Central Garden & Pet Co (CENT) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Central Garden & Pet's first quarter earnings conference call.

At this time, all participants are in a listen only mode and later we will conduct a question and answer sessions.

Instructions will be followed at the end of the conference.

If any one should require operator assistance please press star followed by the zero on your touchtone phone.

As a reminder ladies and gentlemen, this conference will be recorded.

I will now turn the floor over to your host Drew Hyman Director of Capital Markets and Investor Relations of Central Garden & Pet.

Please go ahead sir.

Thank you operator.

Good afternoon to everyone and thank you for joining us today to discuss Central's financial results for the first fiscal quarter of 2003 ended December 28th, 2002.

I expect by now that you have all seen our press release, which we put out earlier today.

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

Before I review the first Fiscal quarter 2003 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 the Company's Form 10-K fiscal year ended September 28th 2002, and other Securities and Exchange Commission filings.

Today we reported net sales for the first quarter of $212m, compared with $211m in the comparable fiscal 2002 period.

The company recorded a net loss for the quarter of $717,000 or $0.04 per diluted share compared with a net loss of $1.5m, $0.08 per diluted share in the comparable year-ago period before the effect of adopting SFAS-142, on September 30th 2001.

Central typically reports a lot, in the three-month period ending in December, which is the slowest time of the year for the Garden industry.

In first quarter of 2002, including the effect of non-cash SFAS-142 accounting charge of $146.7m or $112.2m after tax, the company reported a net loss of $113.7m or $6.17 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 & Garden operations and will update you on our guidance through the year.

And then we will open the call to take your question.

So, here is Bill Brown.

Bill.

Thank you Drew.

Thank you ladies and gentlemen for joining the call today.

As we discussed on our last conference call, our strategy of building our company into a leading marketer and producer of branded product resulted in an excellent year for us in 2002.

And we expect [Inaudible] in 2003 and beyond.

Looking at the year at this point we are on track with our 2003 guidance of a $1.70 to a $1.80 per diluted share.

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

Assuming our recently announced high-yield offering is successfully completed, we anticipate that the increased interest cost for the balance of the year should be largely offset by the elimination of the dilutive effect of the convertible notes.

Because of this, we do not expect to have to change our guidance, as a result of the offering.

On our last call, we said that while we expected strong result in 2003, we expected the first quarter to be soft due to higher grain prices insurance cost and delayed grass feed shipments to a major customers.

That's exactly how it turns out, and while the first quarter was soft in some respect, we are off to a good start and remain confident about the year.

And I would like to turn the conference call over to Stuart our Chief Financial Officer to take you through the financials in some detail.

Thanks Bill.

Net sales for the first quarter of fiscal 2003 were $212m a $1m increase from last year.

This was a result of a $3.3m or 2.1% increase in our branded product sales partially offset by a decrease in sales of other manufacturers' products.

All branded product sales growth was organic.

Gross profit for the quarter decreased by $30,000 to $61.2m and as a percentage of net sales from 29.2% to 28.9%.

Branded product margins were negatively impacted by a higher than normal grain prices caused by the draught in the plain States last year.

These higher expenses were only partially recovered to price increases for our wild and pet seed products.

Selling General and Administrative expenses for the quarter were $59.5m compared to $59.6m in the year-ago period.

Legal and professional fees per litigation were $1m in the 2003 quarter and $2.9m 2002.

Operating income for the first fiscal quarter of 2003 improved to $2m from $1.9m in the year-ago period.

Net interest expense for the quarter was $2.8m, a $1.1m or 28% decrease from last year.

The decrease was due both lower average [Inaudible] borrowings and lower average interest rates for 2003 quarter compared to last year.

Average short-term borrowings for the first quarter of fiscal 2003 were approximately $58m compared with $170m last year.

The average short-term interest rate for the current quarter was approximately 3.9% compared to 5% in the comparable 2002 period.

The company's effective income tax rate for 2003 quarter was 40% compared with 41% for the 2002 quarter.

The net loss for the quarter was $717,000 or $0.04 per diluted share versus the net loss of $1.5m or $0.08 per dulled share in the comparable period last year, before the effect of adopting SFAS number 142 on September 30, 2001.

Depreciation and amortization for the most recent quarter tolled $4.5m compared to $4.3m in the 2002 quarter.

Earnings before interest, taxes, depreciation, and amortization, EBITDA for the first fiscal quarter of 2003 improved to $6.5m from $6.2m in the year-ago period.

Unusual expenses consisting primarily of litigation expenses were $1m and $3.3m in the first fiscal quarters of 2003 and 2002 respectively.

Turning to the balance sheet, we continue to make significant improvements in managing our working capital.

Comparing the December 28th 2002 balances to the December 29th 2001 balances, accounts receivable declined by $29.6m or 22% year-over-year.

Inventories declined by approximately $6.7m or 3%.

Accounts payable decreased by approximately $38m.

Other current liabilities increased significantly year-over-year due to the reclassification of our convertible notes from long-term debt to short term.

As announced last week, we are currently undertaking a new $150m ten-year senior subordinate note offering to refinance our convertible notes, which mature in November.

This will re-capitalize our long-term debt structure without increasing our debt leverage.

In addition, we have commenced discussions with our lenders for our Congress financial and Pennington credit facilities to consolidate them into one facility.

We also continue to make significant strides in improving our financial strength in 2003.

At December 28th 2002, notes payable were $64.6m compared to approximately $120m last year and we had an additional unused borrowing capacity of approximately $121m under our bank lines.

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

Glenn.

Thank you Stuart.

Our pet product segment turned in a strong first quarter.

Our pet brands consist of Kaytee, TFH, Nylabone, Four Paws, Wellmark, Zodiac, All-Glass, Oceanic Systems and [ioncrame].

This segment reported first quarter sales of $118.7m an increase of $1.9m overcome 1.6% compared to last year.

Our branded product sales within this group increased by $3.8m or 4.4% organic growth.

Partially offset by decline in sales of other manufacturers products.

Operating income for the first quarter was $9.9m, compared to $7.8m last year, a 27% improvement.

This was due to increased sales of branded products, significant cost reductions and improved markets.

I will now review the highlights of some of the Pet brands.

Kaytee, the market leader of innovation in bird and small animal foods and treats, continues to perform very well.

The new line of Kaytee cages for pet birds as well as strong sales to key counts contribute to these results.

Our three aquarium brands previously mentioned continue to be the leaders in aquarium products.

Our line of high-end aquariums and mini bowl five and tune up yelling kids, continue to have wide spread consumer acceptance.

Wellmark which is a leading marker and producer of flee tech mosquito and other insect control products under the brand name Zodiac, altacid extinguish free strike.

We have to bring sales to near you for useful frontline plus also remain strong.

Our sales of altacid to mosquito abatement districts across the country have been strong and we expect them to continue to do the west Nile virus concerns.

We also continue to expect to see strong sales of free Strike, our new brand of mosquito control for consumers in 2003.

Our Nylabone premium brands of dog juice and edible bones have achieved significant consumer acceptance while our TFH book business has continued to up its product offerings and significantly reduce its operating costs as previously announced.

Our new lines of Four Paws pet cages and pet beds are receiving excellent acceptance in the marketplace.

As now turning to our Garden product segment, which consists of the following brands, Pennington, Amdro, Grant's, Lilly Miller, Norcal Pottery products and Matthew's Four Seasons.

This segment reported first quarter sales of $93.2m compared to $93.8m in the same quarter last year.

Both branded sales and sales of other manufactures products were essentially flat, compared to last year.

Garden products reported an operating loss for the quarter of $3.5m compared to a loss of $1.6m in the same period last year.

Pennington was as adversely affected by one significantly higher to normal grass prices for walbert (ph) tea products and two the deferral of approximately $6m of grass seed sales from December to January.

In addition our pineic and Grass seeds continues to be the innovation [Inaudible] leader in the category.

As we have previously announced last week Pennington is grass seeds is being used on super bowl playing field, which off course we expect the raiders to win.

We made sure as raider friendly grassy.

Our plantation variety of turf tall fesque has been number one in national quality tests and now it is the largest produced turf tall fesque (ph) variety in the United States.

In addition we have sold eight new grass seeds to Home Depot under the Pennington select brand and the develop a seed and saw the time program for Home Depot for 2003.

Our new Pennington vitane grass seeds, shift to turner in the quarter. but the type of brand is exclusive to our customer in china.

It was grown for that geography, what we expect to reliant to grow rapidly in 2003 and beyond.

Amdro which is the number one consumer fire ant bait brand in the country, experienced significant increases in sales due to a very effective fall advertising campaign.

We conduct junction with a in store merchandising program.

Additionally Amdro secured strong [retailery] acceptance towards new fire and ant yard treatment product.

Our garden sales logistics network continues to strategically support our garden brands to retail shop positioning, new store merchandising, cost effective stored or deliveries and expanding our own brands to more customers and expand its listings.

Looking to the future, we believe our garden brands are well positioned for the upcoming spring season.

We have expanded listing with our major customers and several new innovative products including Amdros, broadcast yard treatment.

Lilly Miller's iron safe fertilizer, Pennington's new grass seed varieties, new illuminator products for Wal-Mart and Norcal Potteries new halice (ph) direct merchandising program for their customers.

Additionally our pet brands are also positioned for a strong year.

We have several new products such as the Big chews for Big dogs, expanded line at mini ball cramps, Kaytee birdcages, expansion of the [Inaudible] food offering from Kaytee and the Pre Strike mosquito control product for consumers.

We also continue to expect to see organic sales growth for our brands because of increase listing at leading retailers like PETsMART, PETCO, Walmart, Target and our independent pet customers.

We're also pleased to report to remain on track with our full year guidance of $1.70 to $1.80 per diluted share.

To reiterate this guidance, we provided to you in our last call, I will now go through the outlook in detail.

First of all, sales are expected to be in the $1b, $100m to $1b, $150m range.

In providing this guidance we looked at our expectations with both our own products and sales of other manufacturer's products.

As you know our margins are much higher on sales of our proprietary products than they are in sales of other manufacturer's products.

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

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

In regards to sales of other manufacturer's 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 that the rate of decline will now be in a range of flat-to-down, 5% down in 2003 as we have indicated in last quarter.

Gross profit margins are expected to be in the 29-31% 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 in other manufacturer's products, manufacturing cost and productivity improvements, and higher than normal range of market prices, which affect our birdseed business.

Our SG&A cost reflect the mix of sales between our branded products and other manufacturer's products.

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

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

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 year 2002 included $3.2m of income, not expected to re-occur this year.

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

The reduction is principally due to lower average borrowings and does not reflect our high yield offering, which we will discuss in a minute.

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

Net income is forecasted in the $35-38m range for the year.

Average outstanding in fully diluted shares are expected to be approximately 23.5m shares, which leads us to our guidance range of a $1.70 to $1.80 per diluted share.

Depreciation and amortization is estimated to be approximately $17m, and EBITDA is expected to be in the $87m to $93m range.

CAPEX is expected to be approximately $20m which includes $8m for the KT plant modernization and expansion which will be spent this year.

That expansion is on track.

The major assumptions we are making for 2003 are as follows.

First, there are no unusual weather events such as droughts or exceptionally rainy or cold weather that have normally affect demand for our products or grain prices.

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

Third, there are no significant changes in [Inaudible] landscape.

Fourth, our new product launches will be successful.

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

Last year we achieved 11.4%.

Mosquito, flee, tick, [Inaudible] products sales are maintained at historical levels and there are no dramatic weather offense events that will affect them.

Our guidance also excludes the impact of any potential acquisitions or major financing events.

As Bill mentioned earlier, this guidance assumes that the convertible bonds will remain outstanding through the end of the fiscal year.

Assuming our recently announced high yield offering is successfully completed, we anticipate that the increased interest costs for the balance of the year should be largely offset by the elimination of the dilative effect of the convertible notes.

Accordingly, we do not expect to have to change our guidance as a result of the offering.

This competes our guidance and major assumptions for 2003.

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

When we look to the future we remain focused on five key strategies.

They are, drawing our brands, developing, launching new innovative products, leveraging our cost structure, positioning our company to support controlled growth and pursuing and completing prudent acquisitions in our Industries.

By pursuing these key strategies, we believe we are positioning central for continued growth and profitability in 2003 and beyond.

We find ourselves very fortunate to be an industry leader in our two core businesses pet supplies and [Inaudible] garden supplies.

Both of these industries are growing, recession resistant industries with favorable demographics striving the growth.

Before I turn this call over for questions, we should give you heads up.

I am in Boston tonight and the rest of the team is in warm California.

It's cold back here.

So, as we take your questions the answers will do a tag team back and forth to try get them answered as best we can.

With that I want you thank you for your attention and participation in this call.

And now, operator, we will questions from the audience.

Thank you sir.

The floor is now open for questions.

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

If any of your questions have been answered, press the pound key to remove yourself from the queue.

Questions will be taken in order they are received.

We ask while posing your questions to please pick up your headset to provide optimum sound quality.

Once again that is one followed by four, if you have a question or comment.

Please hold while I pull for questions.

Our first question comes from Bryan Hunt from Wachovia Securities.

Thank you, just a few bookkeeping issues.

First of all, can you tell us what the CAPEX was for the quarter?

Bryan, it was $2.5m, first is $1.9m last year.

Okay, and then next could you still explain why your payables dropped by so much [Inaudible] a year ago, does it have anything to do with your purchasing cycle, or is there anybody demanding faster payments, or what is that related to?

I have to really deal with our transition from a year ago, we had some payables with [Inaudible], and we also had some accrued payment with Monsanto, [Inaudible], and so it is really related to the year before.

Okay, and then could you give us what your total debt figure was at the end of the quarter please?

Drew, do you have it handy?

We will have it in a moment.

We will have it in a moment.

Okay, and then lastly, could you give us any information on the Phoenix fire, if there is any litigation there, or whether you believe at this time that your insurance will cover all that as well as an update maybe on the Aquaguard litigation, whether that has been settled?

Yes, with regard to the Phoenix fire, there is no change in the circumstances.

We carry a substantial amount of insurance and both our lawyers, the folks that are evaluating there indicate and expect that any losses there would exceed what would be covered by our insurance.

To your question is there any litigation, there are a number of parties who have filed suit.

The expectation is it will be at least another year or two before all of that gets scuttled out.

It seems to be the nature of the way these insurance companies work with each other and resolve who is going to take what share of it, in this case the Archpool Chemical Company and manufacturer of the containers that were involved in the fire are also involved in the litigation along with other parties.

Now, with regard to the earlier question, Drew.

If your question about the total debt at the end of the quarter, it is $215.8m.

And is it possible for you to quantify the increase cost incurred to, what's your listing that on maybe a pro forma basis or a total basis based on your run rate and how much you think you could pass along?

If you don't want to give detail, I can understand that for competitive reasons, but if you could quantify for us?

Well, the market, I think the best way to go is to say that the cost increases are quite substantial and between $1m and $2m for the quarter and probably towards the upper side of that.

A portion of that has been through in the market, and over time we would expect that all of those costs would be passed through in the market.

But when you have such a substantial and sudden step up and this is a largely unprecedented [Inaudible], then for the kind of drought and low yields that we have seen throughout the [Inaudible] .

It takes time for the market place, the retailers, and the like to adjust to and absorb into their business the price changes and that's an ongoing event.

We expect that will shake out in due time and our guidance fully anticipates what we are seeing unfold.

Okay thank you Bill and company.

One little fact Bryan, you also asked about the [Inaudible] litigation, quickly that is progressing as if we have disclosed and it is currently scheduled to go to trial in March.

There is a request to delay it a couple of months and sometime we will find out whether it comes off in March or delayed, but there is literally no change in the circumstances, we don't expect any bad guys from us and we do anticipate some good guys.

Thank you Bill.

Our next question comes from George Kahom from [Inaudible] Bank.

Your line is live.

I was wondering if you can give us some perspective as to what you expect to achieve on the working capital side.

You have given us some pretty good guidance on the P&L, it sounds like you have made a lot of headway on the working capital side on every single line item of the working capital.

By going forward, should we expect further improvement in working capital and if you can quantify to some extent what that is, that would be great?

Always a lot of offsetting events are working through right now, but we would expect not a material change in our working capital position.

In 2003, we are going to grow our brands, which will require some additional working capital, but offsetting that, we would be able to squeeze more out of just the existing operation.

So, net should be pretty much steady.

Okay.

On the -- separate question, on the acquisition front, should we expect that further acquisitions would be along the line of [Inaudible] particularly small to medium size, nothing very big, or do you think strategically you might be looking at something, you know, rather large size?

I think it's more reasonable to think that there would be small-to-medium size roll-in acquisitions and it's always possible that a larger strategic acquisition could come along, but those are difficult to both predict and project and you noted in our comments, we commented about prudent acquisition focus is on doing those things that makes sense for the long haul, that integrate in well, have excellent management teams, have sustainable, grow-able EBITDA profile, and so we are pretty careful and pretty selective.

Okay.

And CAPEX for the year, if we take the 8m out, that's going to be one time short possibly this year.

Should we look at CAPEX to be on [Inaudible] 12m to 13m bucks?

$10m to $12m is a good working assumption.

Great.

Thank you very much.

Next question?

Our next question comes from Joe Attabello from CIBC World Markets.

Hey guys.

Good afternoon.

Hi, Joe.

Couple of quick questions.

One the top line guidance you guys are giving, does that bake in any international expansion?

And second on the advertising side, do you expect the tick up in advertising spending in '03?

As far as international sales, Joe, we just had we had sold some grass seed to China, which we had not really forecasted.

We will see moderate growth in that especially in some of our Pet products area.

So, there won't be anything significant we are expecting in 2003.

Then, what was your second question?

On advertising budget.

Not a significant increase.

We will do some advertising for that pre-strike mosquito controller, we all are excited about.

And we will also do some advertising on our AMDRO.

So, we will do a slight increase on advertising, especially very targeted, very specific timeframes.

Okay.

Great.

Thanks.

Once again if you do have a question or a comment do press the numbers one followed by four on your touchtone phone.

Our next question comes from Jeff Cobolash Salomon Brothers Asset Management.

Hi, you were just commenting about acquisition.

I am curious when you said small to medium size, what kind of price range is that?

Generally on the branded side they have been in the six and six and half times EBITDA occasionally a bit more with the growth aspects of particularly strong but they would, would typically be around there.

And as far as total dollar amount?

In terms of dollar amount, they may range from $10m to $30-40m.

I think that's a pretty typical range for the types of size we are talking about.

Some of the small ones may be less than that.

Okay and how soon might acquisitions occur?

Nothing imminent, Jeff.

But, is it reasonable to expect sometime in the next year?

Historically over the last three years we have done one may be two acquisitions a year.

So, going forward it's possible that that would, that would happen.

All right thanks very much.

Welcome.

You have a follow-up question comes from Bryan Hunt from Wachovia Securities.

Thank you.

Is it possible to quantify what your sales were to municipalities and state governments, of mosquito control products last year and what type of growth you saw on that last year and maybe what your are looking at for this year and maybe how much of that was unexpected a year ago?

We don't have that handy here.

It did grow, I know that, we expected it to grow but I cannot tell you how much it was or [Inaudible] just don't have that handy.

We will make a note and perhaps on the next call, we may be able to break that out.

We will just take a look.

And then based on your new placements [Inaudible] SKU's at Home Depot, are you seeing net growth in grass seed at Home Depot with new placements?

Yes we do.

Okay that's all I have, thank you very much -- I do have one question.

Based on your results you saw in this quarter, were these results ahead of your expectations or were they basically in line with your [Inaudible]?

How do you define this all?

Right in line.

Right in line, okay.

We are pleased with the quarter, and as we said we are comfortable with our full year guidance and I think that's about as far we would think it's appropriate to [Inaudible].

All right, thank you.

Congratulation.

I hope you guys stay warm on the road there.

Okay it's cold here.

Okay next question please.

We have a question coming from Steve Switzer from [Inaudible] Capital.

Hi, good afternoon.

Maybe you could just take us through your seasonal peak borrowing needs for the next couple of quarters and when do you expect it to peak out.

And then secondly, with respect to the litigation charges, how you would expect this to fall out with respect to timing?

And the same question on CAPEX, you've spent $2m in the first quarter, so we just straight line the additional [Inaudible] in the next three quarters?

Okay.

Three questions.

Drop to peak borrowing would occur in the first half of the calendar year.

A drop starts about 1st of January and peaks about late May or early June.

And drop to peak is $50m.

Okay.

So, totally that'll be around $50m higher than it was at the end of the clear up.

Okay?

As I think though that that is some what offset by the earnings in the period but, yeah.

CAPEX for the current quarter is $2.5m and again this [Inaudible] is ready from our construction program, so it's pretty much straight lining.

You'll get a bulge for the next couple of months for the construction program.

And then litigation, that's probably going to be largely a March through June [Inaudible] in terms of payables are tight with the other trials.

We've already spent a million of the four in the first quarter.

Okay.

So, you spend maybe another million in the March quarter and then the bulk or the remainder in the June quarter?

Is it safe?

Somewhere around that.

That is close enough.

Okay, very good thank you.

Okay, next question.

There shows no further questions.

I will turn the floor to the speakers for any closing comments.

Okay.

Thank you everybody.

We appreciate your participation on the call.

As we said earlier, we feel very fortunate to be in the industries here that are growing and we love what the economy does and we love the demographics and the prospects we're looking forward here.

We look forward to talking to you on the next quarter and with that wish you all Happy New Year and I wish for warmer weather on the East Coast.

Thank you.

Bye.

Thank you for joining today's conference call.

You may disconnect your lines and have a wonderful evening.