Hain Celestial Group Inc (HAIN) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Hain Celestial first-quarter fiscal year 2016 conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mary Anthes, Senior Vice President, Corporate Relations. Please go ahead.

Thank you, Abigail. Good afternoon, everyone. Thank you for joining us today.

Welcome to Hain Celestial's first-quarter fiscal year 2015 earnings call. Irwin Simon, our founder, Chairman, President and Chief Executive Officer; John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial North America; and Pat Conte, Executive Vice President and Chief Financial Officer of The Hain Celestial Group are with us as well as several members of our management team today including James Langrock, who recently joined us as Senior Vice President and Treasurer.

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 these factors which may cause results to differ are listed in our publicly filed documents including our 2015 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 last approximately 1 hour, so please be brief and 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, and good afternoon, everyone. I hope everybody had the opportunity to review our press release for our first-quarter earnings of 2016, which is typically our lowest sales and profitability quarter.

We're pleased to report record sales and earnings for the first quarter which in recent years, as I said before, is our lowest quarter. What's going on with consumers and retailers today? The food landscape has changed dramatically.

Fresh, organic and natural products continue to take share from conventional brands and products. Practically every retailer and food service operator is expanding into the space in one way or another. There is an evolution and change in packaged foods and packaged consumer products.

Our global teams have worked hard to build a strong, well diversified customer base worldwide. Hain is increasingly becoming more and more channel agnostic. Today our products may be found in many different channels and many different places around the world, illustrating customers' heightened awareness of overall health, wellness and their desire for farm to table organic natural products wherever they shop today.

Where there is a cash register, as I've said many times, or e-commerce, I want a Hain product and I want to sell product. The consumer has also shifted their preference, going more and more to the perimeter of the store or e-commerce, less in the center aisle and more and more, as I said before, online shopping.

This is amazing. Our business with Amazon is up 39%. They are our number one baby online customer today.

We also have fast-growing e-commerce business with Walmart.com, Target.com, Kroger.com, FreshDirect, and many, many others. As I said before, and I say it continuously, eating healthy is not a fad, it's not a trend, it now is a part of everyday life. I've never seen the opportunities for fresh organic natural products that we're seeing today.

At the same time, I've never seen such competition. While everyone would like a seat at the health and wellness tables, Hain will continue to take its seat at the head and continue to lead the way with our branded organic and natural products. Increasingly, many consumers, and just not millenials, are moving towards more fresh products and farm to table product offerings whether it's at home or eating out.

Hain has a major position in that area and we're seeing good growth of our Greek yogurt, our antibiotic free in organic protein, our meat free and plant-based products, our chilled soups in the UK and Ireland, fresh cold pressed juices and fresh desserts and fresh plant-based drinks around the world. I'm sure, because I know I have, many of you heard or read recently what the World Health Organization's warnings were between red meat and increased incidence of cancer. Hain pure protein products do not contain nitrates, antibiotics or hormones and they never have.

I've said this before but a key differentiator for Hain within the consumer packaged goods industry that we are one of the few companies who can claim this: 99% of our food products today are non-GMIO and over 40% certified organic. These are statements very few consumer package good companies can make with an increasing of consumers wanting more and more transparency on their food.

As I say, there's many organic standards out there, there's many products out there with the organic symbol on it, but not all food is created equal. Consumers increasingly want clean ingredients and labels, sustainable packaging and transparency. More retailers, e-commerce sites and food service operators worldwide are focused on organic, natural and better for you products.

Our global teams are having more and more top-to-top meetings with key customers advising them on health and wellness as a key focus for their customers. We're well ahead in this area, more and more, than most consumer companies today.

And our consumers' insight enable us to play an advisory role in category management to advise our customers. In the quarter, we continued to benefit from the diversification of our business across product, categories, customers and geographies. We generated record net sales up 9% for the quarter to $687.2 million including the impact of foreign currency fluctuation.

The strength of the US dollar reduced our sales by approximately $24 million over the prior year and period during due to foreign exchange with now 37% of our sales generated internationally as our geographic footprint continues to grow in both new and existing markets. GAAP earnings are up 67% while adjusted earnings grew 9% and I'll never forget that in our first quarter last year we were impacted by the nut butter voluntary recall. We're still dealing with its effects on our results which we will discuss later.

In the US, Hain's top 500 SKUs and MULO represent 96% of our sales in the channel, consumption grew 12.7%, distribution grew 7.3% during the latest 12 weeks ended October 4. While IRI and Nielsen track about 55% of our business in the US, the majority of Hain Pure Protein's branded product sales is not included, as well as the customers like Trader Joe's, Costco, Amazon, natural channels. Also we do not track our e-commerce sales in today's POS data and those are some of our fastest-growing customers.

Now let me focus on the key drivers that led us to our solid sales performance. Personal care was up double digits led by the growth of Alba and JASON brands. Ella's Kitchen remains the number one baby food brand in the UK. Celestial Seasonings was up mid-single digits on shipments.

Our new logo and packaging continues to roll out. We expect to see significant benefit once we see the full transition on the shelf. And as we see the full transition on the shelf, it looks great.

We've also expanded our multiyear relationship with Green Mountain Keurig, effective November 1 where we will be responsible for sales in the channel including affiliated websites and natural grocery drug, mass and club. Keurig will retain home, office delivery as well as Amazon and specialty retailers like Bed Bath & Beyond and home improvement.

We've had a strong performance in our snack business, our Greek yogurt, our tea and personal care in the US. We'll have new packaging for our Imagine soup and we're looking for cold weather as we're looking for soup consumption to grow.

We're looking forward to the new packaging and refreshed labels on both Earth's Best and MaraNatha that will happen later this year.

In the US, we've experienced a few challenges primarily in grocery in the center store with temporary customer and distributor disruptions associated with the change between KE and UNFI for the Albertsons/Safeway business. John will talk more about the US business and our latest measured channels which represents about 55% of our sales in the US.

We had strong results in our Hain Pure Protein business along with the United Kingdom, Europe, Canada and constant currency. In the UK segment, net sales were up in local currency. We saw good contribution from our soup, grocery, rice, dessert and plant-based businesses.

Early results for soup are up solid double digits across our brands and own label including a new taste of health exclusive at Sainsbury and Cully & Sully soups will be soon listed in a major retailer. The Linda McCartney brand was up solid double digits. Our new Naughty But Rice dessert brand launched in the late quarter showed promising results.

There's a lot of great things happening in the UK. And as you can see also, the perimeter store is where a lot of the growth is coming from.

In fiscal 2015, we invested in our UK growth with infrastructure, brand building for our soups, desserts, spreads and ready-to-heat rice with CapEx investments and we're beginning to see these investments pay off. Our UK chilled dessert business remains on track to break even and even make money in the second half. This will be our biggest year ever.

Tilda performed well in the first quarter. We have almost fully recovered from our fire in fiscal 2015 which was almost a year ago and the lines affected will be fully commissioned by late December and operational in our third quarter. We plan to expand Tilda into other grains and as grains that consumers want are increasing more and more today.

We're progressing on track with our $10 million CapEx investment on our ready-to-heat product. This business is growing 15% and we will have an additional 25% more capacity once this new facility is commissioned.

Tilda has had additional gains in the US with major customers from Meijer, Giant Eagle, Hy-Vee, Wakefern, BJ's Wholesale. And we think there's tremendous opportunities to sell more and more ready-to-eat and we're ready for the up-and-coming Diwali holiday.

Hain Celestial performed well, up double digits in constant currency, driven again by Yves fresh meat free brands and also many other new products. Strong performance came from our Sensible Portions, Terra, and our new acquired Live Clean brand.

Europe was up double digits in constant currency with growth from Danival, Natumi, Joya and Terra. Organic products in Europe represent 65% of our sales.

In late July, we acquired the Mona group, a leader in plant-based foods and beverages with a wide range of organic natural products mostly under the Joya brand as well as private label products. We acquired this again at the end of July, so we only had sales for approximately 2 months. We now have three plants based in Europe for our Dream, Natumi and Joya brands.

As I mentioned previously, we believe the opportunities are twofold for Mona. Number one, it expands a lot of the Hain offerings in Eastern Europe. It allows us to get our branded products along with private label products at retailer.

Mona increased the scale of our European plant-based operations to over $100 million. I just recently have been over to visit them and so much going on with our Joya Mona plant throughout Europe and the UK.

Internationally, we have our joint venture with Hutchison Hain Organic Holdings which was up double digits in the quarter. Together we're rolling out Earth's Best organic infant formula now that the Chinese government is easing its one child family restrictions and we launched under Alibaba's Tmall global e-commerce shops allowing Hain access to the broader Chinese consumer market with our organic products.

Hain Pure Protein, which had a great, great quarter, was up high double digits. Our branded business in this -- is over 65%. We've had unbelievable demand for many, many retailers and here is a category that is on fire.

Consumers today are eating less red meat, less pork and want more and more chicken in their diet. We're in the midst of building a new Hain chicken facility, should increase our capacity 25%. Hain Pure Protein will officially roll out expanded Plainville Farms and FreeBird branded deli meat coming in early in the new year.

We're leveraging our Empire brand and rolling out existing Hain products that will be ready for Passover in the new year. We're entering our biggest turkey and ABF meat season with the up-and-coming holidays in November and December.

This year we will sell over 1.8 million turkeys for this year's Thanksgiving. I hope everybody on the phone buys one.

Just this week we announced Hain's existing strategic investment and partnership with Chopt and Catterton. Many of you might've said, what is he doing? This for us is only a minority investment.

Chopt serves an impressive 25,000 consumers a day. There's a strong alignment with our culture, vision between Hain Celestial, Catterton and Chopt with tremendous new opportunities, new ideas and partnerships whether it's innovating new products to bring to in-store retail distribution, learning about our shared customers particularly millenials, or the opportunity to support Chopt's growth. Chopt represents a continuation of our mission to provide its consumers with A Healthier Way of Life.

We believe the M&A environment remains attractive, our balance sheet remains strong and gives us tremendous flexibility to go out there and do deals on a global basis. As many of you know we're always actively evaluating deals in the marketplace including some of those recently announced. But we remain intently focused paying disciplined multiples for transactions in the $50 million to $100 million range that will enhance or expand our current business or categories within our existing portfolio.

We'll continue to focus on generating long-term shareholder value. Why does our team remain optimistic about fiscal 2016? We will continue to invest behind our portfolio of branded organic products with a focus on innovation and infrastructure to support what consumers are expecting from Hain today.

Our geographic footprint is growing. Key categories like snacks, ABF proteins are growing at solid double digits. Celestial Tea is relaunching with its new resonating packaging for consumers.

We expect high single-digit growth from tea, yogurt, protein, and personal care categories. These continue to be many, many opportunities for us.

In Europe, we now have $100 million plant-based business which will grow in double digits. In the UK, we have ready-to-heat rice.

We saw 65 million pouches in the UK, just think about the opportunities here in the US. Early results for soup show some strong results that should take place.

I also expect big things out of expansion in India, Middle East as well as our China Hutchison JV. Growth of organic and natural branded products are growing and Hain will continue to lead the way.

While we expect to play an important role with Whole Foods and Sprouts, we think there is tremendous growth still there. So we've had a record first quarter. We overcame challenges to deliver these results. We look forward to another successful year of growth and delivering increased shareholder value.

Before I turn the call over to John I'm pleased to welcome James Langrock who started with us this week. James joins Ross, Lori, Doug and other on Pat's finance team. Most recently, James was the CFO of Monster Worldwide.

With that, I turn the call over to John.

Thank you, Irwin. Good afternoon.

Q1 did not fully meet our expectations for Hain Celestial US, particularly for Hain Grocery. Hain Celestial US Q1 net sales of $331.2 million were down 4.6% versus year ago.

The Q1 net sales shortfall was driven primarily by one, natural channel consumption softness; two, unprofitable year-ago baby and not butter club programs that we chose not to repeat; three, lost sales and inventory from distributor and account shifts; and finally, currency on Ella's Kitchen UK. These four factors cost us approximately $16 million in Q1 net sales.

Our Q1 adjusted operating income of $46.6 million was down 11% versus year ago and our adjusted operating income margin of 14.1% was down 100 bps versus year ago. The Q1 income and margin declines resulted from our top-line shortfall and higher year-on-year nut butter costs which were partially offset by productivity savings of $7.6 million.

Looking at consumption, IRI Q1 consumption for our top 13 brands which account for over 80% of our MULO sales was up 6% versus year ago. This strong increase was led by double-digit gains on Sensible Portions, Greek Gods, Terra Chips and Alba Botanica. And remember these results don't include Ella's Kitchen UK, which were as Irwin said continues to be the number one baby food brand with a double-digit consumption growth.

Now as I mentioned earlier, Hain Grocery did not fully meet our expectations this quarter. But it's really, really important not to lose sight of our other Hain Celestial US businesses: personal care, yogurt, tea, snacks and Ella's UK which had a very, very strong Q1. In fact, these five businesses combined delivered high single-digit sales growth and double-digit operating income growth for Q1.

We achieved this terrific growth despite a year-on-year loss of almost $8 million in Sensible Portions Wal-Mart display sales which we were unable to have this year due to their clean floor policy. And finally, as Irwin said, our sales at Amazon were up 39% for the quarter and it made Amazon our fastest growing top 10 customer.

So let's take a look at Hain Grocery to understand exactly what's going on there. Two brands, MaraNatha and Spectrum, drove the US Q1 top-line sales and income shortfall.

We'll look a little bit closer at MaraNatha and we see, look, the business is still recovering from last year's voluntary recall, specifically in regards to the loss of almond butter sales velocity, peanut butter distribution and private label losses, which was a business that did total $20 million in annual sales for MaraNatha prior to the recall. So we're going to attack these issues by first, strategically reducing our products on shelf to eliminate or reduce competitive price deltas and increase MaraNatha sales velocity.

We're also going to be offsetting peanut butter losses with innovative new products like our new -- and we're going to be the first to the market with this -- our new no added sugar or added salt almond butter which we're going to be launching very shortly. And we're also looking to recapture our lost private label customers, one of which we've already gotten back. They account for 20% of the pre-recall private-label business and we'll start shipping to in spring 2016.

So these initiatives, coupled with our new see-through label on MaraNatha packaging, which highlights our quality, should restart our MaraNatha business and drive higher volumes through our plant and reduce our costs.

Now turning to Spectrum, Spectrum is getting attacked by lower-priced competition in our leading segment, coconut oil, which accounts for about 40% of our business. This is another category where we're going to need to address this issue by strategically lowering prices on shelf at key customers to eliminate or significantly reduce competitive price deltas.

We also, though, are going to work to more strongly communicate particularly on shelf, Spectrum's superior product quality. We clearly sell a superior quality coconut oil and we're not leveraging that strongly enough. So those MaraNatha and Spectrum growth initiatives will be implemented this month to drive accelerated second-half growth.

Now as we look at the balance of the year, particularly the second half, we are very optimistic about Hain Celestial US prospects given the MaraNatha and Spectrum programs, along with other growth initiatives we've put in place including first, retail mix optimization. As Irwin mentioned, consumption and distribution on our top 500 brands -- SKUs, are significantly outperforming our total business, especially on Hain Grocery. We're preparing for this year's category review season with an increased emphasis on driving top 500 SKUs distribution which would be beneficial not only for us but very beneficial for the retailer because they'll get better velocity out of their slots on the shelf.

And to make sure we make significant progress here, we are tying our field sales incentive compensation to achieving specific top 500 SKU distribution gains at each customer.

Our second growth initiative is to expand distribution. There's still a lot of white space out there for us. I mentioned on the last call that we expected to gain 100,000 PODs from last year's category reviews. I can tell you as of today, we have 80% to 90% of these PODS on shelf.

Now I realize MULO shows Hain Celestial US distribution as flat versus year ago, but that's misleading. Five of the six businesses, personal care, tea, yogurt, snacks and Ella's Kitchen UK, are showing distribution growth of 6% combined led by snacks at plus 22%.

Our grocery distribution is down 4% and given the size of grocery that's large enough to offset all of our POD gains. The decline is primarily driven by non-top 500 SKUs and losses there. So grocery will benefit disproportionately from our top 500 SKUs initiative.

In regard to distribution we also have gained some new wins across the portfolio including our Sensible Portions stackable chips which are going to be available as of January at Target, Publix, Meijer, Albertsons Safeway and Giant Eagle as well as a whole slew of other smaller customers. Also we've gotten Celestial Seasonings on the shelf at Wal-Mart and we've got a great new Garden of Eatin' product, Garden of Eatin' bowls, that can scoop up your favorite dip and that's going to be going to Kroger in January.

Terra, Garden of Eatin', and Sensible Portions pita chips expanded distribution at Wal-Mart. Greek Gods just got expanded distribution at Sam's Club, Target and new distribution at Smart & Final, SuperValu and [Servco].

As Irwin mentioned, we're starting to get some real traction on Tilda with the distribution wins at BJ's Wholesale Clubs, Meijer, Hy-Vee, Giant Eagle and Wakefern. We've gotten some MaraNatha maple almond butter at Ahold, we've got Alba sunscreen at Hawaii, Target, because it's Alba Hawaiian, we've also got it at Costco Hawaii and Alba Hawaiian haircare at Walgreens and finally, Earth's Best continues to be a great brand for us. We've gotten -- just gotten Earth's Best jars, pouches and formula into Albertsons.

Our third key growth initiative is the Celestial Seasonings restage. The Celestial Seasonings restage led by the new packaging is a tremendous opportunity to drive growth of the brand by expanding our target market led by the package graphics. We are now shipping 100% of our Celestial Seasonings teas with the new packaging graphics.

Retailers who buy direct from us have got 75% to 80% of the shelf transition today. Retailers who come -- go through distributors have got about 50% to 60% of the shelf transitioned. We expect that by the end of mid -- actually by about mid-December the shelves will be entirely transformed.

In the meantime, we've got great on-shelf signage calling out how our packages has a fresh new look, same great tea at the brand top retailers including Kroger, Ahold, ShopRite, Publix and Safeway. And we've got a really strong November through March support program to drive shelf takeaway during tea season.

The Celestial Seasonings brand has already started to get some traction here. Because what we've seen as we've experienced an 8% increase in purchases by millennial households in the last 12 weeks. This is the first time we've ever seen that number move in a positive fashion towards us on Celestial.

The final growth initiative is improved retail merchandising in natural. Advantage has taken over our retail merchandising function in the natural channel and they started on this in March.

They've staffed up and they've come up to speed very quickly. They will be a competitive advantage for Hain Celestial in regard to retail merchandising, promotional execution and distribution expansion in the natural channel especially in the second half.

They should have a disproportionate impact on Hain Grocery distribution as this business has the most natural channel exposure in our portfolio. Together with Advantage, we will work with our retail -- natural retailer partners -- to drive sales from not only the perimeter of the store but also we're in the center of the store where we have a very strong presence.

So to close, Q1 did not fully meet our expectations for Hain Celestial US; in fact, quite frankly, they didn't meet them at all. We're not happy with it.

But having said that, Hain Grocery was the primary source of the performance softness as five -- as the other five businesses, snacks, tea, yogurt, personal care and Ella's Kitchen UK combined drove high single-digit sales growth and double-digit income growth. We've implemented a plan to restart growth on MaraNatha and Spectrum as these two brands were primarily the key contributors to the grocery performance shortfall. And we're optimistic about our year-to-go prospects, particularly for the second half given our MaraNatha and Spectrum growth programs and our initiatives to optimize retail mix with an increased focus on top 500 SKUs, expand distribution where we're already seeing gains on our non-grocery businesses and some great wins recently, drive Celestial Seasonings behind the packaging restage which, as I said, is showing early signs of traction especially against millennial households, and finally, working with Advantage to drive superior retail merchandising, distribution and promotion execution with our natural channel retail partners to drive growth, especially in the center of the store.

So with that I'll turn the call over to Pat Conte.

Thank you, John, and good afternoon, everyone. I'm happy to be presenting our quarterly results for the first time.

Although I'm new in this role, I've been with the Company for over five years and continue to be excited about its future and continuing success. I look forward to speaking with you in the quarters to come.

Now I'm going to take you through our first-quarter financial highlights. Net sales for the first quarter this year were $687 million compared to prior-year adjusted net sales of $642 million, a 7% increase or an 11% increase on a constant currency basis. Net sales were negatively affected by foreign currencies of $24.4 million and reduced nut butter sales. We're still lapping the nut butter voluntary recall as we continue to regain distribution and market share.

The Mono group, Empire Kosher and Belvedere acquisitions represented $52 million of net sales in the quarter. Going to net income was $31.3 million compared to $18.9 million in last year's first quarter. We earned $0.30 per diluted share on a GAAP basis this quarter compared to $0.18 per diluted share last quarter.

Adjusted net income was $38.2 million this year compared to $34.7 million last year, improving 10%. On an adjusted earnings from operations were $0.37 per diluted share compared to $0.34 per diluted share in last year's quarter. Earnings per share this year were negatively impacted by $0.01 due to FX and a dilutive effect of the Mona acquisition and again we're lapping the nut butter voluntary recall.

As noted in our press release our adjustments in the quarter of $10.2 million are primarily related to acquisitions related fees and expenses including integration and restructuring charges of $4.6 million and net unrealized foreign currency losses of approximately $4.5 million principally on the remeasurement of intercompany financing and nonfunctional currencies. Gross margin in the first quarter was 22.1% as compared to 19.9% in the prior year's quarter. Gross margin on an adjusted basis was 22.4% as compared to 23.5% in the prior-year quarter.

This 110 basis point decline was principally driven by the composition of our sales mix, increased costs associated with improvements to preventive controls in our nut butter business and, to a lesser extent, higher inflation. SG&A expense for the quarter on an adjusted basis and excluding amortization of acquired intangible assets was 12.5% of net sales, 120 basis point improvement from last year. This improvement is due to proactively managing our SG&A expenses which is funding our trade promotions.

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 and savings from a restructuring that eliminated a level of management. Operating income for the quarter was $57.5 million on a GAAP basis compared to $28.8 million last year. On an adjusted basis, operating margin was 9.2% of net sales at $63.2 million this year, increasing 7.5% from $58.8 million.

Adjusted operating margins improved across all segments on a constant currency basis except in the US. Operating margin improvement was driven principally by HPP segment which realized improved sales mix and productivity gains and the UK from improved commodity pricing and productivity gains. On a GAAP basis, our effective income tax rate was 31.5% this quarter.

On an adjusted basis, the effective income tax rate for the quarter was 31.8%, and we expect our annual effective rate to be in this range.

Our balance sheet continues to be strong. At September 30, our cash balance was $148 million. Our working capital was $589 million with a current ratio of 2.6 to 1 at September 30.

In July, we completed the acquisition of Mona Group, a leader in plant-based foods and beverages, the facilities in Germany and Austria for cash, and stock consideration of 37.9 million. Net debt at the end of September was $741 million. At September 30 our bank leverage ratio was 2.4 times.

Accordingly, our strong balance sheet provides us the liquidity to pursue those strategic acquisitions Irwin mentioned. Our cash conversion cycle was 69 days for the quarter which was relatively consistent on a sequential basis. We generated $5.8 million of operating cash flow in the current quarter as compared to $2.6 million in the prior-year quarter.

Capital expenditures for the quarter were $19.5 million as we increased our CapEx investment in our FreeBird and Tilda ready-to-heat facilities. Productivity of $10 million for the quarter was slightly behind our expectations but we are still confident we're going to achieve $60 million of productivity savings for the year.

Consistent with prior years, we expect productivity to be weighted toward the back half of the year. Our fully diluted weighted average shares outstanding for the quarter were 104.3 million as compared to 102.7 million in the prior year. We are reiterating our full-year fiscal 2016 guidance as we expect net sales to be in the range of $2.97 billion to $3.11 billion and our earnings per diluted share will be in the range of $2.11 to $2.26 for the full year.

With respect to the cadence for the remainder of the fiscal year, from a sales perspective, we continue to expect the second quarter to be our strongest quarter with the third- and fourth-quarter net sales roughly consistent to one another. From an earnings perspective, we expect the second quarter to be slightly improved versus the prior year as we focus on top-line growth while investing in our brands around the center of the store. As stated in our press release, our guidance and estimates should be adjusted for any non-GAAP items.

At this point I'll turn the call back to Irwin.

Thank you, Pat, and (technical difficulty).

With that I'd like to open it up for questions. And I know we'll have the answers.

(Operator Instructions) Scott Mushkin, Wolfe Research.

Hey, guys. Thanks for taking my questions.

I guess the first thing I wanted to get into, obviously, you pulled a lot of expenses out and that was quite helpful. Any color on how sustainable that is as we move forward?

It sounds like you cut out a whole layer of management, so it seems sustainable. But should we think of this level of SG&A on a go-forward basis is correct?

So, Scott, number one is when we say a layer of management, I mean one of the big things as we look at Hain today with over 6,700 employees around the world and efficiencies and integration, and as we look at layers of management, were we getting the benefits out of them from a cost standpoint? Of course you can always have heads and think you're going to get something but once they are gone, it's like, wow, what were they doing?

So number one, it was just from efficiencies. Number two, and I've said this before, a big thing that James is going to be doing is looking at integration of back rooms. When you do lots of acquisitions there's big opportunities from integrated and just sitting with him in his first week going through the P&L he's suggested areas.

One of the big opportunities we have not integrated with the Europe today being over $1 billion in sales, between UK and Europe, a lot of integration, each one are running their backrooms separately. Mona and our Hain Europe business has not been integrated.

And, last but not least, we're -- from a productivity standpoint, you heard what Pat said, yes, we didn't get everything we were looking for in the first quarter, but considering were looking for $60-plus million, we got quite a bit. So we think there is a tremendous amount of productivity opportunity still out there for us and then some. And not that we're raising our productivity objective, but I think it is much higher.

So, yes, we think there's lots of costs out there to go after. And the other thing, Scott, which we've gone through in this Company, listen, and we didn't mention it, we had a higher out of stock rate in this past quarter service levels. And that's lost business, personal care. We were down $4 million to $5 million higher this quarter just because of demand with TJ Maxx.

So how do we take up our inventories and get more efficiencies? The other thing is when you're dealing with natural organic products, you have shorter shelf life, so what happens is the stress are at a code and there is a big opportunity for us. So we've identified a lot of areas where we're going to just take out efficiencies and cost to invest back in our business.

That's my follow-up, Irwin, and thanks for the answer. Going through kind of the changing landscape that you described so well and thinking about the US business specifically, do you need to think about rationalizing SKUs?

Do you need to think about investing more behind some of these great brands that you have, telling the story particularly the quality story that's there? Kind of walk me through, or maybe John, even could chime in here, kind of walk me through the investment process and how to get the sales. I hear you that there were two kind of areas that were weak but in my mind, maybe even some of these great brands should grow a little faster.

So, number one is, good question and I come back and I say this here. As you look at Whole Foods or you look at natural organic and everybody says it's declining.

The world -- and maybe we all should -- has not gone on a diet and stopped eating, okay? We're still either eating food at home or eating out. And I think what's happening is we are eating more at home today and that's what we're seeing our protein business grow in high double digits.

And we want farm to table. So number one is, the consumer has changed dramatically eating less and less red meat. Number two, online, and if you come back and look at where our online business is that no one ever tracks and it's a growing part, Amazon up, what I said, 39% and where they've come from and Walmart.com, Target.com, Instacart, etc.

So how you market to those consumers and I go out there and idolize The Honest Company, how they are able to go out there and communicate, email all their consumers and stuff like that and we're going to be doing that. So, Scott, yes, there is absolutely more money that we need to be spending with our e-commerce consumers. There is more monies we need to spend on our great brands because we're not selling Oscar Meyer hot dogs and go out and tell them we've got less nitrates in our products.

We've got great values of our products, so there's a couple things. How do we get more efficiencies out of this business? How do we see where top-line growth drives it to the bottom line?

And I come back and say this here. Look at Amazon. It's the largest -- or from a market cap retailer in the world today and look where that's going.

So yes, we're going to put more money behind our brands. We're going to invest back in the brands.

The other big thing this changing is the center of the store. Not only the center of the store packaging where cans are going, where jars of baby food are going, where other packaging and how you alert the consumer to that.

So they are in three or four areas that we're going to continue continuously do. And what Hain is not going to do and is easy to do, Crisco has come out with organic coconut oil and that's what John was talking about. And -- because their other oil, nobody was using.

Easy for us to take Spectrum down to that level and get that price but Spectrum does not stand for that quality and we won't do it.

But how do we buy better, how do we get more efficient are things that we're going to do on that. So there's four or five point that we're going to focus on and we'll continuously look, find the money, get more efficiencies to spend on it.

Perfect. Thank you.

Evan Morris, Bank of America.

Hey, good evening, everyone. Just my first question, John, this is for you.

If you can -- I guess I got a little confused. Maybe you can help me on the issues that caused North America or the US to fall short. You talked about four, five different things that accounted for $16 million, then you mentioned $8 million on the Sensible Portions and -- but then talked about MaraNatha and Spectrum.

Can you kind of help just build that back for us in terms of those numbers again? Really where the impacts were and how much was related to the distribution -- disruption. If you can, again, just help kind of put those numbers back together and build that bridge back up for us.

Sure, sure. So, Evan, if you look at our Q1 sales of $331.2 million, what we believe we were handicapped by was the loss of about $16 million tied to four things. One is the natural channel consumption weakness, the second piece is the -- we had unprofitable programs with club stores on baby and nut butter that that we didn't choose to repeat.

We lost some sales and inventory from the distributor and account shifts primarily having to do with Albertsons Safeway and we lost money on currency -- we lost some sales on currency from Ella's Kitchen UK. So that's -- basically that totals up to about $16 million which got us to about flat year on year.

So then the next thing we talked about was as we looked at our businesses that were growing really, really strongly, which are the tea, the Greek Gods, the personal care, Ella's Kitchen UK, and snacks. Those businesses were up high single digits versus year ago and actually double digits in income and we did that -- we climbed over and drove that despite the fact that we lost about $8 million in top-line sales from Wal-Mart's clean floor policy.

Got you.

That's all that's kind of the headwinds we had on top line. But then when you look at the top-line business and you say -- Evan, and you look at the grocery business which is the weakest performer this quarter, you drill right down, it's Spectrum, and it's MaraNatha. We get those two things fixed the grocery business will start to grow as well.

And some of that, Evan, as our private label business. Last year we had about $5 million -- or actually higher business that we just gave up when we had our product withdrawal.

And now, as John said, we picked some of that up which will start in the back half. And there's two or three other retailers that are looking to come back to us but we want to make sure we have that plant running right. So that's also added in there.

Okay. No, that's helpful.

And then I guess, John, if you can help kind of build the bridge I guess for the rest of the year, like some of the issues that impacted you in the first quarter, what goes away? What stays with you?

You are starting off I guess kind of in a optically a pretty big hole to get to at least what your expectations were for the full year, sort of that mid to high single-digit organic. What are the expectations? How should we think about the second quarter?

Is a sequentially better? Is it positive growth in the US from an organic standpoint and then how should we think about the back half and how the full-year shapes out? If you can just kind of help take us out of this hole and how do you get to strong growth or being optimistic about the remainder of the year?

Sure, so here, what I would say is the real growth -- the real strength is going to come in the second half. And remember, we already have 50%-plus of our business performing very well in the five different units I talked to you about.

We're going -- we're implementing programs now to address the issues on MaraNatha and Spectrum and those will be -- we expect that those will start to really show up on shelf probably in December. So as those get in and we keep driving against them for the second half, that's when we will see our strongest growth and we expect the second half to rally us back to high, mid-single-digits growth or high single-digits growth.

And, Evan, one of the things again, is John's distribution points, more and more of that will happen which he talked about. There's a ton of stuff that is now going into place at Wal-Mart that we lost that are coming back, new products.

So it's back ended, bringing on new private label customers to make up some of those volumes. So that's why -- and we all feel good about the back half and going into our second quarter. The other thing is, they are our biggest quarters, and that's where it's around holiday seasons, etc.

Okay, no, that's fair, and I understood sort of the back-half growth. But I wanted to I guess confirm that you are not changing your full-year outlook despite some of the issues in the first quarter. So perfect, thank you.

The other thing, just to mention is this here. In the back half, the transition between Albertsons Safeway should be behind us, too. So that's another one.

Right. Okay, perfect. Thank you.

Alexia Howard, Bernstein.

Good evening, everyone. Can I just turn back to the slowdown in the natural channel and can you just remind us how much that is now as a percentage of either your overall US sales or your total Company sales? And is the migration to the perimeter of the store a real problem in that channel and in the mainstream channel in your view?

I should want to hear some comments around that. Thank you.

So, if you step back -- and it's Irwin -- it's about 25% of our sales, the whole natural channel, so that's number one. Number two, our protein business, our yogurt business, our BluePrint which we're doing some things with, we're seeing growth there, our Yves business.

So the perimeter of the store for us is growing in the natural channel. Snacks are growing for us in the natural channel. It's where we're getting hurt and I think Whole Foods talked about it last night is the center of the store.

So we're seeing growth in the perimeter of a Whole Foods and natural, we're seeing good growth at Sprouts and with their numbers today and actually consumption for us is up high single digits, low double digits there. Part of our challenge also Alexia, which John talked about, was our transition to Advantage, and just getting them up to speed.

And I sat through a meeting with John and team the other day. And as they put more people on the street and pour people towards it hopefully focused on the center of the store, we should see some great things happening in independent naturals.

Great. Thank you very much. I'll pass it on.

Rupesh Parikh, Oppenheimer.

Thanks for taking my question. Just going back to the prior question and your comments about BluePrint and some of the fresh categories how they are growing. So if you look at your fresh categories, BluePrint and your yogurt products, we see a lot of competition out there from other players.

Just want to get a sense as you look at your growth, how much is coming from distribution versus consumption growth? And how do you characterize the competitive environment for some of those perimeter store categories?

Rupesh, this is John. So here, let's look at it here. So at this point, very little of Greek Gods yogurt growth is coming from distribution.

It's just coming from increased penetration on the business, so it's not one that's -- it's just rolling, rolling in terms of distribution. In terms of BluePrint, again, the distribution is fairly stable right now and, quite frankly, we're looking at BluePrint and saying, where do we want to go distribute the products and where do we not?

Because, look, if you are a group that's not ready to manage the short codes good there's a lot of spoileds. So we don't want to follow -- we don't want to pursue that.

So, look -- our -- and, look, obviously the protein business is growing great guns on a comp store basis, not to mention some of the new distribution that Ted Maguire and those guys are picking up. So, look, by and large we're getting both comp store growth on our Greek and our Yves business and on the protein business, you're getting both new distribution and comp store growth.

And I come back and say the yogurt category and the reason our Greek yogurt and our nondairy yogurts as they're taking share from other yogurt businesses, number one, number two, in regards to protein and that continues to be whether it's fresh, whether it's deli, whether it's further processed and that's -- and we'll launch a major deli line come January and go after one of the major brands out there that we think they'll take share.

The other one is BluePrint, and we see tremendous opportunity, not so much from a cleanse standpoint. And as we come back and evaluate price, if we can get $7.99 and change for juice that's either a meal or juice and go after the wallet naked juice category, there is big opportunities out there. And I think BluePrint and that category has become crowded, but I think there is such a big opportunity and there's some repositioning going on in that category, too.

Also potential expansion into soups and fresh organic raw salad dressing. So there's a bunch of other new products going on and John has hired an incredible team to focus against that. So if you look at our fresh business today and what we have going on, just tremendous growth.

The other thing we're looking at is fresh in the whole baby food category and that's something that there is a big focus on and there's a couple retailers out there that are focusing on that with us. And then if you look in the UK, our Cully & Sully and our new Covent Garden soup, our refrigerator desserts, our meat free business. So that perimeter of the store is an area where focused on in a big way.

Okay. Thank you for all the color. I'll pass it on.

Amit Sharma, BMO Capital Markets.

Hi, good afternoon, everyone. A couple of modeling questions and then as we go on, HBP massively outperformed versus our expectations. Could you just lay for us is it a seasonality impact in the quarter or should we be modeling for the full year?

And then, Pat, if you could -- you gave $52 million from acquisitions. Could you please divide it among the Empire, Belvedere and the Mona acquisitions please?

So the biggest -- I mean what's going on in Hain Pure Protein today, this year quarter will be our biggest quarter, but the demand and coming on stream and that's why I'm going to be careful here in modeling it, because we have a new plant coming on in the third quarter.

We have our deli business that will start shipping in the third quarter. So, I mean this being the biggest quarter, the next two quarters we're expecting good size quarters, too.

The other big thing out there is, Amit, is just having -- that we're able to get supply of turkeys and chicken and growing them out. The demand is there. We can sell all we can get.

So not ready to -- and if not we can talk to you off-line and give you some more there, but this being the biggest quarter but the next two quarters will be much bigger than the first quarter also. And your next question was --?

Acquisition breakdown between Empire, Mona and the Belvedere acquisition? I guess Live Clean also came through the quarter, right?

Right, the biggest part of the acquisition in there was Empire, which was about $30 million-plus.

Okay.

The other two were somewheres between $8 million for Live Clean and $8 million or $9 million for Mona.

$12 million for Mona.

Mona we only -- Mona we closed in the last week of July.

Got it. And then the bigger one perhaps for John and, Irwin, you too. John, you talked about the retail mix optimization and how you are changing the incentive comp for your salesforce as well area and what's the intended impact?

You carry about 2,000 SKUs. If you are going to focus on only the top 500, which, admittedly, 90% of sales, but what does it due to the rest of the SKUs? Do they die a natural death or should we expect you to rebase sales as well sometimes?

So, Amit, we are clearly focusing on the top 500 primarily for conventional because, as we've talked in the past, basically you find -- in the average grocery store you'll find 300 to 500 Hain SKUs and in the average mass merch, you'll find 100 to 175 SKUs.

So that's where the greatest impact will go. The natural channel prides itself on having more variety and so we have to figure out what's the right number there, just like we found 500 for conventional. And the key there is just it's always fundamental, get the right mix on shelves, show the retailer what your research shows is the best mix to drive sales and profit on their shelves for them.

From there, then we will watch the progress as we go along here, and then make a decision on what we do on the balance of the SKUs. But at this point, what we're firmly focused on is getting the right mix on shelves, getting the right 500 SKUs on shelf in conventional and then doing a comparable exercise for natural.

And, Amit, I think the big opportunity and natural food retailers that we've talked to -- it still 25% of our business. Some of these brands that will just be exclusively sold in natural food stores and they want brands and products that are not going into grocery where they don't have to compete with certain prices, etc.

So there is an opportunity for us. It's just where we spend all our money and support it, and honestly, there's times we sit back and sort of instead of doing acquisitions is go spend our money against some of these brands, our return on invested capital will be good because we already own them. So there are things we're looking at there, and whether it's Health Valley, Hain, DeBoles, Arrowhead Mills, to make sure we invest against those because they are good nostalgic brands in the natural and organic industry.

Just a little clarification on (multiple speakers) will this be margin accretive, John, or does this have any margin impact or no?

Sure, if we do a good job of getting our core SKUs on shelves -- think about it, right, you're going to have the benefit of longer production runs. If they become a bigger part of your orders, you're going to have better service and ultimately we're going to have better margins because we're going to be turning these products quicker, lower discards as a function of the larger runs, we should be able to get better conversion rates.

So there's clearly works through the whole system if we get the right SKUs on shelf. And just to note to as we've talked about, the way you get here is you had multiple distributors bringing natural and organic products to the grocery shelves and there really wasn't -- you can't find a consistent set of products from chain to chain anywhere because different distributors brought in different products. So it's a good time now to clean that up and, as Irwin showed you, the growth on the top 500 SKUs is double digits.

And again, just to go back and -- go back to what John said, part of the problem was distributors brought into supermarkets some of these SKUs that didn't have a chance of selling in grocery stores and belong in natural food stores. So either there were spoils, and that's why you see some of the consumption numbers of SKUs out there that just never had a chance, they were priced wrong, it was the wrong product.

And that's kind of some of the things going on with Safeway right now and Albertsons as we look at the SKUs, and the cleanup of the SKUs are the right SKUs in there, so this is something we will continue to work on. We will continue to discontinue, we will continue to run out their inventories and focus on both the natural and the grocery channel on where the SKUs makes sense.

Got it. Thank you very much.

Andrew Wolf, BB&T Capital Markets.

Hi, good afternoon. I thought -- I think -- John, did you say that distribution was off 4% in grocery? And if so, I guess could you elaborate a little bit on that? Is that where you're talking about some of these -- or maybe what Irwin was just talking about some of these SKUs that aren't moving en masse or just give us a sense of what that was?

Right, Andy, what I said was the non-grocery businesses, personal care, tea, yogurt, snacks and Ella's Kitchen UK were showing distribution growth of 6%. Grocery, you're right, Andy, you've got the number exact, is down 4%.

And what's hurting grocery -- remember, grocery is the first category other than tea that went from natural into conventional. And so you've got a lot of legacy SKUs there that, quite frankly, aren't turning. And so grocery will -- and they are mostly non-top 500 SKUs, so grocery will benefit disproportionately from our top 500 initiative.

Okay, and that's more or less separate from the two brands you said where you have some pricing gap issues, right?

Right, right, right, Andy.

Okay, and just getting the bridge you were talking about to getting to flat sales and where you'll -- three of those go away just because they do, and then the natural one is the one you've got to work on. So I guess just looking at it, currencies are still not good but the other two are -- it would seem like the second-quarter sale should be a little better for the US given that the club deal -- you didn't repeat the club deal, I suppose, and I assume Safeways were and you are working hard on ameliorating their situation.

Well, I think, clearly you hit the nail on the head. Natural channel, consumption weakness is the big focus for us amongst these four.

Look, I wouldn't say that we're all the way to bright in terms of sales and inventory from the distributorships, so I think there will be some of that bleeding over. The one that should not bleed over, and it won't, is the unprofitable year-ago baby and nut butter club programs that we didn't repeat.

Okay, and the last US question is the deleveraging and the profitability. Could you just give us a little sense of why the business delevered more than sales fell?

Yes, it had to do primarily with lost margin on MaraNatha as a function of both the increase in almonds prices as well as on the lower volumes conversion costs were much higher because of unabsorbed overhead.

And the higher cost of your plant.

That's what I was saying, yes.

And so the plan for that brand -- and I guess Spectrum as well sounds like get the price points right and if the velocities come through, for both the retailer and for you guys, the profit dollars start to rise again?

That's correct. That's -- I mean here, we have some -- we're redeploying resources from other parts of the business to go against these price deltas on these two brands.

Because they are so crucial to the grocery business and if we do that -- look, these are great brands and these are -- the business was a really nice business model. So if we get volume flowing through, I know that we will get more -- a greater increase on the bottom line than we do on the top.

Andy, before the recall, MaraNatha was growing 14%, 15%. We did get the distribution back throughout the retailers, it's just not the velocity that we've got to get back.

The same thing with Spectrum. There's just competition from a lot more coconut oils that have come out there and other products.

And again, the easiest thing for us to do from a price standpoint is change our quality, which we wouldn't do. But I think there is some price parity that we've got to work on. The other thing, as John said before, it's also from a social media standpoint it's spending some money, telling our consumers, making sure they know what Spectrum organic coconut oil stands for versus Crisco organic coconut oil.

All right, can I just flip the question on the profitability to the two segments that really did well? So Pure Protein and the UK, I think UK you touched on, but is Pure Protein is that driven by bringing in the kosher business with better margins or is that a mix issue beyond that?

I'm trying to figure out how controllable -- how sustainable an 80% profit margin can be in that business.

Andy, it's four things. It's number one, it's top-line growth, which gets you better efficiency in the plants. Number two, the margins improve there and will continue to improve and that's an opportunity for us as we move not only into fresh, it's further processes into deli.

Margins higher on Empire and will continue to grow that business and get more efficiencies. And last but not least is there is good pricing out there right now in regards to turkey prices and organic and antibiotic free. And I continuously see that continuously -- continuing.

We shouldn't think of an 8% margin, which is a pretty nice margin for a protein business as -- of this size particularly -- as something that's like a peak margin?

It's just -- again, it's just not a protein business. It's also further processed branded products. And we think the consumer will continue to go after our deli products, go after -- whether it's our chicken nuggets, burgers, turkey breast, etc. So it's -- we're turning that into a big branded business and that today, over -- 65% of that business is branded and we look to get it even higher.

Great. Is that -- is the further processed growing at a faster rate on an organic basis than the --?

Yes, yes, yes, yes.

Great. All right, thank you.

Joshua Levine, JPMorgan.

Hey, guys. How are you? First, I apologize if I missed this, but did you guys give an US organic growth in the quarter? And maybe of the $52 million from acquisitions, how much of that was Hain generated?

Wait now, say that -- we --

You guys have laid out on the past. I just was wondering.

$52 million was from acquisitions.

Right.

Basically what ended up with these acquisitions -- there was only a few million dollars generated in growth in these because in regards to the Belvedere Live Clean we cleaned up a lot of products discontinued. In regards to Empire, same thing and we had an overlap last year of when the Jewish holidays were.

It was a couple million dollars on Mona because we closed it, like I said, the end of July. So there was not much Hain generated in this quarter.

Got it. Thanks. And just on the US organic growth, if I could?

Well, US organic growth from the US businesses were down.

Okay. And then just on gross margin, I guess over the last year you gave how much of the gross margin lag had to come from just the sales mix from the protein business? Is there a way you guys could give that figure?

Then as we think about the full-year number, obviously with the first quarter down 110 basis points, I guess do you guys still think that the flat to up 100 basis point gross margin guidance still holds? Thanks.

Right, so two things there, Josh, is the mix impact, the mix of the business in the quarter, the mix of the sales as we moved away from or as we had higher protein business, as we had higher international business, those margins are improving. They are good but they're not as high as the US, so you had a little bit of that going on, the mix of the sales.

With regard to the full year is we expected to improve to get back to our guidance range that we gave, so we should see through productivity, through better sales velocities. The mix we should get to the guided percentages we put out there.

And in John's business, he got hit about 60 bps in regards to MaraNatha nut butters because of efficiencies in the plants and some higher cost to operate that plant until we get to the production and the volumes that we need. And that's bringing in additional sales and private label. And we think ultimately that should subside as we get into the back half.

That's very helpful. Thank you.

David Palmer, RBC Capital Markets.

Hi, everybody. Kevin Lehmann here in for Dave. A couple as well.

A quick question on the US snacking business. It's been a huge growth driver for Hain in the past, I think in the past it was at least in the US scanner data seeing 20%-plus growth, slowed lately. Do you see the category getting more competitive and you guys getting back to that 20% growth in snacking in the US, or is the recent slowdown mostly from the promotion timing you mentioned with Wal-Mart and clean store and what not? Thanks.

Yes, the primary driver on that is the loss of the Wal-Mart end aisle palette displays that we had throughout much of last year. The category doesn't -- look, stacks is always competitive and fraught with activity. I don't see an increase on the same side -- I don't see a decrease either in terms of it.

And we actually -- look, Sensible will get some of it. Sensible has to climb over these displays in loss of them. But on the other side, though, Terra was up very strongly in double digits and our Garden of Eatin' business is just picking up some very nice distribution at Kroger, obviously, a huge customer, on both our 8.1 ounce sizes -- they put all three of them back in the store -- as well as our bowls that are going in the store for January.

So, look, I think we're going to see acceleration in the Terra and Garden of Eatin' trends and I think we'll still be strong double digits on Sensible. I just don't think we get all the way back to 20% to 30% that we were running a year ago.

Right, and John, and you picked up a lot of distribution on the Sensible veggie chips where it was exclusive at Wal-Mart and now were able to roll them out in the back half. So that's going to help secure growth.

Sure, that powers the double-digit growth.

Anthony Vendetti, Maxim Group.

Thanks. I was just wondering with all the issues at Whole Foods -- and we've talked a little bit about -- or maybe a lot about the weakness in the natural chain. Are you seeing the weakness sort of stabilizing here at this level or should we expect what we saw at Whole Foods to continue into 2016, calendar 2016?

So number one, I -- you saw some good numbers coming out of Sprouts today, and we've seen that and we'll -- and we continue to see that. Listen, Whole Foods growth next year is 3% with over 100 new stores opening. So we'll enjoy some of that growth.

You heard what Whole Foods said on their call is they look to work with major vendors on purchasing procurement and we plan to be at the table as one of the first ones to do that as we realize we've got to get the perimeter of the store or the center of the store growing. So from our standpoint, Anthony, it's four or five categories -- it's MaraNatha, it's Spectrum, it's baby and that's it.

Snacks is already growing. We want to grow it more. And so today and you've got a customer that wants growth and being one of the biggest vendors I think we'll definitely be working with them to make that happen.

And just follow up on the pricing, so as they are going through their struggles, I guess, and coming up with a newer strategy, is there pressure on your margins from them, or is it more they are working out their own issues?

No, listen, I don't -- I think there is -- listen -- there's pressure on margins when you don't get volume, okay? So I think as a good partner and we're just going through something like that right now on BluePrint with them.

How do we get the right price at BluePrint to drive volume? Because you can sit there at $10.99 and move one per store per day or bring it down to a reasonable price, whether it's $6.99, $7.99 and you see numbers grow 30%, 40%.

So hopefully you're going to get more efficiencies. They're going to contribute, we're going to contribute and you're going to get volume. So that's the plan here is basically how we drive volume together, not let them sit back and take it, and ultimately we will both benefit from it.

Okay, great. Thanks.

(Operator Instructions) Jerry Gray, Cowen.

Hey, thanks for taking my question. Just to follow-up a little bit on that, with the gross margin question, some of your largest customers are kind of taking a step function change in terms of investments in their employees and costs there.

As they do so, I imagine they're going to be looking for any way to save elsewhere. Are you seeing any change in how your customers are speaking to you on pricing or promotions? Thank you.

This is John. The interesting thing as, you hear rumors about they are going to come back to you with a big ask in terms of putting more in so they can pay for labor and things like that.

But more and more what we're being asked for is packaging or programs that can be executed and allow them to take labor out. They are displayable cases -- we're getting asked for that in every category now. They literally want to rip the top off of it and put it right on the shelf.

And I'm telling you from mass merchandisers to club to grocery we're getting asked for that a lot. So they're looking for more and more ways -- if labor is going to cost more, they're looking for more and more ways to take labor out of the source.

And I think, again, every customer that we're working with and we're visiting every major customer today because more and more natural organic products. What we're looking at, how we get efficiencies out of this business, shipping direct from our manufacturing facilities, how we're able to get costs out. How we're able to do backhauls. So absolutely everybody wants efficiencies and costs that we can pass on or invest back to the consumer.

Great, thanks. And also, just kind of follow-up on the same line here.

I believe Target recently announced a supply chain initiative where they would like to increase the amount of direct shipping that they are getting from their partners and they are looking to ramp up I guess on the supply side with vendors who have the distribution capabilities to ship to their stores. Is that something that Hain is able to take part in and I guess how would an initiative like that -- what kind of potential would that create to drive upwards of that 30% direct business you're currently doing?

Clearly is capable of shipping directly to Target and customers of their size and scale. It's something that they are talking a lot about. We're not seeing a lot of requests to do it yet, but, look, we sell both through pickup as well as shipping ourselves.

Matter of fact, the funny thing is we're getting more questions about pickup than we are having direct delivery. So as Irwin talks about being customer agnostic, we're also agnostic in terms of how they get the product to their warehouse.

And I think just going back to your question, with our scale and depth of products today, folding the fresh and the dry in the frozen, we absolutely can do it. It's not like we're going there with one product.

All right, great. Thanks, guys.

Bill Chappell, SunTrust.

Thank you much. Good afternoon. Two questions.

One on tea. John, I think you said something to the terms of tea is doing well, we're just not seeing it in Nielsen. So can you help clarify and maybe give us a better outlook on -- both for K-Cups and non-K-Cup's kind of what you're expecting over the coming months?

Sure, look, I'm expecting our bag tea consumption trends to improve to mid-single digits. It was interesting, we were doing some work since we last spoke and what we found is our consumption trends on bagged tea are really not falling off.

It has to do with what channels it's happening in. As we have been liquidating some of our old packaging, we've watched that -- places like Big Lots and others like that are now actually doing enough business just for this short period of time -- think about it, right, perfect time to do a liquidation. They are going to tea season.

Right now, our consumption on bagged its tea is basically flat as opposed to down when you include these liquidator channels. We're going to be out of liquidator in a short period of time and once our shelves are fully set and our programming is set, I think we'll see a pretty strong growth rate on our bagged tea.

And, Bill, we kind of planned this out in regards to timing when we dropped FSIs versus last year to get rid of old packaging that was on the shelves. It is confusing when you walk in there and see old packaging and new packaging.

And when you see the new packaging full on the shelf, it looks great. There's going to be some time for consumers to get used to it.

We're going to have to spend some money on it. It was a big change for us, but we had to do it to clean up our packaging and there is -- we watch this like a newborn baby.

Okay, and then I assume getting out of the liquidators will also have a meaningful impact on gross margin once it's done?

Right, but again, you either keep old tea forever or you get rid of it, and basically that's normally what you do when you go to a new packaging. In regards to K-Cup, as of November 1, we've taken over the selling, the marketing of the product in MULO accounts and we saw some pretty steep declines over the last couple of years. And our objective is to stop that and see some good growth.

And we're going to focus to sell that into the tea section where we believe it belongs, and have some of the type of flavors in that that we saw today within our bagged tea business, so we just took it over. Don't expect too much yet as we're already into tea season but we're going to put a lot of effort against that because we see some big opportunities.

We also see some channels that they didn't go to that we think we should go to as well.

Like Whole Foods.

Yes, that's great to hear. And then final for me, just outlook on the UK retail landscape.

It seems like your business is fine. I don't if you were seeing any further changes or if that was actually starting to improve in terms of pushback from the retailers in competitive issues?

So, Bill, I just spent a week in the UK and met with a group of retailers, the top ones, and listen, they are looking for good partners and Hain offers that. And I have over the next couple weeks a bunch of UK retailers coming here to look at what -- some of the new stuff we're doing.

Not focused on organic there but I've got to tell you, focused on wellness, focused on taking sugar out of products. Clean ingredients, free from. Our Tilda rice business is strong and not so much bagged rice, it's the ready-to-heat as consumers and millennial today want to be able to heat it up and eat it at home and actually, as you look at the consumer, the younger consumer within the Indian community, they are looking -- they are not home cooking rice all day.

They are home heating it up within a minute. We sell close to 60 million packs of Tilda ready-to-eat. So big brand in the UK and continuing to evolve it and growing.

Our soup business, great stuff happening with New Covent Garden Soup, Cully & Sully. I wouldn't name the retailer yet, just going into a major retailer.

Our dessert business, finally getting out of the red and seeing some good things for the holiday. We've picked up some good fruit business. So I like what I see in the UK because we have uniqueness.

Certain retailers want own label. One of the other big retailers is looking to work with brands today and we have unique things.

Ella's being the number one baby food in the UK. New Covent Garden being the number one fresh soup. Linda McCartney growing nicely on meat free.

Hartley's Sun-Pat and Gale's growing nicely. So we've really got a nice business in the UK and we're looking at some interesting acquisitions there, looking at some interesting stuff.

Great. Thank you.

Greg Badishkanian, Citigroup.

Hey, guys. This is actually Fred on for Greg. Just one quick question.

If we look at the e-commerce business, which is growing pretty nicely, is there anything notable about the sales mix that you guys are seeing? Is that different from sort of your more traditional brick-and-mortar stores?

And, John, jump in here. I mean baby, personal care, major in those, okay?

Amazon is our biggest baby customer today. But what we continuously see is where they can buy a case or pack and it's amazing as you look at millennials and where they are going, I was recently on a plane sitting next to someone and that person was ordering their days orders before she landed.

So we see that as a big part of our business and whether it's Wal-Mart, Kroger, Target, Whole Foods, they are all jumping into it in a big way. And we expect it to be a big part of our business and we have the products that those that are on our ordering are ecommerce want, that's a big thing, too.

The only other point I would add is a good percentage of our sales comes from subscribe and save programs which the customer says I'm going to need these items, I want it on this date and it keeps coming every time, whereas you don't -- you obviously don't have that option and brick-and-mortar retail.

And, Fred, the other thing is what's here we're getting a lot of good data to go back, whose having babies, who is ordering baby as we work with these ecommerce and be able to get the information about our brands and product and will more coming out with new product. So it's an exciting and a big area for us and it's a big focus for us.

Thank you, everybody. This will end our conference call.

In summary, why do I feel good about Hain? We've delivered our guidance for the rest of the year.

Why are we confident? We have our vision. We're focus, we're laser sharp, we have the products, we have the categories and we have the customers around the world.

We're diversified and, again, we're in so many different channels. And we have the products that consumers want today.

With that I want everybody to enjoy their Thanksgiving holiday coming up. I hope everybody is buying an antibiotic free or organic turkey. Some advice is there is a shortage of turkey out there so you better order it soon. I was talking to our guys today, the 1.8 million turkeys that we will sell are all spoken for as regards to retailers.

Look forward to talk to you in February. Have a safe holiday season. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.

You may all disconnect. Everyone have a great day.