The Hain Celestial Group, Inc. (HAIN) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Misty, and I will be your conference operator today. At this time, I would like to welcome everyone to The Hain Celestial Second Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] Ms. Mary Anthes, Senior Vice President, Corporate Relations, you may begin your conference.

Thank you, Misty. Good afternoon. Thank you, all, for joining us today, and welcome to the review of our second quarter fiscal year 2002 (sic) results. 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; John Carroll, Executive Vice President and Chief Executive Officer of Hain Celestial United States; and from the U.K., Rob Burnett, our CEO of Hain Daniels U.K.. 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 2011 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. [Operator Instructions] Now let me turn the call over to Irwin Simon, our President and Chief Executive Officer. Irwin?

Thank you, Mary, and good afternoon. And I hope everybody had the opportunity to review our press release. And in our 18 years, this -- our second quarter, our largest quarter throughout the year, this being a record quarter for Hain after 18 years, achieving $385.5 million versus $291.8 million a year ago, up 32.1%. Our operating income for the quarter, $40.1 million versus $30.6 million, up 31%, and EBITDA for the quarter, $49.7 million versus $38.5 million, up 31%. EPS for the quarter -- adjusted EPS for the quarter, $0.52 versus $0.39, up 33% for the quarter, and GAAP, which Ira will take you through, $0.44 versus $0.37 -- versus last year, and the adjustment on GAAP is acquisition-related expenses related to the Daniels acquisition. So let's talk about the quarter and all the great things happening in the quarter. We saw about 6% inflation in the quarter. Productivity around the world, we got about $5 million in productivity, and we've got a little over 2% in pricing that helped offset this inflation. So still all in all, with inflation where it was, with productivity and getting pricing, it helped us offset this. We saw a tremendous consumption growth. And one of the things I sit here today proud about is what our consumption growth -- our consumption growth is over 7% here in the U.S. today. And with a lot of other consumer packaged food companies with up 1%, 2% or even negative, having 7% consumption growth is great. And the great thing about that is, yes, our products, yes, the innovation that our marketing team have created in our development of products, but it shows you consumers are transitioning more and more to natural organic products, and the consumer is willing to spend money and spend on that. And at the same time, we have spent dollars in FSIs in regards to driving consumption and driving volume. But just within the quarter, we had 9 brands that were up over 20%, 5 brands, worldwide, that were up over 10% and 10 brands that were high-single digit numbers and just below 10%. So that is tremendous, tremendous, having that amount of brands with those types of growth. And when you come back, and I've focused on Earth's Best, the baby rate within the U.S. is down, baby rate all over the world is down, and we are still growing high-double digit numbers with that brand, and we'll continue to grow with new and new products. And just one area to touch on there, we introduced pouches within -- with a year ago, and pouches today are 20% of our sales, which shows you innovation on product, innovation on packaging and looking for the right product and just a tremendous job on how we're going to expand that. Celestial Seasonings. And it's been a warm quarter here in the Northeast at 60 degrees here, and they've got 24 inches of snow in Syracuse. But still, high-single digits the brand's up. And K-cup, and you heard Starbucks talk about how many K-cups they've sold, we sold quite a few K-cups of tea and probably one of the #1 selling tea K-cup within the U.S. today and strong, strong growth coming from tea. And strong growth coming from our herbal teas, our black teas and our Wellness teas. And then you go back and look at repackaging that we've done with Garden of Eatin', how strong that was up. How strong our DeBoles are -- which again, high in gluten-- or gluten-free products. Our MaraNatha nut butters, almond butters and really have seen the consumer trade more and more to almond butters today instead of peanut butters. And one that I really want to touch on is Imagine soup. Our consumption there is up 7%. And again, with warm selling season up there, still having the consumption up 7%, and it shows more and more the consumers moving away from cans and want either fresh soup, which leads me into our New Covent Garden Soups that we acquired when we acquired Daniels, are looking for fresher soups coming from our Imagine types of soup, are looking for organic soups or our dairy-free soups, et cetera. So we see some great, great things happening. And Greek Gods, which is one of my favorites, and seeing the Greek category growing the way it is today. And it has -- within Hain, just a tremendous superstar, tremendous growth. Great growth in our Imagine frozen business, our Linda McCartney business within the U.K., our Lima business, even though Europe is struggling. With the Super Bowl coming up on Sunday, and we all know who's going to win, but it's a great time for us in regards to displays. In most supermarkets, club stores across America today, we have Super Bowl displays. And over 46 million pounds of chips are consumed during the Super Bowl. 177 million pounds of tortilla chips, popcorn, pretzels and that's for Sensible Portions. That's where our Garden of Eatin', that's where our Little Bear and Bearitos popcorn or Boston's popcorn will come in. And over 1.25 billion pounds of chicken wings, and Hain Pure Protein with their FreeBird chicken wings will be out there being sold throughout the United States. So, big time for us, and we're well prepared for a great Super Bowl event. Let's look at our Canadian business. Our Canadian business, we completed Europe's Best October 5. We fully integrated and really like what we see there. Our growth in overall Canada was up 5%. And from our Europe's Best business, we picked up one of the major accounts, which was lost prior, and we look to grow that. Good strong growth on our carrot chips, Greek Gods, which we've introduced in Canada, was up over 115%. Sensible Portions is strong. So we're seeing good growth in Canada, and Whole Foods has opened up a new store, and we look forward to a lot more growth coming out of our Canadian market. Our European market, with a lot of the turbulence in Europe, was flat for the quarter. And I think flat today in a turbulent market is pretty good. But at the same time, we have a lot of plans for products that we will introduce. But we still saw growth on Dream, our Dream brand, our Terra brand and our Lima brand. We've introduced a lot of new nondairy products. We introduced a lot of new Lima products, and we look to see some good growth coming from that in the second half. In regards to Hain Pure Protein, protein business, which we own 49%, it was a strong selling season during Thanksgiving. The overall business, up 13%; turkey, up 13%; chicken, up over 14%, where it shows the consumer today wants either organic or antibiotic-free products and are really focused on it. And during Thanksgiving, we sold over 1 million turkeys, Plainville turkeys. Really good focus on our deli business, up 19%. And we're really growing in accounts but are serving -- are focused on animal welfare like a Chipotle, a Panera, the Whole Foods type of account, and really, it shows the consumer wants a high-quality protein product and are really focused on a FreeBird or Plainville product. In regards to the U.K. We completed our Daniels acquisition 2 months -- at the end of October, early November, so we really only owned it for 2 months. Our sales were up there, our Fakenham business, up 19.4%. If you put it together with our food-to-go, it was up 5%. Really, you got a good focus on integrating the Daniels together with our current business, and we like what we see. We have Rob Burnett on the phone today, who is our CEO of Hain Daniels. Really good team that has taken over our Luton and our Fakenham facility and have started to focus on integration, procurement, distribution, sales opportunities. The opportunities at Luton are tremendous with that team. And we've got rid of unprofitable customers, and we'll continue to do that. But if we really come back and look at our business, as we look to move to new customers, our opportunities with food-to-go, our juices, sandwiches, soups, desserts and fruit, and as we look to introduce Sensible Portion and Greek Gods, that will happen there very shortly, we feel there's even a bigger selection there. So far, we've integrated with people. We've cut about 18 people. We have about 20, 25 more to go, where we integrate back rooms. But right now, it's the whole focus on food costs and purchasing and distribution. And there's a lot of customers, whether it's club store customers, whether it's food-to-go, whether it's food service and other retailers, that we have really come in there with the whole program, and they've come back to us in regards to gluten-free types of products, other types of soup products. And one of the big things that we're excited about is how we bring New Covent Garden Soups to the U.S., just as they're excited about bringing Greek Gods and Sensible Portions to the U.K. Asia, and I'm fresh with Asia because I had all our Asian group in this week. And our Hain Hutchison business grew 26% in 2011. In 2010, we were only in 3 countries. At the end of 2011, we're in 7 Asia countries. We've already gained a 15% soup share from Swanson's in Asia, and we'll continue to take share away. It's introducing the Asians to a product that does not have MSG, of course. And we do have some work to do, but we're pretty excited on what the growth opportunities are. There's a good base business that will grow just by shipping products here from the U.S. We will look at putting a couple of our own plants over there in snacks and personal care. And then, we'll look at acquisitions and that should get us to a number that we think Asia should be, and we're pretty excited about that. As we look at acquisitions and where else the company should be moving, Australia with a good young population, very similar to the U.K., very close to the Asian markets, eastern Europe opportunities, Middle East. So is there is a lot of expansion opportunities for us. But more -- most important here is the U.S. And we think today, with the U.S. base business we have, with the U.S. businesses that are growing, our top 10 customers have grown over double digits. And our top 10 customers, which are customers that are growing both in consumption and store count and are bringing more and more natural products into the store is where our opportunities are. So there is quite a few acquisitions that we're really focused on as we grow within the U.S. But John will take you through what they've done on their sales organization to restructure, to really implement that growth and really drive distribution. So good exciting time at Hain, and it's great to report the strongest quarter within the history of the company. With that, I'll turn it over to John, and he'll take you through the business.

Thank you, Irwin. Good afternoon. Hain Celestial U.S. had a very strong Q2. We had many highlights in the quarter, starting with our 9% U.S. sales growth. This was driven by strong gains across all U.S. units: grocery and snacks, personal care and Celestial Seasonings. We also had Q2 consumption growth of 7%, which was driven by gains across the portfolio. This growth was led by 12 brands with double-digit or high single-digit consumption increases. Importantly, our U.S. grocery channel consumption was up again, and it was up 6% versus year ago, marking 6 consecutive quarters of growth in this important channel, which accounts for 40% of our measured consumption. Also in Q2, our U.S. gross margin was up 10 bps despite absorbing over 6% in commodity- and fuel-driven inflation. We were able to offset this inflation with productivity savings in our July 1 price increase. Additionally in the quarter, our SG&A as a percent sales was down 40 bps, reflecting the sales increase and better leverage of our marketing, trade and headcount investment. And finally, our U.S. inventory, and this is a really great number to see, our U.S. inventory was down 6% or $8 million, while still supporting 9% sales growth and having very strong service levels. Now as we look at the second half of our FY '12, we continue to be very bullish about the U.S. business. We continue to see strong momentum across the business, and we believe it's sustainable. And I'll give you 4 good factors -- 4 good reasons why we believe that. The first reason is what I just talked to you about in terms of consumption. Q2 was our eighth consecutive quarter of consumption growth. Importantly, our 2-year comps are showing double-digit growth. The second reason is our positioning relative to inflation. As I said in the last quarter, we're well positioned to meet our supply needs for our key organic and natural commodities. We are long where the crop is at short supply or where we believe we have an opportunity to buy below standard. And we are short on commodities in ample supply where we think the market may move further downward. But just as importantly, we're well positioned to offset the significant year-on-year commodity inflation that we're currently facing. Look, I know commodities have softened up recently, but they are still up very strongly versus a year ago, upwards to 30%. So the way we offset this is, first, with our July 1 price increase, which has been accepted across all channels and will be fully realized in the second half '12. And second, our productivity function is in high gear, yielding $7 million from savings in the first half '12, with initiatives like our snacks packaging procurement consolidation, our new Earth's Best Midwest distribution center and the increased throughput that we're seeing in our plants. Now the third reason we feel bullish about the second half is the initial results from our -- what we've talked about, our U.S. sales force reinvention. As I mentioned in last quarter's call, we are reinventing the U.S. sales function to make it more customer-centric for our evolving customer base. This reinvention is a mandate to ensure profitable growth for our U.S. business in all channels, and the channels are evolving from natural to conventional to e-tailers. And in a very short time, we've made significant progress already. We now have the 7 key account teams, co-located with our 7 leading retailers. These team members, many of whom we recruited into the company, represent a talent upgrade for the Hain sales organization. They are generating new sales opportunities that previously we would not have been able to leverage. But more importantly, we're seeing a quantifiable benefit from our sales reinvention. Specifically, Q2 Hain Nielsen distribution trends improved 200 basis points over our 52-week trend. 200 basis points, that's a significant improvement. And this improvement was across our entire product line, not just our core SKUs. Improvements like these confirm our sales organization directional strategy and will continue to drive future growth. Look, we firmly believe that with our reinvested -- reinvented customer-centric sales organization, our great portfolio of leading natural and organic brands and our best-in-class category management insight group, we offer retailers the best opportunity to drive natural and organic sales. The final reason we're bullish about the second half is the continued positive response to our FY '12 innovation. Now normally, I would tell you all about the great new products we're readying for March Expo West, and believe me, we have plenty of them. But today, I'm going to focus on 2 new product launches, our Sesame Street yogurt smoothies and our Earth's Best puree, both pouch products that were launched in the last 6 months. And these new product lines are on a run rate to do over $20 million in FY '12, and we're just getting started with our distribution in the grocery channel. And the other point is these sales are not cannibalizing Earth's Best jars but are coming at the expense of our baby food competitors. Now our success with these product -- these pouch launches have led us to develop 3 other new pouch lines that will expand pouch consumption demographics. Pouch does not only have to be an instant or baby product. Now I'm not going to tell you what these launches are. You have to be patient, but we will unveil these at Expo West. But look, we think the pouch is here to stay and offers even more innovation, scale and margin opportunities for Hain Celestial. We're in the process of installing pouch production lines in our West Chester plant to fully leverage these opportunities. Our new pouch lines will be up in FY '13, and this will allow us to further innovate across all of our brands using the pouch packaging format, where appropriate, and while improving our cost of margins. So as you can see, our pouch launches are the best kind of innovation as they allow us to drive top line growth, expand our distribution, generate innovation across multiple brands and product lines and improve our production with internal -- improve our margins with internal production. So in summary, Q2 was a very strong quarter for Hain Celestial U.S. highlighted by 9% top line growth, gross margin improvement despite absorbing over 6% inflation, lower SG&A and double-digit income growth. And look, we continue to be bullish about year to go prospects given our strong consumption trends, our position relative to commodity inflation, our initial results from our reinvented U.S. sales organization and the strong response to our F '12 innovation, particularly our new pouch products. With that, I'll turn it over to Ira Lamel.

Thanks, John. Good afternoon, everyone. As we said in our press release, all of our income, sales and EPS numbers are the highest in our history. Net income in the second quarter this year was a record $20 million compared to $16.3 million in last year's quarter. We earned $0.44 per diluted share on a GAAP basis this quarter compared to $0.37 per diluted share in last year's quarter. Adjusted net income was $23.5 million compared to $17.5 million, improving by 34.5%. Adjusted earnings was $0.52 per diluted share compared to $0.39 per share in last year's quarter, improving by 33.3%. Our adjustments to earnings are virtually all acquisition-related fees and expenses with only minor integration costs incurred in the first 2 months since our acquisition. These adjustments totaled $5.5 million before tax or $0.08 per share. Net sales reached the highest level in our history, coming in at $385.6 million, an increase of 32.1%, compared to $291.9 million last year. We saw strong increases in sales across our reporting units, coupled with sales contributed by our acquisitions. Sales from our recent Daniels Group acquisition are included only for 2 of the 3 months in our quarter. While [indiscernible] guidance after our acquisition of Daniels, we also updated our expectations for metrics. As expected with that acquisition, we realized changes in the company's gross profit and selling, general and administrative expenses in the second quarter. Gross profit in the second quarter was 27.4% of net sales, while selling, general and administrative expenses were 17.0% of net sales. As a result, our operating margin before acquisition-related expenses was virtually flat compared to the prior year. Input cost inflation amounted to 6.1% in the second quarter this year, measured against the second quarter of the prior year. Inflation was offset by the impact of pricing actions we affected at the beginning of the fiscal year, productivity improvements and a better mix of sales at our pre-acquisition units. Operating income for the quarter was $34.9 million or 9.1% on a GAAP basis compared to $29.7 million last year. On an adjusted basis, operating income was $40.1 million this year, increasing 30.9% from $30.7 million last year. Additionally, and again, as expected when we gave guidance at the time of our acquisition, the company's effective tax rate declined to 36.4% in the quarter compared to 39.6% in the prior year. Depreciation and amortization in this year's quarter was $8.3 million, as compared to $5.8 million in the prior year's quarter, with the increase coming almost entirely from acquisition. Stock compensation in the quarter was $2.0 million as compared to $2.2 million last year. As you can see in our press release, we've added information about our EBITDA performance. We're using a traditional definition of EBITDA, including stock compensation, and have added back acquisition-related expenses to arrive at adjusted EBITDA. For this quarter, adjusted EBITDA approached $50 million, coming in just short at $49.8 million. This is a 29.4% increase over last year's $38.5 million. For the trailing 12 months ended December 31, 2011, our adjusted EBITDA improved by 33.6% to $156.3 million from the prior 12-month period's $117 million. For the trailing 12 months through December 31, operating free cash flow was $72.3 million this year compared to $59.6 million for the comparable 12 months of the prior year, an improvement of $12.7 million or 21.3% this year. Our balance sheet continues to be a strong one. Our working capital was $235.9 million, with a current ratio of 2.1:1 at December 31. Our stockholders equity was $895.6 million. Our debt as a percentage of equity is at 50.3%, and debt to total capitalization is now at 33.5%. Total debt at the end of the quarter was $450.8 million, with 1/3 of our debt carrying interest at a fixed rate and 2/3 at floating rates. At the time of our acquisition of Daniels, we drew down $235 million of floating rate debt under our credit facility, and as of today, we have already repaid $20 million of that debt. Day sales outstanding came in at 42 days. Inventory is at 60 days, and of course, that implies a 6x turn in our inventories. Payables are at 38 days. That results in a cash conversion cycle of 64 days, which is a 14-day improvement as compared to our June 30 year-end and a 12-day improvement compared to December a year ago. As you saw in our press release, we've confirmed -- reconfirmed our guidance for the full fiscal year 2012, with sales expected to come in the range of $1.455 billion and $1.48 billion. We anticipate earnings per diluted share will come in at $1.63 to $1.73 after adjustments for acquisition expenses and integration costs. At this point, let's open it up for questions.

[Operator Instructions] Your first question comes from the line of Greg Badishkanian with Citigroup.

Just had 2 questions, if I could. First one is just with consumption running again 7%, similar to last quarter. What do you think's driving that? And also, you had warm weather negatively impact you, but yet tea and soup are up, I think, high single-digit consumption. Are you gaining share there or is -- or are the categories holding up?

Greg, I think it's a couple of things. Number one, we're definitely gaining share. We're taking share away from conventional products, conventional brands. I think we really have done -- and John, as you heard him say before in regards to his new sales organization and structure, we're gaining new distribution, better displays and a major focus on trade teams and going into selling. And you heard what I said before, our top 10 accounts, we're growing over double digits with them, so it's a major focus on that. The other big thing that's happening out there, when a major retailer today wants to really grow natural organic, with the sales team and the professional sales team and the sales team and the tools the sales team has today, and the product line and the depth, we're the one going in there and becoming the category managers. So I think all around, it's the consumer being more and more awareness. I think the consumer trading up and wanting more and more natural organic and moving off conventional products. And I really say our sales team had done a good job at execution and of course, having great brands with great innovative products out there.

Good. And as a follow-up, did the sales momentum for, do you think, for the industry and for Hain, did that continue into January? Or any drop-off? Or is it pretty consistent?

It's pretty consistent. Nothing has dropped off. And I think what you said before is interesting. Even though with warmer weather in the Northeast and not only -- the Northeastern doesn't make up the world, but we're still seeing good consumption up there. And again, we're -- other times when we've seen warm weather, we've seen consumption fall off. But I really think we're getting a lot of consumption coming over from conventional products.

You're next question comes from the line of Ed Aaron with RBC Capital Markets.

John, I wanted to follow-up on a comment that you made in your prepared remarks about, I think, it was something along the lines of 200 basis points of distribution growth in the U.S. business. Can you maybe just elaborate on that a little bit and talk about what drove that?

Yes. Edward, what I said was we saw a 200 basis point improvement in our 12-week -- our Q2 12-week consumption -- distribution trends versus our 52 week. And you know what? It's because we actually drove some pretty significant distribution gains on Greek Gods, on Sensible Portions, as well as on our core business. We're seeing nice gains on Garden of Eatin' and some of the other brands in the portfolio. And those are driving -- those have lifted the entire portfolio to positive distribution trends.

And just add to that, Ed, when you see the growth in consumption growth on Arrowhead Mills or DeBoles, Health Valley Soups, and again, as they were not so much a rocket brand, but seeing high single-digit consumption growth on that, that is definitely what's helping and driving that growth.

Great. And then just, Irwin, kind of a broader question. You're building a much bigger business now with kind of real global footprint. As you kind of think about that change, do you feel the need for any kind of longer-term infrastructure investments, whether it's systems or otherwise, to kind of support the type of global growth similar to what some of the bigger food companies do?

Absolutely. I think it comes back -- and right now, as were looking to pull all of our teams together, we're looking at a new innovation center in regards to R&D standpoint. We're looking at multiple, from a packaging and packaging engineers, from a systems -- both U.K. and U.S. is something that we're looking at today. And listen, I just keep going back and pointing to what John Carroll and Peter Burns and the team has done in regards to the sales organization and what we've pulled together. And we had salespeople with us in the beginning, and we've had to make some changes there and what were seeing happening there. So again, there's a motto around here, it's Competency Not Loyalty, and at the other hand, we know where we need to put the infrastructure in to take this company to a $3 billion, $4 billion company, which is definitely in sight for us.

You're next question comes from the line of Scott Mushkin with Jefferies & Company.

So the 9% growth, John, that you talked about, there's no acquisitions in there. So was that a good organic number? Is that correct or not correct?

No, no, no. John?

It's clean. It's year-on-year same lines.

Right, that's what I thought. Okay, good. I just wanted to -- and then I guess as I think about the growth, which clearly is incredibly strong. You're talking about distribution improvements. You're doing a big Super Bowl promotion, I think. And I guess, is that your first -- I guess, that's part of my question. But the real question for me is when you look at particularly the U.S. business, you could say that you're somewhat in an inflection point of growth, where growth is -- could really accelerate over the next couple of years, and it's kind of like what Ed was talking about. But do we need extra brand support? Where are we in that process? I guess, sales organization was maybe step one. But kind of where are your guys' heads if we do see what looks to be maybe a building momentum in growth here?

I'll go, and then John -- I will let John touch on it. Number one, let's come back and start looking at us as a global company, and just owning Daniels for 2 months and looking at Greek Gods and being ready to introduce Greek Gods by May in the U.K. is something substantial and the same with Canada. And with that Greek Gods will become over $100 million business if you expand there with the growth and it's a $10 million to $12 million business when we acquired it. If you come back and look at Sensible Portions, and basically it was a club store business when we acquired it. Now how we expanded it into grocery and how we expanded it to up-and-down-the-street business. And Sensible Portions has tremendous opportunity to grow within the U.K. and growing within Europe. So from a standpoint there, Scott, of how we build our global brands and bringing New Covent Gardens here, where I think there's tremendous opportunity for a refrigerated, fresh ready-to-eat soup. We've had to go through a major reformulation on all our personal care products to conform to the new standards for Whole Foods from an NSF standpoint and a much better product and what we've been able to do there. So from a company standpoint, what we're able to do, how we're trying to take our products into a much bigger scale -- and that's with major, major retailers today wanting our products. On the other hand, listen, you heard what I said before on consumption of 177 million pounds or 26 million pounds of potato chips or pretzels or Sensible Portions, Super Bowl -- actually next to the Thanksgiving is one of the most -- is the second most celebrated party type that happens in the U.S. And why not be eating healthy snacks, healthy chicken wings, healthy chili? So you walk into most supermarkets today, you're going to see -- whether it's Garden of Eatin' tortilla chips, et cetera. So we did stuff at Super Bowl at earlier years, and now we're focused on it. Listen, we dropped 3 FSIs on Celestial Seasonings in October-November-December to drive consumption through, and even with a warm quarter, you see what the consumption numbers are. So it's about distribution. It's about global brands. It's about knowing our consumer and about really partnering with our retailer. And what our marketing group is doing today in regards to social networking and talking to our consumers, we get 9.5 million moms a month that visit our Earth's Best website. We have a marketing group that is on Facebook and talking to our consumers all the time. So I mean, that's what we're doing, and that's what's driving our brand awareness, and that's what's really driving our consumption. And again, the consumer's willing to pay a little more today for a better product.

And so just to follow up, and that probably wasn't the most eloquently asked question, but I guess my thought process here is if 9 becomes 12, can you guys handle that? Is that a big deal? Or is that like, "Hey, no worries. We've got the infrastructure. We have what we need to kind of get that done if we do see a stepped up acceleration," which I think we could, so it's...

Scott, bring it on. We're ready for it.

Hey Scott, I'd point this out. We did 9% growth this quarter, and we took our -- took down our inventories by 6%. Okay? And had the service levels to do it. We've got the organization, the group and the structure here to keep driving growth.

And Scott, we know that the consumer's going to become more and more educated on healthy food. It's not a fad, not a trend. And everyday, there is more and more in the media in regards to healthy nutrition. So am I here projecting that going into '12, is there good growth numbers out there? Is there a long runway? Is there more and more Whole Foods stores opening up? Is there more and more mass markets selling more and more natural products? Last year this time, or 2 years ago, we were seeing grocery stores not growing in natural at all. So you're really seeing good growth within natural now. So are we ready for it? As you heard me say before, bring it on. We have an unbelievable management team that absolutely can handle it.

Okay. And if I -- just one more, and then I'll yield here. Another big opportunity, I think, for you guys, I know you touched on it, Irwin, a little bit, is bringing the fresh chilled business here to the U.S. Where are you in that process? Because I actually agree with you. I think if you look at the soup category in particular, it's -- Campbell's problems aren't [ph] as much related to soup as they are to canned soup. So maybe you can kind of give us an idea of where you think that business could be in the U.S. next year.

Well, I think the good news is this year. We have the #1 selling fresh soup today in the U.K. or probably in Europe. We have our own plant. We have our own people on the ground that know how to do it. No different than how are we introducing Greek Gods into the U.K. and Europe. We're using all the intel. We're using our people here to help with that. So Scott, we're all over it. I'm not going to give you away all our secrets, but we're using a lot of the U.K. group to help us introduce it here. And listen, everybody has come to us and asked us, that has seen the acquisition, "When can we get it here?"

Next year? Is that an expectation, or is that too soon?

I would like to have it here -- I'd love to have it here for February season, Scott. But unfortunately, there's different technology. There is just different manufacturing processes, there's shelf life, and we want to make sure we perfect it before we get it here. But it is a high, high, high priority.

You're next question comes from the line of Amit Sharma with BMO Capital Markets.

I wanted to ask quickly, the Daniel -- have you -- are you going to give out predominant [ph] sales they had in the quarter?

Daniels sales in the quarter.

Sure. I mean, we can break it out and give it to you.

Hang in there one second, Amit.

No, just the whole thing. Whole thing.

The whole thing. Don't break it down [indiscernible]. Give us the whole thing.

Amit, it's about $60 million in the quarter.

I got it. Okay. And you've owned this business for about 3 months now, any...

Amit, 2 months.

Two months in the quarter [ph]. Three months til today [ph].

January as well, right?

Right.

Given that, any positive or negative surprises in terms of what you're seeing in the category? Or the level of investment that you might have to make? Or the level of synergy that you're expecting going in? Any doubt there versus what you saw initially?

Listen, I think I like what I saw -- have seen, and Rob is on the phone. Number one, I really feel -- and to step back for a second, as you heard me say before, we had a GBP 55 million business within the U.K. And not acquiring Daniels, and that's not why we acquired it, we would not have got scale. So acquiring Daniels has now given us substantial scale within the U.K., has given us substantial awareness of who Hain is with a lot of the retailers. Without mentioning retailers, Rob and I are in the U.K. within the next couple of weeks having multiple meetings on expansion of some of the Hain products that are here today and some of that Daniel products into other accounts that they have not been in or other products of Daniels that have not been in those accounts. So that's number one. Number two is with Rob and his team taking over our current business there, we're going to get tremendous amount of efficiencies, tremendous amount of purchasing, tremendous amount of distribution opportunities, and there's a good reduction in headcount. Number three, we talked about products from the U.K. coming here. We're excited about Greek Gods and Sensible Portions going there. And that's the U.K. where there's 60 million people. There is a big opportunity to expand New Covent Garden into -- additionally into Europe. We do about EUR 5 million, EUR 6 million today throughout Europe from Daniels, tremendous expansion there. And as we look at western Europe and we look at Australia, these are products that are going to be wanted around the world. As I showed them to our Asian partner that was in here yesterday, the exact same thing. So is there some operation pieces that we've got to go look at, and there's some distribution pieces? Absolutely. Is there some capital that we're willing to invest, whether it's partnering with certain customers? Absolutely. But all in all, I think it's -- it will be a great acquisition for Hain. As I've said, we really acquired a superior management team. We've acquired some great brands. We've acquired products that are in vogue today that the consumer wants. We've really acquired and have partnered with a good diversified customer list. So I'm feeling good.

And just one quick on the U.S. I mean, clearly, tremendous growth story here. One of the reasons or one of the questions I get from investors is, is it sustainable and you put a good case of it. My question is, do you look at price gap between your product line and conventional products in your categories? Is that gap narrowed over time or expanded? Or is that part of the reason why you are seeing such tremendous growth in these categories when conventional is not growing?

Well, I think conventional is not growing. I think, unfortunately, today, America's got separated into a low-end consumer and a high-end consumer. And the consumer that can afford our product is buying our product and fortunately, for us, I think that that's the consumer, maybe it's the biggest part of the population or the 1%. But what I come back with today is this here. There is more and more consumers who are eating at home and are willing to pay a little higher price for better products. And just a perfect example of that is Earth's Best baby food. There -- the baby rate in the U.S. is down 2.3%. That other big baby food company that starts with a G, I mean, their consumptions are down. It's down, and it's not that the baby rate is down. At the same time, you heard me take you through protein numbers during Thanksgiving. And a few years ago, it was difficult selling antibiotic-free and organic turkeys. So it's showing where the consumer is headed today, and the consumer will eat healthier products. Come back and look at consumption today and organic growth at retailers like Whole Foods and retailers that are selling natural organic products and that shows you where the consumers are shopping.

Your next question comes from the line of Andrew Wolf with BB&T.

So the 9% U.S. growth was a little slower than last quarter, and consumption was the same. And I think John, when I asked you last quarter, you said it was largely to do with better growth at non-measured channels and new distribution gains that may not have got into the numbers yet. Could you kind of break that out? And also thinking perhaps, now that you've had a chance to look at it, perhaps last quarter, in Q1, there might have been some folks, retailers or others buying in front of your price increase, maybe that skewed that number up and...

Andrew, this is John. Let's do the 7% to 9%, okay? 7% consumption and 9% growth for us here in this quarter. The key is non-measured channels growing faster, and 2 I'd pop out -- and 2 customers I'd pop out to you are Amazon and Trader Joe's in addition to new product pipeline sales. So that's the bridge between 7% and 9%. The bridge from 11% manufacturer sales growth in Q1 versus 9% this quarter is real simple. It is lower -- what we call our industrial products sales, which are sales that we make out of some of our factories to other companies. It is not a high-margin business. And the other one is some discontinuations we did on Sensible Portions, on products that were not hitting our margin targets, specifically, some private label products.

Got it. And did you also turn on the promotion spigot this quarter versus last quarter, which also might have had a little swing effect?

Promotion was pretty comparable with the exception of Celestial, where we front-loaded our FSI schedule and our sales promotion schedule.

And just one other question on -- back at Daniels. The sales side sounds like it's right on where you were guided to. Could you comment, then, on how the earnings accretion in the quarter is versus what you were looking for? And also, the only other thing I saw was the $50 million jump sequentially in the receivables. I know sometimes seasonally, this could be a bigger quarter, but is that mainly due to Daniels? And are the terms in the U.K. similar to what we see the U.S. or the retailers get better terms there?

The accretion for Daniels was right on what our expectations are or were when we provided the guidance 3 months ago when we did the deal. So that's coming right in line, and that's one of the major reasons why we see our guidance holding. As far as receivables, terms in the U.K. are a little bit longer than our terms here in the U.S. Typically, we sell at 30 days here in the U.S. In the U.K., it's typically 60. So that's a little bit longer. One of the big things in bringing on Daniels in cash conversion was the fact that their inventory is chilled. It's fresh inventory, and that certainly helped to bring our inventory days down during the period.

Your next question comes from the line of Andrew Lazar with Barclays Capital.

Just 2 quick things. First would be, as you make your forays into a lot of these sort of alternative or new distribution channels for you, are you able to do it or manage it in the way that is fairly -- at least margin-neutral to the organization? It seems like you have, but I ask because I've always thought that to be the case, but we've had an example or 2 here from other companies, admittedly one in private label, that has been unable to sort of do that as they've gone into these alternative channels.

I step back for a second. I think there's a couple of things. Number one, that is not where we're selling our product, and that is not where our growth was coming from. And as I said before, within our top 10 customers, we're up double-digits there. So I think it comes back if you don't have -- if you have mature customers and you got to go to other channels, you're going to sell at a price and it's going to be margin-dilutive. And that's not at all where we're where going, Andrew, and you heard John talk about 2 of them on his last question. So we see a lot of growth in our traditional channels, and it's pretty obvious who our #1 customer is. But we see right behind that a lot of other growth. And if you come back and look at Hain, and somebody was asking me this before, if 3, 4 years ago, 30%, 40% of us were going through natural food stores. That is completely reversed today, and it's probably 70% going through more and more mass market and supermarkets and online like Amazon and 30% going through natural food stores and supernaturals. But supernaturals continue to open up stores and more and more consumers are shopping at supernaturals.

Got it. And then in terms of the sales force work that you've done, is it more one or the other of these things that it's impacting? Or is it really all? Or in other words, is it -- is the effort increasing shelf space for your overall categories at your key retailers where you've got these co-located account teams? Or is it more facings for Hain specifically, or just better returns on a lot of your sort of merchandising and promotional programs? I mean, I assume that it's some combination of all, but I'm curious if it's one or these or one that I didn't mention that's sort of disproportionately more advantaged by doing it -- doing some of the work that you've done around on this. And then how many -- I'm assuming it's not many, if any, but how many of what you consider your core competitors in your key accounts either have this sort of setup or have the ability to ultimately really do it or have the scale to do it? I assume it's not many, but I'm curious.

Well, here, in regard to what we're focused on, we're focused on driving distribution and making our promotions more effective and more targeted, and that's the key on those key accounts that we're driving. The other thing is, Andrew, we've really focused on who the key accounts are as opposed to just spreading money across the U.S. In regard to other companies able to do this, I really believe it's a function of scale to be able to afford this. And so there's not a lot other than the CPG guys who are doing it in -- the conventional CPG guys, as opposed to the natural and organic folks.

And I think, Andrew, as John said, it's scale and the products which allows us to win there and be category manager. But just as important, we have our own retail team on the street that calls on natural food stores today. And we are probably one of the only companies out there that has our retails group, whether it's doing store resets, going in and doing reordering, that is actually calling on the natural food stores.

[Operator Instructions] Your next question comes from the line of Sean Naughton with Piper Jaffray.

Congrats on being able to expand the margins on the U.S. business. When you step back and you think about your business overall, what do you think the opportunity is, over the long run, for an operating margin target for you guys? How do you think about that?

So I think, Sean, we look at it a couple of ways. I come back today and I look at our EBITDA margin, and Ira took you through our EBITDA margin, where it's been the greatest growth within the company. But we should be at 14% to 16%, and that is our objective. And I think as we go through acquisitions and you look at today our procurement, whether it's Europe's Best, our Daniels business, all our U.S. and just the amount of countries that now we're procuring and buying through. Jim Meiers has a group together on a global procurement group now looking to buy and take costs out. We're looking for worldwide, this year, somewhere around $18 million to $20 million of productivity. At the end of the day, you heard what John said before about his sales group, and we'll look to carbon copy that around the world. So there is a lot of integration. There is a lot of procurement. There's a lot of manufacturing that we're going to consolidate to do, so -- with growth, you can go ahead and do these things. So 14% to 16% is something that -- 17% is something that we're focused on. My gosh, they're looking at me. I was going to say 20% but they're looking at me like I'm crazy. But...

That's helpful. The other thing I was going to ask you about is just when you look at your personal care portion of your business, I realize it's a smaller portion, but you've obviously done some things there with regards to distribution and Whole Foods. Where do you see the -- are you seeing gains in that particular category from the conventional side? And are you happy with where the product is today? And is this still an area of opportunity for you in the near term here?

Sean, this is John. Absolutely, it's an area of opportunity for us. When you think about personal care, it is analogous to where grocery was 10 years ago. So when you -- it's very strongly developed in the natural channel and in the supernaturals. But this development beyond that is not very strong, and development within natural still has a lot of room to go. Irwin's quoted statistics about how many Whole Foods customers go into the whole body section. So look, we feel like it is the natural evolution from -- for food products, and we still believe that this is going to be a very nice business for us, and we think we've got a platform to drive it even further.

And Sean, everybody wants to look good. Everybody wants to feel good, and everybody wants to stay younger. And our consumer on this here, predominantly a female shopper, with more and more disposable income today is where tremendous growth will come from in this category. And I think as you come back now, there was tremendous amount of confusion in this category before. What was organic, what was natural, and never very clear. And now that the standards are set, I think the growth here is just tremendous.

That's helpful. And then just lastly on the growth, is it still fair to think about the growth that you're seeing is 70% to comp doors and then 30% distribution? I think that you mentioned that on the last call. Is that still a fair way to think about the growth that you guys are getting today?

Yes. I think that's exactly where we're still at is comp growth, new distribution, new products. I mean, worldwide, we probably introduced close to $40 million, $50 million of new products, which is innovation. With our sales organization, comp growth, new distribution growth is where it's coming from. And last but not least, we like when we see our growth retailers opening up more and more stores because that contributes a lot to comp growth.

Your next question comes from the line of Wayne Archambo with Monarch Partners.

The prior gentleman mentioned personal care, and I was going to follow-up on that. I mean, do you see any acquisitions in that area? You folks don't bring that up as much as you used to a few years ago. But did you see acquisitions, or you just see yourself growing organically there?

Wayne, this is John. We're looking for both. We're -- look, there's a lot of organic growth to go, especially in terms of doors that these products aren't in. But there are some bolt-on opportunities that we'd like to figure out how to get into the Hain portfolio.

But Wayne, if we step back. If you take Alba, Avalon, JASONs, Zia Earth's Best line for kids that we created and Queen Helene, which we've seen some great growth, I mean, one of the problems are, everybody, with these bolt-on acquisitions think they're multiples or in the hemisphere, and we're stepping back and sayin, "We don't like multiples in the hemisphere when we're buying, and how do we do it ourselves?" So absolutely, we'd love to be a buyer in this category and perfect example is with Avalon and all of what we're able to do. But we will not be in the hemisphere in multiples that we'll pay. We can create it ourselves. We have a tremendous facility in California, a good R&D team. And what John has done here is put a dedicated team on personal care that every morning, when they wake up, that all the do is focus on personal care. So we could easily take more on and integrate it, but we'll not overpay.

Hemisphere sounds like a seller's market to me. But with that California facility, what level of capacity do you have out there?

Wayne, we're probably at about 60%. Our volumes have grown, but Jim Meiers and his group have done a terrific job of increasing throughput. So we still have room to drive our own organic growth, as well as to integrate an acquisition right into that facility.

Again, it is our second quarter, one of our biggest quarters in the year, our largest quarter within the year. But it's great to sit here and now reporting the largest quarter that we've ever reported within the history of the company. And it's been 18 years in Hain coming together, and we've had challenges along the way in building Hain. But all along the way, we've maintained our brands. We've maintained our people. We've stuck to our strategy. We've focused on our balance sheet. We've really delivered good quality products, and we've stuck to what we've always said. We want to manufacture, market and sell natural organic products. And thank God, the consumers woke up and sort of said, "I want to eat, or I want to use more natural organic products." And again, whether it's gluten-free, whether it's lower sodium, whether it's nondairy, whether it's healthier kids' meals, whether it's Earth's Best, chlorine-free diapers. I could go on for the next 20 minutes about our products and the quality of our products and the ingredients, and we're well set to go to the next level of Hain. With that, thank you very much for this afternoon. And go both New England and the Giants and just eat lots more chips and a lot of chili and a lot of chicken wings, FreeBird, drink our tea. We don't have a beer yet or Kombucha, and we'll speak to you real soon. Goodbye.

This concludes today's Hain Celestial Second Quarter Fiscal Year 2012 Earnings Conference Call. You may now disconnect.