Hain Celestial Group Inc (HAIN) 2009 Q2 法說會逐字稿

Good afternoon. My name is Brittany and I will be your conference operator today. At this time, I would like to welcome everyone to the Hain Celestial second quarter 2009 earnings conference call. (Operator Instructions). Miss Mary Anthes, you may begin the conference.

Good afternoon. I'm pleased to be with you today to introduce our second quarter fiscal year 2009 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 and Chief Executive Officer, Hain Celestial United States.

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 will be limited to approximately one hour, so please limit yourself to one question and a follow-up question. If time allows, we will take additional questions and management will be available after the call for further discussion.

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

Hi, everybody. Good afternoon. I know it's tough out there, but I've got a lot of good things to take us through, and John does, also, and Ira, some of the good things happening in our businesses and where we have some of our challenges but, again, on our solid foundation.

Sales for the quarter up 14.2%. Ira will take you through gross margins, how we reconcile gross margins, but I think we'll see the improvement in the businesses were the gross margin and some of the commodity -- or some of the businesses in chicken and the UK, how they affected us.

One of the things -- what I like to do is be upfront in predicting commodity prices and new trends. But we've really focused on our SG&A. Our SG&A in the quarter 15.4 versus 17.5. Some of it came from the higher sales in poultry, but we've really focused on costs in this Company.

Our cash in the quarter was $50 million. Our free cash, $9.4 million. So I sit back today, no, we're not calling Washington for TARP money or anything like that. Our liquidity, our balance sheet, our working capital, where we really focused on our cash conversion, it's really strong in today's day and age really to have that.

The number one thing, as we all look, what's going on out there, are people trading down? Absolutely. There is some trading down on there, going on out there. As I said on CNBC, we don't live in a cave and we always expected it, and that's why we positioned the Company where it is.

Our average grocery product is $3.89. Our average personal care product is $8. But you know, what we are continuously seeing, health is a concern. And health is a concern when it comes to low-sodium, gluten-free, [kelara] products. We see people are not trading down from a health standpoint. People want to be healthy to keep working.

We're seeing very much more people into family values and eating at home, where the average meal at home is $5 a person versus the $12 a person at eating out. Concerns of obesity and a lot of other things are real important. So we're not seeing trading down, we are seeing inventory reductions. We are seeing pantry deductions, which we'll talk about there.

John will talk to you about grocery, frozen snack, and tea, and -- our Earth's Best business. Baby's got to eat and babies will continue to eat and they're eating organic baby food. So between formula, baby food, diapers, up 37%. Not too many brands grow on a 37% today. And that's bringing new users in every nine months, and that's anywhere from $0.89, $0.99 jars of baby food.

Soup business is strong, up 12%. Our rice milk business, up 15%, and that's Almond Dream, and I'm taking away a lot of John's script, because he's got all the good things to tell you. But it just shows you our consumption in our businesses out there, in a lot of our grocery businesses.

Just one other thing I want to point out is Arrowhead Mills, where people are back cooking and baking, up strong, too.

What I've got to do is congratulate the Celestial team under Peter Burns and John and the group out there. What a great turnaround on Celestial, up 3%, and what we're seeing consumers look -- know the brand, look at the new packaging, and are not buying the higher-priced tea, and John will talk to you about that in a little while.

So, I'm telling you all this good stuff. What happened in the second quarter? Our U.S. business is good. Our U.S. business is strong. You heard Kraft talk today about inventory reductions. You heard Sara Lee talk about inventory reductions. It's something that we can't control.

It's a little scary because I think, out of stock, it will create out of stocks, and as everybody tries to get down to 40 days, 50 days, I think there is some challenges out there. But that's something that every retailer is doing.

We're still living through some of the higher commodity costs and we will get through a lot of it in this quarter. Higher grain -- just on our chicken business alone, it costs us $5.7 million in this quarter, on higher grain costs compared to where grain costs are today, and my prediction here is grain will come down and corn will come down to $3 a bushel.

So, from a standpoint, what do we do in November? We came back and really looked at the organization, how we integrate the organization. Look. We treated every business like an acquisition and how we would integrate it, where could we take costs out. This is not something we have done. We've never really had a reduction in force in the history of Hain, and we reduced our force -- we reduced our people almost 8%. And we will have taken out, on an annualized basis over next year, $15 million, $16 million in people costs. That's quite a bit for the Company and there's some opportunities for more as we integrate.

We went ahead and looked at every area in the Company, and every cost center and really focused on that. And that excludes all the productivity costs that Jim Meiers and his group work on and all the other productivity costs that other people are working on within the company.

So, stepping back, one of the big challenges in this quarter is the UK. The UK market, I was there last week, is much weaker than the U.S.. I've said it, and some of you heard me say it at conferences, we need to evaluate our UK position. There's some good strong businesses there, there's some challenges positions there, and you have got a tough economy.

So Fakenham, which is our business today that has some unabsorbed overhead and is losing money for us today, but I walked out of the UK last week with the Linda McCartney business up over 10%, Realeat business up -- we have a tremendous amount of private-label opportunity. And what really hurt us in the UK -- we used to be a co-packer for Heinz. They pulled that business away from us and that really ate up our unabsorbed overhead. And at that time, we did not pick up other private-label business.

Linda McCartney is going into Asda for the first time, going into Sainsbury in a much bigger way. The Ross business is growing, which is another brand, and we're in the midst of picking up a private-label business.

Right now, we're on about a $14 million run rate on our Fakenham -- GBP14 million. Our guys believe we will get to an GBP18 million run rate, which will get us at a breakeven by the end of our fourth quarter. And that's where we want to go. We get into GB20 million, GBP25 million, and we start seeing us make some good money out of that facility.

And at the end of June, if I don't see that, we will evaluate it and take some other steps. But that's what we're really focused on that. And I feel good about getting to the $18 million run rate. And if we -- a few things come our way on private label and some other things, we could see that run rate with a 2 in front of it.

In regards to the Luton facility, which was basically only a Marks & Spencer facility, sales were down as Marks & Spencer cut back on some of their food, cut back on some of the sandwiches from a spoil standpoint, and their business is down. We've had many meetings with Marks & Spencer. We will change direction where we will become a specialty sandwich maker for them and some -- make some other triangle sandwiches.

But what we've agreed with Marks & Spencer is that this was a facility that was exclusive Marks & Spencer facility, we have the ability to make other products in that plant where we didn't have that before, which will allow us to expand the Luton facility. And the Luton facility is a great facility.

So we're able to improve pricing, mix, other higher-premium products, so looking forward to that out of Luton.

Our Daily Bread business is doing okay, good branded business and good distribution there.

Our opportunity in the UK is our non-dairy business. One of the things that came along with our acquisition on Haldane was a manufacturing facility in Manchester that made soy milk. And we're seeing our sale -- our business up on Rice Dream and Soy Dream, up 8%, and we have the ability to bring a lot more -- a lot more products into that facility.

We weren't able to get a price increase through, which affected our margins also in the quarter in Luton, but we've taken a 2% price increase in January and another 4% in March on our non-dairy business. So I am looking for about a 15 million liter business out of our Manchester facility, and that's all new business coming to us.

We will continue to focus on Earth's Best. We had to get Earth's Best certified from the organic association, soil association in the UK, and that is happening. Celestial and Terra, our other brands.

Europe, Lima for the quarter was up -- flat. Throughout the rest of Europe, our Natumi business was up 10%. We took out some people costs, so we will continue to focus really on our European business.

Let's talk about our poultry business. Our overall business in the quarter was about $61.5 million. That was 17% below our budget. So what happened? Our gross margin was 7.6%. Our plan was to have a gross margin of 14%. The good news in the quarter, our pretax, we made over $2 million versus $2 million last year, where almost every chicken/turkey facility are losing money.

We did not hit our budget. Our plan was to earn about $5 million. Just in the quarter, though, our grain costs were $5.7 million higher than it would be today, and in the first quarter, it was $3 million. So that's $10.7 million.

Other good news, our antibiotic-free Plainville turkey business was -- sales were up 18%. Our ABF chicken business, up 6%.

One of the things that really happened to us and why are sales off, our demand for antibiotic free turkey that we thought would come out of the new Oxford facility, which we would convert from conventional to ABF, was a lot less than we expected, and that had, in my opinion, a lot to do with the economy, where people were not going to buy antibiotic-free versus conventional.

But there is a good place -- a good plan in place of how that becomes much more of an ingredient supplier to antibiotic-free, and what else we're going to do with it. So the model does work.

My prediction is corn prices will come down to $3 a bushel. You've seen us announce that we have closed our Plainville facility and moved it into the new Oxford facility, and we will get about a $9 million savings from that. We are opening up a kosher facility in the Plainville facility up in Syracuse, and we see a big opportunity in that facility and we look for some higher prices.

And our big challenge out there is to convert the conventional to ABF, and we think there are still good opportunities. But we must stay on our plan of staying ABF and not being just a conventional turkey supplier.

Canada in the quarter, just a little lumpier than we would have liked, and not any business issues, just -- our Yves business was up 7%, all other was up 14%. What happened there in Canada was inventory reductions and some currency effects. And I think we've got some good things happening in Canada, and Beena and her group are really focused on it and we will continue to see good growth coming out of Canada in the back half of the year. They've really put some good plans in place.

In our press release, you would've seen, we announced a deal with Martha Stewart. I'm pretty excited about that. I've spent plenty of time with Martha and I got to tell you, she is a great person out there for brands and really believes in quality brands. And what Hain stands for and Martha stands for are a lot of the same things.

We're going to launch a whole line of cleaning products, green cleaning products. And as you know, we've tried to get into this category for a long time. We've tried to do acquisitions. Multiples were just in the hemisphere, so we think with Martha's brands, her advertising power, her concern with quality, and our awareness of green -- this will be made in our plants. We will formulate products together and we look to introduce this some time in September.

On the acquisition front, there's lots going on, and a lot of acquisitions that we looked at last summer, last spring, last fall are still coming back at a lot cheaper multiples, which is the good news. And they're out there and looking for a home, as they look to be part of a bigger company, so that's something that ultimately, as we get into the third and fourth quarter, we will focus on, and there's some real good properties out there.

So, let's recap. U.S. business is strong in grocery, frozen, and snack. Tea momentum is strong. Good momentum at Jason. John will talk to you about Avalon and Alba, where Avalon continues to have good growth, and we've got some things to do with Alba.

We've got a lot happening in the UK, and we really made management changes. You heard Peter McPhillips talk to you on the last call, and we're seeing the benefits of it, and -- not the benefits of the losses, but benefits of some of the wins in sales out there. So I am confident we will get to where we need to on the UK, and we will stick with it for now. But if we see we're not making those headways, we will make some hard calls because we don't want to be in businesses that are losing money.

In regards to the poultry business, same thing. We are still sticking with being on an ABF. We've taken a lot of costs out of that business, a lot of consolidation, and with corn prices coming down, I really think that we can really move to the next level there and really continue to make money. If you can make money in the second quarter in the chicken/turkey business, with corn prices where they are, I really think we can make a lot of money in the next little while.

And the demand for kosher is going to be a big opportunity for us.

So all in all, I sit back today and I'd like to be delivering a little better numbers than we've delivered, but I got to tell you, we have good momentum, we have a strong balance sheet, good working capital, good receivables, and with that, we will maneuver our way through this tough economic time.

What I want to do is turn it over to John and he will take you through what's going on in our U.S. businesses. Thank you.

Good afternoon to everyone. Hain Celestial U.S. posted a very strong Q2 performance, especially, as Irwin talked about, the challenging economic trends we're dealing with here.

Our total Hain Celestial U.S. sales were up, excluding acquisitions. Our gross margin was up for two of our three units, grocery and snacks and personal care. And our consolidated SG&A as a percent of sales was down, as we continued to exercise strong cost control.

So what I want to do is start by taking a closer look at Q2 from Hain grocery and snacks. In grocery and snacks, Q2 topline was up 12% overall and up 6% excluding acquisitions. Irwin mentioned some of these brands, but key growth brands for us included Rice Dream, Arrowhead Mills, DeBoles, Earth's Best, as Irwin mentioned, Sesame Street, Garden of Eatin', Spectrum, Rosetto, Imagine soup, and MaraNatha. So you see a good part of the portfolio showing some strong growth.

We also saw the growth continue to be driven across all channels, including -- almost all channels, including natural, grocery, and mass. And we continue to see growth from new products introduced last year. For example, we got some big hits in Imagine Light in Sodium soups. The holiday products, like Rice Nog and WestSoy Chocolate Peppermint Stick, did very well.

DeBoles Gluten Free is doing really well -- anything we're doing with gluten-free is doing well for us and our new Gluten Free Cafe frozen entrees has become a good business for us. As a matter of fact, we will expand off of that.

As you look at the middle of the P&L, our Q2 grocery and snacks gross margin was up 20 basis points, as pricing and productivity savings offset $8 million in year-on-year inflation. As I noted in the last two calls, most of our key ingredients, especially our organic ingredients, are contracted out through Q3. So we have received little benefit from declining commodity prices in Q2.

Importantly, though, we've realized our July price increase at accounts covering over 70% of our volume, and also delivered $3 million in productivity savings to drive the margin expansion.

Finally on grocery and snacks, our Q2 SG&A was down 40 basis points. So a solid, very good performance on grocery and snacks for Q2.

As we move on to Hain personal care, our Q2 topline was down 5% on an as-reported basis, but up 5%, excluding SKU rationalization. Jason and Avalon Organics led with double-digit growth, excluding SKU rationalization. These increases offset some Alba volume softness in the quarter on some of our new premium-priced products, particularly in the drug channel.

Our Q2 personal care gross margin was up 30 basis points, as the benefits of our SKU rationalization program and production of 10% of Avalon volume in our Culver City plant offset over $1 million in year-on-year inflation. And just as with grocery and snacks, again, Q2 personal care SG&A was down 40 basis points.

Now, turning quickly to Celestial Seasonings, Q2 topline was down on a reported basis, but that only reflects reduced distributor inventories. And this reduction was in line with the strategy I shared with you on our Q4 call and enables us to reallocate, over time, our support against consumption-driving programs.

We saw the first benefit of this strategy as our Celestial tea food, drug, and mass consumption was up actually -- not 3%, as Irwin said -- it was actually up 4%. Not very often that I have a higher number than Irwin. In the last 12 weeks. This is our first 12-week consumption gain in over two years, and shows the impact of our new consumer and trade promotion program.

More importantly, Celestial herb tea, our largest segment, was up 8% in the last 12 weeks. And that's a strong signal of the health of the Celestial franchise.

Celestial gross margin for Q2 was down versus year ago, but this decrease primarily reflects a shift in consumer advertising, which is below the gross margin line, to couponing, which is captured above the gross margin line. Importantly, total Celestial trade and marketing support was flat as a percent of sales basis, and actually down slightly on a dollar basis. So the shift in marketing strategy, not any big increase in spending, has driven this consumption turnaround.

Finally, Celestial SG&A was also down versus year ago, and it again reflects the shift in marketing support and continued tight control of our expenses.

Now, as we look at second half '09, we know there are some tough challenges ahead domestically, including an uncertain economy, a push by retailers and distributors to reduce inventory, as mentioned by Kraft and some others in calls recent weeks, and we do have to struggle a little bit through this Peanut Corporation of America recall that affects only seven of our SKUs -- and that's seven SKUs, not 7%, seven SKUs -- but has consumers skittish about eating products with nuts in them.

So to ensure continued Hain Celestial U.S. profitable growth in the second half '09, we're focused on three key objectives. First one is, look, we've got to drive topline and we've got to make sure it's profitable, and the key initiatives there are continued distribution expansion across all channels, particularly alternate channels.

Second is strong innovation. That's always a key part of Hain and we've got a terrific lineup of new products for the upcoming Expo West, including our strongest personal care, and specifically Alba, introductions in years. So I think you're going -- are really going to help get the Alba brand growing very quickly again.

And then, finally, continue our momentum on the Hain Celestial -- on the Celestial Seasonings turnaround. We've got some other things to really keep that -- keep some fuel in that one. We've got our new herb tea package graphics, with easy-to-read flavor names, that are now shipping in. As you walk and you see the shelves now, you're seeing 75% to 80% of the shelf now with the new packaging.

March will see the relaunch of Celestial teas seasonings -- Celestial Seasonings tea green and wellness teas, with the horizontal packaging and improved taste, and we're launching Sleepy Time Vanilla in the spring as we extend our most valuable tea sub-brand. This is a strategy we talked about in the last call and we are chasing this aggressively.

The second objective to drive the second half is to expand margins. We have a couple of key initiatives there. One, we expect to get the benefit of reduced commodity pricing in Q4 as we contract for a new year of ingredients. Second, we expect to see full realization of our July price increase by Q4. And we have a continued strong emphasis on productivity and we are continuing, where it makes good sense from a business perspective, to look at SG&A reductions.

Let me just tell you about three key SG&A initiatives -- savings initiatives that we announced last week. First, we've decided to integrate our Petaluma personal care warehouse and backroom office into our grocery and snack facility because we know that we can keep focus on these businesses, but there are some real synergies to be realized by combining the two together.

Secondly, we've consolidated our snack sales force into our grocery sales team because, every day, our grocery sales team is our strongest sales team out there.

And third, we're moving retail coverage for the personal care natural business from brokers who carry -- hundreds of products to our own proprietary retail merchandising team that's done a great job for us on grocery.

All these initiatives will reduce SG&A, but more importantly, they will improve the overall Hain Celestial business model efficiency.

And then, our third key objective for the second half is real straightforward. We're going to keep working on improving our cash management by looking to reduce our inventories.

So to recap, Hain Celestial U.S. had a strong Q2 across all units, and we're focused on key initiatives to drive profitable growth, expand margins, and improve cash management as we deal with the economic headwinds in second half '09.

So with that, let me turn it over to Ira Lamel.

Good afternoon, everyone. First, I'd like to give you some sales and gross margin information. Sales this quarter were impacted by four major items, when compared with our expectations. First, as Irwin mentioned, our customers have pulled down inventory days and we've estimated that we lost about $11 million of sales in the quarter as a result.

Second, the impact of unfavorable foreign currency movements on our sales was another $11 million, when compared to what we had expected. Against our expectations, the UK pound declined 10%, the Euro 15%, and the Canadian dollar declined 10%. When we compare those currencies to last year's second quarter, the UK went down 23%, the Euro 9%, and the Canadian dollar 16%.

Third, our Hain Pure Protein unit under-delivered against their sales expectations by $12.5 million, due principally to softer-than-expected market for higher-priced ABF products and by a pullback in production, so as not to be selling products into the commodity markets at lower prices as a result.

And fourth, our sales in Europe, particularly in the UK, were lower than we expected due to the softness in their retail markets in the face of a recession. In particular, Marks & Spencer reported that they had declined 5.2% in the December quarter in food sales, which impacted our sales to Marks & Spencer, our major UK customer.

As we said in our press release, same brand gross margin went from 30.9% to 28.7%. Inflation and input costs impacted our gross margins by 458 basis points in this year's quarter.

Offsetting these cost increases, we achieved additional productivity in the quarter of 95 basis points and the August price increases we implemented have now provided a benefit to our margin by 304 basis points.

The remaining significant changes in gross margins come from a switch, as John mentioned, of some of our advertising and consumer spending, from selling, general, and administrative expense line to more direct-to-consumer couponing, which is reflected as a reduction of reported sales and margins, and therefore caused the 44 basis point drop in overall gross margins.

We also had a decline in margins in the UK other than the underabsorption adjustment, which caused a 95 basis point impact. These impacts combined for an approximate 200 basis point change in same-brand gross margin.

It's also important to note that, had we not seen the distributor inventory reduction and had not had the higher HPP, or Hain Pure Protein, grain costs, and combined with the remaining price increases that we will achieve from the August implementation -- our Q3 gross margins -- excuse me, the price increase to be achieved in Q3, our consolidated gross margins in the quarter would've been another 200 basis points higher than reported.

Let me now review the details of our adjustments this quarter. Our earnings have been adjusted for the following. As we have discussed with you in past calls, we continue to incur costs in connection with unabsorbed overheads in the UK Fakenham facility. These unabsorbed overheads have continued due to the excess capacity at that plant, resulting principally, as Irwin mentioned, from an expired co-pack agreement.

In the second quarter, these costs amounted to 2.59 million, or $0.05 per share. We incurred severance costs of $900,000 in the quarter, or $0.02 a share. These costs arose from a small headcount reduction we effected in November. We recently announced, after December 31, that we would be closing our Petaluma personal care operation and consolidating it into our Melville location. The related severance costs for this headcount reduction will be reflected in Q3.

Our professional fees and other costs during the quarter, resulting from the stock option practices inquiry, were just under $2 million, and added to $0.03 per share. We incurred $1.5 million of stock compensation expense in the quarter, which was another $0.02 per share. And during the quarter, we settled a personal injury litigation in which we contributed $1.35 million above the amount our insurers paid. This amounted to $0.02 per share.

And as I discussed about currency earlier, the sudden strengthening of the U.S. dollar versus other currencies resulted in us recognizing foreign exchange impacts of $1.4 million through the P&L, or $0.02 per share in the quarter.

Some other things to point out to you. As Irwin said, our balance sheet continues to be a strong one. We have $729 million in equity. Debt is only 43% of equity at 12-31. Our credit line has almost 2.25 years before renewal, so we're not in any situation of having to discuss anything with banks about that credit facility now.

We had $50 million of cash at December 31. Our cash conversion cycle has remained flat with September 30. Receivable days, where we're very focused on what's happening in the economy and the strength of our customer base, is down four days against last year's second quarter and is down four days against September 30.

Payables are up one day against last year, but they are lower by five days against September 30. Our inventories declined by almost 3 million, with one day lower in the quarter than September 30. However, with the decline in inventories at distributors impacting sales in December, our inventory days have risen compared to second quarter a year ago.

Adjusted EBITDA for the quarter came in at 34.2 million this year, against 37.6 million last year. Our current depreciation and amortization in the quarter was 5.7 million, and capital expenditures in the quarter were 2.8 million.

As we announced in our press release today, we have reset our guidance for the full year. We now see sales coming in at 1,150,000,000 -- excuse me, $1.175 billion to $1.2 billion for the full year.

We also expect earnings for the full year to now be in the $1.38 to $1.42 per share range, as adjusted. With that, let's open it up for questions.

(Operator Instructions). Christine McCracken, Cleveland Research.

Good afternoon. Just wanted to delve into the changes you're making relative to the Hain Pure Protein business. You talked about, I guess, converting the Plainville facility, I guess transferring that production to New Oxford, and your intention, I guess, to convert, then, the other facility to Plainville -- I mean, to kosher. I'm wondering, can you talk about if you've already made these reductions or the timing around that conversion, and whether or not your CapEx forecast includes the cost of transitioning to kosher?

How did I know you were going to ask us a question on poultry?

Sorry.

That's okay. No, no, no. Actually, it's a good question, with good answers. The conversion from Plainville to Syracuse facility to the brand Plainville to New Oxford happened January 1. And you heard me say there will be about $9 million in savings as antibiotic-free starts to run through the New Oxford facility.

In regards to the kosher facility, there's about $1 million in capital that will have to go into the Plainville Syracuse facility to convert that to a kosher facility, and the biggest conversion is we used to only process or harvest turkeys in that facility. Now we're going to do both turkeys and chicken.

And we see a big opportunity as there was a major kosher supplier who's gone into bankruptcy in that business, and many, many, many of our retailers have asked us for this. And we will be one of the first kosher antibiotic-free chicken and turkey that's out there today. And anybody on the phone that's listening, you know the prices of kosher. So -- and there is a big shortage and demand out there for the product.

And then, just on follow-up, you had mentioned that your outlook is for $3 corn, I guess, later in the year. The curve right now, I think, would indicate something closer to $4. So I'm a little curious why you're so optimistic and if you have any contracts, maybe, that give you an added edge, or if there's something unique to your operation.

I think with demand and I think -- sort of looking at soybean and 80% corn and the soybean in the mix that we see, we see demand, as prices come down, coming down. And today, it's -- you can buy today a little over 3.25 if you pay -- when you buy out.

So that is -- as I said, with our guys, where we see corn going, but even at $4, it's $2.50 a bushel cheaper than we're paying today. So if I am off by $1 or so, much cheaper than we have been paying. We paid a lot higher in the first quarter. Going into the March quarter, we're even at the $5 range. So, coming down to $4 will be great. I just think it's going to come down to $3, $3.50.

I'll leave it there. Thanks.

I haven't become a commodities analyst, either.

Andrew Wolf, BB&T Capital Markets.

Thank you. Good afternoon. In the release, Irwin, you talked about sales moderating towards the end of the quarter. And yet, the numbers Ira gave on deloading and currency -- suggests, at least if you added those back, the quarter would have looked pretty good on the topline.

And then, the Pure Protein, obviously, is kind of trade down related, and then John talked about Alba and I think Terra. So -- if I piece that together, it sounds like certainly you had some -- your higher-priced items, you had a trade out of slower velocity.

And so, first of all, did that happen towards the end of the quarter, number one, and whatever else -- is there anything else that happened towards the end of the quarter? Like -- most -- so was it broad based, the slowdown in sales, towards the end of the quarter? Or was it more like I am alluding to in some of these higher price point items where you might expect to see more trade down?

I think -- again, on trade down, you've got to be careful here. I can't really say what has been trade down, or what has been inventory deload and what is pantry deload. And when we did start to see a slowdown on orders was after Thanksgiving.

Now John gave you some consumption numbers and consumption numbers have continued to be strong. I think there's a lot of shift going on in between channel shifting, where people are moving to mass-market versus independent grocery versus natural supermarkets. I think before where people were buying five boxes of tea, maybe only buying one or two boxes of tea, and using their coupons to do it.

And I think people in the month of December just sort of said, I'm going to save money to ultimately buy gifts, etc.. Two big multinational food companies reported earnings today, and you saw about their inventory and consumption. So I think there absolutely is some slowdown here, but I think also there's a lot that had to do with inventories coming down and pantry deloading.

Ira, on the professional fees in connection with the stock options, any -- can you tell us if that's wrapping up? It's still a -- to my -- seems like a pretty big number.

I think, without trying to be really cute, I think you have to ask the SEC because we can't predict in any manner. We think they are little distracted right now with regard to other things that are going on. The costs that we incurred in the quarter were principally from the very beginning of the quarter with a lot of activity at that time. But we have no manner of predicting where their conclusion is.

And we hope so, that it's wrapping up.

One last thing, Irwin, I think you were talking about getting your volumes up at Fakenham. In pounds, I think it was GBP18 million from GBP14 million. Does that take the whole roughly 2.5 million, 2.6 million quarterly loss, or this quarter's loss, out, or does that just take a portion of that out?

That would take the majority of it out. There's still some overhead costs on people and some central costs that we have, but that would get the loss at that plant of overhead on absorption, yes. And I've got to tell you, I do have a pretty good road map to how we get to going from GBP14 million to GBP18.5 million on that.

Were any of the customers you mentioned -- you might have said this and I apologize, but I wasn't listening well. Are they locked up, or are you still sort of in the selling process?

A lot of it is locked up today. We're probably locked up today to about GBP18 million, on a run rate for a full-year basis. So we have locked up today about GBP3 million to GBP4 million of new additional business that would start from January 1 on to -- June 1.

But we're also out there bidding for some other business that we don't have commitments for today.

Our real objective is we'd like to see this business get to a GBP25 million business, and we used to make crumbles, which was a whole pastry line, for Heinz. We now have been approached to do a lot of other crumble-type products where we were not doing that before.

The good thing about this plant, it's a totally vegetarian plant so you can't do anything with meat in there. So everything in here has to be a vegetarian facility.

The other good news is you heard me say about the McCartney business growing, and part of the road map is picking up new business at Asda, new business at Sainsbury, some presentations at Tesco, so part of that is additional McCartney business coming in there.

Ed Aaron, RBC Capital Markets.

Great, thanks. Good afternoon, guys. So I just wanted to kind of follow up on the implied guidance for the back half of the year, just to get a little bit more comfortable there. So it looks like you would need a pretty significant gross margin improvement relative to Q2, which is seasonally a higher margin quarter. I know there were some issues affecting Q2 specifically, but it sounds like it's not going to be really until Q4 before you really see some of those tailwinds start to kick in. I'm just trying to get a little more comfort around your ability to get into the full-year range of guidance, given the back half.

We do expect an increase in our margin achievements in the back half, and the modeling that we have done suggests to us that, absent Hain Pure Protein, which of course is a different margin, all we need is a couple of points of improvement in margins for the rest of the business in order to get there.

I think the big thing is getting the full benefits of price, seeing commodities come down -- productivity, which we continue with here. There's a lot of new products that we have introduced that go into distribution, the June ones that start to go into -- are the ones we introduced in Boston that start getting shipped in June -- or January, and we introduced some other new products at the March show.

And then, we got significant SG&A savings that we've gone through and have really cut here. So listen, what is ongoing out here. I wish, as Christina asked me before, my belief on corn, I don't have a crystal ball on volume. And I don't think anybody does. And like a lot of other companies that just pull their guidance because they had no crystal ball, we sit back and look at demand, look at consumption, where is the consumer coming in?

The other thing is, listen, you talk to some of our other customers out there, who is taking down inventories, but what I can say is demand still is out there, and we think we've got some also money to spend back on driving volume, like John suggested -- like John talked about before, what happened on our tea business as we dropped coupons. So we've got some work to do, but I think we've got some good ammunition to work with to make it happen.

Ira, what charges should we expect to see in the third quarter numbers in terms of the adjustments?

The only one that we have modeled is stock compensation because we know for certainty what that number will be, absent any additional granting. We really don't know what will come through as professional fees with the SEC inquiry. We don't know what may happen in terms of -- the volumes, even though we have some projections, the volumes going through the plant in the UK with some of the wins that we have had. We expect, but we haven't included it, that the undercapacity at that plant will be reduced. I can't predict what's going to happen with FX, so the only one we've actually -- we know with certainty is the stock compensation.

Scott Van Winkle, Canaccord Adams.

Good afternoon, everyone. John and Irwin, just talking to all these retailers, I'd love to dive in a little deeper on the inventory reductions you're seeing at retail and distribution. I would assume it didn't hit you until after Thanksgiving. You talked about volume falling off. How long does it last? Is it into January, then picks up in February, as you go into February? How long does it take to take a few days of (technical difficulty) channel?

What we heard, in talking to different distributors and different retailers, some of them are taking immediate reductions. But others are actually -- we talked to one yesterday who is actually going to take out inventory over the next two quarters, because their systems are not such that they can take it out and be assured that they'll service the customer. So I think we're going to see this bleed through the balance of the second half.

I think it all comes back to do -- comes back to is they see less consumption going into the stores and less sales. And you know what? What Hain has to do is, this year, as we go out and get new distribution and new accounts and where we had before -- we had certain accounts where we didn't have diapers, whereas diapers now go in with Earth's Best, and where do we bring in new SKUs?

So, as we sit here and paint the picture that there is going to be inventory reductions, on the other hand, where there are SKUs today and we don't have a diapers or we don't have personal care or we don't have other products, there's a lot of distribution opportunity for us to drive new volume through that. I think it's wrong because I think one of the big problems this creates is that of stocks, and I've seen it somewhat, already. (multiple speakers)

(multiple speakers) John, you mentioned specifically in your initiatives, growing distribution and growing profitable volume. What are you doing differently to motivate the sales force? You just hear a lot about sales forces are trying to service the customers and aren't doing that extra trip to pitch the new business. Are you getting more aggressive on the sales force? Or what are you doing differently to keep them going?

Out here, it's real simple. Part of their compensation is based on driving new distribution. And it's something that we -- new distribution has been a key part, along with fixing our mix and driving innovation, that's driven our growth over the last few years. Now, given that they have done a great job in fixing the mix, innovation and driving new distribution are the two key ways that they can drive their topline number profitably.

I think it's dangerous because consumers will come to stores and see certain things out of stock. They're not going to come back there for them, and go somewhere else. And that's -- as we sit with customers that want to do this, that's a big discussion that we have, because that -- if I came back today and put together a number that I believe in out of stocks, 5%, 6% in the quarter for certain of our customers, and you take 6% of our sales, which we don't even look at the number here. That's a big number that we're missing in sales. And we have to go up there and make sure there's product in stock because we don't have an out of stock problem.

Scott Mushkin, Jefferies & Company Inc..

Hi, guys, it's Bakley, filling in for Scott. Volumes -- obviously, we heard from Kraft and others today that volumes are down across the industry. But do you have any sense for when -- and this is a general question, but do you have any sense for when that bottoming process will take place? Do you see an end in sight here, or are we just at the beginning?

I think we can sit back -- what we all know, everybody is going to eat. If we were selling handbags or selling cars or dishwashers, that's discretionary. People are going to eat. And going back to Scott's question, if our products are on the shelf, they're priced right, and they're going to get value, people will buy our products.

I just think there's a new phenomenon out there, there's less consumers coming in the stores, and it's not like we're in the clothing business, you've only got three months to sell shorts or three months to sell tank tops or something like that instead of style. That's not what happens with our food products and our personal care products.

So from our standpoint, this is where driving volume with coupons, promotions, innovation, displays, and that is so important to us. But my belief is -- we're not all going to go on a 40-day fast and not eat for the next 40 days to save money. I think, if anything, what we are continuously seeing is more and more consumers not going to restaurants and eating at home.

And the reflection in our numbers, and if Kraft is seeing it at a $50 billion company, just imagine the effect on us. And it hasn't affected us $11 million. But just think, when they mention it and how much it is. I think we're doing a great job in driving volume right now, and not dealing with inventories coming down.

And -- as it relates to the UK, and it seems like the UK is pretty acute, you mention sort of -- almost sounds like a review of the UK business, but I may have misheard you a little bit. What kind of metrics are we going to look for on UK from the sales side? I know there's a lot, with the facilities and what have you, but from the sales side, where do we feel comfortable with that? Where (multiple speakers)

I think it's pretty obvious, if we can't get to GBP18 million to GBP20 million volume in Fakenham, to break even, we're not going to run a plant that's a loser. And when it comes to Luton, we probably need another GBP20 million, GBP25 million coming from that.

And the good news is we now will be able to do other volume in there, where before it was basically Marks & Spencer. So -- and as I said, there is -- I was going to say a lifeline, but there is a line to the GBP20 million at Fakenham, and there is a line to GBP20 million, GBP25 million in our Luton facility. So we will make that decision by the end of our fiscal year.

Terry Bivens, JPMorgan.

Good afternoon, everyone. Nice to be back on your calls. I just wish the results were a little better, but as you alluded, it's -- you're not the only one that's facing some tough headwinds out there.

I think, in the scheme of things, we're -- the results are -- out there.

As you look -- we had calculated the contribution from acquisitions to be somewhere in that 14%, 15% area. As you look at your core growth, was it essentially flat all-in?

No, not at all. As you come back and -- you come back and look at all of John's businesses on grocery, frozen, snack, and tea being up, absolutely not.

Was that growth in John's businesses offset by what you were seeing in Hain Pure Protein and overseas? I guess that's the question.

Yes.

Okay. Where are these trade deloads hitting you? Is there one channel in particular? I know your distribution pattern is somewhat different from what we see at Kraft. Was there one channel in particular that hit you hard? If you can kind of give us some color on that.

Not really. I think it started to hit across the board, and I think -- there was -- I think everybody is trying to get down to just-in-time, and get down to two weeks or three weeks. Some of our distributors carry four or five weeks, and some of our retailers that carry three to four weeks. I think everybody is trying to take a week or two out of their business. So it's across the board. I think it's mostly happening with distributors first, because they do carry more inventory.

Greg Badiskanian, Citigroup.

Thanks. First question, I was calculating mid-single digit organic growth. Is that close?

You're always usually close to the number.

And then, just looking at consolidation, just talking to a number of real small players out there that compete against you, private equity funding obviously has dried up. They're having a tough time. What's your kind of expectation in terms of seeing some bankruptcies there, some consolidation, and how much market share do you think you gain this quarter, and do you see that accelerating over the next few quarters?

Listen, I think there's a lot of businesses coming our way. And major ones that we looked at before that need funding, ones that -- just one of the things, Greg, just a perfect example is Petaluma, which is a great business where all our personal care businesses run out of, which our personal care business being approximately $150 million in size.

The savings to roll it into our Melville business, and to have our fingers on the pulse and be part of a bigger organization, whether it's from manufacturing, warehousing, sales, distribution, people-wise, tremendous savings to invest back in the business and to grow the business. So there is a $150 million business.

There's quite a few of them out there in a smaller range than as a stand-alone business. We will have some challenges standing -- standing alone. And not only Citibank, but there's a lot of banks out there that just -- don't want these small businesses, and are not willing to keep them in their portfolio.

So I think you're going to see a lot of bankruptcies. I think you're going to see a lot of consolidation, and that's why, I've said before, at Hain, our major priority here is to have our own house in order. Have our balance sheet strong. We will continue to pay down debt, and when the right time comes, we will go out there and do some good strategic acquisitions. And I can tell you, is there is a couple of good things out there today that would make a lot of sense.

One thing I want to re-emphasize, because I think your question is appropriate in the current economic environment, is we have a great team that watches over our receivables. We took receivable date down by four days in the quarter. And that's purely because of the attention that's paid to our receivable file. We have, in fact -- we certainly won't get into names, but we have in fact actually declined credit on some of our sales orders because we're that focused on the quality of the receivables that we carry on the books.

And we've gone -- just on that, we've gone -- given customers, smaller customers that we have focused them to buy from distributors, because we do not want the credit. We've gone to some customers to say, we'll give you better discount terms if you pay upfront. And we just don't want to be in that.

So we don't have to sell them, and don't want to take hits. So we're all over our credit where other vendors do not have that luxury to do that.

So with that, last question -- I come back and say -- back to Terry Bivens, he wished we were delivering better results. Everybody around this table does, too. But in tough economic times, I think we're delivering solid results in consideration of what's going on out there.

I think we're cautious. We've taken the right moves on personnel. I saw Bloomberg today in the first time of its history lay people off, and it was the first time in our history. And I go back and I look at other retailers, whether it's Abercrombie or J.C. Penney, being down 16%, 17%.

So I think, yes, we could deliver better results. And, yes, being concerned about Hain is our number one priority. But seeing what's going on in the world, I think we have delivered results that are okay. And absolutely could do better.

And as you come back and look at what Kraft delivered today, and Sara Lee, two major companies that probably spill more in a year than we do.

The other thing that's affected the food business is this recall on peanut butter. And we've been in the midst of it with our frozen entrees and one Health Valley product. And what I must say is we have a peanut butter facility in Ashland, Oregon, which they're absolutely not. This happens to be, I think, one of the biggest food recalls in the history -- of the U.S., which concerns people of food safety, etc., and just dealing through that. And none of us realized that we were buying from this corporation.

But on the other hand, I think this drives consumers to be concerned about the products they're buying. And quality products, instead of just running out there and buying private-label and buying price products. So I think this absolutely helps where the consumer is as we maneuver through this year.

At the same time, we understand our challenges on the UK and understand some of the challenges on our poultry business. And they have been probably the two biggest draggers on the quarter this earnings. And the guys in both locations are listening, and we know some of the challenges and I will be in the poultry facility tomorrow going through that. And we know what we have to do to move to the next level.

On one hand, we made money and we're probably one of the few poultry suppliers that have, and that's without Plainville being integrated and that's without being in the kosher side of the business, and that's with corn being at $6.50 a bushel that we're paying today.

The UK, it really -- and you heard Peter McPhillips, we've got a good plan there, so we'll ultimately make some decisions there.

And the U.S. business that's run under John, we -- there are some challenges in front with inventories. And -- but I really tell you, we've got strong brands. And I keep hearing private label, private label, private label. But at the end of the day, brands are still 83% of the sales here in the U.S.. Private label represents 17%.

We have had the opportunity recently to look at private-label business in a couple retailers -- as they look at us to make some of the products, which we are not doing. But private label is not out there doing what everybody expects it is doing.

From a Hain standpoint, taking out costs, the G&A costs, not a lot of companies out there today have taken 2% -- 200 BIPS out of their SG&A from a G&A standpoint, and some of that, yes, with poultry, but we've really focused on our G&A, and you'll see us on margins.

So, look forward to speaking to you soon, and being back to you and keep you updated on our business. And stay warm out there, drink tea, and stay home and eat and don't go to restaurants, and eat healthy foods. Thank you.

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