The Hain Celestial Group, Inc. (HAIN) Q2 2009 Earnings Report, Transcript and Summary

Christine McCracken - Cleveland Research Company Andrew Wolf - BB&T Capital Markets Edward Aaron - RBC Capital Markets Scott Van Winkle - Canaccord Adams Blakely Terry Bivens - JP Morgan Greg Badishkanian - Citigroup

Good afternoon, my name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hain Celestial Second Quarter 2009 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Mary Anthes you may begin your conference.

Thank you, Britney. Good afternoon. I am pleased to be with you today to introduce our second quarter fiscal year 2009 earnings conference call discussion of our financial results, which were released earlier today. We have several members of our management team here today to discuss our results. Irwin Simon, President and Chief Executive Officer; Ira Lamel, Executive Vice President and Chief Financial Officer and John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial, United States. Our discussion today will include forward-looking statements, which are current as of today's date. We do not undertake any obligation to update forward-looking statements, either as a result of new information, future events, or otherwise. Our actual results may differ materially from those projected and some of the factors, which may cause results to differ, are listed in our publicly filed documents, including our 2008 Form 10-K filed with the SEC. This conference call is being webcast, and an archive of the webcast will be available on our website at www.hain-celestial.com under Investor Relations. Our call will be limited to approximately one hour. So please limit yourself to one question and a follow-up question. If time allows, we will take additional questions, and management will be available after the call for further discussion. Now let me turn the call over to Irwin Simon, our President and Chief Executive Officer. Irwin?

Thank you, Mary. Hi, everybody, good afternoon I know it's tough out there, but I got a lot of good things to take us through and John does also and Ira and some of the good things happening in our businesses and where we have some of our challenges, but again on our solid foundation. Sales for the quarter up 14.2%, Ira will take you through gross margins, highly reconciled gross margins, but I think we will see the improvement in the business with the gross margin and some of the commodity. Our Sonic businesses in chicken and the UK how they affected us. One of the things, what I would like to do is be upfront in predicting commodity prices and new trends, but we have really focused on our SG&A. Our SG&A in the quarter of 15.4, versus 17.5 some of it came from the higher sales in poultry, but we have really focused on cost in this company. Our cash in the quarter was $50 million, our free cash 9.4, so I sit back today. Now we are not calling washing in for TARP money or anything like that. Our liquidity, our balance sheet, our working capital where we really focused on our cash conversion, it's really strong in today's day and age really to have that. The number one thing is we all look what's going on out there, people are trading down. Absolutely, there is some trading down on there, what’s going on out there as I said on the CNBC, we don't live in the cave and we always expected it and that's why we positioned the company where it is. Our average grocery product is $3.89, our average personal care products is $8, but what we are continuously seeing health is our concern.…

Thanks Irwin. Good afternoon everyone. Hain Celestial US posted a very strong Q2 performance, especially as Irwin, talked about the challenging economic trends we are dealing with here. Our total Hain Celestial US sales were up excluding acquisitions. Our gross margin was up for two of our three units. Grocery and Snacks, and Personal Care, and our consolidated SG&A as a percent of sales was down as we continued to exercise strong cost control. So, all I want to do is start by taking a closer look at Q2 for Hain Grocery and Snacks. Hain Grocery and Snacks Q2 top line was up 12% overall and up 6% excluding acquisitions. Irwin, mentioned some of these brands, but key gross brands for us included of Rice Dream, Arrowhead Mills, DeBoles, Earth's Best what Irwin mentioned, SunSpire, Garden of Eatin', Spectrum, Rosetto, Imagine Soup, MaraNatha. You see a good part of portfolio showing some strong growth. We also saw the growth continued to be driven across all channels, including Natural, Grocery and mass. And we continue to see growth in new products introduced last year. For example, we got some big hits in the Imagine lightened sodium soups. The holiday products like Rice Nog and WestSoy. DeBoles Gluten-Free is doing really well. Anything we are doing with Gluten-Free is doing well for us. And our new Gluten-Free café before the launch has became a good business for us. We will extend after that. As during the middle of the P&L, our Q2 Grocery and Snacks gross margin was up 20 basis points. As pricing and productivity savings offset $8 million in the year end inflation. As I noted in the last two calls most of our key intergradient, especially our organic intergradient are contracted out through Q3, so we've received little benefit…

Thanks John, good afternoon everyone. First I would like to give you some sales and gross margin information. Sales this quarter were impacted by four major items when compared with our expectations. First as Irwin mentioned, our customers of full bound inventory days and we have estimated that we lost about $11 million of sales in the quarter as a result. Second, the impact of unfavorable foreign currency movements on our sales was another $11 million when compared to what we had expected. Against our expectations the UK pound declined 10%, the Euro 15% and the Canadian dollar declined 10%. When we compare those currencies to last year’s second quarter, the UK went down 23%, the Euro 9% and the Canadian dollar 16%. Third our Hain Pure Protein unit under delivered against their sales expectations by $12.5 million due principally to softer than expected market for higher priced ABF products and by a pull back in productions. So it's not that we are selling products into the commodity markets at lower prices as a result. And fourth our sales in Europe, particularly in the UK were lower than we expected due to the softness in their retail market in face of the recession. In particular, Marks & Spencer reported that they had declined 5.2% in the December quarter in food sales, which impacted our sales for Marks & Spencer, our major UK customer. As we said in our press release same brand gross margin went from 30.9% to 28.7%, inflation in input cost impacted our gross margins by 458 basis points in this year’s quarter. Offsetting these cost increases we achieved additional productivity in the quarter of 95 basis points and the August price increases we implemented have now provided a benefit to our margin by 304 basis points. The…

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

Good afternoon.

Good afternoon.

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

I don’t know, you are going to ask us question on poultry Christine, that okay. Actually it's a good question with good answers. The conversion from Plainville to Syracuse facility to the brand Plainville to new Oxford happened in January 1. And you heard me say there will be about $9 million in savings anybody (inaudible) and starts to run through the New Oxford facility. In regards to the [Cotia] facility there is about $1 million in capital, that we will have to into Plainville and Syracuse facility to convert that to a [Cotia] facility in the biggest conversion as we still need process or harvest turkeys in that facility, now we are going to do both turkeys and chicken. And we see a big opportunity as there was a major [Cotia] supplier who is gone into bankruptcy in another business and many, many, many of our retailers have assets for this and we will be one of the first [Cotia] antibiotic free chicken and turkey that goes there today and anybody on the phone is listening you know the prices of [Cotia]. So there is big shortage of demand out there for the product.

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

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

Great. I leave with that. Thanks.

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

Your next question comes from the line of Andrew Wolf. Your line is open. Andrew Wolf - BB&T Capital Markets: Thank you. Good afternoon. In the release, when you talked about sales moderating towards the end of the quarter, and, the numbers Ira gave on de-loading and currency, suggest at least if you had a those back. We will look pretty good on the top line and then Pure Protein obviously it's kind of trade down related and then John, talked about ALBA I think Terra so. If I piece that together it sounds like certainly you had some your higher priced items you had to trade out of slower velocity. And so first of all that happened towards the end of the quarter number one. And whatever else, is there anything else that happens towards the end of the quarter like your most, so was it broad based the slow down in sales towards the end of the quarter, or was it more like I am alluding to in some of these higher price point items where you might expect to see more trade down?

Well, I think again on trade down you got to be careful. I can't, you don't really say what has been trade down or what has been inventory de-load and what is pantry de-load, okay. And when we did start to see a slowdown on orders was after thanksgiving. Now John, gave you some consumption numbers and consumption numbers have continued to be strong. I think Andy, there is a lot of shift going on in between general shifting, more people are moving to mass market versus independent grocery versus natural super markets. I think before people were buying five boxes of tea maybe only buying one or two boxes of tea, using their coupons to do it. And I think people in the month of December just sort of said. I am going to save money to ultimately buy gifts et cetera. Two big multinational food companies reported earnings today, and you saw about their inventory and consumption. So I think there absolutely is some slowdown here, but I think also there is a lot had to do with inventories coming down in pantry de-loading. Andrew Wolf - BB&T Capital Markets: Okay. And Ira, on the professional fees in connection with the stock options, can you tell us if that's wrapping up, it still seems like a pretty big number.

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

And we hope so, Andy that it's wrapping up. Andrew Wolf - BB&T Capital Markets: Okay, and just one last thing, Irwin, I think you were talking about getting your volumes up at Fakenham in pounds I think was 18 million from 14 million.

Yeah. Andrew Wolf - BB&T Capital Markets: Does that take the whole roughly $2.5 million, $2.6 million quarterly loss or this quarter's loss out, or does that just take a portion of that out?

That would take majority of it out. There is still some overhead cost on people and some central cost that we have. But that would get the loss out of that plant of overhead absorption yes. And I got to tell you, I do have a pretty good roadmap to how we get to going from $14 million $18.5 million on that. Andrew Wolf - BB&T Capital Markets: Yeah okay were there any other customers you mentioned although you might have said this and I apologize, I was not listening well. Are they locked up or are you still sort of in the selling process?

A lot of it is locked up today. We are probably locked up today to about 18 million pounds on a run rate for a full-year basis. So we have locked up today about 3 million pounds to 4 million pounds of new additional business that would start from January 1 onto June 1. But we are also up there bidding for some other business that we do not have commitments for today. Our real objective is we would like to see this business get to a 25 million pound business and we used to make crumbles which was a whole pastry line for Heinz, we now have been approached to do a lot of other crumble type products but we were not doing that before. The good thing about the plant it's a totally vegetarian plant. So you can not do anything with meat in there. So everything in here has to be a vegetarian facility. The other good news is you have heard me say about the McCartney business growing and part of the roadmap is picking up new business at Asda, new business at Sainsbury, some presentations at Tesco. So part of that is additional McCartney business coming in there. Next question?

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

Great thanks, good afternoon guys.

Hey, Ed.

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

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

And Ed, I think that big thing is getting the full benefits of prices. I am seeing commodities come down, productivity which we continue with here. There is a lot of new products that we have introduced that, when the distribution the June one start to be there, are the ones who enters Boston, to start getting shift January. And then we introduce some other new products that mark show and then we get significant SG&A savings that we have gone through and really cut here. So I listen to what is on note out here, I wish as Christine asked me before my belief on corns, I do not have crystal ball on volume, and I do not think anybody does. And like a lot of other companies that just pulled the guidance because they had not crystal ball. We sit back and look at the main look at consumption. Where is the consumer coming in, the other thing is when you talk to some of our other customers that are out there who is taking down inventory. But what I can say is the demand still is out there. We think we got some also money to spend back on driving volume, like John suggested to be. John you talked to before what happened on our tea business as we dropped coupon. So we got some work to do, but I think we got some ammunition to work with to make it happen.

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

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

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

Good afternoon, everyone.

Hey, Scott.

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

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

And Scott, I think it all comes to back to us, they see less consumption going into the stores and less sales. And you know what Hain has to do is, this year as we go ahead and get new distribution and new accounts and where we had before at certain accounts where we didn't have diapers, what is diapers now what they are best. Where do we bring a new SKU? So as we sit here and paint the picture, that there is going to be inventory reductions. On the other hand, where there are SKUs today and we don't have the diapers or we don’t have personal care, we don't have other products; there is a lot of distribution opportunity for us to drive new volume through that. I think it's wrong, because I think one of the big problems this creates at the stock I have seen somewhere already.

That's fair. My follow-up questions, just way talked about, Irwin. John you mentioned specifically in your initiatives growing distribution and growing profitable volume. What are you doing differently to motivate the sales force? You just hear a lot about sales forces are trying to service the customers. They weren't doing that extra trip to pitch the new business. Are you getting more aggressive on the sales force, or what are doing differently to keep them going?

It's real simple. Part of their compensation is based on driving new distributions. And it's something that we new distribution has been a key part along with fixing our mix and driving innovation that’s driven our growth in the last few years. Now given that they have done a great job in fixing the mix, innovation and driving new distributions are the two key ways that they can drive their top line number profitably.

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

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

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

Hi [Blake], I listed, I think we can sit back, what we all know everybody's going to eat. If we were selling handbags or selling cars or dish washers you know that’s discretionary. People are going to eat. And going back to Scott's question, if our products are on the shelf, they are price right and they are going to get value people will buy our products. I just think there is new phenomenon out there, there are less consumers coming in the stores. And it's not like with the clothing business, you only got three months to sell shorts or three months to sell plain tops or something like that and that is style. That's what happens with our food products and personal care products. So from our standpoint this is where we are driving volume with coupons, promotions, innovation, displays and that is so important to us. But my belief is, we are not all going to go on a 40 day fast and not eat for the next 40 days to save money. I think if anything what we are continuously seeing, is more and more consumers not going to restaurants and eating at home. And the reflection in our numbers (inaudible), at $50 billion company. I mean just imagine the affect on us, and has affected us $11 million. But just think when they mentioned and how much it is, I think we are doing a great job and driving volume rate now and not the only with inventories coming down.

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

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

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

Good afternoon everyone.

Hey Terry, how are you?

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

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

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

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

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

Yes.

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

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

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

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

You are always using close to the number.

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

I think there is lot of businesses coming our way and major ones that we looked at before that needs funding. One other thing, Greg, just a perfect example is Petaluma which is a great business where all our Personal Care business is run which our Personal Care business being approximately $150 million of size. The savings and to roll up into our Melville business and to have our fingers on the pulse and be part of the bigger organization whether it's for manufacturing, warehousing, sales, distribution, people-wise, tremendous savings to invest back in new business and to grow the business. So there is $150 million business. There is quite of them out there in a smaller range that is a standalone business. We will have some challenges, standing alone. And not only CD thing, but there is a lot of banks out there that just do not want these small businesses and are not willing to keep them in their portfolio. So I think you are going to see a lot of bankruptcies, I think you are going to see a lot of consolidation and that's why I said before Hain, our major priority here is to have our own house in order, have our balance sheet strong. We will continue to pay down debt and when the right time comes. Go out there and do some good strategic acquisitions that I can tell you is there is a couple of good things out there today that would make a lot of sense.

Greg, one thing I want to reemphasize, because I think your question is appropriate in the current economic environment, is we have a great team that watches over our receivables, we took receivable day down by four days in the quarter. And that's purely because of the attention that's paid to our receivable file. We have in fact, and we certainly won't get into names, but we have in fact actually declined credit on some of our sales orders because we are that focused on the quality of the receivables that we carry on the books.

And we have gone and given customers that smaller customers that we are focused them to buy from distributors, because we do not want the credit. We have gone to customers and, say we will give you better discount terms if you pay upfront and we just do not want to be in that. So, and we do not have to sell them and do not want to take hits. So we're all over our credit where other vendors do not have that luxury to do that. So, with that the last question. I’ll come back and say back to Terry Bivens. He wished we were delivering better results. Everybody around this table does too, but in tough economic times, I think, we are delivering solid results in consideration of what's going on out there. I think, we're cautious; we've taken the right move on personnel. I saw Bloomberg today and the first time in it's history laid people off and the first time in our history and I go back and I look at other retailers whether its [Albert] or J C Penney being down 16%, 17%. So, I think, yes, we could deliver better results and yes being concerned about Hain is our number priority. But seeing what's going on in the world I think, we have delivered results that are okay and absolutely can do better and as you come back and look at what Kraft delivered today and Sara Lee two major companies that probably still more near than we do. The other thing that has affected food business is this recall on peanut butter and we have been in the midst with it our frozen trays and one [health value] product and what I must say is we have a peanut butter facility in Ashland,…

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