Hain Celestial Group Inc (HAIN) 2013 Q2 法說會逐字稿

Good afternoon. My name is Brittany, 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 2013 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 Celeste Anthes, you may begin your conference.

Thank you. Good afternoon and thank you all for joining us today, and welcome to the review of our second-quarter fiscal year 2013 results. We have several members of our management team here today to discuss our results -- Irwin Simon, our Founder, President, and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer; John Carroll, Executive Vice President and Chief Executive Offer Hain Celestial US; and Rob Burnett, Chief Executive Officer Hain Daniels.

Our discussion today will contain 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 2012 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 one 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. Irwin?

Thank you, Mary, and good afternoon. I hope everybody had an opportunity to look at our press release that was released at 4.00 today. And another record earnings quarter for Hain. If you come back, our sales were up -- our sales, $455.3 million versus $364.8 million, up 25%. Our gross margin, 28.7% versus 28.7% a year ago, and that is with higher commodity costs, some higher input costs but really how we focused on the margin. Our SG&A, 16.6% of sales versus 17.4% and which really shows how we are integrating the acquisitions; how we are really watching our costs, and how we are actually making a lot of these acquisitions work for us.

Our EBITDA, which -- and I've talked a lot about EBITDA, what I would like it to be is an objective of sales and $67.3 million, which is 15% of sales versus $49.7 million and up 35% versus a year ago. So some great EBITDA, and we're really hitting those metrics out there.

And an adjusted EPS of $0.72 versus $0.53, up 36%. So, as you can see, great numbers, great record earnings.

In the quarter, we really focused on sales. We really focused on profitable sales. And certain brands here in the US -- Rob will talk about what we did in the UK in regards to our ambient brands and how we focused on that and how we really looked at getting higher prices and less promotional products. If you really come back and look at our free cash, our free cash, $106.8 million, up 47%. So we are focused on cash and how we turn our inventories into cash and our cash conversion, and Ira will talk about that.

Let's talk about the quarter. It's hard to believe when we last did our earnings, here we were, sitting through a major hurricane, one of the worst hurricanes in 100 years here in the Northeast. A lot of stores closed. We lost a lot of shipping days with that, and we were able to overcome that. And John will talk about some of the effects of Sandy, but it's way behind us, and we filled a lot of shelves.

From an inventory, sales have been strong, and you heard about us having to do without stocks and inventory, and again, October, November, we had to build up our inventories on Arrowhead Mills, DeBoles and the whole gluten-free, our pouches, and back in December we are really back in stock. So we've had to overcome that and some shortfall in that in the quarter.

In the quarter, we closed on the premier acquisition of the brands. And we've owned it two months, and as I said before, when you can do all your due diligence you want before you acquire business, when you own it, you make a lot of decisions. And within two months, Rob and the team have made a lot of decisions going forward, a lot of the products that we will discontinue and rationalize the business, how we will focus on building the brands and how we will focus on really building that business out, both on our Hartley's brand, Sun-Pat brand, our Gale's brand and our Robertson brand and how we will also focus on building up the profitability of the plant.

We have had 16 brands in the quarter that are up double digits. We had three that are up high single digits; five up low single digits. John will talk about his Nielson numbers over two years, as you stack the number, how they are up.

And one of the things you come back and look at the whole food industry, in our AOC numbers, we are up 4 times in AOC channels what conventional foods are. So natural organic is growing, and it's a major part of the growth within food today, and the consumer is converting to more and more healthy foods.

And just some notable mentions, our Greek Gods yogurt, up 39%; our kiefer, lot of the new products, pretty excited about. Earth's Best and that is just getting back in back in shape with pouches up over 15% -- I'm not stealing your thunder, John. And Celestial Seasonings, we have had some of the strongest tea numbers that we've ever seen in the history of Celestial, and it's not because of the bad flu season or cold weather, it's just we have some great, great products out there.

On the other hand, hey, over $1 billion worth of potato chips are eaten during Super Bowl, and I know I was part of that, but Garden of Eatin' and Terra -- some good strong growth there.

We have some challenges also on the Rosetto business, which we are not focusing on promoting. Sales were off. Our soy milk business where we are focusing on rice and almond was down. And some of the things that we're doing, we have smaller brands in Nile Spice and Breadshop, that factor, our Martha Stewart cleaning products. And again, we're not focusing on those brands, and that's not where our growth is. We will put our money toward growth brands and the same with our private label business.

Our US business -- and, again, John will talk about it -- our growth was 9.2% or 9.4% and good margin growth and see some of the gains, distributions we are making, some of the things we're doing with new products, some of the exciting things in personal care -- why genetically-modified ingredients, the opportunity to be meat-free, gluten-free. And we will talk about BluePrint. We closed on BluePrint the end of December, and I've got to tell you, we've done a lot of exciting acquisitions, and the whole juice category, the whole juicing category, just a hot category today, a hot trend. We think we have a tremendous product. And January being a big slim-down month, and we saw some tremendous sales in January, and we continuously sees strong sales in January in the overall business.

So we're pretty excited about this and pretty excited about rolling the Juice, our Blueprint product, out to retail and rolling it out in Canada and in our UK business.

Looking at our Canadian business, our Canadian business is up strong. Greek Gods, Spectrum, our Dream business, our Celestial -- strong distribution in Loblaws and Walmart.

In Canada we also had some out of stocks that we had to deal with, and we will absolutely have that behind us.

Our protein business, which I've talked about before, up 9.5%, and we're also seeing some good growth in our Asian business with Hutchison Whampoa, and we continue to see that growth.

Europe, our sales in local currency up 8%, and strong sales from our Lima business, our Dream business, our Natumi business. We've really got our inventories and stock under control, and we are seeing some actually good growth in France with Danival, our Lima business. And Philippe and the team really got a good plan in place how we are going to grow through our natural food stores, but how we are ultimately going to get more and more into conventional stores.

We are opening a new non-dairy facility in April, which will give us capacity and a lot of efficiency and new products. We will roll out a lot of our non-dairy products. We have a strong dairy business in Europe today, and with our new non-dairy facility, allow us to roll out a lot more products and expand throughout Europe.

The European team will also take over Hartley's, Sun-Pat, and Robertson's, selling those in April. So it will give us some good opportunities for some of the products from the Premier acquisition.

Rob will discuss a lot with the UK. The UK was up 113%, which doubled the business with the acquisition. And again, we are focused on building brands here. We are focusing on profitable business. We are going to eliminate either private label SKUs; we are going to eliminate SKUs that are not profitable or losing money for us and we can do that now.

One of the things about the Premier business, we got Hartley's, Sun-Pat, Robertson's, that are all number one within their category. You've got Gale's that are number two in honey, but we have an opportunity to become number one. We have new Covent Garden Soup that is number one in soup and Love Tub. So a lot of opportunities to really focus on the UK business and we will go ahead and do it.

So opportunities in meat-free, gluten-free, the whole tempeh, health and snack foods, organic products, GMO, and raw. So we have the categories and the products, and you'll see it in the growth.

What I want to do is turn it over to John and he will tell you about the exciting things that have happened within the US. John?

Great. Thank you, Irwin. Good afternoon.

Q2 was a very strong quarter for Hain Celestial US. Key highlights from the quarter included our Q2 net sales of $280.4 million, up 9.4% versus year ago when adjusted for the transfer of Costco Canada, Sensible Portions sales to our Canadian operation. Importantly, all key businesses, grocery and snacks, personal care, Celestial Seasonings and Greek Gods, showed strong sales growth versus year ago, led by, as everyone already mentioned, Greek Gods with 39% increase.

Our latest 12-week Nielson all-outlets combined consumption growth was 7.5%, which was 4 times higher than the AOC total channel growth. This reflects continued Hain Celestial US consumption gains across all key measured channels. This growth was achieved even as we lapped a double-digit Q2 year-ago comp, resulting in a two-year stack consumption growth of over 18%. These results were driven by gains across the portfolio as we had 14 brands with double- or high-single-digit increases.

Also in Q2, our gross profit margin was up over 100 bps as we were able to offset about $4 million inflation with improved mix, productivity savings and favorable dairy costs.

And finally, and most importantly, in terms of financial metrics, our Q2 US operating income was $47.6 million, or 17% of sales, which is up 14%, or 85 bps respectively versus year ago.

Just another note, our US cash conversion cycle during this quarter was down 10 days, despite increasing our inventory to improve our customer service levels. We offset this inventory increase with higher sales, along with significant payables and receivables improvement.

Now, as we look forward to second half 2013, I want to start by briefly reviewing our US financial objectives. The US business model has consistently targeted and delivered against four key financial objectives. The first one is we look to drive mid- to high-single-digit topline growth. Secondly, we look to drive 50 to 100 bps of margin improvement across the middle of the P&L. This yields double-digit operating income growth, and then by working our cash conversion elements, we look to drive double-digit plus operating free cash flow improvement.

Our first-half results were consistent with these performance objectives. As for the first half of 2013, we had 9% adjusted topline growth, we had 90 bps gross margin improvement, 14% operating income growth, and 20%-plus operating free cash flow improvement. So, as we look at the second half, we continue to be optimistic about the US business, despite some tough second-half comps and some commodity headwinds. We continue to see strong momentum across the business, and we believe it is sustainable based on four key factors.

The first factor is our continued US consumption momentum. Q2 was our 12th consecutive quarter of consumption growth. Our Q2 year-ago comp was a high-double digit number, and we still drove strong consumption gains, in fact, 4 times that of the category growth.

We feel confident that our consumption trends will continue given the six new products that we will introduce at Expo West; the strong sales growth we've already experienced at Blueprint; and most importantly, our second factor, which is our continued AOC distribution growth. Our Q2 AOC distribution was up over 5% versus year ago. This was an acceleration of our distribution growth versus Q1 as we continue to fill in the distribution white space at key customers. This growth was highlighted by distribution gains at AOC accounts such as Walmart, Kroger, Safeway, Target, Publix, Sam's Club, and Giant Eagle.

The third factor that makes us optimistic about the second half is our improving customer service levels. Look, we've mentioned previously our growing US consumption challenged our capacity on some key brands like Earth's Best, MaraNatha, Terra, Arrowhead Mills and DeBoles. Our Q2 service levels improved 150 bps versus Q1 due to capacity initiatives on MaraNatha, Earth's Best pouches and Terra. But our second half forecast calls for an additional 400 to 500 bps improvement based on these capacity initiatives, which will significantly reduce our out of stocks and bring our service levels to the mid- to high-90s.

So the final reason we are optimistic about our second-half prospects is our proven productivity process. I mentioned earlier, we are encountering some second-half commodity headwinds. Second half almond and chia pricing will be up over 30% versus the first half, so not just versus year ago, versus the first half due to higher demand and lower crop yields. So we've already announced a price increase on our almond and chia products that will go into effect in the fourth quarter. But that will only offer us very limited relief. The key to offsetting these almonds and chia increases will be leveraging our proven productivity function for additional savings.

Our first-half productivity savings were over $12 million, up 25% versus year ago. These savings were driven by initiatives such as internal production of Earth's Best pouches, increased throughput at the Terra personal care and MaraNatha factories, and distribution network optimization.

We are executing against a full set of second-half productivity initiatives to deliver savings to help offset these commodity increases and to deliver our second-half financial objectives.

So to close, Q2 was a strong quarter for Hain Celestial US, highlighted by 9.4% top-line growth, margin expansion over 100 bps, 14% operating income growth, and increased operating free cash flow. And this is in line with seeing similar results for the whole first half. And we are optimistic about the second half of 2013 given our strong consumption trends, our robust new product pipeline, our growing distribution base, our improving service levels, our productivity function, and our exciting BluePrint acquisition, which, as I mentioned to you, is off to a fast start in January.

So now let me turn the call over to Rob Burnett in the UK.

Thanks, John, and good afternoon, everyone. Well, I'm pleased to report record sales and operating income from the UK. Sales were just over $120 million, up over 100% on last year, and operating income was up from $3.3 million last year to just over $12 million this time.

Our turnover in the quarter included just two months of sales from our new Ambient grocery brands acquired at the end of October. Now, whilst the income generation was very strong in the new grocery business, sales were a little bit below budget, a couple of main reasons. We saw at the end of December quite a lot of destocking from the retailers, and you can see that in terms of press releases that the retail trade in the UK had quite a tough time over Christmas.

We also suffered a bit from lower sales of Christmas condiments and seasonal lines from the new Premier business. But probably more importantly, when we took over the business, we initiated a drawback of deep-cut promotional activity. We cut back on activities that the previous owner now had been doing, and we concentrated on bringing value to the jam category, in particular, through higher ticket prices. This has been really well received by customers, and we will continue to concentrate on eliminating low margin activity and products.

Three of the newly-acquired Ambient grocery brands were up over double-digit versus last year. That being Sun-Pat peanut better, up 16% in the quarter; Hartley's dessert pots, up 17% in the quarter; and the Cadbury's chocolate spread up 30% in the quarter.

And from the rest of our portfolio, we have strong growth from Love Tub desserts, up 58%, a real hot category for us; Linda McCartney meat-free, up 14%; and Cully & Sully, the Irish fresh soup leader, up over 10%. So that is six brands in double-digit, good double-digit growth.

We launched 122 new products in the second quarter, of which two-thirds of these were completely new and one-third were replacement line items, one in, one out. Notable branded launches included a range of four Greek Gods yogurts and Sainsbury's as an exclusive test, and the launch of Linda McCartney meat-free in the chilled category for sandwiches and weight loss. 54 of these 122 products came from the introduction of the newly-acquired Superior Fruit business, which replaces our sandwich business.

And to update everyone on the revenue synergies from Daniels and the Premier acquisitions, the new Linda McCarthy meat-free chilled range, as I mentioned, was introduced into Sainsbury's and weight loss in Q2. The range has now gone into Tesco and January of this year and will follow in Morrison's this month. This gives us full representation in all five major supermarkets in the UK, and we are supporting this launch in late January and February with the first-ever TV campaign for the brand, which features an animated re-telling of the Linda McCartney story and her life-long commitment to meat-free and vegetarian food. And as an added bonus, we have the soundtrack to the advertisement featuring a new recording from Paul McCartney. And as you can imagine, we've had a lot of great PR from this activity.

We've also just taken in January, a price increase on all our frozen meat-free products brand and on label which will support other initiatives, including re-signing some lower-margin product taken to improve the profitability of this business segment.

Four Greek Gods products were launched into Sainsbury's as an exclusive test in November. We are encouraged by the launch and plan to support the existing lines with a smaller size format and extend the range to a national launch in spring of this year.

And Irwin touched on this earlier, we have agreed to a five-year exclusivity deal with a major customer to provide an extensive range of desserts in our Fakenham facility. Plant configuration has progressed well this quarter, and we will soon be commissioning plant for the first-phase launch in May 2013. The new business will be launched in four phases through to February 2014 when the run rate is expected to be a little over GDP30 million or $45 million.

And now to update you on the integration of our recently-acquired grocery business, the transition is progressing very well. David Atkinson, a former senior member of Premier's management team, is leaving the Ambient grocery business for us, and he brings with him a wealth of knowledge and experience in this category. Customer response has been very positive as we've outlined our vision for the business and category. The customers are very keen to see us reinvigorate this category with new ways of working, increased product innovation, and of course, investment behind our portfolio of market-leading brands.

As I have briefly touched on, we've made an adjustment to the previous strategy of deep-cut promotions in jam, which is already paying dividends in terms of margin and customer confidence, and we've undertaken a review of low-margin products with a view toward eliminating sales that do not fit with our overall profit target.

We've already demonstrated in our new business our commitment to grow our brands by engaging in a media campaign in January and February to support our newly-designed low calorie range. And we kickstarted an extensive branded NPD program to support and extend the key brands in the portfolio, as well as introducing new healthier variants later this year.

We also plan to further support the key brands of Hartley's and Sun-Pat this fiscal with new media activity, the first of its kind for several years.

Looking forward, we expect to complement the acquired business by building up a portfolio of US Hain brands in the UK grocery markets, which will be managed by this new business unit. Work is underway to affect a launch into the branded free-form categories that will feature gluten-free and dairy-free. We are working closely with our European colleagues to take advantage of our superb non-dairy facility in Germany, and the retailers in the UK have strongly supported the concept of free-from and have generally dedicated an area in the store to various product ranges to have the free-from label and healthy eating claims. Gluten-free and dairy-free are the biggest elements of this category, and we will be playing in both areas.

Similarly, we believe there will be great potential for BluePrint broad juice product in this area.

So in summary, after only two months of the newly enlarged UK group, we are in good shape with our fantastic market-leading brands to capitalize on the many different growth opportunities in the forthcoming quarters, and we will enhance our position as the UK's leader in providing added-value fruit, vegetables and free-from products.

Ira?

Thank you, Rob. Thanks, Rob. Good afternoon, everyone.

Income from continuing operations in the second quarter this year was up 53% to a record second-quarter income of $32.2 million compared to $21.1 million in last year's quarter. We earned a record $0.68 per diluted share from continuing operations on a GAAP basis this year, an increase of 47.8% compared to $0.46 per diluted share in last year's quarter. Adjusted income from continuing operations was $34.2 million this year compared to $24.4 million last year, improving by 40.3%.

Adjusted earnings were $0.72 per diluted share compared to $0.53 per share in last year's quarter, improving by 35.8%. Our adjustments to earnings are from acquisition-related fees and expenses, including integration and restructuring charges of $3.8 million offset by a realized foreign currency gain of approximately $1.3 million on the advanced buying of British Pound Sterling to fund our acquisition of the Ambient Grocery group in the UK.

Net sales in the second quarter were $455.3 million, an increase of 24.8%, compared to the $364.8 million last year. We saw strong increases in sales across our US, Europe, and Canada segments, coupled with sales contributed by our acquisitions. Sales in our UK segment include our recent acquisitions of Ambient Grocery for two months, Daniels for the full quarter compared to two month last year, and Cully & Sully for the full quarter this year compared to none last year.

Gross profit at the second quarter was 28.72% of net sales, up from last year's 28.67%. We saw a favorable mix of sales in the quarter and were particularly pleased with margin performance given the lower margin rates in the UK segment, particularly with Daniels in for a full quarter this year as compared to two months last year. The improved gross profit was achieved in the face of input cost inflation amounting to approximately 1.8% in the second quarter this year, measured against the second quarter of last year.

Our SG&A for the quarter, excluding acquisition-related expenses and integration costs, was 16.64% compared to 17.3% in last year's second quarter. The 75 bps improvement comes from the continuing integration in the UK and from lower G&A rates in our recent acquisition of the Ambient Grocery brands from Daniels being in for the full quarter this year, along with our overall focus on leveraging our G&A base across all of our segments.

Operating income for the quarter was $51.2 million or 11.3% of net sales on a GAAP basis compared to $36.2 million last year or 9.9% of net sales. On an adjusted basis, operating income was 12.1% of sales at $55 million this year, increasing 33.8% from last year's $41.1 million or 11.3%.

Depreciation and amortization in this year's quarter was $9 million as compared to $8.3 million in the prior year with the increase coming principally from acquisitions. Stock compensation in the quarter was $3.7 million this year as compared to $2 million last year.

Our balance sheet continues to be a strong one. Our working capital was $279.4 million, showing a current ratio of 2.1 to 1.0 at December 31. Our stockholders equity was $1.1 billion. And our debt as a percentage of equity is at 57.9% and 36.7% as a percentage of total capitalization. Total debt at the end of the quarter was $640.5 million. Our debt increased with the acquisitions of the Ambient Grocery group and BluePrint as we drew down an additional $287 million in order to fund the cash needed for these acquisitions.

For the trailing 12 months through December 31, 2012, operating free cash flow improved by almost 48% to $106.8 million this year versus $72.3 million for the prior year's 12-month period. Significantly, operating free cash flow showed this improvement while we continued with the capital project we have discussed in the past, spending $25 million more on CapEx in the 12-month period this year versus the same period last year.

CapEx in the quarter this year amounted to $16.6 million.

Cash conversion year over year is down 11 days to 57 days on a consolidated basis. Days sales outstanding were 40, improving by three days. Inventory days are 61, improving by four days. And our payables are 44, improving by four days.

We are updating our previous sales guidance to reflect the BluePrint acquisition in the US and to reflect certain integration progress in the UK. We now anticipate the UK operation will eliminate approximately $20 million of Ambient Grocery sales along with approximately $25 million of frozen sales. These discontinued sales in the recently-acquired Ambient Group results from an analysis similar to reviews we have implemented in previous acquisitions of the profitability of selected, private-label products, as well as a reduction in deep-cut promotional activity, as Rob mentioned.

In the meat-free frozen plant, we plan to eliminate approximately $25 million of marginally profitable or unprofitable sales as we reconfigure our Fakenham plant in preparation for the new project we anticipate with a major UK retailer.

Shipments under that project are expected to begin in May. Accordingly, our net sales guidance for the full fiscal year is expected to be in the range of $1.74 billion to $1.755 billion. As the sales we expect to eliminate do not add to profitability, we now anticipate earnings per diluted share to come in a bit higher than originally guided, such that our new earnings guidance is being set at $2.40 per share to $2.47 per share. Our updated estimates show consolidated gross profit for the full fiscal year are estimated to be in the range of 27.7% to 28.2%. SG&A should come in in a range of 16.5% to 16.85%. We continue to expect our tax rate to hold at 34%. And our recent acquisitions adding both fixed and intangible assets expect our depreciation and amortization to come in at approximately $37 million.

The last major assumption is our 48 million share estimate for the full year. Our estimates do not include any of our discontinued operations, any integrations, restructurings or any anticipated new acquisition activity.

At this point, let's open it up for questions.

(Operator Instructions). Greg Badishkanian, Citigroup.

Great. Sales seemed pretty strong; I think 9.4% on a comparable basis. Does that just exclude acquisitions in the US? How do we -- how did you get to that number?

Greg, this is John. That's our sales for like businesses, and then it adjusts for the movement of the Canadian Sensible Portions up to the Canadian division.

Okay, good. That was pretty solid. In terms of January, have you noticed any big drop off or anything different than the trend that you have been seeing the last few months?

Greg, it is Irwin. No, not at all. Actually, January has been a solid month. We like what we see. I think you saw some of it in that consumption numbers at Nielsen's that came out last week. It's a big display month for Super Bowl that happened this past week. But actually, I like what I see for January.

Good. That's really good to hear. And then just you talked about the scanner data, some of the -- I guess Account Nielsen is about half of the US, roughly. The other half, how would you categorize that business trends there the last few months?

Here, think about it this way, Greg. We reported 7.5% for the measured part, for the latest 12 weeks, and we are up at 9.4%. So the balance of the accounts are doing very well, as well.

Bill Chappell, SunTrust.

Just wanted to clarify with the business that you are discontinuing over on Premier and getting out of, how much of an impact did that have on the second quarter, and then also maybe if you could quantify what Sandy had in terms of impact on the quarter?

So, number one, Sandy, again, was $4 million to $5 million that we didn't ship that week. Some of it we picked up, and it got shipped. There was what, over 500 stores closed. I think we saw it within the Nielsen numbers. So that is number one.

And if you go back and look at the effect from the UK, there's a couple of areas there. Number one is the Premier acquisition, as Rob said, three things, the holiday promotional items. Number one; retailers deciding not to promote and us not promoting; and as at the same time as we are converting one of our facilities to take on that business, total was somewheres around $10 million to $15 million.

Okay. I'm just trying to reconcile the original guidance you gave when you closed Premier in terms of revenue accretion this year and then what you are looking at now?

So originally we said about $180 million. It is somewhere around $160 million, $165 million.

Okay. Great. Thank you.

All right. And again, just to get back on that, Bill, it is stuff we decided after we closed to start eliminating, to run the plant more efficiently, margins. And as you can see, it's not one bit effect on profitability here. At the same time, we are pulling some promotions to get retail prices up, and a lot of the retailers want that, too. So this is something that we, as I said before, there's a lot you learn about a business before you buy it, but once you own it, there's a lot more you learn.

And the only thing I'm going to add to that, Bill, is that this is not something that we are doing for the first time ever, having acquired a business. We've done these reviews when we take over the keys, so to speak, and own the business and go through the first few months that make positions about how we want to go forward with some of the product offerings.

Next question.

Andrew Wolf, BB&T Capital Markets.

John, on the commodities side, do you have -- are you going to forward the comp on these products or hedged or some combination thereof? Do you think there is any risk of you as the biggest player in the industry can be caught short again?

In regard to the chia and the almond, I take it?

Yes, or any other commodities that you might have a view on that are running tight.

For example, on almonds, we actually -- the price pressures started in the first half. However, because we had bought out through the first half, we were not affected by it.

So we look to -- look, our position is that in a market like this we will buy spot based on immediate need. But where we see -- we have certain target price points that when we hit them, we will go long on them. There is a shortage right now on blue corn. We actually went long on blue corn originally, and now we are buying it on a spot-by-spot basis here.

And then I think the big thing is price is one part but getting supply, and we'd rather pay a higher price than be out of inventory. But in every one of these cases whether it is blue corn, chia seeds, almonds, we're able to go out and procure with our worldwide procurement today and being able to source all around the world. And that is the big thing that Hain has is it might -- we might not be able to get the product within the US, but if it's South America, if it is somewhere in Europe, the UK, we are able to go there and source ingredients. And if we are -- and listen, the thing is -- and we're able to pass price on and especially with almond butters and nut butters, because with other nut butter plants and peanut butter plants not even operating, it's either you take the price increase or you don't get it. Because we've got a lineup of people that want that product today and are willing to pay the price. And the same with chia seeds. The guys at the beginning of the year went out and bought 20% of the world's chia seed, and we still were out of stock. But we are able to go out and find product.

And a followup on the guidance, the sales change on the rationalization, those are both UK business groups, right? So it was my understanding in the UK a lot of the branded business was predicated also on private label production. So how is it that you can trim this much private label out without it affecting your trade relations?

Well, Andy, it's not all private label. It's SKUs that are not profitable. Some of it is some seasonal items. Some of it is private label business, but you know what? What happens today is this here. In regards to Hartley's, we need production time for branded products and for new innovation and new products. Retailers understand that. And at the same time, if we can't get the right pricing, we're not going to produce the product.

The big thing is, the other one is, there are certain SKUs we were losing money on and producing at Fakenham. We filled up that plant before with some volume when it was just basically a meat-free plant, and we're not going to do that. And we've gone to the trade and said, hey, either we get this price or we are just not going to do it anymore. And Ira talked about and Rob, we picked up an over GBP30 million business that will begin the end of May next year -- has great volume, great margins, and that's what we're going to do there.

Yes, that business comes in actually in May of 2013, so it starts in our fiscal year this year. But it will have almost a zero impact on our sales in fiscal 2013. It will ramp up as we go through fiscal 2014.

And Andy, this is not the first time. No different than when we bought Daniels. We sold off or divested ICL, which is private label, private label meals business. Not our business. Not our strategy here.

At the same time here, we are going to -- and I've said that before, we are going to get rid of unprofitable businesses. And we're looking at the same thing in the US. I mean in this quarter in the last six months, we have not promoted Rosetto. And our sales are down 13%, but our profits are up there because we are not promoting. And if we promoted it, we'd be at the same place.

So that's what we're going to focus on is profitable growth. And our promotion dollars are going to go against our top 18 brands that are growing that make up 80% of our sales.

Well, it sounds like it is working at Fakenham. And I look forward to learning more about it and the rest of the businesses. Thank you.

And it will work at our Histon facility, too, because what we can't do is have all these different SKUs running and the changeover costs. It's just not effective and efficient for us.

And the thing is which we are doing here immediately, you see we figured this out within the first two months. We have not waited six, seven months. We've gone to the trade and said, here is what we're doing. So we have been decisive on a plan here.

Ken Goldman, JPMorgan.

Irwin, you are not selling organic chia pets, are you?

To you, Ken, chia chickens.

That's fine. I'll take that. Irwin, last quarter did your guidance include BluePrint in the top line?

No.

No, it did not.

Okay. So you are lowering your guidance by $45 million on the top line for combined Ambient and frozen, right?

Right.

And you're adding a little BluePrint in, right?

That is correct.

Ex those two, just help me understand, what are you doing with your top line guidance, I guess, on a more organic basis?

Well, it's consistent with our original guidance of growing close to double-digit line for the year. So we are going to probably grow in the 9%, 10%, 11% range on the back half of the year. Total growth with the acquisitions in year over year is 27%.

And I think to be simple about it, I mean originally --

And I'm sorry, Irwin. One of the things that we didn't call out as part of the guidance that we've just given you, Irwin mentioned Hurricane Sandy. Well, we did lose a couple of million of sales on that. So we took it out of the total full-year number. So we are also reflecting not just the forward-looking sales number that we expect, we are also reflecting in it that which we've experienced such as having started in the UK with some of these discontinuances and so on.

So, Ken, this is all UK focused. Originally what we said, we felt that the Histon facility, the Premier brand was about $180 million. Today we are saying it is about --

$155 million.

$160 million. At the same time, there's about GBP5 million coming out of Fakenham to make room and from a profitability standpoint for our new customer that we picked up.

It is not GBP5 million, it is GBP25 million.

I am sorry. It is GBP25 million -- I meant -- sorry.

Look, Ken, I think the one piece that we didn't state, which maybe will help you reconcile it, is we didn't give you what we have counted in for BluePrint. Remember, BluePrint is a half a year. We are counting it for about $10 million, $11 million of sales in the back half, which effectively will be the amount of sales we will get out of it for the fiscal year.

So just to summarize all that, and that's helpful, are there any changes, just to be clear, because, as you know, a lot of investors care about your organic US growth, any real changes excluding BluePrint, excluding Sandy, to your US sales expectations for this year?

No.

There is no change, Ken, to US, Canada, or Europe. It's just the UK is where -- and the change in the UK is to private label business that is manufactured both at Histon and Fakenham and some branded business that is small SKUs that are not profitable.

And again, you step back, you rationalize brands, you rationalize SKUs and again, look at our margins are going up, look at our margins have gone up in the second quarter and our profitability, I think it shows what we're doing to our sales is moving them in the right direction.

Scott Van Winkle, Canaccord Genuity.

John, in your commentary about distribution gains in the US, you listed some retailers. Any specific product categories or anything we should think about where you've seen a little bit of a pickup at least from what you had in Q1 and new distribution?

Sure. Sure. What we're seeing a lot of pickup is on Earth's Best pouches, particularly in the grocery channel, seeing pickup with Safeway, with Kroger; with Publix, Giant Eagle. That is a key piece.

The other thing is we're seeing some nice pickup on Greek Gods. We saw a 25% improvement in our distribution at Walmart that came into -- that showed up in January. And we're also seeing different key accounts picking up [Arkufer]. And then the last one -- and look, these are just three examples, the last one I talk to you about is Sensible Portions where we just got listed at Kroger and Safeway.

Great. And sticking on the US, last year you had a real strong March period. Was there anything that drove that last year that we should think about you cycling against?

I think what you're going to see is that's the time when we picked up and fully realized our first gains on distribution for Greek Gods. At Walmart we are fully fleshed out, as well as Sensible Portions was picked up at Walmart in addition to Sam's Club.

So you are cycling some distribution gains. Has there been any impact of weather on some of your categories, tea and soup?

I'm here. Obviously, tea has gotten a nice benefit from weather. I hate to be the guy who cheers for miserable cold weather and flu season, but it's very beneficial for our tea business, and we've seen it in December and January.

And in your soup business.

And in our soup as well. As Irwin pointed out, as well as Maureen. We are seeing very strong growth on our Imagine soup and our Health Valley soups.

Great. And then Ira, if you can, could you -- and if you did, I apologize; I didn't catch it -- can you frame interest expense now that you have got the acquisition in there and what that looks like?

Yes, we're expecting interest expense for the full year, and this is the interest and other line that will come in -- we're expecting it to come in at about close to $22 million, maybe a little bit lower than that. Just so you want to frame how to look at it, we've got $150 million of fixed-rate debt at 6%. Everything else is at floating rate, and floating rates today are under 3%.

Great. Thank you very much.

Amit Sharma, BMO Capital Markets.

John, I had a question for you. This period non-major channels did better than major channels. That is the reverse of a trend that we have seen over several quarters. Can you walk us through what happened?

I think what we saw here was two things -- one, a very strong pickup in our natural independents and some unmeasured grocery. Remember, ATV is not a measured grocery account, and we're seeing really strong pickup there as well.

And anything of note at Amazon or other etailers?

I was going to go there next. We've seen some very strong growth on some of the Internet retailers, as well, and they are serviced by a variety of different distributors.

Can you give us some idea of how much is etailers as a percent of sales now in US?

I would say that all told, it is definitely within our top 10 customers if we totaled it up as Internet.

And then a followup on the UK business, I mean clearly the strategy of divesting some of the lower-margin business, that makes sense. But if I look at the margins, they are already at 10% in the quarter, operating margins. So, as you get rid of some of these businesses, where can we expect these margins to be once you are fully fleshed out with the portfolio over there?

You are talking about operating margins in the UK?

In the UK, yes.

It should climb up a couple of points. And then we expect as we go into 2014 -- not that we're giving any guidance -- that it will continue to climb because of the efficiencies in the plant -- in the Fakenham plant, as we bring on that program for the major retailer. And again, that will ramp up as we go through fiscal 2014. It won't all start right at the outset of the year. But we should -- it should get to the planned level by the end of 2014.

But bringing that newer business, which is private label business, will not negatively impact your operating margins in the UK?

No, it doesn't.

It's higher.

It's a major program, which is going to make that plant highly efficient and effective. It is one customer, which will take up half the plant.

It's a lot of volume going through that plant.

Got it. So just to reiterate, so about $45 million of sales and 10% to 12% operating margin of that business?

I'm sorry. Could you say that again?

So that business will be about $45 million of annual sales and about 10% to 12% operating margin?

Yes.

Yes. And it will actually be higher than $45 million annually when it's in full --

In full swing and starts to --

A minimum GBP30 million on an annual basis.

Got it. Okay. All right. That's all I had. Thank you.

Sean Naughton, Piper Jaffray.

A quick question for you. We've been talking about the UK and the US a little bit, but maybe just looking at your other line item, the Canadian business and European, continental Europe, margins decreased a little bit there in the quarter, and sales growth look like it ticked down a little bit there. Any sort of commentary there? Is this seasonal, or is there something that impacted the comparability there in the quarter?

So Canada, the margin probably -- the margin -- where the effect in Canada -- we had about $2 million of out of stocks there, just some of the effects of getting product from the US. And at the same time, our margin was down a bit because of Europe's Best and just some of our commodity costs. So that's the big thing with Canada.

In regards to Europe, our sales in Europe were up strong, up almost 9%. And I think our margin could be currency -- but I think our margin -- it's a little bit down -- just a bit down, but our sales were strong in Europe. Europe really had a great quarter.

Okay. And then just outside of chia, just moving to the commodity headwinds you guys were discussing before, outside of chia and almonds, are there other categories that we're concerned about, maybe blue corn, but are there other categories we're concerned about?

And then in terms of the pricing action that you guys took to offset the chia and almond pricing, when did that go into effect?

So almond and chia -- this is John -- the almond and chia are by far the biggest concerns given the 30% increases versus the first half. We just announced -- we've taken pricing on both of those commodities in the beginning of the year and then just have watched them continue. So we just announced another price increase for both of them. But we won't get much this fiscal -- perhaps a little bit in fourth quarter.

The only other two that we are watching real closely are rice and blue corn. Blue corn is more an availability issue, not a wild pricing issue. And rice, we are just watching it relative to what's going on in the non-organic market. But both of those really pale in comparison to the headwinds from chia and almonds.

And in the UK, we did get pricing at the business that we wanted to keep, and that is something we've been able to do.

But I think the big thing, also, Sean, what Jim Myers and his group have been able to do on productivity and get costs out whether it's fuel, whether it's freight, whether it's corn, but the big thing is is supply. I mean, price is one thing, but if you are not in stock, it's a big issue. And we've been able to stay in stock, and today with pouches we've got all the pouches and all the Earth's Best products we want.

The same with Garden of Eatin'. We ran into organic corn. We will get chia. We will get certain other ingredients for Earth's Best baby formula. So the team really knows how to go out and find ingredients here and where to find it just to keep us in stock.

Our gluten-free business, in the first quarter, we were up 35%, 40% on Arrowhead Mills and DeBoles -- just getting ingredients, grains and certain flours to get us back in stock was the first thing, and the group has been able to do it.

Great. Best of luck in the second half, and congrats on the nice margin expansion.

Thank you.

We have time for one or two more questions. David Palmer, UBS.

This is actually [Mineo] filling in for Dave. I'm just trying to think about your general outlook for growth outside the US and I guess most of the UK in particular. If you've mentioned this already, I'm sorry, but what was the organic growth rate in the UK last quarter, and what is your outlook for revenue growth going forward?

So just in the UK?

Just in the UK.

So let's come back -- we've only owned this business two months, three months, okay? And as you heard Rob say, we have the number one brand in Hartley's, and Robertson's is a big opportunity with Gale's. You saw where our business with Linda McCartney was up 14%. We've just hit Greek yogurt. Our Love Tub was up 56%. Our soup business from New Covent Garden Soup business, excluding Tesco, was up about 6% from Nielsen-measured channels.

So to sit here today, as we pull everything together, listen, we've got four or five key categories we are number one in that category. So mid- to high-single-digit, that's where we should be aiming at, but we've got some cleaning up to do. But at the end of the day, we've really got some great brands. And I spent some time with retailers who really want to focus on these brands. And I think what the team will also do is a good job on gluten-free. They're going to take over the non-dairy business once we get our new facility. So a lot of opportunity in our branded business.

And it's very interesting because Tesco who felt they were the major brand recently had major recalls with horse meat in their products, and where they have now focus where brands are important that will benefit us.

Thank you very much.

Ed Aaron, RBC Capital Markets.

I apologize if I missed this, but you've been giving an all-channel consumption number for the past few years. Do you have that number for the second quarter in the US?

Ed, this is John, yes. It is very comparable. It's a little bit over 7% for the all-channel because usually what we see is slower consumption growth in those channels that we are more established in.

Okay. And then to the extent that the reported growth is a little bit stronger than that, is that entirely coming from just business channels that aren't tracking that data, or is there an element of maybe because the inventories have been a little bit light, just you maybe shipping just a little bit ahead of consumption for that reason?

No. It's primarily those channels that are not measured. Remember, Costco is not in there. HEB is not in there. And your Internet guys are not in there, as well.

And we are seeing a lot of sales move over to that Internet, Ed, and that is becoming a bigger part of our business all the time.

All right. I have some more, but in the interest of time, I will take it off-line. Thanks.

Thank you. So since that was the last question, I want to thank everybody for listening to our second quarter. I sit here extremely proud of the team, of what we have been able to do. We have some incredibly strong brands.

When you have the amount of brands that we have that were up double digits, 16 brands up double digits; when you have a traditional food business up slightly, to see how we are executing with new products. The Anaheim Natural Foods Show is March 7. Here in the US we will introduce over 70 new products, 70 new innovative products with ingredients and packaging where we are focused on the GMOs, the organics, what is the latest and greatest, and that is a big show for us.

In the UK, they are introducing another 70 or 80 products, so we introduced over 140 new products a year from innovation. We are in the midst of opening up a new innovation center that will help us tremendously.

At the same time, what John and Rob and that have talked about is how we are partnering with our customers and hugging our customers and how we have picked up a major piece of business in the UK with a customer, how we are growing across multiple channels in the US, and whether it is Internet, whether it is club, whether it is mass. And last but not least, Whole Foods, which is our biggest customer and seeing great trends there.

So we are really partnering well, and we are seeing our growth among retailers that are growing today, it allows John to execute his white space and fill in that. And as you come back and look at it, it is a two-year stack up 18%, that really speaks for itself.

The US is 61%, 62% of our sales, and that is where a lot is happening. So the US is working, and that has what has got to work. And the UK will work for us or is working and will continue to work.

We're making a lot of decisions here to build our business for a long time, and that's profitable growth. Anybody can go out and get growth. You can drive Nielsen growth by promotions and not make any money. But we have 16, 17 brands that make up a big chunk of our sales, and that's where we're going to invest and that is where we are going to spend behind. And that's what we are going to continue to do.

We are in a good category. You saw last week where the USDA, FDA are coming out and changing a lot of the guidelines within foods and what should be sold within food and the whole meal program. We continuously hear 70% of the healthcare costs today come from self-inflictions, which is obesity. The UK has the third-highest rate of obesity in the world today, and health and wellness there will continue to be a big part of eating from a UK standpoint.

So we are really within a great category.

From acquisitions, BluePrint -- we are pretty excited about BluePrint. We think there's a big opportunity for us to expand this at retail in a major way, and we are focused in many, many ways. We are focused on it in Canada and Europe, and we think the whole juice category and fresh juice either from a cleansing, from a meal, and just juice in general will be a big growth for us. And we have seen where we come up against some of the major brands today in the juice category, how we are out-selling them on a 3 to 1 basis. So we think there are some big opportunities there.

And last but not least, there is a lot of other acquisitions out there. We have identified three or four other good niche acquisitions that are in the $25 million, $30 million range that we think are categories that we are not in today, and being part of Hain, we think we can take them to a whole other level.

And what we have seen with BluePrint or what we've seen with Greek Gods, what we've seen with Sensible Portions, the entrepreneurs have done a great job in starting these businesses and have taken them to a level and bringing them within Hain how our infrastructure is able to bring them to a whole other level.

So we have great brands. We really are great partners out there. We are in good categories. I will say we have one of the best management teams in place to really execute this, and eating healthy, as I say, is not a fad, not a trend. And I know we eat a lot of snacks at the Super Bowl on Sunday, but I guarantee a lot of them were healthy snacks.

So with that, keep drinking tea, and you'll avoid the flu. I'm also told BluePrint Juice has a lot of rich nutrients in the juice and also a good flu buster, and thank you for listening and speak to everybody later.

This concludes today's conference call. You may now disconnect.