Central Garden & Pet Co (CENT) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Central Garden & Pet Fourth Quarter Fiscal Year 2002 Earnings Conference Call.

At this time, all participants are in a listen-only mode.

This will call be open for questions and comments following the presentation.

Instructions will follow at that time.

If anyone should require any assistance during the conference call, please press star zero on your touchtone phone.

As a reminder, ladies and gentlemen, this conference call is being recorded.

I'd like to introduce your host for today's conference call, Mr. Drew Tammen Director of Capital Markets and Investor Relations for Central Garden & Pet.

Sir, please go ahead.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us today to discuss our financial results for the fourth quarter and fiscal year ended September 28th, 2002.

I expect by now you've all seen our press release and form 10K, which we put out earlier today.

With me on the call are Bill Brown, Central's Chairman and Chief Executive Officer, Glenn Novotny, our President, and Stuart Booth, our Chief Financial Officer.

Before I review the fourth quarter and full-year 2002 results and turn the call over to Bill, I would like to remind you of the safe harbor provision of the Private Securities Litigation Act of 1995.

Statements made during this conference call which are not historical facts, including future earnings guidance, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.

These risks are described in our 10K for the fiscal year ended September 28th, 2002, which was filed earlier today, and other Securities and Exchange Commission filings.

Also, as noted in our press release on Tuesday, our restatement of financial results for 1998 through 2002 for adjustments related to manufacturing-related costs associated with our Pennington and Kaytee subsidiaries had no impact on cumulative results or 2002 profitability, nor do they alter in any way the fundamentally positive trends in our business today.

Turning to our financial results, today we reported that net income for the fiscal fourth quarter increased to $751,000, or four cents per diluted share, from a loss of $13.7m, or 74 cents per diluted share, in the 2001 period.

The improved earnings were driven by continued growth in our higher-margin, branded product sales, significant cost reductions, including unusual expenses, the elimination of goodwill amortization, and lower interest expense.

Net sales for the 2002 quarter were $241m, compared to $246m in the year-ago period.

The slight sales decline was due to lower sales of other manufacturers' products, partially offset by increases in our branded product sales.

For the year, net income for fiscal 2002, before the effect of SFAS number 142, was $28.5m, or $1.44 per diluted share, compared to a loss of $7.1m or 39 cents per diluted share in fiscal 2001.

The improved earnings for the year were due to growth of our higher margin branded product sales, significant cost reductions, including unusual expenses, the elimination of approximately $11m of goodwill amortization, increased other income, and reduced interest expense.

As previously reported, we adopted SFAS number 142 for goodwill and other intangible assets for the fiscal year beginning September 30th, 2001.

As a result of this adoption, we recorded a pre-tax non-cash charge directly on goodwill of $146.7m, or $112.2m after tax.

Including the effect of the accounting charge, we reported a net loss of $83.7m, or $3.44 per diluted share for fiscal year 2002.

Net sales declined slightly, from $1.12b in fiscal 2001, to $1.08b in fiscal year 2002, due to fewer sales of other manufacturers' products.

Also, on Tuesday and today, we announced that we anticipate substantial earnings growth in fiscal 2003.

Our expectation for fiscal 2003 is that net income will be in the range of $1.70 to $1.80 per diluted share.

On the call today, Bill will provide an overview, Stuart will discuss the details of the financial results, Glenn will provide additional insight into the pet and garden operations, as well as 2003 guidance, and then we will open the call for questions.

And now, here's Bill Brown.

Bill?

Thank you, Drew.

Ladies and gentlemen, thank you for joining our call today.

As reported in our press release today, we've had an excellent fourth quarter and full year, and we continue to make significant progress.

Our pet and garden business segments both came in with substantial improvements over last year, which are largely due to sales growth in higher-margin branded products, along with cost reductions.

Stuart and Glenn will provide more detail for you shortly.

As we have reported to you in previous calls, our strategy during the past several years has been to build our company into a leading marketer and producer of branded products, a major shift from distribution of pet and lawn and garden supplies.

We undertook this transition because we recognized the opportunity to build a portfolio of leading brands and enhance profitability.

We are capitalizing on our knowledge of the pet and lawn and garden businesses, and our strong relationships with retailers, as well as our nationwide sales and logistics network.

Our goal has been to diversify our business and improve operating margins by establishing a portfolio of leading brands.

Virtually all of our sales before fiscal 1997 were from distributing the products of other manufacturers.

Since then, our branded product sales have grown to approximately $800 million, or about 75% of total sales, in fiscal 2002.

During this same period, sales of other manufacturers' products have declined to about $250 million, or approximately 25% of total sales.

Our gross profit margins have improved from 13.6% in fiscal 1996 to 29.7% in fiscal 2002.

This transition has not been easy.

We have stabilized the sales and logistics sides of our business, and have put most of the associated litigation behind us.

This is evidenced in the results we reported today, and the fact that we have achieved four consecutive quarters of significantly improved performance.

We're pleased with our progress and profitability in 2002, as well as our prospects for 2003 and beyond.

And now, I'd like to turn the call over to Stuart Booth, our Chief Financial Officer, to take you through the financial results in more detail.

Stuart?

Thanks, Bill.

Now I will discuss the quarter and the year.

Net sales for the fourth quarter of fiscal 2002 were $241m, a $5m, or 2% decrease, from last year.

This was the result of an increase in our branded product sales, more than offset by a decrease in sales of other manufacturers' products.

Most importantly, all branded product sales growth for Central was organic.

Gross profit for the quarter increased by 4%, to $67 million, as a percentage of net sales from 26% to 28%, compared to last year.

This is the impact of higher-margin branded sales and reduced sales of other manufactured products.

Our pet and garden groups both contributed to this improvement.

Sales, general, and administration expenses for the quarter were $64m, a decrease of 22% compared to last year.

The decrease in SG&A was due to lower dales of other manufacturers' products, and no costs associated with the downsizing of sales and logistics businesses, compared to 2002-- 2001, as well as no goodwill amortization.

Net interest expense for the quarter was $3.3m, a $1.9m or 37% decrease from last year.

The decrease was attributable to both lower average short-term borrowings and lower average interest rates for the 2002 quarter.

Average short-term borrowings for the fourth quarter of fiscal 2002 were approximately $70m, compared with $136m last year.

The average short-term interest rate for the current quarter was approximately 5.5%, compared to 7.1% in the comparable period in 2001.

Net income for the quarter was $751,000 or four cents per diluted share, versus a net loss of $13.7m, or 74 cents per diluted share, in the fourth quarter of fiscal 2001.

Depreciation and amortization for the most recent quarter totaled $4.8m, compared to $7m in the prior year.

The decrease is due primarily to the elimination of goodwill amortization in fiscal 2002, compared to $3m recorded in the fourth quarter last year.

Turning to the fiscal year, net sales were $1.08b in 2002, a 4 percent decrease compared to last year.

This was the result of increases in our branded product sales, more than offset by decreases in other manufacturers' products.

Our branded product sales were $796m, or 74% of sales.

This is an increase of $24m over last year.

All branded sales growth was organic.

Gross profit for the year increased 2.7%, to $320m, and as a percentage of net sales from 27.8% to 29.7%, compared to the last year.

This is primarily related to more higher-margin, branded product sales and fewer sales of other manufacturers products.

Our pet and garden groups both contributed to this improvement.

Operating income improved by $38.7 million, to $52.8 million for fiscal 2002, due to higher gross profits and a $30.2 million decrease in SG&A compared to last year.

The decrease in SG&A was due to lower sales of other manufacturers' products and lower costs associated with the downsizing of our sales and logistics businesses, partially offset by higher legal, litigation, and insurance costs in 2002, compared to 2001.

SG&A expenses for 2001 also included $11.3m of goodwill amortization.

Net income for the year before the cumulative effect of adopting SFAS number 142 was $28.5m, or $1.44 per diluted share, compared to a net loss of $7.1m, or 39 cents per diluted share in fiscal 2001.

With the effect of the non-cash charge, the company reported a net loss of $83.7m, or $3.44 per diluted share, for fiscal 2002.

Turning to the fiscal 2002 year-end balance sheet, we made significant improvements in managing our working capital.

Accounts receivable declined by $10.8m, or 8% year-over-year.

Inventories declined by approximately $24.7m, or 11%.

Accounts payable declined by approximately $31m, due primarily to our reduced inventory levels.

We also made significant strides in improving our financial strength in 2002.

At fiscal year-end 2002, notes payable were $60m, versus approximately $120m last year, or a 50% reduction.

Also at year-end, we had additional unused borrowing capacity of $103 million under our two principal lines of credit.

Glenn Novotny, our President, will now review the operational results for the pet products and garden products segments, and provide guidance for year 2003.

As stated earlier, both the pet products and garden products segments turned in a strong quarter.

Our pet products segment continued to concentrate on growing sales of consumer and professional branded products.

Pet products consist of Kaytee, TFH, Four Paws, Well Mark, and the aquarium businesses, All-Glass, Oceanic Systems, and Island Aquarium, as well as our pet sales and logistics operations.

This segment reported fourth quarter sales for $115.8m, a decline of $1.8m, or 1.5% compared to last year.

The increased sales of our branded products were more than offset by lower sales of other manufacturers' products.

Operating income for the fourth quarter was $10.5m, compared to $5.8m last year.

This improvement was due to increased sales of branded products, cost reductions, including reduced unusual expenses, and improved mix of sales.

For fiscal year 2002, sales were $471.7m, or 1% below last year.

This decrease in sales was attributable to a $22.1m sales in other manufacturers' products, related to the previously announced discontinuance of the Kal-Can business and the related closure of three small distribution warehouses, while being largely offset by increases in our branded sales.

Our branded sales organic growth was above 7% for the year.

Operating income for the full fiscal year was $43.4m, compared to $34.8m, or an increase of 25% compared to last year.

This increase was attributable to increased sales of branded products, new product introductions, improved mix of sales, and cost reductions, including reduced unusual expenses.

I will now quickly review the highlights of the pet brands for the quarter and year.

Kaytee has an exceptional quarter and year, and continues to be a market-leading innovator in bird and small animal foods and treats.

During the year, Kaytee introduced several new products in the U.S. and Europe, upgraded packaging, and implemented productivity improvements and expense controls.

Kaytee also launched two new product line extensions, with a Kaytee branded line of high-end bird cages and the [Sitori] line of [koi] and goldfish food.

In August, 2002, Kaytee received the Strategic Alliance Vendor Award of the Year from Petco at their annual meeting and trade show.

Also, Kaytee broke ground on its new facility in Chilton, Wisconsin, in October of 2002, with a scheduled completion date of fall, 2003.

This capital investment will substantially modernize and expand Kaytee's abilities.

The aquarium businesses turned in another good performance on both the top and bottom line.

All-Glass's continued success is largely attributable to their innovative new products and cost controls.

The new Nylabone five-gallon aquarium line in the translucent hot colors was followed by the launch of the new Nylabone 2.5 gallon aquarium.

Both products have experienced excellent sales.

We were also pleased with our Oceanic high-end aquariums, which have received significant sales growth in the year.

Well Mark produced another strong quarter and year, due primarily to retailer and consumer acceptance of new product sales in the Zodiac line, and continued strength of [Methaprine] sales to Muriel for its frontline products, sold into the veterinary markets.

Well Mark experienced a significant business in its professional product lines for fire ant control in Australia and mosquito control in New Zealand.

And Well Mark is a leading supplier for professional and consumer applications of mosquito larvae sites under the Altocid and PreStrike brands.

We expect to see continued strong demand for these products in 2003, which help combat the deadly West Nile Virus.

At TFH, our Nylabone of dog chews and edible bones have achieved significant consumer acceptance, while our book business has continued to upgrade its product offerings and reduce its operating costs.

Hallelujah.

And Nylabone's latest new product, the Big Chew line of dog chews, won the 2002 Institute of Packaging Professionals Ameristar Packaging Award for its innovative Big Chews for Big Dogs bone package.

In fiscal 2002, TFH implemented steps to significantly reduce operating costs.

The reduction of manufacturing space and improvement in book manufacturing costs and quality is expected to result in significant cost savings in 2003 and beyond.

Four Paws had a good year, introducing a new line of pet cages, improved packaging, additional listing at several large retailers, and continued expense control.

Our pet branded companies continue to focus on delivery of high-quality, innovative products to the pet industry.

In 2002, 11.4% of our pet brand company sales were derived from products introduced in the last two years.

We continue to position our pet companies as the innovation leaders in each of their categories, and that is our strength.

Our pet sales and logistics group continues to support our proprietary brands and selected strategic partners through distribution, in-store merchandising, promotion, and advertising.

This group made significant strides in the quarter and year by increasing our branded sales over the prior year and significantly reduced working capital in their business.

In summary, pet products produced a strong quarter and year.

Let's now turn to our garden products segment, which also had a good quarter and year.

Garden products, which consists of Pennington seed, AMDRO, Grants, Lilly Miller, Norcal Pottery Products, Matthew's Four Seasons, and our garden sales and logistics operations.

This segment reported fourth quarter sales of $125m, a decrease of $3.7m, or 2.9% compared to last year.

This decrease was due to lower sales of other manufacturers' products.

Garden products incurred an operating loss for the quarter of $2.7m, compared to a loss of $14.3m in the same period last year, an improvement of $11.6m, and I guess a double Hallelujah.

We continue to see excellent progress in garden product's gross margin improvement and expense controls.

For fiscal year 2002, sales were $606.7 million, or 6.2% below last year.

This decrease in sales was due to reduced sales of other manufacturers' products, including the Arch Chemical pool product lines.

Operating income for fiscal year 2002 was $37.3m, an increase of $24.6 million from last year.

I will now quickly review the highlights of the garden brands.

At Pennington, sales were down slightly from last year, due to the discontinuance of lower-margin third party distribution sales of pool chemicals.

Sales to Wal-Mart of the Eliminator brand of garden chemicals manufactured by Pennington continued to grow.

Bird feed sales also continued to be strong in 2002.

More importantly, Pennington's operating income increased significantly compared to last year, due to higher gross margins associated with the branded product sales and expense controls.

During the fourth quarter and throughout the year, Pennington has made great strides in launching new products and repositioning some of our existing products.

We successfully launched and achieved major retailer placement of our new premium lines of our bird feed under the Premium Masterpiece Collection and Rainbow Valley brands.

On the grass seed line, our premium turf-type [Tall Fescue Plantation] variety experienced more than 25% sales growth this year, while our premium seeded turf-type Bermuda grass Princess brand was ranked number-one by the National Turf Evaluation Program, a very prestigious award.

Princess is now being sold to golf courses all over the world, and Pennington grass seed will also be used on the playfield for the 2003 Super Bowl in San Diego.

In addition, 2002 was the biggest year in the history of Rebel, premium turf-type [Tall Fescue] and sales of our recently introduced Max Q specialty forage grass for livestock continues to increase as the product gains broader acceptance by the farmers and ranchers.

Turning to our other garden products brands, AMDRO, which is the number-one consumer fire ant bait brand in the country, benefited from continued acceptance of promotional programs and increased fire ant activity due to weather conditions throughout the South.

For 2003, AMDRO has introduced its new AMDRO yard treatment product, and retailer acceptance has been strong.

Our Grants pest control product line produced a healthy increase in 2002, in both sales and profitability, through increased product placements and the launch of their new carpenter ant and termite control products.

Matthew's Four Seasons completed the year with a significant improvement in bottom-line results, driven by improved product line margins.

For 2003, Matthew's has introduced numerous new products, including trellises, plant stands, landscape bridges, planters, and arbors.

Listings for the upcoming season are stronger at several of our major customers.

Our garden sales and logistics business continues to support our proprietary brands and selective strategic partners through distribution, in-store merchandising, promotion, and advertising program.

This business delivered significant improvement in bottom-line performance versus last year.

In summary, garden products made excellent progress in reducing cost, improving new product margins, new product introductions, and very importantly, profitability.

Turning to 2003, we are expecting the year to be stronger than 2002.

We expect our pet segment to produce another strong year in sales and profits, driven by our initiatives in new product launches, increased business with many customers, and continued consumer preference for our high-quality premium pet supplies.

Garden listings are set and expected to bear fruit during the garden season.

We are also excited about new listings at Wal-Mart, under their Eliminator line of chemicals, and numerous other initiatives with other retailers.

Our guidance for 2003, which I will discuss next, includes our current view of the first fiscal quarter, which ends in two weeks.

While we expect strong results in 2003, we expect the first quarter to be soft, and that is reflected in our 2003 guidance.

The primarily factors contributing to the softness in this quarter are, first, the 2002 severe drought in the mid-Plaines states, the Dakota area, caused substantially reduced crop yields and drove grain prices significantly above normal levels.

So far, we have only partially recovered these costs through price increases for our wild and pet bird feed products.

Second, a major retailer has decided to take its early orders for grass seed in January this year, instead of December, like they did last year.

This is moving approximately $4m to $5m in sales in grass seed from Q1 to Q2 for our grass seed business.

And thirdly, we are experiencing significantly increased insurance costs, particularly directors and officers insurance.

These factors make for a soft first quarter and are reflected in our guidance of $1.70 to $1.80 earnings per share for the year.

With all this in mind, we are initiating guidance for 2003 and going forward, we plan to provide more information on a more frequent basis.

So, now let's go through our outlook in more detail and share how we arrived at our earnings per share guidance range of $1.70 to $1.80 for fiscal 2003.

First of all, sales are expected for 2003 to be in the $1.1b to $1.15b range.

In providing this guidance, we looked at our expectations for both our own products and sales of other manufacturers' products.

As you know, our margins are much higher on sales of our proprietary products than they are on sales of other manufacturers' products.

With respect to sales of our own proprietary products, we are expecting organic growth of 4% to 6% for the year.

In arriving at this range, we looked at our historical growth in our brands and our new product development pipeline.

In regards to other sales-- in regards to sales of other manufacturers' products, we are expecting sales to decline modestly.

Our experience over the past few years as we have dramatically decreased our sales of these products from a peak of approximately $900m in 1999 to approximately $250m in 2002.

While we expect the declining trend to continue, we anticipate the rate of decline will now be in a range of flat to 5% down in 2003 for third party product sales.

Gross profit margins are expected in the 29% to 31% range for the year.

In arriving at this range, we took into account a number of factors, including historical trends, the mix of our brands and other manufacturers' products, manufacturing costs and productivity improvements, and higher than normal grain market prices, which affect our birdseed and grass seed businesses.

Our SG&A costs reflect the mix of sales between our branded products and other manufactured products I just talked about.

As you are aware, greater sales of our proprietary branded products have higher margins and expenses that sales of products from other manufacturers.

Operating income is expected to be in the range of $70m to $76m.

Other income is expected to be approximately $2m in 2003, which is a more normal level of income for the company.

Other income in fiscal 2002 included $3.2m of income not expected to reoccur in 2003.

Interest expense is forecasted to be $12m to $14m, as compared to $14.6m in 2002.

The reduction is principally due to lower average borrowings.

Our effective tax rate is expected to be approximately 40% for 2003.

Net income is forecasted to be in the $35m to $38m range.

Average outstanding fully diluted shares are estimated to be approximately 23.5 million shares, which leads us to our guidance range of $1.70 to $1.80 per diluted share for 2003.

In addition, depreciation and amortization is estimated to be approximately $17m.

Our EBITDA is expected to be $87m to $93m range.

CAPEX is expected to be approximately $20m, which includes $8m for the Kaytee plant modernization, and expansion, which will be spent in 2003.

The major assumptions we are making for 2003 in these guidance numbers we just gave you are as follows.

First, there are no unusual weather events, such as droughts or exceptionally rainy or cold weather that abnormally affects demand for our products and grain prices.

Second, grain prices will continue at their current, higher-than-normal levels, and will only be partially successful in passing along increased costs to our customers.

Third, there are no significant changes in the competitive landscape.

Fourth, new product launches will be successful.

Our goal is to have more than 10% of our sales be from new products launched within the past two years.

Fifth, mosquito, flea, tick, ant, and fire ant product sales are maintained at historical levels, and there are no dramatic weather events that would affect them.

Our guidance also excludes the impact of any potential acquisition or major financing event.

This guidance also assumes that our convertible bonds will remain outstanding through the end of the fiscal year.

However, it is our intention to refinance them well before then.

We will revise our guidance once we have completed this financing.

This completes our guidance and major assumptions for 2003, and now I will turn the call over to Bill.

Bill?

Thank you, Glenn.

As you can see, we have made significant strides in our branded products business and are pleased with our progress and overall operating performance this year.

As we look to the future, we are keenly focused on five strategies, and I want to share them with you now.

They are: grow our brands, develop and launch new, innovative products, leverage our cost structure, position our company to support future growth, and pursue and complete strategic acquisitions or mergers in our industry.

By pursuing these key strategies, we believe we are positioning Central for continued growth and profitability in the years 2002 and beyond.

Thank you very much for joining us today on the call, and we'll now be ready to take your questions.

Operator?

Thank you.

If you have a question or a comment, please press the numbers one, followed by four, on your touchtone phone.

If your question is answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they are received.

We do ask while posing questions, to pick up your handset to improve sound quality.

Please hold while we poll for questions.

Thank you.

Our first question comes from Bryan Hunt of Wachovia Securities.

Sir, your line is live.

Thank you, and a very thorough conference call.

I'm sorry, I missed the CAPEX number, could you repeat the expectation for 2003, and what the CAPEX dollars to be spent?

Yes, the CAPEX expenditures, Bryan, will be $20m.

Of that, $8m is for a capital expansion project at Kaytee, which is a one-time event.

Our normal will be about $12m on a normal basis.

Yeah, Bryan, this year we spent $10.9m on CAPEX.

OK.

Next, could you talk about the cost savings generated at Pennington and KT, because it seems that you had a dramatic turnaround in fiscal 2002 and just [inaudible].

Yes.

Operator, we're having a tough time hearing on end here, if you can improve the quality, it would be great.

We'll turn our volume up.

At KT, what we have done, we have made a lot of productivity improvements there, by modernizing the plant, what we could, for small capital expenditures, and so we've seen is a reduced costing of our products up there, and we've also improved our product mix, with more pet products, which has a higher margin than the wild bird seed side.

At Pennington, what we've largely done there is pay a lot of attention to cost controls, and reduce costs and headcount in many of our operations and improve productivity there across the board.

That's very good.

And then with regards to sort of overall listings, you did hit a few high points on listings.

Could you give us a feel for listings, maybe as to your largest customers and your largest businesses, and do you feel like you've gained market share based on what your listings are, going into fiscal 2003?

Yes, I'll take a stab at that.

At Wal-Mart, as you heard, we do the Eliminator private label for them.

That is their store brand, and the Pennington folks have been able to expand with new products and increased market share in 2002 and looking forward for 2003 as well, and we've made some progress at Lowe's and Home Depot and others, in addition.

On the garden side, we are the category captain in several categories at PetSmart.

We're also a strategic vendor at PetCo; we've seen good progress there, as well as Wal-Mart and others.

So we've seen kind of across-the-board increases in our listings, and market share, in both garden and pet.

Can we have the next question, please?

Our next question is coming from Bill Chapel of Sun Trust Robinson.

Sir, your line is live.

Yeah, thank you.

A couple of quick questions.

One, could you maybe talk about the trends you saw in this past year, and past quarter, on kind of growth of branded products versus third party products?

Yes.

For the last quarter, on the pet side, we saw organic growth there of between 4 to 5%, I think 4.5 to 5.5%, I believe, and on the garden side, we are slightly smaller than that.

OK.

And as far as the decline in the third party product in that timeframe?

Decline in third party products was, again, part of it was on the pet side, because of the moving away from the Kal-Can business, that annualized in November of this year, so those sales are out of the mix.

And also, the Arch pool chemicals are gone.

I think we disclosed, I believe it's $14m in Kal-Can and $50 million in Arch Chemical, and you'll see that in the 10K.

OK.

And then maybe you can talk a little bit about where you see the branded products for next year, and new products?

You talked about, on the branded products, being 75 percent.

Is it going to get to 80, 85 percent in the next year, of revenue?

I don't think it'll get to 85.

It'll move north of 75, but I don't expect it'll be 80 to 85.

We expect to see our organic growth, I think I said earlier on the call, we see them growing about 4 to 6% on our brands, and our third party sales will either be flat to decline slightly.

And do you expect the mix of pet to garden to be roughly the same as this year?

It'll be close, unless we do an acquisition.

And one last question -- what was the percentage of business from new products this past year?

Well, I told you the number there is about, on the pet side, is 11.4 percent.

We measure that very deliberately, of products that were launched within the last two years.

That's our measure.

And on the garden side, it was little bit less than that.

I don't have that number handy with me here.

Can we have the next question, please?

Sure.

Our next question comes from Kevin Showers of Tiger Management.

Sir, your line is live.

Good afternoon, guys.

A couple of quick questions.

First of all, could you discuss your A/R as-- your reserve as a percentage of your gross receivables this year declined fairly substantially.

Could you give us some more insight there?

A couple of the things that happened is, you'll remember, at the end of last year, we had a K-Mart issue and a House To Home issue, and the House to Home was going away, and so the reserves were built, as I recall, to take care of that, and as it got dealt with, they were adjusted.

A/R, overall, as Stu reported, also was somewhat lower this year, but I think those are the two principal events.

Yeah, we've managed our exposure to K-Mart.

We're adequately reserved there.

Could you tell us what the composition is of the prepaid expenses and other current assets account is?

Go ahead.

Right now, that's including deferred income taxes as one of the major components.

Is there any prepaid, maybe, advertising in there?

There's a bunch of smaller items that make up that line item; that includes prepaid rent and other items.

But the major component is deferred taxes.

OK.

Next question?

Our next question is a follow-up question coming from Bryan Hunt of Wachovia Securities.

Sir, your line is live.

Yes, I was hoping you could give us some details on the decline in SG&A year-over-year.

If you back out the one-time item, it looks like SG&A dropped by close to $3m, and I was wondering if you could give us some insight into that.

Bryan, yeah, there is lots of things going through there.

Probably the easiest thing to do is take a look at the 10K, which we filed today.

Right.

And then also, I was wondering if you could explain, I guess, the restatement of improvement in SG&A in cost of goods sold dollars -- you know, based on what your press release states today versus the historical quarters, could tell us where the major shifts are?

In terms of dollars, we re-classed, on a net basis, about $25m over the last couple of years, from SG&A to cost of goods sold.

And it's largely-- it's due-- it's due to how we built up our indirect costs for manufacturing, but it's kind of an isolated issue, and we have it all behind us.

We've addressed all the issues related to it.

Next question.

Our final question of the evening is coming from Bill Chapel of Sun Trust Robinson.

Sir, your line is live.

Yeah, just one follow-up on litigation costs.

Can you maybe tell me what the litigation costs were in the September quarter and kind of what your expectations are for 2003?

Our budget is, for 2003, the guidance has in it $4m of litigation cost, which we think should adequately cover the expenses that we expect in 2003.

Do you have a number for the quarter?

I don't think we have a number for that; it may be--

It's relatively small.

--but it was relatively small.

We had the-- a trial coming up in March, so most of that expenditure is expected to be in the timeframe of January through April.

Thanks.

Next question.

That was the final question of the evening, sir.

Do you have any closing comments?

OK, sure.

We'll take more questions, but this is good.

Well, first of all, we thank you for participating in the phone call.

As you can tell, over the last year, we have had strong improvement each of the quarters, over the four quarters, and that's very important for us, to build the credibility that we set out to a year ago, to regain our credibility with our investors.

Our go-forward, you saw for the first time, we gave you a lot of detail on guidance for 2003.

Our goal in doing that, of course, is to continue to build credibility by what we plan to do is to under-promise and over-deliver as we move forward into the future.

That is our goal.

We believe we've positioned the company very strong, have a lot of good things in front of us for 2003 and beyond, and we're excited, and we thank you very much for your participation today, and look forward to talking to you, and we will be advising you more frequently as we move forward in the year.

Bill, any other comments?

Just very, very pleased with the efforts of our entire management team and our employee group to bring about the improvement in performance and get us positioned for the 2003 year.

We've got a great group here, and we are looking to accomplish very things.

And wish all of you a happy holidays and a very prosperous New Year.

Thank you.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.