 percent is brands owned this year and last year. It excludes all of the brands that we acquired since last year's first quarter. It just shows that the strength of the business is there and what happens with the end-of-quarter-- not end of quarter, so much, but the distributor sales in September, the reduction of inventories that those sales really just come back over a continuum and business continues to be strong.

Andy, and there's a couple of things. If you come back and take, number one, the $12 million in reduction that happened in the last quarter and you add that into our number, it hit our internal growth number that we were looking for of 8 to 11 percent and also our 17 percent top-line number.

You know, the good news is, you know, October being strong and Ira's saying up 10 percent on shipments, we were up, you know, closer to 20 percent on orders in the month, which we track right now. You know, we're way ahead-- November 3rd, we're way ahead of where-- you know, 35 percent of the quarter is gone so far, we're way ahead of where orders are in the quarter and that's important to us.

Number one, you know, is there a shortage of trucks out there? There's a shortage, you know, because of the port. The earlier we get this in, it shows the demand is there and I think that's important to look at Hain, as I said to Carole before, is look at the fourth quarter, the first quarter and the first two months of this quarter and I am extremely encouraged on what I've seen in October. I'm extremely encouraged, you know, about the orders and, you know, also this comes in it's at much higher margin dollars because it's not so much on promotion, any of these-- the October sales.

Those are great figures. Is there any benefit there from comparing to the grocery strike last year or did the-- or is it more of November when the orders started slowing down?

The grocery strike didn't happen until the end of October. So the grocery strike is basically, you know, November-December from last year.

So, theoretically, your sales could even get better, right? Now just last question--

Could, Andy? Will get.

OK. Well, your October number sounds pretty good.

The price increase, you spoke about, you know, some price protection and people having, you know, promotions out there and catalogs and what-have-you. Where are you at with that in this quarter? Is that pretty wound down or is there going to be a little bit of a drag?

There is a minimal amount of a drag, but we will get the full impact of our price increase, ultimately in the second half, but, you know, we will get much more of a price, you know, effect in this here quarter than we did in the last quarter.

Terry Bivens, Bear Stearns.

I just want to make sure I'm following the top line here. What we're saying is that inventory reductions by the trade hit you guys for $12 million, right?

Right.

And in pricing-- what did you say on pricing, again?

Pricing in the quarter, Terry, was about $1 million.

OK, plus $1.

Well, the pricing was in the $137.

OK.

Yes.

OK. Now, Irwin, I think in response to Carole's question, you were saying that promotion was basically roughly equal to last year? Is that correct?

No. No.

Did you promote more or less in this quarter?

We promoted slightly more in the quarter.

OK.

But what-- you know, if you come back and say, hey, am I seeing it in the quarter, it doesn't-- you don't-- you'll see it even out. And, again, what I said to you before is I'm not looking to reduce my trade dollars.

Right.

I'm looking to get just better performance for it and the increase in sales. And, actually, you may see, you know, some of our trade dollars even go up to some degree, Terry, because what we're doing is where we were promoting a 10 percent and got nothing for it.

Yes.

On some of our major brands, do we promote at 15 percent and you're going to get benefit for it and make sure it's passed on to the consumer? That's some of the things that we're doing as we re-shift a lot of the dollars.

Well, I guess my concern is, I'm just trying to understand your strategy here. I mean, obviously you want to get more bang for the promotional buck, but I guess in addition to the inventory reductions, the trade also reacted to this, which, you know, would have taken your core business down a bit. Is that correct?

Well, I think the trade reacted to two things. The trade reacted to taking inventories down on there own. There was a major initiative at Gourmet Award/Tree of Life to take their inventories down and I don't think they looked at that in regards to what our promotions are. I think there were some initiatives at United Naturals.

But, you know, at the same time, you're right. I think some of the trades felt if we don't have these promotions out there, there's no need to buy, but I will buy as consumers need it. And, as John said, I think what's key is shipping to consumption, not shipping to promotions.

And number one, you know, it ultimately evens itself out. You spend less, you get better performance and you get a lot fresher product in the stores. So, you know, I feel it evens itself out throughout the year.

OK. And you would look at October as being a sign that maybe your customers are kind of getting over it a bit?

Yes, I mean, October sales make me feel very, very, very good about, you know, our analysis on this. If October was, you know, only up slightly or flat, you know, I might have a little different reaction to that.

John McMillin, Prudential Equity.

You know, Irwin, if core sales are flat and you kind of went over everything that was good, what's bad?

Well, I think, John, when I said core sales were flat, if you come back and what's bad, I don't think anything's bad. It's how we've changed some of the direction. As I said, all our businesses are up. Our Yves's business was down about $.5 million and that's some transition in the way we pack.

John's business, on his grocery side, if you take this quarter, was down about 20 percent. But if you take the fourth quarter on some of the buy-in on soups and soy, because they have shelf life, you take the first quarter and you take October, they were flat. And if you add back that $12 million, our overall growth was up 17 percent plus our organic growth would come out to be where I want to be, in those high single-digit numbers.

And that's the way-- you know, that's why I don't look at it quarter-to-quarter, I like looking at the business throughout the year and, you know, it's important that we look at it that way and I got to tell you, I feel very, very good about the way October's come out and the first two days of November. It's early, but I think we've made some changes in the business and shipping to consumption is something that's very important for us.

Irwin, you reaffirmed earnings guidance, but you really didn't reaffirm sales guidance to get a 17 to 19 percent sales gain in fiscal 2005.

You must still be on China time, John, but I did in the press release. It is in the press release and I'm reconfirming sales guidance, also.

But that's a really big improvement and, obviously, you won't be able to include the fourth quarter of last year. You really think without-- you don't have any acquisitions in the hopper?

We do not have acquisitions in the hopper and, you know, John, listen. As we step back -- and I've said this before -- number one for us is, again, you know, the bottom line and hitting our, you know, margins, hitting our operating income is important for us.

And we feel we have a lot of good things, as I've said there before, going into October, November, December is our strongest quarter. Being in stock at 98 percent service levels will help us tremendously. We have some good things coming from JASON's and our frozen business. We have a lot of new products rolling out. We have a lot of good things happening in Canada. We feel good about Europe.

So there's a lot of things happening in the next three quarters that are our strongest three quarters in front of us.

And just-- in terms of the growth in inventories, did you go over that, as well?

Yes, John, I did. I gave some numbers on where the inventory growth came from earlier in the call. Some of it certainly came from the $12 million in sales that we didn't get, so we had about $8 million increase in inventories because we didn't ship. And then we had about $13 million in inventory increases from the prior year for the acquired companies since last year's quarter. A couple of other, smaller changes, as well, which I discussed.

And, obviously, that earnings guidance is GAAP?

That earnings guidance is GAAP.

That earnings guidance is GAAP.

OK. Well, I'll keep my fingers crossed.

Thank you, John.

Scott Van Winkle, Adams Harkness.

Hey, Irwin, I want to talk about the October sales growth again. If you look at September, was there anything weird in September? Did you less end-of-quarter promotion and, therefore, had a September decline and it pushed into October? Can you help me out there?

Well, I think, Scott, we changed our timing on promotions. So our timing on promotions were more spread out throughout the quarter, instead of just being in October. So the distributors wait to see our promotions in September, possibly, and when they didn't come, you know, or they weren't there, ultimately the good news is there's good consumer demand for the product and that's what you sit here and feel good about it.

So if I just kind of summed up, the lack of internal growth was driven by the distributor de-loading, by the change in promotion timing and maybe some buy-in ahead of the price increase?

Exactly. And I think, you know, you can back-- and I think you know it-- You know it. The major one came from Tree of Life/Gourmet Award as they-- You know, when warehouses close, it takes inventory out of the system and, you know, even though there was a shift from Wild Oats to United Naturals, does not mean there's an automatic shift of $1 to 75 cents here and I think what's important is, as John said before, is shipping more and more to consumption and overly stressing looking at our business not, you know, quarter-to-quarter, as looking at our business of what was shipped in the fourth quarter, what was shipped in September and then what was shipped in October and, you know, what should be shipped in November and December.

OK. I have a couple questions for John. One, when did the soup problems hit you last year in the December quarter? Was it the beginning of December? I think that's what I recall.

It was-- yes, beginning of December.

He wasn't here, yes, Scott, so he can't take the blame for it, but it was the beginning of December and what basically happened was in December we had good inventory, we had great sales in December, but the real big effect, we were probably off a few million dollars in December, but the major effect for us was January, February, March.

Right. Our third quarter, we only shipped 67 percent of our orders a year ago. We're shipping at 97-plus percent right now.

OK. And, John, you mentioned this quarter you're going to present to the board a plan for 20 percent SKU reductions. What percentage of sales does that 20 percent account for?

Less than 20. It is-- the percent of sales is significantly below the percent of SKUs.

OK.

And then, Scott, just to be clear on that, you know, and just going back to John's question and I said that, you know, in our fourth quarter that is not taken out of our number of what the "SKU rash" would be. And, you know, one of the things-- you know, when John presents his "SKU rash," we look at, you know, running down packaging, what are the effects, what are the inventories out there. And the other strategy as we look at today when we go through a "SKU rash," do we take some of these SKUs and they just become exclusive to natural food stores or smaller natural food stores?

So part of it is what's the "SKU rash," what's the strategy with some of these brands and products? And if we have Health Valley cup soups and Nile cup and we put them together as one and Casbah, do we just have one brand and we bring that all together and put the sales-- so there's a lot of so-called -- and I'll use the word -- "science" going into this.

No, Irwin, I wasn't asking the question with a negative tone. I think it's a very good idea.

No, I know it, but I just want to make sure it's out there because it's something that's needed. You know, unfortunately, if we discontinue $300,000 of sales of something, our consumer-- I mean, we discontinued a product and, you know, the threats that come in to us-- myself, personally, because we discontinued a product. You know, in the natural food industry, there's people that have been using, for instance, carrot juice for 75 years. So, you know, we're cognizant to consumers, but we're also very cognizant to our shareholders and our, you know, contribution there.

And the last one is also for John. You know, one of the things that I think is clear is the growth of private label in the natural and organic segment, you know, obviously starting with Whole Foods and Wild Oats and, you know, most of that's in the grocery segment. What are your thoughts there? How are you, you know, combating any risk from private label? And, second, can you participate in any of this?

OK, to answer your questions in order, in terms of combating this, quite frankly, this is what's driving the whole trade strategy change, which is we need to invest against our brands, not against distributors selling them through and that's what's driving that. So the way we're going to fight it is by investing against our brands and being a leader in innovation. Because private label will copy. They will not innovate. We will drive our businesses by being a leader in innovation.

In terms of where we participate, there are categories that we look at and that we will participate, but, look, our first focus is driving our brands in our seven core categories.

And just to add to that, Scott, we are set up in many ways to be a good supplier of private label. We have numerous of our own plants out there. We have, you know, over a hundred co-packers. Many retailers have come to us to do more and more private label. If it's beneficial to us where it's going to enhance our margins at our plants and ultimately we can partner with them where it's us and them, we will definitely look at that.

And I think, you know, one of the things that's important and some of these companies are running into want to do more and more private label, the sourcing of organic ingredients out there becomes more and more difficult and the commitments that you need to make. The certification of organic plants out there today is an issue.

And, you know, one of the things that mainstream retailers are running into, the effects of private label products being GMO-free where their mainstream products are not GMO-free. So are they, you know, sort of sticking their toe into a dangerous area? You know, Whole Foods and Wild Oats, that's not an issue. But more and more in the mainstream, that becomes a bit of a conflict for them.

So there is some big opportunity out there and, you know, we will definitely capitalize on that where it makes sense.

Greg Badishkanian, Smith Barney.

Hey, I have a question, more a commodity question. I missed the first part of the call. I apologize. But could you just talk about like how much of your product is really bought on sort of forward contracts and, you know, when you renegotiate those? And if you talked about it, I apologize, but--

No, that's OK. You know, in the quarter, Greg, what we said we were affected approximately $750,000 in higher commodity costs and, you know, some of the things that-- you know, vanilla extract, rice base, soybeans.

Basically what happens is harvesting basically happens in September. Coming out of the ground now. So we basically have a good feel on our commodity new contracts. We will start to get some of the benefits in this quarter, but the majority of it will come in the second half of the year.

And what I sit here and tell you today, we feel pretty good about commodity prices and pretty good about where commodities are pricing. Our biggest challenge out there today, you know, is fuel and freight, which we're working on and that is going to be, you know, a problem with everybody out there. A shortage of equipment and it's good to see, you know, crude oil today at $50 a barrel, but, you know, we have the opportunity now to work with Heinz, who has a tremendous, you know, freight group out there.

So-- but what we're seeing is good stuff on soy, good stuff on vanilla, good stuff on corn and-- so I feel good about commodities and what they're coming in. And, at the same time, you know, we will get the full effects of price increase, you know, over the second half, too, and, you know, that should be absolutely beneficial to us.

And to follow up on the Heinz, in the past you've worked on some initiatives with them. It seems to have really not materialized in much benefits. What's sort of different now? Is it that you're focusing on the cost side versus sort of, you know, the different top line initiatives? Is that what's changed?

You know, I think as Heinz came back and, you know, they looked at their investment and, you know, to be blunt, their investment has not been where they wanted it to be. And in order to enhance their commitment that we originally agreed to five years ago -- and we've tried some business objectives. And, you know, ultimately, and I understand, you know, Heinz needs to focus on the growth of their business first, but some of the so-called low-hanging fruit, and I just named four or five of them. You know, a Nielsen contract, you know, we spend $3 million a year on Nielsens and spins and stuff like that, tying into their contract and just adding to that, tremendous savings -- corrugate, cans.

So these are simple things where, you know, $4, $5, $6, $7 million of savings is extremely beneficial to us and it makes me feel good to see the commitment from Heinz in putting a person here to work with us that's able to get through the Heinz organization. So, you know, they realize the opportunity and there's a strong, strong commitment and I feel that we're going to get some great savings.

Andrew Lazar, Lehman Brothers.

You know, Irwin, as I sit here and I listen to some of the things that you are your management team are talking about around, you know, shipping to consumption and things of that nature which make, you know, all the sense in the world to me, and I agree a lot of your competitive set is already, you know, well on their way towards doing some of this.

I'm curious, though, a lot of these things do take some time. A lot of them, obviously, require a lot of pretty precise execution and, you know, John mentioned sales force restructuring within grocery. And those may be all, certainly, the right actions. I'm wondering, kind of going back even to the-- part of the first question that got asked of how much are you sort of building in, you know, in terms of flexibility for some of these changes to happen.

I know what you had happen in this quarter was a pretty significant result of some of that, but I'm wondering if, you know, just by looking at October if you feel like, hey, that's behind you. Realistically, though, aren't some of these things several-quarter-long kind of processes? And even though they're the right place to go, how do you feel you're building in enough flexibility is what I'm getting at?

Well, I think, Andrew, step back and it's an excellent question. Number one, you step back and you look in this here quarter that just, you know, passed us, if you add back the $12 million, the higher cost of commodities, the higher cost of freight and fuel, you heard me say that was 8 cents that affected us in this quarter. And, you know, we are making some excellent long-term moves for the Company.

You know, what our challenge needs to be as we go out there and make some real good moves for the company and solidify the-- you know, and solidify the strength of our brands and products and category, at the same time, you know, the other head winds are in our face in regards to commodities and freight, fuel, you know, the opportunity of working with Heinz -- and you and I have had many discussions on that. A lot of new growth chances for us should, hopefully, offset, you know, some of the impacts that are coming at us there.

And I think a perfect example, you know, in this quarter that almost 7 cents of impacts affected us in this quarter. And I believe that we were able to put up, you know, a very, very respectable quarter. And that's what's been important for Hain is to look at Hain for a full year and the accomplishments that we're doing for a full year instead of quarter-to-quarter and we are in a better situation with our brands, our product and our execution.

You know, go back and look at our fourth quarter, we did $137 million, almost the same sales, and we earned, you know, 4 pennies more. So I think we have a really good feel on our business. We have an excellent management team in there to execute, Andrew, and we just have a lot of areas out there where we have other opportunities to go to.

I mean, we will get the full benefit of or most of the benefit of the price increase. We have commodities coming down. So, you know, I hear what you're saying, we have some challenges in front of us and we're going to stick to our plan, but what's important, as I've said to investors, you know, don't look at Hain quarter-to-quarter, look at us for a full year and I feel good about the things happening here and, as I started off the call, you know, with higher cost of business, higher cost of commodities and freight, I feel we're off to a very, very good start and feel very, very good about the business and our business model.

And then, you know, just following up on that, in terms of setting some of the expectations then, and even though you don't want to go ahead and give, you know, quarterly guidance for reasons that largely I do understand, just thinking about some of the forces working sort of for you and against you as the year unfolds, you know, are there any particular quarters based on kind of what happened a year ago and some of those things that have been asked where, you know, you're likely to see a significant skew one way or the other, you know, outside of just having, you know, very easy earnings comparisons in the back half? I mean, you know--

You know, I think I come back to the second quarter, which is our biggest quarter. And, you know, it's a big quarter for tea, a big quarter for soup, a big quarter for hot cereals. You know, do we get all the full benefits but we still get the higher freight costs? You know, I think if you come back and look at it, there's always some effects of a couple pennies here and there. In the second-- in this here second quarter I think last year we were at 29-30 cents. You know, so there's a couple penny effect, probably, still with fuel and freight.

But, you know, I'm really saying when are we going to hit the ball out of the park and then some -- and that's what I've always said -- you know, going into the April-- or going into the January quarter, you know, affected us big time last year in that quarter was soup, which was, you know, almost a couple pennies. We had much-- that was the first quarter of higher fuel and freight. We spent additional trade money there on our whole low-carb area. And, you know, we also had a strike. So there's a lot of things in last year that are not there and I think, just with the management of the business today and having a lot good things going for us, I think, you know, basically that's where you're going to see a lot of our big opportunities come from.

But, you know, this is our biggest quarter and sitting here today, seeing the way October started off-- because the last thing we want to be doing is, you know, number one, you know, there's a shortage of trucks already today as we move into the holiday season and, you know, we basically want to be almost done for the quarter in the first week of December.

Mark Chaganal (ph), Sidoti & Company.

You talked a little bit about more consolidation of suppliers and you mentioned some consolidation in the frozen business. You know, I guess when you look back at some of the operating issues dating back to the Health Valley cereals and also with soup, how have the processes changed, when you're looking at consolidating co-packers, to avoid, you know, another issue like you had last year? I guess on each of those fronts, I guess the frozen that you're looking at, which is a new platform you and some of the other co-packing arrangements you're looking to trim down?

This is John. Let me just respond to that. In regard to frozen, the consolidation we're talking about is within our plants as opposed to consolidating with co-packers. So we feel very comfortable that as we would do that we could certainly control it much better than we could with outside co-packers.

In regard to our co-packers and my sense is you're asking in regard to securing our supply, we continue to make a decision that we are going to have at least two sources of supply in every one of our major categories and we are not consolidating below that for any of our major categories.

And, Mark, if anybody knows frozen, John does, you know, along with Matt Cooper, who's running that frozen business. And-- you know, and hopefully we've got-- we've come back and got smarter and learned-- I mean, we will make mistakes and hopefully we've learned from them and not repeat the same one twice.

That is the conclusion of our call today. You know, I sit here today, as I said at the beginning, with higher costs. I feel we're off to a really good start to hit our objectives. The category continues to grow and, yes, we see competition coming into the category, the Krafts, the Kelloggs and the General Mills, which to me is, yes, it's competition. On the other hand it shows the way the world is changing they way they want to eat. And more and more consumers want healthier products. As a company, we've spent a lot of time working on what the new food pyramid should look like and what portion size and serving size and how that affects-- you know, there's a lot of things that we have done and have been doing and already are-- you know, lead from that.

We've made major changes in people and I think most shareholders can see, with the addition of people, some of the good changes that happened here and now it's looking at the next level. We have some incredible brands and, you know, I get-- when people say to me, you've got 30 brands, well, it's great we've got 30 brands. I'm sure Kraft and Kellogg's and Heinz, you know, have hundreds and hundreds of brands, but where is our growth coming from? And we focus on certain key categories and, you know, you hear John talk about soup, his baby food, his kids food, his soy, you know, non-dairy business, his cereal and cookie business. You know, Nile Spice with the cup of soup is important to him, but that's not what's bringing us over the top and, you know, the snack business, you know, it's Terra and Garden. So as a company, there's 10 -- and I used to refer to them as rocket brands -- there's 10 categories or 10 brands that we really focus on that definitely will take us over the top.

We have a great balance sheet. There's, you know, a new era to our balance sheet where Ira talked about how we're going to work on our cash, our free cash, and what we're going to do with our cash and that is a major initiative for us and, you know, that was just not a focus before.

So, you know, moving into the second half of our year or second quarter of our year, then the second half, you know, I feel very, very, good about the challenges in front of us and the opportunities. The only thing I cannot do today is sit here and predict what the winner of the election is.

I want to thank everybody for their time today. Have a good day.