Hain Celestial Group Inc (HAIN) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Hain Celestial Group Earnings Conference Call. At this time all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS)

I would now like to turn your presentation over to your host for today's call, Ms. Mary Anthes, Vice President - Investor Relations. Please proceed.

Thank you, Eric. Good afternoon. I apologize for the technical difficulty we experienced in [keeping] on the call. We are trying to be more efficient with today's call and we will keep our remarks to a limited amount of time.

I'm pleased to be with you today to introduce our second quarter fiscal 2008 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. Irwin Simon, President and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer; and John Carroll, Executive Vice President.

The Company has continued during this past quarter a review of past practices in connection with grants and stock options in response to the notice it received from the SEC that it was conducting an inquiry into the Company's stock options practices. This review was conducted with outside counsel for the specific purpose of the investigation at the direction of a group of independent directors. The independent directors completed the review and reported their findings to the Board of Directors which the Company reported through a press release in its annual report on Form 10-K for the year ended June 30, 2007, and its quarterly report on Form 10-Q for the quarter ended 2000 -- for the quarter ended September 2007 and on January 31st, 2008.

In light of the government investigation, the Company declines to comment further on the matter at this time.

Our discussion today will include forward-looking statements which are current as of today's date. We do not undertake any obligations 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 2007 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 at www.hain-celestial.com under Investor Relations. Our call will be limited to approximately one hour so please limit yourself to one question and a follow-up question. If time allows we will take additional questions and management will be available after the call for additional follow-up.

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

Thank you, Mary, and once again we are sorry about the technical difficulties and we will tighten up a lot Organic Foods the information we are going to talk about today.

Hopefully a lot of you had the opportunity to look at our press release. Sales for the quarter $276.2 million versus $230 million, up 20%. Our gross margin which we have been focused on a GAAP basis, 28.7 versus 30.4 but if you adjusted for Fakenham input costs and acquisitions, actually acquisitions of our Alba and Avalon business offset our other acquisitions of our protein business and our tofu business; so they offset each other, but higher input costs of 1.7, our margin would have been 31%.

I will talk about in a little while how we've -- the higher input costs and how we offset them. But still with costs the way they are I think we've done a great job on our margin.

Our SG&A, 18% versus 19.5 on an adjusted 17.4 versus 19.2. And I think what we've really done is really focus on the SG&A of the Company. Really focused on the cost but more important what it shows you what kind of job we're doing, integrating these acquisitions and the cost-efficiencies that we are really getting out of those and I think there's still a lot of opportunity.

Net income for the quarter $15.7 million versus $14.2 million - up 10.2% but on an adjusted basis $18 million versus $15 million, up substantially. EBITDA for the quarter 33.6 versus 29.6. GAAP up 13.6 on an adjusted basis 37.3 versus -- 37.3 versus 31, up 20.6 for the quarter on an EBITDA. Earnings per share $0.37 versus $0.34, up 9% on an adjusted basis. $0.43 versus 37% -- $0.37 -- up 16% for the quarter. So good financials. Good numbers.

I think one of the things that you are going to see me talk about today, you know we are knocking the lights out on sales and sales are strong. Consumption is strong. Business is good out there and business happens to be feeling good about business and business is continuing that way.

So as everybody else is feeling it, it's a tough market on costs, but [when] a tough market on cost we are doing a lot about it. Our input costs in the quarter as a company, which we didn't plan for as we put our budgets together and planned, were up $5 million just in this quarter. So how did we make it up? Productivity, higher sales, cost savings, efficiencies. I think we did a great job on that.

We've taken a price increase at the end of December on grocery and frozen. We've taken a price increase on personal at the end of December. You heard me talk about taking a price increase on tea effective October 1st which other people have called. We've taken a price increase in July on our chicken business and in, actually, October on our turkey business. And all these prices have actually stuck and been effective.

You know, what do you when consumption is good, costs are good and you've got costs going up the way they are and I'm not the first consumer packaged good company out here talking about cost today and I think everyone are, but what are we doing about it? We have a great plan in place and as we sit back and understand what we need to do, we are really watching our expenses as a company. Our productivity and that's where a lot of these costs have come from and cost reductions is our productivity and there's more opportunities.

We are meeting with each of our major customers and over the last 35 days or so since the beginning of the year have met with quite a few of them. And we are focused on productivity costs with our customers whether it's freight, whether it's distribution, whether it's manufacturing. And I've got to tell you. They are thinking the same thing because the easiest thing to do is pass on price increase, and you are always worried about pricing [authenticity], but we have customers that are committed to take those costs to the business and customers that are really partnered with us on efficiencies in the business and how we grow the business.

I got to tell you. I feel good about it.

The other thing as a company that we are really looking at, if there is a slowdown in the marketplace which we are not seeing yet, where is there other business opportunities? And what I can say is the category is strong, consumption is strong and business is strong, but we have a good plan out there to look at additional business opportunities and we are seeing some of them become effective already. So where are we getting some of the great growth, Terra Chips up double digits, Earth's Best, Imagine Soups, Arrowhead Mills, Bread Shops, DeBoles, Spectrum.

You know, high single digit growth. Garden of Eatin', Rice Dreams, Soy Dream, Ethnic Gourmet, our tofu business doing quite well with our Seitan and Tempeh, so getting some good things happening there.

Let me talk about Celestial. Celestial for the quarter -- we really have a good plan in place and I'm really excited about what is going on with Celestial. Our consolidated revenue was flat year-over-year. We took the price increase in December. Our retail prices were up $0.16 versus a year ago. Our deals dollars are way down. We reduced volume on deals by 12%. We've done a great job of driving holiday displays. We re-established a lot of consumer advertising, consumer communication, we rolled out coffee, Saphara in October. The redesign of the package is 100% direct now and about 60, 70% through distributors so it is getting out there.

So it's important we are getting the message across to consumers. We grew incremental consumption in key accounts through strong partnerships. And that means we are working with retailer customers on certain products, on certain merchandising, on certain displays. Our mass market in the last four weeks is up significantly and we are seeing, for one of the first times, good growth in natural food.

So we are on our plan. Our plan is not to be the cheapest tea out there and that is what Celestial was. And at the end of March all our new packaging will be out. We would have fixed the mix at shelf. Our promotional dollars are being promoted at shelf so you are seeing 2/$5 not 2/$4. And actually we are not really seeing a decrease in sales at higher promotional dollars.

Others have taken price increase even when the category is soft. There was concern with us taking a price increase and two or three of the other major brands have taken a price increase effective January and effective May; and we may take another price increase again in May. A lot of new products have come out. Our Holiday tea, Valentine's Day teas, iced teas. We are really working on some things with Ready To Drink, our Cool Brew, and we are getting really good acceptance from coffee and Saphara. And what I can tell you is our January sales were quite strong and which shows you, coming off a December quarter; so we are quite encouraged of what is going on in Celestial.

Our Canadian business, overall, up 15.2%. Strong performance in Terra, Garden of Eatin' Imagine, Earth's Best, Yves, Celestial, Imagine Soup, and Casbah. We introduced into Canada the Saphara organic tea and coffee. We launched a major tea party. Lucky enough we had a big snowstorm that day so seeing some good results and good demand in our Canadian market.

Protein business -- our chicken business is up 26%. Our margins absolutely were affected. Actually, if you take our first six months we were affected almost $1 million on feed costs. But because of our sales, such strong sales we were able to achieve our budgeted -- our budgeted sales and our budgeted profit there. We've really managed our live cost, initiatives on [plant] savings, major cost reductions and we feel good about the growth there.

We introduced a lot of new frozen products, ready to eat products. Our turkey business, Plainville, which we closed in September grew almost 20% and big increase in whole birds. Big increase in cooked, up 27%, and tremendous plan savings. So we feel good with what's happening there.

From the UK and Europe market combined, up 15%. Good growth coming from UK. Good growth coming from McCartney. As you saw, we had some onetime costs with a Fakenham plant start-up; and that is taking basically three plants and bringing them into one. It's taken a little longer than we expected and we probably will have about another $1 million going forward. But at the end of the day, like we did with Westchester and we proved with Westchester, we are really going to have a real good frozen business in the UK and Europe, and seeing good demand.

And I have got to tell you we really got some good support from the McCartney family. We will bring McCartney into fresh. As a matter of fact we are looking at the McCartney brand right now in the U.S. and maybe even Asia. So we are pretty excited about that.

We are excited about our brands in the UK and Europe. As I said (inaudible) was up 17%, Rice Dream up 13%, our Terra Chip business up 49%, Earth's Best shipped into the UK for the first time. So we have some good things happening in our European market.

In Asia, Hong Kong, Singapore, China, Korea, and Japan are our identified markets and we continue to ship into those markets and continue to do some unique things there and pretty excited about the Asian market. So let's look forward. January, strong month. Good sales, good consumption, feeling good about business.

So good things coming from our tofu business which we acquired in June. Our Seitan tofu, Tempeh business, a whole new category for us and really some good things.

Our diapers, Wet Wipe business that we acquired in mid-December. We are in the midst of launching our Earth's Best diaper, Earth's Best Wipes, rolling the products out across the U.S.; was a $3.54 million business and we think just a tremendous opportunity in that category and pretty excited.

I'm not sure if some of you heard today in regards to possible sources of (inaudible) baby products; none of Hain products whether it's Earth's Best or Avalon Babi contain any and it just goes back and shows you the concern of ingredients in products today. And I got to tell you, that is just the beginning of people recognizing ingredients in that, whether it's in personal care products are other products.

And again I can't tell you how many people really concerned about chlorine in wet wipes and diapers really converting over to chlorine-free diapers.

Our international business continues strong and we are looking at tremendous things growing internationally. The acquisition pipeline has picked up. It's been a year since we've really done any major acquisitions because we have been disciplined. We are multiples in prices. As the private equity markets have changed, a lot of these acquisitions have come back to us and we are relooking at them and looking at some good categories and some good things.

I sit here today and show you the strength of Hain, the depth of Hain on our brands as we have really partnered up with our partners out there the retailers and our distributors to really look at how to grow the business and how to take costs out of the business, because that's a major major plus for them and that is something that they are looking at is not just to raise the price. As we look at categories we continue to move into categories and evolve in categories as we did with Earth's Best. You know take the brand name into other categories. We will continue to look at that with other categories and other brands.

From a private label standpoint, as other retailers move into private label, we are looking to do some more and more business in private label where it makes sense, where we have supply and where we have capacity. What we are not going to do is just me, too products and we are not going to use up any of our capacity or any of our ingredients.

So with that we are looking at lots of new business opportunities and lots of new products out there. Moving ahead, feeling good about our categories, feeling good about our business, feeling good about where we are in January. We are continuing to confirm guidance for fiscal '08. What I'd like to do is turn it over to John. He will take you through some of this grocery and the personal care business. Thank you.

Good afternoon. Let's start with Hain Grocery and Snacks.

Q2 was a very strong quarter. Topline growth was up 8% plus which represents organic year on year growth as there were no acquisitions in this line. The growth was driven by a combination of consumption increases, ultimate channel gains, and new product sales.

As indicated in the press release we saw growth across the entire brand portfolio; so instead of listing all the growth brands I'd just like to highlight a couple of great stories within our portfolio that reflect our continued investment across our core brand.

The first brand is Terra, which is an example of a great turnaround story by our marketing and sales team. Q2 was the fourth quarter in a row that we saw growth on the Terra brand after a year decline. This turnaround was driven by velocity increases on our largest segment, Terra Exotic, from a product improvement and a better value proposition and a strong consumer response to our latest innovation Terra Stripes in Blue.

The second brand I will highlight is Arrowhead Mills. This traditional natural foods brand is a great example of accelerating growth with innovation. Arrowhead Mills grew 14% in Q2, reflecting continued growth on our baking mixes and ingredient segment, driven in part by gluten-free products as well as the introduction of our first-ever holiday products in the line. Arrowhead Mills Organic Stuffing and Holiday Cooking Mixes. This holiday innovation program was a sellout for us in Q2. It also has led us to enhance next year's program with some great new holiday items across a few other categories that will be unveiled at EXPO West in March.

Turning to the middle of the Hain Grocery and Snacks P&L, we experienced unprecedented cost pressure as Irwin discussed on input costs and fuel-related expenses in Q2. We saw continued cost increases for organic corn, soybeans, wheat, canola oil, fruit and dairy as well as packaging and diesel fuel. In fact our Q2 input costs alone for Hain Grocery and Snacks were up over $2 million versus a year ago.

Additionally, although we announced a 4% price increase in November across the majority of our grocery and frozen line, we will not see benefits in this price increase until second half. Despite these challenges our Q2 delivered product costs actually improved 20 basis points as productivity offset continued rising commodity and fuel costs.

Q2 was the second quarter in a row that the Grocery and Snacks Operations Group generated over $2 million in productivity savings. Key to these productivity savings were throughput and yield improvement on some of our biggest product lines including the Terra line and (inaudible). Logistics savings from realigning our logistics footprint distribution footprint on some key categories and long positions we took on some of our most volatile commodities, namely corn and wheat.

The cost outlook continues to be challenging as we enter the second half. While we expect to have aggressive productivity in place, we do not see any relief on the input costs and actually expect indirect fuel-related expenses to accelerate in the second half as suppliers try to offset their own cost increases by passing through pricing.

As a result, we anticipate that we, like other CPG manufacturers, will need to implement another round of pricing in the second half. This will be required along with productivity simply to maintain our margins in this inflationary environment. We will release the details of this increase in mid-February.

Moving down the P&L, our Q2 SG&A expenses were down 50 bips in Q2. We continued to exercise strong discipline on our operating costs which is essential in an inflationary environment. Our Q2 inventories were higher than a year ago, as we are carrying an additional $10 to $15 million on the fast-growing Earth's Best brand. This is consistent with what we discussed in our Q4 call when we said we would maximize our fresh pack productions in September through December to ensure supply for our fastest-growing brand.

Our inventories excluding Earth's Best were down versus year ago as tight cash management continues to be a priority for the Grocery and Snacks Group.

So to conclude on Hain Grocery and Snacks, Q2 was a very strong quarter with a topline increase of 8%, delivered product cost improvement, despite rising input and fuel cost as well as continued investment on our core brand and continued improvement in our SG&A expenses as a percent of sales.

We are facing cost inflation pressure like everybody else in the CPG world and we expect to announce another round of price increases to help, along with productivity, to offset these costs and maintain our margins.

Moving onto Personal Care. Q2 saw solid topline consumption growth for personal care, driven by our three top brands. Jason, Alba and Avalon Organics. This growth reflected gains across all channels. Natural grocery [en mass]. Gross margin improved, driven primarily by a more favorable mix from the Avalon Organic and Alba brands. Just as with Grocery and Snacks, Personal Care is also being pressured with cost inflation especially in the areas of fuel-related packaging costs and co-packet costs for Avalon.

We put into place a 3 to 5% price increase across both the Jason Avalon lines from which we will begin to benefit in the second half. SG&A was down 90 basis points as the benefits of our Jason and Avalon consolidation continue to ramp up. This benefit was not fully realized in the quarter as we absorbed the cost of some severance and headcount duplications, while we transitioned functions from our Culver City to Petaluma offices.

The integration of Jason and Avalon is now essentially completed. We are now one reporting unit, Hain Personal Care, with one management group, one organizational structure, one broker network and a common IT system. Our focus now shifts from driving profitable growth while we integrate to accelerating profitable growth via innovation and productivity.

Toward that end we are finalizing evaluation of aggressive evaluation of aggressive SKU rationalization programs similar to that executed in Grocery Snacks a few years ago. We believe that a Personal Care SKU rationalization could potentially reduce business complexity, drive margin enhancement and improve operating efficiencies. We are also initiating a project called Streamline to leverage the procurement scale of Hain Personal Care starting with a real focus on reducing our packaging unit and costs.

We are also implementing an integrated Hain Personal Care trade promotion program in this second half that leverages our scale and reduces inefficient trade spending on a brand by brand basis and deploys it against the consumer.

We are also creating a Hain Personal Care R&D Center of Excellence at our Culver City plant that will drive meaningful innovation across all of our Personal Care brands.

And, finally, we are identifying current co-pack lines that we will be able to bring into our Culver City plant to improve quality and margin starting in the second half.

So to summarize on Personal Care, we continue to see strong consumption growth on key brands. We experienced growth margin improvement as well as the reduction of SG&A from the consolidation of duplicative functions. We are feeling the effects of cost pressure on this business as well and have implemented a 3 to 5% price increase that we will realize in the second half. We have essentially completed the integration of Jason and Avalon into Hain Personal Care; and Avalon continues to thrive as a part of Hain.

Our focus now shifts from driving profitable growth while we integrate to accelerating profitable growth via innovation and productivity. Overall we continue to be very well positioned to take advantage of the continued growth of natural personal care both in the natural channel as well as in channels such as grocery, drug, mass and (inaudible).

Now I will turn it over to Ira Lamel.

Thanks, John. Good afternoon, everybody. I am just going to go over a few key items and not go through the normal full-blown results review.

As I said in our press release input costs are rising, a phenomenon that the entire food industry is facing. During the second quarter, as Irwin said, we saw 170 basis points of pressure on our gross margin from those input costs. When adding the effects of these cost pressures, along with the acquisition integration and start-up costs at our Fakenham United Kingdom plant, our gross margin would've been at 31% this year versus the 30.6 as adjusted last year.

Included in that 170 bips of cost pressure was an increase of 28% in the the feed cost in our Hain Pure Protein unit and year-over-year diesel fuel increases of 13%. And John went through some of the impacts of other commodities on our business. Acquisition activity was virtually neutral on the gross margin line with Avalon Alba adding 90 basis points to our gross margin and our other acquisitions - the combined Plainville Farms, Tender Care and tofu taking away 80 bips.

And, last, as we continue to grow our company as a whole, Celestial Seasonings continues to become a smaller percentage of our total sales. Celestial was 270 points lower as a percentage of sales this quarter as compared to last year's second quarter. This phenomenon reduced gross margins by 75 basis points. For the full year we expect Celestial Seasonings will come in at about 9 to 9.5% of our total consolidated sales.

There's a couple of other things I would like to point out to you. Adjusted operating income was up 50 basis points this year to 11.9% versus last year's 11.4. Our adjusted EBITDA was up $6.5 million this year versus last year with this year at 13.6% for the quarter. Our current run rate for depreciation and amortization for the full fiscal year is $18 million. Our operating free cash flow was $33.4 million for the trailing 12 months ended December 31st. Our days in the cash conversion cycle have increased a bit going from 68 days last year to 72 days this year, as the result of having higher inventories in our Personal Care unit, which is norm for the industry, with the acquisition of Avalon and Alba having higher inventory at Celestial Seasonings with our new packaging relaunch and the introduction of our Saphara teas and our coffee. And further with the planned buildup in the number of days of ingredients we carry for our Earth's Best jar baby food brand in order to protect our source of supply as we continue to support the fast growth in that brand.

And last as Irwin mentioned we reconfirmed our full year guidance. We're at $1.025 billion to $1.050 billion in sales and for the earnings per share line we are at $1.38 to $1.42. With that, we are going to open it up for questions.

(OPERATOR INSTRUCTIONS) Scott Mushkin with Banc of America.

It's actually Caroline calling in for Scott. I just had a question about the opportunities you are seeing in the mass channel. I know you mentioned improvement with the Celestial brand, but in general I think especially in the center store are you seeing additional opportunities for the Grocery and Snack category? And could you talk about maybe some initiatives that you are having to continue to drive sales through the mass channel?

I will start it and then John can jump in there any time. I think there's a couple of things. There's certain categories and certain product lines moving over from (inaudible) natural section to the main aisle. So that's No. 1 and I've said it before when we see a product move over from the natural section in the main aisle, we see it increase 4 to 6 times in sales and this natural organic becomes a bigger part. Retailers are looking at that today and meeting with a lot of retailers, that's something high on their list. So that is No. 1.

No. 2, more and more products in the stores as they are seeing, there's major, major demand. And there's a lot of retailers out there where we only had products in half the stores and they are looking now to bring them into all their stores. So just, if we look at 4 or 5 of those and we look at them as $5 million opportunities, that's a $20 million opportunities for us and there's quite a few of them out there as they get on a line with Earth's Best. Earth's Best, Sesame Street. As I look at Terra Chips, as I look at Spectrum which is one that 80% of Spectrum went through natural food stores so we expand that more and more into grocery.

Our Imagine Soup business coming out of the natural section going over to the soup aisle, Earth's Best coming over into the -- actually the baby food aisle. But I must say today is Earth's Best is the No. 1 organic baby food out there today where at one time 85% of Earth's Best was only sold in natural food stores.

So just by sheer number of stores or sheer number of products. And the big opportunity for us also what you heard me before, me saying myself saying is logistics-wise what retailers are looking at, how do I deal with one supplier? How do I take cost out of this business? And how do I do it much more efficient and much more effective?

There's tremendous things that we are doing in regards to LTL full truckloads, backhauls with our partners, our retailers and our vendors out there to take out costs but to sell them more products, and to replace other products out there with some of our brands. Hopefully that answers your question.

Yes and I guess just one more follow-up, do you anticipate making any more investments in terms of personnel in the next few quarters? Are you seeing that as well?

In personnel. Well, I think regards to our business I mean it's growing. And the building the bench trends and I think one of the things is we do future acquisitions what we'd like to have in place is people within Hain that we can move around. And I got to tell you, there's a team here that has stepped up in all of the aspects whether it's Spectrum or Personal Care and what has been spread around.

And there's a couple of things. A lot of the people that were running the grocery/frozen snack business have taken on additional responsibilities in the Personal Care side of the business and as we look at additional acquisitions and opportunities, there's more and more of the responsibilities going to be given to the current management here. But we are going to need more and more bench strength.

The other thing as we look here from the corporate standpoint. There's a lot more other support we're needing as we become bigger. There's other things we need in Europe. So adding personnel is something that absolutely is going to happen here.

Ed Aaron with RBC Capital Markets.

I want to focus my questions on the gross margin line. First of all the 170 basis point impact from higher input cost. Is that net of what you got back from price increases?

No. That's the straight up cost increase pressure that we have felt, Ed. Price increases which we've put through in the past have always looked at what cost pressures we've seen through that point of putting up the price increase. So we have not really put in a price increase yet that addresses the very recent skyrocket in these input costs. So we are going to the looking at that as we go forward.

But price increases from the past, we've often said when we do them they are meant to be neutral to the cost-increase pressures that we've had in the past particularly when we were feeling high pressure from fuel. But this latest pressure is very new across the food industry and we've not yet addressed it with a specific increase.

Just one point. The price increases we did put in place as I said in the discussion were mostly primarily benefit in the second half as they were announced in November. And with lead times we will not began to realize them until the second half.

And it takes a good six to nine months to get a full price increase through with promotions, and catalogs, and changing out there. So I mean even if we take pricing in July and announce it we are really not seeing a lot of benefit from it until say January, February. So and as Ira and John said, the pricing we saw in this quarter was new cost that we never even planned for.

Right. Then secondly I was a little bit surprised -- I was a little surprised to hear that the benefit to margin from the Avalon acquisition was almost fully offset by the other acquisition. And I'm just trying to get might head around the pace at which you think you can ramp the margins up on those other businesses. And also does that 80 basis points of margin -- I guess dilution from those other acquisitions -- does that include the -- I guess what you might call non-recurring charges in the UK that accounted for $0.03 this quarter?

No. Those are separate. The Haldane acquisition which is where this start-up costs are coming from, from the combination of those factories that Haldane brought to us up into the Fakenham facility, is separate and apart. The 80 points of drag that comes from the other acquisitions is predominantly from the Plainville Farms acquisition. The other two -- Tender Care and Tofu -- were much smaller. But Plainville Turkey Farm which is a protein business much like Hain, much like FreeBird -- excuse me -- had substantially lower margins than the rest of our business has. It is a bit higher than FreeBird, but it's still almost only half of what our overall gross profit margin is in the rest of the business. So that is where most of that drag comes from.

Scott Van Winkle with Canaccord Adams.

Couple of questions. First, John, when you mentioned second half you are talking second half of the calendar year not fiscal, right?

No. Second half of the fiscal year.

So you are talking second half of the fiscal year. So you mean impacting current quarter now from the price increases?

That's correct.

What was the -- Ira, for you what was the impact from currency?

Currency is about 2% on our overall consolidated sales.

One of the things you have to focus on with currencies is even if rates are going up, let's just take the pound and the euro. If they go up 8% just to make it nice and round, given that our international businesses are only 25% of our consolidated total, the impact probably comes in at about 2% of that.

And when you are putting through price increases or really any efforts you are making promotions or what have you, how much easier it is it to get it into the independent channel versus supermarket? I mean is it a significant difference? Is that something we have to consider as your channels shift going forward?

It's not difficult. It's just timing and changing promotions for independent promotions or -- . You know we said all our promotions are sometimes six to nine months and when pricing comes, once a promotion is set, they are not going to change it.

So it's not more difficult to get into grocery or mass market, it just takes

And John if you mentioned soup, I apologize. I must have missed it. Can you give me an indication of how Soup performed within the Grocery segment and if there's been any change in the trend as we go into the next couple of months? I think January and February are generally strong.

Actually we saw a very strong double-digit growth on Imagine as well as good high single digits on Health Valley.

Terry Bivens with Bear, Stearns.

Irwin, as you know, I am both a tea and coffee connoisseur but since I'm going to adhere to the one question rule, just want to ask you something about P&L here. If we look at our model, it looks as though sales X as you cycle through some of the acquisitions are going to begin to decelerate a bit from what we have seen in the first two quarters. So we are looking at kind of flat gross margins on the year.

Is that realistic now in light of the push you experienced in this quarter?

With all the input pressures that we are seeing I don't think that is and unfair conclusion. Unadjusted margins without any addbacks for the various items clearly are under pressure throughout the food industry. So if we are flat for the rest of the year, which is a year-over-year flat I think that's pretty good and we will be somewhat satisfied with that.

Certainly we want our margins to improve. John talked about all of the efficiencies that have gone through, that have offset a lot of the pricing pressures. We continue to get those efficiencies. Hopefully when we are completed with the integration and start-up costs in our UK facility we will get some improvements their as well on a reported basis.

Yes, Terry, just to add to that. I think that a couple of things in here. Yes we will get some benefit pricing that we have not gotten the first half. The second thing, there's a lot of efficiencies we continue to work on here. There's a lot of things we are working with our customers on. And last but not least, sales are strong and sales continue to be a great solver for a lot of problems out there and sales continue to really accelerate.

So with that, I feel good about the margin. Listen, if you sat here last year and asked me where corn would be, where soy would be, where oil prices would be and fuel would be, I would say, you were absolutely crazy. But considering where everything is today I feel we've done a great job on managing our margins and I've been all over margin enhancement, margin enhancement. And I think we would have hit our margin enhancements number today if we never had all these cost increases and we were back two years ago prices.

So I mean we are really focused on it and I think we absolutely can do it.

And I think just one more item and I know it's a repeat of what I said during my little discussion about gross margins. Celestial Seasonings is now less than 10% of our Company sales and the overall and, Terry, you go back with this Company far enough to know when we first did that transaction with Celestial Seasonings, they made up about I think 24% of sales. So that in and of itself is an embedded dilution in the margin line, which we have offset with a lot of other things that we've been doing.

Thanks very much.

And, Terry, you are not going to (inaudible) are, our coffees a good product and so is our tea.

Andrew Lazar with Lehman Brothers.

Just a few very very quick ones. You have about $22 to $23 million running through the sales line in terms of acquisitions in the quarter. Is that about right? I'm just trying to get a sense. It seems like organic growth accelerated a bit I guess the past couple of quarters, but I want to make sure that is directionally right.

I think you are directionally on track.

Then I think in the release it mentioned that tax rate might be lower for the full year. You have a sense of (multiple speakers) what that is?

The 37.5 is really the rate we set out at the beginning of the year. It compares favorably to the prior year by a little bit for a couple of reasons. The first is, last year's full year rate had some special transactions in it overseas. If you remember we had made the sale of our Biomarche business and we couldn't get a deduction for the goodwill.

So that increased last year's rates so it's come back down to a more normal rate. And then our tax rate again is probably a little bit better than the prior year because of the mix of where our income is coming from. Overseas, our income is taxed at a lower rate than our income is here so the rates come down a little bit as a result of that. But the 37.5 was our estimated rate at the beginning of the year.

And then have you -- is there any way to get a sense of how much your key ingredients are either hedged at this point or -- I noticed you are trying to get a sense of what your level of visibility is now, looking forward for the rest of the fiscal year on your key inputs.

I think just coming back from our protein side of the business we are pretty well covered out on grain and soy and corn for the rest of the year. So we are okay there. On most of our key products, [Hibiscuses] which has gone up incredible. I mean we are okay there and again the two big tea companies took price increase much bigger than we did in January and another one took a price increase in May which we may follow.

So if we aren't covered we will take another price increase in May. Snacks, we are covered. I think the big unknown is where oil is. Canola, but we are covered. I think from Personal Care, we are pretty well covered. But I think John had some wheat and corn not knowing where that's going I think that and soybean. That's the three big ones up there, that we are just -- and to some degree you know what?

The thing is which we're a little different to, Andrew, we are using organic. So it's not even if you are covered, you are sometimes not covered out there. Okay? So that's why what we're doing, that's why you see our inventories in Earth's Best go up because we are buying as much as we can and out there because, just No. 1, volume is tremendous and No. 2, whenever we can get our hands on it we will buy as much as we can.

So I'd like to say we are out there hedging as best as we can, but I'm not sure anybody is that good out there today. The hedge.

And, then, in terms of (inaudible) with sales I guess you obviously seem pretty confident about where that is going. To date I would assume then that it's just you haven't seen much in the way of broader consumer trade-down whether it's to private-label or value-oriented brands. It's a little different when we are talking about pure organic and natural customer to some extent, anyway, but trying to get a sense of what you're seeing out there anecdotally.

Well I'll tell you a couple of things. What I'm seeing, what I'm hearing is we are meeting with our customers. You know I think retail is much better than people believe it is. I believe that people are not going out to restaurants and are going to supermarkets and purchasing and staying home.

At the same time is there is some soft spots in the U.S. which may be softer than the other? Absolutely. But I think so far and this has continued into January and January ended on Thursday, we saw a much stronger January this year overall business than we did last year in that is across the board. Not one category here, etc.

You know if I sit back and the big thing with our team is, we sit back and sort of say if there is a softness and that's what I've said before what are we doing out there to make sure that we have new business and new business opportunities to make up for that? And what we're going to do is just drive sales because if we have margin softness because of cost, then the sales will absolutely pick that up.

But right now we are feeling good about the business. We are feeling good about the category and we are feeling good about the consumer and there's nothing in front of us today that saying that softening, can I predict in three months? No. But there is not an indication out there.

The other thing, Andrew, I think from a Company standpoint innovation, new categories, new products are something we have got to continuously do and you heard what I said before. One of the things we are also looking at now for the first time although we never --

You know, a lot of retailers are talking about private-label and we are looking at private-label where it makes sense for us and we think there's some opportunities. And we think there's some volume opportunities. We will not utilize or use any of our ingredients or manufacturing in our already demand for our products but we think there's some good growth opportunities there too.

[Jaclyn Ryder]. Lazard Capital Markets.

Wondering if you could just -- you know you're going to have great -- are we are going to see SG&A improvement from your Personal Care business, UK. You've been doing an amazing job in the Grocery business with the squeezing out costs. Where specifically should we be looking over the next few quarters? I mean you really mentioned Personal Care as an area for more rationalization, but what other areas are you really going to go after and try to squeeze the costs out of?

I think No. 1 is sales and sell strong, we are going to continue to go after sales. I think that's No. 1. No. 2, from a productivity standpoint logistics and, today, logistics are one of our higher costs out there and logistics has become such a big percentage of a factor today.

So what we're doing is looking at making sure we ship full truckloads, not [LTL] anymore and how we get off that. We are working with our customers that they do a pickup on a backhaul and multiple ways there.

We are also as a company that's very much into recyclable and green. We are looking at multiple ways to change packaging. We are looking at ways to cut back on packaging; and we see tremendous savings on where it is a penny here, or a penny there.

So there's many studies and many cost proficiencies going right now on packaging. As John took you through Personal Care consolidating those two businesses from an SG&A and headcount standpoint we are looking at tremendous synergies and opportunities there.

In regard to procuring ingredients what has not [it] happened from purchasing standpoint from our Melville operation to our Personal Care operation to our Protein we now have a global head of procurement that's out there for curing products ingredients for us. We are looking for the best prices where before we were only buying in certain businesses.

So if we can each one of those get a quarter of a point, there's just tremendous savings there and that's where the big focus is, because what we don't want to do is focus on 10 of them and come up with one. But there are or five big ideas, Jackie, that we are really focused on where we are going to get our savings and unissued us from.

That's great and are you at capacity on any of your businesses from a manufacturing standpoint or do you have enough room to grow all of your businesses, what you have?

We today do have some capacity constraints out there and we are looking at -- in one of our businesses where we may have to build a new facility because the demand and growth. And as we look out over the next 4 or 5 years we may need -- we will need an additional facility.

As we today look at freight and distribution, where is the best places we ship to our customers around the country and that's a big one with our Snack businesses. We are shipping Terra Chips from [Nowacki], New Jersey to Los Angeles, California, and that's a long way.

The other thing is we are working with [rollers] today where we are a big user of blue potatoes and a truckload of blue potatoes coming from Washington State to Nowacki, New Jersey, versus Maine. We are working with that versus Long Island. So there's multiple studies and there's multiple tasks coming on from purchasing, logistics, manufacturing, and where we are going to move some of our manufacturing facilities. Because you know -- and the good news is there's demand for the product.

That's fantastic and one last thing. You were talking about direct versus distributors in the last few quarters. What is that number right now? I think it was last 55% going direct to your retailer? Is that unchanged?

It's probably still 55, 45 and there's a big difference in natural. Natural's probably a lot higher. Natural's probably 70 -- well [7] 80/20 and from a naturals standpoint 90/10 and, listen, our distributors do a great job for us. And I think at the same time we are working with them of how to take costs out.

And the other big thing which I didn't mention to you just ask me for in cost. 98, 99% fill rates are key out there because the last thing you want to do is be shipping product and shipping truck and cuts and shorts and stuff like that because all that money you are wasting a lot of space on a truck. So that's been another big thing.

We've got our fill rates up to 98, 99% here and our distributors have really done a great job partnering with us out there.

Thank you very much. Great quarter.

Greg Badishkanian with Citigroup.

Question on pricing. Are you seeing your competitors pass-through pricing price increases pretty similarly to what you are or are you leading those prices -- price increases?

I think we are leading those prices and I say this year if you are out there today, you're not taking pricing I'm not sure you'll be in business next year. Because there's no -- you just can't be out there and absorbing these price increases. I think people like us that take pricing first, listen, back when we announced our price increase in October on or August on tea, I think everybody felt here's a tough category, how can you take a price increase? Well thank God, we did take a price increase and then you saw the big guys come after us. Okay.

Everybody is taking pricing and meeting with our retailers out there. I mean, it's something they are seeing across the board and so it's part of business today.

Good. And in terms of your EPS guidance, that -- of those commodities that are not hedged, did that sort of assume a similar type of commodity price going forward for the remainder of the year? What does that assume?

That assumes that we confirm guidance and that we will, if there is some price increase and we are not hedged on it, with productivity with all the cost additions and that I mentioned before, we'll, between strong sales and strong initiatives out there, we will just have to offset it.

Andy Wolf with BB&T.

If John is still there, this is, I think, more for him. John, you mentioned in Personal Care I think you have plans for a SKU rationalization. And I just want to ask you, do you see the kind of -- I know it's a smaller business unit than was Grocery when you did the SKU rationalization there.

But do you see a similar type of potential positive outcome out of it that you got in dry grocery in margin and in sales and, really, in organizational focus and marketing? Is there that much to harvest there, if you will?

Sure, Andy. Look we are busy evaluating this, but we see the same set of circumstances within the Personal Care unit that led us to do a SKU rationalization in Grocery and Snacks; and as a result, we'd expect comparable -- comparable benefits from doing such an action.

The one thing there, Andy, the one thing -- and you were right in your question, the Personal Care unit itself is much smaller scale than Grocery and Snacks as a business unit, as a reporting unit. So while the benefit within the unit to itself may be the same as was with Grocery Snacks, the consolidated benefit may not be as great as it was for Grocery Snacks.

Absolutely. Got it. I just wanted to get a sense of it and using that as the benchmark that we could all understand.

And I also want to follow-up -- I guess, like everyone else -- on the margins. Just doing some quick math, 170 bips, the pressure and increase cost this quarter is about $5 million; and a 3% across the board price increase becoming effective some time around now, the second half of your fiscal year. On Grocery gets about actually it's a little under $5 million but around it and the same with the 3% price increase.

I mean, is that -- not that it was necessarily planned that way, but are we, is that kind of how we can get to, plus with your hedging and without any unanticipated further hyperinflation and some of your input costs, but is that more or less how we can get to a flattish kind of gross margin in the second half?

Yes. I think just as in your first question, you're right in phrasing your second question. The operating efficiencies in the leverage we are getting and what the operating people themselves are driving through is what is helping us offset some of the pressure. Now a lot of the pressures that we talked about with that offset are exceeded by the efficiencies, because you take what the effect was at Celestial Seasonings as I mention. That's another 75 basis points. And there are efficiencies within Celestial that have to be achieved; which that management team is doing an excellent job of watching and the Grocery Snacks team is doing an excellent job of handling.

And wherever it is that we have manufacturing operations, people are very, very focused on cost consciousness. And that is where we are helping to offset a lot of the increases that we are seeing.

Lastly -- and I'm sorry to violate this, but the backhauling idea just -- this would be like let's say a big retailer or distributor, whoever, coming to your facility actually bringing you some ingredients out of D.C. or -- what are we talking about? Or supplies and No. 1 and, secondly, just given the size of the organization, the scale, it sounds like you are probably one of the few organic manufacturers -- distributors, manufacturers out there, marketers that can actually do this effectively with another big organization.

I think what we are doing and making sure -- and I've had many meetings, John and I, with retailers and distributors. What happens is we have a distributor delivering product to Denver and he's going back to empty, freight now, Celestial, is a delivered price. They would go to Celestial and pick up tea -- and pick up a truckload of tea where normally they were going back with that empty truck. So it may be half the freight or we split it.

The other thing which we need to do with our customers and some of the things we are doing is better forecasting to ship directly from our factories, instead of going into a warehouse and having another set of hands touch it, and we are planning with that.

So what I can tell you is, we really have a strong initiative with our customers out there of how to take cost out of the business and not just sit there and keep taking price increase after price increase because I think the day of cheap food in America is over. And there's something we have to do about it and whether it's smaller sizes, better packs, cheaper packs and cheaper logistics, you know, we just got to be careful with retail pricing.

Christine McCracken. Cleveland Research.

Just wanted to touch base on -- in terms of the Personal Care rationalization. Historically you guys -- and you commented on this earlier but this is kind of a follow-up -- in terms of the drag that that might have on your business historically when you did rationalize SKUs that did hurt results for a few quarters. Is that your expectation and how would that roll out?

I think, Christine, what we want to do is have our full plan in place. And I think No. 1 it's not hurt it's how we go forward in [health]. And what I would like to do is let us have it totally in place with what our products are and what pack size are and what we are going to discontinue and how it can help margins not how it can hurt. And I think that is something we are not ready to talk about yet.

Right. But you wouldn't expect any drag on sales?

Actually not at all. I think it actually improves sales because what you're doing -- you know, -- well, there's two things. If you're discontinuing products there is some drag on the other hand. The offset there is [this here]. If you're discontinuing sales you are going to put in there faster moving sales in a space. So there may be some offset but net, net, net you may have a quarter or two where you see a drag but net, net, net in the long-term and as we look at it on a full year basis or a quarter basis you are going to see an increase.

You would expect that probably not to really come into play here until probably early '09? Is that kind of [commenting] on that because you wouldn't -- you haven't even finalized those plans yet so it would probably be a few quarters before we saw any impact?

Yes, before we see any impact. Exactly.

David Palmer with UBS.

Our questions were answered.

I think this is the last question.

Dan Khosaba with KSA.

What was your CapEx for the last four quarters?

Give us one second (inaudible). Trailing 12.

Yes, that's what I'm looking for.

About $13 million.

About $13 million. Okay you said that, in your press release, that your operating cash flow was 33 million on an LTL basis. Is that CFOA? Is that before CapEx?

That's after deducting CapEx.

That's after deducting CapEx. Okay. Now I am just trying to back into this math. One of the callers has suggested that acquisitions accounted for about $24 to $25 million of revenue and you said that FX was about 2%. That's roughly about $5 million, which means that volume and price together might have been something like 5 to 6%. Is that correct?

Well, I'm not sure what you're it doing on that with taking acquisition sales and a percentage to get the CapEx.

No, it has nothing to do with CapEx. Just second -- second question is totally different. It has nothing to do with CapEx. It has to do with sales.

I'm trying to figure out what volume and price combined were in the quarter.

In terms of breaking out the total sales growth?

Yes. Sales were up 45 million year-over-year, right?

If you are trying to get to what some people have called organic growth John talked about the organic growth in his Grocery and SNACKS business which is more than 50% of our total business. So I think that's probably the way to go.

I'm trying to get to organic growth for the Company and then organic growth for the Company and then organic growth by next question was [40s] at retail?

No. 1, I think from what we gave and what was answered was what was acquisition. I think we gave pricing and what I also gave is what our shipment sales were on Celestial. And we -- there's no way I'm going to be able to give you what our organic growth at retail was on Celestial.

You don't have organic -- what -- how about organic growth for the Company?

We do not give organic growth for the Company.

Why not?

Because we don't give it.

I mean I would think you would want to share that with your shareholders.

No. We don't give it. Can we move onto the next question?

Pablo Zuanic with JPMorgan.

My question is really more about the sales (inaudible) not entirely a follow-up to the previous question but the 8% sales (inaudible) in Grocery. Was that just Grocery or Grocery and Snacks? And related to that you don't have to give us organic sales growth if you don't want to. I mean you own the Company, but I think it would be helpful to us if you [don't] tell us whether on the total Companywide basis are you seeing an acceleration in what we call organic sales growth, quarter in quarter, and if that is the case, what's driving that? Has that been driven by acceleration in Grocery, and acceleration in how somebody (inaudible)?

Some clarity there is improvement potentially what you call organic sales growth, where is that coming from? That would help that level of clarity.

I think, Pablo -- No. 1, let me make it clear. I don't own the Company. The shareholders own the Company, okay. So I think that will make it very clear. No. 1.

No. 2, I think we've been very clear in regards to how we give our growth. John Carroll went through what organic growth was on the Grocery, Frozen and Snacks. He went through what his shipments and consumption were on Personal Care. I went through what our business was on Celestial, was flat year-over-year and at the same time I went through our Canadian business growth and our European business and at the same time, Pablo, we said approximately $22 million came from acquisitions and 2.3% came from pricing. I'm not sure what else I could give you to not to figure out what organic growth is.

So I think we have been very clear. You know when we acquired businesses' discontinued product lines we try to give as much as [we can]. It's not like we are doing major acquisitions here and it's basically the big acquisition that overlaps here is Avalon Alba.

Okay, and (inaudible) tea, then shipments were at 4% in the September quarter and now they are flat in the December quarter. You note that can show any signs of improvement right although that's been all (inaudible) behind the brand. How do we explain that?

Well, No. 1, ship -- this is the big quarter and I think, Pablo, you continue to focus on teas. Tea is 9% of our sale. With [that] our pricing -- you know what happens is from a shipment standpoint, shipments are affected by inventories coming down. Shipments are affected by pricing at retail where we're not promoting and I think I saw in your note where you expected shipments in the quarter to be down substantially. But with that tea shipments being flat, No. 1, I think is good. We are seeing good consumption, good movement at retail and what we are not going to do and it's very easy Pablo (technical difficulty) shipments increase when you go out there to promote heavily, now we are out there changing our promotions, 2/$5 and raising our promotional prices.

So I think we've been very clear on what our key strategy is and we are going to get back to the consumer and get back in building the brand.

Ladies and gentlemen, this concludes our Q&A at this time. I [would like to now] turn the call over to Mr. Simon for closing remarks.

What I would like to do is thank everybody for your time. As you can see we had great sales growth with costs (inaudible) the way they are. (inaudible) in margins. We really watched our SG&A. Our businesses are performing strong. Tea has had (inaudible) challenge so I think we got -- really got a good plan in place with tea. It is not about a quarter. It is not about two quarters. It is really focus on shipments. It is really focus on consumption. It is really focus on getting the right price points out there.

And I think -- you know, I feel good about where the consumer is and the focus in our business and thank you for spending time and listening to us this afternoon and drink plenty of tea out there. Bye-bye.