Hain Celestial Group Inc (HAIN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hain Celestial second-quarter fiscal year 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As reminder, this conference is being recorded.

I would like to hand the conference over to Mary Anthes. Ma'am, please go ahead.

Thank you, Karen. Good afternoon, and thank you all for joining us today. Welcome to Hain Celestial's second-quarter fiscal year 2014 earnings call. Irwin Simon, our founder, President, and Chief Executive Officer and several members of the Hain Celestial management team including John Carroll, Executive Vice President and President and CEO of Hain Celestial US; Steve Smith, EVP and CFO Hain Celestial; and Rob Burnett, CEO of Hain Daniels UK; and Rohit Samani from our recently acquired Tilda operations are with us today to discuss our results. 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 result of new information, future events, or otherwise.

Our actual results may differ materially from what is described in these forward-looking statements and some of the factors, which may cause results to differ, are listed in our publicly filed documents, including our 2013 Form 10-K filed with the SEC. A reconciliation of GAAP results to non-GAAP financial measures is available in our earnings release, which is posted on our website at www.hain.com under investor relations.

This conference call is being webcast and an archive of the webcast will be available on our website under investor relations. Our call will be brief, so please limit yourself to one question. If time allows, we will take additional questions and management will be available after the call for further discussion.

Now let me turn the call over to Irwin Simon, our founder, President, and CEO. Irwin.

Thank you, Mary, and good afternoon, everybody. I hope you had an opportunity to review our press release that was released at 4 o'clock this morning -- at 4 o'clock this afternoon. It feels like this morning.

I will start with a brief overview of our second quarter results as well as an update on our strategic growth initiatives and provide you with additional color on our Tilda acquisition, which we completed three weeks ago.

Many of you listening to our call today have followed Hain for many years and many quarters. This quarter I'm pleased to say that we passed a major milestone. As both the founder and CEO, I have taken great pride when we reached $500,000 in quarterly sales. Then to the success -- $500,000 in reaching $5 million, a quarterly sales then to [successor] Company reaching $5 million in sales. Then we hit the $50 million in sales, and truly it is exciting to see how far we have come with now over $500 million in net sales in just one quarter, our largest quarter in Hain history.

I work with a tremendous team on a global basis, and I would like to congratulate them for their efforts which helped us to report a record second quarter. Thank you, team. And our 12th consecutive quarter of double-digit sales and adjusted earnings growth.

Importantly for Hain organic and natural industry trends remain very favorable as we continue to generate robust growth across our portfolio of brands. We previously talked about our distribution white space opportunities in taking our top 100 SKUs in the US from approximately 30% ACV to 50% ACV, this representing an incremental retail sales opportunity of $250 million at retail. This is still our strategic goal, and we will continue to do that. And John will talk about some of the great successes that he is enjoying in accomplishing this.

We believe this positions us well to continue and expand our distribution of our brand portfolio across geographies and sales channels to capitalize on the tremendous white space opportunities over the next several years. If you take Whole Foods's and Sprouts's new store plan, it's worth $0.75 billion of sales when they reach their new store goals.

We also believe there is additional opportunities for our products to be sold with social media and e-commerce. Of the top 12 Hain Celestial brands in the US, we show a reach of 65 million impressions in just January. We touch 9 million to 12 million parents a month on our Earth's Best and Ella's website and view this to be a tremendous asset to sell products and educate parents about our brands.

Now focusing on our second quarter performance a little more closely. Net sales were up 18% to a record $535 million. John Carroll will talk about his US sales, which generated $328 million. A great quarter with continuing strong consumption trends. And really when you look at conventional food and you see where natural organic trends are, it is something to be excited about.

I will talk about Hain Daniels and the rest of the world. Rob Burnett and his team generated net sales of $146 million, up 7.4% in local currency, with strong demand for key products.

And the rest of the world with Beena in Canada and Bart in Europe and their teams generated sales of $62 million, including double-digit local currency growth in both Canada and Europe.

As impressive results are, our sales were impacted by about $[15] million of (inaudible) stock. Due to capacity constraints mainly with our MaraNatha, DeBoles, Earth's Best and New Covent Garden soup brands, all which have been resolved except for MaraNatha, which we expect will be resolved by the end of our fiscal year.

We are seeing strong demand for those products along with many more, and we will continue to build out infrastructure to support our growth. And you actually saw it last year as we spent close to $70 million building out infrastructure support our growth over the year.

Now, I'll focus on the key drivers that led to our strong sales performance. Our organic growth was up 5 single digits excluding currency. Similar to growth in prior quarters, key drivers were -- new distribution, deeper penetration in key accounts, new and existing products, strong consistent consumer demand, and new private authorizations across many classes of trade.

Specifically in the quarter, our brand performance was strong with broad-based increases. We had 19 brands up double digits, five brands up mid- to high-single digits. What an accomplishment. Our strong brand contribution and operating leverage drove our record second-quarter GAAP earnings per diluted share of $0.84 versus $0.68 in the second quarter last year, a 25% increase and a record second-quarter adjusted earnings per diluted share of $0.87 versus $0.74 in the second quarter last year, up 18%.

Touching on specifics, Steve will do in a little while. Our operating income was up 25% with operating margins of 12% of net sales on a GAAP basis and 12.5% of net sales on an adjusted basis as we really managed our costs.

I have had objectives, and I always had objectives for sales growth, EBITDA growth. Our EBITDA was $79 million or 14.9% of sales. One of my long-term objectives has been to reach 15% to 18% EBITDA growth and as a percentage of sales, and that is something we are well on our way to doing.

Adjusted gross margin was 27.2, primarily due to higher commodity costs, product mix, and a shift in trade spending to point-of-sale activities, which we report against net sales. SG&A was down 190 basis points at 14.1 with expense leverage as we continue to integrate our three acquisitions from fiscal 2013 and realize further synergies. And we will continue to do this, and we are on the path to do this. And we will continue as we accumulate these synergies and savings to spend on our business.

In the US, organic and natural product sales continue to help fuel the growth in the AOC channels. In the US the combined Nielsen AOC and natural channel grew 9.2% in the latest reported periods. And the January 18 Nielsen's results showed organic and natural products once again outpaced conventional product growth, which was at 1.6%. Unbelievable growth and John will take you through that in a little while.

Even though we didn't advertise during the Super Bowl this weekend, we had a lot of snack displays on social media across the big game where we were the 12th man on the field, and we were scoring touchdowns. We had good product placement and sellthrough. And with that, we've got trial and repeat. We had major display activity featuring our snack products with Whole Foods's Garden of Eatin' displays; in-store weekly flyers with Kroger, Publix, Wal-Mart, Costco, Target, with Sensible Portions snacks displays along with them.

Hain snack brands grew a combined 19% as measured by Nielsen through the 12 weeks ending January 18, 2004, and that was not even yet the Super Bowl hitting. Our Hain Pure Protein sold over 100,000 pounds of chicken wings, the equivalent of almost 3 trailers during the Super Bowl. It continues to be an exciting time for Hain with organic and natural industry being more relevant than ever before our leading brand -- our portfolio -- and more and more consumers seeking organic natural and non-GMO package products.

So we believe white space distribution opportunities continue. As I have said before, wherever food is sold, wherever there is a cash register, I would love to see at least one Hain product, at least, but I know we are going to see a lot more. From airports to college campuses to food service and beyond in restaurants like Panera, Chipotle, and others, we are looking to improve our distribution and have Hain products out there.

Rob and his team have made good progress in the UK this quarter. In late October, we started to ship Tesco where new Covent Garden Soup was approved for 19,000 distribution points, and, by the way, this is a lot more distribution points than we had the last time when we were at Tesco.

We had some challenges getting the new lines up to speed and had less than ideal service levels. So in December, we decided to pull back on promotions this year, which affected our sales on soup sales for November and December. Consumer demand for our products is very strong, but we could have executed better on our soup to meet this demand and maximize on our higher-margin sales opportunities.

At this point we have cycled the production issues. We are carefully managing our promotional schedules to ensure that we are able to serve our customers at the right levels. So we believe we have improved our position and capitalized on a lot of growth in the UK.

In the quarter, Hain Daniels experienced strong growth in Hartley's desserts, a lot of new products similar to our MaraNatha products on Sun-Pat. Our Linda McCartney, our Cully & Sully soup business was up double digits, and our fresh fruit brands were up strong. There is a lot of positive momentum around these brands, and we are continually -- continuously gaining distribution as we introduce innovative new products, which retailers continue to support.

We look to continue to improve our financial metrics in the UK to ensure we are increasing our well-positioned -- we are well-positioned to accelerate sales and long-term growth. Later this year in our fiscal 2015 we will introduce Celestial Seasons herbal tea as well as gluten-free products in a lot of our snack products. We're also looking at increasing our sales distribution and major focus on our nondairy business.

Touching on Europe, we had strong performance, 13% growth on our nondairy business where we have invested in an incredible new dairy facility in Germany to help us add capacity to meet our growing demand. This will help us further expand our nondairy business in the UK across Europe with our branded, plant-based nondairy products including coconut milk, nut blend milks, almond milk, soy milk, rice milk under the Dream brand as we successfully have done in the US.

We have also had strong performance from our Lima, Danival, Rice Dream brands in Europe. In Belgium, we have entered into an agreement to divest Grains Noirs, which I have talked about many times, which was a non-core asset for us. In fiscal 2015, we should be -- this should be accretive by $0.01 or $0.02.

Our Canadian business also had strong performance year over year from our MaraNatha brand, Terra, Earth's Best, Greek Gods, Imagine, and Casbah brands. Sales of our key customers -- of our two key customers grew in double digits, and we continue to see strong growth in our club. Our Hain Pure Protein JV continues to do extremely well with net sales up 18%. Our Hutchison Hain Organic Asia joint venture also did well with double-digit sales principally in China, the Philippines, and Singapore.

Looking ahead, productivity is still a big focus for us. We have done a great job managing headwinds in commodity pricing and meeting our operating margins. And with that, you can never predict where commodities are going. We will continue to invest to support the growth of our organic natural products and plan to ensure we have the capacity to support growth across the brands.

Recall that we made major investments of $70 million last year in several of our plants to support the supplying growth of our expanding business in new retail expansion. We will continue to support the business this way and build out our infrastructure. Our balance sheet is strong, and we will continue to provide the financial flexibility to pursue strategic opportunities as they present themselves.

Our debt was down at the end -- at the quarter to $560 million versus almost $600 million last year and $625 million at the end of our fiscal year. As a reminder, we paid down $94 million of debt from acquisitions and invested another $70 million in our facilities and capital infrastructure from our cash flow, and our debt level is down.

As you may recall in mid-January we announced the strategic acquisition of Tilda, 100% branded leading premium Basmati and specialty rice company. We have owned this business for three weeks, and we are excited about the opportunities here. We have also received calls from retailers in North America looking to buy Basmati rice already.

We will be traveling to the Middle East and India and looking how we integrate Hain products within there.

To wrap it up, it was a record performance for Hain across our brands, sales channels, and across the geography. We continue to be optimistic about our brands, our products, and our distribution throughout the UK, Europe, Canada, and the US.

In the back half of the year, we are expecting sales growth of 20% to 23%, and earnings-per-share growth of 23% to 30%. Boy, got a lot of work to do.

By the way, we love the cold, and we want to see it snow, snow, snow. With that, I will turn it over to John.

Thank you, Irwin. Good afternoon, everyone. I am pleased to say that Q2 was a very strong quarter for Hain Celestial US. I'll start with a couple of key highlights. Our Q2 net sales, as Irwin already mentioned, were $328 million, up 17% versus year ago. Importantly, our net sales gain reflected strong growth from our core business as well as excellent performance from our two acquisitions, BluePrint and Ella's Kitchen.

Our latest 12-week Nielsen AOC consumption growth for the period ending January 18 was 9.2%, which was 18 times higher than the AOC total channel growth of 0.5%.

Our growth was achieved even as we lapped a strong year ago comp, resulting in a two-year stacked comp of 19%. These results were driven by gains across the portfolio, including 14 brands with double or high single-digit increases. We leverage our Q2 top-line growth across the middle of the P&L to increase our US operating income to $56.5 million, up 19% versus year ago.

And our Q2 operating income margin was 17.2%, up 20 bps versus year ago. We offset over $6 million in inflation with productivity and SG&A savings that expand our operating margin.

Now in our Q1 call, we talked about five key factors that made us optimistic about our balance of the year outlook. As you recall, these five factors were consumption trends, AOC distribution growth, innovation, productivity, and our most recent acquisitions performance.

Our Q2 results continue to show strong momentum across these five factors starting with our continued consumption momentum. Q2 was our 16th consecutive quarter of strong US consumption growth. Remember, I always say this: our business is not are one- or two- or three-brand portfolio. We have 20 plus brands and still drove consumption growth 18 times the category average.

Our second key factor is our AOC distribution growth. Our top 13 brands, which account for over 80% of our AOC sales, a distribution gain of 7% in Q2 versus year ago, which actually was up a full point versus our Q1 distribution gain of 6%.

As we always talk about, we continue to fill in the distribution white space on key brands and at key customers. Brands experiencing strong distribution gains this quarter included The Greek Gods, Sensible Portions, Dream, MaraNatha, Garden of Eden, Spectrum Naturals and Essentials, Alba Botanica, and Ella's Kitchen.

Now, the third factor fueling our optimism is our strong innovation. Now, we're getting ready for our Expo West show in early March, in Anaheim, California where we will introduce over 100 new products. Highlights of our exciting Expo West innovation queue include great new products like our new Imagine Organic simmer sauce, which -- they are getting strong response from retailers who have already seen them. And we expect to get a really strong response when we are at Expo.

We also have Terra Tropical Blend chips, which integrate coconut and plantain chips into a Terra blend. We're introducing Earth's Best gluten-free chicken nuggets and Spectrum Essentials Warrior Vitality Blend, featuring Chia, maca powder and cacao. We're also introducing Alba Botanica Good and Healthy, a line of plant powered moisturizers with kale, spinach, and Swiss chard. BluePrint is introducing a one-day innovation -- renovation cleanse retail pack that will be available in stores. And Celestial Seasonings is introducing a Reflections tea line to help people relax in the middle of the day. I could use some of that sometime.

These are also just a few of the exciting new products we will be introducing at Expo West, and we would ask for those of you attending the show to stop by our booth and try all these products I mentioned as well as many more. And remember, we are seeing our innovation positively impact our consumption growth across all channels, not just natural -- the natural channel. More and more conventional retailers, leading conventional retailers, are recognizing the importance of innovation in driving organic and natural sales and are increasing their speed to shelf on our new products.

The fourth factor is our productivity program. Just as we saw in Q1, almond and dairy pricing, two of our leading commodities, was up significantly in Q2 versus year ago. And we have seen no relief on these commodities. In fact, both almond and milk prices are currently higher -- at higher levels than we saw in Q1. The key to offsetting these cost increases in Q2 was our productivity program and our SG&A savings.

Our productivity savings were over $7 million, and we realized significant productivity gains from increased plant efficiencies, for example, at our new Lancaster Sensible Portions plant; increased internal production, again, an example of that is increase production of Earth's Best pouches in our Westchester plant; and value engineering.

Going forward, though, we expect pricing for almond, dairy, and California-based commodities to rise. These increases will drive us to announce price increases on the products affected by these higher commodity costs, but we will not be alone in this. I am sure we will see pricing actions across the industry based on the California drought, and to the extent it is applicable, almond and dairy costs.

And, look, we have taken pricing before when the commodities have driven it and will do it again, and we will execute it as we have in the past.

Then the fifth and final key factor driving our optimism is our latest acquisitions performance. Q2 saw BluePrint and Ella's Kitchen's acquisitions combined to meet both their top- and bottom-line budget. Importantly, both businesses had strong consumption growth and expanded distribution.

Ella's Kitchen's launch into Wal-Mart has been successful, delivering unit movement comparable to Earth's Best despite a 22% higher unit price. And BluePrint continues to expand distribution into test markets at leading grocery accounts across the country.

And both businesses have accelerated development of their innovation queue and implemented productivity measures. So, we are very pleased with the performance of our BluePrint and Ella's Kitchen lines, and we expect that we will set up well with them for the second half.

So, to close, Q2 was a very strong quarter for Hain Celestial US, highlighted by our 17% top-line growth and our strong AOC consumption growth of 9.2% in the last 12 weeks. We also had a 19% gain in operating income versus year ago and 20 bps increase in our operating income margin.

And we're optimistic about our go-forward prospects given our strong consumption trends, our growing AOC distribution, our Expo West innovation queue, our productivity function, and our BluePrint and Ella's Kitchen acquisitions.

Now, I will turn the call over to Steve Smith.

Thank you, John, and good afternoon everyone. I'm thrilled to be joining you for a second quarter call, my second call with Hain. I'm going to take you through the financial highlights for the second quarter, and then we will have a few comments on guidance.

We earned $0.84 per diluted share on a reported GAAP basis, an increase of 25% when compared to $0.67 per diluted share last year. Included in reported earnings-per-share is $0.03 of income from discontinued operations. Income from continuing operations in the second quarter this year was $40.1 million compared to $32.2 million in last year's second quarter.

Adjusted income from continuing operations was $42.7 million this year compared to $34.8 million last year, improving by 23%. Our adjusted earnings from continuing operations was $0.87 per diluted share compared to $0.74 per share in last year's quarter, improving by 18%.

As noted in our press release, our adjustments to operating income of $2.6 million principally from acquisition-related and fees and expenses, integration and restructuring charges, and factory startup costs in Europe and the United Kingdom.

Gross profit on adjusted basis was 27.2%. On prior calls, we discussed our expectations for gross margins to decline in the second quarter. Specifically, we discussed how gross margins were affected by mix of business; the effect of acquisitions, which operate a lower gross margin, but also have lower SG&A spend; and the effect of business seasonality; timing of promotions; and commodity increases.

Our gross margin compression was actually greater than anticipated and driven by changes both in the US and the UK. The additional compression is split roughly 50-50 between the US and the UK. And the US was affected by mix; a shift to certain trade spend activities, which are classified as an SG&A expense; the point of sale activities, which are classified as a reduction of sales and reduced our net sales in the quarter; and the continuing impact of increasing commodity pricing including almonds and related yields and milk prices, as John just mentioned.

The impact of input cost inflation amounted to about 3.2% in the second quarter this year as measured against the second quarter last year, and was partially offset by the productivity initiatives and price increases we put in place.

Our productivity initiatives continue to track to plan.

The UK was affected by the mix of product sales, including a proportionally smaller amount of higher-margin soup sales as well as the soup performance that Irwin spoke about earlier.

SG&A expense for the quarter on an adjusted basis and excluding amortization of acquired intangible assets was 14% of net sales, 200 basis point improvement as compared to 16% last year. The rate of SG&A spend declined in the quarter mainly from an aggregate impact of our acquisitions and as we achieved some real strong operating leverage in addition to the shift in spend I just mentioned.

As a result, we continue to show robust operating margin expansion. Operating income on a GAAP basis for the second quarter was $64.3 million or 12% of net sales as compared to $51.2 million or 11.3% of net sales from the prior year. Operating income was also impacted by the acquisition-related expenses and other charges when compared to last year. So on an adjusted basis, operating income was actually 12.5% of sales at $66.9 million this year, increasing over 21% from $55 million or 12.1% of net sales in last year's second quarter.

On a GAAP basis, our effective income tax rate from continuing operations was 33.8% for the second quarter this year compared to 34% last year. Our adjusted effective income tax rate from continuing operations was 32.2% of pretax income for the second quarter this year compared to 33.3% last year. The reduction is due to increased income in the United Kingdom as result of our recent acquisitions and the associated lower tax rate in that jurisdiction.

For the full fiscal year, we expect the effective tax rate to be approximately 33% before any discrete items. Depreciation and amortization in this year's second quarter was $11.4 million as compared to $9 million in the prior year with the increase coming principally from our capital spend in the prior year and the acquisitions.

Stock comp in the quarter was $3.4 million as compared to $3.7 million in last year's second quarter.

Our balance sheet continues to be very strong. Our working capital is $372.4 million with a current ratio of 2.4 to 1 at December 31. Stockholders' equity increased to $1.35 billion. Debt as a percentage of equity is at 46%, and total -- and debt to total capitalization is now at 32%.

Total debt at the end of the quarter was $628 million. Our debt declined from June 30 by $38.2 million, and our cash balance was $67.5 million, increasing over $26 million from June 30.

For the six months ended December 31, operating free cash flow increased by 45% to $52.7 million this year versus $36.3 million for the prior-year period. And the increase is principally from improved earnings. And our cash conversion cycle for the second quarter was consistent with the prior year quarter at approximately 58 days.

Finally, turning to guidance. Including the acquisition of Tilda, our guidance for net sales for the full year is expected to be in the range of $2.115 billion to $2.145 billion with the remaining sales for the fiscal year split being about 2% to 3% higher for Q4 than for Q3.

We anticipate earnings per diluted share from continuing operations for the second half will now be $1.68 to $1.78, and the year will come in at $3.07 per share to $3.15 per share with Q4 being slightly higher due to expected mix and the effect of the timing of when productivity initiatives will flow through earnings.

Some significant estimates we used in arriving at our guidance include our estimate of consolidated gross margin for the year, which we are now expecting to be in the 27.5% to 27.7% range given our performance to date. Our SG&A rate, which includes amortization of acquired intangibles and as a percentage of sales, is estimated at 15.8% to 16% and our effective annual tax rate is approximately 33%.

Our estimates are based on current exchange rates. Additionally, we have signed an agreement to sell our Grains Noirs business in Belgium, and we expect to close that sale shortly. The divestiture will impact sales by about $4 million a quarter as compared to the prior year, and that's been reflected in the guidance given with no significant impact to our EPS this year. And as Irwin mentioned, there will be a slight decrease in the first half of fiscal 2015 from the sale.

The last major assumption in our guidance is that our weighted average diluted share count will be approximately 50.9 million shares for the third quarter, 51.2 million for the fourth quarter, and 50.1 million for the full fiscal year. And these estimates include the 1.6 million shares we issued in connection with the Tilda acquisition last month. And our estimates do not include any results of discontinued operations restructurings or acquisition activity. And at this point, I will turn it back to Irwin.

Thank you, Steve. With that, we will open it up now for questions.

(Operator Instructions). Ken Goldman, JPMorgan.

Irwin, did I hear you mention a high single-digit organic growth number in the US? I just wanted to make sure I heard that right.

You heard me mention a high single digit overall, Ken.

Overall, okay.

Yes.

Usually you give it in the US. And the reason I'm asking is, you cited a $15 million out-of-stock number. Your two-year growth rate in the US did slow down fairly substantially this quarter. You said Ella's did well, and I guess the implication is organic growth did well too. But maybe if you could help us understand what organic growth was in the US, and, also, how that out-of-stock number compared to last quarter, it might help explain a little bit where that slow down came from.

I will let John explain it, but I don't think you are right in regards to a slowdown in the US. So, John.

(multiple speakers). On a two-year basis, it clearly slowed down. It went from 32 to 25, no?

No, no, Ken, it went from 22 to 19.

We will talk about that after the call. Maybe our numbers are little off here, but everyone I am talking to is seeing a slowdown on a two-year basis in your United States numbers.

In the AOC numbers?

No, I'm sorry, in your reported numbers.

Not what we're seeing. I don't know where you're coming up with that.

Okay, so here, basically what we saw was the business overall was up 17, right, and the core business was up mid- to high-single digits. And then the balance of it was the acquisition.

And the other one was your spending.

And then in terms of the out of stocks, the out of stocks were primarily on MaraNatha, and Earth's Best baby food, and those, obviously those obviously cost us. And they were at comparable levels to the previous quarter.

Okay, and so the mid- to high single-digit on the core, it was 9% last quarter, right? That is somewhat of an organic slowdown, no?

Yes, it's slower than what we saw in the last quarter, but, again, right in line -- (multiple speakers). Basically, but our consumption has been pretty consistent.

Okay. And then I wanted to ask one more thing, which is you took guidance up not only for Tilda but also for fundamentals as well. What are you seeing that is better than what you previously expected, because you took the -- you cut out the bottom half of your guidance range there?

First of all Ken, it's a tighter range, and secondly, listen, what we have talked about always this year, in the back half, our strong quarters today are just not second quarter. Our strong half is our third and fourth quarter. As you go back and look at the UK with a lot of new products, with a lot of things happening, a lot of growth, we are introducing 91 new products, as John talked about, over 100 new products at Anaheim in March. So with that our business no longer has the seasonal affective just the second quarter.

Okay. Thanks, guys.

Greg Badishkanian, Citigroup.

Irwin, can you maybe give us a little more color? You mentioned that the third quarter is off to a strong start. Maybe just qualitatively anything that really stands out in terms of maybe geography, channel, or products.

So, John, I will let you just talk about your products in the US, and then I can talk about the rest of the world.

Greg, to Irwin's point, we have actually got off to a very strong start in this quarter. Additionally, we had very strong promotional activity around the Super Bowl and our snacks line, and our consumption in the most recent 12 weeks is at 9.2%. So basically, we're still seeing very good momentum.

The other thing is, you know what, the other thing even on our four-week data, if we include the natural and Whole Foods numbers, we still -- we actually are seeing better growth that we are seeing in total for the AOC. So our momentum has been pretty strong on the business.

And, Greg, around the world what we are seeing in the UK is strong growth on our Sun-Pat, our Hartley's desserts, our Linda McCartney brand, our fruit sales. In Europe, we are seeing good, strong growth against our nondairy business, our Danival business. And in Canada, we are seeing good growth among are two big customers up there, Loblaws and Sobeys.

So it's first month -- listen, cold weather, we like cold weather. When there is warning of snowstorms, you run and shop and stay home. The other thing is we have had a lot of success with the Super Bowl. You heard what I said before. Our consumption was up 19% on snacks, and that was before the Super Bowl. And we had a lot of displays out there.

So with that and back to the other question, we are not seeing geography slowing anywhere in particular.

Good. All right. Thank you.

Sean Naughton, Piper Jaffray.

I just had one question and maybe a follow-up. I guess on the droughts in California, obviously, a pretty big region for producing [thoughts] on some other things the guys put into your products; mentioned a couple times on the call. Can you just talk a little bit more about maybe what you are hearing on this topic and your ability to alternative source some of these items and when should we expect some additional price increases associated with the commodities there?

Sean, a couple of things here. Obviously, our biggest crop and our biggest commodity that we buy is almonds of which we buy it exclusively from California. So, but almonds have been under cost pressure even prior to the drought. So almonds, we will price on almonds very shortly because we have a sense of where the crop is going this year.

In regard to the balance of the California crops, and our exposure there is not heavy. Beyond almonds, you go all the way down to romaine lettuce and celery used for BluePrint as well as some of our soups. So it is not -- we don't have as much exposure there.

Those will probably watch to get a sense of where the drought -- where the drought is going to impact them and what the cost impact, and then we will pass that on probably within 60 days. The big one is almonds. Look, we buy as many almonds as anybody in the package food business with the exception of people who just sell bagged nuts, and we're all over that. And we are ready to pass on pricing that addresses where the cost are going for the next [crop].

And then just a second -- just on the channel conflict that is out there, can you talk about maybe your brands as you potentially diversify to some of these larger players, larger channels of distribution and conventional warehouse discount. Is there a risk to impacting any of the relationship that you have with the core natural and organic guys or is there enough product differentiation or enough differentiation within the brand by product that that is less of an issue than some people may think? Just curious about your thoughts there.

Look, I will quote Irwin. Irwin always talks about hugging our customers. Irwin and I were out with a major natural independent chain last week doing a top to top. We tried to give different offerings to different customers to address their customer base. And as a result, we don't -- we try to avoid direct comparisons from one line to another to another across different customers. And that seems to have worked well for us, and we will continue to tailor programs and products to our key customers as need be.

Okay, thank you. Best of luck for the rest of the year.

Amit Sharma, BMO Capital Markets.

John, did I understand or hear you correctly that consumption in natural and whole food channel is just as solid as it is in conventional channels?

Yes, Amit, that's absolutely true.

So, then, if consumption is 9% and you are saying core sales growth is mid- to high-single digit, are we having some inventory issues that some of the larger customers that is causing the wheels to slow down?

No, no, actually -- no, I think whatever slowdown we are seeing here is a function of the inventory build, the pipeline builds for some major distribution gains that we got in the beginning of the fiscal, specifically on Greek Gods, on Sensible Portions, and Ella's.

Right.

But the consumption turn has been consistent.

So no reason to believe that sales growth in second half will be any different than the consumption trends that we are seeing here in the US?

No, I think, look, goes back to what we have always said that we are driving for mid- to high-single-digit consumption growth and top-line growth on the US business, and we expect to continue to deliver that.

All right. And, out of stock for MaraNatha and Earth's Best, is that going to continue for the rest of the quarters or are you up to speed on that?

So, on Earth's Best we're actually -- we're out of the woods on that one. On MaraNatha, we're installing a second line in March -- that comes up March/April, so for Irwin's point, we expect to be through our supply issues on MaraNatha by the end of the fiscal. But what will happen is as soon as the new line comes up, we will start fulfilling our orders at 100% and then the people -- the accounts will accelerate their orders. So that will cause them some blips in terms of supply versus demand, but by the end of the fiscal we will be fixed on MaraNatha, and we are already -- have adjust our issue on Earth's Best cereals.

And Amit, we keep building out the infrastructure to support. The other thing is and I think in this year quarter we talked about MaraNatha. Not only did we touch $6.5 million to $7 million, we couldn't go out and take on any new business, and that brand is up 20%. Same with DeBoles pasta, we just didn't have the inventory to fill demand out there, and that is something that will happen with growth and we will continue to build the infrastructure out to support it.

But the good news is you heard what I said before, number one is filling distribution white space is something that is going to continue with the growth among two of the major natural food retailers out there going both to 1200 stores. There is a lot of growth out there. And, listen, there's inventories, there's promotions that shift between quarter and quarter where there is a promotion. With Terra Chips, our promotion with Sensible Portions where it happened in one quarter and not the other, and, again, we don't look at our business quarter to quarter and how it's growing.

But I think the key thing that John talked about his consumption numbers, and that's product coming off the shelf. And that still remains pretty strong.

Sure, I agree. Just one more on that. Other than the stock out, any other issue with your core portfolio?

Our core portfolio, I think as we go back and look at it, like a lot of other brands, are we seeing the greatest growth coming out of soy? No. We are deemphasizing our Rosetto pasta and Ethnic Gourmet as we're just not spending against that, so that's probably down year over year.

The only other area where we saw sales off was our new Covent Garden Soup, and there we just couldn't supply the product, so we pulled promotion. Listen, when you have 19 brands up double digits and five brands up high single digits, boy, I hope I have those problems all the time out there. And when you come back and look at consumption, we're the largest or one of the largest sources of organic ingredients in non-GMO and being able to hit supply -- in the UK with oranges, here with almonds, blue corn, red -- yellow corn. Baby food -- not baby food, our formula business and ensuring that we can grow that and looking for organic whey.

So when I step back, listen, there is commodity issues in regards to supply. There is commodity issues with headwinds out there, Class II milk. And I think where I can pack and really commend this team, still with all the commodity issues out-of-stock issues, demand issues, what this team has been able to deliver in operating income is phenomenal out there, and supply, the growth that's coming at us.

I agree. That's all for me. Thank you.

Scott Mushkin, Wolfe Research.

So I'm going to switch gears, but I am going to get back to the topic of the day with my second question. But I wanted to poke a little bit more at the UK, Irwin. Looking -- is there any way to quantify the challenges in the UK, what you think it cost you on the EBIT line? And, clearly, EBIT margin was down year over year. Sales looks pretty good, what was our two to three-year goal in the UK on that business on the margin side? So I guess a couple of questions there.

So just to come back on that, our growth in the UK on local currency is 7% plus, 7.4%. Here we are. We had good growth among Sun-Pat, Hartley's desserts. We have changed a lot. Last year when we but Hartley's it was on sale for [GBP1] each. We have change the promotional schedule two for a pound. Okay. The biggest thing is, listen, two things. Our soup sales in the UK were not where we expected to be, and we picked up 19,000 distribution points. We couldn't supply and couldn't commit to promotions.

At the same time, we put a new line and for Sainsbury private-label business along with their promotions, and they would come back and say, we are not comfortable with giving these promotions, because we don't know if you can supply. And we wouldn't take it.

So, with that, Scott, two things that affected us. We walked away from promotions, and we cut sales, so it was probably worth GBP2 million to GBP2.5 million out there or dollars in profit. It was probably worth another $3 million to $5 million minimum sales. And not only that, what we have decided to do going forth is we will service everybody in the next couple of quarters, but we're not going to go out and promote the product even though we have the placement because we can't cut customers.

So that makes sense, Irwin. So the relationships, though, first of all are you back up to where you can supply everybody and are the relationships on solid footing?

Well, the relationships, number one, you walk into the UK today with Tilda, with Ella's, Sun-Pat, Linda McCartney, New Covent Garden, Hartley's, some of our nondairy business, and it's like walking into a major store here. The other thing is in regards relationships, the person that was responsible for us going into our Castle deal and our expansion, just became the new CEO of Sainsbury, so that is somebody who is in a good spot today. We just went into Tesco with 19,000 new distribution points on soup.

And two of the major retailers over there. We have some big opportunities with Costco, with our relationships here. Asda, which is Wal-Mart over there, then Waitrose and Morrisons. So, listen, we had one challenge on start up, but with the rest of the portfolio, they are performing. And we are still -- Scott, we owned this just one year. We're still cleaning up the portfolio. We are still rolling out products. We are still in the midst of some integration, still on the Premier system.

So, it's a year, and we are liking what we see.

Okay, that's perfect. And then just going back to the other topic that's been, I guess, beaten on a little bit, and then I will yield, because I am just a little bit confused, maybe other people are. So if I were going to look at consumption, in other words, what's going out the door? When you look at Nielsen and I think John provided for some of the natural and organic guys, that's the 9%, 9% to 10% level, but your sales were mid- to high-single digits, so there is a mismatch between what's going out the door and what you are putting forward. Is that how I should read what was said?

There is a -- in the previous period, we saw significantly higher year-on-year sales comparison due to the three pipeline sales that we talked. In terms of the growth on the consumption, look, we are seeing roughly 9% plus, and going forward, the inventory and the shipments will catch up.

But at this point there's a little bit of a disruption there, but part of being driven by our out of stocks. But other than that, basically, we forecast mid- to high-single digits in terms of consumption and top-line growth, and we are delivering that.

So just to paraphrase you, John, things going out the door, retailers are a little higher right now than what you are shipping to them, but you think that will square itself in the second half?

Yes, they will catch up.

Okay, thank you I will yield. (multiple speakers).

Scott, Scott, just also in this quarter in the said affected margin, there were some difference in promotions and marketing and scan downs that we did that from a $3 million -- about $3 million plus, John, in the quarter that you don't see on the top line because it is -- so I mean there is some shift that goes back and forth, so, again, I am not sure from a slowing standpoint, but as John said, there is always shift in a quarter between quarter.

Perfect, guys, thanks for your clarifications. Thanks for letting me ask questions.

David Palmer, RBC Capital Markets.

Congrats on a strong (multiple speakers). Congrats on the strong consumption trends that continue.

In the categories like nut butters and snacks are really very strong, seem to be unusually strong and seemingly in line with wellness trends. And tea has been one of those categories that has been labeled as up-and-coming beverage, particularly in the chilled form, but also in the hot form. I'm amazed that tea isn't stronger for you guys, particularly with the weather. Is there an insight there about what's going on in the last quarter or so about your tea trends? And do you have plans there with that category?

David, this is John. The one drag we have on tea right now is take out, which is we have called out over the summer as well as in last period. But it will take us the full year to lap that, and no longer have those comparisons, particularly on ice K-Cups. Our bag tea is actually running up 4% to 5%, and showing consumption that's comparable to that as well.

So, the one drug we have on tea is our K-Cups.

And, David, we don't -- our K-Cups are not sold through Hain. (multiple speakers). It is sold through Green Mountain. But it's collected in our data. So we don't -- we are not out there selling it.

Got it. A little bit of a loaded question here, I am just -- the UK opportunity with regard to acquisitions, clearly Ella's and that type of an acquisition sells well, not just in the home market, but has given you something to sell back here. Do you see a lot of those type of potential acquisitions where you could cross sell across the pond and how deep is that opportunity in that way?

Listen, we tried to New Covent Garden Soup in a carton and the consumer here didn't know what the carton was and didn't recognize it as soup. In the UK, it has been there for 20 plus years. We will be and the fresh soup business here in the US with a similar product, but not so much in a carton, and whether we will be under Imagine name, Health Valley name, or et cetera and know our brand, so there's a lot of technology that we are learning from the UK to introduce a 20- to 25-day shelf life on soup.

Listen, Ella's, the team, we closed on Ella's in May. The team had distribution by September in 4400 stores in a mass-market, and have done a great job on expanding Ella's both in products and distribution. At the same time, you're going to see similar things on Tilda, and I have said that before.

Tilda has GBP8 million of distribution in North America and not only Basmati rice, but the ready-to-eat technology; they also have different rice desserts. They also have some rice for kids that are in pouches. So we're looking at that, David.

In regards to our juice business and fresh juices and drinks and that, in the UK, it's mostly private label for us, but there's a lot we are learning and looking at that, same with -- we own Gale's honey. We have also introduced in the US some of the UK products that we acquired from Premier under the Hartley's brand, the Gale's brand, Frank Cooper brand. So we're ultimately looking to do that.

And we will continue vice versa, you heard what I said before, gluten-free, which we have close to 500 products today, we are looking at bringing some of those to the UK. We're going to use the UK infrastructure to help us with our nondairy business. We are looking to introduce snacks in the UK.

The UK has the highest consumption of chips anywhere in the world. So, we're going to look how we can both help each other in many, many ways. And the other thing, what I said before, David, we are looking at the Tilda infrastructure that has multiple distributors across the Middle East, and I'm going to be over there in the next little while. We're going to look at -- and they are all excited about Hain products. Whether it's Ella's, Earth's Best baby food, whether it's our tea, whether it's our snacks, and how we put together in one container.

And the [save one] India. That was some of the exciting things there. So lots of opportunities cross-border to sell products, both products that are in the US, across the border and products that are in the UK or Middle East to sell here.

Thank you very much.

Andrew Wolf, BB&T Capital Markets.

Was hoping to clarify, you have talked about -- given anecdotes and some granularity, but on the $15 million out of stocks, can you just with that between the UK and the US, just so we can model that and understand what the factory sales could have been?

It was probably, Andy, $12 million, $13 million in the US, and somewheres around their around $3 million to $5 million, and it actually was higher -- and I use $15 million as a rounded number. It was probably somewhere around in US dollars $3 million plus to $5 million in the UK. But the majority (multiple speakers).

Thank you.

But the majority of it was MaraNatha, which was $6 million, Earth's Best cereals, and then it was DeBoles. That's the three. And it was much higher in this quarter than it was in other quarters for the MaraNatha and just demand for that product.

Okay, and I think you have indicated going forward, it's been fixed, everything except the MaraNatha because you need to get a production line going?

Everything has been fixed on Earth's Best and DeBoles. DeBoles, we got 100-year-old plant in Shreveport, Louisiana that's just running seven days a week and running at full capacity. Part of that is looking for additional capacity or bringing up the new plant or something like that as the whole gluten-free pasta business and DeBoles line of pastas grow, because of the Jerusalem artichoke -- great brand.

In regards to MaraNatha, we have been installing lines in our facility in Oregon, in Ashland, and we should be completely done by the end of this fiscal year. It will start up in sometime in March/April. It will take us a few months to really get the line up and going full speed.

And the other thing, Andy, when I said before with out of stocks, it's not only the out of stocks; it's just business we are walking away from. And I can tell you two major customers that we have walked away from major business and also our Canadian business because we just couldn't supply.

Okay, and shifting to the -- I think you have said the POS promoting was $3 million in the US, so that would've been on the top line, right?

Approximately. Yes.

And, could you just talk about what that was about, you or John, is that to create trial in some products or was that to match someone? Why all of a sudden the increase in couponing?

No, Andy, it's basically to drive trial on our products, and it's basically moving from fixed-rate spending to scan-based spending, so we got better reflection of our investment in trade. As a matter fact, it's something that we want to continue to do. It's simply taking the inefficiencies out of the trade spending. (multiple speakers).

I understand that. I just want to understand the accounting. So the sales were $3 million last -- the SG&A was $3 million less, because you shifted where it hits the P&L and the gross profit dollars were $3 million less than if you had maintained the same less efficient way of promoting?

If we went through normal trade dollars, exactly.

Okay, well, that's fine. So we should look for that too. (multiple speakers).

But, Andy, what John was saying and what we were doing as we moved more and more into grocery, scan down makes more sense than off invoice or just giving trade promotion. You are paying for it when the consumer buys the product and that's when it -- you are seeing the benefit of it. There is other times you spend trade dollars, and it just going in as someone else's margin.

But, Andy, it's a consistent amount of spend. It's just a matter of doing it in scan as opposed to fixed cost programs at the trade. So, it's --. (multiple speakers).

That's great. So that -- because we are looking at your P&L and the SG&A was great and, obviously, of the gross profit was light. So on a pro forma if you had done it the same way last year, gross profit dollars and SG&A dollars each with have been $3 million higher, right?

So just to move on to price, pricing, did you say -- I didn't quite hear -- did you say you could get pricing out in 60 days? That seems a little quick compared to historical.

No, Andy, in terms of announcing it in regard to assessing what the California drought impact will be on our commodities out of there ex-almonds. Almonds we expect to release pricing within the next 30 days.

But, Andy, I think what he said, he has taken a price increase and we will start to see more of the benefit of it, John, in the next quarter or two, correct?

The price increases that we put in place. (multiple speakers). You'll see in the second half.

Yes.

Quantify what that is either for the US business or for all of Hain.

It's mostly the US business.

Is it -- what the average price increase across the US portfolio?

So, Andy, what we took -- we took across the portfolio at the beginning of this fiscal about 2% to 3%, between 2% to 3%, so we will see that in the second half. In regard to what we are going to have to take out almonds going forward, we are still determining that.

Thank you.

We have time for one or two more questions. Mitchell Pinheiro, Imperial Capital.

I will be quick. Just most of my questions have been answered. Your new product launch is coming up, Expo West. It sounds like a big new product launch, but you always talk about you put one -- if you put one on the shelf you are taking one off in the natural channel. Are you taking share? Are you getting increased shelf space in natural as a result or is it just culling out the bottom and putting in some more traction?

Mitchell, this is John. What it is is basically in the natural channel, it is basically pulling off the bottom and putting out new and more interesting and engaging products. In terms of the conventional channel, it is actually expanding shelf space.

Okay, thank you.

Thilo Wrede, Jefferies.

Can you quantify how much project Castle and the Ella's distribution gains with one of your large customers, how much that contributed in revenue in the quarter?

Wait now, say that again.

The Project Castle revenues and the Ella's distribution increase in the US, how much that contributed the quarter?

Project Castle was about $1 million, $1.5 million in the quarter, Thilo, and --

Ella's is between $1 million and $2 million.

Okay, so those were major drivers. Okay. Okay, then the other question I had, I think between closing the Ella's deal and getting it on the retailers' shelf here in the US, it was about five months. Can we expect a similar quick response time for Tilda in the US?

Listen, we have owned it three weeks. And Ella's was in the US. It was in Target. I think there is tremendous opportunities with Tilda, and like I said, we have got calls from customers. If I said yes, you would take my number up again, but I'm not going to -- there is a tremendous opportunity for Tilda Basmati rice and ready-to-eat rice.

And listen, rice consumption during Ramadan and other holidays are some of the strongest consumption, and I have learned a lot when consumers eat rice and around the certain holidays, et cetera, so there is a lot of opportunity out there to grow Tilda, to expand Tilda, both on the ready-to-eat and the Basmati rice.

So, am I going to commit that we're going to do the exact same timing, no. But are we going to slow down and wait, no.

Okay, fair enough. Thank you.

Thank you. I think that is our last question. I want to thank everybody for our participation today and your questions. In closing, like I said before, I am really proud of our global team; appreciate their efforts to forge ahead. And it is special for me to sit here and report a $535 million Company in this quarter, and that is stuff we will continue to do in the next couple quarters.

As we forge ahead and we tackle distribution; provide some of the best innovative products. And those that are going to the Anaheim show, you will see some of the innovation that we are doing. And some of the innovation that we are doing on packaging, products, ingredients that has to do with caloric, has to do with some of the organics, GMO verified, et cetera. And not only just supplying it and introducing them, it's making these products today and being able to source these ingredients around the world.

We are a leader in compliance across food safety and packaging standards. And with over 5000 products globally today and 2000 Certified Organic and over 500 verified non-GMO products, there is high, high, high standards that we have to adhere to, and there is a team around the world that ensures that we do that.

I have always said this here, if we were just a traditional specialty food company and not buying genetically modified free ingredients today, we would have about $100 million of savings just on cost of goods.

But that's not what we are and that's not what we do. And as one of the largest purveyors of organic ingredients and non-GMO and we put some great products out there, that's what Hain has the product, the brands, and the reputation it has.

We will continue to source non-GMO products around the world and in order to continue to provide only high-quality products for our consumer. Technology with the Internet and digital marketing continue to play an important role in consumer education. You heard what I said before on the hits that we had with our products between moms and dads on Earth's Best and Ella's and 65 million likes on our products in the month of January. And we are exploring a lot of additional ways and relevant ways to ensure that we get products to our consumer.

Coming up soon, as I said about our natural products and Expo, and please, if you're going, please stop by.

In sum, we are really pleased with our second quarter results and the first half of 2014 financial performance. As evidenced by our recent expense leverage, our global team is intently focused on driving cost of our business and realizing greater synergies. So if you come back and look at -- even though we were faced with headwinds on commodities, even though as we look to spend additional marketing dollars, and you look at acquisitions, number one, we have been able to hit operating margins. And we have been able to do lots of acquisitions as we pay down debt. And with that, it will [enable] to continue to achieve our productivity, and we're really excited. As you heard me say, just if you take the two major chains with the stores that they are opening, it is worth close to $0.75 billion.

I can't emphasize enough that Hain is better positioned than ever before with all the right people, and we continue to add to our bench. We continue to invest behind our brands and our global infrastructure that will drive sales earnings growth for the next several years.

Have a great evening, and make sure you go out and stock up for the next couple of days, because we have a lot of cold weather and a lot of snow coming this way. And you do not want to be without a Hain healthy product. Have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.