Hain Celestial Group Inc (HAIN) 2008 Q3 法說會逐字稿

Good morning, my name is Chris and I will be your conference operator today. At this time I would like to welcome everyone to the quarter three 2008 Hain Celestial earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I will now turn the call over to Mary Celeste Anthes, Vice President of Investor Relations. Please go ahead.

Thank you, Chris. Good morning. I'm pleased to be with you today to introduce our third-quarter fiscal year 2008 earnings conference call discussion of our financial results which were released earlier 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.

Our discussion today will include forward-looking statements which are current as of today's date. We do not undertake any obligation to update forward-looking statements either as a result of new information, future events or otherwise. Our actual results may differ materially from those projected and some of those factors which may cause results to defer 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 this morning will be limited to approximately an 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 further discussion.

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

Thank you, Mary. Good morning, everybody. I hope everybody had an opportunity bright and early to review our press release and our information for our Q3 fiscal '08. Our sales for the quarter, $264.6 million versus $238.027 million, up 11.2%. In this quarter there was approximately about $5 million of product that we discontinued for SKU rationalization which sales would have been up 14%.

Our margin 30.7 versus 30.5, and that's up 20 bps, and that's the same brands year-over-year which I think is phenomenal considering the cost pressures that we're facing today. Our SG&A on an adjusted basis 18.4 versus 19.9. Our SG&A down 1.5% and you're going to hear me talk more about productivity and efficiencies in cost of how we're dealing with a lot of the higher costs and to offset that.

Volume growth has been great. I continuously hear people are eating or trading down. We're not seeing that and we haven't seen it continue into April; April sales have been extremely strong and we like what we're seeing. With SKU rat and nine-month sales up 15%, April continued strong. So we like what we see out there in regards to the consumer. Terra Chips up over 5%; Arrowhead Mills up over 5%; Earth's Best over 36%; formula business pretty strong; our spectrum business up 11%; our Hain business up 14%.

Celestial Seasonings, and I'll talk about that in a little while, growth in this quarter, one of our biggest quarters, up 2%. Our chicken business up 14%; Avalon and Alba, and John will talk about that in a little while, up 27%. Our Canadian business up almost 40%. Our European business up 20%. Our UK business is one that was down this quarter, 8.2, and I'll talk about why we were down and some of the issues that you can see what happened in the UK.

As you can see, growth is strong. But one of the things we're experiencing costs that I've never seen before and in my career I've never had to deal with costs this way. So what are we doing about it? Growth, growth, growth. I think there's a major initiation on, I talked about it in our second quarter -- how we're driving growth through new channels, new distribution and we're seeing a lot of the results for it and we're seeing a tremendous shift in our business where our growth is coming from.

Innovation, at the Natural Food Show in March we introduced over 50 new products, extremely innovative and I'll talk about some of the innovation that we're doing in a little while, but innovation is key.

Productivity, a tremendous amount of productivity coming out of Hain. I'll take you through how we saved about $10 million to $12 million in cost through productivity; it shows you what our SG&A is. So from a cost-cutting standpoint a lot of cost, a lot of consolidation going on. SKU rationalization -- in 2005 we initiated a SKU rationalization and it was extremely successful.

Some of the things that I'm looking at is selling some of our brands that are lower volume brands or not number one or two in the category. So our portfolio is a complex portfolio and I think we should look at streamlining it and we'll continue to do.

I'd get asked about price increases. We have taken numerous price increases and I think our brands and our products support price increases. There's always a time lap within our pricing and we've taken, since 2005, over eight price increases and have another one in place effective May 3rd. So we're not afraid to take pricing. And one of the big things we have done in taking pricing is ensuring that our trade dollars are passed on at retail and consumers are not seeing the high prices that have been taken in price increases.

One of the big things, consolidating businesses -- we now will consolidate all our U.S. operations under John. John has done a great job of taking cost out of our Grocery Frozen Snack business, our Personal Care business and putting tea, snacks, grocery, Personal Care all together under one U.S. operation. We see tremendous efficiency, tremendous cost savings, tremendous shipping savings.

Acquisitions, you know, we're continuously looking at acquisitions and I'll talk about our acquisitions and that in a little while. We can't control fuel, we can't control commodities and when we started to do our fiscal '08 plan back in May of last year, diesel was at $2.84, today diesel is at $4.10 and we know where corn, we know where soy is and we know where wheat is.

So far we've absorbed over $26 million of cost, that's almost $0.40, $14 million we were able to make up in price increase and another $11 million in productivity. So as you can see, we can do it, we're all over this and dealing with a lot of cost out there. Personally I think commodities are tapped out. I don't think we're going to see them go up further, but I've been wrong before. And a question always asked to me is organic prices moving higher or on a percentage basis -- are they going up a lot more than regular commodities, not at all and we're not seeing that.

About the consumer -- I had Nielsen's go out and pull together some data and asked has organic sales slowed because of prices. And over a 12-month period ending the end of February natural sales are up 11% over a four-year period, they're up 35%. Organic products that have a UPC code for 12 months ending the end of February up 25% and four-year up 142%.

So we're not seeing any slowing going on. And one other category that affects our protein -- antibiotics free 12 months up 17%, four years up 66%. So the consumer is still looking for organic products and natural products, the consumer is still looking to eat healthy.

From a private-label standpoint, something that I continuously get asked, are people converting more and more to private-label or trading down? There are over 500 products and 50 different categories in private-label today. Some of the top categories -- 2% milk, 64 pounds fat-free milk, organic eggs, whole carrots, lettuce, Romaine lettuce, spinach, tomatoes, white eggs and greens, flakes, cereal flakes, cereal bars are some of the bigger categories which ultimately as consumers look to trade down.

SKU rationalization is something we spent a lot of time on and, as you saw in our press release, we finally took action on it on our Personal Care business as we consolidate Avalon, Alba, JASON, Zia and Queen Helene -- we've been -- we were very successful in 2005. We improved margins there almost 8 points and we saw sales growth. What this allows us to do is improve margins next year 2 points on our Personal Care business and eliminate over $1 million, $1 million plus dollars in people.

It will allow us to consolidate products and bring them into our manufacturing plant. So with that it pays for itself in one year and it's the right thing to do for the business as we see great growth going on in our Personal Care business.

As I said before, our portfolio is a complex portfolio and previously we've looked at the portfolio and we've divested brands and we're going to do that again at categories and brands that we think that we can't grow them any longer should be part of someone else and we would look to sell or divest some of our smaller brands or some of our brands that have three or four positions.

Celestial -- at the beginning of year we said it was a transition year. Our objective was not to always be on promotion which I think is a great objective. Grow volume and develop programs that we can deliver with non-promoted volume. And our achievements, so we got our new packaging, we're seeing some good things happen on coffee and Saphara. Our volume this quarter is up 2%, our margin's up 2%. And I think one thing that's very important is 45% of our volume is up 18% and that 45% of our volume today is not measured through Nielsen's numbers.

Our grocery volume is down 1.5 million units, and 87% of that is due to non-promoted volume. So we're not out there promoting, we're spending a lot more on the consumer and Celestial Seasonings is the only brand showing a decrease in non-promoted volume. Previously it was buy one, get one free, two for $4, so it's important for us not to be on promotion, get our retail prices up and it's something that we're going to continuously do.

Our Canadian business is up almost 20% -- sorry, almost 40%. Our supermarket business strong in Canada. Our mass-market strong in Canada and we continue to do that and some of the good things we're seeing in Canada -- our Yves business, 83% share of the market; our Terra Chips up 65%; soups up, Imagine Soups up 20%; Earth's Best up 24%; Celestial up 12% in Canada. So good growth, good things happening in Canada, a good market for us.

Our European business up 20%, Lima up almost 20%. Our Hain European business up 15%; Natumi, which is our non-dairy business, up 10%; and Celestial seasonings is strong. Grains Noirs, we've been hit by higher cost there, some of the fresh products getting price increases through and we continue to evaluate Grains Noir to see that we can get some pricing.

Our antibiotic free chicken and turkey business, which has substantially become a much bigger business for us since 2005, it's approximately on a run rate after buying the New Oxford business and going into next year it will be approximately a $150 million business for us. And what we're seeing is the demand for ABF growing, as I said to you before, it was up 17%. What we see people trading down from red meat and buying more and more chicken and more and more turkey.

This year just on our chicken business alone our costs were up $1.6 million. We've taken two price increases. Our chicken sales FreeBird were up 13.8%; our gross margin was up 10.9 versus 9.7. And from a selling price $1.37 versus $1.35. So as you can see, we're getting the price increases and we're getting our average selling price off an absorbing cost.

From a turnkey standpoint on our Plainville business, our turkey business is up over 4%. We absorbed over $700,000 of cost. Margins were off a little bit there, 12.3 versus 12.6, but our earnings were up substantially.

UK had a tough quarter, one of our tougher quarters in that market, and when you have a tough quarter in the UK it's a double whammy because of where the pound is today. We're still having challenges integrating the three plants, not as smooth as I expected. We've sent over some personnel from the U.S. to help with that that helped us with the Westchester facility.

We had a $1.8 million startup cost this quarter, in the next quarter we should continue to see that. Volume down 8% in the UK and some of that is SKU rat on our Manchester non-dairy business. We eliminated a lot of SKUs from the Haldane integration. We got rid of a lot of private-label business that was not profitable for us and we shifted a McCartney promotion to Tesco that last year was in March that this year will happen in April.

We had some falloff in Rice Dream, a study came out that just said there was arsenic found in rice which affected consumption, but we've seen sales come back. We're excited about our Daily Bread acquisition. We're excited about the fresh category in the UK and we will get the UK fixed. We've got a lot of opportunities there and a lot of growth.

And one of the big things is we expanded our distribution there with the Daily Bread acquisition. There are a lot of great Earth's Best Fresh into the foodservice expanding Terra there. So that's apart from the UK, but that is one area that we need a lot of work on today.

Management -- I've got to tell you going through challenging times like this it's important to have smart energetic management and I must say that's what we have. Consolidation in key, taking cost out and underneath John that's something that we're going to continuously look at.

From an acquisition standpoint, the middle of March, the end of March I think we did three great acquisitions. MaraNatha is a lot like Spectrum. We looked at it before, we liked the nut butter category, we really like the organic chocolate category. We think there's just a great opportunity in kids product, special events products whether it's Halloween, Valentine on the organic side.

77% of the products sold in MaraNatha go through natural today just taken through our channel. We'll eliminate a lot of cost. We have gone out and announced the closing of their headquarters and we'll integrate it into the Hain Celestial infrastructure sales force distribution force. So we see some good growth coming from MaraNatha both on the chocolate side and the nut butter side.

Buying the New Oxford facility from Pilgrims Pride, I think we bought it as a great price. Big capital avoidance, good price, it gets us into fresh pack. And most important, supply -- we were having a big issue with supply of antibiotic free turkey, and this will take us -- this will help our supply, also take us a lot into deli and prepared foods which we are looking into that category.

You heard me talk about Daily Bread and we really think fresh foodservice soups, salads -- we really look to go into that category.

So all in all it's been a tough year, it really has been. If you go back and look, as I said, last May when we're doing the plan and you're looking at this May and looked at cost, man, we were off on cost but that's something we can't control.

But we've driven growth, we've cut a lot of cost out of this business. We've introduced a lot of new products. We're in a great category in natural organic. We've been able to take pricing and we will continue to take pricing. There's just a lag time, 60 to 75 days, before pricing gets through. And last but not least, we've made some great acquisitions.

So all in all it's been a tough year, but we've delivered and that's what I'm proud of, of this company and these brands. What I'd like to do is turn it over to John and he'll take you through some of the things he's doing on SKU rationalization and some of the great growth in his businesses.

Good morning. Today I'll review the Q3 results for Hain Grocery and Snacks and Personal Care; update you on the MaraNatha and SunSpire brands acquisition; and highlight the Personal Care SKU rationalization opportunity.

Starting with Hain Grocery and Snacks, Q3 was a very strong quarter. Our top-line growth was up 9% which primarily represents organic year-on-year growth as the MaraNatha and SunSpire brands were only acquired as of March 6th. The growth was driven by a combination of consumption increases, alternate channel gains and new product sales.

We saw growth across the brand portfolio, as Erwin had said. Our Terra turnaround continues for the fifth quarter in a row. Additionally, we saw high single or double-digit 12-week consumption gains as measured by SPINS Natural and Nielsen Grocery on for Earth's Best, Rice Dream, Imagine Soups, Garden of Eatin', Sesame Street, Imagine Frozen, Spectrum Naturals and Essentials, Arrowhead Mills, DeBoles Pasta, Walnut Acres and Hain Pure Food.

Turning to the middle of the grocery and snacks P&L, we continue to experience unprecedented pressure on input costs and fuel-related expenses. We saw continued year-on-year increases for organic corn, soybean, wheat, canola oil, fruit and dairy as well as packaging and diesel fuel. In fact, our Q3 COGS inflation was almost $5 million.

Despite these challenges our Q3 delivered product costs actually improved 20 basis points as productivity and pricing offset continued rising commodity and fuel costs. The cost outlook continues to be challenging as we enter the fourth quarter. We see no abatement in the year-on-year pressure on input costs and fuel-related expenses.

As a result, like several other CPG manufacturers, we announced a 4% price increase in March. This increase will have little effect on Q4 given the leadtimes required by our customers. However, this pricing action, along with productivity, will be required simply to maintain margins going forward.

Moving down the P&L, our Q3 SG&A expenses as a percentage of sales were flat as Grocery and Snack savings were offset by the absorption of the MaraNatha and SunSpire brands' headquarter personnel costs. These costs will be eliminated in late Q4. We continue to exercise strong discipline on our operating cost which is essential in an inflationary environment.

Our Q3 inventories were higher than year ago as we were carrying an additional $10 million in Earth's Best inventory. This is consistent with what we discussed in our Q4 call where we said we would maximize our fresh pack production 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, Q3 was a very strong quarter with a top-line increase of 9%, a delivered product cost improvement despite rising input and fuel costs, and continued improvement in our SG&A expenses as a percent of sales prior to the absorption of the MaraNatha and SunSpire headquarter costs. We're facing cost inflation pressures like everybody else in CPG and we've just announced a 4% price increase to help, along with productivity, offset these costs and maintain our margins.

Turning to the MaraNatha and SunSpire acquisition, we expect this to be terrific for the Company as it will bolt-on efficiently to our Grocery and Snacks business platform. It will give us entry into two on-trend fast-growing categories, nut butters and organic chocolate, and great brands with natural category leadership positions. And finally, it will create significant synergy opportunities in SG&A and in nut butter operations.

We're moving aggressively to integrate this acquisition, as we already have announced on March 27th a reduction in force at the MaraNatha and SunSpire headquarters in this San Leandro, California to eliminate duplicative positions. This action should mostly be completed by the end of May as we are subject to a 60-day notice period.

We also moved the entire operation onto the Hain Grocery and Snacks IT platform effective on May 1st, which then enables us to consolidate the back room, sales and marketing functions into Melville as of this week. Both brands continue to do well, led by MaraNatha's 28% consumption increase in the last 12 weeks.

Now moving on to Personal Care -- our Q3 top-line growth was up 11% ex SKU rat driven by our three top brands -- JASON, Alba and Avalon Organics, which were up a combined 18%. Alba led the way with year-on-year year growth over 30%. This growth on our top three brands reflected gains across all channels -- natural, grocery, drug and mass. In fact, new distribution growth accelerated in Q3 as we gained placement in mass and chain drug customers that introduced new natural Personal Care sets.

Just as with Grocery and Snacks, Personal Care is also being pressured with cost inflation, especially in the areas of fuel-related packaging expenses and co-packer expenses for Avalon. We announced a 3 to 5% price increase in November from which we will begin to experience benefit in the fourth quarter. Personal Care SG&A was down 100 basis points for the quarter as we continued to realize the benefits of the JASON and Avalon consolidation.

As I stated in the last call, the integration of JASON and Avalon is now essentially complete. We are one reporting unit, Hain Personal Care, with one strong management team, one organizational structure without redundant functions, one sales and broker network and a common IT system. We are now focused on accelerating profitable growth.

Toward that end we are ready to implement an aggressive SKU rationalization program similar to that executed in Grocery and Snacks a few years ago. That program was a catalyst in accelerating Grocery and Snacks' top-line and income growth. We believe a Personal Care SKU rationalization could have similar or greater benefits -- greater relative benefits.

Hain Personal Care is the consolidation of four separate acquisitions with many duplicative SKUs and inventories. The Personal Care SKU rationalization is targeted to eliminate 30 to 40% of our SKUs. The decrease in sales volume from discontinued SKUs will be offset by an acceleration of sales of continuing SKUs with higher margins along with the sales of new products.

The SKU rationalization will yield significant annualized benefits after full implementation including a 30 to 40% improvement in SKU velocity, reduced working capital as our inventories will be relieved of redundant SKUs and turn faster, reduced business complexity and improved operating efficiencies, a 2 percentage point gross margin improvement and, importantly, position Hain Personal Care to leverage its Culver City manufacturing facility as a competitive advantage.

This last point is a key strategic imperative behind the Hain Personal Care SKU rationalization. Most natural Personal Care suppliers rely exclusively on co-packers to manufacture and in some instances distribute their products. The Personal Care SKU rationalization, coupled with extensive operational improvements made in our supply chain in the last 12 months, will allow us to consolidate the majority of our co-packed volumes into our Culver City plant by the end of FY '09.

Our Culver City facility has made productivity a priority in the last 12 months and has implemented S&OP and MRP processes, optimize manufacturing processes by focusing on bottle and tube manufacturing which constitutes the bulk of our sales volume, outsourced inefficiently manufactured products like lip balms and jars, significantly reduced changeovers and increased throughput by 80% from 50,000 units per day to 90,000 and decreased downtime by 50%.

The Culver City manufacturing facility has a low overhead cost structure that is only operating on a one shift per day, five day work week. So as you can see, we have a significant opportunity for margin enhancement as we implement SKU rationalization, consolidate Avalon co-packer volume into Culver City, accelerate the growth of core SKUs and new products and bolt-on future natural Personal Care acquisitions. This is an opportunity we are very excited about.

So to summarize on Personal Care, we continue to see strong top-line growth on our key brands, strong margins and reduction of SG&A from the consolidation of JASON and Avalon. We're feeling the effects of cost pressure on this business as well and have implemented a 3 to 5% price increase that we will begin to realize in Q4.

Our SKU rationalization is modeled after the successful Grocery and Snacks program and will help us to reduce business complexity, increase SKU velocity, decrease working capital, improve gross margin and, importantly, leverage our supply chain as a competitive advantage.

Overall we continue to be well-positioned to take advantage of the continued growth in natural Personal Care both in the natural channel as well as grocery, drug, mass and club. Now I'll turn the call over to Ira Lamel.

Thanks, John. Good morning, everyone. I'm going to walk you through the adjustments we've made to this quarter's earnings to give you a little bit more detail behind it. We've added back $0.13 for a total of $8.5 million on the SKU rationalization, severance and other reorg costs. We identified $6 million of inventory that we will not go forward with. We wrote off certain assets related to the inventory such as packaging design costs with those items coming in at a bit over $1 million. And we've eliminated certain positions that resulted in our incurring severance and other costs of just under $1 million in the quarter. These three items add up to the $8.5 million related to that SKU rationalization.

Going forward we expect to incur another $2 million in additional costs related to this program; costs that accounting rules currently would not allow us to charge off to the P&L until we actually incur them over the next couple of quarters. These costs will be taken as the additional positions are eliminated, almost all of which have already taken place during April and on May 1st.

As we mentioned in our press release, we expect the program to benefit consolidated gross margin by about 100 basis points. That's certainly less than what John talked about as the impact on the Personal Care reporting unit, but on an overall consolidated basis it should round out to about 100 basis points. We will get additional benefit to the P&L, to the operating income line from the personnel reductions which I believe will take about $2 million out of G&A going forward.

As we've discussed with you in recent quarters, we continue to incur start-up costs in connection with the consolidation of manufacturing facilities and processes in our UK Fakendam plant; Irwin spoke about those earlier. The progress on this has not been as anticipated and the costs have been higher than we expected.

In the third quarter we incurred $1.8 million of start-up costs which cost another $0.03 of earnings. We have made changes in personnel at the facility and we've engaged manufacturing consultants, Irwin referred to them being over there now. We expect these costs to continue at some level through Q4, but anticipate they will trail off after the consulting project is completed.

We also concluded, as in the past, the P&L impact of the mark to market adjustment on ungranted stock options to the CEO and the costs incurred in the quarter for the stock options review. These two items substantially offset and therefore had no net impact on earnings. We did file an 8-K in the first week of April to disclose that on April 1st the ungranted options to the CEO was concluded.

As Irwin discussed, there have been no secrets in the media regarding significant increases in input costs. These increases have accelerated in their effect on our costs and during the third quarter we saw 314 basis points of pressure on our gross margins. These pressures have been offset almost entirely in large measure by productivity improvements which we saw at 180 basis points of improvement and by the price increases we have been successful at implementing.

Celestial Seasonings continues to become a smaller percentage of our total sales. It was 80 basis points lower as a total percentage of sales this quarter as compared to last year's third quarter coming in now at less than 10% of consolidated sales.

We have confirmed our full-year guidance but have narrowed the range of that guidance. For the full fiscal year 2008 we expect to be at $1.04 billion so $1.05 billion in sales and we anticipate that earnings per share will come in within a range of $1.38 to $1.40. This earnings guidance, as noted in the press release, does not include the impact of stock compensation and other adjustments we may continue to incur.

As for stock compensation, the fourth quarter will bear a charge of approximately $4.1 million. In the quarters that follow we will continue to incur approximately $1 million in each quarter subject to any adjustments on stock compensation that we may have for our experience with forfeitures.

A couple of other things I'd like to point out -- adjusted operating income was up 80 basis points this year to 10.6% versus last year's 9.8%. Adjusted EBITDA came in at $32.1 million versus $27.2 million last year with this year at 12.1% for the quarter and last year at 11.4%. Our current depreciation and amortization run rate for the full fiscal year is about $19 million. Our operating free cash flow for the trailing 12 months was $22.2 million. Our days in the cash conversion cycle was up at 79 days this year versus 72 last year.

John spoke earlier about the investments we've made in Earth's Best inventory, about $10 million since last year, and this $10 million along with a few other items affected our days and our operating cash flow. At this point we'll open it up for questions.

(OPERATOR INSTRUCTIONS). Andrew Wolf, BB&T Capital Markets.

Good morning and congratulations on the quarter. My question is -- I'm not trying to get you to formally obviously guide on '09, but just to talk a little around it, particularly given how many -- in the macroenvironment how much is going on. But let's just start with your assumption, Irwin; let's assume it's right that commodity costs kind of cool down and stop inflating so rapidly.

And going back to the comment you made early in the call where -- I forget the exact numbers, but maybe it was $40 million or some very large number of increased input costs including fuel. And your price increases covered a certain amount of it -- sorry, I was in a car listening to the call and dealing with a few other things so I don't remember the numbers precisely. But the essence of it was your price increases, if I remember, covered less than half of it and the efficiencies -- operating efficiencies, more or less, got you to the rest.

So what I'm getting to is as we look at '09 and assuming the sales environment as traditionally has occurred in natural foods remains fine, then we get down to the gross margin line. Given the price increases that John talked about and that you talked about that are coming up in March, in a stable cost environment are we going to see somewhat of a stabilization or a flip in that kind of a ratio is how you're able to deal with increasing input costs? In other words, are the price increases you've put in so far going to be sufficient if commodity costs and fuel reach a certain -- have plateaued?

Andy, good question. One of the big things -- I believe costs have plateaued over the last two weeks, commodity costs have started to come down. We haven't seen it in fuel, but we've seen it on commodity costs. And it also gives us some opportunity for some buying in.

So number one, as I said before, as long -- sales continue to be strong and what we're seeing is demand and some of the bigger box stores now wanting more and more organic. So there are a lot of great opportunities for us to continuously expand our sales.

Number two, I think what we've seen on the SG&A line as we cut costs, we continue to cut costs and we think there is some more and more cost to be taken out in consolidating personnel and people.

In regards to cost, it was $0.40 last year and about two years ago when I said I'd like to see our margins get up to the 33 to 35% level over the next couple years. Well, if we never had this abnormal year of cost we would have made a great run on it and we absorbed close to $0.40 on in earnings per share.

So I step back and say we're sitting here today planning for fiscal '09 with some of the same costs in place and kind of watching fuel. But I look at some opportunities if costs come down we've built in some good price increases and I think there are some good opportunities for us.

I think what's important, if that happens there are some more dollars to spend on the business. So going into '09 I feel good about getting some good price increases. I feel good about the productivity we got through here. And I feel that costs have tapped out. So I'm kind of looking forward to 2009. I think we're in a good spot.

Okay. And one quick follow-up related to what I -- line of questioning. Just on the price increases that Hain has taken, what has been the other category participants' response? Has everybody essentially, given they're in the same boat, also increased prices similarly or have many people tried to eat some of this --?

No, I think generally everybody has followed. And if we're experiencing it and -- the thing is, which is great about our portfolio today, we're diversified, size does matter -- being over $1 billion in size today. I think if we save -- as John said before, 2% margin savings on Personal Care on his business next year is almost $3 million in savings for him. So from a G&A standpoint $1 million to $1.5 million. So what we're seeing is other people follow. We're seeing the cost, they've got to be seeing it too. So I think we've just got a lot of good areas to go to.

Ed Aaron, RBC Capital Markets.

Good morning, guys. A couple of quick ones for you. I think I have a good amount of appreciation for the benefits of the SKU rationalization given what you've done in the recent past. But in the Personal Care business you paid a pretty big multiple for that Alba and Avalon acquisition. So just retrospectively how are you thinking about the total return on that investment just given some of the costs that are required with the SKU rat?

Well, I think, number one, we pay a good multiple, but I think other companies have gone out there and I'd like to see what -- from a multiple what we paid. As you heard me say before, I'm glad we bought Avalon and Alba when we did. Our Personal Care business today is over a $150 million business, a great margin business and growing at high double-digit. So from a standpoint it's been a great acquisition and a great category from us.

What we're seeing today, we're putting four acquisitions together and taking out tremendous cost and going to get tremendous efficiencies out of the JASON's plant. The big SKU rationalization that we're seeing here is coming through JASON products mostly and not Avalon products. And with costs and that today, Ed, we don't want to be out there with four lavender shampoos, four lavender soaps, four moisturizers. We want $5 million SKUs and that's some of the things we're going to do.

And one of the things that a problem with this industry, there are a lot of brands, a lot of SKUs and, as you heard John say before, how many SKUs we're taking out of this business today which is going to improve our margins by 2 points, I would do a SKU rationalization every year on a category if I can get a 2 point margin increase.

Thanks for the clarity. And then also, how are you thinking about just overall consumption versus shipments just in aggregate? And then which of your bigger brands have you seen consumption growing faster than shipments and also vice versa?

Good question there because one of the things we are seeing from a shipment standpoint and especially the last two quarters, we're seeing shipments -- distributors and customers ordering more frequency and really bringing down their inventories. So if you look at this quarter inventory in March came down at some customers but really picked in April so they're ordering a lot more frequently.

But as you heard us say before, good growth on our snack business, good growth on Spectrum, our Hain business was up substantially, our Earth's Best, our formula business, our Arrowhead Mills business, our soup business -- so we're seeing it all around. In this here quarter I think the UK was our only division that really saw anything of anywhere of negative sales.

So we're seeing good consumption all the way around. You heard me say about our chicken business, protein business, chicken up 14%. So we're seeing strong consumption out there. We'd like to see tea get up to 6% consumption and John has got his work cut out there. But I'm happy where some of the consumption numbers are.

Jacklyn Rider, Lazard.

Good morning. A few questions. On personal products SKU rationalization you said JASON was where a lot of rationalization was, but I thought it would have been more out of Zia or Queen Helene?

JASON is the bigger brand within there, Jackie. Queen Helene there's some. But the duplicate SKUs of JASON is similar to the duplicate SKUs of Avalon and Alba. Queen Helene is going after a different target audience and the same way with Zia. So the big rationalization there was JASON. The other reason JASON's SKU rationalization was the big effort here, we wanted to move a lot of the Avalon and Alba manufacturing into the JASON facility that gives us even more efficiencies.

And how far along are you with that process, with getting JASON -- I'm sorry, getting Alba and Avalon into the Culver City facility?

Jackie, this is John. We actually started to produce Avalon product in the facility in third quarter. That will ramp up in Q4, but it will take us throughout FY '09 to get all of the product into Culver City.

And just on that, Jackie, one of the biggest producers of Avalon and Alba today comes out of Mississauga, Ontario. So we are shipping a lot of product from Ontario back to California and then reshipping it back out. And from a Canadian dollar standpoint our cost there went up substantially so we're going to see tremendous efficiencies. And anybody that's been to the Culver City plant, it is a night and day operation to where it was when we acquired it and where it is today.

Terry Bivens, Bear Stearns.

Good morning, everyone. A couple of things here, Irwin. Let me just make sure I'm clear on the price increases. I heard a 4% price increase in March, then I believe you mentioned one as of May 3rd, and then I think John Carroll mentioned one in the Personal Care. Can you kind of clarify that a bit if you don't mind?

Terry, in March we announced a price increase on Grocery and Snacks for 4% that will be effective in mid-May. That's grocery. In Personal Care we took a 3 to 5% price increase that we announced in December that will be effective primarily in Q4.

Okay. Those are the two to look at?

Yes.

Okay, great. Just in terms of the --.

And Terry, we've taken price increase -- a couple price increases on chicken and we've taken a price increase on Turkey, we've just -- and the thing about price increases, I was asked a question about this this morning, there is probably a 60 to 90 day, even a 120 day lag time on pricing.

So one of the big effects, when pricing or we've got to buy commodities or we've got to buy something we get the price today. We can't go to our customers because there are book, there are promotion sets. And it takes 90 to 120 days to get a price into effect and it probably takes at least 120 days to get that full price into effect.

Okay. In terms of the inventory write-down, Irwin, you know a lot of companies just kind of (technical difficulty) that through. What was the rationale for taking it all at once and just immediately writing it all down?

Well, I think the big thing is, number one, is to get slower selling SKUs off the shelves and get it out, Terry, and it's just inventory that we think and we've seen it before -- number one, it's a one-year payback, it's a 2% improvement on margin. And I think going back to our rationale before, which we saw in grocery, we saw sales tremendously increase when we took slower selling SKUs instead of putting them out there and then ultimately putting new SKUs that we would see our sales increase.

And at and of the day once we discontinued it they would have sent it back and we would have had to spend all this money on spoils. So it didn't make sense to ship it out there, bleed it out there, have it sit on the shelf and one day take it back to at that time destroy it. So this gets it behind us, moves on, it helps our plant, helps our growth, helps our margin tremendously.

And Terry, one of the other things today, we have competitors walking in and saying here's a slower selling SKU, I want your space. So a big part of this is taking these slower selling SKUs and going in there with new products to pick up that space for Avalon, Alba and other JASON products.

And Terry, just another thing I want to touch on -- we bled a lot of this through already on the P&L throughout the year. I mean, until we were ready between people and other SKUs we've argued bled quite a bit of this through the P&L.

The last part of it, Terry, is that in this particular program, because we're consolidating manufacturing of the Avalon and Alba brands into the Personal Care facility in Culver City, we've already taken out the inventory that we will not produce. If we can't manufacture from grower ingredients and packaging that we have on hand for the SKUs that are going to be eliminated by bringing Avalon SKUs in, we've taken the hit on that inventory.

Simeon Gutman, Goldman Sachs.

On the $5 million of Personal Care SKU rationalization this quarter, what is the full run rate, is that it? And then how quickly do you expect to get back to even as far as productivity? And then in terms of the productivity improvements, is that going to come through a greater concentration on existing shelf space, are you going to get more allocated shelf space with fewer SKUs?

Simeon, we plan over the next couple quarters from a run rate on sales another $2 million or $3 million in the fourth quarter, another $2 million or $3 million in the first quarter. But we over a full -- starting now over a full 12-month period, that's when we should see the benefit of the SKU rationalization on margin. And how quick? When you discontinue a SKU you better be ready to put something new in that space immediately.

So what we've been holding off and sending out a notice to all our distributors and customers the SKUs that have been discontinued, that will happen now and our people are out there making sure we keep the space and we get all our new products in place. And as you can see, the growth of Avalon and Alba is in high double digits and we have a lot of new products that we launched in March at the natural food show. So we have a lot of new products to go out there and fill that space with.

(multiple speakers) these are SKUs of JASON's and have been around a long, long time and ingredients and stuff like that that have just needed to be adjusted and cleaned up.

Okay. And then my follow-up. As you guys look across the portfolio of products -- and maybe you get this a lot -- what are some of the faster growing products or categories in natural organic that you guys are not in today?

We like the fresh category. We see more and more opportunities in the whole fresh category. As you know, we have a good position in fresh in Europe, the UK and there are a lot of things we're looking at there. We like a lot of things with probiotics, prebiotics, that category. We do like the cleaning supply, cleaning area, household cleaning. We are seeing Clorox and now S.C. Johnson get into it. And we think with our Personal Care we have a good opportunity there.

We continuously like snacks. There are a lot of other things happening in the snack category that we would like to focus on. The other big thing is we're looking at the baby bottle -- we're looking at Earth's best, how do we take it into other categories with the brand. Moms feel very, very comfortable with that brand. We've gone into a whole line of Earth's Best meals and we see what's going on with the whole weight management in mainstream. We see a big opportunity in the whole weight management type of products in natural organic and frozen. And with our frozen facility we think there are some opportunities there. So there are some of the categories we're looking at.

David Palmer, UBS.

Thanks, good morning. It's actually Jeff Birnbaum for Dave. A couple questions for you. First question, are you guys seeing any evidence of channel switching? Are your consumers shopping less in Whole Foods and more at Wal-Mart nowadays?

What we're seeing is with the price of fuel consumers going to bigger box stores and buying a lot more instead of going to stores more frequently. We're seeing some of that. What else we're seeing is consumers on baby food and diapers buying 12 pack or 24 instead of buying six single units. So we're seeing some bigger purchases on product and we're seeing those out of bigger box stores.

Okay, thanks. And my final question would be in measured channels it looks like Hain has been losing share to some measured brands and I would say that -- A, do you see that occurring across all of your channels? And then B, do you see marketshare perhaps accelerating given -- marketshare losses given -- accelerating perhaps given the macroenvironment and your price increases?

I think the thing you should come back and look at today, when you look at measured channels, and you heard me say before, probably half our business and probably less -- in tea if 50% (technical difficulty) go through measured channels it's probably reversed. It's probably 60% of our products today go through non-measured channels and the 40% go through measured channels.

So just as you ask me the question, you may look at a Nielsen report and say we're losing share, but there's a lot of shifting going on there today. And whole foods being one of our biggest customers, that's not measured. So it's hard to look at Nielsen data today and really look at if we're losing share.

I mean, one of the big things that I can tell you -- I took you through sales of brands, distributors and retailers are really watching their inventories today. So it's a good indication of consumption when I go through sales members.

Alvin Concepcion, Citi.

Good morning. I just wanted to get a better sense of organic sales growth. We're getting around 7%, is that about the right range?

I think you've done a good job and I think we feel good about sales. In this here quarter about $5 million, which is the same as our SKU rationalization, came from new acquisitions in this quarter, (technical difficulty) a lot of acquisitions (technical difficulty) you're close.

The other thing that you have to consider is last year's quarter includes sales of the Haldane units that we subsequently sold off. So that shows up in last year's sales line and we had no sales from that this year.

Okay, great. And then you mentioned April was strong. Are there any categories or brands that did particularly well?

Across the board I think we're seeing good growth and it sort of shows you March at the end of a quarter when you go into your first month and sales are extremely strong I feel good about it. But it's across the board where it is and we're seeing good continuous growth. So, and again, I think a lot of it has to do with as retailers or distributors took down their inventories they're on a continuous ordering pattern. So that's where some of the sales are coming from.

Thank you.

Christine McCracken, Cleveland Research.

Good morning. Early morning. I just wanted to follow-up on your comments relative to possible divestiture of some brands. You kind of talked about maybe the low hanging fruit, the number three and four brands. Do you have any estimate as to what percentage of the portfolio might be included as part of that group?

I do, but I'm not ready to talk about it yet and I want to go through some more. But I think it's just categories where we're three or four and take our efforts, our marketing dollars and put it towards categories where we're one and two. But there are some brands out there that are some good brands and may make sense (technical difficulty) someone that's more focused on that category and ultimately we think there are some good valuations that we'll utilize the capital somewhere else or some other acquisitions. But we got to streamline the portfolio and I think we did that two years ago and we sold off a bunch of brands and we'll look to do that again.

Can you just provide any color then on the overall kind of atmosphere out there for M&A at this point? Clearly you guys have been active in that environment, particularly given some of the changes maybe in private equity? But what's the appetite for the possible sale of some of these brands?

I think some of these brands we would be able to sell, they're good brand names. It's not some -- it's Old Spice or something like that, that's not what I'm looking at. But in regards to divestitures, I think the reason I don't want to mention these because my phone will be ringing all day from private equity and a lot of other people looking to acquire them.

So I think it just makes sense if we can get the right premium for it why not focus somewhere else. At the same time, from an acquisition standpoint, we did three good acquisitions the first time in over a year or so and we see private equity on the sidelines, on the other hand we saw S.C. Johnson just buy Mrs. Meyer's and paid an enormous multiple for that. But we're seeing some stuff out there strategically. With a strong balance sheet we have the opportunity to use our balance sheet to do acquisitions or to do other things.

Pablo Zuanic, JPMorgan.

Good morning, everyone. When you mentioned those numbers about the industry as a whole, you said natural foods growing 11% in the last 52 weeks and organic I think you said 25%. I'm trying to reconcile that on an apples-to-apples basis with your growth ex acquisitions right? Which in my numbers has been in the mid to high single-digits. How should we interpret that, the fact that you're growing apparently below the growth pace of the overall categories?

If you were listening to my comments which said UPC code, I'm not in milk, I'm not in eggs, I'm not in lettuce, I'm not in butter and that included all that and that's probably growing at a much higher rate. I took you through before the top 10 private labels. So that's what it includes on a UPC basis all those types of -- not commodities -- conventional type products.

So overall you believe that you are growing in line or ahead of the overall category for natural and organic foods?

In the categories that I am in today -- you excluded milk, butter, eggs, produce, lettuce in that out of there which is a UPC code brand, absolutely.

Okay. And just a quick follow-up. In terms of a channel shift, in the past you have told us that in terms of a strategy or your expectations that the bulk of the growth, as I understood it, would come from the grocery channel, and that's not what you're saying now and I want to understand why is that the case in what's driving this?

Let me just be clear, a bulk of our channel would come from grocery, mass-market and specialty accounts. So I include a Costco, a Sam's, a Wal-Mart, a Target, a Babies "R" Us, a Toys "R" Us into grocery. Natural organic I include Whole Foods, a Trader Joes, and there are about 10,000 independents out there that also buy natural food. I don't include foodservices which has been a good growing business for us, I don't include military.

And the other thing which, if you look at our overall numbers, Pablo, Europe and Canada are becoming a much bigger part of our business today. So a question asked before -- are consumers' trends changing? Yes, more and more people are going into mass-markets and more and more people are going into the Costco's and Sam's of the world and the clubs type of businesses and you're seeing a lot more growth coming out of our businesses there. This is our last question?

Jacklyn Rider, Lazard.

Thanks for taking the follow-up. Actually I just wanted to hear you address private label. I know you talk about all the commodities that you are obviously not in and that's where lots of supermarkets are pushing into. But where there are opportunities where some of the supermarkets are going into some of the products that you have, what is your role when like a SuperValu goes into private-label and do you see any opportunities to get into their business? If they're doing their own natural and organic do they need your support? Maybe are you seeing yourselves being displaced? What exactly is going on there?

I think you heard my heart about the top 10 private-label products. From a grocery standpoint none of them are in the top 10. Jackie, today we're talking about SKU rationalization, brand rationalization. We're not set up for private-label from a company standpoint. We do some private-label and we get called every day to do customers' private labels. But it gets into, again, buying commodities. We want to make sure from a sourcing standpoint, and one of my concerns is organic ingredients, that there's enough for us.

So with that we want to focus on our brands. We want to focus on growing our product lines. And if we go out there and I think making private-label for other people from a price standpoint to manufacture with us, yes, we get some efficiencies. But at the end of the day it's not the efficiencies that really enhance our overall operating income.

And from a plant standpoint, from a capacity -- we're not out there today underutilized in most of our facilities that we could take a lot of this on. So today I think we've got enough brands to focus on, enough categories, enough products where private-label just does not make sense for us.

Okay, and I wasn't actually suggesting that you'd go into private-label yourself, more of a -- in the case where SuperValu or someone would go into baby foods how would that maybe displace your business or would you see an opportunity to be the number one organic baby food brand out there. But we can leave it at that.

Jackie, this is John. Just a quick point on that. Look, Jackie, that's we in our key categories, we look to be a number one or number two brand. We look to work with the private-label via category management to eliminate some of the Tertiary brands. And last but not least, the one thing private-label never keeps up with is innovation and that's why one of our key principles is to be the lead innovator in the category. So private-label sometimes in many instances simplifies a category for us as opposed to causing more problems.

Thank you, Jackie. With that I'd like to wrap up the call. It's been a tough year but all in all I feel we have really delivered good growth. We've focused on customers, we've focused on diversifying our products. We've really cut costs and I've got to tell you we look for paper clips these days, but we have really cut costs around here.

Back to what John said before in new products -- from an innovation standpoint new products are a key and new categories and that's something we've always tried to do. What's the next soy milk? What's the next rice cake? And there's a smaller company out there. We need to be the innovator because there are a lot of big companies that are in the natural organic category today.

We've been able to take pricing and I think hopefully we made it clear today on the pricing that we've been able to take and the pricing we've been able to get through and hopefully we don't have to take that going into next year, that commodities and price stabilize.

We've made some great acquisitions and these acquisitions will give us some good opportunities for earnings going into 2009 and we have the ability to look at other acquisitions going forward. Yes, we know we have some challenges in the UK but we're all over it and we feel confident we'll get those under control.

And last but not least I want to congratulate John for taking over all the U.S. operations. He's been here four years and there's been some good consistency, good growth and good development and it will be good to have the U.S. operations under one head and consolidate our numbers and get costs and efficiencies. And we're excited to keep John's track record going since he's been here since 2004.

I want to thank everybody for getting up early and spending the first part of the morning show with us and hopefully we'll talk to everybody soon. Have a great day.

This concludes today's quarter three 2008 Hain Celestial earnings conference call. You may now disconnect.