Hain Celestial Group Inc (HAIN) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Hain Celestial third quarter fiscal year 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator instructions). I would now like to turn the call over to Ms. Anthes. Please go ahead.

Good afternoon. I'm pleased to be with you today to introduce our third quarter fiscal year 2009 earning 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 on 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 an 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 after the call for further discussion. Now let me turn the call over to Irwin Simon, our President and Chief Executive Officer.

Good afternoon, everybody. I hope everybody had an opportunity to review our press release. With us today, as Mary said, is Ira, John, and I want to welcome Kim Azzarelli, who has joined us as our new General Counsel over the last few weeks.

As you can see, our sales, to $267.723 million versus $264.631 million, and from an adjustment standpoint it was about $12.7 million in currency and approximately $10 million that we lost in inventory reduction from distributors, from retailer and our peanut butter recall.

Our SG&A, which we've talked about how we focused on cost -- 17.8% versus 18.4% -- margins other than Hain Pure Protein, 28.3% versus 27.2%, up over 100 BPS. We paid down in the quarter about $28 million of debt, and with that we continue to have a strong, strong balance sheet.

Let me talk about the quarter. Boy, it was a tough quarter. Probably in my years, my history, my toughest quarter and some of the toughest business conditions that I've ever seen out there. When we did earnings back in January/early February, business really started to deteriorate after Thanksgiving. But in January I think the lights totally went out. In February, the lights were out, but it got a little brighter. But the good news is, March, thing started to come back and we continue to see that moving to April.

Inventory reductions by the distributor, the retailer and the consumer, and I'll talk about how the consumers' pantry de-loading, probably cost us about $0.05. And Hain Pure Protein, with the higher grain prices on commodity, turkey probably cost us another $0.04 in the quarter.

What are we seeing out there? We saw retail prices up 15% as all the price increases started to hit, and so retail prices are up. What are we doing? We must promote, and those that got their Sunday Times saw a $1 coupon off Terra. Our Celestial Seasonings, which we promoted, consumption was up significantly, and John will take you through those later.

We cannot lose share. And a perfect example, I'll talk about it, what we did in Canada where we went back and promoted. Yes, we spent more money and our margins were down, but we saw our sales up significantly and we saw that we were able to definitely gain back share. So I'm going to make it very clear. We are going to promote, we are going to drive volume and we are going to grow our business.

I continuously hear organic is down and people are not buying organic. We're seeing that in some cases. We are seeing milk down 7%, organic eggs down 8.4%. We are seeing salsas, organic snacks -- and it's interesting because our Garden of Eatin' tortilla chips is up over 10%, down 24%. We're seeing organic produce down 5%, organic frozen fruits and vegetables down 10%, which are categories that we're not into, of course, and more commodity type of categories.

How is our business changing what's happening out there? What we're seeing is growth in the natural food stores, growth in mass-market, growth in specialty chains like Toys "R" Us, Bed, Bath & Beyond, etc., and growth in certain grocers. So what is good to see is the consumers shopping in mass market today, the demand is absolutely there for natural organics. The consumers shopping at specialty chains, the demand there is for natural organic. And at Hain, what we are really looking at is value brands and ultimately what makes sense, organic versus natural and -- from a price point standpoint, and the consumer really is looking for value out there today. The consumer also is focused on gluten. Gluten-free category continues to be a strong growth category. Ancient grains, kids products just continuously on fire and Earth's Best up over 37% in the quarter and continues to be strong.

Some of the things, what we are seeing from the consumer, they are cutting down on out-of-home entertainment, spending a lot less on clothes, and they are eating at home. And from everything we say, the consumers that are eating at home are continuously cooking healthy.

Consumers basically are not loading up their pantry like they used to, buy more frozen foods because they don't want to (inaudible) going out and purchase weekly. And something very important that we're seeing is couponing is up 17%, and that will show significantly. And we've been doing a lot of it, and it reflects back in our margin and our top line as couponing has become a big part of our business.

Consumers are still focused on health and wellness. It's interesting how people keep asking me, are people trading down? But consumers are focused on the omegas, gluten-free, fiber, MSG, salt, lactose intolerant, very focused on antibiotic-free. And with that, they're focused on certain personal care items in regards to parabens and chemicals and stuff like that.

In regards to Hain, what are some of the action steps that we've taken? Back in November we went out and did a reduction in force here in Melville and across the country and almost a savings of $20 million. We're focusing on inventory and Ira will take you through our inventory. Our inventory is up with Earth's Best in our protein business, but there's a major focus on inventory.

There's a major focus on our gross margins that we are delivering it and John will take you through where has improved his gross margins and where our gross margins have improved in the UK and where our gross margins in Canada will improve but we spent trade dollars to drive volume. We've gone out and right now a good market to attract people with moving our personal care business back to New York. We're in the midst of adding people, where we cut approximately 75 people and we'll add about 20, 25 people here. Our whole operations group is really focused on productivity. Back when we presented our plan last year, we were looking for $12 million, $13 million of productivity. We're looking for, this year, probably another $5 million out of all the businesses on productivity, and we're getting it.

So just on cost alone, we're looking at $25 million of cost savings coming out of the business this year.

So let me talk about the quarter and some of the brands. Our Garden of Eatin' you heard say was up 10.2, and I don't want to steal all John's great thunder. Imagine up 16.2, that's Rice Dream. Our DeBoles, which shows you consumers are going back, eating grains up 14%. Our Earth's Best is up 35%, 36%, and that brand just continues to be a rocket. Our diaper business, which we bought last year, has doubled in size. And a lot of that has to do with the Earth's Best brand on it, the distribution. Our new wet wipes are chlorine free, and it's interesting what some of the other guys are doing.

Our nSpired, which we acquired just the organic growth in that brand, up over 5%; our Westbrae business, which are canned good business, up 20%. Our continental Europe business up 5.4%, Jason's up 3%, Avalon up. Our Free Bird business up 5.5% and Plainville up 30%. So antibiotic-free chicken and turkey is what consumers want.

And yes, there's brands down. Our Terra business was down in the quarter, and John will talk about that. WestSoy, some things in Spectrum, our UK business was down, Alba business and Health Valley. So there's definitely some brands down, some things to do.

So big focus on margins in the quarter. We probably are missing somewhere about $1.5 million of pricing that we weren't able to get with all our pricing that we should totally get in the fourth quarter. Basically, our margin, our overall margin, is affected by commodity turkey, which I'll talk to you about in a few minutes. But John will take you through all his margins and the growth in his business.

Let me talk to you about Canada. Our Canadian sales overall was up 5%, strong growth at Loblaw's, Sobeys and Metro. Our margins were down 2.5% on our Canadian business on an adjusted basis and that basically came from promoting and spending on the business there, where we do not want to lose share. And you come back and look at Garden of Eatin' up 35%, our Casbah business 21%, our Earth's best up 9%. Our Eve's business, which is a big part of our business, up 9%; Celestial up 6% and our personal care business up 24% in Canada.

And similar to the US, our Terra business and our Spectrum business were down. So with that, Canada having even a slowing economy, it was very important for us to drive sales, to keep share and not have to go back and take share later on.

Let me talk about one of our businesses right now that has been a challenge business, is the protein business. And with that, we think chicken and turkey consumption will go up with swine flu. But it was a tough, tough, tough quarter after Thanksgiving. And with our antibiotic-free -- with our commodity turkey and the price of grain prices that we paid for and the selling price today cost us $0.04 in the quarter. Some of the things we've done, we've had a major reduction in force, which was about $1.5 million. In January we consolidated our Plainville into our New Oxford facility. We're looking at $6 million to $10 million of savings over a 12-year period -- 12-month period; better not be a 12-year period. We're staying on plan, where 80% of our production will be antibiotic-free on our turkey side and 100% on the chicken side. We're currently working out of our commodity chickens, which is -- our commodity turkey and fresh meat with higher grain prices, and we look to work out of that over the next couple of quarters. The good news is, grain prices continue to come down.

We've opened up our specialty kosher business last Sunday, and we continue to focus on that and we are looking for some good things coming out of kosher. [Poll] placements are down, which should increase pricing. And just what's interesting, you heard me say before, antibiotic-free turkey business, which is our Plainville brand, up 30%. Antibiotic-free chicken business is up 5%.

And in the quarter, of our sales, almost $10 million of turkey, and that (inaudible) -- conventional turkey, was sold at lower prices because of the higher grain prices and the softer market. But just as an example to show you a conventional turkey today, a whole bird, sells for $0.80 a pound; antibiotic-free turkey, $1.77 a pound, and not that much difference in production here. So you can understand where we want to go and what we want to do here.

And as we look at this business, how it fits into Hain and long-term strategic plan -- we are evaluating and we see lots of options and lots of opportunities out there and lots of opportunities with partners and other things that we can do. So we are focused on that.

In regards to the UK, UK is in probably a tougher, recession, tougher place than here. And we've made lots of progress on our Fakenham facility, which we had our own absorption. Our Linda McCartney brand up 45%, our Ross Brand up 45%, which is a meatless brand. Overall sales at Fakenham were down, but that was due to co-pack that we lost on the Heinz private-label.

New business for Fakenham, which we secured, is coming in in the next quarter, which we'll get to a breakeven if not a lot better. So I feel that we have that business, we've committed to that. We're working on some major programs with the McCartney family in regards to meat-free Mondays. So with that we should see some good things really happening coming out of our Fakenham business. Our margins in the UK on an adjusted basis are up 18.8 versus 16.2, almost 200 BPS there. So we're focused on margins and costs.

In regards to our Luton and MNS, we've agreed to exit MNS as a supplier over the next year, and we'll be completely -- and I don't know if completely will ever happen. But a majority of our supply will cease by the end of next April. We'll start to wind down sometime in July [ending in] September, but we'll continue to do specialty sandwiches for them. In the meantime, we have no exclusivity. We are able to make specialty products for other customers and with higher margins and not having the same stringent controls that we've had on with Marks & Spencer. So Luton should create some other opportunities for us and Luton should be able to do some other fresh products.

The plan in buying Luton from the beginning was never to be Hain sandwich maker, it was Hain to be the prepared fresh foods, and that's something we'll continue to do.

Daily Bread -- for what has gone on in the economy, sales are flat, March were up 6%. So I'm happy to see what's going on in Daily Bread, and we have been able to maintain margins there.

We have a non-dairy soy milk plant in Manchester, and we've picked up 15 million liters. And with that, that has become a good business for us. And it's interesting because there's a brand, a major brand for sale in the UK right now, and we see that being sold to one of the majors. It will create some great business opportunities for us, so we'll have a solid business in the UK on our non-dairy business.

On our brand side, our Terra business, Celestial business, continues to grow. We are in the midst of shipping Earth's Best and Garden of Eatin' into the UK and working on things there. So you'll start to see some additional Hain brands in the UK.

In our European business, the European business was up 6%, our Lima business was up 4%. Our Rice Dream business continues to be strong, up 27%. Our Celestial business, small, but up 27%. Our margin in Europe was down a few points, and that had more to do with some of the business at Grains Noirs, but other margins are up and taking some cost out.

In the UK -- in Europe, we settled some social costs that came with one of the acquisitions back in 2003 that affected us in the quarter.

So let's come back and recap. Despite what has gone on out there in January and February, we had a solid quarter. We've gone through inventory reductions. We had to deal with consumer confidence. We had to deal with a peanut butter recall. We've got some good margin enhancement on the US business. We've got a good UK plan in place, how to get to profitability with Fakenham, a solid plan in place with strategic options on protein.

Europe is on track, and really [Phillipe] is on his best when he's out there selling. We've really put good cost control in place at overall Company. Our operations group is focused on productivity. We continuously have upgraded people, and now is the chance that we really will look to upgrade our personnel where it makes sense.

And what I can tell you is our hands are on the wheel, and our hands are on the wheel, which I think in times like this really got to be on the wheel, and will create opportunities for us. I think the important thing to see is health in nutrition. And, as people continuously say, people are not eating organic trading down. Yes, a big part of our food is organic, but so many other parts of our food, whether it's gluten-free, low sodium, lactose -- and that is a big part. And really what I feel good about, consumers are going to a lot of other classes of trade and buying our products.

From acquisitions, we are still looking for acquisitions that we've been into, looking at acquisitions hard. But I think there's a lot of acquisitions out there and we'll start to. In the quarter, we had a cost of close to $0.5 million of an acquisition we walked away from. And yes, it was $0.5 million that cost us, but it was a good $0.5 million to walk away from. So we are still going to be very, very, very disciplined on acquisitions, and we'll continue to do that.

So with that, let me turn it over to John and he'll take you through his business, and I'll come back later for questions. Thank you.

Thank you, Irwin; good afternoon. Hain Celestial US posted a solid Q3 performance. Some of the highlights included our total US consolidated sales were up versus year-ago, despite the challenging macro trends Irwin discussed. Gross margin increased. Our consolidated SG&A as a percentage of sales was down. Our inventory decreased versus previous quarter. All three units -- grocery and snacks, personal care and Celestial Seasoning -- introduced strong innovation at Expo West.

And finally, Celestial Seasonings experienced tea season consumption growth for the first time in three years.

So let's take a closer look at Q3 performance for each unit, beginning with Hain grocery and snacks. Our Q3 top-line growth for grocery and snacks was up 4% overall versus year-ago as we lapped last year's acquisition of nSpired. Irwin talked to you about the different brands that were up -- Rice Dream, Earth's Best, Spectrum Naturals, Hollywood, Rosetta. We had growth across the portfolio. We also introduced several exciting new grocery and snacks products at Expo West, including the Imagine aseptic roasted turkey and savory beef gravy. This expands Imagine into a whole new category with some terrific new products. We are building off of our seasonal product initiative with the launch of Arrowhead Mills' pour and bake pumpkin pie filling, which will be a big hit for us come this fall.

MaraNatha, one of our new acquisitions, introduced MaraNatha dark chocolate peanut and almond butter spread. This is our version of an organic Nutella, and it's delicious.

Earth's Best Sesame Street French toast sticks builds often our successful launch of Earth's Best frozen, which has been a winner for us. Almond Dream is introducing a 32-ounce non-dairy beverage, and Terra Mexicano Exotic Vegetable Chips are our first new flavor of Terra Chips since we introduced Zesty Tomato and Mediterranean six years ago. This line has been dying for some new innovation on our exotic vegetable chip side, and this introduction, coupled with our aggressive Terra couponing program that will be very similar to what we used on Celestial, is expected to turn around Terra consumption.

Now, turning to the middle of the grocery and snacks P&L, our Q3 gross margin was up over 100 basis points as pricing and productivity savings offset $4 million in year-on-year inflation. Importantly, we also drove margin expansion by delivering over $3 million in productivity savings and realizing our July price increase at accounts covering over 80% of our volume.

Q3 grocery and snacks inventories were down over $11 million from previous quarter as we began working off our increased Earth's Best fresh pack production. Finally, our Q3 grocery and snacks SG&A was down 30 basis points.

Moving onto personal care, our Q3 top line was flat excluding our SKU rationalization. Now, recognize this is a really tough environment right now for down-the-drain personal care products. And flat reflects our strong Avalon Organics, Jason and Zia growth, but that had to offset our Alba volume softness, which occurred on our most premium priced products, and occurred primarily in the drug channel, which is very soft now for personal care products.

Like grocery and snacks, Hain personal care also introduced exciting innovation at Expo West, including Alba Botanicals' Rain Forest Beauty Care, a new line of highly efficacious -- new line based on the highly efficacious properties of Rain Forest Botanicals. This product line has gotten a really strong response. As a matter of fact, we've gotten very [good] acceptance across the line at some very big customers, and we're going to have to watch that we have enough supply.

Avalon Organics deodorant sprays are new for us, and they contain essential oils carefully selected for their deodorizing properties and their pleasant scents. And we introduced something called Jason's Tea-infused hand and body lotions. These are carefully formulated with Celestial tea in each bottle to deliver a unique antioxidant-rich lotion that provides superior moisturizing. Antioxidant is a key to consumers in skin care these days and we are well positioned with this line.

Our Q3 personal-care gross margin was up over 50 basis points on a GAAP basis, driven by our SKU rationalization. We also successfully executed three personal care SG&A savings initiatives in the quarter. The first was the integration of the Petaluma personal care warehouse into our grocery and snacks Ontario distribution center. This was completed on March 1 and will drive significant efficiencies in our logistics operation.

The second was the integration of the Petaluma IT system in the backroom office into our Melville platform. This was completed by April 1. And last, we transferred the retail coverage for the Hain personal care natural channel business from our brokers to our proprietary in-house retail merchandising team. This was also completed by April 1, in line with what we told you in the last call.

All these initiatives will significantly reduce personal care SG&A. In fact, Q3 SG&A was down more than 100 basis points when adjusted for the cost of implementing these initiatives. More importantly, though, these initiatives will strengthen our personal care execution and improve the overall Hain Celestial US business model efficiency.

Finally, our Hain Q3 personal care inventories were down $2 million versus the previous quarter.

Now turning to Celestial Seasonings, our Q3 top line was down slightly on a reported basis, which reflected reduced distributor inventories and increased above-the-line coupon and promotional spending. Now, this top-line reduction was in line with the strategy I shared with you back starting in our Q4 call, and as it enabled us to reallocate over time our support against consumption driving programs. So what we are trying to do here is move money that had previously been tied up with driving volume into distributors or ineffective advertising, move it up to couponing, and drive consumption.

And we've already seen the benefit of this strategy as Celestial Seasonings' food, drug and mass consumption was up 3% in the key October through March hot tea season, which was our first increase in three years. Additionally, this increase was three times higher than the specialty tea category growth rate of 1%.

Celestial Seasonings was the only brand of the top three brands in the category to experience growth this tea season. More importantly, Celestial herb tea, our largest segment, was up 7% for the season, an important signal of the health of the Celestial franchise.

At the same time, Celestial Q3 gross margin expanded more than 50 basis points versus year ago. This increase primarily reflects the impact of an improved mix and pricing, which offset the shift from consumer advertising to couponing, which, as you know, is captured above the gross margin line. Celestial Q3 SG&A was down 70 basis points due to continued tight control of expenses. And, finally, Celestial inventory was down slightly versus year-ago.

We are now moving aggressively towards the next phase in the [rationalization] of the Celestial Seasonings tea business. This phase is focused on accelerating Celestial Seasonings' profitable growth via innovation and productivity and features four key initiatives, including extending our category leading Sleepy Time franchise with our new Sleepy Time Vanilla launch. The second piece is supplementing our herb tea momentum with the relaunch of our new and improved green tea and wellness lines. This is going to be a big piece for us because green tea has really been lagging over the last couple of years. We have improved the product, cut it with white tea to smooth the taste, and also put our packaging back to the horizontal packaging so it will have a lot more impact on the shelf.

These relaunches were announced at Expo West to a very strong response.

The third piece is that we are implementing a productivity initiative to expand Celestial margins, which will be modeled after our successful grocery and snacks program that Irwin discussed earlier.

And the fourth piece is we are evaluating an aggressive SKU rationalization at Celestial, similar to those executed on grocery and snacks and personal care units. If we do this, this will allow us to reduce business complexity, enhance margins and improve our operating efficiencies. We've seen this work on both grocery and snacks and personal care, and we'll update you more on this potential initiative in next quarter's call.

So, to recap, Hain Celestial US had a solid Q3 with top-line growth, improved gross margin, decreased SG&A and reduced inventories versus the previous quarter.

Look, Q3 was a tough environment but we've demonstrated that we can execute and deliver by really working the middle of our P&L, even if top line gets challenged. We continue to be focused in Q4 and beyond on our three key objectives. The first one is we always want to be driving profitable sales growth. And our key initiatives are continuing our distribution expansion across all channels. Here's a point to consider. Our top 100 SKUs in grocery and snacks have an average of only 33% ACV in grocery. There's a lot of head space there for us to get more distribution. The same top 100 SKUs for personal care has only 7% ACV -- again, an opportunity to grow our top line. We are also focused on growing our top line with strong innovation, and we talked about the new SKUs there, and continuing our momentum on Celestial Seasonings.

Our second key objective as we drive our business model is to expand our margins, and we'll continue to do that via what we expect to see, reduced commodity pricing in Q4, full realization of last year's price increase, continued strong emphasis on productivity and continued SG&A reductions wherever possible.

And finally, our third key objective is to improve cash management by always looking to reduce our inventories.

So with that, I'll now turn it over to Ira Lamel.

Thanks, John. Our sales this quarter were impacted by three major items. The impact of unfavorable foreign currency movements on our sales was $12.7 million when compared to average rates in last year's third quarter. These average rates in the UK declined 27%, the euro declined 13% and the Canadian dollar declined 20%. Distributors and retailers have continued to reduce their inventory days and we estimate we lost approximately $10 million in sales from these reductions. And our sales performance was impacted by the Peanut Corporation recall with certain of our frozen products, nut butter products and crunchy bar products impacted. Our estimate here is that we lost approximately $2 million of sales in the quarter as the result.

In total, we believe we were impacted by a total of $24.7 million in sales from these items. And, had we achieved these sales with currencies at last year's levels, our sales would have increased by 11%.

In addition to what's in our earnings release, I want to point out that our adjusted gross margin before Hain Pure Protein came in this year at 29.8% versus 30.4% last year. It calculates to a 66-basis-point drop, and it came entirely from the movement of some of our promotional spending dollars from advertising and other marketing activities to direct-to-consumer couponing. John talked about the Celestial Seasonings impact, which was 55 of the 66 basis points. All other changes in margins netted to zero during the quarter.

During the third quarter our earnings have been adjusted from the following items. As required under accounting rules, accounting for goodwill and other intangibles in FAS 142, we performed a review of our recorded goodwill and other intangibles, a review that was initiated because our market capitalization dropped below our net equity for a period of time during the third quarter. As a result of this review, we've made the preliminary determination that the recorded goodwill in two of our operating units, or reporting units, I should say, Protein and Europe, appeared to be impaired. We have therefore estimated that approximately $61 million of goodwill and other intangibles should be charged off against earnings with $7.5 million of that charge offset by the participation of our minority partner in our protein unit.

The net pretax charge is therefore $52.6 million. As much of this charge is to eliminate nondeductible goodwill, the tax benefit is extremely low, yielding only $4.2 million of tax relief. The after-tax result net of minority interest is $48.4 million or $1.19 per share. As we've discussed with you in past calls, we continued to incur costs in connection with the unabsorbed overheads at our UK Fakenham frozen foods plant. These unabsorbed overheads have continued due to the excess capacity at that plant, resulting principally from an expired co-pack agreement.

In the third quarter these overheads amounted to $1,532,000 or $0.03 per share. In January we announced that we would consolidate our Plainville turkey operations into our New Oxford processing facility and that we would convert the existing Plainville facility into a kosher chicken and turkey operation. We temporarily closed the Plainville operations at the end of December and entered into a four-month conversion of the plant to kosher, successfully beginning these operations in late April under the Kosher Valley brand. The impact of this on the third quarter was that we incurred plant reorganization, integration and start-up costs amounting to $2.3 million in our protein unit. These costs net of the minority interest had a $0.03 impact on our earnings per share.

During the quarter we incurred reorganization and severance cost of $2.95 million or $0.05 per share coming from the previously announced closing of our Petaluma personal care operation in order to consolidate these operations into our Melville location. We also incurred severance costs in this operation. Included in the charge is -- excuse me. Included in the $1.85 million charge is the write-off of fixed assets including approximately $1 million for the personal care IT platform which has now been migrated onto the same platform used by our grocery and frozen operations in Melville.

We also incurred $1.6 million of stock compensation expense in the quarter or $0.02 a share. Professional fees and other costs related to the inquiry into our past stock options practices resulted in a credit to our GAAP income as a result of obtaining reimbursement for certain of the fees from our insurer. Therefore, to properly reflect our adjusted earnings, we have deducted the net recovery in the quarter, amounting to $2.3 million or $0.04 per share.

Other items, including $937,000 to adjust cost of sales, $990,000 to adjust SG&A offset by $957,000 of other income expense items include costs related to the peanut butter recall, the settlement of the pre-acquisition contingency that Irwin mentioned, which could not be estimated or accrued at the time of the acquisition in 2003, and the costs we wrote off in connection with performing diligence in an acquisition we determined to not go forward with -- these items aggregated $0.04 per share.

Some other things I would like to point out -- the balance sheet we have continues to be strong. We have $686 million in equity after the impairment write-off and debt amounting to only 43% of equity at March 31. We had $27.8 million of cash at the end of the quarter after reducing our outstanding debt by $28.5 million. Receivable days are at 41, payables are at 42 days and our inventories are at 93 days at March 31. This translates into a 14-day increase in the cash conversion cycle driven by a change in inventories. Inventory is higher due to the decline in inventories at distributors and retailers over the past two quarters, an increase of $12 million in Earth's Best inventories over the last year to secure supplies of ingredients for that brand and a $32 million increase in inventory at Hain Pure Protein.

Although we had acquired the New Oxford operation for Hain Pure Protein in Q3 last year, we did not acquire much inventory in the acquisition, as we were initially providing only processing services under an agreement for the prior owner. Now that we produce our own sales, all inventories are owned by us.

Adjusted EBITDA came in at $26.8 million this year versus $30 million last year. Current depreciation and amortization in the quarter was $5.2 million and our capital expenditures in the quarter were $3.8 million, of which $2.2 million was spent in the conversion of the upstate New York facility to a kosher operation. As we announced in our press release today, we have reset our guidance for the full year. We now see sales coming in, and the range of $1.162 billion to $1.170 billion for the full year. We also expect earnings to be at $1.25 to $1.30 per share, as adjusted. With the recent grant of equity in March, we expect our stock compensation expense to be $0.10 for the full fiscal year 2009.

At this point we would like to open it up for questions.

Ed Aaron, RBC Capital Markets.

I wanted to just start with Q4 sales guidance. It looks like you're guiding to maybe 4% to 7% growth range there, which would be a bit of an acceleration. I know you had some destocking issues this quarter. But just with promotional spending, it seems like it's picking up, and that's [across your] revenue account. And you would think that it would maybe hurt Q4 sales more than what might be reflected in your guidance. Can you just help me understand that a little bit better?

Ed, I think [went] back and said, January and February were pretty tough months. We saw March come back, we see April okay. And listen, we got some good stuff coming out, we've got some good new products that we're launching. And part of that is our new kosher chicken and our kosher facility that we'll be starting to distribute, that was not there a year ago and our expansion more and more into mass. That's what we're seeing from a standpoint there.

And then I wanted to just talk briefly on the UK business and the protein business. You continue to have some adjustments there in your numbers. I know, Irwin, you talked about last quarter that you were going to through an evaluation process, at least on the UK, that you thought would be done by about year end. So I was wondering if you could maybe just talk about that evaluation process in general. And then also, just when you evaluate those businesses, are you -- we can debate all we want about whether these charges should be included or excluded. But when you're analyzing the expected returns on these businesses, are you giving consideration to these charges that you're excluding out of your numbers?

Well, absolutely, because we're adding them back and they don't make the numbers easier when you go up against next year. Okay? So that's number one. Number two, let's look at the UK businesses first. Okay? I feel we are really moving in the right direction in regards to the UK business. We are picking up new business at Fakenham, and I feel that going into our fourth quarter, going into our first quarter, Fakenham will be making money, breaking even if not making money.

You heard me go through our other businesses in regards to Daily Bread and our Manchester facility in non-dairy. We've got some work to do at Luton to fill up that facility, but we've been kind of boxed in there in regards to Marks & Spencer, and that is a good facility to do things.

So I think, Ed, as we've gone back, is there businesses we should get out of? And if you are asking me, as we look at these businesses, there's a couple of things we look at. Number one, should we be divesting? And number two, is there opportunities to grow them and is there opportunities to grow the margins? And are we spending -- are we investing too much capital in these businesses, and not getting the return?

So we are going through all that. We've gone through that in UK, and it looks like we are really on the right track there.

In regards to protein, we'll step back. In the case on protein, the big thing there is converting that business to the 100% antibiotic-free. There we are only 50.1% partner, and there's a lot of other options. But we are absolutely evaluating what our options should be there in regards to what we should be doing in regards to growing the business even more. Should we have another partner in there? Should we be doing other things with our partner, etc.? So there's a lot we are absolutely looking at.

John Heinbockel, Goldman Sachs.

So, Irwin, talk about consumer take-away through the four months of the year. How has that progressed? And it sounds like in March or I guess in April, all of the destocking became restocking. Is that -- ?

I'll let -- John is pulling some numbers out and [Maureen] in regards to consumption, but as you know, John, from other companies out there, nobody cared what was on the shelves in January. Okay? And it's interesting. Here we are talking [May 3] today, about January. It seems like a decade ago, but it's in our numbers and January was disastrous for the retailer, from the consumer standpoint.

And you don't go make up two months in one month. Okay? You heard me say before just in the UK in January and February on our Daily Bread business, people were just not buying sandwiches. And we were up significantly in March.

So, John Carroll, just take us through some consumption numbers here. And again, our consumption numbers include Trader Joe's, our consumption numbers include Wal-Mart and a lot of these other places where they are not measured with a Nielsen's. But let's just talk -- I can have John take you through some of our consumption numbers on our US businesses.

I think the key is that the consumption numbers that are published here don't reflect two of our key sources of growth. One is the Whole Foods. As you know, John, that's not included in Nielsen, and Wal-Mart. When you go through our business including food/drug/mass and then including Wal-Mart and Whole Foods, basically we are continuing to see strong consumption growth on Earth's Best, Celestial, Garden of Eatin', as we mentioned. Tara is struggling, and we have some work to do there. Rice Dream, WestSoy is struggling a bit. Imagine is up on soup. Arrowhead Mills is up. Spectrum Oils is up. MaraNatha is up. So we are still seeing -- and on our personal care, we are seeing growth on Avalon and Jason and Rosetta.

So we are still seeing strong growth across our entire portfolio.

I will tell you that the growth is slower than we saw it previously, prior to November. But we are continuing to see growth across all of our key brands with the exception of Tara and WestSoy and Health Valley.

And John, again, that is -- originally in my comments, you heard what I said before. We are also seeing the consumer going shopping the first of the month, the 15th of the month. And we are also seeing what I heard [you] say before, consumers are just not pantry-loading anymore and shopping weekly, so there's some effects on that here.

And the big thing I said earlier -- we've taken a lot of price increases over the last year, and now you are seeing a lot of those price increases hit. So retail prices somewhat have jumped up there. And we've got some work to do through couponing and promoting to continuously drive volumes. And we see it. When we put products on promotion, we see the volume really spike up.

And you see, that's across the entire category. A lot of pricing got passed through in the last year because of commodities, but the important thing is to promote with vehicles that we control as opposed to just padding a distributor or a retailer margin.

So it sounds like it would be difficult to get to -- in the near/intermediate term, it's going to be difficult to get to a mid single-digit growth rate in consumption, given where the macros sits, even if you promote. Do you think that's fair?

Listen, is it -- again, I think it's a hard question for us to answer, not knowing where the economy is out there. But on the other hand, I think where our opportunity is in distribution, in other classes of trade and expansion into other classes of trade. And right now, John, that's where we are seeing our significant growth come from.

The other thing is, in those other classes of trade -- and if we take 10 different products, whether additional Westbrae, additional Arrowhead Mills, additional baby formula, etc., and expand them in those classes of trade, we could see some good growth coming from that, just from expansion of some of our current product lines.

Christine McCracken, Cleveland Research.

I just wanted to ask you a follow-up I guess on that earlier line of questioning relative to promotions. Is the whole category being equally as promotional, or are you actually gaining a lot of incremental share with the couponing?

The best model I have for you is on Celestial, and as I pointed out in the call Celestial is actually -- with the couponing we put in there, actually growing faster than the category growth rate and up, whereas the top two competitors are down. So, yes, we're gaining both consumption and share growth.

And I think what's important there is a couple things. The retailers, you heard one major retailer say last week, consumers will speak with their pocket book on price. And I believe you either pay now or pay later when you lose share. There's some consumer packaged goods companies out there saying we are going to protect our bottom line. I'll tell you right now, yes, we are going to protect our bottom line. But we are going to grow the top line because commodity prices have come down. We're not going to roll back prices, and we are going to support and grow our brands and expand our brands even more.

And I feel that -- part of our other strategy is looking at our brand portfolio on a value added standpoint. And does WestSoy need to be an organic soy milk brand today? It will absolutely be natural because everything is in here in the GMO-free soybeans. But from a price standpoint, is being organic important when we have organic soy drink?

And we are going through the line. Something we saw -- we took Health Valley to be 100% organic across the line, and we saw consumption drop off in Health Valley. Should that be just a totally natural, clean line, low-sodium in our soups and not organic? And you'll see price points come down significantly when we do something like that.

Following up on that, then, what is the cost difference between like a natural ingredient and an organic? In most cases, I think it's 40%.

It depends by commodity, but it can be anywhere from 20% to 40%. Just for instance, on chicken, and we are moving away in a big way from organic chicken. It will all be antibiotic-free. But it's almost a $0.75, $0.80 a pound difference on chicken.

Scott Mushkin, Jefferies & Co.

A couple in the line of I guess housekeeping items and I guess what John was talking about. Volume at retail, ex-acquisitions -- and this, I guess, is for John, really, in the US business -- was that up or down in the quarter, and how much?

Basically the volume was about flat, Scott.

Flat? Okay. And did you give us the gross margins in the grocery and snack, whether that was up or down?

Yes. I said in both instances, in grocery and snack, the gross margins were up over 100 BPS.

So what I'm trying to do is reconcile a little bit of what I think Ira said that year-over-year adjusting for stuff actually gross margins were down about 65 BPS. What I'm trying to do is -- so when I do the numbers it looks like last year, ex-one-time charges, you were 28.9, this year you're at 25.6. Then I adjust for protein, I get 30.25 this year and 30.16 last year, which is up 9 BPS, which seems to match what you said, John, because you had grocery up 100, personal care up 50 and tea up 50, I think. So I'm just trying to reconcile those numbers because, gosh, 9 BPS of improvement sounds pretty good.

The first thing, you're going to have to readjust your numbers just a little bit. The Hain Pure Protein margin dilution was much bigger than you've accounted for. You go down to, let's see, about 485 BPS as the result of Hain Pure Protein's margin. And the change from last year is 360. You got 126 last year as dilution and 485 this year. So I think you didn't give it as much dilution as we had.

But, Scott, you're on where we are focused on margins. And one of the other things that's important -- we did not, in this quarter, did $1.5 million, which ultimately drops to the bottom line, get full benefit for all the price increase that have gone through, through the whole Company, some in Canada, some here in the US. So that ultimately enhances margins.

And in the fourth quarter, that's when we start to see commodity prices start to subside as new contracts and that come in place. So there is a major focus to get our margins where we want them to be, in the mid-30s.

Andrew Wolf, BB&T Capital Markets.

John, on the three brands that ran down in the quarter -- Terra, WestSoy and Health Valley -- it sounds like Terra, it's a price point, it's a different kind of item and you're going at that with the coupons. But on WestSoy and Health Valley, I guess maybe it's a price point issue on the Health Valley, on the ingredients going to organic. Can you help me with that, on WestSoy and Health Valley? Are you seeing a trading down to private label there that you're not seeing in the other brands, or is Health Valley suffering any de-listings, maybe in cereal? Just a little light on those.

Andy, a couple of comments. One, on Terra, pricing is part of it. But quite frankly, it's a refocus on what makes us distinct, which is exotic vegetable chips. We've gotten away and introduced a lot of potato-based products; we're not distinctive. So we're focusing on our strongest element of our line, and reintroducing it to consumers who, quite frankly, have become lapsed users. Regardless of price point, they weren't coming back. So we need to bring them back, not dissimilar to what we did on tea.

But price point, Andy, did get up there to $6, $6.50, so not cheap for a bag of chips.

Secondly, in regard to WestSoy, WestSoy is clearly -- WestSoy was built on value, and basically we tried to take the line organic. That one we are going to go back and put a real strong value orientation specifically against the blue box, which is the entry point of the WestSoy line.

The third thing, in regard to Health Valley, Health Valley -- yes, we've seen some discontinuation on the non-soup and bar side of the business. But Health Valley, quite frankly, is another brand where we need to get back to standing for something to consumers. There's a lot of products that offer health-oriented benefits. Health Valley was strongest when it stood for something very distinctive, when low-fat was important or low-salt. And you are going to see us -- as a matter of fact, we're testing a variety of different positioning options for us. You're going to see us reposition that brand against a specific benefit in the area of health as opposed to an amorphous overall benefit.

And the other follow-up is on the $3.4 million, the minority interest in the protein operations -- that's a 50-50 JV. So that doubles to about a $6.8 million loss for the quarter. Is that accurate?

That's accurate.

And the $2.3 million --

And, we lost you. Anybody else?

Andrew Lazar, Barclays Capital Markets.

One of the issues on the stock, I think, has been as you look to focus a little bit more on promotions going forward, given the cost favorability, will you have to promote away, if you will, all of the potential cost favorability that you have coming as the year progresses? So perhaps maybe, John, if you can just give us a sense -- you gave us a sense of market share in Celestial. Is there a way to give us a sense of market share progress in grocery and snack and household and personal care? Just because, as Irwin said at the outset, we are really not going to be willing to lose share here. And that's going to relate to how much you've got to do in terms of promotions.

And candidly, market share is a lot cleaner in tea than it is on our other businesses because we don't see competitive activity on Wal-Mart or in Whole Foods. So there we are focused hard on driving consumption at faster than category growth rates.

And, Andrew, there is not the competition out there on other products like there is on tea, number one. Number two, we can get a 10% to 15% premium. I think, where commodities went up and prices hit, I think retail prices went up significantly. And on the other hand, commodities and other costs, fuel and that, come down. There's absolutely dollars to go back -- we don't have to reset the bar back to where it was two or three years ago. But there's dollars to promote these products.

And then, last but not least, I think the other thing we are seeing, you know, many retailers doing a lot of brand and SKU rationalization at retail, and there will be private-label. Private label on store brands today in conventional is probably 18%, 19%. In our categories, it's probably about 6%, 7%, maybe a touch higher. So I think there's some opportunities to pick up share in that here just with smaller and fragmented companies going away and some major SKU rationalization happening with the retailers.

On the top line in the quarter, you laid out what some of the takes were on the top line in terms of FX, peanut butter recall and inventory. In terms of what was added outside of organic sales growth, I guess it's just acquisitions, would that add about maybe 6 points of growth year-over-year or so? I'm just trying to get a sense of what (multiple speakers) --

Not at all, because in the quarter last year there was some Pilgrim's Pride, a good part of -- we had it from March that we ultimately don't have Pilgrim's Pride as a customer this year. And the only other piece in there was we had MaraNatha basically for March. So that would have been it, so there's not, other than that, that much. And there's Daily Bread, where we had a Heinz co-pack business that basically offset that last year. So not that much acquisition dollars in here at all.

Scott Mushkin, Jefferies & Co.

Just banging on that margin question one last time, trying -- at John. John, I think you said basically all the US businesses saw better gross margins and lower SG&A. Is that true?

Total Hain Celestial US saw gross margin improvement and lower SG&A as a percent of sales, yes.

Actually, we saw that across the Company, better gross margins across the Company -- better SG&A across the Company, Scott. Not better gross margins across the Company, but better SG&A and, as John said, better gross margins across his business.

Andrew Wolf, BB&T Capital Markets.

I think I heard Ira say that the $6.8 million -- I just wanted to check -- the $2.3 million in start-up costs for Kosher Valley -- that's part of that; right?

That's correct.

Okay, so that's that. And on, Irwin, I think at the beginning you said couponing was up 17% --

Overall couponing was up 17%, measured by Nielsen's, not just us.

Okay. Yes, I was wondering if you had a -- I wanted to realize which that was. So that's an industry number?

Yes.

Was that more for Hain, and is that going to be even more for Hain, given what you're talking about with market share and what the consumer's looking for in terms of a value proposition?

Yes. Listen, right now, we are going with what works. And if overall industry is showing -- and actually, the 17% -- and it's an interesting chart to look at, how couponing declined where on Sunday -- it used to be Sunday FSI's, people used to just walk over and dump them into the garbage. But the circs have gone up tremendously, so it's something that we'll continue with. And we've also gone back and measured other type of advertising that we used to do. And we see a significant growth and improvement coming from couponing. So it's something we'll continue to do across the brands, Andy.

Andy, in terms of the relationship of the industry 17% to what we did, quarter over quarter our couponing was up exactly 50%. So we are much more aggressive than what's out there.

Andrew Lazar, Barclays Capital.

Just a broader question. It's interesting, I can't help thinking about it, when you hear about what some of the distribution numbers are across, let's say, your US retail business. I think John mentioned 33%, 7% in the personal care business and such. And you're obviously suggesting potentially there's a lot more opportunity over time there. And then you put that in context with some of the other businesses overseas and what have you, and protein, where you've had some more challenges. I'm assuming that takes a lot of your time and a lot of management time. And I just wonder how you would respond to, I guess, this question.

Do you think all of those other businesses, which partly were going after growth and what have you -- do you think that has really impacted your ability to get distribution over the core a lot higher? In other words, if it weren't for those, would we see your core US retail business that we can see is obviously behaving a lot better -- would ACV be at 40% at this stage? Would it be bigger in mainstream retailers than it is today? In other words, what's the bandwidth of your resource; do you know what I mean? And would that be a lot higher if you hadn't gotten into some of these other things?

I know it doesn't make sense to look backward that much, but it plays into how you think about some of those other businesses that are more challenged going forward.

Listen, I wish I had a crystal ball and I always could look at it and say, hey, is this going business going to be challenged or not? But I think I step back. Absolutely, from a profitability standpoint, would our profits be higher if we had not some of these businesses? The numbers speak for themselves.

On the other hand, some of these other businesses with some of the big retailers, as we go in there that helped us tremendously to open the door to bring us in as a full package company, i.e., like the P&G's to some of the big mass-market, etc. To Whole Foods, we are their largest supplier of natural and organic foods, personal care and protein today.

So yes, would more time be spent on distribution? But you come back and -- listen, when we bought Earth's Best, it was a $14 million business. And where Earth's Best is going today and what Earth's Best is doing to that other baby food company out there and Garden of Eatin', where that was, and look at some of the brands -- listen, I come back and say the reverse. If we are able to take all our dollars and not contribute to your bottom line, and I think in today's times step back what Hain has been able to do to grow the brands, make profits, pay down debt, do acquisitions. But I think what's happened out there today and what we are really seeing, the consumer demand for Natural Foods and healthy options, gluten-free, is growing. And the demand in mass-market, the demand in grocery, will continue for us.

I guess to wind up your question, Andrew, it maybe affected our profitability, but I don't think it pulled back on our overall growth.

Ed Aaron, RBC Capital Markets.

Ira, how much of the year-over-year increase did you say was protein-related and inventory?

In inventory? $32 million.

So as we look out over the next one to two quarters, there's been margin pressure in that business. As you look to work down that inventory, when you think about the cost basis of that inventory, what does that suggest about the potential for margins to recover over the next one or two quarters in the protein business area?

That inventory is largely turkey. Because our chicken business is a fresh business, we don't have very much in terms of finished inventory. So turkey builds out or grows out, if you will, over a longer period of time. And as we get into the September period, October period, we start selling into Thanksgiving Day prices, and the margins go up in that period. It's a very seasonal business.

And just on that, Ed, you heard what I said before. Whole bird is $0.80 a pound we sell for. Whole bird on antibiotic-free, $1.77. So just moving very much into that direction. And cost-wise, yes, there is more cost. But that will improve margins tremendously on the protein business for us moving into mainly antibiotic-free. And with corn prices coming down where there are, will help us significantly.

Yes, even conventional birds sold into the Thanksgiving markets go up into the $0.90 a pound when we get into that selling season. So it's a big difference.

And can you give us a sense of where you expect to finish the fiscal year from an inventory standpoint, how much opportunity there is just in the fourth quarter?

We'll let you know when we know whether or not the distributors and retailers keep destocking.

I think there's a couple things. There's a major focus on us taking down inventories. The two big parts of the inventory today which we need is our Earth's Best (inaudible) [pack], which thank god we have it to keep up with demand. And moving our birds through, our commodity birds and whether we move them through slower to get in closer to Thanksgiving or turn it into cash, and that's what we'll continue to look at doing.

But there's nowhere else that our inventories seem to be high. And we'll adjust our inventories as retailers and distributors adjust their inventories.

Scott Mushkin, Jefferies & Co.

So with the core business having flat volume with margins up in one of the worst economies in decades, you guys are really kind of an aspirational product, this is pretty darned good performance. I guess this dovetails off of Andrew's question, and he probably said it a lot more eloquently than I will right now. But where do we go from here? You don't seem to be getting any credit or much credit for the 80% of the business that's doing, I would say, reasonably well to quite well.

The story of my life. Step back for a second, I think flat and flat is good, I guess, right now. But you come back and look in the quarter, what inventory came out from distributors and retailers, and again what happened in regards to FX. So we would have been up almost 10% if you come back and added those back.

Where do we go, Scott? I think, again, as we consolidate it into a US operation, John and his group have a lot of good things happening and as we go into other classes of trade and we expand there. We have to come back and evaluate what's going on in protein because we do put -- when you've got challenges in businesses, you put a lot of time and effort and dollars against it. And when and where does it make sense?

But I think the strategy is clear for the US operations, the product lines. I think, as we stepped back and went through SKU rationalization, we went through new products, we went through consolidation. Listen, I've got to tell you, we decided back in February the best thing to do for the business was consolidate personal care April 1. Personal care is back in New York, new team hired, up and running pretty well without any glitches.

And you come back, and that's what you said, look at what's happening in personal care and with the economy and where it is. And let me tell you something, there's big companies out there like Clorox, there's big companies out there with Burt's Bees, there's big companies out there like Colgate with Tom's, that just our spending. And I think it goes back to show how well we are doing with our product line, with our people and with our relationship with customers.

And I appreciate the compliment because there's a lot of work, and you heard what I said before -- our hands are on the wheels here. And as the economy and the world turns, I think we'll see a lot of the benefit for it. And I've got to tell you, I step back, this has been the toughest quarter in my lifetime in working, and I think most of the people around here. And I would like to see the numbers a lot better, and so would everybody else. But I think we have been able to deliver some good, solid performance, considering what has gone on out there.

With that, I pat myself and everybody else on the back here. I can go with our closing comments. And just to continue on what Scott said, we had a solid quarter, despite what was happening out there. We went through inventory reductions. We -- you know, consumer confidence, we stick-handled around that. $1 billion in recall in regards to peanut butter and peanut-derivative product -- peanuts derived from -- products derived from peanuts. And we dealt with that. And we had a lot of products here, and it really gave us a chance to look at our recall and what we were able to do. And Ellen and Dr. Gerry Amantea did a great job there, but the cost in the dollar is not associated with it.

You heard what we've done on margins and how we've been able to enhance them, and we're going to promote back. We have a good plan in place on the UK, and we've picked up customers and we'll continue to do that. I am not happy at all what happened in our protein business, and we are focused on antibiotic-free, where we should have been. We've made numerous management changes, and I plan to spend a lot of time there with Jay Lieberman and the group. And we will get that back on focus and decide where we are going with that. And we continuously look at strategic options.

I step back on another action plan. We decided in November to really focus on cost. We've taken out $20 million of costs on the SG&A in line. Jim Myers and his group and the operations groups across the country took out, this year, between what was planned originally and additional, close to another $15 million. And again, we realize where we need people and where we're going to staff up. And we're going to add to the SG&A because we need people to help take us to the next level.

And back to what Andrew said before, which is important -- when you come back, and Andrew and some of the other people on the call get to listen to the Krafts and the bigger companies out there, the Kellogg's, we are only $1 billion in size. So when we hit a speed bump, we feel that speed bump. So I really am proud of the team, of what we've been able to do worldwide, considering what has gone on in the world, considering what has gone on in the economy and considering what has gone on with the consumer. And I think, when you look down and deep into our results, it shows what we've been able to do.

I look forward to talking to each and every one soon and get caught up with everybody. Have a good evening. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect your lines.