Mary Celeste Anthes - Senior Vice President of Corporate Relations Irwin David Simon - Founder, Chairman, Chief Executive Officer and President John Carroll - Executive Vice President and Chief Executive Officer of Hain Celestial United States Stephen J. Smith - Chief Financial Officer and Executive Vice President.

Kenneth Goldman - JP Morgan Chase & Co, Research Division Gregory R. Badishkanian - Citigroup Inc, Research Division Sean P. Naughton - Piper Jaffray Companies, Research Division Amit Sharma - BMO Capital Markets U.S. Scott Andrew Mushkin - Wolfe Research, LLC David Palmer - RBC Capital Markets, LLC, Research Division Andrew P.

Wolf - BB&T Capital Markets, Research Division Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division Thilo Wrede - Jefferies LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the Hain Celestial Second Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to hand the conference over to Mary Anthes. Ma'am, please go ahead..

Thank you, Karen. Good afternoon, and thank you, all, for joining us today. Welcome to Hain Celestial's second quarter fiscal year 2014 earnings call.

Irwin Simon, our Founder, President and Chief Executive Officer; and several members of the Hain Celestial management team, including John Carroll, Executive Vice President and President and CEO of Hain Celestial U.S.; Steve Smith, EVP and CFO, Hain Celestial; and Rob Burnett, CEO of Hain Daniels U.K.; and Rohit Samani, from our recently acquired Tilda operations, are with us today to discuss our results.

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 what is described in these forward-looking statements, and some of the factors which may cause results to differ are listed in our publicly-filed documents, including our 2013 Form 10-K filed with the SEC.

A reconciliation of GAAP results to non-GAAP financial measures is available in our earnings release, which is posted on our website at www.hain.com under Investor Relations. This conference call is being webcast, and an archive of the webcast will be available on our website under Investor Relations.

[Operator Instructions] Now let me turn the call over to Irwin Simon, our Founder, President and CEO.

Irwin?.

new distribution, deeper penetration in key accounts, new and existing products, strong consistent consumer demand and new product authorizations across many classes of trade. Specifically in the quarter, our brand performance was strong with broad-based increases. We had 19 brands up double digits, 5 brands up mid- to high-single digits.

What an accomplishment. Our strong brand contribution and operating leverage drove our record second quarter GAAP earnings per diluted share of $0.84 versus $0.68 in the second quarter last year, a 25% increase and a record second quarter adjusted earnings per diluted share of $0.87 versus $0.74 in the second quarter last year, up 18%.

Touching on specifics, Steve will do in a little while. Our operating income was up 25%, with operating margins of 12% of net sales on a GAAP basis and 12.5% of net sales on an adjusted basis as we really managed our costs. I've had objectives and I always set objectives for sales growth, EBITDA growth. Our EBITDA was $79 million or 14.9% of sales.

One of my long-term objectives has been to reach 15% to 18% EBITDA growth and as a percentage of sales, and that is something we're well on our way to do it. Adjusted gross margin was 27.2%, primarily due to higher commodity costs, product mix and a shift in trade spending to point-of-sale activities, which we report against net sales.

SG&A was down 190 basis points to 14.1% with expense leverage as we continued to integrate our 3 acquisitions from fiscal 2013 and realize further synergies. And we will continue to do this, and we're on the path to do this and we will continue as we accumulate these synergies and savings to spend on our business.

In the U.S., organic and natural product sales continued to help fuel the growth in the AOC channels. In the U.S., the combined Nielsen AOC and natural channel grew 9.2% in the latest reported periods. In the January 18 Nielsen's results showed organic and natural products once again outpaced conventional product growth, which was at 1.6%.

Unbelievable growth, and John will take you through that in a little while. Even though we didn't advertise during the Super Bowl this weekend, we had a lot of snack displays in social media across the big game, where we were the 12th man on the field, and we were scoring touchdowns. We had good product placement and sell-through.

And with that, we got trialed and repeat. We had major display activity featuring our snack products with Whole Foods, Garden of Eatin' displays, in-store weekly fliers with Kroger, Publix, Walmart, Costco, Target with central portion snack displays along with them.

Hain's snack brands grew a combined 19% as measured by Nielsen through the 12 weeks ending January 18, 2004 (sic) [2014], and that was not even yet the Super Bowl hitting. Our Hain Pure Protein sold over 100,000 pounds of chicken wings, the equivalent of almost 3 trailers during the Super Bowl.

It continues to be an exciting time for Hain with organic and natural industry being more relevant than ever before our leading brands, our portfolio and more and more consumers seeking organic, natural and non-GMO packaged products. So we believe white space distribution opportunities continue.

As I've said before, wherever food is sold, wherever there's a cash register, I would love to see at least 1 Hain product, at least. But I know we're going to see a lot more.

From airports to college campuses to food service and beyond and restaurants like Panera, Chipotle and others, we are looking to improve our distribution and have Hain products out there. Rob and his team have made good progress in the U.K. this quarter.

In late October, we started to ship to Tesco, where New Covent Garden Soup was approved for 19,000 distribution points. And by the way, this is a lot more distribution points than we had the last time when we were at Tesco. We had some challenges getting the new lines up to speed and had less than ideal service levels.

So in December, we decided to pull back on promotions this year, which affected our sales on soup sales for November and December. Consumer demand for our products is very strong, but we could have executed better on our soup to meet this demand and maximize on our higher margin sales opportunities. At this point, we've cycled the production issues.

We're carefully managing our promotional schedules to ensure that we're able to serve our customers at the right levels. So we believe we've improved our position and capitalized on a lot of growth in the U.K.

In the quarter, Hain Daniels experienced strong growth in Hartley's desserts, a lot of new products similar to our MaraNatha products on Sun-Pat, our Linda McCartney, our Cully & Sully soup business was up double digits and our fresh fruit brands were up strong.

There's a lot of positive momentum around these brands, and we're continuously gaining distribution as we introduce innovative new products which retailers continue to support. We will look to continue to improve our financial metrics in the U.K.

to ensure we're increasing our well positioned -- we're well positioned to accelerate sales and long-term growth. Later this year, in our fiscal '15, we'll introduce Celestial Seasonings herbal tea, as well as gluten-free products in a lot of our snack products.

We're also looking at increasing our sales distribution and major focus on our nondairy business. Touching on Europe. We had strong performance, 13% [ph] Growth on our nondairy business, where we've invested in an incredible new dairy (sic) [non-dairy] facility in Germany to help us add capacity to meet our growing demand.

This will help us further expand our non-dairy business in the U.K., across Europe with our branded plant-based non-dairy products, including coconut milk, nut blend milks, almond milks, soymilk, rice milk under the Dream brand, as we successfully have done in the U.S.

We've also had strong performance from our Lima, Danival, Rice Dream brands in Europe. In Belgium, we've entered into an agreement to divest Grains Noirs, which I've talked about many times, which was a non-core asset for us. In fiscal 2015, we should be -- this should be accretive by $0.01 or $0.02.

Our Canadian business also had strong performance year-over-year from our MaraNatha brand, Terra, Earth's Best, Greek Gods, Imagine and Casbah brands. Sales of our key customers -- of our 2 key customers grew at double digits, and we continue to see strong growth in our club [ph].

Our Hain Pure Protein JV continues to do extremely well, with net sales up 18%. Our Hutchison Hain Organic Asia joint venture also did well with double-digit sales, principally in China, the Philippines and Singapore. Looking ahead, productivity is still a big focus for us.

We've done a great job managing headwinds and commodity pricing and meeting our operating margins. And with that, you can never predict where commodities are going. We'll continue to invest to support the growth of our organic natural products and plan to assure we have the capacity to support growth across the brands.

Recall that we made major investments of $70 million last year in several of our plants to support the supply and growth of our expanding business and new retail expansion. We'll continue to support the business this way and build out our infrastructure.

Our balance sheet is strong, and we'll continue to provide the financial flexibility to pursue strategic opportunities, as they present themselves. Our debt was down at the end of -- at the quarter to $560 million versus almost $600 million last year and $625 million at the end of our fiscal year.

As a reminder, we paid down $94 million of debt from acquisitions and invested another $70 million in our facilities and capital infrastructure from our cash flow, and our debt level was down. As you may recall, in mid-January, we announced the strategic acquisition of Tilda, a 100% brand-leading -- premium Basmati and specialty rice company.

We've owned this business for 3 weeks, and we are excited about the opportunities here. We've also received calls from retailers in North America looking to buy Basmati rice already. We'll be traveling to the Middle East and India and looking how we integrate Hain products within there.

To wrap it up, it was a record performance for Hain across our brands, sales channels and across geographies. We continue to be optimistic about our brands, our products and our distribution throughout the U.K., Europe, Canada and the U.S.

In the back half of the year, we're expecting sales growth of 20% to 23% and earnings per share growth of 23% to 30%. Boy, we got a lot of work to do. By the way, we love the cold, and we want to see it snow, snow, snow. With that, I'll turn it over to John..

consumption trends; AOC distribution growth; innovation; productivity; and our most recent acquisitions performance. Our Q2 results continued to show strong momentum across these 5 factors, starting with our continued consumption momentum. Q2 was our 16th consecutive quarter of strong U.S. consumption growth.

Remember, I always say this, our business is not a 1- or 2- or 3-brand portfolio. We have 20-plus brands and still drove consumption growth 18x the category average. Our second key factor is our AOC distribution growth.

Our top 13 brands, which account for over 80% of our AOC sales, saw a distribution gain of 7% in Q2 versus year ago, which actually was up a full point versus our Q1 distribution gain of 6%. As we always talk about, we continue to fill in the distribution white space on key brands and at key customers.

Brands experiencing strong distribution gains this quarter included the Greek Gods, Sensible Portions, Dream, MaraNatha, Garden of Eatin', Spectrum Naturals and Essentials, Alba Botanica and Ella's Kitchen. Now the third factor fueling our optimism is our strong innovation.

Now we're getting ready for our Expo West Show in early March in Anaheim, California, where we will introduce over 100 new products.

Highlights of our exciting Expo West innovation queue include great new products like our new Imagine organic simmer sauces, which -- they're getting strong response from retailers who've already seen them, and we expect to get a really strong response when we're at Expo.

We also have Terra tropical blend chips, which integrate coconut and plantain chips into a Terra blend. We're introducing Earth's Best gluten-free chicken nuggets and Spectrum Essentials' Warrior Vitality blend, featuring chia, maca powder and cacao.

We are also introducing Alba Botanica Good and Healthy, a line of plant-powered moisturizers with kale, spinach and Swiss chard. BluePrint is introducing a 1-day innovation -- renovation cleanse retail pack that will be available in stores. And Celestial Seasoning is introducing a Reflections tea line to help people relax in the middle of the day.

I could use some of that sometime. These are also just a few of the exciting new products we will be introducing at Expo West, and we'd ask for those of you attending the show to stop by our booth and try all these products I mentioned, as well as many more.

And remember, we're seeing our innovation positively impact our consumption growth across all channels, not just the natural channels. More and more conventional retailers, leading conventional retailers, are recognizing the importance of innovation and driving organic and natural sales and are increasing their speed to shelf on our new products.

The fourth factor is our productivity program. Just as we saw in Q1, almond and dairy pricing, 2 of our leading commodities, was up significantly in Q2 versus year ago. And we've seen no relief on these commodities. In fact, both almond and milk prices are currently at higher levels than we saw in Q1.

The key to offsetting these cost increases in Q2 was our productivity program and our SG&A savings. Our productivity savings were over $7 million, and we realized significant productivity gains from increased plant efficiencies. For example, at our new Lancaster Sensible Portions plant increased internal production.

Again, an example of that is increased production of Earth's Best pouches in our West Chester plant and value engineering. Going forward, though, we expect pricing for almonds, dairy and California-based commodities to rise.

These increases will drive us to announce price increases on the products affected by these higher commodity costs, but we will not be alone in this. I'm sure we will see pricing actions across the industry based on the California drought and to the extent applicable, almond and dairy costs.

And look, we've taken pricing before when the commodities have driven it, and we'll do it again and we'll execute it as we have in the past. And the fifth and final key factor driving our optimism is our latest acquisitions performance. Q2 saw BluePrint and Ella's Kitchens acquisitions combined to meet both their top and bottom line budget.

Importantly, both businesses had strong consumption growth and expanded distribution. Ella's Kitchens launch into Walmart has been successful, delivering unit movement comparable to Earth's Best despite a 22% higher unit price.

And BluePrint continues to expand distribution into test markets at leading grocery accounts across the country, and both businesses have accelerated development of their innovation queues and implementing productivity measures.

So we're very pleased with our performance -- with the performance of our BluePrint and Ella's Kitchen lines, and we expect that we will set up well with them for the second half.

So to close, Q2 was a very strong quarter for Hain Celestial U.S., highlighted by our 17% top line growth and our strong AOC consumption growth of 9.2% in the last 12 weeks. We also had a 19% gain in operating income versus year ago and 20 bps increase in our operating income margin.

And we're optimistic about our go-forward prospects, given our strong consumption trend, our growing AOC distribution, our Expo West innovation queue, our productivity function and our BluePrint and Ella's Kitchen acquisitions. Now I'll turn the call over to Steve Smith..

Thank you, John, and good afternoon, everyone. I'm thrilled to be joining you for our second quarter call, my second call with Hain. I'm going to take you through the financial highlights of the second quarter, and then we'll have a few comments on guidance.

We earned $0.84 per diluted share on a reported GAAP basis, an increase of 25% when compared to $0.67 per diluted share last year. Included in reported earnings per share is $0.03 of income from discontinued operations.

Income from continuing operations in the second quarter this year was $40.1 million compared to $32.2 million in last year's second quarter. Adjusted income from continuing operations was $42.7 million this year compared to $34.8 million last year, improving by 23%.

Our adjusted earnings from continuing operations was $0.87 per diluted share compared to $0.74 per share in last year's quarter, improving by 18%.

As noted in our press release, our adjustments to operating income of $2.6 million are principally from acquisition-related fees and expenses, integration and restructuring charges and factory start-up costs in Europe and the United Kingdom. Gross profit on an adjusted basis was 27.2%.

On prior calls, we discussed our expectation for gross margins to decline in the second quarter.

Specifically, we discussed how gross margins were affected by mix of business; the effect of acquisitions, which operate at a lower gross margin, but also have lower SG&A spend; and the effect of business seasonality, timing of promotions and commodity increases.

Our gross margin compression was actually greater than anticipated and driven by changes both in the U.S. and the U.K. The additional compression is split roughly 50-50 between the U.S. and U.K. And the U.S.

was affected by mix; a shift to certain trade spend activities, which are classified as an SG&A expense, to point-of-sale activities, which are classified as a reduction of sales and reduced our net sales in the quarter; and the continuing impact of increase in commodity pricing, including almonds and the related yield to milk prices, as John just mentioned.

The impact of input cost inflation amounted to about 3.2% in the second quarter this year as measured against the second quarter last year, and it was partially offset by the productivity initiatives and price increases we put in place. Our productivity initiatives continue to track to plan. The U.K.

was affected by the mix of product sales, including a proportionately smaller amount of higher margin soup sales, as well as the soup performance that Irwin spoke about earlier.

SG&A expense for the quarter on an adjusted basis and excluding amortization of acquired intangible assets was 14% of net sales, 200 basis point improvement as compared to 16% last year.

The rate of SG&A spend declined in the quarter mainly from an aggregate impact of our acquisitions and as we achieved some real strong operating leverage in addition to the shift in spend I just mentioned. As a result, we continue to show robust operating margin expansion.

Operating income on a GAAP basis for the second quarter was $64.3 million or 12% of net sales as compared to $51.2 million or 11.3% of net sales in the prior year. Operating income was also impacted by the acquisition-related expenses and other charges when compared to last year.

So on an adjusted basis, operating income was actually 12.5% of sales at $66.9 million this year, increasing over 21% from $55 million or 12.1% of net sales in last year's second quarter. On a GAAP basis, our effective income tax rate from continuing operations was 33.8% for the second quarter this year compared to 34% last year.

Our adjusted effective income tax rate from continuing operations was 32.2% of pre-tax income for the second quarter this year compared to 33.3% last year. The reduction is due to increased income in the United Kingdom as a result of our recent acquisitions and the associated lower tax rate in that jurisdiction.

For the full fiscal year, we expect the effective tax rate to be approximately 33% before any discrete items. Depreciation and amortization in this year's second quarter was $11.4 million as compared to $9 million in the prior year with the increase coming principally from our capital spend in the prior year and the acquisitions.

Stock comp in the quarter was $3.4 million as compared to $3.7 million in last year's second quarter. Our balance sheet continues to be very strong. Our working capital is $372.4 million with a current ratio of 2.4:1 at December 31. Stockholders' equity increased to $1.35 billion. Debt as a percentage of equity is at 46% in total.

And debt to total capitalization is now at 32%. Total debt at the end of the quarter was $628 million. Our debt declined from June 30 by $38.2 million. And our cash balance was $67.5 million, increasing over $26 million from June 30.

For the 6 months ended December 31, operating free cash flow increased by 45% to $52.7 million this year versus $36.3 million for the prior-year period, and the increase is principally from improved earnings. And our cash conversion cycle for the second quarter was consistent with the prior-year quarter at approximately 58 days.

Finally, turning to guidance. Including the acquisition of Tilda, our guidance for net sales for the full year is expected to be in the range of $2.115 billion to $2.145 billion with the remaining sales for the fiscal year split being about 2% to 3% higher for Q4 than for Q3.

We anticipate earnings per diluted share from continuing operations for the second half will now be $1.68 to $1.78, and the year will come in at $3.07 per share to $3.15 per share with Q4 being slightly higher due to expected mix and the effect of the timing of when productivity initiatives will flow through earnings.

Some significant estimates we used in arriving at our guidance include our estimate of consolidated gross margin for the year, which we are now expecting to be in the 27.5% to 27.7% range, given our performance to-date.

Our SG&A rate, which includes amortization of acquired intangibles and as a percentage of sales is estimated at 15.8% to 16%; and our effective annual tax rate is approximately 33%. Our estimates are based on current exchange rates.

Additionally, we have signed an agreement to sell our Grains Noirs business in Belgium, and we expect to close that sale shortly. The divestiture will impact sales by about $4 million a quarter as compared to the prior year, and that's been reflected in the guidance given with no significant impact to our EPS this year.

And as already mentioned, there will be a slight accretion in the first half of fiscal '15 from the sale. The last major assumption in our guidance is that our weighted average diluted share count will be approximately 50.9 million shares for the third quarter, 51.2 million for the fourth quarter and 50.1 million for the full fiscal year.

And these estimates include the 1.6 million shares we issued in connection with the Tilda acquisition last month. And our estimates do not include any results of discontinued operations, restructurings or acquisition activity. And at this point, I'll turn it back to Irwin..

Thank you, Steve. With that, we will open it up now for questions..

[Operator Instructions] Our first question comes from the line of Ken Goldman from JPMorgan..

Irwin, did I hear you mention a high-single digit organic growth number in the U.S.? I just wanted to make sure I heard that right..

You heard me mention a high-single digit overall, Ken..

Overall? Okay. Usually, you give it in the U.S., and the reason I'm asking is you cited a $15 million out-of-stock number....

Yes?.

Your 2-year growth rate in the U.S. did slow down fairly substantially this quarter. You said Ella's did well, and I guess the implication is organic growth did well too.

But maybe if you can help us understand what organic growth was in the U.S., and also how that out-of-stock number compared to last quarter, it might help explain a little bit where that slowdown came from..

I'll let John explain it, but I don't think you're right in regard to a slowdown in the U.S.

So, John?.

On a 2-year basis, it clearly slowed down.

It went from 25 to 30 -- 32 to 25, no?.

No, no. Ken, it went from 22 to 19..

Well, we'll talk about that after the call. Maybe our numbers are a little off here. But I mean, everyone I'm talking to is seeing a slowdown on a 2-year basis in your United States numbers..

In the AOC numbers?.

No, I'm sorry, in your reported numbers..

Okay....

Not at all, not what we're seeing -- I don't know where you're coming up with that....

Here, okay. So here, basically, what we saw was the business overall was up 17 and the core business was up mid- to high-single digits. And then, the balance of it was the acquisitions..

And the other one was your spending..

And then, in terms of the out-of-stocks, the out-of-stocks were primarily on MaraNatha and Earth's Best baby food. And those -- obviously, those, obviously, cost us and they were at comparable levels to the previous quarter..

Okay.

And so the mid- to high-single digit on the core, it was 9% last quarter, right? That is somewhat of an organic slowdown, no?.

Yes. It's slower than what we saw in the last quarter. But again, right in line....

What's your scanner [ph] do [indiscernible] ?.

Yes, yes. I mean, here, basically, but our consumption has been pretty consistent..

Okay. And then, I wanted to ask one more thing, which is you took guidance up not only for Tilda, but also for fundamentals as well. What are you seeing that's better than what you previously expected because you took -- you cut out the bottom half of your guidance range there..

So first of all, Ken, it's a tighter range. And secondly, listen, what we've talked about always is this here -- in the back half, our strong quarters today are just not second quarter. Our strong half is our third and fourth quarter. As you go back and look at the U.K. with a lot of new products, with a lot of things happening, a lot of growth.

We're introducing 91 new products that John talked about -- over 100 new products in Anaheim in March. So with that, our business no longer has a seasonal effect of just a second quarter..

And our next question comes from the line of Greg Badishkanian from Citigroup..

Irwin, can you maybe give us a little bit more color? You mentioned that the third quarter is off to a strong start.

Maybe just qualitatively, anything that really stands out in terms of, maybe, geography, channel or products?.

So, John, I'll let you just talk about your products in the U.S. and then I could talk about the rest of the world..

Listen, Greg, to Irwin's point, look, we've actually got off to a very strong start in this quarter. Additionally, we had very strong promotional activity around the Super Bowl in our Snacks line, and our consumption in the most recent 12 weeks is at 9.2%. So look, basically, we're still seeing very good momentum.

The other thing is -- you know what? The other thing -- even on our 4-week data, if we include the Natural and Whole Foods numbers, we still -- we actually are seeing better growth than we're seeing in total for the AOC. So our momentum has been pretty strong on the business..

And, Greg, around the world, what we're seeing in the U.K. is strong growth on our Sun-Pat, our Hartley's desserts, our Linda McCartney brand, our fruit sales in Europe. We're seeing good, strong growth against our non-dairy business, our Danival business. And in Canada, we're seeing good growth among our 2 big customers up there, Loblaws and Sobeys.

So I mean, it's first month. Listen, cold weather, we like cold weather, but there's warning of snowstorms. You run and shop and stay home. The other thing is we've had a lot of success with the Super Bowl. You heard what I said before. Our consumption was up 19% on Snacks, and that was before the Super Bowl and we had a lot of displays out there.

So with that and back to the other question, we're not seeing geography slowing anywhere in particular..

And our next question comes from the line of Sean Naughton from Piper Jaffray..

So I just had one question and maybe a follow-up. I guess, on the droughts in California, obviously, a pretty big region for producing nuts and some other things that you guys put into your products and mentioned a couple times in the call.

Can you just talk a little bit more about maybe what you're hearing on this topic and your ability to alternative source some of these items? And when should we expect some additional price increases associated with the commodities here?.

Okay. So, Sean, there are a couple things here. Obviously, our biggest crop and our biggest commodity that we buy is almonds, of which we buy it exclusively from California, so -- but almonds have been under cost pressure even prior to the drought.

So almonds -- we will price on almonds very shortly because we have a sense of where the crop is going this year. In regard to the balance of the California crops -- and our exposure there is not heavy. Beyond almonds, you go all the way down to romaine lettuce and celery used for BluePrint, as well as some of our soups.

So it's not -- we don't have as much exposure there. Those we'll probably watch, just get a sense of where the drought is going to impact them and what the cost impact is, and then we'll pass that on probably within 60 days. The big one is almonds.

We -- look, we buy as many almonds as anybody in the packaged food business with the exception of people who just sell bagged nuts. And we're all over that, and we're ready to pass on pricing that addresses where the costs are going for the next crop..

Okay.

And then just second -- just on the channel conflict that's out there, just -- can you talk about maybe your brands as you potentially diversify to some of these larger players, larger channels of distribution and conventional warehouse discount? Is there a risk to impacting any of the relationship that you have with the core natural and organic guys? Or is there enough product differentiation or enough differentiation within the brands by product that, that's less of an issue than some people may think? Just curious about your thoughts there..

Look, I'll quote Irwin. Irwin always talks about hugging our customers. Irwin and I were out with a major natural independent chain last week doing a top-to-top. We try to give different offerings to different customers to address their customer base.

And as a result, we don't -- we try to avoid direct comparisons from one mind to another to another across different customers, and that seems to have worked well for us and we'll continue to tailor programs and products to our key customers as need be..

And our next question comes from the line of Amit Sharma from BMO Capital Markets..

John, did I understand or hear you correctly that consumption in Natural and Whole Food channel is just as solid as it is in conventional channels?.

Yes, Amit, that's absolutely true..

So then, if consumption is 9% and you're saying core sales growth is sort of mid- to high-single digits, are we having some inventory issues at some of the larger customers that's causing the slowdown?.

No, no. Actually, yes -- no. I think whatever slowdown we're seeing here is a function of the inventory builds, the pipeline builds or some major distribution gains that we got in the beginning of the fiscal, specifically on Greek Gods, on Sensible Portions and Ella's. But the consumption turn has been consistent..

So no reason to believe that sales growth in second half will be any different than the consumption trends that we are seeing here in the U.S.?.

No. I think, look, it goes back to what we've always said that we are driving for mid- to high-single digit consumption growth and top line growth on the U.S. business, and we expect to continue to deliver that..

Got it.

And out-of-stock for MaraNatha and Earth's Best, is that going to continue for the rest of the quarters? Or are you up to speed on that?.

Yes. So on Earth's Best, we're actually out of the woods on that one. On MaraNatha, we're installing a second line in March and April -- that comes up March, April. So to Irwin's point, we expect to be through our supply issues on MaraNatha by the end of the fiscal.

What will happen is, as soon as the new line comes up, we'll start fulfilling our orders at 100%. And then, the people -- the accounts will accelerate their orders. So that will cause some blips in terms of supply versus demand.

But by the end of the fiscal, we will be fixed on MaraNatha, and we are already -- have addressed our issue on Earth's Best cereals..

And, Amit, we keep building out the infrastructure to support. The other thing is -- and I think in this year [ph] quarter, we talked about MaraNatha. Not only did we cut $6.5 million to $7 million, we couldn't go out and take on any new business, and that brand is up 20%.

Same with DeBoles pasta, we just didn't have the inventory to fill demand out there, and that's something that will happen with growth, and we'll continue to build the infrastructure out to support it. But the good news is -- you heard what I said before, number one is filling distribution white space is something that's going to continue.

With the growth among 2 of the major natural food retailers out there going both to 1,200 stores. I mean, there's a lot of growth out there.

And listen, there's inventories, there's promotions that shift between quarter and quarter where there's a promotion with Terra chips or promotion with Sensible Portions where it happened in 1 quarter and not the other. And again, we don't look at our business quarter-to-quarter. Now it's growing.

But I think the key thing that John talked about is consumption numbers, and that's product coming off the shelf and that still remains pretty strong..

Sure, I agree. Just one more on that.

Other than the stock-out, any other issue with your core portfolio?.

Our core portfolio, I think, as we go back and look at it, like a lot of other brands, are we seeing the greatest growth coming out of soy? No. We are de-emphasizing our Rosetto pasta and Ethnic Gourmets. We're just not spending against that. So that's probably down year-over-year.

The only other area where we saw sales off was our New Covent Garden Soup. And there, we just couldn't supply the product, so we pulled promotion. Listen, when you have 19 brands up double digits and 5 brands up high-single digits, boy, I hope I have those problems all the time out there.

And when you come back and look at consumption, we are the largest or one of the largest sources of organic ingredients in non-GMO and being able to hit supply, I mean, in the U.K.

with oranges, here with almonds, blue corn, red -- yellow corn, baby food -- not baby food, our formula business and ensuring that we can grow that and looking for organic way. So when I step back, listen, there's commodity issues in regards to supply, there's commodity issues with headwinds out there, class 2 milk.

And I think where I come back [ph] to really commend this team, still with all the commodity issues and the stock issues, demand issues -- what this team has been able to deliver, and operating income is phenomenal out there and supply -- the growth that's coming at us..

And our next question comes from the line of Scott Mushkin from Wolfe Research..

So I'm going to switch gears, but I'm going to get back to the topic of the day with my second question, but I wanted to poke a little bit more at the U.K., Irwin.

Looking -- is there any way to quantify the challenges in the U.K.? What you think it cost you on the EBIT line? And clearly, EBIT margin was down year-over-year even though sales looked pretty good. I mean, what's our 2-, 3-year goal on the U.K. on that business on the margin side? So I guess kind of a couple of questions there..

we walked away from promotions and we cut sales. So it was probably worth GBP 2 million to GBP 2.5 million out there -- or dollars in profit. It was probably worth another $3 million to $5 million, minimum sales.

And not only that, what we decided to do going forth is we will service everybody in the next couple of quarters, but we're not going to go out and promote the product even though we have the placements because we can't cut customers..

So that makes sense, Irwin.

So the relationships though -- I mean, first of all, you're back up to where you can supply everybody and are the relationships on solid footing?.

Well, the relationships -- number one, you walk into the U.K. today with Tilda, with Ella's, Sun-Pat, Linda McCartney, New Covent Gardens, Hartley's, some of our non-dairy business, and it's like walking into a major store here.

The other thing is, in regards to relationships, the person that was responsible for us going into our Castle [ph] deal and our expansion just became the new CEO of Sainsbury. So that's somebody who's in a good spot today. We just went into Tesco with 19,000 new distribution points on soup. And 2 of the major retailers over there.

We have some big opportunities with Costco with our relationships here, Asda, which is Walmart over there, then Waitrose and Morrisons. So listen, we had one challenge on startup. But with the rest of the portfolio, I mean, they're performing. And we're still -- Scott, we've owned this just 1 year. We're still cleaning up the portfolio.

We're still rolling out products. We're still in the midst of some integration, still on the Premier system. So it's a year, and we're liking what we see..

Okay. That's perfect. And then, just going back to the other topic of that's been, I guess, beaten on a little bit and then I'll yield. Can I just -- I'm a little bit confused, maybe other people are.

So if I were going to look at consumption, in other words, what's going out the door when you look at Nielsen and I think John provided for some of the natural and organic guys, that's kind of the 9% to 10% level, but your sales were kind of mid- to high-single digits.

So there's a mismatch between what's going out the door and what you're putting forward.

Is that how I should read what was said?.

Well, there's a -- in the previous period, we saw significantly higher year-on-year sales comparison due to the 3 pipeline sales that we talked. In terms of the growth on the consumption, look, we're seeing roughly 9-plus and going forward, the inventory and the shipments will catch up.

But at this point, there is a little bit of a disruption there, but part of being driven by our out-of-stocks. But other than that, I mean, basically, we forecast mid- to high-single digits in terms of consumption and top line growth, and we're delivering that..

So just to paraphrase you, John, things going out the door, retailers are a little higher right now than what you're shipping to them, but you think that will square itself in the second half?.

Yes, they'll catch up..

And, Scott, just also in this quarter [indiscernible] affected margin, there were some difference in promotions and marketing and trades and scan downs that we did that from a $3-plus million, John, in the quarter that you don't see on the top line, is it -- so, yes.

So I mean, there are some shifts that go back and forth there -- so again, I'm not sure from a slowing standpoint. But as John said, there's always shifts in a quarter between quarter..

And our next question comes from the line of David Palmer from RBC Capital Markets..

The categories like light nut butters and snacks are really very, very strong -- seem to be unusually strong and seemingly in line with wellness trends, and tea has been one of those categories that's been labeled as sort of up-and-coming beverage, particularly in the chilled form but also in the hot form.

I'm amazed that tea isn't stronger for you guys, particularly with the weather.

Is there an insight there about what's going on in the last quarter or so about your tea trends, and do you have plans there with that category?.

Sure, David. This is John. The one drag we have on tea right now is K-Cup, which as we've called out over the summer as well as in the last period. But it'll take us the full year to lap that and no longer have those comparisons, particularly on ice K-Cups.

Our bagged tea is actually running up 4% to 5% and showing consumption that's comparable to that as well. So the one drag we have on tea is our K-Cups..

And, David, we don't -- our K-Cups are not sold through Hain. It's sold through Green Mountain, but it's collected in our data. It's collected in our data. So we don't -- we're not out there selling it..

Got it. And a little bit of a loaded question here on just the U.K. opportunity with regard to acquisitions. Clearly, Ella's and that type of an acquisition sells well not just in the home market but has given you something to sell back here.

Do you see a lot of those type of potential acquisitions, where you could cross-sell across the pond? I mean, how deep is that opportunity in that way?.

Listen, we're -- we tried New Covent Garden Soup in a carton, and the consumer here didn't know what the carton was and didn't recognize it as soup. In the U.K., it's been there for 20-plus years. We will be in the fresh soup business here in the U.S.

with a similar product, but not so much in a carton and whether it will be under Imagine name, Health Valley name, et cetera, to know our brand. So there's a lot of technology that we're learning from the U.K. to introduce a 20- to 25-day shelf life on soup.

Listen, Ella's, the team -- we closed on Ella's in May, the team had distribution by September in 4,400 stores in a mass market and have done a great job on expanding Ella's both in products and distribution. At the same time, you're going to see similar things on Tilda.

And I said that before, Tilda has 8 million pounds of distribution in North America and not only Basmati rice, but the ready-to-eat technology. They also have different rice desserts. They also have some rice for kids that are in pouches. So we're looking at that, David.

In regards to our juice business and fresh juices and drinks in that in the U.K., it's mostly private label for us. So there's a lot we're learning and looking at that same with -- we own Gale's honey. We've also introduced in the U.S. some of the U.K. products that we acquired from Premier under the Hartley's brand, the Gale brand, Frank Cooper brand.

So we're ultimately looking to do that, and we'll continue vice versa. You heard what I said before, gluten-free, which we have close to 500 products today, we're looking at bringing some of those to the U.K. We're going to use the U.K. infrastructure to help us with our non-dairy business. We're looking to introduce Snacks in the U.K. The U.K.

has the highest consumption of chips anywhere in the world. So we're going to look at how we can both help each other in many, many ways. The other thing what I said before, David, we're looking at the Tilda infrastructure that has multiple distributors across the Middle East, and I'm going to be over there in the next little while.

And we're going to look at -- and they're all excited about Hain products whether it's Ella's, Earth's Best baby food, whether it's our tea, whether it's our snacks and how we put it together in one container and the same on India. That was some of the exciting things there. So lots of opportunities across border to sell products.

Both products that are in the U.S. across the board and products that are in the U.K. or Middle East to sell here..

And our next question comes from the line of Andrew Wolf from BB&T Capital Markets..

Hoping to clarify, you've talked about -- given sort of anecdotes and some granularity, but on the $15 million out-of-stocks, could you just kind of split that between the U.K. and the U.S.

just so we could, kind of, model that and understand what the factory sales could have been?.

It was probably, Andy, $12 million, $13 million in the U.S. and somewhere there around $3 million to $5 million, and it's -- actually was higher and I used $15 million as a rounded number. It was probably somewhere around in U.S. dollars, $3-plus million to $5 million in the U.K.

But the majority of it was MaraNatha, which was $6 million, Earth's Best cereals. And then, it was DeBoles. That's the 3, and it was much higher in this quarter than it was in other quarters for the MaraNatha and just demand for that product..

Okay. And I think you've indicated going forward it's been fixed -- everything except the MaraNatha because you need to get a production line going..

Everything has been fixed on Earth's Best and DeBoles. I mean, DeBoles, we've got a 100-year old plant in Shreveport, Louisiana that's just running 7 days a week and running at full capacity.

Part of that is looking for additional capacity or bringing up a new plant or something like that as the whole gluten-free pasta business and DeBoles line of pastas grow because of the Jerusalem artichoke -- I mean great brand. In regards to MaraNatha, we've been installing lines in our facility in Oregon, in Ashland.

And we should be completely done by the end of this fiscal year. It will start off sometime in March, April. It'll take us a few months to really get the line up and going full speed.

And the other thing, Andy, what I have said before with out-of-stocks, it's not only the out-of-stocks, which is business we're walking away from and I can tell you, 2 major customers that we've walked away from major business and also our Canadian business because we just couldn't supply it..

Okay. And shifting to the -- I think you've said the POS promoting -- it was $3 million in the U.S.

so that would have been on the top line, right?.

Approximately, yes..

And could you just talk about what that was about -- you or John? Is that to create trial in some products or was that to match someone? Like what -- why all of a sudden the increase in coupon?.

No, Andy. It's basically to drive trial on our products, and it's basically moving from fixed trade spending to scan-based spending. So we've got better reflection of our investment and trade. As a matter of fact, it's something that we want to continue to do. It's the -- it's simply taking the inefficiencies out of the trade spending..

[indiscernible] I just want to understand the accounting. So the sales were $3 million less.

The SG&A was $3 million less because you shifted where it hits the P&L and the gross profit dollars were $3 million less than if you had maintained the same less efficient way of promoting?.

If we went through normal trade dollars, exactly..

Okay. Well, that's fine. So we should look for that, too....

What John was saying and what we were doing as we move more and more into grocery, scan down makes more sense than off-invoice or just giving trade promotion. You're paying for when the consumer buys the product, and that's when it -- you're seeing the benefit of it.

There's other times you spend trade dollars, and it's just going in as someone else's margin..

But, Andy, it's a consistent amount of spend, it's just a matter of doing it in scan as opposed to fixed cost programs of the trade. So it's....

That's great.

So that -- because we're looking at your P&L, and the SG&A was great and obviously the gross profit was like -- so on a pro forma, if you'd done it the same way as last year, gross profit dollars and SG&A dollars each would have been $3 million or higher, right? So just to move onto price -- pricing, did you say -- I didn't quite hear you, did you say you could get pricing out in 60 days? That seems a little quick compared to historical..

No, Andy, in terms of announcing it in regard to assessing what the California drought impacts will be on our commodities out of there x almonds. Almonds, we expect to release pricing within the next 30 days..

But, Andy, I think what he said, he's taken a price increase and we'll start to see more of the benefit of it, John, in the next quarter or 2.

Correct?.

The price increases that we put in place already, we'll see in the second half..

Yes..

Quantify what that is either for the U.S. business or for all of Hain..

That's mostly the U.S. business..

Is it a -- what the average price increase across your U.S.

portfolio?.

So, Andy, what we took across the portfolio at the beginning of this fiscal about 2% to 3%, between 2% to 3%. So we'll see that in the second half. In regard to what we're going to have to take on almonds going forward, we're still determining that..

And our next -- we have time for 1 or 2 more questions. Our next question comes from the line of Mitchell Pinheiro from Imperial Capital..

I'll be quick. Just -- most of my questions have been answered. Your new product launches coming up Expo West sounds like a big new product launch, but you always talk about you put one on the shelf, you're taking one off in the natural channel.

Are these -- are you taking share? I mean, are you getting increased shelf space in natural as a result? Or is it just calling out the bottom and putting in some more attractive?.

Yes. Mitchell, this is John. What it is, is basically in the natural channel, it is basically pulling off the bottom and putting out a new and more interesting and engaging product. In terms of the conventional channel, it is actually expanding shelf space..

And our next question comes from the line of Thilo Wrede from Jefferies..

Can you quantify how much Project Castle [ph] and the Ella's distribution gains was only very large customers how much that contributed in revenue in the quarter?.

Say -- wait now, say that again?.

The Project Castle [ph] revenues and the Ella's distribution increase in the U.S., how much that contributed in the quarter?.

So Project Castle [ph] was about $1 million, $1.5 million in the quarter, Thilo, and....

Ella's is between $1 million and $2 million..

Okay. So those weren't major drivers. Okay. Then the other question I had, I think, between closing the Ella's deal and getting it on the retailers' shelf in the U.S. there was about 5 months.

Can we expect a similar quick response time for Tilda in the U.S.?.

Listen, we've owned it 3 weeks, and Ella's was in the U.S. It was in Target. I think there's tremendous opportunities with Tilda. And like I said, we've got calls from customers. If I said, yes, you'd take my number up again, but I'm not going to -- there is a tremendous opportunity for Tilda Basmati rice and ready-to-eat rice.

And listen, rice consumption during Ramadan and other holidays are some of the strongest consumption, and I've learned a lot when consumers eat rice and around a certain holidays, et cetera.

So there's a lot of opportunity out there to grow Tilda, to expand Tilda, both on the ready-to-eat and the Basmati rice, so -- and I'm going to commit that we're going to do the exact same timing, no, but are we going to slow down and wait? No. I think that is our last question.

I want to thank everybody for their participation in today in your questions. In closing, like I said before, I am really proud of our global team. I appreciate their efforts to forge ahead and it's special for me to sit here and report a $535 million company in this quarter, and that stuff we'll continue to do in the next couple of quarters.

As we forge ahead and we tackle distribution, provide some of the best innovative products and those that are going to the Anaheim show, you will see some of the innovation that we're doing -- and some of the innovation that we're doing on packaging products, ingredients that has to do with caloric, has to do with some of the organics, GMO verified, et cetera.

And not only just supplying it and introducing them, it's making these products today and being able to source these ingredients around the world. We are a leader in compliance across food safety and packaging standards.

And with over 5,000 products globally today and 2,000 certified organic and over 500 verified non-GMO products, there is high, high, high standards that we have to adhere to, and there's a team around the world that ensures that we do that. I've always said this here.

if we were just a traditional specialty food company and not buying genetically-modified free ingredients today, we would have about $100 million of savings just on cost of goods. But that's not what we are, and that's not what we do. And as one of the largest purveyors of organic ingredients and non-GMO and we put some great products out there.

That's why Hain has the products, the brands and the reputation it has. We'll continue to source non-GMO products around the world and in order to continue to provide only high-quality products for our consumer. Technology with the Internet and digital marketing continue to play an important role in consumer education.

You heard what I said before on the hits that we had with our products between moms and dads on Earth's Best and Ella's and 65 million likes on our products in the month of January. And we're exploring a lot of additional ways and relevant ways to ensure that we get products to our consumer.

Coming up soon, as I said, about our natural products and Expo and, please, if you're going, please stop by. In summary, we're really pleased with our second quarter results and the first half of 2014 financial performance.

As evidenced by our recent expense leverage, our global team is intently focused on driving costs out of our business and realizing greater synergy.

So if you go back and look at -- even though we were faced with headwinds on commodities, even though -- as we look to spend additional marketing dollars and you look at acquisitions -- number one, we've been able to hit operating margins, and we've been able to do lots of acquisitions as we pay down debt.

And with that, it will enable us to continue to achieve our productivity. And we're really excited, as you heard me say it. Because if you take the 2 major chains with the stores that they're opening, it's worth close to $0.75 billion.

I can't emphasize enough that Hain is in a better position than ever before with all the right people and we continue to add to our bench, we continue to invest behind our brands and our global infrastructure that will drive sales, earnings growth for the next several years.

Have a great evening, and make sure you go out and stock up for the next couple of days because we have a lot of cold weather and a lot of snow coming this way, and you do not want to be without a Hain healthy product. Have a great evening..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day..