Central Garden & Pet Co (CENT) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Central Garden & Pet second quarter fiscal 2004 earnings conference call.

At this time all participants are in the 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 please press the star followed by the 0 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 for Central Garden & Pet.

Please go ahead, Sir.

Good afternoon, everyone, and thank you for joining us today to discuss Central's financial results for the second fiscal quarter of 2004 which ended March 27, 2004.

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

With me on the call today 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 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 futures 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 for the fiscal year ended September 27th, 2003, and other Securities and Exchange Commission filings.

On the call today Glenn will provide an overview and discuss the recent impact acquisition of Interpet.

Stu will discuss the details of our financial results.

Mike will report on the pet and garden operation and then we will return to Glenn who will provide an update on our 2004 earnings guidance and wrap 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're very pleased with the results we reported today for the second quarter and first half of the year.

And that we are on track for an excellent year for 2004.

Overall our sales grew from 331 (ph) million to 359 million or nearly a 9 percent increase compared to last year with 6.4 percent of this growth coming organically and the remainder from the recent Kent Marine and New England Pottery acquisitions.

More importantly, we recorded net income for the quarter of 18.8 million or 91 cents per diluted share compared with net income of 13.5 million or 68 cents per diluted share in the year ago period.

This represents an earnings per share increase of 34 percent.

The garden season is off to a good start and our portfolio of No. 1 pet brands experienced a very strong quarter.

We are also pleased to continue our track record of developing and launching innovative new products and packaging.

Our pet brands were recently recognized at the Annual American Pet Products Manufacturers Association trade show where we received eight out of 33 awards that were given for excellence and product packaging and innovation.

We were also quite easy in the second quarter on the corporate development front completing the Kent Marine transaction in January and New England Pottery in February.

In addition, on April 1st we announced the acquisition of substantially all of the assets of Interpet Ltd. which is a leading manufacturer and marketer of pet brands in the United Kingdom which closed last week.

This is an excellent strategic acquisition for Central that also provides us with the platform and marketing strength to expand sales of our existing U.S. brands in the United Kingdom and Europe.

It also has a number of premium pet brands for our U.S. portfolio that we will source from them.

We expect the acquisition of Interpet to be approximately 3 cents accretive to our earnings per share for the remainder of 2004 and 8 cents per share in 2005.

We'll give you more color on our increased guidance later in the call.

And now I will turn the conference call over to Stu Booth, our Chief Financial Officer, to take you through the second quarter and year-to-date financials.

Stu?

Net sales for the second quarter of fiscal 2004 worth were 359 million, a $28.5 million or 8.6 increase from last year.

This included a $14.5 million or 5.6 percent increase in our branded products sales along with a $14 million increase in sales of other manufactured products.

Gross profit for the quarter increased $12.9 million or 13 percent to $112 million.

Gross profit as a percentage of sales increased to 31.2 percent from 30 percent last year as both garden product and pet product margins improved.

Margin improvements were due primarily to more normalized margins related to our wild bird feed products.

Selling, general, and administrative expenses for the quarter were $77.7 million and as a percentage of net sales, SG&A expenses remain relatively flat at 21.6 percent.

Operating income for the second quarter of 2004 increased 21.9 percent to $34.4 million.

Net interest expense for the quarter was $5.4 million, a $1.8 million decrease from last year.

The decrease was due primarily to the inclusion of $1.4 million of non-recurring interest expense in the second quarter of 2003, related to the refinancing of our convertible subordinated notes and lines of credit.

Net income for the quarter increased by 39 percent to $18.8 million.

Similarly, earnings per share increased by 34 percent to 91 cents from 68 cents per share last year.

Depreciation and amortization for the most recent quarter totaled $4.3 million, the same as last year.

Now turning to the first half of fiscal year, net sales were $581 million, a $39 million or 7.2 percent increase from $542 million in the comparable 2003 period.

Gross profit as a percentage of sales increased 30 basis points to 29.9 percent, the midpoint of our guidance range.

Net income for the first six months of fiscal 2004 was $18.2 million, up 41 percent over last year.

Earnings per diluted share were 88 cents compared with 64 cents per diluted share in the comparable period last year, an increase of 38 percent.

Turning to the balance sheet comparing the March 27, 2004 balances for the March 29, 2003 balances accounts receivable increased by $24.4 million or 12 percent year over year.

Inventories increased $21.2 million or 9 percent over last year.

Capital expenditures for the quarter totaled $1.7 million year-to-date, our capital expenditures totaled $6.3 million, which is in line with our fiscal 2004 guidance of $13 to $15 million.

At March 27, 2004, total debt stood at $309 million compared with $249 million last year.

The increase in debt over the last 12 months is due primarily to the acquisitions of Kent Marine and New England Pottery in the second quarter.

In summary, sales and profits were strong for the quarter and first half of the year.

In addition, our financial performance and capital structure provide both the foundation and flexibility to continue pursuing our growth aspirations.

Also I'm pleased to announce that Paul Warburg joined Central Garden & Pet as Vice President of Investor Relations earlier this week.

Paul was most recently a vice president of investor relations at NASDAQ.

Please join me in welcoming Paul to our management team.

Also with Paul's arrival Drew Tammen will now shift the majority of his time to managing our cash management and financing programs.

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

As Neil Pinkus who usually reports on garden products is traveling.

Now, Mike.

Thank you, Stu.

As Glenn mentioned, earlier our pet products segment turned in another strong performance in the second quarter and first half of fiscal 2004.

Our pet segment includes the following brands.

Kaytee, TFH, Nylabone, Four Paws, Wellmark, Zodiac, Pre-Strike Altosid, All-Glass, Oceanic, and Kent Marine and our pet sales and logistics operations.

This segment reported second quarter sales of $145 million, an increase of $16.4 million for 12.8 percent, compared to the same quarter last year.

Sales of our branded products were up $11.9 million or 12 percent of which $2.2 million was derived from the recent acquisition of Kent Marine.

That's organic brand sales increased by 9.8 percent, sales of other manufactures products also increased.

Operating income for the second quarter was $15.7 million, an increase of 20 1 percent.

In addition to the quarter's strong performance, we are very pleased by the recognition from our customers with the eight industry awards for new products and packaging at the recent 8th APPMA show.

Now let's briefly review highlights of our pet portfolio.

Our Wellmark brands, which include flea, tick, mosquito and other insect control products for professional pest control operators and for consumers under the brand names Zodiac, Altosid, Extinguish and Pre-Strike enjoyed a very strong quarter.

As discussed in our last earnings call, the new international approvals for Mariol's (ph) Frontline plus product line containing Wellmark's larvacide Esmetoprene (ph) stimulated growth as Mariol built inventories in the first and second quarters for the European and Japanese markets.

In direct response to health concerns for horses from the West Nile virus Wellmark introduced two new product lines.

One's a fly and mosquito repellent, the other, insect control wipes.

Both won awards at the APPMA show.

Wellmark's Altosid professional brand and Pre-Strike consumer brand were selected by Orkin Inc., a national pest control company, for use in its new mosquito control program for commercial and consumer applications.

This is the first such program by a national pest control provider.

Kaytee, our leading brand of bird and small animal nutritional products and supplies, experienced steady growth in pet, bird, and small animal products during the second quarter.

Kaytee's new avian and small animal Treat Stirs, a line of granola bar type treats introduced in the first quarter and Cory's Choice Floating Pine Food Sticks won awards at the APPMA show.

In the second quarter Kaytee introduced several new products, including Fusion avian foods, a nutritionally complete brand of extrutive (ph) foods, seeds, fruits and nuts for companion birds.

All Glass and Oceanic our key aquarium brands continued strong growth in the second quarter.

Oceanics patent pending sea salt product line, another award winner at the APPMA show, is quickly becoming the preferred choice for saltwater aquarium hobbyists.

Larger aquariums, equipped with All Glass new patented overflow filtration system, primarily focused on saltwater environments, also grew nicely.

TFH and Nylabone products also enjoyed a strong second quarter and received recognition at the APPMA trade show for the Simple Guide to series of pet care books and for Nylabone's new Quest Nutradent line of dental care products for dogs.

During the quarter TFH and Nylabone continued to experience strong new product growth with that new Quest Nutradent line being well received by retailers, consumers, and dogs.

Dogs just love 'em.

Our January acquisition of Kent Marine has gone well and is already opening new doors to product development opportunities and operating synergies.

Our pet sales and logistics network had another quarter of strong performance growing sales of Central brands 12 percent and those of our strategic partners as well.

This impressive growth is driven by value added consumer advertising and promotions that help independent pet stores survive and thrive.

And now I will review the performance of the garden product segment which consist of the following brands.

Pennington, AMDRO, Grant's, Lilly Miller, Matthews Four Seasons, Norcal Pottery, the newly acquired New England Pottery and GKI/Bethlehem brands and our garden sales and logistics operation.

On balance our portfolio of garden products performed well for the quarter with grass seed the primary exception.

Despite softer grass seed sales, operating earnings for the quarter were up almost 13 percent.

As most of you know our second quarter begins the spring gardening season in earnest.

In that quarter the garden product segment reported sales of $214 million, an increase of $12.1 million or 6 percent compared to the same quarter last year.

due to soft grass seed sales, organic branded product sales declined $2.6 million.

The $5.1 million of sales derived from New England Pottery acquisition more than offset this decline.

Garden products and operating income for the quarter of $26.9 million compared to $23.9 million for the same period last year reflecting a 12.6 percent increase year over year.

AMDRO, the number one consumer brand of fire ant bait in the country, experienced strong growth in the quarter.

This season sales will also be aided by our first ever campaign of television commercials in key fire ant markets.

In addition to our consumer media campaign, AMDRO is providing product samples and informational material to local, county, and state extension agents to further build product awareness for professional use.

During the quarter, Pennington experienced good sales growth in control products which was more than offset by a decline in grass seed sales of approximately $5 million compared to last year.

Grass seed sales in 2003 were stronger than normal and created a tough comparison for 2004 sales.

Our soft grass seed sales for the quarter are more the result a reduction in retail inventories than a reduction in consumer purchases.

Overall grass seed sales remained on a positive longer term trend line.

Pennington did experience strong growth in its professional and forage grass seed sales.

These are strategic growth initiatives launched within the last year to gain market share in higher margin markets.

We're pleased to announce that Pennington's professional perennial Rhine (ph) grass seed brand, Applaud, was selected for the US Open Call tournament at Shinnecock Hills next month.

Pennington's new product launches included Pennington De-icer, the Eliminator seven granules and Natural Springs granular hummingbird food.

All of these products are performing exceptionally well in the market.

In addition in the first half of the year, Pennington's wild bird feed margins returned to more normal levels.

Lilly Miller.

Launch of its new sprayable Alaska fish fertilizer is being well received by national retailers.

Norcal Pottery experienced a strong quarter driven by new products developed during the last two fiscal years.

Consumer specific promotions and increased listings with both existing and new retail customers.

Our combined New England and Norcal pottery brands provide a strategic platform to better service national and regional retailers.

Our garden sales and logistics network continues to strengthen our sales by providing value added in-store service and merchandising programs during the busy garden season.

In summary, at the midpoint of the garden season, our portfolio of brands is performing well overall.

And now I'll turn the call back over to Glenn.

Glenn.

Thank you Mike.

It's always tough to follow a professional speaker like Mike. (laughter) Before I discuss our guidance I would like to touch on the TFH litigation.

We remain confident that we can prove our case that Herb Axelrod defrauded Central and our shareholders by artificially inflating the value of TFH prior to our purchase of the company.

Herb Axelrod as you have probably heard is now a fugitive from justice having not shown up for his arraignment on a federal tax evasion indictment on April 21 and has fled to Cuba.

His status and the status of his assets have raised questions which cannot presently be answered about Central's ability to collect on its claims.

Due to the fact that the situation remains fluid it would not be prudent to discuss litigation further.

We will keep you -- continue to keep you informed as the process unfolds.

Now back to our business.

We are forecasting 2004 to be another strong 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.

Taking into consideration our first-half results, our current expectations for the remainder of fiscal 2004 and including the acquisition of Interpet we are raising our earnings per share guidance and tightening the range from $2.10 to $2.20 to a range of $2.15 to $2.23 for the year.

This represents a 24 percent to 29 percent increase over last year's earnings per share of $1.73.

Now just a few facts into our forecast.

Sales are expected to be in the 1,240,000,000 to 1,290,000,000 range or range of 8 to 13 percent above last year.

We continue to expect organic sales of our branded products to grow 5 to 7 percent with the remainder of the growth coming from acquisitions and sales of other manufacturers' products.

We continue to expect gross profit margins to be in the 29 to 31 percent range.

Our SG&A costs continue to reflect the mix of sales between our brands and other manufacturers and we continue to anticipate litigation expenses of approximately $4 million in 2004.

Operating income is now expected to be in the range of $89 to $94 million.

We continue to expect other income to be approximately 2.5 million for income from our equity investments.

Net interest expense is forecast to be 17.5 to 19.5 million.

Our effective tax rate is expected to be approximately 39.2 percent in 2004.

Net income is forecasted to be in the $45 to $48 million range.

Average outstanding fully diluted shares continue to be estimated at approximately 21 to 21.5 million shares which leads us to our guidance range of $2.15 to $2.23 per diluted share.

Depreciation and amortization is now estimated to be approximately 18.5 million.

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

Our other major assumptions in arriving at this guidance have not changed from our last call.

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

That completes our updated guidance and assumptions for 2004.

Our Company's vision and strategy are to achieve significant growth in topline sales and bottom-line profits per year over the next several years through continued organic growth and acquisitions.

The acquisitions of Kent Marine and New England Pottery in the second quarter and, most recently, Interpet are testament to this strategy.

We continue to believe there are significant opportunities to further consolidate both industries we participate in and remain very busy on the acquisition front.

We are blessed that we enjoy a leading position in both pet and garden and have the management and financial strength to execute our vision.

And now, Operator, we will turn it over to you for questions.

Please begin the questions from our audience.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Ron Phillis, Banc of America Securities.

This is Esther (inaudible) calling for Ron Phyllis.

My question is what is target leverage you want to get down to until you make another acquisition?

Esther, we're pretty deleveraged right now.

We're actually below what we would consider our kind of steady run rate.

We set a house limit of about three times that of EBITDA and I think we're below that right now.

Okay.

Thank you.

Bill Chappell of SunTrust Robinson.

Couple of questions.

First, maybe you can give us a little color on the grass seed business.

Was it below plug your expectations for the quarter or are we off to just a slow start or was there anything in particular that brought that down year-over-year?

First of all Ron, we had a tough comparison to last year we had a very good year.

This is Bill, (MULTIPLE SPEAKERS)

Who am I now? (laughter) Bill, we had a tough comparison versus last year.

It is somewhat below our expectations.

Primarily what we saw is the retailers pulled their inventories down in their stores.

POS sales are actually not as far down as what we saw so we expect to see some improvement going forward here.

With that I think -- I guess in looking at your guidance it seems that you had some impact last year from weather especially being rainy and wet and cold on the East Coast.

Should pick up this year.

Are you seeing that in the first weeks of April and your outlook for this quarter?

First two weeks of April started off slow.

The last three weeks we've seen sales increase significantly as you know you had some pretty bad weather on the East Coast first two weeks of April.

Got you.

Just a follow-up on litigation and I know you can't go into details but can you tell us what the litigation charges were for this past quarter and then maybe help me understand if someone is out of the country, how you would continue to meet the same litigation cost for this year?

That's a good question.

First of all litigation expense for the quarter, Bill, was $1.8 million.

Okay.

Going forward, are you expecting similar type levels?

We're going to try to stay as close to our $4 million of guidance as we can for the year.

One follow-up.

On the gross margin Stu you said it was primarily because of lower wild bird seed cost.

Can you maybe give us an update on where prices are there and have they come back down to meet the lower commodity cost and how that looks for the rest of the year?

It's a combination of price of the retailer and price of the commodity level.

We're seeing some stabilization of the commodity prices and we've been able to maintain adequate pricing at our major retailers.

So we're seeing some improvement over last year, last year at this time we were just getting our price increases approved for retailers.

So that should carry over for at least another quarter or two?

Somewhat, yes.

We hope we can retain our prices with our retailers.

Thanks a lot.

Alexis Gold, with CIBC.

Just a couple of questions.

You mentioned a new advertising campaign for AMDRO.

Just wondering where we would expect to see those commercials and is there, is that incremental advertising spend and how much is associated with that?

It is incremental advertising spend and is targeted where the fire ant markets are, primarily in Texas and in the Southeast.

We have done that.

We are seeing nice sales increases going forward for this year and it is, I won't give specific number but it's a few to several million dollars.

Then, just to touch back on the grass seed sales for a second.

Sounds like the sales really is okay, just trying to get a sense for a measure of line reviews are beginning or probably start to prepare for this.

Are you seeing reordering, kind of similar levels similar to what you saw in '03?

What we're seeing now is the POS sales are increasing especially the last three weeks as I said in April.

So we are now seeing the grass seed sales improved.

We won't recover everything that we lost, you never do.

But we will recover, I think, a portion of that.

So we're looking our line reviews right now and are looking good for next year.

Great just one more thing.

I think you touched a little bit towards this on your overall leverage and acquisitions but assuming that as usual you continue to evaluate opportunities and obviously seeing rise in acquisition multiples.

What are your feelings on that?

Are you seeing increased multiples?

Does that mean you're going to hold off a little bit or maybe we will see some smaller token acquisitions this year?

We always remain very disciplined on what we do.

Yes you are right that some of the multiples business are selling for have increased over last year, previous years.

And we understand that and we will for the right strategic acquisition, yes, we would pay a high multiple than normal.

But we also want to make sure that it is accretive to what we're doing and it's a fit strategically and as Stu said, we have the flexibility with the balance sheet to pursue everything that we are looking at in front of us right now.

Great.

Thank you very much.

Joe Altobello of CIBC World Markets.

On the grass seed front not to beat this to death, but I think you guys said on the last call there was $6 million in sales that you normally would have had in December quarter that sort of snuck into the March quarter.

Was that the case and were you still below your sales target even with that extra 6 million?

Yes.

New England Pottery.

I think you guys had said 5.1 million of sales in the quarter.

Yes.

Now that's a pretty seasonal business and obviously I think you had maybe half a quarter of sales but I was looking for a little bit more there.

Is it just more seasonal than was modeling?

Joe we have one month in the quarter. (MULTIPLE SPEAKERS) and we're just getting started on the season.

And last question.

I think last year you guys had a pretty good June quarter and aquariums with Finding Nemo coming out.

I'm curious how difficult the comp is this year in the aquarium business?

It will be somewhat more difficult than we had last year that is correct.

We do have our margins better this year.

Better margins but sales somewhat depressed?

Sales growth somewhat depressed I should say.

Is it a tough comp?

Yes, but our aquarium sales are up very nicely in the first quarter.

Thank you.

First-half, excuse me.

You're welcome.

Doug Lane of Avondale partners.

I'm sorry.

I missed a number.

Did you give out what you expect depreciation and amortization to be for this year?

18.5 million.

, Okay, thank you.

Looking at the EPS forecast going up three cents on the high end of the range and up 5 cents on the low end of the range.

So that looks like that as far as the upper end of the range is concerned all you did was really flow-through the benefits in the Interpet acquisition.

What was the reason then for the other 2 cents on the low end of the range if you had to characterize it? (MULTIPLE SPEAKERS)

First half of the year we feel comfortable what we scored so far in the year.

I think we're kind of we moved up half up, to more to our midpoint of our range we had before and now we're just adding on top of that 3 cents for Interpet.

Okay, that's a good way to look at it.

And I was with (indiscernible) Power & Co. a year ago and looking at the garden side and I see the tough comp in the second quarter this quarter last year up 16.7 percent and then, up 0.1 percent in the third quarter.

Can you just put some color on that?

I guess the obvious 1 1/3 quarter was the poor weather back East but anything else you can give us some color on the lumpiness of the garden business a year ago?

Probably the lumpiness last year we had a very late spring last year (MULTIPLE SPEAKERS).

Spring never happened last year on the East Coast.

This year California had a really early spring and the one back on the East Coast is not as bad as last year but not as good.

Not as good as we would hope for, of course.

And as far as grass seed sales, we just had a really good -- a better year on grass seed than we did this year.

Any reason for that?

Just maybe they were buying ahead and got stuck with the bad weather or what was going on last year why the grass seed was so strong?

It was growing.

Everybody kind of figured it would really take off towards the last so the retailers actually ended the year with more grass seed in their inventories than normal so we had to bleed through that this year.

So hence, the inventory destocking.

So you get the sense that inventories are about right so if we get decent demand in the third quarter, you'll see it on the sales line?

Yes we will pick up part of those last sales but as I said earlier we won't pick all of them up.

Just never do.

I think the retailers are going to be smarter this year.

They're going to be much more careful about their inventory levels the rest of year.

Sure.

Question on the debt.

Is there ... in your EPS forecast, is there any consideration of a, short-term interest rates rising or b, fixing a portion of your debt exposure?

We have a little bit of room for rising interest rates and we just went from fixed to floating on a large portion of our debt which we've enjoyed the benefit of for a period of time here.

Is all the acquisition debt including the one that's closed this quarter, is that all that variable rate debt?

Yes.

And have you thought about fixing it or hedging it?

When we do our next sizable acquisition, we will look at rebalancing our GAAP structure but we're only 75 percent floating right now which is not a bad place to be for what we see.

Bill Brady of Presidio Management.

Very good quarter, you guys.

Several questions.

With four months in Canada and a couple of months in pottery under your belt is this confirming that in fact saw a lot of sales synergies there and do you feel that they maybe able to grow revenues faster than you thought and perhaps faster than the Company in general?

First of all Bill, thank you for the compliment.

We had as we said we had a very good quarter.

Everybody's talking about grass seed here but you look at the quarter, we had a very good quarter.

Other than that.

As far as the acquisitions we now have them in now for a couple of three months, we are seeing positive signs.

We like what we see so far and we'll ask you to stay tuned as we go forward and which we can really bring more with them.

We are very pleased with what we've seen so far to date for the first three months.

Okay, good.

See that both inventories and accounts receivable grew faster than sales.

Should we -- bother us at all or you wanna -- ?

No, Bill, I think it's more of a fact of the acquisitions.

New England Pottery brought in a lot of inventory as well as receivables.

It would just hit that approach the incline to the garden seeds and that they were the biggest impact on both the inventory and AR.

Okay, I would expect a little more leverage in SG&A.

Was this a matter of product mix, that more of it came from other people's products and sales costs were higher or --?

A little bit of that and there was a fair amount of additional expenses and admin this quarter.

Just cats and dogs (ph) kind of thing.

Getting back to guidance for a second, the Multex and First Call numbers were 83 which you beat by 8 cents.

Did you do better in second quarter than you had anticipated?

You know, Bill, it's one of those things where we've been in this business for many years but we can't gauge the garden season because it crosses over two quarters.

I -- just putting the numbers together I could infer that and I hope I'm wrong that, because you're adding 3 cents on the acquisition and then 8 cents that you beat Multex -- Multex numbers for the third and fourth quarter aren't too high and or you're seeing something that would cause you to be more conservative and (indiscernible) for those quarters.

I think, Bill, that is why we give annual guidance because quarter over quarter, the estimates out there are just that.

Coming back to your selling in general expenses, they were basically flat for the year-to-year.

Yes I realized the percentage was flat but the -- they're up a little bit they were up dollarwise more than sales. (inaudible)

So remember we brought in the two acquisitions (inaudible)

Great, okay, great quarter.

Thank you.

Rob Schwartz of JL Advisors.

Congratulations again on a great quarter.

Just wanted to review the acquisitions scenario here.

If you could walk us through once more the acquisition criteria you look at and then, if we could walk through the long-term model on how acquisitions affect that?

We have a series of criteria for that.

First of all we want to make sure it's the No. 1 and No. 2 brand.

It's strategic within our two categories of growth garden and pet.

We also pay attention to of course do we get good management or not since that is what we try to do.

We try to make sure that we can bring some kind of (indiscernible) synergies to it.

We want to make sure it has the earnings track record, the history of innovation and we want to be able to complete them at a reasonable price and as Alexis said earlier the reasonable prices are moving up higher than they were in the past.

But we always want to make sure they are accretive from day one.

So what we are continuing to look at is opportunities both in our pet in garden categories which we know very well and we will continue to pursue those as we move forward here.

We've already done three this year and we remain very busy.

And long-term can you talk about how we should look over the next 3 to 5 years how we can look at acquisitions affect on top line, bottom-line, and stuff of that nature?

Of course.

We will tell you what our internal goals are and we will also tell you on Wall Street.

We want to grow our top line, organically, 5 to 7 percent and our bottom-line by the 10 to 12 percent organically.

Through acquisitions, we would expect to bring in on average about 10 percent top line growth and about 15 percent bottom-line growth on average.

So if we continue doing this over the next several years which -- that's our vision and our strategy, we would expect to see our sales (inaudible) top line and total somewhere in that 15 percent range and our bottom-line would grow around 25 percent through the combination of both of those.

That is our vision and exactly what we're trying to did.

That's great and then, as you continue to do this, can you talk about potential, margin potential by category in pet and then lawn and garden?

Well as you know our position in pet, we are the largest pet supply manufacturer out there.

And we have great position there without a doubt and we will continue to pursue our acquisition of the premium brands and fill in those gaps that we know exist.

It's exactly why we did Kent Marine and why we did Interpet to help us fill in and one of the things about Interpet really gave us a platform now to grow our sales, moreover, in the UK and Europe which we really couldn't get there without a good platform.

This was a great move for us from that standpoint.

As far as the garden side, we continue to look at things there.

We did New England Pottery and we are trying to find those acquisitions that, again, are No. 1 and No. 2 brands that help us to grow us.

We like our position in the grass seed.

We are the largest grass seed manufacturer out there, we're bringing some pretty good technology from that and we'll continue to pursue things like that.

And where we can actually have No. 1 and our No. 2 brands.

We see the opportunities in both of them that (inaudible) plenty of them for us to choose from.

Looking forward to seeing these opportunities.

Congratulations, again, guys.

(OPERATOR INSTRUCTIONS)

Bill Chappell of SunTrust Robinson.

Just a quick couple of follow-ups.

First on the property plant and equipment.

Looks like that was actually down sequentially even though you made a couple of acquisitions.

Am I right in saying you're not really taking any hard assets when you're making these acquisitions right now?

No.

We actually take assets with them.

It's just not showing up, maybe I'm missing it on the net.

There's not a lot.

We didn't take down a lot.

Great and second, maybe, if you could talk about as we go into West Nile viruses and what kind of the outlook is or what you're doing promotionally for Pre-Strike and Altosid and the outlook for that business?

We continue to have ongoing programs to push in both areas.

Of course Altosid is primarily directed at the professional market and we have a series of agents in the market who do an awfully good job of getting that product in the right hands of mosquito controlled districts and other kinds of professional applications.

The Pre-Strike we will again this year have a strong support in a variety of modes in the marketplace.

We will have print advertising for the purchase of course promotional programs and media advertising.

So I think it's kind of across the board in those categories.

It was interesting we actually track and see how our products to and for instance last year with those cities in the municipalities which actually used both Altosid and Pre-Strike they saw a significant part, say, a good decline in West Nile virus cases in those communities.

Part of the reason we've launched these new products for horses last year in Colorado, we actually did emergency shipments to Colorado because the West Nile virus problem in Colorado, especially, and so that's part of the reason we've focused to develop this whole new line which we think will sell very well.

But we are pleased that our products are selling well No. 1, but more importantly that it is helping to protect human and animal life and that is part of what we live our lives for.

Thank you.

Good quarter.

There appear to be no further questions at this time.

I will now turn the call back over to the speakers for any further or closing comments.

Okay, well, thank you, everybody, for your questions.

As you can tell we are pleased with the results.

I will turn again to kind of our future strategies and this will answer one of the questions that you asked earlier here.

Really what we're trying to do is we're trying to grow and extend our brands in garden and pet.

We have lots of opportunities to do that.

We continue to really develop and launch new innovative products while our sales are growing.

It's because of lots of innovative new things.

Leveraging our cost structure, positioning our Company with the right human resources to grow and then pursuing and completing strategic acquisitions in our industries.

We are picky as to which ones we do but we want to make sure we do the right ones.

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

Both of these industries are growing, they are recession resistant with great demographics and they provide two strong legs for future growth, both organically and through acquisitions.

I'd like to thank all of you for joining our call and wish all of you continued success in 2004 and I can't resist this plug.

Don't forget that Sunday is Mother's Day and Father's Day is coming up right around the corner.

May we suggest ever so subtly that garden and pet products would make great gifts for both?

And with that, we thank you for your attendance today and goodbye.

Thank you.

This does conclude this afternoon's teleconference.

You may disconnect your lines and enjoy your day.

Thank you, Operator.