The Hain Celestial Group, Inc. F3Q08 (Qtr End 3/31/08) Earnings Call Transcript

May. 5.08 | About: The Hain (HAIN)

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

F3Q08 Earnings Call

May 5, 2008 8:15 am ET

Executives

Mary Anthes - Vice President, Investor Relations

Irwin Simon - President and Chief Executive Officer

Ira Lamel - Executive Vice President and Chief Financial Officer

John Carroll, Executive Vice President

Analysts

Andrew Wolf - BB&T

Ed Aaron - RBC Capital Markets

Jacqueline Rider - Lazard

Terry Bivens - Bear Stearns

Simeon Gutman – Goldman Sachs

David Palmer – UBS

Alvin Concepcion – Citi

Christine McCracken - Cleveland Research

Pablo Zuanic – JP Morgan

Operator

(Operator Instructions) At this time I would like to welcome everyone to the Quarter Three 2008 Hain Celestial Earnings Conference Call. I will now turn the call over to Mary Anthes, Vice President of Investor Relations.

Mary Anthes

I’m pleased to be with you today to introduce our third quarter fiscal year 2008 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.

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 defer are listed in our publicly filed documents, including our 2007 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 Simon

I hope everybody had an opportunity bright and early to review our press release and our information for our Q3 fiscal ’08. Our sales for the quarter $264.6 million versus $238 million ’07 up 11.2%. In this quarter there was approximately $5 million of product that we discontinued for SKU Rationalization which sales would have been up 14%. Our margin 30.7% versus 30.5% that’s up 20bps and that’s same brands year over year which I think is phenomenal considering the cost pressures that we face today.

Our SG&A on an adjusted basis 18.4 versus 19.9 our SG&A down 1.5%. You’re going to hear me talk more about productivity and efficiencies and costs of how we’re dealing with the higher costs and to offset that. Volume growth has been great, I continuously hear people are eating or trading down. We’re not seeing that and we haven’t seen it continue into April. April sales have been extremely strong and we like what we’re seeing.

With SKU Rat and nine month sales up 15% April continued strong so we like what we see out there in regards to the consumer. Terra chips up over 5%, Arrowhead Mills up over 5%, Earth’s Best over 36%, Formula business pretty strong, our Spectrum business up 11%, our Hain business up 14%, Celestial Seasonings, I’ll talk about that in a little while growth in this quarter one of our biggest quarters up 2%.

Our Chicken business up 14%, Avalon and Alba, John will talk about that in a little while up 27%, our Canadian business up almost 40%, and our European business up 20%. Our UK business is one that was down this quarter 8.2% and I’ll talk about why we were down and some of the issues that you can see what happened in the UK.

As you can see, growth is strong but one of the things we’re experiencing costs that I’ve never seen before and in my career I’ve never had to deal with costs this way. What are we doing about it? Growth, growth, growth, I think there’s a major initiation, I talked about it in our second quarter how we’re driving growth through new channels, new distribution and we’re seeing a lot of the results for it and we’re seeing a tremendous shift in our business where our growth is coming from.

Innovation, at the Natural Food Show in March we introduced over 50 new products, extremely innovative and I’ll talk about some of the innovation that we’re doing in a little while. Innovation is key. Productivity, tremendous amount of productivity coming out of Hain. I’ll take you through how we saved about $10 to $12 million in costs through productivity; it shows you what our SG&A is.

From a cost cutting standpoint a lot of costs, a lot of consolidation going on, SKU Rationalization. In 2005 we initiated SKU Rationalization and it was extremely successful. Some of the things that I’m looking at are selling some of our brands that are lower volume brands or not number one or two in the category. Our complex portfolio, I think we should look at streamlining it and we’ll continue to do.

I get asked about price increases. We have taken numerous price increases and I think our brands and our products support price increases. There’s always a time lap within our pricing and we’ve taken since 2005 over eight price increases and have another one in place effective May 3rd. We’re not afraid to take pricing. One of the big things we have done in taking pricing is insuring that our trade dollars are passed on at retail and the reason consumers are not seeing the high prices that have been taken in price increases.

One of the big things consolidating businesses we now will consolidate all our US operations under John. John has done a great job of taking costs out of our grocery frozen snack business, our personal care business and putting tea, snacks, grocery, and personal care all together under one US operation. We see tremendous efficiency, tremendous cost savings, and tremendous shipping savings.

Acquisitions, we’re continuously looking at acquisitions. I’ll talk about our acquisitions and that in a little while. We can’t control fuel, we can’t control commodities and when we started to do our fiscal ’08 plan back in May of last year diesel was at $2.84, today diesel is at $4.10 and we know where corn, we know where soy is, we know where wheat is. So far, we’ve absorbed over $26 million of costs. That’s almost $.40, $14 million we were able to make up in price increase and another $11 million in productivity.

As you can see we can do it, we’re all over this and dealing with a lot of costs up there. Personally I think commodities are tapped out. I don’t think we’re going to see them go up further but I’ve been wrong before. A question always asked of me are organic prices moving higher or on a percentage basis are they going up a lot more than regular commodities, not at all, we’re not seeing that.

About the consumer, I had Nielsen’s go out and pull together some data and ask has organic sales slowed because of prices. Over a 12 month period ending the end of February, Natural sales were up 11% over a four year period they’re up 35%. Organic products that have a UPC code for 12 months ending the end of February up 25% and four year up 142%. We’re not seeing any slowing going on. One other category that affects our protein, antibiotic free 12 month up 17%, four year up 66%.

The consumer is still looking for organic products and natural products; the consumer is still looking to eat healthy. From a private label standpoint something that I continuously get asked, are people converting more and more to private label or trading down? There’s over 500 products and 50 different categories in private label today. Some of the top categories 2% milk, 64 oz fat free milk, organic eggs, whole carrots, lettuce, romaine lettuce, spinach, tomatoes, white eggs, greens, flakes, cereal flakes, cereal bars are some of the bigger categories while ultimately consumers look to trade down.

SKU Rationalization is something we’ve spent a lot of time on and as you saw in our press release we finally took action on it on our personal care business as we consolidated Avalon, Alba, Jason, Zia and Queen Helene. We’re very successful in 2005, we improved margins there almost eight points and we saw sales grow. What this allows us to day is improve margins next year two points on our personal care business and eliminate $1 million plus in people. It allows us to consolidate products and bring it into our manufacturing plant.

With that it pays for itself and it’s the right thing to do for the business as we see great growth going on in our personal care business. As I said before our portfolio is a complex portfolio and previously we looked at the portfolio and we’ve divested brands and we’re going to do that again at categories and brands that we think we can’t grow them any longer and should be part of someone else. We would look to sell or divest some of our smaller brands or some of our brands that have a three or four position.

Celestial at the beginning of the year we said it was a transition year. Our objective was not to always be on promotion which I think is a great objective. Grow volume and develop programs that we could deliver with non-promoted volume. Our achievements, we got our new packaging, we’re seeing some good things happen on coffee and so forth. Our volume this quarter is up 2% our margin is up 2%.

One thing that’s very important, its 45% of our volume is up 18% and that 45% of our volume today is not measured through Nielsen numbers. Our grocery volume is down 1.5 million units and 87% of that is due to non-promoted volume. We’re not out there promoting, we’re spending a lot more on the consumer and Celestial Seasonings is the only brand showing a decrease in non-promoted volume. Previously it was buy one get one free, two for $4.00, so its important for us not to be on promotion, get our retail prices up is something that we’re going to continuously do.

Our Canadian business is up almost 40%. Our supermarket business strong in Canada, our mass market strong in Canada and we continue to do that and some of the good things you’re seeing in Canada our Yves business 83% share of the market, our Terra chips up 65%, Imagine soup is up 20%, First Best up 24%, Celestial up 12% in Canada. Good growth, good things happening in Canada, a good market for us.

Our European business up 20%, Lima up almost 20%, our Hain European business up 15%, Natumi, which is our non-dairy business up 10% and Celestial Seasonings is strong. Grand Law we’ve been hit by higher costs there, some of the products getting price increases through and we continue to evaluate the Grand Law to see that we can get some pricing.

Our antibiotic free chicken and turkey business which has substantially become a much bigger business for us since 2005. On a run rate after buying the new Oxford business and going into next year there will be approximately $150 million business for us. What we’re seeing is the demand for ABF growing, as I said to you before it was up 17%. What we see people trading down from red meat and buying more and more chicken and more and more turkey.

This year, just on our chicken business alone, our costs were up $1.6 million. We’ve taken two price increases. Our chicken sales, FreeBird were up 13.8%. Our gross margin was up 10.9% versus 9.7%. From a selling price $1.37 versus $1.35. As you can see we’re getting the price increases and we’re getting our average selling price up and absorbing costs.

From a turkey standpoint on our plainful business our turkey business was up over 4%. We absorbed over $700,000 costs. Margins were off a little bit there 12.3% versus 12.6% but our earnings were up substantially.

UK had a tough quarter; one of our tougher quarters in that market and when you have a tough quarter in the UK it’s a double whammy because where the pound is today. We’re still having challenges integrating the three plants, not as smooth as I expected. We’ve sent over some personnel from the US to help with that that helped us with the Westchester facility.

We had a $1.8 million start up cost this quarter. In the next quarter we should continue to see that. Volume down 8% in the UK and some of that is SKU Rat on our Manchester non-dairy business. We eliminated a lot of SKUs in the housing integration. We got rid of a lot of private label business that was not profitable for us and we shifted a McCartney promotion to Tesco that last year was in March this year will happen in April.

We had some fall off in Rice Dream, a study came out that just said there was arsenic found in rice which affected consumption but we’ve seen sales come back. We’re excited about our Daily Bread acquisition. We’re excited about the fresh category in the UK. We will get the UK fixed. We’ve got a lot of opportunities there and a lot of growth.

One of the big things is we expand our distribution there with the Daily Bread acquisition there’s a lot of great products to take into the whole food service and we’re looking to take Earth’s Best Fresh into food service and expanding Terra there. That’s a par for the UK but that is one area that we need a lot of work on today.

Management, I’ve got to tell you, going through challenging times like this its important to have smart, energetic management and I must say that’s what we have. Consolidation is key, taking costs out and underneath John that’s something that we’re going to continuously look at. From an acquisition standpoint the middle of March, the end of March I think we did three great acquisitions, MaraNantha is a lot like Spectrum.

We looked at it before, we like the Nut Butter category, we really like the organic chocolate category. We think there’s a great opportunity in kid’s products, special events products whether it’s Halloween, Valentine on the organic side, and 77% of the products sold in MaraNantha go through Natural today just taken through our channel. We’ll eliminate a lot of costs, we have gone out and announced the closing of their headquarters and will integrate into the Hains Celestial infrastructure sales force distribution force. We see some good growth coming from MaraNantha both on the chocolate side and the Nut Butter side.

Buying the new Oxford facility from Pilgrims Pride, I think we bought it at a great price. Big capital avoidance, good price, it gets us into fresh pack. Most importantly, supply we were having a big issue with supply of antibiotic free turkey, and this will help our supply also take a lot into deli and prepared foods which we were looking into that category.

You heard me talk about Daily Bread and we really think fresh food service, soup, salad, we really looked into that category. All in all, it’s been a tough year, it really has been. If you go back and look, as I said, last May when we were doing the plan and you look at this May and look at costs we were off on costs. That’s something we can’t control. We’ve driven growth, we’ve cut a lot of costs out of this business, we’ve introduced a lot of new products, and we’re in a great category in natural organic.

We’ve been able to take pricing and we will continue to take pricing. There’s just a lag time 60 to 75 days before pricing gets through. Last but not least we’ve made some great acquisitions. All in all it’s been a tough year but we’ve delivered and that’s what I’m proud of, of this company and these brands. What I’d like to do is turn it over to John and he’ll take you through some of the things he’s doing on SKU Rationalization, some of the great growth in his businesses.

John Carroll

Today I’ll review the Q3 results for Hain Grocery and Snacks and Personal Care update you on the MaraNantha and SunSpire brands acquisition and highlight the personal care SKU Rationalization opportunity. Starting with Hain Grocery and Snacks, Q3 was a very strong quarter. Our top line growth was up 9% which primarily represents organic year on year growth at the MaraNantha and SunSpire brands were only acquired as of March 6th.

The growth was driven by a combination of consumption increases, ultimate channel gains and new product sales. We saw growth across the brand portfolio as Irwin had said. Our Terra turn around continues for the fifth quarter in a row. Additionally we saw high single or double digit 12 week consumption gains as measured by Spins Natural and Nielsen Grocery on Earth’s Best, Rice Dream, Imagine Soup, Garden of Eden, Sesame Street, Imagine Frozen, Spectrum Naturals and Essentials, Arrowhead Mills, DeBoles Pasta, Walnut Acres and Hain Pure Food.

Turning to the middle of the Grocery and Snacks P&L we continue to experience unprecedented pressure on input costs and fuel related expenses. We saw continued year on year increases for organic corn, soy beans, wheat, canola oil, fruit and dairy as well as packaging and diesel fuel. In fact, our Q3 cost inflation was almost $5 million. Despite these challenges our Q3 delivered product costs actually improved 20 basis points as productivity and pricing offset continued rising commodity and fuel costs.

Cost outlook continues to be challenging as we enter the fourth quarter. We see so abatement in the year on year pressure on input costs and fuel related expenses. As a result, like several other CPG manufacturers we announced a 4% price increase in March. This increase will have little effect on Q4 given the lead times required by our customers. However, this pricing action along with productivity will be required simply to maintain margins going forward.

Moving down the P&L our Q3 SG&A expenses as a percentage of sales were flat as grocery and snack savings were offset by the absorption of the MaraNantha and SunSpire brand headquarter personnel costs. These costs will be eliminated in late Q4. We continue to exercise strong discipline on our operating costs which is essential in an inflationary environment.

Our Q3 inventories were higher than year ago as we were carrying an additional $10 million in Earth’s Best inventory. This is consistent with what we discussed in our Q4 call where we said we would maximize our fresh pack production in September through December to ensure supply for our fastest growing brand. Our inventories excluding Earth’s Best were down versus year ago as tight cash management continues to be a priority for the Grocery and Snacks group.

To conclude on Hain Grocery and Snacks, Q3 was a very strong quarter with a top line increase of 9%, a delivered product cost improvement despite rising put and fuel costs and continued improvement in our SG&A expenses as a percent of sales prior to the absorption of the MaraNantha and SunSpire headquarter costs. We’re facing costs inflation pressures like everybody else in CPG and we’ve just announced a 4% price increase to help along with productivity offset these costs to maintain our margins.

Turning to the MaraNantha and SunSpire acquisition. We expect this to be terrific for the company as it will bolt on efficiently to our Grocery and Snacks business platform, it will give us entry into two on trend fast growing categories, Nut Butter and Organic Chocolate, with great brands with Natural category leadership position. Finally, it will create significant synergy opportunities in SG&A and in Nut Butter operations.

We’re moving aggressively to integrate this acquisition as we already have announced on March 27th a reduction in force at the MaraNantha and SunSpire headquarters in San Leandro, California to eliminate duplicate positions. This action should mostly be completed by the end of May as we are subject to a 60 day notice period.

We also moved the entire operation onto the Hain Grocery and Snacks IP platform effective on May 1st which then enables us to consolidate the back room, sales and marketing functions into Melville as of this week. Both brands continue to do well let by MaraNantha’s 28% consumption increase in the last 12 weeks.

Moving on to Personal Care. Our Q3 top line growth was up 11% ex SKU Rat driven by our three top brands, Jason, Alba and Avalon Organics which were up a combined 18%. Alba led the way with year on year growth over 30%. This growth on our top three brands reflected gains across all channels; Natural, Grocery, Drug and Mat. In fact, new distribution growth accelerated in Q3 as we gained placement in mat and change drug customers that introduced new natural personal care set.

Just as with Grocery and Snacks, Personal Care is also being pressured with cost inflation especially in the areas of fuel related packaging expenses and co-packer expenses for Avalon. We announced a 3% to 5% price increase in November from which we will begin to experience benefit in the fourth quarter. Personal Care SG&A was down 100 basis points for the quarter as we continued to realize the benefits of the Jason and Avalon consolidation.

As I stated in the last call, the integration of Jason and Avalon is now essentially complete. We are one reporting unit, Hain Personal Care with one strong management team, one organizational structure without redundant function, one sale and broker network and a common IT system. We are now focused on accelerating profitable growth. Toward that end we are ready to implement an aggressive SKU Rationalization program similar to that executed in Grocery and Snacks a few years ago.

That program was a catalyst in accelerating Grocery and Snacks top line and income growth. We believe a Personal Care SKU Rationalization could have similar or greater relative benefit. Hain Personal Care is the consolidation of four separate acquisitions with many duplicate SKUs and inventories. The Personal Care SKU Rationalization is targeted to eliminate 30% to 40% of our SKU. The decrease in sales volume from discontinued SKUs will be offset by an acceleration of sales of continuing SKUs with higher margins along with the sales of new products.

The SKU Rationalization will yield significant annualized benefits after full implementation including a 30% to 40% improvement in SKU velocity, reduced working capital as our inventories will be relieved of redundant SKUs and turn faster, reduced business complexity and improved operating efficiencies, a two percentage point gross margin improvement and importantly position Hain Personal Care to leverage its Culver City manufacturing facility as a competitive advantage.

This last point is a key strategic comparative behind the Hain Personal Care SKU Rationalization. Most natural personal care suppliers rely exclusively on co-packers to manufacturer and in some instances distribute their products. The Personal Care SKU Rationalization coupled with extensive operational improvements made in our supply chain in the last 12 months will allow us to consolidate the majority of our co-pack volume into our Culver City plant by the FY09.

Our Culver City facility has made productivity a priority in the last 12 months and has implemented S&LP and MPR processes, optimized manufacturing processes by focusing on bottle and tube manufacturing which constitutes the bulk of our sales volume, outsource inefficiently manufactured products like lip balms and jars, significantly reduce change over and increase through put by 80% from 50,000 units per day to 90,000 and decrease down time by 50%.

The Culver City manufacturing facility has a low overhead cost structure, is only operating on a one shift per day five day work week. As you can see, we have a significant opportunity for margin enhancement as we implement SKU Rationalization, consolidate out of line co-packer volume into Culver City, accelerate the growth of core SKUs and new products, and bolt on future natural personal care acquisitions. This is an opportunity we are very excited about.

To summarize on Personal Care, we continue to see strong top line growth on our key brands, strong margins, and reduction of SG&A from the consolidation of Jason and Avalon. We’re feeling the effects of cost pressure on this business as well and have implemented the 3% to 5% price increase that we will begin to realize in Q4. Our SKU Rationalization is modeled after the successful Grocery and Snacks program and will help us to reduce business complexity, increase SKU velocity, decrease working capital, improve gross margin and importantly leverage our supply chain as a competitive advantage.

Overall, we continue to be well positioned to take advantage of the continued growth of Natural Personal Care both in the Natural channel as well as Grocery, Drug, Mat and Club. Now I’ll turn the call over to Ira Lamel.

Ira Lamel

I’m going to walk you through the adjustments we’ve made for this quarters earnings to give you a little bit more detail behind it. We’ve added back $0.13 for a total of $8.5 million on the SKU Rationalization, severance and other reorg costs. We identified $6 million of inventory that we will not go forward with. We wrote off certain assets related to the inventories such as packaging design costs with those items coming in a bit over $1 million.

We’ve eliminated certain positions that resulted in our incurring severance and other costs of just under $1 million in the quarter. These three items add up to the $8.5 million related to that SKU Rationalization.

Going forward, we expect to incur another $2 million in additional costs related to this program. Costs that accounting rules currently would not allow us to charge off to the P&L until we actually incur them over the next couple of quarters. These costs will be taken as the additional positions are eliminated almost all of which have already taken place during April and on May 1st.

As we mentioned in our press release we expect the program to benefit consolidated gross margins by about 100 basis points. That’s certainly less than what John talked about as the impact on the Personal Care reporting unit but on an overall consolidated basis it should round out to about 100 basis points. We will get additional benefit to the P&L for the operating income line from the personnel reductions which I believe will take about $2 million out of G&A going forward.

As we discussed with you in recent quarters we continue to incur startup costs in connection with the consolidation of manufacturing facilities and processes in our UK Fakenham plant. Irwin spoke about those earlier. The progress on this has not been as anticipated and the costs have been higher than we expected. In the third quarter we incurred $1.8 million of start up costs which cost another $.03 of earnings.

We have made changes in personnel at the facility and we’ve engaged manufacturing consultants Irwin referred to them being over there now. We expect these costs to continue at some level through Q4 but anticipate they will trail off after the consulting project is completed. We have also included as in the past the P&L impact of the mark to market adjustment on un-granted stock options to the CEO and the costs incurred in the quarter for the stock options review. These two items substantially offset and therefore had no net impact on earnings.

We did file an 8-K in the first week of April to disclose that on April 1st the un-granted options to the CEO was concluded. As Irwin discussed there have been secret in the media regarding significant increased in input costs. These increases have accelerated in their effect on our costs and during the third quarter we saw 314 basis points of pressure on our gross margins. These pressures have been offset by almost entirely in large measure by productivity improvements which we saw our 180 basis points of improvement and by the price increases we have been successful at implementing.

Celestial Seasonings continues to become a small percentage of our total sales. It was 80 basis points lower as a total percentage of sales this quarter as compared to last years third quarter coming in now at less than 10% of consolidated sales. We have confirmed our full year guidance but have narrowed the range of that guidance. For the full fiscal year 2008 we expect to be at $1.04 billion to $1.05 billion in sales and we anticipate that earnings per share will come in within a range of $1.38 to $1.40.

This earnings guidance, as noted in the press release does not include the impact of stock compensation and other adjustments we may continue to incur. As for stock compensation the fourth quarter will bear a charge of approximately $4.1 million. In the quarters that follow we will continue to incur approximately $1 million in each quarter subject to any adjustments on stock compensation that we may have for our experience with forfeitures.

A couple of other things I’d like to point out. Adjusted operating income was up 80 basis points this year to 10.6% versus last year’s 9.8%. Adjusted EBITDA came in at $32.1 million versus $27.2 million last year with this year at 12.1% for the quarter and last year at 11.4%. Our current deprecation and amortization run rate for the full fiscal year is about $19 million. Our operating free cash flow for the trailing 12 months was $22.2 million. Our days in the cash conversion cycle were up at 79 days this year versus 72 last year.

John spoke earlier about the investments we’ve made in Earth’s Best inventory about $10 million since last year. This $10 million along with a few other items affected our days and our operating cash flow. At this point we’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrew Wolf - BB&T.

Andrew Wolf - BB&T

I’m not trying to get you to formally obviously guide on ’09 but just to talk a little around it particularly given in the macro environment how much is going on. Let’s just start with your assumption Irwin, let’s assume its right that commodity costs kind of cool down and stop inflating so rapidly. Going back to the comment you made earlier in the call where I forgot the exact numbers but maybe it was $40 million or some very large number of increased input costs and including fuel. Your price increases covered less than half of it and the efficiencies operating more or less guide you to the rest.

What I’m getting to is as we look at ’09 and assuming the sales environment are as traditionally has occurred in Natural Foods remains fine then we get down to the gross margin line, given the price increases that John talked about and that you talked about that are coming up in March. In a stable cost environment are we going to see some sort of stabilization or a flip in that ratio is how you’re able to deal with increasing input costs?

In other words, are the price increases you’ve put in so far going to be sufficient if commodity costs and fuel has plateaued?

Irwin Simon

One of the big things, I believe costs have plateaued over the last two weeks commodity costs have started to come down. We haven’t seen it in fuel but we’ve seen it on commodity costs. It also gives us some opportunity for some buying in the end. Number one as I said before, sales continue to be strong and what we’re seeing is demand and some of the bigger box stores wanting more and more organic so there’s a lot of great opportunities for us to litigiously expand our sales.

Number two, what we’ve seen on the SG&A line as we cut costs we continue to cut costs we think there’s come more costs to be taken out of consolidation personnel and people. In regards to costs, it was $0.40 last year and about two years ago what I said I’d like to see our margins get up to the 33% to 35% level over the next couple of years. We never had this, a normal year costs we would have made a great run on it. We absorbed close to $0.40 on an earnings per share.

I step back and say we’re sitting here today planning for fiscal ’09 with some of the same costs in place, watching fuel but I look at some opportunities if costs come down we’ve built in some good price increases and I think there’s some good opportunities for us. What’s important if that happens there’s some more dollars to spend on the business. Going into ’09 I feel good about getting some good price increases. I feel good about the productivity we got through here. I feel that costs have tapped out. I’m looking forward to 2009. I think we’re in a good spot.

Andrew Wolf - BB&T

One quick follow up related to what the line of questioning. On the price increases that Hain has taken, what has been the other category participant’s response? Is everybody essentially given they’re in the same boat also increased prices similarly or have many people tried to eat some of this?

Irwin Simon

I think generally everybody has followed. If we’re experiencing it, the thing which is great about our portfolio today, we’re diversified; size does matter being over a billion dollars in size today. As John said before 2% margin savings on Personal Care, on his business is almost $3 million in savings for him. From a G&A standpoint $1 million, $1.5 million. What we’re seeing is other people follow, we’re seeing the costs, and they’ve got to be seeing it too. We just got a lot of good areas to go to.

Operator

Your next question comes from Ed Aaron - RBC Capital Markets.

Ed Aaron - RBC Capital Markets

I think I have a good amount of appreciation for the benefits of the SKU Rationalization given what you’ve done in the recent past. In the Personal Care business you paid a pretty big multiple for that Alba and Avalon acquisition so retrospectively how are you thinking about the total return on that investment given some of the costs that are acquired with the SKU Rat.

Irwin Simon

Number one, we paid a good multiple but I think other companies have gone out there and I’d like to see from a multiple we paid as you heard me say before I’m glad we bought Avalon and Alba when we did. Our Personal Care business is a over $150 million business, great margin business and growing in high double digits. From the standpoint, it’s been a great acquisition and a great category for us. What we’re seeing today, we’re putting four acquisitions together and taking out tremendous costs and going to get tremendous efficiencies out of adjacent plants.

The big SKU Rationalization here is coming through Jason products and not Avalon products. With costs in that today we don’t want to be out there with four lavender shampoos, four lavender soaps, and four moisturizers. We want $5 million SKUs and some of the things we’re going to do. One of the things that’s a problem in this industry there’s a lot of brands, a lot of SKUs and as you heard John say before, how many SKUs we’re taking out of the business today which is going to improve our margins by two points. I would do a SKU Rationalization every year on a category if I can get two point margin increase.

Ed Aaron - RBC Capital Markets

How are you thinking about overall consumption versus shipments in aggregate? Which of your bigger brands have you seen consumption growing faster than shipments and also vice versa?

Irwin Simon

One of the things we are seeing from a shipment standpoint and especially the last two quarters we’re seeing shipments, distributors or customers ordering more frequency and really bringing down their inventories. As you look at this quarter inventory in March came down on some customer but really picked up in April so their ordering a lot more frequently. You heard us say before good growth on our Snack business, good growth on Spectrum. Our Hain business was up substantially, our Earth’s Best our Formula business, our Arrowhead Mills business, our soup business.

We’re seeing it all around, in this here quarter I think the UK was our only division that really saw anything of anywhere of negative sales. We’re seeing good consumption all the way around. You heard me say about our chicken business, protein business, chicken up 14%. We’re seeing strong consumption out there. We’d like to see tea get up to 4% to 6% consumption. John’s got his work cut out there. I’m happy where some of the consumption numbers are.

Operator

Your next question comes from Jacqueline Rider – Lazard.

Jacqueline Rider - Lazard

On Personal Products SKU Rationalization you said Jason was where a lot of Rationalization was but I thought it would have been more out Zia or Queen Helene?

Irwin Simon

Jason is the bigger brand within there. Queen Helene there’s some. The duplicate SKUs of Jason is similar to the duplicate SKUs of Avalon and Alba. Queen Helene is going after different target audience and the same with Zia. The big rationalization was Jason. The other reason Jason SKU Rationalization was the big effort here we wanted to move along the Avalon and Alba manufacturing into the adjacent facility that gives us even more efficiencies.

Jacqueline Rider - Lazard

How far along are you with that process with getting Alba and Avalon into the Culver City facility?

John Carroll

We actually started to produce Avalon product in the facility in third quarter. That will ramp up in Q4 but it will take us throughout FY09 to get all of the product into Culver City.

Irwin Simon

One of the biggest producers of Avalon and Alba today comes out of Mississauga, Ontario. We are shipping a lot of product from Ontario back to California and re-shipping it back out. From a Canadian dollar standpoint our costs there went up substantially. We’re going to see tremendous efficiencies and anybody that’s been to the Culver City plant it is a night and day operation to where it was when we acquired it and where it is today.

Operator

Your next question comes from Terry Bivens - Bear Stearns.

Terry Bivens - Bear Stearns

Let me just make sure I’m clear on the price increases. I heard a 4% price increase in March then I believe you mentioned one as of May 3rd. I think John Carroll mentioned one in the Personal Care. Can you clarify that if you don’t mind?

John Carroll

In March we announced a price increase on Grocery and Snacks for 4% that will be effective in mid May. That’s Grocery. In Personal Care we took a 3% to 5% price increase that we announced in December that we will be effective primarily in Q4.

Irwin Simon

We’ve taken price increase on chicken and we’ve taken price increase on turkey. The thing about price increase, I was asked a question about this, this morning, there is probably a 60 to 90 day even 120 day lag time on pricing. One of the big effects when pricing, we’ve got to buy commodities, we’ve got to buy something we get the price today. We can’t go to our customers because there are books; there are promotions and it takes 90 to 120 days to get a price into effect. It probably takes 120 days to get the full price into effect.

Terry Bivens - Bear Stearns

In terms of the inventory write down, a lot of companies bleed that through what was the rationale for taking it all at once and immediately writing it all down?

Irwin Simon

The big thing is number one to get slower selling SKUs off the shelf and get it out. Its inventory that we think and we’ve seen it before it’s a one year payback; it’s a 2% improvement on margin. Going back to our rationale before which we saw in Grocery we saw sales tremendously increase when we took slower selling SKUs instead of putting them out there and then ultimately putting new SKUs that we would see our sales increase.

At the end of the day, once we discontinued it they would have sent it back and we would have to spend all this money on spoil. It didn’t make sense to ship it out there, bleed it out there, and have it sit on the shelf and one day take it back to destroy it. This gets it behind us, moves on and helps our plan, helps our growth, helps our margin tremendously.

One of the other things today, we have competitors walking in and saying here’s a slower selling SKU I want your space. A big part of this is taking these slower selling SKUs and going in there with new products to take up that space for Avalon, Alba and other Jason products. Another thing I want to touch on. We bled a lot of this through already through the P&L throughout the year. Until we were ready between people and other SKUs we’ve already bled quite a bit of this through the P&L.

Ira Lamel

The last part of it is that in this particular program because we’re consolidating manufacturing of the Avalon and Alba brands into the Personal Care facility in Culver City we’ve already taken out the inventory that we will not produce if we can’t manufacturer from raw ingredients and packaging that we have on hand for the SKUs that are going to be eliminated by bringing Avalon SKUs in we’ve taken the hit on that inventory.

Operator

Your next question comes from Simeon Gutman – Goldman Sachs.

Simeon Gutman – Goldman Sachs

On the $5 million of Personal Care SKU Rationalization this quarter what is the full run rate and how quickly do you expect to get back to even as far as productivity. In terms of the productivity improvements is that going to come through greater concentration on existing shelf space or are you going to get more allocated shelf space with fewer SKUs?

Irwin Simon

We plan over the next couple of quarters from a run rate on sales another $2 or $3 million in the fourth quarter, another $2 or $3 million in the first quarter. We over fold starting now over a full 12 month period that when we should see the benefit of the SKU Rationalization on margin. How quick, when you discontinue a SKU you better be ready to put something new in that space immediately. What we’ve been holding off is sending out a notice to all our distributors and customers the SKUs that have been discontinued that will happen now.

Our people are out there making sure we keep the space and we get all our new products in place. As you can see, the growth of Avalon and Alba is in high double digits. We have a lot of new products that we launched in March at the Natural Food show so we have a lot of new products vote there for that space. These are SKUs in Jason have been around a long, long time. Ingredients and stuff like that have just needed to be adjusted and cleaned up.

Simeon Gutman – Goldman Sachs

As you guys look across the portfolio of products and maybe you get this a lot, what are some of the faster growing products or categories in Natural Organic that you guys are not in today?

Irwin Simon

We like the fresh category. We see more and more opportunities in the whole fresh categories. We have a good position in fresh in Europe, the UK and there are a lot of things we’re looking at there. We like a lot of things with pro-biotic, pre-biotic, that category. We do like the cleaning supply, household cleaning. We’re seeing Clorox and now SC Johnson get into it. We think with our Personal Care we have a good opportunity there.

We continuously like Snacks. There are a lot of other things happening with snack categories that we would like to focus on. The other big thing is we’re looking at Earth’s Best, how do we take it into other categories with the brand, Mumsfield, very conformable with that brands, we’ve gone into Earth’s Best meals. We see what’s going on with the whole weight management in mainstream we see a big opportunity in the whole weight management type of product in natural organic and frozen. With our frozen facility we think there’s some opportunity there. There are some of the categories we’re looking at.

Operator

Your next question comes from David Palmer – UBS.

David Palmer – UBS

[Inaudible] First question, are you guys seeing any evidence of channel switching. Are your consumers shopping less at Whole Foods and more at Wal-Mart now days?

Irwin Simon

What we’re seeing is the price of fuel, consumers going to bigger box stores and buying a lot more instead of going to store more frequently. We’re seeing some of that. What else we’re seeing is consumers on baby food and diapers buying 12 pack or 24 instead of buying six single units. We’re seeing some bigger purchases on product and we’re seeing those out of bigger box stores.

David Palmer – UBS

When you measure channels it looks like Hain has been losing share to some measured brands and I would say that do you see that occurring across all of your channels and do you see market share perhaps accelerating given market share losses accelerating perhaps given the macro environment and your price increases?

Irwin Simon

When you look at measured channels, you’ve heard me say before, half our business and probably less, tea is 50% of us that go through measured channels it’s probably reversed. It’s probably 60% of our products today go through non-measured channels and the 40% go through measured channels. Just as you asked me the question, you may look at a Nielsen report and say we’re losing share but there’s a lot of shifting going on there today.

Whole Foods being one of our biggest customers that’s not measured. It’s hard to look at Nielsen data today and really look at if we’re losing share. One of the big things I can tell you, I took you through sales of brands, distributors and retailers really watching their inventories today so it’s a good indication of consumption when I go through sales numbers.

Operator

Your next question comes from Alvin Concepcion – Citi.

Alvin Concepcion – Citi

I just wanted to get a better sense for organic sales growth. We’re getting around 7% is that about the right range?

Irwin Simon

I think you’ve done a good job and I think we feel good about sales in this quarter about $5 million which is the same as our SKU Rationalization came from new acquisitions in this quarter there’s not a lot of acquisitions. I think you’re close.

John Carroll

The other thing that you have to consider is last year’s quarter includes sales of one of the [Halbain] units that we subsequently sold off. That shows up in last year’s sales line and we had no sales from that this year.

Alvin Concepcion – Citi

You mentioned April is strong, are there any categories or brands that did particularly well?

Irwin Simon

Across the board we’re seeing a good growth. It sort of shows you March at the end of a quarter when you go into your first month and sales are extremely strong I feel good about it. It’s across the board where it is and we’re seeing good continuous growth. I think a lot of it has to do with as retailers or distributors took down their inventories they’re on a continuous ordering pattern. That’s where some of the sales are coming from.

Operator

Your next question comes from Christine McCracken - Cleveland Research.

Christine McCracken - Cleveland Research

I wanted to follow up on your comments relative to possible divesture of some brands. You talked about maybe the low hanging fruit the number three and four brands. Do you have any estimate as to what percentage of the portfolio might be included as part of that group?

Irwin Simon

I do but I’m not ready to talk about it yet and I want to go through some more. Its categories where we’re three or four and think our efforts and marketing dollars and put it towards categories where we’re one or two. There are some brands out there that are some good brands and may make sense part of someone more focused on that category. Ultimately we think there are some good valuations that we’ll utilize the capital somewhere else or some other acquisitions.

We’ve got to streamline the portfolio and I think we did that two years ago when we sold off a bunch of brands and we’ll look to do that again.

Christine McCracken - Cleveland Research

Can you provide any color on the overall atmosphere out there for M&A at this point? Clearly you guys have been active in that environment particularly given some of the changes in private equity. What’s the appetite for possible sales of some of these brands?

Irwin Simon

Some of these brands we would be able to sell they’re good brand names, it’s not some aisle spice or something like that, that’s not what I’m looking at. Regards to divestures I think the reason I don’t want to mention these because my phone will be ringing all day from private equity and a lot of other people looking to acquire them. It just makes sense if we can get the right premium for it why not focus somewhere else.

At the same time, from an acquisition standpoint we did three good acquisitions first time in over a year or so. We see private equity on the sidelines on the other hand, we saw SC Johnson just buy Mrs. Meyer and paid an enormous multiple for that. We’re seeing some stuff out there strategically with a strong balance sheet we have the opportunity to use our balance sheet to do acquisitions or to do other things.

Operator

Your next question comes from Pablo Zuanic – JP Morgan.

Pablo Zuanic – JP Morgan

When you mentioned the numbers about the industry as a whole you said Natural Foods 11% in the last 52 weeks and Organic I think you said 25%. I’m trying to reconcile that on an apples to apples basis with your growth ex acquisitions which on my numbers has been in the mid to high single digits. How should we interpret that, the fact that you’re growing apparently below the growth base of the overall categories.

Irwin Simon

If you were listening to my comments which said UPC code, I’m not in milk, I’m not in eggs, I’m not in lettuce, I’m not in butter and that included all that and that’s probably growing at a much higher rate. I took you through before the top 10 private label. That’s what includes on a UPC basis all those types of conventional type products.

Pablo Zuanic – JP Morgan

Overall you believe that you are growing in line or ahead of your overall category for Natural and Organic foods?

Irwin Simon

In the categories that I am in today, you excluded milk, butter, eggs, produce, lettuce which is a UPC code brand absolutely.

Pablo Zuanic – JP Morgan

In terms of a channel shift in the past you have told us that in terms of a strategy or your expectations that the bulk of the growth as I understood it would come from the Grocery channel and that’s how we are saying now and I want to understand why is that the case and what’s driving this?

Irwin Simon

Let me just be clear. A bulk of our channel would come from Grocery, mass market and specialty accounts. I include a Costco, Sam’s, Wal-Mart, Target, Babies R Us, Toys R Us, into Grocery. Natural Organic I include Whole Foods, Trader Joes, then there’s about 10,000 independent out there that also buy Natural Foods. I don’t include Food Service which has been a good growing business for us. I don’t include Military and the other thing is which if you look at our overall numbers Europe and Canada have become a much bigger part of our business today.

A question asked before, are consumer trends changing, yes. More and more people are going into mass markets and more and more people are going into the Costco and Sam’s of the world and the club type businesses. You’re seeing a lot more growth coming out of our businesses there.

Operator

Your last question comes from Jacqueline Rider – Lazard.

Jacqueline Rider - Lazard

I wanted to hear you address private label. I know you talk about all the commodities that you’re obviously not it that’s where most of the supermarkets are pushing into. Where there are opportunities where some of the supermarkets are going into some of the products you have, what is your role in like a SuperVal goes into private label and do you see any opportunities to get into their business if they’re doing their own natural and organic do they need your support. Are you seeing yourselves being displaced? What exactly is going on there?

Irwin Simon

I think you heard my part about the top 10 private label products. From a grocery standpoint none of them are in the top 10. Today’s we’re talking about SKU Rationalization, brand rationalization, we’re not set up for private label from a company standpoint. We do some private label and we get called every day to do customers private label. It gets into buying commodities, we want to make sure from a sourcing standpoint and one of my concerns is organic ingredients that there’s enough for us.

With that we want to focus on our brands, we want to focus on growing our product lines and if we go out there, I think making private labels for other people from a price standpoint the manufacturer, yes we get some efficiencies but at the end of the day its not the efficiencies that really enhance our overall operating income. From a plant standpoint, from a capacity we’re not out there to underutilize and most of our facilities that we could take a lot of this on.

Today I think we’ve got enough brands to focus on and enough categories, enough products where private label just does not make sense for us.

Jacqueline Rider - Lazard

I wasn’t actually suggesting you go in private label yourself, more of in the case where SuperVal or someone would go into baby foods, how would that maybe displace your business or would you see an opportunity to be the number one organic baby food brand out there. We can leave it at that.

John Carroll

Just a quick point on that. That’s why we, in our key categories, we look to be a number one or number two brand. We look to work with the private label via category management to eliminate some of the third brands and last but not least the one thing private label never keeps up with is innovation. That’s why one of our key principles is to be the lead innovator in the category. Private label sometimes in many instances simplifies a category for us as opposed to causing more problems.

Irwin Simon

I’d like to wrap up the call. It’s been a tough year but all in all I feel we have really delivered good growth. We focused on customers, we focused on diversifying our products, and we really cut costs. I’ve got to tell you we look for paper clips these days but we have really cut costs around here. Back to what John said before in new products from an innovation standpoint new products are key and new categories and that’s something we’ve always tried to do.

What’s the next soy milk, what’s the next rice cake, and as a smaller company out there we need to be the innovator because there is a lot of big companies in the natural organic today. We’ve been able to take pricing and I think hopefully made it clear today on the pricing that we’ve been able to take and the pricing we’ve been able to get through. Hopefully we don’t have to take that going into next year as the commodities and prices stabilize.

We’ve made some great acquisitions and these acquisitions will give us some good opportunities for earnings going into 2009 and we have the ability to look at other acquisitions going forward. Yes, we know we have some challenges in the UK but we’re all over it. We feel confident we’ll get those under control.

Last but not least, I want to congratulate John for taking over all the US operations. He’s been here four years and there’s been some good consistency, good growth and good development. It’ll be good to have the US operations under one head and consolidate our numbers and get cost and efficiencies. We’re excited to keep John’s track record going since he’s been here since 2004.

I want to thank everybody for getting up early and spending the first part of the morning show with us. Hopefully we’ll talk to everybody soon. Have a great day.

Operator

This concludes today’s Quarter Three 2008 Hains Celestial Earnings Conference Call.

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