The Hain Celestial Group F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

The Hain Celestial Group Inc. (NASDAQ:HAIN) F1Q08 (Qtr End 9/30/07) Earnings Call November 1, 2007 4:15 PM ET

Executives

Mary Anthes - VP, Investor Relations
Irwin Simon - President and CEO
Ira Lamel - EVP and CFO
John Carroll - EVP

Analysts

Greg Badishkanian - Citigroup
Andrew Wolf - BB&T
Scott Mushkin - Banc of America Securities
Steven Kron - Goldman Sachs
Terry Bivens - Bear Stearns
Christine Mccracken - ClevelandResearch
Scott Van Winkle - Canaccord Adams
David Palmer - UBS
Suzanne Price - ThinkEquity
Pablo Zuanic - JP Morgan

Operator

Good day, ladies and gentlemen. Thank you very much for yourpatience, and welcome to the First Quarter 2008 Hain Celestial Group EarningsCall. My name is Bill and I will be your conference facilitator for today.

At this time, all participants are in a listen-only mode. Wewill be conducting a question-and-answer session towards the end of today'sconference. (Operator Instructions). As a reminder, today's conference is beingrecorded for replay purposes.

I would now like to turn the presentation over to your hostfor today's conference call, Ms. Mary Anthes, Vice President of InvestorRelations. Please proceed, ma'am.

Mary Anthes

Thank you, Bill. Good afternoon. I am pleased to be with youtoday to introduce our first quarter fiscal year 2008 earning conference callto discuss our financial results, which were issued after the close of themarket today.

We have several members of our management team here with usto discuss our results, including, Irwin Simon, President and Chief ExecutiveOfficer; Ira Lamel, Executive Vice President and Chief Financial Officer; andJohn Carroll, Executive Vice President.

The Company has continued during the past quarter, a reviewof past practices in connection with grants of stock options in response of thenotice it received from the SEC that it was conducting an inquiry into thecompany's stock options practices. This review is being conducted with outsidelegal counsel at the direction of a group of independent directors.

While counsel's review is substantially complete, thecompany is not yet in a position to file its Annual Report on Form 10-K for theyear ended June 30, 2007, or its quarterly report on Form 10-Q for the quarterended September 30, 2007.

The financial information disclosed today remains unauditedand certain items on the balance sheet such as stockholders' equity anddeferred tax accounts are subject to the conclusion of the review. Pendingcompletion of counsel's review, we will be unable to respond to furtherquestions about stock options on today's call.

As expected, on September 14, 2007, the company received aNASDAQ Staff Determination letter, which indicated that the company is not incompliance with the filing requirements for continued listing set forth inNASDAQ marketplace rules, due to the fact that it did not file timely its Form10-K for the fiscal year ended June 30, 2007.

In response to the letter, the company met yesterday withthe NASDAQ Listing Qualifications Panel pursuant to the company's request forhearing and continued listing. Pending a decision by the panel, HainCelestial's shares will remain listed on the NASDAQ Global Select Market.

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

Our actual results may differ materially from thoseprojected, and some of the factors which may cause results to differ are listedin our publicly filed documents, including our 2006 Form 10-K filed with theSEC.

This conference call is being webcast and an archive of thewebcast will be available on our website at www.hain-celestial.com, underInvestor Relations.

Our call will be limited to approximately one hour, soplease limit your self to one question and a follow-up question. If timeallows, we will take additional questions, and management will be availableafter the call for additional follow-up.

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

Irwin Simon

Thank you, Mary. Hopefully, most of you've had anopportunity to look at our release that came out around 4 O'clock. So, oursales were up 13% for the quarter, our margins were up a full point, and I feelgood about where our margins are. As we said in our fourth quarter, ourobjective is to see our margins hit 30% and seeing 29%.

In the quarter, we had $6 million of input cost, a costacross the company that we had to make up and as we had higher cost coming in,I will talk about price increase in a little while, but it's great to see ourgross margins up a full point.

Adjusted or net income for the quarter $10.8 million versus$8.8 million, up 22.4%; adjusted net income at $11.9 million versus $9.7million, up 23%.

Let me talk about the quarter, Ira will take your through alot more financials in a little while. So, you heard me talk about cost, costswere up overall. Diesel fuel, just one item and an important item, up 25% forus in the quarter.

We have in place major cost initiatives, many productivityopportunities underway, and I got to tell you, I felt good about theinitiatives that we put in place and the savings that we were able to achievewith that. We've been able to take pricing, which I'll go through in a littlewhile, and multiple categories and multiple of our business as I put pricingthrough.

John will take you through his Melville of business,Grocery, Snacks and Frozen, which was up 9% for the quarter and good growthamong, you know, Terra Chips, Arrowhead Mills, Imagine soups, Health Valley, goodgrowth, good consumption numbers, and feeling pretty good about where ourbusiness is going. And I'll talk about seeing a continuation of it moving rightinto October. So feeling good about where business is.

Let's talk about Celestial, as you seem to love to hearabout Celestial. Lot of good things going onat Celestial; even though October was a pretty warm month, our key shipments wereup 4% for the quarter. On an overall basis, Celestial was up 2% last year as weshipped a new product called: “Zingers To Go” in the quarter. So we're upagainst that. The key shipments of 4%, that's pretty good.

You know with that; our big thing is focusing on certainaccounts and making sure that on a sales management and category management,how we look at shelf. Part of the problem is you look at Nielsen numbers, duringpromotion of dollars, discontinued SKUs, as we discontinued SKUs for new packaging.

As you look at scanner data, the category is down, and welook a little worse in the category. But you got to look at shipments and wherewe're moving on that.

70% of our new packaging is now into the marketplace and weare going to get good reception. We started to ship Holiday Shippers, and weshipped a lot more Holiday Shippers this year than last. So our HolidayShippers are big hit with the Celestial Group and big hit amongst Celestial consumers.

In October, we've taken a 3.5% price increase which has gonethrough, and gone through to all our customers. In October, we started to shipour new brand called Saphara by Celestial Seasonings, a journey by CelestialSeason. It's our organic fair-trade tea, well accepted, well positioned, retailprice $599, and we feel good about that. Its first entry is into natural foodstores, and across the natural food trade.

Our coffee began shipping October 15, and again first entryis into natural food stores, but there are a lot of other multiple chains thathas started to take our coffee, and actually our coffee, great product and Isee some great things happening.

One of the things that is happening in regards to ourbusiness; our business is changing in regards to how we go to market. Today,55% of our business is direct, 45% is distributor, and that's complete oppositea year ago, which means, a better price at retail, higher margins, deal moneybeing passed on to the consumers. So, that’s the way we want to go, andactually, you'll see some change in the way shipments are, but good way toreally see our business moving in that direction.

Our advertising starts now for the season as we move intoit, and we have some great new ads really breaking for Celestial. So, with thatwe need some cold weather in November, we've talked about that. But feelinggood about where our packaging is, feeling good about where our product is,feeling good about the new products that we've launched, and we are in themidst right now launching multiple new products for our Valentines Day, and aswe move into next years iced tea season. So we've got a lot of things moving onin that direction.

If you look at our European business, we know Biomarche,which is a business that we sold at the end of August last year. Our business isup 12% in Europe. Europe today is now 80% ofour sales, so Europe is a big part of ourbusiness. What we focused on in Europe isconsolidating plants. The Newport Pagnell plant which we acquired as part ofour Haldane, we closed in April.

We integrated into Fakenham in the summer and today, thefacility and I was just there on Monday is running smoothly efficiently. We'relooking for about a 5% of half point increase in margins and now that plant isrunning at a 65% capacity, where before it was running about 35% capacity.

We had a business that made certain powders for musclebuilding, certain mixes which we sold off. There were some private label andsome small branded business that came along, which we called the Barrow business.Barrow facility we sold that off in October. So, now that is out of ournumbers.

We're looking at our Soy milk plant in Manchester and how we consolidate that withour German facility. So, Haldane was a good acquisition. It came along withthree plants. We’ve now gotten rid of two, and we’re looking at the Manchester one. And whatyou will see from that is multiple opportunities, cost savings, marginenhancement.

Our Luton fresh business continues to be strong, up 17% andanybody that was in Europe this summer Julyand August were pretty raining month. So that does affect us, but our businessup 17% are fresh business. The Linda McCartney business, all our new productsare out and a lot of great new listings coming, and we see some great new otherproducts and fresh category and ready-to-eat categories coming from that area.

The London UK operation now is taken over handling TerraChips, Celestial Seasonings Tea and our Rice Dream business where before these weremanaged at Belgiumand were handle as an export product line. So, we have our own U.K.sales group on the ground that are handling this businesses.

In our continental Europe business, our Natumi business wasup 32%, Rice Dream up 16%, Terra up 8%, and Lima up 2%. So our European brand of businesson continental Europe continues to do well andsome good things happening there.

Our Canadian business up 6% and it would have been a lothigher, but we did suffer from some other stocks in Canada, which we now have thatcorrected. Estee business is strong has an 86% share. The Celestial redesign isin place being rolled out in the Canadian market. Saphara being rolled out in theCanadian market, and some of our other brands, Casbah, Terra Chips, Earth'sBest Sesame up 27%. So we are getting good growth in some of other businessesin the Canadian market.

If you look, some of the advertising and consumeradvertising is important, I have talked about that in our last quarterly callor the end of our fiscal '07. We are doing International TV in English andFrench and really focusing on that. We have a big push on aseptic soups whichis a good market in the Canadian market, and that was one of the first marketthat Campbell's launched their Aseptic soups, and we are seeing some goodreception on that.

Our protein business, the end of August we acquired Plainville. So far and ifyou sell turkeys in November, December when can you sell them. So we are prettybusy up there, as a matter of fact, we are totally sold out of natural turkey forthis season, demand has just been unbelievable, feels good about where thatbusiness is going, and feels good about the opportunities going into value-addedproducts, expanding that facility, expanding that plant and expanding thedifferent products that are coming out of there.

Our chicken business, FreeBird was up 13.2%. A lot of thatcomes out of the FreeBird branded business. We continue to move into nuggets,wings, burgers, chicken burgers. So we really liked where that's going. We areprobably at full capacity now on antibiotic-free organic chicken, and we'regoing to have to look and see what we need to do there to enhance the capacity.With that, we've taken a 9.5% price increase as corn prices continue to go up, andwe can still see where we are moving on our growth.

So from a cost standpoint, we got tremendous costcontainments in place, with costs coming at us. We've taken a tea priceincrease effective October 1. Wev'e taken a Melville price increase on numerousproduct lines at 4.5%, effective December 15th. We'll take a JASON price increase,about 5% effective January 1. And throughout Europe,effective January 1, we'll take 4% to 6% price increase across all of ourproducts.

So with that we'll see the benefit of the price increase inthe first -- in the second half. And we know we're going to have to be able tolook for productivity to pave off some of these costs that are coming at us,and we feel good about doing them.

You know, we've talked a lot about how we bring the consumerand spending. We are really managing our trade spending and ensuring that getspassed on the consumer, as consumers today are looking at pricing, and pricingis important. So it's important that our pricing is competitive and tradepromotions get passed on. And there is just a tremendous amount of discipline putinto our whole trade spending program in making sure that we are gettingsomething from it.

At the same time, we've really increased our spending to theconsumer, our programs to the consumer, our couponing to the consumer, andwe’ll see lots of benefit from that.

Sales continue to be strong. October sales were quitestrong, we’re quite happy where October is, we like what we see out there, andeven with the weather not co-operating with us, we were very happy whereOctober has come in.

What’s happening as we see the category, we continue to seegood strong sales. But as we look at the market place there and you look atHain about 30% of our sales come from the Whole Foods, Wild Oats, Trader Joe's.About 30% of our sales come from the supermarket, 10% come from natural foodindependent and about 30% comes from mass market and other.

And it’s amazing, the focus that each of these accountsreally have on growing the natural organic category, it’s amazing that each of thesereally focus on where the placement is in the store, moving these products overto main houses of store and that’s something that’s happening today.

We look to close the TenderCare acquisition sometime inDecember, and pretty excited about that. We introduced Earth's Best diaper at the show in Baltimore, the naturalfood show and lot of good comments, lot of demand and chlorine-free diaper anda flushable wipe seems to have lot of demand out there.

Also at the Baltimoreshow, we introduced numerous new products across the board, and I think what’sthe interesting and unique thing is. As I look at this business today, there isdefinitely and a question continuously asked to me is about private label, butinnovation, newness and unique is something that's very important. And I got totell you, anybody that was at that show, that's one thing we offered is a lotof new product, unique product and innovation, and I think that's just atremendous strength of ours.

With that, I believe on Sunday for China, as we continue to look atgrowing in marketplaces and look at our venture with our Yeo Hiap Seng partner.We are looking at numerous opportunities in snack category, the personal carecategory, as we really look to move into the Asian markets. So, we are lookingat some things there.

So, a lot of exciting things happening, lot ofdiversification happening here, lot of cost containment, good growth, goodsales growth, good growth continued into October, and what I would like to dothen as turn it over to John, and let him take you through all the good thingshe got going on his business. Thank you.

John Carroll

Good afternoon. Today, I will cover the Hain Grocery &Snacks and Personal Care Q1 results, as well as provide the brief update on ourPersonal Care integration. I will start with Hain Grocery & Snacks, whereQ1 was a very, very strong quarter. Top line growth was up 9% and that growthwas driven via combination of consumption increases, alternate channel gains,and new product sales.

Importantly, we saw growth across the brand portfolio, someof the brands Earth's Best, Sesame Street, Rice Dream, Westbrae, ArrowheadMills, Casbah, DeBoles, Imagine soup, Imagine frozen, Health Valley across theline. Hain, Spectrum Natural, Spectrum Essentials, and Garden of Eatin’ andTerra.

Two key points to note here, one is the wide breadth ofbrands that are seeing growth and the second thing is the continued turnaroundof the Terra brand. Q1 was the third corner on a row that we saw growth on thatbrand, and it’s driven by consumption gains in our major channels.

As we move the middle of the Hain Grocery & SnacksP&L, Q1 gross margins were up 200 basis points. As productivity, mix, andreduced trade spending as percent of sales offset continuing rising input costsand fuel costs.

Regarding productivity, the Grocery & Snacks operationsgroup generated almost $2 million in productivity in Q1. This was key to our Q1gross margin expansion as we like all other food manufacturers are beingchallenged by inflationary pressures. We are seeing continued cost increasesfor organic corn, soybean, wheat, canola oil, cranberry, dairy, as well aspackaging and diesel fuel.

As Irwin mentioned, due to this cost pressure, we announceda 4% price increase across the majority of our grocery and frozen product line,which will be effective mid-December. We will not see benefit from this priceincrease in to the second half, but this move was required for us to maintainour current margins in this inflationary cost environment.

Our Q1 inventories were higher than year ago, as we arecarrying an additional $10 million to $12 million in Earth's Best inventory.This is consistent with what we discussed in our Q4 call, where we said wewould maximize our fresh pack season production, which we will run fromSeptember to December to ensure supply for our fastest growing brand.

In regard to marketing support, as Irwin spoke about, in Q1we continue to increase our marketing investment against our core brand. Thisis a key strategy to build our brands in this increasingly competitiveenvironment. This investment is best reflected across three areas: innovation,multi-brand promotional events, and media spending.

Just want to give you a few examples in each area. To startwith innovation, as Irwin said, we introduced several and tactful new Grocery& Snacks products at September's Expo East show. These products includedour new Rosetto and eat all natural Ravioli, which is the first frozen pastathat can be steamed to perfection in its bag, in your microwaves in only five minutes.

We are also introduced Earth's Best, Sesame Street, Organic Elmo, Frozenentrées, two great varieties featuring kids’ favorite flavors that are organicand fortified with iron, zinc and six B vitamins. And in the area of Imagine,we introduced new Imagine low-sodium organic beef broths, our low-sodiumorganic chicken broth quickly became at the top ten SKU, and beef was anobvious extension.

On the side of Terra, we introduced new Krinkle and Kettlehard-bite chips with unique chef-inspired flavors such as Chesapeake Bay and Beer, Pesto in smoked mozzarella, General Chow andArrabiata. Also on Garden of Eatin, we introducednew extra bowl tortilla chips in four exciting flavors including Maui Onion,Three Pepper, Focaccia and key lime jalapeno.

The second example is the strong response that we have seento our multi-brand promotion. Q1's marketing support included our Eat RightMorning, Noon and Night group promotion which featured our Terra Brand,Imagine, Health Valley, Walnut Acres and Ethnic Gourmet, and it was anchoredwith a September 30, national FSI and strong in-store support. Thesemulti-brand events allow us to leverage our scale efficiently to drive strongerretailer support in consumer response, than the brands would achieve individually.We continue to see strong response in these events and we will invest behind amulti-brand promotion every quarter in FY '08, which will be an increase of twoevents versus a year ago.

Finally on the media side, we continue to support our Earth'sBest brand with a full year national advertising program on PBS' Sesame Streetprogram. In addition, we will supplement that this year with advertisingsupport across several of our core brands on the new Discovery Planet GreenNetwork in the second half of '08.

As I said, increasing marketing investments against thesethree key levers, innovation, multi brand, promotional support and media is keyto driving our core brands' growth. There's a lot of competition out there inthe natural and organic arena, particularly with the increasing presence ofprivate label. We will grow our business in the space by focusing on our corebrands, leveraging our number one or two brand positions in core categories andincreasing our marketing support, with unique innovation, multi brand promotionand incremental media support.

So, to conclude on Hain Grocery & Snacks Q1, it was avery strong quarter with top line up 9%, gross margin expansion despite COGSinflation and continued investment across our core brands. We are facing inputcost inflation like everyone else in the CPG, and we have announced a 4% priceincrease to help along with productivity, offset these costs, maintain ourmargins and deliver growth to the balance of FY '08.

And moving onto Personal Care. Q1 saw a solid top lineconsumption growth for Personal Care driven by our three top brands, Jason,Alba, and Avalon Organics. Gross margin was up, driven primarily by a morefavorable mix from the Avalon Organic and Alba brand. Just as with our Grocery& Snacks business, Personal Care is also being pressured with costinflation, especially in the areas of fuel-related packaging costs andco-packer costs. To offset this, we are announcing as Irwin mentioned before, a3% to 5% price increase across both the Jason and Avalon lines, which will beeffective January 1, 2008.

In Q1, we began to experience the benefits of ourconsolidation in SG&A. This benefit was not fully realized in the quarteras we absorbed the cost of severance from our August reduction in force, aswell as some continued headcount duplication, while we transition functionsfrom our Culver City to the Petaluma offices.

Just as with Hain Grocery & Snacks, we continue tosupport our business with a strong innovation, including the following newproducts that were introduced at September's Expo East show.

We introduced new Jason Natural Renewing Body Scrub withthree different scrub bases. Rice brand, walnut powder and corncob, that give arecognizable edible ingredient as opposed to some of the other ingredients youfind in these products, the competitive products that would be, and differentlevels of scrubbing power to clean and re-hydrate your skin.

In addition, capitalizing on the success of our JasonFragrance free body and hair care launches, we are now expanding the line toinclude new Jason fragrance free skin care. This line will feature a new twicedaily facial, cleanser, a daily facial cream, a nightly moisturizer and amineral-based hand and body lotion to care for dry and sensitive skin. Thewhole fragrance free area is of really strongly growing area, and Jason has areal leg up in that area.

On the Alba side, we've introduced new Alba moisturizingcream shades to further extend our leadership position in this growing segment.These new hypoallergenic shades come in three exotic flavors; coconut milk,papaya mango and cocoa butter, and provides rich moisturizing shavingprotection for both men and women. Also on Alba, we introduced our new AlbaTropical Hair care, featuring tropical food extracts, nourishing plant oil andorganic aloe vera to create exotic treatments for soft healthy luminous hair.

And finally, on the personal care side: The re-launch of ourZia Treatments line, featuring improved paraben free formulas in new packaging,create a customized skin regiment, perfect retailers for every skin type. Thisis a key initiative behind our re-launch of the Zia line.

Turning to integration, we continue to be on schedule inintegrating the Jason and Avalon businesses into Hain Personal Care and thefollowing initiatives have been executed. All backroom functions, finance,accounting, customer service and IT have been consolidated into our Petaluma location.

Marketing sales have been integrated into one Hain PersonalCare group, and we had our first national sales meeting at September's ExpoEast show. At that meeting, we executed our broker consolidation, picking thebest of the best from the two different groups in each territory to carry theentire Hain Personal Care line, and now leveraging our scale to achieve areduced rate versus our previous payment structure.

We also migrated to a new IT system, The Vision, for all ofthe Personal Care in October. We developed a new Hain Personal Care tradepromotion program that will be implemented in the second half '08 to leverageour scale and reduce inefficient trade spending on a brand-by-brand basis andredeploy against the consumer. And we've made further progress in evaluating anaggressive Personal Care SKU rationalization program, to reduce businesscomplexity, drive margin enhancements and improve operating efficiency.

So to summarize on Personal Care, we continue to see strongconsumption growth on key brands, gross margin improvement and reduction ofSG&A from the consolidation of duplicative functions. We're on schedule forintegration of the two businesses into Hain Personal Care.

The Avalon acquisition is delivering against its targets,and while we are feeling the effects of cost pressure, we will implement a 3%to 5% price increase effective January 1 to offset it. Overall, we continue tobe well-positioned to take advantage of the continued growth of naturalpersonal care, both in the Natural channel, as well as in new channels such asGrocery, Drug, Map and Club.

So with that, I'll turn it over to Ira Lamel.

Ira Lamel

Thanks, John. Our sales in the first quarter this yearreached $237.2 million, up 13% over the prior year sales of $209.9 million. Netincome was up 22.4% to $10.8 million in the first quarter this year, comparedwith $8.8 million in last year's first quarter.

We earned $0.26 per diluted share on a GAAP basis this yearversus $0.22 last year. Our diluted share count this quarter was $41,825,000against $40,023,000 in last year's quarter. Earnings per share increased by18.2%, even with the increase of 4.5% in our share count.

On an adjusted basis, we earned $11.9 million or $0.29 perdiluted share. These adjustments included the following; as in past quarters,we continued to mark-to-market the value of ungranted stock options. This gaveus a charge of $420,000. At our Fakenham, U.K. frozen meat-free manufacturingfacility, we consolidated the manufacturing operations of the recently acquiredHaldane, Newport Pagnell facility. We acquired Newport Pagnell in December andimmediately announced that we would close that facility.

We incurred $1,073,000 in start of course, during the firstquarter, related to the new lines at Fakenham. These costs were not chargeableto the acquisition purchase accounting of Haldane under accounting rules. Inconnection with the inquiry into its stock options practices, we incurred legaland other professional fees during the first quarter of $2,300,000.

And then, in the other direction during the quarter, we soldour investment in a rice cakes manufacturing joint venture in Belgium andrealized the gain of $2 million from that transaction. In total, the adjustmentaggregated $1.1 million net after tax, and brought our adjusted net income to$11,000,939 or $0.29 a share.

Gross profit for the first quarter this year was 29% ascompared to 28% last year. As Irwin mentioned, that’s a four point increase. Ifwe adjust both years for the startup costs incurred at different facilities inthe first quarter of each year, Fakenham this year and West Chester Frozen lastyear, gross margins would be 29.5 this year versus 28.6 last year. So, thealmost one point increase holds whether it's GAAP or adjusted. And this is inthe face of the $6 million of input cost that increases in diesel that Irwinand John mentioned.

Our SG&A in the first quarter this year was 21.3% versus19.9% in last years' first quarter. If we adjust SG&A for the professionalfees we've incurred, and the ungranted options, SG&A would come in at20.2%. That would be a 30 basis point increase from the SG&A last year, andwith the added acquisitions where we continue to have duplicative operationswhile we are going through integration phases, we think that, that 30 pointincrease coupled with all of the cost increases that we've been incurringparticularly in the depreciation and amortization increases from acquisitionswe've had over the past year and from increased employee and benefit cost, that30 basis point increase is a very good result.

Operating income for the quarter was $22.1 million adjusted,compared to $18.1 million adjusted last year giving us a 22% improvement.Interest expense this quarter totaled $3.3 million, it includes the cost of 150million 10 year notes that we have outstanding, as well as the cost of carryingborrowings under our credit facility. Interest expense was offset in part byinvestment earnings of $600,000 in the quarter, bringing us to $2.7 million ofnet interest expense.

Included with interest and other expense is the gain of 2million on the rice cake joint venture sale. Excluding the impact of specialitems our effective tax rate of 37.6%, this compares to 36.7% for the fullyear, 2007. EBITDA amounted to $25.3 million for the first quarter this year,versus 20.4 million last year. Depreciation and amortization in this years'quarter was $4.5 million, an increase of $1.2 million over the prior year $3.3million. CapEx came in at $5 million.

Our balance sheet continues to be very strong, workingcapital was $210 million at the current ratio of 2.7. Our stockholders equityis now at $717 million. Debt as a percentage of equity is 30% this year withdebt totaling $216 million. If we reduce our cash of $51 million, debt comesdown to $ 165 million net.

We are at 75 days in the cash conversion cycle, and ouroperating free cash flow in the quarter came in with a usage of $1.8 millionthis year. That usage comes from the increase in capital expenditures,particularly because of the secondhand build out, as well as, plannedinvestment that we made in inventory build at Earth's Best, and investments ininventory that we made with the restaging of Celestial Seasoning Tea, alongwith a build in inventory for its Saphara and Coffee introduction.

With that we'd like to open it up for questions.

Mary Anthes

Bill?

Irwin Simon

Hello?

Question-and-AnswerSession

Operator

Sorry about that folks. Thank you very much. (OperatorInstructions). And our first question comes from the line of Greg Badishkanian of Citigroup. Please proceed.

Greg Badishkanian - Citigroup

Great, thank you. Hey guys, just a few quick questions here.I am looking at organic sales growth kind of in the high single-digit rangeorganically, am I kind of in the ballpark?

Irwin Simon

You are doing the numbers Greg.

Greg Badishkanian - Citigroup

Yeah.

Irwin Simon

Listen, I've said before. We would like to be at the highsingle low double-digit, and I think you heard John talk about the great growthand good growth in Europe, growth amongCelestial. So, with that we feel we are on our targets.

Greg Badishkanian - Citigroup

Great, excellent. And just drilling in a little bit onOctober, it sounds like growth was very strong, any categories or brands thatdid particularly well in October?

Irwin Simon

Actually right across the board

Greg Badishkanian - Citigroup

Yes.

Irwin Simon

Business was extremely strong in October. And the groceryfrozen snack business is strong, we are seeing personal care, good stuffhappening there, good stuff out of Europe.Okay on tea. So yeah, there is nothing that's surprising me. But October, whichis normally a strong month was even stronger than we expected it.

Greg Badishkanian - Citigroup

Okay, great. And with respect to coffee, it sounds like apretty good opportunity for incremental growth. Is that something that if youget some okay size, can that be fairly profitable?

Irwin Simon

It can. Saphara is something, also we are pretty excitedabout, its organic fair trade, fully biodegradable. So number one, that issomething that's a good margin, good growth. And some of you have seen thecoffee, the packaging, the product, the quality is exception here. It's organicfair trade, not a lot of flavored coffee out there.

So we've got some pretty good listing so far, and don'tforget, we went out a little late selling this, a lot of coffee sets. But thosethat we showed it are inviting us back but we didn't get it forJanuary-February. So some good stuff could happen on coffee too.

And I know I haven't talked about it, but the ready-to-drinkthing is something we are still working on and got those things moving there.And also Greg hearing some real good feedback on our packaging and everybody onthe call asking, go look at it on the shelf and I love your input back, butsome good stuff on our new Celestial for packaging also.

Greg Badishkanian - Citigroup

Great. And just as we focus in on winter, I think was it twoor three years back, you had some issues with soup. How are you positioned there with manufacturing and justgetting with sourcing and also just how packaging and the branding ispositioned?

Irwin Simon

Well I'll tell you what Greg, we got plenty of soup, plenty of packaging, just bring out somecold weather then we'll fulfill every order that we can get.

Greg Badishkanian - Citigroup

Good. Well a tough challenging environment, you guys didreally well. So thanks.

Irwin Simon

Thank you.

Operator

Thank you very much sir. Ladies and gentlemen, next questioncomes from the line of Andrew Wolf of BB&T. Please proceed.

Andrew Wolf -BB&T

Thank you. Irwin, I just want to double check what I thought-- did you say that most of, forget the exact number if you could repeat it.Most of the Celestial that’s been repackaged and redesigned has alreadyshipped?

Irwin Simon

No, 70% of it. All the packaging has been redesigned Andy,but 705 of it will be in the marketplace today. That may not be in every store,but 70% is shipping out to warehouses and ultimately get out to retail market.

Andrew Wolf -BB&T

Okay. And does that apply to the September quarter. I guessI want to think of it in reference to the quarter?

Irwin Simon

It would not be the September quarter. It probably wouldhave been 40% by the September quarter.

Andrew Wolf -BB&T

Thank you. And sort of the same thing for the Saphara, andalso when you talk about Saphara and the coffee, could you just sort of discussa little bit about why those type of products go into the natural channelfirst? Sort of a traditional thing, or is it more just the conventional folkswant to kind of wait around and see if it make sense for them, if there isenough movement?

Irwin Simon

Well, Saphara number one is organic, fair trade,biodegradable and the natural channel, Londontook it right away. And same with coffee, as we shipped it into our naturalorganic distributors, as they get it out to the independence and get it out inthe marketplace, takes a little more time in presenting it to the mass marketand to the supermarket, conventional supermarkets for set for a set. So that'swhy we went there. And usually its interesting because you get a good readthere and lot of people run to Natural Food stores and see what's new. And itactually helps you to get listings in other places.

Andrew Wolf -BB&T

And just on those two, on the Saphara and the CelestialCoffee, same question, but when it's shipped, was it more in the quarter youjust reported?

John Carroll

Both of them shipped in October. Coffee shipped October 15,and Saphara shipped around that time also. So, there none of that in thequarter we have just reported.

Andrew Wolf -BB&T

Okay. And just my last follow-up, I am sorry, I asked acouple of more questions, last question is, on the guidance, is that guidanceof 138 to 142, is that in reference to the $0.29 adjusted EPS or to the $0.26GAAP?

John Carroll

I would be into the $0.29 adjusted.

Andrew Wolf -BB&T

Great. Thank you.

John Carroll

You are welcome.

Operator

Thank you very much, sir. Ladies and gentlemen your nextquestion comes from the line of Scott Mushkin of Banc of America Securities.Please proceed.

Scott Mushkin - Bancof AmericaSecurities

Hi guys.

John Carroll

Hi Scott, how are you?

Scott Mushkin - Bancof AmericaSecurities

I am good, how are you doing?

John Carroll

Good.

Scott Mushkin - Bancof AmericaSecurities

So, obviously, Burt's Bees got taken out.

John Carroll

Might have got taken out, had wind fall.

Scott Mushkin - Bancof AmericaSecurities

They had a wind fall. Two questions revolving around it,honestly. Number one is, sitting here looking at Celestial, you guys, youclearly, and what quarter on to put out a lot of your brands are very prevalentin their documents, and so would you ever, I mean, how do we look at this froma shareholder perspective? Would you ever consider monetizing some of thePersonal Care business, if they kind of let some of that value out, I guess, isone?

Then the second question is, one other things that Burt'sBees I think it has become as a fairly down, this goes how terrible but not ahighly regarded natural and organic brand, it's available almost everywhere andits part of life, I think it's recognized so much. But Celestial seems tosuffered a little bit from that where brand, because it was available in somany different places, maybe, it isn't quite what it once was at one point. Earth'sBest is another one of your great brands. So I guess the question is, how doyou, A: prevent that from happening, but B: also make sure the premium brandsare getting the billing they deserve?

John Carroll

A couple of good questions there. Number one, I think it'sgreat that can back what Clorox thought of the multiple they take for Burt'sBees in time sales and EBITDA, I think is great. It comes back and reinforceswhat we were saying to our investors, to everybody about the personal carecategory and the opportunity there, I think there is a good piece in today'sNew York Times. So, I feel good about that.

Listen, I feel good that a big company like Clorox come in,will spend money on the category and help bring additional awareness to thecategory, and I think that's great. And I think one of the big things as welook around at Burt's Bees, Burt's Bee is in a lot of different places today,and it's important to keep its uniqueness.

I think that's one of the key things within our personalcare group today, there is Avalon, Alba, and Jason's and certain brands willstay within Natural, certain brands will win the mass market and certain brandswill win the chain drug. And they will not become mainstream brands. At thesame time, as you see Burt's Bee or Tom's going mainstream, its going to openup room within Natural Food stores and other stores for more Alba or moreJason's or more Avalon. So the opportunities there are tremendous for us.

So, this is great for the category and I think great for ourbrands to maximize shareholder value, whenever we can do it we will do it. AndI think what John talked about right now, one of the big things we need to dois integrate these businesses which we are doing, integrate the managementteam, go through the SKUs and see what SKUs makes sense, that we keep what SKUsdon't make sense, bring the manufacturing into our plant and really take thesebrands to whole other category.

The good news is, I would not want to be buying Avalon thisyear, this time because just where Burt's Bees went, the price would be a lotdifferent. So I feel good about only today and not negotiating, because westarted to negotiate around this year, last year for it.

In regards to Celestial, Scott, again, Celestial today is a30 year old brand. It started in Natural Food stores, it went to grocery, itwent direct, it went into mass. It's hard to turn the clock back and so to say,I'm only going to become a Natural Food brand or I'm only going to become amass market brand. We got to accept the cards that were dealt goes there.

And I think what's important, number one on Celestial is tosolidify our strength in the tree that we are, and make sure we solidify ourstrength with certain products, and we have a lot of uniqueness with Sleepytime and Zingers and certainCelestial flavors and make sure we emphasize that. And we've not emphasizedWalnut teas and Black teas the way we have, we are really focused on herbalteas.

Saphara is something that's interesting. We loved at NaturalFood stores and I think that's a great opportunity for us, and that will onlygo into Natural Food stores, and now will only go into natural sections withinstores. It's not going to go in the mainstream tea isle. The same with coffee,it will go into the coffee section, but we will start with Natural Food storesfirst.

In regards to brands like Earth's Best, there's a bunch ofthings we are doing there as we expand Earth's Best into supermarkets andorganic baby food becoming prevalent through all supermarkets, it's going inthe main isle in a lot of supermarkets today, and that’s just something that’shappening. On the other hand, we are working on premium baby food today, thatis going to be the next evolution of Earth's Best and I think that’s what Ichallenge our people everyday, what’s the next Earth's Best within Earth'sBest, whether its fresh or frozen, I don’t think its frozen because there'smultiple out there.

But just come back and think what we have done with Earth'sBest now. We took it as a brand that was a $14 million brand on the roof, readyto fall off. We bring new users in every nine months. We now have infantfeeding food. We now have toddler's food, and we are going into diapers whichwe showed at the Baltimore Show, which people are pretty excited. So, here is abrand that we have to grow by bringing into multiple categories and expand. Celestialtried to do it, and I am not sure they got it right, when they tried to do itin other categories. Hopefully, that answers your question.

Scott Mushkin - Bancof AmericaSecurities

That’s great. Thank you very much.

Operator

Thank you very much, sir. Ladies and gentlemen, your nextquestion comes from the line of Steven Kron with Goldman Sachs. Please proceed.

Steven Kron - GoldmanSachs

Thanks. Hi, guys.

John Carroll

Hey, Steven, how are you?

Steven Kron - GoldmanSachs

Good, thanks. Couple of questions. One, I just want toreconcile some numbers. I thought last quarter on the call, you mentioned thatJuly and August shipments for the Celestial business were up. I thought it wasaround 12% and then you indicated your Celestial sales, if I heard youcorrectly, were up 2% overall. So, I'm just wondering if am comparing apples tooranges there, are those numbers comparable and did I hear them right?

John Carroll

Celestial tea sales, I am sayingabsolutely just tea shipments, because in there, there's other products whetherits Zingers to go etcetera.

Steven Kron - Goldman Sachs

Okay.

John Carroll

So, that tea sales were up 4%,overall Celestial business was up 2%.

Steven Kron - Goldman Sachs

Okay. Did that show adeceleration in the September month, because still it seems as though there mayhave been?

John Carroll

Well, September is your biggestmonth. And of July and August it's your biggest month of your quarter. I don'tthink it showed at any of that, it's just way the month evened out, and the waythe shipments evened out. And it's interesting now, what's happened is,Celestial shipments have evened out, where it's on the leg of a third. So, Ithink some of that is a reason it was up higher against lower shipments a yearago, and higher shipments in September a year ago.

Steven Kron - Goldman Sachs

Okay. And then, Irwin last quarter, you talked a little bit aboutkind of the environment for M&A deals, and it seems as though there was asense of kind of enthusiasm that there was a bit of an abatement ofnon-traditional competitors, as it relates to potential deals out there, thatbeing the private equity bid seem to have abated a bit. Can you kind of assessthe environment now, what you are seeing in the marketplace for anything thatyou might be looking at?

Irwin Simon

Well, I would have done my callon Monday, before Burt's Bee, I would have said, multiple network coming down.But I think this is something different. We today, wrote there actively in themarketplace and again focus, and don't forget, we are specialized because weare focusing on the natural organic category. And we are looking at three orfour real good things out there right now, which I think were competitive inpricing and moving in the right direction with them, and have walked away fromtwo things where expectations were still in the hemisphere as people have notcome back and realized, there has been a price adjustment here. So, I thinkthey’ll come back.

So, the environment out there Steven is still good, and Ithink one of the problems is I’m not sure that everybody has totally adjustedtheir price expectations on some of the properties that are out there. But thereis some good stuff out there. I just came back from Europe and saw some goodstuff in Europe too. And these are stuff andagain I don’t want to scare anybody, these are things that are in $50 million,$70 million range, not $500 to a $1 billion not a $100 million range. And rightwithin our sweet spots, our rate within categories were not in today, that canbe very helpful within our infrastructure. Good growth, good accretion there.

Steven Kron - Goldman Sachs

Okay, that’s helpful. And then just one last one: Just tomake sure that I understood this correctly, the roughly 3% to 5% priceincreases that you are taking across your brands, I guess it’s a global basis,it seems that that will be fully realized as we turn the calendar to next yearat something. Given your outlook today for commodity cost, that should beenough to protect margins with all the efficiency programs that you have inplace.

Irwin Simon

At today’s cost, okay.

Steven Kron - Goldman Sachs

Okay.

Irwin Simon

I mean if tomorrow diesel's at $5, I mean we are back totake a price increase, okay. But at today’s cost absolutely and I got to tellyou we have just tremendous aggressive productivity and the pricing so yes.

Steven Kron - Goldman Sachs

Okay, super thanks a lot.

Irwin Simon

You’re welcome.

Operator

Thank you very much sir. Ladies and gentlemen your nextquestion comes from the line of Terry Bivens of Bear Stearns, please proceed.

Terry Bivens - BearStearns

Okay, good afternoon everyone.

Irwin Simon

Hey Terry, how are you?

Terry Bivens - BearStearns

Pretty good, pretty good Irwin how are you?

Irwin Simon

Good.

Terry Bivens - BearStearns

Couple of things. One the tea price, have the competitorsfollowed yet or is it is a bit too early there?

Irwin Simon

It’s a bit early yet, Terry. And I think, you know, beingthe leader someone has got to get out there. And as of two weeks ago, nobodyelse had followed. We heard a lot of rumors. And you heard me what I saidbefore, our business is shifting more on a direct basis, which helps our retailprice, okay, which a lot of these people that used to buy before throughthird-party distributors will not even see a price increase at retail. Theother thing is where we have our promotions out there that price is going to getreflected at retail, we'll not see a major price increase. But we haven't takena price increase in Celestial in four years and you know Hibiscus, chamomile, corrugateand freight have gone up and we just had to take a price increase and. youknow, we did. So we'll see what the competitors do.

Terry Bivens - BearStearns

Okay. One question that I have gotten quite a bit lately: Itwasn't clear the extent to which the grocers knew the tea price was coming andthere were some question as to whether there might have been a buying in theSeptember quarter. Could you just clear that up briefly?

Irwin Simon

Well, I don't believe that people watch their inventoriestoday, and there was a 60, 90-day notice given on the price increase, Terry.

Terry Bivens - BearStearns

Okay.

Irwin Simon

So I don't think there was a buying for pricing. And todaywith pricing, with inventories, people may buy an extra week or so, but peopleare not buying in product. The other thing is people are not buying with thenew packaging coming out, as everybody is going to want the new packaging andwait for that too. So that's not something I am concerned with, and that's notsomething which drove the 4% increase in sales.

Terry Bivens - BearStearns

Okay. This one's for John Carroll. John you talked a goodbit about integration. Is there a number we should be looking at for '08 orperhaps even '09 in terms of how that might hit the P&L?

John Carroll

I think in the last call Terry, I spoke of being able torealize on an annual basis over $2 million in SG&A cost from theintegration of the businesses.

Terry Bivens - BearStearns

Okay, per year, you mean?

John Carroll

Yes. We won't recognize all of it this year, but ongoing onan annual basis, it will be $2 million.

Terry Bivens - BearStearns

$2 million, okay. And then, last thing, I just wanted tomake sure my math was somewhere --

Irwin Simon

And Terry just on that, we think there is additionalopportunities in savings and margin opportunities as we look at additional, notonly on the SG&A side, but on the whole SKU side, and the way we go tomarket and reducing SKUs and stuff like that. So, we are getting close to thatand we'll be back, but we think it will be our, like we did before, it will bea great margin improvement and a lot of good efficiencies that we are going tosee happen here.

Terry Bivens - BearStearns

Okay. And last thing for me if I might, its acquisitionscontribution to sales this quarter. Ira I was looking to somewhere in theneighborhood of $20 million. Does that sound reasonable?

Ira Lamel

No. That’s high.

John Carroll

No, that sounds high.

Irwin Simon

That's quite high. And Terry, what you got to take out ofthere also is the divesture of Biomarche, because we had that for two and ahalf months last year.

Terry Bivens - BearStearns

Okay. I'll go over that offline.

Irwin Simon

Basically, you know offset and everything, its basically theacquisition in here is Avalon and all, but that’s the big ones here, becausewe've discontinued a lot in regards to Haldene and the Soy business is small.

Terry Bivens - BearStearns

Okay.

Irwin Simon

But very little margin in it. So, I mean

Ira Lamel

The other thing is that Haldene business had a greatslowdown in sales during the quarter because of the integration. So, we didn'tget a lot from that.

Terry Bivens - BearStearns

Okay. Very good thanks.

Irwin Simon

Thank you.

Operator

Thank you very much sir. Ladies and gentlemen your nextquestion comes from the line of Christine Mccracken of Cleveland Research.Please proceed.

Christine Mccracken -ClevelandResearch

Good afternoon. I just wanted to follow-up a little bitalong the pricing outlook, only in that consumers are facing the same priceincreases from the entire food industry as well as obviously a lot of othereconomic pressures. At what point do you get or do you hit a ceiling in termsof what you can pass-through or where you expect to see some demanddestruction, given that this is kind of a premium sector, maybe it's a littleinsulated from that. Can you talk about kind of how you look at that and whereyou might and might not see any kind of push back?

Irwin Simon

Hey Christine, I got to tell you, if I can look into acrystal ball and figure that out I don't know if I should be doing this here.But as I say I think looking back, if you can't get pricing now you never can.On the other hand, what you got to make sure is trade dollars promotionaldollars are truly passed on and you are getting the benefits from, okay. And ifyou are going to do trade promotions, do 15% off less frequently instead of4%-10% off cause you are going to get it reflected at the retail.

The other thing is which we are talking about, and we aretalking to our customers all the time. How do we ship cheaper to our customersand if it's a 4% price increase it's only 2 whether it backhauls or they arepicking up etcetera, etcetera, etcetera. So, I think nobody want to see usslowdown, and I got to tell you we are working with our distributors, we areworking with our customers to make sure we are seeing not full pricing passedon where there is cost savings with our customers and our partners too.

Christine Mccracken -ClevelandResearch

So you are not seeing any trade down right now, right?

Irwin Simon

Trade down?

Christine Mccracken -ClevelandResearch

Well, are you seeing any specific areas where may beconsumers are going to more private label or there is any particular areas ofweakness?

Irwin Simon

Well, I don’t why how I would absolutely see it. As we trackour numbers and I know that you are on a call, but October has been a strongmonth for us and business is good. If anything what I feel in times like thishere, people stop going out to restaurants and people stop going out to eat andgo to Whole Foods, Wild Oats, Trader Joe's, Safeway Kroger and every other goodcustomer that we have out there and shop and cook at home and stay at home. Ithink that’s the trends that we see.

Christine Mccracken -ClevelandResearch

Got it. And then just as you look at what the comments thatwe hear out of the trade relative to weakness in California. Is there anything specific, isthat an economic issue or are you seeing that same kind of geographic weaknessand may be you could just comment on that?

Irwin Simon

I am not sure the comment that you are hearing on theweakness. I did see it in your note though, but right now we are not seeing itand I guess absolutely with the fires are not out there, but, and if anythingCalifornia is a very, very, strong natural organic market for us. Whole Foodhas just opened up two more stores in California,one in Arizona.So they continue to open up additional stores, but we are not seeing it yet,and so we are not seeing the effect of California.

Christine Mccracken -ClevelandResearch

Okay. I leave it that. Thanks.

Irwin Simon

Okay.

Operator

Thanks very much ma'am. Ladies and gentlemen, your nextquestion comes from the line of Scott Van Winkle of Canaccord Adams. Pleaseproceed.

Scott Van Winkle -Canaccord Adams

So Irwin, how are you?

Irwin Simon

Hey, Scott, how are you? Still celebrating?

Scott Van Winkle -Canaccord Adams

Doing the best we can, you know. The overhang of the great RedSox run.

Irwin Simon

I know. That's why I didn't want to come to Colorado, right?

Scott Van Winkle -Canaccord Adams

Hey, if you said this, I apologize. Did you give usconsumption numbers for Celestial? And if they were below the shipments, right,I wonder what you think about the channel inventory?

Irwin Simon

Well, I didn't give them. And our consumption was down, andthe reason the category was down -- and this 12-week shipments were down, ourconsumption was down about 14. And just let me add to that, because one of thebig things, Scott, about 35% of our business goes through Nielsen measuredchannels, okay? And so that's number one.

Number two, we know some of the reasons our numbers aredown, some stuff at Kroger this year versus last year and just continue SKUs.Some are transitional SKUs, some are the promotional dollars. So, as I look atthe category in consumption, I don't get concerned with these numbers right nowand some of the transitions are not going on with some of the people waitingsome of the new flavors and not coming into the marketplace.

So, I didn't give the number, but that's what the number is.That's some of the reasons that it doesn't concern me what the numbers are.

Scott Van Winkle -Canaccord Adams

So, you're not concerned about consumption trend, but I wasjust wondering, there was a question earlier about buying ahead of a priceincrease and the disparity between the consumption and the shipments. I justwant to make sure you're comfortable with what's out there in the market?

Irwin Simon

We do not see today. And again onCelestial, where 55% of our business is now going on a direct basis and therewas even, you could say that, your lost cases, 55%. You don't see customersbuying in on price increase today like they used to.

Scott Van Winkle -Canaccord Adams

Okay. And, I guess for you orJohn, what do you have to do to manage all these price increases across severaldifferent divisions and brands over a three-month period. Is that a really tallcap to take care off?

Irwin Simon

Well, just number one; let mestep back for a second. I think one of the great things in Hain today, as wecome back and look at the company, look at the visibility we have today inmeasuring. We just didn't wake up in August and say oh my god, look at priceswhat happened, I mean we started productivity, say in back 6 to 9 months agoand we're able to get them in basically prices whether it's organic fruits andvegetables, one of our co-factors that was inflicted upon us.

So, what I go to say is, we havean incredible group today that's really out there with visibility, watching thebusiness, measuring the business and truly watching cost, and knowing how we'regoing to get our cost initiatives. In regards to John's group, when we take aprice increase, we're looking at what the competitive price is? What's thelandscape? We're talking to the retailers and saying hey, how much of this isgoing to get passed on? How much can we save between each other on ourshipping?

So from a standpoint here, I mean we've really worked withour customers on that. Celestial did theirs on their own and that was done backin June-July. It happened last week; it will be effective December 15th. Europe does there is on their own. Personal care will bedone by John's group. So it's not all one group's doing it, it's multiple groups,taking it, getting a price list out, seeing the major customers and now theyare talking to the major customers. But the big thing is that we havevisibility to the increases in the costs coming out of the numbers Scott thatI'm just not sitting here in the call today and say well, we had $6 million hittoday and we couldn't do anything about it. I think, really getting out theredoing things about it and offsetting the cost and then taking the priceincrease just shows a lot for the people here at Hain.

Scott Van Winkle -Canaccord Adams

Got you. And then finally, the follow-up to our previousquestion that was out there. I pull up a transcript and it did look like wewere talking about Celestial shipments being up 12% in July and August, youthink its just maybe just different number we are looking at relative to beingup 4% for the quarter?

Irwin Simon

Well, I think it just moving out for the quarter, that's allit is. July and August probably, there were a lot less shipment last year,where September was a bigger shipping month. And we shipped a lot less, inSeptember we shipped a lot more in July and August.

Scott Van Winkle -Canaccord Adams

Got you. Great, thanks.

Operator

Thank you very much sir. Ladies and gentlemen, your nextquestion comes from the line of David Palmer of UBS. Please proceed.

David Palmer - UBS

Hi guys.

Irwin Simon

Hi David, how are you?

David Palmer - UBS

Good, Irwin. There was a comment, I think maybe you or Johnwere talking about the marketing support being increased, and I assume thatthere is an increase as a percentage of sales, could you just give us, or giveme a sense of your marketing support as percentage of sales in the quarter, andwhat do you expect it to be for the year, it was the composition of yourmarketing spend and with these increases, what is the composition of theseincreases?

Irwin Simon

David, what I said here, our trade spend runs in the 12% to13%. And our consumer spend running in the 7% and 9%. And you heard me talkabout Yves with TV. I talked about our major consumer program rolling out ofCelestial lanes and all those products, you heard John talked about a lot ofadvertising on Earth's Best, I mean we are going to spend dollars against ourkey brands to get the right message across.

So, there probably was a couple percent increase in thequarter and we will continue to increase about another 2% throughout the year.We are looking to continue our FSI for the whole company. We did a major FSI inOctober with about a $36 million sold. We continue to advertise in Body andSoul and a lot other magazines and going on TV with our Yves product that as Italked about.

David Palmer - UBS

And when you are talking about increasing a couple percent,are you talking about that 7% to 9% being 9% to 11%?

Irwin Simon

No, it's always from 7% to 9%.

David Palmer - UBS

7% to 9%.

Irwin Simon

Yeah.

David Palmer - UBS

And of those two points, is that more the advertising or isit more the trade type of spending that might increase your profile at retail?

Irwin Simon

No, it is advertising. Trade is trade.

David Palmer - UBS

And because you said FSI, I was thinking…

Irwin Simon

Well, FSI, we consider, that's advertising.

David Palmer - UBS

Okay, not related to couponing.

Irwin Simon

Yeah.

David Palmer - UBS

The other question I had was with regard to market share andI guess it's related in to that, I wonder about your advertising and how youare thinking about. The importance of advertising as perhaps the growth shiftsaway from the natural channels to some degree or get magnified acrosstraditional channels. But I am wondering if you could give the lowlights andhighlights about your market share trends by channel? I mean were you growing,was your market share up or down, what channel was going better than others interms of your market share?

Irwin Simon

Our consumption is growing across both channels today innatural and grocery, and you’ve heard what I said before. If you look at ourbusiness today and look at the category, and not our business, but due to thecategory, 31% of the category goes through about 1000 stores, the other 30%goes through 31,000 supermarkets. So, if you look at the category today, thereis a lot of opportunity and that’s why we feel we have to invest in theconsumer, in both the grocery category and then right mass market category. Wefeel that we are absolutely doing that right now in the supernatural category.

David Palmer - UBS

You don’t often really talk of market share, and I guessphilosophically do you feel like that is just not as important to be talking interms of market share or in other words, you just want to keep your eye on theball and growing profitably period, and whether that come bounces out as losingshare in one channel or one category or not? That’s not the top of the list foryou.

John Carroll

Hi, this is John Carroll. Just a key point on market sharein this business: Given that whole food is no longer in the database forindicated data. You don’t get a good read on market share out of sense today.So, at the end of day, our focus is, is our consumption growing across everychannel? And that’s how we measure this business.

Irwin Simon

And David on that too, I think the big thing for us today isgrowing distribution. There're 31,000 supermarkets out there, we have a lot ofdistribution opportunities to grow. And you come back and look at a growingmarket share. Our top three customers today in Earths' Best are not evenmeasured in the market share data does there today. So, where we sell today,30% to 40% of our business is not even measured in the market share.

David Palmer - UBS

Okay. Well thanks very much.

John Carroll

You are welcome.

Operator

Thank you very much sir. Ladies and gentlemen we have timefor only a few more questions. Our next one comes from the line of SuzannePrice of ThinkEquity, please proceed.

Suzanne Price -ThinkEquity

Hi guys, how are you doing?

Irwin Simon

Hi Suzanne, how are you?

Suzanne Price -ThinkEquity

Good, thanks. I wanted to know if you have seen any results,I know, it's only been a short time, but any positive or negative effects ofthe Whole Foods merger closing?

John Carroll

Absolutely not all, you know, it's early. I have said thisbefore, it's in my notes. I think it's good for the industry, good for thecategory. I've heard different types of stores, the 10 stores, the 15 storeswhatever it is. I think Whole Foods will get these stores back rolling wherethey were not under the Wild Oats banner, and they are kind of faltering outthere. So I think it's going to be good for us. We had anywhere from 11 to 1400SKUs within Whole Foods. We had a lot less within Wild Oats, and I think WholeFoods will take a good broom to them, clean them up and make them into somegood appetizing stores.

Suzanne Price -ThinkEquity

Great. And just a kind of detailed question: A lot of theincrease in SG&A was legal fees related to the stock option enquiry. Isthat something we should expect to carry over into Q2 and potentially then Q3?

Irwin Simon

I guess I should say unfortunately, but you know itcontinues and you know the bills unfortunately, continues. So I think so.

Suzanne Price -ThinkEquity

Okay.

Irwin Simon

Yeah, it is, absolutely.

Suzanne Price -ThinkEquity

Okay. And this has been talked about a lot, but the 4%number that's been shown around in terms of increase of shipments forCelestial. Is that for October or is that for the September quarter?

Irwin Simon

No, that's July, August and September.

Suzanne Price -ThinkEquity

Okay. Alright, great. Thanks a lot. All my other questionshave been answered.

Irwin Simon

Thank you.

Operator

Thank you very much, ma'am. Ladies and gentlemen your nextquestion comes from the line of Pablo Zuanic of J.P. Morgan. Please proceed.

Pablo Zuanic - JPMorgan

Good afternoon everyone.

Irwin Simon

Good afternoon, Pablo.

Pablo Zuanic - JP Morgan

I am a bit concerned hereobviously with your T numbers and please explain to me I am wrong here, but whywould the competition want to follow the price increase what are doing in T's,really repositioning your brand. I mean you have these new packaging, you havethe marketing coming through now. You are repositioning the products, so thereis no reason for the competition to follow. And related to that, showing youhave done first all the brand support and created more awareness for the newpackaging and then follow through with the price increase later.

And the last question on T to behonest, I consider myself a tea connoisseur, I think I buy quite a lot of tea.I am not persuaded by your new packaging and I stand in front to the tea aisle andI look Bigelow and Twinings jump out of me. So that’s (inaudible) and Yogi thenew packaging of Celestial does not. So, why would I want to pay a premium ontop of that? And I think the consumption number is getting your 14% down, aretelling us something. Show me how things go through this please? Thanks.

Irwin Simon

Well, number one, you can't lookat the consumption numbers and look at the key business data consumption numberis 14% down. Number one, as I said, 35% of our business does not go throughmeasured channels.

Number two, Pablo, listen, thereis a lot of consumers out there buying tea and everybody has a preference, andwe just did not come out with our packaging and put it on the shelf, we testedit, we did tremendous amount of research, and I got great feedbacks. So, I feelgood about our packaging, we hired the great firm and they did a lot with it.So, that's number 2.

Number 3, in regards to a price increase, we can't be afraidto take pricing out there, you've got to take pricing, I can't sit withhibiscus, transportation, chamomile going up and not take pricing. If I don’ttake pricing and I need to support the brand at trade, so number one, I got apricing issue, and number two I got a trade issue, at least if I had takenpricing, I need to support it. I do have margin now, additional margin tosupport it at trade level.

And number four, listen, the key category over the lastcouple years, there has been a lot of entries in there with Tazo and Bigelow.There is lot of entries in there with multiple other teas, and those that haveposition and merchandised end market are going to sell. We weren’t effectivelydoing a lot of category management. There is a new head of sales in there, agentleman by the name of Jack White, that come out of our grocery group. Wehave met with each of our major accounts and each of our accounts, Pablo reallywant to focus on the category, because they want the category growing and it'sa good margin category.

The other thing Pablo, I'm not sure if you missed what Isaid, 55% of our business now goes through on a direct basis, which helps retailprices and helps margins. And you know what, the other thing is, we're spendinga lot more on the consumer. Tea is now less than 10% of our sales. So, we'reable to take our foot off the pedal from the profitability of Celestial andspend more money back towards the consumer. So, I think we have a great plan inplace, and I think I happen to like our packaging, I think we diversified withSaphara, I think we've diversified with coffee. I think a price increase wasdefinitely a warrant with increased cost coming at us. And I think if we neededto roll back some price promotions, at least we have our price increasecovered, and ultimately the right way to go.

Pablo Zuanic - JP Morgan

That’s all. I appreciate it and then just a follow-up maybefor John on the grocery side. 9% growth there, John, that includes the tofu acquisitionor I should really think of it as really an organic growth number.

John Carroll

Pablo, that does not include tofu.

Pablo Zuanic - JPMorgan

Okay.

John Carroll

That is just -- and there are no acquisitions in there. Thatis just year-on-year growth on the same brand.

Pablo Zuanic - JPMorgan

Okay. So (inaudible) is not included there.

John Carroll

And tofu is small.

Pablo Zuanic - JPMorgan

Okay. And body care is not included on the 9%?

John Carroll

No it doest not.

Pablo Zuanic - JP Morgan

And then, just if you mind, just give us a range for someproducts. I mean I suppose some products like maybe the non-dairy rice or soydrinks were below the number and what was above, just a range, if you can. Whatall performed...

John Carroll

Pablo, in the brands that I spoke to you about, basically,we saw most of them between 6% to 10%, and with Earth's Best over 20% andImagine soups being over 20. But by and large, we are seeing solid consumptiongrowth across all those brands I spoke about.

Irwin Simon

And Pablo, we're seeing brands like Arrwohead Mills,DeBoles, not only within our number one tier brands or number two brands too.

John Carroll

And Pablo, just let me come back on tea, for a second. Asyou look at tea numbers in consumption and I gave you 12 week consumption.July, August and September are not the months to come back and look atconsumption numbers totally on tea either.

Pablo Zuanic - JPMorgan

No, I agree. And, well, the comps get easier also, I guess,right?

John Carroll

Well, the comps do get easier, but I think being up 4%shipment this year versus last year is pretty good.

Pablo Zuanic - JPMorgan

And one last one, if I may. Can you give us any color on thePlainville deal,any intensive accretion or dollar sales?

John Carroll

Well, we closed that the end of August and we obviously onlyhave one month….

Irwin Simon

So we're small part of it. And basically, you know, whatwe've said is a neutral maybe accretive by a penny or so. But we're saying thatneutral with higher cost coming on Turkey. But we feel going into '09great value-added products and great opportunity. As matter of fact, one of thethings we saw, the previous owners did not go out there and arrange foradditional turkeys for this Thanksgiving. So, it will be a flat year forturkey, but the demand, the value-added products are tremendous there.

Pablo Zuanic - JPMorgan

And roughly there is a lot of sales --

Ira Lamel

I'm sorry Pablo its Ira Lamel. Don’t forget that havingacquired it at the end of August, the month of September is not a heavyshipping month for turkeys. That will come in the next quarter.

Pablo Zuanic - JPMorgan

Okay. But roughly, dollar sales for that business annual?Just that’s my last question.

Irwin Simon

That’s about $30 million.

Pablo Zuanic - JPMorgan

Okay. Thank you.

Operator

Thank you very much sir. Ladies and gentlemen, thatconcludes our Q&A for today. I'd like to turn the call back over to ourspeakers for any closing remarks.

Irwin Simon

Thank you everybody. Thank you for listening to today'scall. Some good questions, and hopefully some good answers, but it's our firstquarter of our new year, we got a lot of good things happening. As John talkedabout a lot of exciting new products, both on personal care, grocery, frozenand snacks. We've got good consumption and it's continued into October, and alot of that talking about his consumptions, does not include new productshipments that have gone out there.

In regards to Celestial, I feel good about Celestial, I feelgood about what we have in place. I got to tell you, going into this yearversus last year with the products with the new packaging, and I feel prettygood about it. The management team out there and everybody are pretty excitedof what can come out of Celestial, we would just like a little bit of colderweather out there.

Some good things happening in Europe on the consolidation ofplants, on our McCartney brand and Luton piece and the rest of our brands in Europe continue to do well. Our Canadian businesscontinues to do well. We are focused on margins here and you must have heard mesay margins quite a few times, Ira or John. So margins cost containment issomething that we are focused on.

A lot came up about pricing and we will take pricing. Wehave to take pricing, and I think for many, many years we suffered to where noone wanted to take pricing. And taking pricing is important, but having therelationships with your partners to see how you can take costs out of thebusiness, and I that’s where Hain has done a magnificent job at, is partneringup with its distributors and retailers and get efficiencies out of thisbusiness, and that’s why it makes sense.

On the acquisition trail, you heard me talk aboutacquisitions. We are looking in our sweet spot and we think there is somethings out there, and we'll continue to follow them, not at the same multiplesthat But's Bees went for, of course, but products that meet our criteria. So,with this probably we'll get a chance to talk to most people, have a happyholiday and safe holiday out there, and eat healthy, eat organic and buy Plainville turkey ifthey're not sold out. You better buy it early because my only guess that I canChristine that I can't tell you what the consumer is going to do, but I know wewill be sold out of turkeys. Thank you.

Operator

Thank you very much ladies and gentlemen for yourparticipation in today's conference call. This concludes your presentation forthe day, you may now disconnect. Have a good day.