Hain Celestial Group Inc (HAIN) 2011 Q2 法說會逐字稿

Good afternoon. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hain Celestial second-quarter, fiscal year 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you, Ms. Anthes. You may begin your conference.

Thank you, Chanel. Good afternoon. Thank you all for joining us today and welcome to the review of our second-quarter, fiscal year 2011 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; John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial US; and Jim Meiers, Chief Supply Chain Officer, Grocery and Personal Care, and Chief Operating Officer, Personal Care and Refrigerated.

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, www.hain-celestial.com under Investor Relations.

Our call will be limited to approximately an hour, so please limit yourself to one question with a follow-up question. If time allows, we will take additional questions, and management will be available after the call for further discussion.

Now, let me turn the call over to Irwin Simon, our President and Chief Executive Officer. Irwin?

Thank you, Mary. I hope everybody had an opportunity to see our two press releases that went out today, one about our Q2 and the other about two acquisitions, which I will talk about in a little while.

Our sales that we announced today, $292 million versus $242 million, up almost 21%. I must mention, this is our largest quarter ever in the history of Hain, excluding when we used to include Hain Pure Protein. It also, from organic growth -- and you know I'm not someone who loves to talk about organic growth -- but what's going on out there, and if you go back and look at our numbers, double-digit organic growth is something that you will see within our numbers today.

Our gross profit 29.4% versus 28.5%, up 0.5 bps. Our EBITDA up 31%, and earnings per share, including acquisition costs, $0.39 versus $0.28 a year ago, up almost 40% on the earnings side.

So, real good quarter, and with a lot of opportunities, but a lot of other challenges that we had to climb over.

So what is happening out there? Well, we all know there's a lot of cold weather and a lot of snow, and actually very good for business, as people go to the grocery store, stock up, stay home and eat and have to replenish. So absolutely has helped volume.

But at the same time, snowstorms, traveling, have hurt getting trucks out and moving trucks around. But weather has absolutely been on a factor on the positive and sometimes on the negative.

What else is happening? Eating at home. The consumer is eating more and more at home. And since 2008, when the recession began, as the consumer watched their dollars, they began eating at home, saw the benefits, and eating more and more healthier products. And that's why we are seeing the growth in consumption in all our categories.

We have just seen a lot of new dietary guidelines that are coming out for all Americans, nutritional labels. And the good news is we fit within a lot of these new guidelines and have always been doing it. Controlling sugar, consumption of calories, saturated fats. We've heard about sodium levels, where the average consumer consumes anywhere from 3500 to 4500 milligrams of sodium. You only should be consuming 1500. And our Health Valley soups, which John will talk in a little while, the growth in our soup business, not only because it's cold; because we really watch the salt.

The nutritional guidelines in regards to food labeling and what is on the label and what's not confusing is something we've always focused on. And again, it's something that will benefit our products. And not a lot we will have to change.

So about the quarter; it was record sales for us, record earnings. Celestial Seasonings -- and we've now owned Celestial for about 10 years. It was our largest quarter ever in the history of Celestial Seasonings. And that's great because we've had a lot of transition at Celestial, and what a great brand. And it really shows the consumer is back, drinking tea, and a lot of the innovation that the group has done in Boulder.

Terra Chips up 35%. We've still got some work on Garden of Eatin' and we're doing that, and a lot of new and unique things there. Sensible Portions, which we acquired in June, we almost doubled the sales of that business and continues to grow. And Greek Gods, our yogurt business, which Greek yogurt has been just a fabulous category. The growth in Greek yogurt is 100% growth, where traditional yogurts is flat, if not growing minimal.

And with the Greek yogurt acquisition, and not only have we doubled the business and then some, it's enabled us to get into something that I've wanted to get into for years, is Earth's Best for yogurt for infants, toddlers, and kids. And it's something that we will get into in April. And the group -- the group that runs Greek Gods helped us substantially get into that. Without them, we would be still trying.

Soup business, strong, Arrowhead Mills. And our Personal Care business, which we've seen just tremendous growth. And because of that, we have Jim Meiers on the call today, and Jim will take you through some of the great things that's happening at Avalon, JASON, and Alba.

So what did we do? We drove distribution, and that was a key, because the consumer wants to buy our products, wants to buy our brands. We have good products. We have good tasting products. We have good nutritionals. We have good brands. And we were able to do that. And it shows you how the consumer today really is focused on natural, organic products.

I was talking to a large retailer the other day, and they told me over 80% of their sales today are antibiotic-free chicken versus conventional, and almost 80% of their milk sales are organic versus conventional milk, which shows how the consumer is looking for organic products.

So let's talk about the countries. Our Canadian business on local currency was up 6%. And that's strong growth coming across from our Loblaws, Sobeys, Walmart, and Costco Canada. And across our Rice Dream Dream business, our Maranatha, our Imagine business, and Terra business. And it's interesting to see how our brands in Canada resemble other things that are happening in the US.

We just introduced Greek Gods into Canada this quarter, and for one quarter, saw substantial growth, and the same with Sensible Portions.

Our Yves meat-free business is still the number one meet-free brand product and Canada, and we've seen some good growth there.

Continental Europe, which we announced two acquisitions today, which I'll talk about, our European business on a local currency was up 7.4%. On US dollars, it was flat. And that is with currency year-over-year, with the Euro being down versus this time last year. So, strong growth in non-dairy, strong growth in our soup business.

Our Grains Noirs business, which is our fresh business, and for a long time, we have not seen growth in that business, and saw some great growth in regards to that business this year.

We continue to grow through the delis in Carrefour and into Belgium, into France. And with the acquisition of Danival and GG Crackers, it will help us grow our European business, and we will -- I will talk about those -- as we integrate into our European business.

Our UK business, which we all know we've had some challenges -- and it's not just us in the UK, it's the UK economy; it's the UK environment. Overall, our business on a local currency was up 13.5%. On US dollars, it was up 10%.

On our meals-to-go and ready-to-go business, we have done a great job on integrating our sandwich business, and that's going well. We've really taken a lot of costs out of that business. And over the last six months, really have integrated the Churchill business.

Volume has picked up. We've picked up new business. And we are in the midst of working on some unique business opportunities and some big new business opportunities, which will change the face of that business tremendously, if some of those come through.

But what I'm really happy with is seeing the cost, the infrastructure, really coming down as we integrate Churchill. And with that, the new business opportunities that are being presented in front of, us with a lot of new innovation on food-to-go. But it's still challenging climate in the UK.

On our meat-free business, which includes Linda McCartney, our private label, and also our desserts business, which is all frozen out of our Fakenham facility, our sales growth overall was up 40%. Our Linda McCartney on a local currency was up 11%.

And it's interesting, because from the meat-free category, our overall meat-free category was up 13.5%, but the category in meat-free was down 8.2%. And Quorn, which is owned by Premier Foods, which is our biggest competitor, just got sold two weeks ago to a private equity group. So it will be interesting what happens in that category.

But we see continuous opportunities -- continuous opportunities to grow in that category. Pricing is a little difficult in the UK, which we've got to continue to work on. But I think we've done a great job of taking out cost.

In regards to the protein category, our overall antibiotic-free -- and it goes back to what I referenced before in regards to antibiotic-free -- our antibiotic-free turkey and chicken business was up 23% year-over-year, which shows you the consumer is eating antibiotic-free. With corn prices going where they are and meat prices going up, the consumer is going back and eating more and more chicken, and that's why we are seeing the growth there we are. Unfortunately, we do have higher corn prices, which ultimately affect us.

But on a positive side -- and this is the overall protein business, which we are a 48% partner -- the business earned $2.5 million this quarter versus a loss of $0.5 million. So good turnaround there and good demand. Again, we have to watch corn prices as go into the back half. But our biggest quarter is this quarter that just passed with Thanksgiving.

China, which we see tremendous opportunity. In 2010, we launched 400 products through Hutchison JV in Hong Kong. Our market share is growing fast in categories like baby food, snacks, soups, pastas, and sauce. We have over a 10% share in Hong Kong in PARKnSHOP, and PARKnSHOP is the largest retailer in Hong Kong. And we see tremendous opportunities there.

We launched organic formula in China in November. And we will be in 130 cities by mid-2010 with organic baby formula in China. We have 70 products which we launched just at the end of 2010 in Thailand, and over the next year, working with Jim and his group, we will have in 8500 stores Hain personal products throughout Asia. And that is through a lot of the Watsons and Hutchison retailers that we have our joint venture with.

So the acquisitions you talked about -- that you saw today that we announced, Danival, which is located in the south of France. And the great thing about this business, 100% of the products they make are organic. They manufacture them all themselves. Very few products are private label.

It fits right into our sweet spot. It strategically fits with Lima. Danival sells into markets that we don't sell Lima, and at the same time, we're able to take Lima into markets that we don't sell Danival. So a lot of complementary, a lot of good integration from a sales organization. They manufacture all the products themselves, so there's manufacturing opportunities for Lima, and there is absolutely some good manufacturing opportunities for our US operations.

They do soup in a bag. They do pouch baby food in sauces. So we are pretty excited about what Danival can do for us, both US, Europe, and Asia.

GG UniqueFiber, which is a unique cracker. And the interesting thing is we've tried to look how we can do this cracker, how we could duplicate it. And because of the wheat that comes from Norway, grown in cold climate is what makes this product unique. Each cracker is about 12 calories, and, trust me, a lot of fiber. And we see tremendous expansion throughout Europe, which we look to expand this, throughout Asia. And we will ultimately look to expand this in the US, as the US is tied up on a contractual agreement.

So, from a standpoint, some great growth. And we've just entered the fiber category with a brand and a joint venture called F-Factor, so we see the opportunities in the fiber. And look what Fiber One has done out there.

So with that, yes, we know -- we see commodities, but we have initiated tremendous productivity savings across the Company, and John and Jim will talk about that. And I think that has been a tremendous cost savings and a tremendous aspect of Hain.

We are really in good categories and we are really in categories where the consumer is looking to buy. We are focused on good health. We're focused on eating at home. And the big thing that has changed tremendously how we've moved into a diversified classes of trade, and really moved across many channels.

Today, you saw Costco come out with good sales. You've seen Whole Foods come out with good comps. So from that, we have moved across many classes of trade, and the consumer has demands for our products going into multiple classes of trade.

Just another category we just had a great quarter is Personal Care. And the consumer is looking for clean ingredients for their Personal Care, for themselves and taking care of that.

Our balance sheet is strong, which allows us to do future acquisitions and any other thing. And when Ira takes you through the numbers, he will take you through where our debt levels are and how much debt we've paid down and how much free cash.

So all in all, a great quarter, great accomplishments by the team, and we've got a lot of good excitement and momentum going into 2011 and the next quarter.

What I want to do now is turn it over to John.

Thank you, Irwin. Good afternoon. I am pleased to report a very strong Q2 for Hain Celestial US. Now, there were many highlights in the quarter, and I'm just going to call out a few, starting first with our double-digit US sales growth. This was driven by strong year-on-year growth for all of our US units. That means Grocery and Snacks, Personal Care, and Celestial Seasonings, coupled with the strong sales from the Greek Gods and Sensible Portions acquisitions.

Another highlight was US consumption growth of 6%, which reflects continued improvement versus our previous 12- and 52-week consumption trends. We saw growth across the portfolio, led by several brands with double-digit increases, including Earth's Best, Spectrum, Health Valley Soup, Terra, Maranatha, Greek Gods, and Sensible Portions.

Importantly, Hain Celestial US grocery channel consumption -- and now remember, this is a channel that has been a struggle for many manufacturers, and for us it accounts for over 40% of our measured consumption. Our grocery channel consumption was up again for the second consecutive quarter. So we had consumption gains across all the major channels -- natural, mass, and grocery -- in Q2.

Now in the quarter, we saw our gross margin decline slightly, as expected, due to a 40% almond cost increase and higher-priced sweet potatoes purchased for our incremental Terra Sweets Costco national rotation. We were still able to offset most of these increases with productivity savings and a minimal contribution from our Q2 quite increase. In fact, ex the almonds and the sweet potato cost increases, the gross margin on the balance of the business was up over 50 basis points.

Additionally, our Q2 SG&A as a percentage of sales was down, reflecting better leverage of our trade, marketing, and headcount investment to drive sales.

Finally for Q2, our US inventories ex acquisitions were down 4%, despite supporting double-digit sales growth. This inventory decrease, coupled with our accounts receivable improvement, was the major driver in the Company's improved cash conversion metrics.

So it's clear we have good momentum coming out of Q2. Now, looking forward to the second half, we obviously have to note the rising commodity and fuel costs and the general consumer uncertainty. Look, we are still bullish on our Hain Celestial US year to go prospects, and I'm going to take you through five key factors that keep us very bullish.

The first factor is our continued US consumption's trends improvement. Q2 was our fourth consecutive quarter of consumption growth. And we are counting on more new distribution wins and great lineup of new product innovation to maintain our consumption momentum.

The second factor is we are seeing a very healthy Celestial Seasonings tea business. Irwin alluded to it, but Q2 was the strongest quarter in Celestial Seasonings' 41 year history. Celestial Seasonings Q2 Nielsen grocery and mass consumption growth was 3 times the category growth rate, increasing our share by almost a full point in the critical hot tea season. This consumption increase, coupled with our fast-growing sales from our partnership with Green Mountain on the Celestial Seasonings K-cups, drove our record Q2 results.

Peter Burns and his celestial team have done a really terrific job in positioning this business for profitable growth.

Third, we are seeing strong performance from both our Sensible Portions and our Greek Gods yogurts acquisitions. Both brands delivered outstanding growth versus year ago. Additionally, both acquisitions continue to benefit the overall US business, as the acquisitions' founders have stayed on with Hain and made significant contributions.

For example, Jason Cohen of Sensible Portions secured our first-ever Terra Sweets Costco national rotation. While Basel Nassar of Greek Gods led the development of the Earth's Best yogurt that Irwin talked about before.

The fourth factor is that we continue to be well-positioned against cost increases for most key ingredients. We've taken inventory positions for most of our most volatile commodities into at least the third quarter, and for many, the full fiscal year. This strategy has helped us avoid many of the recent commodity cost increases, like the 80% increase in corn prices.

Now, we have some second-half exposure on oil, dairy, and fuel, dairy being for yogurt obviously, and fuel, but we have a full slate of productivity initiatives, coupled with the Q2 2.5% price increase that has already been implemented, to help offset most rising commodity and fuel costs.

The final factor is Personal Care and the growth we've seen there from Jim Meiers and his team to drive a tremendous resurgence on that business. I am now going to ask Jim to give you a quick overview of Personal Care's strong Q2 performance and its year to go outlook. I'm confident after hearing about the Hain Personal Care business trends, coupled with the momentum we have across the balance of our business, you too will understand why we continue to be bullish on the US year to go outlook. Jim?

Thanks, John. We are very excited about our second-quarter results and our outlook for the second half of the fiscal year. Let me take you through the Personal Care performance.

Coming into the fiscal year, we focused the entire Personal Care organization on four key fundamentals to restart the profitable growth. They were -- driving consumption on existing SKUs, expanding distribution in grocery, driving innovation, and expanding our margins. And I can tell you, we are seeing the results.

Our Q2 Avalon, Alba, and JASON brands consumption was up mid-single digits, reflecting continued improvement versus our previous 12- and 52-week periods. The restaging of our Avalon products to 70% organics was one of the key drivers with our consumption.

On distribution, the grocery channel is our biggest opportunity. Our grocery distribution was up 10% in the second quarter. Key to this, we gained distribution on 14 items at Publix, and I can tell you, we have plenty of room to go.

On innovation, we introduced Alba ACNEdote and Avalon Essential Lift in the first half, with great acceptance. In fact, we've got a national AutoShip with Whole Foods and gained distribution on ACNEdote at Walmart and at Target.

On margins, we continue to show significant expansion from a better product mix, increased utilization of our Culver City facility by moving co-pack products in-house, and driving productivity.

So, in summary, Hain Personal Care has good momentum going into the second half, with growing consumption, distribution gains, particularly in the grocery channel, a strong pipeline of product innovation that we will introduce at Expo West, improved product mix, and better utilization and efficiencies at our factory.

I would now like to turn the call over to Ira Lamel.

Thanks, Jim. Good afternoon, everyone. We had record net income in our second quarter this year, reaching $16.3 million as compared to $11.2 million in last year's quarter, an improvement of 45%. We earned $0.37 per diluted share on a GAAP basis this year against $0.27 per diluted share last year, improving by 37%.

Before charges for acquisition-related expenses and integration costs, adjusted net income was $17.5 million, or $0.39 per diluted share, compared to $11.7 million, or $0.28 per diluted share, in last year's quarter.

Net sales in the second quarter this year reached $291.9 million, an increase of 20.6% compared to last year's $242 million. We saw increases in sales across all of our operating units, along with the addition of Sensible Portions, 3 Greek Gods, and Churchill's.

Foreign currency had a $1.4 million drag on sales in this year's quarter as compared to last year.

Gross profit in the second quarter this year improved by 37 basis points to 29.3% on a GAAP basis compared to 28.9% in the second quarter last year. We realized improvements in our gross profit performance from a more favorable mix of sales worldwide, including the favorable margin rates of businesses acquired, and productivity improvements, which together, overcame the cost challenges we face on the input side of the business.

As John mentioned earlier, we incurred higher costs for almonds in our Maranatha nut butters brand and for sweet potatoes in our Terra-branded snacks products. The increased cost this year of just these two inputs caused an 85 basis points drag on our gross margin performance this quarter as compared to the cost of these ingredients during the second quarter last year.

Overall, we saw 1.6% inflation in the cost of our inputs this year as compared to last year.

Our SG&A in the second quarter this year was 18.8% versus 19.5% in last year's second quarter. We saw improvement in the SG&A rate from the leverage achieved from our existing expense base over our higher sales, coupled with a slower rate of increase in SG&A spending as compared to the rate of increase in sales. The higher SG&A spending was due in large part to our acquisitions, including product demonstrations and store level sampling, along with increased amortization of acquisition-related intangibles.

Operating income for the quarter this year was $29.7 million or 10.2% on a GAAP basis, and was $30.7 million adjusted last year, or 10.5%. The operating margin improved by 127 basis points over last year on a GAAP basis and 112 basis points on an adjusted basis.

Irwin earlier walked you through the Hain Pure Protein results, where we have a 48.87% joint -- where we are a 48.7% joint venture partner. The profit from continuing operations of Hain Pure Protein doubled this quarter over the prior-year quarter, and our after-tax share of Hain Pure Protein's results from continuing operations amounted to $742,000.

We continue to focus our attention on improving our working capital turnover and generating improved cash flow. For the trailing 12 months through December 31, 2010, operating free cash flow was $59.6 million versus $37.7 million for the comparable 12 months ended December 31, 2009, an improvement of $21.9 million, or 58%.

With this free cash flow over the last 12 months, borrowings have remained somewhat flat when compared to June 30, 2010 levels, despite the acquisition and integration spending we have experienced.

Days Sales Outstanding was at 41 days versus 48 days at the same time last year. Our inventory days have gone down year-over-year to 75 from 88, and our payables have shortened by four days. Depreciation and amortization in this year's quarter was $5.8 million as compared to $4.8 million in the prior year, with the increase coming from our acquisitions.

Stock compensation in the quarter was $2.2 million compared to $1.7 million last year. And capital expenditures amounted to $2.2 million in this quarter.

As we discussed in our earnings release, we have increased our sales guidance for the full 2011 fiscal year to $1.060 billion and up to $1.080 billion. Our earnings per share guidance for the full year is $1.24 to $1.31, which indicates a significant improvement for our back half as compared to last year's back-half earnings. Our guidance for both sales and earnings includes the acquisitions we have announced today. We expect these two acquisitions to be neutral to earnings over the remainder of the fiscal year, although we will incur customary acquisition expenditures. We expect to see accretion in fiscal year 2012.

With that, we will open up the call to questions.

(Operator Instructions) Terry Bivens, JPMorgan.

Good afternoon, everyone. Outstanding top line.

It's so solemn, I thought maybe I couldn't hear you.

Irwin, as we look -- I guess the question here becomes sustainability of the top line. Am I correct in assuming you had about 8% in there from acquisitions?

No, not that high, Terry. But on acquisitions, on the 20.5 or organic growth, which one?

On the total -- what portion of that would you say was acquisitions?

It's about the number you said, 8%.

Okay, then of the rest, which I guess would be organic, can you give us some idea what the pricing component of that was?

Very, very little, Terry. We took a price increase -- it's probably across the whole Company -- we took a 2.5% price increase on some of John's businesses in August, and very little of it got -- was effective. So it's less than 0.5% -- 0.25% was pricing in the quarter, of the whole Company.

Okay. Just, John, to go back to Celestial, I'm not sure I caught the total growth number there for Celestial Seasonings' sales growth.

Here, Celestial Seasonings had double-digit sales increase for the quarter.

Okay. Very good, I'll pass it along. Thanks very much.

Greg Badishkanian, Citigroup.

Thanks. Yes, great quarter, guys. Just two questions. First, are there any segments that kind of stand out in terms of consumer trends that you are seeing? You mentioned eating at home more. Maybe some other -- maybe higher-end versus lower-end? Are there any other trends that you have seen?

I think, Greg, as we come back, and I said at the beginning, we saw it across all categories. Great growth on our snack business, good growth at Celestial Seasonings, our soup business. Our Greek yogurt business, Arrowhead Mills, which shows a lot consumer cooking at home. We saw good growth on our gluten-free, our DeBoles business.

Our Personal Care business, I mean, that is one that you go back and look at Avalon, JASON, and Alba, up 35%, 25% on JASON. So it's the consumer is just eating healthier. We had some brands where it didn't grow, and I mentioned Garden of Eatin', and we are in the midst of restaging, repackaging on a product there. But the majority of our major brands were up double-digit numbers. Earth's Best was up double digits. So it was across multiple channels.

Good. And how would you categorize the inventory level within the trade, throughout the trade, distributors, retailers, and kind of how that's progressed over the last quarter or two?

Well, if anything, I think the inventories might be too low, with volume and consumption where they are. And we are not seeing heavy loads of inventory out there. If anything, I'm hearing about out of stocks at certain retail levels. So there is not an abundance of inventories out there.

Good. Good to hear. Thanks, guys.

Scott Mushkin, Jefferies & Company.

A couple questions. So did you guys give it and maybe I missed it -- kind of the volume and sales growth in the US ex acquisitions?

What I said, organic growth, Scott -- and organic growth, if you don't include any acquisitions, is mid to high single digits. And if you include the organic growth just in acquisitions, it's double-digit growth.

Okay. And is that overall Company, Irwin, or is that just the US?

That's overall Company. And again the only acquisition, which is not the big one, and if you take out the Marks & Spencer business that we had last year with the Churchill business, they wash each other pretty well.

Okay. Then how about trends, near-term trends? Have they been changing at all?

Not at all. Going into calendar year 2010, we like what we -- 2011, sorry -- Mary had to remind me it's been a new year -- we like what we see, what the consumer continues to do. January has been strong. And as you heard me say at the beginning of the call, I think consumer continues to eat more and more at home, continues to watch label. And I think weather to some degree has helped in buy-ins.

But the other hand, there's -- absolutely has hurt us in getting product to the stores and getting product out because of snow delays and stuff like that. So I think one offsets the other. But volume is strong. Consumption is strong.

And I know John mentioned that all your channels are showing good growth. We have been picking up that maybe natural and organic is starting to grow a little faster in the grocery channel. I don't know if John has any comments on that.

Scott, I would agree with you. I am seeing the trend in regard to our growth, as well as natural and organic category outpacing conventional within the grocery channel.

Scott, that is something where grocery was a big part of our business. And you look at it, there's 33,000 grocery stores out there, and you especially know what's going on in a lot of the grocery retailers. And a lot of other retailers have taken share and market away.

But grocery, for us as a category, has been down most of last year; the last two categories were up. And it's nice to see grocery rebound, even though we see some retailers still challenged out there.

And Irwin and John, this acceleration in grocery, is it being driven by kind of like-for-like, for better terminology here, or is it -- do you see distribution coming back? Or is that something that can happen as you get them to take more product? I know they all kind of stopped and maybe even cut back a little bit through the downturn.

Scott, most of the growth we are seeing is increased movement on existing distribution. But as I said in the last call, we are finally starting to see grocery channel begin to increase some distribution. But it's mostly on existing SKUs.

Scott, listen, let's come back and be honest. What's happening is it moves through the retailer. You can put it on the shelves, but if the consumer is not picking it up, it's not selling, okay? So you've got demand by consumer.

The other thing is as retailers look at what's going on at Whole Foods and other natural independents, and they see the comp growth coming from there, they don't want to miss that business. So that has helped grow grocery tremendously also.

I had one final one. I hate to do this, but I guess I will. This is on price, so will you guys take -- costs are rising here. It sounds like you have forward bought and you are pretty well protected through this fiscal year. Will you take price in anticipation? In other words, that's your guys' good management. You did this, that's fine.

But are we going to have a lag where we're going to see -- and I guess that's my second question on price -- is like how much of a price increase are you going to need if things stay the way they are right now?

As John mentioned, we are protected in the back half of this year. But as we look going into next year, we will be looking at taking pricing to cover the commodity increases.

Do we have any idea how big that's going to need to be?

I don't think we know yet. But the thing is, we are out there evaluating it. And, listen, I mean if you go back and look at fuel when we started our budgeting, and diesel at $2.85, and today it's got a 3 and then some in front of it, corn $3.25, today $6.50, dairy prices, almonds.

But again, what we've got to do (technical difficulty) make sure this year. Just taking pricing is easy, but I've got to come back and commend the team on the productivity that they have been able to get in driving costs out of the business, where in the last quarter, between almonds and sweet potatoes and fuel, it probably cost us close to $3 million. And we were able to offset that with productivity costs and increased volume, et cetera.

So I think, Scott, what we are looking at is where do we have to take pricing? It's easy to pass on -- and I heard Kellogg's today passing on 7% prices. But pricing is ultimately going to affect the consumer and purchasing too. So we've really got to look at where we can get better productivity, where we can get better efficiencies, and where we have to take pricing.

The other thing is, which we have done a great job on, how we are stretching our marketing dollars, our trade dollars, and getting the benefit for it. We've taken our inventories down tremendously, so we are getting good turns on and inventories. We are really watching and managing our cash. So it's a combination of multiple things that we look at, but there's going to have to be some pricing absolutely taken out there.

All right. Thank you so much for taking all my questions. I appreciate it.

Scott Van Winkle, Canaccord Genuity.

Good evening. Congratulations on the results. John, if you could on Celestial Seasonings, I appreciate the great growth there. Can you dig into why? I don't mean that as I'm shocked. I mean that as you are outpacing the category by a factor of 3, and the category seems to be improving. What are you doing or what has changed in the tea landscape?

A couple of key things. First of all, our grocery distribution was up 6% in the quarter. Second thing is, to Peter Burns' credit, he and his team identified a real gap in grocery with wellness teas, and we have really put strong emphasis on our wellness teas, like our sinus soother and things of that sort.

That coupled with our herbal, our Sleepy Time and our core herbal business, are driving the increase. Then the last thing is Peter aligned, as I said, with Green Mountain, and the K-cups being sold at retail are another nice source of growth for us.

Scott, if you go back and look at it, Sleepy Time, being our biggest SKU, our biggest seller, always only had one SKU, Sleepy Time. Now we have, as John said, four reiterations of Sleepy Time in wellness tees and other categories. So just the expansion, and the team has done a great job in really expanding distribution.

The other thing that has happened out there, there was a lot of new tea entries into the category that ranged from $6 to $12 for tea. The average consumer has four to six boxes of tea in their pantry. And you had your pyramid bag, you had your canister. And I think that consumers come back and sort of say, hey, I'm going to buy one of the best specialty well-known brands out there, and that's what they did with Celestial.

So it's not like the category has made a move, like the black -- the green tea trend, and you got on the right side of it. It's more maybe internally and the consumers work through inventory.

It is definitely internally. We improved our green tea tremendously, which helped. Innovation and expansion of distribution, and a good team really running the business out there.

And then lastly, kind of breaking down the growth year-over-year, and you start with 6% consumption, and you kind of work your way to double-digit organic growth. Was the comparison to last year, when there was probably some channel deloading, was that meaningful in the year-over-year growth rate?

Actually, our key distributor inventories hit some high points in Q2 a year ago and then worked their way down from there. We saw our major deloading in the second half.

It was the third and fourth quarter, Scott.

Okay, and broadly across the grocery business, would that be the case as well?

Yes.

Great. Thank you.

Andrew Wolf, BB&T Capital Markets

In the last question, how can there not have been a lot of restocking, if the internal -- the organic growth was double or so the consumption? Not that a lot of restocking is a bad thing; it's a good thing. But isn't that sort of the simple math of it?

Andy, I'm not understanding what you're saying. Consumption growth was 6%. Our organic growth was double digits.

Right.

There's inventory that goes into customers and into the stores, so it's not like somewhere there's a four- to six-week turn. So there's absolutely inventory that goes into the distributors, and then inventory that comes out of stores. So it would -- you will not get organic growth -- if not, you're going have major out of stocks -- and consumption growth the same number.

Fair enough, okay. And I dropped off the call for a while. When I came back Scott was still on. But in any case, did you give out the numbers for how the channels are improving? In particular, what your consumption numbers are now at the grocery stores compared to where they were last quarter and what kind of momentum is there really going on at grocery.

Andy, we just gave total, but what -- as John said in his remarks -- for the last two quarters, it was -- we are seeing two quarters in a row where our consumption has grown in the grocery channel. Which has been a challenged channel not only for us, for multiple manufacturers, consumer manufacturers. And that's just with a lot of consumers switching to club stores, mass market, natural food stores, et cetera.

But we are seeing a major focus at supermarket level because of the demand by the consumer, and I think the supermarket is seeing the growth coming from Whole Foods and does not want to miss that opportunity of growth in natural/organic.

Okay. And just on the UK, in the press release, you said it's getting better, but not great; there are some issues. Could you just update us on that? Do you think -- is it still heading towards a breakeven run rate this fiscal year, or it is that a little bit of a push off? Where is that business --?

Well, what I said in the press release, it's getting better than it was last year. Is it at our expectations, where we expect it? No. But in my remarks what I said is -- integration, we've got some great costs -- great cost-cutting our food-to-go business. We have won some new business. We are in the midst of bidding and looking at a lot of new business that could be substantial.

In regards to our meat-free business, our Linda McCartney business was up nicely. Our meat-free business was up nicely, even though the category was down. Our dessert business was up.

The UK economy is still challenged. And there's plenty of growth going on for us. Pricing has been a bit of a challenge and issue over there. We are still losing some money there, nowhere near what we were losing last year. And I think we are making good headway and volume will ultimately be the cure and taking costs out. So there's a good plan there, Andy.

Good, all right. I mean, it's a small part of the company. The rest of it is obviously above plan.

So let me ask you one last question, also referring to the press release, which is I think the same statement as last quarter -- in the guidance, that financial results performance is going to improve sequentially. And what exactly is meant by that? Is that year-over-year EPS growth or -- it's certainly not sales, because guidance implies the sales are going to stay about what they are.

Well, the guidance says we've taken sales up for the full year. So we are obviously taking credit, as we should, for what we've achieved for the six months and what we see coming in the back half.

There's a little bit in there for the acquisitions we made, but it's not substantial.

As to the earnings guidance, if you look at the back half that's implied by the earnings guidance versus last year's back half, you see some pretty significant growth.

Andy, the back half, we are looking for guidance growth of 12% to 25%. And with commodities and other unknown out there, there's always the opportunity to increase. But I think this visibility on commodities and what's going on, I think we just have to have a better handle on it.

No, this is a statement in that -- it says our expectation is to see stronger year-over-year results as we move through the balance of 2011. And it's in the press release. I just wanted some clarification which results we are talking about.

Well, again, if you look at what we've achieved in the first half of the year, deduct it from the full-year guidance, you will see the back half has higher earnings than the back half last year, and it's at a better rate.

And that is both on an adjusted basis, right? You're not saying -- because last year back half had some pretty big charges. You are talking about adjusted earnings?

Andy, we are GAAP on GAAP. And I think it's pretty clear it's fiscal 2010 versus fiscal 2011.

Okay, all right. Sort of a fine point. I just wanted to understand the guidance.

Anyway, congratulations on the kind of momentum in the business. I think that was exhausted by the previous questioner. Thank you.

Colin Guheen, Cowen and Company.

Most of my questions have been answered. Just frame the opportunity on productivity, especially in the G&A line. You got a lot of savings last year. You got some creep coming back in here with the growth. Maybe just frame the opportunity or the level around G&A for the Company going forward.

The G&A won't necessarily stay at the rate that it was in the second quarter, simply because the second quarter is traditionally our highest sales quarter. So the leverage that we get in the second quarter over the fixed expense base takes the rate down.

What we did see in the second quarter, of course, was higher dollar spending this year over last year. That comes on board because of the acquisitions that we made. But the rate of growth in that spending was lower -- or slower, if you will -- than the rate of our sales increase.

One of the things that really did contribute to the lower rates of SG&A, Irwin mentioned cost-cutting in the UK. We made some significant cuts in the UK in terms of cost-saving programs. Those came through in the second quarter this year and that helped as well.

So I would expect for the full year, we are going to go up a little bit from what the second-quarter rate was and get back closer to the 19 or so percent for the full year for SG&A.

Okay, so -- helpful. Still on the dollar basis below kind of that '09 level in the back half, it sounds like.

Well, the '09 level, you are comparing to two years ago.

Yes.

I had to look back at that, because I really had not looked at '09 in comparison to this quarter.

I'm just seeing how much of the integration -- is some of it more one-time G&A associated with integration, or is this sticky G&A that's going to remain?

No, the G&A that we have on our SG&A line in this quarter is spending that will stay.

Okay.

Okay? We have the integration costs carved out on the P&L; you can see, in that adjusted P&L in the back, where our acquisition-related expenses and integration costs were.

Okay. I thought you mentioned that there was still some integration-related expense in the G&A line. But I misheard that. Thank you.

I think what he meant, Colin, there's also -- there's some integration G&A opportunities as we continue to integrate some more of these acquisitions, where we have not integrated totally back rooms and we have not integrated all the (multiple speakers) of it. So there's still G&A out there that will get integrated into the main functions of Hain Celestial. And that's (multiple speakers) --

Okay. Yes, that clarifies it. That's what I was thinking. Okay. So that clarifies it.

Andrew Lazar, Barclays Capital.

Good evening. I guess just two things. The first would be as I look through the P&L in the quarter, I guess, the one thing that surprises me is with double-digit or low-double-digit sort of organic sales growth, I guess I would expect -- or typically with that kind of strength, you see some really, really good operating leverage through the P&L. And you did have some margin expansion. I realize there were some cost increases on those two items you called out.

I guess I just would have thought it would've been even more powerful like down to the earnings line. So I just wanted to see if there's anything in there that I can't tell from here. Because -- I guess the reason I ask is because with the kind of sales momentum that you seem to have in the business -- not that every quarter is going to be double-digit organic -- I guess it would have struck me that maybe that guidance in the back half around sales and earnings could have gone up, particularly with the kind of visibility that you seem to have on the input cost side. That's why I asked the operating leverage question.

Well, I think you come back -- and I think what we said, Andrew, if you come back and look what went to the bottom of the P&L -- I think what you heard us say, we absorbed an additional $3 million, at least, of productivity costs. You know, from a P&L standpoint, did we achieve everything we wanted to in the UK?

So, with that, I'm not sure what you are seeing that's not going to the bottom line and not flowing through the P&L.

In regards to the back half, sales are strong, but there are also a tremendous amount of commodity costs that are moving in multiple different directions that we are not prepared today to make a bet on, and we do have some exposure on certain ones out there. With that, we are being cautious on how we are going to account for them.

With the forward buying that you have done, is there a way to get a sense of what your sort of the overall cost of goods inflation will be for the fiscal year, based on the hedges or the forward buying positions that you've taken?

If I knew that, I'd have a crystal ball and I shouldn't be doing what I'm doing, if I could know what commodities were.

I mean the stuff you've locked in; in other words, the positions that you already have.

Are you saying if we had to buy them now?

No, what you have bought in, and how you are covered through the year -- is cost of goods, input cost inflation up 7% for you? I realize you have visibility to it, but visibility at what level?

Andrew, it's Ira. One of the things I pointed out in my remarks is that our overall input inflation was up 1.6% in the quarter. For the six months, it's actually a little bit higher than that; it's about 1.8%, because we did experience a little bit higher first-quarter inflation as it started to accelerate at that point.

I pointed out and John pointed out two examples which are outside of our normal upfront commodity or ingredient buys in which we secure prices and supply. We had heavy increases in sales on Terra that increased the need for us to acquire sweet potato. We had to go out there beyond our plan and buy it on spot prices. That brought up our input costs, and I pointed that out in my remarks. And that's an example of why it's almost impossible to look forward for the whole year and say this is what our inflation is going to be.

Okay. All right. And then I guess the last thing would be -- just to switch gears -- I'm just curious. How do you -- it's got to be tough to manage, as you're trying to get incremental distribution in -- call it -- mass merchandisers, you have to manage, obviously, the supernaturals as well, who sometimes say, if certain things go into mainstream mass merchandisers, we don't want to carry it here.

So how do you balance that opportunity, particularly because new distribution is a big piece of, obviously, your thrust going forward, but you've got some pretty critical customers that really sort of pay the bills?

Listen, every customer pays the bills, and I think we go back and look at that. And as I have said before, there's a model out there for supernaturals. If you walk through a Whole Foods, we have 1800 to 2000 products in a Whole Foods today. In a Walmart, maybe we have 65 to 100. If you go through a grocery store, we may have 600 to 800 out there.

So there's certain brands and certain product. And also today, as we work with our retailers and our partners in planning, we customize certain products that are exclusive for them, and we've done numerous products that are exclusive to certain retailers and we will only sell them in certain retailers and introduce them there.

So I think that's what's unique about our business today, and that's what's different. You can't just have a green model and ship into every store, and you can't have a red model and go into every store. I think that's, again, what's unique. Every retailer is looking for something unique. And you walk into Whole Foods, there's a lot of uniqueness in there. You see a lot of Arrowhead Mills products. You see a lot of Imagine products. You see a lot of JASON's, Avalon products that you are not going to see anywhere else, a lot of Terra products. And there's a lot of products in there that you will only see there.

So with that, that's where you are not going to have just catch up across the board. Then it becomes a football. Everybody else looks at it for price, price, and price, because there's nothing unique to offer, Andrew.

So, number one, I've always said this about Hain. We have a lot of uniqueness in our brands and our products. And now, with the demand, we have a lot of uniqueness in the products and the brands that we sell to multiple retailers. In club stores today, there's only 10 items in club stores, but they do a lot of volume in those 400 or 500 Costcos or Sam's. So with that, that's what we focus on for them.

And there are no further questions at this time. Presenters, do you have closing remarks?

Thank you, operator. I want to thank everybody for listening to today's call. You know, with our record sales, our record profitability -- and one of the questions asked about our expectations is to achieve stronger year-over-year results as we move through 2011, and that is coming, which is evidenced by our strong sales. Our strong financial metrics, where we are focused on our balance sheet, we are focused on our cash, we are focused on our margin, we are focused on our return in invested capital. As I said before, we have great brands. We are really in a good category. And every day, there is more and more news coming out about food, food labeling, ingredients in food, so much on the prevention of food, and we are definitely in the category and the space.

With that, there's more and more demand for retailers to have our brands, whether it's food and our personal care products. So with that, we have some exciting things planned for the back half. We've talked about a few products that we'd introduce at Anaheim, which is in March, which is the big expo. We will introduce between -- in total companies, somewhere between 50 to 75 new, innovative products, which will be pretty exciting. So I am pretty excited about the back half.

Just to clarify something -- we are asked about guidance. Guidance is adjusted, and the adjustment is for integration of acquisitions that we've always talked about, and today acquisition costs go through the P&L. So that's the adjustment, just to clarify the question that came from Andy Wolf.

So yes, our guidance is adjusted for acquisition costs; that does go through the P&L, just to be clear on that. So with that, thank you. Stay warm, drink tea and soup and every other product.

Thank you. This concludes today's call. You may now disconnect.