Central Garden & Pet Co (CENT) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to Central Garden & Pet's First Quarter Fiscal 2004 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 assisitance during the call, please press the star followed by zero on your touchtone phone.

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

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

Please go ahead, sir.

Thank you operator.

Good afternoon everyone and thank you for joining us today to discuss Central's finance results for the first fiscal quarter of 2004 on December 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;

Stuart Booth, our Chief Financial Officer;

Mike Reed, Executive Vice President of Pet Brands; and Neil Pincus, President of Garden Products.

Before I review the results for the quarter and turning 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 applied by forward-looking statements.

These risks are described in our Form 10-K for the fiscal year ended September 27, 2003 and other Securities and Exchange Commission filings.

Turning now to our financial results, today we reported net sales for the first quarter of $222m or 5% increase from $212m in the comparable fiscal 2003 period.

Income from operations improved 80% to $3.6m from $2m in the year-ago period.

For the quarter, the company recorded a net loss of $645,000 or $0.03 per diluted share compared with a net loss of $717,000 or $0.04 per diluted share in the year-ago period.

Central typically reports the loss in the three months period ending in December, which is the slowest time of the year for the Garden industry.

On the call today, Glenn will provide an overview and discuss the recent acquisitions of Kent Marine and the pending acquisition of New England Pottery.

Stu will discuss the details of our financial results.

Mike and Neil will then report on the Pet & Garden operations and then we will turn the call back to Glenn, who will provide an update on our 2004 earnings guidance and rap things up.

Then we will open the call to take your questions.

And now here's Glenn Novotny, Glenn.

Thank you Drew.

And thank you everyone for joining our call today.

We are pleased with the results we reported today and we are happy to report that we are on track for an excellent year in 2004.

Sales of our branded products grew 4% overall, despite this quarter being the slowest time of year for the Garden business.

Our Pet segment turned in another strong quarter with a 9% increase in sales.

This is a result of our continued focus on launching new innovative products such as our new Aquarium Kits, Kaytee,

small animal and

.

Nylabone's new

and quest dental products for dogs and Oceanic's new line of sea salt.

All of which were introduced in the first quarter and continued to achieve excellent trade acceptance and sell through.

We've also been quite busy on the acquisition front as you may have noticed.

We announced two acquisitions in January that compliment both the Pet and Garden sides of our business and add to our portfolio of leading consumer brands.

Strategic acquisitions are an integral part of our growth strategy.

We believe there are significant opportunities to continue to consolidate both industries, which we participate in.

We already enjoy the leading in both the Pet and Garden industries and consider the following criteria one assessing potential brand acquisitions.

First, potential of the brand to be a number one or number two in this category.

Organic growth history and potential, strong management and cultural fit, earnings track record and potential, a history of innovation, complimentary products to existing set of brands, the potential expansion to other markets, channels, or customers, our ability to extend or leverage the brand to other lines of categories, and the ability to complete the acquisitions at a reasonable price and that they are accretive on day one.

We are pleased to report to you that the Kent Marine acquisition and the pending New England Pottery acquisition both meet substantially all of these acquisition criteria.

Now, I would like to run through some of the highlights of these two new businesses.

On January 8, we announced that we had acquired substantially all of the assets of Kent Marine.

Founded in 1989 by Jack Kent and based in Georgia, Kent Marine markets and sells premium aquarium supplies domestically and internationally primarily under the Kent Marine and County scientific brand names.

Sales for 2003 were approximately $7m.

Kent Marine is the leading supplier of salt water aquarium supplements and conditioners and is also a leading supplier prior premium water filters and protein skimmers, fish foods and accessories, sea salt, fresh water treatments, and supplements and sprays for pet birds and small animals.

We believe this acquisition offers several opportunities for cross branding and product development initiatives with our existing All-Glass Oceanic and Kaytee brands.

Our pet sales and logistics groups, which is industries leading distributor of pet supplies has been distributing Kate Marine products for several years into the specially built channel.

These consumables products are premium quality and meet the needs of salt water Aquatic Hobbyist and Professional.

This acquisition complements our industry leading brands of aquariums and to use their analogy.

This provides razor blades for our razors.

We are particularly pleased that Jack Kent, Founder of the business, and well respected expert in salt water aquarium management will continue leading the business and add his expertise and skills to rest of our pet brands in management team.

On January 26, we announced that we have agreed to acquire substantially all of the assets for New England Pottery for approximately $69m.

Founded in 1975 by Alan Antokal and Larry Gitlitz, this business is based in Foxborough, Massachusetts, proud home of the New England Patriots and their happy fans, I'm sure.

New England Pottery is a leader in marketing and selling decorative pottery, and seasonal Christmas products.

Its proprietary brand names include New England Pottery and GKI/Bethlehem Lighting.

Sales for 2003 were approximately $75m.

New England Pottery is the largest marketer and supplier of decorative pottery in the Northeast and mid Atlantic area.

This is an excellent strategic fit with our Norcal Pottery Brand, and strengthens our innovative product development in national coverage capabilities.

Norcal and New England Pottery combined is the largest decorative pottery supplier in the country.

Central and NEPs, we now refer to New England Pottery, have different geographical focus for sales, but ultimately have the same large customers such as HomeDepot, Wal-Mart, and Lowe's.

They source product from the same countries and sometimes even the same vendor.

GKI/Bethlehem Lighting, which includes seasonal lighting, we look forward, in glass ornaments is a new activity for central, and will be a big help to offset the seasonality of our Lawn and Garden business.

This unique business markets and sells premium branded products to commercial and high-end retailers.

GKI is well known for consistently bringing up new and innovative seasonal products, and we are pleased that Larry and Alan will continue to lead New England Pottery following completion of the transaction.

We expect the acquisition of Kent Marine and the pending acquisition of New England Pottery to add $0.10 to our earnings per share in the remainder of fiscal 2004, which I will go through in detail later on in the call.

And now I'd like to turn the conference call over to Stu Booth, our CFO, to take you through the first quarter financials in some detail.

Stu?

Thanks Glenn.

Net sales for the first quarter of fiscal 2004 were $222m, a $10m or 5% increase from last year.

This included a $6m or 4% increase in our branded product sales along with the $4m increase in sales of other manufacturing products.

Our branded products sales growth was organic.

Gross profit for the quarter increased by $900,000 to $62.1m and as a percentage of sales, was 27.9% compared to 28.9% last year.

This decline in gross margin was due primarily to product mix shifts in the quarter led by stronger than anticipated sales of aquarium kits, with introductory pricing.

Competitive pricing on some of our wild bird feed products and the delay in grass seed shipments to key retailers as they continue to move more of their purchases from December to January and February.

Selling, General, and Administrative expenses for the quarter were $58.5m compared to $59.2m than the prior year period.

In terms of

components, higher selling and delivery expenses increased in line with our sales and were more than offset by lower administrative costs.

Operating income for the first quarter of 2004 improved 80% to $3.6m, from $2m in the year ago period.

Net interest expense in the quarter was $3.9m, a $1.1m increase from last year.

The increase was due primarily to higher interest expense associated with the placement in January 2003 of our Senior Subordinated Notes and the refinancing of our senior credit facility.

Net loss for the quarter was $645,000 or $0.03 per diluted share versus a net loss of $717,000 or $0.04 per diluted share in the comparable period last year.

Depreciation and amortization for the most recent quarter totaled $4.6m compared to $4.5m in the 2003 quarter.

Turning to the balance sheet, comparing December 27, 2003 balances to December 28, 2002 balances, accounts receivable increased by $8m or 7.6% year-over-year and the inventories increased 19% or 8.4% over last year.

Virtually all of our increases in inventories is on the garden side of our business.

The increase reflects anticipation of a strong season, a $6m delay in grass seed shipments to a big retailer from December to January and February.

Neil will discuss the other inventory bills in his comments.

Capital expenditures for the quarter totaled $4.6m of which approximately $1m was for the completion of Phase I of our Kaytee Products capital expansion project.

Capital expenditures for the prior year, I'm sorry, for the prior year quarter was $2.5m.

At December 27, 2003 total debt stood at $250m compared to $270m last year.

However net of cash and equivalents totaled net debt actually decreased to $185m compared to $202m a year ago.

Mike Reed will now review the operational results for the pet product segment.

Mike?

Thank you, Stuart.

In the first quarter of 2004, our pet products segment continued its strong performance with growth from new product sales, growth in sales channels, new placement of key retailers and growth of our branded sales through sales and logistics.

Our pet segment includes the following brands, Kaytee, TFH, Nylabone, Four Paws, Wellmark, Zodiac, Pre-Strike, Altosid, All-Glass and Oceanic and our pet sales and logistics operations.

This segment reported first quarter sales of $129.5m, an increase of $10.8m or 9.1% compared to the same quarter last year.

Sales of our branded products increased by $6.4m or 7.1% during the quarter.

Sales of other manufacturer's products through our pet sales and logistics operations also increased in the quarter.

Operating income for the first quarter was $10.9m compared to $9.9m last year, an increase of 10%.

I will now review the highlights of the pet brands.

Our Wellmark brands, which include flea, tick, mosquito, and other insect control products for professionals and consumers under the brand names Zodiac, Altosid, Extinguish and Pre-Strike enjoyed another solid quarter.

Sales of Zodiac branded products were strong with growth in the pet specialty mass and grocery channels.

For five years, Wellmark and

have cooperated in pursuit of further international approvals for sales of the Mario Frontline Plus product line containing Wellmark's active ingredient as methoprene.

During the quarter, the European Union approved use of Wellmark's active ingredient and the sale and use of Frontline Plus in that market.

Also during the quarter, Wellmark achieved registration of its active ingredient in Japan allowing Mario to offer Frontline Plus in that market as well.

By the end of the quarter, Wellmark began to see increased sales volumes to Mario as it prepares to introduce its Frontline Plus product line in more markets around the world in 2004.

This strength thus continued in our current quarter.

Kaytee, our wild bird, pet bird, and small animal products brand continues to position itself as the innovation leader in those markets.

In this quarter, pet bird and small animal food sales continued to grow in both unit and dollar sales.

Sales volumes and margins on Wild Bird Food, the more competitive part of Kaytee's product mix were impacted by aggressive competitive pricing as competitors anticipated grain and seed cost returning to more normal historical levels.

During the quarter, Kaytee introduced new items including Treatsters, a line of pet treats resembling energy or granola bars for humans, and Soft-Sorbent, a line of paper-based, highly absorbent, non-toxic bedding and litter products.

Both have been favorably accepted in the trade, and Treatsters opens the door to a new interactive treat product category for Pets.

Our new aquarium brands, All-Glass and Oceanic, experienced very strong sales growth in the first quarter.

The new All-Glass Geneva series and Oceanic's contrast series of aquarium stands led the way to 20% growth in aquarium stand sales this quarter.

That growth was exceeded by the performance of the aquarium kit category with the mini bow 2.5 gallon kits recent placement in 2600 Wal-Mart stores and a new kit line offered exclusively to the pet specialty channel, an increase in sales in the kit category of 50% from this quarter last year, far above our expectations.

There were a lot of aquariums bought for Christmas.

The unexpected surge in kit sales positions us well for future periods but in the first quarter reduced our margins more than expected as product mix shifted heavily to a lower margin category, required unplanned temporary labor with its inherent inefficiencies and introductory pricing applied to much more volume than planned.

The continuing strength of the aquarium market and acceptance of these lines bodes well for improved contribution as we enter the second quarter with more normal pricing in place as promotional and discounted pricing expired at the end of December.

During the quarter, Oceanic introduced to the market its newest patent pending product line, Sea Salt, for marine aquariums that dissolves quickly and completely in water and features innovative packaging.

Early reception of this product line has been favorable and sales volume is strong.

More importantly, this introduction marks our first entry into accessories and conditioners that naturally fit with our aquarium sales.

As Glenn noted, this introduction fits our strategy of having razor blades to go with our razors.

Our Nylabone brand, a premium dog chews and edible bones continues to sell well and gain additional listing with retailers.

Since their introduction in the first quarter, Nylabones new patent pending Nutri Dent and Quest dental products for dogs attained sales of more than $1m and with a variety of new edible and Chew Toy introductions led the way to gratifying sales growth.

Our TFH book business introduced several new titles and series during the quarter, and Tropical Fish Hobbyist magazine, and several new book titles were recognized with awards for excellence.

Four Paws, a leading provider of dog, cat, and small animal products experienced growth in sales of its dog training product line including Wee Wee Pads and Wee Wee brand stain and odor removal products during the quarter.

Four Paws enjoyed new placement in the Farm and Fleet distribution channel and continues its strategic focus on the pet's specialty channel.

Our pet sales in logistics network continue to support our proprietary brands and selective strategic partners, increasing the sales of our branded products 14% over the prior year.

The pet sales and logistics operation continues to achieve increases in overall sales reflecting a strong season in the pet specialty retail channel.

And now, I'll turn the call over to Neil Pincus to review the results for the garden product segment.

Neil.

Thanks Mike.

As most of you know, the first quarter of our fiscal year is all about getting ready for spring.

Our Garden Product segment, which consists of the Pennington, AMDRO, Grant's, Lilly Miller, Norcal Pottery products, and Matthews Four Seasons brand and our garden sales and logistics operation reported first quarter sales of $92.8m compared with $93.2m in the same quarter last year.

Both branded sales and the sales for other manufacturers' products were essentially flat compared to the last year.

Garden Products incurred an operating loss for the quarter of $2.9m compared to a loss of $3.2m in the same period last year.

Our Pennington grass seed operations continued to be the innovator and quality leader in this category.

Regarding the professional side of our grass seed operations, we're very pleased and exited that our Princess bermudagrass was selected for the Super Bowl playing field again this year.

In addition, we experienced entry sales of our patented

products.

On the consumer side of our grass seed operations, we experienced the layers in shipments to key retailers from December to January and February.

Our Pennington wild bird food operation experienced a recovery in gross margin percentage as new crop grain prices were near to historically normal levels.

Our Pennington chemical and fertilizer brand began to ship new Eliminator listings to replace sales to

products, loss due to EPA regulatory changes.

In preparation for the season, we have built additional inventories to support both expanded listings and new business at two of our large retail customers.

Additionally, with our AMDRO brand, we have moved our manufacturing capabilities from Arkansas of Georgia requiring a build of safety stock inventory during the transition.

We are optimistic about the upcoming lawning garden season and the prospects for all our garden brands.

As we continue to expand listings and product placement, introduce new innovative products and product line extensions, and expand further into the mass and grocery channel.

On a personal note, I'd like to take this opportunity to welcome Larry Gitlitz and Alan Antokal to the Central family.

I've known both New England Pottery and its founders for more than 15 years.

And as the former owner of Norcal Pottery, I've come to respect Alan and Larry personally and professionally.

The friendship and respect developed over the years has

bringing them into the Central family of brands

for the great fit and a complement to what we do.

Now, I'll turn the call back over to Glenn to update you on our earnings guidance for fiscal 2004 and wrap thing up.

Glenn.

Thank you Neil.

As we reported to you in our last earning call, we're forecasting 2004 to be stronger than last year.

We expect both our Pet and Garden segments to produce another good year in sales and profits driven by our pipe line of new product launches increased businesses -- business for many customers, continued consumer preference for our high quality products, cost reductions, and continued productivity improvements.

In addition, we know you are interested in our current expectations for fiscal 2004 and beyond.

Taking into consideration our first quarter results, our current expectations for the reminder of fiscal 2004, the acquisition of Kent Marine and the assumed completion of New England Pottery acquisition early this month, we have raised our earnings per share guidance to $2.10 to $2.20 range for fiscal 2004.

This is a 21% to 27% increase over last year's earnings per share of $1.73.

I would now like to take, to go through the factors that have changed from our previous guidance.

Sales are now expected to be in the $1.225b to $1.275b range or a range of 7% to 11% above last year.

We continue to expect organic sales of our branded products to grow 5% to 7% and sales growth of other manufactured products to be 0% to 5%.

We continue to expect gross profit margins to be in the 29% to 31% range for the entire year.

Our SG&A costs continue to reflect a mix of sales between our brands and other manufacturers' products.

Our branded products have higher selling expenses than products from other manufacturers as you all know.

We continue to anticipate litigation expenses of approximately $4m in 2004, primarily associated with the TFH trial, which was scheduled to begin in February 2004, but has been postponed once again due to change in judges.

We do not have a new trial date yet, we do expect it will happen sometime in 2004.

Operating income is now expected to be in the range of $88m to $93m.

We continue to expect other income to be at approximately $2.5m for income we recorded from our equity investments.

Net interest expense is forecasted to be in the $16.5m to $18.5m range and our effective tax rate is expected to be approximately 39.2%; how about that for approximation, in 2004.

Net income was forecasted to be in the $44m to $47m range.

Average outstanding fully diluted shares continue to be estimated at approximately 21m to 21.5m shares, which leads us to our guidance range or new guidance range of $2.10 to $2.20 per diluted share, up $0.10 higher than previously talked about.

Depreciation and amortization is now estimated to be approximately $18.5m.

We continue to expect CAPEX to be approximately $13m to $15m for 2004, of which approximately $3m is for Phase II of our Kaytee expansion and the remainder for maintenance, CAPEX and other small capital outlays.

Our major assumptions in arriving this at this guidance have not changed.

Our guidance also excludes the impact of any potential acquisitions beyond those already disclosed or any other major financing events.

This completes our updated guidance and assumptions for 2004.

In our last call, we told that you that we were planning in 2004 to grow our topline by approximately 5% and our net income 15% to 20%, and longer-term we expect to produce on average a 5% to 6% topline growth and 10% to 12% bottom line growth, all organic.

We also told you that our goal is to achieve significant growth in topline sales and bottom line profits per year over the next several years through acquisitions.

The acquisition of Kent Marine and the pending acquisition of New England Pottery are testament to this strategy.

We continue to believe there are significant opportunities to further consolidate both industries we participate in.

We remain very busy on the acquisition front.

We enjoy leading position in both pet and garden and have the management and financial strength to execute our vision.

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 now open for questions.

If you do have a question, you may press one followed by four on your touchtone phone.

If you are on a speakerphone, we do ask that you please pick up your handset to minimize any background noise, and if at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

Once again, if you do have a question, you may press one followed by four on your touch-tone phone.

Our first question is coming from Ron Phillis of Banc of America Securities.

Hi, Stu.

I was wondering if you could tell us a little about the restricted cash in the balance sheet?

Thanks.

Ron, I know you are familiar with our Scott's litigation, and in the fall we established that approximately a $15m escrow account in connection with the litigation in lieu of paying Scotts the current outstanding judgments in favor of Scotts.

We are doing this while we are appealing the decisions in the Ohio court.

I appreciate it.

Thank you, our next question is coming Joe Altobello of CIBC World Markets.

Thanks, good afternoon guys.

Hi Joe.

Just a quick question, gross margins obviously were down pretty significantly and it sounded like you guys gave some pretty good answers as to why.

I was curious if you could give us a little more color there.

It sounded like, some of it is due to the delay in the grass seed sales, but it sounded like a lot of it is also due to pricing on the pet side, if you can give us some more color there?

And also I was curious if there are any potential synergies or revenue enhancements from the acquisitions in your updated guidance?

Okay, well first of all on the gross margins side you're right.

The good news, the bad news, the good news is we sold a lot of aquariums, the bad news is we discounted them more than we thought we were going to have to and that ran out as in December 31.

So, our margins are now back to where we like them.

We just had an explosion in aquarium sales at that Christmas time, especially on the kid's side.

And on the low-end side, which are, the kits compared to our normal stock tanks, which have much higher gross margins from that standpoint.

The other thing about the synergies, we do see some, we're not scoring those yet.

We want to really get our hands on the business and understand them.

But you can believe me that we have people working on those right now to try to bring more into the bottom line.

So there's further potential upside from the 210, 220 then?

We're not going to tell you that.

If I could ask that.

You almost got me in there.

Okay.

And just going back to the gross margin question again for a second.

I think your comment last call was, obviously the guidance was 29% or 31%, but I think you mentioned that the midpoint of that is probably most likely, is that still the case around 30% gross margins this year?

Yes.

You have to wait for the whole garden season to go in full swing here.

But we're trying to hit the middle of it.

Okay, great thanks.

You are welcome.

Thank you, our next question is coming from Doug Lane of Avondale Partners.

Hey, good afternoon everybody.

Questions first on the acquisitions and the incremental $0.10, how should we look at that seasonally on the remaining three quarters of the year.

Is it pretty much all going to be in the June quarter or I guess some of it will be in the off-season with the lighting business.

Just give us some sort of just directionally where should we be putting most of the $0.10 on a quarter-by-quarter basis?

Pretty much spread it on a monthly basis.

Okay, and that's easy.

Starting in March.

The

was just pretty steady throughout the year.

The New England pottery won, the pottery will be strong in the second and third quarter and the

, what we liked about that acquisition also, Doug, was the GKI/Bethlehem Lighting, we have walked through their showroom.

My

I don't dare bring my wife back here so, I'm buying Christmas stuff.

But that will be more in the first quarter sales

2005..

Okay.

And on the grass seed that was delayed from December to March quarters, was that anticipated when you talked about fiscal '04 last quarter, or was there any change over the last three months, and it was more or less or about the same I guess is my question.

Is that what you expected at the beginning of the year?

A little bit was dependant on leather, but again there's been a shift, at least the start of last year for us, we shifted $6m sales of grass seed last year between the first quarter and we did the same thing this year again.

So, we're up to 12, that's shifted for us of the two-year period.

It's a little bit of weather, there also may be change in the buying patterns of the major retailers.

We saw that not just on the grass seed, we also saw that on a lesser extent even on the pet side, where normally we would have big shipments in the last week of December, most of them pushed off in the first week in January.

So, I think it's really going in for retail.

They're trying to push more into January versus December.

And this is just them trying to manage inventories more precisely.

We shouldn't read into it that maybe their inventories of your products might be a little bit long?

That's correct.

It's just a moderate business management.

Okay, okay.

And you have been talking or I had heard you talk about sort of a 10% or double-digit target operating margin.

Can you give us a feel for, with the new acquisitions and at least as far as we are into the new year, if that's achievable in the next two years, three years, five years, just what do you think?

All the above.

Okay.

We still believe that, we still think it will have that 5, on the organic growth, we still expect to see our topline sales of 5% to 6% and that' sustainable, and we also see sustainable over the next several years, we can double that bottom line.

No change on it.

The creep in the operating margin, we'd have to get that in double digits.

As we keep saying as soon as possible and again, we're very comfortable, we have got a nice base to build that now.

So, hopefully, we will start seeing that sooner and sooner as we bring more acquisitions in.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question is coming from Jan Loeb of Jeffries & Co.

Hi good afternoon.

Hi Jan.

Hi Jan.

Hi.

A couple of questions.

Firstly, can you break down a little bit this $0.10 of incremental earnings from the acquisition?

Just roughly, what would be Kent and what would be New England?

Kent would be about $0.02 and New England would be about $0.08.

Okay.

So, if I would extrapolate a little bit, I mean you've said that New England is half pottery, half lighting.

Yes.

And that this year, you are not getting any benefit from the lighting because that's a total first quarter business.

That is March.

We do get a little bit in the fourth quarter.

A lot of it's in the first quarter.

We do get a little bit hopefully, in the fourth quarter.

Okay.

Therefore, one could really say that looking into next year, I might get an additional $0.07 or so of incremental earnings from New England?

You're in the ballpark.

In the ballpark.

Okay.

Second point is on litigation, you said you are going to spend about $4m this year.

How much was it in the first quarter and how would you spread the $4m over the four quarters?

The first quarter was $1m, that was the same as last year.

It was $1m and $1m.

You know Jan, it's pretty hard to spread the remainder of it, because a lot of it is changing on the TFH litigation.

I don't know if we want to even guess when that's going to crank up.

With a new judge on the action for our trial there, I don't see it happening in the next six months.

So, it will probably shift more towards third and fourth quarter.

We shouldn't have that much in the second quarter.

Okay.

And so, really the balance that $3m is almost all related to TFH?

Probably, the three quarters of that.

Okay.

And then, the other quarter would be to Scotts appeal?

Scotts and the Phoenix Fire.

Okay and would you anticipate any legal oriented in fiscal 2005?

Maybe, TFH could push back that far, maybe it does.

We hope not.

I can't believe that our dean and judge

.

It's been strange doing anyway.

So, do you think there wouldn't be any in 2005?

If there is, it should be very small.

We don't expect to have $4m again, we'll tell you that.

Okay.

Thank you very much.

You're welcome Jan.

You're welcome.

Thank you.

Our next question is coming from Alexis Gold of CIBC.

Good afternoon.

Hi Alexis.

Hi.

How are you all doing?

Good.

And just a couple of questions.

You definitely continued to allude to acquisitions going forward.

I am just trying to get a sense for your appetite, you've always talked about trying to get leverage and keep leverage in that three times area and if I remember correctly, your covenants of about four and a quarter and then, in addition to that, I believe that your acquisition basket in your credit agreement is about $75m and I am guessing you're pretty close.

So, if you do continue to plan any acquisitions, where you see that being reset and could you give us any update there?

That would be great.

Well we are in the process of resetting our acquisition basket as we speak.

So, again, the facilities that we have in place will, should do us a lot of good service to complete the acquisitions that we have completed right now.

And you're right on the leverage covenants and alike.

Again, our house

try to stay in a sustainable bases of about three times debt to equity.

We have the capacity and the facility to spike about that approaching 4.25 times.

And we will spike about warehouse limits for the right kind of investment as long as we can cash flow them down in a reasonable period of time.

But it is suffice to say we still have plenty of drive pattern left to pursue the ones we're going after.

And we're basically resetting the baskets, which is a process we're going through right now.

And do you plan to draw the revolver to finance acquisition, and obviously significant cash as well.

We'll be drawing on the revolver to complete the NEP acquisition.

Okay, and it will, I mean the whole thing will use cash as well?

Oh, no.

Cash first and drawing on revolver second.

Okay, and then just an update on grain pricing.

I know you talked about your gross margin, and I'm just wondering if there's any type of grain pricing in there.

When I look, it looks like pricing is actually fairly high right now.

I know that you do some hedging but just trying to get a sense for where that stands right now.

Grain prices have been strong in the last month or so.

The future is calling for perhaps a little more strength.

Here I'm talking about corn, Milo, the green part of our markets.

The other part that drives some of what we do our oil seeds.

And right now oil seed has not seen the same kind of strength that the grain sector has, and we're keeping a close eye on that market but we don't currently forecast a lot of upside on the oil seed market.

Okay, so it's essentially the day out, I mean that was not -- there was no impact on gross margin then?

There was a little bit, I mean, grain prices have returned to near historical levels, but they haven't come all the way down yet.

Okay.

And then just finally, you did mention with the new acquisitions.

It sounds like you have access to your different distribution outlets.

I know you mentioned some high-end retailers with GKI of Oklahoma.

I mean are there any retailers that you haven't had access to before where you see opportunities, cost sell, any maybe the Pet Products, some of the other things?

One, we think about one of the large customers for GKI Lighting is QVC, the shopping channel.

We are trying to get those folks to help us, maybe sell some of our cool new pet products in there and some other things as well.

So, yes, we do have a new channel there from that standpoint.

Then the Kid marine, we were kind of surprised how much they sell overseas, because

technology.

If you're a salt water acquarius anywhere in the world, this is what you are going to turn to.

So, we think they will help us a little more in the international front as well.

Great, thanks a lot.

Congratulations.

Thank you.

Thank you.

Thank you, our next question coming from MIchael Friedman of Sidoti & Company.

Hi guys, I had two quick questions.

One is did you guys mention, the operating margin for both business segments?

Just a second.

Well, the operating margin on the Garden side is a lot.

And on the pet side, we'll calculate real fast.

Okay, and then I might need more calculation.

How many shares did you guys buy back in the quarter and what was the average price on that?

We haven't bought back any shares.

You didn't buy back any, okay.

Zero.

You have any questions while I am looking.

No, that's it.

How about we go to the next question, and we give the answer real quick, and so you have anything else.

No, that's all.

Thanks.

Okay.

Thank you.

That segment is 8.4% and the garden is a negative 3.1%.

Okay, next question?

Thank you, our next question is coming from Brad

of RBC.

Hi, two questions actually.

First the competitive pricing, you mentioned on the green seed, I was wondering how -- if that's carried forward into the current year, and does your expectations, your outlook there, and if that's actually offsetting the benefit you are getting in the year-over-year pricing?

And the second question is regarding

they made some comments that could be interpreted as jabs towards your acquisition of New England Pottery, and it sounds like they might have passed on this.

I was wondering if there was an auction process, your expectations for return on investment there, and when do you expect to achieve those?

Thank you.

Neil, do you want to cover the green seed part of the question?

Yes, talking first about your question on competitive pricing, that was mostly effective for us in the months of October and November.

In December, we had some pretty intense winter weather over a big part of the country, and at that point, there is a lot more spa sale and purchase of this wild bird kind of a product, and at that point, the pressure from the competitive pricing really stopped impacting volume at all and margins very much.

We are continuing to see strong movement of wild bird products in the month of January and we've got strong orders on the books as we go into February.

In terms of offsetting the value of the market drop, again in those early months that did happen to an extent as

Competition just saw the markets dropping further and faster than we did and as it turns out, they may have been overly optimistic.

Okay.

Regarding your question on Scott's, I don't think pottery is really a strong spot for them or sweet spot for them in the first place on the -- on the New England Pottery, it was a limited option, the price we paid for the business is within our guidelines and we expect it will be accretive from day one as we've said, and we expect to make our returns that we're looking for in that business.

And also around the Southwest, our ability to reach the national coverage by combining the two operations it builds and in all we have in the Northeast.

So, we see it as a huge win and complement to what we are doing.

There is a lot more strategic

.

Yes, we became basic, whereas this would be just a fraction in the market prospect.

Okay, thanks.

Welcome.

Thank you.

Our next question is coming from George Chalhoub of Deutsche Bank.

On the debt, it sounds like you still have almost the same debt items as you had last quarter, which is no drawings under the revolver and $88m on the term loan.

Is that right?

Yes.

Now, you mentioned that you are going to be borrowing slightly to fund whatever is left over from the NEP acquisition after you've exhausted your cash.

It sounds to me that you are going to do a $40m to $45m bucks of free cash flow in fiscal '04.

So, I guess the earnings that we need on the revolver will be short lived.

Right?

Yes.

Okay.

On the acquisitions front, obviously you gave us a sales and a purchase price.

Can you give us an EBITDA associated with NEP or should it adjust back into your maximum of up to seven times EBITDA multiple you've been talking about or how should we look at the EBITDA multiple for that acquisition?

Please back in, we don't want to disclose that to either you or to our competitors.

Now, that's fine.

But I mean if we -- when you say within invalid lines, we should use this range you gave of 5% to 7% is what you are saying?

Yes.

Okay.

Now -- in the other ones you are looking at, you are very comfortable that you are going to be able to still live within that range or do you think maybe pricing should go up here and and maybe you'll be able to -- you'll have to maybe pay a little bit more than what you have stated before?

I was saying I would never say never George, but at the same time, we are very pretty disciplined.

We have passed on already other acquisitions that went above our range.

It has to be very, very strategic and be very extraordinary for us to do that.

Because we're really focused on, as I said on our quarterly call last time, we want to get our return equity and return on investment capital

it is.

In that sense, you have pay for the businesses that you buy.

Great.

Thank you.

You're welcome.

Thank you.

Our next question is coming from Peter

of Presidio.

Thank you.

I was just wondering what the percentage of your Garden business was in the professional long-term market?

For the quarter, our average for the year, is slightly around 10%.

We didn't calculate for the quarter.

No, the year is fine.

Is that an area that you'll be looking for in the acquisition market just because it's not as well served across the country in terms of the sales effort by some of the bigger players?

Sure.

We will look for commercial opportunities in both Pet and Garden.

Okay.

Next question please.

Our next question is coming from Rob Schultz of JL Advisors.

Hello Rob.

Hey, how are you.

Congratulations on a nice quarter.

Just a little more color on the acquisitions if you now, I guess the New England Pottery deal isn't going to close mid-second quarter.

Is the -- even though you are not giving specific accretion, can we assume -- can you speak 2005 at all?

New England, it's really, all these acquisitions you have to digest them a little bit.

So, we are pretty guarded at about, we want to contribute to 2005, but I'm going to say conservatively $0.10 to $0.15 per share in 2005.

We are comfortable with that range.

Good, thank you.

You bet.

Thank you.

As a reminder, if you do have a question, you may press one followed by four on your touchtone phone at this time.

Our next question is coming from Michael Grossman of Essex Investment Management.

Hi, how you are doing?

Good.

Question on the G&A, which was down this quarter.

I was wondering the sustainability of that.

Trying to keep G&A flat or have it grow at a lesser rate than our branded product sales.

What's being cut out?

Nothing has been cut out.

It's been a little trimming here and there.

There is no big silver bullet in there to speak of.

So, in terms of giving your double-digit EBIT margin, what are the key drivers?

Well, there are a few things.

Change in our product mix shift to higher margin products on the cost of good side continuing to grow our branded products in terms of the overall mix.

In terms of the SG&A, stopped leverage in our sales force.

We grabbed the scale now.

So, we should get economies of scale there.

On the administrative side, all those expenses is flat as we can in the face of some pretty steep rising, things like insurance and new benefits and things like that.

There's couple of other big things that we did do as we announced last year on the TFH books.

We pulled about $3m of annual cost out there last year by outsourcing printing and binding.

We are enjoying that now.

We'll continue to enjoy that advantage and the other one is why we put the money on Kaytee.

The

very reason was to primarily take our cost down as well as to give us new manufacturing capability for new products.

Okay.

Last question related to the aquariums, and since you've pulled those discounts off, I know we are working on a seasonally adjusted basis here.

But have you continued to see robust growth in aquarium sales just by the pricing return in normalized levels?

The sales are still going very briskly.

I'm not sure I want to predict a lot of quarters with 50% growth, but we are seeing good growth for this time of the year, good volume for this time of year.

We don't feel like that's hurting us.

And with the normalized margins that should help you out next quarter?

It is better.

There are lots of discussions around that, believe me.

Okay.

Thank you.

Okay, you are welcome.

Thank you.

Our final question will be coming from Doug Lane of Avondale Partners.

Hi.

Two quick follow-ups, just to make sure I am clear on this New England accretion, so you've said of the $0.10 for fiscal '04, probably $0.08 is New England?

Yes.

it is $0.10 to $0.15, so our '05 incremental accretions should be somewhere between $0.02 and $0.07?

That's what we are providing you with right now.

Okay.

I just want to be clear on all that.

Lot of numbers being turned around.

Second thing, what was the coupon on the bonds that you did a year ago?

908.

So, what are the opportunities for refinancing that?

Is that something that can be done this fiscal year?

No.

It's got a 109 call on a -- 109 and a quarter call.

Okay.

Quite, almost four and a half years to call now for a schedule redemption.

Quite frankly though, we are pleased with the offering.

It seems like pretty expensive money today, but it was a very, very well received offering last year.

And that was in the first quarter, last year?

That was the first calendar quarter?

Yes.

One thing we have done Doug, we picked up in the last call, we have done pay floating swap for $75m of that to get some of the cost down.

Okay.

Okay.

Thank you.

You bet.

Are there any questions?

Sir, there appear to be no further questions at this time.

Okay, operator thank you.

Okay everybody on the call, well, first of all thank you for your questions.

You hit some of the hot buttons, we thought you would.

First of all we are pleased with our results thus far and continue to view 2004 as a benchmark year for growth and profitability.

Don't forget about it right now.

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

We'll continue to grow and extend our brands in both garden and pet.

We'll continue launching the new innovative products, which is our pipeline when we'd like.

Leveraging our cost structure, positioning the company to continue our growth for organic and through acquisitions and of course pursuing and completing those strategic acquisitions that make sense.

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

Both of these industries are growing, recession resistant with good demographics, which helps to grow.

And case for rising tide raises all ships, and they do provide two strong ways for future growth both organically and acquisition orient.

We thank you all of you for joining our call, and wish all you continued success in 2004 and we do want remind you, don't forget to buy Valentine's day gifts for your pets, they need love too.

And with that thank you very much for your patience today and your attention and good luck to everyone.

Good bye.

Thank you and thank you callers.

This does conclude today's conference.

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