Central Garden & Pet Co (CENT) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to Central Garden and Pet's fourth quarter fiscal year 2003 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.

If anyone should require assistance during the call, press the star followed by the zero on your touch-tone phone.

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

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

Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone.

Thank you for joining us today to discuss Central's financial results for the fourth quarter and fiscal year ended September 27, 2003.

I expect that you've all seen our press release which we put out earlier today.

With me on the call are Glenn Novotny, Central's President and Chief Executive Officer;

Stu Booth, our Chief Financial Officer; and Mike Reed, Executive Vice President of Pet Brands.

Before I review our results and turn the call over to Glenn, I would like to remind you of the Safe Harbor provisions of the Private Securities Litigation Act of 1995.

The 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 10K for the fiscal year ended September 28, 2002, and other Securities and Exchange Commission filings.

Turning to our financial results, today we reported net sales for the fiscal fourth quarter of $257 million or a 7% increase from $241 million in a comparable 2002 period.

Income from operations increased nearly three-fold to $9.6 million from $3.3 million in the year-ago period.

And net income for the quarter increased to a record $4.6 million or 23 cents per diluted share from $751,000 or 4 cents per diluted share in the comparable 2002 period.

For the fiscal year, net sales were $1.15 billion or a 6% increase from $1.08 billion in the fiscal 2002 period.

Net income for the year increased 21% to a record $34.6 million or $1.73 per diluted share from $28.5 million or $1.44 per diluted share in fiscal 2002 before the effect of adopting FAS 142 on September 30 of 2001.

Including the effect of the noncash FAS 142 accounting charge of $146.7 million or $112.2 million after tax, the company reported a net loss of $83.7 million or $3.44 per diluted share.

On the call today, Glenn will provide an overview, Stu will discuss the details of the financial results, Mike will report on the pet and garden operations and then we'll return the call to Glenn, who will provide 2004 guidance and wrap things up.

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

Now, here's Glenn Novotny.

Glenn?

Thank you, Drew.

Thank you, everyone for joining our call today.

Today we reported excellent results for the fourth quarter and full year which included record net income for both periods.

More importantly we were able to produce these impressive results despite higher than normal grain costs for bird feed throughout the entire year.

Our garden segment turned in good results for the quarter and year.

And on the pet side we experienced strong top line and excellent bottom line growth for both the quarter and the year.

Mike will cover more on this in just a minute.

On the cost front, we also significantly reduced litigation, hallelujah.

And administrative costs while driving productivity improvements across the board.

A few of the highlights for 2003 were the following: Our cost reductions at TFH paid off handsomely in the year.

Second, the capital expansion at KT came in on budget and on time.

This bodes well for 2004 and beyond.

Wellmark enjoyed strong sales and profits, especially with their Altosid and Pre-Strike mosquito products which are to help prevent the spread of West Nile virus.

The grass seed business at Pennington saw double-digit sales and profit growth fueled by innovative new products and consumer offerings.

Our AMDRO fire ant business produced strong results including a very successful launch of its new AMDRO yard treatment line.

The eliminator private label garden chemical line for Wal-Mart experienced excellent sales growth and competed very favorably against leading national brands.

And we completely refinanced our debt structure through two very successful debt offerings which gives us a strong foundation for future growth.

Now, despite our successes, as always there are a few areas for improvement.

We see lots of opportunities to continue improving our sales margins and profits and feel good about our progress on these measures to date.

However, we are not satisfied with our current return on invested capital of 7.3%, or return on equity of 8.8%.

We are committed to improve both of these key performance measures in the future.

Our goal is to improve both of these measures every year until we get into the double digit range and beyond.

Those are goals we've laid out for our company and for ourselves in the future.

Stu Booth, our Chief Financial Officer will now provide details on our overall financial performance for the quarter and the year.

Stu?

Thanks, Glenn.

First, I will discuss the quarter and then the year.

Net sales for the fourth quarter of fiscal 2003 were $257 million, a $16 million or 7% increase from last year.

This included a $7.6 million or 4% increase in branded product sales, along with a $9 million increase in sales of other manufacturers' products.

All branded product sales growth was organic.

Gross profit for the quarter increased by $3.9 million to $70.9 million and, as a percentage of net sales was 27.5% compared to 27.8% last year.

Our gross margins continued to be impacted by higher than normal grain prices caused by last year's drought in the plains states but to a much lesser extent than in earlier periods.

Selling, general and administrative expenses decreased by $2.4 million or 4% to $61.3 million.

In terms of the SG&A components, selling and delivery expenses increased in line with sales of our branded products and higher advertising expenses.

These increases were more than offset by lower administrative costs due primarily to significantly reduced legal and litigation expenses and other administrative costs.

The increased sales and lower expenses produced operating income for the quarter of $9.6 million compared to $3.3 million in the year-ago period.

This is nearly a three-fold improvement.

Net interest expense for the fourth quarter was $4.7 million, a $1.4 million increase from last year.

The increase was due primarily to higher interest expense associated with the placement in January of our $150 million 9 and one-eighth% senior subordinated notes and the refinancing of our senior credit facility in May.

Net income for the quarter increased to $4.6 million or 23 cents per diluted share from $751,000 or 4 cents per diluted share in the fourth quarter of fiscal 2002.

Depreciation and amortization expense for the most recent quarter totalled $4.6 million compared to $4.8 million in the prior year.

Turning to the fiscal year, net sales for 2003 were $1.15 billion, a 6% increase from 1.08 billion in the comparable 2002 period.

This was a result of a $65 million or 8% increase in our branded product sales to $863 million, and a modest $2 million increase in sales of other manufacturers' products.

All branded product sales growth was organic.

Branded product sales represented 75% of Central's total sales in 2003.

Gross profit for the year increased by 4.1% to $333 million, a record high.

And as a percentage of net sales was 29.1% compared to 29.7% last year.

As we've reported throughout the year, the decline in gross margins is due primarily to the impact of higher than normal grain prices caused by last year's drought in the plain states.

Partially offset by increased sales of our higher margin branded products.

We are now seeing wild bird feed gross margins recover to more normal historical levels.

Operating income improved by $19.5 million to $72.3 million for fiscal 2003 due to higher sales and a $6.5 million decrease in SG&A compared to last year.

The decrease in SG&A was due, primarily to lower administrative and litigation expenses, partially offset by higher selling and delivery expenses due to our increased sales and higher advertising expenses.

Net interest expense for the year was $19.2 million or a $4.6 million increase from last year.

Of this increase about $1.8 million were fees and expenses associated with the early retirement of our 6% convertible notes in January and the refinancing of our senior credit facility in May.

The remainder is due to higher interest expense associated with the placement in January of our senior subordinated notes.

Other income for the year was $2.5 million compared to $5.5 million in fiscal 2002.

Last year we included $6 million of nontaxable life insurance proceeds partially offset by a $2.8 million charge to write down an equity investment.

The Company's effective tax rate for fiscal 2003 was 37.8% compared to 34.7% in the prior year.

Net income for the year increased 21% to $34.6 million or $1.73 per diluted share from $28.5 million or $1.44 per diluted share in fiscal 2002 before the effect of adopting FAS 142 on September 30, 2001.

Including the effect of the noncash FAS 142 accounting charge of $146.7 million or $112 million after tax, the company reported a net loss of $83.7 million or $3.44 per diluted share in fiscal 2002.

Turning to the fiscal 2003 year-end balance sheet, accounts receivable increased by $15.1 million or 11.5% and accounts payable increased by $8.3 million or 8.6% year-over-year.

Inventories increased $24 million or 12% year-over-year.

In addition to inventory increases in line with higher sales at fiscal year-end, we were building inventory for new product launches and carrying higher finished goods, inventory at several of our companies to accommodate transitions to new facilities and not interrupt the supply of our products.

In addition, we purposely increased grass seed inventories for several of our varieties in anticipation of rising costs in 2004.

Capital expenditure for fiscal 2003 totalled $18 million, of which approximately $7 million was for the phase one of our KT products capital expansion product.

We also made significant strides in improving our financial strength in 2003.

As a result of our recapitalization program, total debt increased to $250 million compared to $213 million last year.

However, net of cash and equivalents, total net debt actually decreased to $173 million compared to $202 million a year ago.

Subsequent to our 2003 fiscal year-end, we entered into a $75 million pay floating interest rate swap effectively converting half of our $150 million fixed rate senior subordinated notes to a floating LIBOR rate of LIBOR plus 4.04%.

At current rates this transaction will potentially save us nearly $3 million in pretax interest expense.

In addition, we recently reduced the pricing of the term loan B portion of our credit facility by .5%.

From LIBOR plus 2.75% to LIBOR plus 2.25%.

Annual savings from the term loan repricing will equate to approximately $500,000 per year.

Mike Reed will now review the operational results for the pet products.

He will also cover garden product segment since Neil Pincus is traveling.

Mike?

Thank you, Stu.

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

Our leading pet brands include KT, TFH, Nylabone, Four Paws, Wellmark, Zodiac, Pre-Strike and Altosid mosquito products, All-Glass, Oceanic systems and Island Aquarium.

Our pet sales and logistics network strategically supports our pet brands.

These businesses reported fourth quarter sales of $124.7 million, an increase of $8.8 million or 8% compared to last year, all of which was organic.

Our branded product sales increased $4.4 million or 5% in the quarter while sales of other manufacturers' products increased $4.5 million.

Operating income for the fourth quarter was $13.3 million compared to $10.6 million last year, a 25% increase.

This improvement was due to increased sales of branded products, especially those with higher margins, cost reductions and productivity improvements.

For the full fiscal year 2003, sales were $502 million or 6.5% above last year.

This increase in sales was attributable to a $25.8 million or 7.3% increase in sales of our brands, and a $4.8 million increase in sales of other manufacturers' products.

Operating income for the full fiscal year was $52.7 million compared to $43.4 million or an increase of 21.4% compared to last year.

This increase was attributable to increased sales of branded products, especially those with higher margins, new product introductions, productivity improvements and cost reductions.

I will now review the highlights of the individual pet brands.

Our Wellmark business, a leading marketer and producer of flea, tick, mosquito and other insect control products for professionals and consumers under the brand names of Zodiac, Altosid, Extinguish and Pre-Strike had another great quarter leading to an excellent year.

Our new Pre-Strike line of consumer mosquito control products and our Altosid line of mosquito control products for professional and public health applications continued to experience robust sales in the fourth quarter later than in prior years.

Pre-Strike was launched in early 2003 with an aggressive campaign of print and radio advertising, retail circulars and a public information campaign including radio and television interviews, newspaper and magazine articles, and information used in public health websites.

More importantly, reported cases of West Nile virus experienced a dramatic reduction in 2003 in cities and states where Altosid and Pre-Strike were widely applied.

Wellmark enjoyed another strong year of sales to Muriel's buntline [ph] plus product line sold to veterinarians which incorporates Wellmark's active ingredients.

We also continued growing international sales of insect control products especially to Australia and New Zealand.

TFH and Nylabone also experienced sales growth this year in spite of a decision to discontinue low or no margin printing activities for third quarters.

Growth was attributable to expansion of the plastic chew line, the big chew line and the award winning chew and brush line.

In 2003, TFH executed its new big book business model which included outsourcing printing and binding operations, rationalization of active book titles in print and introduction of new more marketable book concepts.

The book business has now turned from a loser to a winner with higher quality, lower costs and more profits.

We also installed new, more efficient plastic molding machines with patented high performance molding technology for the production of our chew toys.

KT products, the leader of innovation in the bird and small animal nutrition and treat markets continued to record strong sales through the fourth quarter.

KT introduced two major new innovative product lines in the fourth quarter.

Soft sorbent is a revolutionary new concept in paper bedding for small animals.

It is more absorbent and safer for small animals than any other bedding or litter products.

We are also very excited about our new Treatster line of small animal and bird treat bars.

This is a totally new pet product concept similar to energy or granola bars.

Treatsters are packaged in brightly colored foil like granola or energy bars and are experiencing strong retail placement.

In the fourth quarter KT completed the first phase of the new manufacturing facility in Chilton, Wisconsin which we announced last year.

It was done on time and on budget.

The plant is now fully operational and was formally opened in a ceremony in October.

KT forecasts material manufacturing cost improvements from this plant with more to come as the remaining phases of the project are completed in 2004.

The aquarium businesses turned in a strong quarter and year in sales with gratifying growth for both the All-Glass and Oceanic branded product lines.

New and innovative products continue to be the strength of our aquarium businesses.

Among new products offered for sale in the fourth quarter were the All-Glass Geneva line of contemporary aquarium furnitures recognized as best new aquarium product at the 2003 APPMA show and the Oceanic contrast collection awarded best new aquarium product by Pet Business Magazine.

The Mini-Bow 7, 5 and 2.5 gallon aquarium line in translucent colors continues to sell well in all channels of trade.

A new line of consumer friendly aquarium kits created in partnership with an equipment manufacturer that are sold exclusively through specialty pet stores has taken off beyond expectations.

At year-end Oceanic moved to a larger plant to accommodate its sales growth.

We purposely carried larger inventories at both All-Glass and Oceanic at year-end due to the move and large pending orders for new product launches and the Christmas season.

We also knew the Finding Nemo DVD was being launched with a lot of advertising in early November.

Four Paws, our leading provider of dog, cat and small animal products introduced a line of sleeper pads for dog crates and a line of stain and odor removers in the fourth quarter.

During 2003, Four Paws using the pet select brand experienced gratifying sales growth in the grocery and mass channel including Wal-Mart, Publics and Ahold.

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

In 2003, 16% of our pet branded 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.

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

This group made significant strides in the quarter and year increasing sales of our branded product 7% percent and those of other companies by 4% over the prior year.

Our sales and logistics business put in place a series of promotional programs to better support the specialty pet retailer and initiated programs to combine products from separate manufacturers to offer complete pet care systems to the consumer.

Continued focus on reducing expenses and working capital allow this business to contribute stronger earnings and improved return on assets.

In addition, our sales and logistics business was named best distributor of the year by Pet Business Magazine in the fourth quarter.

In summary, pet products produced a strong quarter and year, and is poised for an even better 2004.

Now, I will stand in for Neil Pincus and review the results for garden.

Our garden product segment includes the following brands: Pennington, AMDRO, Grants, Lilly Miller, Norcal Pottery products and Matthews Four Seasons.

This segment reported fourth quarter sales of $132.8 million, an increase of $7.8 million or 6.2% compared to last year.

Sales of our branded products were up $3.3 million or 3.6% all organic, while sales of other manufacturers' products were up $4.5 million.

Garden products reported a loss from operations for the quarter of $1.9 million compared to a loss of $2.7 million in the same period last year.

For fiscal year 2003, sales were $643.3 million or 6% above last year.

This increase in sales was due primarily to a $39.4 million or 8.9% increase in sales of branded products, more than offsetting a $2.7 million reduction in sales of third party products.

Operating income for the fiscal year 2003 was $39.3 million, an increase of $2 million over last year.

The improvements in operating income for the quarter and year occurred in spite of significantly higher than normal grain prices which reduced wild bird feed margins at Pennington throughout the year including to some extent the fourth quarter.

All of our high priced grain inventory is now exhausted and wild bird feed margins are now at more normal historical levels.

Pennington had a good quarter and year reporting double digit sales growth with grass seed leading the way.

Pennington is the largest manufacturer of grass seed and continues to be the category leader in innovation and quality.

Our new 2003 product introductions under Master Turf, Tournament Quality and Pennington Select brands all performed well this year.

Sales from our recently launched innovative seed and sod program selling the same variety of seed to sod growers and consumers, enjoyed a successful launch and is well-positioned for future sales to both professional and consumer channels.

Pennington's garden chemical sales also reported exceptional results for the quarter and year with especially strong Eliminator private label sales to Wal-Mart.

Our new product introductions to the Eliminator weed and grass killer line performed exceptionally well at retail and against other nationally recognized brands.

An example is the reusable Eliminator pump and spray weed and grass killer.

An easy to use product for consumers to kill unwanted vegetation, offering an attractive value proposition to the consumer.

AMDRO, the leading fire ant bait brand experienced weaker fourth quarter sales compared to last year due to less favorable weather conditions for fire ants.

For the fiscal year, AMDRO delivered strong top line growth and profitability driven by sales of its new AMDRO yard treatment product.

This business also benefited from a significantly increased consumer advertising campaign.

Sales of Grants ant control products remains strong for the quarter and the year supported by improved off-shelf display activity and new listings of its products in the mass merchant houseware channel in addition to the traditional garden channel.

Lilly Miller finished the year with a very healthy year-over-year increase in sales driven principally by new product introductions and the expanded listings and success of our Alaska fish line of fertilizer products.

Norcal Pottery products sales were up for the year and have secured expanded listings for 2004.

We are pleased to report that our garden sales and logistics business returned to profitability in 2003 following three years of monumental transformation.

This business, which supports our garden brands increased its sales of central branded products by 5%.

We believe this business provides a strategic advantage over our competitors and offers economies of scale and convenience for our customers.

And now, I'll turn the call back over to Glenn to run through our earnings guidance for fiscal 2004 and wrap things up.

Glenn?

Thank you, Mike.

You can now see why we are pleased to report on our overall performance for 2003.

Looking to the future, we are expecting 2004 to be a much stronger than last year.

We expect our pet and garden segments to produce another good year in sales and profits driven by our pipeline of new product launches, increased business with many customers, continued consumer preference for our high quality products, cost reductions and continued productivity improvements.

We know you are interested in our views of 2004 and beyond, so now let's go through our outlook in more detail and share how we arrived at our earnings per share guidance range of $2 to $2.10 for fiscal 2004.

First of all, sales are expected to be in the $1.190 billion to $1.215 billion range or a range of 4% to 6% above last year.

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

As you know, margins are much higher on sales of our own products.

With respect to sales of our branded products, we are expecting organic growth of 5% to 7% in 2004.

We consider the historical growth of our brands, our new product pipelines and consumer listings for 2004 in establishing this range.

We also expect sales of other manufactures' products to be zero to possibly up to 5%.

Gross profit margins are forecast to be in the 29 to 31% range.

In arriving at this range, we took into account a number of factors including historical trends, the mix of our brands in other manufacturers' products, manufacturing cost and productivity improvements and the expectation that grain prices which affect our two bird seed businesses will remain at more normal historical levels.

We also expect grass seed crop yields and prices to be normal on average.

Our SG&A cost reflects the mix of sales between our brands and other manufacture's products.

Our branded products have higher selling expenses than products from other manufacturers.

We anticipate litigation expenses of approximately $4 million in 2004, very similar to 2003, primarily associated with the TFH trial which is scheduled to begin in February of 2004.

Operating income is expected to be in the range of $82 to $88 million.

Other income is expected to be approximately $2.5 million, for income we record from our equity investments in Commerce LLC, Cedar Works and Matson, LLC.

Net interest expense is forecasted to be $15 to $17 million as compared to $19.2 million in 2003.

The reduction is due primarily to the net reduction in interest rates associated with the $75 million reverse swap on our senior subordinated notes and the repricing of our term loan, both of which occurred in the first fiscal quarter of 2004.

Our effective tax rate is expected to be approximately 40% in 2004, driving down to our net income is forecasted to be in the $42 to $45 million range.

Average outstanding fully diluted shares are estimated to be approximately 21 to 21.5 million shares which leads us to our guidance range of $2 to $2.10 per diluted share for 2004.

In addition, we estimate depreciation and amortization will be approximately $18 million.

And CAPEX is expected to be approximately $13 to $15 million of 2004 of which approximately $3 million is for phase two of our KT expansion and the remainder is for maintenance CAPEX and other small capital outlays.

The major assumptions we are making for 2004 are as follows: First, there are no unusual weather events such as droughts or exceptionally rainy or cold weather that abnormally effect demand for our products or grain or seed prices.

Second, grain prices for wild bird feed prices will remain at more normal historical levels and we will realize more traditional margins for these products.

There are no significant changes in the competitive landscape.

Our new product launches will be successful.

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

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 events.

This completes our guidance and assumptions for 2004.

I will now wrap up our prepared script and describe to you where we are as a company today and where we strive to go in the future.

In 2002, we stabilized the business after a dramatic transformation from a distribution business to consumer products company.

In 2003, we continued to prove our operating performance and significantly strengthened our balance sheet.

We now find ourselves going into 2004 with a strong foundation on which to build both organic development and acquisitions.

I would like to thank all of our employees, customers, suppliers and investors for their support and faith, especially over the last few years.

Our journey has just begun.

Now for the future.

We have the vision, appetite and wherewithal to make this company a lot bigger and more profitable.

We have just told you that we are planning in 2004 to grow our top line by approximately 5% plus and our net income 15 to 20%.

Longer term, we expect organically to produce an average of five to six top line growth and ten to twelve percent bottom line growth a two to one ratio, which we like.

We believe also that there are significant opportunities to consolidate both industries we participate in.

We enjoy a leading position in both pet and garden and now have the management and financial strength to do just that.

Our goal is to achieve significant growth in both top line sales and bottom line profits per year over the next several years through acquisitions.

As you might guess, while we have nothing to announce today on the acquisition front, you can be assured we are very busy.

With that, I will ask for your good wishes and blessings and now we will turn it over to you for your questions.

Operator?

Thank you.

The floor is open for questions.

If you have a question, please press the numbers 1 followed by 4 on your touch-tone keypad at this time, please.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question that you pick up your handset to provide optimum sound quality.

Once again, that's 1 followed by 4 for any questions.

First question comes from Ron Phillips from Banc of America Securities.

Your line is live.

Hi, guys.

This is Brian Park for Ron Phillips.

Great quarter.

Just a really quick question.

On the Scott's call, they talked about increasing their legal expenses last quarter because of some litigation involving you guys.

But you guys said you are reducing your legal expense.

Can you talk about what Scott's was talking about?

Yes we can.

They are probably referring to the Scott's anti-trust which is right now in the appeals court.

That's kind of status quo and we are waiting for that court to make a judgment in the next weeks or months and we'll make a decision after that.

We do not expect at this point litigation costs from our standpoint to go above what we've told you.

Okay, great.

Thank you very much.

Thank you.

The next question comes from Bill Chappell of SunTrust Robinson.

Your line is live.

Good afternoon.

First, a couple questions on the tax rate both for the quarter and going forward.

I guess maybe you can help me understand when you gave guidance last quarter had you expected the 17% effective tax rate this quarter?

Bill, we always have to true that stuff up at the end of the year.

We always put in a pretty conservative effective tax rate as we go through the year and true it up as quickly as we get more insight into our actual tax position.

So would this be in line operationally with what you were expecting on the guidance, or was this kind of a miss?

It's a good miss if I want to call it a miss.

I'm just trying to figure it out.

If I was going to use a 40% tax rate I'm coming up with numbers of 16 cents for the quarter instead of 23.

I would just call it conservative planning on our part.

I guess conservative planning going to next year you've set a 40% tax rate.

Is there a reason why the tax rate would go up year-over-year?

We did realize some tax recoveries this year that were look-backs.

Going forward, I don't know if we'll be able to continue to get additional credits back on a look-back basis.

So for planning purposes and for purposes of model building I would recommend 40%.

We strive to get to a much lower effective tax rate as we continue our tax planning program throughout the year.

Gotcha.

Maybe help me understand going forward on your guidance, just trying to see from an operational standpoint with litigation costs surprisingly being the same year-over-year, and I mean it seems like most of the improvement comes from interest expense and not a whole lot of gross margin expansion even though you have pretty easy comps in the wild bird seed.

What are you expecting there?

Are there other costs that are going to creep up that are going to hold back the gross margin expansion?

For 2004?

Yeah.

We hope to achieve somewhere near in the middle of that range.

We've given you a pretty broad range again like last year, 29 to 31.

Right.

We would love to be able to restore to our 2002 gross margin of 29.7 and actually do better than that with a better mix of new product introductions.

So, that's where we are trying to hit.

We've given you a pretty broad range to work with.

It just seemed like you would have, especially on the December and March quarter, assuming that wild bird seed costs don't carry on for the 5th and 6th quarter you would have some easier comps.

Let's hope so.

We hope so.

One last thing on -- well two last things.

On litigation, just trying to understand I mean this is the same TFH trial that you're prepping for again.

It seems like the costs are similar year-over-year.

How conservative is that number?

And also you talked about a rise in inventories because of kind of building grass seed for higher costs going into 2004.

Can you give us some more color?

Do you expect grass seed issues going into next year?

Sure.

Talk about the TFH first.

TFH, they changed judges on the trial here about two or three months ago, if I remember right.

That is now scheduled for early February to start, and so this is like the third or fourth time we started preparing for trial.

Every time you do the costs go up.

We have plugged in our best number we can come up with for that trial.

We hope it finally comes to play so we can get this behind us and move on with our lives.

As far as the inventory, the big changes we had in really the changes is we had a lot of new product launches in Pet.

We told you about that.

We actually moved the Oceanic plant to a brand-new plant and that was really about the first week in October.

So we built inventory for that.

At All-Glass, we had some very large pending orders, especially for our new launches.

So we purposely built a warehouse full of inventory.

In fact, we just walked through there two weeks ago.

Ready for our new product launches, we've built that up.

On the grass seed what we had, we had anticipated a rising market so we took a position more than normal.

Those are the primary reasons why our inventories are up.

Okay.

Just one housekeeping.

What was the actual litigation costs in the fourth quarter?

Just a second, we have it.

$700,000.

Thank you.

Thank you, Bill.

Thank you.

The next question comes from Joe Altobello from CIBC World Markets.

Your line is live.

Thank you.

Good afternoon, guys.

Couple questions.

First, I was curious if you guys see any potential for price increases next year, your model is pretty levered for pricing.

There's a significant upside if that's possible, I was curious if that was possible, particularly on the Pet side.

And second, receivables were up 12%.

I know you touched on inventories.

What was driving that?

Is that a timing issue?

Mostly a timing issue, Joe.

Sales were up quarter-over-quarter and we had more sales toward the end of the quarter.

We are not particularly excited about, or it's not an unusual event, per se.

Okay.

But we are comfortable with how the number shook out.

And on the price increase possibility?

We'll do what we can.

We are not going to announce on the phone what we're going to do, of course, Joe.

What we'll try to do is, probably more importantly is with the grain prices being back to more normal, we expect our margins on our wild bird feed products to be much more closer than what we've seen in the past.

So you have not built any price increases into your guidance?

Not a great deal, no.

Okay.

And one more if I could.

The top line growth guidance next year you gave was actually 4 to 6%.

Right.

What is that by business line meaning Pet versus Garden?

We haven't broken it down, Joe.

Pretty much rough cut top line.

Just the way the industry's been shaking out we'll probably see a little more growth on the Pet side than the Garden side.

A blend of 4 to 6% is probably right on.

Okay.

Great.

Thanks.

The next question please?

Thank you.

The next question comes from George Callob [ph] of Deutsche Banc.

Your line is live.

On the working capital side sounds like you have some decent growth coming through in '04, but you're ending '03 with a high level of inventory.

Should we look at working capital to be a moderate use of cash, if any?

For the year?

Yes.

Our working capital model the last couple years, we have actually pulled cash out of the business.

We are trying to reach a stabilization point as we return to a more stable operating environment.

I would expect our working capital requirements to stay relatively flat.

It's not a big driver.

Okay.

So if we use the same assumptions that were there in '04, we should be for modeling purposes, that should be close enough?

Sure.

Yes.

Okay.

On the acquisitions front you obviously have a high amount of cash on the balance sheet, and sounds like you're going to be having a lot of free cash flow coming through in '04.

Now, is there a certain leverage ratio you have in mind that you would love not to surpass?

Obviously, how you finance and how much you pay are big parameters here, but, away from covenants set by the banks and all that stuff, in your own mind what is the kind of leverage you'd love to keep the business at, including acquisitions?

Kind of our house limits, George, I think that's what you're asking for, is three times debt to EBITDA.

Okay.

Obviously our loan agreements were very carefully worked out with our lenders and we have room to surge for the right kind of investment, but on a sustained basis we look for that kind of level.

Great.

Thank you.

Next question.

Thank you.

As a reminder for any further questions that's 1 followed by 4 on your touch-tone keypad at this time, please.

Please hold while we poll for any further questions.

Thank you.

The next question comes from Bill Brady of Presidio management.

Your line is live.

Yeah, I had the same balance sheet questions that Bill Chappell did, so mine have been answered.

Thanks, Bill.

Thank you.

The next question comes from Michelle Siegel of Sladder [ph] Capital Management.

Your line is live.

It's Steve Martin.

Hi guys.

Hi, Steve.

I won't ask you the obvious acquisition question because I know you won't answer it.

Because you have been conspicuously quiet, I would add.

Can you talk about what's going on on the competitive front, brands, other distributors, et cetera?

Sure we'll try to cover that for you.

We are not going to tell you about acquisitions, Steve, you know that.

Even though we like you a great deal.

But you will acknowledge, of course, that you have been conspicuously quiet?

Yes.

Okay.

As far as the competitor standpoint, of course on the Garden side we are pleased with some of our performance, especially in the Eliminator line and grass seed line compared to our national competition and selling very well.

So we are feeling very good about that in 2003 and looking forward to 2004.

We are very pleased with the AMDRO performance, we kind of talked about that for the year.

That was really good news for us on that front.

On the pet side, you've seen us continue to move along with very good top line and bottom line growth for the year.

We are the leading player there.

So we are moving along there.

We don't see a lot of new competition from that standpoint, since we are kind of the innovation and category leader there, we just want to continue building our momentum and keep on going.

Do you see mom and pops disappearing?

I mean it's hard for things to go bankrupt with one percent interest rates or very low interest rates, but do you see any of that kind of activity?

Steve, if you have any one percent money for us we'll borrow all you will give us.

I mean interest rates at one percent.

But recognizing it's still not expensive out there on a relative basis.

Right.

Well, you're going to see the mom and pops will continue to be somewhat declining the overall sales in the overall pet channel.

At the same time, and I talked about that earlier, Mike did, about that new aquarium kit we put together.

That was really aimed at the independent, specialty trade to help them survive.

There's a saying in business, you're either going to grow, you're either busy growing or busy dying.

You either get big, get focused or get out.

If you look at the successful independent pet stores those that are focusing especially on aquariums, on birds, live animals, live fish, high-end dog and cat they are doing pretty darned well.

They are the toughest ones.

We are trying to do all we can to make sure that they survive and thrive.

That's what we have our distribution business for.

We aim our products to launch there first if we can and then move on into other channels as much as we can.

Yes, we think over the years that channel will shrink down, but I think a lot of the shrinkage is already gone and we want to do all we can to make sure they survive.

Okay.

Thank you.

You're welcome.

Thank you.

As a reminder, for any further questions, it's 1 followed by 4, please.

There are no further questions.

I would like to hand the floor back over to Mr. Tammen for any closing remarks.

Okay.

Thank you, operator.

First of all everybody on the phone call thank you for your questions.

We are pleased with our results for 2003 and really see 2004 as a continuation of our trend for growing our growth and profitability.

As I said earlier, we do see opportunities and we want to, in fact, improve our return on equity and return on investment capital.

Those are two key measures we want to make sure we start moving much faster on.

As we look to the future, we also will continue to execute against our five key strategies.

And again, they are: We want to grow and extend our brands in both Garden and Pet.

We're going to continue developing and launching new innovative products in both channels while leveraging our cost structure, positioning our company to support our controlled growth and pursuing and completing strategic acquisitions in both the Garden and Pet industry.

We are fortunate to be an industry leader in our two core businesses, both pet supplies and lawn and garden supplies.

We are blessed in that both of these businesses are growing recession resistant industries with favorable demographics and they really provide us two strong leads for future growth both organically and acquisitions and we see opportunities, as I said earlier, to do acquisitions in both of these channels.

With that, I'd like to be the first to wish you all of you a joyous holiday season and a Happy New Year.

Yes, Christmas is only 35 days away.

We also remind you, please don't forget to buy gifts for your pets, too.

With that, we thank you for your attention, and have a good evening.

Bye.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and enjoy your evening.