Hain Celestial Group Inc (HAIN) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hain Celestial Group's third-quarter 2006 earnings conference call. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session toward the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Mary Anthes. Please proceed.

Thank you, Stephen. Good morning. I am Mary Anthes, Vice President of Investor Relations of the Hain Celestial Group. I am pleased to be with you today to introduce our third-quarter fiscal year 2006 conference call where we will discuss earnings that were released earlier this morning, as well as other announcements on the acquisition of a fresh prepared foods business in Luton, England and the potential acquisition of the Linda McCartney brand meat-free business and our new enhanced Amended and Restated Credit Agreement with a private placement of ten-year fixed-rate senior notes.

Irwin Simon, our President and Chief Executive Officer; John Carroll, Executive Vice President and President of Grocery and Snacks and Ira Lamel, our Executive Vice President and Chief Financial Officer, will be delivering prepared remarks and Steven List, Executive Vice President and President of Celestial Seasonings and Hain Celestial Canada, will be joining in the question and answer session this morning.

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. I will now turn the call over to Irwin Simon, our President and Chief Executive Officer.

Thank you, Mary and good morning. I hope everybody has had the opportunity to see our press releases that were released this morning in regards to our quarter, our bank financing and our two acquisitions in the European market.

Our sales for the quarter, 196.4 versus 161.3, a record third quarter for Hain Celeste and that is up 22%. Our gross margin, 30.4 versus 28.2, and if you take out our recently acquired chicken business, 29.4 versus 28.2. So you can see, as I have talked about margin enhancement, margin enhancement is something this group has been focused on. Our margins are up almost two points and on a comparable basis, 1.2. So I am quite proud of where our margins come in even with all the input costs and higher costs that are facing us today.

Our EBITDA for the quarter, 20.8 versus 15.3. We have continued to manage our SG&A. We have continued to watch our spending, which I'll talk about in a little while. SG&A, $20.6 million versus $20.9 million a year ago. Net income, $9.748 million versus $7.7 million, up 27%.

I have told you cash conversion was something this group was totally focused on and there is still some more gold in the hills out there and we are not going to see the same results because as we do a better job each time, it gets more and more difficult. But our cash conversion is 70 days versus 78 days. Earnings per share, as you have seen, $0.25 versus $0.21 a year ago. And we have, in this quarter, 39.5 million shares versus 37.3 million shares that were outstanding a year ago, which is up almost 2.2 million shares.

So let's look at the quarter and look what is happening. John, in a few minutes, will take you through all the great things going on in grocery, frozen and snacks and consumption. He'll also talk about the integration of Spectrum, growing of Spectrum, talk about price increase, how they have been -- how we have taken price increase, the fuel costs that affected us and how we are still absorbing it and a lot of things happened there. Also John will just talk about, and I'll touch base in a few minutes on the way we are running our businesses today, but it is now about six, seven months since we have integrated snacks, frozen and grocery and we're seeing a lot of good effects of scale, a lot of good effects of pricing promotion going on with that business.

Two years ago, which is when we had our soup issue, also much higher input costs, and we have said that we were going to focus on margins, we were going to focus on the business and we were going to focus on service levels. Our service levels today are running about 99% service levels. Two years ago and even a year ago, they were running -- two years ago, they were running about 93%. A year ago, they were running about 96%, 97%.

Today, they are running at 99% service levels with, as you heard me say before, converting our inventory into cash much quicker. So we have really done a great job on that. And let me tell you, 99% service levels goes a long way with your customers and your consumers and your efficiencies within the business.

Price increase, as you heard me say, we have taken three over the last year and a half. We are looking at where we need to take other prices. Fuel, freight, packaging continues to be something that is ongoing and everyone of us go to the pump and don't be surprised if we see $4 dollar fuel July 4th weekend and that is not something we budgeted for today. So a price increase, if that was to happen, would have to absolutely happen.

SKU rat. We talked about SKU rat last year. I think SKU rat has been one of the most effective programs or executions that we have done in this Company has been done throughout the total Company. That is why you're seeing the top-line growth that you're seeing today. Number one, we are getting multiple new products in much quicker and secondly is our A SKUs are getting more and more space.

SKU rat is something that we will continuously do. SKU rat is something we are in the process of doing right now and SKU rat is something that will continuously happen as we continue to prune the trees throughout the Company.

New products. We probably had at the last natural food show one of the greatest new product introductions we have ever had. And I have been going to natural food shows for about 12, 13 years and I've never seen a booth as busy as ours and the excitement about our products.

Just to mention two products. Number one, was our Earth's Best organic infant formula. It has taken us five years to develop this product just because of the ingredients and we are pretty excited and we should start shipping this in this quarter and it all depends on availability of organic milk and organic whey and I think the sales could go through the roof.

The other thing is our Zingers To Go, which is a powdered iced tea, which has tremendous application, tremendous opportunities, which I will talk about when I talk about Celestial.

Spectrum, Para, two acquisitions, one in December, one in March, two great deals, two great platforms, for categories for us. John will talk about how he has integrated Spectrum and Para is being integrated right now into the personal care area and I will talk about that in a little while.

This morning, we mentioned our two European deals, which I will talk about. We've also inked a very good bank deal for us, permanent financing. As you know, I am not a big believer in debt, but having $150 million of permanent debt today at the rate we are paying, when interest rates moving to where they are, has been a great deal for Hain.

And last but not least, in the middle of December, the end of December, we completed the sale of Heinz's shares and I think with our additional float and just having a different base of shareholders, it is reflected in the price of the stock.

The demand for organic continues. The demand for organic ingredients continues. And with the demand for organic, there is absolutely a major demand for organic ingredients and organic facilities to produce these products. We, today, have the infrastructure, we have the commitments and we have the relationships to continuously grow this business. Whether it is in North America, whether it is in Europe, whether it is in Asia, whether it is in South America, we have set up an infrastructure to be able to go out and supply these demands. And just a prime example is how we were able to put together three major ingredients in infant formula to bring this to market.

We have really focused, as you heard me say before, on our margin enhancement and that is coming from our SKU rat, price increase when you grow your products from a scale standpoint, personal care becoming a bigger part of our product, our warehousing costs as we consolidate our products continuously will come down.

As we look at our business and we look at the channels -- growth among channels, what we are seeing today is good growth among all our channels of business and we are seeing exceptional growth of the supernatural -- naturals. We are seeing a lot of other channels get into the business today in the mass merchandise or the grocery food service. So we are seeing good growth come across all channels of business.

I will talk a little bit about our chicken business and our protein business. Just on our JV standpoint, JVs have been good for us. Our investment has been a lot less than we'd have to do it on our own and there has come some management expertise along with it. And if it didn't make sense, we would look at other JVs in other areas.

Let me talk about our Luton facility. As you saw, we announced that today and I'll get into that in a few minutes. You will first look at that. That will depress our margins because it is a much lower margin business, but this business will be accretive to earnings in 2007. It will be a great beachhead for us going into the U.K. market.

A question asked to me continuously is about the private label business. Private label in organic and natural is something that is out there. It is not today our total focus, but we will partner in certain areas, we will focus with certain customers and what we have to supply in doing that is the procurement of ingredients, the procurement of packaging, the ability to ship it with our products and in certain areas, we will absolutely look to do some private label with some certain customers out there.

So let's look at Celestial, as John will take you through the rest. With a tough, tough, tough winter season and with a tough team market from a competitive standpoint and coming up against some very strong comps versus last year. Last year, the category was up 15%. Celestial was up 16% in the consumption. We were still up 1%. February and March were absolutely much cooler months than January, but you don't get that month back when you lose that month in January and still the group at Celestial still came through with a stellar quarter with Celestial in having such a warm January.

Our consumption was down 10% and what is happening at Celestial -- our business mix is changing dramatically. In our drug chain today, we have a 57% share. At Kmart and Target, we have a 44% share. So we are absolutely diversifying in many multiple channels and actually Celestial is expanding in channels that are not measured by Nielsen or IRI. So when you look at consumption, you don't totally get a true picture of Celestial.

You heard me talk about the single serve instant iced tea in four flavors that we introduced at the Anaheim show and a lot of opportunities here with cold and flu products, with energy drink products. So we have got some exciting things to do here. Celestial also introduced some organic teas, which we are seeing some good stuff happening and some good demands from that.

Our Personal Care business, it will be almost two years that we acquired our Personal Care business in June. We were up 103% on our personal care business and that included versus last year the Zia and part of the Para acquisition that closed in March.

To look at consumption on JASONs. JASONs was up 37%. Our Zia business was basically flat and we have gone through a major SKU rationalization on Zia just like we did with JASONs when we acquired that.

Big focus on the category, supernaturals. More and more customers today -- if you go back and look at supernaturals, probably one or two of every customer that comes into Supernatural goes into the Personal Care area. Big opportunity. You get an additional consumer, your business doubles. But chain drugs and mass merchandisers are really looking at this category and there is a big opportunity for us.

In early March, Tom's of Maine was acquired by a big consumer products company called Colgate. I look at that as a great opportunity to bring more and more awareness, grow share and one of the reasons I think Colgate went into the category is a reaction why they were losing share and more consumers were shifting over whether to natural toothpaste and natural personal care products.

We have introduced with JASON some great new products, but some of my favorite is a new bug repellent called Quit Bugging Me. One of the first products out there that is DEET-free and OFF is a great product to keep flies away, but contains a horrible agreement called DEET.

We have also come out with toothpaste for infants and toddlers under the Earth's Best name for JASONs. We have really relaunched and rebranded a lot of the new Zia products and pretty excited about some of the things there. Our consumption numbers are strong at JASONs. Hair care up 21%, body wash up over 41%, oral care up 11% and our skincare up 21.5%. So a lot of good things happening on the Personal Care business, a lot of good growth.

In early March, we acquired Para brands, which was Queen Helene, Batherapy. A lot of these products are sold into the mass market and chain drug and actually some food accounts, basically skewed toward the ethnic market. We think there is a big opportunity to bring those into natural foods and we think there is a big opportunity to use the infrastructure of Para to help us grow our business into those accounts with JASONs, etc.

We have heard a lot about the protein category. I spent last Thursday there. We are still focused on the protein category, even though it affects our margins. Our chicken consumption and projected per capita, 90.6 billion pounds versus 62.5 for beef. So chicken is the fastest-growing and the number one per capita protein overall. And we know the markets today are absolutely depressed and we know prices have come down. It has not affected us. It only affects us when we have to sell our chicken into the conventional market.

The antibiotic-free category -- pricing has stayed stable and the organic category, which is growing in double digits, has remained in a very strong place. So we see very, very good opportunities. We are still very committed to this area and we are still pretty excited.

A lot of times people ask me about Avian bird flu. All our birds on the farm are of the same age and are marked at the same time. Our farmers are experienced and trained in disease prevention and our flocks are tested for Avian Influenza via blood samples that are submitted to state testing laboratories and, thank God, I am proud to tell you we have never had any of them (indiscernible) positive. So I am feeling good about the protein category considering where the protein category is today.

Our Canadian business and the reason I wanted to just touch base on our Canadian business under Steve List and [Bina Dolenberger], our business has really turned around in Canada. We are up 11%. We have an 87% share in Yves and today our Earth's Best, Casbah, Garden of Eatin' and Imagine business and Spectrum business is actually bigger than our Yves business and some good things happening in the Canadian market. As I told you before, we moved our Canadian headquarters to Toronto. We have really upgraded the management team and feel good about where we're going in Canada.

Moving on to our European business. Our European business for the quarter was down 4.7%, but with a currency adjustment, it was up 5%. And our biggest brand in Europe today is Lima. That is a grocery line of natural -- of all organic products that is only sold in natural food stores. Our second biggest product line in Europe today is Rice Dream, Soy Dream and Natumi that is sold throughout the U.K., Holland, Belgium, Germany, etc.

Our fresh business, which we will focus on with Grains Noirs. Grains Noirs has grown dramatically and we see some big opportunities with Grains Noirs. We also see some good opportunities with Terra and our Celestial business continues to be a good business in our European market. We will look to introduce Spectrum into the European market, which does have some sales today.

And we are currently looking at where it makes sense within some of these smaller businesses on a divestiture basis and we will be back talking about that over the next month or so where it doesn't fit within our business and may be lower margin, even though it is growing at a good clip.

So what happened with our most recent acquisitions? We announced the acquisition of a business in Luton that is fresh prepared foods. Why are we excited about it? We get to work with a great customer called Marks & Spencer. We also have Whole Foods coming big into the U.K. market. What this does, as you are well aware, Europe has a major fresh market and we see a big opportunity to increase margins. We see a big opportunity to bring other customers into this facility. We see a big opportunity for other new fresh products. We think the workforce can be upgraded here and this, today, is our beachhead to go into the U.K. market.

Right now, we don't have a real infrastructure in the U.K. market to absolutely sell our current Hain products and we think this will help us tremendously. And we think with Whole Foods coming into the market there, it will help branded products because, as you are well aware, U.K. market is basically focused a lot on private label.

Overall, this business will affect our margins by a point as it is a much lower margin business, but as you are looking to go into marketplaces and you're looking for new entries, this business will be accretive immediately in 2007 and this business will give us the opportunity for good growth and a good category within the fresh category and will give us a good opportunity to grow some of our existing brands, which is not built into any of our accretion models.

You also heard us announce today that we are in final discussions or serious discussions in acquiring the Linda McCartney brand. What is the brand? The brand is much bigger in Europe. The brand principally is in the frozen vegetarian products and we will look at how do we position it, what other categories. We have had a meeting with the McCartney family and they are committed to growing this brand in Europe and North America.

There is a facility that comes along with this in Fakenham, England and we think with our knowledge on Yves, our knowledge on vegetarian products and the commitment to the McCartney family to support these products and bring the equity back to what the brand stood for, that we really can take this to a whole other level both in Europe and the USA.

One of the things I forgot to mention. Ira gives me a little cue card here. David Arrow has joined us to become Managing Director of our U.K. operations and having somebody on the ground running our U.K. operations has been important for us and David originally worked for Sara Lee and worked for a company called Cauldron, which was in the meat analog business and did a good job of growing this before it was sold off to Premier Foods.

So we look to close this deal sometime in mid-June and ultimately finalize our negotiations with Heinz on the Fakenham facility, finalize our license and look forward to -- we will look to close that and some pretty exciting things here. I have got to tell you, it is pretty exciting how committed the McCartney family is to really growing and developing and extending this brand and it is a brand that has potentially a lot of legs. We know the frozen category is challenged in the European market, but I know between frozen and chilled and shelf stable, there are some big opportunities. So I am pretty excited about this.

Reconfirm our fourth-quarter guidance and our full-year guidance of $1 to $1.02 and I think what is important is the $1 for the year is something that we have looked to achieve for a long time and I'm excited that we're looking to achieve that $1 for fiscal '07.

So what I would like to do is turn it over to John. He will take you through his grocery frozen comments and then he will turn it over to Ira. Thank you very much.

Good morning. Hain Grocery and Snacks Q3 results were very strong, especially within the context of our four strategic objectives, which, as you know, are one, to drive profitable growth in our core categories. Two, to improve our margin. Three, to improve our working capital management and four, to deliver best in the natural and organic class execution.

Now if we look at our first objective, which is profitable growth in our core categories, Hain Grocery and Snacks Q3 top line was up 9% net of SKU rationalization and divestitures. If we include Spectrum sales, which is not in the year-ago base, Hain Grocery and Snacks sales are up 18%.

Our growth was driven by two key factors. First, we have very strong momentum in our alternate channel businesses, i.e. club, Trader Joe's, Babies R Us, Toys R Us and mass. And second and this is more important, we saw continued strong natural and grocery consumption trends net of SKU rat on our key brands in the last 12 weeks.

Some examples are Earth's Best. When you look at it with our Sesame Street business, it is up 38%. Garden of Eatin' was up 26%. Imagine aseptic soup was up 24%. Spectrum Naturals was up 14%. Ethnic Gourmet frozen meals up 13%, Westbrae up 13%, Rice Dream up 12%, Spectrum Essentials up 9%, Health Valley ready-to-eat soup up 8%, Arrowhead Mills up 7%, Terra up 6% and Rosetto ravioli in a very flat category, up 5%.

Now we expect to see our growth in all channels continue because we're investing behind some focused business building initiatives. I will give you a couple of examples. To start, our Earth's Best advertising campaign, which we broke in Q3, as a national sponsor of PBS' Sesame Street program. This is a first for us.

Second thing is we have done our first-ever Hain Grocery and Snacks group promotion and we executed this on April 2. This promotion leveraged many of our core brands' consumer and trade spending together. So we created one powerful event, which we anchored with a 22 million [circ] FSI and we got major displays at retail, both in natural and grocery. Based on the response to our first promotion, we plan to do two group promotions in FY '07.

And then the third business building initiative I want to talk about is our continued innovation where we're working to fill unmet natural and organic consumer needs. Now in Grocery and Snacks, we debuted our FY '07 new product lineup at Expo West. The lineup featured several first-ever new products for the natural organic category and I'll give you some examples.

We introduced Earth's Best organic infant formula, which Irwin has already spoken to you about. We are the first ones to introduce an organic microwavable soup bowl, which we're going to introduce under the Health Valley name. We are introducing Imagine organic low-sodium broth, Imagine kids soy, kids dream soy and juice smoothies.

Introducing Earth's Best organic semolina pastina. This is a product that consumers have used in the mainstream grocery for years and years and has never been available in an organic form. We're also introducing Terra low-salt seasoned chips, Terra Parsnip Chips. We are working with Celestial to introduce Mountain Sun pomegranate juice combined with Celestial Rubios tea.

We are learning from our experience at Spectrum and introducing DeBoles organic whole wheat pasta with flax. We are extending our Celestial Tea Dreams line with a line if frozen novelties and then from our newest brand, you will see Spectrum organic omega 3 salad dressings and Spectrum organic refrigerated vegan mayonnaise. These products all received a very strong response at Expo. They will begin shipping in Q4 and along with the other building initiatives I discussed, will continue our top-line momentum.

Now turning to our second strategic objective, which is improving margins, Groceries and Snacks achieved over a 200 basis point improvement in Q3 gross margin as pricing, lower taro costs, SKU rationalization savings and slightly lower trade spending offset higher costs in raw materials, packaging and distribution. This margin improvement was achieved despite diesel pricing being up 21% versus a year ago, which drove increased Q3 fuel-related costs of $1.5 million.

Now in Q4, we anticipate fuel-related costs to continue moving upward. We have seen in April alone, diesel fuel was $2.90 a gallon, which was up 16% from Q3 and 32% versus a year ago. Our November 3% price increase has been implemented at the majority of our customers and this, along with key productivity initiatives, will be required to offset these fuel-related costs and maintain margins.

We also continue to make progress on major productivity/margin improvement initiatives across core categories, including SKU rationalization. As Irwin discussed, we have stopped shipping on almost 95% of the SKUs that we've targeted for discontinuation and we're seeing improvement on inventory levels, spoils and copacker run sizes.

Also, in the area of frozen production, we've consolidated the production of all of our frozen meals now and our ravioli on high-speed lines into our Westchester, Pennsylvania facility. And then in the area of alternate ingredient sourcing, our Snacks operation team has identified and is currently receiving shipments from alternate taro suppliers, which has helped us reduce our costs of this key Terra ingredient significantly from a year ago. Additionally, all of our groups are exploring sourcing oil from our Spectrum ingredients group as an opportunity to drive out costs.

Moving on to our third strategic objective, which is improving working capital management, we saw continued improvement against the key cash metrics and the performance in Grocery and Snacks is reflected in the overall Company performance on cash conversion. It is just a continuation of our focus to drive better turns on cash.

Finally, the fourth strategic objective, which is delivering best in natural organic class execution, Irwin has already talked to you about our Q3 service levels, which were the highest in Company history at 99.1%. In fact, those were higher than our 98.5% target and was achieved despite lower inventories.

Additionally, we completed our Spectrum transition with the following milestones. All the finance, accounting, customer service and operations backroom functions have been integrated into Melville. Spectrum marketing, R&D and field sales have been right sized and integrated into their respective Hain Grocery and Snacks functions. 90% of all headcount reductions have been completed and a Spectrum SKU rationalization has been initiated. All these key milestones were executed while delivering Spectrum Q3 operating results that were ahead of the acquisition model.

So to summarize, Q3 was a very strong quarter for Hain Grocery and Snacks as we delivered significant improvement in the top line, consumption, margin and key cash management metrics. We introduced a strong lineup of innovative new products and other business building initiatives to drive Q4 and future growth. We continue to make progress on key margin improvement and productivity initiatives, as well as progress on execution and we integrated Spectrum on-time and ahead of budget without loss of business momentum.

As we look forward, Hain Grocery and Snacks will continue to be challenged like everyone else in the CPG space by cost inflation driven by fuel prices. We're confident we have taken the necessary steps to offset these costs in Q4 with our November price increase in productivity initiatives.

More importantly, Hain Grocery and Snacks is focused on delivering sustainable quarter-on-quarter top-line and margin growth. We believe we have the team, the momentum and the strategic initiatives necessary to deliver on that promise. Now I'll turn it over to Ira Lamel.

Thanks, John. Good morning, everyone. Irwin walked you through the details of our operating results, but just to give you a little bit more on that, I will give you some detail. The sales performance in the third quarter reached a record $196.4 million, which was up 21.8% over the prior year's third-quarter sales of $161.3 million.

Our net income reached $9.7 million or $0.25 per diluted share in this year's third quarter, again, $7.7 million or $0.21 per share in the prior year quarter. Diluted earnings were computed on 39,547,000 shares, representing a 2.2 million share increase or 6% over last year's average shares of 37,308,000. The share increase caused a $0.01 dilution year-over-year this year.

Gross profit in the third quarter this year was reported at 29.4%, but after removing the impact of our lower margin chicken business, we actually achieved 30.4% in the remaining units we have as compared to 28.2% last year before owning the chicken operation. That is a 220 basis point improvement.

In last year's third quarter, we incurred a $1.2 million charge for our SKU rationalization program and therefore gross margins last year would have been 60 points higher. So the real improvement is 160 net basis points in operating performance.

The continuing improvements from gross margin come from the positive impact of the SKU rationalization program from 2005. That program has resulted in direct cost savings, as well as improved margins from the acceleration of sales on better performing SKUs. We got increases from the effect of our price increases in October and we received productivity improvements across all of our operating functions.

These improvements were offset by the impacts of continuing higher input and distribution costs. Petroleum prices alone are up 21% in the third quarter this year as compared to last year. We are particularly pleased with all of these performance metrics through the gross margin line as we continue to show that we are less dependent on the high margins that are achieved at Celestial Seasonings as it becomes a lower percentage of our consolidated sales.

Celestial Seasonings is 3 percentage points lower this year in our consolidated sales than it was last year. We are also picking up improvements with the Personal Care products unit, whose margins are a bit higher than our average margins elsewhere. They are not however as high as Celestial Seasonings.

SG&A in the third quarter was $40.4 million or 20.6% of sales compared with $33.7 million or 20.9% of sales in the prior year. We continue to get improvements in G&A as a percentage of our sales as we benefit from synergies of integrating acquired companies.

In the third quarter, with the bringing on of Para Laboratories, we have not integrated that business as yet, so we have additional G&A as a result of operating in a separate location and while John discussed that we have made significant progress in the integration of Spectrum, we do not have 100% of Spectrum integrated at this point.

Operating income for the quarter was $17.2 million or 8.8% of revenue as compared to $11.7 million or 7.3% of revenue last year. Interest expense and other expenses are up $400,000 at $1.6 million versus $1.2 million last year.

As in the first two quarters of this fiscal year and as we estimated when we gave our guidance in September, our effective income tax rate is about 38%, just a little bit lower, as compared to the full fiscal year rate, which was lower by one point last year.

In last year's third quarter, we had the benefit of a $1.3 million tax credit. So when you look at our income statement, you're going to see a swing of about 10 percentage points upward in the effective tax rate this year over last year.

EBITDA in the quarter amounted to $20.8 million, which was 10.6% of sales versus last year's $15.3 million or 9.5% of sales. As always, our balance sheet is strong. Working capital is $158.7 million giving us a current ratio of 2.7 at March 31st this year. Total assets are now $843 million and our stockholders equity is pushing up at the $600 million mark coming in at $595 million.

Cash conversion was at 70 days in the third quarter versus 78 days in the third quarter of last year. For the nine months of our fiscal year, we have generated almost $12 million of free operating cash flow as compared to just under $15 million last year. This small reduction reflects the inventory investments we have made in connection with the increased number of new products we have introduced across our Company and the buildup of inventory in connection with the consolidation in early April of our two frozen foods manufacturing plants into one location.

Free operating cash flow was impacted to a lesser extent by the receivables increase resulting from the strong second half of the quarter sales after rebounding from the effects of the warm winter.

As we stated in our press release, we have updated our guidance for fiscal year '06. We expect that our fourth-quarter sales this year will range from $185 million to $190 million, which will bring our total sales for the full fiscal year to over $730 million.

Our guidance for earnings in the fourth quarter is $0.22 to $0.23 per share, which when added to our cumulative earnings in the first three quarters, will total $1 to $1.01 per share. Our guidance for the fourth quarter includes expense of $0.01 to $0.02 per share for the likely grant of equity awards to our Hain Celestial employees. That expense of course will be dependent upon the share price at the time that we make the grants and we will keep you updated when that happens.

We expect that in the fourth quarter, the recent acquisitions we have made will continue to be neutral to earnings as they each are in the early stages of our ownership.

In addition to the earnings release this morning and in addition to the acquisition releases discussed earlier, we also announced the closing of new financing arrangements for our Company. Along with Banc of America, our lead bank, we have amended our existing revolving credit agreement by enhancing its terms to be reflective of our current size and excellent credit profile.

Our interest cost under the agreement has been amended to reflect the lower margin spread over LIBOR and we have greater flexibility with reductions in our covenants. Further, in order to take advantage of the recent low, long-term interest rate curves, we have completed a private placement of $150 million of ten-year fixed nonamortizing notes at 5.98% interest. This interest rate was set about two weeks ago and currently the treasuries, which the interest rate is based on, plus the spread, is now nine basis points higher than when we priced this deal.

This access to capital combining fixed-rate long-term financing along with the availability for additional capital under our revolver will give us greater flexibility as we continue to seek acquisitions and we continue to expand our existing business.

At this point, we will open it up for questions.

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

Hello? Hello?

Irwin?

Yes?

Sorry about that. My mute button was on.

Okay. Mine's not on, Scott.

A question for you. Is there a bigger reason for going into Europe than just the opportunity on fresh and prepared? Do you see something bigger in that market or is it a reflection of what you have got to pay for acquisitions in the U.S.?

Okay. Maybe you should answer your phone, Scott. But, listen, I think the opportunity for natural organic is good in Europe. We went into Europe in 2001. We have been successful -- we have been successful in Europe with our smaller acquisitions. We have not gone in and done humongous ones and paid a lot for it. There is a big commitment to natural organic by Marks & Spencer.

There is a big commitment to Whole Foods into the marketplace and I think Whole Foods is going to revolutionize natural organic in the European market and I think with them going in there, there is a big opportunity for us. I think a lot of retailers are looking to see what Whole Foods does in the marketplace and, Scott, for us, it is important for us to have a good beachhead in there. I think there is some great niche acquisitions for us to pick up inexpensively.

There is a pretty good level of penetration of organic in that market, but do you see it changing? Do you see the type of retailer changing? A lot of people talk about your exact comment about what Whole Foods is going to do in the U.K. in that market. Do you think that happens in Europe across the board?

Absolutely. And I have seen that -- it did not go into Marks & Spencer's and see the selection of organics or hydrogenated oils and concerns or fillets or Sainsbury absolutely and U.K. today is a market that absolutely is concerned with obesity and health and nutrition and I see it as big a market and opportunity as the U.S. and if not bigger.

Congrats on the excellent execution.

Thank you, Scott. And Scott, just to add to that. If you come back and look at the European market and some of the issues that they have had with toxins in foods and mad cow disease and concerns, the demand will be tremendous. As a matter-of-fact, if you come back to baby food today, organic baby food outsells conventional baby food in the European market and that is not the same as in the U.S.

Andrew Lazar, Lehman Brothers.

Irwin, two separate questions. The first one, I wanted to explore a little bit some of the commentary around the acquisition strategy offset by the impact on margins that you've had, whether it be from poultry or your expectation in terms of the impact from the just recently announced deal. I guess I am sensitive to -- you have a balance and you want to make sure you are situating yourself in places where there continues to be the kind of growth that you want to be ahead of, even if there is an impact on margins.

And certainly I appreciated the detail in terms of the comparable margin improvement that you have been making, which is obviously critical. So I wonder -- normally there have been a lot of deals that you have done where you saw a lot of the opportunity to improve the margin structure of the business you were buying such that maybe there wasn't anything structural about it that would prevent you from getting it up to a corporate average margin or thereabouts.

And with some of the things like a poultry or perhaps this fresh business in the U.K., it seems like there is probably still a lot you can do on the margins there, but that those businesses will have perhaps better growth, but always will have a margin structure that is just below where a lot of your others are like structurally. So I'm just trying to get a sense of how you balance those things as you go forward.

Very good question, Andrew and I think, number one, what we have to look at is the big picture. If everything I just looked at margins, I would say get rid of everything else, just be in the key business and just be in the Personal Care business, okay? But, okay? Then I come back and say we are not a mature company. We are a growth company. We are an innovated company and I think that is one of the things about Hain. In '97 when I went into the soy milk business, people thought we were a little crazy for going into soy milk. In Personal Care in 2002 or 2004, people were skeptical of us about Personal Care.

I think one of the things that is unique about Hain is hopefully its ability to have a vision out there for categories and I think -- stepping back -- so as a growth company, we have to look at how we are going to grow. Now, John and the group have done a great job in stabilizing the margin here in Melville. Steve and the group have done a great job with the margin in Boulder and we are doing a great job with our Personal Care margin business. So we have three solid businesses that really got good margin growth over the last couple of years.

Opportunities for margin enhancements still there, but we also have got to step back and say, hey, we are a growth company. I think one of the problems that as happened to a lot of packaged goods companies today is you're just focused on margin, margin, margin and there's ultimately only so much margin you can squeeze out.

Who is the first in categories and where is there big growth opportunities? And so as I look at it, the four or five pegs on the stool, chicken for us -- I am still 100% behind that protein category. Chicken is the number one consumption area. There is a big opportunity continuously in that category. I learned from my mistakes in the organic milk business five years ago because I sat here and looked at the same thing and said, wow, look at the margins. But look at the organic milk business today.

So from a standpoint -- and if you go back and look at the protein category, conventional chicken today is at the lowest level at $0.40 a pound. ABF is about $0.81-$0.82 a pound and organic is about $1.25 a pound. That is the category we are in and that is where the growth is and where we suffer is if we have to sell it into the conventional market, we get the $0.40 a pound, even though we have raised it at the higher levels.

But as we go into value added products and we go into other products, we are absolutely going to see the benefits from that. And we are seeing the benefits also helping some of our other brands. So to roll the movie forward into the U.K. market, going into this fresh opportunity, it allows us to expand into the fresh category into the U.K. market, which fresh is a big part of the sales over there.

It allows us to have a great beachhead in there. It allows us to do an acquisition of good size in dollars, not paying a lot of money for it and there is going to be a lot of hard work, but overall, it is going to affect our overall corporate margins, but it is accretive immediately in 2007, so it is not a drag on earnings.

I think what has been important is to be able to come out there and explain and as we talk about our margins, protein versus our regular margins in fresh, and be able to explain to yourself and our shareholders, I think people will be very accepting of that.

Got it. I appreciate it. And then the second thing -- I know it is a little early and you'll probably give more on this on the fourth-quarter call -- but as you kind of think forward, right, as you look into fiscal '07, there are a number of things I guess on both ends of the spectrum.

From a tailwind standpoint, it seems like you will have the accretion from three of the recent deals you talk about. You have got some top-line momentum now for the past couple quarters and John talked more about that, some of the incremental benefits of pricing. Costs are obviously still an issue and no one knows exactly how much, but perhaps they aren't up quite as much as they were in '06 might be a fair comment, although we will have to see and obviously a very warm January from a comparison standpoint.

So it seems like you've got certainly a lot of things going your way from an earnings perspective. What are some of the headwinds at least that you can see today? I know they can change. Is advertising or reinvestment on marketing where you need it to be? Or does that still need to be an uptick? What are some of the things that you already know today or some of the headwinds that might offset some of the things that are clearly working your way for '07?

Good point. I think they are a lot of good things. Number one, the category is strong in multiple classes of trade. I think we've really put the portfolio in really good shape. I think the spectrum of Spectrum, big opportunities there, big opportunities on the Para side and we see some good things coming out of our U.K. operations.

I think, as a company, we step back and as we approach that $1 billion in sales and we approach a fast-growing category, you have a lot of people that want to get into the category. We have to spend more money on consumer advertising and building brand equity and even connecting all the brands in the Hain Celestial group very much. So that is one thing from a headwind standpoint.

I think as we look from a system standpoint and where we have to invest in systems, then capital there, is something absolutely today as we approach that $1 billion company in size, but the positive side of that is what we have had in place is the infrastructure and people and that that we brought in with John and Steve and the group to support the $1 billion in size. So we have the people and, yes, we have to keep adding to bench strength, but there is going to have to be some investment into the systems area of this Company.

And I think that is where the big pieces are as we face headwinds and I guess the unknown always out there is fuel. If it is $4, $3 or whatever and if it is $4, we're absolutely not budgeting for it and we'd have to take pricing.

Nor does anybody else for that matter.

Right, but we are watching that. We are up there. Terra Chips getting up there at $4.99 a bag. In New York City, at Food Emporium, $6.99 a bag. A lot of our products today -- there is pricing elasticity in a lot of our products, but $6.99 is a lot of money. Even analysts can't afford $7.99 for a bag of potato chips. But we have just got to watch our retail prices out there.

Scott Mushkin.

I have got a couple quick questions here. Number one, it seems like with Earth's Best, the brand itself is really in breakout mode and I know you have been leveraging the brand, infant toddler, food and also health and beauty care items. How much more do you think you can do of that and do you think it is something we should look for in other brands? I know you mentioned on the last question of maybe some more advertising, but it seems like it's been a pretty big deal for the Company, Earth's Best?

Earth's Best is one of my favorite brands and I got excited about it when I was feeding baby food to my first child and to step back, the awareness level today in toxins in regards to infant food, toddler foods, whether it is in foods, whether it's in suntan lotions. So to expand that brand whether it is in the dairy products, into yogurt products still has many, many, many legs on it, but just more important there is continuously -- you heard what I said before.

Organic baby food is bigger in Europe than conventional and the opportunity for us just to grow the brand with existing products. I wouldn't want to put a projection out there on how big our infant formula business could be, and we will have it both in milk and soy, if we could actually get unlimited supply.

So number one, the opportunity with the brand extension into other classes of trade, you know, Whole Foods today in Oats business is just tremendous with our Earth's Best line of products. So number one is to expand the current product line within our existing core business and other classes of trade where it makes sense.

Secondly is we are looking at other categories, and is it milk, is it yogurt, is it other areas; absolutely. So we see that brand as one of the top brands within Hain and its growth.

From other brands, we have recently gone into some nondairy products with Celestial Seasonings, Tea Dreams, and Heinz, and we just introduced Tea Dreams in bars which were very successful. We also took the Ethnic Gourmet and went into teas from a tea standpoint. So there are three brands that we have crossed over. We are looking at some other things in the frozen category. Earth's Best also has a big opportunity in the frozen meals for kids area, the fresh meals for kids area. So that is a brand. Hain has gone into the fresh category, the fresh meal category, the frozen vegetable category. So we do have multiple brands, and one of the things that is important as we start looking at classes of trade and where our brands should be and where our brands probably don't make sense, that is the advantage of having multiple brands, that they go into certain classes of trade and be focused on that class of trade.

And this is probably maybe a question for John. The margin improvement, obviously, very nice margin improvements that you guys have been working on. What inning do you think we are in your efforts there?

John will say we are in the ninth, but I'd say we are in the first and we're going to the ninth again.

Probably we're in the middle of the game, Scott.

Ken Goldman, Bear Stearns.

The call is getting a little long, so I will limit myself to one. Just curious how you think about maintaining the focus of top management during a time when you are expanding into categories that weren't necessarily your areas of expertise a year ago, what you're buying in Europe a little bit and the poultry. Some might say that the SKU reduction has helped. I agree with that, but the business is also being a stretched a little bit arguably into categories that aren't your core competencies. I'm just wondering how you think about that in the long run and how the challenges have been and what actions you have taken to face those challenges.

Ken, just to come back for a second, if you come back and look at 90% of our sales or 95% of our sales, the people running those businesses today I would have to classify as very experienced and very experts in those marketplaces, and they are experts within consumer packaged goods. And I think, you know, with that fresh and frozen, if we had to take some of these managers and whether it was moving into other categories, I think they are quite capable and able to do that. And that is what has been important is to move people around.

In regards to our protein business, Joe DePippo I think has about 25 years within the business. And then, as you know, we have done this with a joint venture with Pegasus. Dave Wiggins, I think, has about 25 years experience, both in the protein category. And that is what was important to us in doing a JV, that we got expertise that came along with our joint venture partner. We just didn't need the money. And absolutely good expertise on both here, and it is -- when you sit through a board meeting or sit through with them, they can go back 25 years of history in the market and what has happened.

So we have an excellent team in place in the protein category, and they are working quite closely with John and his group on some of the frozen stuff we're looking at, some of the distribution. And whether it is super-naturals or whatever, we do calls together and we share a lot of information among the companies.

In regards to Europe, you know, Philippe and his group have been running the European operation. We sent over to Europe last year, about a year and a half ago, [Jim Lenski] out of the U.S. We recently hired David Arrow who comes out of Sara Lee and then had adventure running Cauldron, which was in the fresh meat analog business. So part of this, Ken, is bringing new management into the Company, and one of my big challenges is continuously raising or increasing the bench strength as we are going to make John, Steve, Andy and that do more. I mean -- so that is some of the things that we are going to do.

I appreciate that. I guess when I asked about senior management, I was using that as a euphemism for you in particular. How do you deal with the challenges? Are you -- getting into poultry, do you find yourself stretched a little more thinly than you would like these days, or is it -- how do you deal with that on a day-to-day basis?

I spent last Thursday at our chicken facility, and there was a lot I learned there. And the good news is -- and a perfect example is the results today -- when you have good, competent managers in running the businesses and empower them, which they are, it allows me to focus in other areas. And I happen to be in Asia next week and in Europe the following week. So with John and Steve and Andy and the group here, I am very fortunate and lucky to have a good group focusing on their businesses, and you are seeing the results they are delivering.

I've turned this one question into three, so I apologize. But does that mean it is fair to say that you are taking a little more hands-off approach to some businesses than you might have five or ten years ago, just given that it's expanded and that you trust the management that is in place right now?

Well, ten years ago we were about a $2 million business and eight people -- absolutely -- and five years ago we were probably a $250 million business. But absolutely, Ken, and I am glad I can do that. I'm glad I've got great people to work with in doing that. And I think it is great for the Company to allow myself the opportunity to look at other strategic acquisitions, other great categories from a global standpoint, because I think Hain can be the Google of the consumer packaged goods business. And with that, it allows me to go do that and it allows people with great experience and great energy to operate our current businesses.

So you're saying your stock can get to $400?

We don't comment on those things, Ken. You know better.

It's your job to predict, Ken.

Okay, thanks.

Greg Basishkanian, Citigroup.

Nice job this quarter. Just one quick one. In terms of acquisition sales, I'm not sure if you got into this, but I'm looking at 10 to $12 million. Is that about right?

Yes. In here, Greg, is a full quarter of Spectrum and that is it, and then there is about 20 days of Para.

Okay. So maybe -- I think Spectrum is how much annually? I have 20 million, but is that --?

Spectrum annually was about 40, $45 million. And there is some seasonality in that, so if you took on a quarterly basis about $12 million for Spectrum 12, $15 million, and it ranges in quarters, and Para would be about $1 million, $1.5 million.

So maybe midteen organic growth is what I am coming to. That seems really high, though. Is that about right, though?

It is just a little lower, and as you take out SKU rat and absolutely, it's just not much lower, but absolutely is double-digit organic growth for us.

Thank you. Nice job.

Andrew Wolf, BB&T Capital Markets.

Congratulations. I know the call is going on, so I will stop with the chatter. From Greg's question, is Para running about a $7 million per quarter run rate? The $1 million to $1.5 million is for the 20 days. I just want to clarify that.

Para will run about -- it's about a $20 million business that we said in the press release. And one of the things, which is important -- for instance, Zia. Zia this year in this quarter is flat if not down a little by $70,000 because we're going through, as we buy these businesses, SKU rationalization or SKUs the margins.

We took a step back on JASONs before we took a step forward and John is going through that right now with Spectrum in regards to cleaning up the SKUs and part of Spectrum also was an ingredient business. So just when you take a business sometimes, a $30 million business, it could come back down to a $25 million business before we move it to clean up the SKUs there. That is a big part of the SKU rationalization.

I'm sorry. I was distracted. Is that in regards to Para or is that Spectrum or both?

It's overall. It is Para and Spectrum. What we're saying is we will discontinue SKUs and cut SKUs out of the business.

Structurally at Spectrum, just to switch to that acquisition, part of it was an ingredient business that I have been wondering whether you could keep that business because of potential conflicts. What is your thought process there?

Actually they have a very different customer base and we have very few conflicts with that. At this point, we continue to operate that and use it as leverage for our own procurement.

That's good to hear. Also I think Ira mentioned in the quarter or maybe it was you, John, in any case, in regard to Spectrum, that severance occurred and yet you were realizing synergies. How did that net out? It sounded like it netted out neutral and would you be willing to say what the severance charge that you didn't tell us about, if you had a decent severance charges, what that would've been in the quarter?

John didn't say anything about severance. We didn't have any severance charges in the quarter. So I don't know --.

I'm not sure where you got that.

-- where you got that. The synergies will continue to improve with the passage of time and the implementation of all of the processes that we have implemented. At this point, we have already integrated the Spectrum sales function onto our billing and invoicing system. So that is on the North American Melville base if you will platform, but there is still a number of administrative functions that continue to be located in the original Spectrum location and that will continue for some time.

Can you speak then to the net -- I think you did say a headcount reduction. That's how I got it. I made an inference. What the net headcount reduction was I think in marketing and perhaps in some of the administrative --?

The key thing was reducing the backroom functions because they were duplicative to what we already have here in Melville. So we have executed that and then right-sized the sales and marketing and R&D functions and integrated them into Hain groups already.

So the accretion you expect from Spectrum specifically, is that something that, for all of fiscal '07, can approach something close to the corporate average, EBIT margin, which is approaching 10%?

We will be giving guidance on '07 when we finish Q4 and what we see coming for Spectrum will be in that.

And Spectrum, a couple things. I think what we're looking to see is some good growth from Spectrum. We have gone through SKU rationalization. Spectrum had 85 people. It will be down to 14, 15 people. We have had to take some price increases with Spectrum as olive oil prices have gone through the roof and can you take a full price increase for -- full price increase as much as pricing has gone up?

The key thing is we see this as a great business, a great category and we will evaluate the ingredient business if it makes sense, but right now, we are a big buyer of ingredients and where this does make sense -- you hear me say before -- is supply of organic ingredients. And Spectrum will be very, very, very helpful in regards to supplying organic ingredients to all of Hain and has been so far.

Switching lastly just to the Heinz acquisitions today, could you tell us just how big the fresh chilled and fresh business is and if you do close on the meat-free business, how big that would be?

The chilled business today and I know what it is in pounds and I'll convert it to 25 million pounds -- sorry -- 30 million pounds. The other business is approximately 10 million pounds.

Thank you. And just last thing I think for Ira. Am I still on?

Yes.

In your press releases, when you talk about acquisitions, you use the -- you say they will be accretive to earnings. I think I've asked you in the past does that suggest that they are also accretive to earnings per share. I think you have said yes. So from that, can I take away that you pay cash for these because your share count will not go up?

You can't take away only that we have paid cash. Although in the case of acquiring the business that we just acquired from Heinz, the Luton business, yes, we paid cash only. But as an example with the Spectrum acquisition, we did pay a combination of cash and shares. In the Para acquisition, we gave a selling entrepreneur some shares as well so that we provide him with continuing interest if you will in growing our Company and earning from that as well.

But in each case where we say we believe it is going to be accretive in a particular period, such as the fiscal '07 period, it includes all the aspects of the accretion model. It includes the earnings contributed, it includes the cost of carrying any debt we may issue as a result and it includes the overall dilution to the entire earnings per share calculation by the issuance of new shares. So it is all-inclusive.

Thank you for the clarification and again, congrats on the quarter.

Christine McCracken, FTN Midwest Research.

I just wanted to get a little more color around tea. I think you said sales were down 1%, consumption down 10%.

No, I said -- reverse. Sales were up 1%, 1.5%. Our consumption was down 10%, but we are coming off a base of being up 16% a year ago and the category being up 15%. So we are coming off a strong base, but still we were up 1%.

What did the category do?

The category -- Steve, the category was down --

The category was down about 9%, 10% as well.

Same thing. That's what I thought.

So your efforts essentially to remain competitive are working. It seems like you've really turned that business around. This is more of function of the weather?

Well, I think it is a function of the weather, number one, but I hate to blame anything on the weather. I think also there have been a lot of promotional dollars being thrown at the category and Celestial has combat that as Celestial has come out with some new product.

But the other thing is you heard me say before we do have a big share in the chain drug business, a big share in other mass market, which are not measured here --.

And our international business is growing as well.

So we are also moving into a lot of other channels that are helping our business. And January, traditionally being a cold month and a big flu month, is normally one of our bigger months and when you lose January, you just don't get it back. But all in all, I think they did a great job being flat or being up 1%, 1.5% considering the seasonality, considering the weather. And I think they got some great new things coming out that absolutely will help the business.

All right. You said also that it seems like you're going to spend a little bit more behind advertising going forward and you talked about this [other side] that you did this winter. Can you talk about how you look at advertising? I know a lot of packaged food companies have fallen into the trap of not targeting the spending. It seems like with Earth's Best, for example, you're doing a very good job of targeting the market. I am just wondering how are you going to direct those dollars and make sure that that you get the return on those dollars.

Well, I think a couple of things. Let me go back and put it into two buckets. We have done a great job in regards to managing our trade spending, [EITF], and getting the performance for that. And that has helped us getting performance out of our customers, getting price reflected at retail and with that, it also has helped us with our price increases where we have not seen our retail prices increase at the same percentage that we have increased to our customers. So that is number one.

Number two in regards to consumer advertising, I have said it before, for us to go on TV in 30 seconds and tell all about our brands, there is too much good things to say in 30 seconds. So we have targeted different audiences and what you have seen, you are right, we have done some great things going after the moms on Earth's Best and we will do some other great things in regards to Earth's Best formula. We have done it with Sesame Street. Has been a great thing for us. Martha Stewart and advertising in her magazines and with her has been very good for us in regards to Imagine.

Steve and the Celestial out there and Steve, you can touch base on that in one second some of the things that you are doing. But in the personal care magazines, whether it is Shape, Prevention, Body and Soul are some of the things that we are doing there. Doing a lot of demonstrations. So doing some good advertising out there, doing a lot of good PR work with a lot of spokespeople and that is where our focus is going to come from.

Sounds good. Thanks much.

Eric Larson, Piper Jaffray.

Congrats on a good quarter. Most of my questions have been answered, so I'll keep it to one. Irwin, in your prepared comments, you did talk about potentially taking or addressing some more pricing after having about three in the last year and a half. Is it a relatively significant chunk of your portfolio that you might be addressing or is it really one-off type stuff that needs to be adjusted?

More one-off, Eric and I think -- I hate to say I'm going to pay 5% or 1% or 2% across the board. I think we're going to look at -- again, when we go through a pricing -- we look at the competition, we look at the marketplace, we look at retail prices, but we don't have budgeted $4 dollars a gallon for fuel. Then where can we get efficiencies? So we are looking at one-offs and Terra Chips will not be part of the one-offs just because of where the price has gone there. So we will definitely go across the board and look at one-offs.

Ed Aaron, RBC Capital Markets.

Nice job on the quarter. A couple of questions for your. So Irwin, it looks like we're going to finally get to that $1 per share mark this morning -- this quarter -- this year, which is obviously something you have been working toward for a while. When you look out beyond that, and I know you're not ready to commit to exact numbers for 2007 or beyond, but what type of earnings growth do you think you can deliver on an annual basis from a status quo environment?

Well, here is what I want to say and I think what is important is this here. We will deliver I think about 18% earnings growth this year versus last year. We will deliver double-digit -- double-digit volume growth, both from acquisitions and organic. Going into next year, we have some great acquisitions that we did in the middle of the year and we also have some costs facing us. So it is early for me to absolutely commit to any numbers, but I feel good about the category and I feel good about where we are going. So you're not going to get a commitment out of me.

Always worth a shot. When you look at the supply chain, can you talk about some of the stuff that is going on? You were talking about your position in terms of being able to supply the ingredients. Are you seeing much supply shortages out there because I know that there is obviously some retailers that have been coming into the space and overall demand has been very strong? So how is the industry doing in terms of any supply constraints?

A perfect example is formula. Organic nondairy milk, organic whey, organic lactose and we have been able to come up with a good supply, but could we supply every bit of demand for the product? Absolutely not. But I think what is important, doing this now for 11, 12 years, we have laid the infrastructure and relationships with the farmers out there that grow specifically just for us.

There are farms out there, as I said before, do not have telephones that grow organic ingredients for us. We have people just out in the fields, out in the farm, purveying for us. We are now traveling all over the world buying organic in Asia, South America, other parts of North America. So there is absolutely a shortage and you know the shortage of organic milk and the need for that out there.

So I think we're well-positioned and we are well-positioned to be able to have a good grasp on ingredients and that ultimately will have a lot to do on our growth too because if we have unlimited ingredients, I think there is unlimited growth out there in certain product lines. But we are well-positioned for it and that is just part of a real hidden asset within Hain today.

Great. And then the -- you might have already covered this, but the price increase that you put in back in October and November, how much of that was reflected in Q3 numbers? I know you should have both full benefit by Q4, but presumably you didn't have the full benefit yet in Q3. Is that correct?

Yes. This is John. That is absolutely correct. At this point, we probably got about 50% of the customers on through Q3 and we will say the majority of them come on in Q4.

I know you've talked about some ceilings in terms of where you think pricing can go at the retail level before you would expect it to affect demand, but have you seen any examples of categories where price increases have not been able to be passed through without disrupting demand?

I think we are a little concerned on Terra Chips just as I said. Not only when we -- what happens is when we put a price increase out there, a retailer pays a price increase, everybody starts taking margin on top of margin, you have got to watch retail prices and we are very, very sensitive of it. We think organic and natural can absolutely demand a premium, but it doesn't come in a blue box with the name of Tiffany on it yet.

Great. Last question. This is maybe for Ira. You talked about acquisitions being neutral in Q4. You said recent acquisitions. Should I assume that is everything done over the past 12 months?

Yes.

Yes. And what happens also and when you start adding in with -- our interest rates now are fixed, but at additional shares and actually to some degree, they are dilutive, as you saw in this quarter here as we issued additional shares and interest rates. So to some degree, we say they are neutral, but they could be dilutive by $0.01 or $0.02 also.

I think we should go to the last question and then just wrap up for comments.

[Akshay Jadil], JPMorgan.

Just a quick question. I know you've touched on the higher fuel prices and how that is affecting margins. Can you just talk about how that is affecting maybe consumer spending in your categories? Do you think that with higher fuel prices, consumer spending dollars are being squeezed and with the organic natural category being premiumly priced, is there any trading down that you're seeing, and if not, are you concerned about that?

Well, it's a good question and I think it's a little too early yet as fuel prices just in the last three or four weeks have risen. We did not see it affect products when we saw fuel rise. Actually we saw it good for our business because where it affected where people didn't go out to restaurants and didn't spend disposable income there and they felt going to a supernatural and buying good food and staying home and cooking helped us. So like I said, it is too early yet. We might see a positive benefit of it where people will stay home and cook instead of going out.

Okay. Do I have time for one more or is that --?

Go ahead.

You also touched on this a little bit in terms of your private label strategy. Can you just talk a little more regarding that and can you quantify that in any way in terms of the opportunity that you said you may want to get into more of private label, like 4% of sales maybe are you targeting?

Well, I'm not ready to quantify yet because we are a branded food company, a branded consumer packaged goods company. And we have -- we produce 50% of our own products today and 50% of it is outsourced. If there is an opportunity out there to strategically align with a customer, we will absolutely look at it where it is profitable for us and it makes sense and to the date today, it is a small part of our business and it could be big if we really wanted to focus on it, but there is -- the focus today is growing our margin, our branded business and enhancing margins there.

We have no plans today that there is an issue with unabsorbed overhead. So we just want to bring volume in there to absorb it in our plans and usually a lot of times you go and do cold packing just for that.

Thank you.

Since that is our last question, let's just do a quick wrap-up. As I originally said, it is our third quarter. It was a great quarter for us and the management team, and I continuously got asked about the management team, has really executed here from all around and it is great to work with such a great management team and I would like to thank them publicly.

Secondly, the category is strong today. Just coincidentally we have a couple of other natural organic food companies reporting, a natural organic food retailer and just the category is strong. As we hear about more and more consumers being educated about health and wellness and a perfect example of that was when I came back from the natural foods show, I have never seen a show that had such large attendance to it.

And even myself, being in this business and hearing about 1200 chemicals in suntan lotion that we put on our kids, where Earth's Best does not contain any chemicals in its suntan lotion or a product called DEET in OFF. We do not have any chemicals and people are becoming more and more aware of that.

So we are in a good space. We are in a great category. We have got retailers really focused on it. We really have good products, great brands and, as always, it is continuously up to us to execute and we're doing that right now. Want to thank you for the long hour and a half today. I would be surprised if we didn't answer any of your questions because I think we answered them all and if we didn't, we look forward to updating you at a future time. Have a good day. Thank you.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.