Hain Celestial Group Inc (HAIN) 2005 Q2 法說會逐字稿

Hello, everyone, Thank you for holding, and welcome to the Hain Celestial Group second quarter fiscal year 2005 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 are estimates of past or future performance and 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 forward-looking statements is contained from time to time in the filings of the Hain Celestial Group with the U.S. Securities and Exchange Commission. Copies of these filings may be obtained by contacting the Hain Celestial Group or the SEC. At this time, I would like to turn the call over to Ms. Mary Anthes, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good afternoon, I'm Mary Anthes, Vice President Investor Relations of the Hain Celestial Group, and I'm pleased to be with you today to introduce our second quarter 2005 conference call, with earnings that were released after the market closed this afternoon. We have several members of our senior management team here today to talk about our results with you, and they include Irwin Simon, our President and Chief Executive Officer, Ira Lamel, our EVP and Chief Financial Officer, and John Carroll, President of Grocery and Frozen.

Our discussion today will include forward-looking statements, as the operator has indicated, and those risk factors referenced therein are in our Form 10-K for the year 2004. Our call will be limited to approximately one hour, so please adjust your questions accordingly. Our management will be available after the call for additional questions. Now, let me turn over the call to Irwin Simon, our President and CEO.

Good afternoon, everybody. Thank you, Mary. I hope everybody had the opportunity to read our press release for our Q2 fiscal '05 earnings which was released this afternoon. As most of you have had the opportunity to read, our sales for the quarter was $169.5 million, versus $142.8 million, which is 19 percent growth.

Our EBITDA GAAP number was 21.9 versus 19.8, and our adjusted GAAP EBITDA number was -- or adjusted GAAP number was -- EBITDA number -- was 23.1. Our pretax income GAAP number was $17.5 million versus $16.7 million, and our adjusted number was $18.6 million and, of course, versus 16.7 a year ago. Net income GAAP, 10.7 million versus 10.3 and adjusted was 11.3 million, versus 10.3, of course. There was an additional million -- 1.1 million shares outstanding for the quarter, 37.2 versus 36.1 shares. EPS for the quarter, GAAP $0.29 versus $0.29 and adjusted, of course was $0.31 versus $0.29. So there are the financials. Ira will tell you some more things about the financials in a little while.

Let me talk about the quarter. Let me first talk about Grocery for just a couple of seconds, because John Carroll will take you through all the great things that are happening in the Grocery and the Frozen group. We had good growth in the Grocery Frozen group. All of our brands in the Grocery Frozen group grew either high single digits or in double digits. The only one that did not grow to where we wanted it was Health Valley, and we know we have some things we're doing -- some of the new products were delayed in introduction.

John will tell you about some of the things that we're doing on soup and how our other stocks and soup have been sold, and the service levels being at 98 percent. Talking about service levels, last year in this quarter, our service levels -- and this is out of Melville -- and service levels around the rest of the country run at about 99 percent. But service levels out of the Melville businesses ran about 97 percent versus 92.5 percent -- John will talk about that later -- and, boy what that does for efficiencies, what that does, you know, making sure that trucks go full instead of 80 percent -- and what that does to keeping happy customers out there, you know, when you are servicing them. So we've done a good job with filling our orders. We've done a good job on service levels.

We've done a good job, you know, with costs being higher, with commodities still out there being higher, fuel, even still, our guys did a great job in controlling those. And John will talk also about some of our pricing and some of our potential need for additional price increases as we move down the rest of the year. In regards to CarbFit, last year at this time I was probably banging on the table, pretty excited about the whole carb category. And as most of you know out there, there's been a lot of changes in the carb category. And that's a perfect example of why our Deboles pasta is up 17%, and with Arrowhead Mills [INAUDIBLE] good numbers, because people are coming back and eating whole grain products, and not so much on the carb product; and I will talk about the food pyramid in a little while.

So with that, we were up against last year this time a major selling of CarbFit and seeing that in our third quarter. What our plans are, we'll still keep some CarbFit products around, but we will skinny the line down to just a few items over the next couple of quarters, and that will be part of our SKU rationalization, which I will talk about in a while. Then, you know, the good news is we sold it. We sold most of it through. There's still some stragglers, some product that we have to get rid of; and ultimately, you know, our retailers are looking to reduce the space, because we are not the only low carb item out there, and I must tell you there's a lot of them out there looking for places to go.

Let me tell about you some of the good things that happened at Celestial for the quarter. Our overall sales at Celestial grew about 8 percent. That's pretty good, and you know, we are all feeling the cold today and we are feeling the effects of the flu, but don't forget that happened in January. October and November were, you know, extremely warm months but still with strong competition from Twinese [PHONETIC] and Tazo, Celestial sales grew overall 8 percent for the quarter, which -- and that's coming off a strong quarter last year. So those guys up there have been doing a good job. They've done a good job in getting their holiday teas out. They've done a good job in getting new products out there.

Consumption during this period was relatively strong, with dollar growth keeping pace with the category. We also posted good gains in our green -- our green tea sales were up 30 percent. Those that aren't drinking green tea on this call, should be. Our black tea sales were up 3 percent; and as you can remember, our black tea sales -- before, it was a small part of our business, and it's continued to grow. What we are doing on black tea, actually, is replacing a lot of our wellness tea. You know, for the quarter, Twinese [PHONETIC] and Tazo were the major brands that were up. Most of the other brands were down.

Our share -- our unit volume grew 5 percent and actually against a very competitive category that grew grew at 7 percent. We grew very strong in the category in Wal-Marts, mass merchandisers, and we grew extremely strong in chain drug. In Q2, we supported a line with multiple programs to -- designed to pull the products if -- some of you probably received FSIs at home, and some of you probably have seen a lot of our sampling. So we saw a lot of print advertising continue in Q2. In Q2 -- and actually tomorrow Celestial Seasonings will be a sponsor of the Red Dress Fashion Show, which kicks off this week in New York.

And the partnership will enable Celestial to bring the message of tea and heart health to millions of women across the nation, building awareness for the link between drinking more tea and women's heart health. And I think it's a great area for Celestial to get involved with, and if you saw the names of major companies, it just shows us up against, you know, great companies and it's a great program for us to participate in. As it stays cold out there, and those that have flu, make sure you drink plenty of tea and make sure it's Celestial. Snack business, our carrot shipments for the quarter were up 15 percent. Our consumption in natural is up over 9 percent. Consumption in grocery is up over 9 percent.

Our Kettle blends continued to show strong ACD growth, and we're expanding [INAUDIBLE] at club stores, and we continue to expand into club stores and other wholesalers. We have a lot of exciting new products. Actually, we're looking at a lot of ways to reposition Terra into new categories and some exciting things to come out from there. Garden of Eatin' did not grow in the quarter the way it has been growing. We've seen some entries on some private label; but on the other hand, our Little Bear product, which is a natural food tortilla type product, and is in mostly natural food stores, grew over 12.5 percent. Consumption was strong on the tortilla business and our consumption at Garden was up 4.7 percent.

Those this weekend watching the Super Bowl, when you're out there buying snacks, make sure you're out there buying Terra and Garden and Walnut Acre salsa. So healthier chips and organic salsa should be part of your Super Bowl weekend. Our Canadian business was up 17 percent, and where our main growth came from there was on our Hain brands, and that's our Earth's Best, Health Valley; our Rice Dream product is extremely strong. Our Rice Dream for the refrigerated product. Now the carob chip business Canada growing nicely. In Canada, our Eve's business has had some growth, not the growth that we wanted.

There's some competition -- Schneiders, which is a meat packing company up there, has just come out with some products; and, actually, you know, we have some challenges here in the U.S. on Eve's which we think easily we'll overcome. We're in the midst of introducing some Eve's frozen product, and Eve's will expand more and more into club and Wal-Mart and other classes of trade. Our Euro business was up over 22 percent, and that's Euro over Euro. Good growth coming from Lima, Grains Noirs. Our Natumi business, which was our new acquisition, and our rice drink business. And as you heard me say on the last call, we're doing a lot of consolidating over there.

Jim Menske [PHONETIC], who ran our natural sales business, has now been moved over to our European operation. We are consolidating all of our businesses under Jim, and we're putting together one integrated sales organization, one integrated marketing organization, where before we had different sales organizations selling Natumi, our milk-free line, or Natumi [INAUDIBLE], in our Rice Dream line and our Limo line, so we'll have one sales organization selling to grocery stores and one sales organization selling to the grocery stores over there. And our focus today in Europe is UK, the Netherlands, Holland, and Germany, and we have a pretty good plan in place there.

Personal Care has been one of my pet projects and pet products, and I will tell you, the category growth is up 14 percent. Jason's, who in both bath, oral, and -- has been up, both either 16 -- 16 percent and 13 percent, and one of the things we had to do with Jason's, when we acquired it in June, evaluate the product line, and evaluate, you know, people that we had there. So we have now brought in a complete new management team in marketing and sales. We've evaluated the products. Jason's has not had any really new products in the last two or three years, and there was really none in the pipeline. We've gone back and went through some major product improvements -- major product changes.

We've developed multiple new products; and come March and April, we will be introducing number one, a whole baby line of products under the Earth's Best name, which we feel that there's some customers already and it shows you the strength of the brand, that we will be rolling out, and this will be introduced at the Anaheim Natural Food show. We'll also be introducing a product line called Red Elements which is made of rooibas tea, and this will be the first major entry -- the first entry of new products coming under the Jason's brand. So we're very happy with the performance. We're very happy with the direction, and, you know, we've had to make a lot of changes, but we're pretty excited about what's going to happen in the next six months and then after that.

Our food service business, which we continue to nip away at and, you know, we see big opportunities in food service. McDonald's in New York City is now permanent, and we'll continue to expand stores there, so anybody in New York listening to this call, you can go in and get your McVeggie burger. If you are in Canada, in British Columbia, if you want to order a Vegetarian Veggie Pizza, you can at Pizza Hut. We are expanding our business tremendously across the country, universities, colleges, and NYU in New York has been the first major one in New York.

Airlines today -- again, Jet Blue and American Airlines are airlines that you can find our products, and those airlines today are selling food. We're in discussions with multiple airlines on that. And as you have probably heard and seen, there's a lot going on in the vending area of -- with campaigning, and we're in the midst of moving into vending machines. A lot of have you heard about the food pyramid, the new dietary guidelines, and you know, every five year the government publishes new guidelines, and the latest guidelines suggest that we eat healthier foods such as whole grain, fruit, vegetables and consume fewer calories and exercise more.

You know, the majority -- I would say 98 percent of our cereals are made of whole grain. They always have been. A lot of our [INAUDIBLE] -- all of our rice, pastas are whole grain. So more and more fruits and vegetables, which the dietary, you know, guidelines call for, you know, whether it's Walnut Acre juices, more and more vegetables in our Health Valley Soups, which will increase. They recommend milk or equivalent milk alternatives, and Imagine, WestSoy Fat-Free, Low-Fat Soy Milk are excellent milk substitutes.

And meat and beans [INAUDIBLE], between our Eve's soy burgers, our Eve's soy, you know, meat in a lot of products, or -- we today probably have one of the largest selections between Walnut Acres, Little Bear, Westbrae, in the bean area, so a big opportunity. And last but not least, oils -- mono and polyunsaturated fats are recommended. Hain and Hollywood Oils are high in mono and polyunsaturated fats and absolutely contain no transfat, so we absolutely, from the new food pyramid out there, there's a lot of SKUs, there's a lot of products that would encompass products being made by the Hain Celestial Group. So we're looking for tremendous benefit from that. I continuously get asked about our Heinz relationship and how is that working out.

Ira in a little while will tell you about our tremendous improvement on our cash flow and our cash conversion cycle. And we've seen a lot of good things happen there. From a cost savings, we've been working on this for four months. We've identified three quarters of a million to a million dollars ready that we'll have in savings over the next year, and by no means are we stopping there. And there's multiple other areas that we're looking at, and going into.

Another topic, which is a topic which is high on a lot of people's question list, is SKU rationalization. We've begun to identify a lot of SKUs to rationalize, and the first six months we have discontinued over 70 SKUs which we ran through our P&L. Our SKU rationalization plans are close to being in place, and we're just in the midst of finalizing; but as I've told a lot of you, what's important about a SKU rationalization is a couple of things.

Number one, you know, we have space out there that we want to protect. And in order to do a SKU rationalization, we want to make sure, A, we don't lose that space; and B, we don't have competitors coming in with similar products as smaller companies. And C, we do not want retailers putting in other private label or other things in that space. And last but not least, we want to make sure our sales organization is fully ready to take that space and put one of our Hain products in.

We're also looking today at our product line to say, what should be exclusively sold in natural food stores? What should be exclusively sold in grocery stores? What should be exclusively sold in mass market? So over the next six months, we will be discontinuing SKUs, we'll be running them through our P&L and probably somewhere between a million to a million and a half and -- in the next two quarters, but we are into it and we are evaluating it.

And we're making sure, though, that we're replacing that space, because that is very, very valuable out there, and what's very important is to make sure our sales organization is ready, and at the same time what we are trying to do is make sure that we run down as many SKUs as possible that we don't have, -- you know, just obligations that are there, and exposures on, you know, packaging and projects as they're run through our systems. You read in the press release from a people standpoint, Steve List [PHONETIC] will now assume responsibilities of our Canadian business. Steve did have responsibilities of Celestial Canada.

As we look to consolidate businesses, Steve has a good infrastructure in Boulder, and there's some -- some of that infrastructure that could be used up in Canada, and Steve will look to see what we can do to integrate that. We will definitely still have the stand alone Canadian operation. We will still have, you know, our Vancouver office, but what else can we do from efficiencies and to integrate the businesses, and Steve is now responsible for any of these businesses. So with that, I feel very good about the businesses. I feel very good about the people, very good about the changes, the accomplishments we made in this quarter.

January has been a good month for us, and we like what we're seeing in the industry, even though we're dealing with inventories coming down, even though we're dealing with wear houses closing. You know, as a lot of you out there continuously hear in the major food companies talking about, you know, higher costs in freight and fuel, commodities -- we may have to, and we're evaluating it right now, take another price increase on some items, which John will talk about, will -- it will not be against the full line, of course; but as we look at that. So, you know we're evaluating that.

Sarbanes continues to cost us, and we'll be ready for implementation, which Ira will talk to you about, but it continues to be higher than anticipated because of acquisitions and that, that we continue to do. We're pretty excited about this half. We feel good about the acquisitions. You heard me talk about Jason's and our full body care. John's going to talk about some of the great things happening on Frozen. I feel great about the new products that we're coming out with -- really, Maureen Putman and her group, [INAUDIBLE], Matt Cooper on the Frozen side -- he really has some incredible frozen and refrigerated products that we're coming out with, and you heard me mention about the Earth's Best, some of the Celestial.

We really have -- which I call the next iPod of products coming out, and that's been my challenger on this group, is I -- what's the next iPod for Hain? We have put in place many, many, many cost contingencies. Jim Myer has just joined us to run John's operations group, and John will talk to you about him and some of the directives and mandates that he has. In the next half, we feel good about getting the full effects of our full price increase, as -- as we said to you before -- [ No audio ] Price protection [INAUDIBLE] promotion, so we didn't get the full benefits.

From a trade promotion standpoint, as you can see, our trade dollars were flat against last year, and again, we're doing a good job making sure we're getting good benefits and good effect for our trade. And, you know, last but not least, you've heard me talk about the SKU rationalization; and not only, you know, will we see, you know, not -- benefits not [INAUDIBLE] away from the SKU rationalization, but some of that space will be able to be used for a lot of our new products.

Just one thing I forgot to mention in regards to the people, with Steve List now taking over Canada, Cecilia Atkinson, who has been Vice President of Marketing, will assume some of Steve's responsibility and she'll become General Manager of the Celestial Seasonings. So with all the good things -- and even though there's a lot of challenges out there in the second half,-- I'm reconfirming our full year guidance of $0.92 to $1.01 for the rest of the year. What I'd like to do is turn it over to John Carroll, and he will second everything what I said about all the good things that him and his group are doing in the Grocery and Frozen Foods. John?

Thanks, Irwin. Good afternoon. As I stated in previous calls, Hain Grocery and Frozen is working against four strategic objectives: First is to drive capital growth, second is to drive out costs and rebuild margins, third one is to improve our working capital management, and fourth is to upgrade our talent and our execution. Our goals have been to make meaningful progress every quarter; and in Q2 represented significant progress as we continue to be on target for delivery of our FY '05 budget.

Key highlights started with our top line growth, which was up 3.6 percent versus a year ago, with Frozen up in the double digit area and Grocery up about 1 percent. Now, the Grocery number is somewhat misleading, because if you remove the $3 million in Carb Fit sell-in in Q2 a year ago, Grocery was up 6 percent. In fact, without the CarbFit sell in Hain Grocery , total top line would have been up 78 percent. This was driven by many of our key brands, including Imagine Soup, which was up 43 percent, Imagine Rice and Soy Dream, which were up 20 percent, our Earth's Best business, which was up 16 percent, our DeBoles pasta, as Irwin previously alluded to, was up 17; our Arrowhead Mills and Westbrae, which were up double digits; and our Hain brand, which was up 7 percent.

In addition , our new frozen brands are performing well too. Ethnic gourmet frozen meals were up 20 percent, and Rosetto was up 3 percent. And a key point on that is, that is the first quarterly year on year increase that Rosetto has seen in four years. Our year-on-year top line gains reflect a few things. First, improving consumption trends on several key brands; also continued growth in channels not measured by Spins or Nielsen. For example, Mass Merchandiser, Trader Joe's and drug. These gains also were slightly offset by our continuing to restrict unprofitable distributor buyouts. Moving on to the area of margins, our gross margins in Grocery and Frozen showed a 500 basis point improvement over Q1.

This was driven by, of course, as Irwin talked about, our price increase, as well as lower sales promotion expenses, which were offset partially by 2 percent higher delivered case costs due to increased raw material, packaging distribution costs. As we worked our way further down the P&L, we saw an increase in marketing costs, as we continue over time to shift our spending from distributor push spending to retailer consumer pull. That increase, however, was more than offset by a decrease in our SG&A as a percent of sales, as we realized more synergy efficiencies from our Frozen acquisition, all of which led to an improved Grocery and Frozen bottom line.

Moving on to working capital management, we saw improvements across our days in inventory, which were down 13 days, and our receivables outstanding, which were down 11 days. And these were driven primarily by not building and billing for quarter end buyouts; and also as we started to reduce our soup inventory, which we had told we built to a million cases so we could not have any shortages in our soup sales this year. In the area of upgrading our talent and execution, we saw a continuation of our improvement in the operations area, as Irwin previously alluded to.

Our order fulfillment was 98%, which is a huge gain versus where we were a year ago, and it represents -- it's driven primarily by soup, which is over 98 percent, whereas a year ago our soups fulfillment numbers for the second quarter were in the high 80s. It's a key point to note that our operations function was previously seen as an Achilles heel for the Hain Grocery group, and they have made huge improvements and are really doing well for us right now. As Irwin also alluded to, we continue to upgrade our management talent with the addition of Jim Myers as the VP of Operations. Jim replaces Fran Daily, who returns to his position as EVP of Business Development and Strategic Planning, after helping the operations group make these tremendous slides over the last six months.

Jim comes to us with more than 20 years experience in the packaged goods business, most recently at the -- at Specialty Brands, Incorporated. Jim brings a wealth of personal experience across all elements of the supply chain, as he's worked in every piece of it, and he will be focused against driving our strategic objective of driving out costs and improving margins. The other point I want to make in regard to this is Jim Myers' hiring completes the new Hain Grocery and Frozen management team, and now I believe we have a strong, accomplished and experienced leadership function which features Maureen Putman and Matt Cooper as General Managers of our Grocery and Frozen businesses, respectively; Jim Breen [PHONETIC] as our VP of Sale; Rose [INAUDIBLE] and Marla Henman [PHONETIC] as our VPs of Finance and our VP and Controller of Hain Grocery and Frozen; and this is a team that's poised to deliver the numbers that we have promised.

We are also moving on, as we discussed before, to upgrade our next level of management. In the last quarter, we added a new operations finance director, an eastern division sales director and a new southeast regional business manager, all three of whom boast tremendous experience and a commitment to help us achieve our strategic objectives. Other accomplishments in Hain Grocery and Frozen in the second quarter include rebuilding our new product queue for both Grocery and Frozen.

We've got some new strategies here. To start, we've focused on our core product categories, we're opting for fewer but bigger launches, we're focusing against two launch windows, Expo West in March and Expo East in October. And we're launching only new products that one, leverage the new learning from the new FDA food pyramid changes, and second, enhance our margins. Now this new approach will help us deliver better new products; and more importantly, focus our execution and get them to shelf, and allow us to measure our performance at retail.

Now, our upcoming Expo West show promises to be a very exciting debut for some of the our new innovation, including in the Frozen area, organic ravioli from Rosetta, eight new Ethnic Gourmet entrees and bowls, featuring authentic recipes from Latin America and Italy, our new Celestial Tea Dreams Nondairy Frozen Desserts, which feature six top selling Celestial tea flavors and delicious creamy, nondairy ice cream-type treats -- and also three new categories in Frozen. Under the Hain Pure Foods brand, we'll launch frozen all-natural vegetables in a unique and proprietary serving vehicle that preserves 100 percent of the nutrients and is packed -- they are packed two hours from when they are picked in the field.

We're also launching frozen and refrigerated all-natural ready to eat meat products that go from four minutes from package to plate. These products feature flavors such as pork [INAUDIBLE], pork roast au jus, meat loaf and chicken wings. These products are all from small family farm-raised livestock and are fed only vegetarian diets and are GMO, antibiotic and hormone-free. On the grocery side, we also have some great news. We are launching our Horchata [PHONETIC] Rice Dream, which is a drinkable rice pudding, and it is first to [INAUDIBLE] new product, and the first of many to come. Also, our new Health Valley Organic Kids cereal, which will be fun and fortified whole grain cereal, Health Valley's [INAUDIBLE] cereals with nuts and fruits, Health Valley Heartwise breakfast bars, featuring Corawise [PHONETIC], which leverages our success with the same ingredient in nondairy beverage; Health valley Organic Creamy and Seafood soups from [INAUDIBLE], which is a breakthrough in the category, Mountain Sun Pure Black Blueberry Juice, which is very high in antioxidants; Mountain Sun Pomegranate and Black Cherry blended juices, and our latest innovation, which is -- will be Walnut Acres organic beans and baked beans in our new tetra re-cart cartons. These are easy opening, preservative free, space-saving containers that have 79 less -- 79 percent less packaging material than a steel can and unrivaled freshness and taste.

These are key attributes that are very important to the natural customer. Moving on from new products, as Irwin said, we're also preparing our SKU rationalization. We've identified a net SKU reduction of 20 percent of our SKUs, and are working to implement over the second half without losing any facings at retail in all channels. Finally, we also continue to work towards reducing costs and adding more cost certainty by moving more of our co-pack production to turnkey.

A key breakthrough for us has been that our largest [INAUDIBLE] co-packer has committed to begin a turnkey pilot with us in February, with a goal of going entirely turnkey in FY '06. We also are, as Irwin discussed, reviewing pricing opportunities across our line, as we look to offset continued cogs in fuel pressure and will take pricing where the marketplace will allow us to. So to summarize our Q2 performance in Hain Grocery and Frozen, we made good progress against all of our strategic objectives.

We saw top line progress, margin progress, cash payment progress, and in the area of people and execution. We are on track through the first half to deliver our FY '05 budget. We recognize the second half has some challenges with continued cost pressure, and some opportunities to improve our trends in Health Valley; but we expect our momentum across many areas of our business, our improved execution, across all functions, and our exciting new products to enable us to deliver the year. So with, that I will turn it over to Ira Lamel.

Thanks, John. Good afternoon, everyone. As everyone discussed earlier, our sales for the second quarter this year reached a quarterly record of $169.8 million, up 18.9 percent over the prior year's second quarter sales of $142.8 million. Diluted earnings were $0.29 per share on a GAAP basis, with 37,207,000 shares outstanding.

Before deducting charges for terminated personnel, non-cash compensation and outside Sarbanes-Oxley consulting costs, second -- in the second quarter , our earnings on an adjusted GAAP basis -- non-GAAP basis, excuse me -- was $0.31 per share. The total of the cost that we added back to these items aggregated 1,164,000 before tax. In the prior year's quarter, we had earnings of $0.29 cents a share on 36,135,000 shares outstanding, while incurring none of the compensation or Sarbanes-Oxley costs I just mentioned. Diluted shares increased by almost 1.1 million shares over last year's average, which impacted earnings per share by one cent year-over-year.

Gross profit for the second quarter this year was 31.4 percent, as compared to 33 percent in the same period last year. In this year's second quarter, we did get a 2 percent positive impact on a consolidated basis from our price increase, which was principally offset by a 2.2 percent higher cost of product, as compared to the same quarter in the prior year. Our margins were most negatively impacted by the current quarter's mix of sales, as our higher margins Celestial Seasoning sales represented a 2.1 percentage point smaller component of consolidated sales this year than last year, as a result of the acquisitions we made increasing the scale of our business.

This anomaly had the effect of reducing consolidated margins by 1.5 percentage points. Our SG&A in the second quarter this year was $35.2 million or 20.7 percent of net sales, compared with 30 million or 21 percent of net sales in the prior year's second quarter. We continue to realize reductions in G&A as a percentage of sales, as our sales base increases and as we benefit from integrating our acquired companies.

We spent more dollars in this quarter on selling and marketing expenses by approximately 3.1 million when compared to the prior year's quarter, with almost half of that increase coming from consumer-based promotional programs. Operating income for the quarter this year was $18.1 million or 10.6 percent of revenue, as compared to $17.1 million or 11.9 percent of revenue last year. In this year's second quarter, interest expense and other expenses totalled $553,000 versus 350,000 last year. Our interest expense was 350,000 higher this year, the higher interest resulting from higher interest rates than last year by approximately one half a point; and we had higher average borrowings this year by approximately 30 million in the second quarter versus last year, all that borrowing coming from our acquisitions during the past year.

We have paid down approximately 14 million of debt since June 30th, 2004 when we did our last acquisitions. And we have scheduled an additional 8 million paydown on Monday for a total of 22 million by the time we close business on this coming Monday. In the area of foreign exchange, we did have 210,000 higher foreign exchange gains this year versus last year. As I discussed last quarter, our effective income tax rate has risen to 39 percent this year, while last year, the effective income tax rate was 37.9 percent. This 1.1 percent change in rate increased the tax expense quarter-over-quarter by approximately $200,000.

As Irwin mentioned earlier, EBITDA was 21.9 million or 13 percent for the second quarter, versus 19.8 million or 13.9 for last year's quarter. Depreciation and amortization in the quarter was 3.2 million, compared to 2.7 in the prior year's quarter. We continue to have a very strong balance sheet. Our working capital is 130.9 million, our current ratio is 3.0 to 1. Our working capital has increased $20 million since the end of the year.

Our total assets are now almost $700 million, and our stockholders equity is just shy of 525 million at December 31st. Our debt -- our debt as a percentage of equity before Monday's paydown is 18.6 percent, and after Monday's paydown, it will drop below 17 percent. Since June 30th -- I said that earlier -- we have paid down that debt. As we announced last quarter, we will be reporting free operating cash flow and cash conversion cycle statistics in each of our quarterly releases. We generated $12.3 million of free operating cash flow in the second quarter this year, improving from a negative 9.6 million in the first quarter.

Our cash conversion cycle stood at 82 days in the second quarter versus 94 days in the first quarter. We made improvements in days and receivables by going from 47 days down to 39, and in inventories by going from 83 down to 71. We remain an excellent payer of our bills, taking advantage of discounts when we can; and in this quarter, our payable days actually shortened to 28 days. This, of course, had a negative impact on our cash conversion cycle, but we continued to encourage those responsible for paying our bills to take advantage of real cash discounts, and we will in that circumstance be willing to, I guess, suffer the consequences of a few extra days in the cycle.

A note about our inventories, which I mentioned, we're at 71 days. This 71 days comes after increases in inventories acquired in our recent acquisitions, which have not had a full year to cycle through the system. We see continuing opportunities to reduce inventory days significantly in the future. These acquisitions, which took place if the fourth quarter of our '04 fiscal year, brought on $10 million onto our balance sheet. Irwin mentioned earlier the costs of Sarbanes-Oxley, and said I would discuss our experiences with it so far.

We retained an outside consulting firm, one of the major accounting firms -- not our audit firm, certainly -- to be the project leader for us in bringing to us compliance with the Sarbanes-Oxley Act by the end of our current fiscal year, which is the due date for us. I think it's fair to say that we're really no different than many of the other companies in the public sector that are experiencing the process of going through compliance with Sarbanes-Oxley, and it is simply costing us, as well as all of corporate America, far more than anticipated by anyone at the outset of the process.

We do not know today what the ultimate total cost will be when we add up what will be the consulting costs and what our incremental fees will be with our auditing firm and others; however, I'm very pleased to report that we are on track to be in compliance with the requirements of Sarbanes 404 by the end of our current year , and I look forward to being able to give you, you know, good reports in that regard. It is currently too early to give you any specific reports regarding Sarbanes-Oxley. I think everybody in corporate America knows that we all have to wait until actual testing is done and completed. With that, we'll open it up for questions and turn it back to the operator.

Absolutely. If anyone online would like to ask a question today, you may do so by pressing the star key followed by the digit one on your telephone keypad. We will pause just for one moment to assemble a roster. Again, if you do have a question at this time, please press star one now. And we'll go to Terry Bivens with Bear Stearns.

Good afternoon, everyone.

Hi, Terry.

Ira, let me see if I have my numbers right. If you x out acquisitions, base business growth pretty close to 10, 11 percent -- would that be reasonable?

That's a very close number, Terry. We were in the double digit range this quarter for internal growth.

Okay. And did you have -- I guess using Irwin's numbers, the SKU reduction looks likely to nick about a percent maybe per quarter. Was there any such subtraction for SKU reduction in this quarter?

No, this quarter we discontinued -- it's small, Terry. It was about 70 products. It will -- the next two quarters will be the bigger quarters.

Okay. And I guess just, you know, on margins, Irwin, I mean, you know, I understand what you're saying on Sarbanes-Oxley. I guess all of us will have to kind of make our decisions on whether that, you know, is something you add back or not. But if you look at margins kind of more in a GAAP kind of way, they have kind of declined now on an operating basis for the last four quarters. When -- you know, we should have, I think, a much easier comparison in suit as we go through March. When would you expect that curve to begin to take more of an upward tack?

I think, Terry, just come back with what, you know, Ira, you know, has said. You know, as we do acquisitions we're not doing acquisitions at the same margin level that Celestial was. And this here quarter, this being a big quarter -- one of our biggest quarters -- and the next quarter being our biggest quarters for Celestial, that was predominantly, you know, the total difference in this year versus last year on margin. And if you then add back about another, you know, .2, .3 on costs -- and we didn't get the full benefits of the cost, you know, increase, but we got the full benefit -- the price increase -- we got the full benefits of the cost increase, and at the same time, you know, we're not getting all the cost efficiencies on the integration and not yet of the acquisition. So, you know, we're looking -- what you're going to continuously see is our margins being affected by additional acquisitions. I mean, if you went back -- and people continue to go back and say your margins, your margins, your margins -- you know, at one time, Celestial was 45 percent of our business. You know, today Celestial being, you know, being a 100,000,000, $1,115,000,000 business, it's not a big percentage our business anymore, so that affects margins big time. But, you know, to come back as our costs continue to improve and there's multiple moves, you should see us -- that moving into this quarter, next quarter and thereon after.

And you know, it's interesting -- just to add one more comment about Celestial Seasonings. Celestial Seasonings is getting very good growth, certainly, within the context of its own business, and Irwin reports that, and you see it in consumption numbers. What is happening, however, is as we grow in total as a company, whether it's through organic growth, if that organic growth is a little bit faster than Celestial's growth, and when we apply our other businesses, certainly Celestial becomes just a lesser component of the total. That doesn't mean I -- I wish to diminish its importance to us or its profitability, it's just a lesser, you know -- lesser component of the total. It's interesting that, you know, the second quarter is one of the Celestial's two very strong quarters, and in the second quarter a year ago, Celestial dropped three points as a percentage of our total business, and in this year's second quarter, it dropped another 2.1 percentage points as a component of our total business. I think everybody out there knows it's a strong margin product, and that, of course, has the effect of diluting the margins somewhat.

And Terry, just one other thing you mentioned in regards Sarbanes, whether it is one offs. In the quarter we had an additional-- a lot of other Sarbanes cost in the quarter. This was just over and above our budgets, as, you know, we're looking to do additional stuff in acquisitions. So, you know, I hear you -- we budgeted for it, of course. We knew it was coming. But this was a lot more than we originally had budgeted for. So -- and as we go forward, there could be a lot more, and -- but, you know, we have, over the next two quarters, you know, budget for it; but you never know what they want today, and that's the unknown out there. So --

Okay. Well, thank you very much. I will yield the floor.

Thank you.

We'll move to John McMillin with Prudential Securities.

Well, if we go beyond an hour, don't blame me!

It's all your fault, John. It always is.

Ira, what was the number that acquisitions added? Is it, you know -- can you just give us the number?

Well, I think -- I think John, what you usually come back and say, I mean is it's very easy if -- you just heard what Terry said what our organic growth was.

Yeah, I would like to calculate it myself. You know, I would like to know the numbers the revenues added. I guess you told me what the currency added, but that was below -- that was on income, correct, $210,000?

You and I discussed this before, and you know that we don't take the view that it's the same store sales concept. I know you might , but we don't take that view because once we acquire a business, we make a lot of changes and the growth that comes within the period of that business, we believe, is our growth rather than something we acquired. Certainly if the -- you know, the company sales from the prior year, you know, that's what that is. But I -- I will tell you that it was about 13 to 15 million total of acquired sales.

Because clearly, if you strip that out, you don't get any number near 10 percent.

Well, that depends, again, upon, you know, whether you're using the same store --

Sure, I got you. So you just -- you know, I think that's fair. If you take last year's 142.8, add what these businesses did when they were part of someone else and get to some 10 percent number, I just would kind of like to know, you know, how you got to that , but --

It's impossible for to us give you exactly every number that is involved in the calculation for a lot of different reasons; but remember, when we acquire businesses, there are SKUs that are eliminated and then we grow the business with new SKUs. There are all kinds of events that take place, and it's a very, very difficult number to hone in on. It's --

But, John, I think it's -- to be clear, our organic growth comes from what we grew our existing businesses that we owned a year and the percent that we grew businesses that we bought.

Well, that -- that's fair enough. Now, that -- that number was a after-tax number, right, Ira?

No, I quoted pretax.

Oh, pretax.

Yes, sir.

And then, John, what was the aseptic business up in the quarter?

The aseptic soup was up --

No, no, no, no, the aseptic assorted beverages -- can you --

I'm sorry? The --

The aseptic beverages. Nondairy beverages.

They were up 1 percent.

But, John, what he said are aseptic rice and soy -- or aseptic Soy Dream and Rice Dream was up almost 20 percent, our West Soy business was down approximately $1 million and that's -- our Rice Dream business continues to grow extremely strong, and it's trading off sometime on promotions and some of the things we did this year versus last year and, you know, West Soy had some things, you know, last year, where we were in some clubs and things like that.

Well, it's hard to get more than -- that much more than 1 percent out of nondairy [INAUDIBLE].

Well, we expect more. We absolutely expect more.

Well, you're going to need it -- I mean, Irwin, by keeping your sales guidance, you know, you need -- going to need to put two quarters of kind of mid-20 sales growth together. Did you contemplate at least taking the high end of sales and earnings guidance out, just to kind of, instead of coming in one day and taking big numbers down, did you think about like taking a half a step back here?

Well, I think John -- and the reason is this here, most people -- consensus today is at 93, 92 -- I'm not sure.

It's slower.

Yeah, I mean, so, you no if consensus was at $1.01 -- would I take in -- I may take a big step back. But I kind of, you know, at the low end and look at what the analysts are seeing out there. And, you know, we -- you know, in the next six months, we have a couple, you know, analyst meetings and stuff out there, we'll be talking more about it. But, you know, January continues strong. We have a lot of good things happening out there. This, John, is our roll out of new products. We have not had any real new products roll out in the first half of any significance. So I think when, you know, we're right now confirming guidance, but consensus is out there, you know, close to the lower end.

Okay. And John, wasn't there a 5, $6 million revenue hit last year due to the California strike?

Yes. Yes. But on the other hand, at the same thing, you know, this year, you know, we're up against, you know, at least that and then some on CarbFit, John.

Okay. Thanks a lot.

You're welcome.

And we'll move to Andrew Lazar with Lehman Brothers.

Good evening.

Hey, Andrew, how are you?

Good, good. Just a couple of quick things. One, I think last quarter -- I mean, you'd said that 12 million or so in sales were kind of pushed, or kind of didn't come through because of some of the trade spending adjustments that you're trying to go do, and retailers kind of held back to see whether or not that was forthcoming in the quarter. So I'm wondering, did you get kind of a bounce back that would you have expected once this quarter started; and if so, are you -- you know, with that are you still happy with kind of the sales you got in the quarter, even if you had gotten kind of a big bounce back?

Well, I don't think we we got a bounce back. What happened, Andrew is we continue, you know, on our process of, you know, trying to ship as much to consumption. At the same time, you know, what we try -- what we had again in this quarter is, you know, similar to last quarter, and we also had additional warehouses closing.

Right.

So I don't think anything changed differently from last quarter, but what I did say last quarter, you know, October was very strong. And January has been very strong for us. So, you know, we're looking to, you know, continue on a good even path throughout the quarters of our --

Inventory, as you said, kind of just coming out of the system for good, which ultimately, obviously, is a good thing.

Absolutely. And you know, one of our big customers out there so far has closed about five warehouses, okay? And, you know, that five warehouses closing, I mean, there's a lot coming out of the system. You know, we're up against last year at this time, you know, a big transition with Wild Oats going from one to another -- just because it would switch like that, doesn't mean sales necessarily will stay the same. They all look to turn their inventory. I mean, no different than we are. Everybody's looking to reduce inventories.

Okay. And then on the SKU rationalization, I will think you had given a number perhaps of an impact on the -- on second half sales of between one and one and a half million dollars.

The impact --

Is that right?

Well, of the impact would be margin that will go -- that will affect, you know -- that will just run through -- the impact will be even higher on the sales line.

Okay.

But we'll run through P&L and just run it out, but we -- you know, when we do it, we may sell it below cost or at cost -- it will not be normal margin that we want to get rid of the product -- you know, we don't want to have to end up throwing it out. Whatever we can recoup, we will.

Right. I just wanted to make sure that it was more of a -- an impact on margin rather than sales.

Yes.

Because I'm assuming that the rationalization process is larger, if you will.

It's 1.5 --

Yes, $1.5 million.

Okay. And then just one last thing, you mentioned, you know, private label a number of times through your prepared remarks in various places and, you know, I know you've contemplated it in various times, you know, how to sort of handle private label from some of the -- you know, some of the key natural foods retailers and such. And you know, it does seem like some of those retailers in and of themselves are, you know, as brands -- the store brands do have some cache, if you will, with their consumer. I'm curious how you go through the process of what can be obviously a very slippery slope where you decide to provide some of that. You know, do you look at it on a sort of a category by category basis or, you know, once you were to jump in with one in one category, does that open up, you know, the flood gates that you have to do it for everything, or how do you look at that? Is there a certain time frame where you feel you need to kind of make a decision on that?

Well, we're already in the midst of making decision and we already do some private label business today. And, you know, if a retailer decides to get into private label, they're getting into private label. And, you know, my philosophy is number one, if we can work at partner with the retailer, and it makes -- you know, we can make sure that it's a good quality product out there, because the last thing we want is a private label products have a good quality product because it hurts branded stuff. If it can help our shipments and we can help manage the category and drive up costs, we will do it. You're not going to see a Terra original private label out there, and certain key product lines, Andrew; but other ones, absolutely, where it definitely makes sense, it can drive down costs, you know, and, you know, us and the private label guy are in there managing the category.

Okay. Thanks very much.

You're quite welcome.

We'll move to Ed Aaron at RBC Capital Markets.

Thanks, good afternoon. Just one clarification question on your -- on your earnings guidance. Is that $0.92 to $1.01 range, was that a GAAP or a non-GAAP range?

Well, Ed what we like and what we are doing is we are adding back, you know, the $0.03 back into that, and that's why there is a range out there. So if you took the 31 and the 18 in last quarter you would add those back but, you know, again, that's why there's a range of $0.92 to $1.01.

Okay. Okay. And then just to kind of circle back to some of the -- your initiatives on -- on just cost management, you know, I think you're maybe a year into the 30 M-3 [PHONETIC] initiative that you had announced. How much of that 30 would you say you've taken out?

Well, you know, I guess what we -- I'm going to come back to and say this here -- we've taken quite a bit out of the 30. The unfortunate thing, when we've taken what we've seen, is a lot more, you know, cost coming in and a lot after decisional costs going up, and, know, I think in this here quarter we held our costs at 2.2 percent. You know, you look at our commodities and look at some of the other price increases. Our costs, you know, if we didn't get costs, use some of the costs savings that we've had, would have been up a lot more. So I couldn't actually give you a number right now. But it has been a good savings number that we have made. Our guys, you know, in order to hit the budget, even though with all the fuel surcharges that came in front of us, everybody on this call today, that covers -- any consumer package companies knows what it's costing on trucking. We came in as a percentage, a little bit below our budget on freight and warehousing, which is pretty good, which came from savings. So there's not a number I can give you, but what I can tell you is this here, there's many areas that are totally identified. And 30/03 is something that's still out there. It may not be 30 and three, it may be 30 and four or 45 and four. But -- or 50 in four, or whatever it is. We're out there looking for a lot of cost savings because we know they are out there. We know we need them.

Okay. And just one last question, and I will open it up. The market spending that you went up -- I think you said $3.1 million, could you give us the base from last year?

Ed, can we get back to you on that? I don't think we have it right --

Sure. [INAUDIBLE]

We'll come up with you and get back to you on that, okay?

Okay. Thank you.

We'll take the next question from Greg Badishkanian with Smith Barney.

Hey, guys -- hey guys.

Hey, Greg.

Just got a question regarding potential price increase. You obviously had a nice acceleration in, you know, your organic sales up against I think a positive 8 percent last quarter, and so it doesn't -- the price increase really doesn't seem to impact DDO in terms of losing share. You know, how much of your product portfolio do you think you could raise prices and by how much, and have you talked to your, you know, retail customers about that and what's their reception to it?

Well, Greg, I think the good news is out there. When Campbell's Soup announces price increase, and you know, General Mill with cereal, the major manufacture -- the major consumer packaging companies are also. So number one, everybody else is out there, and as retail prices go up on main products, it helps us. But, you know, right now, we've identified, you know, probably 100 items that need price increase right now, because costs just keep coming up for us, and what we'd like to do is, you know, really go out there and we're doing some major studies on it right now, our competitors price, our price, and we would announce a price increase and what magnitude we will know in April that would be effective our new fiscal year July 1. So we're in the midst of doing a major study on that right now.

Great.

Yes, but it would not be as big, Greg, as the one that's, you know, across the board right now.

Great. And also with respect to contracts, I mean, most of your contracts are for your costs for your agricultural commodity.

Absolutely -- I mean, our soy contract -- you know one of the things that's very interesting, you know, one of our major soy contractors, you know, soy has come down, you know, dramatically; but we're looking for a big tolling increase because of healthcare and because of, you know, other costs have gone up there, and, you know, Tetra Pack has taken close to a 7 percent increase in regards to packaging. So we're definitely seeing, you know, soy coming down but we're looking at, you know, manufacturers in that we're pushing back and seeing how we can effect that, but we're not getting tolling costs and things like that. John you wanted to add something?

Well, I just want to also add is, increasingly, as organic products become more prevalent in proteins, organic seed is taking -- increasing demand for soy beans. So even though you see the basic soy beans going down, organic soy beans are still challenging to get at a price reduction.

Okay, and when you look at the soup business, it's done well for you -- your in-stocks are very strong. You know, are you -- are you maintaining the shelf space that you may have -- you know, may have lost it out of stocks last year this time? Are you getting some of that back?

Yes, Greg we are going to get that back. We did lose some. And we acknowledge that.

Mm-hmm.

But we are going back; and more importantly, the new products I talked about, in terms of the creamy and the seafood, that will also help us regain the shelf face that we lost because of last year's out-of-stock.

And I think, Greg, one thing that's important is this year, you heard John say before, in his talks on soup, I think he said ran about 98, 99 percent, and you know, we produced a lot of soup and we had displays out there. And you know, the weather really didn't start until January, so we'll see a lot more effects of that. But a lot of consumers are transitioning to aseptic soups. Our [INAUDIBLE] aseptic soups were up 45 percent, which is tremendous for us. And at the same time, you heard John talk about the new recard, which you will have aseptic soups with particulates of ingredients, and we will very shortly will have, and we'll be one of the innovators in that, and ultimately that will be replacing cans. So we're pretty excited about some of the new soup opportunities for us.

Does that have a higher margin -- or a dollar margin -- and do you stronger share in that particular segment of the soup business?

Yes. Yes on both counts.

Thanks, that's a helpful turn.

Absolutely.

Great. Thank you.

Thank you, Greg.

Andrew Wolf, BB&T Capital Markets.

Ira, in the $0.02 for the severance and the other issues of Sarbanes Sarbanes-Oxley, could you give us a -- you know, the proportions roughly that were allocated to each one? Was it mainly Sarbanes-Oxley.

No, Andrew, I would -- mainly -- it was mainly -- it was mainly for compensation, only what, about 300 --

It was a little over 300 for Sarbanes-Oxley. Andrew, it's on the chart that we -- that we released. We did a reconciliation right on the table this time.

Okay, great, I'll take a look at that. Thank you. Now back to your guidance, are you contemplating further non-GAAP, you know, reporting within that guidance, like the 300,000 of Sarbanes-Oxley, for example?

Well, I think, Andrew, as we came back -- you know, I said before, we will be running through P&L, a million to $1.5 million of, you know -- when we do our SKU rash and -- in each of the quarters and Sarbanes, as Ira has said, as we go forward, we do have a budget, and as higher costs come in and are over our budget, we will be identifying them.

So is there a million and a half of pretax charge contemplated in there for the SKU rationalization?

It's not a -- it's not a charge, we will be running it through P&L.

Andrew, we're still in the process of identifying exactly where the SKU rationalization is going to come out. The products have not as of yet been discontinued. As Irwin indicated earlier, we are protecting shelf space that we have at the retail level. We're still producing product that may ultimately end up in a SKU rationalization program, but we do expect during the third and the fourth quarters to get down to the final decisions on the SKU rationalization. Products are still being produced. Products are still being sold, and what Irwin is alluding to is trying to give you a feel for what might happen when we do get down to the bottom of the SKU rationalization process and make some hard decisions with some of the products that we will ultimately rationalize out.

Okay. So right now, the GAAP guidance is 89 to 98, right, because if I were to take the current -- the 92 to 1.01, I could take out the $0.03 of mainly severance charges. I'm just trying to understand the guidance, to be frank.

Well, Irwin told you that the range is $0.92 to $1.01, we are still confirming the range and we will come in with that; but we also described that in our our first and second quarter, we had items that we identified principally for the compensation costs that we talked about in the first quarter, and then we did include in that the Sarbanes-Oxley costs. But it's $0.03 that we have discussed in the first and second quarter. The $0.92 includes the $0.03 as though we had earned it. Or the range, I should say, of $0.92 to $1.01.

Okay, so you are excluding that, but you're not necessarily -- you're not excluding anything in the second half? We can talk about it later.

No, if I had -- Irwin had something specific to exclude in the second half, just as we did when we announced the earnings earlier in the year when we talk about known compensation cost that were coming, we would certainly identify them today. We do not have any specific numbers yet on what the SKU rationalization program would be, and, you know, other than what Irwin has talked about, and, you know , we don't have any -- any specific items -- you know, to disclose at this point, certainly.

Okay. I mean, it doesn't sound like that huge of a number. I'm trying to understand and kind of pin you down a little bit. Irwin, you spoke about challenges in the second half, and I guess my take away was it's less about sales and probably less about competition and more about inflating product costs. Is that sort of the right take away -- and other factor costs like, you know, fuel and packaging. Is that what you see as the biggest challenges in front of you for the second half?

Well, I think, Andy, there's always -- the day I forget about sales and the day I forget about competition is the day I'm in trouble. But, you know, I think it is -- again, we have a lot of good things going on in the second half, and I've always said that. But, you know, when I see the bigger companies out there being hit by a lot of these things, I'm just, you know, being a little cautious as I talk about them. And, you know, hopefully with the cost savings initiatives and all the good things we have in place, and, you know, good sales base, good new products, good acquisitions we did last year, we overcome a lot of these costs. But I feel pretty good about the second half, and a lot of the good plans that we have in place.

Great. Thanks.

Eric Larson, Piper Jaffray.

Yes, just one question, guys. In your shares outstanding increase in the quarter, how much of that was due to acquisitions in the over the last year?

Very, very, little, Eric. We have not in the couple of acquisitions -- or three acquisitions -- that we have done in the past year, used our currency -- use our stock as currency. They were cash deals.

Okay.

So the increase is -- is just a real increase from shares issued and the various prices on the market and [INAUDIBLE] and the earning per share calculation.

Okay. And then, you know, in the acquisitions that you have made in the last year, I can't remember all the numbers that you had put in place, but are you getting a net EPS contribution from those acquisitions today in the second quarter?

We're still pretty neutral on that, you know. The acquisitions that we've done -- in particular, the one in Europe, the one in California -- are standalones, so we haven't had the synergies there yet. We're working through what we are going to do down the road with those stand alones for the moment, and the new Frozen business that we acquired also brought on two factories; and therefore, you know, while those businesses are doing a little bit better than expected at this point in time, we haven't seen real accretion yet.

That's why I said before, Eric, in the second half, you know, we have a lot of good things kicking in there.

Okay, thank you.

You're welcome.

I think we have time for one more question before Irwin gives us some closing remarks.

Absolutely. We'll take our final question today from Mark Chekinau [PHONETIC] with Sidoti.

Good afternoon. Talking a little bit about the internal growth, you previously, I guess, had talked more of in an 8 to 10 percent range. Now that you have the price increase intact, you are potentially talking about another one, and you're bringing in, you know, the Personal Care, as well as the Frozen segment, which seem to be growing faster than your base business. Should we be disappointed to see an internal growth rate come below 10 percent as we look out over the next several quarters? I mean, is 10 percent now like kind of the minimum, I guess, that you would expect?

Mark, I think, you know, again, you know, 8 to 10, 8 to 11, you know, part of that growth has SKU rationalization with SKUs coming out of that, inventory is coming down -- you know, if you add all of that back, maybe. But I think absolutely -- you know, it's -- it wouldn't be fair for us to be increasing our growth to 10 percent.

Okay. And also, just could you kind of go over some of your key categories? You went over how their performance has been. Can you go over what do you expect for the year, you know, whether it be a Terra or Garden or the nondairy business -- kind of an annual outlook at sort of the growth that you're expecting on a year-over-year basis?

Well, I think, you know from our Grocery overall, you know, we need to be up in the high single digits to the low double digits in our major categories; and, you know, Terra has been up double digits, and we expect it to be up double digits. You know, we expect, you know, Earth's Best to be up double digit and Imagine to be up double digits. You know, this quarter, we saw Imagine and Rice Dream up -- way in the double digits. You know, with some of our promotions and that, you may see West Soy, you know, up substantially next quarter. So it depends on some of the consumer spending and it depends on some of our, you know, promotions, but I'm looking for, you know, Terra to be up double digits, Garden to be up high single digits. Our Frozen business, you know, Ethnic Gourmet to be up high -- in double digits, you know, 10 to 12 percent, so. But it was great to see, as you heard John say before, you know Hain business up 7 percent. The DeBoles business up 17 percent. You're not seeing too many pasta businesses growing 17 percent. You know, Arrowhead Mills, which is grains and oats, and we think that has a lot to do, you know, with the new food pyramid and people now eating right carbs, so you're see that, you know, up 8 to 11 percent. So we're excited about the growth of our brands and the consumption, and, you know, we're also pretty excited about some of the new products coming out.

Okay, just finally, can you just -- you went over some of -- most of those brands. Can you touch just a little bit on Health Valley?

Yes, Health Valley, you know, it grew in this quarter in the low single digits, and this is one of our most competitive categories. You know, you've got Cascading out there with cereals bars, you've got Kashi and Nature's Path. We did not really launch a lot of our new products. We did well on our soups, but, you know, we're looking to a big new product plan to roll out at Health Valley at Anaheim, you know, in March. But it was up not where we wanted to. It was up minimal.

Okay. Thank you.

And actually, we're in the midst of redoing all of our Health Valley packaging.

Great. Thanks.

Thank you. With that, what I'd like to do is do our wrap-up. I feel we had a great quarter with a lot of challenges out there, and I feel good about the brands, the products, the categories, and you heard me talk a lot about the management. I feel good about coming into this second half; and absolutely the second half is not without challenges, but you heard me -- I said out there before, it's, you know, not without great opportunities. Last year in the second half, yes, we had commodity challenges in front of us. And we had a lot of execution issues that encountered, and I think today we -- I know today we have the best management team in place to make sure we execute, and it's -- it's about executing.

And I think our business is becoming, you know, a lot more easier as we consolidate. It may not be as easier to understand our margins, like I explained to it to Terry, as Celestial becomes a bigger part of our margins in two quarters, but I can tell you that, you know, John's group, Adam's group, Steve's group, Filipe's group, and Andy are looking every day to improve costs. At the same time, you know, we're looking to grow our business. You know, when I go back today and measure myself -- and I guess as we have to measure ourselves, we measure ourselves against the big consumer packaged goods companies -- and you know, the big consumer goods packaging companies today are not growing in the double digit numbers that we are, and -- but we still have a lot of the similar costs and some of the disadvantages that are out there today.

But I'm pretty psyched. I feel good because of what I saw in January, and after coming out a strong second quarter on sales and consumption, it's good to see a good strong January, and hopefully we see a lot more snow storms and a lot more cold weather, a few more Super Bowls. And, you know, I look forward for the next two quarters. I would like to thank everybody for their time tonight -- I know it's late -- and hope to speak to most of you soon. I know it's late -- and hope to speak to most of you soon. Thank you.

That will conclude today's conference call. Again, we do thank everyone for their participation.