Hain Celestial Group, Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: The Hain (HAIN)

The Hain Celestial Group, Inc. (NASDAQ:HAIN)

F2Q09 (Qtr End 12/31/08) Earnings Call

February 04, 2009, 4:30 am ET


Mary Anthes - VP, IR

Irwin Simon - President and CEO

Ira Lamel - EVP and CFO

John Carroll - EVP and CEO, Hain Celestial, United States


Christine McCracken - Cleveland Research Company

Andrew Wolf - BB&T Capital Markets

Edward Aaron - RBC Capital Markets

Scott Van Winkle - Canaccord Adams


Terry Bivens - JP Morgan

Greg Badishkanian - Citigroup


Good afternoon, my name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hain Celestial Second Quarter 2009 Earnings Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Mary Anthes you may begin your conference.

Mary Anthes

Thank you, Britney. Good afternoon. I am pleased to be with you today to introduce our second quarter fiscal year 2009 earnings conference call discussion of our financial results, which were released earlier today.

We have several members of our management team here today to discuss our results. Irwin Simon, President and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer and John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial, United States.

Our discussion today will include forward-looking statements, which are current as of today's date. We do not undertake any obligation to update forward-looking statements, either as a result of new information, future events, or otherwise.

Our actual results may differ materially from those projected and some of the factors, which may cause results to differ, are listed in our publicly filed documents, including our 2008 Form 10-K filed with the SEC.

This conference call is being webcast, and an archive of the webcast will be available on our website at www.hain-celestial.com under Investor Relations. Our call will be limited to approximately one hour. So please limit yourself to one question and a follow-up question. If time allows, we will take additional questions, and management will be available after the call for further discussion.

Now let me turn the call over to Irwin Simon, our President and Chief Executive Officer. Irwin?

Irwin Simon

Thank you, Mary. Hi, everybody, good afternoon I know it's tough out there, but I got a lot of good things to take us through and John does also and Ira and some of the good things happening in our businesses and where we have some of our challenges, but again on our solid foundation.

Sales for the quarter up 14.2%, Ira will take you through gross margins, highly reconciled gross margins, but I think we will see the improvement in the business with the gross margin and some of the commodity. Our Sonic businesses in chicken and the UK how they affected us.

One of the things, what I would like to do is be upfront in predicting commodity prices and new trends, but we have really focused on our SG&A. Our SG&A in the quarter of 15.4, versus 17.5 some of it came from the higher sales in poultry, but we have really focused on cost in this company.

Our cash in the quarter was $50 million, our free cash 9.4, so I sit back today. Now we are not calling washing in for TARP money or anything like that. Our liquidity, our balance sheet, our working capital where we really focused on our cash conversion, it's really strong in today's day and age really to have that.

The number one thing is we all look what's going on out there, people are trading down. Absolutely, there is some trading down on there, what’s going on out there as I said on the CNBC, we don't live in the cave and we always expected it and that's why we positioned the company where it is.

Our average grocery product is $3.89, our average personal care products is $8, but what we are continuously seeing health is our concern. And health is a concern when it comes to low-sodium gluten free, calorie products and we see people are not trading down from a health standpoint. People want to be healthy to keep working.

We are seeing very much more people in the family's values and eating at home where the average meal at home is $5 a person versus $12 a person than eating out. Concerns of obesity and a lot of other things are really important. So, we are not seeing trading down, we are seeing inventory reductions, and we are seeing pantry deductions, which we will talk about there.

John will talk to you about grocery frozen snack and tea, our Earth's Best business babies got to eat, babies will continue to eat and are eating organic baby foods. So between formulae, baby food, diapers up 37% not too many brands growing at 37% today and that’s bringing new users in every nine months and that’s anywhere from $0.89 to $0.99 a Jar of baby food.

Soup business is strong up 12%, our rice and milk business up 15% and that’s Almond Dream and I am taking away a lot of John’s script as he has got all good things to tell you. But this shows you our consumption in our businesses out there in a lot our grocery businesses.

Just one other thing I want to point out is Arrowhead Mills where people are back cooking and baking up strong too. What I got to do is congratulate the Celestial team under Peter Burns and John and the group out there. What a great turnaround on Celestial up 3%. And what we are seeing consumers know the brand, look at the new packaging and are not buying the higher price, and John will talk to you about that in a little while,

So, I am telling you all this good stuff what happened in the second quarter. Our US business is good. Our US business is strong. You heard (inaudible) talk today about inventory reductions, you can certainly talk about inventory reductions. It’s something that we can't control. It’s a little scary because at the stock, it will create at a stocks and as everybody tries to get down to 40 days, 50 days I think. There are some challenges out there but that’s something that every retailer is doing.

We are still living through some of the higher commodity costs and we will get through a lot of it in this quarter, higher grain, just on our chicken business alone. It costs us $5.7 million in this quarter on higher grain costs compared to where grain costs are today and my prediction here is grain will come down and corn will come down to $3 a bushel.

So, from a standpoint what we do in November, we come back and really looked at the organization, how we integrate the organization, we treated every business like an acquisition and how we would integrate and work if we take cost out. And this is not something we have done. We never really had a reduction enforce in the history of Hain. And we reduced our people almost 8% and we would take it out on an annualized basis over next year, $15 million, $16 million in people cost.

That’s quite a bit for the company and there is some opportunities from [Moore] as we integrate. And went ahead and looked at every area in the company, every cost center and really focused on that. And that excludes all the productivity costs that Jim Meiers and his group work on, and all the other productivity costs that other people are working on within the company.

So stepping back one of the big challenges this quarter is the UK. The UK market, I was there last week is much weaker than the US. I said it, somebody heard me say at conferences, we need to evaluate our UK position, there are some good strong businesses there, there is some challenges positions there and you got a tough economy.

So, (inaudible) which is our business today that has some unabsorbed overhead and is loosing money for us today. But I walked at UK last week with the Linda McCartney business up over 10%. Our Realeat is up, we have a tremendous amount of private label opportunity. And what really hurt us in the UK we used to be a co-packer of our Hain, they pulled that business away for us and that really ate up our unabsorbed overhead and at that time we did not pick up other private label business.

Linda McCartney is going into Asda for the first time, going into Sainsbury in a much bigger way, the Rosetto business is growing which another brand and we are in the midst of picking up a private label business.

Right now we are on about a $14 million run rate on our (inaudible) to 14 million pounds. Our guys believe we will get to an 18 million pound run rate which will get us at a breakeven by the end of our fourth quarter, and that’s where we want to go. We get into 20 million pound, 25 million pounds and we start seeing this make some good money out of that facility.

And at the end of June if I don’t see that, we will evaluate and take some other steps, but that’s what we are really focused on that and I feel good about getting to the $18 million run rate and few things come our way on private label and some other things. We can see that run rate with the two in front of it.

In regards to the Luton facility which was basically only Marks & Spencer facility, sales were down as Marks & Spencer cut back on some of the food, cut back on some of the sandwiches from the spoil standpoint and their business is down. We had many Marks & Spencer will change direction, we will become a specialty sandwich maker for them and make some other triangle sandwiches, but what we have agreed with Marks & Spencer is that this was a facility that was exclusive Marks & Spencer facility. We have the ability to make other products in that plant where we didn’t have that before, which will allow us to expand a Luton facility, and the Luton facility is a great facility.

So, they will be able to improve pricing mix other higher premium products, so looking forward to that at Luton. Our daily bread business is doing okay, good brand of business and good distribution there.

Our opportunity in the UK is a non-dairy business. One of the things that came along with our acquisition on Haldane was a manufacturing facility in Manchester that makes Soy Milk. And we are seeing our sale, our business up on Rice Dream and Soy Dream up 8% and we have the ability to bring a lot more, lot more products in to that facility.

We were not able to get a price increase through which affected our margins also in the quarter. But we have taken a 2% price increase in January and another 4% in March on our non-dairy business. So I am looking for about a 15 million liter business out of our Manchester facility, that's how new business coming to us.

We will continue to focus on Earth's Best we had to get Earth's Best certified from the organic association, soil Association in the UK and that's happening. So let's care about other brands.

Europe Lima for the quarter was up flat through the rest of Europe our Natumi business was up 10%. We took out some people cost. So we will continue to focus really on our European business.

Let's talk about our poultry business.

Our overall business in the quarter was about $61.5 million it was 17% below our budget. So what happened our gross margin was 7.6 our plan will have a gross margin of 14%. The good news in the quarter our pre tax remained over $2 million versus $2 million last year we are almost every check in turkey facility are losing the money.

We did not hear our budget our plan was to earn about $5 million. Just in the quarter though our grain costs were $5.7 million higher then it would be today and in the first quarter it was $3 million. So that's $10.7 million. And the good news our antibiotic-free Plainville turkey business were sales were up 18%, our ABF chicken business up 6%.

One of the things that really happened to us and why our sales are up are demand for antibiotic-free turkey. And we thought we are committed at New Oxford facility which we would convert from conventional to ABF was a lot less than we expected and that has in my opinion lot to do with the economy where people were not going to buy antibiotic-free versus conventional.

But there is good place, a good plan in place of how that becomes much more of an green supplier antibiotic-free and what else we are going to do with it. So, the model does work, my prediction is corn prices will come down to $3 (inaudible).

You have seen us announce that we closed our Plainville facility and moved into the New Oxford facility and we will get about $9 million savings from that. We are opening up a couture facility in the Plainville facility up in Seraque and we see a big opportunity in that facility and we look for some higher prices.

And our big challenge out there is to convert the conventional to ABF and we think there is still good opportunity, but we must stay on plan. I will stay in ABF and not being just a conventional turkey supplier.

Canada in the quarter, just a little lumpier than we would have liked and not any business issues just ease business up 7%, all other was up 14%, what happened in Canada was inventory reductions and some currency effects. So I think we got some good things happen in Canada and been in a group of really focused on and we will continue to see good growth coming out of Canada in the back half of the year and they really put some good plans in place.

In our press release, you would have seen we announced a deal with Martha Stewart. I am pretty excited about that. I have spent plenty of time with Martha and I got to tell you she is a great person up there for brands and really believes in quality brands and you know what Hain stands for Martha stands for a lot of the same things.

So, we are going to launch a whole line in cleaning products, green cleaning products and as you know we have tried to get into this category for a long. We try to do acquisitions, multiples were just in the hemisphere. So we think with Martha's brands, her advertising power, her concern with quality and our awareness agree, this will be made in our plans we will formulate products together, we look to introduce this sometime in September.

On the acquisition front there is lots going on, and lot of acquisitions that we looked at last summer, last spring, last fall are still coming back at a lot cheaper multiples which is the good news and they are out there and looking for home is that look to be part of a bigger company. So that something that ultimately, as we get in to the third and fourth quarter we will focus on and there are some very good properties out there.

So let's recap, US business is strong and grocery-frozen is back, key momentum is strong, good momentum at Jason, John will talk to you about Avalon and Alba, where Avalon continues to have good growth and we got some things to do with Alba. We got a lot of happening in the UK and we have really made management changes, as Peter McPhillips talked to you on the last call.

And we are seeing the benefits of it, not the benefits of the losses but benefits on some of the wins and sales out there. So I am confident we will get to where we need to on UK and we will stick with it for now but if we see we are not making those headwinds. We will make some product calls, because we don’t want to be in businesses that are losing money.

In regards to the poultry business, same thing we are still sticking with being on ABF we have taken a lot of cost out of that business lot of consolidation and with corn prices coming down I really think that we can really move to the next level there and really continue to make money.

If you can make money in the second quarter in the chicken, turkey business with corn prices where they are, I really think we can make a lot of money in the next little while and demand for culture is going to be a big opportunity for us.

So all in all, I sit back today and like to be delivering a little better numbers than we deliver, but I got to tell you we have good momentum. We have a strong balance sheet, good working capital, good receivables, and with that we will maneuver our way thorough this tough economic times.

What I want to do is turn over to John and he will take you through what's going on in our US businesses. Thank you.

John Carroll

Thanks Irwin. Good afternoon everyone. Hain Celestial US posted a very strong Q2 performance, especially as Irwin, talked about the challenging economic trends we are dealing with here.

Our total Hain Celestial US sales were up excluding acquisitions. Our gross margin was up for two of our three units. Grocery and Snacks, and Personal Care, and our consolidated SG&A as a percent of sales was down as we continued to exercise strong cost control.

So, all I want to do is start by taking a closer look at Q2 for Hain Grocery and Snacks. Hain Grocery and Snacks Q2 top line was up 12% overall and up 6% excluding acquisitions.

Irwin, mentioned some of these brands, but key gross brands for us included of Rice Dream, Arrowhead Mills, DeBoles, Earth's Best what Irwin mentioned, SunSpire, Garden of Eatin', Spectrum, Rosetto, Imagine Soup, MaraNatha. You see a good part of portfolio showing some strong growth.

We also saw the growth continued to be driven across all channels, including Natural, Grocery and mass. And we continue to see growth in new products introduced last year. For example, we got some big hits in the Imagine lightened sodium soups. The holiday products like Rice Nog and WestSoy.

DeBoles Gluten-Free is doing really well. Anything we are doing with Gluten-Free is doing well for us. And our new Gluten-Free café before the launch has became a good business for us. We will extend after that.

As during the middle of the P&L, our Q2 Grocery and Snacks gross margin was up 20 basis points. As pricing and productivity savings offset $8 million in the year end inflation.

As I noted in the last two calls most of our key intergradient, especially our organic intergradient are contracted out through Q3, so we've received little benefit from declining commodity prices in Q2. Importantly though, we have realized our July price increase at account covering over 70% of our volume and also delivered $3 million in productivity savings to drive margin expansion.

Finally on grocery and snacks, our Q2 SG&A was down 40 basis points, so a very good performance on grocery and snacks for Q2. As we move on to Hain Personal Care, our Q2 top line was down 5% on as reported basis but up 5% excluding SKU rationalization. Jason and Avalon organic led with double-digit growth excluding SKU rationalization.

These increases offset some Alba volume softness in the quarter and some of our more premium price products particularly in the drug channel. Our Q2 Personal Care gross margin was up 30 basis points as benefits of our SKU rationalization program and production of 10% of Avalon volume in our Culver City plant offset over $1 million in year-on-year inflation. And just as with grocery and snacks, again Q2 personal care SG&A was down 40 basis points.

Now, turning quickly to Celestial Seasonings, Q2 top line it's down on a reported basis, but that only reflects reduced distributor inventories. And this reduction was inline with the strategy I share with you on our Q4 call and enables us to reallocate overtime our support against consumption-driving program.

We saw the first benefit of this strategy as our Celestial Tea, food, drug and mass consumption was up actually not 3%, that was actually up a 4%, not very often that I have a higher number than Irwin, in the last 12 weeks. This is our first 12-week consumption gain in over two years and shows the impact of our new consumer and trade promotion program.

More importantly, Celestial's Herb Tea, our largest segment was up 8% in the latest 12 weeks, and that's a strong signal of the health of the Celestial franchise. Celestial's gross margin for Q2 was down versus year ago, but this decrease primarily reflects a shift in consumer advertising, which is below the gross margin line to couponing, which is captured above the gross margin line.

Importantly, total Celestial's trade and marketing support was flat as a percent of sales basis, and actually down slightly on a dollar basis. So the shift in market strategy, not any big increase in spending has driven this consumption turnaround.

And finally, Celestial's SG&A was also down versus a year ago. And it again, reflects the shift in marketing support and continued tight control of our expenses. Now as we look at second half '09, we noticed some tough challenges ahead domestically, including an uncertain economy, a push by retailers and distributors to reduce inventory as mentioned by Kraft and some others in calls recent weeks, and we do have to struggle little bit through the Peanut Corporation of America, recall that affects only 7 of our SKWs, and that's 7 SKWs, not 7%, 7 SKWs, but has consumers skittish about eating products with nuts in them.

So to ensure continued Hain Celestial US profitable growth in the second half '09, we are focused on three key objectives. First one is, look, we cannot drive top line, we are going to make sure it's profitable. And the key initiatives there are continued distribution expansion across all channels, particularly all alternate channels.

Second, is strong innovation, that's always is our key part of Hain, and we have got a terrific lineup of new products for the upcoming Expo West including our strongest personal care, and specifically Alba introduction is near, so I think you are really going to help get the Alba brand growing very quickly again.

And then finally, continue our momentum on the Hain Celestial and on the Celestial Seasonings turnaround, and we have got some other things to really keep some fuel in that one. We have got our new Herb Tea package graphics, easy to read flavor names that are now shipping, and as you walk in and you see shelves now, you are seeing 75% to 80% of the shelf now with the new package.

March will see the re-launch of Celestial Tea Seasoning, Celestial’s Seasoning Tea, green and wellness teas with the horizontal packaging, and improved taste and we're launching Sleepytime Vanilla in the spring, as we extend our most valuable tea sub-brands. This is the strategy we talked about in the last call, and we are chasing this aggressively.

The second objective to drive the second half is to expand margins, and we have a couple of key initiatives there. One, we expected to get the benefit of reduced commodity pricing in Q4 as we contract for a new year of ingredient.

Second, we expect to see full realization of our July price increase, and price in Q4 and we have a continued strong emphasis on productivity and we are continuing where it makes good sense from a business perspective to look at SG&A reductions.

Let me just tell you about three key SG&A saving initiatives that we announced last week. First, we have decided to integrate our Petaluma personal care warehouse, and backroom office into our grocery and snacks facility, because we know that we can keep focus on these businesses but there are some real synergies to be realized by combining the two together.

Secondly, we have consolidated our snack sales force into our grocery sales team, because everyday our grocery sales team is our strongest sales team out there. And third, we're moving retail coverage for the personal care natural business from brokers who carry hundreds of products to our own proprietary retail merchandising teams that has done great job for us on grocery.

All these initiatives will reduce SG&A, but more importantly they will improve the overall Hain Celestial business model efficiency.

And then our third key objective for the second half is real straight forward. We are going to keep working on improving our cash management by looking to reduce our inventory.

So, to recap Hain Celestial US had a strong Q2 across all units and we are focused on key initiatives to drive profitable growth, expand margins and improve cash management as we deal with the economic headwinds in second half '09.

So with that we turn it over to Ira Lamel.

Ira Lamel

Thanks John, good afternoon everyone. First I would like to give you some sales and gross margin information. Sales this quarter were impacted by four major items when compared with our expectations. First as Irwin mentioned, our customers of full bound inventory days and we have estimated that we lost about $11 million of sales in the quarter as a result.

Second, the impact of unfavorable foreign currency movements on our sales was another $11 million when compared to what we had expected. Against our expectations the UK pound declined 10%, the Euro 15% and the Canadian dollar declined 10%. When we compare those currencies to last year’s second quarter, the UK went down 23%, the Euro 9% and the Canadian dollar 16%.

Third our Hain Pure Protein unit under delivered against their sales expectations by $12.5 million due principally to softer than expected market for higher priced ABF products and by a pull back in productions. So it's not that we are selling products into the commodity markets at lower prices as a result. And fourth our sales in Europe, particularly in the UK were lower than we expected due to the softness in their retail market in face of the recession.

In particular, Marks & Spencer reported that they had declined 5.2% in the December quarter in food sales, which impacted our sales for Marks & Spencer, our major UK customer. As we said in our press release same brand gross margin went from 30.9% to 28.7%, inflation in input cost impacted our gross margins by 458 basis points in this year’s quarter. Offsetting these cost increases we achieved additional productivity in the quarter of 95 basis points and the August price increases we implemented have now provided a benefit to our margin by 304 basis points.

The remaining significant changes in gross margins come from a switch as John mentioned of some of our advertising and consumer spending from the selling, general and administrative expense line to more direct-to-consumer couponing which is reflected as a reduction of reported sales in margins, and therefore caused the 44 basis point drop in overall gross margins.

We also had a decline in margins in the UK other than the under absorption adjustment, which caused a 95 basis point impact. These impacts combined for an approximate 200 basis point change in same brand gross margin.

It’s also important to note that had we have not seen the distributor inventory reduction and had not had the higher HPP or Hain Pure Protein grain cost. And combine with the remaining price increases that we will achieve from the August implementation. The price increase to be achieved in Q3, our consolidated gross margins in the quarter would have been another 200 basis points higher than reported.

Let me now review the details of our adjustments this quarter. Our earnings have been adjusted for the following: as we have discussed with you on past calls, we continue to incur cost in connection with unabsorbed build aheads in the UK Fakenham facility. These unobserved build aheads have continued due to excess capacity at that plant resulting principally as Irwin mentioned from an expired Co-Pack Agreement.

In the second quarter these cost amounted to $2.59 million or $0.05 per share. We incurred severance cost of $900,000 in the quarter or $0.02 a share. These costs arose from a small headcount reduction we effected in November. We recently announced after December 31st, that we would be closing our Petaluma personnel care operation and consolidating it into our Melville location.

The related severance cost for this headcount reduction will be reflected in Q3. our professional fees and other cost during the quarter resulting from the stock option practices enquiry. We are just under $2 million and added to $0.03 per share. We incurred $1.5 million of stock compensation expense in the quarter, which is another $0.02 per share. And during the quarter we settled the personnel injury litigation in which we contributed $1.35 million above the amount our insurers pay. This amounted to $0.02 per share.

And as I discussed about currency earlier, the sudden strengthening of the US dollar versus other currencies resulted in us recognizing foreign exchange impacts of $1.4 million through the P&L or $0.02 per share in the quarter.

Some other things to point out to you. As Irwin said our balance sheet continues to be a strong one. We have $729 million in equity, debt is only 43% of equity at 12/31. Our credit line has almost 2.25 year’s before renewals, so we are not in any situation of having to discuss anything with banks about that credit facility now.

We had $50 million of cash at December 31. Our cash conversion cycle has remained flat with September 30. Receivable days where we are very focused on what's happening in the economy and the strength of our customer base is down four days against last year second quarter, and is down four days against September 30. Payables are up one day against last year but they are lower by five days against September 30.

Our inventories declined by almost $3 million with one day lower in the quarter then September 30. However, with the decline in inventories at distributors impacting sales in December our inventory days have risen compared to second quarter a year ago.

Adjusted EBITDA for the quarter came in at $34.2 million this year against $37.6 million last year. Our current depreciation and amortization in the quarter was $5.7 million, and capital expenditures in the quarter were $2.8 million. As we announced in our press release today we have reset our guidance for the full-year. We now see sales coming in at $1.175 billion to $1.200 billion to the full-year. We also expect earnings for the full-year to now be in the $1.38 to $1.42 per share range as adjusted.

With that let's open it up for questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from the line of Christine McCracken. Your line is open.

Christine McCracken - Cleveland Research Company

Good afternoon.

Irwin Simon

Good afternoon.

Christine McCracken - Cleveland Research Company

I wanted to dwell into the changes you are making relative to the Hain Pure Protein business, you talked about I guess converting the Plainville facility, I guess transferring that production to New Oxford. And your intention I guess the convert then the other facility to Plainville, I mean it's a [Cotia]. I am wondering, can you talk about if you already made these reductions or the timing around that conversion and whether or not, your CapEx kind of forecast includes the cost of transitioning to [Cotia]?

Irwin Simon

I don’t know, you are going to ask us question on poultry Christine, that okay. Actually it's a good question with good answers. The conversion from Plainville to Syracuse facility to the brand Plainville to new Oxford happened in January 1. And you heard me say there will be about $9 million in savings anybody (inaudible) and starts to run through the New Oxford facility.

In regards to the [Cotia] facility there is about $1 million in capital, that we will have to into Plainville and Syracuse facility to convert that to a [Cotia] facility in the biggest conversion as we still need process or harvest turkeys in that facility, now we are going to do both turkeys and chicken.

And we see a big opportunity as there was a major [Cotia] supplier who is gone into bankruptcy in another business and many, many, many of our retailers have assets for this and we will be one of the first [Cotia] antibiotic free chicken and turkey that goes there today and anybody on the phone is listening you know the prices of [Cotia]. So there is big shortage of demand out there for the product.

Christine McCracken - Cleveland Research Company

And then, I just want to follow up as you had mentioned that your outlook is for $3 corn I guess, later in the year. The curve right now I think would indicate something closer to $4. So, I'm a little curious why you are so optimistic and if you have any contracts may be that give you an added edge or is there something unique to your operations?

Irwin Simon

Well, I think we demand and I think sort of looking at soybean and 80% corn and the soybean and the mix that we see. We see demand as prices coming down and today, you can buy it today with a little over three and quarter if you pay big, when you buyout. So, that is as I sit with our guys when we see corn going. But even at $4, it's $2.50 a bush cheaper than what we are paying today. If a mass buy $1 or so much cheaper than we have been paying. I mean, we paid a lot higher in the first quarter. Going in for the March quarter, or even at the $5 range, so coming down to 4 will be great, I just think it's going to come to $3, $3.50.

Christine McCracken - Cleveland Research Company

Great. I leave with that. Thanks.

Irwin Simon

Okay. I haven't become a commodities analyst either.


Your next question comes from the line of Andrew Wolf. Your line is open.

Andrew Wolf - BB&T Capital Markets

Thank you. Good afternoon. In the release, when you talked about sales moderating towards the end of the quarter, and, the numbers Ira gave on de-loading and currency, suggest at least if you had a those back. We will look pretty good on the top line and then Pure Protein obviously it's kind of trade down related and then John, talked about ALBA I think Terra so.

If I piece that together it sounds like certainly you had some your higher priced items you had to trade out of slower velocity. And so first of all that happened towards the end of the quarter number one. And whatever else, is there anything else that happens towards the end of the quarter like your most, so was it broad based the slow down in sales towards the end of the quarter, or was it more like I am alluding to in some of these higher price point items where you might expect to see more trade down?

Irwin Simon

Well, I think again on trade down you got to be careful. I can't, you don't really say what has been trade down or what has been inventory de-load and what is pantry de-load, okay. And when we did start to see a slowdown on orders was after thanksgiving. Now John, gave you some consumption numbers and consumption numbers have continued to be strong. I think Andy, there is a lot of shift going on in between general shifting, more people are moving to mass market versus independent grocery versus natural super markets. I think before people were buying five boxes of tea maybe only buying one or two boxes of tea, using their coupons to do it. And I think people in the month of December just sort of said. I am going to save money to ultimately buy gifts et cetera.

Two big multinational food companies reported earnings today, and you saw about their inventory and consumption. So I think there absolutely is some slowdown here, but I think also there is a lot had to do with inventories coming down in pantry de-loading.

Andrew Wolf - BB&T Capital Markets

Okay. And Ira, on the professional fees in connection with the stock options, can you tell us if that's wrapping up, it still seems like a pretty big number.

Ira Lamel

I think without trying to be really cute, I think you have to ask the SEC, because we can't predict in any manner. We think they are a little distracted right now with regard to other things that are going on. The cost that we incurred in the quarter were principally from the very beginning of the quarter with a lot of activity at that time, but we have no manner of predicting where their conclusion is.

Irwin Simon

And we hope so, Andy that it's wrapping up.

Andrew Wolf - BB&T Capital Markets

Okay, and just one last thing, Irwin, I think you were talking about getting your volumes up at Fakenham in pounds I think was 18 million from 14 million.

Irwin Simon


Andrew Wolf - BB&T Capital Markets

Does that take the whole roughly $2.5 million, $2.6 million quarterly loss or this quarter's loss out, or does that just take a portion of that out?

Irwin Simon

That would take majority of it out. There is still some overhead cost on people and some central cost that we have. But that would get the loss out of that plant of overhead absorption yes. And I got to tell you, I do have a pretty good roadmap to how we get to going from $14 million $18.5 million on that.

Andrew Wolf - BB&T Capital Markets

Yeah okay were there any other customers you mentioned although you might have said this and I apologize, I was not listening well. Are they locked up or are you still sort of in the selling process?

Irwin Simon

A lot of it is locked up today. We are probably locked up today to about 18 million pounds on a run rate for a full-year basis. So we have locked up today about 3 million pounds to 4 million pounds of new additional business that would start from January 1 onto June 1. But we are also up there bidding for some other business that we do not have commitments for today.

Our real objective is we would like to see this business get to a 25 million pound business and we used to make crumbles which was a whole pastry line for Heinz, we now have been approached to do a lot of other crumble type products but we were not doing that before.

The good thing about the plant it's a totally vegetarian plant. So you can not do anything with meat in there. So everything in here has to be a vegetarian facility. The other good news is you have heard me say about the McCartney business growing and part of the roadmap is picking up new business at Asda, new business at Sainsbury, some presentations at Tesco. So part of that is additional McCartney business coming in there. Next question?


Your next question comes from the line of Ed Aaron. Your line is open.

Edward Aaron - RBC Capital Markets

Great thanks, good afternoon guys.

Irwin Simon

Hey, Ed.

Edward Aaron - RBC Capital Markets

Hey, I just wanted to kind of follow-up on the implied guidance for the back half of the year just to get a little bit more comfortable there. It looks like you will need a pretty significant gross margin improvement relative to Q2 which is seasonally higher margin quarter and I know there were some issues affecting Q2 specifically. But it sounds like it's not going to be related to Q4 before and you really see some of those tailwinds start to kick in. So I am just trying to get a little more comfort around your availability to get into that full year range of guidance given the back half?

Ira Lamel

We do expect an increase in our margin achievements in the back half and the modeling that we have done suggest to us that action Hain Pure Protein which of course is a different margin. All we need is a couple of points of improvement in margins for the rest of the business in order to get there.

Irwin Simon

And Ed, I think that big thing is getting the full benefits of prices. I am seeing commodities come down, productivity which we continue with here. There is a lot of new products that we have introduced that, when the distribution the June one start to be there, are the ones who enters Boston, to start getting shift January. And then we introduce some other new products that mark show and then we get significant SG&A savings that we have gone through and really cut here.

So I listen to what is on note out here, I wish as Christine asked me before my belief on corns, I do not have crystal ball on volume, and I do not think anybody does. And like a lot of other companies that just pulled the guidance because they had not crystal ball.

We sit back and look at the main look at consumption. Where is the consumer coming in, the other thing is when you talk to some of our other customers that are out there who is taking down inventory. But what I can say is the demand still is out there. We think we got some also money to spend back on driving volume, like John suggested to be.

John you talked to before what happened on our tea business as we dropped coupon. So we got some work to do, but I think we got some ammunition to work with to make it happen.

Edward Aaron - RBC Capital Markets

Thanks and Ira, what charges should we expect to see in the third quarter numbers in terms of the adjustments?

Ira Lamel

Well, the only one that we have modeled is stock compensation, because we know for certainty what that number will be absent any additional grant there. We really don't know what will come through as professional fees with the SEC inquiry, we don't know what may happen in terms of the volumes, even though we have some projections volumes going through a plant in the UK with some of the wins that we have had, we expect what we have and included it that the under capacity of that plant will be reduced. I can’t predict what's going to happen with FX, so the only one we have actually, we know with certainty is the stock compensation.


Your next question comes from the line of Scott Van Winkle. Your line is open.

Scott Van Winkle - Canaccord Adams

Good afternoon, everyone.

Irwin Simon

Hey, Scott.

Scott Van Winkle - Canaccord Adams

John and Irwin, you talked about all these retailers. I would love to dive a little deeper in that in the inventory reduction you are seeing retail in distribution. I would assume that didn't hit you until, on Thanksgiving you talked about volume falling off. How long does it last, is it end of January then fix up in February as you go into February? How long does it take to take a few days in the channel?

John Carroll

Scott, this is this John. When we heard in talking to different distributors and different retailers, some of them are taking a immediate reductions, but others are actually we talked on yesterday, who is actually going to take out inventory over the next two quarters, because their systems are not such that they can take it out and be assured that they will service the customer. So Scott, I think we are going to see this bleed through the balance of the second half.

Irwin Simon

And Scott, I think it all comes to back to us, they see less consumption going into the stores and less sales. And you know what Hain has to do is, this year as we go ahead and get new distribution and new accounts and where we had before at certain accounts where we didn't have diapers, what is diapers now what they are best. Where do we bring a new SKU?

So as we sit here and paint the picture, that there is going to be inventory reductions. On the other hand, where there are SKUs today and we don't have the diapers or we don’t have personal care, we don't have other products; there is a lot of distribution opportunity for us to drive new volume through that. I think it's wrong, because I think one of the big problems this creates at the stock I have seen somewhere already.

Scott Van Winkle - Canaccord Adams

That's fair. My follow-up questions, just way talked about, Irwin. John you mentioned specifically in your initiatives growing distribution and growing profitable volume. What are you doing differently to motivate the sales force?

You just hear a lot about sales forces are trying to service the customers. They weren't doing that extra trip to pitch the new business. Are you getting more aggressive on the sales force, or what are doing differently to keep them going?

Irwin Simon

It's real simple. Part of their compensation is based on driving new distributions. And it's something that we new distribution has been a key part along with fixing our mix and driving innovation that’s driven our growth in the last few years.

Now given that they have done a great job in fixing the mix, innovation and driving new distributions are the two key ways that they can drive their top line number profitably.

John Carroll

And Scott, I think it's dangerous, because consumers are coming to stores and see certain things out of stock. They are not going to come back there for them and go somewhere else. And that's as we sit with customers that want to do this, that's a big discussion that we have, because if I came back today and put the other number then I believe in other stocks 5%, 6% in the quarter for certain of our customers and you take 6% of our sales which we don’t even look at the number here, that's the big number that we are missing in sales and we have to go out there make sure there is product in stock, because we don't have another stock problem.


Your next question comes from the line of Scott Mushkin. Your line is open.


Hi, guys. It's [Blakely] filling in for Scott. Volumes obviously, we heard from Kraft and others today that volumes are down across the industry, but do you have any sense for when, and this is really a general question, but do you have any sense for when that bottoming process will take place? Do you see end in sight here, or we are just beginning?

Ira Lamel

Hi [Blake], I listed, I think we can sit back, what we all know everybody's going to eat. If we were selling handbags or selling cars or dish washers you know that’s discretionary. People are going to eat. And going back to Scott's question, if our products are on the shelf, they are price right and they are going to get value people will buy our products.

I just think there is new phenomenon out there, there are less consumers coming in the stores. And it's not like with the clothing business, you only got three months to sell shorts or three months to sell plain tops or something like that and that is style. That's what happens with our food products and personal care products.

So from our standpoint this is where we are driving volume with coupons, promotions, innovation, displays and that is so important to us. But my belief is, we are not all going to go on a 40 day fast and not eat for the next 40 days to save money. I think if anything what we are continuously seeing, is more and more consumers not going to restaurants and eating at home. And the reflection in our numbers (inaudible), at $50 billion company. I mean just imagine the affect on us, and has affected us $11 million. But just think when they mentioned and how much it is, I think we are doing a great job and driving volume rate now and not the only with inventories coming down.


Okay, thanks. As it relates to the UK and it seems like the UK is pretty acute, I mean, you mentioned sort of well sounds like kind of a review of the UK business and I may have misheard you a little bit, but what kind of metrics are we going to look for on UK from the sales side and there is a lot of facilities what have you, but from the sale side, where do we feel comfortable?

Irwin Simon

Well, I think its pretty obvious if we can’t get to an 18 million to 20 million pound volume in Fakenham to breakeven we are not going to run a plant that’s a loser. And when it comes to Luton, we probably need another 20 million, 25 million pounds coming from that and the good news is we now will be able to do other volume and there were before it was basically Marks & Spencer. So and as I said there is, I was going to say a lifeline but there is a line to the 20 million pounds of Fakenham and there is a line to 20 million, 25 million pounds in our Luton facility. So, we will make that decision by the end of our fiscal year.

Next question.


Your next question comes from the line of Terry Bivens. Your line is open.

Terry Bivens - JP Morgan

Good afternoon everyone.

Irwin Simon

Hey Terry, how are you?

Terry Bivens - JP Morgan

Pretty good, Irwin. Nice to be back on your call. I just wish the results were a little better, but as you have alluded it's, you are not the only one that’s facing some tough headwinds out there.

Irwin Simon

I think, Terry, in the scheme of things, enough results are out there.

Terry Bivens - JP Morgan

As you look, I mean, we had calculated the contribution from acquisitions to be somewhere in that 14%, 15% area. As you look at your core growth, was it essentially flat all in?

Irwin Simon

No. Not at all. As you come back and look all jobs, businesses, grocery, frozen snack, and [tea] being up. Absolutely not.

Terry Bivens - JP Morgan

Was that growth in John's businesses is offset by what you were seeing in Hain Pure Protein and overseas, I guess that’s the question?

Irwin Simon


Terry Bivens - JP Morgan

Okay. Where are these [trade de-loads] hitting you? Is there one channel in particular, I know your distribution pattern is somewhat different from what we see it crept, was there one channel in particular that hit you hard, if you can give us some color on that?

Irwin Simon

Not really. We can start to hit across the board and I think everybody is trying to get down just in time to get down to two weeks or three weeks and some of our distributors carry four five weeks and some of our retailers that carry three to four weeks. I think everybody is trying to take week or two out of their business. So, it's across the board, I think it's mostly happening with distributors first because they do carry more inventory, Terry.


Your final question comes from the line of Greg Badishkanian. Your line is open.

Greg Badishkanian - Citigroup

Hey, thanks. Hi guys. First question. I was calculating mid single-digit organic growth is that closed?

Irwin Simon

You are always using close to the number.

Greg Badishkanian - Citigroup

Okay. Great. And then just looking at consolidation just talking to number of real small players out there that compete against you, private equity funding obviously is dried up. They are having a tough timing. What's your expectation in terms of seeing some bankruptcies there, some consolidation and how much market share do you think you gain in this quarter and do you see that accelerating over the next few quarters?

Irwin Simon

I think there is lot of businesses coming our way and major ones that we looked at before that needs funding. One other thing, Greg, just a perfect example is Petaluma which is a great business where all our Personal Care business is run which our Personal Care business being approximately $150 million of size. The savings and to roll up into our Melville business and to have our fingers on the pulse and be part of the bigger organization whether it's for manufacturing, warehousing, sales, distribution, people-wise, tremendous savings to invest back in new business and to grow the business.

So there is $150 million business. There is quite of them out there in a smaller range that is a standalone business. We will have some challenges, standing alone. And not only CD thing, but there is a lot of banks out there that just do not want these small businesses and are not willing to keep them in their portfolio.

So I think you are going to see a lot of bankruptcies, I think you are going to see a lot of consolidation and that's why I said before Hain, our major priority here is to have our own house in order, have our balance sheet strong. We will continue to pay down debt and when the right time comes. Go out there and do some good strategic acquisitions that I can tell you is there is a couple of good things out there today that would make a lot of sense.

Ira Lamel

Greg, one thing I want to reemphasize, because I think your question is appropriate in the current economic environment, is we have a great team that watches over our receivables, we took receivable day down by four days in the quarter. And that's purely because of the attention that's paid to our receivable file.

We have in fact, and we certainly won't get into names, but we have in fact actually declined credit on some of our sales orders because we are that focused on the quality of the receivables that we carry on the books.

Irwin Simon

And we have gone and given customers that smaller customers that we are focused them to buy from distributors, because we do not want the credit. We have gone to customers and, say we will give you better discount terms if you pay upfront and we just do not want to be in that.

So, and we do not have to sell them and do not want to take hits. So we're all over our credit where other vendors do not have that luxury to do that. So, with that the last question. I’ll come back and say back to Terry Bivens. He wished we were delivering better results.

Everybody around this table does too, but in tough economic times, I think, we are delivering solid results in consideration of what's going on out there. I think, we're cautious; we've taken the right move on personnel. I saw Bloomberg today and the first time in it's history laid people off and the first time in our history and I go back and I look at other retailers whether its [Albert] or J C Penney being down 16%, 17%.

So, I think, yes, we could deliver better results and yes being concerned about Hain is our number priority. But seeing what's going on in the world I think, we have delivered results that are okay and absolutely can do better and as you come back and look at what Kraft delivered today and Sara Lee two major companies that probably still more near than we do.

The other thing that has affected food business is this recall on peanut butter and we have been in the midst with it our frozen trays and one [health value] product and what I must say is we have a peanut butter facility in Ashland, Oregon which they are absolutely not in.

This happens to be I think one of the biggest food recall in the history of the US which concerns people of food safety et cetera and just dealing through that. And none of us realized that we are buying from this corporation but on the other hand I think this drives consumers, to be concerned about the products they are buying.

And quality products instead of just running out there and buying private label and buying priced products. I think this absolutely helps where the consumer is as we maneuver through this year.

At the same time we understand our challenges on UK and understand some of the challenges on our poultry business. And they have been probably the two biggest draggers on the quarter this earnings.

And the guys at both locations are listening and we know some of the challenges will be in the poultry facility tomorrow going through that. And we know what we have to do to move to the next level, on one end we made money and we are probably one of the few poultry suppliers that have. And that's what our plans will be integrated and that's what it will be in the couture side of the business. And that’s what corn been at $6.50 a bushel that we are paying today.

UK it really and you heard Peter McPhillips, we've got a good plan there. So we will ultimately make some decisions there and the US business that's run under John. There are some challenges in front with inventories and but I really tell you we got strong brands.

And I keep hearing private label, private label, private label but at the end of the day brands are still 83% of the sales here in the US private label represent 17% and we have had the opportunity recently to look at private label business in a couple retailers as they looked at us to make some of the products which we are not doing.

Private labels are not doing out there doing what everybody expected is doing. From the Hain's standpoint taking out cost to G&A cost. I mean not a lot of companies are there today have taken 2% of 200 bips out of their SG&A from a G&A standpoint. And some of that yes with poultry. But we've really focused on our G&A and you'll see this on our margin.

So look forward to speaking to you soon and we will back and keep you updated on our business. And stay warm or there drink tea and stay home and eat and do not go to restaurants and eat healthy foods. Thank you.


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

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