Hain Celestial Group Inc (HAIN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hain Celestial fourth-quarter and FY15 conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Anthes. Ma'am, you may begin.

Thank you, Kaylee. Good morning, everyone, and thank you for joining us today. Welcome to Hain Celestial's fourth-quarter and FY15 earnings call. Irwin Simon, our Founder, Chairman, President and CEO; John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial North America; and Steve Smith, Executive Vice President and Chief Financial Officer are here with us today, as well as several members of our management team. Our discussion today will include forward-looking statements, which are current as of today's date. We do not undertake any obligation to update forward-looking statements, either as a result of new information, future events, or otherwise. Our actual results may differ materially from what is described in these forward-looking statements, and some of the factors that may cause results to differ are listed in our publicly filed documents, including our 2014 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. Irwin?

Thank you, Mary. Good morning, everyone, and welcome to our fourth-quarter, our FY15, and our FY16 outlook. We're excited to report a record sales and earnings for the fourth quarter and our fiscal year. The fourth quarter represents Hain's 20th consecutive quarter of double-digit net sales growth. We generated record net sales up 20% for the quarter and 25% for the fiscal year to $2.7 billion. Including the impact of foreign currency fluctuations, adjusted earnings grew 22% for the quarter, and 18% for the year.

Highlights of our achievement in FY15 include: our team completed three great strategic acquisitions, with Hain Pure Protein last July, Empire Kosher, and the Live Clean brand personal care business up in Canada. Our worldwide sales reached $2.7 billion, within reach of our $3.5 billion goal for 2018. We've introduced over 200 new innovative products around the world. US consumption of our top 20 SKUs was up 11%, with distribution up 5%. We've achieved record adjusted EBITDA of $375 million, a 14% increase, and our SG&A was 13.6%, or 13% on an adjusted basis.

Productivity, which is a key, remains a key strategic initiative for Hain. For FY15, we generated about $55 million in savings worldwide, in line with our expectations. We target around $60 million for productivity in FY16. We hear a lot today about zero-based budgeting. It's nothing new at Hain. We've been doing it for a long time, and you can ask Pat Conte how we do it. These successful results were achieved despite the largest, toughest voluntary recall in our Company's history. And along with that, a fire that limited our capacity for one of our core brands, Tilda.

Strong demand for our portfolio of leading organic and natural products helped fuel our growth across 15 or 20 core product categories, sales channels, and geographies. Our portfolio is diverse across categories, brands, customers, and geographies. For example, in the US natural channel, we have 12 brands that are number one, two, or three; and in the MULO channel, where we have much more distribution white space opportunity, and John will talk about that later.

We have brands over $100 million -- we have eight brands over $100 million and we have five brands over $60 million. And which is important is how Hain is diversified -- no one brand represents more than 10% of our net sales. In the US, Hain top 200 SKUs are measured by Nielsen, grew 11% in consumption during FY15, and 5% in distribution. That's before our 100,000 distribution points, which John will outline later.

The strength of the US dollar reduced international sales by approximately $56 million. With approximately 40% of our sales generated internationally, our geographic footprint continues to grow in both new and existing markets. Sales in local currency were up in every segment of our business. Excluding the impact of our nut-butter withdrawal, organic growth was in the high-single digits. Distribution continued to grow across all sales channels, and John will again talk about the US.

At Hain, we are a disruptor. Hain is well positioned in a growing segment, with a channel-agnostic go-to-market strategy. While our brands used to be primary in the natural channel, today you can also find organic natural products in grocery, mass, clubs, specialty retailers, on e-commerce sites, QSR, sports stadiums like City Field and Madison Square Gardens, just to name a few, within food service. Natural and organic products are better for you, are now mainstream, and will continue to go more and more mainstream.

Practically every retailer is expanding into the space, including dollar stores. Our team has worked hard to build a strong, well-diversified global portfolio, and a strong customer base. We heard today about Panera rolling out BluePrint in 1,900 stores, testing gluten-free breads in their stores on the West Coast. Hain has truly evolved over the years to ensure our products are available to meet wherever consumers choose to shop. As we all know, consumer shopping habits continue to change in today's global economy, and we want our products to be wherever commerce is taking place. And as I said a lot of times, wherever there's a cash register, I want Hain products. Today, we're probably one of the few companies who can claim that 99% of our products are non-GMO, and 50% are certified organic or vegan, a claim very few consumer package good companies can make.

As I said before, we made three great acquisitions in 2015, acquiring the Plainville Farms, FreeBird, Empire Kosher Valley, and Live Clean brand. To start off FY16, we expanded our portfolio in Europe with our Mona Joya brands of plant-based beverages. We've been disciplined, and we will continue to be disciplined, in our M&A, and pay reasonable multiples. At the same time, we've invested behind our existing brands, with new product innovation and new categories.

In the quarter, acquisitions contributed $130 million in sales, which include $30 million of sales growth of the brands under our ownerships, which shows the power of our distribution system. Our global team did a tremendous job of successfully integrating acquisitions, achieving synergies including Rudi's plant SG&A, efficiencies in HPPC in the US, and Hain Daniels Grocery integration into the UK, by leveraging our infrastructure, controlling expenses, and improving productivity. We achieved the majority of these productivity benefits in the fourth quarter, after working throughout the fiscal year to reap the benefits.

SG&A as a percentage of net sales was 13.6% or a 155-basis-point improvement, or adjusted 13%, with 206 basis points improvement, from leveraging our base, including outsourcing our natural merchandising team, as well as the benefits from Hain Pure Protein, with its lower SG&A. Our SG&A benefit from accumulated efforts made throughout the year. Our record net sales and expense improvement drove our fourth-quarter adjusted earnings to $0.55, and adjusted operating income of $90.4 million in the quarter, or 12.9% of sales. Our EBITDA was $111.6 million, or 16% of sales.

Next Weekly reported last week that, increasingly, food drives are close-knit communities of people bound by not only nutritional health needs, but also personal value, beliefs, behaviors, are influencing broader consumers' food shopping behaviors. Consumers read labels today -- read where the product's made, and what it's made from. These groups and their heightened focus on food attributes are having a broad impact on the way consumers eat.

Manufacturers and retailers and food-server operators are being forced to respond to this. According to Nutritional Business Journal, these self-identified food drive members spent $92 billion in 2014, or 12.5% of US food sales. That's a big market for us to go after. This is just one small example, as many of you are aware, there are countless other worldwide, that accelerates. Organic and natural industry growth is not slowing.

Look at the fourth quarter more detail, our brand performance was strong, with broad-based increase. We had 18 brands up double digits. We had three brands up mid- to high-single digits. US growth remains strong, and we're also continuing to grow in 70 other countries around the world today, including India and the Middle East, through partner distributors.

Now I'll focus on the key drivers that led us to the strong sales performance for FY15. Personal care was up double digits, led by the growth of our core brands -- Avalon, Alba, and Jason -- with some great new packaging and great new products. I personally use them every day, myself. The baby category was up high-single digits, where we saw good growth from formula, our frozen products from Ella's, the number one baby product brand in the UK. In beverages, Celestial Seasons (sic) was up mid-single digits. We have high expectations for this year's growth, with a new logo, new packaging, some new products, our Chai Lattes, and other aseptic beverage. Everybody we've shown our package to has been pretty excited about our new logos and our new packaging that will roll out.

BluePrint is our lifestyle brand. We've hired a new General Manager, Alex Galindez, who has a successful beverage background, and just joined us from Facebook. We'll be rolling out more BluePrint juices in food service, including what I just announced with Panera today. In grocery, Imagine soup has a great new logo, great new packaging, and most important, a great-tasting product.

In the UK, segments net sales were up in constant currency, but the retailer environment does remain competitive. We saw good growth from our soup, grocery, desserts, rice, and plant-based beverages. We're expecting an exciting year in the UK this year. In FY15, we invested in our growth in the UK with infrastructure, brand building for our soups, dessert, ready-to-heat rice, with CapEx investments, as well as in our plant-based beverage in Europe, and we believe these investments are starting to pay off, and we're seeing them. In constant currency, our Tilda, Frank Cooper, Farmhouse Fare, and Sunripe brands were up double digits, and New Covent Garden was up, in mid-single digits.

We expect our Project Castle chilled-dessert business to break even in FY16. Tilda has been a great acquisition for Hain, and has performed well, with the fourth line up and running, as expected, in March. And we are ready for Ramadan sales, and we're currently meeting only 40% of our requirements in-house, and we're still using third party co-packers to supply us. We're on track with the mill refurbishing. The lines affected by the fire should be commissioned by December, and full operational in our second quarter -- in our third quarter. We also plan to expand Tilda into other grains, and as consumers increasingly realize the benefit of whole grains around the world.

Our ready-to-heat product was up 20%, in a category grown 11%. We're expanding this plant capacity with $10-million investment in CapEx. Tilda expanded Hain distribution network with great responses from the Middle East market, listing Terra Chips and other baby products, and look to expand that more and more into the Middle East. Tilda also had its first major US distribution with BJ's Wholesale Clubs, Wakefern, Giant Eagle, and Hy-Vee, and that's just the beginning.

Hain Celestial Canada, under the Rest of the World segment, performed well in constant currency, driven by Terra, Greek Gods, Jason, Alba, Avalon, and seeing some incredible traction coming from our Yves meat-free brand, as well as strong performance in the mass channel and snacks, Europe's best, Yves, as I just said. The balance of the Rest of the World was up in constant currency, with double-digit growth from Lima, Danival, Terra, Celestial Seasons, our grocery business.

In July, we acquired the Mona Group, a leader in plant-based foods and beverages, with a wide range of natural products under the Joya and Happy brands. This, as I said before, will give us access to sell products into Austria, Germany, Eastern Europe. Mona also will give us the opportunity to expand our plant-based business to over $100 million, and give us two plants of additional capacity, where we are reaching capacity at Natumi.

Internationally, we've also had a joint venture with Hutchison Hain Organic Holdings, with sales up 20% and growing, with a lot of opportunity in China. Hain Pure Protein, which we acquired last July, had a phenomenal year, up strong double digits. It's showing how the consumer today wants to eat less red meat, less pork, more protein that's organic and antibiotic free. It's a fast-growing category, and we've added capacity, which we're in the midst of building a new chicken facility, which should come on line by the end of this calendar year. Hain Pure Protein has launched Plainville Farms antibiotic-free deli program, along with a FreeBird deli program. At Empire, sales are up single digits, only owning it four months. They've introduced a new logo, a lot of new kosher products, and will introduce a kosher, antibiotic-free deli program.

Our balance sheet remains strong, as does our ability to generate free cash. We continue to always evaluate our capital structure. We take cash to the bank. At June 30, our bank leverage was 2.37, our lowest in five years, compared to 2.85 last year, during which we spent nearly $100 million on acquisitions and $50 million in CapEx. Our debt declined by $24 million. We'll continue to focus on generating shareholder returns, as well as our focus on return on invested capital. Our return on invested capital in FY15 is in the high-single digits. We're targeting low-double digits for FY16.

Looking forward to 2016, we are excited, and we're looking to build upon robust growth, with an increased focus on some of our legacy brands. We would like to get brands like Arrowhead Mills, DeBoles, Hain, Health Valley growing in high-single digits, like we did with Little Bear and Bearitos brand, up 26% this year. When you put focus, money, and attention, it's amazing what you can do, and it's much easier for us to do this than to go out and pay high multiples for some of the acquisitions that are already out there.

In FY16, we expect high-single-digit organic growth, with two-thirds of the growth of our net sales coming from existing portfolio, and one-third of the growth coming from acquisitions that we made in FY15 and the beginning of 2016. We'll continue to do strategic acquisition -- there's lots out there. But we will be disciplined, and we will continue to pay disciplined multiples, like we've done before.

Why am I so optimistic about 2016? Our geographic footprint will get bigger. Today, international sales are 40%, with the US at 60%, and I'd like to see it 45%/55% or even 50%/50%. We have a great position in categories like snacks, antibiotic-free and organic protein, which are growing double digits. We are excited about the Celestial Seasons tea launch. I'd expect high-single digits from our baby and our personal care categories.

In Europe, we now have a $100 million plant-based business, and look for some great growth coming out of Danival and Lima. In the UK, we had the impact of the Tilda fire -- that is behind us. We will have capacity with our ready-to-heat rice. We're looking for a strong year coming out of New Covent Garden soup, with new packaging, new products, and a great new product lineup for the trade. The whole meat-free category and vegan continues to grow, and we're pretty excited about what Linda McCartney will do this year. And as I said before, we expect this year for Castle to break even and be our biggest growth year ever.

I also expect some great things in expansion coming out of India and the Middle East, and China. We have 35 plants around the world, we're one of the biggest sourcers of GMO and organic ingredients. We have 6,400 talented people that work at Hain today, and we will look to add to that. We're in one of the hottest category in consumer packaged goods. All we have to do is easy -- execute. I'm being facetious, when I said easy.

In summary, we've had a record FY15. Overcame two big challenges, as the year began. The first quarter of FY16 is off to a good start. We look forward to another successful year of growth, and delivering increased shareholder value. With our $3.5-billion target in sight for 2018, we're looking for $5 billion in 2020, with continued internal growth and acquisitions.

With that, I will turn it over to somebody that's going to help me get there at the $5-billion number in 2020, John Carroll.

Thank you, Irwin. Good morning. Q4 was a very good quarter for Hain Celestial US, and it closed a strong year for the business, despite having to overcome the nut-butter voluntary recall. Key highlights from Q4 included net sales of $332.8 million, up 3% versus year ago.

Q4 net sales, ex-nut butters and FX, however, were up 8% versus year ago, with organic growth of 6%. Importantly, our Q4 growth was achieved despite weaker overall sales trends in the natural channel, and $3 million to $4 million in personal care product cuts due to an unforeseen increase in demand, which caused a significant shift in channel and product mix. Our Q4 adjusted operating income increased to $62.2 million, up $9.9 million, or 19%, versus year ago, and our Q4 adjusted operating income margin increased to 18.7%, up 250 BPs versus year ago, driven in part by almost $10 million in productivity savings, and tight expense management.

Turning to the full year, our FY15 results reflected our fifth consecutive year of meeting our US business-model financial objectives, which call for us to drive mid- to high-single digit top-line growth, 30 to 50 BPs of margin improvement, and double-digit operating income growth. So, as you look at 2015, you can see that our adjusted net sales of $1.3832 billion were up 8% versus year ago. Our FY15 adjusted net sales, ex-nut butters and FX, were up 11.3% versus year ago, with organic growth of 8%.

Our FY15 adjusted operating income increased to $236.8 million, up 11.5% versus year ago, and our FY15 adjusted operating income margin increased to 17.1%, up 56 basis points versus year ago. Additional key FY15 achievements included a very strong year for AOC consumption growth. FY15 marks our fifth consecutive year of strong US consumption trends. Our full-year AOC consumption growth, ex-MaraNatha and Celestial Seasoning K-cups, was up 8.1%. We drove AOC growth across our brand portfolio, despite going against a year-long 10.7% year-ago comp. We also delivered 17% two-year stack growth and, as Irwin mentioned before, across the ocean, Ella's Kitchen continues to be the number-one baby food brand in the UK.

Our next key FY15 achievement was our strong innovation performance. We introduced over 100 new SKUs, driving $46.5 million in FY15 sales. These SKUs included great new products like Sensible Portions Stackable Chips, Earth's Best Toddler Formula, BluePrint Organic and Raw Green Ginger 32-ounce juice, Alba Botanica Coconut Body Wash, and Celestial Seasonings Caramel Apple Dream Tea.

Another key FY15 achievement was in the area of productivity, where we delivered $35 million in productivity savings to more than offset 2% inflation. Key FY15 productivity initiatives included the BluePrint manufacturing consolidation into our Westchester plant, which drove yield and efficiency gains, with lower labor costs. We also realized the next packaging savings from identifying a lower-cost, higher-quality packaging supplier. We will look to use this supplier to drive more savings in additional product categories in FY16. And, we moved our natural-channel merchandising team to advantaged sales and marketing to drive SG&A productivity. This outsourcing initiative will improve our natural-channel merchandising performance, while reducing annual cost by 20% to 25%.

Our final key FY15 achievement was Rudi's Organic Bakery performance. We drove high-single digit AOC growth, despite slowing demand in the gluten-free category, and having to de-emphasize most of the previous owner's unprofitable new product launches. We improved the Rudi's business model by driving significant synergy savings, while simultaneously driving supply chain productivity across the product line. And, we delivered a first-year EBITDA multiple of approximately 8 times against our $62.1-million purchase price, which is in line with our objective of paying 6 to 8 times fully synergized EBITDA for strategic acquisitions.

All of these FY15 achievements will be key contributors to our FY16 performance. And, as Irwin said, we are optimistic about FY16, given several key factors, starting with our pipeline of new distribution wins. As I said on our last call, we achieved distribution wins totaling over 100,000 new points of distribution, or PODs, at key retailers across the country, in Q3. Over 70% of these POD wins are currently on shelf today, most of which appeared on shelf in the last few weeks. As we measure this, these POD gains impact will be best reflected by the performance of our top 200 products, which account for 70% of our AOC sales.

As Irwin said, our top 200 SKUs consumption and distribution was up 11% and 5%, respectively, in Q4. Our distribution momentum has continued, as we gained additional new authorizations in Q4 at key accounts such as Whole Foods, Kroger, Meijer, Publix, Sprouts, and Wal-Mart and Target. And, again, I want to repeat that Panera Bread just authorized two BluePrint SKUs in all US locations, and we'll begin shipping this week. We're also optimistic about FY16 because our MaraNatha brand is now poised to recapture lost AOC business. We've regained 100% plus of our roasted, no stir, and raw almond butter distribution. We're also executing a MaraNatha-brand makeover, featuring new interruptive packaging graphics, with a clear wrap-around label, to showcase our high-quality product, and we're aggressively investing in digital and in-store marketing to drive retrial of MaraNatha, which is still, by the way, the leading brand of almond butter in the category.

Finally, we're excited about our FY16 innovation lineup, which includes terrific new products like Greek Gods Chia Greek Yogurt; Terra Fruit and Veggie Nut Bars; Celestial Seasonings ready-to-drink and aseptic Chai Tea Lattes, which are good for the current users as well as millennials; Alba Mineral Continuous Spray Sun Screen; Rudi's Organic Pumpkin Bread, which is our first ever Rudi's seasonal product; and Sensible Portions Bats and Ghosts halloween snacks. Our strong lineup of innovation, coupled with the resurgent MaraNatha brand, new distribution wins, and a full queue of new productivity initiatives, makes us very optimistic about FY16.

So, to close, Q4 capped a record FY15 for Hain Celestial US, with 11.3% adjusted net sales growth, ex-nut butters and FX, and 8% organic top-line and AOC consumption growth. We also had an 11.5% increase in operating income, and a 56 basis points increase in FY15 operating income margin. And we're optimistic about FY16, given our continuing momentum of new distribution wins, our MaraNatha relaunch plans, our new slate of innovation, our stronger natural-channel merchandising team with advantage, and our productivity initiatives across the P&L.

Now, I'll turn the call over to Steve Smith. Steve?

Thank you, John, and good morning, everyone. I'm going to take you through the financial highlights of the fourth quarter, the full fiscal year, and balance sheet, and then we'll have a few comments on guidance. If not stated, amounts I will be discussing are from continuing operations.

We had another solid quarter from a sales perspective. In addition to increases from our portfolio, our acquisitions of Hain Pure Protein and, to a lesser extent, Empire Kosher, Live Clean, and Rudi's increased sales by $131 million in the current quarter, with these businesses showing strong growth under our ownership versus the same period last year, up approximately $30 million, to 26%. Our results versus a year ago are also affected by unfavorable foreign currency of $28.4 million; nut-butter sales, which were down $13 million in the quarter as we continue to rebuild distribution; and purposeful reductions in private-label food service rice sales in the Middle East of $10 million that were unprofitable to continue.

Gross margin on an adjusted basis was 24.9%, while it was 27.8% in the same period last year. As discussed on prior earnings calls, a straight comparison is not meaningful due to the HPP segment, which did not exist last year. Excluding our Hain Pure Protein segment, adjusted gross margin for the current quarter would have been 27.6%. The balance of the change compared to prior year, or about 20 basis points, is primarily due to increased investment in point-of-sale trade and promotional spend activities in the UK, and mix.

Increased trade and promotion investment activity in the US and UK, as well as mix, are also the primary drivers of the shortfall in gross margin, compared to our expectation for the quarter. Examples include, in the UK, at Daniels, where promotional activity has increased, and at Tilda, where we look to liquidate higher-priced rice inventory ahead of the arrival of new crop. We continue to make purposeful investments in different categories across our brand portfolio and geographies, to drive consumption and invest behind our customers, brands, and markets. While, in the short term, certain of our metrics may be adversely affected, we believe this is the right longer-term business decision.

Total SG&A expense on an adjusted basis was 12%, a 310-basis-point improvement compared to 15.1% last year. The Hain Pure Protein segment had a 170-basis-point favorable impact on our SG&A rate, and the rate of spend continued to decline in the quarter from the aggregate impact of our acquisitions, as we continue to achieve additional operating leverage. On an adjusted basis, operating income was 12.9% of sales this year, increasing 20 basis points from 12.7% of net sales in last year's fourth quarter. Excluding the Hain Pure Protein segment, on an adjusted basis operating margin would have been 13.8%, or 110 basis points higher than the prior year.

On a GAAP basis for the fourth quarter this year, our effective income tax rate was 3.7%, due to a one-time $20.7-million benefit from the tax restructuring of our Canadian subsidiaries. Of the total benefit, $9.6 million will be realized as cash in FY16. Our adjusted effective income tax rate for the fourth quarter this year, and which excludes this benefit, was 31.9% compared to 34% last year. Our adjusted earnings from continuing operations was $0.55 per diluted share, compared to $0.45 per share in last year's quarter, improving 22%. As noted in our press release, our current-quarter adjustments, which reduced net income by $13.9 million, are principally from the $5.6 million of unrealized currency gains and the non-recurring tax benefit of $20.7 million.

Partially offsetting these amounts are: start-up costs of $2.9 million related primarily to Project Castle, our chilled desserts facility in the UK; $3.5 million of acquisition-related fees and expenses, as well as integration costs including a factory consolidation project for BluePrint, as production moved from Long Island City to our Westchester facility; $6.3 million, primarily for a negotiated settlement of the personal-care packaging claim lawsuit, which goes back to 2007, around the time we acquired the related business; $2 million related to the continuing reboot of our nut-butter facility; and $0.5 million of severance costs.

Turning to full-year results, Irwin already commented on our sales numbers, but I'll elaborate a little bit more. Sales growth was driven by incremental distribution and consumption as our existing portfolio of brands continued to perform well, plus the acquisitions of Tilda, Rudi's, Hain Pure Protein, Live Clean, and Empire Kosher increased sales by approximately $514 million for the year. This amount also includes brand growth of some $75 million, or 13.3%, under our ownership.

Net sales were also impacted by the favorable -- unfavorable effect of foreign currencies of approximately $56 million for the full year -- and again, that's an unfavorable effect -- and lower nut-butter sales of approximately $30 million, which is on an adjusted sales basis. As a result, growth from both our existing portfolio and our acquisitions, excluding nut-butter sales and in constant currency, and as a percentage of sales, was high-single digits. On an adjusted basis, gross margin was 24.6% as compared to prior year's adjusted gross margin of 27%.

Similar to the explanation for the quarter, you need to exclude our HPP segment to compare to the prior year. Doing so, adjusted gross margin would have been 26.75%, or 215 basis points higher than the straight comparison. Additionally, adjusting for the effect of having Rudi's for a full fiscal year in 2015, but not in 2014, would add another 15 basis points to this year's margin, or to 26.9%. As we said when we acquired Rudi's, it would be slightly dilutive to gross margin. The balance of the change in gross margin is primarily due to the additional point-of-sale trade and promotion investment, which is shown as a reduction of net sales, and adjusted gross margin was slightly below our expectations for the same reason.

Total SG&A expense on an adjusted basis was 13%, a 210-basis-point improvement compared to 15.1% last year. The Hain Pure Protein segment had a 150-basis-point favorable impact on our SG&A rate. Additionally, the rate of spend declined as we continued to proactively manage our costs and leverage our infrastructure as the aggregate impact of our acquisitions helped us to achieve additional operating leverage. Adjusted operating income was $314 million, or 11.6% of adjusted net sales this year, as compared to $256 million last year. Excluding the Hain Pure Protein segment on an adjusted basis, operating margin is 12.2%, an improvement of 35 basis points versus the prior year.

For the full fiscal year, depreciation and amortization was $57 million, as compared to $48 million in the prior year. Stock compensation was $12.2 million for the year, compared to $12.4 million last year. On a GAAP basis for the full fiscal year, our effective income tax rate was 22.2%, compared to 33.8% last year, due to the previously mentioned tax restructuring. For the full year, our adjusted effective income tax rate was 32.9%, which is slightly better than prior estimates, due to the final mix of our worldwide income, and is the same as the prior year. Adjusted earnings were $1.88 per diluted share, compared to $1.59 last year, improving by 18%.

Our balance sheet continues to be strong, our working capital is $571 million, with a current ratio of 2.6 to 1 at June 30. Increase in working capital of $191 million is primarily from three sources: a $43-million increase in our year-end cash balance to $167 million; debt repayments; and working capital requirements for our acquisitions. Stockholders' equity was $1.772 billion. Debt as a percentage of equity is 48%. Debt to total capitalization is at 32.3%. Net debt at the end of June was $677 million, a decrease of $67 million.

During the fourth quarter, we generated $115 million of operating cash flow, an increase of almost $53 million over the prior-year period. As a result, operating cash flow for the full fiscal year is $185.5 million versus $184.8 million in the prior year. And this is despite the nut-butter recall, which cost us $34.3 million pretax. For the year, operating free cash flow was $134.3 million this year, as compared to $143.2 million for the prior year. The decrease in operating free cash flow of $8.9 million is the result of a nut-butter recall and higher capital expenditures, which are $51.2 million for the year, or $9.6 million higher than the prior year. CapEx is higher than the prior year because of $10 million of capital investment to expand the capacity and increase the efficiency at our Hain Pure Protein segment production facilities, including the acquisition of a new facility for FreeBird chicken -- and that's a processing facility. Our cash conversion cycle was 65 days for the year, flat to prior year.

Turning to FY16 guidance, net sales for the full FY16 are expected to be in the range of $2.97 billion to $3.11 billion. This includes our most recent acquisition, Mona Group, which we previously stated was approximately $50 million, and the full-year impact of our FY15 acquisitions, as well as the impact from currency. Approximately two-thirds of the growth is organic growth, including the growth of acquired brands under our ownership, and one-third of the growth is coming from acquisitions. With respect to the cadence of our quarters from a sales perspective, our second quarter is historically our strongest quarter, with the third and fourth quarters roughly consistent, and our first quarter the smallest.

We anticipate earnings per diluted share will be in the range of $2.11 to $2.26 per share for the year. We expect first-quarter earnings to be up slightly to the prior year. Mona Group will be slightly dilutive in the first quarter, and we will have a higher share count as compared to the first quarter last year. Including the effect of Empire Kosher acquisition, our gross margin for the year is expected to be 24.5% to 25.5%, while our annual SG&A rate, which includes amortization, is estimated at approximately 12.7% to 13.4%. Including the effect of the Empire Kosher acquisition, full-year operating margin is estimated at 11.8% to 12.1%. As we acquired Empire Kosher March 2015, our metrics for the first three quarters of FY16 will be impacted by the acquisition.

Our effective annual tax rate is approximately 32%. Weighted-average diluted share count is estimated at 105.5 million shares for the full fiscal year CapEx is estimated at approximately $50 million. Interest expense is anticipated to be approximately $26 million. And, as indicated in our press release, our estimates do not include any results of discontinued operations; acquisition-related expenses; integration/restructuring charges, start-up costs, unrealized currency gains or losses; reserves for litigation matters; other non-recurring or one-time items, including any product recalls or product withdrawals that may have been or may be incurred during FY16; or future acquisition activity.

And, at this point, I'll turn it back to Irwin.

Thank you, Steve. We will now open it up for questions.

(Operator Instructions)

Our first question comes from the line of Amit Sharma with BMO Capital Markets.

Irwin, you talked about expansion beyond the natural channel. Could you just lay out for us what's the growth for different channels as you think about groceries, mass, natural, and other newer channels that you talked about?

Well I think as you look today, and you look at our growth last year, Amit, we've had double-digit growth coming from two of the big mass market retailers out there. We've also had some great growth coming from retailers in the grocery channel. And if you come back and look at what John talked about as 100,000 SKUs growing, it's growing in grocery and mass market. And just to name a few, the commitment by Target, the commitment by Wal-Mart, commitment by Sam's going to more and more organic products. And as Sam's sells to food service and other consumers, and again, on digital, the big thing, what's happening today with digital whether it's Amazon -- and not only Amazon, it's retailers that are selling direct to consumer.

You heard me talk about this morning where Panera is taking BluePrint in 1,900 of their stores around the US, and they look to roll out and test gluten-free breads on the West Coast. Our protein business, and we have seen some incredible growth on protein in regards to antibiotic-free and organic. So if you go to City Fields you'll find our products. You go to watch a game at Madison Square Garden you'll find our products. So as I said, Amit, everywhere there's a cash register, but if you look at what Albertson's and Safeway, as the two retailers got together and see their growth, the focus and they said that in their recent prospectus, their focus on natural organic is a big focus for them.

So I would come back and say again, with Whole Foods, and yes, there's been slowing in the natural channel, but with the growth among our mass market -- listen there's 4,400 Wal-Marts, there's 600 Neighborhood Shops, there's 600 Sam's out there, there's 400 or 500 Costcos around the world, there's 1,800 Target stores. There's 2,200 Albertson's Safeways now under one banner. There's 3,200 Krogers, not just Publix, Wegmans to name a few, and then there's all these regional retailers, there's lots of room for us to go. If you come back and look at our ACV in grocery today, it's probably in the 35% range, if you take all our products, and the opportunity for expansion. And again, where it's coming from, it's not that consumption is growing, and you heard me talk about the $92 billion of food out there that is converting. It's converting from conventional food, where the consumer is looking for healthy alternatives.

Got it. And then just a quick follow-up with Steve. Steve, I don't know if I missed it, did you give FX impact for FY16 on sales?

I did not, but the impact is approximately $50 million on FY16. Most of that is going to be in the first half of the year.

Great, thank you very much.

Just to add to your comment before, I think as I said to you the big thing about Hain is how diversified of a portfolio we are, and how we have the opportunity to sell in a lot of retailers. And that's when you look at our earnings and as we look at guidance, I mean, we're looking at 70 countries that we sell in today. We're looking at multiple categories, multiple brands. And I think the thing is that comes back and shows us here, we were off close to $50 million on MaraNatha this year between the brand and the private label sales, and we made it up with our other products and our other brands around the world. And not easy to go out there and make up a $50 million drop in sales when you have a brand like that, and when you see natural slowing and go out there and make up the sales that we have made up in other chains, which shows the demand for our products.

Got it. Thank you very much, Irwin.

Our next question comes from the line of Evan Morris with Bank of America.

I guess first question is for John.

Evan, could you speak up? We're having trouble hearing you.

Yes, can you hear me now?

Yes.

Okay, first question is for John. You mentioned that you're very optimistic about FY16 in the US, and just wondering if you can kind of put some parameters around that, your expectations for sales growth for the US business, I guess, really on a like for like, you have some easier comps in the first half. You're rolling through the MaraNatha issue. So if can you just frame where your expectations are for FY16, and I guess the cadence of how it flows through the year?

Well I think our 16 objectives are consistent with what we've called out in our US business model. Look, we're looking to drive mid to high single digit top line growth, we're looking to find 30 to 50 BPs of margin improvement, and we're looking to drive double digit operating income for our sixth consecutive year. In regard to the cadence of it, clearly, we're going to have a benefit with MaraNatha in the after post August 19, which is today, because we will be going against softer comps, so we should see some strengthening in MaraNatha. There are puts and takes throughout the portfolio, but look, I think that our strongest part of the year will be the second half, as you'll see the full maturation of the 100,000 points of distribution that I talked about last quarter, as well as new wins that I mentioned in this quarter.

And Evan, I think the big thing, just going into what I said before, to Amit is this here. The world is our oyster out there, in essence where to go with our products. And I think the big thing is you come back and you heard me say, so we're rolling out a whole new line of teas with Celestial, going after millennials. If you look at Celestial today, it goes after an older consumer base. If you look at our snacks, what we rolled out with Sensible Portions and as we went into Wal-Mart with an exclusive package similar to a Pringle package in our new snacks. So I think from a US standpoint, with the amount of retailers and the amount of ACV and white space out there, there is a lot of opportunities for us to grow our business.

Okay, and then just a question on productivity. You had $55 million in savings this year, with a lot of issues, whether it's the MaraNatha, the Tilda fire, whatever it is. And you're targeting only $60 million for next year, so I'm just wondering why that number isn't meaningfully higher, what -- why aren't there further opportunities for additional savings, considering again, you've got $55 million in this past year with a lot of those headwinds?

So number one, when we go for $60 million we start all over again, so it not like we take $50 million and we get a plus $5 million to add to $60 million, okay?

Right.

So the clock starts at zero to get those, so that's number one. Number two, I will tell you this here. When we get to $60 million, we don't stop looking, okay? I think the big thing is, where do you look and where do you go? A big part of last year had to be SG&A integration. A lot of it comes from acquisitions and procurement. So again, I come back and say $60 million is a good start and a number that we can achieve, but if there's $100 million out there, I promise you, we'll go for it.

Okay, and do you think as you look at the productivity and cost-saving opportunities, whether it's integrating certain businesses, whatever it might be, the $60 million, is that a pretty good run rate then, at least for incrementally over in the next couple years? Is there still that level of productivity savings and left within the business?

I think a couple things, Evan. It depends on acquisitions, as we do acquisitions, how we integrate them, and productivity we get out of those. Listen, we have not integrated all our UK businesses. There's three businesses over there that still operate separately, and we've done that for a reason. As one of the big things today is we globalize our business on procurement. Right now, as we look at freight around the world, we have what is it, 8,000 to 10,000 ocean liners we use, that we're now consolidating through one ocean liner company, our freight, our warehousing, and that's where we are going.

If you come back today and look at Hain and our business, so the US, excluding protein, is $1.5 billion, $1.6 billion next year. You look at our Hain Pure Protein approaching a $500 million business, I mean, there's a tremendous amount when it comes to insurance, when it comes to corrugate, when it comes to packaging. As we look today with health insurance what we're purchasing around the Company. So we will continue as we add people, as we add manufacturing facilities, we have 35 manufacturing facilities around the world today. It's amazing how much money we save as we buy hair nets from one Company around the world, or earplugs, or safety glasses, et cetera. So that's a big part, as we bring it all together on a global basis.

But I come back and say that we can sign up here, and $60 million is a number built into our budget. It's not like it's a low-hanging number out there, we don't hit it, no big deal. It's all part of our compensation. So it's there, and at the same time, if we can put productivity and cut other costs, and put it towards marketing and building brands, we're going to do it.

Okay, thank you. I'll pass it along.

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

John, when you joined this Company many years ago, I doubt you ever expected to be talking about a 19% operating margin, so to follow on, on that last question, where can this operating margin go in the US?

Okay, so as Steve mentioned before, our operating margin is still being weighed down by our Rudi's acquisition. So as I look at this here, I think we can continue to be adding 30 to 50 basis points of operating margin improvement year-on-year for minimally the next three years. As Irwin said, there's still a lot of opportunities here, for us to take costs out of the business. Back to Evan's question and so I can give you some sense of this. We've got some -- one of the reasons why we're not seeing a huge increase in productivity this year versus last year is we're moving to longer lead time projects with longer -- which ultimately produce longer streams of annual productivity savings. So God, I don't think we've hit a wall here yet. I still think we can continue to deliver, as our financial model has been doing for several years.

And Scott, just to add to that, if you come back and look at our infrastructure and our SG&A today, the infrastructure is built out, and yes we'll continue to add to it. But if we can add and get to the $5 billion mark by 2020, after cost of goods, a lot of that drops to the bottom line. It's not that we're going to be adding three more John Carrolls or three more Irwin Simons, thank God, but there's additional manpower. But that's the big thing here, is how we build scale. And if we can grow high single digits low double digits and do $100 million or $200 million acquisitions, there's a lot of coin or gold that drops to the bottom line here at Hain.

Okay, great and then another one for John. So I think the stat that was thrown out was that the top 200 SKUs in the US in the fourth quarter had 11% growth in measured channels, and then that was about 70% of the sales base, those 200 SKUs; is that right?

That's correct for the AOC channel, yes, Scott.

So can you help us foot the other 30% of sales, the rest of the SKUs, and bring it to that 6% internal growth number you gave from the US in Q4? I'm wondering, it just seems like a big disparity. 11% growth in the AOC channels for the majority of the business, and then a 6% internal growth number for the entire US business. Can you foot the two?

Sure. I think the key is that the AOC business accounts for 60% to 65% of our business, so it speaks to, as Irwin mentioned, that the natural channel, for example, is not growing for us at this point in time. That balances out, even though we're looking at Top 200 SKUs, the overall business has a drag on it, a slight drag on it, as a function of the non-AOC business and the non eCommerce business.

And in that number you are not including the Costcos of the world, the eCommerce, food service, et cetera. So that's additional growth opportunities, that's not in the AOC number.

The natural channel is, I think, the piece that I wasn't getting there. And then real quick, one more, I apologize, the Pure Protein number was really strong this quarter. Can you give us an idea of what to expect, maybe in Q1, or the first half? Its been a tough number to forecast, now you've got two acquisitions we're compounding on.

So again, Thanksgiving will be -- this will be a big year for turkey. Turkey prices are high, and so if you come back and look at Hain Pure Protein, the second quarter and your fourth quarter are your biggest quarters, and then if you look at Empire, it is your third quarter, no it's your fourth quarter this year because Passover is late, and that's a big quarter for us. So that's your biggest quarter. So basically your second and your fourth quarter are your two biggest quarters, Scott.

Listen, the big thing coming out of Hain Pure Protein is we're today processing close to 10 million turkeys a year, 20 million chickens, all antibiotic-free and organic. We are launching a major deli program, and going after the antibiotic-free and organic deli category to further process. We look to grow that to a $0.5 billion business for us, and not only as you look today for fresh products, we have a great fresh distribution system with Hain Pure Protein today, and today we'll have, with our new plant coming on, we'll have four protein processing.

And I come back and I say this here, the big thing that we've done with Hain Pure Protein, we have bought this business in 2005, it was an $8 million business. Between our growth and acquiring Empire, it's on its run rate to be $0.5 billion in size. If you look at consumption on chicken and turkey, and protein, here are the two categories that are growing. Listen, avian bird flu was something out there last year, and I knock on wood and we avoided it, and that has driven prices up. I like where corn prices are today, soy prices in regards to that, but it's a fascinating category with tremendous opportunity, and great demand for us. And expansion opportunity, and the big thing, Scott, here, what's happened for us is before this business used to be 60%, other people's label and 40% our brand. That's reversing to 60% branded, 40% other people's label.

Thank you.

Our next question comes from the line of Scott Mushkin with Wolfe Research.

So I wanted to get back, I know there's been a lot of time spent on the call on the growth rate and given the channel shifting going on in the mainstreaming. But I think what I want to dive into is, does -- when does the slowdown in the natural and organic, when do you get a little bit nervous about that, number one? But also number two, and I think maybe more importantly, how does it change your business as you start dealing more and more with the guys like Kroger and Target and Costco and Amazon. How does that change the dynamics of your business, your go-to-market strategy, and then I had a follow-up.

I think, Scott, to answer your first question, this is John. Look, the slowdown in the natural channel, it would make us nervous if we didn't see it offset elsewhere in the business, in terms of -- in conventional, specifically. So as we look at this and we continue to see good growth both for the category and ourselves in the natural channel -- in the conventional channel, we're still very comfortable with our category. In terms of the dynamics, when we start to work with more conventional customers, the key dynamic is that you're -- in many instances, you're dealing directly with a direct ship customer, and as a result, your programming and your pricing ends up being better than it would be, in instances where you would previously have gone through a distributor. Because it's the same cost, just with going to a direct customer, you actually can invest those costs directly against price and programming. So ultimately, that should lead to faster turn of our products in the conventional channel, which will ultimately help us as long as the category continues to grow overall, lead to good strong growth for ourselves.

And Scott, I think the thing is you come back and look at Hain today, and as we've been building out the infrastructure and building out for this year, we feel that our growth will come back. Among natural, there's 467 Whole Foods out there, there's 180,000 -- 180, I wish 180,000, 180 Sprouts, and they continue to open up stores. So between the two of them, they will continue, and I think they will right size the numbers and get pricing right, and we'll continue to see growth absolutely rebound in both Whole Foods and Sprouts, and I feel comfortable in saying that.

On the other hand, as I keep saying, there is so much other conventional product that will convert to natural products. And one of the things that we have done and we've talked about it, we've set up an infrastructure to go out and service all these direct accounts, so we have a team down in Bentonville, we have a team up in Minnesota, we have a team that just calls on club stores, we have a Kroger team. We have a Publix team. So we have built a sales organization out there, and we have built a distribution network to be able to deliver to these accounts. And there's some that talk to us now about going direct, and because they can get a full truckload coming out of Hain, and that's the model.

So today as we built this out, that was part of our overall strategy many years ago, that we felt confident in this category, that this would continue to grow, and this was just not for consumers that shopped in natural food stores. And today, we have a distribution system built out to service every grocery store in America, every mass market, we have a sales organization that calls on channel specific, we have merchandisers that just call on natural food stores that we've outsourced today, that have the newest technology to go into a store. So we're there for that, regardless of the channel, and that's what I said before, wherever there's a cash register, we can sell Hain product to today, and as we look to grow up and down the street, as we look to grow more and more food service, again just think about it. We're going to be able to distribute BluePrint with a 40-day shelf life on it to 1,900 Paneras around the US. We sell a lot of chicken and turkey today to a lot of retailers with seven-day shelf life on it, so we're set up for it, and we're ready to sell a lot more.

So Irwin, that's a good segue into my second question that goes to the M&A side. A lot of -- you have obviously been doing smaller tuck-ins with great results, but I guess the question is, you look across the landscape. Is it time to consider something bigger, particularly in the US, as the land grab starts to increase? As the food, the mainstreaming of the pure foods movement continues, and maybe even accelerates? What's the Company's tolerance for doing something a little larger, and would you consider paying a little bit more if it were likely important strategically?

Listen, number one is, I think Hain gets a tremendous amount of credibility out there for what we've done on acquisitions and made some great acquisitions and multiples that are attractive, and there's times we've been criticized that there's no more acquisitions, and we keep seeming to find great niche acquisitions, and have done a great job at it. You sit back and look at our portfolio today, and if we had one of the top consulting firms do this 20 years ago, I don't think they could have come up to where we are today. But the next phase at Hain to get to a $5 billion or $10 billion Company, just adding $50 million in acquisitions is going to be tougher for us if we're looking to get to $5 billion, $7 billion, $8 billion. So my tolerance is, listen, and I don't have tolerance for debt with 3 plus in it. On the other hand, good, accretive strategic acquisitions, if we added some of those, and they made sense, we would definitely look at those.

But I think as I said, we're not going to go out and pay 5 times revenue for $100 million acquisitions, or we aren't going out to pay 4 times revenue, and that's -- I think there's a lot internally. And what I said originally was we have brands today in Hain, Health Valley, Arrowhead Mills, DeBoles, Westbrae, that we already own. Put some focus against them, get them growing, instead of going out and buying some of these start ups, our return on invested capital is going to be a lot better, and it's going to help our growth rate, because some of those are flat or declining. So that's what we're going to look at, but as you see, our balance sheet today, our debt to equity, we're down to 2.3 times. We haven't been there since 2008, 2009.

2012.

2012. So, Scott we have the ability to step up and do a big acquisition.

That's perfect, thanks for taking my questions, and thanks for the answers.

Our next question comes from the line of Alexia Howard with Bernstein.

Can I touch a little bit on the gross margin outlook? There were a lot of puts and takes this quarter that you went through, but as you look out into 2016, are you anticipating that you might be getting maybe better operating leverage, or what's the shape of the gross margin outlook from here? Thank you.

Well we gave guidance of 24.5% to 25.5% for FY16, and that includes the Empire acquisition. Obviously, productivity is a margin enhancer, mix is a margin enhancer; however, things like inflation will offset that. So we continue to believe that we can expand gross margin into FY16 and beyond. And do you have any other questions, or did I answer your question?

Yes, it was really just around the comments around promotional activity stepping up, is that going to get more intense? But it sounds as though it's more steady as she goes through the year.

Right.

Okay, and then just a quick follow-up. You said that Tilda is proving to be a great acquisition. I think, to begin with, there's obviously been issues with it along the way. Is that coming around really strongly now? Just a quick update on that because that did sound as though it was a change. Thank you and I'll pass it on.

Sure, thank you. So Tilda was a great acquisition, we paid a good multiple for it. It got us into grains, which great growth category, basmati rice, great demand. It allowed us to expand into other markets like the Middle East, like India, and the ready-to-heat which is the fastest growing grew almost 20% last quarter, and the category growing at 11%. Right now, we've just picked up BJ's Wholesale Club, Hy-Vee, Wakefern here, and Giant Eagle here in the US.

We look to introduce the ready-to-heat. Our plants should be up and running 100% by the end of calendar year. Our ready-to-heat facility should be up running in the beginning of the new year. So if you go back and look at multiples that were paid, and you look at a global brand business, and today we paid about 9 times before synergies and savings, and you get a global brand like that, Alexia, its been a great acquisition for us. If you look at all of the components its done for Hain.

Great, thank you very much. I'll pass it on.

I'd like to find another Tilda.

Very good.

Our next question comes from the line of Ken Goldman with JPMorgan.

Good morning, everybody.

Ken, how are you?

I'm doing well, Irwin, you?

I'm great.

How is the knee?

That's the third thing that happened this year. I'm not skating yet.

John, I think you said your sales in the natural channel aren't growing. We can see how comps have slowed there, but total sales for most of these customers including new store growth, they remain positive. So I'm curious why Hain still wouldn't, in general, see revenue growth in that channel, even though comps have maybe come down a little bit?

I think we are seeing some growth from new stores, but from a comp store basis, we're flat. So that's the key piece of that one.

Got it. Okay, we're running long, so I'll just let it go there, thanks everyone.

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

Irwin, congratulations on a really good year. But I do want to ask about the UK, if I could. Could you just elaborate on the profit situation? Is that mainly what's going on competitively among the retailers? Are they pushing private label, and is that causing branded players to have to step up promotionally, or is there something else more operational happening with the profits?

No let's come back and look at UK in four different outlooks. Number one, from a Tilda standpoint, we had a great year on ready-to-heat, an okay year on Tilda bag rice. As you go back and look at Hain Daniels, we had a really good year on our grocery business, and the thing about our grocery business, we focused on the brand. Private label was where we were hurt, because you had European private label coming in at lower prices, and we just backed away from pricing there.

In regards to our soup business, we spent a lot of money and launched our soup business, you saw that we grew 8% in our soup business. Our New Covent Garden soup, and we're ready for a great soup season this year. We picked up some additional fruit business, fresh fruit, fresh juice business, which is mainly private label. You've got to remember in the UK, 60% of our business is branded, 40% is private label.

In regards to Linda McCartney, we saw growth but not profitability. Where we invested, we're looking for both this year. And Castle, we're looking to breakeven this year on Castle and hopefully make some money. So again, its been investment. Today, we got close to $1 billion business in the UK, Andy. And then last but not least, our Ella's baby food and our baby products, very profitable, good growth, it's now the number one baby product, the number one baby food in the UK.

We're in the midst of launched our non-dairy plant-based beverages through our grocery group. We'll look to introduce Celestial Seasonings, we wanted to wait for the new packaging. We're going to look to introduce Sensible Portions now, and we backed off acquisitions until now, until we got everything fixed in the UK, and we're expecting a big year in the UK, where profitability this year is up almost 40% to 50%, if you look at our profitability this year, so looking for a big year. Listen, we started the year with a fire with Tilda, that hurt us, with some other issues, but we're expecting some big things coming out of the UK this year.

That's comforting. So it sounds like some of the results in the last couple of quarters were impacted by these investments in soup and some other things, and also, I guess stepping back from some unprofitable business.

Some of the things that we right sized in the business, we had a business called Abu Shmagh, which basically was a food service private label business, and the previous owners in that sold a lot of rice into the Middle East. It was great for sales, but there was no profitability. We decided to emphasize that, just in this quarter, the fourth quarter alone, it was $10 million of sales that we've taken out, and it was basically either sold at a breakeven or a loss. So there's some stuff in Tilda we're still cleaning up from the prior owners, and the thing is you've got to look at UK on our branded business and our private label business.

Just one follow-up, and it's about Tilda more in the US. So you announced some new distribution gains. Is that in the ready-to-heat products or is that across the portfolio, products?

It's across the portfolio. In BJ's, it will be in the bulk products, and in grocery customers it will primarily be in the ready-to-heat, but we're getting interest in both sides of the business.

Do you have, what kind of expectations do you have for that product? Especially ready-to-heat for this year, is it either in the guidance or above and beyond the guidance, if you wanted to comment on that?

Here, it's incorporated in our guidance, but we're very excited about the ready-to-heat. We think it's a truly differentiated product that we can drive some sales on, going forward.

Andy, not a lot, because the big thing with ready-to-heat, until we get capacity in the UK, with 20% growth in the UK business, we've got to get that in our new plant that we've just added. We have a plant in the UK, which is the Jazz plant, which was not affected by the fire, but is running 24/7 just to supply our demand in the UK. Ultimately, what we have to do is move manufacturing here, and that's something we will do, because everybody that we've shown the ready-to-heat product to wants it. We just don't have capacity.

That's very clarifying, thank you.

Thank you. Our next question comes from the line of Bill Chappell with SunTrust.

This is actually Stephanie on for Bill. I just have a quick question about what you're seeing in terms of the competitive environment for baby in the US, and if there's any change to that? And that's all.

So here, Stephanie. This is John. Basically, the baby environment is very competitive right now, and it's driven primarily by the mass customers. We don't see any significant change in the level of competition in the short-term, and that's why we've actually, as we have spoken about earlier, we've actually increased our investment against our baby brands, and quite frankly, it's working. Earth's Best continues to be the number one organic baby food brand in terms of the standalone brand, and showing good growth in the high single digits. And Ella's, look, we had a rough year at Wal-Mart where they brought in Happy Baby and Plum onto the shelf, but actually even Ella's, as we lap the introductions of Plum and Happy Baby is starting to get more traction in Wal-Mart, and overall it has always had a very strong business at Target.

I appreciate the color, thanks so much.

Our next question comes from the line of Andrew Lazar with Barclays.

There was some discussion, as I recall on the last conference call, about, as you build new distribution and gain on some of those wins, I think that the velocity of the sales in those new points of distribution come in at slower rates for a period of time, until they build up to more of the Company average, or the channel average. And that's when you would start to see organic growth really accelerate, as a result of those new distribution wins. So I'm trying to get a sense, first off, do I have that right, and then because some of these new distribution wins you have talked about are so new, I guess is there a typical lag that we should expect between those new products getting on shelf, and when you see the organic growth accelerate as a result of it? Or what stage are we at in that process or what that history shown you when you've gotten new significant wins, like the ones you've talked about are, in terms of the forward-looking growth?

Andrew, this is John. What we generally see is that it takes a new SKU three to six months to fully achieve velocity comparable to the SKU, the same SKU in other retailers. The only wiggle there is if it turns out that they bring it on shelf, and you have to wait nine months until -- if they do it right at the end of the season. So for example, for soup, if you brought it in April, or some of the other -- or tea, and then you'd have to wait a little bit longer as you got into the season. But overall, here is why it's so important that we focus on the top 200 SKUs, because those are our highest-velocity SKUs, and generally have our highest distribution, as well. And as we bring them on, we will actually see the new distribution ultimately lift the velocity of the entire business, because as I've talked about, in each of these channels, the top 200 SKUs accounts for 60% to 70% of the business.

Okay, so is--

Andrew just again, as we cut them in, it takes times as they do the resets, and some in September, and then you run into holiday season, where no new products come in, et cetera. So there is three to six months before you get it in, and most retailers reset once a year, some do twice a year.

And I'm trying to put the sheer number of the new points of distribution, the 100,000 number, just because I forget perhaps. I'm trying to put that in perspective of how significant is that, relative to when you've won sizable amounts of new distribution before? Is this, maybe the largest incremental gain in new distribution you've had in a couple of years? I'm trying to put it into perspective, because I truly don't remember.

Sure, what I'd said before was that these new gains are comparable to what we saw in FY14, where we gained three huge pieces of business, driven first by Wal-Mart because Wal-Mart is 25%-plus of the AOC on Sensible Portions, Greek Gods, and Ella's Kitchen. This is a little more fragmented, because it's not concentrated on three key brands, but in terms of the actual increase in PODs, this is more comparable to what we saw in FY14 which had been, by far, our largest increase, at least in the history that I've been here at the Company.

Got it, okay, thank you because what I'm trying to do is you get a sense is -- again trying to draw what could be a reasonable connection between some of the distribution you've talked about and where organic sales growth can go, and things of that nature. So that's helpful, thank you.

Andrew, there's more to come. Just because we've got 100,000 doesn't mean we stop there. We're presenting new products all the time.

We talked about getting nice gains in Q4 as well.

So I think you've got to look at that too so as -- which is important.

Thank you.

Thank you. We do have time for one or two more questions. Our first question comes from the line of Rupesh Parikh with Oppenheimer.

So I just wanted to touch on the natural channel. So clearly, trends there are continuing to slow at some of your leading customers. Just want to get a sense, as you look at the various channels, what other opportunities do you see right now in helping to drive stronger growth in the natural channel?

Listen, I think it comes back down to three things. It's selection, it's price, and again, making sure the products are in the stores, not out of stocks, and that we have distribution, and I think that's key in regards to maintaining and getting additional growth in natural food stores. But if you're out of stock, you can't sell a product. If you're priced 20% to 30% higher than other retailers, retailers today are crossover shoppers. And last but not least, is there's selection -- that you have to have the right selection. And what we continuously do is we come out with new products around natural expo. We look to introduce them into the natural channel first, because that's where our original, that's where our consumers shop, so innovation is key there, also.

And is there more than, go ahead.

Rupesh, this is John. One other point I would add is when you think about our key natural channel brands, MaraNatha obviously did not have a strong year, given the recall. Imagine Soup, we've been quite candid about, look, we did not execute soup season like we wanted to, and we will not repeat that this year. We're going to win in soup season. And Dream plant-based beverages, those are three key brands that we're putting quite a bit of effort against, and we think that we can dictate our own fortunes in the natural channel by investing on those businesses, in those businesses and driving increased consumption against what I'd argue is probably a low base in that channel.

But consumers today are out there shopping for selection, innovation, and price, and that is something so important, and I think that's a key driver where natural has got to focus on.

And on the selection side, do you see an opportunity for maybe more exclusives going forward for the natural channel?

Sure. I mean listen, with the major natural food retailer in July, we had a Hain store within a store, and in 176 of their stores, and we had a couple hundred SKUs in there, John? Very, very successful. And again, with Bearitos, Westbrae, and we look at what do we do with certain brands that are focused on just natural channels? Listen Arrowhead Mills and DeBoles are focused on the natural channel. We have 50-plus brands today, and that's where the opportunities are, what brands do we bring that are exclusive, just to the natural channel.

Okay, thank you for all of the color.

Thank you. Our last question will come from the line of Anthony Vendetti with Maxim Group.

Thanks. Just a quick follow-up on the ACVs and grocery, you said you were around 32% or so. What is the opportunity there, in terms of where do you think that could go over the next several years? And then just a quick question on Ray Kelly joining the Board, just the rationale for that, and the composition of the Board going forward now?

So Irwin had talked about an average ACV of about 35%, that actually reflect our top 100 SKUs. Our top 200 SKUs average about 26% ACV in the AOC channel. Look, I think that if we continue to focus very diligently on driving the top 200 SKUs, we could move that number up to 40% to 50% over three to five years, so I think there's a lot of room there.

And regards to the Board, the composition of the Board, listen, I think we have, as always, we have a very independent Board. I'm the only insider on the Board and that's been the way all the time, very much an independent Directors. The Board is elected every year. In regards to Ray Kelly, we had a Board member that passed away this year, and when I was out there looking for Board members, what do we not have on the Board today, in regards to experience, that could ultimately add value? I've known Ray a long time. He ran a 55,000 person police force in New York City, he ran customs, he's -- from a global standpoint.

Today, as Hain expands into so many countries around the world, with cyber security and we recently heard about Reuters being hacked with press releases, our risk management, our international relationships today is we go into India and the Middle East, the risk management today in regards to the companies and foreign corruption acts and stuff like that, just to ensure, so it's just another element to ensure that Hain has experienced Board members to help us with. We have a diversified Board today that understands food and understands packaged goods, that understands finance, that understands comp, and when you can get somebody like Ray Kelly's talent, it's a big addition to our Board, and we'll continue with our Annual Meeting coming up in November, as we look to add to the Board, and that's something we'll continue to do.

If I could just follow-up on the Hain pure protein. Clearly, you've been able to avoid the avian flu issue, but as you mentioned, turkey prices are going to increase this year. How do you adjust for that? Is that something that just impacts the gross margin a little bit, or do you try to pass that along to your customers?

Hopefully when you've got the goods you can get the price, so that's one thing. And the good news is the thing about turkey, the poults are in the ground now, and we're growing them, and we're growing our own. So we're positioned for that, and let's knock on wood there. We are set and we're expecting a major Thanksgiving this year, we're looking for good pricing.

The good news is consumer wants antibiotic free. Today, we're probably one of the largest producers of antibiotic free turkey breasts, turkey in general, ground turkey, and the market is moving more and more towards that from a protein standpoint, and the same with chicken. So we're vertically integrated and again, we're watching our barns, and we've got a lot of security in place when it comes to our barns, and how you visit us, et cetera. And that goes the same for Empire Kosher today, in regards to all of our products going through there, antibiotic free, or organic, we're moving towards that in regards to our whole deli program. So the big difference is, we aren't out there trying to buy birds on the market, we have our own, with our own grower barns, and we can manage that very closely.

Excellent. Thanks a lot.

With that, that is our last question, Mary tells me, and when Mary tells me something, I've got to listen. Again, 2015 started off last year this time with us discussing a major product withdrawal or recall, one of the biggest and toughest within Hain history. As you heard me say before, including private label products that we manufacture, it was close to $50 million in sales that we didn't get this year, and we plan to make up every dollar of that and then some.

At the same time, we did make it up with other brands, other categories, other products. We made the profitability up, and within months got back in production with MaraNatha and have recovered from it and you're going to see some major distribution drives and some major things happening with MaraNatha, as John talked, about new packaging, new products et cetera. We can't control the almond prices, but we'll get the product out there, and we'll look to from lots of productivity, to manage the pricing.

With regards to Tilda, again, we never planned for a fire. We never had a fire before, and in October we had a major fire. But within weeks, Rohit, Umesh, and Bob and the team were able to move to third party co-packers, which is amazing, and not miss a beat. We might have missed a few weeks of production, and we were able to be back up and running and servicing Tilda brands around the world. At the same time dealing with demand of ready-to-heat rice and, which I've learned buying basmati rice is not that easy. A lot of fluctuation in price, a lot of different farmers in India, and we have done a great job, and the plant -- we'll have a brand new plant with many efficiencies, lots of velocity and have capacity to produce a lot of product, and again, that is behind us.

Other challenges happened in the year, but we deal with them and we move on, and whether natural channel's slowing, and where do we move that to, whether we have a customer that decides to discontinue a product or bring on other products. Or as you heard John say before, with bringing on a new customer, where we overshot the projections and our volume on personal care took us out of stock on other customers, and how do we make up that $5 million to $7 million of out of stock, those things happen.

What Hain does a great job at is managing a very diversified portfolio with multiple commodities, with multiple geographies, multiple customers. As you heard me say, there's no one brand that represents more than 10% of our sales, and we have an exceptional diversified customer base, where our biggest customer today is probably 13% of our sales, and if you look at our business today, we're 60% US, 40% outside. Yes, we have currency fluctuations, but we'll deal with it.

We're in a hot category. Natural organic products will continue to grow. As I've said it before, eating healthy is not a fad. It's not a trend. It's a part of life, living healthy and lifestyle. If you go back and ask anybody about the word wellness 10 years ago, maybe 5%, 10% focused on it. Today, it's 99% and eating healthy is not for the 1%, and we're seeing it growing in multiple channels and multiple mass retailers around the world.

You heard me talk about our balance sheet. Our balance sheet is strong at 2.3 times, so we have the ability, as asked to do multiple acquisitions out there, and to do acquisitions that are much higher or larger than we've done before, and we've tested that before. We didn't go ahead with it, so we would know how to integrate that.

What I have to say is this here. We have an exceptional team at Hain, that is why we've been able to put these results up. There's a roll up your sleeves, get things done here, and we're entrepreneurial, we're nimble, flexible, and the team works 24/7 to make things happen around the world. Today, we have 35 manufacturing facilities. We have now one in Vienna, two in Germany, in the UK, so again, we have multiple manufacturing facilities, as we have to manage that. I'm excited about 2016, because of our products, our categories, our customers, and last but not least, just the demand for natural healthy products. With that, I want to thank everybody again for joining our call today, and enjoy the rest of your summer and continue to live, drink and eat healthy. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.