Mary Celeste Anthes - Senior Vice President-Corporate Relations Irwin David Simon - Founder, President, Chief Executive Officer & Chairman James R. Meiers - Chief Operations Officer, The Hain Celestial Group, Inc.

John Carroll - Executive Vice President & CEO-Hain Celestial US Pasquale Conte - Chief Financial Officer and Executive Vice President Kenneth B. Goldman - Analyst, JPMorgan Securities LLC.

Akshay Jagdale - Jefferies LLC Scott A. Mushkin - Wolfe Research LLC Rupesh Parikh - Oppenheimer & Co., Inc. (Broker) Andrew Lazar - Barclays Capital, Inc. William B. Chappell - SunTrust Robinson Humphrey, Inc. Amit Sharma - BMO Capital Markets (United States) Alexia Jane Howard - Sanford C. Bernstein & Co.

LLC Andrew Paul Wolf - BB&T Capital Markets Mitchell B. Pinheiro - Wunderlich Securities, Inc. David Palmer - RBC Capital Markets LLC.

Good day, ladies and gentlemen, and welcome to the Hain Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn introduce your host for today's conference, Ms. Mary Anthes. Ma'am, you may begin..

Good afternoon, Katy. And thank you all for joining us all today. Welcome to Hain Celestial's third quarter fiscal year 2016 earnings call.

Irwin Simon, our Founder, Chairman, President and Chief Executive Officer; John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial North America; Pat Conte, Executive Vice President and Chief Financial Officer; and Jim Meiers, our newly appointed Chief Operations Officer, Worldwide; as well as several members of the Hain Celestial management team, are with us here today.

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 2015 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.

Our call will be brief, approximately one hour, so please limit yourself to one question. If time allows, we will take additional questions, and management will be available after the call for further discussion. Now, let me turn the call over to Irwin..

to strategically invest in small brands that may be lagging in high potential categories like DeBoles, our pasta brand, SunSpire, our chocolate brand and by giving them dedicated creative focus and resources; to incubate small acquisitions that would not be given sufficient attention in our core portfolio like I did in 1993, version two of Hain; to invest in products, concepts and technologies in food and wellness space, which align with our mission.

Cultivate Ventures will be run independently, fund and staffed with a dedicated team. Finally we're packaging for sale several of our long tail brands representing approximately $30 million in net sales which no longer fit into our core strategy for future growth.

We'll provide you with more detail about Project Terra when we go into our fiscal 2017 guidance along with our fiscal year-end report. Now to our recent results, our operating segment posted very strong results including the U.S. business, which I'll let John take you through in a little while.

In our UK segment, net sales were up 22% in constant currency including the acquisition of Orchard House which we did in December, which achieved double-digit growth. We achieved growth from our spreads business, Tilda performed extremely well around the world with strong sales and margins.

In our Rest of World segment, Bart, who runs Europe and Beena who runs Canada did a great job with their business.

Hain Celestial Europe sales were up double-digits in constant currency including double-digit brand growth from Danival, Dream, Joya, Natumi, a strong non-dairy business and Celestial Seasonings as well as high single-digits from our Lima brand. Gross margins also improved 200 basis points.

Hain Celestial Canada continued to perform well despite currency, up single-digits in constant currency, strong performance came from our meat-free Yves offering, Sensible Portions and Terra Chips. Our Hain Pure Protein business grew 37% over the prior year, our Plainville brand Farms grew 30%, our FreeBird up 11%.

Our Empire Kosher business was flat and that's due to the shift of Passover which happened in the fourth quarter this year. Along with our venture group we will continue to look at acquisitions and there is plenty of them out there. At the same time, we are quite excited about going into fiscal 2017 and returning to mid-single-digit growth in our U.S.

business along with achieving our 2015 margins. We also look to expand in many countries as today we sell in over 70 countries. With that, I will turn it now over to Jim Meiers and will take you through his plans on how he's going to shore up $100 million in savings.

Jim?.

Thank you, Irwin, and good morning, everyone. You've heard me say before at Hain Celestial U.S., we have a proven productivity process with a track record that has consistently delivered cost savings year-over-year. We implemented this process 10 years ago and over the last three years have delivered over $100 million in cost reductions at a 13% CAGR.

Three years ago, we rolled out our productivity process globally with not only a regional focus but an increased focus on global opportunities. In FY 2016, we expect to deliver over $50 million in cost reductions globally.

As Irwin mentioned, we worked with BCG [Boston Consulting Group] as a part of project Terra to assist us in evaluating our supply chain to help us identify additional areas to drive savings both tactically and strategically.

BCG provided us with additional resources, proven tools and competitive benchmarking to further model opportunities that we expect to deliver upward of $100 million of cost savings globally over the next three years. This is incremental to our current productivity process.

Hain will use these savings to reinvest in our growth brands to drive consumption. So let me provide more detail on the Project Terra supply chain areas that we will be focusing on to drive the $100 million of savings. There are five key buckets where we will drive cost savings. The first bucket is optimizing procurement and logistics.

We will set up a procurement group in Lake Success that will focus on global purchases and cost reduction. Leveraging our global volume and spend will be key to identify areas of opportunity to reduce cost and complexity. In the U.S., we're in the process of rebidding our freight lanes and revisiting our transportation routing guides.

We will optimize our ocean freight by leveraging the 10,000-plus containers that we ship around the world annually. The second bucket, SKU optimization, where we are identifying low-volume SKUs to take out and replace with high-volumes ones.

That will help us to reduce complexity, take waste out of the system and improve both internal and external supply chain cost.

The third bucket is optimizing our co-packing network by reducing the number of co-packers, rebidding key categories, identifying joint purchases on ingredients and packaging with our vendors and suppliers, driving value engineering to reduce cost while maintaining, if not improving, quality. The fourth bucket is facilities rationalization.

We're evaluating make versus buy across our network of facilities. The fifth bucket, reducing spoilage and discards by reinvesting in systems, continuing to improve our S&OP process, which is sales, operations and planning and re-evaluate our spoils allowance and key is working lockstep with the SKU optimization process.

So, in August, we will update you with more specifics on the buckets, the savings and the FY 2017 timing. So, let me tell you, I'm very excited about my new role.

It's all about accountability and having one person in charge of Project Terra and global operations will provide opportunity bringing a consistent approach to optimizing our supply chain from a global standpoint and taking out costs. With that overview, I'll now turn it over to John Carroll..

Thanks, Jim, and congratulations on your appointment to Chief Operations Officer of Hain Celestial. Believe me when I say there is not a better person that Irwin could have chosen for this important role. Good morning, everyone. I am pleased to say that Hain Celestial U.S. net sales returned to growth in Q3.

Our Q3 net sales of $351.9 million were up 2.4% versus year ago and up 2.7% on a constant currency basis. These increases represented a sequential improvement of over 500 basis points versus our Q2 results. Q3's return to growth was achieved despite two challenges. First, Celestial Seasoning sales declined versus year ago.

And second, we lost Sensible Portions display sales due to Walmart's Clean Floor Policy. These two issues cost us approximately $6 million in Q3 net sales. Without these issues, our net sales would have been up 4% in Q3. Q3 consumption for our top 13 brands, which account for over 80% of our MULO sales, was up 1% versus year ago.

Our growth was impacted by soft Celestial Seasonings consumption trends. Ex-Celestial tea, consumption for our top 12 brands was up 3.4%.

We experienced double-digit or mid to high single-digit Q3 MULO gains on several brands including The Greek Gods, MaraNatha, Earth's Best frozen, Jason, Alba Botanica, Terra, Garden of Eatin' and Sensible Portions, Imagine soup, Westbrae and SunSpire. Now as I mentioned on our last call, MULO only accounts for approximately 60% of our consumption.

For example, MULO does not include Ella's Kitchen UK where we continue to be the number one baby food brand with double-digit consumption growth. MULO also does not include Amazon, which is our fastest growing top 10 customer, and our number one baby customer. It doesn't include quite frankly any of our fast-growing e-commerce customers.

And finally, MULO does not include Costco where we're seeing very strong year-on-year growth. Moving on to the financials, Hain Celestial U.S. Q3 adjusted operating income was $57.2 million, which was down slightly, $1.8 million versus year ago. Our Q3 adjusted operating income margin was 16.3%, down 90 bps versus year ago.

Our year-on-year income and margin decline are due to Celestial Seasoning's lower sales and unfavorable mix. However, despite that, our Q3 adjusted income margin of 16.3% was up 110 basis points on a sequential basis versus Q2. Now during our last call, I identified four underperforming brands and outlined action plans to improve their performance.

These brands were Sensible Portions, MaraNatha, Spectrum and Celestial Seasonings. I'll give you a brief update on how these brands are performing, starting with Sensible Portions. As you may recall, Sensible Portions consumption had slowed in first half 2016 due to a loss of displays at Walmart.

And we worked with Walmart on a plan to increase support of the brand with improved merchandising and resumption of displays which started in February. We also expanded distribution of our stackable chips into the grocery channel.

These products are now available at Kroger, Publix, Albertsons, Safeway, Meijer, Target, Giant Eagle and Sprouts with more retailers to come. Our Q3 results indicate the plan is working as Sensible Portions MULO consumption was up 9% in the latest 12 weeks. So, we're pleased with the results on Sensible Portions. Next a quick look at MaraNatha.

We strategically lowered MaraNatha pricing in Q3 to reduce competitive price deltas. We funded the price reductions in part from reduced almond costs. The response has been very strong. MaraNatha consumption and distribution are both up 10% in the last 12 weeks.

The brand has also picked up some important new distribution wins at Walmart, Sprouts and Target. We've also made progress rebuilding our private label. We will begin shipping private label almond and our peanut butter, private label peanut butter to a very large retailer this month. So, we're making good progress on MaraNatha. A quick look at Spectrum.

Just like MaraNatha, we also strategically lowered pricing on Spectrum coconut oil to reduce price deltas versus competition. And just like MaraNatha, this reduction was funded in part due to savings on the commodity, coconut. The response to Spectrum's pricing action has however been mixed.

Spectrum coconut oil sales trends are up in direct customers as they reflected the new pricing immediately. Distributor supply customers did not reflect the pricing as quickly and have not seen the consumption gain. We expect this price decrease will be fully reflected across all key customers direct to distributor supplies in the next 90 days.

Finally, a quick look at Celestial Seasonings. We invested in this year to drive consumer awareness of our new Celestial Seasonings package with full page FSIs, shelf signage in store, shopper marketing programs, social media and reduced pricing.

The response to all this activity quite frankly was disappointing as Celestial Seasonings bagged tea dollar sales trends did not improve in Q3. Our research and consumer contacts told us that our core consumers were confused by our new package and in some instances, chose another brand of tea.

So, we made a strategic decision to re-launch Celestial Seasoning's classic package, i.e., our previous package, for the next tea season. We will transition to the classic package on shelf by September and reclaim our lapsed users with an impactful tea season support program.

We will have more details on this program for you on our fourth quarter call. The last initiative I want to discuss is our top SKUs focus. Consumption trends on our top 500 SKUs to 800 SKUs, which account for – at 800 SKUs account for 97% of our MULO consumption, are outperforming our total business by almost 500 basis points.

As I said on the last call, we prepared for this year's category review season with an emphasis on driving those SKUs and we've seen a 6% increase in our MULO distribution of the top 500 SKUs to 800 SKUs. We will continue to focus on driving these top SKUs' distribution across all channels.

These SKUs provide the highest return for Hain and improve our growth and margin profile. So, to summarize, our Q3 performance reflected a return to growth for Hain Celestial U.S. Our Q3 net sales were up 2.4% and up 2.7% on a constant currency basis. These increases reflected a sequential improvement of over 500 basis points versus our Q2 results.

We had 3.4% MULO consumption growth on our top brands at Celestial Seasonings. We saw double-digit or mid-to-high single-digit growth across a variety of brands in our portfolio. We drove 6% MULO distribution growth versus year ago on both our top 500 SKUs and our top 800 SKUs.

We delivered 16.3% in Q3 adjusted operating income margin, up over 100 basis points versus Q2. We made a strategic decision to go back to Celestial Seasonings' classic package. We're excited about this decision because we believe it will help us recharge our Celestial Seasonings business.

And finally, as Irwin mentioned, we're working towards delivering FY 2017 growth at mid-single-digit levels along with margins at FY 2015 levels. So, with that, I'll turn the call over to Pat Conte.

Pat?.

Thank you, John, and good morning, everyone. I'm going to take you through our third quarter financial highlights and guidance. Net sales for the third quarter were $750 million compared to $663 million in the prior year's third quarter, a 13% or 15% increase on a constant currency basis.

After adjusting for acquisitions, our net sales increased mid-single digits at constant rates. The sales increase was primarily driven by strong performance by our U.S. business, growing low-single-digits in the third quarter. This is up from low-single-digit decline in the first half of the year.

We're extremely pleased with the third quarter performance, and expect these trends to continue in the fourth quarter. Solid performance at our Hain Pure Protein segment, which produced high single-digit organic growth when adjusting for the Empire acquisition.

Our UK business delivered low-single-digit organic growth on a constant currency basis, after adjusting for the Orchard House acquisition. Our European business delivered high single-digit organic growth on a constant currency basis after adjusting for the Mona acquisition. And our Canadian business was roughly flat organically at constant rates.

The Orchard House, Mona Group, Empire, Kosher and Belvedere acquisitions represented $93.5 million of net sales in the quarter, as compared to $18 million in the prior year. Net income was $49 million compared to $33.4 million in last year's third quarter.

We earned $0.47 per diluted share on a GAAP basis, compared to $0.32 per diluted share in last year's third quarter.

On pre-tax, non-GAAP adjustments, in the third quarter of $2.3 million related to the following, a $9 million gain associated with the fire at Tilda's rice milling facility, we purchased new capital equipment with our insurance proceeds, and the new fair value of these assets resulted in a gain.

Acquisition, integration and restructuring-related fees and expenses of $5.7 million, primarily related to additional contingent consideration earned for the Belvedere acquisition, integration costs associated with The Orchard House acquisition, and severance costs, $2.7 million of cost associated with the Celestial Seasonings packaging launch support and $3 million of incremental cost associated with the chiller equipment breakdown at our Hain Pure Protein turkey facility primarily related to labor associated with replacing the temporary chiller with the new chiller.

From here on I will only be speaking to adjusted amounts. This quarter's net income was $50.6 million compared to prior year's third quarter of $46.5 million, a 9% improvement. Earnings per diluted share were $0.49 compared to $0.45 in last year's quarter.

As expected, net income this quarter was impacted by $1.3 million of unfavorable foreign currency, or $0.01 a share. Gross margin was 23.5% compared to 24.7% in the prior year third quarter. This 120 basis point compression was principally driven by our sales mix in the U.S., mainly due to lower sales of tea.

However, we're pleased with the progress we've made in the U.S. on a sequential basis with margins improving almost 100 basis points, the impact of Project Castle, but here we're forecasting to breakeven by fiscal year's end, and the effects of U.S.

dollar purchases in our Canadian business partially offset by increased sales of higher margin branded products at both Hain Pure Protein and European segments. SG&A expense for the quarter excluding amortization of acquired intangibles was 12.5% of net sales which is in line with last year's third quarter.

We continue to be extremely focused on proactively managing these expenses. Operating income increased 4% to $80.5 million compared to $77.5 million in last year's third quarter. On a constant currency basis, operating income increased 6%. Operating margins grew across Hain Pure Protein, the UK, Europe, while the U.S.

and Canadian margins were compressed for the reasons I previously mentioned. The effective income tax rate for the quarter was slightly below 31%. We generated $32.2 million of operating cash flow in the current quarter as compared to $15.9 million in the prior year quarter and free cash flow of $15.4 million.

Our cash conversion cycle was 69 days, which is consistent on a sequential basis. Capital expenditures for the quarter were $16.8 million. We've achieved approximately $13 million of productivity savings for the quarter and expect to generate another $16 million of productivity savings in the fourth quarter. Our balance sheet remains strong.

At March 31, our cash balance was $125 million. Our working capital was $582 million with a current ratio of 2.6 to 1. Our net debt decreased to $792 million from $805 million at the end of December. And our bank leverage ratio decreased sequentially from 2.52 times to 2.38 times.

This past Monday, we redeemed our $150 million 10-year senior notes at 5.9% by utilizing our current revolving credit facility at more favorable rates. Our strong balance sheet continues to provide us with sufficient liquidity to continue to pursue strategic accretive acquisitions.

Moving on to guidance, with our fourth quarter guidance, we're narrowing the range of our full year fiscal 2016 guidance with net sales expected to be in the range of $2.946 billion to $2.966 billion and earnings per diluted share to be in the range of $2 to $2.04.

We expect our fourth quarter 2016 net sales to be in the range of $756 million to $776 million, an increase of 8% to 11% year-over-year. We expect the fourth quarter 2016 earnings per diluted share to be in the range of $0.57 to $0.61 and as stated in our press release our guidance is presented on an adjusted basis.

At this point, I'm going to turn the call back over to Irwin..

Thank you, Pat. What I'd like to do now is open it up for questions and of course answers..

Our first question comes from the line of Akshay Jagdale with Jefferies. Your line is open..

Good morning..

Good morning, Akshay..

Thanks for all the details....

Akshay, you got to speak up. We can't hear you..

Is this better?.

A little bit..

Can you hear me now? Okay. So, I'll do my best. I'm on a cell phone in Texas but anyway, so – can you – you were very clear about margins in the U.S. for 2017 getting back to 2015 levels, which is very useful. Can you help us understand long term the impact of Project Terra on margins.

So, is – specifically is this project expected to be accretive to growth and margins? And your 5% growth number for the U.S. next year, does that include any benefits from reinvesting some of those savings in the brands? Thanks..

So, number one, the savings absolutely, it's to support the business and grow the business. So, there's benefit.

And we like to think, again, as we look at our growth, we look at some of the things that we're doing with divestiture of brands or carving out our venture group, absolutely, the savings will get us to those numbers and hopefully even better. In regards to margins, as we said, Akshay, we'd get back to 2017.

The other thing is – which Jim – with 2015 margins back in 2017 – but the other thing which we're looking at today is not only just the U.S. We just recently bought Orchard House, consolidating some of our facilities which we're in the midst of looking at now from a fruit and juice facility as we're looking at consolidating some of soup facilities.

And what Jim has said also, in doing our Project Terra evaluation, we see there is a lot of similarities in purchasing, in procurement globally whether we're buying pouches around the world for both Ella's and for Earth's Best, whether we're buying corrugate, whether we're buying fruits and vegetables with the acquisition of Wellness, Orchard House, we see we're both buying a lot of fruits and vegetables in Costa Rica, it also allowed us to purchase on a lot of their programs that we saw we were paying higher prices.

So, from a standpoint, we're not ready to come out and say, hey, here's where margins are.

But I got to tell you, there's a good feeling today as we look at things around the world and the opportunities from a procurement standpoint, the opportunities from looking at some plant synergies or closing some of our duplication of plants in fruits and vegetables. And we'll be able to talk more about it over the next couple of months..

Okay. And just one for John, if I can. So, in the U.S. measured channel versus unmeasured channel, there seems to be, obviously, a disconnect that's favorable for your results. So, the unmeasured channels, Costco, Amazon, et cetera and Ella's in UK, growing much faster than measured.

Should we expect that gap to remain the same for, at least the next year or so or was there something specific going on in this quarter or does that sort of move around quite a bit?.

Akshay, you should expect this sort of separation between the measured and unmeasured because the initiatives that are driving the growth in the unmeasured will continue for at least the next 12 months..

And, Akshay, a lot of the declines that are happening at MULO or grocery, it's moving over to e-commerce or moving over to the Costcos. Also, whether it's Trader Joe's, whether it's Whole Foods, Sprouts or natural food market, so that's – if you're seeing losses in MULO or seeing losses in grocery, that's where it's moving to..

Perfect. I'll get back in line. Thank you..

Thank you..

Our next question comes from the line of Scott Mushkin with Wolfe Research. Your line is open..

Hey, guys. Thanks for taking my questions, and really like the plans going forward. I did want to dive in to the brand investments and trying to create emotional ties with the consumer.

And just get some maybe initial thoughts, I mean obviously, you guys have done a ton of work on the cost side, but as you look at your brand portfolio here, especially in the U.S., what are the three or four brands you're kind of targeting for maybe some reinvestment and kind of how do you think that's going to play out over the next 12 months to 18 months?.

So, Scott, I'll take a shot at that and then John can. But as you come back and you look maybe baby being one of our biggest categories between Ella's and Earth's Best, and also we'll look at how we sell into different channels, where Ella's belongs, where Earth's Best, we're not going to go in and compete with each other.

So, we think there's a big opportunity, baby food, formula, diapers, meals, personal care products and to expand that. Snacks, we saw our snack business grow double-digits in this quarter, and that will continue to be, and we see a big opportunity, whether it's convenience store, and again, going back to club, going back to e-commerce.

So, our snack business we see some big opportunities. Our personal care business probably, one of our fastest-growing business today, and we see some major focuses continuing on personal care. And each of these there's one or two stars in there which we'll refer to. You heard John talk about MaraNatha and Spectrum getting back to some good growth.

MaraNatha is back to its levels pre-recall, which is great to see. And then protein being a big category, continues to be a big category for us. The great thing within Hain is how diversified we are. The other thing we'll look to do this around the world. You heard me say we have $1 billion fresh business.

You're going to see us in fresh soups, you're going to see us stronger into Kombucha with BluePrint, you're going to see us looking at other fresh ideas that we're going to come in to the U.S. with that we're doing in the UK. So, as we look at these platforms, we look at them around the world.

Today, we're the second largest plant-based, non-dairy business in Europe.

So, as we look at some of the innovation coming out of there, how do we bring it here? And John?.

Scott, I just want to jump in real quick on one thing. I agree with everything Irwin said. The only thing I would add is....

First time ever, John..

It's a big day. The only other thing I would add is we certainly would invest in our tea business. I think that's a huge opportunity for us..

I left that one for John..

Appreciate it..

And that's a big one for us. Listen, we had a tough year with Celestial when it came to weather and we made some decisions on packaging which our consumers told us, hey, they didn't like it. So, as John said, we're going back, we listened to our consumers.

And just getting back to flat on tea is a big move in our growth and we will invest in that and tea is a big category and an exciting category for us..

That's perfect. I appreciate the answer. Then, I just had one kind of more housekeeping item.

When we look at these different strategic areas that you've laid out here, I guess there's about six of them, are we going to anticipate some management beef-up there like there's going to be someone kind of running those silos or how should we look at it from a kind of managerial, structural point of view and then I'll yield. Thank you..

Right. First of all, we don't have silos here, Scott. And, actually, this allows us to run these platforms and part of it is there'll be senior brand managers or senior managers running these platforms reporting into someone that will report into John. And they will be – more of that will go along with it from R&D and innovation.

And the way Hain was set up before, as some of the things got lost, but the big thing is there is 13 to 15 key businesses and brands here that they'll focus on among six platforms. So, it allows you to put the time, the energy and the dollars against it..

Platforms is a much better word. Thank you..

Thank you..

Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open..

Good morning and thanks for taking my question. So, I just want to go back to the commentary both Irwin and John you made about the U.S. segment for the next fiscal year. So, it's a great performance this quarter. It sounds like Q4 will also be strong for the U.S. segment.

What gives you confidence to be able to get back up to the mid-single-digit rate next fiscal year?.

Well, I come back and I say, I see where our growth is now. Number one, let's step back from the category and the category growth and the consumer demand.

Number two, is if you come back and look at our growth and even go back and look at our first two quarters, I mean, some of this was self-inflicted with tea, some of it was a change in retailers' behavior in regards to where they went to a clean floor strategy, some of it was because of what happened at Albertsons and Safeway and a change-over there.

And listen, we got some great brands, we got some great categories, we got some major products that consumers want today. And with that, we believe there's demand there. It's just how we're going to present them, market it and sell it. So, that's why we're confident.

And as we put the right dollars against it and one of the things going through Project Terra allowed us to focus on how we're spending trade and how we're going to get more effective trade dollars out of it. So, I am extremely confident that we'll get back to those growth numbers and then some.

John?.

Rupesh, the other thing I would add is if you recall, when I was talking about our brands and we have several brands that are already at the mid to high-single-digit or the double-digit level, as I talked about Greek Gods, MaraNatha, Jason, Alba, all of our snack brands.

So, we're starting to see that we're getting more traction, that more of our brands are starting to grow at the targeted level. That we're starting to see more distribution wins, particularly against our top 500 SKUs to 800 SKUs.

We're resolving some of the issues that we had with retailers, for example, with the clean floor policy or with distributors as we had accounts shift. And then last but not least, we're looking at smarter investments in trade and incremental investments in marketing on these businesses out of Terra.

So, look, we're pretty optimistic that we can drive the sort of growth that we're targeting here..

And I think last but not least is just what our customers, our retailers are telling us. Our retailers want more and more health and wellness. And I've never seen it like this from around the world.

You heard me say before, one of our customers in the UK when they did their survey, health and wellness was the number three thing on minds between security and financial health, was health and wellness. So, we got a pretty good feel that's a category that consumers want today..

Okay. Great. Thank you..

Thank you..

Our next question comes from the line of Andrew Lazar with Barclays. Your line is open..

Morning, everybody..

Good morning..

First off, Irwin, on the SKU rationalization program, am I right that that is separate from the $30 million of sales that you're looking to divest?.

Exactly, Andrew. We really have not announced the SKU rat yet and that's something we'll continue and as we keep going through this, what will be just automatically discontinued, what will go away on its own. But there will be somewhere a small SKU rat that we'll continue to focus on as we go into fourth quarter and next year..

Got it. And that, I assume, is whatever the impact that there may be on the top line from any SKU rationalization, that's incorporated in your expectation of getting Hain U.S. back to mid-single-digit growth in fiscal 2017.

Is that right?.

Exactly. As John always talks about his tail out there, and what was the drag, that tail was a part of that, and where we had SKUs selling $100 a week or $100 a quarter. And that, as Jim Meiers talked about, product going out of code and discards, that's where that went too. So, we'll continue to run that down.

The thing is what you got to really be careful when you get into a SKU rat, there's space that's in stores that we still want to put other products in there. As you announce it, you have retailers send the product back to us.

So, it's managing it properly that A, we can get the space for additional Hain products and that we don't have products coming back from retailers..

Right. Got it..

And just to add to that, Irwin and Andrew. This is Jim Meiers. Yeah, so, the way we're looking at it in terms of optimizing the SKUs, it's really, we're looking at it in phases. The first obvious phase is we have slow moving SKUs there. And what we want to do is we want to swap them out with higher volume SKUs, okay? And that's kind of the first phase.

And then the next phase will eventually be, we'll end up with a number of SKUs that we'll have to deal with..

And, Andrew, the other thing, which we're looking at, is we're looking at certain channels. There is going to be certain brands that we don't want to see in the MULO channel and we want to see in the Natural channel. And there is some of that also that we're going to focus on, and that allows uniqueness.

The other thing that allows us here is to get pricing power, and that's one thing we want to make sure we're able to keep within our brands..

Got it. Okay, thanks for that.

And then with respect to some of the reinvestment of the Project Terra savings as you go forward, is there any way to maybe compartmentalize a little bit how much of that maybe goes towards some of the additional price point optimization that you need to do? So, you mentioned MaraNatha, Spectrum, some specific price reductions to get you back in line with, maybe a price gap that was more appropriate and the brands are responding more than less, are there other maybe specific brands of any size that you feel like you are not in the right range from a price gap standpoint that you've got to get that in line with or is that a smaller amount of where the reinvestment goes and the bulk of it is more on innovation, [A&C] things like that?.

Andrew, this John..

Hi, John..

There's about four key brands that we are addressing pricing on. We already talked about MaraNatha, we already talked about Spectrum, we know that there's some opportunities for us to address pricing on baby and obviously on tea. So, those are the four primary areas.

As we look through the rest of the portfolio, we don't see any huge price delta issues, but these are the four that we're going to focus on and put into place some actions as we go into 2017..

But, Andrew, the other thing is non-dairy plant-based. We see a big opportunity there and we're moving more into refrigerated in almonds. So we're going to have to spend some money in regards to the non-dairy business. Now we got a refrigerated business and a refrigerated distribution system, we can go into that.

We're going to keep a leading position in Greek yogurt and we're going to look to move into other categories into the whole Greek yogurt category. The personal care category is a pretty exciting category and continues to be with good margin. So how we put some more dollars against that to expand distribution..

Got it. Thanks. The very last thing I promise, is just how many brands more or less are in the venture group? And maybe how do you see it at the start as a percent of sales? Thanks for your help..

So, the venture group probably is somewhere around $20 million to $30 million of sales. And listen, we got a great brand called SunSpire chocolate and you saw what Hershey paid for a chocolate business. There's a lot of things we can do in the chocolate with SunSpire. And there's some great products there.

DeBoles pasta which has been around a long time in the pasta category is a great pasta. GG crackers, which is a great snacking category. Boston Popcorn, Little Bear and part of this is also going to have Tilda ready-to-eat rice in there. Our meat-free product Yves, our WestSoy Seitan, Tofu, Tempeh.

So, there's some great businesses that are going to be part of this that are going to get focus, love and attention, where before they kind of got lost in the first 15 brands.

And it's interesting as you look at valuations today and you look what businesses are being bought for and what these are worth and get them on a growth trajectory, there's some great businesses that we can really turn into something. And they're all on trend categories, whether meat-free, chocolate, high-fiber crackers, et cetera..

Thank you very much..

Thank you..

Our next question comes from the line of Bill Chappell with SunTrust. Your line is open..

Thanks. Good morning. Just want to follow-up on the U.S. channel, to make sure I understand. If you kind of do the math on the non-track channels it had to do high-single digit to maybe even double-digit growth to offset the track MULO channels.

And I understand the faster growth on online and Costco and what have you, but maybe can you talk a little bit about what's going on in the natural channel? I mean, I thought that was still kind of flat to down and that would have offset some of the growth..

Bill, this is John. I think your calls are right across the board. You know where the MULO is. We are seeing high-single to double-digit on the areas that I called out. And we're not seeing a great deal of growth coming out of the natural channel at this point in time..

Not all natural. Some natural..

Absolutely. Sprouts is doing really well. There's a couple others that are. But – so by and large, that's how we roll up the pieces to get to the numbers that you saw this morning..

Okay.

So, you're still not seeing any real improvement or change in those channels?.

Yeah. As Irwin said, look, we're seeing some customers break out and led by Sprouts. But other than that, everything is still pretty much as it was..

Okay. And then, as you look out to the next year, what are your expectations for a tea recovery? And I say that just because it's been down for so long, you certainly had the misstep on the packaging. And there's some customers that have gone to other brands.

How long does it take to get it back to even category growth and is just switching the packaging back that quick of a fix?.

Here, it's funny I anticipated that I might get this question. Listen, a year ago, I was on this call and I said we would win the upcoming soup season, so that we would get back to growth and actually we did win. We did very strong. We have double-digit growth on soup this year. We're going to do the same thing on tea.

I'm not telling you double-digit growth on tea, but I'm telling you we will get the tea business back. And, Bill, it's not just the package. Package is just the starting point. It's reminding people why they buy Celestial tea, the strong emotional relationship they have with the brand because look, this is not just another brand of tea.

When we talk to people about the package and the brand, they told us stories about the brand and how it was intertwined in their lives that could bring you to tears. So, we need to make sure that we get the package right, take that out as a problem, and then from there, market on top of it.

That's why what we're looking for is some of the Terra savings to be invested in here. Look, I definitely believe we can bring the key business back..

And, Bill, I don't think we're the first company that ever changed back because the customer didn't like and went back, so that's number one. A little company called Coca-Cola or Tropicana has done that in their lifetime. Nothing has changed about what was in the box or what's in the tea bag.

Celestial Seasonings has been around since 1970 and there's only one Sleepytime, one Red Zinger. Throughout this, which is interesting, we did not lose distribution and that's a big thing that we – retailers did not give up on us. And when you're down, some of those numbers, they come back and they will eliminate some SKUs.

So, we didn't lose distribution. And I think with our right marketing program in place and going out to tell consumers, hey, we listened to you. You told us you want our old packaging back and we're going to – and that's why we didn't go for a packaging in between to introduce a third entry in there, we would have confused the hell out of them.

So now, it's going back. We listened to you. And there's a lot of good PR and there's a lot of good marketing around that, about how we've listened to our consumers..

Got it. I'll turn it over. Thanks..

Thank you..

Thank you. Our next question comes from the line of Amit Sharma with BMO Capital Markets. Your line is open..

Hi. Good morning, everyone..

Hi, Amit..

Irwin, two questions. One for John. John, the tea discussion is I think, is very, very helpful. I just also want to get your sense of if you're looking at 2016 operating margins in the U.S., somewhere 150 basis-point margin contraction.

How much of that you could ascribe to the softness in Celestial Seasonings teas this year? And then I have a follow-up for Jim..

Amit, you're cutting in and out. I'm not totally sure that – I didn't hear the last couple. I didn't hear your last piece of your question..

Let me say that again. So of the expected margin contraction in the U.S., how much of that could be ascribed to Celestial Seasonings weakness on the margin line? And then a follow-up for Jim, U.S.

opportunity is pretty clear, but Jim, as you take responsibility for the global operations, you talk about UK and multiple operating structures in the UK, margins probably below where they should be.

What's in the pipeline for improving margins there?.

Okay. Amit, this is John. In regard to the lower operating income margin in the States, in this quarter and throughout the year, they have been 100% attributable to our Celestial Seasonings lower sales as well as our unfavorable mix on that brand.

So, when you think about what Irwin said before, if we got it to flat, we would make significant improvement in that area..

Got it..

So – and then Jim?.

Yeah. Amit, good morning.

How are you?.

Good morning..

Good. So, to address the question on the UK margin, just margins in general. Look, Project Terra is going to provide great opportunity in the U.S., but also globally and, more specific, the UK. And we currently do have quite a few initiatives that are going on. We plan to go through and do a warehouse network optimization.

We have some global activity as it relates to some of the procurement that we're doing. We buy bananas and use bananas around the world. And we just jointly did a global purchase on bananas that drove very nice savings and also provided some regional benefits of being able to get them close to the end user. Another one is flexible packaging.

We identified a supplier for flexible packaging that we're using on our snack products. We currently implemented two brands throughout this year and we'll do the balance of them. But we're also working globally to use this supplier. They have very high quality and we're seeing some very nice benefits. And then there's factory rationalization.

I mean, look, going forward, we're going to make some big changes. I mean, we need to change the way we do business..

And, Amit, I think the big thing is as we have looked at the U.S. now and, again, going through it, it's amazing the crossover when you go across the pond. Like Jim said, we're buying close to 200 million pouches today around the world. We're buying corrugate. We're buying a lot of fruit around the world today.

The warehouse companies that we own or third parties are global companies today, even though they drive on the different side of the road, the freight companies we use today, as we ship by freight liners and that, I think it's 10,000 different freight liners that we're shipping product between India that – and there's tremendous savings as we bring all that together.

So, whether it's buying mangoes, buying oranges, buying coconut, buying pomegranate, it's how we do it together. The other big thing that's going to come out of this, that has come out of it is our ability to source and supply. And what keeps me up at night is we need 99% of our products are GMO-free. And Jim puts in centralized procurement.

It's going to allow us, whether it's cashews, whether it's almonds, whether it's coconut, whether it's pomegranate, to procure on a global basis and get supply for that. And that's been some of our biggest challenge today is just getting supply..

Yeah. And I think to that, Irwin. I mean, basically, this group will not only – will help leverage pricing, volume and spend, but also to Irwin's point about supply, we need to be ahead of the curve in terms of developing supply.

There's a large percentage of our natural and organic products come from the U.S., and we're developing other geographic areas..

Great. That's really helpful. Thank you very much, Jim, Irwin..

Thank you. Next question..

Thank you. Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open..

Hi, I'll be quick. Pilgrim's Pride just announced a pretty major push into organic chicken. I think they say they'll produce about 20% of all the organic chicken in the U.S. once that plant is converted. So, I guess I'm just curious, Irwin, to what extent you may view this as a threat longer term to your protein business.

Again, as demand is expanding rapidly, but it's starting to attract some larger customers, so just from a strategic or tactical perspective, is there anything Hain will be doing differently to combat, I guess what may be a more competitive environment a couple of years from now?.

So, number one, Ken, we just opened up a new protein facility that opened in February. Number two, is listen, I think the way we raise our birds, the way we grow our birds out, our birds today are totally vegetarian fed, where some of these other companies that got into the whole antibiotic-free have not. Again, what's happening also.

Ken, the whole protein category is growing where you got meat and pork declining and that's why Pilgrim's has got into this is because their other businesses are declining.

So, the average consumer eats 88 pounds of chicken versus 20 pounds of turkey, where you're seeing meat and turkey – you're seeing meat and pork decline, I just think the market is moving more and more towards organic chicken and antibiotic-free chicken, and that's why Pilgrim is doing it.

And let me tell you, I think there is enough business out there that they want to deal with a smaller supplier. The whole thing today with organic is how it's raised and I think FreeBird has the right story behind it. It's something that we always do. It's where we get our feed from and that's a big part of the story.

The important part is to go out there and tell the story..

Thank you, Irwin..

Thank you..

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Your line is open..

Good morning, everybody..

Good morning, Alexia..

Hi. So, can I ask about the outlook for input cost? It seems to me that the market for GMO-free and organic ingredients is tightening in the U.S and that might accelerate as this whole GMO labeling debacle kind of kicks in depending upon how that plays out.

Are you starting to see very sharp increases in your agricultural ingredients or does it all feel pretty good for now and how confident are you that it can stay that way? Thank you..

Good morning. This is Jim. Yeah. So, in the current quarter, basically what we saw was, we saw – we actually – on our top spend items, we saw about a 1% improvement year-over-year.

And as we look forward, we have some key commodities like almonds that – almonds have dropped over the last three to four months and we expect that to settle out as we go into 2017. And, look, as we look at – at least, as I look at 2017, we're not seeing any big spikes but I would expect to see modest inflation in 2017 offset by productivity..

But the big thing is this here also, everything we procure in Europe is GMO-free. So, as we go around and look throughout the world today for both organic and GMO-free, we're finding more supply. In the U.S., there is absolutely some supply issues.

We're also today working within Africa and looking to get – grow products there and starting up some farms there. So, a big part of it is, I think there is some – could be some cost issues, but if you're planning it out and working with farmers, that's a big advantage, Alexia..

Great. Thank you very much. In the interest of time, I'll pass it on..

Thank you. And I think, Alexia, just one other thing I want to mention with that is I hear about private label, and yes, private label is something that's out there. But one of the big things which is important within Hain is we're out there doing our own sourcing and out there doing our own deals with farmers and contracts. It gives us supply.

Where I think the barrier to entry into this category becomes tougher and tougher to get supply..

Great. Appreciate it. Thank you..

Thank you..

Thank you. And we do have time for a few more questions. Our next question comes from the line of Andrew Wolf with BB&T Capital Markets. Your line is open..

Good morning. I'll just ask a question with a follow-up attached to it.

So, John, how was the price elasticity versus what you expected in terms of Sensible Portions and the MaraNatha and the Spectrum direct? And also, what does that imply as a broader question about the priorities for where you want to put the brand-building on the net savings that you're – savings you're going to generate out of the global procurement and out of Project Terra? Is it a price-driven or are you going to do other – also emphasize a lot of other aspects of brand-building? Thank you..

Sure. You have two pricing examples. MaraNatha, the elasticity has proved even stronger than we expected. Spectrum, we don't have enough data yet to give you an answer on that. And then in regard to – as we talked before, we're going to invest against baby, tea, personal care and snacks as our core four areas with Terra savings.

Only two of them, baby and tea will see some price investment. But by and large, the majority of the investment will be against brand-building..

Next question?.

Thank you. Our next question comes from the line of Mitch Pinheiro with Wunderlich Securities. Your line is open..

Yeah. Hey. Just a quick question.

Irwin, on your path to the $5 billion revenue goal, how do you see that? Any change in how you see that breaking down between acquisitions and sort of organic growth? And is Project Terra evenly spread? Is the benefits, a third, a third, a third over the next couple of years or is it a back-end loaded kind of benefit? How do you see that?.

So, I see it – listen, I see it a third, a third, a third. Hopefully, more comes upfront because there is some low-hanging fruit to get. So, I'll say a third, a third, a third but I think there's potentially more upfront at first.

In regards to getting to the $5 billion, it's growing mid-single-digits and doing $100 million to $150 million of acquisitions. And we've done every year $100 million to $150 million in acquisitions..

And the acquisition pipeline, is it – how would you describe it maybe compared to this time last year?.

It's interesting. There's a lot – and that's – a couple things as we look at it today. We see a lot of interesting smaller stuff that we just either didn't have the time in integrating it, would have got lost within Hain, and that's why we developed Cultivate and we'll work on that. At the same time, there is some bigger stuff out there.

We're not going out to do $1 billion deals and the $2 billion deals in this category that got done were things we looked at but didn't fit within us. But there is definitely $100 million, $200 million deals out there that – and the big thing is going out and finding these deals.

It's not deals that are in front of your nose, and that's how we're finding them..

Okay. Thanks for your time..

Thank you..

Thank you. And our last question comes from the line of David Palmer with RBC Capital Markets. Your line is open..

Thanks. Good morning. Thanks for getting me in. Question about salty snacks and yogurt. I think this one – be for John. Obviously, two of your largest and best growth categories, it looks like you're getting really good growth from adding new items per store, and also to a lesser degree getting new distribution.

Velocity has been down in both in the last 12 weeks.

Are you seeing this in your data? Is that concerning at all to you or do you see this velocity trend as somewhat temporary?.

David, I'm not seeing declines in velocity in either space. What you may be seeing is the impact of Greek yogurt getting a significant increase in Sam's Club, which may be reflected in unit velocity but not – it doesn't address the number of ounces. So, by and large, we're seeing both good unit and dollar growth on both..

And, David, you wouldn't see it in the consumption of the sales because these are not long shelf-life products for any of them. So, I mean, that's where I'm a little surprised that you're seeing it there..

Yeah. No, I mean, it's interesting how the contrast from the data from the Nielsen data.

I know you switched vendors, but the average number of items per store for baby food is in contrast to the other two big categories, I mentioned yogurt and salty snacks where baby food it looks like you're losing number of items per store and that includes Earth's Best, and in the case of, for instance, Sensible Portions or Garden of Eatin' or Greek Gods, you're gaining significant amount of new – you're adding more items per store.

So, it's interesting contrast, and I was wondering if there is a story behind these?.

Well, I think a couple things on baby food. What you're looking at in the data is not – our number one baby customer is not in that data. Number two is one of our biggest snack customers in club is not in that data. So, I don't know if that's doing anything to your data..

Yeah. We can take it offline. Thank you very much..

Yeah. We absolutely can. So, thank you, David..

And I'm showing no other questions at this time..

Well, thank you, everybody, for today's call. Again, there's a lot of great things happening here at Hain. If you step back today and you look at what we've been able to do over the last 20-plus years, as you see, yes, a lot of consumers want more and more healthy products.

You see the diversified portfolio that's within Hain today and many times when I'm in stores or I'm at some of our facilities, I pinch myself and say, wow, we own that brand or we own that product. And it's more exciting. I pinch myself twice when I see it in customers' carts and they're paying for it as they walk out to the cash register.

This is an exciting category, absolutely attracting a lot of competition as they see conventional categories decline. As Ken said before, Pilgrim's Pride, yes, is coming into the organic chicken category because consumption on conventional chicken continues to decline, and you're seeing that in many, many categories.

I think what's important is we recognize how Millennials want these brands, how Millennials are very, very, very responsible in the food they eat. We just saw with Johnson & Johnson in one of their talc-powder, and that's something where Hain is. There are very few companies out there that can boast and say 99% of their products are GMO-free.

Over 71% of our products from a transparency percent – or transparency have 13 ingredients or less. Over 40% of our products today are organic. You hear a lot of these companies and I heard today 7-Eleven by 2025, hopefully I'm alive then, 2025 are going to cage-free eggs. That's eight years from today, it's going to take them to get there.

So a lot of retailers, a lot of consumers want more and more health, Hain is there, and Hain will continue to be there. From a distribution standpoint and household penetration, a lot of these dollars will go out there to build our brands. A lot of these dollars will make more and more consumer aware of the Hain products.

And last but not least, if we continue to go after distribution white space, the growth numbers we talk about will absolutely be achievable and then some. Have a good Memorial Day, which is coming up. Eat our healthy snacks, our healthy products and look forward to updating everybody on Project Terra, our fiscal 2017 in early August or mid-August.

And I was saying to the guys last night before we know, it will be here. So have a safe and enjoyable spring and summer. Thank you very much for your time today..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day..