Good day, ladies and gentlemen, and welcome to the Q2 2016 The Hain Celestial Group 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Anthes. Ma'am, you may begin.

Thank you, Chanel. Good afternoon and thank you for joining us all today. Welcome to Hain Celestial's second quarter fiscal year 2016 earnings call. Irwin Simon, our Founder, Chairman, President and Chief Operating Officer; John Carroll, Executive Vice President and Chief Executive Officer, Hain Celestial North America; and Pat Conte, Executive Vice President and Chief Financial Officer, as well as several members of Hain Celestial's management team are with us 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, so please limit yourself to one question. If time allows, we'll take additional questions and management will be available after the call for further discussion. Now, let me turn the call over to Irwin Simon. Irwin?

Thank you, Mary, and good afternoon, everyone. I hope everybody had an opportunity to review our second quarter 2016 earnings release. We are pleased to report worldwide record net sales up 8% or 11% in constant currency in this quarter as compared to prior year. This has been our largest quarter of sales and profit in the history of Hain Celestial. Our GAAP earnings for the second quarter were up 28% compared to prior year quarter. Our adjusted earnings were up 6% compared to the prior year quarter. It is also, as I said before, the largest in terms of operating income. Organic growth for all our businesses, excluding the U.S., was up high single-digits. Organic growth for all our businesses, including the U.S., was up low single-digits. Our global diversified business model drove these strong results. Hain is a disruptor. For more than 20 years, we have led the way with a relentless focus on health and wellness, providing consumers a healthier way of life. The food industry, like so many other industries, is changing faster than ever. Health and wellness's transparency and sustainability are driving consumers' choice. At Hain Celestial, we've been ahead of this trend and we're going to keep it that way and we'll take it to the next level. Our ability to operate our businesses with a greater sense of purpose is what's differentiates us from everyone else. Another key differentiator for Hain within the CPG industry is that we are one of the very few companies who can claim on a worldwide basis that 99% of our food products are non-GMO and nearly 40% are organic. While traditional CPG companies are just starting to focus on clean and simple ingredients, in the U.S. alone, 71% of our grocery and snack products have 13 ingredients…

Thank you, Irwin, good afternoon. Hain Celestial U.S. saw improved performance in many areas in Q2 versus Q1, but we have a lot of opportunities to do more. Our Q2 net sales were $342.3 million, down 3% versus year ago. This shortfall was driven primarily by five key factors. The first was Sensible Portions' year ago Walmart display sales that were lost when Walmart implemented a clean floor policy. The second was unprofitable year ago club programs on baby and nut butter that were not repeated. Third was lost sales and inventory from distributor and account shifts. Fourth was lost private-label sales, primarily on nut butter; and finally, currency on Ella's Kitchen UK. These factors cost us approximately $28 million in Q2 net sales. Without these factors, Hain Celestial U.S. sales would have been up 3% plus in Q2. Q2 consumption for our top 13 brands, which account for over 80% of our IRI MULO sales, was up 1% versus year-ago. This growth measure was weighed down by weak Celestial Seasonings consumption trends in the middle of tea season, when Celestial represents a bigger part of the portfolio. Ex-Celestial tea, consumption for our top 12 brands was up 3.4%, which, quite frankly, is very similar to the growth adjusted number I just reviewed for the five factors. We experienced double-digit or mid to high single-digit Q2 MULO consumption gains on Greek Gods, MaraNatha, Earth's Best Frozen, JASON, Alba Botanica, Spectrum Essentials, Sensible Portions, Imagine Soup, Hain and Westbrae. Now, it's important to remember that 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. Regardless of whether it's organic or conventional, we are number one with a double-digit consumption growth. It…

Thank you, John. Our other operating segments posted very strong results, as you saw. Starting with our U.K. segment, net sales were up in local currency. We saw some good contribution coming from our soup business, our grocery business, our rice business and desserts, even with warm weather. Our soup business, as I said, was up mid-single-digits in the quarter. Our Sun-Pat Gale's brands were up high-single digits. Tilda performed extremely well in the quarter, with worldwide net sales for the brand up high-single digits, driven by a ready-to-eat and an increased distribution in India and the Middle East. Our Tilda ready-to-heat facility and our CapEx expansion is fully commissioned, and actually we expect over 25% additional capacity, and the demand is there. Hain Celestial Canada performed extremely well. Too bad the currency didn't. Strong performances came from mass grocery, up double-digits from our Live Clean, which was an acquisition we did last year, Sensible Portions, Europe's Best and our Ease brand. Europe was up high-single digits in constant currency, with growth from Natumi, Lima and our Danival, our JOYA brand, Terra, and our spreads business. Our integration of Mona, which we acquired in late July, is on track and we expect a lot of efficiencies and savings to come in the back half of fiscal 2016. Our Hain Pure Protein, as you heard me say before, had an excellent quarter, selling 1.8 million turkeys. I wish we had a Thanksgiving every quarter. It was our largest quarter ever for Hain Pure Protein, which grew 21%; and that excluded the acquisition of Empire. Our Plainville Turkey business was up 36%. And Empire, under our ownership, was up 9%. We expect additional FreeBird capacity to come on, which will allow us to sell more and more FreeBird protein. At Hain Pure Protein, we posted strong gross margins. Many times I was asked when we would get to a 15% of gross margin; we got to 16%, which is 430 bps up from last year. Our international business, which is our joint venture with Hutchison Hain Organic Holdings, was up double-digit in the quarter, with Earth's Best, Avalon Organics performing well. You know accretive acquisitions have been a part of our strategy and we'll continue to look at accretive acquisitions, like we did on Orchard House. And we'll continue to make more as we see them come along, as we look for strategic acquisitions and growth acquisitions, which is a part of Hain's DNA. With that, I'll turn it over to Pat.

Thank you, Irwin, and good afternoon, everyone. I'm going to take you through our second quarter financial highlights and guidance. Net sales for the second quarter this year were $753 million compared to prior year quarter's net sales of $696 million, 8% increase or 11% increase on a constant currency basis. Net sales were unfavorably affected by foreign currencies of $18.3 million. The increase was primarily driven by our Canadian business, which delivered high single-digit growth on a constant currency basis. HPPC delivered solid double-digit growth, as Irwin said. Our European business delivered mid-single-digit growth on a constant currency basis. Our U.K. business delivered low-single-digit growth on a constant currency basis, and our U.S. business was down low-single-digits. The Mona Group, Empire, Kosher and Live Clean acquisitions represented $59 million of net sales in the quarter. The net income was 500 -- excuse me, $56.9 million compared to $44.6 million in last year's second quarter. We earned $0.55 per diluted share on a GAAP basis this quarter compared to $0.43 per diluted share in last year's second quarter. As noted in our press release, our adjustments in the quarter on a pretax basis of $8.1 million were primarily related to acquisition-related fees and expenses of $2.5 million; net unrealized foreign currency losses of approximately $2.8 million, principally on the re-measurement of intercompany financing and nonfunctional currencies; Celestial Seasonings' products support related to its new packaging launch; and our transition of K-cup products from Keurig of $1.8 million. And a seven-day product -- production interruption related to the critical chiller equipment breakdown at our turkey facility, costing $1 million, which does not include the lost sales for those days. From here I will only be speaking to adjusted amounts. This quarter's net income was $59.2 million compared to prior year's quarter…

Thank you, Pat. And we'll now open it up for questions and answers.

[Operator Instructions] And our first question comes from Bill Chappell with SunTrust. Your line is now open. Please go ahead.

Good morning. I’m sorry, good afternoon.

Hey, Bill, it’s afternoon over here in New York [indiscernible] Carolina.

Fortunately, even Georgia as well.

Okay.

Just going to the U.S. business and talking about the comments in the release and comments we've heard, can you kind of talk about SKU rationalization? The general thought is if you’re still in the early stages of getting more products into conventional grocers and still have so much market share opportunity, why are we seeing a cut-back of SKUs? Why are we seeing inventory de-stock? And how that kind of plays into your comments you've made of further SKU rationalization later this year and into next year?

So, number one is, I think, listen, as we look at it -- and I think my point before was one glove does not fit all. And as we look at our business across classes of trade, what we sell into the mass-market, what we sell into grocery and what we sell into natural. And I think as you heard John take you through, I mean, 60% of his business still goes through MULO. But I've got to tell you, as we visit with our customers, there's a big demand for products that are not going into mass-market or not going into grocery; they want uniqueness and differentiate. And I think part of our work with Boston Consulting Group is to work -- look at different brands and look at different SKUs. I mean, we go through a practice every year, Bill, where we just continue to go through SKU rationalization. And we do that anyway. When we come out with new products, it's before one new product comes out, one new product -- before a new product comes in, products come out. So that's something ongoing. But it's something we are looking at today in a much bigger way. And you heard what I said, how do we take complexity out of our supply chain? And that's something we will look at. You know, I'd like to be able to say something right now on what we are doing; just not ready to be able to come out with it yet. Does that answer your question or?

I think so. I guess it's just even on the most recent quarter, just trying to understand, like are you seeing pushback from retailers saying we've got too much of your product here, we want to add more conventional players, or something else?

If anything, absolutely not, if anything. And if you come back and look at the quarter, it's not discontinuing of SKUs, it's not one brand that we've got discontinued we lost. It was more of inventory and clean floor strategy that Walmart brought into place. And if anything, without talking about it, what you are going to see is, with the changeover with distributors and the right product mix going into Safeway and Albertsons, we will see a pickup there. So from a sales decline right now, it was not because we have too many SKUs and we've got all these dying SKUs out there; the biggest part of it was inventory reduction. And the second biggest part of it is in regards to MaraNatha and dealing with some Spectrum. I can't sit here today and sort of say we lost all these sales and lost all this distribution because of competing products that came in there. And I will say this here. When it comes to competing products, if anything, when they come into play, if they are taking any share, it's taking it away from conventional brands, not so much our brands or our products.

Got it. Well, I'll turn it over. Thanks so much.

Thank you.

Thank you. And our next question comes from Amit Sharma of BMO Capital Markets. Your line is now open. Please go ahead.

Hi, good afternoon, everyone.

Hey, Amit, how are you?

I’m very well, thank you. Pat, a quick clarification from you. Could you just let us know what is the actual FX and -- acquisition contribution for sales in the quarter? And how much are you building for in the guidance?

So in the guidance, the growth breakout of the acquisition growth is 20% of the growth -- it would be about 20% of the growth on acquisition, the 80% organic. And the -- I guess your other question was $18.3 million was the effect of the FX in the quarter.

And acquisitions?

Acquisition was $56 million.

Got it. Okay, perfect. Thank you very much. And then, Irwin, just going back to what you just said, I mean, if it is not coming -- it's good to hear that it's not coming from the -- or slowdown in U.S. is not coming from competing products yet. But is that a risk that we should be aware of or should we start to think about? And as you laid out the plan to maybe invest more behind brands here, bring more capabilities, how should we think about that from a margin perspective as well? Is that going to be margin-neutral in U.S.? And you expect this $100 million going to cover for that? Or should we think about margin switch in U.S., and maybe start to model a little bit on margin compression here?

So, I like you are optimistic, yet. Okay? So that's number one. Listen, I've said this before. As you sit and look at companies today, how they are dealing with the whole Vermont and GMO, we are 99% GMO-free today. You look at companies that want to go ahead with cage-free eggs and where we are on our eggs that are cage-free, 71% of our products today don't have -- you know less than 13 ingredients. So, Amit, we are there with the products. And that's what the consumers want. You heard what I said before. Household penetration, there's no one brand that has over 15% of household penetration. It's now finding the dollars and which we will to spend on the consumer to bring more and more awareness to our brand. So it's not we're sitting there and you've got all these new competitors. And as John said, yes, there's start-up companies and there is one-off companies out there. But we are not out there building the new awareness to the natural/organic category. What we're doing is taking share away from the current conventional products out there. So again, there's plenty of distribution whitespace. Let me tell you something. This weekend for Super Bowl, walk into many, many supermarkets around the country and see our Garden of Eatin or our Terra Chips or our Sensible Portions displays that are built up for a healthy snacking occasion for Super Bowl. So again, if not yet and it is absolutely on the complete opposite of that, where the opportunities are, as we build household penetration.

So just to complete that thought on that, so you will have to invest more. Right? You are talking about investing more. So point A, is that $100 million cost saving that you talked about -- is that incremental to about $60 million annual that you have outlined so far? And do you believe that's sufficient to build a mode around your U.S. portfolio as you see more competition going forward?

So number one, do I believe we have to spend more? We will spend more. Number two is, listen, I think $100 million is a lot more than we are spending today and we have been getting the growth. So do I think $100 million is sufficient? I think it's a great start. If we had that $100 million today you would see the benefit of it. So we know what it costs us to go out there and to double our household penetration. And it's a lot less than $100 million. Okay? And with that, there's a lot of sales on top of that. And again, I'm not saying we are going to advertise on the Super Bowl. We are not advertising on TV. It's not that our spending -- like we are a traditional consumer packaged goods company. Our consumers are focused on social media, on Facebook and SnapChat and all this. And it's not the most expensive way to advertise. But we have so many great things to be telling about our brands that we need to get out there and just tell more and more about it.

Got it, thank you very much.

Thank you.

Thank you. And our next question comes from Evan Morris of Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Hey, good afternoon, everyone.

Hi, Evan. How are you?

Good, going pretty well. Thanks to self.

Thanks.

I guess, Irwin, just -- and then maybe Pat can chime in here. Just trying to understand a little bit more about what's going on at the top here from a management standpoint. I mean, you had a CFO change not that long ago. Now you had someone, Chief Accounting Officer, leave. I mean, if you could talk about management stability here? Because I'm sure you can understand the optics. Right? Results haven't been great, certainly below your expectations, below trend. And now we are seeing some changes here. I mean, what's -- can you comment on that? What's going on? Why the change? I mean, how do we get comfortable here that there was changes in management and the results -- they are not related? Just -- if you can kind of just help and give us some comfort there that they are mutually exclusive.

So, Evan, number one, in changes I believe in competency and loyalty. And if you don't have competency, you make a change. And that's what happened here. Ross Weiner, who is sitting in this room and I was here to wish Ross good luck, good wishes. I believe when someone gets another position and wants to move on, and change and grow -- and Ross is sitting here and been here for four and a half years, has done a great job, and unfortunately, leaving for a new position. And Ross, thank you and good luck for all the great things. So whatever uncertainty, Evan -- again, people come and go all the time. We are not the first company. It happens at your company and it happens at a lot of companies out there that people come and go. With that, listen; I've been doing this for 23 years. John has been doing this for 10 years. Our people in the U.K. have been there for a long time at Tilda. Jay Lieberman, who has been running Hain Pure Protein, so I'm not sure what you are saying, lots of changes at the top and lots of changes with management. Hey, I've got to tell you I sit here today and, number one, put the highest sales number this Company has ever recorded, up. We made over $92 million of operating income, at the same time, did acquisitions and have a leverage. So, you know what? Is everything perfect? No. But I've got to tell you the company today with its assets, with its brand, with its direction, with its category and where we are going -- we are in a pretty great place. And I've got to tell you there's a lot of consumer packaged good companies out there that would love to own the brands in snacks, personal care, yogurt, grocery, protein, basmati rice, fresh soups that we own around the world today. So I'm proud of what we own. I've got to tell you we got great brands, we have great people. I think we have a great strategy. And you know what? We can always execute in a better way, and we will do it. And you know what? We will deliver back to our shareholders.

Okay. No, no. That's really helpful. Thank you and I'll pass it on.

Thank you. And our next question comes from Scott Mushkin of Wolfe Research. Your line is now open. Please go ahead.

Hey, guys. Thanks for taking my question. So, we're all kind of harping on the same stuff, so I'll give it a run at it as well. And we put out a fairly large research piece talking about kind of the strategy of the Company going forward. And I think John commented on if some of the changes that are happening in the marketplace. So I was excited to hear about the BCG coming in. I guess, as you look at it, Irwin and John, kind of the U.S. business going forward with the changes, I mean, do we even have to take a more holistic look around the strategy, organize maybe the company a little bit differently? And then I would say, to the earnings questions that have come out, if it's wise to invest $125 million, $150 million in building brand assets, but it creates a lot of long-term value. Is there resistance to do that if it maybe hurts short-term earnings?

Hey, Scott, number one, I thought your report was great. And I enjoyed reading it, along with a lot of the other Hain employees. And it's not blowing smoke or doing anything to tell you that. I think you did a great job. What I come back and say, you heard what I said in my remarks, that the food industry, other consumer packaged goods industries, are like a lot of other industries out there, changing faster than ever. And anybody that doesn't change is going to get swallowed up. So, number one, I want you to know that in 23 years -- and if I was starting this, I wouldn't want to be starting Hain from scratch today, because you can see a lot of consumer packaged goods companies are trying to get traction and trying to figure out how to compete in this world with 80 million millennials. So, Scott, to your point, absolutely. Like I said before, we are not just vanilla and one glove doesn't fit all. How we sell into Whole Foods or Sprouts is differently, how you sell into a Walmart or a Target. And I think that's what we always identify differently. And again, you heard what I said before 40% of our products are organic. 99% are GMO-free, which consumers today are demanding. We have a big meat-free business. We have an antibiotic-free business. We have a yogurt and snack business. And with that, Terra may not fit within certain mass market but it fits in within natural. So again, coming back and re-looking at our business and where can we get pricing opportunities? And what I -- but I don't want Hain products to become just the football on the team and being thrown around. Where can we get pricing? Because we are selling to different retailers or different products. The other big one out there that has become a big customer of ours is ecommerce. And it's a big focus on that of where we will go with that. So, Scott, absolutely -- listen, if we could spend $250 million and be an Amazon and just report topline sales, it would be fantastic out there. But still, with all that we are spending, all that we are doing, we are still making $92 million of operating income and still growing our topline. Do we have to spend more? Absolutely. And it's not only us; it's every company out there that has to spend more. And that's why we will work with Boston Consulting Group. Let me tell you something. I never wanted to work with consultants because I used to say, if we didn't know what we were doing, then who else does? But I've got to tell you, like anything, I've changed too in how we look at things differently. John, you want to add anything?

I think, to Irwin's point, Scott -- and we've talked about this before-- there is a certain level of investment that we are going to need as, increasingly, we need to be driving household penetration, and in some categories, they become share fights. So, it's important we do this. We -- look, we have an enviable portfolio of brands that appeal to millennials as well as current consumers. There's no reason an investment in consumer will not yield some very strong returns on this business.

And Scott, I think the other big thing is which a lot of people just don't respect and look at -- the barrier to entry into this category is real difficult. Supply chain and sourcing organic ingredients and sourcing GMO-free ingredients, or sourcing meat-free ingredients and finding manufacturing facilities is very difficult out there. So over the last 23 years, we've put together -- our growers around the world, our sourcing around the world, and with that, we can source almost any ingredient, whether it's in organic or GMO-free. And that's a lot of the intel that's within Hain today.

That's a key impediment, especially when they need to get scale. Look, anybody can go in a garage and come up with a new product. But when you need to get scale and you move beyond a certain channel of sales, you need to be able to have the procurement advantages that we have here.

And Scott, one other point is our consumer trust around our brands. And that's a big thing which, from a Hain Celestial, that's all we do. And we've seen it, where smaller brands, as they become part of bigger companies, lose the consumer trust. And I can tell you that's one thing within Hain that we have today is good consumer trust.

So that's a really great information. And it kind of points out that the bones of the Company are strong. I guess, though, the one thing I get -- and it's my last follow-on comment or question -- is that, do -- does Hain have the talent, the kind of historic, I guess, makeup to make the transition to building brand assets using those bones, and then making the transition to building some really strong brand assets with the emotional value that John talked about? I don't know if you have a comment there. And then I'll yield. Thank you.

So, listen, I think with anything, whether it's a hockey team, whether it's a baseball team, whether it's a consumer packaged goods company, it is competency versus loyalty. As a founder, there's times you step back and you continuously look at that. And that's a big part of what Boston Consulting will work with us. Do we have the bench and do we have the talent to take this to a $5 billion company? And what I can tell you is this here. If we don't, there's a lot of people out there that want to work with Hain that will help take us there.

Thank you.

Thank you.

Thank you. And our next question comes from Alexia Howard of Bernstein. Your line is now open. Please go ahead.

Good evening, everyone.

Good evening, Alexia. How are you?

I’m good. Can I ask about price caps? It's a question that's been coming up quite a bit. You talked about the need to correct pricing downwards on Spectrum and MaraNatha, and I think that some pricing and competitive dynamics with Plum Organics and baby food. How confident are you that your price caps across the portfolio in U.S. retail are fundamentally misaligned and that you will be able to either stabilize or hopefully increase gross margins over time? Just want to get your level of confidence in the current level of gross margin. Thank you.

Alexia, this is John. In regard to price caps, the two areas where we have actually invested in price are obviously in almond butter and coconut oil. In both instances, the commodity is actually helping us because the commodity has moved down on coconut oil and, for the first time in a very long time, in almonds. So that ultimately should, on those brands, help us be able to maintain our margins. The problem -- and you mentioned the other one, which is, look, there's a war going on in the category of baby food, organic baby food. And we're going to need to make a determination whether price will be the lever that we'll use or whether it will be consumer investment in other areas. And at that point, in regard to that, we are still studying that.

Okay, great. And just as a quick follow-up, the natural food channel that I think represents about 27% of your U.S. retail sales. Did that continue to decline this quarter? Was it flat? Was it up? And I'll pass it on. Thank you so much.

Alexia, it was fairly flat for us.

Thank you very much. I'll pass it on. Cheers.

And Alexia, just on that also, some of the things that's happening -- as we look where -- as we are diversified in a lot of categories, it's the perimeter of the store where you are seeing a tremendous amount of growth versus the center of the store. And as we sit with the center of the store and you talked about baby food, baby food is moving into fresh. Baby food -- in Earth's Best, what we have done with brands like Earth's Best, we've taken it bigger into the frozen category, bigger into the fresh category. And we have been able to expand Earth's Best into multiple categories. Listen, the big thing about baby food, you keep -- you have a baby for nine months and then you are cycling out. But the big thing with Earth's Best and Ella's, and where we are getting our tremendous amount of growth, is additional products in that category to keep the infant and toddler within the franchise. And that's the same with Spectrum. That's the same with MaraNatha as we are looking at other products in those categories. And a big part of it is, okay, what is the center of the store? What are some of the staple products? But what is the innovation that we are going to build around those products? And that's from the center of the store. And listen, whether it's Whole Foods or other retailers, they don't want the center of the store to die. So they are all looking for innovation and working with us on innovation there.

Thank you.

Alexia, I'll just add this. Along those same lines, look, conventional frozen is not growing particularly well right now. And there's major retailers who are coming up to us on Earth's Best and saying, look, we love what you are seeing on your Earth's Best frozen line. Can you give us more products to fill a door? So it's not just baby in the zero to two age; it is -- it's zero to seven, eight years old right now. So it's great opportunities for us across different age groups.

Thank you so much for the extra color. Cheers.

Thank you, Alexia.

Thank you. And our next question comes from Akshay Jagdale of Jefferies. Your line is now open. Please go ahead.

Good afternoon.

Hey, Akshay. How are you?

Good. How are you doing? [Technical Difficulty] --since you initiated certain actions. What was -- can you just give us some sort of timeframe on when those actions started, and if those numbers, the 10-point change on the tea and the other businesses, if those were for the overall business or for the businesses within a certain channel or customer? That would be helpful. And then I have a follow-up on long-term guidance.

John, you want to just give him the change on the ….

Sure. Sure. Let's talk -- in regards to the areas where I gave you some change in movement trends where on Celestial Seasonings, where -- and that's a MULO change, basically the brand has been down double-digits in terms of both units and dollars. And what we saw was, in the most recent -- as a matter of fact, the low point was down 16. In the most recent period, we saw it down between 4 and 6%. So we are clearly making progress against that. And then on MaraNatha, same thing. Looking at MULO, we saw units actually go, in the most recent period, up 10% versus flat in the previous four-week period.

And then just on guidance, so what is implied for the U.S. business in terms of growth as we exit the year?

So, Akshay, it's Pat. How are you?

Hi. How are you doing?

Good. We are looking at flat for the year, coming out of the year.

So flat growth in the fourth quarter?

Yes, plus to plus-one.

Flat to plus. Okay. And then just, Irwin, the cost savings program, when are you going to get more or give us more color on it? So when do they conclude or have some final numbers to share on the cost savings program and where it will be invested? And does this -- how does this change sort of the long-term goals? You have had a $5 billion sales target by 2020. Is that for any reason, I mean, would you be changing that in light of what we are seeing in the U.S. segment? And any commentary on where margins might go? I mean, there's a lot of talk about competition. I think the concern is this cost savings program has been initiated because you've had some issues here in the U.S. So does this mean you still have the $5 billion goal and you think it's achievable? And are margins at least going to stay stable going forward?

So, Akshay, number one, the $5 billion is achievable. And absolutely I feel even better about it being achievable because of the dollars that we are going to put behind the brands to achieve this number. Okay? So that's number one. When I originally came out with my $5 billion or $5 billion -- we were not contemplating bringing in a BCG and going after the type of synergies and cost savings that we had. So that is a big part of it to reinvest back in the business and to be able to hit those numbers and look at additional acquisitions. On margins, not ready to do that right now because of mix, and we are just getting started. And I will be able to give a further update on our next earnings call. What I don't want to do is give a haphazard update and not have details behind it. So we will be able to give a better update on our next earnings call.

Thank you, I'll pass it on.

Thank you.

Thank you. And our next question from Mark Sigal of Canaccord Genuity. Your line is now open. Please go ahead.

Yeah, thanks. Irwin, you just threw out some growth expectations for the U.S. business by Q4, and then you also talked about consumption on your top 13 brands in MULO. I think the number was 3.4%. I think you also threw out some distribution gains of about 7%. -- of up 7%. So when you think kind of in the medium-term, where do you kind of assess growth, either brand growth or consumption growth in the U.S. in the near to medium-term? And then, when we are thinking about an increased trade spend; can you talk about how much of that is truly incremental versus perhaps a shift in trade dollars?

I'm going to let John -- and actually, it was John that gave you those. But then I'll come back on them once John does.

Yes, Mark? This is John. So here, with what you have here is that we invested in price on a couple of our brands, obviously on nut butters and Spectrum coconut oil. We saw some improvement in our share and our consumption in both categories. And ex-Celestial, we were up 3.4% in the most recent 12 weeks. Do we expect that to continue? Yes. We're going to have to -- remember, we have one more 12-week period where Celestial is the largest brand we have in our portfolio, which obviously is the January through March period. But once we get through that, we expect that we're going to start to drive growth in terms of our consumption perspective in the three-plus range, month in, month out. What else can -- I guess my question is what else are you looking for in this one?

No, that's fair. I was just looking for your assessment of medium term growth, so it was in that 3% to 4% range.

And Mark, there's a lot of things that we are doing that we have not seen the benefit -- listen, we've changed Celestial Seasonings packaging. We're not seeing any of the benefit right now. If anything, we are seeing a negative benefit. At the same time, we're getting a lot of great comments -- looks uncluttered, looks cleaner on the shelf. And whether it's somewhere in between, we will figure that out. At the same time, we made a major change on our sales organization in our merchandisers and how they go to market in natural foods. It's a little slower, but there's a big learning curve there. In the long end, it will be the right thing for the business because of technology, because of learning and the type of people. So, there's a lot we are going to do and change for the long-term benefit that we may see some effects now that we're going to see some major opportunities and major rewards later on.

Okay. And then just on the trade spend side, can you give us any broad sense proportion -- in proportional terms what comes from a shift in trade dollars versus what's truly incremental?

Actually, as we look at our second half, it is primarily shifts in trade dollars as opposed to incremental investments.

Okay, that helps. Thanks.

Thank you.

Thank you. And our next question comes from Rupesh Parikh of Oppenheimer. Your line is now open. Please go ahead.

Good evening, and thanks for taking my question. So, I want to switch topics maybe to HPP. Just wanted to get a sense, maybe a little more color in terms of what drove the stronger margins and how to think about margins going forward?

So, what drove strong margin there is, number one, our -- the conversion to more and more branded products under Plainville, and more and more antibiotic-free and organic. And one of the big things that we are entering in a big way is the whole deli program, further processed where there's higher prices. So, where do I think the margins go? Listen, when we were at 13%, I was asked could we get to 15%; we got to 16%. There's big demand out there for turkey today and antibiotic-free -- antibiotic-free deli. So, I see some good opportunities to increase our margins on our Hain Pure Protein business. And again, it's a category that's growing in high double-digits.

And then sticking to that topic, we're hearing more about deflation on the meat side, at least in conventional meats. In your Hain Pure Protein business, is -- are you still getting price increases or is there any deflationary pressures in that business?

We're not getting price increases. We're seeing some higher prices on organic turkey and some of our turkey breast and deli prices. But at the same time, we're not seeing deflation out there at all.

Okay, great. And I'm going to sneak in one more question. Just going back to your comments before about the natural channel and that you were seeing flattish growth, I just want to get -- how does that flattish growth compare to what you have been seeing in recent quarters?

Go ahead, John.

Yeah, it actually is about a 100 to 200 basis points improvement on we'd seen previously.

Okay, great. Thank you.

Thank you. And our next question comes from David Palmer of RBC Capital. Your line is now open. Please go ahead.

Thanks. Good evening. I wanted to ask a follow-up question sort of towards--

Hey, David, you've got to speak up. We want to answer your question, but if we can't hear you.

You can't? Okay. I'll speak up a little louder.

Okay.

The distribution gains that we see in the Nielsen data in your conventional channels and this is sort of a follow-up to what we saw -- what we talked about at ICR in that breakout. I just want some color about why you think those -- the growth with new SKUs in conventional channels has slowed? Was it in certain categories where you saw that that stalled out or maybe there were some SKUs coming out that caused a net effect there? Can you help us analyze that in the last year, what's going on?

Sure. So David, what we think it was, was that we brought some brands that, quite frankly, shouldn't go into the conventional channel. And that's part of what Irwin talked about before. So, as we looked at it, there were some soup SKUs that really did not belong in that category and went in and washed out in a year's time. So, that's why our whole focus is -- look, let's focus on the top 500 items. We know they turn. We know they get traction. This way, you are not wasting your slotting and more importantly, you have got a better selling case. We actually are pulling back from some of the new items that we are showing to the conventional channel because, quite frankly, they -- we owe it to them to prove out those items before we bring them into them. So, again, that's why the whole thrust is to focus on the top 500 SKUs.

And David, just to that, I think, again, what you heard me say before not one glove fits all. When I come back and I look at Ella's and Earth's Best have different consumers and different markets. Does Ella's and Earth's Best have to be in the same accounts together? And should Ella's just be in natural where you can get value, pricing power, et cetera? And that's the same with some of our other brands, as Health Valley, who went into mass-market, doesn't belong there. And I think, as we tried products, we've also had retailer say we want more and more natural products. And did we have too many in there and not the right mix? So, I think that's kind of, as we come back now and we look at it, where does one glove fit for mass? Where does the glove fit for grocery? And where does the glove fit for natural? And as you look at the different silos out there, there's 10,000 independent naturals. There's Whole Foods, there's Sprouts, there's grocery, there's mass-market, there's ecommerce. There's a lot of customers out there to sell with a lot of different products and I think that's the uniqueness within Hain. The other thing is, is this here. If we want to sell a cheaper coconut oil, it's not going to be under Spectrum. But it may be under a Hain product or it may be under one of our other brands and we have the ability to do that.

Just a quick follow-up on snacks. There has been a number of companies that are talking about how there are smaller brands that are gaining more share, at least there's a fragmentation going on, plus the lack of available display space, is sort of a twin problem. And whether it's Snyder's Lance or the Pirates Booty brand from B&G, there seems to be just a rightsizing of the expectations to the downside not just for a quarter or two with snacks, but for a longer period of time. Do you subscribe to that? Or do you think that the trajectory of your snacks business is just going to be different longer term?

Well, I think -- we don't have potato chips. We have a vegetable chip, on Terra Chips, and we have a different product. I think our Garden of Eden tortilla chips are different. Listen, what we've seen on Sensible Portions is exactly what you just said happened at Walmart on displays. On the other hand, we have very little distribution today in grocery. So, I subscribe to some of it. But you've got to go out there and be unique and different. And our tortilla chips are 70% organic and GMO-free. Our Terra chips are a different product. And I think we offer different than just a potato chip or a kettle chip or just a pretzel. Frito has a big distribution system to compete with out there. And if you don't have a DSD distribution system or are not part of a DSD, and now there's other ways to get that space, whether it's using a broker to get your products on the shelf and getting the displays. But snacks is a whole other animal to deal with; how to get the displays, how to get the products, and how to differentiate. Because there is -- I go through Kennedy Airport or LaGuardia Airport, there's brands of snacks there I've never even seen. So, again, the snack business is something that you really got to put distribution or you got to put merchandisers behind it to get the displays and have in different products. And I absolutely think we have that in Terra, Garden, Little Bear Burritos and Sensible Portions.

Thank you very much.

Thank you.

Thank you. And our next question comes from Ken Goldman of JPMorgan. Your line is now open. Please go ahead.

Hey, good morning or good afternoon.

Its afternoon, Ken.

Its morning somewhere, right? In getting from GAAP to pro forma numbers, there's an excluded item that's Celestial Seasonings marketing support. Would you mind walking us through what this charge entails, I guess, and why it's something that should be considered outside the normal cost of doing business?

It was our -- as we cleaned out inventories, Ken, it's a one-time to clean out old packaging and inventories to introduce our new pack that we do every seven or eight years.

And remember the shelves, not just for us but for everybody -- the shelves move slower because of the warm weather. So as result, when we expected to have the shelves entirely turned over, we still had some remnant of the old packaging still out on the shelf.

Okay.

And some of that, Ken, is, as we took over the K-cups from Green Mountain, some of the cost for our startup and cleanout of some of the K-cups as we inherited from Green Mountain. So, we took that business over, which -- in late November. So, some of it's that. By the sound of your question, I know you don't agree with it, but it was clean it off--

No, no.

It was basically, we got the old product off the shelf to get the new product on the shelf to see what we're seeing today, and seeing what works instead of have a mix of old and new on the shelves and which will confuse the consumer even more.

I don't agree or disagree. I was really just curious. Another question. Corporate unallocated expense, it's as low as it has been in years. Is this related to compensation costs? Or is there something else? I'm just curious how to think about modeling that one going forward.

Yes. Some of it is -- listen, as we've looked at healthcare costs, as we've looked at integration, lower SG&A at our Hain Pure Protein and as we've come ahead -- we have consolidated some business and lower compensation costs.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from Andrew Lazar of Barclays. Your line is now open. Please go ahead.

Good evening everybody.

Hi, how are you?

Very well. Thank you. Two things from me, if I could. The first one I may have missed and I apologize if I did. But the $100 million plus productivity that you've identified, I know you don't have all the specifics yet, but just to be clear, do you see that as incremental to the ongoing productivity that you deliver each year, like the $60 million this year, as an example? I just want to make sure I have that right.

Andrew, yes. So, Andrew, one of the things that we used to do each year is look at productivity around the world and where was opportunities on co-packers, purchasing, et cetera. When we would do an acquisition, we would integrate it into our purchasing, integrate it into our procurement. And if they were buying one size glass jar, we continue to buy that glass jar for them. Or if they were buying a certain sea salt, we continued to buy it. What we plan to work with, with BCG, is how we get down to three glass jars or how do we get down to two sea salts? And how do we look at our ingredients? How do we come back and look at our freight handlers and using one lane or two-lane? If we have 18 distribution centers, do we have the wrong distribution centers? Shelf life, as we -- with our products we have a much shorter shelf life. And is there certain businesses we shouldn't be in? Because from the time the product is manufactured to the time it gets to the retailer, are we left with 30 days code on it? So, that is things they are going to be going through. At the same time, they are also going to be looking at our trade spend. And the last thing we're going to be doing is reducing trade spend; if anything, increasing it. And how are we using our trade spend more effectively?

Got it. Okay, thanks for that. And then I think a lot of the questions -- well, first of all, thanks for getting into not only maybe some of the near-term tactical sort of challenges, but maybe more acknowledging some of the more dynamic shifts or changes going on in the industry that you've got to address through investment spending, what have you. As we think out to -- maybe not this year but fiscal 2017, it sounds like you've got incremental investments that will really be kicking in next year. I know we're not clear on the timing of the productivity flow through yet, but I guess is there a scenario where we ought to be thinking about fiscal 2017 as a year where maybe there's a bit of a mismatch maybe in timing between benefits flowing through from productivity versus what you've got to spend? And obviously, you'll have some impact from the SKU rationalization as well. I'm trying to think out around expectations for 2017. And is it maybe a little bit of a reset year to really get this business in the right place to grow from that base? Or do I have that kind of wrong?

So, I hope you have it wrong, because I don't like reset years, number one. So, I think -- listen, I think a lot is we come back and look at 2016. I think if you step back, Andrew, we've got some very, very strong businesses and we've got some businesses that need some change. I think the big thing that we are recognizing is this here, how we look at supply chain and how that evolves within Hain. We put together lots of acquisitions. So, that's number one. Number two is this here. What we're not looking at, like a lot of other packaged goods companies you cover, is categories that are declining and how do we stop the decline. What we think and what we know and our research knows and the big thing is here, is we focus on household penetration and how many households today -- there's 94% of households that buy organic products, right. There's a big percentage that buy one Hain product. So, again, the question is how do we go out there and invest to take share away from conventional? Number two is, whether it's Earth's Best, whether it's Terra, whether it's Garden, how do we get more distribution points? And number three, I think the big thing is, from our trade spend, how do we get more benefit from our trade spend? And I think the last piece is, as I said before, our business model with -- has to change and look at it. And it's probably more complicated than a lot of the other big consumer packaged goods companies. But what we are looking at, how do we get pricing power, because that's what everybody's complaining today. How do you get price increase? How do you get pricing? It's different by every class of trade today. And we know why a consumer is going to Walmart. We know why a consumer is shopping, whether at Target or grocery. And we got a lot of brands where we think there's pricing power. And have we been able to get that pricing power as we move it into every class of trade. So, in 2017, I think, again, there's a lot of great things happening within Hain. There's a lot of good things. And there are some things that absolutely got to change. But I think what we're doing is boxing in the things that got to change, which will help us tremendously in 2017.

Got it. Thank you very much.

And with that, from a transitional year, Andrew, I think this is the first time and I think it is the first time that we have ever worked with a BCG to help us box those in, to figure out how to get all the benefits out there.

Great.

Before, we all -- we did it internally.

Sounds good. Thank you.

Thank you.

Thank you. And our final question comes from Andrew Wolf of BB&T Capital Markets. Your line is now open. Please go ahead.

Great. Thanks for extending the call beyond 5:00, because we know it's 5:00 somewhere.

We waited for you. Andy, we waited for you.

Okay. I just wanted to get the time of day right and make that 5:00 somewhere reference. Anyways, so the brand segmentation you're talking about, is that coming from working with BCG? Because it strikes me when I talked to you recently and I kind of tried to go in that direction, I wasn't sure you were thinking that strategically in that direction and segmenting the brands for different segments and different types of stores.

So, Andy, I -- listen, we spent a lot of time with BCG and I don't think anybody is ready to make recommendations. It didn't -- it did not -- in discussions with them, it absolutely has come up. But again, it's coming from internally, as we have met with every one of our retailers. And at same time, as we sit here and read data and we look at pricing and we look at our brands, that's where it's coming from and as we see some of the growth of our brands in mass-markets and we see the fall-off, and we see the pricing in mass-market versus in natural food stores, et cetera. So, that has been determined internally with BCG asking us a lot of questions. And again, we already have the complexity. We already have the brands. What we got to do is match them up now with the right retailers to get them to the consumers.

Yes, and I just wanted to extend that question to -- so if you're saying this brand fits more in natural, this brand fits more in mass, yet the categories fit in both, so you're going to have to create some new sub brands, I would imagine.

Well, it's not creating new sub brands. Listen at the end of the day; we start with a clean base of products. 99% of our products are GMO-free. All our products are natural, okay. 40% of our products are organic. 71% of our grocery and snack products contain 13 ingredients or less. So, it's not like, oh, my God, we got to go out and clean up this ingredient before we can go there. So right now, first and foremost, where we have got to start -- everything got to fit natural first. And how do we roll it out from there? And at the same time, as I said, we have plant-based milks under WestSoy or under Imagine. Where does that brand belong to? We have certain products, whether its chili -- there's organic chili, there's vegetarian chili and there's natural chili. I always say this, go look at our section in the soups area of the store. We have Health Valley soups, we have Imagine soups, and we have gluten-free soups. But you don't see Campbell's or Progressive Soups in the stores. So, with that, we have different price points and different blockers in there, and different promotional times. And that's where we have to come back and sort of say here's where we're going to get value; here's the difference in packaging. Some are vegetarian, some are organic and some are just natural. And how do we go back there and own the shelf and the category in soup? And that's what we've got to come back and look at Hain, is how we own the category. It's not just Terra Chips, Garden of Eden, Sensible Portions or burritos. It's the snack category. It's not just Alba, JASON's or Avalon; it's the personal care category. It's the grocery category. As we create a beverage category with Celestial Seasonings and Blueprint, our Greek yogurt category. So, that's how you need to look at us, is categories today, not just our brands. We've got so many products out there within our brands; it's how many products we have within the category. The other thing that's changing today is distribution. It's a fresh category today. We've got more and more products in fresh. It's much easier to move more products into fresh for us than we have been able to do before. So, a lot will change with brands, categories and how we sell it. The other thing is come back and look at complexity of our co-packers in our own manufacturing system. Maybe there are certain categories we just don't want to be in because there are not the right co-packers there for us. So, they are all things that we're looking at today to get greater sales penetration and greater sales.

And I want to echo what Andrew and I think Scott were saying about this has been very good for us to think, as you're revealing more of your strategy for us and how you're thinking about it. Just to drill down on one thing John talked about with Celestial doing better, back to the execution in the quarter, John, just sort of back of the envelope, it looked like it took about a 5% to 10% net realized price investment to get the needle moving on units. I think you said you got a 10% bump. Is that in the ballpark, throwing horseshoes?

Yeah, it is. I'd probably say it's closer to the 5% than the 10%, Andy.

Okay, great. All right. Well, thank you.

Thank you.

Well, thank you, everybody. And I hope we've been able to answer all your questions. As I said earlier on, I have Ross Weiner here. Ross, I want to thank you for all your contribution, your four and a half years. And good luck in all that you have you been -- contribute to Hain. And as I call Ross, he's a couple million dollar man, so. So, I come back and I say this here. We have incredible brands. We have a great roster of people. We have a great strategy and we know how to execute. Again, I go back and reiterate. It was our highest quarter ever in sales in the company's history. It's our highest profitability quarter, making operating income of $92 million. There's a lot we got to change, and we know that and we recognize that. And as I said before, working with the BCG and going out and getting the help to do that on many aspects will help us get to that $5 billion. As we started to go back after ICR and spend more time on this year and as Andrew asked about a reset and meeting with our customers out there and doing focus groups on our consumers, there's lots of things we did with Celestial Seasonings to change our packaging, our MaraNatha, bringing it back in stores. And what I say is some things went right and some things didn't. And with that, we're flexible and nimble and we'll make things happen. And where things don't go right, we'll admit it and make the change. But what I got to tell you is I feel great about the brands, the category, the execution around here and the people that have it -- that make it happen. We have Super Bowl Sunday coming up. Eat healthy. Buy our FreeBird chicken wings, our Plainville chili that's a turkey chili that's out there, our Garden of Eden snacks, our Terra Chips, our Sensible Portions. We do have Walnut Acre salsa out there. And that those that are vegetarian, we have a lot of meat-free products from Yves. And I guess because of Celestial Seasonings, go, Denver, go. And everybody have a good evening. Thank you very much.