Hain Celestial Group Inc (HAIN) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 Hain Celestial Group earnings conference call. My name is Tawanda, and I will be your coordinator for today. (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, Vice President of Investor Relations. Please proceed, ma'am.

Thank you, Twanda. Good afternoon. I'm pleased to be with you all today to introduce our third-quarter fiscal year 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 today 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.

Our discussion today will include forward-looking statements which are current as of today's date. We do not undertake any obligation to update such 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 of the webcast will be available on our website, www.Hain-Celestial.com under Investor Relations. Our call will be limited to an hour. So please limit yourself to one question, and if we have time to pursue additional questions, we will take you at that time. Management will be available after the call for additional follow-up.

Now let me turn the call over to Irwin Simon. Irwin?

Thank you, Mary, and good afternoon, everybody. I hope everybody had an opportunity to look at our press release that was released at 4:00 today on our Q3 numbers.

Great quarter and I have got a lot of exciting things to tell you about. Ira and John are here with me, and we will talk about the business, the financials and what is happening and what we see happening going forward.

So let's take a look at Q3. $237,905,000 versus $196,443,000, up 21.1%. Gross margins 29.7 versus 29.4. If you take our Luton business that was not there a year ago with lower margins, 31% versus 29.4%. As we told you, we are focused on margin enhancement, focused on margin enhancement, and again effects of a total price increase but effects too of higher commodity costs, and we saw fuel price increase -- we saw fuel creeping up the last two months of the quarter. So again, this is with headwinds with commodities and fuel. We are still focused to get these margins up into the 34, 35% range overall and continuously work on that. So I think we have made some great progress on our margins.

Our SG&A 19.8 versus 21.2%. And some great enhancement on our margins, which shows you we are really starting to integrate businesses, really looking at costs in businesses, and a perfect example is the Spectrum business, which we saw grow 12, 13% in this quarter. We have owned it now over a year. We fully integrated it and what a great business. Also, in the quarter, our Para business, which we basically have integrated it, we have owned it just over a year, and again consolidated the Personal Care business, consolidated the operations and seen the benefits from it in the SG&A piece. And so there are still opportunities in SG&A, and we think as we do future acquisitions that it is going to help our internal rate of return, but it will also help the SG&A number. Our operating income 23.6 versus 16.1, a 46% increase. EBITDA and my objective is to get to a 16% to 18% of sales EBITDA goes in the right direction, 27.2 versus 20.5 at 32.7%.

Earnings per share, $0.30 versus $0.25, a 20.8% increase. And our big one, which we have really focused on and really put a lot of attention on, is our free operating cash, $67 million versus 20.7, and that is up 224%. Ira will take you through our cash conversion, how we're focusing on that, and how we're trying to take these inventories and our payables in a little later on.

So let's talk about the quarter. This was a great quarter. Really third quarter started off, as I referred to, a little lumpy. January was a little soft. But the quarter came back stellar, and again high agriculture, high fuel but with those headwinds. And also coming off a very warm second quarter and actually the first part of January being warm, but we have seen some great things happenings.

Great turnaround on Terra, getting back into high single digit, double-digit growth. Good performance on Garden of Eden, good growth on Spectrum which I have talked about as an acquisition. Earth's Best continues just to be a rocket for us in all aspects of the business -- infant food, toddler's food, formula, our Sesame Street Earth's Best combination of products -- so really seen some great things happening there. With that, a big part of our margin, 160 bips came from our grocery and frozen snack business, and John and the group have done a great job, have really focused on costs and getting costs out of the business and really productivities out of the operations group.

The Personal Care side of the business, we completed the Avalon/Alba acquisition in January 11. This is going to be a really great acquisition. We have owned it now 8 to 10 weeks and, of course, in this quarter owned it for the month of April. Really seen a lot of great things out of the brand. A lot of people really in classes of trade excited about this. We're in the midst right now of looking at the integration, a lot of synergies in this business. As I have reported before, this business reports into John, and ultimately he is in the midst now of evaluating and viewing it, and by the middle of our first quarter, end of our first quarter, we will have this thing totally integrated. It is a lot better for our customers on shipments, a lot better on efficiencies, and there is a lot of cost to be saved here.

So middle of first quarter, end of first quarter we will have this business totally integrated, and expect a lot from our Personal Care business. It is just a great, great category and a great category to be into.

Celestial Seasonings, what can I say? We came off a warm second quarter. You heard me say before about January and coming off a warm quarter, and what we have really noticed about Celestial, as we have done our research, when the weather is warm, people skew to drinking ready to drink, and actually, as you look at the category for 12 weeks, the category was down -- the category was down three, Celestial was down 8. But it is interesting our herbal tea was up 6, and we were down 14 on our green. And those people that left drinking green tea went to ready to drink. So it is not like we're losing Celestial Seasonings users and not using Celestial Seasonings. They are actually leaving the category to go to the ready to drink category.

So what is happening? A lot is happening at Celestial. We made some management changes there. David Ziegert is acting General Manager. Right now, myself, I'm actively involved and spending a lot of time at Celestial. We're in the midst of reducing inventories both at distributor and shelf, and the reason why we have a major packaging overhaul. If you come back and look at Celestial Seasonings from illustrations, it is a lot of old artwork, and we think we have to keep the continuity of the equity, but in the meantime how do we upgrade the packaging; how do we have a new look? And I have got to tell you, we have worked with a first-class branding company here in New York, and we really came up with a great new look, great new pack of Celestial, and we hope to start to ship that sometime in the first quarter. And what we're trying to do is reduce inventories at shelf and distributors to get the new pack out as soon as we can.

So that should start to ship sometime in the first quarter. We're pretty excited about it. Our research comes back and tells us our consumers really like it. I think part of our decline in Celestial was we just became kind of boring at the shelf and not exciting. And, as the tea category got very crowded, we got somewhat lost in there.

So what else are we doing? You know, what we're seeing today is organic fair trade, pyramid-type teas of being a good category. We have launched a new brand called Saphara by Celestial, which is pyramid teabag, organic fair trade, and actually we're really going after more of the organic/natural food sections of the stores. It will retail for $6.99 to $7.99, promoted $5.99. It will go into organic sections of supermarkets into Whole Foods while those grade acceptance will start to ship June 22. So it will have its own brand name, Saphara, but it will be by Celestial Seasonings in much smaller print, and we're looking for some good things here. So it will be a much higher retail price.

At the same time, we really feel that a lot of people that drink coffee in the morning are our consumers, and after they have their coffee in the morning, they do drink tea in the afternoon, and we're losing some of those consumers. So, for the first time, Celestial Seasonings is going into organic coffee, again fair trade coffee. And the concept here is we will have flavors of Celestial Seasonings and packaging of Celestial Seasonings which will be our coffee brands. And our house blend, which is Morning Thunder; a French Roast; a Vanilla Hazelnut, which is a tea flavor; a Chocolate Caramel, which is tea flavor, and that will be a similar packaging that we have on Celestial today. And it will retail for $8.00 to $9.00 a pound. It is very competitive with what organic coffee is today, and that should start to ship in September/October. But we're pretty excited about that. And I think it will help us to maintain some of our consumers, say, both on the tea and coffee side.

Our Go Stix, which we introduced back in December for kids, you know continues to do well for us. Zingers to Go, and we're really looking hard at the ready to drink category. I mean there is a lot of ready to drink teas out there, and just to jump into the ready to drink category when it was something unique I don't think would be a good idea. But there's a lot of new innovation with the Celestial name that we're looking at, and there are some partnerships which I am not ready to talk about yet, but that is the category that is really up on our drawing boards and some things we're looking at.

So yes, tough year with Celestial. Yes, tough quarter. But I must say there is a lot of good things in place there, and there is a lot of things happenings, and there's a lot of enthusiasm coming out of that brand.

Europe, a lot going on in Europe, probably one of our greatest quarters ever in Europe. April 30 was our anniversary of buying our Luton facility, and our Fresh business is up double digits. In the first week of March, we launched organic sandwiches into our Marks & Spencer, doing quite well. And a big part of our Luton business is look to do a lot more Fresh- type items, which we're looking at right now.

Our Linda McCartney business is up double digits, and that is with losing a lot of accounts last year when we just took the business over. And, at the same time, we have relaunched the packaging. We have totally gone to a whole new product, and as we speak, this product is now going into distribution. And within nine months, we have totally overhauled the product, overhauled the packaging, and you hear about Paul McCartney working with Starbucks. Stay tuned for a lot from the McCartney's working with Hain Celestial on our product rollout here and really endorse it. Not only Paul, but his two daughters, too. So we're pretty excited about that.

We will also look and start working through the next couple of weeks of relaunching that back into the US. So some pretty exciting things there.

In December we acquired Haldane and closed it in the middle of December. Right now we're in the midst of looking at integrating the business. We will integrate the Newport Pagnell plant into the Fakenham plant, which is the meat analog plant. We're looking at a plant that makes dry mixes. What we should be doing with that in our Manchester plant, which is our soymilk plant and we also have a soymilk plant in Germany we're looking at, where are the efficiencies in cost there.

So there is a lot of good opportunities with Haldane, a lot of good costs that we can take out of that business. I spent the last week there, and we are in the midst of our total European plan there. We currently sell Rice Dream, Soy Dream, Celestial and Terra into the UK market right now. And with the new Whole Foods opening up in the middle of June or the beginning of June, we will have Earth's Best and Spectrum and some of our other European brands in there. But we're excited about launching some of the US products into the UK market.

So the UK market we are really focused on, and within a matter of a year, that has become a great base business for us. The rest of our European business as we look at Europe today, last year we divested the Biomarche business. We continue to focus on brands, brands, brands. We will continue to look at our Grains Noirs business as that is again a Fresh business with multiple customers out there and ultimately because that makes sense for us and where do we -- when -- if we do -- when and if we divest it, what does it make sense? So the Grains Noirs business is something we're looking at.

What we are focused on there is Lima up double digits. Natumi which is our soymilk business, up double digits. Rice Dream up double digits. Our Terra Chips business up double digits. So we're getting great double-digit growth from our branded business in Europe, and we're really continuously focused on that.

So with that, with Europe being strong, demand for natural/organic foods, we will look at the UK, Ireland and Wales. Then we will look at Eastern Europe, Western Europe and Northern Europe how we go into those markets and how we split Europe up.

You know right now we also sell some Personal Care products into the European market, which is sold directly to the US. And we're going to look at how there is a bigger play for us within the European market on the Personal Care side of the business.

You saw a couple of weeks ago we increased our investment into Yeo Hiap Seng. We're pretty excited about that Asian market, and we're going to do cobranding with Yeo Hiap Seng, our Yeo Soy Dream brand, or Yeo Terra brand as we export our products into the Asian market.

On the reverse side, we're looking at taking Asian ethnic products and selling them into the US market. We think there's a big opportunity for Hispanic products and ethnic Asian products to be sold back into this market into the natural/organic side. So you are going to see us make a lot of move in there and a lot of new products coming in there.

Also in Asia, the Personal Care area is something we're looking at whether it is acquisition or take our existing products. So a lot happening from an Asian standpoint.

In regards to our Protein business, it is almost going to be two years since we have gone into the chicken business, and our margins have really increased. Went from 3, 4%, up to close to double digits. Our business is growing in double digits. Today our antibiotic-free organic capacity is at 85, 90%. We're looking at major expansion in regards to the facility and what we need to do for more output.

The other thing is what we're looking at is in the Midwest or the South where else do we put a facility here because the demand for antibiotic-free organic chicken. Not only selling it as from a chicken standpoint but value-added type products, we just introduced nuggets and wings and meals like that and doing quite well. So some pretty exciting things on the protein area from a standpoint.

So we come back and I close and look at it. We had a great growth on sales, margin enhancement, a big focus here. A lot of new products. We had our major natural/organic food show in Anaheim in early March. Probably the biggest attended show that I have ever seen. And we probably introduced the most new products both in Personal Care and Food that I have ever seen from our introduction of product and pretty exciting. And they will roll out over the next few months.

European expansion, we have really got a good foothold in Europe. We will continue to look at the rest of Europe and how we move into Western, Northern and Eastern Europe.

Personal Care, a great acquisition again on all Alba and Avalon, you know, combined with Para and Jason's and Zia. And John has really got a great plan of how he's going to consolidate and integrate.

Lots going on with Asia. We continuously look at acquisitions. There are some interesting things out there for us, and we will continue to look at it.

And last but not least, we're excited about rolling out the McCartney line.

What I would like to do is turn it over to John. He will take you through some Personal Care stuff and some of his other businesses, and then he will turn it over to Ira. Thank you.

Thanks, Irwin. Q3 was a record-breaking quarter for Hain Grocery & Snacks, and I will start with Grocery & Snacks and then move onto Personal Care.

Hain Grocery & Snacks toplines sales reached the highest level we have ever achieved in Q3, despite lapping the Spectrum acquisition in December and having to overcome a warm winter's impact on our soup lines. Our topline growth was driven by gains across the business, including Earth's Best, Garden of Eatin', Spectrum Naturals and Essentials, Westbrae, Imagine Soup, Imagine Rice Dream Beverage, Imagine Frozen, Ethnic Gourmet, Arrowhead Mills, Health Valley Soup and Terra.

A quick point to make here is we're beginning to see a Terra brand recovery, and we saw it in Q3. The latest consumption trends at Whole Foods and Grocery are positive. Our new Terra Stripes & Blues, our most innovative new product in years, began shipping in March to a very strong trade response, and it will be the focus of our large Terra July 4th promotion. And also Terra will be featured in our first-ever National Costco MVM Coupon Promotion. It will happen in May. This is a program that is usually reserved for mainstream salty snack brands. So we're starting to see a Terra turnaround.

We expect Hain Grocery & Snacks topline growth to continue behind a strong slate of innovative new products that Irwin alluded to at Expo West. And just a couple of key highlights. We introduced Arrowhead Mills Organic Stuffing, which will be Arrowhead's first venture into holiday items, and provides an excellent opportunity for secondary displays during Thanksgiving and the holidays. Earth's Best Sesame Street Organic Toddler Soups, we are again pushing the Sesame Street line. We are going to have Elmo shapes, and like all Earth's Best products, there will be an excellent low salt, iron, zinc and six B vitamins for toddlers.

Earth's Best Organic Country Dinners, here is a great idea. It is four new meat SKUs for a hearty lunch or dinner for infants. We only have two meat-based SKUs in the entire Earth's Best line right now, and they are our number one and two ranked items. These products will do really well.

Health Valley Organic Microwave Chili. Last year we introduced the first organic microwavable soups, and they had great success. This year we are introducing two vegetarian microwavables chillies.

Rice Dream Supreme, this is the first in the rice nondairy beverage category. Rice Dream Supreme comes in two decadent flavors -- Chocolate Chai and Vanilla Hazelnut -- that are delicious, lactose free, dairy free and gluten free. And then Garden of Eatin', we're going to introduce Garden of Eatin' baked and multigrain chips, and the differentiation on these chips is that we go one better than the competition with the addition of flax seed that provides 300 milligrams of Omega 3's per servings.

Lastly, Spectrum Essentials DHA Chewables. This is the first vegetarian easy to chew soft gels for children. Omega 3 DHA has been clinically proven to aid in children's brain and vision development, and Spectrum Chewables provide 100% of the daily recommended value.

Moving beyond topline for Grocery & Snacks, our other Q3 highlights included continued margin expansion as Irwin talked about as we saw pricing, trade spending savings and productivity initiatives offset rising commodity and fuel costs. Productivity initiatives yielded over $1 million in Q3 and continue to be a key area of focus this year and beyond.

Also, our West Chester startup is now complete, and the plant is running at 100% of standard. Our inventories continue to decrease and free up cash year as year-on-year inventories were down 4%, even with increasing sales. Service levels were strong at 99%, and SG&A was down versus year ago both in absolute dollars and as a percentage of sales due to the Spectrum synergies and continued discipline regarding adding costs.

We developed a solid Hain Grocery & Snacks management team here in Melville led by Adam Levit, Maureen Putman, Jim Meiers, Marla Hyndman and Rose Ng. In turn, they have each developed strong goal-oriented functional groups supporting them. They are executing well and have delivered strong results for the first three quarters. I expect more of the same in Q4, and as I have said -- in FY '08, as I am now freed up to spend more time working with our rapidly growing Personal Care unit.

Let me just take you through Personal Care quickly. Both Jason and Avalon natural products had strong Q3 results. Personal Care topline was up double-digits led by strong growth on Jason, Avalon, Alba Botanica and the Queen Helene brand. The growth was driven by consumption increases in Whole Foods and Grocery and new distribution as more and more retailers are putting a stronger emphasis on natural Personal Care. We expect our Personal Care topline growth to continue behind increased turn, new distribution gains and again an innovative slate of new products from Expo West, including Jason Cinnamon and to Vanilla PowerSmile Toothpaste and Mouthwash. PowerSmile is the number two selling brand of toothpaste in the natural channel. As a matter-of-fact, we have the number one selling SKUs in the natural channel, and then we also -- it is the number one brand of mouthwash in the natural channel. These SKUs address key flavor gaps in the line.

Jason fragrance free cleanser, night and day creams and hand and body wash with SPF. The Jason's Fragrance Free line introduction has been very successful for us as it addresses a key benefit gap in the natural category. And these new SKUs just add new segments, new product segments to the line.

Queen Helene is introducing a natural/organic fair trade certified coco butter bodycare line. It is four SKUs that include a body wash, a scrub, a lotion and a cream that let users nourish their skin while supporting a global cause.

And lastly, Alba is introducing Serenade, which is a patented and innovative clinically proven line of hydrating creams and replenishing lotions that help repair damage to the skin's protective barrier.

We continue to be very excited about our Avalon acquisition. Avalon had a strong Q3 from both a topline and a margin perspective, and additionally, combined with our Jason line, Avalon gives Hain a leading position in natural Personal Care with first a well-differentiated brand portfolio. The Jason, Avalon Organics, Alba Botanica, Zia and Queen Helene brands address different product, price and user segments with very little overlap.

Additionally now we have a one-stop solution for retailers looking to expand their natural Personal Care presence. We also see, as Irwin alluded to, significant potential synergies, particularly in the supply chain area.

And lastly, consumer and trade support, scale and leverage should drive more efficient and better consumption driving support programs.

As Irwin stated, we will begin integrating these two businesses in Q4. This will include moving onto one IT platform. Consolidating wherever possible. Backroom operations for efficiency and synergy. Coordinating our go-to-market sales approach across all brands to reduce ineffective spend and increase impact. Identifying the best suppliers and packers across all of our Personal Care brands and consolidating our activities with the supply partners that supply the best quality and price. Instituting a better SNOP process to increase service levels and reduce inventory. And finally, integrating into our Culver City plant any production where we are the best quality, least cost supplier to drive supply chain synergies.

This Personal Care integration will take some time, but will yield a focused and efficient Hain Personal Care unit that will be an innovative category leader and deliver significant benefits to Hain's shareholders.

So to summarize, Q3 was a record-breaking quarter for Hain Grocery & Snacks and a strong quarter for Personal Care. The businesses are well positioned to deliver the balance of the year targets, and the integration of Jason and Avalon Personal Care into one platform is being initiated to drive growth and realize significant operating synergies.

Now I would like to turn it over to Ira Lamel.

Thanks, John. Sales in the third quarter this year reached $237.9 million, up 21.1% over the prior year's third-quarter sales of $196.4 million. Our net income was $12.4 million this quarter or $0.30 per diluted share against $9.1 million last year or $0.23 per share GAAP. Last year we adjusted earnings by $0.02 for a FAS 123R charge of $1.1 million, which resulted in adjusted earnings last year's quarter of $0.25.

Diluted earnings were calculated on 41.5 million average shares outstanding this year versus 39.547 last year. So this increase in share count cost us a full $0.01 per share in earnings. Included in third-quarter earnings this year is the previously discussed FAS 123R mark-to-market adjustment for the ungranted stock options. We still have not granted these options, and as a result, we recorded a $98,000 pretax increase to earnings in this quarter. This had no impact on our earnings per share this quarter, which remain at $0.30 both before and after that adjustment. This adjustment will continue until the stock options are granted or otherwise resolved. We expect to have this resolution prior to our June 30 year-end, along with new equity grants to others in the Company.

When these ungranted options are resolved, as we have discussed in the past, we expect there will be a charge to earnings for the resolution of the 2005 ungranted options, which have yet to be recorded in the financial statements under FAS 123R.

Gross profit in the third quarter this year, as Irwin said, was 29.7 as compared to 29.4 in the same period last year. These percentages include the 130 basis point impact on gross margins from the inclusion of the lower margin UK operations. In the UK we continue to copack certain products under a contract with the prior owner at margins designed to recover only cost.

On a comparable year-over-year basis, our gross margin improved 160 basis points this year to 31%. This improvement was achieved while absorbing the reduction in overall margins from the effect of Celestial Seasonings becoming a lower percentage of our sales than in the past. This year Celestial Seasonings represented 460 basis points lower in our consolidated sales line than it did in the prior year.

The increase in the scale of our Personal Care unit as a percentage of our total sales, along with improved margin performance in that unit and improved margin performance as discussed by John in Grocery & Snacks, helped to offset the effect of the Celestial Seasonings decline as a percentage of our total Company sales.

Our SG&A in the third quarter this year was $47.1 million or 19.8% of net sales compared with $41.6 million or 21.2% last year. The reduction in spending as a percentage of sales is in part due to the inclusion in the prior year's third quarter of that FAS 123R charge I referred to earlier, and therefore, on a comparable basis, SG&A was 19.8 this year versus 20.6 last year.

In this quarter we spent 80 basis points more as a percent of sales directly on consumers including media, couponing and demonstrations at store level. So net-net our spending in other areas of SG&A dropped 160 basis points from the continuing increase in the scale of our overall business, the continuing integration of the acquisitions we made prior to the Haldane and Avalon transactions, and from an increased focus on our spending. Operating income for the quarter this year was $23.6 million or 9.9% of sales versus the $16.1 million or 8.2% of sales last year.

Interest expense and other expenses this year totaled $3.3 million versus $1.6 million last year. Our interest expense totaled $3.4 million in this year's quarter versus $1.7 million last year. This was offset in part by higher interest income, totaling $600,000 versus only $100,000 last year. Other expenses included in the caption amounted to $0.5 million and includes such items as foreign exchange gains and losses, and the minority interest in our Hain Pure Protein investment that we removed from the P&L.

Our EBITDA, as Irwin mentioned, is $27.2 million this year or 11.4% of sales against last year's $20.5 million or 10.4% of sales. Working capital was $191.4 million on a current ratio of 2.5 to 1 at March 31. Our total assets are now $1.1 billion, and our stockholders equity is $674.4 million. Our debt, which totaled $224.4 million at March 31, was a low 33% of equity, and our net debt after deduction of cash and cash equivalents was only $169.5 million or 25% of equity.

On the cash conversion front, we finished at 72 days in the quarter against 70 days in the second quarter -- excuse me, third quarter last year. Our days and receivable stood at 41, inventories at 65 and our payables at 34. The two-day increase in the cash conversion cycle was caused by the higher levels of inventory in the Personal Care unit, principally as the result of the Avalon acquisition. We have generated $67 million of free operating cash flow in the 12 months ended March 31, a 224% increase over the $20.7 million in free operating cash flow in the same period last year.

As we stated in our press release, we're providing guidance for the remainder of fiscal year 2007. We expect fourth-quarter sales to be in the range of 223 to $227 million and our earnings to be $0.26 to $0.29 per share. With this guidance, our full year should come in with sales of $902 million to $906 million, and our adjusted earnings for the year should be in the range of $1.19 to $1.22.

With these comments, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Ed Aaron, RBC Capital Markets.

A really solid quarter, guys. A couple of questions. First, just quickly on Celestial. Did you give a reported sales number for Celestial this quarter? I might have missed that?

No, we did not.

I think last quarter you said it was maybe down 6%. Can we assume something of similar magnitude this quarter?

Actually probably a little higher, and you heard me say our consumption -- I did give a consumption number. Consumption number for 12 weeks was down 8, and category was down 3. So just a bit higher than that, that is what it was down.

Okay. Then you talked about the inventory deloading. How long do you expect that to last?

Well, when I said inventory deloading, what I meant was, we are in the midst of a packaging overhaul, and what we are trying to do is get the new packaging out as soon as we can and get a sell-through of existing packaging and get our new pack out there. Because the new pack, the logo, there's consistency of logo, great new look. So the less of the old stuff we ship in and the sooner (technical difficulty)-- we get the new stuff out, that will help us tremendously. So we started to do it last quarter. We hope to get a lot done this quarter and ship it within the first quarter.

Scott Mushkin, Banc of America Securities.

Hopefully I can articulate this question clearly. But it seems to me that the channel is changing a little bit. You know we have spent a lot time in Whole Foods, but also at Safeway and Wegmans, and those three retailers in particular seem to be pushing their private-label extraordinarily hard. Yet it does seem, even with that backdrop, that Hain has somewhat a unique opportunity. I know that Safeway had a bake-off between a couple brands, and I think you guys won. I believe maybe you won because your brand was thought of as more premium.

And that kind of goes to the other trend we have seen, which I think is emerging, which is the premium and natural/organic seem to be kind of coming together. I was wondering, Irwin, if you could talk maybe about this trend. Do you think it is important? And what kind of opportunity do you think it presents for the Company? Because we actually think it presents a pretty large one as you guys maybe become the premier premium natural and organic food company out there. And how do you get more brands -- I think Earth's Best is one of them -- to be thought of in this light?

It is a good question, Scott. I think if you go back to Earth's Best, there was a certain retailer that wanted its own private-label baby food and wanted an organic line. And if you come back and think of organic baby food, it is Earth's Best. It has always been 100% organic. It is GMO free. Our full line is organic. We have a full line of products. If you look at sales, if you look at sales per point and you look at innovation, I mean we are the ones that skew to the organic consumer, okay? And with that, we went into this account in all stores being the only other organic supplier along with them. And by the way, we were the last jar where the other company had plastic. So there's a lot of aspects.

So the thing is, which I have always said at Hain, I mean everyday we wake up, organic and natural is every part of our life. And whether it is sustainable agriculture, whether it is recyclable or whether it is soy, etc., is a big part of our product lines. And today, not only to the premium part, consumers out there are looking at that. I cannot tell you how many consumers today in our consumer hot line call people want to know what is recyclable? What is PET? What the lids are? You know recyclable ink.

So they are looking at products. They are looking at the whole green part today is looking at it from a premium standpoint.

And the second part to your question is, yes, they are looking for premium products. And what we're seeing, yes, private-label has been around, and today we saw there's a lot more organic milk out there than we suspected, etc. But consumers today want to buy organic brands.

Just as you come back to it, Arrowhead Mills has been an organic brand that has been around a long time. We have taken it totally back to organic. It is gluten-free. Tremendous demand and you can come back and say, flour is flour. Well, not every flour processes all organic. It is all milled at our facility. So there is another brand for us that is just a tremendous brand with a premium to it from a brand equity standpoint.

Rice Dream, Soy Dream, same thing. And then we have WestSoy, which can be very much a price product for us. Our Imagine aseptic soups.

So that is just four to me in regards to premium products where yes, it is easy to gloat there and get private-label and private-label organic. And here the perception of all those four brands that I just mentioned is to the premium brand, or if they go with private-label, they want a comparable brand out there that is a premium brand where they may be able to charge a little less. And that is the position that is being created out there where there will be a private-label brand, and there will be a premium brand with either similar pricing or a little higher pricing.

The only big thing about what you're seeing, though, Scott, out there in private-label, yes, you're seeing more and more private-label. But you are seeing traditional items. And the big thing about Hain what we have to keep doing -- I say this -- is keep adding unique items and keep adding value-added items and keep the innovation. Because still source and supply are going to continue to be a challenge out there. And not only source and supply, it is finding plants that are certified organic today is something that continues to be a challenge for a lot of these companies.

Greg Badishkanian, Citigroup.

Nice quarter. I just wanted to ask you about the impact of the Celestial Seasonings products in your business. I am calculating sort of a mid single digit organic sales growth, and then I am just wondering a), is that kind of in that right range? And then b), when you sort of take-out some of the other like the tea and soup and hot cereal, how much did that drag down your sales or either at shipments or whether it is at retail?

Good question, Greg, and I think I always -- organic growth that great question out there. And I think it is easy to figure out, but one of the great things about what is happening at Hain today, we are diversified. Celestial at onetime used to be 15, 18% of our business and much more of our profits. Today it is a much smaller part of our Company. Today Celestial is 10% of our sales in this quarter.

So if you step back from a seasonal standpoint, Celestial being 10% of our sales, but soup and cereal, our soup business was not where it was a year ago with the warm weather. And but, on the other hand, you saw our growth. So if you come back and added the weather factor in here, which I hate to add, seeing our organic growth being a lot higher is absolutely something.

Pablo Zuanic, JPMorgan.

Really a philosophical question. But when I think of the natural channel, I see that your competition is very fragmented, so you obviously have a scale advantage there. But then when I think of the mainstream channel, I see that the larger players there are responding with their own organic varieties. Kellogg in cereal beyond Kashi with their own Rice Krispies brands, Campbell's launching their own aseptic soup, and we see that as a bit of a trend. Just tell us how do you find you are faring against those branded players launching their own brand in organic alternatives?

Very good question, and I think what I have said before, organic and natural because it is the trend today, everybody seems to be getting into it. And I have always said this, our brands go one way only -- natural/organic. And I think we saw a lot of brands that, whether it is Campbell's or Kellogg's, that where their traditional brands and they had their organic offerings on the shelf, and we saw that happened into some recent mass markets.

And I think back to a previous question, consumers today want brands that stand for total natural, total organic and it comes back to the whole green effect, too. So to one point, listen there is a lot more competition out there from the bigger guys. On the other hand, I think one of the greatest things is, if you walk into supernaturals today, into Whole Foods or Wild Oats, yes, you're seeing Kashi, but you are not seen a Kellogg's Organic. You're not seeing a Campbell's Organic. And consumers get educated at Whole Foods and Wild Oats about organic products, and I think that is where they learn about them to go shopping at the mainstream supermarket, which helps us tremendously. And I go back and said about private-label, what we've got to continuously do is keep doing unique innovative products and keep building the awareness of our brands. Because there definitely is more and more competition coming out there.

John McMillin, Prudential Equity Group.

Well, in difference to Mary, I won't say hi guys but I will say hello. Irwin, just to kind of get a tea estimate for the year, I know we went from flat -- I mean from up 4 to flat. Can you kind of target the current plan in Celestial?

You know, John, right now I'm here, we're coming into April, May. We're in April, May, June. What I can tell you is, April this year against last year was up a bit, just a bit. With that right now, what I'm trying to basically do is look at from a category standpoint, you heard what I said about the category, the category was down 3. We were down 8. And the interesting thing, which I mentioned on the category, our herbal tea, which is 60% of our business -- don't forget when I say consumption, that does not include about 35% of our shipments out there whether it is Wal-Mart, Trader Joe's, etc. So don't get totally skewed off here.

But John, we're going to end up the year down on Celestial. I know I had a bet with you, but I lost it. But we're going to end up down, and what I can tell you is the more tea, that old packaging that we can get out there and get ready for the new tea season, we're right now really focused on next year's teas season, and we are pretty excited to have our new look, our new pyramid bag, coffee. But despite all this, our margins are still up on Celestial because we really looked at some of our costs there and really have focused on our margins there, and we need to spend some more money on the brand.

Ken Goldman, Bear Stearns.

A question on expansion into Europe, which you touched on Irwin. First, can you talk a little bit about the criteria you would use in determining which countries to go into? Just add a little color there, and perhaps a little more on which products might fit in which markets.

Then, as a quick follow-up to that, I'm curious how strongly you are considering partnering with perhaps a larger food company that already has strong distribution there? I know you have had mixed experiences and the past partnering with larger companies, but it might not be the worst idea, and I'm curious how you are thinking about that?

Well, there was a CEO once that decided how he was going into Europe where he played rugby. I'm going to tell you that's not how I am going to do it where I played hockey. That is not what I'm going to decide about how we would go into Europe.

But you know right now in looking at our European focus, the UK, Wales, Ireland because of the crossover in accounts from the UK is a major focused market for us and with Whole Foods opening there. And the Benelux, France, Italy, Spain is a second major focus of markets for us. And then we will start to look at Eastern Europe.

You know, one of the big problems in partnering up with someone in Europe, there is not a big natural/organic company over there, and we truly understand it ourselves. Between Philippe and David Arrow, we have an excellent management team in place now and an infrastructure. Prior to that, we did not have an infrastructure in place in Europe. And with that, if I had to say right now, our plan would be to go it alone. We're looking at some unique acquisitions in Europe. And Hain Celestial has a pretty good name in Europe today, and I think there's a lot of opportunities and a lot of things we can do.

Christine McCracken, Cleveland Research.

Just on teas, you had said I think that you're planning on rolling out these teas I guess in the next couple of months. I'm just curious on the timing. Did I misunderstand the timing of the rollout in the middle of the summer? It seems like you would want to roll those out in the fall, or is it just that it takes awhile to get them on the shelves?

Christine, what I said is the Saphara would start to rollout -- I mean you want to roll it out when it is ready to get it on the shelves. So, number one, we're going to start rolling this out come June, July -- the Saphara brand -- and the new packaging will start to rollout somewhat in the first quarter to be ready for September, October, November retail. Tea season really starts in September.

But one of the big things you heard me say before, we're running down inventories of where you have the new chamomile ready. We will start to ship it when it is ready.

Andrew Wolf, BB&T Capital Markets.

Congratulations on the quarter. But I do like everyone -- like a lot of the questions, I want to focus on the tea area.

I think, Irwin, you talked about three I am calling them sort of line extensions, but maybe you can be more precise if my rhetoric is wrong. But, in any case, the pyramid bags, coffee and then you said you are studying ready to drink, could you just give us a sense of on each of them what the possible sales opportunity is, and what the margin effect would be on the division or on the Corporation -- or on the corporate P&L?

You heard what I said before. Listen, tea today in one of the biggest quarters was 10% in sales, okay? And, from a standpoint, herbal teas are the biggest part of our business with some of our biggest margins. If you come back and look at our pyramid teas, they don't have the same type of margins that our herbal tea do. And if you come back and look at coffee, they have some good margins. You come back and look at ready to drink, and I am not ready even to look at margins yet because we're still finalizing a bunch of concepts there.

So my point is, it is irrelevant right now what the margin is. I think the most important thing is we look at the tea category evolving, and you heard what I said before. When it is warm out, it is a 7% drop in tea. People are moving to a category called ready to drink or moving to pyramid teas. We just need to be in those categories. Because whatever the margin is, we're losing margin because we're losing consumers, okay?

So I think the big thing right now is to make sure we are in those categories, have great products in those categories, and make sure we're not losing consumers. And honestly it is too early to tell you what kind of an overall impact it would have on my margin. But I to you what it does, it has a big overall impact by losing consumers and not having an offering for that.

Ed Aaron, RBC Capital Markets.

You guys are running a tight ship with the follow-up questions today.

I wonder what happened to you there, you know. I thought you fell off.

I just wanted to ask your opinion about a comment that Dean Foods made today about the Horizon Organic business being more challenged because of the amount of supply that has come online in that category. I'm wondering if that is just an entirely specific issue to that particular business or whether there are other categories in the industry where that could be an issue? I know a number of categories have been trying to ramp up in terms of supplies. So I just wanted you to address that if possible.

Well, that goes back to the question before about private-label. I mean that and milk has never been a branded category. We buy milk, okay? And that is a perfect example of where that is happening and where it commoditizes when you have an oversupply.

Now, from our standpoint, where does it present us opportunities? I mean we have had the hardest time finding organic milk and organic whey for our Earth's Best formula and held us somewhat a bay at expansion. We're looking at Earth's Best kid's milk and infant milk with DHA and could not find milk or could not find ready to drink milk, which gives us an opportunity now.

So I think what we will look to do in that opportunity is from a branding standpoint, and we think there's a market out there to capitalize on that and what is the next evolution there. So we are not seeing that in any other category. If anything, we're kind of happy we can get some organic milk. Because it is going to help us in some areas.

John McMillin, Prudential Equity Group.

Ira, you went through some adjustments to gross margins for UK. What was that all about again?

John, if you go back to when we first acquired and talked about our UK acquisition back in fiscal '06 --

But if you are going to make adjustments to gross margins and make adjustments for acquisitions coming in and out, can't you give us the numbers for sales coming in and out and kind of give us that organic sales number that at least I want? Do you see my point? If you do it for gross margins, why cannot you do it for sales?

Well, John, there are a lot of reasons why, and we have discussed this quite frequently as to why we don't believe organic sales numbers are a meaningful measure of what this business is all about.

When you look at trying to level a playing field in terms of gross margin performance when we have focused on improvements in margin, it has been a mantra around here now for two years, we think it is appropriate to look at it from the perspective of the oddball, so to speak, and trying to put it on a year-over-year basis. We no longer adjust for the Hain Pure Protein FreeBird business because that particular acquisition has anniversaried. And once we anniversary what we did in the UK, we will no longer talk about that. So that is the position we are taking, and we will stick with it.

Pablo Zuanic, JPMorgan.

Look again it is a strategic I guess philosophical question. But when I look at Kashi and what Kellogg has done with their brand, it has been an umbrella and they have extended it to a lot of categories with big success. I'm trying to understand whether that is something that you guys could do more of? I mean obviously you gave examples of that in Earth's Best, but it seems to me that there is a little more potential for doing that than continuing to buy more and more brands. Can you walk us through that, how you can leverage better your core brands? Or at the end of the day, they are not strong enough to really do what Kashi has done.

Exactly and a good question there. I think you know take Health Valley. Today it is in cereals. It is in soups. It is in bars. It is in crackers, and we will continue to do that.

Arrowhead Mills, we're looking to take that -- you heard John say before we have gone into stuffings. We're looking at the frozen category on Arrowhead Mills. We're looking at the gluten-free category. in essence, we're also consolidating brands because a lot of people say we have way too many brands. And we took Ethnic Gourmet -- the Ethnic Gourmet into the tea category for Ethnic Gourmet. We have taken Celestial Seasonings. We have done a license deal on spices with somebody who has licensed the brand for us, and we've taken Celestial Seasonings into the frozen category into frozen desserts. We're looking at Terra right now into the confection category in regards to bars and things like that. We're looking at Garden of Eden into some other categories.

So instead of doing acquisitions, absolutely. We're looking at categories how to expand our brands into. And whether it is frozen, whether it is fresh -- and there are some things we're looking at right now at the WestSoy is how do we buy a productline and rebrand it WestSoy?

So exactly what you're saying, is some things that we're definitely doing. And we have decided to walk away from certain acquisitions for that same reason because we said, listen, we have the distribution. We have the infrastructure. We take one of our brands, and all it takes is finding a supplier which we can do to go into that category instead of spending the kind of dollars to buy it. And that is a big part of some of the acquisitions that we're walking away from.

At this time there are no further questions in the queue. I would now like to turn the call over to Mr. Irwin Simon for the closing remarks.

Thank you. So, with the end of our third quarter and going into our fourth quarter, it is a great time in the natural/organic industry. It is a great time. Continuously we're hearing about green. We have a group within our headquarters, headed by Ellen Deutsch, that is all over how we have become a much greener company and how our products and our whole environmental movement moves out towards the companies. And I must say it is something we have been doing and how do we get the next evolution, whether it is buying wind power, how we're making sure all our packaging, sustainable agriculture. I mean we are something we continuously focus on, which consumers today look at that.

Our sales growth is strong. Our margin enhancement is strong. I think the industry continues to evolve and consolidate with Wild Oats and Whole Foods potentially coming together, which I think will be great for the industry.

We've got a lot of exciting things to come back at Celestial. I know there is a lot of questions on Celestial and somewhat some concern. But I feel great where Celestial is. We have owned Celestial since 2000. It has been a great growth vehicle for us. It has been a great provider of income for Hain. And [Moe Siegel] said a couple of times, Celestial had to redefine itself being a 30-year-old brand, and right now is that time it has to redefine itself and break out into some other categories. And we're pretty excited. It is a real strong brand.

European expansion for us is tremendous and tremendous growth. You know, I think there's a lot of people that don't look at Hain at what we have in Europe today and what we're doing in Europe. And the same with the Personal Care. I don't think they totally understand the opportunities in Personal Care today, the opportunities to grow in Personal Care for us and the opportunities to enhance our margin and where we go with that.

So with that, we have a lot of exciting opportunities. We have a lot of exciting places to go. Asia is just a whole other world for us, and the demand for natural/organic in Asia is just tremendous what is out there in front of us.

We have an incredible team. You see from a bench strength standpoint. As John is picking up the pieces of Personal Care, how between Maureen and Adam and the group here in Melville, where he is -- Marla and Rose -- he has delegated a lot of these pieces, too. You know from what Pablo asked me about acquisitions and that before in other brands, Ellen and her group are working on categories today that we have looked at acquisitions, did not make sense for us, and how do we take our infrastructure and rollout these productlines with some of our brands. And we're really focused on that today.

We have got tremendous things happening in the Whole Foods service in restaurant area, which were continuously rolled out. So a lot of exciting things happening. And, as we move into our fourth quarter of fiscal 2007, we are well into fiscal 2008 and pretty excited about that. So thank you very much for your time, and we look forward to speaking to everybody soon. Thank you.

Ladies and gentlemen, that concludes the presentation. You may now disconnect, and have a great day.