Hain Celestial Group Inc (HAIN) 2010 Q3 法說會逐字稿

Good afternoon. My name is Taprika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hain Celestial third-quarter fiscal year 2010 earnings conference call. (Operator Instructions). Ms. Anthes, you may begin your conference.

Thank you, Taprika, and I apologize to all for the delay. Thank you for joining us today as we welcome the review of the third-quarter fiscal 2010 results. We have several members of our management team here today to discuss our results -- Irwin Simon, President and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer; and John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial 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 2009 Form 10-K filed with the SEC.

This conference call is being webcast, and an archive of the webcast will be available on our website at www.hain-celestial.com under Investor Relations. Our call today will be limited to approximately one hour, so please limit yourself to one question. 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.

Good afternoon, everybody, and once again, I want to apologize for the delay. As you can see, we've got a lot going on and a lot of great things going on.

Let me talk about our third quarter, and let me talk about some of the other things that we announced today. I'm quite excited, from what I see on consumption trends and where the business is going, and how our growth has come in.

As you can see, in our North American business, consumption is up 3%. Our margin is up 24 bips. Our operating free cash, almost $60 million on a 12-month period. Brands like Celestial up 8%, Terra up 9%, Imagine aseptic soup up 19%, and John is going to talk about a lot of the other things, both in personal care and tea and the grocery and snack business, in a little while.

But at the same time, we had to deal with inventory destocking, our grocery business coming back. And with that, we've been able to overcome that. In the month of March, at the Anaheim show, we introduced numerous new exciting products, which we should be rolling out in the next few months, and some pretty exciting products for Hain. And I happen to think this is one of our best launches ever.

Our consumption trends and our growth continued in the month of April. We still see strong trends, and we expect and hope for them to continue.

And just to look at other parts of our business, our Canadian sales up 7.1%, 2% on local currency. And in the quarter, we had the Olympics, and very, very successful event for us. We absorbed a lot of the costs of the Olympics in the marketing. And I was in Canada last week, and continuously hear from a lot of our retailers how we partner with them, the success of it, and the awareness that we built with consumers was tremendous.

Let's look at the UK. And as you read through our press release, we took a noncash charge on our tax rate. But that doesn't give an accurate picture of what's going on in the UK. Our UK business this quarter ex-Marks & Spencer and basically [red of] Marks & Spencer was up 21%. Fakenham is on a run rate to break even in the fourth quarter, and that's with the Linda McCartney business up almost 40%.

And our meat-free business continues to grow nicely, and that is doing private label for a lot of the retailers out there and the expansion of Linda McCartney.

With our [luten and our fresh] business, our Daily Bread business, we picked up a new customer, a large customer, within Tesco. We are now serving Tesco with the Daily Bread brand, which is pretty good to be doing a branded product.

And I got to tell you, you come back and look at the opportunities on the fresh side of the business, and you come back and look at where fresh can go, with the economy turning in the UK, we see tremendous amount of opportunities. And we look for our fresh business to be on a breakeven for next year and the UK to be to a profitable position next year.

And the management team really has done a lot there to really get us in that position. And also in the UK, we are seeing good growth on Rice Dream, growth on Celestial Seasonings, and you heard me talk about our meat-free business.

Our European business, which we opened up a new headquarters outside of Brussels last week, a totally green headquarters, phenomenal headquarters, our business is strong there, up 9%, but good strong growth from Lima, Rice Dream, our Celestial business, our Terra business. And I really like what I am seeing in Europe, even considering what's going on in our Europe business.

Our protein business, our sales on our FreeBird and our sales on our Plainville business are up double-digit numbers. And it's interesting to see really what's going on in the antibiotic-free category in protein, good, strong growth on both of those, and consumers looking for better protein products and looking for products that are antibiotic-free, and much more educated about the product.

As you saw in the press release today, we announced the sale of our Kosher Valley business to Empire Kosher Chicken. We entered the kosher protein business last April, May. We've grown it to a good-sized business in nine months, and with a lot of startup costs, and approximately, from a Hain standpoint, in nine months, almost $2 million in after-tax. And that was our portion. But that's what we invested. That's what we absorbed through the P&L.

And you saw what it cost us in this quarter. But with Empire, we have the opportunity to expand within the deli business. We have the opportunity to expand within organic. And there's a lot more efficiencies that we will get out of the business moving into their facility. So with that, we move on from losing money at our Kosher Valley facility, a brand with good growth, antibiotic-free, and good acceptance. It's accretive immediately, which is always very good.

And I will be on the Board of Empire and working with them, and with continuously growing the Kosher Valley brand and continuously growing the Empire brand. And within the fourth quarter, we will integrate it shortly, as we will have some costs in that in the fourth quarter as we integrate it. But it's a really good move for Kosher Valley. It's a good move for Empire. And it's going to be a good move for the retailers and the consumer.

We also announced this afternoon where we have entered into a principle agreement to acquire World Gourmet, which is Sensible Portions. And I got to tell you, I've watched this brand grow tremendously over the last few years. Jason Cohen and Jerry Bello, who are the cofounders, created this business from scratch. And if you walk into club stores today, this is a significant snack within club stores.

What I really like about this business, it's a great fit for Hain. It really takes us into baked snacks. And I really think the future of snacking is baked. As you're well aware, we've talked about other snack acquisitions which are in the fried category. And if you come back and look at where consumers, especially the younger generation, who are eating snacks today and what is being served in school and healthy snacks, baked is something that is very important.

And if you really come back and look at it, it's a sweet spot for Hain. It's healthy, it's natural, of course no trans fats. And what it really does for us, not only do we get the opportunity to go into club stores, it really allows us, because they have their own facility, to go into portion sizes. And that's where Sensible Portions -- and with that today, one of the big opportunities we always looked for was how do we take Earth's Best into snacks, and snacks for kids? And we know how big Pirate's Booty has become, and other snacking products, so what a big opportunity.

Hain does business in club stores today, but nothing on a significant basis. And we know the growth that is going on in club stores, and with that, what a great opportunity to complement our business and take it in club stores? And I've seen a lot of club models out there, and Jason and Jerry have one of the best club models I think in the industry.

It gives us the opportunity to manufacture other Hain products in their facilities in regards to crackers, popcorn and some of our other Garden of Eatin' products, so we can move production in there.

And last but not least, you heard me talk about Jason and Jerry. They will absolutely be staying with this and playing a major role within the growth of Sensible Portions/World Gourmet and playing a major role within the growth of the snack business within Hain. And just as important, it's accretive upon close. So we are real excited about this category and real excited about this brand and the growth in this brand.

Other brands, other things that we are doing, Martha Stewart, we introduced it in December, January. It is in Home Depot. It is also going into the Canadian Home Depot. We've been on display at the front of the stores. We will go back on display again in October. And right now, it's integrated within the sets and doing extremely well.

We've got into Publix, Wakeford, Giant, chains like King Kullen. And with this, Martha Stewart has been a startup, has cost us dollars to fund, dollars to start up the brand, and we have absorbed it. I think there's just some great growth and great category in the whole cleaning area, and pretty excited about it, and really excited about working with Martha Stewart and her team, how they have teamed up with us. And actually, Martha Stewart has made sales calls with us.

China continues to be a very important part of our business, and we think there is a big opportunity for Sensible Portions in China, too. But with our Hutchison Whampoa, we've gone into PARKnSHOP. We've gone into Watson, which are owned by Hutchison. And we -- almost 400 or 500 SKUs. We will be introducing Earth's Best Zhi Ling Tong formula, which is the Hutchison brand name over there, in August and September.

And the category for formula in China is $4.4 billion. Just give us a couple percent of that, and we will be very happy. Also, we are pretty excited about the baby food opportunity in that -- in China.

Acquisitions, this is something that we have not done for two years. It's probably around two years ago, the last time that we did an acquisition. And we have been very disciplined. We look for good brands, good products, good management, and we think we've definitely found that within Sensible Portions/World Gourmet.

We are looking at other acquisitions today that are strategic, that get us into new categories. And we are excited about that. And I think what's important is, throughout the last 12 months, Hain really managed its balance sheet, really managed our debt and paid down a tremendous amount of debt, and now gives us the ability to go out there and do good, strategic acquisitions.

And with that, it's really put us in a good spot to look at fiscal '11, 2011, which begins July 1 for us, where we are seeing consumption growing, where we are seeing distribution and products growing in mass-market, babies, Toys"R"Us, etc., where we are seeing Asia growth. So -- and these new acquisitions, which we think we are going to get some good growth coming from, too.

With that, what I'd like to do is turn it over to John. He'll take you through his business, and he'll turn it over to Ira. Thank you.

Thanks, Irwin, and good afternoon to everyone. Look, we are really pleased to report another quarter of improved performance for Hain Celestial US. As we look back here, our US business model and our pretty focused strategy have enabled us to weather the really tough consumer, customer and distributor environment that we have seen and consistently drive increased profit and cash flow over the last 12 months.

As we focus on our Q3 performance, as Irwin mentioned, our latest overall -- so that's for all of our businesses -- our latest overall 12-week consumption number was up 3%, which reflects continued improvement in our trends versus the previous 12-week period and, of course, the previous 52-week period.

Irwin mentioned some brands that were driving it, but the important thing is that our key brands are driving it. We are seeing double-digit -- and this is consumption gains -- on Terra, MaraNatha, DeBoles, Imagine, Spectrum Naturals and Alba. And those are complemented by some pretty strong single-digit gains on Celestial Seasonings, Earth's Best, Alba Organics, and Dream nondairy beverages, as well as nondairy frozen desserts. So we are seeing consumption come back in the business.

Now, in regard to our topline sales, adjusted for -- remember, we have the Celestial SKU rationalization, top line was down just a little around 5%. And here is why. We saw a 4.5-week inventory reduction at our leading distributor. And this is something we've talked about. For the last two quarters, we've seen our leading distributor take out about eight weeks of inventory out of our business. Adjusted for the inventory reduction, our US Q3 topline increase would've been roughly in line with our consumption increase.

Now, despite the distributor inventory reduction, our US business still drove year-on-year Q3 income and operating free cash flow improvements, and here's the key things that drove it. One was our gross margin improved as a percent of sales. And it was due to favorable PPV, improved plant utilization -- you know what? When you sell more Terra, you run that factory more than you have in a long time. We had a record month in March. And better logistics costs from the warehouse consolidation that we did a year ago, and we told you we would get savings there.

Additionally, our SG&A overhead decreased on both an absolute and a percent of sales basis, because we got the savings we promised for you on the personal-care consolidation into Melville. And then finally, a key part of driving the operating free cash flow was our US inventories are down 12% versus year ago.

So as we look forward, we are increasingly bullish about our business. Think about it here. In the first three quarters of F10, we had a really tough economy, and we had two very tough quarters of distributor inventory reductions, and still drove income and cash flow growth.

We know there are still some challenges ahead as we look for the next 12 to 18 months, but -- and here -- we know we've got some commodity inflation. Almonds are a challenge. We've got rising fuel prices. And we probably have one to two quarters more of distributor inventory adjustments, although not like we've had for the last two quarters. But the positive signs outweigh the negatives, particularly in regards to the top line.

Irwin talked about our consumption trends, but here's another piece of this. Our consumption trends are improving across all channels. Additionally, we are starting to see distribution trends improve, which, for the whole category, they were going down in the last year.

We also -- Irwin talked about the innovation. We, at Expo West, we had our usual slate of new products. But we had five what we'd call best-of-show new products. We introduced the first vegetarian, frozen vegetarian corn dog in Yves. Corn dogs just -- look, in the conventional category, corn dogs are one of the number one SKUs in the entire frozen category.

We introduced Earth's Best frozen popcorn chicken. Our Earth's Best frozen nuggets were a big success. These are going to be strong, too. We introduced Almond Dream frozen desserts, which is a first frozen desserts based on an almond platform. We know what almond did in nondairy beverage; they're going to be huge in frozen desserts.

We introduced Alba [Acnedote], which is the first natural product to combat acne with the ingredients that have been clinically proven to do so. And of course, when we talked about -- this has been coming a long time, but now we are currently shipping and people are consuming Celestial Seasonings refrigerated kombucha. As a matter of fact, it's really selling well.

You take all that, and you add to -- over the last few years, we've demonstrated that our US business model is becoming increasingly efficient, and we are pretty optimistic.

So, look, to close, we are pleased with our Q3 performance, and we are optimistic about our go-forward opportunities in the US as our consumption and our top line continue to improve and work with an increasingly efficient US business model.

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

Thanks, John. Our net income this year's quarter was $2.7 million as compared to a loss of $41 million in last year's third quarter. We earned $0.06 per diluted share on a GAAP basis versus a loss of $1.01 per share in last year's quarter.

The $0.06 this year is after recording a noncash deferred tax valuation allowance in the UK, without which earnings were $0.24 per share. In addition, we absorbed litigation-related settlements and costs amounting to $722,000, which includes the conclusion of a derivative action, or $0.02 per share. And our share of losses recorded by our Hain Pure Protein joint venture at its Kosher Valley operation amounted to $701,000 after tax, or another $0.02 per share.

Our improved earnings this year comes from the solid performance in the US, as John discussed, where pretax income improved by $7 million over the prior year after deconsolidating Hain Pure Protein from the prior-year amounts. Pretax earnings from our foreign operations improved by $1 million after adjusting for the impairment of goodwill and other intangibles amounting to $45 million, taken against foreign investments last year.

Sales in the second quarter this year were $222.1 million compared to $234.6 million last year, after eliminating the sales of Hain Pure Protein. That's a net change of $12.5 million. Included in this $12.5 million change is $15.4 million of destocking at the two major distributors we deal with, $7.1 million from the phasing out of production of fresh sandwiches from Marks & Spencer in the UK, and these items were offset in part by favorable currency impacts of approximately $4.8 million.

Gross profit for the third quarter was 27.7% as compared to 22.6% in the third quarter last year. After adjusting for the deconsolidation of Hain Pure Protein, gross margin in last year's third quarter was 27.5%. Thus, we had a 24-basis-point improvement year over year on a like basis.

That improvement was driven by margin improvements from our US operations resulting from a favorable sales mix and a moderated input cost environment. We continue to get the benefit of productivity initiatives as well.

SG&A for the third quarter this year was $42.2 million, which was lower by $670,000 as compared to last year's SG&A, excluding Hain Pure Protein. The reduction of $670,000 would've been larger if not for the effects of currency changes of approximately $1 million.

Our SG&A in the third quarter this year was 19% of net sales versus 18.3% in last year's third quarter, adjusted for the deconsolidation. The SG&A rate increased principally due to overall sales.

Our tax provision in this year's third quarter includes the effect of recording a valuation allowance of approximately $7.1 million for deferred tax assets in the United Kingdom. In accordance with GAAP rules interpretations, a valuation allowance must be established when an operation has experienced cumulative losses over time and future income is not assured.

In the UK, we've experienced losses over recent years, as we have discussed in previous quarters. While we continue to gain confidence in the future of the UK operation and its return to profitability, our expectations do not provide the necessary basis to overcome the accounting requirement. As a result, we have recorded the tax charge.

In the UK, tax loss carryforwards can be used in future periods without expiration. In the future, in periods that the UK earns income, these carryforwards can be used and will result in a reduction of our tax provision and liability at the time of use, thereby increasing income.

Our EBITDA in the quarter was $26.2 million versus $24.7 million last year, adjusted for the HPP deconsolidation. Depreciation and amortization in this year's quarter was $4.7 million compared to $4.6 million last year. Stock compensation in this year's quarter was $1.9 million compared to $1.6 million last year. And our capital expenditures in this year's quarter amounted to $2.5 million.

As we enter the second half of fiscal 2010, we had anticipated Hain Pure Protein would be breakeven. However, as we continued during the year to build that Kosher Valley brand, we continued to have unabsorbed overheads which impaired HPP's ability to break even. Our after-tax minority share of the net loss of Hain Pure Protein in this quarter was $653,000, an amount that was almost $1 million lower than our expectations and approximately $2.4 million better than what we recorded from HPP in last year's third quarter.

The $653,000 loss includes $701,000 of losses at Kosher Valley after tax and for our share of the joint venture, which offset the small profit that was earned by the other HPP operations. With the announcement of HPP's pending divestiture of Kosher Valley, HPP's results should improve, and that improvement will flow through to our share of the joint venture's results in the future.

We continue to focus our attention on improving our working capital turnover and generating improved cash flow. For the trailing 12 months through March 31, operating free cash flow was $59.4 million this year versus a net usage of $24.5 million for the comparable 12 months ended March 2009. That is an improvement of $83.9 million year over year.

As a result, we've been repaying debt. $10 million of borrowings were paid off this quarter, and that brings to a total of $63.5 million the amounts we've paid off over the last 12 months.

Our working capital was $217.6 million. Current ratio was at 2.7 to 1 at March 31 this year. Our stockholders' equity was at $734.3 million, and our debt was 30.7% this year of equity, with debt totaling $225 million at March 31.

Our cash conversion, inventory days have improved by one day year over year, with inventory down $10 million since one year ago. Our payables are one day shorter than last year. However, our receivable days are up by seven days year over year. And that's principally due to the lower sales in the quarter versus last year and the phaseout of sales to Marks & Spencer, who used to pay their invoices very quickly.

At this point, we'll open it up to questions.

(Operator Instructions). Greg Badishkanian, Citigroup.

It kind of looks like consumption has picked up pretty decently. Did you mention positive 3% in the quarter?

Yes, Greg, this is John. Yes, across all of our US businesses -- tea, personal care, and grocery and snacks, plus 3%.

And I think you guys mentioned on your last call that it was about flattish in December, if I'm not mistaken.

Right, so we are seeing favorable comps even versus the previous period.

And is there any channels that are particularly stronger or weaker, independents or mass?

You know, here, mass continues to be strong. Super-naturals is picking up. Independents are picking up. Probably the only channel that's lagging a bit is grocery.

And that's interesting too, Greg, because grocery is one of the biggest parts of our classes of trade out there. But you are seeing mid-single digits to high single digits, and even in some of the mass markets seeing even double-digit growth. And in the month of April, what you heard me say before, you are seeing sales growth in the high single digits. So we are seeing consumption trends absolutely continue.

That's great. And then just in terms of the distributor reduction, I think you mentioned $24 million in the press release. Maybe just a little more color on that. And then you mentioned it's going to not go to zero, but it will come down some. Where do you think that goes by next quarter, and when do you think that's eliminated?

I think with our major distributor, our number one distributor, I think that's really coming to -- it's really starting to crawl at this point in terms of not being as big a year-on-year impact. I think the piece that we are going to see over the next two quarters is consolidation of some warehouses, given some of the consolidation in the industry.

Okay. And that's in the -- then those two are the US you're talking about?

Yes.

Okay, all right. Yes, I think the one is -- yes. And then you've got some additional kind of facility consolidations, and then I'm assuming that's going to continue.

Exactly.

Okay, got it.

Greg, the good news on that is, when consumption is growing, that helps it tremendously. And I think the other good thing that we've overcome here is a bunch of SKU rationalization at Celestial. And with that, as we start to introduce new products in the June timeframe, that helps also. So the big part on our biggest customer is behind us, and as you get new stores opening with Whole Foods and other new stores, that helps, too.

I think what's important is the amount of contribution that comes from a major destocking is tremendous and is lost, but the good news is it's behind us, and we move on.

Yes, all right, makes sense to me. Thank you.

Scott Mushkin, Jefferies & Company.

This is actually Mike Otway in for Scott. A quick question on the productivity savings side. I know you guys continue to benefit there. How much more contribution could we see here, and are those savings going to come from the same buckets kind of that they have been recently?

I think from a contribution standpoint, our operations group worldwide has laid that out within their budgets. And actually, gasoline and fuel has been higher, and at the same time we are offsetting, as you heard John say before, almonds and some other commodities increase. On the other hand, you've seen some commodities go down.

But we have a pretty good productivity plan in place. And with some of the acquisitions, the acquisition we announced today of Sensible Portions, we'll continue to get some savings there, the synergies from both businesses.

The other big thing, Mike, is our G&A savings, and as we consolidate the back offices. So throughout this year, we continued to support the brands, spent on the brands. We spent a lot of money introducing Martha Stewart brand that we absorbed. We spent a lot of money on the Olympics which we absorbed, on trade promotions and couponing which we absorbed. And that's why you're seeing Terra and Celestial Seasonings. In the meantime, we really watched our G&A and pulled back on that to fund all that.

Great. Thank you very much. I'll jump back in the queue.

Andrew Lazar, Barclays Capital.

Just a couple quick things. One, with respect to the underlying topline growth, you broke out the -- obviously, the inventory reduction portion of it. Was pricing or mix a significant contribution or a detraction from sales growth year over year, such that the underlying -- or was the underlying primarily sort of volume in terms of that consumption?

This is John. The underlying -- the key piece underlying the consumption was volume. (technical difficulty) pricing was actually a negative this period as we had announced previously a couple of key price rollbacks that we executed.

Got it. Is there any way to put a little bit of quantification on that? In other words maybe on a year-over-year basis, did the promotional spending clip whatever it was, a couple of percent, from the top line, or just that volume was even that much stronger?

It's Ira. The actual impact of pricing year over year was to take away about 1 point of sales from us. So --

With more couponing, Andrew, (technical difficulty) other marketing dollars. And that's -- and again, as John has told you about this in other quarters, with Celestial and Terra, seeing those up -- the numbers they are today, we feel pretty good about that.

Yes. Getting the payoff. Okay. And then in terms of your visibility into sort of what is remaining around some of the inventory reduction, I just want to get a sense of your level of confidence there. I think if I'm not mistaken, maybe last quarter I think you had thought that the level in this quarter that you just reported might be lower than it was in the second quarter, but it seems to be about the same. So I don't know if you just -- I wanted to get a sense again of what your level of confidence is around that starting to trail off as we go into the next two quarters.

Sure, Andrew. Here's the thing. The distributor that we've been talking about now is carrying inventories at between 5.5 and 6 weeks for us. They have told us that is their target to be at. So we believe that they've reached the inventory levels they want to, and now the only thing still out there is the consolidation of warehouses for the recent acquisition in the industry.

Is there any way you can give us a sense of, with the acquisition on Sensible, how big is that business, even if it's just a broad sales number? I'm just trying to get a sense of what that really means to the P&L.

It's about $55 million to $60 million of sales and growing in double digits, and we look for some exciting growth from that brand and taking a lot of their intel and doing some of our brands with it.

And the margin structure relative to overall Hain, is it sort of accretive to the overall corporate margin structure?

It's actually a little bit -- it's a little better than our overall margin. So we are not only looking for growth businesses, we are looking for businesses that have better margins than we have.

Got it. And then very last thing --

So with efficiencies and purchasing together, there's a lot of synergies and a lot of savings here.

Got it. And very last thing is, with the destocking, Irwin, is it giving you some additional insights, maybe an opportunity to zero in on the core SKUs that really work? You've maybe rationalized some of the peripheral ones. So what I'm getting at is, once that really is over, are you growing at a base that is much more solid, maybe, than was the case before?

Absolutely, because as you heard John say, when retailers and distributors are carrying anywhere from two to four to five weeks of inventory, one of the things is, what happens if they are not reordering and you're sitting with it, it's spoiling out. So it's kind of showing what are your top SKUs, what are not your top SKUs. And it forces you also to go through some additional SKU rerationalizations as you look at that.

So the good news is we are seeing consumption across the board. Do we have some other SKU rationalization, absolutely, to do. Now we are doing that as everyday part of the business. As we introduced a lot of the new products that we did at our Anaheim show, we discontinued a bunch of products. So this year, we've taken out a lot of other SKUs, and as we looked at our business on the slow-moving, what would go out of code, etc. So we are doing that, Andrew.

Thanks very much.

Ed Aaron, RBC Capital.

Just wanted to ask a question for clarification around your sales guidance. It looks like you trimmed it a little bit from where it was 90 days ago. Most of what we've heard from you is indicative of kind of better industry consumption trends. And so is it fair to say that the delta there is that destocking was a bit more significant than you even expected three months ago, when you were pretty cautious about that?

I think what -- listen, it's a fourth quarter, so it gives us one more quarter or two more months to sort of home in on, Ed. At the same time, we are feeling good about consumption, and we really look at our business today, what's consumption, not what's going in on the warehouse. But it's mostly because of destocking. And that's -- and I think if you look at it, you look at the range, it's pretty close to what we said in our last earnings call.

And would you expect that, to the extent that you get hurt by, say, $50 million or $75 million of destocking this year, but that kind of by the end of the year your distributors are ordering on a turn basis basically one-for-one replenishment, would that imply that you're going to kind of pick up $50 million or $70 million of sales in 2011 on a year-over-year basis above and beyond whatever your consumption growth is?

I don't think -- listen, I think destocking is -- it's a one-time event. And I think everybody has gone through it, whether you sell to Wal-Mart or you sell to Whole Foods or you sell to UNFI.

I think what drives -- listen, if UNFI or Tree of Life decide to take their inventories up, and I think they're too low because they are out of stock, absolutely. What ultimately, where we pick this up -- and I think the good news about this here, you're always selling fresh coded product. You're always moving your inventory. You could reduce your inventories. But I don't think it's an automatic pickup because you destocked the following year, unless distributors or whoever decide to increase their inventory.

And you heard me mention it before on a call where we've had a retailer who took their inventories down too low and were out of stock on a regular basis, especially on Earth's Best because of the size, and really were missing sales, and had to take their inventory up by $3 million or $4 million. So I think sometimes inventories get too low, out of stock, you lose sales, you lose margin. But that's where you pick it up.

Okay. And then a last quick one for me, if I could. Just on SG&A, that number came in a bit better than we had expected this quarter. And is the legal charge in that number as well? So would that have even been a bit lower if not for that legal expense?

Yes, that's correct, Ed.

So where did you pick up -- it looks like about, adjusting for that, a good $5 million or so sequentially. What drove that improvement, and is this current kind of $40 million more representative of what the run rate will look like on a going-forward basis?

We picked up principally because of the actions we took a year ago in terms of cutting costs out of the system. If you remember, John mentioned or alluded to it, that we've delivered on the cost savings that we promised in the consolidation of our personal care business back here to the Melville platforms. We delivered on some headcount reductions that we announced a year or so ago, just in the normal course of looking over our business when the economy went into the recessionary period that it did.

So we've learned to operate a little bit leaner than we had been in the past, even though we've always looked upon ourselves as being somewhat of a lean operation. We are getting the benefits of scale in G&A. And you'd be surprised as to how many of the costs come down when you take some of these actions. It just isn't only the headcount costs. I could be silly and say fewer people use fewer paperclips. Costs just keep coming down when you have less people around.

And it's what we've tried to do, is watch our costs and see the benefit from it, and as we integrate back rooms and we integrate pieces, to spend back on our business. And also, in some of this SG&A, and as you heard me say before, we absorbed a lot of costs in regards to Martha. We absorbed a lot of costs in regards to the Olympics. We absorbed a lot of other costs that have gone through here and helped to grow the business.

So it sounds like something close to that $40 million mark on a going-forward basis is in the ballpark.

Yes.

Thank you.

(Operator Instructions). Eric Larson, Soleil Securities.

Your guidance number of $1.03 to $1.06, what number in the third quarter you just reported is in that number? Is it $0.24, or are you -- are the two $0.02 items that you outlined, are those -- is it a $0.28 quarter? Is it -- it's in that $1.03 to $1.06 comp?

We've included the items that we've pointed out to you in the press release.

Okay. So use a $0.28 item as your base for that guidance number. The legal expenses in the quarter, they were high. What were they related to? Was it acquisitions, or what was it?

I alluded to in my remarks that we settled a derivative that we had which was hanging for a couple of years and finally got settled out. So that's a piece of that number. And we also had a litigation that was brought against us I think about six years ago, but had always been estimated by us to really have virtually no exposure.

Unfortunately, it kept marching down a road; it was getting ready for a trial. We got estimates of what the actual legal costs would be absent any potential for a loss at trial. We still believe we would win. But it was a case up in Canada with all kinds of legal issues surrounding it, and we decided it was better to estimate a potential settlement on it, which is what we have done. And we are in discussions with the plaintiff on this case, and we believe it's going to get settled and be behind us for an amount that's almost equal to what the cost of the lawyers would have been.

Well, I hope you have an equity interest in the law firm. (multiple speakers)

We have an equity interest in a lot of law firms.

As Ira said, it was something that happened back in 2003, and again, it was a good settlement. And it was all the legal fees that ended up settling it. And the derivative goes back to the stock option piece, so it's settled. Everything is behind us. And I hopefully can say they are one-time and move on.

Okay. Then just one final question. It comes back to the inventory destocking issue. And correct me if I'm wrong, but it seems like the numbers, if I just add them up over the last three or for quarters, it's kind of getting -- I don't know, it was about $80 million. Is that even close to right?

The destocking. It's probably within the $50 million, yes --

$50 million to $60 million.

$50 million to $60 million, Eric.

Okay. All right. So equivalent to 5% of your total gross sales, if you even exclude HPP.

Right.

Also, when you look at that number, and I know -- I think Greg -- and I apologize if it wasn't Greg -- earlier alluded to the destocking being the $24 million that's in the press release, that $24 million has other items as well, including the Marks & Spencer sales decline. So it's not all destocking. Don't add the $24 million into your destocking number.

So it's destocking plus discontinued items, things like Marks & Spencer sandwiches.

Well, in particular the Marks & Spencer -- that's correct. The Marks & Spencer is in the press release. It was $7 million last year.

Okay. All right, thanks, guys.

Jason English.

A quick question for you on this Empire and your Kosher Valley transaction. I see the losses here. As you get rid of this business, will be there any stranded costs left behind?

We have to evaluate that. This is a transaction -- this is Ira. This is a transaction that we have literally just learned we -- Hain Pure Protein was going to do. Certainly we have been involved alongside our joint venture partner in the decision process on -- as members of the Board of Hain Pure Protein and so on.

But we have to evaluate, along with the people at Hain Pure Protein, what will happen once this transaction closes. And when we report in the fourth quarter, we hope to have all of that information finalized, including any gains or other accounting impacts that Hain Pure Protein has to recognize that flows through to us.

And Irwin, I think you mentioned -- or maybe it wasn't you, Irwin, but I think you mentioned costs of integration related to this. Are you absorbing costs to integrate this into Empire?

I think what Irwin was referring there was Empire is going to have to go through a process of integrating the Hain Pure Protein/Kosher Valley business into its operation. There won't be any integration costs that Hain Pure Protein incurs, other than if we have to go through any employee reductions or anything of that nature from this process.

And Jason, that is a kosher facility. Depending on what we're going to do with the facility, and where there is some severance and where we have to -- on Hain Pure Protein, and that's what I was more or less referring to. But it is good for the business, good for the brand and good for Hain Pure Protein. And we see tremendous opportunity on the chicken, on the deli, on the turkey side. And then we see other opportunities potentially with the Plainville facility to do other things with.

One thing I think is important to point out, any cost that Hain Pure Protein incurs to exit the kosher business will be offset against any gain that we believe will be earned by Hain Pure Protein on this divestiture. And it will flow through the Hain Celestial financials in the noncontrolling interest line. It will not be part of our operating metrics, if you will. It actually comes below the net income for Hain line.

Got you, okay. And one last housekeeping item, and then I'll pass it on. I think last year, you also suffered -- I think you're comping this period around $10 million of inventory reductions from this same period last year and the $2 million loss in sales for the peanut butter recall. Is that correct?

That's correct.

Yes.

Thank you guys very much.

Thank you, everybody. That was our last question for the day, since no one else is in the queue. What I want to do is -- sorry again for the delay. Third quarter, our fiscal year is almost upon us, our fiscal '10. And with that, definitely it was a hard year.

But while I sit here today, I'm pretty excited about the consumption growth. I'm pretty excited about the growth in Europe, growth in UK turning around, throughout the year with the Martha Stewart startup, with China started up, with a lot of the other new products that we started up and how we really managed our balance sheet and our bank debt down to $60 million and end the quarter with $37 million of cash. We really -- Ira reminds me $40 million -- sorry, Ira.

We really managed our balance sheet, which gives us the opportunity to go out and do great acquisitions like Sensible Portions/World Gourmet and other acquisitions in good growth niche categories that we are looking at, and hope to talk about soon if we're able to go ahead with them.

Going into 2011, we have the brands. We have the products. And every day now, we hear about eating healthy, whether it's lowering salt intake, about kids' school lunches, taking soda out of kids' schools, taking soda out of vending machines, putting in portion-controlled snacks.

There is not a day that doesn't go by where obesity, health and nutrition is not a concern. And I think one big thing that we've seen and learned is consumers will not give up on good-tasting and healthy food and how we're educated about that. And I happen to think we are very much in the right spot for that. We have the right brands. With Sensible Portions and with Jason and Jerry today, it gives us a good opportunity to go into club stores, where we have not been a big force, and taking our brands in there, where a lot of consumers absolutely are shopping today.

So I feel good about where we are, and I look forward to coming back and reporting to you on our fourth quarter sometime in August, and thank you very much.

This concludes today's Hain Celestial third-quarter fiscal year 2010 earnings conference call. You may now disconnect.