Hain Celestial Group Inc (HAIN) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter Hain Celestial Group earnings conference call. My name is Anthony and I will be your coordinator for today. At this time, all participants are in listen-only mode. We'll conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to your host for today's conference, Ms. Mary Anthes, Vice President of Investor Relations.

Thank you, Anthony. I'm Mary Anthes, Vice President of Investor Relations of the Hain Celestial Group. I'm pleased to be with you today to introduce our first-quarter 2006 conference call regarding earnings that were released earlier this morning. We have several members of our 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 Chief Financial Officer; John Carroll, President of Grocery and Snacks and Steve List, President of Celestial Seasonings and Hain Celestial Canada.

Our discussion today will include forward-looking statements. These forward-looking statements are current as of today's date. We do not undertake any obligation to update forward-looking statements either as a result of new information, future events or otherwise. Our actual results may differ materially from those projected and some of the factors which may cause results to differ are listed in our publicly filed documents, including our 2005 Form 10-K.

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 approximately one hour this morning so please adjust your questions accordingly. Management will be available after the call for additional questions. Now let me turn the call over to Irwin Simon, our President and CEO.

Thank you, Mary. For me, good afternoon; for everybody, good morning. I'm here in Europe with our European team, including our President and CEO of Europe, Philippe Woitrin. Hopefully most of you have had the opportunity to see our press release this morning and I'm pretty excited to announce to you our first-quarter numbers. Our sales were 161.1 million versus 137.6, a 17% increase over last year the same quarter.

Our gross margin 28.5 versus 28.3. Let me just point something out to you on the gross margin. Our chicken business, our protein business, with a 7% margin, affected our margin by 1.1 -- 1 1/10, which would have brought our margin up to 29.6. And also higher costs in the quarter affected our margin by 4/10 of a point. So our objective right now was to get our margins at 30%. We are well on the way to do that.

Our SG&A in the quarter was flat, 20.5 versus 20.5 a year ago. Our operating income $12.8 million versus $10.8, up 19% and our earnings per share for the quarter $0.20 versus $0.17, which is up 18%. Our cash conversion cycle, which we have been working on pretty hard and has come up with some great results for us. As you remember in the fourth quarter, our cash conversion cycle was at 69 days. Last year this time, it was 94 days. This quarter it was 67 days. So we are really working on converting our ingredients to cash and you can see a good example of what we were able to achieve in this quarter.

I am very excited, very proud of what has happened in this quarter and as everybody out there today knows what we are faced with in higher costs, higher input and higher freight. And it continuously streamlines down as we as a company are just getting -- we hate to see the mail come because in the mail just becomes numerous more and more price increases every day.

With that, we did take a price increase in mid-June. That probably did not get totally effective until sometime in September. So we absorbed a lot higher costs up through September to get our first price increase through and you know what happened with the hurricanes and all the other higher freight rates and all the other higher diesel rates that affected us in the first quarter.

We have implemented another price increase effective October 14 that is going to take somewhere between 45 to 60 days to get through the system but we just had to because of all the other higher costs that were coming at us. Also in the quarter, which Ira will talk about in a little while, as we completed our audit for the quarter, we were affected by almost $1 million of Sarbanes-Oxley costs. So all in all with higher costs from freight, higher costs from fuel, higher input costs and higher Sarbanes cost, we were able to achieve 19% operating income growth and 18% EPS growth, which I think the team deserves a great applause for doing that.

We really look at controlled spending and one of the things we've really taken initiatives on this year, not only controlled spending but how are we taking costs out of the system. A perfect example is how the group was called upon to take costs out of the system knowing in front of them were all these higher costs that were facing us. The SKU rat, which we have talked a lot about, has worked and is still working and going to continue to work.

Where did the growth come in our sales? A lot of growth came from additional space from some of our better SKUs and also what happened is a lot of the growth came from new products, which we made space for through the SKU rationalization. As you heard me say, people are a big part of our change and in order to consolidate our Melville business I made some people changes. John Carroll now will head up the snack, grocery and frozen group out of New York and Adam Levitt will take over all of sales for that group and Maureen Putman will take over all of marketing for the sales, grocery and snack group and Adam will run sales for the grocery, snack and frozen group.

Some of the things we announced before. We were able to take our refrigerated business in Rice Dream and Soy Dream and complete the licensing deal we did with Heritage Dairies. As Heritage Dairy is in the dairy business both in organic milk and other Nestle products. So going through a refrigerated distribution system will help our Soy and Rice Dream business grow with the refrigerated area and ultimately a royalty and a licensing fee back to us will throw us off a lot more than some of the losses we were incurring on our refrigerated product going out of code.

I think we did a great job on new products and a perfect example is shown on our top-line growth as we got them out their pretty quickly as we saw space available. Our balance sheet continues to be extremely strong and as a company we continuously throw off strong cash.

Let me take you through the quarter in both some of the brands in the quarter. Our Terra Chip business was up 14%. Our Garden of Eatin' business was up 32%. Our Imagine aseptic, which includes Rice Dream and Soy Dream and the predominant driver here is Rice Dream was up 27%. And WestSoy was up 5% and a lot of that is coming from alternative channels, mass-market, mass drug and good to see aseptic soy growing again. Arrowhead Mills up 50%. We're doing a lot of good things on the kamut and spelt and other organic cereals, which John will talk about in a little while, continues just to be a barn burner. Our Earth's Best baby food, our Sesame Street and come January, we will become an official sponsor of Sesame Street and those that are up at 7 AM in the morning watching Sesame Street, you will see Earth's Best as an advertiser on that program.

What a difference a couple of years makes with Health Valley soups and Health Valley cereals. The brand was up 13%. We still have a lot of work to do here. But we have launched numerous new products, numerous new distribution and a whole new line of packaging and we are continuously looking to see the results.

Our key business is up 7% and Steve will tell you about a lot of the big things that he has going on and this is it. This is tea season. We are praying for cold, snowy weather and hopefully it is coming. But Steve and the group are well-prepared for all the shippers and all the holiday teas and all the new exciting things that we're doing.

Our personal care business is up 32%, including our Zia line. I'll tell you more about the Zia for men line that we introduced and some of the Earth's Best kids products that we're doing. Our Canadian business under Steve, a great turnaround. We're up 5% and seen some good things happening on the Hain line, the Terra line or Yves line and Steve will talk to you about that in a little while.

Over here in Europe, we're seeing a lot of good things happening in Europe, which I will tell you about in a minute. Our European business was up 10% for the quarter. John will take you through grocery, frozen and snack. Steve will take you through tea, both on consumption and some of the things going on.

But let me just give you a quick overview on JASON. You heard me say before the personal care business was up 32%. We launched numerous new products and one of the things about JASON is when we acquired it, there was not new products in the pipeline. So we had to go back and reformulate, reposition and come up with a lot of new products. New body washes, the whole new red element line, a great line for us as a whole, Earth's Best kids line getting tremendous distribution, not only in Whole Foods and Wild Oats but throughout drugstores throughout the United States.

Our mouthwash, Healthy Mouth (ph) number one. Our toothpaste 31.3%. This is consumption numbers. Our body wash 20.6% and JASON's haircare products up 14.1% consumption. Zia, which was the high-end skin care line that we acquired in late April, we have folded into JASON. We have integrated the businesses and shipping out of a lot of the same warehouses and we have got a lot of great plans for Zia. But the first new product launch for Zia of course is a men's line and Zia for men has been one of the first entries of men's personal care products in the natural food category and we're looking for some good things for that.

One of the things that we're doing this year and as you get ready for your holiday shopping, we have JASON and Zia and some combinations I think with Celestial Seasonings doing a holiday gift baskets and the response is tremendous. They told me they are sold out but if anybody wants one I think we can get you one. But what a great idea for us to be able to do.

Our European business is up 10% and we are really focused on the European growth with Whole Foods opening up a megastore in London in 2007 and the demand. One of the things we're looking at in Europe is organic food versus natural food and natural doesn't really have a big definition over here. As we look to come out with natural foods that are GMO-free and expand some of our brands and as we look at Northern Europe, Eastern Europe and Southern Europe, we're really looking on how to focus our business here and we have a good management team here and we have a good group and we're looking at some potential acquisitions over here.

Lima is one of the oldest and organic brands that are sold through natural food stores. We have launched Terra and we're going to continue to launch Terra. We're in the midst of launching Yves Fresh over here and some big opportunities for that. We have an excellent tea business over here and Rice Dream and Soy Dream very, very strong businesses for us here and of course we have Biomarche and Grains Noirs. So we've got some real exciting things going on in the European market.

In regard to our protein business, remember we acquired it in July. We really spent three months running it. We've seen the business grow 11% in the quarter. And our big challenge there is when you process antibiotic free chicken, you're selling them as antibiotic free chicken, not as commodity chickens. So our business was up. Our margins were up and our margins being at 7% being up. You kind of laugh but there was basically -- this business was losing money until we took it over. But what I must tell you is there is some pretty exciting opportunities and all our current customers are pretty excited about the antibiotic free chicken business.

Antibiotic free chicken has grown at 18% and chicken is, from a per capita standpoint, is the highest growth protein that is out there today. We are looking also at value added products meaning whether we do chicken nuggets or chicken fingers or chicken tenders for kids, etc. And that has much higher margins but we think as we convert all of our products to antibiotic free that our margins will improve dramatically on that.

We completed our Asian deal, which I should be over there in the next two weeks and numerous opportunities. We are sourcing numerous product lines and ingredients and manufacturing already from Asia. We are about to, with our Asian partners, start launching some of our products over there and we are looking at launching some of their Asian products as natural or organic ethnic Asian products into some of the natural food stores. So we're excited about our Asian opportunity.

Our Spectrum deal is getting closer to closing. We should close this transaction sometime in mid-December and what I can tell you is product line and consumption still is pretty strong with Spectrum and we are excited and look forward to getting that in place.

It is the first month of Q2, which is just behind us, October. The category and sales continue to be very, very strong out there and with that, with strong sales, definitely will offset a lot of the higher costs that are facing us right now and so we're feeling very, very good about going forward with our numbers. I am confirming 650 to 670 going forward, $0.98 to $1.05 and just remember the 650 to 670 is off the 590 days as we divested Kineret and got rid of numerous SKUs. Also got rid of our Rice Dream and Soy Dream refrigerated business.

So with that, I'm going to turn it over to John Carroll. He is going to tell you about some of the exciting things he has going on in snacks, grocery and frozen and then we'll come back for questions. Thank you.

Thank you, Irwin. Good morning. I will cover three topics on today's call. First, I will talk to you about the consolidation of our New York-based brands into one group in grocery and snacks and the benefits of this move. Second, we will talk about the Hain grocery and snack's results, which were good for Q1 and third, we will close with talking about the effect of rising fuel prices on Hain grocery and snacks and outline our plans to offset back.

To start, as Irwin discussed, we consolidated our grocery, frozen and snacks brands into one unit, Hain grocery and snacks group. The benefits of this combination into one group are multiple, including it will allow us to leverage our combined scale and resources across all categories both internally (inaudible). This combination creates a critical mass unlike any other U.S.-based natural organic company.

We have two examples of how this leverage will manifest itself. Externally, we are going to execute in Q3 a Hain grocery and snacks group promotion leveraging all of our core brands, consumer and trade promotion spending to create one powerful event. Now this is the first time we have ever done this. This is the first time that we've presented ourselves as one group to the trade and to the consumers. This should enable us to drive greater levels of display and trial more efficiently than we ever could do individually.

Now in terms of an internal example -- think about this. We will now be able to combine the purchasing power of our brands on key commodities like we have never done before. For example, we buy a lot of oil for snacks. We buy a lot of oil for grocery and combine those and combine that with leveraging Spectrum's oil procurement expertise, that should enable us to drive even greater savings.

The second benefit of this combination is that we will be able to leverage our best talent and our best practices across all of our brands. I'll just give you two examples of that. The first one is in the area of sales. When you think about our snack sales team, they have expertise in driving new distribution and improved display that is far superior to any other group in this company and we're now going to take that expertise and apply it to our grocery and frozen brands. On the flip side, grocery strength has been in the area of trade funds management and we're going to take that expertise and use that to drive improved snacks trade investment ROI. So those are two areas that we are going to see benefit of leveraging our best talent and our best practices.

Finally, the last area will be in the area of increased headcount synergies and particularly with regard to our headcount needs as we grow both organically and via acquisition. This is not some far-flung thing. We will realize the benefits of this quickly as we will be able to integrate the Spectrum Organic acquisition with fewer incremental headcounts.

Now as Irwin discussed, coincident with this consolidation, we announced two important personnel moves to ensure strategic alignment across all Hain grocery and snacks businesses. Adam Levitt, formerly General Manager of snacks, was promoted to Hain grocery and snacks Chief Sales Officer and Maureen Putman, formerly General Manager of grocery, was promoted to Hain grocery and snacks Chief Marketing Officer. So across all of the brands, the direction will be consistent in marketing, the direction will be consistent in sales. And these two moves reflect taking the very best people we have in their respective function and applying their talents to the benefit of all of our New York-based brands.

Now turning to Q1 results, Hain grocery and snacks results were strong, especially within the context of our four strategic objectives, which as we discussed in the previous calls are to first drive profitable growth in what is now are seven core categories when we include snacks. Second, to improve our margins by driving out costs. Third, to continue to work to improve working capital and management via inventory reduction and fourth, to deliver the best in the natural organic class execution.

Starting with the first objective, Hain grocery and snacks Q1 top line was very strong, up 24% net of the impact of SKU rationalization and divestitures. The grocery brands led the way with an increase of 28% followed by snacks of 21% and frozen at 5%. Now some of these brands Irwin has already mentioned but the key brands driving these increases included Arrowhead Mills, up 58%, Earth's Best up 61% with our new Sesame Street introduction, Imagine soups up 52%, Westbrae vegetables up 54%, Rice Dream up 24, Garden of Eatin' chips up 32, Ethnic Gourmet up 22, Health Valley up 13. These are just a few of the numbers -- the positive numbers we're seeing across the grocery and snacks businesses.

These strong growth numbers were driven by a combination of factors, including a cleaner year-on-year quarterly comparison without distributor deal buyouts. As you recall, we talked -- starting a year ago, we worked hard to discourage that practice and price increase by-ins. Then secondly, continued strong consumption trends on key benefits; benefiting in part from greater shelf space from our SKU rationalization. When you look at these numbers, they are also very impressive. When you look at our grocery and natural consumption indices, combined, Earth's Best is up 27%, Imagine soups is up 22%, Garden of Eatin' up 19, Westbrae up 15, Rice Dream up 10, Health Valley showing a turnaround. Health Valley soups up 4, Health Valley cereals up 1% in grocery. We are continuing to see good strong consumption growth.

Turning to our next strategic objective, which is improving margins. We saw an 80 basis point improvement in Hain grocery and snacks Q1 margin and it was driven by a 30 basis point decrease in sales promotion expenses, which reflects more effective and efficient selling with our trade dollars and approximately a $1.5 million benefit from our June 1 price increase. These two things more than offset the increased raw ingredient and packaging and distribution costs that Irwin spoke of earlier.

Now to ensure that this margin growth becomes a way of life at Hain, we have several major productivity initiatives under way across all core categories. And I'll just mention three of them for you. The first one is, as Irwin talked about, SKU rationalization. We have now stopped shipping on over 80% of the SKUs targeted for discontinuation. This is ahead of schedule and we're now starting to see the improvement in our inventory levels, our spoils and we're also now, that we have gotten rid of the smaller SKUs, starting to be able to extend our copacker run sizes and realize some savings from that.

The second area I want to talk to you about is frozen production consolidation. We talked in the fourth quarter about how we're going to close our Framingham meal plant in early Q3 and consolidate production of all of our frozen meals and ravioli on high-speed lines in Westchester, Pennsylvania. And we're on target to do just what we said we were going to do.

And then the third one is a new one. We are looking to repatriate our snacks volume from our copackers. Not all of it, but we are pursuing aggressively opportunities where we can increase our margin by producing more Terra and Garden of Eatin' products at our Moonachie plant versus at our copackers.

Moving onto our third strategic objective, which is to improve working capital and management. We saw improvement across all key metrics of working capital, of which our focus is inventory. Hain grocery and snacks days in inventory decreased 27 days as we are seeing the benefits of our Q1 sales growth, an improved FNOP process and the elimination of slow-moving SKUs.

Finally, looking at our fourth strategic objective, which is to deliver the best in class execution. The evidence of our continuing progress is demonstrated by our ability to execute well several of the key initiatives we have underway, including as we talked about, SKU rationalization. As Irwin talked about, our new products where we're now using our fewer but bigger new product strategy and we're launching fewer SKUs but all of which are focused against our core categories and consumer gaps and they are rapidly gaining acceptance, including Garden of Eatin' pita chips, Terra Sweets and Beets, Health Valley cream soups and Celestial Seed (ph) Dream (ph) and Imagine seafood soups.

Also we are continuing to drive distribution gain. Earth's Best and Sesame Street have been expanded nationally in 1500 Safeway stores. Terra Kettles and Garden of Eatin' 22 oz. big bag is expanded nationally at Kroger. Health Valley soup is now available nationally at SuperTarget. So there are several opportunities that we've been taking advantage and executing well against.

So Q1 was a strong quarter for Hain grocery and sales across all fronts, which brings us to our last topic, which is year ago energy impact on Hain grocery and snacks. As you know, diesel fuel for October was $3.10 a gallon, up 45% versus year ago. Crude oil was $60 a barrel, up 25%. While these prices are slowly going down, no one budgeted for natural disasters such as Katrina and Wilma and the resulting effect on energy costs on a year-on-year basis.

Increased energy is affecting us in two ways. First in the area of direct transportation cost for both inbound and outbound deliveries and second, indirect costs as our suppliers pass on increased cost for raw materials, packaging and conversion. In Q1, we only saw the impact of increased direct cost as our fuel surcharge for deliveries was up more than 50% or, as Irwin said, over $300,000. But as we go into Q2 through 4, we're increasingly seeing price increases on both direct and indirect costs.

While we're trying to hold the line on these costs at least until January 1, we still expect to see increases that will cost us 1.5 to 2 margin points in the balance of the year with the impact split evenly between direct and indirect costs. We recognized this early and implemented the following initiatives to offset the impact. As Irwin discussed, we announced s Hain grocery and snacks 3 to 4% price increase effective on October 14. We expect many of our competitors will be doing the same. We will receive minimal benefit from it in Q2 but increasing benefiting in Q3 and Q4 as it takes time to implement it.

Secondly, we are reevaluating shipping locations and our transportation mode mix. We're exploring new factory direct pickup and delivery incentives on key lines to reduce movement of products within our network and we are working with our key copackers and suppliers to identify opportunities to purchase more strategically, i.e. larger quantities, larger runs, etc. to offset increased energy costs and we are continuing to explore margin and mix to drive a more profitable mix. We expect these initiatives should enable us to maintain our margins despite rising fuel-related costs in the balance of the year.

So to summarize, Q1 was a strong quarter as we consolidated grocery, snacks and frozen into one unit, which will enable us to better leverage our scale, best practices, stronger talent and synergies across all of our brands to drive improved results. We delivered significant improvement in Q1 top line, margin and days in inventory and we continue to improve our execution across all fronts and we implemented several initiatives to aggressively attack year to go fuel-related direct and indirect cost increases. Now, I'll turn the call over to Steve List.

Thank you, John. Good morning, everyone. First, I would like to give an update on our Celestial Seasonings brand. We recently celebrated the 35th anniversary of Celestial Seasonings with a party in Boulder that was attended by approximately 500 people, including current and former employees.

Some notable details on the brand. Celestial Seasonings experienced unit growth of 9% in the quarter, net sales growth of 7% investing in couponing and promotional activities. At retail, tracked by Nielsen, we grew at a rate of 3% for the 12 weeks ended October 8. Excluding our Wellness tea line, which is not a core item and represents only 3% of our sales, we maintained share in the 12 week period. Our growth accelerated in the four weeks ended October 8th to 8% gaining share in the category. The category continues to be highly promotional.

Our growth in channels not tracked by Nielsen averaged even greater growth. These channels include foodservice, military, Wal-Mart and international where we have just expanded our distribution to over 70 countries and just realized our first shipment to China. In the last 52 weeks, we have built our green tea business by over 20% expanding our share in the category where we are already the leader. This is fueling the growth of the entire specialty tea segment.

Celestial Seasonings, for the first time in our history, has moved into fourth place in the black the category behind the growth of our bag Chai teas and cool brew iced teas with over a six share surpassing Lipton. We've grown share in this category in 4, 12 and 52 weeks period. Holiday teas, an important driver of our off shelf display activity, are up 8% in the quarter benefiting from the expansion of the line with candy cane lane decaf green tea. This is major news for us with competition from new entrants into the holiday tea category by many of our competitors.

Celestial Seasonings is once again partnering with the Red Dress NHLBI to increase awareness among women of heart disease and to promote the link between tea and heart health. This partnership will be featured in consumer promotions and advertising throughout the season. Celestial will offer two limited time black teas, decaf vanilla rose and black cherry pomegranate, which will only be available on display in January and February. A portion of the proceeds of sales of these items will go to Women's Heart, a foundation of the NHLBI.

In early May, we hired Bina Goldenberg (ph) as General Manager of Hain Celestial Canada reporting to me. Bina spent six years as General Manager of Borden (ph) Foods in Ronzoni, Canada. Prior to that, she had leadership experience in marketing at Parmalat, Canada and Pillsbury, Canada. We have also upgraded our resources in talent levels in many areas of our Canadian organization and we have created a structure that will allow us to be successful at growing the Yves brand while continuing our growth of other brands that are sold in Canada.

Sales in Canada are now approximately 50% from our Yves brand and 50% from our other Hain Celestial brands. In an effort to further focus on growing our Canada sales and profitability, we have recently opened a Canadian head office in Toronto. The large percentage of the Canadian population lives in the Toronto area and it is also home to the corporate offices of most CPG companies and several large retailers. With our Canadian headquarters closer to our customers and consumers, we will be in a better position to grow. We will now manage Hain Celestial Canada from Toronto while several key people will continue to be located at our manufacturing operations facility located in Vancouver.

We have focused on the consumer by increasing our rate of marketing spend, specifically for sampling and awareness activities. Yves Canada has ads running in Chatelaine, Canada's number one women's magazine, monthly from October through February, to build awareness and trial. Earth's Best is sponsoring Movies for Mommies and Rice Dream is sponsoring the Canadian Run for the Cure. Yves currently holds an 86 marketshare in the fresh meat alternative segment in Canada and has 29 of the top 30 selling items in the category. The next largest competitor has less than a five marketshare.

In the last six months, we have launched several new items, including veggie ground turkey, an extension of our ground round, which already has a 93 marketshare of the fastest-growing meat alternative segment in Canada. Two new deli slices, including roast beef and cajun chicken, chicken and beef tenders, two veggie sausages and a frozen burger, which is our first frozen offering. This line will be expanded in the spring for barbecue season.

In Q1, we grew sales of other Hain Celestial brands in Canada by 24% with Earth's Best growing 77%, Garden of Eatin' by 139%, Terra by 42% and Imagine, including soups, aseptic, fresh and frozen, by 31%. New products recently launched include three Imagine organic creamy soups and several larger size mac (ph) SKUs. We have recently won distribution of Hain Celestial products into club stores and drugstores in Canada while expanding our distribution in grocery.

Rice Dream currently enjoys a 93 marketshare in aseptic rice beverages and 89 marketshare in fresh rice beverages. While it will not be easy to maintain these marketshares, the growth is encouraging as rice is growing at a much faster pace than soy in Canada. We have spent a lot of time over the last several months looking for ways to cut our costs while enhancing our efficiency. These savings will be applied towards our increased sales and marketing opportunities in order to drive future growth. Now I will turn it over to Ira Lamel.

Thanks, Steve. Good morning, everyone. Just to review quickly some of the numbers that Irwin went over. Our sales were 161.1 million, up 17.1% over last year. And these sales increases came from virtually all brands across the board and set new record levels for our first quarter.

Net income was 7.4 million in the first quarter, $0.20 per share compared to 6.2 million last year or $0.17 per share. Our share count was up 705,000 shares or 2% reaching 37,000,560 average diluted shares. Our gross profit for the first quarter was 28.5 versus 28.3. While this appears virtually flat, on first look, there are some important factors to point out. As Irwin discussed, Hain Pure Protein, a joint venture which we consolidate and have operating control over, contributed gross profits of only 7% due to the nature of its current operations and its product mix. This of course pulls down our overall gross profit. So there was a 110 basis point drag overall.

In addition, we had other input cost increases during the period, some of which Irwin referred to such as fuel and freight. But on top of that, as we discussed a couple of quarters ago, we continue to have increased costs from inputs of Taro in our Terra product line and that cost us about a $0.5 million more this quarter than in the first quarter last year.

One last item I want to point out to you is that as we continue to diversify our total brand portfolio, we have less reliance on the contributions of Celestial Seasonings and while Celestial Seasonings had very strong sales growth this quarter, it is actually 3.5 points lower as a percentage of our total gross profit. When you take all of this in and adjusting for the chicken contribution, our gross profit was actually 29.6% during the current period.

SG&A was flat at 20.5% this year compared to last year's first quarter. We did spend more on marketing and promotional programs this year. These funds came available as we have predicted they would from the changes in our trade management practices. We have also begun investing more in consumer-based promotions at Celestial Seasonings as well with more coupons. And as we said in our release and as Irwin discussed earlier, our Sarbanes-Oxley costs in the first quarter reached $1 million.

Our operating income for the quarter this year was 12.8 million as compared to 10.8 million last year, improving 18.2%. In this year's first quarter, interest expense and other expenses totaled 868,000 versus 655,000 last year. Interest expense was $300,000 higher this year principally the result of higher rates despite our lower borrowings. Our estimated annual tax rate this year is a bit higher than 38%, which is what we reported to you in the last quarter as our expected rate for the year.

EBITDA was 16.6 million for the first quarter this year versus 14.3 last year. Depreciation and amortization in this year's quarter was 3.2 million compared to 3.1 last year and capital expenditures were 3.4 million. Our balance sheet continues to be very strong. Our working capital was 131.3 million with a current ratio of 2.8 to 1 at September 30th this year. Our stockholders equity is at 507.8 million and our debt as a percentage of equity remains a very low 17.5% this year. Total debt, and that is before reducing it for cash, total debt was 94.9 million at September 30th this year and was 104.9 million at September 30th last year. Our debt is down despite the fact that we have made business acquisitions and spent 14.8 million to do so during the last 12 months. At September 30th, our cash position totaled 20 million.

Irwin discussed our cash conversion cycle and I want to give you the details behind the improvements. First, our cash conversion cycle improved by two days, as Irwin said, to 67 days for the quarter compared to 69 days last quarter and 94 days a year ago. We are collecting our receivables in 42 days in the quarter against -- excuse me -- 40 days in the quarter against 42 days for the fourth quarter. We have 63 days in inventories against 64 days at June 30th and that is in the face of building inventories going into the colder months. Inventories at last year's September 30th quarter were 83 days. And lastly, we had 36 days in payables against 35 in the June quarter.

Our operating cash flow improved this quarter by $5 million compared to last year's first quarter. And this quarter completes four quarters of focus on cash conversion. Our improvements in this initiative have far exceeded the goals that we set out at the beginning.

As for the adoption of FAS 123R rules on equity compensation, we had no option grants in the quarter and no overhang from previous stock option grants. Our stock option expense therefore was zero as we had accelerated divesting of options in the fourth quarter. We continue to amortize stock grants from previous years with 234,000 of expense being charged against earnings in the quarter. At this point, we will open it up for questions.

(OPERATOR INSTRUCTIONS). Scott Van Winkle, Adams Harkness.

A few questions. First, remember last year, see if I remember last year, at September you did not do your end of quarter promotions and you had what I assume last year was a soft September but then a very strong October. How did it look this year, September and October year-over-year?

Scott, I'll answer that. Number one, the whole quarter -- what basically happened, we did have a soft September, soft first quarter last year but we have had a very, very strong first quarter and you heard me say in my comments it has continued into the second quarter, the first month. So hopefully that answers --.

Good enough. We talked a lot about the consolidation of grocery, frozen and snack. Can you give us an update today as to where we stand on the mix of revenue between your major segments?

Well, in regards to segments, I'm not sure what you mean by that.

Grocery as a percentage of sales, frozen, things of that nature.

Irwin, if you'd like, I can take that one.

Ira, I will let you talk about that just because it is from a reporting standpoint.

That's alright. From a category perspective, just so you know approximately where we are at this go round. Our grocery snacks unit, as John now leads, is at about 60% of total sales. We have about 15 coming out of our tea business. Personal care is at about 5 and Canada a little under 10, Europe around 10 and about 5 is the joint venture sales from Hain Pure Protein. I have done some rounding here so it may not come out to exactly 100. But I don't think I am more than a couple of points off.

Close enough. And on personal care, you mentioned the growth of personal care. Zia was in there. What is JASON's up on its own year-over-year?

JASON was up, Scott, high single digits. And actually if you come back, just to include in there, if you come back versus a year ago comparison, Zia was down and that was on purpose as we discontinued a lot of SKUs. So as part of the acquisition, that was our strategy here, no different than what we did last year. One other thing as we're mentioning here, not included in our numbers is about 5, $7 million on SKU rat products that were discontinued and Kineret, that was in last year's numbers. So they are not in the 17% growth. They were in last year's numbers but they are definitely not in this year's numbers.

I guess a question for John probably, in grocery, how are the copacker agreements set. Is it a cost plus agreement? Do you go in and renegotiate contracts as you go along? So when you make changes like being able to make a longer run of a certain product, how quickly does that flow through to your cost savings?

Our contracts -- we have different contracts with different copackers. Some are strictly turnkey, some are on a cost plus basis. But every one of them that we have negotiated in the last year includes productivity initiatives so that we can take advantage of longer runs, fewer SKUs, things of that sort.

So fairly immediate?

Yes. Absolutely.

And Scott, that's why SKU rat was so important. It's not just about getting slow-moving products off the shelves. It's getting slow-moving products out of our facilities because it was costing us so much more to run these products than we ever realized.

I guess a big picture question for you, Irwin. McDonald's this week started selling organic coffee in their Northeast stores. What do you think that says?

Well, number one, it is Paul Newman's. So they have been selling organic -- they've been selling Paul Newman's products. But without going into it, all I can say is that after two years, we continue to service McDonald's with veggie burgers and I just saw something where McDonald's -- we just did a big promotion in New York and I got something that they were flying off the grill. So there is other opportunities there that I probably can't talk about right now with McDonald's. If they are selling organic coffee, we happen to be in the tea business and some other things. So I am not committing to anything but all I say is there is opportunities there.

And other foodservice channels and there is a lot of things in foodservice that we're working on. I didn't announce it in my commentary but if you go to Madison Square Garden, come January, we will be the official snack of Terra Chips at Madison Square Garden. So not only McDonald's, stadiums and places like that are looking for healthier snacks and healthier products.

One last question, the avian flu and your Pure Protein business, what do we think could happen there?

Well, I think -- I wondered who the first person was going to ask me. Number one, in regards to avian flu, I think there's more of a chance of catching it from a bird outside. When a chicken is cooked, there is almost no chance of getting the avian flu from a cooked chicken. Our birds are kept inside and I think it becomes a major catastrophe if it happens but it would be a problem but I don't see it being a problem for us right now.

Good job on the quarter.

Thank you.

Greg Vandekamp (ph), Citigroup.

Greg Badishkanian. Great. Good quarter, guys, as well. Hey, just wanted to ask you quickly on price increase. What percentage of your product portfolio and what type of price increase are you going to see there on your next price increase? Or the most recent one?

Well Greg, what I said before, there's a couple of phases of price increase and price increases unfortunately. Price increases take much longer to put through than price increases back to us for some reason. I have this discussion with our people all the time. Why can people give us price increases right away and we have to wait 60 to 90 days? So our first price increase went through in June with promotions etc. and that out there. We are just seeing the benefits of that price increase now. It probably will not get fully through the system until sometime in December.

The second price increase went through October 14th, we will probably not see the full benefit of that until February, March. And if for some reason there is a fuel price rollback, we would look to either roll back prices. This price increase was basically just based on fuel and freight.

Which product categories would that --?

It's mostly grocery products today, Greg, and snack products and some frozen products. We did not take a price increase on tea as we are in tea season right now. Everything is set d and we did not take a price increase on personal care products. We did take a price increase on personal care products in June -- July actually. In Europe, we did not take a price increase. We only took it on our fresh products and we did take a price increase in June and July on some of our Canadian products. So the big price increase in October was on John's business in New York.

And the increase, what that was like 2, 3%

2, 3%.

And organic sales, could you just -- comes out to be about midteen. Is that right or --?

Yes. Basically, if you add back what I said before in regards to last year not having -- taking out products for SKU rat, taking out Kineret, that basically almost offsets the small acquisitions that we did both in the chicken and Zia. So double-digit organic growth is something that is easy to see.

And in that regard, I'm just trying to understand, is this -- do you think it is the overall industry that is growing pretty quickly? It seems like you're gaining some share and if so, is it different channels that you are penetrating and if so, which of those channels are growing faster than typical?

Natural foods is strong. From the supernaturals out there, we are seeing good robust sales, good take away, good consumption numbers, which John talked about. But I think what is important to come back and look at, why are we seeing good top-line growth? Number one is getting rid of a lot of the slower selling SKUs and getting new products in there. But we are expanding distribution and that is key and I think I've made it very clear. Our natural food business is the most important to us and servicing them and making sure that we're able to service them is the first and foremost. But we will expand. Your heard me say about Madison Square Gardens, you heard me talk about McDonald's. You heard me -- you go into Duane Reade, you'll start to see Earth's Best personal care products, and JASON's.

You go into Toys R Us, Babies R Us, you see over 700 stores has Earth's Best infant food, toddler food, and Sesame Street products in there. So natural foods as a category is expanding across many, many classes of trade. And last but not least, Greg, is our service levels. Our service levels are running in the 98, 99%, and probably last year this time we were probably running in the 94, 95s. So just by servicing our customers better, we are getting big incremental push on that.

Christine McCracken, FTN Midwest.

Good morning.

Hi, Christine. How are you?

Not bad.

It's actually afternoon.

There you go. Very early morning for me. In any case, I wanted to touch a little bit more on this price increase, only in that I think in your prepared comments you mentioned a potential buy-in before the price increase. Can you talk about whether or not you saw any higher-than-expected volumes tied to that?

First of all, the price increase -- and I didn't say it in my prepared comments. I think it might have been -- if it was, it was somewhere else. The price increase was announced October 14th, and the last price increase was June 1st.

Irwin, this is John, if I can help out here. The comment was that we actually have seen very little price buy-in against both the June 1st and the October 14th, because we have actually discouraged it in our new practice.

Thanks for clearing that up. And in terms of impact on consumption, obviously you have taken the prices up, but it doesn't sound like there has been any impact on consumption trends at all. Can you talk about whether or not you have seen any change in volume?

Christine, let me talk about that. Then I want to turn it over to John. And the reason I want to talk about it is to commend the group for what they have done in regards to our trade dollars. If you come back and as we look at retail prices, our retail prices have not gone up anywhere near our price increases. That is because we are making sure our trade dollars are effectively used and are effectively used to reduce price at shelf level. And I'm not sure that we always did a good job with our trade dollars before and were getting the performance for it. So not only are we spending less on trade, more on consumer, but we are getting performance for it at retail which helps tremendously. But you are right on, consumption is definitely there still with all the price increases. And when you take price increase, let me tell you, you're concerned because of consumption and price elasticities and stuff like that. But I am happy to say our consumption has stayed strong with the price increases that we have taken.

And the trade's been fairly receptive to that? Typically, when you take money away, that doesn't meet with such approval. I'm just wondering have they pushed back on that at all, or are they fairly willing to accept that?

Are you allowed to take the Fifth on a conference call? You know, I think the thing is with our businesses this year as we partner up with everybody, it's not so much what the trade wants to do; what everybody wants to do is sell products today, not have trophies on the shelf. And I think if we can go in there and show them that better retail price is going to move product instead of higher margins that sit on a shelf, I think every one of them are in favor of it. And it has changed a lot today with having data that we have today, with our Nielsen data and with our trade marketing group that we can go in and show them, that we can go in there with planograms and show them what sells, what doesn't. So that has helped tremendously in working with the trade to make sure we get price points that are suitable for consumers. That was a big part of the natural food industry -- problem with the industry before. We had a lot of nice products on the shelf, but we had a lot of nice trophies that were pretty expensive.

Fair enough. Then just in terms of the SKU reduction, I think you had talked about that kind of getting finished up here I think in the current quarter. But maybe you could just go over kind of where we are in the process and how long that is expected to impact --.

John, I will turn that one over to you.

Sure. Christine, what we have done is we have stopped shipping 80% of the SKUs that have been targeted for discontinuation. The majority of them will be done in Q2 and there will be just a handful of stragglers into Q3. And we expect, starting in the second half, we will start to see the benefits of SKU rat in terms of our margins and these will help us offset this increased fuel.

Good to hear it.

Andrew Lazar, Lehman Brothers.

Just a couple of quick things. One, with respect to some of the pricing that you have been getting through and it's great to see that obviously. Consumption and shipments continue to accelerate if anything. Where you have some competition in certain categories from store brands, have you seen price points there move up as well, any kind of lockstep with what you have been doing?

John and Steve, do you want to comment on those two?

Sure. This is John. Actually we have looked at both private label and our key competitors and over the last year, we have seen in our core categories pricing move up with us. And now we are continuing to evaluate with these most recent price increases.

Andrew, I'll answer for -- in Canada, I'm definitely seeing that the store brands are moving up closer to the national brands. As you know, President's Choice is a big brand up here and they look to take pricing whenever they can. In the tea category, there is a better quality tea, specialty tea out there from a store-brand perspective and they are pricing very close to the national brands.

Andrew, I think we are all suffering from the same problems; high fuel, high input costs. And I think we know all the prices of toluene and stuff out there and what manufacturers are passing on in price increase. So I have got to tell you, anybody that is not taking price increase, their margin is being affected because I don't think there is anybody out there that is not suffering from a lot of the same things.

We are certainly seeing that. No question about it. We haven't seen too many examples where companies have taken pricing where there hasn't been either pretty strong volume disruption or -- we certainly haven't seen cases where sales have accelerated into kind of a price increase. It's good to see and I'm just trying to get --.

I think our acceleration, as I said, comes from three key points here. It is new products, new distribution but now what we have on the shelf today because of SKU rat is a lot better SKUs where we had products on the shelf before that was dead space and dead SKUs.

If you take SKU rat -- a few examples where other companies have done something similar over the last couple of years, it almost seems like in every case, they found the results to be a lot more powerful from it than they might have even thought and it let them to kind of go to ultimately around two and say you know what, let's now go a whole level deeper because this really is powerful. Do you think there is opportunity, and maybe it's not this year or whatever, to go another level deeper into the portfolio now that you've got better data and an understanding of how this went?

I think cleaning out your closet or cleaning out your basement should be something that happens every spring or every fall, whatever. And we will do that anyway. You have got to remember we put a certain threshold where there is a minimum of a product will do that -- that we will keep it. I think what is important is this here. Number one, we have different customers today. We're one of the biggest suppliers of supernaturals versus what we are to supermarkets. We have to look at our businesses, what is sold into supernaturals and what is sold into supermarkets. But if we go deeper and we go -- we code out before our next production run, that is a no-brainer that we're going to discontinue it. I think what we need to look at now is, as we expand distribution, are these good products or not and we will make decisions. But learning from this experience, we know less is more.

The last thing is with respect to the margin structure, you have always talked about how, within the grocery piece, that is where perhaps some of the biggest opportunity was relative to kind of where corporate average margins were. Can you just update us on perhaps -- I realize fuel and energy have kind of put a crimp in everything. But that aside, has the progress there been going a pace and I'm assuming there is still a lot of opportunity left, specifically in the grocery side. But where have we come to and how much more opportunity is left?

To get to -- if you add back, as I said before, add back the chicken piece and add back what the fuel impact was, getting to 30% margin versus 28.3 a year ago and it is even as Celestial becomes a smaller part of our business. John and his group, and John, I think what you said, you improved margins, what, one point -- your group for the quarter --.

That is correct. It's up 80 basis points for the quarter.

Right. And that is again 80 basis points with him being hit with 3 to $400,000 easy just on small incremental costs where he is not seeing the big pieces coming. So we are seeing good headway there.

My sense is though it is still on average obviously a lot lower than corporate average of where you think you can be. In other words, there's still a lot of headroom there.

Let me help with that one a little bit. Andrew, you are right. Those businesses or brands are a little bit lower certainly than the corporate average but as we try to describe, we believe we really achieved something here in terms of those brands improving and our overall margins are actually better than they were last year when you just take everything absent that chicken business.

And on top of that, in the snacks brands, the taro effect continues to be very significant. $0.5 million of taro costs over last year's first quarter is very significant to the margin of those products and then of course, as I said in my remarks earlier. the percentage of our total that Celestial represents today versus a year ago as we diversify further into our brands, makes that contribution a little lower and has a kind of that drag effect on the margins as well.

So the improvements that we show, again, absent the chicken business, in the face of all of the higher input costs, I think are really showing two things; the price increases are sticking as we have discussed and then more importantly, the initiatives that we have put forward in terms of cost efficiencies throughout the business across the board are starting to creep into that margin and we're getting good benefit from it.

And Andrew I think what is important is this here. It is the biggest business we have and you who covers Kellogg's or General Mills, when you look at their margin, and I've seen somebody to models where they look at our margin structure versus a traditional consumer packaging company, everything in John's business today is -- a good part of it is organic. A good part of it is -- almost everything is GMO-free. There is nothing processed. There's no additives. There's no stabilizers. So our ingredient costs -- our costs are going to be much higher than traditional food companies. But would I like to see this group get to a 25%? Would I like to see the corporate get to 35% gross margin as my objective, 35 to 40%? Absolutely. But just by integrating the businesses under one roof there is a lot of costs that are going to come out of here from the SG&A side and the margin side. So if we can get a point, a point and a half every quarter, I think we'd all be happy.

And the bundling of promotions makes all the sense in the world in my view so it will be interesting to follow that. So thanks a lot. I'll pass it on.

Terry Bivens, Bear Stearns.

Good morning.

Hi, Terry. How are you?

Pretty good. Thank you, Irwin. This kind of follows on Andrew's question a little bit. I was intrigued as well with the bundling of promotions but it also gets to the margins. It looks like given the announcement by Wal-Mart that they are more interested in the category. It looks like things are kind of moving more your way in terms of demand for organic better foods in the mass grocery channel, the grocers, as well as Wal-Mart. So I guess the question is there do you feel that essentially you are underpriced in the grocery channel if demand does start to rise and there was a period where getting in bigger grocery stores -- Safeway for example, they used to hold you guys up on the slotting side. Do you feel that leverage is beginning to shift your way in the mass grocery channel, plus Wal-Mart, is really the question?

Well, number one, the big thing on organic is demand and supply and to be into organics today you just don't say I'm going to produce organic apples and there is an abundant supply out there. We grow two to three years out and we also have organic producers out there. So number one, as one of the largest organic producers out there today, I think we are more apt to pick up a lot more business but we've got to make sure there is absolutely supply out there for us, Terry.

As the demand -- as the demand continues, there is a bigger opportunity for us to go out there and procure more and more organic ingredients and to procure more and more organic plants. We do have capacity. With that, and we come to some normality on fuel, I think prices could come down. So I think one of the biggest things that we have going for us is our ability to procure and our ability to manufacture and with that, I think we can get some of the best pricing out there.

Okay. Just in terms of Wal-Mart, has their stated intentions -- I know it is early days, but have their stated intentions to get bigger in organic been communicated to you in anyway?

Listen, I just see what I read in the press.

And you can't believe most of that.

You are right. And I have heard that organic and natural is big into Wal-Mart's plans. We do service them today with quite a few products and it is important for us to make sure we never lose our base business where we started and able to service them but there is a big opportunity for us with Wal-Mart. There is a big opportunity for us in chain drug and there is a big opportunity for us as more and more supermarkets. So the opportunity for us is just tremendous but again it comes back to -- there's a big issue out there today with supply of organic milk. There is just not enough organic cows around. So we've just got to make sure we have supply.

Irwin, if I could add to that for a moment. John and I share a sales team dedicated to growing the sales of all products in this channel. We do have an office located in Bentonville.

Okay. Great. Thanks very much and nice quarter.

Thank you.

Andrew Wolf, BB&T Capital Markets.

Hello. Good quarter. Just a generally phrased question before I get to some specifics, you talked about a lot of new products. They are filling in for SKU rat items, they are just put out there de novo. But should we look for also good internal sales growth just from new products in the current quarter or was this sort of a one quarter event and then we have to wait until the next natural foods Expo.

Well Andy, hopefully this is not just a pipeline fill. We just don't ship all new products out and in one swoop they get shipped out over a period of time. So we introduce new products twice a year around both expos. We started to ship some of the new products and most of the new products that we started to ship would have been soups of course as we go into soup season. But there will be many new products being rolled out in October, November and December into many classes of trade, etc. So it is not open up the gates, they are out and that is it. They roll out over a period of time.

Great. Appreciate that. Here is the specific sales question and then I have a couple of cost questions. Could you give us the dollar contribution last year from Kineret in the last year quarter and the dollar contribution this year from Zia and if you can't give us that, can you say if they were about equal size?

Well let me -- why I did say and I'll say it again. Including chicken, Zia, if took Kineret and SKU rat products and in next quarter you will have our refrigerated rice and soy, they will equal chicken and Zia. So basically it is a wash.

I mean given the margin number that Ira gave back into what the protein business gave to sales. So I just -- for my purposes, if I knew if Kineret and Zia were about the same, that would give me how I'm going to calculate internal sales.

That's what I said. Including SKU rat, it is about the same.

Okay. Moving on to some cost issues. Around the Sarbanes-Oxley, you called that $1 million in the quarter. What do you look for the rest of the year? Are Sarbanes-Oxley actually going to go down or is this sort of the plateau or do they actually go up from here?

I certainly hope they go down. We had, what I would characterize as very high cost in the implementation phase our first year into Sarbanes-Oxley. We will have continuing cost. We have done a few things internally such as add some positions. We will continue to incur higher professional costs because, going forward, Sarbanes-Oxley is an every year event. It's not a one year event. The implementation year however was more expensive and what I am hearing in the marketplace from other CFOs is that they are being told that ensuing years are going to run around 70% of initial years. So we'll see how that flies as we go forward.

Would you include this one million in your implementation phase?

Most of it is implementation phase, probably a good three-quarters of it.

Lastly, back to Irwin, with Spectrum set to close -- that's one of your bigger acquisitions in a while. Could you just update -- I know that's -- not in your guidance, right?

Not at all.

What do you anticipate in terms of for this fiscal year and then beyond that for accretion or dilution to earnings and if you could broadly speak to any -- what you expect from the business operationally, changes you might make there?

I think, as I said before, it will not -- it should be neutral for the rest of this year. And it will be accretive going into 2007. In regards to operationally, Spectrum is -- from a growing standpoint, consumption is up 14%, John, I think in the last consumption numbers.

That's correct, Irwin.

80 to 85% of their sales come from natural foods stores. I think they have an excellent product line that can be expanded through supermarkets and mass markets. They have a neat little business in Canada and I am over here in Europe today and we have talked about it and they're coming over to see the European group next week about expanding it throughout Europe. 85% of the products are organic. It is one of the few trans fat-free oils out there. They have an incredible spray similar to a Pam but without all the things in it. And their flax seed oil, their essentials are good product lines. So I'm pretty excited and I think there is a lot of cost and efficiencies that can be taken out of that business as we put it alongside the Hain business. It will be integrated into John's business. So from a bundling of trade promotions and opportunities, there are some good opportunities there.

Jim Norris (ph), Cook Miller (ph).

Hi, everybody. I would just like to commend you guys for the work you have done on your balance sheet. This improvement in the cash conversion cycle is pretty impressive and I know you said in your comments that you're actually ahead of schedule and you're doing better than the original plan. Now I guess my question there would be I am a little greedy; I want even more. So how much more improvement do you think you can ring out of this balance sheet?

I will answer that first, Jim, and then I'll turn it over to Ira. But there is a lot more cash in those hills, okay? And as a company who likes to do acquisition, who hates debt, from a standpoint of getting our inventory or getting our cash conversion down into the 67 days in a short period of time and I think a number with a five there is something that should be easily achievable for us.

Okay. And then also, Irwin, you stated in your opening comments that you are throwing off strong cash and obviously that's partly due to this improvement in the cash conversion cycle. But I wonder if you could elaborate on what you mean by strong cash. I know we are only a quarter into the year but could you elaborate on what you think cash flow goals might be for your company for the year?

Well we should be throwing off from a cash standpoint, if you take our EBITDA in the 80s, 80 million plus and if you come back and look at from a CapEx, I'd like to see us throwing off maybe 50 to $60 million of cash going forward this year.

Ed Aaron, RBC Capital Markets.

Hi, everybody. Nice job on the quarter. I just have a couple of margin questions. First on the protein business, can you talk about the pace which you expect margins to kind of ramp back up to what you might consider more ideal levels?

Well I think there are three major focuses. We took the margin from 0 to 7% in one quarter and again, as we process almost 50,000 birds a day, some of it goes -- it's all process antibiotic but some goes antibiotics, some goes Hillel and some goes to commodity. The objective is to get to 100% antibiotic-free. With the appointments, with the demand, I don't see us a problem getting there.

The second thing that we are going to do here is move into added value products and is that IQF on chicken nuggets and chicken fingers and chicken tenders and stuff like that where there is a much higher margin product line and protein and seafood are the number one growing category today in natural foods and chicken is the number one growth among protein. So we are looking for some major margin improvement and Ed, it would be too early for me to come back and say 30%, 35% I think we need to own this a little more and dig into it. But I have got to tell you, when we bought this, we knew it was not going to be a grocery or Celestial, personal care margin right away. But I got to tell you, I feel good that in owning it one quarter even with a 7% margin.

You talked a little bit about the ongoing mix shift in the margin impact. Could you address it more specifically for Q2 just because it is a seasonally strong quarter?

I missed that question. Sorry. What was that?

You talked about how the mix shift away from Celestial has affected margins a bit over the past couple of years.

Just because it becomes a smaller part of the business.

I understand that. And I'm just asking about specifically for the December quarter, how much might that affect margins in the second quarter specifically just because it is a big key quarter historically.

What happens is -- Irwin, I think I will address this one. What happens, Ed, of course is that the Celestial Seasonings brand makes up a greater proportion of our sales in the colder months than it does in the less cold months. So the second quarter we get a stronger contribution if you will from that. What happened in the first quarter this year compared to the first quarter last year is that Celestial was 1.3% lower as a percentage of our total sales and I expect that that trend overall will continue. But of course until we see the actual results, until we see whether we have a warm winter or a cold winter, we won't know exactly where Celestial will come out in the second quarter.

The other thing that is going to happen, as somebody asked earlier, depending upon the timing of the closing of our acquisition of Spectrum Organic, that will increase sales and of course cause Celestial again to be a little bit lower as a percentage of the total. So there are a lot of variables that would prevent us from telling you exactly what will happen.

And just lastly on the impact of higher commodity costs. I think you said it was 40 basis points this quarter. If I'm not mistaken, it was actually running at a higher level over the last couple of quarters on a year-over-year basis.

Are you saying commodity or fuel and freight?

I guess I was kind of combining it all into one.

Well, commodity, commodity -- the only place we're really being affected today in commodity is taro and that has probably cost us about $0.5 million at taro chips. But our commodity prices right now are in pretty good shape. Actually I think commodity prices when everything comes out of the ground in November you could see some opportunities in commodity to make up some of the higher prices on fuel and freight.

That was essentially my question. Thank you.

Eric Larson, Piper Jaffray.

Good morning, everyone and good afternoon to you, Irwin.

How are you doing?

Good thanks. Just a quick question, just clarification on your revenues. You obviously had -- you beat the numbers pretty substantially in the first quarter and if you look at your guidance, if you just take the middle part of the range and I stripped out from last year's reported 620 million about 40 million for SKU rationalization and it sounds like acquisitions could possibly make up for that difference this year. It means that your growth rate goes to 3.5% per quarter for the next three quarters. And we didn't even have a 3 to 4% price increase factored in on about 80% of your product line. Can you give us a little idea of how your guidance sets regarding all those moving factors?

Eric, what I did was I took and I started off at a base of approximately 590 and 590 excluded Kineret, SKU rat and beginning somewhat in September about a 10, $11 million of Imagine and Rice Dream refrigerated. So that was the base. And basically wanting to grow organically 10 to 12% on top of that. And that is how I got the 650, 670.

Okay. So internally looking at the number then though on a reported basis -- here again, I'm just using the mid part of the guidance range, about 3.5%. Mine are actually a little higher than that. Would that be consistent with that 10 to 12% then internal growth rate?

Absolutely. Internal growth rate -- organic growth rate at 10 to 12%. Absolutely. That is our objective. If we beat it like I think you can figure out what we did in this quarter. If we need to raise our revenue, we will do that. But it is way too early to do that.

Okay. I just wanted to get a flavor for how you were kind of setting the guidance numbers. Thanks.

Conservatively.

Let's take our last question.

Mark Chekanow, Sidoti.

Good morning and good afternoon. Just thinking about Spectrum as you're going to be closing on this in not too long. Do you look at that brand perhaps in a big picture sense as one of your stronger brands to be in your portfolio and maybe look at bringing products and new products outside of the oils category to Spectrum and maybe using that as almost like a Health Valleyish type brand where you can span different categories given its strength? Is that something you're looking at or you're really just going to keep it tight with the oils?

Honestly, Mark, I think right now we have not gone out to look at -- Spectrum is out there in many, many different names and many different other categories that we do not own the name for. One of the big opportunities for us, as I said before. There is a big, big, big opportunity in Spectrum in the oils part, the condiments part, the salad dressing part, some mixes part, in natural foods but beyond that grocery. And I think that is the first thing we need to do is exploit the current products and the current brands into the mass market and into the supermarket chain and where else we can use it, I'm not sure. But it is a great name and there is a big opportunity to grow the product line.

They have looked at doing Spectrum snacks made with olive oil and there may be some opportunities there to look to do product lines that are made with olive oil as we know olive oil is one of the good cooking oils. So there is some cobranding to do with Garden of Eatin' or Terra Chips. Terra Chips made of Spectrum olive oil, potentially there is some big opportunities there.

Also on the price increases -- obviously you've now been through a couple of rounds here. Are prices on the shelf moving in lockstep with your price increases and at some point given the natural organic products that are a premium priced category, are you expecting any kind of consumer resistance or are the retailers and/or the distributors kind of eating some of this price increase to keep shelf prices low and keep the party going with the volume and everything?

Well, I think number one, I don't think anybody likes to eat price increases and I don't think the retailers are but there are three things that we have to do. Number one, price increase and we really have got to make sure retail prices are not something that are in the hemisphere because I don't care how much the balloon is on the industry, price is important out there and yes, 10 to 15% premium is acceptable. But beyond that we are not putting gold in boxes here. Even though I have passion for my brands and products, I am realistic.

Number two, what we have done a great job at, Mark, and I commend ourselves and this group deserves a lot of credit, we have made sure that our trade dollars, and we spend a lot of trade dollars in this here quarter, it's about 13% of our sales is going towards trade dollars, is reducing the retail prices and consumers are getting value. If you take price increase and price increase and price increase and don't promote it and don't get the price reduced at shelf level, you're going to have a problem with consumption.

And last but not least, Hain Celestial is not the only company out there taking price increases today. So I think -- you have told me you do the food shopping in your place. When you go shopping and buy other products than Hain, I hope not a lot, you are seeing other retail prices going up at the shelf. So I think people are seeing that. The other thing I can say, and Mark I always dread over a price increase, the first two we saw consumption being strong. I hope it stays that way.

Just one last question here. Amongst the many growth rates you had run through, you mentioned something about frozen up 5%. That seemed to be a little low during the strength in the category. There are issues maybe with Rosetto and the pasta category even. Ethnic Gourmet seemed to be doing well. What was behind that frozen growth of 5% because you guys are considered a mid high teens growth category.

Irwin, I can jump in on that. Basically what that reflects is we made some private label products for -- not private label, some work in process products for Heinz and that drove down the number in frozen because the shipments in this quarter were significantly less than a year ago.

And that just adds me to one other thing I think Scott Van Winkle asked me what was our growth weight before on JASON's. JASON's, as a brand, was up 20%. I looked at a number -- as we do some private label in JASON's, which was down, which is okay for us. The brand was up. The private label was up 7%. Overall, JASON's brand was up 20% just to clear up any confusion.

Thank you.

Thank you, Mark. Since this is our last question, I would like to thank everybody who was on this long call today. I didn't expect it to go this long. I guess I wanted to see midnight in Europe. But as you can see, we have had a great quarter and with that, was a lot of challenged out there in front of us. And this is all execution. We have great products and great brands but I have got to tell you the team that I have working with me, whether it is Europe, whether it is Canada, Melville, California, Boulder, what a great team and ultimately Asia. We are excited about ultimately closing on the Spectrum acquisition. We see tremendous opportunities that we've worked well with these people on integration and we are ready to move through. It's just getting the proxy through and that is one of the ordeals of acquiring a public company.

As a company, I feel good about the categories that we're in today. I have said this many, many times. Natural foods is not a trend. It's not a fad. It's a way of our lives and what we do is everything we put in our products whether it's organic, whether it is GMO-free, whether there was never any trans fats. The new trans fat laws that came into effect in January helped us tremendously because when you look at our label it says trans fats zero, not where you're going to look at 3%, 5%. We have never done that. So I'm pretty excited about our product line and our portfolio.

I think understanding Hain a lot better as people come back and say you've got too many products, too many SKUs. I think I was very clear when I said 10 SKUs make up 80 to 85% of our sales. But if you go into supernaturals today, you see Hain representing in the grocery, personal care product area and ultimately the protein area anywhere from 1100 to 1500 SKUs. So we make up a lot of the products that mainstream products would make up that are not sold in natural food stores.

With that, I would like to thank everybody for their support and have a good holiday season and speak to everybody soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone, have a wonderful day.