Hain Celestial Group Inc (HAIN) 2009 Q4 法說會逐字稿

Good afternoon. My name is Angelina and I will be your conference operator today.

At this time, I would like to welcome everyone to the Hain Celestial fourth quarter and fiscal 2009 conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer session. (Operator Instructions). Thank you. Ms. Anthes, you may begin your conference.

Thank you Angelina. Good afternoon, I am pleased to be with you today to introduce our fourth-quarter fiscal year 2009 earnings conference call discussion of our financial results which were issued earlier today.

We have several members of our management team here today to discuss our results -- Irwin Simon, President and Chief Executive Officer; Iran Lamel, Executive Vice President and Chief Financial Officer; and John Carroll, Executive Vice President and Chief Executive Officer of Hain Celestial US.

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. Irwin?

Good afternoon, Mary. I hope everybody has had an opportunity to read our release. Ira will take you through our release in a few minutes with our adjustments and with and without chicken.

But let me just talk about a couple of things and then I'll turn it over to John. 2009, what a tough year it is, and actually I'm quite happy it's over. But still all in all, we've had some great things happen.

Hain continues to grow topline even in these tough times. Our free cash increased $28 million to $33. We reduced our debt by over $47 million and what a strong balance sheet we have.

Our gross margin in the fourth quarter was up 1.56 bips and our earnings per share, $0.28 with a $0.04 loss included from frozen. John will talk about all the good growth going on in his division in grocery, non-dairy, Celestial and what's happening to Earth's Best. I will then take you back and go through Europe, about our turnaround program in Europe, our growth in Canada and what I see happening on Hain Pure Protein and the turnaround there and our outlook for fiscal 2010, acquisitions and strategic alliance.

So let me now turn it over to Ira. Ira?

Thanks Irwin. Good afternoon everyone. Our adjusted earnings came in at $0.28 per share in the fourth quarter and $1.24 adjusted for the full fiscal year. These earnings include a $0.04 loss per share in the quarter and an $0.18 loss per share for the full year coming from Hain Pure Protein.

Reported sales for the fourth quarter this year totaled $262.7 million with sales negatively impacted by $10.7 million due to changes in currency rates this year's fourth quarter compared to last year's. For the full fiscal year, sales totaled $1,135,300,000 after the negative impact of $35.6 million from currency changes.

On a constant currency basis, sales for the year grew by 10.8% year over year. As our press release today points out, our focus on cash generation in recent quarters gave us strong results this quarter. And just to clarify what Irwin said earlier, we generated $28.0 million of operating free cash flow in the fourth quarter which is an improvement of $33.2 million over the prior year's fourth quarter.

This allowed us to pay down debt by $30.2 million in the quarter. For the full year, we paid down $47.2 million in debt, reducing the total outstanding to $258 million of which $150 million is represented by non-amortizing fixed rate 5.9% rate notes due in 2016.

We continue to have sound financing in the face of market conditions today. We saw strong results from our focus on gross margin expansion. Our adjusted gross margins without Hain Pure Protein improved by 156 basis points in this year's fourth quarter as compared to last year's fourth quarter.

This improvement came from strength of our US operations where the benefits of our pricing actions early in the year, our productivity initiatives and reduced diesel prices all combined to increase the margin results. While we have seen some input costs come down, overall we experienced higher input costs in the fourth quarter this year compared to last year's fourth quarter. And if you remember, the inflation accelerated during the first half of our year fiscal year this year. So really didn't exist to any large measure in the fourth quarter of '08.

We also continued to move promotional spending from our selling and marketing expense programs, classified as SG&A, to increase our use of consumer couponing which is classified as a reduction of sales. In the fourth quarter this year, we spent 64% more on consumer coupons that in the prior year. Our margins were impacted by this shift in promotional spending. And margin performance in Europe also brought down overall margins in this year's quarter as compared to last year's quarter.

I'm going to give you some information about certain of our adjustments this quarter. We've added back $3.9 million or $0.03 per share after the minority interest for the startup costs incurred at the Kosher Valley facility. This facility began production in late April and the facility was in startup phase for a significant portion of the quarter.

The Celestial Seasons SKU rationalization and personal care consolidations are detailed in our press release. So I won't repeat those numbers.

The components of the charges include inventory to be discontinued at Celestial Seasonings, the write-off of assets that will no longer be used such as packaging print plates and the like, and the expected cost of implementing this program at retail. The personal care charge includes severance which under accounting rules could not be accrued in prior periods when the program to consolidate was announced and the write-off of inventories that were deemed not advantageous to move from distribution points in Northern California to our primary distribution center 500 miles south in Southern California.

Other items we have added back are consistent with those of previous quarters and are included in our release. As we reported to you some weeks ago, our equity ownership in Hain Pure Protein has been reduced.

We now have a 48.7% non-controlling interest which makes us the minority investor. And as a result, we will no longer consolidate Hain Pure Protein in our financial statements going forward. Our June 30 balance sheet reflects the classification of our investment in other assets as an investment in a joint venture.

Our P&L however continued to include Hain Pure Protein on a consolidated basis through June 30, 2009 which is the date the transaction took place. In the future, Hain Pure Protein will be presented as a one-line item in equity investment, net of tax, labeled as income from equity investment.

We've given you our guidance for the full year 2010. We expect our sales to grow at a rate between 4 and 6% to a range of $1.110 billion to $1.130 billion and we anticipate that our earnings per share will come in between $1.19 and $1.28.

Our sales growth range is computed using sales for 2009 less sales of Hain Pure Protein and less sales of products discontinued in the SKU rationalization we've announced. We've changed the manner in which we provide guidance such that we now deduct stock compensation from the earnings so that our guidance is now lined up with GAAP and we will post stock compensation expense for 2009 and 2008 on our website along with HPP information.

Some of these significant estimates in arriving at our guidance include our estimate of consolidated gross margins, which we expect to be in the 28.5 to 29.5% range for the full fiscal year. We've also estimated that our SG&A as a percentage of sales will be between 19.5 and 20.5%.

These estimates reflect the effects of no longer having Hain Pure Protein in our consolidated metrics. We expect our interest expense to come in between 11 and 12 million for the year of course dependent on rate movements during the fiscal year. We've also estimated our annual tax rate to be 37% and the last major assumption in our guidance is that our share count will approximate 41 million shares for the full year.

We announced in our press release that we are consolidating our UK Daily Bread operations into other our Luton facility. We will incur severance costs for this consolidation as well as certain other costs typical in such a program.

We estimate that these total costs will be approximately $2 million and that they will occur in the first quarter of fiscal year 2010. We also expect that due to seasonality in certain of our reporting units and other factors, including the phaseout of private label sales at Luton in the UK, that the first half of our fiscal year will not be indicative of the full year results we anticipate.

In order for you to compare our annual and quarterly results of fiscal year 2008 and 2009 to the guidance we have provided for fiscal year 2010, we are posting to our website after today's call information about those years. You can find that on Hain-Celestial.com under the investor relations page. This information includes details of these prior periods regarding the changes related to Hain Pure Protein and the stock compensation expense.

I'll now turn the call over to John Carroll who will take you through our US operations for Q4 and fiscal '10 outlook.

Thank you Ira. Good afternoon. Hain Celestial US delivered strong Q4 organic operating results in a very challenging economic environment. Let's take a look at our Q4 highlights and we're going to start with topline.

US Q4 organic sales were flat versus year ago. However, several core categories experienced strong growth, including tea, where Celestial Seasonings sales driven by solid consumption gains were up double digits versus year ago. Also, infant and toddler care where Earth's Best sales were up double digits despite going against a strong Q4 year ago which included pipeline fill for the Target national expansion.

In nut butters where our new [inspired] business drove double-digit growth across our category. Other US core categories experiencing Q4 gains included dry grocery, non-dairy beverages and frozen, all of which experienced single-digit growth. These gains offset declines in personal care, snacks and refrigerated.

Now, turning to gross margin, US Q4 gross margin was up versus year ago and was the key driver behind the overall company gross margin improvement. The US gain was driven by personal care and grocery which offset a slight Celestial Seasonings decline.

Celestial Seasonings gross margin decline was due to a support spending shift from advertising to couponing which we have noted since the Q1 earnings call. Normalized for that shift, Celestial's gross margin would've been up versus year ago.

Now key drivers behind the US gross margin improvement were full reflection of the July price increase, improved fuel and commodity costs, personal care SKU rationalization and warehouse consolidation, and productivity savings of over $2 million. Moving further down the P&L and looking at SG&A, US Q4 SG&A was down significantly across all three units.

That includes grocery, Celestial and personal care. The improvement was driven by consolidation of the personal care Petaluma office into Melville, savings from our November (inaudible) and continued tight cost controls across all functions.

So finally, our strong Q4 performance was a key driver of the Company's improved operating cash flow and concluded a very solid FY 09 for Hain Celestial US. Despite the challenging economy, Hain Celestial US delivered FY 09 improvement across all key metrics including topline sales, gross margin, SG&A spending, operating income, and operating free cash flow.

As we enter F10, the environment continues to be challenging for natural and organic products especially from a topline perspective. Natural and organic category sales and distribution growth trends, while still being positive, have declined over 10 percentage points since November 08.

At the same time, private label growth in both areas has accelerated. But for Hain Celestial US, we enter F10 with some significant positives including we now have a resurgent Celestial tea brand with growing consumption. We also have solid growth trends in several core categories that I mentioned.

We also have margin expansion opportunities from Celestial tea, SKU rationalization along with the US productivity initiatives. And finally, we walk into F10 with a more efficient SG&A structure.

Our F10 Hain Celestial US strategic objectives are very simple and focused. They're about driving profitable topline growth, expanding margins and increasing operating income and free cash flow.

The key to the FY10 plan is objective number one which is driving profitable topline growth. To achieve this objective, we are focusing against four key, topline growth levers which I'm going to share with you.

The first growth lever is expanding distribution, especially for our grocery and personal care lines. Remeber, our top 100 SKUs for grocery and personal care average only 33% and 7% respectively in grocery channel ACV.

There is growth available just by adding new doors for our product lines. The second F10 growth lever is strategically investing in value against some core categories including non-dairy beverages where we will roll back specific WestSoy SKU price points to below $2 to compete with private label.

Also in snacks where we will use the aggressive couponing program that works so well for Celestial Seasonings to now drive Terra growth. We initiated the program for Terra in early summer and saw a 12 percentage point improvement in our core exotic chips consumption trends.

The third area that we're going to use value is against Alba lip balms where we're going to use an everyday $2.99 price point as an entry point into this important franchise. The third growth lever is leveraging innovation which is a Hain staple across all parts of our Hain Celestial US portfolio and we have some exciting F10 new launches including our Terra A La Mexicana exotic vegetable chips which are already in distributions in 2500 Wal-Mart stores nationally.

We also have our new gluten-free cafe soups which capitalize on a growing consumer trend and our new Alba Rain Forest skin and hair care line which is currently available nationally at Whole Foods. Our final topline growth lever is accelerating our Celestial tea momentum by continuing to drive consumption on our category leading herbal tea, by introducing our Sleepy Time vanilla tea and by relaunching our green tea with improved taste, high impact new packaging and a strong trial program.

So to summarize, our Q4 performance indicates that despite the economic headwinds, the Hain Celestial US business is robust as we enter F10. We're focused against driving topline sales which coupled with our productivity initiatives and our leaner SG&A structure will drive expanded operating margins and increased income and operating free cash flow. So with that, I'm going to turn this back to Irwin.

Thank you John. As we started off the year and we saw a lot of the challenges and headwinds in front of us beginning in October, November; we focused on cost reduction and a reduction in [force] which we eliminated about $15 million in cost on an annualized basis. Our groups across the country went into major productivity mode and we removed about another $15 million of cost.

And you know as you step back and you look back, it's been a long year. It almost feels like it's two years rolled into one. But you got a sales slowdown by consumers, you had tremendous inventory coming down by both distributors and retailers. You had chain drug sales fall off and you had a lot of private label company coming into the category.

But what did we do? We consolidated the Petaluma into Melville which helped us with two margin points on the personal care. We executed real well SKU rationalization which we will continue to do. And with that, we grew our diaper business which we acquired almost two Decembers ago. We doubled that business.

You heard John say about our [inspire] business was up over 16%. If you come back and look at a brand, Earth's Best, when we acquired Earth's Best it was approximately a $14 million business. We have expanded that into frozen, we expanded that into personal care, diapers, formula.

And that brand combined was up over 34% for the year and that is something that is just exceptional to achieve. You heard John talk about gluten free. As a total company today, we have well over 330 gluten-free products.

And gluten free happens to be one of the fastest-growing categories and there's just a staggering number out there with every day that someone is diagnosed with celiac disease. John talked to you about Celestial.

What a great turnaround as we sat here a year ago talking about the package change in some of the new products that we were able to achieve and of course on non-dairy. So let's come back and talk about Hain's focus for fiscal 2010.

We continuously hear consumers will are trading down on organic. Yes, that is true. But on the other hand, as a lot of our competitors and other companies leave, that creates other opportunities for us.

But as consumers that used to buy organic are always going to continue to (inaudible) buy healthy nutritious products and what we are seeing today, trends in nutrition, trends in health are continuously expanding across multiple retailers. And we are only in just half the doors that are selling products today and we will continue to expand.

With our Martha Stewart Clean products which will be launched in October/November, that will take us into a large retailer that we have never sold products before and which will give us the opportunity to expand multiple products. Some of the hot categories that are out there today are omegas, and no fructose, fiber, gluten-free, protein, antibiotic free, antioxidants, reduced calorie, natural which everybody is looking at ingredients and what are the ingredients in there; no MSG and lactose-free which are categories that Hain participates in.

So when you come back and look at Hain, you say the healthy natural organic food company. Yes organic is a big part of our Company but we have multiple other categories that are focused in health and nutrition that we will continue to grow.

Spending money this year on the brands is something that we will continue to do and we have to get our message out and that is built into our guidance and built into our numbers. John talked about price rollback and price points.

We have got to show value out there. I say every consumer wants to eat healthy but every consumer wants value and that is something that we are going to continue to do and we will continue to be an advertiser.

Hain, the largest natural organic, personal care, food and consumer products company out there; we will be the leader. We will take ahold of the lead out there across all major retailers across the country.

What we see in couponing and you heard Ira mention what's happening with couponing. Couponing has doubled.

You used to get one quarter of 1% redemption. We're seeing redemptions doubling and tripling out there and tremendous what's going on with couponing. It's a great way to sample and that is something we'll continue to do.

Other trends we're seeing, tremendous amount of people eating at home. 37% increase April, May, June quarter over April, May, June of last year where people are eating at home and there are new consumers that we're bringing in buying our food. People bringing lunch to work and people are eating breakfast at home continue to be opportunities and trends.

So, yes, maybe people are trading down or maybe people are leaving the organic category but we have multiple amount of other categories which we will bring people into and multiple other classes of trades that we are going after for distribution. So let me talk about our European business which now -- which always included the UK. I've never separated the islands of the UK and Europe.

But we now classify as Europe as total business which includes the UK. Our European business which is just Europe now, grew 7% and that is adjusted for local currency. And growth coming from our Rice Dream, our Lima, our Natumi and our Rice Dream brand grew 48% in our European business and we continuously see strong growth.

Our strategy is to grow our brands throughout the rest of Europe and our strategy will be to focus on how we can go into other countries and grow distribution. And we will continuously look at where there is opportunities on acquisitions.

In the UK, it was a tough year. UK, tough economy. And with that as we move on from the [MNS], we have opportunities to bring our Luton products into new products, hot foods, kids meals and that's something we're going to do. With the acquisition of Daily Bread, it allows us to fold it into our Luton facility and allows us to do existing products, get into other channels of trade and is something that will help the Luton capacity.

Our Linda McCartney brand was up 45% and we have now over a 10 share of the meat-free category and what a difference a year makes. The other thing what a difference a year makes, basically in the UK last year this time we probably had two customers. We are now doing business with every major customer in the UK -- Tesco, Asda, Sainsbury and we continue to expand that.

Our Manchester facility (inaudible) non-dairy, we picked over 1.4 million liters of non-dairy milk. So with the consolidation of Daily Bread into our Luton and a lot of new products, we are looking for our European business, including the UK, to break even next year. And with our current management team in place which is led by Peter McPhillips and a lot of you have met Peter or talked to Peter, we expect some good things and we're pretty excited with the turnaround that's in place.

Our protein business, another tough year. And with that, we were just in the wrong sandbox in playing in the commodity turkey business. High corn prices with that, it's something that as we see corn prices come down substantially -- and just on corn prices alone, at buying today at today's corn prices versus last year where we are, it's over a $4 million savings.

We will only focus on antibiotic free turkey and chicken. We have integrated the Plainville operation into New Oxford. Our Fredericks chicken facility is running well and Kosher Valley startup had a few blips but what a great opportunity and what a great reaction we have had on our Kosher Valley.

Why do I feel a good turnaround? Why did we not decide to get out of the [total] business? With lower grain prices, new customers and being focused on antibiotic free, I still see some great opportunities there. And with that, why not ride the upside and not move on when things are on the upside? So I see some good opportunity and actually I see us making some money in our protein business this year.

Canada was up 4% on an adjusted basis for the full year. Good growth with the chains in Canada. There's three or four good grocery chains and we expect to continue to grow in Canada.

We're looking for good growth in '10. We're a big sponsor of the Olympics and we've rolled out numerous new products.

So why do I feel good about fiscal '10? I believe we have conservative growth on our topline. We have tremendous amount of distribution expansion.

And as I sit with John and the rest of the group and as John mentioned before, the top 100 products where we are, where we aren't and where can we go, there's just a tremendous amount of opportunity. And you heard me take you through before why the consumer is looking for better-for-you products. But of course it's got to be at value.

Hain US operations are solid and positioned for solid growth. Our Hain Canadian business looking for high single-digit growth. I feel good about our European turnaround and our Hain Pure Protein anticipates profitable growth.

Our Martha Stewart line will roll out in October/November. It gets us into the whole cleaning area which is a category we're not in today. I mentioned our first chain that we're going to go into is somebody that we're not doing business with today and gives us the opportunity to bring in a lot of other Hain products.

We have a strong balance sheet which in fiscal '09 we did not do an acquisition, probably the first year in the history of Hain that we did not do an acquisition. We stepped back, got our own house in order and with that we are ready to do an acquisition.

I must tell you, having a strong team, I think we have one of the strongest management teams in place right now throughout the world to help us accomplish what we are set out to do in 2010. The consumer will eat healthy and we have numerous products.

And if they eat healthy, maybe they will not get the swine flu. Strategic opportunities in other countries is something that's out there and that is something we are looking at. We will be back to talk to you at another time about some of the strategic things that are going on.

Business today -- and there's a question always asked to me, how's business, how's business? Business is consistent out there. We're not seeing the declines that we have but we're really seeing a good consistent, good solid business and now we know what to expect and we know what to do and as we have seen inventories come way down, we are prepared for it.

So business is absolutely consistent. And last but not least, the new products, the innovation that we continue to do. And you know you keep hearing about private label, private label. And yes, private label is a product out there in natural and organic. And for Hain, we have to stay ahead. We have to be innovative and we have to continue with new products [and] something that we will do.

With that, I will now open it up to questions and answers. Thank you.

(Operator Instructions) Greg Badishkanian, Citigroup.

Great, thanks. Hey guys. On the sales front; excluding currency, sales were down sort of low single-digit and I'm wondering are there any adjustments there? No acquisitions, is there anything we should consider for that?

In that number besides currency, there is some private-label business we didn't do this year versus last year in the UK and then there's -- which is the UK -- part and then there is SKU rationalization and personal care rationalizations. But the big thing is a major SKU rationalization of product lines and a major co-pack agreement we had in the UK that we didn't have this year, Greg.

Okay. So I'm assuming it will probably be positive excluding that?

I will let you say it.

And then kind of moving to POS, obviously we've seen a lot of de-stocking particularly at the retail and distributor level. So how much of that went on during your fourth fiscal quarter and would you say that retail sales were higher than your sales to retailers and distributors?

Greg, I think in the fourth quarter, we didn't see it like we saw it in the second or third. Actually we did see a couple major mass markets take out about half a week and I have John and Adam of here nodding their heads.

So it was the more direct customers, not distributors. So I would say about a half a week come out of some major retailers. But the significant came out in the second and third quarter for us. And again, what we are seeing and some of the statistics we are seeing is consumers going to the supermarket a lot more often and pantry de-loading. But we are seeing [not consumption max] in some of our shipments here.

Edward Aaron, RBC Capital Markets.

I guess my question is for John. Looking out to 2010 -- because Irwin, I think you said that Europe and the UK were going to be breakeven and that protein is going to make money. So wouldn't that imply that -- John, wouldn't that imply your business will be lower in 2010 than 2009?

No. In a word, no.

Thank God you are not his boss, Ed.

If there's an opportunity to sign up for that, I might.

Can you help me understand the math on how it could be up and still get into your guidance range? Because the UK was -- lost a decent amount of money and so did protein this year. So I'm just trying to understand how the math works there.

Well one of the things you have to take a look at it I think is the adjusted schedules that we have. And I think if you pull out Hain Pure Protein and look at us without it, you're going to see that all the businesses will be improving in the next year.

There's different growth rates among the different businesses that we have, the different reporting units that we have. Some of them are lower than the 4 to 6% that we've guided to for the full year. Some of them are higher.

And depending upon where those ups and downs are if you will, you get quite a wide skewing of what results fall to the bottom line. So I don't think that you can simply draw the conclusion that if we think Europe is going to be at breakeven, that's John's businesses or the US businesses are going to be down overall. I don't think that is the path that we are taking at all.

John Heinbockel, Goldman Sachs.

Want to drill down on a couple of things. If you look at the 4 to 6% target that you guys have, how much inflation is built into that? And what if you assume for currency -- and I guess is that 4 to 6% back end loaded, you think it will be stronger in the second half?

John, number one, there is nothing in there for pricing or inflation. And in regards -- you know, the reason it's back end loaded, that is our biggest quarter, our October-November-December quarter. And actually as we -- in the beginning of last year, we had strong first half. So as we overlapped some of those comps and we had lower comps in the second half. So that's something that we have in front of us. In regards to currency, Ira?

We adjusted our rates toward the end of last week. So they're very current rates that we've used in our projections. Of course if those rates change, then certainly --

So it's current rates.

Yes, it's current rates. The other thing that I will point out is that we've for the first time done some currency hedging up in Canada because our Canadian business buys a lot of its ingredient from the United States from sources in the United States. So we have allowed them to go ahead and hedge against the US dollar. So we should be pretty safe and be able to predict well what will happen between Canada and the United States on currencies.

Currency should be a benefit next year. We don't know how much, but it certainly won't be a drag. It could be a benefit.

John, I love to hear your certainty but we will see what happens as we go forward. I don't think any of us really know what currencies will be in January or February or March. But we will see when we get there.

And then secondly, if you're looking at a 9% EBIT margin which no longer includes Pure Protein, you look back historically and you've sort of been in that range give or take. Is the thought that that's about as far as it can go or given the cost work that you've done, the consolidations you've done, this business ex the Protein should be a double-digit EBIT margin business at some point?

Absolutely and I think you heard me say a couple things. We have done numerous price rollbacks here. We have built in spending a lot more money on advertising.

We think growing 4 to 6% in these times, yes. But as times return to normal times, we think there is opportunity for additional growth. And then last but not least as we consolidate and get the benefits from all our businesses -- and at the same time, ultimately as commodity prices come down even more and looking to get some of the benefits from commodity price and fuel price throughout the year, we see opportunities there.

One of the other things I think is important to point out when you talk about the spread of income across the Company is that this year's guidance -- and I hope I was clear -- we are treating stock compensation as an expense. So when you look at next year's results, it will be with that stock compensation deducted.

We won't be reporting it as an addback in any fashion. So we had $7.2 million of stock compensation during fiscal '09 and it's the last year that we're going to treat that as an addback.

Scott Mushkin, Jefferies & Co.

I'm actually walking into the Whole Foods in Long Beach as I'm doing a little store tour here.

Hain Celestial products, Scott.

Actually you guys look pretty good out here, I thought, on the shelves and a lot of the retailers. But two questions.

One actually has to do with what I've been seeing and maybe John (inaudible) with the Garden of Eden product. It looks like you have a lot of new product across baked chips on the shelf. I know you don't specifically talk about Garden of Eden (inaudible) snacks, is Garden of Eden significantly outperforming Terra and maybe give us a little color on some of the new products you've got going there?

Garden of Eden was significantly outperforming Terra. Terra is starting to come back, Scott. But Garden of Eden is a very strong performer.

It was up almost double digits in FY 09 for us. And we have got -- Maureen is here. Maureen, you want to just call out (multiple speakers)

(multiple speakers) recently introduced the baked and multigrain which is doing exceptionally well and also veggie chips.

So baked, multigrain and veggie chips are our three new launches this year against Garden of Eden.

And do you guys have any idea what percentage of the snack category you have in like a Whole Foods? It seems like it would be about 40% of your product on the shelf. Is that do you think about accurate? Do you have any idea?

I think that would be an estimate. Because as you know, it's not reported with (multiple speakers) entire category.

If you take Terra, Garden, Little Bear burritos, Boston popcorn, we should have at least that. And if we don't -- Adam is shaking his head -- we better have it.

And then with the baby aisle, the baby food, you guys are going to be at least 70% share in the natural organic baby food? Is that correct?

Yes, Scott. I think we should be higher. I'm not sure we see -- we do see some other ones out there and that is what continues to make sure that no one else enters that category with Earth's Best. The big thing is we are now getting over 5 million hits a month on our Earth's Best website which shows you the strength of that brand.

And then finally -- and I apologize. I actually missed what you said about acquisitions later this year. Could you just -- I heard something about it but I missed it. Just maybe briefly go over your thought process as you look and what categories you would like to acquire in.

You didn't hear the big announcement I made, Scott? No, I'm just (multiple speakers) what I said on acquisitions, I said with our balance sheet where it is and really feeling we have our house in order after fiscal '09 and looking into fiscal 2010, we are ready to do acquisitions that are strategic in categories that we can grow.

And what we want to do as you have seen -- John talked about [inspire] and nut butters. It is in the grocery isle. The business grew for us over 16%. When we acquired Spectrum, we have taken that business and we doubled it. It's grown nicely to a $10 million EBITDA business.

So we are going to continue to focus on good grocery categories where we're not today, we can grow, and categories -- we're not going to be all over the store. We're not going to just do a cluster of acquisitions. If we can find something in the snack category that we can add value to and help us grow, we will. So it's basically -- they've got to complement where we currently are today and they've got to be strategic, got to be accretive and that's the type of acquisitions we're looking at, Scott.

Finally and I'll get off, how about divestitures, Irwin? I know you haven't talked much about that in the past but is there any categories when you look at your core competencies and say -- hey, those don't really line up very well?

I think -- listen, we started to do it with Protein and not from a divestitures standpoint, not have the majority. But from a category standpoint, if we're going to sell something, we would sell and get out of that category altogether and not just sell a brand.

So if we were to do something, we go across multiple categories. So it's difficult to do. But you know, if it made sense for us -- and we're continuously stepping back and sort of saying how do we have difference and uniqueness for natural? How do we have difference and uniqueness for mass? How do we have different and uniqueness for grocery and how do we separate some of our brands?

As I said before, yes we have multiple brands. 15 brands approximately make up 80% of our sales. But in a Whole Foods, you'll see 1400 to 1700 of our SKUs. In a traditional grocery, you may see 400 to 600. In a mass-market you may only see 100.

So we have different brands going into different channels and that is something that we continuously to focus on. But if they can't be profitable, we can't grow them. We shouldn't keep them.

Thanks for taking my questions. I hope there wasn't too much background noise.

Andrew Wolf, BB&T Capital Markets.

I think you said it was 60% plus increase in the coupon redemptions.

It's almost probably 100%. It's almost double.

64 quarter over quarter.

Alright and that's a topline deduction. Can you actually give us a dollar value? So just this year and last or a swing or something along those lines?

We will just stay with the 64% increase in couponing.

You think it's a competitive thing? You don't want to give out your coupon rate?

Nope.

Alright, it's fair enough. But I could assume it's a pretty large number given -- well I'll just use an industry average. Just for John on the flat consumption trend you saw for the business units in the US, was that consumption or factory shipments?

Factory shipments, factory sales.

Could talk a little about overall consumption? Was it similar to that and across the brands and how do you think Hain Celestial did -- in the US is doing compared to competitors or overall categories?

The consumption is in line with the shipments, maybe outpacing it a tad. In regard to -- look, we are seeing -- as I said to you, natural and organic growth trends have actually declined. The trends have declined about 10 points since November. So for as we look at it given that we are eking out some growth in consumption, we are actually trending better than most of the players in the categories.

Andrew Lazar, Barclays Capital.

I'm trying to -- I want to come back to your comments around distribution gains going forward. I know it's something that you talked about before sort of ongoing and I'm trying to get a sense if there are certain examples of things that maybe you're going to be doing differently going forward to sort of get those distribution gains. And is now the right time in other words? Are retailers really thinking now along the same lines as we've got to increase our kind of better-for-you sort of options from a distribution standpoint?

Number one, we have the infrastructure, the sales infrastructure, the personnel to go ahead and our growth on Earth's Best, our growth on tea, our growth on non-dairy is not coming today from your traditional grocery. It is coming from other channels as consumers go to other channels.

So number one, what are we doing differently? We have the infrastructure, we have the distribution; and thank God, we've got consumer demand. So that is number one.

Not to talk about -- there's one retailer in particular that's become -- where two years ago, three years ago we never did business with is our largest Earth's Best customer today. And they are looking as they see the success of those products, they're looking for additional products that are health and wellness in those.

And I go back and say this here. Price and value are important. The other thing that has happened, a lot of the desert bigger consumer packaged good companies were in there before with a lot of their products and they have left the natural category, the organic category which gives us opportunities.

And then with respect to the -- excluding currency in the quarter, the sort of -- whatever it is -- low single-digit sort of topline decline year over year, I'm trying to get a sense even directionally, where sort of volumes versus pricing came in in terms of making up that organic sales decline. If you can give us a sense directionally kind of where volumes were and where pricing was in terms of how we got there?

We got better benefits from pricing. If you remember back in August/September, we put in a fairly significant price increase. That matured in the fourth quarter. So we don't see pricing from that particular implementation helping us in fiscal 09 any more than it has in the fourth quarter (multiple speakers) fiscal 10 any more than it has in fiscal year 09 fourth quarter. And the volumes were slightly down, not anything that was really substantial, but a little bit down.

The big effects mostly on volume came out of the UK business between discontinuing co-packing for a Heinz contract that we had, loss of business with MNS, major SKU rationalization on our [haldane] acquisition and that hit us with currency and product. So that is where the majority of it came from.

We saw good growth in our US operations, good growth -- mid growth in our Canadian operations. So it mostly came out of Europe.

Michael Piken, Cleveland Research.

I'm calling in on behalf of Christine. A couple of questions. Just following up in terms of what you said about kind of where the distributors are with their inventory levels.

You know Unify, I guess their inventories had increased a little bit over the last quarter and just sort of wondering kind of -- if you have seen any signs that they are going to try to move that down a little bit more or are they sort of through their de-loading. Just wanted to get a little more color around that.

I think in discussions with them, they're pretty well through it. But I'm not totally sure. But we did not see anything in this quarter in regards to distributors de-loading. It was more from the retailer side continuing to do that.

Okay, great. And then if you could just talk a little bit more about Celestial and some of the progress. What do you think is really -- I mean you talked about couponing. But I mean is it really just that Celestial is considered a good value brand or could you talk a little bit more about some of the things that you have done to really turn that business around?

I think the key on Celestial -- this is John -- was to go back and focus on our core tea and we did that by focusing on where we are the strongest which is our herbal tea. And what we saw was that our herbal tea has grown very -- in high single digits this year in terms of consumption.

And that is what we're going to build off of. With our SKU rationalization, we're going to get out other products that are not base tea and we're going to continue to drive against our herbal tea. We're going to relaunch our entire green tea peace and we're also going to get into the wellness tea side of the business in a bigger way. Those are the things that have driven us so far and the things that will drive us going forward. It's a great opportunity for us.

Just to add to that, I think the big thing is where before what was driving the growth in tea and probably driving some of our [loss] this year, you saw a lot of these higher end teas out there, anywhere from 7 to 8 to $9 and you are seeing them sitting on the shelf today where the pyramid bag and some of these higher end teas and consumers are not spending that kind of money on tea. The average consumer has six boxes of tea in their pantry and they're not spending -- 7, 8, $9 boxes of tea and they're coming back to traditional tea and buying Celestial.

Jason English, JPMorgan.

Couple of quick questions for you. One on the personal care business. I believe this is the first quarter where you had converted from a brokerage unit to in-house.

Can you update us on how that's going, whether or not it's resulted in any sort of distribution upside and also whether or not it had any topline impact just moving from a commission based structure to in-house?

We did that effective May 1. So it's actually too early to get a good read on it.

Was there an impact on the topline (multiple speakers) system?

No, not from that at all.

You mentioned -- some of your comments were focused, John, on your prioritization within the portfolio focusing investment. You didn't mention much on Earth's Best. What are you guys doing on Earth's Best to keep the growth momentum going this upcoming year?

What aren't we doing on this Earth's Best? The key on Earth's Best is -- look, the base is the jarred baby food and we're continuing to drive new distribution and innovation against our baby food.

But also we know that Earth's Best travels -- the brand can travel to new categories because mothers want the qualities of an Earth's Best product across several different categories. So as Irwin mentioned, frozen has become -- has grown I think it was 74% for us in the last year on our Earth's frozen line. Diapers more than doubled.

So it's a matter of driving the core and formula. Formula almost doubled as well. So it's a matter of driving the core baby food business but also sanding out and finding those categories that the Earth's Best brand name brings some real value and quality to and expanding into them. Don't worry. It is the number one focus of our grocery unit.

Edward Aaron, RBC Capital Markets.

You guys did a nice job on the balance sheet this quarter and just trying to get a sense of where the drawdown came from on inventory. And then secondly, we're almost two months through the September quarter. Irwin, I know you mentioned that sales trends were -- you used the word stable. I was just hoping you could maybe elaborate on that and just tell us whether you think the sales growth will be positive in the quarter. Thanks.

Well on the inventory, if you are just looking at the balance sheet, the ending balance sheet at June 30, '09 no longer has Hain Pure Protein inventory in it. So the big decline that you see year-over-year was in part the result of that.

On top of that, we have gone through trying to reduce inventories. We've had an aggressive program of doing that and I think inventories have come down pretty much across the board.

Cash generation, there was about $22 million brought into cash that came out of working capital during the period and none of that is impacted by this deconsolidation of Hain Pure Protein. That's a separate transaction.

So I think it's just good focus. We do weekly calls here now which we did a couple years ago and we have brought them back where we are focused with every division and unit on its cash conversion and generating cash and we have just managed it much more closely. That started back in November when the credit crunch started and we just wanted to stick to our metal.

You asked me about sales. I think what is important is we are seeing it consistent. And again, one of our largest customer who saw negative comps throughout the year, we overcame that. What we're not seeing is that major drop-off that we saw from Thanksgiving on.

But we're seeing good, solid, consistent sales. And with that, you have to work at it and that's something we are continuously doing. (multiple speakers) we have some tough comps in front of us. We feel that there's some good opportunities out there for us to gain distribution.

One more quick one, if I could. Ira, you mentioned in your prepared remarks that the first half of the year is not going to be representative of the full year. I think I missed the reasoning behind that. Could you just elaborate there and how much different the second half should be than the first half?

We have some traditional seasonality. Even though Celestial Seasonings has dropped as a percentage of our total sales, it still gets its major sales part of the year coming in the second and the third quarters.

So you know, we are going to see the impacts of that. The other thing we're going to see is that last year, you saw an increase in sales out of Hain Pure Protein in Q2 because of the Thanksgiving and other holidays. That will no longer be in our sales, so we won't see that happening.

So it's kind of not going to represent necessarily what we have seen in the past. The other thing that's going to happen in the UK with the phaseout of sandwiches to that major retailer we talk about is those sales are going to decline prior to it building up all the new business that's been obtained for the UK and Europe.

So there may be some slow start to that business coming in. We should get to the second half of the year and have that business in place and producing sales, so that will play well for us in that second half.

Andrew Wolf, BB&T Capital Markets.

Just to follow up, Ira, if could on the guidance. Your website doesn't yet have some of the details but is the $2 million restructuring at the Daily Bread or the integration there, is that excluded from the earnings per share guidance of 1.19 to 1.28?

No, it's included, meaning we've already treated it as an expense. We will not be adding it back.

Okay. On that vein, are there any other -- so is this 1.19 to 1.28 essentially a gap at this (multiple speakers)

Yes, yes.

That's great to hear. Are you contemplating any other charges within that 1.19 to 1.28 that we should know?

Andrew, it's interesting in the sense that we have evolved to the point where we are now going to deduct stock compensation. It's included in the guidance, it's on a GAAP basis.

We know that we have these charges coming through with the Daily Bread consolidation. We're certainly going to call them out when we release earnings in the period that it takes place.

It should be done by Q1 but it's possible it will slip a bit into Q2. We will call out what those charges are when they actually happen. But we can't guarantee -- I don't think any company can -- that there are never going to be adjustments for GAAP and addbacks because there are events that happen that are just not foreseen.

That's fine. But as you set it now and obviously that's fine, but as things are set now, there's $2 million of costs in that one. I just wanted to know that (multiple speakers) and you might have said this already and I just apologize if I'm making you repeat yourselves. What is this year's contemplated options expense either in dollars or earnings per share?

Right now we are planning on (multiple speakers) about 7 to $10 million. It was 7 in the past year. It will go up a little bit.

Jon Heinbockel, Goldman Sachs.

A quick question. How concerned are you guys at all about the recent run-up in commodity cost, both agricultural and energy and where that may go and what you can do to mitigate that?

The good news is, John, when you come back and look at corn and soybean, they're much lower today than they were a year ago. So I think we have built in for our pricing basically where they are. If they go back to last year's high, we're all going to have some challenges out there.

But I think we're okay and I think one of the important things is where before we never saw commodities move the way we did before or never saw fuel prices, I mean it's something that is a weekly event and we look at it. And our group has done an incredible job in regards to sourcing and out there buying out and protecting ourselves. So I'm okay but in this crazy world, we never know what's going to happen.

You never rolled back your pricing, so -- you're not going to. So that is -- I guess it's not a risk that you have to take pricing again.

Right, we have not rolled back pricing. With that being the last question, I want to thank everybody for their time.

I know we've told you a lot and I'm glad '09 is behind us and a lot has happened in '09. But I must tell you, with that, we have come out of '09 with good topline growth. You saw what we showed you in regards to fourth quarter.

Our margins were up 156 bips. We paid down debt. Our free cash was up $28 million. We reduced our inventories. We grew quite a bit of the categories and brands in our US operations.

We took a strategic view and strategic positioning on our Protein business and look for anticipated turnaround there next year. And what a difference it's going to make in a year within the UK. So with that, I'm looking -- I'm happy we are into fiscal '10 and I look forward to speaking to you at one of our conferences up and coming or in our next earnings call and give you an update what we are doing. Enjoy the rest of your summer and we will speak to you soon. Thank you.

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