Hain Celestial Group Inc (HAIN) 2009 Q1 法說會逐字稿

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hain-Celestial first fiscal year 2009 earnings call.

(OPERATOR INSTRUCTIONS).

Thank you. Ms. Anthes, you may begin your conference.

Good afternoon. I'm pleased to be with you today to introduce our first quarter fiscal year 2009 earnings conference call discussion of our financial results, which were issued 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 and Chief Executive Officer of Hain Celestial United States. And Peter McPhillips, Executive Chairman, Haines Celestial Europe Our discussion today will include forward-looking statements, which are current as of today's date. We do not undertake any obligation to update forward-looking statements, either as a result of new information, future events, or otherwise. Our actual results may differ materially from those projected and some of the factors which may cause results to differ are listed in our publicly filed documents, including our 2008 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 today will be limited to approximately one hour. So please limit yourself to one question and one follow-up question. If time allows, we will take additional questions, and management will be available to answer on the phone for further discussion. Now let me turn the call over to Irwin Simon, our President and Chief Executive Officer. Irwin?

Good afternoon, everyone, and thank you, Mary. And I hope that everyone has had a chance to look through the first quarter fiscal '09. It seems like we just reported fiscal fourth quarter 2008. We definitely are in different economic times and I think we have a lot of good things to talk about what is going on in the category and in the marketplace and what's going on in organic food.

If you read the New York times and Wall Street journal, you would think not good things but they -- that is not what we are hear to talk today. Our sales for the quarter are 289.3 versus 237.2 up 22%. Our gross margins as reported 25.9 versus 29.5. On an apples to apples basis the 28.6 versus 30.8, and if you took our price increase which we enacted in August, it would have added two to three points so are margins would have been up a little. And Ira and John will take you through the margins and going forward as they talk about their businesses. Our SG&A which we continuously focus on and will, 18.2 versus 20.2. We talked about productivity. We talked about acquisition integration. We talked about efficiencies and we are really focused on the SG&A line and will continuously do that. Net income on an adjusted basis 11.4 versus 11.9. And earnings per share $0.28 versus $0.29. adjusted versus a year ago.

One of a good things about a company, is in the good days things are going great. And in tougher times how you adjust, and I think one of the great things at Hain today, we don't have to adjust for economic times and how do we service a consumer and how do we get a demand out there for consumer. So I come back and say this here, we have great products and great brands. We are spreading out where our products are sold. We have a strong, strong balance sheet and I will talk about some of the things we have done to it to enhance the balance sheet, Why I feel good about not doing certain acquisitions and being smart about acquisitions. And we will talk about that.

Sales are up 22%, as you can see. Brand growth, Garden of Eatin' up 14%, Wes Soy up 8.5% and that comes back and shows people reducing their milk intake and their preference for soy. Earth's Best Baby Food up 28%. Our soup business, Imagine Health Valley up 22%. Mostly Imagine (inaudible) Our Rosetto business which shows our consumers are back eating grains and eating carbs up 27%. And our DeBoles business up around the same thing. EnSpire, which was an acquisition that we acquired in April, organic growth and that is up 18%.

Let's look at tea business. Tea business was off a million dollars in sales, and we feel good about that. Last year in this period we had a price increase and we really looked to reduce our inventories out there. John's going to talk about some of the coupon things, some of the distribution drives we are doing at store level to make sure we get the right flavors and how we are focused on tea and some of the management changes and that we have done out there. And I'm really excited about tea and what we are definitely seeing in tea.

Our Personal Care business was up 15%. Our Canadian business up 10%. Our Europe business up 22%. And our UK business. And this is mostly Fakenham and some Luton. And our UK business. And this is mostly Fakenham and some And our UK business. And this is mostly Fakenham and some Luton is down some 4.6%. Peter McPhillips is on the phone, who runs the UK/Europe business and he will tell you about what we are doing in the UK, is down some 4.6%. Peter McPhillips is on the phone, who runs the UK/Europe business and he will tell you about what we are doing in the UK, ur UK business. And this is mostly Fakenham and some Luton is down some 4.6%. Peter McPhillips is on the phone, who runs the UK/Europe business and he will tell you about what we are doing in the UK, is down some 4.6%. Peter McPhillips is on the phone, who runs the UK/Europe business and he will tell you about what we are doing in the UK, and I think you will get a good flavor from Peter.

I think what is important here -- that October finished on Friday and if I was Wall Street I would be happy October finished. But we are seeing great October sales and it is continuing. And see, the first month going into this being the holiday season -- really it is good to see and we are seeing sales strong all over the place. Our chicken business from FreeBird up 11%. Our Plainville turkey up 9%. And come back and look at this, why is chicken Protein business up? Antibiotic-free chicken or turkey is $1.50 a pound. Conventional $0.95. The chicken is $1.25 a pound. But come back and look at steak today. Red meat up $8 a pound. And we are continuously seeing people are trade down from red meat into other Proteins.

Let's talk about some of our costs. We told you in the fourth quarter and early September we would have to work through commodities, and sitting here last year this time seeing where commodities going -- it was like the wild, wild west out there. The good news is we feel that commodities are where they are. We're not going to have to take additional pricing and we have pricing in place to absorb those commodity costs. And you know what , we booked out a lot of commodities and hopefully there is pricing that comes down in the third and fourth quarter. At the same time, we continue to see fuel prices come down and there is a benefit from that.

But if you come back and and look at the commodities today, just in this quarter, just in groceries and frozen and snacks, commodities were about $7 million higher. Which John -- are costs were about $7 million higher in this quarter for commodities. We got about a $1 million price benefit from the price increase. The tofu business, without pricing which we have taken was $600,000. And the Protein business if you took pricing today, and bought corn where corn was today, and what we paid for it in the first quarter it would be a $3 million benefit from it. So good news is commodities are coming down.

The other things we have pricing out there to cover it and that is what is reflected in our budgets and projections in our back half. But you know, we really like what we see and where commodities are going. There has been a lot of news, a lot of questions every financial conference I'm at and a lot of you on this call talk to me about people trading down. There is so much confusion about trading down. Number one, there is a reference made to Nielson's. Nielson's does not include Trader Joe foods, Whole Foods, Wal-Mart, independent natural food stores where there is 10,000 of them. Davies or Costco and other food service and convenience stores.That's a lot of retail that we sell products to.

The other thing that is happening out there today, what happening when we see trading down on organics? Well, we are seeing trade down on red meat and organic produce. We're seeing trade down on eggs. We're seeing trade down on organic milk, which we saw at $7 a gallon. The other big thing that we are seeing, we saw a lot of organic mainstream brands like Kelloggs organic, Gerber organic and Smuckers organic and a lot of brands like that.. And we're seeing those go away. Where the consumer does not want and will not pay a higher price for a main stream organic brand than they saw in the conventional. And that gets all included, when you see the Nielson organic numbers are coming down.

We are still seeing good consumption and the category strong. The other thing that is important in grocery, snack, and tea. Our average price is $3.99. There is a lot you can do with our products. And I beg to differ, from a breakfast item to a dinner item where $3.99 you can cook with or you can go out and buy in a food service outlet. Today consumers are eating more and more breakfast at home and dining at home. So our focus and how we will continue to grow. More and more outlets today are selling organic foods. Before you could only go to supernatural or independents and buy natural organic baby food or Personal Care. You now can find it in many, many outlets in the US, Canada and Europe. More and more consumers are eating home. And we are seeing the benefit whether it is Spectrum oil, Arrowhead Mills, [DeBoles], chicken, Rosetto, more and more consumers eating at home and seeing the benefit to that.

Consumers are trading down from red meat to other Proteins. and not only chicken and turkey but Proteins and not only chicken and turkey, we are are seeing it on (inaudible) and tofu. And consumers today are really focusing on infant and toddler health. I think if you really come back and look at it, I was going through some numbers before with Maureen Putnam -- there is a $0.05 to $0.10 difference between Earth's Best Baby food and conventional baby foods out there, and I'm not sure a mother's going to trade down on that, just for $0.05 and $0.10.

Diets today there, is a lot of consumers out there watching on special diets, gluten free, dairy free, cholesterol free, fat free or salt free they are not trading down when they are on a diet to watch their health. And you know, as we continue, sales are up at supernaturals like whole foods for us on the center of the store. We are seeing the independent natural food stores doing quite well and we're seeing a lot of other retailers. We continuously see, you know people not trading down, people continuously eating healthy.

Let's come back and look at our SG&A number. Our SG&A number, 18.2 versus 20.2. Down two points. You know, as a Company we are continuously evaluating where we can tighten the belt around here. And we are looking at productivity, we are looking for productivity of $15 million in this Company and there is a lot of good plans in place from the UK to Vancouver to maritime provinces to the East Coast all throughout the country we are looking for productivity. We're also looking today at our whole employee base and where it makes sense for us to make some cuts.

We have a complete hiring freeze. And you know, we're doing well. But I think what's important is in this times, to make sure you tighten the belt and make sure you have a good handle on things. And regards to acquisitions, I feel great about our acquisitions and our discipline. In the month of October, we stopped and said we are going to focus on our business. We're going to focus on driving our business and what we have. And we feel that acquisitions are going to be there for the opportunity. We feel that costs that -- will come down. We feel there will be great prices out there. And with that we'll be patient and wait and see. And if nothing comes along, we'll continue to focus on what we have.

But we walked away in July and August from one major acquisition that I sit back and glad we didn't do. There was some currency with the pound at $2 and the pound today at $1.60 and paying multiples that are in the high single digits or low teens, I think it would have affected us today and I think it shows the discipline of us walking away and us not doing acquisitions that are not right, and that is why we are in a position on the balance sheet that we are today. As you heard me say our financials -- we have a strong balance sheet and we will continue to watch the balance sheet and really will. There are many times I had a lot of people walk in to me and say your balance sheet is underleveraged and you got to use it, use it more, and thank God we didn't. We have a lot of strong banks out there with us. And we continue to do.

That you know, our plan over the next 12 months is to reduce CapEx. But it's not necessary. But how do we reduce CapEx? How are we reducing inventories? And with that, we are looking to build $60 million of cash to use to pay down debt or go to -- go to do acquisitions at the time. But we are really focused on converting that to cash. From a receivable standpoint, as a Company our size our bad debt experience has been you know, has been good. And with that we're really focused on receivables and we see anybody that gets beyond a day we're all over it. But if you look at our top 20 customers they are fortune 500 companies or companies we can get accurate reporting on. We really have our eye on the ball.

What I come back and say is this here. Number one, we are driving sales. Number two we are focused on costs. Number three we are focused on productivity. Number four we are focused on innovation because last year we had $26 million of innovation new products. And last and not least, fortunate to have the best team I would ever work with. and one of the smartest teams, and in tough times like that is something you absolutely need. Led me turn it over to some of these smart people and I will tush it over to Peter McPhillips where it is 9:42 or 9:46 in the UK. And he works the back shift and the day shift. Let me turn it over to Peter, and he will tell you about all the stuff we're doing in the UK. We absolutely have challenges there but we're all over it and then he will turn it over to

Thank you so much, ladies and gentlemen, hello. For those of you that don't know me, I'm Peter McPhillips. I worked at Hain since the beginning of this financial year and I joined via the acquisition of Daily Bread. I find Hain-Celestial an extremely exciting Company, and a Company that is positioned to take advantage of the current economic climate we find ourselves in. What an interesting time that is. I have spent 38 years in the food industry. It's never been a boring industry. And I think it is probably set now to completely change and restructure the way it operates. I will focus on three things if I can.

First of all I will focus on the categories and the focus we are building today. Secondly, I will focus on the customers base that we deal with and those we are going with and thirdly, on the structure of the people to deliver that. And now for our business in the UK and Europe in three categories. Food to go, which is about sandwiches, salads,and food on the move, that is a market that is growing in the UK. Yes it's in some movement in terms of price, and we have seen some of our major customers looking to changing the ranging we got there, but an exciting opportunity. And Daily Bread acquisition has meant that the [Liefseder] facility that we have had is able to spread the channels and the customer it goes after. But having to readdress our range and the launch of a complete new range of daily go products on the market which are positioning them between GBP 1 pound and GBP 1.50 pound. Excuse me for talking Sterling, but the way our currency is moving, I won't try to convert it to dollars.

Looking at food on move. And this is an opportunity we are growing our food products both in the UK and in Europe. And Phillip and I have a meeting today, talking about how we are going to expand our European offer.

Our frozen category. This is a category that has been in decline for some years now, frozen food sector within the UK and within Europe. However, we are now seeing the growth in that category. And we will change to something like a 6% growth in terms of the frozen market and specifically in the meat free market where we trade [ Inaudible ] where we are relaunching our product range throughout December and January. We had a good reception to that new launch from the retailers. And got new [stockers] and greater cabinet space. Our new brands within the frozen sector were increasing our range. But -- with the Ross brand and the (Inaudible) and the economy and also products we can promote heavily post Christmas. Which will be a very interesting and difficult trading time in terms of price points, etc. and promotions. On frozen (inaudible) what Jonathan, me and [Stents] are doing a SKU rationalization on a number of products to put in our base that are focused on the markets and we've completed the SKU rationalization. Hopefully that will be fully implemented by the end of the second quarter.

The third category which is our grocery brand. This is an area particularly mainland Europe (inaudible) has done an extremely good job. And we have seen growth in each brand in excess of 20%. We have gotten new listings[ Inaudible ] in certain areas. We have gotten new customers and that's an area I think that is only just started to grow. Who are we growing with? Our customer focus increased significantly in the major multiples in the UK. We're still seeing growth in terms of all of customers, but the exciting thing is we are seeing more cabinet space particularly to our frozen side and great opportunities with our food to go.

So who is doing that? I since joining the business put in place a new management team. I think with my operational team (inaudible) and finance team I have now got one of the strongest management teams in situ in the UK. They are more than capable of delivering the challenges that lie ahead of us. And certainly from our point of view, we have already started an operational review. We looked to our headcount. We looked to our overhead, and we have taken in GBP 1 million to GBP 1.5 million pounds worth of cost in our family. The business (inaudible) for the latter part of this year and certainly I will take that into the next financial year. Earnings cover price increases. only because of the market [ Inaudible ] UK and Europe and Europe [ Inaudible ] to the states. However, we do still start to see and we are seeing price increases going across on raw materials. They have now stabilized in wheat, soil, and Protein. So we have to be ready for the second round of price increases. They won't be more difficult to implement than in stage two. However, we are in a position to pass some of those on to our customers. But the marketplace going forward, I think particularly after Christmas will remain very competitive. And I'm pleased to say we are in a strong position to broker that. And that was a very quick (inaudible) of what we do in York, and I hope that gives you a feel of where we are. Irwin back to you.

Thank you, Peter, now I will turn it over to John

Good afternoon, today I will review the Hains Celestial US Q1's performance which includes Hain Grocery and Snacks, Hains Personal Care and Celestial Seasoning. Starting with Hains Grocery and Snacks, we saw another strong quarter of growth on top line. We are up 15% versus a year ago and up 7 [x] the acquisition. Our Q1 growth was experienced across all channels and was driven by core SKU velocity, continuing expansion and distribution and exciting new products like Rosetto steam and eat, Imagine low sodium broth. Almond Dream and our Garden of Eatin', multigrain and baked products.

We saw growth across the portfolio in key brands that are growing, Rice Dream and soy dream, West Soy, DeBoles, Earth's Best. Sesame Street, Imagine soup, Garden of Eatin', Spectrum, Rosetto and Maranatha And as you can see it is widespread across the portfolio. And we expect to see the growth continue because we have a very strong new product line up that we just introduced at Expo East, which includes products such as the first organic stuffing product that can be prepared in a microwave, our Arrowhead Mills stuffing express, the Wet soy longevity product which is a nondairy product for baby boomers and especially fortified for them. our Earth's Best gourmet blends which are strong in high Protein which is a real growth area for us. Our Terra salted sweet potatoes and some seasonal products including the launch of our Rice Nog, the Rice Dream brand and bringing back a new stuffing on Arrowhead Mills. The corn bread stuffing. Moving on to the middle of the P&L we experiences Q1 gross margin growth, but we were down as a percentage, which is similar to what other CPG companies have reported.

The key issue was not being able to fully offset the impact of rising commodity and fuel prices that we experienced in March through July, which is a key price and supply contracting season for organic ingredients. We experienced as Irwin said, over $7 million of inflation in Q1 which we partially offset with $2 million in productivity and a price increase we announced on July 1. All the major accounts accepted our price increase, but because of timing and promotions we were only able to realize $1 million of benefit in Q1. We will not realize the full benefit until second half. We expect to see both dollar and percentage gross margin growth in the second half, as we will have slow price impact, we will have continued productivity savings. We are looking for over $10 million in FY '09. And potentially we will see softer organic commodity and fuel pricing.

Although we have not seen any organic year-on- year pricing declines to date. And as we noted in the first quarter call and Irwin reiterated, we are contracted out through Q3 on most key ingredients, especially the organic ones so we can ensure our supply and cost certainty. So any benefit from declining commodity pricing will probable not be realized until Q4.

Moving further on to the P&L. Our Q1 marketing and sales support was up commensurate with the sales increase, and reflects our continuing commitment to invest behind our core brand. In our Q1 SG&A, as a percent of sales was flat with a year ago as we continued to control our spending closely. Our Q1 inventories were up versus a year ago consistent with our Q4 earnings call forecast. And it was driven primarily by increased by Earth's Best fresh pack inventory and the acquisitions inventory. Inventory reduction is a key area of focus area for the Company. And we look to see improvement on Grocery and Snacks by the second half (inaudible) Earth's Best build. (inaudible) So to summarize on groceries and snacks, our top line growth continues to be strong, up 15 with acquisitions, plus 7 (inaudible) with acquisitions. We are seeing this trend continue in October.

Our gross margin was down as a percentage but up with dollars as the pricing lags our March through July commodity increases. We expect gross margin growth in the second half from full price realization and productivity, and we continue to increase the investment against our core brands to drive growth and we got our expenses in check as reflected by our flat SG&A. Now to Hain Personal Care. Now Hains saw very strong Q1. We saw double digit reported sales increases driven by year on year consumption and distribution growth on Alba, Avalon, Jason and Queen Helene.

The reported sales increase also reflects lower year-on-year trade off invoice spending as we have transitioned the business over the last 12 months to a pay for performance trade program. Our Q1 gross margin was up 200 basis point, which reflects the benefits from the SKU reduction as we are no longer producing lower margin, smaller production run SKUs, as well as the improved mix. in part due to SKU rationalization as well as product review and channel mix. The trade reduction previously mentioned and improved efficiencies at our Culver city plant.

We should note that commodity inflation was not as impactful on Hain Personal care, as it runs about 50% of the Hain Grocery and Snacks rate. Hains Personal Care price increases have been implemented on this business to offset inflation, but again will not be realized until second half. Our Q1 SG&A on Hain Personal Care was done over 100 basis point as we continue to realize the benefits from consolidating Jason and Avalon. This is the last quarter we will experience such a strong savings because we are starting to lap year-on-year on the consolidation.

And finally,on Personal Care we brought in over 10% of Avalon's production into Culver City this quarter to further increase our efficiencies and to drive our productivity savings. We are on track to produce 20% of Avalon volume in Culver City in the second half and significantly more in FY 10. We have increased our Q1 inventories versus a year ago, and we look to balance off our certainly production initiative with the Company's inventory reduction initiative in further quarters. So to summarize on Personal Care, Q1 was a very strong quarter, Top line growth was double digits on Alba, Avalon and Jason. We're realizing the promised benefits on integration and SKU rationalization with our gross margin up 200 BPs and our SG&A down 100. And our pricing increasing accepted and we will realize in the second half to offset inflation. So a very strong quarter for Hain Personal Care.

Lastly, we will move on to Celestial Tea. And if you recall, on our last call, I discussed that our FY '09 Celestial Seasonings primary objective was to restore -- restart profitable consumption growth on our base Celestial tea business. Toward that objective, we have identified three key initiatives, the first one is to improve presence at retail. The second one is to halt Celestial Seasonings consumption and share losses in tea season. And third improve our green tea product line to restart growth in this important segment of the business.

Q1 saw us make significant progress against all these initiatives, starting with improving our presence at retail. Our number one consumer complaint is that our consumers cannot find their favorite Celestial tea products at the store. We -- to address this we unveiled a new Celestial tea Seasonings package which combines our improved graphics that we introduced last year which significantly larger flavor and type communication. The improved package received a strong response from buyers and consumers at Expo East in the last couple weeks and our production on this package started next week. We expect to see it on shelf in second half '09 and we think it will make a market difference in consumers ability to find their favorite flavors.

We also -- against this initiative we also shipped a record level of cCelestial holiday displayed in Q1. So not only should the consumer be able to find their product on the shelf, they should be able to trip over the displays as they are walking through the aisles. As we move to the second initiative, which was to halt consumption and share losses this tea season, toward that end we implemented a high impact consumer and trade promotion program to bring back lapsed Celestial users to the franchise. The program started with an October 5th national FSI featuring a $1 off coupon and we coupled with strong in store support. The results from our first effort here have been very encouraging as we have experienced our first year-on-year Celestial Tea increase in food, drug and mass consumption four week consumption, the first time we have experienced this in over three years. Our twelve week trends have been down 8%, our latest four week trends are up 1%.

More importantly, Celestials' herb tea, our largest segment was up 4% in the latest four weeks, after being down 3% in the latest 12. We are seeing positive signs in our efforts to bring back lapsed Celestial users. Which brings us to the third initiative which is improving our green tea to restart growth on this important segment. On Expo East, we showed new packaging graphics to better call out the green tea segment and its flavors from the rest of the Celestial line. We are also improving the product with a better taste profile and higher anti oxidant level. And we are getting ready to introduce this improved tea on schedule for the second half, and you are see this flow through and we believe this will make an improvement in this trend.

And finally, we strengthened our management in Celestial with Peter Burns, as general manager. He comes back to Celestial, having been here from 1992 to 2000, but along the way he gained strong turnaround experience from his stints at Muana Loa and Easy Soda. Peter's strength is in sales and marketing and we are confident in his ability. To summarize on Celestial we focused the organization on restarting the Celestial tea profitable consumption growth. Brought in a new general manager, Peter Burns implemented initiatives to improve our retail presence, bring back lapsed users and improve our green tea and we are pleased with our initial results seeing our first consumption increase in over three years and we continue to see strong October sales. With that I will turn it over to Ira Lamel.

Thank you, John, good afternoon, everyone. I will walk you through some of the details on our adjustments for the quarter to our earnings. As we discussed with in previous quarters, we continue to incur start up costs with consolidating into our UK Fakenham plant into the first quarter this year. That phase of the integration now complete. The integration arose in connection with our acquisition of Haldane Foods in the UK, and we determined to eliminate two Haldane facilities. In completing the integration project in the first quarter we incurred $2.5 million of costs which impacted after tax earnings by $0.04 a share and including the unabsorbed overheads in resulting from our expired co-pack agreement at that plant.

We are continuing with our reorganization program as discussed in both Q3 and Q4. During the first quarter the program cost us $900,000 or $0.01 per share for the cost of closing the warehouse facility and reducing our headcounts. As John discussed, the Personal Care margins in connection with this program have started to rise as anticipated when we initiated it. We also pointed out the you in the past that we were obligated on a co-pack and processing agreement with the former owner of the Oxford While the contract obligations are completed, and the contract has expired our first quarter results were negatively impacted by $0.01 a share in earnings. As a result of our obligations under this agreement, coupled with the severe increases in corn and soy meal prices in the summer months, gross margins in our Hain Pure Protein joint venture declined from 12% a year ago to 5% in this quarter.

Now that the contract obligations are completed and corn and soy meal prices have moderated, we expect our Hain Pure Protein margins to return to their previous leveling going forward. We also added back to professional fees we continue to incur during the inquiry into our the stock options practices, in the first quarter we incurred $1.8 million of such fees which is $0.03 a share after taxes. During the first quarter we amortized outstanding equity grants to our P&L, and as we anticipated we incurred $1.4 million of stock compensation expense, or $0.02 per share.

In the development of our full year earnings guidance, which we published with our 4th quarter earnings release, we anticipated that the first half of our fiscal year would bear the increased effects of inflation, much like we saw in Q3 and Q4 of fiscal year '08. Inflation started to impact our earnings after Q1 last year, and therefore a comparison of margin performance in this years first quarter must be viewed with that in mind. Inflation and input cost was more than 7% over the year ago quarter with a net impact on our gross margins computing at approximately 445 basis points. We achieved additional productivity in the quarter of another 70 basis points. So the net impact on margins was about 375 BPs.

We expect to see a leveling of inflation year-over-year beginning with future quarters, and despite the 375 point drag on gross margins, our same brand margins year-over-year, absent the Hain Pure Protein unit declined by only 218 basis points. With over 20% of our Company's business coming from units outside the United States, and with the strengthening of the US dollar information about the impact of foreign currency on our nine US businesses may be important for you to know. Our nine US businesses operate with the Canadian dollar, British pound, and the Euro as their functional currencies.

During the first quarter this year, the Canadian dollar and Euro were stronger against the dollar, while the pound was weaker all when compared with last year's first quarter average. During the first quarter this year foreign currency fluctuations had almost no effect on sales causing only a $500,000 decline year-over-year. If the dollar strengthens by 10% on average for fiscal year 2009 versus the average of fiscal year '08, consolidated sales will be affected by only 2.3%.

Some other things I would like to point out to you. As Irwin said our balance sheet continues to be strong. We have $745 million in equity and debt amounted to only 43% of that equity at September 30th.. And our credit is with a consortium of strong banks. We had over $40 million of cash at September 30th. Our inventories have increased by $40 million in the quarter, driven by the increase in inventories at Hain Pure Protein, as it prepares for the heavy shipping season leading to the Thanksgiving holidays. Inventory in that unit alone totaled $36 million. We expect a significant reduction in our inventories by December and in the following quarters. and expect to be building cash as Irwin said, as we go forward in the year. Our adjusted EBITDA is for the quarter came in at an $27.2 million versus $26.7 million last year, and current depreciation and amortization for the quarter was $5.4 million. With that, we can open it up for questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of David Palmer with UBS. Great, thanks. The release said that the Company expects that the benefits from price increases will improve margins during the second half by 200 to 300 basis points I'm wondering exactly what does that mean? Is that your year of trends will improve by that? In other words the gross margin deterioration will be reduced from the 350 plus to 50 to 150? You know, how exactly should we be thinking about that?

David, it's Ira, the way we look at it is that the price increases we announced in July and went into effect in the middle of August, had a small impact on Q1 probably only $1 million dollars worth of sales increase from that price increase. We expect that the price increases that we've implemented will give us another $6 million to $7 million in sales. And without using the funds from those increased sales for any other purposes; if it drops straight to the margin line that would improve our gross margins by that 200 to 300 basis points. Typically, it takes till the second or third quarter after a price increase for it to mature in full and that's why we expect it will help margins in the back half of the year.

And if we were to kind of break down the gross margin, you gave lots of data points there. You said at one point Hain Pure Protein, if you excluded that it would be only 218 basis point decline. I guess that was implying there was only 130 to 150 basis points was due to that one division being down to a 5% margin from 12%? Is that correct?

You're right on in that number. It was about 150 basis point decline on the consolidated margins resulting from Hain Pure Protein and it mentioned it went from 12 to 5. But remember this quarter we took the effect of inflation that really started to accelerate on us beginning with the end of the second and last fiscal year. On an anniversary basis we are just getting there and we had a 7% rate of inflation on our inputs. It was about 150 basis point decline on the consolidated margins resulting from Hain Pure Protein and it mentioned it went from 12 to 5. But remember, this quarter we took the effect of inflation that really started to accelerate on us, beginning with the end of the second quarter and last fiscal year. On an anniversary basis we are just getting there and we had about a 7% rate of inflation on our inputs. And David, I think the other thing is in the first quarter, we did not hedge we bought out.. If we were to buy that same corn, today in the 1st quarter it would be about a $3 million difference in price. So coming back to our 12% 13% operating income, or margin on our chicken ---excuse me -- protein business that is how we are looking to get there.

If I have one last follow up, it would be on the tea business. Some of the things John was talking about about. It seemed like improvements for the second half of this fiscal year. This is a very seasonal business and I'm wondering has the inventory ship already sailed and the marketing plans already pre-dated John and his improvements, whatever he was talking about there, I guess there was new displays. But are we really talking about a top line recovery more in next tea season?

David, this is John. Actually the program that drove the increase in full wheat consumption was something we implemented late this summer. So the answer to your question is this program will impact this tea season. I am looking to reverse consumption losses in this tea season.

And David I think one of the other things we are seeing out there is the consumers are now buying the $2.99 and $3.29 tea and trading down from the higher priced 8, $9 teas and seeing the benefit of that. But, you know, we're seeing already a lot of the benefits, and a lot of the benefits that were put in place at shelf, flavor, some of the new packaging, some of the promotions are absolutely in for this tea season.

Thank you.

You're welcome. Your next question comes from the line of Scott Muskin with Jefferies & Company.

This is actually [Mike Alloway] in for Scott. One quick question. Irwin you seem to be seeing significant increment business with mass merchants and supermarkets like Kroger and I know you have been in some of these retailers for some time. So what inning do you think you are in in terms of the merchandising of that channel,p and why are they taking more of your product and what advantages does Hain have over transitional CPG companies and other small organic companies? Is there is kind of a margin opportunity for more of your product in this channel going forward?

I think a couple things. Number one I look through a list today, whether it is Gerber Organics, Smuckers organics, Swanson organics, Ragu organics Prego organics, or Kellogg's organics. And want to come back here and say they are not great brands but there are a lot of organic brands lot of conventional brands that converted to organics. And that consumers saying, "Wait now, I see it on the shelf at one premium, why am I paying a premium price and I don't understand why this is organic. So number one where they went into supermarkets first, they are now coming out of supermarkets and a lot of these the categories and brands are going away. The second thing is there are a lot of smaller brands out there and again this is a fragmented industry, where a lot of these brands are just not going to make it. And Hain today, going in as one of the largest natural organic food and natural Personal Care and protein Company. We are going in there with a solid program, solid support. And the big thing is we are going in there with solid data to show what is going on here. No different than we are showing data consumption numbers today. And you know, whether it's Kroeger or big mass merchants -- that is what they are used to dealing with and that is the kind of products and brands. And with our diversification of products and SKUs that is where we are seeing a lot of growth

Okay. Thank you very much.

You're welcome

Your next question comes from the line of Gregory Badishkanian with Citigroup.

They will get your name right one of these days.

Question on the sales line. I'm estimating about $3 million in sales from acquisitions about 10% organic growth companywide, how far off am I?

Greg, you will have to come up with new questions. Greg, I think you figured it out pretty closely.

All right.

I think, you know, we're absolutely in range of that. Yes. And you know.

Okay. Good, good.That's an acceleration from last quarter. So my question is having been out at the Expo and a number of -- we were seeing a number of the vendors actually had canceled, smaller vendors I'm assuming part of that has to do with market share and a robust industry. Just with the credit markets and financial markets in distress, are you noticing a number of your smaller competitors not having capital to expand and grow and a nice opportunity to pick up share from the difficulties in the financial markets?

You know, we're definitely seeing that and you know, we're hearing that from grocer and they are coming to us and whether it's a belly bar or something for a pregnant mother or something like that, "Can you guys do that, can you take one of your brands." We're absolutely seeing that. The other thing some of these smaller companies where they are co-pack and don't have the capital from a co-pack standpoint. And the other big thing today is that every company is worried about quality controls and what they -- are they spending on quality control and quality insurance. And that is something that is a higher standard here. So you know, you're going to see this industry go through some changes. And I think as we read some of the articles out there about organic consolidating or organic slowing, not so much organic is slowing -- you are going to see no different than you saw in other categories a lot of of brands and products go away. And some of the smaller ones and it's great for us for a shakeout here -- in this category where people are going to go back and focus on what they do best. We are seeing this on conventional grocery brands.

And just as a follow up, you know, obviously very strong growth in the quarter. You mentioned in the press release that October was strong as well. You seeing deviation with sell through at retail with shipments? Or this is -- I'm assuming that retail and your shipment growth are kind of pretty consistent. I don't know many retailers out there that are building up inventories in this environment.

If anything Greg, and I didn't mention this earlier. What we have seen are some of our customers reducing inventories, no different than we are trying to take inventories down. So not factored in our numbers is customers that have taken down inventory. And the numbers that John Carroll gave you, were all consumption numbers. so they are sell through numbers at retail. The numbers I gave you were shipment numbers and John's numbers are consumption numbers.

Good, nice job in the quarter too. Thanks.

Thank you.

Your next question comes from the line of Jacklyn Rider with Lazard Capital Markets

Hi, just a few questions --

Can you speak up?

Sorry about that. Going into the key holiday season with the Protein business you no longer have any of these contracts that cause you to lower the prices of your product or anything along those lines, correct?

Absolutely. When we acquired this business and one of the reasons was a contract that we had to produce for Pilgrim's Pride at our absolute cost -- turkey meat and turkey breast which they sold to the customer. And with that -- as prices moved up because grain prices moved up, we could not sell that to other customers so part of the contract and part of the purchase agreement. As of October 1st that is behind us.

Excellent. And then also on your commodity costs. Inflation here. What percentage of your -- of your raw materials is coming from organic versus conventional? You know, I know organic prices are not coming down. So when we are watching the conventional prices coming down dramatically how much of a benefit will you you get from that?

Over 50% of our contracted commodities are organic.

And when we say organic prices are not coming down. We purchase it once a year and to secure that. We purchased this in August and September. And we'll probably purchase out to the third quarter. I think the good news is this year if we are buying spot, yes spot prices may come down, but we're not going -- to be doing a lot of that. We can sit here today and assure you on a couple things, number one, I mean, sitting here last year we didn't know where commodities were going. Andy assisting here today we know they're not going up. And the other good news we as a Company have taken pricing to be able to support the prices that are out there today. And that's how we plan to the -- it our full forecast year et cetera. But I think the big thing was secure supply. And as some of these other organic companies decide to exit the category, I think there should be an opportunity for additional supply and prices in our second half will start to come down and the third and fourth quarter. Don't forget, we're thrifty, we're six weeks away from our year half being over here. Shortly we are into next year's contracts and a lot of organic ingredients start to come out of the ground next July August, so we're almost a year out. But on the positive side, on the Protein business we hedged out and we're buying at much lower prices in the second quarter. And buy much lower prices in part of the third quarter. But going into the fourth quarter we're going to start buying contracts shortly for all our Protein businesses.

Great and up with question on acquisitions. You are going to take a pause right now. But if the right acquisitions do come along I'm sure the pipeline is still active. If prices do come down, will you still pull the trigger?

We will pull the trigger if it's strategic and nondilutive and accretive and we buy it right. We feel the days of double digit EBITDA numbers are over. And I think there's going to be opportunities from private equity. There's going to be opportunities from smaller companies that are stretched and not financeable, or can't get financing. And we think there's also going to be opportunities for companies whether they are public with a beaten up equity and there could be some opportunities there. And you know, so there is going to be opportunities. But today what I can tell is you we're set assisting here with a great portfolio of brands and products and that is where our focus is going to be today and focus on that. And if we build our cash, cash will be king.

All right. Thank you.

You're welcome.

Your next question comes from the line of Simeon Gutman with Gold man Sachs.

First question I think for Ira. First question what is the biggest delta low to the high. The first quarter is done, top line is great but now you have visibility with regard to the back half of the year.

You have price increases et cetera. What can change or what can swing within that range from this point on?

I think rather than talk to what might be one biggest item, I think there are a few items that we look at when we look at our guidance Clearly we have to execute on the sales line. We have to execute on the margin line. We have to get productivity improvements out of our operating units. And those things are all variable and all subject to you know, as I use the word execution going forward during the year. We're encouraged with the strength of sales. That certainly is helpful to the reason we feel very comfortable reconfirming full year guidance. You know, we may see fluctuations in the quarters as we go forward from what may be our usual quarterly earnings stream. But on a full year basis we feel pretty good about getting to the goal line.

It's Irwin -- and I want to add to that, -- that I think to Ira's key point sales continuing strong is a key metric here. Having pricing across all John's business, to our tofu tempe business taking a price increase in Canada. Peter taking some pricing That we got those in place and we'll start to see the benefit and that's why I'll say our guidance for the full year is important for us. You know, the other thing on sales, as I said before there might be categories that slow down, whether its supernaturals or convenience, but I think as a group we know where we have to make it up and we are diversified in different brands. Along the way, am I going to sit here and say everything is going to do perfect? and do we think every other categories is going to stay on fire and sell? No, but do we see our other categories really selling and doing great things? Absolutely. And you know, with that, the other thing you heard me say before, which is not in our guidance and it's not in there, as we look to cut other costs around here and tighten the belt. And whether it's personnel, whether it is other expenses, we're really going to look at that as you know, no one is certain what is going to happen in this world. I think that is important for us.

And then just following up on the consolidation or acquisition question. You may be averse to the high multiples and maybe the industry might not have the high multiples on big businesses. What is the brand power and the leverage you have from having all the different categories, what does that do for you with regard to taking a sub $50 million brand and potentially having more of those opportunities looking out and a better value. What is your motivation to do that -- that? Maybe you don't want to do a certain number at a certain time but how easy -- how exciting does that look over the next 12 months?

Well, number one we might pay those high evaluations, there is no might we will not, and thats number one. And number two, we don't have to go out there and hit the grand slam there is nothing wrong with good doubles and triples here. Avalon, Alba, Spectrum, MaraNatha, EnSpire just to name a few. They were $50 million businesses and have grown on their way to $100 million and great for us. So we're not out there looking for the billion dollar opportunity. We are looking for good $50 million to $100 million, if something in the $200 million came along and really made sence. But it is important for us for the categories, categories that can enhance us with our customers.

Thanks.

You're welcome.

Your next question comes from the line of Scott Van Winkle with Canaccord Adams. Now that commodities have stabilized, this is a follow up to the last question. Where are we in the process of productivity gains and reformulating products with lower ingredients? I'm assuming you overshoot on one end and in the back end. Are re-- we going to see more productivity gains and changes in formulations to get better pricing and you know what does it look like 12 months from now? Are you on a better situation on margins. I'm wondering where you are in the process now that commodities have stabilized.

Scott this is John. I mean, we put productivity as an initiative over the last couple years and it is one that we focus on every day. We went from zero to $4 million to $8 million last year. We expect to get more than $10 million in my units and Ira and Irwin were talking about 15 for the total business. And we're looking at -- you name it, whether we need to downsize a product or need to look at sourcing ingredients from other areas and things of that sort. It is part of our culture here. So a year from now I would expect to see us grow this number aggressively in terms of productivity savings and if we get back to a stable commodity environment I would expect us to get back to a position where we are driving improvement in gross margin quarter on quarter.

And Scott, sitting here is Elen our chief growth officer and she wrote me a note about value engineering and keeping quality. And we have had a major meeting here in New York about three weeks ago, where we had the technical people and R&D people and QC people from all over the world in. And right now we are going through ingredients and sweeteners and where we are sourcing ingredients from, what are we limited and what can come from China and can we replace anything from Asia. We are all over South America. We had a rice -- cereal problem in the Earth's Best, we couldn't get it in the US, and where we went and outsourced it in South America. The other thing Scott, that has happened dramatically here there are two big drivers that drove up our costs and that was freight and packaging, because of petroleum base from packaging. And there is a major initiative on here in regards to reducing packaging and not having a petroleum based and that is a big part too. So that is something that is on continuously ongoing. And you know, today, with us producing gluten free and you know, us producing lactose and rice and where the rice comes from, our different rices and different blends. There is a ton of that happening from a product standpoint. So, absolutely, it is a big part. And it's a big way to drive down costs from our business.

Thank you.

You're welcome.

Your next question comes from the line of [Shawn Tessarow] with Black Rock.

Irwin, just a quick question reconciling what Ira said in reclaiming 6 to $7 million of the costs from pricing over time. This quarter, you all set $10 million in costs with $1 million in pricing. Are we kind of in the current quarter we're in are we at half, 50%. You left 90% out there in the past quarter. And I know as we get to kind of half it should be closer to the parity -- it should be closer too. I wonder if you can help me with that.

Just what Ira said is basically, Shawn, we had hit us in this quarter, you know, $7 million to $8 million in higher costs. We were able to offset that by $1 million.

Okay. And what we'll get over the next three quarters, including this quarter, the full benefit of our price increase. Our full price increases never come into place until August 18th, and we're able to only benefit $1 million where from a pricing standpoint, we got the cost that hit us all July 1st. And that was the same on certain tofu products and and that was the same on frozen grocery snacks. The UK products also we paid a much higher premium for corn in the first quarter. And it's not --

Go ahead.

And on a stand alone basis. If we're just looking at the costs and taking the pricing. How much can pricing offset and how much is coming from productivity? I imagine it's not all coming from pricing, or you don't want it to all come from pricing per se.

It's not all going to come from pricing. It is going to be continuing productivity. And just to make sure we get the numbers right. It is $10 million that we saw on the input side as inflation. Irwin's 7 was the% of inflation. It was $10 million in inflation that we saw. We saw about a $1 million to $1.5 million come through in the current quarter in productivity improvements and we saw about a $1 million come through in the quarter in pricing on the recently effective August price increase. Now remember, there were other price increases that were put through in earlier quarters, which have now matured and did help in terms of comparing sales this year to sales last year and the like quarter. The $1 million I referred to was only the impact of that most recent price increase that we called out.

Okay. So that number pricing offset is somewhere higher? 3, 4, wherever it be?

That's correct.

Yes, and Shawn just to be very clear, last year we got $12 million, $13 million in productivity as a Company. And $12 million, $13 million in pricing and the rest came from higher sales and other costs. We're looking for pretty well the same this year. We're looking for additional costings as you heard me talk about before and other belt tightening because of some of the unknowns out there.

Okay. So kind of a parity between the pricing and productivity?

Yes. Absolutely. And the productivity plan, you know that has been in place since last year. And I think there is some good opportunities James Meiers who lets it up from the cooperate level and Peter McPhillips talking about take $1.5 million out in the UK, and I have been on the phone in Canada. There are major initiatives going on here. And that is a big part of our plan.

Okay. Great, thank you Irwin.

Your next question comes from the line of Andrew Wolf with BB&T Capital Markets.

Hi, good afternoon. You mentioned the Nielsen not capturing a lot of the channel.

Yes.

Is it fair to say we should just take away from that that you are seeing better sales into those companies that don't report? And if that is accurate is it more, you know new distribution or nor reorders? Since in the article organics is slowing using Nielsen info.

We are seeing both. You heard Trader Joe, Whole Foods, Walmart, independents Babies 'R' Us, Costco, all them, convenience stores, all them are absolutely are not part of Nielsen's, okay. That is number one. Number two the other thing which I mentioned before, you heard me name major brands, and I have in front of me, whether Gerber organics, Smucker's organics,some of those Ragu organics where we are seeing absolutely falloff in those organic brands. But you are seeing great increase from a Hain side in those accounts that are not covered by Nielsen's.

So it's more you are taking share as a category, maybe actually slowing as Nielsen is reporting is that how you are looking at it? I'm just trying to figure out if Costco is a proxy for a non-Nielsen measure is growing faster than the Nielsen measured channel is growing faster than Nielsen measured channel.

I would think Costco and some of these other are, mass market are absolutely growing faster than Nielsen measured channels.

So it sounds like a combination of both, you are gaining relative shares, brands recede and some of these nonmeasured channels?

I think what is important is our model has changed. Hain-Celestial was a player in the natural organic industry which it is. But the consumer is demanding more and more natural products and more and more classes of trade. And we out there servicing with our portfolio more and more natural products. Still today in supernaturals you will find 1400 to 1500 of Hain products and supernaturals or independents. You will not find that many in supermarkets or mass markets, but you are going to find more stores out there the. And you know, the focus of our group is really to grow our business statewide, nationwide. And globally.

Okay. And just wanted to ask you, am I still on? Okay. Sorry. You know, the earnings, the consensus progression for Q2 and Q3 and Q4 is almost the same -- it's not exactly the same but it's 12%, 17% then 9% in Q4 because of the low tax rate last year. That is pretty tight and everything you're saying from my point of view sounds like pretty back end loaded earnings growth including the hedges coming off. Right now you have a pretty aggressive FSI;s against the tea business that is moving the product, but those FSi's cost you something. Sounds like the UK is still maybe, at best in a very early turn or lets call it an early turn. Would you care to comment on that whether you think the consensus might be a little too smooth and should be more back end loaded?

I think that we have always said that, it should be back end loaded because of pricing, getting efficiencies of our acquisitions and --

the anniversarying of input up costs.

And anniversarying of input costs. Absolutely we've said that and is proved here in the first quarter. And that's why we set guidance for the full year and we focus on that. But I step back today and feel good about how sales are growing. I feel good about where our margins and our price increase having a good handle on commodity costs and, really have to diversify of our portfolio and brands. Yes we still got some challenges in the UK and we know we have to work on it. And you heard from Peter McPhillips knowing what we got to do there.

But on the other hand, Andy in six weeks from today half the year is going to be over. We are pretty far out there already with plans and executions. So.

Okay. Thanks.

Thank you. I think this is the last question.

We have time for one final question. Your final question comes from the line of Brent [Shukwin] with RBC Capital Markets.

Just two quick ones. Seems like Personal Care, if there is one area of your business that would -- that would have a little bit more impact, see only impact from that kind of deteriorating economy it would be there just because people view those as a little bit more of a premium product. Just want to get your thoughts on that and whether or not you are even able to see a weakness given the muddling of the situation from the SKU rat?

We at this point we continue so see good solid consumption in Personal Care. We don't see it gets softer yet. We saw double digit growth in this quarter and October still looks good and we are not seeing it fall off. I understand your concern and it's something we are watching closely. But I think this is where it is important to be a number one or number two brand. Because there is going to be falloff at the fringes here. And but there are -- Jason, Avalon and Alba have been core brands in this category for a long time.

And Brent what we see here is -- we have gone to the trade and looking to remove slower selling SKUs and coming in with faster selling SKUs and taking that space. So I think from that standpoint, that's the benefit and that's why we are seeing, as John said, his margin being up 2 points. But I think John hit on a good point which I tried to hit on before, you know, listen, these tougher economic times, there is some benefit for people here. And hopefully as smaller brands, weaker brands that can't support their brands to go away there are other opportunities in space. And I know Peter McPhillips and I have been pulled into situations where potential vendors could go bankrupt and a retailers doesn't want that is there an opportunity for us and can we supply that? And I think that is something with a strong portfolio and balance sheet and things that we are focused on ourselves. As I said before in times like to this is where you need a real tough plan, a great group of people, and brands and what we're seeing here in the natural organic industry, consumers want brands. A question continuously asked to me about private label we are not seeing anybody hit the ball out of the park so far on private label and trading down to private label. If anything there is backup and trouble in some private label areas.

Great, thank you guys.

With that, thank you very much.

That being our last question, I want to thank everybody for participating in today's call. As you heard me say before we are definitely not, in easy times. And when the going gets tough, the tough get going. Its just as good running the Company in the go go days as running them in the tough days. It's a good brand, good people, strategy and good financial metrics. And the team I sit here with today -- if you want to go to war -- this is the team. And number two I said assist here with great brands and diversified and absolutely not everything will go right and we are watching some of the brands and just as the last question asked is stuff going to fall off in Personal Care. It could, but we are focused on that and making sure Adam and his group and the other teams out there are absolutely saying hey we need 5.4, we need 5.4 because of a potential falloff so we are focused all over that.. Drive sales, drive sales. We are making our distributors and customers work for their trade dollars and performance. It's not just here's a gift. The other big thing, spending our consumer dollars today we are spending it back towards the consumer, whether it is a coupon drop or whether its cents off at retail. t man standing got to eat. Hopefully they will continue to eat healthy foods. Have a great Thanksgiving and holiday and thank you for listening to our call today. We have seen extraordinary results just on the Celestial Seasonings one dollar off how that really drove sales. So we are really focused on that. And with that, they always say the last man standing has got to eat

This concludes today's conference call. You may now disconnect.