Hain Celestial Group Inc (HAIN) 2012 Q2 法說會逐字稿

Good afternoon, my name is Misty 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 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you, Ms. Mary Anthes, Senior Vice President Corporate Relations, you may begin your conference.

Thank you, Misty, good afternoon, thank you all for joining us today and welcome to the review of our second-quarter fiscal year 2002 (sic) results. We have several member 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 United States, and from the UK Rob Burnett, our CEO of Hain Daniels UK.

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 2011 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, so please limit yourself to one question with a follow-up question. If time allows, we'll 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, and good afternoon and I hope everybody had the opportunity to review our press release. And in our 18 years this our second quarter, our largest quarter throughout the year, this being a record quarter for Hain after 18 years achieving $385.5 million versus $291.8 million a year ago, up 32.1%. Our operating income for the quarter, $40.1 million versus $30.6 million, up 31%. And EBITDA for the quarter of $49.7 million versus $38.5 million, up 31%. EPS for the quarter 50-- adjusted EPS for the quarter $0.52 versus $0.39, up 33% for the quarter, and GAAP which Ira will take you through $0.44 versus $0.37 versus last year and the adjustment on GAAP is acquisition-related expenses related to the Daniels acquisition.

So let's talk about the quarter and all the great things happening in the quarter. We saw about 6% inflation in the quarter. Productivity around the world, we got about $5 million of productivity and we got a little over 2% in pricing that helped offset this inflation. So still all in all, with inflation where it was with productivity and getting pricing, it helped us offset this. We saw a tremendous consumption growth and one of the things I sit here today proud about is what our consumption growth, our consumption growth is over 7% here in the US today. And with a lot of other consumer packaging companies with up 1%, 2% or even negative, having 7% consumption growth is great.

And the great thing about that is yes our products, yes the innovation that our marketing teams have created and our development of products, but it shows you consumers are transitioning more and more to natural organic products, and the consumer is willing to spend money and spend on that. And at the same time we have spent dollars in FSIs in regards to driving consumption and driving volume. But just within the quarter we had nine brands that were up over 20%, five brands worldwide that were up over 10% and 10 brands that were high single-digit numbers and just below 10%. So that is tremendous, tremendous having that amount of brands with those types of growth.

And when you come back and I focus on Earth's Best, the baby rate within the US is down, baby rate all over the world is down and we are still growing high double-digits numbers with that brand and will continue to grow with new and new products. And just one thing I can touch on there, we introduced pouches within a year ago and pouches today are 20% of our sales, which shows you innovation on product, innovation on packaging and looking for the right product and just a tremendous job in how we're going to expand that.

Celestial Seasonings, and it's been a warm quarter here in the Northeast and it's 60 degrees here and they got 24 inches of snow in Syracuse, but still, high-single digits the brands up and the K-Cup, and you heard Starbucks talk about how many K-Cups they've sold, we sold quite a few K-Cups of tea and probably one of the number one selling key K-Cup within the US today and strong strong growth coming from tea and strong growth coming from our herbal teas, our black teas and our wellness teas. And you go back and look at repackaging that we've gone with Garden of Eatin' how strong that was up. How strong our DeBoles, our-- which again high in gluten-- or gluten-free products. Our MaraNatha nut butters, almond butters and really have seen the consumer trade more and more to almond butters today instead of peanut butters.

And one that I really want to touch on is Imagine Soup, our consumption there is up 7%. And again, with warm selling season out there, still having the consumption up 7% and it shows more and more of the consumers moving away from cans and want either fresh soup which leads me into our New Covent Garden Soups that we acquired when we acquired Daniels, are looking for fresh soups coming from our Imagine types of soup or looking for organic soups or dairy-free soups, et cetera. So we see some great, great things happening. And Greek Gods, which is one of my favorites in seeing the Greek category growing the way it is today and it has within Hain just a tremendous superstar and tremendous growth. Great growth in our Imagine Frozen business, our Linda McCartney business within the UK, our Lima business even though some of Europe is struggling.

With the Super Bowl coming up on Sunday, and we all know whose going to win, but it's a great time for us in regards to displays in most supermarkets, club stores across America today we have Super Bowl displays. And over 46 million pounds of chips are consumed during the Super Bowl, 177 million pounds of tortilla chips, popcorn, pretzels and that's where Sensible Portions, that's where our Garden of Eatin', that's where our Little Bear and Burritos popcorn or Boston platform will come in and over 1.25 billion pounds of chicken wings and Hain Pure Protein with their FreeBird chicken wings will be out there being sold throughout the United States. So a big time for us and we are well prepared for a great Super Bowl event.

Let's look at our Canadian business, our Canadian business we completed Europe's Best October 5 we fully integrated and really like what we see there. Our growth in overall Canada was up 5%, and from our Europe's best business we picked up one of the major accounts which was lost prior and we look to grow that good strong growth on our Terra Chips. Greek Gods, which we've introduced in Canada was up over 115%, Sensible Portion strong. So we're seeing good growth in Canada and Whole Foods has opened up a new store and we look forward to a lot more growth coming out of our Canadian market. Our European market, and with a lot of the turbulence in Europe, was flat for the quarter. And I think flat today in a turbulent market is pretty good. But at the same time, we have a lot of plans for products that we will introduce. But we still saw growth on Dream, our Dream brand, our Terra brand and our Lima brand. We've introduced a lot of new non-dairy products. We introduced a lot of new Lima products and we look to see some good growth coming from that in the second half.

In regards to Hain Protein, protein business which we own 49%, it was a strong selling season during Thanksgiving. The overall business up 13%. Turkey up 13%, chicken up over 14%, where it shows the consumer today wants either organic or antibiotic free products and are really focused on it, and during Thanksgiving, we sold over 1 million turkeys of Plainville turkeys.

Really good focus on our deli business, up 19%, and we're really growing in accounts that are serving-- are focused on animal welfare, like a Chipotle, a Panera, a Whole Foods type of account and really it shows the consumer wants a high-quality protein product and they're really focused on a FreeBird or Plainville product.

In regards to the UK, we completed our Daniels acquisition two months -- or at the end of October or early November, so we really only owned it for two months. Our sales were up there, our Fakenham business up 19.4% if you put it together with our Food-to-Go was up 5%. Really got a good focus on integrating the Daniels together with our current business and we like what we see. We have Rob Burnett on the phone today who is our CEO of Hain Daniels, really good team that has taken over our Luton and our Fakenham facility and have started to focus on integration, procurement, distribution, sales opportunities. The opportunities at Luton are tremendous with that team and we've got rid of unprofitable customers and we'll continue to do that.

But if we really come back and look at our business, as we look to move to new customers, our opportunities with Food-to-Go, our juices, sandwiches, soups, desserts and fruit, and as we look to introduce Sensible Portion and Greek Gods, that will happen there very shortly, we feel there's even a bigger selection there. So far we've integrated with people, we've cut about 18 people, we have about 20, 25 more to go where we integrate backrooms. But right now it's the whole focus on food cost and purchasing and distribution. And there's a lot of customers, whether it's Club store customers, whether it's Food-to-Go, whether it's food service, and other retailers that we have really come in there with a whole program, and they've come back to us in regards to gluten-free types of products, other types of soup products, and one of the big things that we're excited about is how we bring New Covent Garden Soups to the US, just as they're excited about bringing Greek Gods and Sensible Portions to the UK.

Asia and I'm fresh with Asia because I had all our Asian group in this week. And our Hain Hutchison business grew 26% in 2011. In 2010 we're only in three countries, at the end of 2011, we're in seven Asia countries. We've already gained a 15% soup share from Swanson's in Asia and we'll continue to take share away. It's introducing the Asians to a product that does not have MSG, of course, and we do have some work to do. But we're pretty excited on what the growth opportunities are. There's a good base business that will grow just by shipping products here from the US. We will look at putting a couple of our own plants over there and snacks and personal care and then we'll look at acquisitions and that should get us to a number that we think Asia should be and we're pretty excited about that.

As we look at acquisitions and where else the Company should be moving, Australia with a good young population, very similar to the UK, very close to the Asian markets, Eastern Europe opportunities, Middle East. So there is a lot of expansion opportunities for us, but more -- most important here is the US. And we think today with the US base business we have with the US businesses that are growing, our top 10 customers have grown over double digits and our top 10 customers, which are customers that are growing both in consumption and store count and are bringing more and more natural products into the store, is where our opportunities are. So there is quite a few acquisitions that we're really focused on as we grow into the US.

But John will take you through what they've done on their sales organization to restructure, to really implement that growth and really drive distribution. So good exciting time at Hain and it's great to report the strongest quarter within the history of the Company. With that I'll turn it over to John and he'll take you through the business.

Thank you, Irwin. Good afternoon, Hain Celestial US had a very strong Q2. We had many highlights in the quarter starting with our 9% US sales growth. This is driven by strong gains across all US units, grocery and snacks, personal care and Celestial Seasonings. We also had Q2 consumption growth of 7% which was driven by gains across the portfolio. This growth was led by 12 brands with double digit or high single-digit consumption increases. Importantly, our US grocery channel consumption was up again and it was up 6% versus year ago marking six consecutive quarters of growth in this important channel, which accounts for 40% of our measured consumption.

Also in Q2, our US gross margin was up 10 bips despite absorbing over 6% in commodity and fuel-driven inflation. We were able to offset this inflation with productivity savings and our July 1 price increase. Additionally in the quarter, our SG&A as a percent of sales was down 40 bips, reflecting a sales increase and better leverage of our marketing, trade and headcount investment. And finally our US inventory, and this is a really great number to see, our US inventory was down 6%, or $8 million, while still supporting 9% sales growth and having very strong service levels.

Now as we look at the second half of our FY '12, we-- look we continue to be very bullish about the US business. We continue to see strong momentum to across the business and we believe it's sustainable, and I'll give you four good factors -- four good reasons why we believe that. The first reason is what I just talked to you about in terms of consumption. Q2 was our eighth consecutive quarter of consumption growth. Importantly our two-year comps are showing double-digit growth.

The second reason is our positioning relative to inflation. As I said in the last quarter, we're well positioned to meet our supply needs for our key organic and natural commodities. We are long where the crop is in short supply or where we believe we had an opportunity to buy below standard, and we are short on commodities in ample supply where we think the market may move further downward. But just as importantly, we're well positioned to offset the significant year-on-year commodity inflation that we're currently facing. Look, I know commodities have softened up recently, but they are still up very strongly versus a year ago, upwards to 30%.

So the way we offset this is first with our July 1 price increase, which has been accepted across all channels and will be fully realized in second half '12. And second, our productivity function is in high gear yielding $7 million in savings in the first half '12 with initiatives like our snacks packaging procurement consolidation, our new Earth's Best Midwest distribution center and the increased throughput that we're seeing in our plants.

Now the third reason we feel bullish about the second half is the initial results from our -- what we talked about our US sales force reinvention. As I mentioned in the last quarter's call, we are reinventing the US sales function to make it more customer centric for our evolving customer base. Now look, this reinvention is a mandate to ensure profitable growth for our US business in all channels, and the channels are evolving from natural to conventional to etailers, and in a very short time we've made significant progress already. We now have seven key account teams, co-located with our seven leading retailers. These team members, many of whom we've recruited into the Company, represented talent upgrade for the Hain sales organization. They are generating new sales opportunities that previously we would not have been able to leverage.

But more importantly, we're seeing a quantifiable benefit from our sales reinvention. Specifically, Q2 Hain Nielsen distribution trends improved 200 basis points over our 52-week trend. 200 basis points, that's a significant improvement. And this improvement was across our entire product line, not just our course use. Improvements like this confirm our sales organization direction and strategy and will continue to drive future growth. But we firmly believe that with our reinvested -- reinvented customer centric sales organization, our great portfolio of leading natural and organic brands and our best-in-class category management insight group, we offer retailers the best opportunity to drive natural and organic sales.

The final reason we're bullish about the second half is the continued positive response to our FY '12 innovations. Now normally I would tell you all about the great new products we're readying for March Expo West, and believe me we have plenty of them, but today, I'm going to focus on two new product launches, our Sesame Street Yogurt Smoothies and our Earth's Best Puree, both pouch products that were launched in the last six months. And these new products lines are on a run rate to do over $20 million in FY '12 and we're just getting started with our distribution in the grocery channel. And the other point is these sales are not cannibalizing Earth's Best jars but are coming at the expense of our baby food competitors.

Now our success with these product--these pouch launches have led us to develop three other new pouch lines that will expand pouch consumption demographics. Pouch does not only have to be an instant or baby product. Now I'm not going to tell you what these launches are, you have to be patient, but we will unveil these at Expo West. But look we think the pouch is here to stay and offers even more innovation, scale and margin opportunities for Hain Celestial. We're in the process of installing pouch production lines in our Westchester plant to fully leverage these opportunities. Our new pouch lines will be up in FY '13 and this will allow us to further innovate across all of our brands using the pouch packaging format where appropriate and while improving our cost of margins. So as you can see, our pouch launches are the best kind of innovation, as they allow us to drive top line growth, expand our distribution, generate innovation across multiple brands and product lines and improve our production with internal-- improve our margins with internal production.

So in summary, Q2 was a very strong quarter for Hain Celestial US highlighted by 9% top line growth, gross margin improvement despite absorbing over 6% inflation, lower SG&A and double-digit income growth. And look, we continue to be bullish about our year to go prospects given our strong consumption trends, our position relative to commodity inflation, our initial results from our reinvented US sales organization and the strong response to our F '12 innovations, particularly our new pouch products. With that, I'll turn it over to Ira Lamel.

Thanks, John, good afternoon, everyone. As we said on our press release, all of our income sales and EPS numbers are the highest in our history. Net income in the second quarter this year was a record $20 million compared to $16.3 million in last year's quarter. We earned $0.44 per diluted share on a GAAP basis this quarter compared to $0.37 per diluted share in last year's quarter. Adjusted net income was $23.5 million compared to $17.5 million, improving by 34.5%. Adjusted earnings was $0.52 per diluted share compared to $0.39 per share in last year's quarter, improving by 33.3%. Our adjustments to earnings are virtually all acquisition-related fees and expenses with only minor integration costs incurred in the first two months since our acquisition. These adjustments totaled $5.5 million before tax, or $0.08 per share.

Net sales reached the highest level in our history coming in at $385.6 million, an increase of 32.1% compared to $291.9 million last year. We saw strong increases in sales across our reporting units coupled with sales contributed by our acquisitions. Sales from our recent Daniels Group acquisition are included only for two of the three months in our quarter. When we raised our guidance after our acquisition of Daniels, we also updated our expectations for metrics. As expected, with that acquisition, we realized changes in the Company's gross profit and selling, general and administrative expenses in the second quarter.

Gross profit in the second quarter was 27.4% of net sales, while selling, general and administrative expenses were 17% of net sales. As a result, our operating margin before acquisition-related expenses was virtually flat compared to the prior year. Input cost inflation amounted to 6.1% in the second quarter this year measured against the second quarter of the prior year. Inflation was offset by the impact of pricing actions we affected at the beginning of the fiscal year, productivity improvements and a better mix of sales at our pre-acquisition units.

Operating income for the quarter was $34.9 million, or 9.1% on a GAAP basis, compared to $29.7 million last year. On an adjusted basis, operating income was $40.1 million this year, increasing 30.9% from $30.7 million last year. Additionally, and again as expected when we gave guidance at the time of our acquisition, the Company's effective tax rate declined to 36.4% in the quarter, compared to 39.6% in the prior year. Depreciation and amortization in this year's quarter was $8.3 million as compared to $5.8 million in the prior year's quarter with the increase coming almost entirely from acquisition. Stock compensation in the quarter was $2 million as compared to $2.2 million last year.

As you can see in our press release, we've added information about our EBITDA performance. We're using a traditional definition of EBITDA including stock compensation and have added back acquisition-related expenses to arrive at adjusted EBITDA. For this quarter, adjusted EBITDA approached $50 million, coming in just short at $49.8 million. This is a 29.4% increase over last year's $38.5 million. For the trailing 12 months ended December 31, 2011, our adjusted EBITDA improved by 33.6% to $156.3 million from the prior 12-month period's $117 million. For the trailing 12 months through December 31, operating free cash flow was $72.3 million this year compared to $59.6 million for the comparable 12 months of the prior year, an improvement of $12.7 million, or 21.3% this year.

Our balance sheet continues to be a strong one. Our working capital was $235.9 million, with a current ratio of 2.1 to 1 at December 31. Our stockholders equity was $895.6 million. Our debt as a percentage of equity is at 50.3%, and debt to total capitalization is now at 33.5%. Total debt at the end of the quarter was $450.8 million, with one-third of our debt carrying interest at a fixed rate and two-thirds at floating rates. At the time of our acquisition of Daniels, we drew down $235 million of floating rate debt under our credit facility, and as of today, we have already repaid $20 million of that debt.

Day sales outstanding came in at 42 days. Inventory is at 60 days, and of course that implies a six times turn in our inventories. Payables are at 38 days. That results in a cash conversion cycle of 64 days which is a 14-day improvement as compared to our June 30 year end and a 12-day improvement compared to December a year ago.

As you saw in our press release, we've confirmed -- reconfirmed our guidance for the full fiscal year 2012 with sales expected to come in the range of 1.445-- excuse me, $1.455 billion and $1.48 billion. We anticipate earnings per diluted share will come in at $1.63 to $1.73 after adjustments for acquisition expenses and integration costs. At this point, let's open it up for questions.

(Operator Instructions) Greg Badishkanian with Citigroup.

Great, great job guys in the quarter. Just had two questions if I could, first one is just with consumption running again 7%, similar to last quarter, what you think is driving that and also the-- you had warm weather negatively impact you but yet tea and soup were up I think high single-digit consumption, are you gaining share there or is-- are the categories holding up?

Greg, I think it's a couple of things. Number one, we're definitely gaining share. We're taking share away from conventional products, conventional brands. I think we have really done, John as you have heard him say before in regards to his new sales organization, his structure, we're gaining new distribution, better displays and a major focus on trade teams and going in and selling. And you heard what I said before, of our top 10 accounts we're growing over double digits with them so it's a major focus on that.

The other big thing that is happening out there, when a major retailer today wants to really grow natural organic with the sales team and the professional sales team and the sales team and the tools the sales teams has today, and the product line and the depth, we're the one going in there and becoming a category manager. So, I think all around it's the consumer being more and more awareness. I think the consumer trading up and wanting more and more natural organic and moving off conventional products, and I really say our sales team has done a good job at execution and of course, having great brands with great innovative products out there.

Good, thank you. And as a follow up, did the sales momentum for-- do you think for the industry and for Hain, did that continue into January or any drop off or is it pretty consistent?

It's pretty consistent.

We -- nothing has dropped off and I think what you said before is interesting. Even though with warmer weather in the Northeast, and not only the Northeast doesn't make up the world, but we're still seeing good consumption out there and again where at other times when we've seen warm weather, we've seen consumption fall off. But I really think we're getting a lot of consumption coming over from conventional products.

Great, thanks, and nice job, again.

Thank you, Greg.

Ed Aaron with RBC Capital Markets

Great, afternoon everybody, thanks for taking the question. John, I wanted to follow up on a comment that you made in your prepared remarks about I think it was something on the lines of 200 basis points of distribution growth in the US business, can you just maybe elaborate on that a little bit and talk about what drove that?

Yes, Ed, what I said was we saw a 200 basis point improvement in our 12 week-- our Q2 12-week consumption distribution trends versus our 52-week. And you know what, it's because we actually drove some pretty significant distribution gains on Greek Gods, on Sensible Portions, as well as on our core business. We're seeing nice gains on Garden of Eatin' and some of the other brands in the portfolio and those are driving -- those have lifted the entire portfolio to positive distribution trends.

And just add to that, Ed, when you see the growth in consumption growth on Arrowhead Mills or DeBoles, Health Valley Soups, and again, as they were not so much a rocket program, but seeing high single-digit consumption growth on that, that is definitely what's helping and driving that growth.

Great, and then just, Irwin kind of a broader question, you're building a much bigger business now with the kind of real global footprint, and as you kind of think about the change, do you feel the need for any kind of longer term infrastructure investment, whether it's systems or otherwise, to kind of support that type of global growth similar to what some of the bigger food companies do?

Absolutely. I think it comes back and as right now as we're looking to pull all of our teams together, we're looking at a new innovation center in regards to R&D standpoint, we're looking at multiple from a packaging and packaging engineers, from a systems both the UK and US is something that we're looking at today. And listen, I just keep going back and pointing to what John Carroll and Peter Burns and the team has done in regards to the sales organization and what we pulled together and we had sales people with us in the beginning and we've had to make some changes there and what we're seeing happening there. So, again there's a model around here, it's competency not loyalty, and at the other hand, we know where we need to put the infrastructure in to take this Company to a $3 billion, $4 billion Company which is definitely in sight for us.

Great, thanks, everybody.

Thank you.

Scott Mushkin with Jefferies & Company.

Hi, guys, thanks for taking my questions. So the 9% growth, John, that you talked about, there's no acquisitions in there so is that a good organic number, is that correct or not correct?

It's clean. It's year on year same lines.

Right, that's what I thought, okay good, I just wanted to -- and then I guess as I think about the growth which clearly is incredibly strong, you're talking about distribution improvements, you're doing a big Super Bowl promotion I think I guess, is that your first year I guess that's part my question? But the real question for me is when you look at particularly the US business, you could say that you're somewhat at an inflection point of growth where growth is -- could really accelerate over the next couple of years and it is kind of like what Ed was talking about, but do you need extra brand support, where are we in that process? I guess the sales organization was maybe step one, but kind of where are your guys heads if we do you see what looks to be maybe a building momentum and growth here?

I'll go and then I'll let John touch on it. Number one, let's come back and start looking us as a global Company and just owning Daniels for two months and looking at Greek Gods and being ready to introduce Greek Gods by May in the UK is something substantial and the same with Canada. And with that, Greek Gods will become over $100 million business if you expand there with the growth and it was $10 million, $12 million business when we acquired it. If you come back and look at Sensible Portions and basically it was a Club store business when we acquired it, now how we expand it into groceries and how we expanded it into up and down the street business. And Sensible Portions has tremendous opportunities, it's growing in the UK and growing within Europe.

So from a standpoint there, Scott, of how we build our global brands and bring in New Covent Gardens here where I think there's tremendous opportunity for a refrigerated fresh ready-to-eat soup. We've had to go through a major reformulation on all of our personal care products to conform to the new standards for Whole Foods from an NSF standpoint and a much better product than what we've been able to do there. So from a Company standpoint, what we're able to do, how we're trying to take our products into a much bigger scale, and that's with major major retailers today wanting our products.

On the other hand, listen, you heard what I said before on consumption of 177 million pounds or 26 million pounds of potato chips or pretzels or Sensible Portions, Super Bowl actually next to Thanksgiving is one of the most -- is the second most celebrated party type that happens in the US and why not being eating healthy snacks, healthy chicken wings, healthy chili, so you walk into most supermarkets today, you're going to see whether it's Garden of Eatin' tortilla chips, et cetera. So we did stuff at Super Bowl in earlier years and now we're focused on it. Listen, we dropped three FSIs on Celestial Seasonings in October, November, December to drive consumption through and even with a warm quarter, you see what the consumption numbers are.

So it's about distribution, it's about global brands, it's about knowing our consumer and about really partnering with our retailer and what our marketing group is doing today in regards to social networking and talking to our consumers, we get 9.5 million moms a month that visit our Earth's Best website. We have a marketing group that is on Facebook and talking to our consumers all the time. So I mean, that's what we're doing and that's what's driving our brand awareness and that's what is really driving our consumption. And again, the consumers willing to pay a little more today for a better for you product.

And so just a follow up, and that probably wasn't the most eloquently asked question, but I guess my thought processes here is if 9 becomes 12, can you guys handle that, is that a big deal or is that like no worries, we got the infrastructure, we have what we need to kind of get that done if we do see a stepped up acceleration, which I think we could so I just, --

Scott, bring it on, we're ready for it, man.

Scott, I'd point this out, we did 9% grow this quarter and we took down our inventories by 6%. Okay, so, and we have the service levels to do it. We've got the organization, the group and the structure here to keep driving growth.

And Scott, we know that the consumer's going to become more and more educated on healthy food. It's not a fad, not a trend, and every day there is more and more in the media in regards to health and nutrition, so am I here projecting it going to 12, is there good growth numbers out there? Is there a long runway? Is there more and more Whole Foods stores opening up? Is there more and more mass-market selling more and more natural products? Last year this time, or two years ago, we were seeing grocery stores not growing in natural at all. So you're really seeing great growth within natural now. So are we ready for it? As you heard me say before bring it on we have an unbelievable Management team that absolutely can handle it.

Okay, and if I just one more then I'll yield, here. Another big opportunity I think for you guys and you touched on it Irwin a little bit is bringing in the fresh chilled business here to the US. Where are you in that process because I actually agree with you, I think if you look at the soup category in particular, it's-- Campbell's problems aren't as much related to soup as they are to canned soup, so maybe you can kind of give us an idea of where you think that business could be in the US next year?

Well, I think the good news is this year. We have the number one selling fresh soup today in the UK or probably in Europe. We have our own plant. We have our own people on the ground that know how to do it. No different than how are we introducing Greek Gods into the UK and Europe. We're using all of the intel, were using our people here to help with that. So, Scott, we're all over it, not going to give you away all our secrets, but we're using a lot of the UK group to help us introduce it here. And listen everybody has come to us and ask us when they see the acquisition when can we get it here.

Next year is that an expectation or is that too soon?

I would like to have it here-- I'd love to have it here for February season, Scott, but unfortunately there's different technology, there's just different manufacturing processes, there's shelf life and we want to make sure we perfect it before we get it here. But, it is a high, high, high priority.

Great, thanks for taking the time to answer my questions.

Thank you, Scott.

Amit Sharma with BMO Capital Markets

Wanted to just quickly, Daniel, have you -- are you going to give out what (inaudible) sales they had in the quarter?

(Inaudible) sales in the quarter.

Sure, I mean we can break it out and give it to you.

Just hang in there a one second, Amit.

Okay.

No, just the whole thing.

The whole thing, don't break it down into-- give us the whole thing.

Amit, (multiple speakers) do you have another question? Amit, it's about $60 million in the quarter.

Got it, okay. And you've owned this business for about three months now, any--

Amit, two months. (multiple speakers)

So given that any positive or negative surprises in terms of what you're seeing in the category or the level of investment that you might have to make or the level of synergies that you're expecting going in? Any delta versus what you saw initially?

Listen, I think I like what I saw -- I've seen. And Rob is on the phone. Number one, I really feel-- and to step back for a second, as you heard me say before, we had a 55 million pound business within the UK. And not acquiring Daniels, and that's not why I acquired it, we would not have got scale. So acquiring Daniels has now given us substantial scale within the UK, has given us substantial awareness of who Hain is with a lot of the retailers. Without mentioning retailers, Rob and I are in the UK within the next couple of weeks, having multiple meetings on expansion of some of the Hain products that are here today and some of the Daniel products that other accounts that they have not been in or other products of Daniels that have not been in those accounts. So that's number one.

Number two is with Rob and his team taking over our current business there, we're going to get tremendous amount of efficiencies, tremendous amount of purchasing, tremendous amount of distribution opportunities, and there's a good reduction in headcount. Number three, we talked about products from the UK coming here. We're exciting about Greek Gods and Sensible Portions going there. And that's the UK where there's 60 million people. There is a big opportunity to expand New Covent Garden's into-- additionally into Europe. We do about EUR5 million, EUR6 million today throughout Europe from Daniels, tremendous expansion there. And as we look at Western Europe and we look at Australia, these are products that are going to be wanted around the world as I showed them to our Asian partner that was in here yesterday the exact same thing.

So, is there some operation pieces that we got to go look at, there's some distribution pieces, absolutely. Is there some capital that we're willing to invest, whether it's partnering with certain customers, absolutely. But all in all, I think it's-- will be a great acquisition for Hain. As I've said, we really acquired a superior Management team. We've acquired some great brands. We've acquired products that are in vogue today that the consumer want. We've really acquired a partner with a good diversified customer list. So I'm feeling good.

And just one quick on the US, I mean clearly tremendous growth story here. One of the reasons -- one of the cautions you get from investors is is this sustainable and you put a good case of it. My question is, do you look at price gap between your product line and conventional products in your categories? Is that gap narrowed over time, or expanded, or is that part of the reason why you are seeing such tremendous growth in these categories when conventional is not growing?

Well, I think conventional is not growing. I think unfortunately, today, America has gotten separated into a low-end consumer and a high-end consumer. And the consumer that can afford our product is buying our product and fortunately for us, I think that that's the consumer, maybe it's the biggest part of the population or the 1%. But what I come back with today is this here. There is more and more consumers who are eating at home and are willing to pay a little higher price for better products.

And just a perfect example of that is Earth's Best baby food, there is the baby rate in the US is down 2.3%. That other big baby food Company that starts with a G, I mean their consumptions are down and it's not that the baby rate is down. At the same time you heard me take you through Protein numbers during Thanksgiving. And a few years ago, it was difficult to sell the antibiotic free and organic turkeys. So it's showing I mean where the consumer is headed today and the consumer will eat healthier products. Come back and look at consumption today and organic growth at retailers like Whole Foods and retailers that are selling natural organic products and that shows you where the consumers are shopping.

Great, thank you. And Irwin, I'm going with your pick for the Super Bowl, too.

But you better buy my products while you're watching the Super Bowl, okay.

Always, thank you.

You better have Garden of Eatin', Terra Chips and Sensible Portions and whatever tea you want, or beer.

Andrew Wolf with BB&T.

So the 9% US growth was a little slower than last quarter and consumption was the same, and I think John when I asked you last quarter you said it was largely to do with better growth in non-measured channels and new distribution gains that may not have got into the numbers, yet. Could you kind of break that out? And I'm also thinking perhaps, now that you've had a chance to look at them, perhaps last quarter in Q1, there might have been some folks, retailers or others buying in front of your price increase, maybe that skewed that number up and--

Andrew, here this is John, the-- let's do the 7% to 9%, okay. 7% consumption, 9% growth for us here in this quarter. The key is non-measured channels going faster, and too I'd pump out-- and two customers I'd pump out to you are Amazon and Trader Joe's in addition to new product pipeline sales. So that's the bridge between 7% and 9%.

The bridge from 11% manufacturers sales growth in Q1 versus 9% this quarter is really simple. It is lower, where we call our industrial product sales, which are sales that we make out of some of our factories to other companies, it is not a high margin business. And the other one is some discontinuations we did on Sensible Portions on products that were not hitting our margin targets specifically, some private label products.

Got it, and did you also turn on the promotions spigot this quarter versus last quarter which also might have had a little swing affect?

The promotion was pretty comparable with the exception of Celestial where we front loaded our FSI schedule and our sales promotion schedules.

And just one other question on back to Daniels, the sales side sounds like it's right on where you were guided to, could you comment on how the earnings accretion in the quarter is versus what you were looking for? And also, the only other thing I saw was a $50 million jump sequentially in the receivables. I know sometimes seasonally this can be a bigger quarter, but is that mainly due to Daniels? And are the terms in the UK similar to what we see in the US or the retailers get better terms there?

The accretion for Daniels was right on what our expectations are, or were when we provided the guidance three months ago when we did the deal. So that's coming right in line and that's one of the major reasons why we see our guidance holding. As far as receivables, terms in the UK are a little bit longer than our terms here in the US. Typically we sell at 30 days here in the US and the UK it's typically 60. So that's a little bit longer. One of the big things in bringing on Daniels in cash conversion was the fact that their inventory is chilled, it's fresh inventory and that certainly helped to bring our inventory days down during the period.

Okay, great. Well thanks and congrats on the quarter.

Thank you, Andy.

Andrew Lazar with Barclays Capital

Just two quick things. First would be as you make your forays into a lot of these sort of alternative or new distribution channels for you, are you able to do it or manage it in a way that is fairly at least margin neutral to the organization? It seems like you have, but I ask because I've always thought that to be the case, but we've had an example or two here from other companies admittedly one in private label that has been unable to sort of do that as they've gone to these alternative channels.

I step back for a second, I think there's a couple of things. Number one, that is not where we're selling our product and that is not where our growth is coming from. And as I said before, within our top 10 customers, we're up double digits, there. So I think it comes back, if you don't have-- if you have mature customers and you got to go to other channels, you're going to sell at a price and it's going to be margin dilutive, and that's not at all where we're going, Andrew. And you heard John talk about two of them on his last question.

Yes.

So we see a lot of growth in our traditional channels and it's pretty obvious who our number one customer is, but we see right behind that a lot of other growth. And if you come back and look at Hain and somebody was asking me this before, if three or four years ago, 30%, 40% of us were going to natural food stores, that has completely reversed today, and it's probably 70% going through more and more mass market in supermarkets and online like Amazon and 30% going through natural food stores and supernaturals. But supernaturals continue to open up stores and more and more consumers are shopping at supernaturals.

Got it, thank you. And then in terms of the sales force work that you've done, is it more one or the other of these things that it's impacting or is it really all? In other words is it-- is the effort increasing shelf space for your overall categories at your key retailers where you've got these co-located account teams or is it more facings for Hain specifically or just better returns on a lot of your sort of merchandising and promotional programs? I mean I assume it's some combination of all, but I'm curious if it's one of these or one that I didn't mention that's sort of disproportionately more advantaged by doing it some of the work that you've done around this. And then how many, I'm assuming it's not many, if any, but how many of what you'd consider your core competitors in your key accounts either have this sort of setup or have the ability to ultimately really do it or have the scale to do it, I assume it's not many, but I'm curious.

Well here in regard to what we're focused on, we're focused on driving distribution and making our promotions more effected and more targeted, and that's the key on those key accounts that we're driving. The other thing is, Andrew, we've really focused on who the key accounts are as opposed to just spreading money across the US. In regard to other companies able to do this, I really believe it's a function of scale to be able to afford this. And so there's not a lot other than the CPG guys who are doing it in the conventional CPG guys as opposed to the national and organic folks.

And I think, Andrew, as John said, is scale and the products, which allows us to go in there and be the category manager. But just as important, we have our own retail team on the street that calls on natural food stores today. And we are probably one of the only companies out there that has a retail group, whether it's doing store resets, going in and doing reordering that is actually calling on natural food stores.

Great, good, thank you.

Thank you.

(Operator Instructions) Sean Naughton with Piper Jaffray

Hi, thanks for taking my question and congrats on being able to expand the margins in the US business.

Thank you.

Yes, when you step back and you think about your business overall, what do you think the opportunity is over the long run for an operating margin target for you guys, how do you think about that?

So, I think, Sean, we look at it a couple ways and I come back today and I look at our EBITDA margin, and Ira took you through our EBITDA margin where it's been the greatest growth within the Company. But we should be at 14% to 16% and that is our objective and I think as we go through acquisitions, and you look at today at our procurement whether it's Europe's Best, our Daniels business, all are US and just the amount of countries that now we're procuring and buying through. Jim Meiers has a group together on a global procurement group now looking to buy and take costs out. We're looking for worldwide this year somewhere around $18 million to $20 million of productivity. At the end of the day you heard what John said before about a sales group and we'll look to carbon copy that around the world.

So there's a lot of integration, there's a lot of procurement, there's a lot of manufacturing that we're going to consolidate to do. So with growth, you can go ahead and do these things. So 14% to 16% is something that-- 17% is something that we're focused on. My guys are looking at me, I was going to say 20%, but they're looking at me like I'm crazy, but-- (laughter)

That's helpful, thanks. The other thing I was going to ask you about is just when you look at your personal care portion of your business, I realize it's a smaller portion, but-- and you've obviously done some things there with regards to distribution in Whole Foods. Where do you see the-- are you seeing gains in that particular category from the conventional side and are you happy with where the product is today and is it still an area of opportunity for you in the near term here?

Sean, this is John, absolutely it's an area of opportunity for us. When you think about personal care, it is analogous to where grocery was 10 years ago. So when you -- it's very strongly developed in the natural channel and in the supernaturals. But this development beyond that is not very strong and development within natural still has a lot of room to go. Irwin's quoted statistics about how many Whole Foods customers go into the Whole Body section. So look we feel like it is the natural evolution from food products and we still believe that this is going to be a very nice business for us and we think we've got a platform to drive it even further.

And, Sean, everybody wants to look good, everybody wants to feel good and everybody wants to stay younger, and our consumer on this here are predominantly female shopper with more and more disposable income today is where tremendous growth will come from in this category. And I think as you come back now there was a tremendous amount of confusion in this category before, what was organic, what was natural and never very clear. And now that the standards are set, I think the growth here is just tremendous.

That's helpful. And then just lastly, on the growth, is it still fair to think about the growth that you're seeing is 70% comp doors and then 30% distribution? I think that you mentioned that on the last call, is that still a fair way to think about the growth that you guys are getting today?

I think that's exactly where we're still at is comp growth, new distribution, new products, I mean worldwide, we probably introduced close to $40 million or $50 million of new products which is innovation with our sales organization. Comp growth, new distribution growth is where it's coming from. And last but not least, we like when we see our growth retailers opening up more and more stores, because that contributes a lot to comp growth.

Absolutely. Okay, best of luck.

Thank you, Sean.

Wayne Archambo with Monarch Partners.

Irwin, how are you?

Hi, Wayne, how are you doing?

Good I--

I know you're a Giant fan.

I was going to say since you said you knew who was going to win, I guess I'll see you at next week's Patriot's parade, so that's good to know.

Can you make sure they serve Terra Chips and Garden of Eatin' there, we'll send you the red blues, okay.

I'm sure you'll be up in full gear, I'm sure, Irwin. (laughter) The prior gentleman mentioned personal care and I was going to follow up on that, I mean do you see any acquisitions in that area? You folks don't bring that up as much as you used to a few years ago, but do you see acquisitions or you just see yourself growing organically there?

Wayne, this is John, we're looking for both. We're-- look there's a lot of organic growth to go especially in terms of doors that these products aren't in. But there are some bolt-on opportunities that we'd like to figure out how to get into the Hain portfolio.

But Wayne, if we step back, if you take Alba, Avalon, JASON, Zia, Earth's Best line for kids that we created, and Queen Helene, which we see some great growth, I mean one of the problems are everybody with these bolt-on acquisitions think their multiples are in the hemisphere and we're stepping back and saying, we don't like multiples in the hemisphere when we're buying and how do we do it ourselves?

So absolutely, we'd love to be a buyer in this category and a perfect example is with Avalon and Alba what we're able to do, but we will not be in the hemisphere in multiples that will pay, we can create it ourselves. We have a tremendous facility in California, a good R&D team. And what John has done here is put a dedicated team on personal care that every morning when they wake up, that's all they do is focus on personal care. So we could easily take more on and integrate it, but we'll not overpay.

Hemisphere sounds like a sellers market to me. But with that California facility, what level of capacity you at out there?

Wayne, we're probably at about 60%, our volumes have grown, but Jim Meiers and his group have done a terrific job of increasing throughput. So we still have room to drive our own organic growth as well as to integrate an acquisition right into that facility.

Okay, John, thank you.

Wayne, since you got the last call, what are the odds on the game?

While the spread is three points, I'll be there myself, but these Giant fans are way too cocky for me, so I think it could go either way. It's going to be a close game.

All right, well we hope a lot of chips are sold, thank you, Wayne. With Wayne being our last question and ending with a New England fan, we don't have a Giant fan to end up, but hopefully we're all fans of Hain. Again, it is our second quarter, one of our biggest quarters in the year, our largest quarter within the year. But it's great to sit here and now reporting the largest quarter that we've ever reported within the history of the Company. And it's been 18 years in Hain coming together.

And we've had challenges along the way in building Hain, but all along the way we've maintained our brands, we've maintained our people, we've stuck to our strategy, we focused on our balance sheet, we've really delivered good quality products and we've stuck to what we've always said we want to manufacture, market and sell natural organic products. And thank God the consumers woke up and sort of said I want to eat or I want to use more natural organic products. And again whether it's gluten-free, whether it's lower sodium, whether it's non-dairy, whether it's healthier kids meals, whether it's Earth's Best, chlorine-free diapers, I could go on for the next 20 minutes about our products and the quality of our products and the ingredients, and we're well set to go to the next level of Hain.

With that, thank you very much for this afternoon and go both New England and the Giants, and just eat lots more chips and a lot of chili, a lot of chicken wings from FreeBird, drink our tea, we don't have a beer yet or a Kombucha and I will speak you really soon. Bye-bye.

This concludes today's Hain Celestial second-quarter fiscal year 2012 earnings conference call. You may now disconnect.