Hain Celestial Group Inc (HAIN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2006 second-quarter Hain Celestial Group earnings conference call. My name is [Minoshia], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Mary Anthes, Vice President of Investor Relations. Ma'am, you may proceed.

Good afternoon. This is 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 fiscal-year 2006 conference call to discuss earnings that were released after the close of the market this afternoon.

Irwin Simon, our President and Chief Executive Officer, and Ira Lamel, our Executive Vice President and Chief Financial Officer, will be delivering prepared remarks. And John Carroll, Executive Vice President and President of Grocery & Snacks, will be joining in the question-and-answer session this afternoon.

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.

In response to those of you who find our calls too lengthy, we're making a concerted effort today to limit the call to an hour, so please adjust your questions accordingly. Management will be available for additional questions after the conference call.

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

Thank you, Mary, and good afternoon, everybody. I hope everybody has had an opportunity to see our press release that was released at 4 PM today. Those that saw it, you would have seen today is our record quarter that we are announcing for Hain -- our biggest quarter on both sales and profit in the history of the Hain Celestial Group.

Our sales for the quarter -- $186.2 million versus 169.7, up 10%. If you were to add back our divestitures, our Imagine refrigerated licensing deal, and our SKU rationalization plan that we put into place last June, our sales for the quarter were up 15%.

Something that we have worked on and worked hard on is our gross margin enhancement. And I'm going to continue to talk about margin enhancement in a little while. But if you take our GAAP report, it was 31.2 versus 31.4. But if you add back our protein business, our margin in the quarter -- 32.3 versus 31.4, almost up a full point versus a year ago. And I'll talk about the higher input costs that we had in the quarter -- and I think a great accomplishment for this team to be able to come up with this type of margin enhancement with the higher costs that we're all facing out there today.

Earnings per share in the quarter -- $0.33 versus $0.29, up 15% versus a year ago. Something else that we've worked hard on -- our cash conversion. And as you can see, in our last quarter, we really did a great job. And this is something we started on about three quarters ago. Our cash conversion -- 67 days versus 82 days, and Ira will talk about that in his remarks in a little while in regards to our operating cash. But great job, and great accomplishment from the team on that.

We've talked about a lot of priorities. And one of our big priorities was our margin enhancement. Our objective is to get to a 35% margin. How do we do that? Well, by scale -- and scale, I mean growing organically -- as we continue to grow, our objective on organic growth -- that will help our overall scale of margin.

Our pricing -- we have taken over the last year and a half three price increases, one in June 2004, one in June of 2005, and another one in the middle of October of 2005. And if necessary, we would look to take other price increases if we saw fit.

We've gone through a major SKU rationalization that we announced last June. The team has executed perfectly. Not only have we discontinued numerous SKUs where sales and margin did not fit our profile, we've taken that space and put in its place and lots of faster-selling products or SKUs. And that's why you're seeing the type of growth that we're seeing on our topline today.

Our Personal Care business continues to be a strong grower and a contributor for the Hain Celestial Group. We expect our Personal Care business to become a bigger part of the Hain Celestial Group, which will enhance our margins. And last, but not least, as we consolidate our businesses, consolidate our warehouses and freight, we look for substantial savings from those to enhance our margins.

So let's talk about some of the highlights in the quarter. Price increase that went into effect -- we institute another price increase in October. We have executed on our SKU rat.

One of the things this industry has always been plagued with -- there are very few brands. And what I can tell you is this here -- we have spent a lot of time, and now, a lot of money in building brand equity among some of our greatest brands.

Today, if you watch Sesame Street, you will see brands like McDonald's, Procter & Gamble, Beaches, [ONOES], Earth's Best. If you go to Madison Square Garden, you will be able to buy Terra Chips. In April of this year, on a two-page FSI in over 22 million drop, you will be able to find two pages of Hain Celestial products that will be first time of anything of this significance that we've been able to do or that we've ever done.

In December, we closed on a secondary of Heinz stock. And near the end of December, we closed on the acquisition of Spectrum.

Just recently, we have heard about the American Heart Association publishing a paper casting doubt on the health claim that soy-based foods lower cholesterol levels. We've heard from a lot of you on that and how it affects our business.

Well, let me tell you this here -- one study doesn't refute decades of study on soy. Soy -- not only does it -- you know, it reduces cholesterol. Not only do people drink soy because they are lactose-intolerant, and there's a lot of polyunsaturated fats, high in fiber and vitamins, soy has been a big part of the natural food consumer's diet for a long time. And the FDA still sticks by their claim that 0.65 grams of soy protein reduces cholesterol.

So let me talk about our business. And the way I want to talk about our business today is on consumption, because what we see continuously happening is just like us reducing our inventories, our distributors are reducing their inventories. Our distributors are consolidating warehouses, so actually shipments are down.

But the good news is consumption is outpacing shipments. And what consumption is is actually products that are bought off the shelf. Our Terra consumption is up 15%. Our Garden of Eatin' consumption is up 22%. Our Earth's Best consumption is up 40%. Our Imagine consumption is up 49%. Our Ethnic Gourmet consumption is up 16%. Our Rice Dream consumption is up 15%, and our Health Valley soup consumption is up 11%. Our WestSoy shipments are up 7.2%.

As you are all aware, we've had a warm November, and now a warm January. We've heard a lot about soup and tea sales. Well, you have heard me talk about our consumption on soup. And we've had some strong consumption on soup. Even with the warm weather, our tea sales grew 2%. Our case sales are up 4%, and that absolutely has to do with our mix. Our consumption across all categories of tea are flat, and the overall tea consumption is flat. So at least we're keeping up with consumption out there.

What we've done -- we've actually come out with a lot of new bag teas. We've come out with organic teas. We've come out with Ethnic Gourmet. And a hot new product that we're coming out with is called Zingers [To Go]. And Zingers To Go is a mix of tea which you'll be able to add to your water which will be able you to give you a tea drink on the go.

Our Personal Care shipments are strong, up 33%. Our Jason consumption is up 27%. Our consumption on hair care, body wash, deodorant, oral care and Jason products are up double-digit numbers.

Our Zia consumption, which -- again, Zia we acquired in May of last year, and went through a major SKU rat there and continue to do that. Our consumption of Zia is up 5%. One of the big things with Zia is expanding distribution and expanding products.

We're continually expanding the distribution of Jasons into other classes of trade other than natural food stores. We are also in the midst of launching multiple new products (technical difficulty) which we think is quite unique is a bug repellent called Quit Bugging Me, which will be one of the first DEET-free products that will be in the market very shortly.

Our chicken business -- shipments were up 12%. And we're hearing a lot of information on chicken right now and a lot of noise. The good news is the antibiotic-free chicken market is very strong. The commodity market is down, which ultimately affects the pricing. And the chicken that we don't sell as antibiotic is sold within the commodity market. From the standpoint -- we are looking to introduce many value-added products, and these will be introduced at the natural foods show in Anaheim. We've committed to the national U.S. chicken industry program to test all our flocks on the farm two weeks prior to delivery to the processing in regards to avian bird flu.

Our Canadian business is up 6% -- strong growth, with Earth's Best up 33, our Terra business up 36%. We continue to get strong growth from refrigerated Rice Dream, aseptic Rice Dream. Moving our Canadian headquarters to Toronto is in place -- a new management team in place there; quite happy with the results coming out of our Canadian market.

Our European market -- we're seeing good growth coming out of our nondairy business and our fresh business. And we are focused on moving into the UK with multiple new products and multiple new entries, and actually looking at some very exciting acquisitions within the European market.

As you heard me say before, we closed on Spectrum in the middle of December. We operated Spectrum for 16 days. John and his group are in the midst of integrating the businesses today. And by the end of this fiscal year, we would have integrated all the people. We would have integrated co-packers. Jim Meiers, our Vice President of Operations, spent about two weeks in Europe visiting all our growers over there and all our co-packers of oils. And we really have a great plan and pretty excited about the opportunities with Spectrum, both on the branded, the Essentials, and the ingredient businesses that come along with that.

So let's just go back and look at the quarter. We really focused on our margins, which we see the effects -- good consumption, good pricing in the quarter. The group in the quarter really looked at costs. And as you heard me say before, we had $3 million of cost increase, input cost in the quarter, which we really -- hitting our numbers and hitting our goals really did a good job of containing the cost. We've really watched our SG&A numbers. We've really watched our spending within the Company.

We've really focused on building brand equity, and that's something, whether it's the Earth's Best brand or the Celestial brand, the Terra brand, we are really spending against to make sure that our brands are world-class brands, and that when you say Earth's Best, what people say -- or that people know the brand.

And last but not least, I'm proud to work with one of the world's classiest and best management teams in running the Hain Celestial Group today.

What I'd like to do is turn it over to Ira Lamel. He'll take you through his comments. And then we'll open it up for questions for Ira, myself, and John.

Thanks, Irwin. Good afternoon, everyone. As Irwin said earlier, our sales in the second quarter this year reached a quarterly record of 186,200,000, up 10% over the prior year's second-quarter sales of 169,800,000. Our net income was $12.7 million, or $0.33 per share, both numbers being records for Hain Celestial, versus 10.7 million, or $0.29 per share, a year earlier.

Diluted earnings at $0.33 per share was computed on 38,434,000 shares outstanding for the period versus $0.29 last year on 37,207,000 shares outstanding. That's a 1.2 million share increase, or 3%, over the number of shares outstanding in the computation last year. And the effect of that was to reduce our earnings per share by $0.01.

Gross profit for the second quarter this year improved to 32.3% from 31.4% in the same period last year. These numbers are before the impact of the gross margin of our Hain Pure Protein joint venture, which operates at significantly lower margins and therefore reduced our gross profit by 1.1 percentage points to 31.2% for the quarter.

Our gross profit continues to be negatively impacted by higher input and distribution costs. In the second quarter this year, we were impacted by approximately $3 million of input cost increases compared to last year, with about 40% of these increases coming from increased energy-related costs. These increases were offset in part by an approximate 2% positive impact on our consolidated margins from the price increases we've put in in the past in the Grocery & Snacks brands.

Our margins have also been negatively impacted by the current quarter's mix in sales, as our higher-margin Celestial Seasonings sales represented 1.7 percentage points smaller component of sales this year than Celestial Seasonings did in last year's quarter. This comes as a result of the acquisitions we've made and the continued internal growth in our other branded businesses.

The Celestial Seasonings effect had a 0.6% impact on our margins, reducing our margins. And offsetting that impact are the efficiencies that we are getting in our Grocery & Snacks unit, which had an equal, offsetting 0.6% positive impact.

Our SG&A in the second quarter this year was 36.4 million, or 19.6% of sales compared to 35.2 million, or 20.7% of net sales in the prior year's second quarter. The percentage reduction comes from G&A being spread across a larger base, and we continue to realize these efficiencies when we effectuate synergies of the businesses that we've acquired.

Operating income for the quarter this year was 21.7 million, or 11.7% of revenue as compared to 18.1 million, or 10.6% of revenue last year. In this year's quarter, our interest expense and other expenses totaled 1.3 million versus 553,000 last year. Our interest expense was 450,000 higher this year than last year, resulting from higher interest rates and higher average borrowings as the result of the acquisitions we've made.

In the second quarter this year, we had no foreign exchange gains or losses, while in last year's quarter, we had foreign exchange gains totaling 560,000. These two variances created a negative impact on our earnings this year, pulling earnings down by $0.02 per diluted share.

As in the first quarter, and as we estimated when we gave annual guidance back in September, our effective tax rate is running at 38% this year compared to the full-year rate last year of 36.7. Our EBITDA was 24.9 million, or 13.4% of sales for the second quarter, and 22.4 million, or 13.2 last year.

Our balance sheet continues to be very strong. Our working capital is at 142.3 million, with a current ratio of 2.5-to-1 at December 31st this fiscal year. Our total assets are now 800 million, and our stockholders' equity is 578 million at December 31st, '05. And debt-to-equity, even with the acquisitions we've made, continues to be a very low 19%.

Our cash conversion cycle is now down to 67 days this year versus 82 last year. Days in receivables stand at 38 days. Our inventories are at 64 days. And our payables, while we remain an excellent payer of our bills, taking advantage of discounts wherever we can, are at 35 days.

We have generated 23.9 million in free operating cash flow in the trailing 12 months ended December 31st, 2005, improving 79% from the 13.3 million in free operating cash flow in the same trailing 12 months of the prior year.

As we stated in our press release, we have updated our guidance for fiscal year 2006. We are confirming our earnings guidance of $0.98 to $1.05 for the full fiscal year, while increasing our sales guidance to reflect the addition of Spectrum to 670 to 690 million in sales. We anticipate that Spectrum will be neutral to fiscal '06 earnings, as our incremental interest costs and the incremental shares outstanding as a result of the acquisition of Spectrum will offset our estimates of its operating contribution results. We expect Spectrum to become accretive during our fiscal year 2007.

At this point, I'm going to turn it back to Irwin. And then after that, we'll go forward to questions.

Thank you, Ira. I just want to make one quick correction. When I was going into consumption, I said our shipments are down. That's not what I was actually referring to. What I was referring to is that inventories are down, not shipments.

So what I'd like to do now is turn it over for questions and answers. Thank you.

+++ q-and-a.

(Operator Instructions) Greg Badiskanian, Citigroup.

Thanks, and nice job in the quarter, guys.

Thank you, Greg.

Yes. First question -- I missed the first minute or two. Did you talk about organic sales growth? And if so, what was that, excluding the SKU rationalization?

What I said Greg, in my opening notes, that basically our sales were 186.2 versus 169.7. If you add back SKU [rats], divestitures, and Imagine, sales were up 15%. So I did not go into what our overall organic growth was.

Okay.

But it's not hard to figure it out.

Yes. What was -- if you add back Imagine Foods?

Well, SKU rat, divestitures, and Imagine -- if you add that back, it's about 15% increase in overall sales for the quarter.

Okay, good. And just looking at maybe lumping some of the warm weather products -- I guess there was speculation that that was having an impact, and maybe it did. What was your retail sales for soup, tea, and some of the other products and maybe from shipment and from a retail perspective?

Good question, Greg. On a couple of fronts, I do think it affected our tea sales. Our tea sales were up over -- on shipments, 2%; in units, 4%. And as you know, this is our biggest month, and weather does somewhat affect tea.

On the other hand, our Imagine aseptic soups -- our consumption was up 49%, and our Health Valley soups was 11%. So our soup business was not affected, but it definitely affected our tea business.

And the overall tea category on consumption and shipments actually were flat. (multiple speakers) It was just not Celestial, it was the total category.

Yes, I mean it makes sense -- [I mean, it may] compress the sales a little bit. When you look at the SKU rationalization, maybe you could just point to one or two big areas that you benefited from increased turn at the retail level?

Why don't I turn that to John, because I think it's his group that we really focused on and -- John?

Sure. Greg, in regard to SKU rat, we've discontinued at this point 88% of the SKUs that we identified for SKU rat. And what we're seeing improvements in is, obviously, in our inventory levels, as Ira spoke to earlier, and our spoils, and also being able to increase our co-packer run sizes, therefore helping our margins.

And where some of our biggest growth is coming from in products -- WestSoy. That was a big area; we did some major SKU rat on WestSoy. We also did some major SKU rat on Health Valley cereals and bars and cookies. And we're seeing some good growth there.

And we also -- where we did SKU rat on other products and discontinued, we put in some of our new products like some of our new Earth's Best products and that's why you're seeing the consumption there. At the same time, some of the WestSoy or Soy Dream SKU rat -- we took that space up with Imagine Rice Dream, and we're seeing consumption on Rice Dream up over 15%. So SKU rat has worked well in many ways for the Company.

Ken Goldman, Bear Stearns.

Your cash conversion cycle -- obviously, it's been impressive in its decline. I'm just wondering how you think of it going forward. Can the rate of decline be maintained? Can it be increased? Or if low-hanging fruit is gone, do you think it will decelerate a little bit going forward?

I think it definitely will decelerate. I think any time you initiate a focus on something that you didn't focus on in the past, you get a lot of low-hanging fruit and benefit up front.

I mentioned that we're at 67 days. We're in the process of developing our targets for the fiscal '07 year on what we will be looking to get out of cash conversion. We still believe we have at least another 10% reduction in there, maybe a little bit more than that. And we'll keep talking about cash conversion as we go forward. But I think you're right, the initial shock in the cash conversion cycle has been taken out of it.

Question about Europe -- it's a time when a lot of food companies are struggling a little more than they had expected there, given the economies. I'm curious what you're seeing over there that you think Hain Celestial perhaps could do differently. And I believe I'm responding [that] when Irwin said he was looking at some possible acquisitions in that region.

Well, I think what we can do differently is the same thing we do here in the U.S., is natural and organic. And if you look at what a lot of companies are exiting, Ken, they are exiting commodity or mainstream products, because there's such demand for store brands and private-label. I think there's going to the a lot of change in the demand for brands.

I think Whole Foods is going to change a lot of their retailing. They opened up a 90,000-square-foot store in the middle of central London, which I've seen. I spent some time there two weeks ago. And I think the retailers there are truly, truly understanding the value of natural organic. And I think some of the things that we see is the demand for natural organic on the fresh side. We're seeing a lot more demand for Rice Dream and Soy Dream.

And so we think we can take a lot of our formula and go into Europe with the natural organic. We're not going to go in there and change the way consumers buy products, but I think we can go in there and offer them a healthier selection of products than they have today.

Andrew Lazar, Lehman Brothers.

Question on the pricing, Irwin. I'm curious -- with the unprecedented rise we've seen in input costs and the need for you and others to really push some pricing through, it's kind of a real-world test of elasticity of a lot of your different brands and products.

And I'm curious, maybe some of the learning that you've gotten as you put through three different increases, which brands have you been -- and categories have you been kind of surprised on the positive, in terms of their ability to just sort of accept it and keep the growth rate moving forward; and which, if any, were you surprised maybe that they were more elastic than you thought, and perhaps weakened? And does this help you, obviously, as you target where there is more opportunity around pricing going forward?

Well, I think one thing we try to do here -- if input costs and freight and warehousing go up, we have to go up, because we just can't absorb. Our margins were never great enough that we could absorb them, okay? So I think it's a must -- we take them, or we pass on [those] pricing.

I think what has happened [as is] here, John's group on frozen -- Grocery & Snacks, and that is where we've seen some of the best acceptance of pricing. And I think number one, we have not taken pricing there in a long time. Number two is we've done a good job in regards to our trade spending to offset some of the prices at retail.

And number three is I think what we've done is continuously created demand. And being one of the biggest in natural organic, Andrew, others have followed us. So we have not stood out there alone as the higher price, okay? So Earth's Best seeing consumption up 50% -- you know, if you go into Whole Foods right now, you'll see Earth's Best baby food not the highest priced in the store. But when it comes to buying your children or your infant or your toddler organic baby food and paying an extra $0.10, you don't think twice.

So we have not seen a push back. And we have taken three price increases. On the other hand --

And push back -- you mean from either other, obviously, retailer, and in many cases consumer, either?

Well, I've never had consumption numbers like this here. So I never want to bring some ill will on my (multiple speakers), but it's working.

On the other hand, we did take a price increase in August 2004 on tea. And we have not taken a price increase since then. It's been tough to take a price increase on tea, as you have Lipton and Twinings and some of the most competitive pricing that we've ever seen within the tea category today.

Now, the good news is we're dealing with a good margin business, and we're dealing with a strong brand within Celestial. We're dealing with a much maturer brand within the mass market.

But pricing is tough in the tea category today. We have seen some good opportunities on pricing on our Personal Care product line. We've also seen some good pricing -- and anybody out there today looking at the protein category -- good pricing on the antibiotic-free chicken category. If we have to sell antibiotic-free into the commodity market, we don't like the pricing there. So what people are paying for today is natural, organic, antibiotic-free, and will pay the price for it.

In terms of -- as you look out into the fiscal second half -- and you're off to a good start this year, and perhaps one of your better starts through a half of the year in quite some time in terms of it being balanced in how you got there, your level of visibility going into the second half -- so you've got incremental rollover or carryover from some of the pricing you've been taking. The margins you've been managing pretty aggressively. And hopefully, costs don't keep going up on you, and perhaps there will be some relief, or at least stabilization.

I'm trying to get a sense of your level of comfort and visibility around the range that you have provided, because I guess in the past, we've had some of the ups and downs. And it just seems like there's more working your way structurally here in terms of what you've done around the cost side. So I'm trying to get a sense of that level of visibility.

Well, you heard me say before my objective is to get to a 35% gross margin, and how I was going to get there on scale on my organic growth, how I was getting there on pricing, how I was getting there on mix of business, and how I was getting there on cost containment.

Number one, I have so much better visibility of all of our businesses today, from systems to actual consumption numbers. We have, I think, a real good plan in place of how we're going to execute. I think the growth in the category is there. And last, but not least, to carry out all those things, Andrew -- as you heard me say before, we have a world-class management team out there executing and making it happen.

Christine McCracken, FTN Midwest.

Just wanted to follow up on the drop in SG&A. It's down, I assume, as a percentage of sales only because sales got bigger. Is there anything more to it than that?

(laughter) I hope that's not the only reason.

Well, it is a major reason. We are more cost-conscious than we might have been in the past. But you're right; it is the major reason. As we garner sales, and we bring these businesses onto the platforms that we have existing already, we get a lot of savings. And that's where it's coming from.

But I think, Christine, what's important, and I've said this before -- one of the things over the last year or so -- I've been building the infrastructure and the management team and the systems to run a $1 billion business. If we were put 2 to $300 million additionally on this business today -- yes, we do need some additional personnel, and yes, we do need some additional infrastructure.

But that's where -- I come back before, the scale comes into [part] here. And continuously adding business helps our overall SG&A within the Company. And back to what Ira said before, really managing our costs, not only our margin; really watching overall spending within the Company -- that's something this group has done.

So going forward, it's reasonable to assume that you could continue to ratchet this down, assuming, of course, that you can continue to grow sales. But that's a realistic assumption at this point, right?

Yes. The other thing, Christine, is the sales level in our second quarter is higher than it is in our other quarters. So the fixed costs that are in G&A get spread over a higher sales base in this quarter.

So I wouldn't look for continued reductions from the level that it is in the second quarter. I'd look at it more on an annual basis year over year. So don't look necessarily for reduction in the SG&A as a percentage of sales in Q3 and Q4 while we still keep the dollar spending in line.

Sure. Just on a separate subject then -- at one of your major competitors over, I guess, at Kettle announced a massive expansion here a couple of days ago. How do you position yourself knowing that they're going to be producing so much more product going forward?

Well, we already have a plant in the East Coast. We also have the ability to add on to that plant. And we also potentially ourselves are looking at facilities on the West Coast.

And it's great to see the consumption of snacks growing the way it is. And you've heard our consumption. And we built the new plant about three years ago on the East Coast. And there's a time we're going to have to face when we're going to have to build potentially a plant on the West Coast.

Okay. And so going forward, you believe at least at this point that consumption can really absorb the majority of that additional production going forward?

Consumption can, and we're also looking at other co-packing opportunities. We do not produce all our snacks in one facility today. We produce our snacks in our own facility and one other facility. We produce our tortilla chips, Garden of Eatin' and Little Bear/Bearitos in three to four different facilities today.

So we're not doing everything out of one facility. If you take all our snack business today, we have five to six facilities out there. We also produce snacks in Europe today. We also have our vacuum fryers strategically located throughout Europe and some in Asia. But another facility is something that we're in the midst of talking about today.

Great. And just in terms of some of these new, I guess, organic efforts by a lot of the mainstream retailers that have been opened or announced in the last quarter or so -- can you talk about how you're working with them in terms of being able to supply into those retailers? And obviously, that's a pretty broad question. But specifically, if you could mention any specific examples of how you're working with those accounts. And then secondly, how you're competing, given the fact that Safeway now is pushing pretty hard on their own private-label organic brand?

Well, I'm going to answer that, and I'm going to let John answer part of that also.

Number one, one of the things, and one of the real hidden assets within Hain, is over the last 10 years, what we've created is an infrastructure in procuring and manufacture natural organic ingredients. And in regards to that, we today are one of the largest purchasers of organic fruits and vegetables because of our baby food business, Earth's Best. We're one of the biggest purchasers of organic yellow and red corn, blue corn.

So with that, what Hain has and what we've been doing and what we've built is relationships out there. We go out there and procure and manufacture natural organic ingredients. So there's a tough barrier to entry here.

Now, is Safeway going to be able to come out with certain cereals and cookies? Absolutely. But I think one of the things, I've said this before, with Hain -- that's why it's important for us to diversify. That's why it's important for us to be innovative, to stay ahead with new products and new ideas.

One of the things -- there's multiple people that would love for us to become their co-packer on private-label. That's not our expertise. We want to focus on our brands. And you know what? There's not enough organic or natural ingredients out there to supply the demand in growth organics ourselves to go out there and produce for other people. In the right situation, we will partner. But it's got to be the right situation for us.

I've just gone through a major SKU rationalization. It's not something that I want to take on and become a co-packer of private-label. John?

I think a couple of other points. First, Christine, in most of our categories, in our core categories, we are a number one or number two brand. The way we will coexist with private-label is twofold. One, we will be more innovative than the private-label guys. They will follow us. We will lead.

The second thing is, we are going to spend to support our core brands. Irwin talked about what were doing on Earth's Best, what we're doing on Terra Chips. These are brands that are core to us. Rice Dream, things like that -- we're going to spend to support those brands' equities. And I think by doing that and working with the retailers as the number one or two brand to manage the category, so that if they have a private-label it's us, the private-label, and maybe another brand, I think we can coexist quite well with them.

And then with some of the new organic efforts being introduced, it seems like you guys should be the natural beneficiary.

Absolutely.

Wayne Archambo, BlackRock.

If you could just give us a little more detail on the European possibilities -- would we expect some possible transaction in 2006, and could you quantify the size? I know you'd been looking at something in Europe last fall, and it fell through. Is there anything of size that's meaningful to you folks there?

We've talked about a significant acquisition that we looked at in Europe last year that fell through. What we are looking at now is smaller type of acquisitions. And that's kind of what we're looking at in our overall acquisition strategy.

As we've stepped back -- number one in the U.S., we think that we can buy smaller companies and integrate them and take them through our distribution system, our (technical difficulty) [logistics] system, and use our sales force to grow them. It will be something that we can do a great job with.

In regards to Europe, we think the UK market with our current brands that are in Europe right now -- if we can find a good platform in Europe, a good platform in the UK which would significantly help our current brands, that's what we would look for. And we'd be quite happy in the 25 to $50 million range, and we could ultimately digest something in the $100 million range. But we'd like something in the 25 to $50 million range.

Could we expect to see something this year?

As my lawyers tell me, I can't comment on acquisitions. (laughter) But it's something we're focused on.

Eric Larson, Piper Jaffray.

Just to finish on dissecting the sales for the quarter, when you entered 2006, I think you had -- well, you did obviously make some acquisitions. And I think it was about 16 million of additional sales without any growth on top of that that would accrue to '06. Is about a $4 million number in sales from poultry, and you had another small acquisition -- would that be about the right number for the quarter?

Well, I think if you step back, what we started with, Eric, was $590 million for the year as we rolled back. What we said -- and you can analyze it; you can come back -- we said poultry was somewhere around 20 to 25, and that Zia was somewhere around $8 million, okay? And again, what we do and what we've done -- I mean, on Zia, we've gone through a major SKU rationalization, and the same with chicken. Our chicken business was up 12% this quarter. But one of the things we've done is got rid of businesses that were -- the margin of that business is 7%, but we've got rid of unprofitable business.

So I think you can easily figure out if you add back SKU rat, divestitures, and Imagine, 15% would be our topline growth -- you could come back and figure out what our organic growth is if that's what you're trying to get at.

Yes, okay, got you. And then it's great to see particularly your operating profit margins do so well. Your marketing spend in your marketing spend as a percent of sales -- is the percent of sales maintaining where it's been, or is that increasing? How does your marketing spend this quarter and the first half compare with a year ago?

Well, one of the things we never want to do -- and your heard me, what I said before -- building brand equity is a key. You don't start spending money with Sesame Street and MSG and do freestanding inserts if you're not spending money.

Where the team has really done a great job, Eric, is getting the benefit of the spend. I think one of the things we did before -- we spent the money; we didn't get the benefit.

So we're spending around a lot of the same dollars. But we're focused on getting something for it, where I'm not sure that was always the case before.

Ed Aaron, RBC Capital Markets.

Nice job on the quarter. A couple of questions. First, Irwin, the AMA story -- have you seen any impact on consumption since they put that out?

John?

We have not seen any impact in our shipments. We have not seen any consumption data since that came out.

And I think one thing, Ed, is this here -- we sell aseptic soy. We sell it to natural food -- the natural food consumer who's been buying aseptic soy buys soy because they know all the other value added of soy. They buy it because they want to reduce their dairy intake, or they're lactose-intolerant, and a lot of other benefits of soy.

And actually, when you read it, it's one study. And if you come back, soy has been around a long time. It's been a big part of our diets. And so the American Heart Association comes out with a study -- I mean, the FDA still backs their study. So I mean, sometimes you have to wonder who funded the study.

But it's something that -- and the other interesting thing is we did not get any calls on our consumer hotline or our consumer affairs group asking questions about it. So you know, more questions came from the financial community than our consumers.

And it wasn't actually a negative piece of --

No, it just said it reduced it by 0.3 versus 0.6 on the study, or 3 versus 6. So it still reduces cholesterol. But one study does not decide something either.

So you can keep drinking soy, Ed. It will keep your heart in good shape.

Okay. Ira, did you say that pricing helped margin by 2 points?

Yes. That's the price increases that we put in in the past that have gotten close to -- let's call it maturity. That does not include the price increase that we put through most recently, which really hasn't cycled through our numbers.

Right, but if you -- I think you also said that your input costs were up by about 3 million, which is I think 1.6% of sales. So should I conclude from that that your price increases are more than (multiple speakers)

No, it's really mutual. When you start to take other costs that are not in input -- when we talk about input, we're talking about ingredients, we're talking about energy costs, things of that nature. It doesn't include other components of labor and overhead.

So total costs are up. And when we've computed our price increases, we've tried not to take anything out of our customer's back pocket. We're doing it to be neutral.

And if you go back and look at it -- a perfect example is right now, diesel is up almost $1 this year versus last year on a gallon. And we've seen our packaging costs up almost 10% this year versus last year. And we're waiting to see other price increases that our vendors have come back to us on, so it's still a wait-and-see. And I think that's one of the reasons we stepped out and took another price increase to make sure we're well protected.

Do you think it's fair to say that for the most part, all these price increases are being passed on fully through the supply chain to the consumer?

Absolutely. I just don't know how anybody else absorbs it.

Okay. And then lastly, could you maybe just update us on your mix of business domestically just by channel -- just kind of some rough numbers? I just haven't heard that from you in a while. It would be just good for an update.

In our last call, I gave some numbers that gave what our percentage of sales were running principally by what we are now showing in our financial reporting as reporting units. So our Grocery & Snacks brand are running about 22% of total sales --

Actually, I meant by sales channel -- so natural channel versus supermarkets and everything else.

What is the mix of our product sales today?

Yes.

We're probably 55/45, still natural to -- I'll say supermarkets, mass-market. Don't totally hold me to that because of what goes through UNFI and Tree that we don't actually sell to direct. But I would say still our biggest area is going through the natural food stores, the supernaturals.

Right. In retrospect, does that surprise you, Irwin? Just if you would have thought -- five years ago, I seem to remember -- I think you would have thought that a bigger part of your business would be coming from the supermarket channel by this point.

Well, I would have, but I think the supernaturals have done a great job of their growing. And I think they've gone out there and continue to open new stores, and continue to have double comp growth. And that's what continues to deliver sales to us. So that's what's happening out there.

Okay. And actually, if I could sneak one more in -- you gave some consumption numbers. Is there any way of maybe giving us a blended total consumption number across all brands?

Ed, the reason that's hard to do -- there's way too many channels. As you know, today in consumption -- and just to be clear, Wal-Mart numbers are not in there. Trader Joe's numbers are not in there. So in actuality, it's hard to give you one overall blended. And also from discontinued products, it's hard too.

Let's have the last question, as we are now one hour into the call.

Andrew Wolf, BB&T Capital Markets.

A couple of questions on Spectrum. First of all, could you tell us how much sales were in the quarter, if any?

First of all, Andy, we don't give sales by brands. But as we said, we only owned it by two weeks. So the last two weeks of the quarter -- so it was not significant.

Okay. I'll just do a pro rata on what's in their last Q.

Yes -- it's not significant, Andy, so it's very easy to do.

And what are your early impressions, now that it's been owned by Hain for a month and a half? And is it too early to speak of some longer-term plans for the business unit?

I said earlier in the call, my early impressions and my impressions during my due diligence -- we feel very good about the brand. We feel very good about the products. We feel good about the category. Healthy oils is something that consumers want -- healthy spreads, healthy mayonnaise. We also got some pretty exciting new salad dressings in that coming out within the brand.

We think there are some good -- we're seeing some good consumption numbers out there. There's been some pricing taken at the end of December that is 60, 90 days away that we'll be able to get the effect. We're seeing some higher olive oil prices than we anticipated, but we'll deal with that. Jim Meiers just came back from Italy and Spain -- out there looking for organic oil, and we see good opportunity. John and Maureen and his group have gone out there, and we really put a good plan together to integrate the business back into the Melville business.

So we feel pretty good about the opportunities. We have visited a lot of our customers, and they are pretty excited about the brand. And we visit customers who were not buying brand before and are looking forward to us getting the products authorized within their chains and shipping it with our products. So overall, very, very positive.

Thank you for the update. And my last question is for Ira. You gave a pro forma on the gross margin as if -- excluding Hain Pure Protein. Could you give us that equivalent number for the operating expense ratio so we can get to the margin without Hain Pure Protein?

Are you talking about SG&A on Hain Pure Protein?

Yes, excluding it, since you were nice enough to give us the gross margin excluding it.

You can drop the SG&A by about 0.2 points. It's a much lower G&A based business.

So you raise it because it's a lower business, or you drop it?

No -- if you were to [raise] the SG&A percentage by about 0.2 points without Hain Pure Protein.

So it would be about 19.8, something like that?

Yes.

Well, that's a good number. Thanks.

Thank you, Andy.

What I'd like to do is do a quick wrapup here. Thank you for listening to our second quarter. As you can see, we've stuck to the hour. It was a record quarter for us on topline; it was a record quarter for us on earnings. And you've heard me say we're really focused on our margin enhancement and our cost containment.

And with that, I am excited about our brands, and some of the brands, whether it's Celestial, whether it's Earth's Best, whether it's Terra Chips -- and to see our brands today growing globally is something pretty exciting. And if you go to Madison Square Garden, to be able to buy Terra Chips, or to see Earth's Best alongside McDonald's, Procter & Gamble, Pampers, Beaches is something pretty exciting for us here at Hain. So our brands and building our brands a key priority for this Company.

We've talked about our people. We've done a great job of upgrading our people. We'll continuously do that. And we feel we have an excellent management team in place, and we continue to build upon bench strength.

Our European acquisitions and our European growth is important to us, and we continue to look to grow within Europe. We also look to enhance our Asian relationship with Yeo Hiap Seng, and look to grow and procure and manufacture upon that relationship.

In regards to our cash conversion, we really worked on that. And you can see what the group has done when we focused on that. And going down to 67 days has been a great accomplishment.

And just as important, which I feel real good about -- as Ira told you, our improvement in operating free cash -- $24 million versus 13.3, a 79% increase this year over last year, is a great accomplishment.

What I want to do is just go back and reconfirm our guidance -- including Spectrum, 670 to 690, and $0.98 to $1.05 -- and that is GAAP.

I'd like to thank you for listening this afternoon, and have a great day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a wonderful day.