Hain Celestial Group Inc (HAIN) 2010 Q1 法說會逐字稿

Good evening. My name is Tiara and I will be your conference operator today. At this time, I would like to welcome everyone to the Hain Celestial first-quarter 2010 fiscal year earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Ms. Anthes, you may begin your conference.

Thank you, Tiara. Good afternoon. I'm pleased to be with you today to introduce our first-quarter fiscal year 2010 earnings conference call and discussion of our financial results, which were issued earlier today. We have several members of our management team here to discuss our results -- Irwin Simon, President and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer; and John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial United States.

Our discussion today will include forward-looking statements, which are current as of today's date. We do not undertake any obligation to update forward-looking statements either as a result of new information, future events or otherwise. Our actual results may differ materially from those projected and some of the factors which may cause results to differ are listed in our publicly filed documents, including our 2009 Form 10-K filed with the SEC.

This conference call is being webcast and an archive of the webcast will be available at 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 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.

Thank you, Mary and good afternoon. I hope everybody had an opportunity to look at our press release. As you saw, our sales for the quarter were $230.5 million. And on an adjusted basis for Hain Pure Protein and approximately $22 million for SKU rat, the loss distribution in Marks & Spencer, one distributor who had some transition in the quarter, our sales were slightly up in the quarter, which, in today's economy, I think that is pretty good.

Our EBITDA in the quarter was up 8.5%, 23.1% versus 21.3%. Our operating free cash, which we have been focused on for a 12-month period, $56.4 million. In the quarter, what you see is our margin up 280 basis points. A lot of that comes from our protein being deconsolidated. But again, it is a big focus on our cost structure, big focus on productivity. And as we looked to obtain our goals of 28.5% to 29.5% margins for our full year, we are well on the way to that.

I am very proud of our SG&A, and as we gave you some SG&A numbers on our fourth conference call -- on our fourth-quarter conference call, it was in the 20% range and we saved about 190 bps. Now some of that without HPP, but again that comes from savings, consolidations, reduction in force and really watching our cost structure which allows us to invest back in our business.

Let me talk about the quarter, and I am going to just hit on all the highlights. I get to talk about all the good things. I will let John talk about everything in a few minutes. But one of the things we talked about Terra Chips, and we're seeing consumption. We saw Terra Chips basically flat in the quarter, and that is great to see with its price points and distribution.

But if you come back and look at Imagine Soups, Arrowhead Mills, Earth's Best, nondairy, our nSpired business, DeBoles, they were basically up double-digit numbers. And again, you come back and look in the quarter with inventories coming down and numerous other things, and we are still growing double digits in those brands. I am pretty happy with that.

If you come back and look at some of our other business, Celestial Seasonings up 2%. And again, with our inventories coming down, SKU rationalization, great to see that. I will take you through Canada and some of the other product lines and some of our other categories in a few minutes. But we, again, with inventories, grocery, channel shifting, a lot of good things happening within the tea category, a lot of good things happening in personal care, a lot of good things happening in Europe and Canada.

So let me take you through some of the other things. So our Canadian business -- and basically in Canada what we are seeing, and we had a little shift in this quarter -- our Canadian business in local currency was up 6.3%. And what we saw in this quarter were strong sales on our Hain brands like MaraNatha, Health Valley, Celestial, Terra, Garden of Eatin'.

And what we saw, though, was our Yves business down, and our Yves business was down about 9% in July and August. With not great weather up in Canada, we didn't have a great BBQ season but we have seen our business come back in October. As you are well aware, we are a sponsor of the Olympics in February 2010, and we are seeing some pretty good consumption on our Hain brands that do contain the Olympic emblem. And we will be selling into all the venues and we will be selling at the Olympics.

So we're pretty excited about that. But it is amazing what kind of lift we have seen when we have tied the Olympic brands into retailers and with the Olympic emblem on it. It has been a great program for us so far.

Let's talk about our Protein division. I must say Protein is performing well. In the quarter we lost money and we planned for that, and that was attributed to our commodity turkeys which we said we would be deemphasizing and getting out of. By the end of this second quarter, we will be totally out of commodity turkeys and not -- we will not be doing that business any longer. It just won't be part of our protein business.

Also in the quarter, we had some losses in the startup of our kosher facility. And I must tell you we started our kosher facility in April, which is approximately six months ago at the end of the quarter. And it is pretty exciting the business that we have been able to bring on. It is pretty exciting the distribution that we have been able to get. And we are pretty happy with the sales.

We just had Kosher Fest, and Kosher Valley won the top new protein product there. So a lot of excitement about our kosher antibiotic free, the first product out there, and we should continue to see some good success there.

What we are seeing, though, and which we have always said is our sales in antibiotic free are up 30%, and that is where we want to be. If you come back and look at chicken, commodity chicken is about $0.77 a pound, antibiotic free $1.15. And today we don't do any commodity chicken, and big difference.

In regards to turkey, and we are definitely in turkey season right now, $1.10 a pound for fresh, $1.80 for antibiotic free turkey. And with Thanksgiving coming up, right now we are projecting to sell over 4 million pounds of antibiotic free turkey, almost a million pounds more than last year.

In the quarter we announced that we were doing a Martha Stewart antibiotic free turkey, and some good orders coming in for that. The team is doing really well there. There is a really strong team in place with a lot of good experience in the Protein category, and looking forward to be profitable for the rest of the year.

And actually as I talked to just recently, we looked at our corn positioning and corn today is about $4. That is where we bought into it versus $6 last year and we are bought into about 72% of the year. So we are in a great position in our commodity and our corn needs for that business.

Let's come back and look at the UK. I just came back from the UK and there is a lot of good news in the UK and there is still some challenges there. The good news is we are really making progress at Fakenham and for full-year fiscal 2009, our Fakenham business was about GBP14 million. We should end the year on an annualized run rate of about GBP29 million at Fakenham. And what Fakenham is today, it is the manufacture of the Linda McCartney brand and that brand in our first quarter was up 64%. We are doing a lot of private label for Tesco, ASDA, Sainsbury, Morrison's and we are also now doing a lot of frozen baked products.

And what is important in the UK as private label is probably 55% of sales, in order to grow your brand, it is important to do the retailers' private-label business and that is something that we have been picked up and absorbs a lot of unabsorbed overhead, which you know we had last year. So Fakenham is really on some good progress and the Linda McCartney brand now has a 10 share of the meat-free category in the UK, which is tremendous how far that brand has come.

Our Manchester facility, which is a nondairy facility, our sales in the first quarter grew 13%. Our Luton/Covent Garden facility sold. As you saw, we had about $1.7 million hit in the quarter in regards to closing the production facility at Covent Garden converting it to Luton. So the plan is ultimately we will produce two brands, Daily Bread and [Deli to Go], which will be our fresh business and that will be our branded product and then we will produce private label.

The thing is is it going as quick as we'd like? No. Some of the business that was supposed to come in in September didn't come in until October and each time you miss a month, ultimately affects some of our projections and that out there.

So I like what is happening on our frozen. Our fresh business going a little slower, but the good news is we have a really good strategy in place there and we will ultimately get the business. It just might be a little slower than we anticipated.

Our European business doing very well. On a local currency, up over 4% last quarter and strong growth coming from Rice Dream, Celestial, Terra, Lima. And I must tell you, Philippe really has focused the team and good teamwork and really seeing with the European economy where it is what is happening in Europe and quite happy the results that came out of our European business.

You saw us announce in our first quarter a deal with China and Hutchison Whampoa, which is a $45 billion company in US dollars and I think it is probably the second or third largest Chinese company out there and great people to work with.

We are working with their medical group and they have a brand today, ChiMed, which we are going to co-brand with Earth's Best and we will be selling baby products, some will be manufactured over there, some will be manufactured here and we are pretty excited about our deal with Hutchison.

Hutchison today has 8300 retail stores worldwide, supermarkets. They have about 275 stores in Hong Kong and other parts of China and we are expecting and looking for about $10 million of sales over the next 12 months and pretty excited about that. You come back and look at it, the baby formula business in Asia today is $3.8 billion. There is over a billion people. We sell $3 to the average American today. Just think what size of business we can have when we sell $1 and what Asians are looking for and what they are looking for in China today is western food where they feel it is safe and healthy and just a big opportunity. And what is important here is who your partner is. And I think we have really got a good partner that is already in this business.

Talking about a good partner, we are pretty excited about the Martha Stewart brand. And let me tell you something. She sells product and I have spent a lot of time with her developing products and creating labels. And we have some great news in regards to our cleaning products. We are also going into our baking product, our pasta product and with the protein group, they are going into a turkey product.

And Martha opens up a lot of accounts to us like a Macy's, a Home Depot, a Michael's that she already is selling products into that give us the opportunity to get in and sell some of the Martha products, but some of our existing products. Martha's products appeal to a lot of the mass market, which does not conflict with some of our products. So we look to bring a lot of these cleaning products into the mass market and all these products that we are making under the Martha brand will be made in our manufacturing facilities, which absorbs a lot of overhead and we are able to get some good price points.

Working with Martha and participating, the numbers that she has in social networking, in appearing on her TV show, which I have had and her advertising will continuously bring a lot of awareness to the Hain Celestial Group.

So from a standpoint, our focus is sales, sales, sales. And John is going to take you through some of his distribution drives and some of the things that he and his group are doing and we have got some pretty exciting things out there in sales and distribution.

The same with our group up in Canada, same with Europe and same within UK and of course, Asia and Martha. And it is how we grow some of our existing brands, which we are really going to make our profits on and that is things that we are really focusing on, which leads me to innovation. And innovation is key and I think a lot of companies during these times step back and say, hey, let's just focus on what we have and not innovate. And I must tell you, Maureen and her group, being in her group, are just continuously focusing on new innovation, new products, new packaging and something that Hain has done a great job on and we will continue to do that.

We will continue to spend on our brands. You saw that we spent a lot more dollars on trade dollars, on couponing. We are seeing how it works and it is working for us and we will continue to do that. What we are seeing in inventories where a lot of retailers and distributors took down inventories for the first nine months, what we are seeing and they are realizing, maybe we took our inventories down too far and my God, we are out of stock. So is it better that we build back our inventory or be out of stock and it is more important that you build your inventory, be in stock because consumers will go somewhere else and buy product. So we are starting to see retailers and distributors starting to increase some of their inventories.

One of the things that Hain is focused on and we have focused on back to basic approach to labeling. And we propose the truth in labels and the standards. And that is one thing, whether it was trans fats, whether it is MSG, whether it is natural, now we have always went, and I can refer to it as straight and narrow on that and we always are truth about labeling. And if you just recently saw Kellogg's had some issues in regards to removing immune on cereals and stuff like that.

So in the long run -- and I think what is important and we have launched a program in regards to the basic approach to labeling and telling the truth and being out there and doing that -- and that falls right in line in regards to health concerns with swine flu and flu and healthy eating and let me tell you something, Hain is right there today and right smack in the center of that and we will continue to lead and innovate in that category.

You heard me say before we sell $3 to the average person in the US and my challenge to John and his group and the rest of Hain is how we get every person in the US buying one more $1 of Hain products and what is that worth. So with that, I'll turn it over to John. He is going to tell you how he is going to do that and some of the other exciting things. So John?

Got it. Thanks, Irwin. Good afternoon. As Irwin mention, Hain Celestial US delivered another strong quarter in Q1 in a pretty challenging economic environment. What I will review with you is our Q1 highlights along with our outlook for the balance of F'10.

Now starting with Q1 top line, US Q1 organic sales were flat versus year ago. However, several core categories experienced growth, including infant and toddler care where Earth's Best continues to grow double-digits in a very tough baby category right now. Tea where Celestial Seasonings, ex the SKU rationalization, were up again versus year ago, nondairy beverages, soup, nut butters and Spectrum Naturals. These gains offset declines in snack, personal care, which in part reflected continued chain drug weakness and refrigerated.

Turning to margin, our US Q1 gross margin was up versus year ago driven by improvement in grocery and Celestial Seasonings, which offset a personal care decline. Key drivers behind the gross margin improvement were productivity savings of $2 million, improved fuel and commodity costs, Celestial's tea SKU rationalization and personal care warehouse consolidation, increased utilization of the Culver City facility, which is where we are making the Martha Stewart cleaning products and full reflection of last year's price increase.

Now the personal care gross margin decline was primarily due to trade charges that were incurred to wind down some unprofitable chain drug and alternate channel account programs.

Moving on to SG&A, our Q1 SG&A was down significantly across all three units -- grocery, Celestial Seasonings and personal care. The key drivers were continued tight cost control across all functions, consolidation of the personal care Petaluma warehouse office facility into Melville and savings from last year's RIF.

Finally, turning to inventory and cash management, Hain Celestial US Q1 inventory was down $15 million versus year ago as we continue to focus on improving our operating free cash flow by reducing our inventory, which are, of course, our biggest use of cash.

So to summarize, Hain Celestial US's strong Q1 continues the performance momentum we saw in FY '09. Despite the challenging economy, Hain Celestial US drove Q1 improvement in several core categories in our gross margin and SG&A efficiency and in inventory and operating free cash flow.

Now as we look out to the balance of F'10, the operating environment continues to be challenging for natural and organic products, especially from a top-line perspective. Natural and organic category sales growth trends, while positive, are still down 10 percentage points since November '08. Additionally, the growth the category is experiencing is primarily due to organic private-label products, which are up 20%.

However, in our F'10 planning, we assumed these conditions would continue at least through the first half of our fiscal year. We also knew we had some significant positives entering the year, including solid growth trends in several core categories, several meaningful margin expansion opportunities and a more efficient SG&A structure.

Our F'10 Hain Celestial US strategic objectives continue to be really focused. As Irwin said, the number one objective we have is driving profitable top-line growth. That, coupled with expanding margins and then increasing operating free cash flow.

So I want to talk a little bit more about what we are doing to drive profitable top-line growth. To achieve this objective, we are focused on four key areas. We are focused on expanding distribution, strategically investing in value across core categories, leveraging innovation and driving Celestial Seasonings' tea sales. These are consistent with the initiatives I discussed in our Q4 call and we are executing well in each area.

For example, in the area of expanding distribution, we have closed some significant distribution gaps in Q1 at major accounts, including Safeway where they just authorized eight new Imagine Soup and gravy SKUs, two new Imagine frozen items, ALMOND DREAM nondairy beverage and along with two new Earth's Best SKUs.

How about Giant Eagle where they just authorized 38 new Hain personal care items, 23 new Earth's Best SKUs and the entire Martha Stewart Clean line, which you can see on the shelves today.

ShopRite, where they just authorized 10 new Spectrum SKUs, two new Earth's Best SKUs and five new Garden of Eatin' SKUs. And of course, Whole Foods where they recently authorized 20 new items, including nine Imagine soups and gravies. These are just a few of the examples of the accounts where we are achieving new distribution.

Now the second are we talked about was strategically investing in value against core categories. We are now starting to see reduced retails on our WestSoy blue box to $1.99 to compete with private label. And we are starting to see our Alba lip balms to $2.99 to be a low entry-level price point into our personal care franchise. Additionally, the other value initiative was, on Terra Chips, we implemented the aggressive couponing program that has worked so well for Celestial. And we saw our first 12-week consumption growth up 3% in more than a year. We expect to build on that momentum with holiday and March Madness FSI.

As for our third strategy, leveraging innovation, it starts with our new holiday program, which our holiday product sales are up 27% versus a year ago. Additionally, in January, we will be introducing some exciting new products like new ALMOND DREAM frozen desserts where we will be the first to market with an almond-based nondairy dessert. Almond is a very fast-growing area in the nondairy market.

Additionally, we are introducing new Garden of Eatin' pop tortilla chips where we will be the first to market with a pop tortilla that features 18 grams of fiber per serving. And we are going to introduce new MaraNatha sunflower seed butter, which offers a delicious way to get nine grams of protein and four grams of fiber in every serving. And of course, as Irwin already mentioned, we are introducing the new Martha Stewart Clean and baking productline right now with Clean and in the spring on baking.

Finally, as for our fourth strategy, driving Celestial tea sales, our latest 12-week natural consumption was up 4%, our first gain in the natural channel in over a year. We continue to drive all other channels with couponing support behind our category leading herbal tea, our relaunched green tea and our introduction of Sleepytime Vanilla and new Celestial Seasonings wellness teas. These new teas have already been authorized at Safeway, Publix, Stop & Shop, Giant-Landover, ShopRite, Wegmans and A&P just to mention a few.

And now we have some real exciting innovation coming in the spring where you can look for our new Celestial Seasonings refrigerated Kombucha tea, which will be our first entry into the refrigerated, ready-to-drink market with a totally differentiated proposition.

So to close, for the balance of F'10, we are assuming that the retail environment will continue to be challenging, at least into Q3, but we are executing well against our top-line growth initiatives. These initiatives, coupled with the things we are doing to expand gross margin and our leaner SG&A platform, will drive increased income and operating free cash flow for Hain Celestial US in F'10. So I'm going to turn it now over to Ira Lamel.

Thanks, John. Good afternoon, everyone. Our sales in the first quarter this year were $230.5 million as compared to $248.4 million of sales last year adjusted for the deconsolidation of Hain Pure Protein. Total reported sales in last year's first quarter amounted to $286.8 million. Last year's sales included $38.4 million from Hain Pure Protein, our previously consolidated joint venture in which we now have a minority interest. Hain Pure Protein is no longer consolidated.

Our net income was $8.1 million in the first quarter this year as compared to $7.0 million in last year's quarter. We earned $0.20 per diluted share on a GAAP basis versus $0.17 per diluted share on a GAAP basis last year, up 17.6%. Our improved earnings this year comes from the solid performance in the US where pretax income improved by $6.4 million over the prior year. Pretax earnings from our foreign operations declined by almost $4 million.

We have reclassified certain promotional expenses from selling, general and administrative to sales, thereby reducing reported sales and SG&A. This reclassification had no impact on our operating income or net income in any period. The impact of this reclassification is that SG&A by quarter in fiscal 2009 will be reduced by an aggregate of $12.572 million. Details of this reclassification by quarter have been posted to our Investor Relations page at our website.

As we discussed on our fourth-quarter call, we had initiated the consolidation of our Daily Bread Covent Garden inside London production into our Luton site just outside London. During the quarter, we incurred $1.779 million, or $0.03 per share, in exit costs, principally for severance. We anticipate that we will incur an additional cost in the second quarter, approximating $1 million to conclude the project.

As we entered fiscal year 2010, we anticipated that Hain Pure Protein would be profitable and we continue to expect that it will be so for the full fiscal year. During the first quarter, our minority share in the net loss of Hain Pure Protein was $996,000 or $0.02 per share. This amount is on an after-tax basis. The loss in the quarter arose in part from the acceleration of sales of commodity products at lower prices than originally forecasted by HPP, taking advantage of larger bulk sales opportunities of the commodity products, moving them out of inventory more quickly to transition to an antibiotic-free model.

There is seasonality in the Turkey side of Hain Pure Protein given the sales of Turkey into the Thanksgiving and Christmas season and therefore, the second quarter is typically HPP's strongest quarter, which should provide HPP with better earnings. Hain Pure Protein also reports to us that its new Kosher Valley operation is expanding distribution and increasing sales.

Hain Pure Protein now operates independently from Hain with its own management and infrastructure while we maintain a presence on its Board of Directors representing our 48% interest. Gross profit for the first quarter this year was 26.8% compared to 24% in the first quarter last year. The 280 basis point increase in our gross profit reflects the deconsolidation of HPP, offset by higher promotional spending.

Continuing our focus on promoting to boost consumption, we spent 150 basis points more on promotional costs this year as compared to last year, which costs are recorded as a reduction of sales. Our SG&A in the first quarter this year was 18.5% versus 18.6% in last year's first quarter. The deconsolidation of HPP was expected to increase our SG&A rate as a percentage of sales. And it did so by 183 basis points, which would have put last year's comparative SG&A at 20.4%. Our SG&A rate benefited from our focus on the cost-reduction programs we instituted last year, including headcount reductions at facility consolidations.

Operating income for the quarter this year was $17.5 million, or $19.2 million before the UK restructuring expense, compared to $15.5 million last year before restructuring, giving us a 24% improvement. Our effective tax rate in the quarter was 37%, which is calculated before the loss attributable for Hain Pure Protein, which is already net of tax. Our pretax income without the Hain Pure Protein loss was $14.4 million, on which the tax provision of $5.3 million results in the 37% effective tax rate.

EBITDA was up 8.5%, coming in at $23.1 million for the first quarter this year versus $21.3 million last year. Depreciation and amortization in this year's quarter was $4.6 million as compared to $5.4 million in the prior year with the reduction principally from the deconsolidation of Hain Pure Protein.

Stock compensation in the quarter was $1.55 million compared to $1.42 million last year. Our working capital was $210.8 million, bringing us a current ratio of 2.6 to 1 at September 30 this year. Our stockholders' equity was $716.1 million, our debt as a percentage of equity is 33.8% this year with debt totaling $242 million, including the $150 million long-term notes we have outstanding.

We have focused our attention on improving our working capital terms and generating improved cash flow. For the trailing 12 months through September 30, operating free cash flow was $30.4 million this year versus a negative of $26 million for the comparable 12-month period, giving us an improvement of $56.4 million in the trailing 12-month comparative period. As a result, we repaid $16.3 million of borrowings in the quarter and $76.5 million in the past 12 months, which has also reduced our interest carry. At this point, we will open it up for questions.

(Operator Instructions). Scott Mushkin, Jefferies & Co.

Hey, guys. Thanks for taking my questions. So Irwin, I didn't hear, maybe I missed it, any talk about recent trends in the business, any evidence that certain things are picking up a little bit, certain areas are picking up. So I was wondering if you could maybe dive into that. And then almost on a -- and I know John touched on it a little bit about penetration into mass merchants, but clearly some of these guys look to be capturing share. So I was wondering if you could just give us a feel for how much additional penetration you guys have into the mass merchants and whether you think it could actually move the needle as we go through the holiday season?

Scott, I think a couple things. Number one, adjustments for SKU rat and adjustment for currency, our sales were up slightly in the quarter. And you heard me, myself and John talk about some of the double-digit growth in about seven or eight of our brands and high single digit growth in some of our other brands. And of course, some of our brands were down. But I also showed you Terra, which is a higher priced product, coming back to flat, up a little bit.

So the trends are your friends and the trends right now are moving in the right direction. And I think what is important from us -- there is a couple things. Number one, last year, everybody just said we have got to take inventory out, we've got to take inventory out, we don't care if the shelves are empty. And we've actually had one customer that came back and said, oh, my God, look how much I am missing in sales here and I don't have enough inventory on my shelf. I am out of stock all the time.

Things are feeling better out there and I think the big focus for Hain -- we haven't done an acquisition in the last 20 months, but we are focusing on growing our existing brands, growing distribution, SKU rationalization on products that are not selling and moving the products in that are selling.

So yes, I think as we sit here today, what a difference a year makes and last year at this time, we were growing at double-digits. So we are feeling much better, we are feeling much better about the distribution opportunities. You heard John say before about some of the new distribution gains they just had, some of the things happening in mass market for us, whether Terra Chips going into one of the major mass markets and what we are seeing on a per-week basis. I think there is going to be tremendous opportunities with the Martha Stewart line and we are starting to see that right now. So our biggest growth today, Scott, is coming from specialty and from the mass market. And so we are feeling a lot better about things.

One quick follow-up to that. So do you anticipate actually sales to turn positive in the second quarter or in the next couple of quarters or is that too bullish as we look at things?

Well, I think just if you come back, and again I come back and look how you say sales turned positive. Sales were positive in this quarter if you come back and eliminate the SKU rat, currency, Hain Pure Protein. So sales are positive today. And what happened is we are overlapping now some pretty strong sales last year. So when you get into our second half, that is when sales started to fall off. I mean we are still looking for 4% to 6% growth.

Okay, great. And then one final one. Maybe -- I don't know who wants to take this -- but the SG&A dollar growth was a lot lower than I was expecting and I was just wondering maybe we could dive just maybe for 30 seconds into how -- was it maybe I was just modeling it wrong or were there some things unique to SG&A this quarter that drove it down so much?

Well, I think one of the things that --.

Not growth -- decline.

Well, it was a decline.

Yes, decline. (multiple speakers). Sorry, the decline.

I got you, Scott. The decline in SG&A dollar spending, you have to look at certainly year-over-year adjusted for the reclassification we talked about because $2.5 million came out of last year's SG&A line and a greater number came out of this year's SG&A line had we reported the old way because we were doing more promotional spending. So that is one reason.

Another reason is, if you'll remember last year and continuing for a few quarters during the year, we were instituting numerous consolidation programs and headcount reductions and that started to come through certainly this year as it compares to last year's quarter.

The other thing, last year and it certainly since ended, we were spending legal fees. So there are a myriad of reasons why the SG&A has come down. The rate, if we didn't have the reclassification, would have been compared to that 20% plus number. And if you remember when we did our -- we gave our guidance, we were guiding SG&A to about 20%. So we really are on plan and we have been watching costs and we expect we will continue to have good SG&A rates.

Perfect. Thanks, Ira. Thanks, Irwin, for that color. I will give up the floor.

Ed Aaron, RBC Capital Markets.

Thanks, good afternoon. So I wanted to firstly ask you about the destocking. I was surprised to see you put such an exact number in there. I'm wondering how you can measure it so precisely.

Well, it is not only destocking, it is actually currency. It is destocking and it is what they purchased last year. It is SKU rationalization and it is also what originally was bought by the customer, Marks & Spencer, last year in the UK.

Okay.

So it is not we pull a number out of the hat, Ed. It is actually, as you looked at sales that we had last year, what they would've been if we had those same sales this year.

And do you have a sense as to whether that destocking has entirely run its course?

Well, it is not destocking. Marks & Spencer, we've -- there is no longer -- service them other than one productline. In regards to that one customer, I think you know who I am talking about and there is some changes going on there and I think as they look at their -- that sale process happens and they look at their inventories, that is going to continue. But currency will continuously have effect and the big other one in there was SKU rationalization, which we said originally was somewhere around $4 million to $5 million on Celestial throughout the year, $4 million to $6 million.

Okay, thanks. And then just wanted to drill down maybe a little bit on the gross margin. It is a little hard to compare this year and last because there is a bit of apples to apples in there. But if you adjust last year's numbers for the deconsolidation, some of the one-timers that you had and the reclassification that you just talked about, Ira, I come up with a year-over-year gross margin comparison that is pretty flattish. And I just wanted to make sure I understand the different puts and takes. I would think that the commodity tailwind that you should be seeing would more than offset what I think you said was 150 basis points of higher promotions. So I was hoping maybe you could talk a little bit more about the commodity help that you got in the quarter and how we should measure that.

I think there is a couple of things you have to look at in terms of margin and you are right about the 150 basis points on promotional spending. That certainly has a direct impact on margins. One of the things that also had an impact on margins, as John talked about in the US business, really boils down to some product mix because we saw some declines in the personal care unit and personal care operates at a higher-margin rate than other reporting units that we have. So I think that had an impact.

The other thing I think that you mentioned about commodity costs, while there is a lot of talk about commodity declines and we have seen some, they are just not as large on what we have been buying in organic as elsewhere. And what we have seen year-over-year is only about a 1% or so decline in those input costs, which doesn't translate to another 100 basis points in margin. It is much smaller when it flows across what our labor costs are and so on going into the cost of sales line.

The other point I would make is, remember, we sell many canned products and the biggest increase that people have seen across the canned industry is tinplate. Tinplate is up 50% plus versus year ago.

And that had the impact of moderating the deflationary --.

You have that on your canned products and you have it on Earth's Best lids.

And Ed, I think the other big thing is what we have always said. Where we are really going to see the margin, you have heard me say it when I talked, in the back half, but our crop does not start coming out of the ground. So we are still working off some of the older crop and some of the higher crop and didn't start to come out until August or September. So that is when we will continuously see commodities come down. One of the things, when I talked about the protein business, corn today at $4 versus $6, I mean we are just working off some of the older corn prices. And that is not in our margin, but just for an example there.

Right. So if you think about when the year-over-year commodity tailwinds should peak, what quarter would you estimate that happens?

Third and fourth.

Thank you.

Christine McCracken, Cleveland Research.

Good afternoon. One of your comments was that the baby care and baby category had gotten a lot more competitive. Can you provide any more color around that?

Go ahead, John.

Christine, this is John Carroll. What I am saying to you is that actually we have seen organic as well as commodity baby sales down for the total category. Actually down I think 5%, 6% in total in the last 12 and 24 weeks. So we have seen that happen. Despite that though, our consumption on Earth's Best is up versus a year ago.

All right. It sounds like you guys are getting a lot of new distribution, especially on Earth's Best, into traditional groceries. So I assume you're going to probably see some growth. I am wondering is there a cost to getting that product on the shelf or could that maybe offset maybe the initial gains that you are going to get from some of that incremental distribution? There are costs associated with that?

Sure. There is always an entry-level cost in grocery that we have to offset and it takes us a quarter or two to get that.

So a quarter or two?

Christine, there is no free lunch.

No free baby food.

No free way to pay your babies. But I think what is important here, and we always hear about private label, private label and there is absolutely private-label baby food. What we are continuously seeing is, today, the conversion from conventional baby food, and there is some other organic baby food out there, but here is where our brand makes so much of a difference. And just with Earth's Best, and I love to boast about this that we get 6 million hits a month from moms on our website and it is the power of the brand here that is driving the growth as we continuously grab share. And even though the category is down, and I think in some cases there are mothers that are making their own baby food, but it is the power of the brand.

All right. Thanks.

(Operator Instructions). Andrew Lazar, Barclays Capital.

Good evening. Just a couple quick things. One, and if I missed this, I apologize, is there a way to sort of quantify what the foreign exchange hit was on the top line in the quarter?

It was $4.6 million.

The 4% to 6% full-year sales guidance, is that on a reported basis or is that excluding kind of the SKU rationalization that you had this quarter and that you might see going forward?

Yes, Andrew, when we reported in the fourth quarter, we mentioned that it was off of a base that took out the Hain Pure Protein sales and took out the SKU rationalization. And of course, now because of the reclassification of those promotional expenses to the sales line, it is off that base today.

Got it. But like as an example, the $22 million or so that you saw of distributor destocking in this quarter, like is that incorporated in?

No.

Okay, so that --.

So if you -- I think we stated it in the press release that our sales guidance has been moved just a little bit because of the reclassification. So we are still at $1 billion plus on sales guidance.

Got you.

That's for the full year, the full year certainly.

Right. Right. And then in terms of I guess thinking about gross margin and thanks for some of the clarity in the earlier question, if we think about how that sort of trends as we go through the year, is it fair to say you have some additional pressure still probably in the second quarter as you mentioned? You get a little bit more favorability on inputs as you get into the third and fourth quarter and maybe volume leverage becomes somewhat more positive then as well. In other words, what I'm getting at is year-over-year gross margin, again apples to apples, could that be under some pressure again in the second quarter and then start to perk up a bit in the back half? Is that the way to look at it or no?

No, I think, Andrew, listen, you continuously see cocoa sugar and not that that affects us and other commodities. But I think as we step back right now, and you heard what I said before, the good news is a lot of our commodities that came out of the ground now, there is as good a crop that came out in certain products, but visibility-wise, we have been stung on commodities before. But right now, we are still feeling good about the 28% to 29% objective for margins. But we're cautious to what happens with commodities out there, which we have no control. We have bought in -- made commitments to a lot of our growers, a lot of producers on commodities, but right now, other than any big surprises and tinplate has been a big surprise, some other packaging has been surprises, we are still feeling good about our objective of 28% to 29.5% gross margins.

Got it. I know it is hard to know sort of where various retailers and distributors' inventory levels are and such, but I mean would you expect kind of a hit to the extent that you had this quarter going forward? You made a comment that you think kind of folks are getting down to some bare-bones on the inventory side.

The one I was referring to, which is one distributor in particular that is either going through a sale or going through some changes, and I guess they just wanted to build cash. And when it is one of your top five customers that take their inventories down, it affects you. Ultimately, will it come back? Yes. But on the other hand, what I heard me say before is we have seen a customer in particular where they took their inventories down way too far and had out-of-stocks and saw that they were suffering from it. So I am hoping that continues to spread across a lot of chains.

And one last one. And it is more general. But I am just curious, and I am trying to -- I haven't heard a great answer to it yet, but with all of the at-home eating that has been going on and that has been a tailwind to the packaged food companies in general over the past couple of quarters, as these companies all start to lap a lot of the pricing, volumes have still remained remarkably weak broadly across the industry. And I am just trying to get a sense of how to square that, how you square more and more folks eating at home and the fact that volumes have been so remarkably weak for the group. So I don't know. I mean I know -- we start to lapse some easier comparisons in general going forward.

Well, I think you and I -- just on that, yes, we are going to lap and that is what I said. Last year this time, we were lapping double-digit growth last year at this time, okay. So that is the first thing.

The second thing is, as we started to go into Thanksgiving and beyond, that is when we went up against major pantry deloading at home and major retailer and distributor deloading, okay?

So I think the good news that is in front of us is we are feeling consumption is picking up. We are feeling that we are through all the inventory deloading. We had the chain drug class of trade that basically just stopped ordering personal care. So just a major deloading there. So basically I feel we are through deloading on distributors. We are through deloading on retailers. We are feeling consumption picking up, Andrew. So we'll see people start buying again and not waiting for the 1st or the 15th to go shopping. And hopefully that will drive sales. But if you take away what I said before, ex that one customer, ex M&S, ex foreign currency and ex that SKU rat for Celestial, we were up minimal in this quarter.

Yes, okay. All right, thanks very much.

Terry Bivens, JPMorgan.

One day I will learn how to work this mute button. Good afternoon.

Hi, Terry. How are you? You must have learned because we hear you.

I have good help. A couple of things, Irwin. First question, John, what we are hearing from some of the tinplate people is that it is pretty likely that prices may well come down, perhaps as early as January. Is that consistent with your understanding?

No, I haven't heard that but look, Terry, from your lips to God's ears. We will take it.

Okay. I mean, obviously, that sounds like that would also buttress the notion that your gross margins should pick up in the second half.

Absolutely.

Just one housekeeping thing. I kind of got lost a little bit, Irwin, in the sales. Let me just make sure I have this correct. I think you said European sales were up 4% if you exclude currency.

No, local currency, they are up 4%, excluding currency -- local currency.

Okay, locally they were up 4%, locally Canada is up 6%.

Irwin Simon. 6.3% yes.

Okay, and then US basically flat?

US basically flat.

Okay. So I was just wondering how you get to -- it seems like foreign currency would be a bigger hit but maybe -- what am I overlooking in there? Is there some re-class in there that I haven't accounted for? What would get us down to that 7%?

What do you mean by 7%, sorry?

What were consolidated sales down in general overall?

Consolidated sales, if you take out Pure Protein, they were down --.

About $18 million.

$18 million.

Okay. All right. Let me go back and look at that. I think I missed a step in here. (multiple speakers). What's that?

I was just going to say make sure you are using the FX number that I gave, which was 4.6%.

4.6%. Okay. And my last question, just a broader one. Irwin, as you know, Wal-Mart is in the midst of this Project Impact and one of the things, among many of the things they are doing, is trying to clean up the shelves a little bit, do quite a bit of SKU rationalization. How has Hain fared under that? What have they communicated to you?

So I am going to let -- I have got Adam Levit here who spends a lot of time in Bentonville and John. The good news is we didn't have a lot of product, so when you don't have a lot, you can't lose a lot. On the other hand, when they are looking for new stuff in innovation and our stuff does not resemble the private-label area where they want to go, it creates a lot of opportunity in SKU rationalization and shelf space. So Adam?

Terry, they are looking at takedown brands in categories where they have three, four, five brands. A lot of the areas we compete, nondairy, we are the brand. So they are not going to abandon the categories of nondairy beverage, baby food, Terra Chips. We don't have a lot of competition for our products in the stores so we fared very, very well.

How about in the tea aisle, Adam?

This is John. Our tea distribution is up versus a year ago, Terry. As a matter of fact, overall, we are showing net gains for Hain Celestial at Wal-Mart.

Okay, very good. That was my question. Thank you.

(Operator Instructions).

No other questions? Thank you, operator. Thank you, everybody. As I said before, our objective is to focus on sales, distribution, cost, spending back on our brands as we were asked about our margin dollars and our SG&A. We think our inventories -- as inventories come up, we feel the consumer absolutely is focused on healthy living. Our objective today is to have pricing somewhat in the 5% to 10% premium to conventional products. Hain will focus on challenging back to basics on labels.

Our balance sheet is strong, which again gives us the opportunity to look at acquisitions and opportunities. But first and foremost, over the past 20 months, we have focused on our brands and have done a lot there and we will continuously look at brands as it makes sense for us to divest. So with this, as we go into one of our biggest holiday seasons, which is our biggest quarter that we are into today, with concern on healthy living, concern on flu, concern on eating healthy, we are feeling pretty good. But on the other hand, optimistic about what happened and is happening out there. So thank you for your call. Happy holidays to everybody and wash your hands a lot with Alba and JASON's and Avalon products, drink a lot of tea and soup and eat a Plainville turkey and talk to you soon.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.