Hain Celestial Group Inc (HAIN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Hain Celestial Group earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms. Mary Anthes. Please proceed, ma'am.

Thank you, operator. Good afternoon; I am pleased to be with you today to introduce our first-quarter fiscal 2007 earnings conference call to discuss our financial results which were issued after the close of the market today. We have several members of our management team here with us to discuss our results including Irwin Simon, President and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer; and John Carroll, Executive Vice President and President - Grocery and Snacks.

Our discussion today will include forward-looking statements which 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 2006 Form 10-K filed with the SEC.

This conference call is being webcast and an archive to the webcast will be available on our website at www.Hain-Celestial.com under Investor Relations. Our call today will be limited to approximately an hour so please ask one question; then you will go back into the queue if you would like to have a follow-up question. Management will be available after the call for additional questions.

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

Thank you, Mary. Good afternoon, everybody. Hope everybody had the opportunity to look at our press release that was released at 4 PM today. Our sales for the quarter, $210 million versus $161 million a year ago, -- up 30%. Gross margin, 28.1 versus 28.5 but on an adjusted basis for West Chester and our new UK business -- 29.6 versus 28.5.

SG&A for the quarter, 19.9% versus 21% -- a savings of 1.1% or an improvement of 1.1%. And what that is showing is as we integrate acquisitions, integrate businesses, we are really focused on cost and getting efficiencies out of these businesses. And that 1.1% on the SG&A number is a great improvement.

Net income, $9 million versus $6.9 million -- a 31% improvement. Our EBITDA, $20.7 million versus $16.5 -- a 26% improvement. And operating free cash, just for the quarter -- and Ira will talk more about the full year -- 16.3 for the first quarter versus a negative $3.7 million a year ago and what a tremendous improvement in our operating cash.

On our cash conversion -- and again this is with four additional acquisitions that we have integrated -- in our fourth quarter it was 71 days and that is with the four acquisitions. Last year it was 67 days, so you can see we returned it back to the 67 days. As you heard me say before, there's a lot of gold in those hills and we're still focused on 67 days. And we set our objectives and goals on what we want our cash conversion to be. It was 67 days so we did hit our goal in the first quarter. And we continue to work on that as the quarters move on.

So, good numbers. Good increases quarter-over-quarter, year-over-year.

Let's talk about some of the quarterly highlights. We were able to take a price increase which we announced July 1. And in the quarter, even though you heard me say on an adjusted margin 29.6, we probably absorbed at least $1 million of higher cost in the quarter with fuel, freight, and packaging for the whole Company. Don't forget, we forget about it today, here it is November 2 -- remember July 4 weekend, we were paying over $3.00 a gallon for fuel and other costs. And we have not seen the benefits of price increase even though it went into effect in mid-September. We will start to see it in this quarter. But we were still charged with all the higher costs.

So price increase went through.

We sold Biomarche just after a lot of the lettuce scares and a lot of the spinach scares. And it was not a branded business. It will improve our margins going forward in Europe. So a great divestiture for us.

We had our Natural Foods Show in October. And we introduced multiple new products, some of you on the call were there and we'll start to roll these products out in the beginning of the new year. We're not seeing the benefits of any new products yet. But a lot of good products introduced and a lot of excitement!

We continue to have some of the strongest consumption. And matter of fact, consumption outpaces shipments to some degree. And our consumption numbers are strong and strong across multiple channels. I think that is one of the benefits we're seeing today as more and more retailers and more and more channels today are concerned about healthy foods and concerned about the demand for it and went to make sure they have a presence. We are seeing more and more channels that we're doing a lot more business with. So our expansion of distribution is the best we have ever seen.

We continue to work on margin enhancement. We have talked about our margin enhancement, how we want to get to an optimal gross margin of a 35%. But we would also look at growth opportunities. The example is our Fresh business in Europe, where the margin is a lower business but on the other hand, we're going to see some good growth numbers and I'll talk about that in a little while.

A perfect example is last year we acquired a protein business, a chicken business. Margins were running in the 7, 8%. Today those margins almost double. And we are seeing that business go on a double-digit number two. And demand for organic and antibiotic-free chicken is really moving in the right area.

West Chester facility and John will talk about that -- a lot of good things happening. You saw $1.1 million. We still have a little bit in the second quarter to absorb. But third and fourth quarter, we will get that back to where we budgeted it to be. But the good news is, frozen business is good. Our consumption on Ethnic Gourmet, which John will talk about, is in good shape. And that will allow us to expand into a lot of other frozen categories.

Our acquisition consolidation -- really got some good things happening in the UK business, which I will talk about, and integrated those acquisitions. Seeing some good growth and good savings on the SG&A number from the Spectrum acquisition and also on the Para acquisition. It really is helping the overall personal care business and a lot of good personal care growth coming from other channels that's helping us.

SKU rat, we have overlapped for a year. And the last of the SKU rat numbers whether it was our refrigerated Rice Dream, Soy Dream -- it was in this quarter last year that we had it, but it is gone. So the SKU rat basically is something that will continue. And it is a big part of the business going forward, not to the magnitude but as new products come in, old products have to go out. And as new products come in, we look to bring new products in with much higher margins and look to remove products with much lower margins. So there's some of the highlights in the quarter.

Let me talk about a couple of brands. John will talk to you about the grocery, frozen and snack brands. In regards to Celestial, the good news is September happened to be one of the coldest Septembers in five years and we hope that continues. Our shipments for Celestial for the quarter were down 2%. And on a 12-week basis, the same period pretty well, the total category was down 2.4%.

The positive side -- what's going on at Celestial -- are herb tea, which is the biggest part of Celestial's business, was up 10%. And that is our highest margin business and of course our biggest business. Green tea was down 16.4%. And what's going on with green tea? I think people have abandoned somewhat of green tea as they thought there was a lot of health benefits for green tea. And I also think to some degree, a lot of commodity has come into green tea.

And basically I think people are coming back to the whole herbal tea category, and that is where Celestial is strong. If you take green tea out, Celestial would be up 8%, excluding green tea. And again, this being one of our biggest quarters big into holiday teas, our Zingers To Go. You heard me talk about new line-up, new positioning. There's a lot of good things going on with Celestial. And the best thing we can pray for now is good, cold weather. But we absolutely have the products in the line-up going forward.

In regards to our personal care business, our overall personal care business was up 12%. Our JASON business grew 30%. We acquired the Terra business in March and have totally integrated the business and has some challenges along the way. But we absorbed all the bumps and feel good about where the Terra business can go and the opportunities it can move into.

And not only -- has it ultimately helped our JASON's and Zia business with a lot of other categories and a lot of other varieties of products that we can go into. So feeling very, very good about the whole personal care area. Major opportunity there. Major opportunities into other classes of trade.

And one of our biggest opportunities looks us right in the face. It's in the whole supernatural business. We made some changes in that business -- the business now reports into John Carroll. And we will look how to integrate some of that business back into our Melville business and how we get some of the benefits and the effect of the Melville business to help the overall personal care business going forward.

Our Canadian business was up double digits. Our Yves business in Canada, which we have an 88% share -- and we had a major competitor called [Schneider's] that was in the hot dog business and into other businesses that come after us as a competitor, basically has withdrawn from the market other than the frozen business. So we still have a good share in the marketplace there. Our Terra business is strong -- up 60%. Our Rice Dream business is strong.

So from a consolidated, what we have done is consolidate the business; the Celestial Seasons business used to report into Boulder and be managed to the Boulder. We have now pulled it into the whole Canadian operation. And we have a 24% share of the herbal market in Canada and look for some additional growth from Celestial. So Canada is doing well. And some good things happening in the Canadian business.

In regards to Europe, we are pretty excited about what is going on in Europe. Our overall European business was up in the high single digits. We are willing out a whole line of organic fresh foods, organic sandwiches -- which will roll out in February/March. And that is something that should be exciting. Major repositioning, rebranding on the Linda McCartney product and repositioning the product line. We are in the midst of a whole packaging overhaul. And we will start talking to the trade in November about it. And I think one of the good things about the Linda McCartney business is when we acquired the business, it was in tough shape. And we have been able to hold a lot of the business. Yes, we've lost distribution, but year-over-year where flat in this business even though we have had a lot of challenges with the business.

But the trade is pretty excited about what we have to come with that; and that's both in the frozen, fresh and ambient business, which will start to roll out in March and April.

Lima -- a brand that is almost 50 years old. And spent some time in Europe two weeks ago really understanding and studying the Lima brand. Today Lima's basically only salt and natural food shop and we see Lima as an opportunity in the UK market. And Lima rolling out in supermarkets and other retailers in the UK. So we are going to put a lot of emphasis on growing that Lima brand. Because there is a good variety of product. And everything in Lima is organic. So a big opportunity there.

Biomarche as you heard me say before is divested it, and moved on.

Our chicken business, protein business -- our margins are up double digits in that business. Good growth -- 10% growth in the business. A big percentage of the business moving towards antibiotic-free from conventional commodity and good demand. And at the Natural Food Show we launched eight new products in chicken nuggets, chicken fingers, chicken burgers, chicken wings -- that will be value-added product so ultimately help our overall margins. So I'm excited about where the protein business is moving.

So good direction, good growth, good consumption numbers. A lot of focus on cost. It's great to see fuel prices coming down and hitting I think about $55 a barrel today. So that helps our overall business. And the category remains strong.

What I am going to do is turn it over to John and he will take you through the frozen grocery, and snack business. Thank you.

Good afternoon. In grocery and snacks, Q1 results were strong, especially when you look at them within the context of our four key strategic objectives which are number one, to drive profitable growth in our core category; two, always being improving our margins,; three, improve working capital management; and four, we want to deliver the best in the natural organic class in the area of execution.

Starting with our first objective, which is profitable growth in our core categories, Hain grocery and snack's Q1 top line was up 9% net of SKU rationalization and divestitures. If we include Spectrum sales, which were not in the year ago base -- Hain's grocery and snacks Q1 sales were up 26%.

Our growth was driven by two key factors. First, we saw continued strong natural and grocery Q1 consumption trends, net of SKU rationalizations on our key brands including Earth's Best which was up 36%; Ethnic Gourmet frozen meals, again up 36%; Mountain Sun Juice, up 32%; and Imagine (indiscernible) soup, up 24, Garden of Eatin' snacks, up 18%; Westbrae and Health Valley ready to eat soups, up 13%; Spectrum, up 11%; Walnut Acres, up 10%; Imagine Frozen, up 9%; and Rice Dream, up 5%.

Additionally, we also saw a continued strong momentum in our alternate channel business -- i.e., that is Club, Trader Joe's, Babies R Us. This consumption is as you know is not measured by spins or Nielsen but has driven strong growth across many of our core categories such as rice and soy milk, baby food and snacks.

We expect to continue growth in all our channels as we invest behind marketing support and innovations on our core categories. As Irwin mentioned, our Expo East new product line-up featured several first-ever products for the natural organic category including our new Earth's Best organic soy formula with DHA and ARA for lactose-intolerant infants. This will be the only organic non-dairy infants formula available on the market.

We're also introducing new Earth's Best organic 2% milks, which is fortified with vitamins A and D and will be packaged in an aseptic eight ounce package that is perfect for school lunch boxes.

We are also introducing new Terra Stripes and Blues, which is our first ever Terra exotics new blend and features candy-striped beets, ruby sweet potatoes, and blue potatoes, in a delicious and really colorful combination.

Also introducing new Garden of Eatin' blue and yellow corn chips which at the only organic alternative available on the market to the leading national corn chips brand. We've got new Earth's Best Sesame Street frozen meals, which feature kids' favorites such as Grover's Mini Cheese Ravioli and Elmo's Whole-grain Pizza, both of which are made with organic ingredients.

On the Spectrum side, we are introducing new Spectrum Organic Flax Oil with DHA, again being first to market with DHA which offers a complete vegetarian omega-3 solution as we source a vegetarian DHA. We've also got new health value organic microwave chili bowls. And again, we will be the first with organic microwavable chili.

And finally we've got new Rosetto gourmet ravioli, which is available in two delicious flavors -- pesto with walnuts, and butternut squash, to address consumers' desires for upscale flavors at an everyday price.

You might notice this is a smaller and more focused new product line-up than in the past as we continue our less is more new product strategy. This strategy improved our execution as our Q1 new product sales were up almost 200% versus year ago.

We also continue to be committed to our News for SKUs product improvement program and brand consolidation. At Expo East, our News for SKUs was that Health Valley is continuing its move to organic with the conversion of Health Valley bars and crackers to USDA organic status. We also announced the integration of our Breadshop's granolas into the Arrowhead Mills brand, which will allow these products to benefit from the Arrowhead Mills' umbrella brand marketing support.

Now, turning to our second strategic objectives, which is improving margins, we achieved over a 100 basis point improvement in Hain grocery and snacks Q1 gross margins as SKU rationalization savings, productivity and pricing offset higher raw materials, packaging and distribution costs. This margin improvement was achieved despite absorbing the West Chester start-up costs that Irwin discussed before and [dealer] pricing that was up 14% versus year ago.

Now the key to offsetting these costs was the SKU rationalization and our commitment to making productivity a Hain priority. Our lower SKU count and resulting higher sales per SKU yielded manufacturing efficiencies from being able to have longer production runs, fewer changeovers, and elimination of penalty charges for small runs.

We also implemented productivity projects that drove waste reduction and yield efficiencies that are key co-packers and another project that reduced utility costs and increased utilization at our largest warehouse. Our Q1 productivity savings were over $1 million and we expect to drive similar quarterly savings for the balance of FY '07.

Now regarding the West Chester start-up, we are on track to begin realizing $1 million to $1.25 million in annualized savings, starting in Q3. The plant ran a 68% of standard in Q1. We are targeting 80% of standard for Q2, and we will be at 100% of standard at Q3. The plant is now producing higher quality, more consistent Ethnic Gourmet and Rosetto products than ever before. We are well positioned to expand our frozen offerings by extending our fast-growing Ethnic Gourmet line -- which as I noted before was up 36% in consumption -- and then also internally manufacturing the Linda McCartney entrees, the Earth's Best Sesame Street meals and other new products that are still to come.

Moving on to our third strategic objective, which is improving working capital management, our focus at the reporting unit level continues to be on driving inventory efficiency. Our Hain grocery and snacks Q1 inventory without Spectrum was down 3% versus year ago, while driving 9% sales growth.

Now our Q1 inventory adjusted to include Spectrum for both years was up only 1%. This improvement in inventory efficiency was due to SKU rationalization and a continuing focus on reducing the levels of inventory required to operate the business.

Finally, as to our fourth strategic objective, which is to deliver the best in natural organic class execution, Hain grocery and snacks service levels continue to improve as our Q1 fulfillment rate was over 98%, which was up 1.4 percentage points versus year ago despite lower inventories. Additionally, our less is more new product strategy has improved our execution and doubled our new product sales versus year ago. We also successfully implemented the 3% grocery price increase that we announced in our last call and we will have all key accounts paying the increased rate by the end of Q2, thus benefiting our second half results. And our Spectrum integration continues to drive improved results versus year ago and the acquisition model.

So to summarize, Q1 was a strong quarter for Hain Grocery and Snacks as we delivered improved top line, consumption, margin, and key cash management metrics. We introduced a focus less is more slate of innovative new products, product improvement and brand consolidations to drive future growth. We made progress on productivity initiatives to drive over $1 million in Q1 savings. And we saw key execution metrics to have continued progress.

So with that, the Hain Grocery and Snacks management team continues to be focused on driving profitable growth and the delivery of our FY '07 financial targets. Now I will turn the presentation over to Ira Lamel.

Thanks, John. Good afternoon, everyone.

Our sales in the first quarter this year reached a record $210.2 million, up 30.5% over the prior year's first quarter sales of $161.1 million. Our net income was up 31% to $9 million in the first quarter this year as compared to $6.9 million in last year's quarter.

We earned $0.23 per diluted share on a GAAP basis versus 18% per diluted share last year. On an adjusted basis, we earned $10 million or $0.25 per diluted share. Our adjustments are $1.1 million or $678,000 after tax added back to start-up costs at our West Chester frozen food facility; $2.246 million, or $1.389 million after tax added back due to an unfavorable tax decision in Germany; and $2.510 million or $1.077 million after tax excluded for our gain on the sale of our Biomarche operation in Belgium.

During the first quarter this year, we had 40,02000 average diluted shares outstanding, which is 2,463,000 average shares or 6.6% higher than last year' first quarter average of 37,560,000 shares.

As Irwin discussed, gross profit in the first quarter this year was 28.1% as compared to 28.5% in the first quarter last year. When adjusted for the West Chester frozen food facility start-p costs of $1.1 million, gross margin would have been 53 basis points higher. Further, this year's margins were affected by our UK operation which was new to our consolidated total and not included last year.

In the UK we continued to co-pack for the previous owner of one of the facilities under a co-pack agreement allowing for a minimal margin. And as a result, during the term of this agreement our margin generated in the UK will be challenged even though the agreement helps absorb overhead. The effect on our gross margin this quarter and the UK was a full 100 basis points reduction on our consolidated total.

After these adjustments, gross margin this year was 29.6%, up 110 basis points overall. We're no longer adjusting the presentation of our margins for our FreeBird antibiotic-free chicken operation as they are now included in each period we present. That operation, however, has improved its own gross margins as it has succeeded in improving its mix of sales such that almost 75% of its total production is now sold into antibiotic-free and organic markets rather than commodity markets. While margins in that operation are still not at the levels we believe we can achieve in the future, FreeBird margins have almost doubled in one year.

Our SG&A in the first quarter this year was 19.9% versus 21% in last year's first quarter. We saw a 30% increase in sales overall while SG&A spending increased only 23% as we continued to leverage our existing infrastructure over our increasing sales base. We spent more on consumers in the first year's -- in the year's first quarter with increases in advertising and promotional programs while our rate of this type is spending as a percent of sales decreased a bit on a consolidated basis, as the acquisitions we made included lower spending models, such as our fresh chilled operation in the UK.

Operating income for the quarter this year was $18.4 million adjusted for the start-up costs at West Chester compared to 12 million last year giving us improvement of 54% on the operating income line. In this year's first quarter, interest expense totaled $2.5 million, virtually all of which is related to the $150 million of 5.98% Senior Notes we issued last spring. This interest expense was offset in part by investment earnings of $600,000 during the quarter netting us $1.9 million of net interest expense.

That expense is $1 million higher than last year when our outstanding borrowings were $57 million lower. Included with interest and other expenses are the two special items we had during the quarter. Our sale of Biomarche resulted in a pre-tax gain of $2.5 million. The gain game was computed after charting off goodwill of $3.35 million allocated to Biomarche. However, this goodwill is not tax deductible and as a result, our tax rate on the gain is an unusually high 57%.

We also were required to report a charge in our German operations for an unfavorable decision by the German government in interpreting a provision of a law outlining valuated tax or VAT as it's commonly known. The non-dairy beverage industry in Germany on whom the tax has been imposed has for many years applied VAT at the identical rate imposed on dairy milk, a rate that is lower attend the general VAT rate.

In the courts, the non-dairy industry originally won the decision that determined that non-dairy beverages were eligible to be treated in the same manner as dairy milk. The government has now determined in late September that VAT or non-dairy beverages are not eligible for the special rate for dairy milk, a rate that is nine percentage points lower than the general rate. The charge is not a continuing one and the higher rate by law will be passed on to customers and will not impact our operating results, as this type of tax is a consumer pass-through tax. The non-dairy industry will continue to contest the issue in Germany and seek to have the rate aligned with dairy milk.

Excluding the impact of the special items, our effective tax rate for the quarter was 38.6%. As we reported to you in our year end call in September, we expect an annual rate between 38 and 39% for the year, excluding those special items I discussed. EBITDA amounted to $20.7 million for the first quarter this year versus $16.5 million last year. Depreciation and amortization in this year's quarter is up slightly at $3.3 million compared to $3.2 million last year. CapEx amounted to $3.6 million in this year's quarter.

Our balance sheet continues to be very strong. Our working capital is $196.6 million with a current ratio of 2.8 to 1 at September 30 this year. Our stockholders' equity is now $630.3 million. Our debt as a percentage of equity remains at a low 24% this year with debt totaling $152 million at September 30.

At September 30 -- the close of the quarter -- we had cash of $78 million. We are at 67 days in our cash conversion cycle and our operating free cash flow in the quarter was $16.3 million this year versus a negative $3.7 million in last year's first quarter. For the trailing 12 months through September 30, operating free cash flow totaled $58.2 million this year versus $30.9 million last year.

At this point, we'll open it up for questions.

(OPERATOR INSTRUCTIONS). Greg Badishkanian.

Another good quarter, guys. Just my question is with respect to organic sales growth. And I am sort of calculating $30 million in acquisitions -- is that right?

Yes, that is probably right.

That sort of gives you around a 12% not to -- I know you don't like to disclose the specifics. But sort of a low teen organic growth rate -- is that way off?

Your numbers are working.

And just on that theme -- it is a little bit of an acceleration. Whole Foods reported a little bit weak comps tonight. What are you seeing in the industry, in the marketplace? And is this from market share gains or just sort of strength in the industry -- what is driving your good result here?

I think what I said originally, the overall category is strong. I think consumption is strong for us. And this is without our new products. I think in our organic growth, for instance, we're seeing some good things happening at Spectrum. But were also seeing good things happening with our personal care business. JASON's been up almost 30%. Our Earth's Best business being up 50% or [Asceptic] soup business. Our Garden of Eatin' products. And don't forget, you're seeing this number with the Celestial Seasonings being down 2%.

So -- and that being a big part of our sales number. So there's a lot of good growth with major double-digit numbers. We had Yves in U.S. this quarter and one of the Supernaturals grow 14, 15% where it was a flat category. Seen Arrowhead Mills, DeBoles -- some good things coming from that.

So it is coming from multiple channels. And I think we are expanding distribution, as you heard me say earlier in my notes.

John McMillin, Prudential Equity Group.

Congratulations. I would ask how you are, but that would count as a question, so I will let that slide by. This is just a comment -- why isn't a company that is focused on organic so reluctant to really give that hard answer to the previous question -- what organic sales is?

I don't think we are reluctant, John. I think the thing is, as we come back and forth -- we give what acquisitions are. For instance, on a Para acquisition we discontinued numerous SKUs. So compared to last year you would see Para being down this year versus last year. And I don't know that I can accurately tell you what true organic growth is. And I think from a standpoint of what acquisitions are, what our growth is, and what consumption are -- I think most people are able to figure it out.

Well, the number is high enough that really, whenever it is it looks pretty good.

John, is non-dairy soy in your grocery group where you're seeing a nine number?

Yes, John.

And when you say net of SKUs, you're basically giving the number including these SKU reductions, right?

Yes, exactly, John, I'm taking the SKU rat out of it -- out of both [years'] space.

And just to continue on this grocery point, the non-dairy soy aspect -- is that business stabilizing?

Actually it is better than stabilizing, John, it's actually growing.

It would almost have to be to get the nine number. And why is that? Can you just kind of go into that non-dairy side? And I will stop.

For us, for non-dairy on our side on soy, John, we took most of the line organic in the last year. And that plus fixing the mix itself, has really driven some growth.

And, John, I think just to answer that, non-dairy is a big part of our business. And rice is a big grower in there -- big demand for rice. And I think the big thing is, we have focused on Asceptic and we do a good job added. We licensed out and that [last] over a year are refrigerated rice and soy. And today I think what has happened is, because we focused and with our WestSoy and our Soy Dream and our Rice Dream today, I think a lot of the private label business has gone away and a lot of the other branded business has gone away.

And you've been to most stores today where you see WestSoy, Rice Dream, Soy Dream, and one or two other brands. And I think that's where we've been able to see our good growth coming from.

Scott Mushkin, Prudential Equity Group.

It is actually [Carol Baker] calling in for Scott. I was actually wondering if you could talk a little bit more about the Celestial business and what kind of growth there expecting going into the next quarter, especially anything that you are looking out with Zingers? And what you think about the green tea and your new introductions there?

The good news is, our last four weeks, category saw some growth and Celestial saw some growth. You heard me say our herbal tea was up strong. I think everybody has jumped into green tea. And green tea has become very much a commodity business. If we can see 4 or 5% growth, I think we would be happy with that.

And the reason I am just a little reluctant is cold weather does help sales here. But I would like to see 4 or 5% growth. And we do have one of the best herbal lineups to go after, and seeing growth coming in herbal makes me happy. Because a lot of people come out there with green tea and commoditize the total category.

We are also in the midst -- this is our biggest quarter for holiday teas. And I think at the show you saw some of that new stuff that we are coming out with. And stay tuned for some of the other things that I'm not ready to talk about right now in regards to Celestial.

So a lot of energy, a lot of excitement. And we should expect some growth there. And hopefully, weather continues to be cold and we get a good flu season.

(OPERATOR INSTRUCTIONS). Terry Bivens. Bear, Stearns.

Just on Terra, Irwin, and John, I apologize if I missed this -- I heard most of the numbers. I didn't see Terra listed among your strong sales mentions here. Can you kind of fill us in on how that is going? I know there is a little bit of a hitch there just in terms of the pricing to size, etc.

How is that business developing and kind of where do you see it going for the balance of the year?

I'm going to let John jump in here in a second, Terry. One of the things in regards to Terra we did last year, we ran into a supply product and pricing product. And with that, we took price increase. And we did some sizing down. I think we saw some effects on the sales side of that business. Just recently launched, we have added 15% more to all Terra chips; and at the same time in Honduras, Nicaragua, we were able to find the ingredients at a much lower price than we were paying for it.

So Terra sales were down. But the most recent consumption number, John, which you can talk about, we are seeing again back nicely.

Actually, Irwin and Terry, to that point, the bonus packets now out there we put the 15% bonus packets and started shipping it in August. We have increased the taro content in the product. We have reinstated the advertising promotions for it against the brand. And with the Stripes, with the Stars and Stripes, that is the first new build they have had in exotics ever.

The net of it is the early results are that October grocery sales were up 7%. And we don't have the natural sales for October yet. The program started with Labor Day. So we're starting to see some good results on it already.

Just on that, add to it, our Garden of Eatin' numbers consumption continues to be very, very strong on our Garden of Eatin' numbers.

Christine McCracken, Cleveland Research.

Wanted to touch on alternative channel growth. It has been a big part, I think, of this story especially in a couple of brands -- Earth's Best and some of the snack units. I am wondering how much of the growth you are seeing in these product specifically as coming on distribution gains? And how much is actually coming as a result of increased consumption amongst the same group of customers?

I will turn it over to John. And then I will add a little to it.

The majority of the growth we are seeing on those categories you mentioned is driven by consumption and just simply turn increases in natural organic. And then a combination of turn increases and some distribution, but only about probably seven, eight points of distribution growth -- seven, eight percentage points of distribution growth in grocery. When you look at our alternative channel sales, they are not as huge a part of our business as perhaps a mainstream CPG company would be.

Do you see that, though, you clearly have identified that as a possible kind of route to increase growth. Is that something -- it's clearly going to be part of your strategy going forward, but is that almost something you need to dedicate some kind of different resources due to kind of get this incremental sales dollars? And how big can alternative channels be for you?

Well I think there is plenty of opportunities out there for alternative channels. And I think you are hearing about a lot of alternative channels that want organic foods. Our first and foremost is number one, supply and making sure that we have supply today. And with that, we have no issues on supply today.

I think what you're seeing is a good part of our growth coming from a couple of areas. Our service levels today are running at 99%. Last year our service levels were probably running at 96, 97. So just by being in stock, that is driving consumption tremendously. And I think another thing that is really driving our consumption is the group has done an incredible job of making sure trade dollars are being reflected in getting good promotional dollars spent at retail, which reflects prices, which reflects promotional dollars, and even though we have taken multiple price increases, we are seeing in some case retail prices come down, which is helping drive consumption.

And the third part of that will be to expand distribution. And we will expand distribution in types of products whether it is multi-packed, bigger sizes, etc., because the demand is there for it now. And we also expand distribution into foodservice. And there are multiple other food service accounts that are looking for natural organic products today.

So it's a whole big opportunity for us. The big thing is which we really have to manage the supply.

It sounds like you are fully committed to ensuring supply to your core customers. And if alternative channels kind of work out, and you have supplies, then that is something you will pursue.

Absolutely. But we will not go after customers just to go after customers and have spotty supply everywhere. Basically then we are in trouble everywhere.

That is good to hear. Congratulations.

Andrew Wolf, BB&T.

Congratulations as well; pretty strong numbers. Irwin, just on Europe, you might have mentioned this, and in case I didn't hear it. In regards to Europe, sort of refresh us or tell us how you are doing against your strategy there to try to get -- using the Hain's Fresh as sort of a platform to gain distribution for more of the traditional grocery products Hain sells to some of the UK retailers, if there has been any progress in that regard?

Our Fresh products are doing very well. We have seen since we have owned that business, a lot of good things happening. Good high single digit growth also in that business, you heard me say before, we will be expanding that business into the whole organic line, which is a higher price, higher value-added. At the same time we're expanding that business into Fresh meals and that, for kids, etc.

So the facility that the original Fresh products are made -- we're looking to, we have increased shipments. We are now increasing product line for the much higher margin products and value-added products.

On the Linda McCartney situation, I talked about total relaunch there, which will help us with the trade in rolling out, in a bigger way, Soy Dream, Rice Dream, Terra Chips, the Lima brand in the UK market. And at the same time, we are looking at the rest of Europe right now on where we are going to roll out Terra Chips, Celestial Seasonings and how we are going to bring Lima into a much bigger way.

And then we are also looking at the big opportunities. Whole Foods is opening that store in London with Earth's Best and some of our other products. So we are definitely on strategy. And I'm happy where we are. With the UK acquisitions we did in April/May, as a he matter of fact, I think we are little bit of head ahead of where we thought we would be.

And the sale of Biomarche -- you know, timing was great selling to produce business at the end of August.

David Palmer, UBS.

It is actually (indiscernible) on behalf of David. Congratulations. I have a bone to pick with you. If you are ahead of your guidance or consensus for the first quarter, fuel prices are better, why aren't you narrowing your guidance range or raising it?

We are not adjusting our guidance. We're not changing it. We reconfirm our guidance.

Do you see any additional risks? Or are you just being conservative because it is (multiple speakers) ?

Number one, I think it is the first quarter. And coming out in the first quarter, I've got three quarters ahead of me we're moving into. We come into our big season. So I feel good about the year. I feel good about where we are and I feel good about the opportunities.

And if there is anything else to add to our guidance, we will talk about it but right now I'm reconfirming guidance and feeling good about where we are going.

Andrew Lazar, Lehman Brothers.

I want to just take a step back for a minute and a lot of what you have been doing and a lot of the recent success both in margins and the top line, I think, as you've kind of talked about, can be traced to the kind of the less can be more strategy. Whether it is SKU rationalization, whether it is some of the divestitures, whether it is the fewer, bigger new products -- they are all kind of along that theme. And I'm just curious. I know from an SKU perspective it is kind of ongoing. You're always looking for how you optimize that.

But in looking at your overall portfolio or strategy, have you reached more of a plateau or a place where you are pretty happy with what you've got? Or are there some other things that you continue to look pretty hard at or places in the portfolio where maybe there are still more opportunities to kind of take it to another level?

Because it seems like that has had -- or maybe that has been the catalyst for some of the biggest positive change that we have seen so far?

Good question, Andrew. I think there's a couple things. I think as we look today at margin enhancement, return on investment capital, we also look at where are the big opportunities? And sometimes you spend more time on the little things dealing with that than the big things.

Our business is a lot more complex and a lot different than your traditional grocery or traditional package goods because of our product lines that are sold into natural food stores versus traditional grocery. And what is manufactured at co-packers. On the other hand, what we're looking at is categories where there is high single digit or double-digit growth. And we will continue to focus on that.

And the other thing we come up against, Andrew, is supply and where is the supply and where we can take product lines there.

So I think as you step back today, I think we are in good shape with the portfolio. You saw us divest two businesses. You saw us get rid of close to another $15, $18 million of sales. And we will continue to re-look at that. But I think we have tremendous opportunity in the frozen category. Tremendous opportunity in the fresh category. The personal care category -- look at their essentials -- what that is doing out there and what we can do in that category.

So with that, you heard us talk today about our growth number. And yes, we are sitting with Celestial Seasonings at down sales, so it is good to have a good diversified range. Because when you have some challenges on one business, you get other businesses to pick up the slack.

Wayne Archambo, BlackRock.

Just a question on the pipeline in terms of acquisitions. Is there much out in the marketplace on the personal care side? Those are obviously great margins. And is there comparable type businesses that you see out there -- comparable for JASON's?

There is, and there's stuff out there that, strategically, I think makes sense for us. There's good opportunities for us. On the other hand, we looked at some of the Private Equity guys out there which on one hand proves that we've done some great deal on JASON, Zia, and Para. On the other hand, where are some of these prices? But from a synergy standpoint from a growth category, we are going to be aggressively looking at this category, both domestically and Europe.

So the answer to your question is, yes, there is stuff out there. Yes, we are going to be aggressively looking at this category -- both here and Europe.

Robert Smith, Center For Performance.

Center for Performance Investing. Thanks, guys, for keeping your eye on the bottom line. (indiscernible) . The question is -- could you share with us what you feel the implications are for your operations with Wal-Mart's higher profile in natural foods?

Good question. And I appreciate your thanks were keeping an eye on the bottom line, but that is a major objective and one of our major criteria here. So I appreciate your thanks on that and noticing it, because there's a lot of eyes on that.

I think, where I step back today is, I think the world has got to change the way it eats, the way it lives. And I think any retailer out there today that is taking an effort to supply organic baby food, organic milk, organic eggs, organic protein and giving consumers the opportunity to buy it, I think it's great. And I think Wal-Mart has just -- whether they do well or not with it is one thing -- but I think just by Wal-Mart talking about organic has brought the alertness, the awareness of organic tremendous attention and will help the overall category.

John McMillin, Prudential Equity Group.

Is your guidance GAAP guidance? Or is that using adjusted?

In the last quarter, recall, John, when we gave our guidance for the full year, we also told the Street to expect that we would have start-up costs in the first couple of quarters of the year as they go through that start-up phase at our West Chester frozen foods facility. So the guidance that we gave does not include those charges. We talk to that separately. (multiple speakers)

We also did not include in the guidance, because number one, we didn't expect that it was going to happen -- the unfavorable decision in Germany. And we did not include in the guidance the gain on the sale of Biomarche.

And that is still not included -- ?

That is correct.

Scott Van Winkle, Canaccord Adams.

From Canaccord Adams. Congratulations, guys, great job again.

Irwin, can I steal a clarification before my question?

Sure.

You made a comment, you answered a question a few questions back about consumption being driven by higher in-stock levels. Can you quantify that? I think John said that in-stock levels were up 1.4 points. Does that turn into a 1.4% increase in sales? Or is that a 2 or 3% increase in sales because it is more available?

Well I think, number one is -- you can look at it a couple of ways. I think it's driving consumption by at least one to two points just being in stock. And we ran last year -- John, what was it -- just on your side of the business -- about a 96, 97%?

That's correct.

96, 97%. And when you are 99.1% service levels, Scott, that helps at least one to two points on organic growth.

Scott, the other piece of that is if your levels are running where we are running now, retailers will promote with you before they wouldn't. That actually helps drive stronger promotions for us.

The real question is a simple one given the excitement around West Chester and your opportunities there on margin and maybe some product expansion. What percentage of your sales are being manufactured in-house today and where does that go over the next five years?

Well in-house overall, we still run about the 50/50 split. And if we were to not make any additional acquisitions then I think it is fair to say that we would probably stay at pretty much the 50/50 but start edging toward more in-house as we look to consolidate some of the products on acquired businesses, where they are made by co-packers but we have the capability in-house. And we have the capacity. An example of that is, ultimately, bringing more of our personal care products into our facility in California and manufacturing in-house.

But dependent on acquisitions, I would look to a continuation of the split we currently have, with very minor changes.

And Scott, we will look at where it makes sense. Except it becomes a bigger part of our business and growth with Asceptic, our soup business -- if it makes sense strategically to have a facility because of the opportunities of margins and freight, our balance sheet is strong. So we will look to do that from a plant standpoint and open a plant. So there are things that we are looking at there, what makes sense for us and product lines that we have to manufacture because we control our destiny. Because it's such a big part of our portfolio.

Andrew Wolf, BB&T.

I actually have two follow-ups. On the West Chester facility, I take away from John's commentary is that you are at least on plan, maybe ahead of plan. Is that a sort of accurate take? And secondly, are you anticipating financially to have in the current quarter, the second quarter start-up costs associated with it still? And if you are, are they going to be more or less than what you reported in the first quarter?

Andrew, the start-up costs are continuing in the second quarter. We expect that the second quarter is likely to be the last quarter. But the costs in the second quarter we are anticipating to be about half of what it was in the first quarter.

So the $1.1 million of quarter one is likely to come down to 5, maybe $600,000 in quarter two.

The other question is just on Celestial, really from a high level I think, Irwin, I don't think you said you'd restructured it completely; I think you just said the Canadian part of it is reporting now into Toronto. I just want to make sure that that is accurate.

Are you saying you are looking for growth in the current quarter, overall, for the business? And should we take away from that that despite some of the issues, particularly the green tea that Celestial is in good shape? And there is no operating or internal issues there?

Celestial is in good shape. There is no operating issues. If you step back, Andy, and I have said it before, especially key category has grown for the last nine years. Celestial -- even though, despite the category last year, grew from a Company standpoint 2% -- our margins last year were up a half a point in the business, which we spent back on trade.

So from a standpoint -- it is not Celestial. It was the overall tea category that was down and not Celestial. It was driven by the declining green tea. So I feel good about Celestial. I feel good about where we can go. Last year we get challenged because of a much warmer winter and a lot of promotional -- a lot of new products thrown out there that didn't sell. And it's good to see the herb tea business, because herb tea, like I said, is about 60, 70% of Celestial sales.

So the current quarters -- when you were saying you are looking for I think you said 4% growth or something --

Yes.

-- and it sounded like a goal. I'm not baking it into my numbers or anything, but is that the current quarter or is that sort of for the year?

Basically the next second and third quarter. Because they're both the seasonal quarters for us.

And like I said, we grew 2% last year with Celestial. And that was with a very warm winter. So I feel very comfortable that we can grow 4% at least for the year.

Thank you, Andy.

I want to thank everyone everybody for their time today in listening to Hain talk about its exciting first quarter. We feel good about the category as I said. We feel good about the product. We have an excellent management team in place that is executing and integrating and really focused on top line growth. Focused on margins, focused on cost. And you can see that from our SG&A savings.

Yes, you have heard us talk about our margins where we are going to make entries into the Fresh category like we did in the UK. Yes, we see big opportunities there. Two years ago, in 2004, when we talked about personal care, I think a lot of people kind of looked at us a little sideways. A good category, good growth, and exciting growth category.

Last July, when we talked about the protein category and (indiscernible) chicken, people thought, "hey, the 7% margin category -- tough category." At the end, we saw our margins in the double digits this quarter and good organic growth, and focused on it. So I'm feeling good about being consistent, delivering. We are back continuously focusing on margins.

From our acquisition standpoint, a lot of people asked me about our return on invested capital is the continuous focus of this year. And at the same time, the question asked before -- moving into other channels -- we really got to make sure we don't lose sight of the natural organic industry. And the industry is dramatically growing on the other hand there's got to be that strong foundation there. Because there's a lot of oil and gas and a lot of consumers that look for Hain Celestial products. So I want to thank everybody. And have a great holiday season. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great day.