Hain Celestial Group Inc (HAIN) 2011 Q1 法說會逐字稿

Good morning, my name is Andrea, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hain Celestial first quarter fiscal year 2011 conference call.

(Operator Instructions)

Thank you. And I'd like to now turn the call over to Ms. Anthes. You may begin your conference.

Thank you, Andrea. Good morning, everyone. Thank you all for joining us today, and welcome to the review of our first quarter fiscal year 2011 earnings results. We have several members of our management team here today to discuss our results, Irwin Simon, President and CEO, Ira Lamel, Executive Vice President and CFO, 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 2010 Form 10-K filed with the SEC.

This conference call is being webcast, and an archive of the webcast will be available on our website at, www.hain-celestial.com under Investor Relations. Our call will be limited to approximately an hour. We hope to be done by 9:30, so please limit yourself to one question and a follow-up question. If time allows, we'll take additional questions, and management will be available after the call for further discussion. And now let me turn the call over to Irwin Simon, our President and Chief Executive Officer. Irwin?

Thank you, Mary. Good morning, everybody. I hope everybody had the opportunity to review our press release, and review our very strong first-quarter numbers. In our first quarter, our sales were $258 million versus $230.5 million, up 12%. Our gross margin, 27.5% versus 26.8%, up 52 bps. And that's with increases in certain commodities that John will talk about later, and certain fuel costs coming at us. So we were able to absorb them in the quarter. Our earnings per share, $0.25 adjusted versus $0.22 a year ago. And as you can see our share count, 43.9 million versus 41.2 million were up, versus a year ago.

So let's talk about the quarter, and what's happening out there. And I'm sure a lot of you, got a lot of color last night, on Whole Foods' call, on the growth of the industry. Let's talk about some of the great things that Hain was able to achieve in the quarter. In early July, we completed the Greek Gods acquisition, and we have seen double-digit growth. And you're hearing a lot of growth in regards to the overall Greek yogurt category, growing at 100% rate. And we're quite excited about the opportunity with Greek Gods. And not only Greek Gods, the opportunity with some of the other yogurt products that we will introduce very soon. We started to integrate the Churchill brand in the UK, and we'll start to see some more efficiencies. We'll start to see some other business come from the Churchill accounts, and we'll continue to work on our UK food-to-go business.

We integrated Sensible Portions, or began to integrate Sensible Portions. The Sensible Portions group has helped us tremendously integrate some of the Hain products into club stores. We're seeing some good growth within club stores. We're also seeing double-digit growth coming from our Sensible Portions, and we look for a lot of opportunity come from that brand. Which is great to see, we're growing distribution, and one of the things that happened back in 2008 and in early 2009, as distribution stopped growing because of the consumer not buying natural organic foods, we're seeing a demand, and the consumer coming back. So retailers wanting more and more natural foods.

We grew our distribution almost a third in the major mass market. We grew our distribution tremendously in club stores. And what that is showing, is consumption is growing in high single digits. And John will talk more about that on his US side of the business, but we're seeing that across the world. Our organic growth grew mid-single digits, and it's great to see organic growth back growing again. You heard me talk about margin enhancement, and there's an interesting article in today's Wall Street Journal about commodities. And from a standpoint, I think we're in some good spots on the commodity place, and we'll continue to watch it. But right now, it's something that's out there, that we'll keep our eye on.

Our Hain Pure Protein business returned to profitability. We're seeing some good success, and good strong markets out there. And this is the time for turkey, and we're seeing some good strong demand, and a good turn around there. And again, there is a couple times during the year that we introduced new products, and we introduced over 30 new products in September, which will roll out now. And then we introduce our next line of new products, come March. And last, but not least, our personal care business. A great turnaround there, and great demand, great consumption that we are starting to see from the Avalon, Alba, JASON's brand, and we like what we see.

So let's talk about growth. And I really come back, and look at, how do we get brands in businesses growing? I think that is so important. And over the last two years, as we saw growth stagnate, it was something of concern. But we're seeing Earth's Best grow 14.5%, actually 14.3%, Celestial Seasonings, and we're not even in season yet and the cold weather hasn't hit, but we're seeing Celestial grow over 7%, Imagine aseptic growing at 4.5%, our end-- [Spire] business growing 27%. and that's our nut butters and our confectionery business. And that business has almost tripled since we have bought it. Our Terra Chip business, which we worked on, a lot of new flavors, a lot exciting things there, growing almost 14%.

Our Imagine Soup business, and this is one that the group has worked hard on, and has done a great job with a lot of new entries, a lot of new products. And we've also come out with Imagine in cans, and it shows the consumer wants organic soup or reduced sodium soup, and that is up 19%. Our Yves business, which is our vegetarian business, up 8%. You heard me talk about personal care, and really congratulations to the personal-care group, because Avalon was up over 30%, and good growth and good consumption there.

In the UK, the Linda McCartney brand was up 14%. Our overall frozen business, growing within a 40% range. So just, looking at the countries, our Canadian business, some good strong growth there. We've got some good club entries happening in Canada, growing with other chains, Loblaw's and Sobeys. And I think some of the big opportunities that we're going to see in Canada, as we expand Sensible Portions and Greek Gods, and as they move into the marketplace. And they were in there in a minor way. I was there with the team last week, and met with some retailers, some good exciting things happening, both on the Sensible Portions and the Greek Gods business.

Our European sales were up 6% and strong growth coming from our branded business. That's Terra Chips, Lima, Celestial Seasonings, Rice Dream and Natumi. And we had a good turnaround at Grains Noirs, which is our fresh prepared food, growing nicely. So we're seeing some good things in Europe, even with Europe struggling over -- as an economy, we're seen some good turnaround, some good growth there.

Our UK business, and let's talk about it in two areas, our food-to-go. You heard me talk about integrating our Churchill business. What we're seeing there, is good cost containment. We're seeing a lot of efficiencies coming out, with our Churchill being integrated. We're really working on food cost, we're really working on labor. We see some really big opportunities with some food service. We see some big opportunities with retailers that we are working on. And we expect to move that business along, and get it to a place, that we like where it's going. But we've got some work to do. But I think, what I feel good about, is the integration, and some of the cost, and some of the things that we can do there. On the Linda McCartney business, our vegetarian business, that's up 14%, our other frozen private-label dessert business up 41%. And Corn, which is our major competitor over there, has been put up for sale. And they're out there promoting pretty heavy, so that's some the things we're dealing with, and combating with is a heavier promoted product over there, which is our bigger competitor.

China, which our joint venture with Hutchison Whampoa continues to grow nicely, continues to do strong within the Hutchinson retail markets, and good demand. We're now in November, just introduced baby formula and baby rice cereal. There is every week, there's a recall on a Chinese-made formula or a Chinese-made cereal, so we're going to see some good growth coming out of there.. We're seen some good growth on personal care products, so I really like what I see in Asian market for us and the opportunities.

We're focused on some other markets. We're getting tremendous requests, in regards to India, Turkey, Russia, to go into those markets. And we're looking at those, for the right partner to do that, we'll continue to do that. As you heard me talk about the three acquisitions, that we did back in June and July, we're looking at some other unique and neat acquisitions out there, that are unique to our portfolio, and unique to growth. And we'll continue to do that. At the same time, we're monitoring some of the businesses that we think we should be divesting, that are not strong brand-equity businesses, that are not totally complementary. And we'll continue to focus on those, and continue to see, when the right time is, that we will divest them.

So, why do I feel good about our growth? Why do I feel good about the demand for natural organic foods? I hate to say it, but 70% of Americans are overweight or obese. And go back 20 years ago, that was 50%. So just think how the market has grown. And the staggering number, 32% of children, and 20 years ago that was 10%. So with that, there is such demand out there for natural, organic and healthy foods. The Center for Science of Public Interest has really focused on chemicals and food coloring, which is causing the allergies and cancers to kids. And again, Hain products, none of them have anything like that in there.

We hear about sodium levels, especially here in New York. and we're one of the first ones to participate, where 3500 mg of sodium a day is what we intake, and we should only be intaking 1400. We're really focused on high fiber. We're introducing a line of F-Factor products, which we'll start to roll out in December and January. And we really think that's a big opportunity in the whole high-fiber category. Our gluten-free market continues to grow for us.

So from a Company standpoint, we're also very focused on environmental footprint. And what we're seeing today, it's interesting, the consumer is focused on price, yes they are. And that was the whole bit today in the Wall Street Journal, is the consumer only going to buy because of price? That's not what we're seeing. The consumer today wants good ingredients, good product, it tastes good, important. But it's amazing how they're focused on animal welfare, what the packaging is made of, the manufacturing process, the waste and water energy.

And as a Company, they were really focused on our BPA. And it's amazing how many moms are focused on BPA,when they're buying their baby food. So with that, we are reconfirming consensus, a $1.24 to $1.31, up 22% to 28%, and top line up 12% to 15%. So we're looking for some extraordinary growth, and feel good about it, because the market out there, really wants our products. What I'm going to do is turn it over to John. And he'll take you through what's happening in his side of the business. And Ira Lamel will take you through the numbers. And then we'll then come back, and answer questions. Thank you.

Thank you, Irwin. Good morning. I'm pleased to report another strong quarter for Hain Celestial US. The key highlights for the quarter included overall US consumption growth of 5%, reflecting continued improvement versus our previous 12- and 52-week periods. Importantly, we again saw consumption growth across the entire US brand portfolio,12 of our top 15 brands experienced growth in the cate -- in the quarter. MaraNatha, Alba, Avalon, Sensible Portions and Greek Gods led the way, with double-digit consumption gains. We also had double-digit Q1 sales growth, driven by Celestial Seasonings and personal care increases, in the Greek Gods and Sensible Portions acquisitions.

Now our grocery and snacks Q1 sales were flat, as year-on-year declining distributor inventories offset consumption growth. Grocery and snacks sales would have grown in line with our 5% consumption gain, had distributor inventories remained constant. Also in the quarter, we saw US gross margin expand, driven by Celestial Seasonings and personal care margin gains, productivity savings, and our margin accretive acquisitions. Importantly, we offset rising input and fuel costs in the quarter, led by almond cost increases, which totaled over $2 million for the quarter. Now our Q1 US SG&A percent, as a percent of sales was up slightly, driven entirely by the increased acquisition amortization costs, along with in-store demo costs required to support the Sensible Portions club business. And finally, our Q1 inventories ex-acquisition were down 3%. This reflects continued, tight-cash management, and tops off a very strong Hain Celestial US Q1 performance.

Now as we look forward beyond Q1, we see five key performance indicators that make us bullish on our full-year outlook. The -- starting with our improving US consumption trends. Q1 was the third consecutive quarter of US consumption growth. More importantly, we saw consumption gains in the grocery channel, for the first time in over a year. The grocery channel accounts for 40% of our US consumption; it is essential that we grow in this channel. The second indicator we're seeing, as Irwin talked about it, improving distribution trends. As I mentioned in the last quarter call, we are seeing distribution wins in key customers. And a great example of this is Safeway, where we gained new distribution authorizations across the US portfolio, including nine grocery and snack gluten-free SKUs, six Alba Hawaiian Hair SKUs, four Celestial Seasonings Wellness Teas, five Greek Gods SKUs, and two Sensible Portions snacks. As you might bet, we look to repeat our Safeway experience at other accounts across the country.

The third indicator were seeing is the resurgent Hain personal care business. So we heard that the Q1 consumption for our big three personal care brands Alba, Avalon and JASON, was up high single digits. We also had improved margins, distribution wins like the one at Safeway, and strong sales from our Alba ACNEdote new product launch. We feel very confident this business is poised, and ready to keep growing. The fourth indicator is the strong performance that Irwin mentioned from our Sensible Portions, Greek Gods acquisitions. Both brands delivered strong growth, and improved margins versus a year ago.

Additionally, our acquisitions benefited the overall US portfolio. For example, Sensible Portions, with strong relationships with customers new to Hain, has resulted in new distribution opportunities, even beyond the club channel for our products, that we would have never seen before. And finally, we are well-positioned against cost increases for key commodities. As you know, we contract for most of our key commodities in the late summer -- late spring and early summer. We have taken inventory positions for most of our more volatile commodities out into at least our third quarter, and for some, for the full year.

This strategy has helped us avoid many of our recent commodity cost increases. For example, we bought our full-year needs for corn in early summer, at significantly lower prices than it is today. We also did the same on wheat, for our Arrowhead Mills products. These commodity positions, coupled with a full slate of productivity initiatives, and the 2.5% grocery and snacks and personal-care price increase implemented in Q2, should enable us to offset rising input costs. So in summary, Hain Celestial US posted a strong Q1 performance, highlighted by growing top line sales, our third consecutive quarter of consumption growth, and continued margin expansion. Based on our Q1 results and the momentum we see, we continue to be bullish about the FY 2011 Hain Celestial US prospects. Now I will turn the call over to Ira Lamel.

Thanks, John, and good morning, everyone. Our sales in the first quarter this year were up 11.9% to $258 million, as compared to the $230.5 million last year. Net income was up 12.4%, to $9.1 million, and we earned $0.21 per diluted share on a GAAP basis this year, versus $0.20 per diluted share last year. Our GAAP earnings per share were diluted by one full $0.01, due to the 2.0 million-share increase in our average shares outstanding. In addition, had we been able to record the tax benefit for our operating loss in the UK, our earnings would have been $0.03 higher.

Before charges for acquisition-related expenses and integration costs, our adjusted pretax income was $18.3 million this year's first quarter, up 13.2% over last year. Adjusted after-tax earnings were $10.8 million, up 19.8%, with adjusted earnings per share landing at $0.25. And as I mentioned a moment ago, adjusted earnings per share would have been $0.03 higher, had we been able to record that UK tax benefit. As we discussed in our fourth quarter call, we expected to incur costs for acquisition of the Greek Gods yogurt business in July, and we expected that we would incur costs in integrating our three recent acquisitions into our existing portfolio.

During the first quarter, we incurred $2.3 million in such costs, consisting of transaction closing, professional fees, severance and integrating Churchill's production into our Luton food-to-go facility. We anticipate that we will continue to incur additional integration costs for these acquisitions, the amount and timing of which, cannot yet be estimated. During the quarter, our minority share of the results at Hain Pure Protein was income of $194,000. This amount is on an after-tax basis. This of course, reflects a return to profitability at Hain Pure Protein, after its divestiture in Q4 of its Kosher Valley brand. The second quarter includes the Thanksgiving holiday, and we anticipate that the second quarter to be Hain Pure Protein's strongest quarter of the year.

Gross profit for the first quarter this year was 27.2%, as compared to 26.8%, in the first quarter last year. On an adjusted basis, gross profit was 27.3%, an improvement of 52 basis points over last year. This improvement reflects a strong mix of product sales, including sales from higher margin products from our acquisitions, together with cost savings initiatives, which more than offset increases in input costs. Our SG&A as a percentage of sales the first quarter this year was 19.4%, versus 18.5% in last year's first quarter. This increase came from the increased amortization, and from higher store-level demonstration and sampling costs, each attributable to our acquisitions.

Our effective tax rate in the quarter was 44.5%. This high rate is attributable to the operating loss in the UK, on which we could not record any tax benefit. Before the UK impact, our tax rate would have been approximately 38%. Depreciation and amortization in this year's quarter was $5.9 million, as compared to $4.6 million in the prior year, with a $1.3 million increase coming substantially from the tangible and intangible assets we added with our three recent acquisitions. Stock compensation in the quarter was $1.75 million, as compared to $1.55 million last year, and CapEx, amounted to $2.6 million in this year's quarter.

Our working capital was $179.9 million, with a current ratio of 2.1 at September 30 this year. Stockholders equity was $786.4 million, at September 30, 2010. Our debt as a percentage of equity is at 32.8% this year, with debt totaling $257.7 million at September 30. Our credit facility borrowings at September 30 this year were $107.6 million, an increase of only $15.6 million over the amount outstanding under the facility at September 30, 2009, while we expended cash of $72.6 million on the three acquisitions we have made. We believe this is a very good indicator of the strength of our operating cash flow.

Our operating free cash flow for the trailing 12 months through September 30 was $55.9 million this year, an improvement of $25.5 million over the comparable 12-month period last year. And cash conversion was reduced to 78 days from last year's 88. Receivable days are down to 44, inventory days down to 79, and payables are at 45 days. We are reconfirming our full-year guidance today. Sales are expected to grow 12% to 15% to $1.025 billion to $1.050 billion. Earnings are expected to be a $1.24 to a $1.31, showing growth of 22% to 28% over last year. At this point, we will open up the call to questions.

(Operator Instructions).

And your first question comes from line of Terry Bivens with JPMorgan.

Good morning, everyone.

Hi, Terry how are you?

Pretty good, pretty good, hope you guys are doing well.

We are.

Irwin, question on soup. As you know, some larger companies that make soup seemed to be having yet again, a tough winter. When we look at your numbers, certainly in the Nielsen channel they look pretty good. You talked about Imagine today. How did health Valley do, number one? And the follow-up just in general, why do you think your soup line appears to be doing better than the bigger, more mainstream guys?

Number one, Terry, I think aseptic packaging. This consumer today cooks with soup, has soup as a meal, has soup as an appetizer. And I think perception out there is our soups are just a much healthier soup. I think our soups are lower -- not think, they are much lower in sodium. And from a management standpoint, all our soups are organic, a lot of our soups are dairy-free. And we've seen some great growth. I don't know what the numbers, John, on Health Valley?

We have seen for Health Valley, in the last 12 weeks, we were up which is the first time in two years. And a key part of that -- building on what Irwin said, is our new Health Valley nutritional callouts, where we call out the salt, the fat level, things right on the for the package. So I think to Irwin's point, we're --our soups are addressing in the consumers have, and we're off to a very strong start this year.

Okay. Thank you. I'll pass it along. (Laughter).

That's by buying them,Terry.

I love the tomato soup.

Thank you.

And your next question comes from the line of Eric Larson with Soleil securities.

Morning, Eric.

Yes. Good morning, everyone, how are you?

Good. Thank you.

Just a quick question and maybe this one is for Ira. Ira, talk about your UK tax benefit again. And is that something that would be a benefit that recurs over a period of time, or is it a one-time thing that you referred to the $0.03, could you explain that to me a little bit?

Yes. .

It's not a benefit Eric.

No, it's not a benefit, Eric, it's something we could not record.

It's a loss, Eric.

Okay.

Yes, we had an operating loss in the UK, and we no longer record the benefit that we would otherwise get for those losses. And the reason, is the accounting rules. So we don't have any tax charge or any tax benefit in the P&L. If under the normal circumstances, the accounting rules might have allowed us to take the benefit, we would have received $0.03 per share, and our tax rate of 44% would have been reduced to the 38 that we guided to.

Okay. So I just misunderstood the whole thing. So with the tax, it 's a tax hit, and that goes on. And that's obviously a cash item as well, correct?

Yes.

Yes.

Well that's, that's the real issue there. And then, I believe you stated in your guidance that you're a $1.24 to $1.31. It does exclude your transaction and integration expenses from acquisitions? Will we see more of that in upcoming quarters this year? And I guess the real question is, these are sort of ongoing cost, why do you exclude them at all? I'm assuming you to make acquisitions in the future?

Well, I think it's commonplace for companies who buy other companies to report their earnings, both before and after the cost of integrating them into the portfolio. So I don't think we are doing anything unusual there. We certainly call them out, so that all of you on the street can understand what those charges are. As we pointed out in this quarter, we had about $2.2 million or $2.3 million of those charges, split between the cost of actually closing the transaction which is a requirement now under accounting rules, which is something in the past that could be capitalized. And, the cost of actually closing the facility, and bringing it into our existing facility. So, these are not real operating costs, they are costs specific to buying a company, and you go forward ultimately without those costs in the P&L.

And Eric, it's not one-time hits, it's cost that under accounting the only can be recorded, when you're actually done. So that's why -- but going forward there's only one time you'll record the fees to do the deal. There's only -- there is going to be an integration of people, there's only when that happens, that's when you record it. But there is not going to be ongoing, of the one-time -- this and that happening -- it just subsides, as these get totally integrated.

Yes, until you make more acquisitions, which is sort of an ongoing part of your overall strategy. I understand your explanation and all, I just want to move on to one other further question for John. John, in the second quarter , in the first let's say, five weeks or so, four weeks of your second quarter, what have consumption trends been like? You said 5% for the quarter that just ended, is that still about the same rate? Is it accelerating? How are you seeing your current transfer

Were seen strong transfer Q2, consistent with what we saw in Q1, except for we're getting a nice boost in the club channel, with the Terra sweet potato national promotion that we have going on right now.

And actually Eric is out of that, we're seeing good consumption across other channels. And as you saw Whole Foods last night numbers come out, I mean we're seeing that across mass market, we're seeing across club, and we're seeing certain supermarkets really focused on it. And I think other supermarkets, it's not natural food that is down, I just think they just got their overall problems.

Okay. I will pass that on . Thank you,

Thank you.

And your next question comes from the line of Andrew Lazar with Barclays capital.

Morning, everyone.

Good morning, Andrew.

I guess Irwin in your prepared remarks, you talked a little bit about continuing to always take a look at the portfolio where there might be certain businesses that may not make sense, and thinking about divestitures and such. I'm just curious if you, what is your thought process or do you have a filter of sorts, that you're using to think about what kind of businesses either belong in the portfolio or don't? And then, what sort of are the key considerations or metrics that you're looking at, when you evaluate that? And then, in thinking through some of the businesses that you're looking at, I mean are we talking about, again relatively a small sort of percentage of sales base? Or are there some things that potentially are larger, but that don't necessarily contribute a lot in terms of the profit picture, or the growth outlook?

Well, I think first and foremost where branded food and personal care Company. So, number one, in cases where there's not a brand, that gets lumped into something, that's may not fit. The second thing is, is we look at the growth factor. And the third thing is we look at the margin contribution and the profitability. We have smaller brands that may, better smaller brands that may not be growing, but they are made in the same plant, and helps overhead, and helps margins of some of our bigger brands. But that's what we're focused on Andrew, is the brand, the margin contribution here, and whether it's profitable. The other thing what we're looking is, how from the complexity standpoint, how we really come back and look at complexity, and how complex is it to manage ingredients and that business. And that's sort of some of the things that we're looking at divesting.

That's helpful. The branded -- when you're talk kind of about brands, versus not branded, and I should maybe know this, but how big a percentage of your business at this stage really is?

It's mostly over in Europe, Andrew.

Got it. Okay.

They're over in the UK, so.

Got it, okay. And then just one last one is, over the last, call it two years or so in the downturn, when volume for the industry was weaker, you certainly done a lot of work around productivity, and the cost save side, which we've seen in margin, so one would think that the operating leverage you have going forward, when your volumes start to accelerate, like you're seeing now, would be potentially that much greater, than it might have been a couple of years ago. Is there any way to sort of help quantify that? I mean do you think about, as you're -- once you've covered fixed cost, is your variable contribution margin today, sort of X percent higher than it might have been three years ago, before you did a lot of the productivity? Or I don't know, I'm just thinking -- or are there some metrics you can think about, give us a sense of the operating leverage might be today, versus a couple years ago?

Well, I think there is a couple things. Number one, if you start focusing on margin. You heard what John said before, as we bought out a lot of our commodities, and a lot of our products early on, we're going to get a lot of benefit from that, in the scale and the ability that we've been able to do it. And just comment, Earth's Best baby food is we sourced a lot of organic fruits and vegetables that we're going to use a lot of our other brands, and get the benefit of that.

Today, you heard John talk about club stores, where we're utilizing the sales force, and utilizing the infrastructure at Sensible Portions help us at club stores, where we don't have to add that. The other big thing is now, as we start consolidating our freight and our freight routes, and right now between Sensible Portions and Terra, we have both East coast plants, we're looking at West coast plants, to consolidate and be shipping. So there's multiple areas today, that as we get a scale, as we get size, that we are going to get the benefits from.

Same with backrooms, on some of these acquisitions, same with backrooms as we integrated personal care within our New York business, and some of our the businesses, as we integrate those backrooms. So, there is margin enhancement. And I think understanding our margins, is the benefit we get from doing it ourselves versus the investment we make in building plants and brick-and-mortar. And then the benefits, as we get to consolidate the all-in-one warehouses, and there is opportunity there. And that is why we have been able to get the productivity over the last couple of years, of close to $20 million worldwide, that we were able to get.

Great. Okay. Thank you very much for the clarity.

Thank you, Andrew.

And your next question comes from line of Scott Mushkin with Jefferies & Company.

Hi, guys. Thanks for taking my question. So I wanted to delve a little bit more into the volumes and the sales. And I think -- or when you mentioned that Whole Foods obviously had great sales, and they were talking about acceleration of branded product. I think you mentioned, and maybe I missed it, that you're actually seeing similar trends in certain grocers, so I clarify that. But I also wanted to have John talk about why, Safeway, you're thrown some nice winds there, and how much more can we see out of the traditional channel, or maybe even the club channel, or the mass merchant channel, as far as getting more product on the shelves? And then I'd like to segue that into, sorry for such a long question, to Sensible Portions which we've seen, for instance down in Arkansas at the neighborhood market down there, so it seems like you're getting a lot more distribution of that product. And so how far do we have to go there as well?

So Scott, let me take the first part of it. I think what's really important to see, when you read the Wall Street Journal's article this morning on commodities, it's all everybody gets focused on, is will consumers pay the higher prices, et cetera, et cetera. If you come back and look at the consumers that are buying our product, it's not where I believe -- it's the bottom end of consumers out there. And as you come back and look at it is , they're concerned with healthy, natural products, but they're concerned with animal welfare, they're concerned with packaging, it's not only price.

And from the standpoint, we know prices at Whole Foods, compared on prices at other retailers, there is a difference there. So consumers will look and pay a premium, and I look at our products being 10% to 15% more. From the standpoint, as the consumer demands more and more natural products, other retailers are bringing more and more natural products within their stores. And we're seeing that across many mass markets, we're seeing that across many clubs, we're seeing that across specialty stores, and we're also seeing that across certain supermarket chains, that are committed to growing their natural organic section. So, that's where we're seeing our growth come from, and I'll let John talk to you about Safeway, why Safeway's focused on it, and why we got the wins. Because that is a retailer that is focused on it, and some of the other ones are also focused on

Scott, this is John. Just a couple quick points. One in regard to your first question, our growth at Whole Foods is consistent with what their overall growth this. So we are pacing at the high single digits, in there, and that changes just like they are, in terms of their ident. Secondly, Safeway is just one example. Safeway is just one example, I picked Safeway, because it is an example that works across the entire portfolio at this point in time. But we are seeing nice wins across the country, in different chains for different parts of our portfolio. For example, we just got 600 more stores in the SuperValu chain for Earth's Best. Meyer just authorized Sensible Portions. Kroger just authorized some additional SKUs on Greek God. Personal care, we picked up a national distribution on Alba ACNEdote. So Safeway, just basically encompasses the entire portfolio at a point time, that we've gotten gains. But we're seeing gains across all of the channels on different parts the portfolio.

And John, just to get to Sensible Portions. I guess we saw down in Arkansas, and I was really surprised to see it down there. When you look at like the net gain, because honestly some product comes out, as well as some goes in, I mean have you seen a change in trend over the last three months, where you are really noticing a pickup in the net gains into -- into the channel besides Whole Foods?

Yes. I mean that, I think let's talk first about Sensible Portions. Sensible Portions is all of a sudden starting to really gain some momentum in the non-club channels. So, we're seeing, they put in I think it was four SKUs or six SKUs into Wal-Mart that they never had before, and we're seeing good turn on those. And then there's just all whole hit list of chains that have brought Sensible Portions in on the grocery side. ShopRite has brought in six SKUs. Meyers, I already talked about. So we're just -- everyday we're hearing more and more chains that are bringing on the Sensible Portions line. That was one of the big strategies in buying the line. So it's a great club platform, but this has a great opportunity to spread across all channels .

And that goes back and shows what I said before on acquisitions, when Andrew asked me that question. Where this was complimentary, they have helped us tremendously in club stores, and will expand the overall Hain business in club stores seven or eight fold, at the same time, between grocery and natural foods, we will expand Sensible Portions. The other big thing, is airports, food-service, convenience stores. And as you walk through airport today, you will now find Terra Chips, you find Sensible Portions and Garden of Eden, and they are big snacking areas.

So I have two small ones here, if you guys will entertain me for a little bit longer, and then I will yield the floor. Sensible Portions or a Sensible Portion what portions-like product into Whole Foods, how likely are we to see that? That's one. And then I was wondering if we had a, if you guys want to give us a loss in the UK member? And whether it was up or down year-over-year?

Sensible Portions type of products into Whole Food is something you will see, whether it's under one of our different brands, or whatever, it will. In regards to the UK, it will be up, but because there's of integration costs and that associated, that is why it is up, Scott.

Okay great. Like to see the acceleration, that's great, great news.

Thank you, Scott.

Your next question comes from the line with David Palmer of UBS.

Thanks. Hi, guys.

Good morning, David.

Big, big picture question, long-term question here. And it's kind of based on this year's earnings. If the tax rate this year is something like 38%, then it looks like consensus EPS, and you are at the high end of your targets, would imply that EBIT margins are approaching your peak levels from a few years ago, fiscal 2008 I think. So internally, I'm wondering how you're thinking about this, how should we perhaps dream about Hain margin opportunity over time?

How can we quantify, how far you can take these margins up, while achieving what you think of in terms of sustainable growth? And if I were add a couple things I'm thinking about here, you got strong momentum, you've got (inaudible) drags from Celestial and protein, and the UK business probably not hurting you like they did. It seems like your back on the bolt-on acquisition trail here. On the negative side, you got the food costs, and even that will probably creep up in the organic side. And then you probably want to reinvest in to some of the marketing, R&D, and other stuff in your business. So, how come we think about ultimately, how far you can take these margins? Thanks.

Good morning David. We guided to EBIT margins that are about 9% or so. We think there's at least a couple of points that we can get moving forward. The growth that Irwin talked about, in terms of being able to leverage off the base that we have, the incremental leverage. The growth that Irwin talked about in terms of the acquisitions that we've made, and what they're going to help us bring to the table, are all going to accrue to the bottom line performance. So, I think in the fairly near future, I don't mean one year, but certainly over the next two to three, we should be able to get another couple of points out of our EBIT margins.

And, David, that comes back to again, number one, us pruning the portfolio, as we talked about, where we're not getting the growth, we're not getting the profitability, getting the efficiencies. And we're going to make decisions, where it makes sense for us to manufacture our products and integrate it where it makes sense to co-pack, and there's margin that we're giving up there. But we're not utilizing capital, we don't have to have -- we don't become plant slaves. And at the same time, the volume growth in these mass market, the volume growth in supermarkets, and Whole Foods has over 300 stores today, they have an aggressive growth plan out there, which will continue. Continuation of volume growth drives a lot to the bottom line here.

One of the other thing about our EBIT margin growth potential, while I talk about it being able to move of a couple of points, you might have expected it could be even more than a couple of points. But please remember, that as we grow the business with acquisitions, and grow faster than our Celestial Seasonings brand might be growing. Celestial Seasonings with it's very high margin performance, becomes a lesser relative contributor to the EBIT margin. So there's a little bit of a drag, as a result of that even though Celestial is growing, and continues to give us great returns. But it just ends up relative to the whole portfolio, a smaller piece.

But on addition to that, as personal care continues to go, personal care has tremendous margins, and that helps the overall margins. Great margins in Greek Gods, as that business grows from a small $10 million to $12 million business to -- our objective is a one-day $100 million business, you'll see good growth in that, same with Sensible Portions, good margin businesses.

That's very helpful, guys.Thanks so much.

Thank you, David.

And your next question comes from the line of Colin Guheen with Cowen and Company.

Hi, just a follow-up, maybe on the divestiture criteria. Hain seems to be moving more toward bigger channels, distribution, bigger brands even in it's acquisition criteria. So on the divestiture side, is there an opportunity for somebody to take some of the smaller, more fragmented brands that have higher mix to the independent channel, and create value out of those? And thereby, and the second question I guess on margins, are some of those smaller brands dilutive to the overall margin structure of Hain?

No, Colin, number one is, again, understanding our model, you walk into a Whole Foods, we have over 1800 SKUs. And what's important for us also, is as we build and grow with a great partner with Whole Foods, what's different and unique in Whole Foods, and how we have certain products, identified for certain channels. No different than a Ralph Lauren does, where it sells certain products at Bloomingdales, and certain products at other department stores. So I think it's important for us to differentiate our products. Some of our smaller brands are made in the same plants, as some of our bigger brands, so there's is absorption. And the other thing that we don't want to do is, we sold a brand that has a cereal line, and we're going to be competing with them, whether it's Arrowhead Mills or Health Valley, does that make sense. So from a standpoint, is as we look at farm teams to some of these smaller brands, and we've seen that with some of the [Westbury] brands, and we've seen it with Little Bear, how do we ultimately take them up to the bigger league for us? So that's not something we'll look at, it's more than non-branded, lower margin commodity-driven type of products, which are mostly in Europe or the UK. Your next question was?

I think that answered it. Just a second question would be on the guidance Ira, what tax rate are you using in the out quarters?

Well, we think we'll continue to see 38% for the quarters going forward, and if anything happens in the UK, that will have to be treated discreetly to each quarter, as it was in this quarter.

Okay, great. Thank you.

And your next question comes from the line of Scott Van Winkle with Canaccord Genuity.

Hi, guys. Most my questions have been answered. But there was a comment, I think John made a comment about, it has been a year since you seen consumption growth in the grocery channel. I'm wondering if you could give us the same type of comment about distribution gains, like the magnitude of the Safeway gains? Has been a year since you've seen those customers really taking on incremental and organic SKUs?

Yes. Scott, as I said in the last call, for about a year plus, they were actually shrinking the sections, or not take anything new. Only in the into the fourth quarter, now in the beginning of this quarter, we're starting to see them get very aggressive, and add feet to their square -- to their natural set, that they weren't doing before.

And how significant, the Safeway example, the gains and slots, what does that compare your overall number of slots? Is that a 5% increase, or a 20% increase?

It's probably somewhere between the two.

Yes, it's between there, Scott. But Scott, what happens, is here, the consumers drive demand, and the retailers will bring in what the consumer wants. And as you see consumption levels growing at Whole Foods and others, there's not too many other supermarket retailers growing at those rates, so they want similar types of products. And it goes back to where Hain has the ability to offer those, but we also have a lot of other products to differentiate, to offer to Whole Foods.

Is it also, the fact that everyone seeing what Whole Foods is doing again, on the financial side, with their comps, their sales momentum, traffic gains. And are we going to another cycle, like we saw five, six, seven years ago, where everyone was watching what they were doing, and try to replicate? Are we going through another cycle, of maybe people trying to replicate what Whole Foods is doing?

Well, when you're growing, when you're green, you're growing. When you're ripe, you rot. And I think it shows that Whole Foods is pretty green there. And it is not only that Scott, you heard me say when I did my remarks, what are the trends out there in obesity? What are the trends out there in sodium? What are the trends out there, and what our consumer demands. So it's not, I think just, Whole Foods is doing a great job in delivering products. But, at the end, it's consumer who wants these types of products.

Great. Thank you.

Thank you.

Our next question comes from line of Andrew Wolf with BB&T.

Thank you, good morning. Can you hear me all right?

We can hear you, Andrew.

Okay. My question is a bit of a segue from Scott's. On -- maybe it's for John, or Irwin as well. But on the 5% US consumption growth, how does that kind of aggregate between the natural side of the business which I think is around -- still around 42% of your sales versus conventional? So -- is the sales momentum coming more from the sell-through improving on the conventional side, on the consumer side as to take away? Or is it more, that you're getting distribution gains there, folks like Safeway are just getting back in the category? Or is the mass-market already seeing accelerated consumer takeaway?

And it is John. Basically when you think about our consumption trends, the primary, the fastest growing segments are clearly in the super naturals and the mass channels. And in the supernaturals and conventional grocery, mostly what's driving that is turn, but we're now starting to see distribution push it as well. In the mass channels, it is being drive by distribution and turn.

And Andy, you can't look at supermarkets the way you look at supernaturals, because there's 33,000 supermarkets out there. Not every supermarket, and you cover supermarkets, is performing the same way, as some of the other chains.

Okay. That's still helpful. Also I was -- if part of the call, John, did you mention destocking a bit effecting the quarter, and if you did, did you give a number, either a the dollar amount or as a growth rate impediment?

Sure. What I mentioned was, and as you recall on the last call, I said we expected to have one more quarter, that we would have to go against distributor destocking. And what I said was, it primarily impacted the grocery and snacks business, and caused us to be flat, whereas if we didn't have the destocking, we would have been up about 5%.

It's just inventory levels of last year were much higher, than they were of this year, and this is -- was the quarter that we just overlapped Andy.

Was that at [KE&Tree], or was that still with UNFI

It was UNFI and there was some [KE&Tree] because of the consolidation of warehousing going on there for the acquisition.

You're saying if, if John's business units were flat out at the factory level, even though consumption was up five, so --

Andy, you need to --

And we can probably add that back to what the sales trends should be, some a less proportion of the business, am I understanding that correctly?

Andy, what I said was, the US was up double digits in sales, out of the factory. That was driven by sales increases in Celestial tea, personal care, as well as the acquisition. The only unit I had that was flat was grocery and snacks.

Okay.

And that's the unit that was impacted by the distributor destocking primarily.

But we had, Andy, high single digit growth in Europe, we had mid single digit growth in Canada.

I was just trying to get to what the real internal sales growth was. So was the consumer sell-through at Stacks grocery also around 5%.

Yes.

Okay that's helpful. Great. And is destocking over?

We believe, as I said in the last call, we believe this is the last quarter where it will be a primary, have a strong impact on our year-to-year comparisons.

Andy, we believe with volume demands and growth, inventory levels need to go up.

That's what we believe.

That's probably true, the volume being under growth, you want to stock up. Costs. It's interesting with the ingredient costs going up now, in fuel, the world changing again. What is your outlook, if there is a substantial, if costs do stay high for a while, what do you think is going to happen in the pricing side of the equation?

Listen, again I refer to the article in the Wall Street Journal this morning. The bigger companies, like Kraft, General Mills, Kellogg's are going to take pricing. But first and foremost, what we are going to do, is try and get productivity. I think we've done a great job in buying, but fuel has an effect on packaging, corregate, distribution, if prices go up, we will not be alone, we will not be the only out there, and we'll have to take them. So, we'll have to monitor that, as we see what happens.

Got it. And my only other question is on the tax rate, Ira. The 38% for the rest of year, mean that the UK is now, your planning it,sort of break-even there, for the rest of the year?

Well, we would hope that they do reach that point, Andy. Our tax rate, we're still guiding for 38%. But as I said earlier in the call, if the UK doesn't meet our expectations, then the tax differences will have to be handled discreetly, because that's what the accounting rules require.

So, quarter by quarter.

Yes, that's right.

So it stands to reason, if it's going sort of go from losing money, to losing less, to break-even to making some money, that the tax rate is going to sort of go from 42 to 40, 38 or something like that?

That is the way the model would work, if we achieve our goals.

Okay. And can you tell us when the break-even quarter is? So we can sort of think about the tax rate?

Not yet. But we still believe that they can get to that point by the end of year.

Great. That's helpful.

And Andy, listen, one of the big things is, we're seeing the volume growth in the UK. We're seeing the UK come back. I think as you heard last night, Whole Food is opening additional stores in the UK, which is helpful to us. And I think we'll continue to build upon it, and growth there is important. Profitability, it takes a little longer, but I think the big thing is, that we're growing those businesses nicely. And our Linda McCartney businesses was up 14% which is our whole branded vegetarian business. Our overall frozen business was up 41% versus a year ago. So a big thing is, we're getting some good growth there in our UK businesses.

Is the McCartney brand, the Linda McCartney brand in frozen, can it be run as an autonomous entity, if you were to divest unbranded businesses?

Well, it's run today as a -- it's run separately today, as a frozen operation of that so.

Okay. Congratulations on the good sales momentum in the quarter.

Thank you, Andy.

And your next question comes from the line of Ed Aaron with RBC Capital Markets.

Thank you. Just wanted to ask a clarification question, first on the consumption trends. Irwin, did I hear you right in your prepared remarks, that the overall consumption was up high single digits? Because I am just trying to reconcile that with John's comments about 5% in the US?

I said, overall organic growth was up mid to high single digits.

Okay. And then, when we think about

Just on that, I said, consumption, just on that, consumption was up, what John said, five, mid single digits.

Okay.

It's higher, You look at that as the average, including grocery, but it's higher in certain other classes of trade.

Right. So why shouldn't we expect a pretty nice acceleration, going into the next quarter where you have -- you come up against the destocking impacting from last year, which hurt you significantly. And I mean, you also -- it sounds like you had some decent distribution gains, which should amount to some pipelines, some new products. How much of an acceleration is it prudent to think about, in terms of your reported organic growth number, excluding the acquisitions over the next kind of one to two quarters?

Ed, we, in our guidance said 12%, so I think that's a pretty good growth rates that we're looking out. And we want to make sure everything goes the way it should go, instead of coming out there -- as we don't want to look into a crystal ball, and say, this is what's going to happen, and be wrong. I think what we need to do, is just make sure everything stays on track, and goes where it's going right now.

That's fair. And then just on the commodities. You mentioned that [Soundsky] bought [Cornwell] kind early in the summer, maybe at much lower levels. Is also true for the protein business, because that would have been a bit different ownership structure so, but corn is somewhat sensitive (inaudible) in that business.

Well, we're bought out, and good news is from commodity standpoint, and I can't tell you how strong the turkey business is for Thanksgiving, we're bought out on there until April. And were brought out on chicken until April also. So we also do over 70% of our Turkey business in these three months. But right now we're covered, let's see what happens. I mean corn is trading around six dollars a bushel with basis, we may have to take some pricing there.

Right. And last one if I could, I think you mentioned a 2.5% price increase the goes into effect in the second quarter. I mean, as you talk to the trade about that, what was their response, because we're just sort of now getting into the point, where pricing is becoming just more broadly, a bigger part of the discussion, and just curious to know how those conversations have gone over?

Ed, we announced our price increase in July 7th, and the discussions we've been having from the trade recently, is that you were ahead of the curve, because everybody is running into them with price increases right now.

And I think timing is right for us, because of almonds, and you heard what John said. But we looked at was how to take the price across the board, to absorb some of our almonds increase, which cost us in this quarter almost $2 million, or over $2 million along with fuel. We felt that we spread it among all our products. And yes, there was some perspective from the trade. But as fuel and that started to increase, the trade came back, and said I get it. And we've been able to get the price increase through everywhere across all our accounts.

Thank you, guys.

Thank you.

(Operator Instructions).

Our last call?

Your last question comes from the line of Tony Gikas with Piper Jaffray.

Hi, good morning, guys. Couple questions. I wanted to go back to the gross margin. I think last quarter, or when you said that you would see gross margin improvement across the board, you still expect to see that level of meaningful improvement? During the current quarter was 50 basis points, was that the type of improvement that we expect to see for the full-year? And if there's any shifting around between the major components, maybe the point that out as well. And then I have a follow-up.

Yes, Tony, it's Ira. I don't think we have any shifting amongst the components. Our first quarter always has a lower gross margin than we experienced in Q2 and Q3. And we're still holding her margin guidance, which was given in August. You will see margin acceleration in Q2 and three, winter months always bring better sales for a higher margin. Hot beverage products out of Celestial Seasonings. As we mentioned earlier the call, our soups are doing well. So we're still holding to that guidance, and we should be fine on margins going forward.

And the thing with personal-care Tony is we had personal growth there, and going into Sun, and going into those seasons, and as we expand distribution, you will see it there. But we, definitely will hold to what we had in our guidance in regards to our margin.

And then on the last quarter when you gave us guidance for this year, it looked optimistic relative to the estimates that were on the street. How are you feeling about that where you are today, and what would be the biggest risk factor to those guidance numbers for the balance of the year?

Listen, I don't have a crystal ball, but I feel good about the consumption trends. I feel good about the consumer buying our product. As I look at October sales, October sales look very strong, so I like what's happening out there across our businesses.

There's a flag up out there on commodities, and that's the big one. And ultimately getting our UK operations moving in the direction that we had planned. But all in all, I like what I'm seeing across all our businesses right now. And I like the growth number, I like the consumption numbers out there. And I really feel from a Company standpoint, the efficiency and productivity were getting out there is improving tremendously. And last but not least, Tony, I keep going back to this year. If the consumer is out there buying your product, that's 90% of the gain. And I think we could not be in a better space, and a better place where the consumer is looking for natural, healthier products.

Okay. Thanks, guys. Good luck.

Thank you.

I would now like to turn the call over for closing remarks to Mr. Simon.

Thank you very much. operator. And I want to thank everybody for participating in our first quarter call. As you can see, we had a very strong quarter, and I go back and say, hey, it's about our brands. It's about our people who are executing. It's our strategy, and it's about us returning what we committed to shareholders. But I go back, and I want to be consistent in what, how do we feel about where we're going, how we are going to get there.

Yes, there's a lot of obstacles that will get in the way, in regards to commodities, and other retailers are doing as well. But at the end of the day, the consumer today, is in a better place in regards to buying natural organic products . And Hain today, with over 35 different brands, with over 3000 SKUs, who has operations throughout US, throughout Canada, expansion throughout Europe, throughout Asia. And you heard me say about the request today, coming, looking for partnering with us, whether it's Russia, whether it's Turkey, whether it South America, whether it's India. And there's no one out there, with the depth and the portfolio of products that we have.

And you come back and look at brands like Earth's Best, as we feed infants and toddlers their first food. We recently benefited from a major recall on a baby formula out there. And again it goes back, where the mother is looking for organic baby formula. We've seen tremendous growth in our whole diaper business, where they're chlorine free or flushable wipes. We see big opportunities in our infant and baby personal care business. So, we have a lot of categories out there that will grow, and that are just in emerging categories, that we look, we're pretty excited about.

And last but not least, for two years we didn't do any acquisitions. I think we were selective, we were disciplined, and we focused and looked for the right acquisitions, and we found them. And not only did we get good brands, we got products in good categories. And a lot of that came some very very good people, that will help us grow our businesses in club, grow our business in snack. I love the yogurt category, and stay tuned for Hain getting into other categories within yogurt, and yogurt drinks. They are just big growth categories.

So I want to wish everybody a happy Thanksgiving. When you're buying your turkey for Thanksgiving, make sure it's a Plainville antibiotic free turkey, our Arrowhead Mills stuffing, our Imagine soups to go along with it, or Imagine gravy, and our DeBoles pasta. So with that you'll have a good healthy Thanksgiving, and look forward to speaking to you back in February, when we report our second quarter earnings . Have a safe holiday, and thank you

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.