Central Garden & Pet Co (CENT) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Central Garden & Pet's fiscal third quarter results and guidance update conference call.

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

Later, we will conduct a question-and-answer session. (Operator Instructions).

I would like to now introduce Mr. Paul Warburg, Vice President of Investor Relations for Central Garden Pets.

Please go ahead, sir.

Thank you, Operator.

Good afternoon everyone and thank you for joining us.

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

Stu Booth, our CFO;

Mike Reed of our Pet Division and Neal Pinkus of our Garden Division.

Before I turn the call over to Glen, I would like to remind you of the Safe Harbor provisions of the Private Securities Litigation Reform 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 or implied by forward-looking statements.

These risks are described in the Company's earnings press release and Form 10-K for the fiscal year ended September 27th, 2003 and other Securities and Exchange Commission filings.

And now, here's Glenn Novotny.

Glen?

Thank you, Paul.

And thank you everyone for joining us this afternoon.

I will provide an overview of the quarter and update you on business trends and developments, Stu will discuss the operating and financial results including grass seed and then I will summarize and discuss our acquisition strategy before going to Q&A.

First of all, Central continues to make a solid progress against our branded product strategy.

We continue to invest in the next generation of innovative high-quality products and packaging.

We leverage our strategic distribution network, enabling us to compete for shelf space and get product to the market fast.

Streamline our operational infrastructure to reduce costs and improve profits.

And acquire strategic businesses with recognized number one or number two brands.

While short of previous street expectations, our results for the quarter and year-to-date reflect good progress.

Net sales for the quarter increased 8.5 percent to 374.4 million when compared to last year.

Gross margins expanded 190 basis points to 31.5 percent and net income for the third quarter increased 4.1 percent to 17.9 million.

Net income for the first 9 months of the fiscal year is up more than 20 percent to over $36 million.

Total Company organic sales growth for the quarter increased 1 percent.

The year-to-date organic net sales growth is up 4 percent on a total Company basis.

Now I will quickly cover the highlights of our Pet and Garden segments and give you more information.

Our Pet business produced another solid quarter.

Total Pet sales, which include the acquisitions of Kent Marine and Interpet, increased 12.5 percent in the quarter and 11.5 percent year-to-date compared to last year.

Organic sales growth in Pet increased 5 percent in the third quarter and 8.4 percent for the first 9 months of the year.

Operating income for the quarter increased 19.4 percent to 19.7 million.

The year-to-date operating income has increased 17.3 percent to 46.2 million.

Driving this solid growth in Pet is continued strong performance from several of our operations.

First, our well-marked brands featuring professional and consumer products for flea, tick, mosquitoes and other insect control, specifically sales of Wellmark’s active ingredient S-Methaprene (ph) to Muriel (ph) for the Frontline Plus products in their new veterinary markets in both Europe and Japan continues to be strong.

T.F.H. and Nylabone posted double-digit sales growth due to the launch of several new products, including NutriDent and Quest Dental Chews, a variety of other bones and toys and newly published award-winning books.

Our aquatic brands, including All-Glass, Oceanic and Kent Marine recently completed the formation of a consolidated field sales force to call on the Pet specialty trade channel.

This change should improve our sales efforts and customer service, as well as bring more efficiency.

In addition, all aquatic group administrative functions have now been consolidated to the All-Glass facility and team.

These moved to improve our customer focus and enhance our operating leverage.

We also are in the final phase of closing our aquarium manufacturing facility in Los Angeles.

In consolidating that production into our two remaining plants to give us more economies of scale.

As we move forward, our new product pipeline for Pet looks robust and we expect to continue our track record of delivering 15 percent of our total revenue from products launched within the past 24 months.

In addition to product of innovation, Pet continues to make strides in expanding our customer base into newer channels, including mass grocery and drug, while strengthening our presence in the Pet specialty channel.

In summary, the Pet business is solid with strong prospects as we look torwards next year.

Turning to Garden products, sales increased 6 percent in the quarter, primarily due to grass seed; organic sales growth declined 1.9 percent in the quarter and is relatively flat year-to-date.

Operating income for Garden declined 2.9 million to 16.7 million in the quarter.

Year-to-date Garden operating income is 40.7 million, relatively unchanged from last year.

However, within the Garden, several product lines performed well, both in the quarter and for the first 9 months of the fiscal year.

Our lawn and Garden fertilizer weed and pest control products experienced strong performance of 7.4 percent for the quarter.

Our private-label brand, Eliminator, is selling at a 1-to-1 ratio with the national brands.

This is especially gratifying in light of the natural brands having significantly more shelf space at the retail level.

AMDRO Fire Ant Yard and Bait Treatments experienced over 20 percent sales growth driven by our television advertising campaign in key fire ant markets.

Our Garden pottery brands, Norcal Pottery and New England Pottery, enjoy the number 1 market share in the U.S. and Norcal experienced solid sales growth in the quarter.

I would now like to turn the call over to Stu to review our financial performance in grass seed.

Stu?

Thanks, Glen.

First, let's discuss our grass seed operations.

To provide context, grass seed sales are expected to be approximately 12 percent of total Company sales in 2004.

We are basic in this business and have the number 1 market share.

Grass seed gives us scale and presence with major retailers.

We have a strong pipeline of new innovative products under development to increase our share of proprietary grass seed varieties, which generate better margins.

Now turning to third quarter grass seed results, I will address this topic in three pieces -- what happened, lessons learned and what we doing about it?

First of all, what happened.

Grass seed sales were off significantly in the quarter, especially in June compared to last year.

Sales were weak due primarily to a normally cool and wet weather spanning from Texas to the Carolinas.

In light of these conditions, we implemented in-store promotional activities, as well as curtailed shipments in June to ensure retailers were not overloaded with inventory.

Additionally, margins were squeezed due to increased grass seed costs in the face of declining sales, which prevented us from increasing prices.

Finally, our fixed costs were not fully absorbed given the significantly lower throughput in the quarter.

Now, lessons learned.

First of all, in the face of the unexpected softness in the third quarter in hindsight, we carried too much inventory into the 2004 season.

We need to increase prices to offset rising grass seed costs.

We need to migrate our product mix to faster to higher margin proprietary varieties.

Finally, our cost structure is not flexible enough to accommodate extraordinary swings in throughput.

So what are we doing is the following.

We are accelerating our efforts to move more of our sales to proprietary varieties in premium brands.

The acquisition of Budd Seed, which includes one of the best-known premium brands in the country, Rebel, augments our ongoing development of proprietary varieties in premium brands.

We're actively expanding our professional sales to sod growers, athletic fields, hydroseeders landscapers and other professional channels, which demand higher quality premium brands beneath their specific applications.

We are the supplier of choice for premium sporting events, including the Super Bowl, professional ballparks and the U.S.

Open Gulf Tournament.

Finally, we have implemented initiative to realize a more flexible and optimal cost structure.

Yes, we're on track to manage our grass seed inventories down to appropriate levels by the end of September.

In conclusion, we're taking active steps to improve the profitability of the grass seed operations and mitigate risk on an ongoing basis.

Turning to consolidated results, as Glen mentioned, net sales for the third quarter fiscal 2004 were $374.4 million or $29.3 million or 8.5 percent increase from last year.

Sales from acquisitions contributed $26.9 million in the quarter.

Gross profit for the third quarter increased $15.7 million a 15.4 percent increase to $118 million.

Gross profit as a percentage of net sales increased to 31.5 percent from 29.6 percent in the year ago period as both Garden products and Pet products margins improved.

The margin improvements were due primarily to contributions from acquisitions and more normal margins realized for our wild birdseed products.

Selling, general and administrative expenses for the quarter were $86.2 million.

As a percentage of net sales, SG&A expenses increased 280 basis points to 23 percent.

Accounting for the increase, our costs associated with our Garden segment and at corporate, professional fees for acquisitions that did not materialize and additional accounting fees related to Sarbanes-Oxley.

Operating income for the third quarter of 2004 declined slightly to $31.7 million.

Net interest expense for the quarter was $4.9 million, a $0.5 million decrease from last year.

The tax rate for the quarter was 37.1 percent, down from 40 percent in the year ago period.

The decline is due to a lower tax rate associated with Interpet based in the UK and from an estimated lower combined state tax rate.

Net income for the quarter increased by 4.1 percent to $17.9 million.

Earnings per fully diluted share was $0.86 cents, flat compared to last year.

Depreciation and amortization for the most recent quarter totaled $4.7 million, up slightly from $4.5 million last year.

Capital expenditures for the quarter totaled $4.2 million.

Year-to-date our capital expenditures totaled $10.5 million in line with our fiscal 2004 guidance of 13 to $15 million.

Turning to the first 9 months of fiscal -- of the fiscal year, net sales were $955.8 million, up $68.2 million or 7.7 percent over last year.

Organic sales increased nearly 4 percent and gross profit as a percentage of sales increased 100 basis points to 30.6 percent.

Net income for the first 9 months of fiscal 2004 is $36.1 million up 20.3 percent over last year.

Earnings per fully diluted share is $1.74, up 16.7 percent over last year.

As mentioned a couple of weeks ago, we have an ongoing program to reduce the level of overhead and costs required to run our business.

By year-end, we will have closed 3 grass seed related facilities as well as we will have consolidated 3 aquarium manufacturing facilities to 2.

Our objective is to create 2 times operating leverage from our organic sales and ultimately grow our operating income margin to better than 10 percent.

Turning to the balance sheet, comparing June 2004 balances to June 2003 balances, accounts receivable increased $18.1 million or 10.7 percent year-over-year.

Inventories increased $30.8 million or 14.5 percent over last year.

The majority of these increases are due to acquisitions completed within the past year.

As of June 26th, 2004, total debt stood at $289.5 million compared with $262 million last year.

The increase in debt over the last 12 months is due primarily to acquisition activity year-to-date.

We're reaffirming our fiscal 2004 guidance of $1.92 to $1.96 per fully diluted share based on estimated sales of $1.25 billion.

As many of you know -- as many of you have asked, about 2005 guidance -- we plan to host call prior to the release of our fiscal fourth quarter employee results providing guidance for 2005.

Most likely, late October or early November.

I will now turn the call back to Glen for his insight into our acquisition strategy and summary comments before Q&A.

Glen?

Thank you, Stu.

First of all, we continue to aggressively pursue strategic acquisitions that fit into our portfolio brands.

Year-to-date, we have completed 4 acquisitions, which have contributed approximately $33 million in net sales.

We anticipate sales from these 4 acquisitions to add approximately $130 million or 10 percent of sales on an annualized basis.

This is our stated goal.

These acquisitions are what I think of as a string of pearls.

They each complement our existing portfolio brands and tuck nicely into our existing operations.

These acquisitions are generally less than $100 million and our objective is to continue aggressively on this track.

We like the pricing and risk profile of these businesses.

Along with these acquisitions, we're constantly evaluating larger businesses that will strengthen our portfolio of Garden and Pet brands.

We're disciplined buyers and for every acquisition we carefully weigh the strategic fit and its overall risk and reward profile.

This is especially important for larger businesses.

During the quarter, to summarize the quarter, we're on track for solid year, despite what we admit are disappointing results in grass seed.

We're expanding our presence and customer base into new retail channels.

We are developing and introducing new innovative products and packaging that continue to gain traction in the marketplace.

We're improving our business through customer focus and operating efficiencies.

And we're managing a pipeline of potential strategic acquisitions that meet our criteria.

As Stu said, we plan to host a 2005 guidance call before the next earnings release and we expect to do that in late October, early November.

With that, Operator, I would like to open the call to Q&A.

(Operator Instructions).

Bill Chappell, SunTrust Robinson Humphrey.

First, I guess, on the P&L, can you break out what in the quarter were litigation costs and then maybe quantify what the costs relating -- around sales, acquisitions would be for the quarter?

Litigation for the quarter was $800,000, Bill.

Year-to-date, we're about $3 million.

Our guidance for the year was 4.

So, we're there.

Are you still expecting to do another 1 million next quarter?

We'll have to ask Mr. Axelrod. (laughter) Back to a higher point.

Acquisition related costs for those acquisitions that we're unsuccessful -- you'll see in the queue that we identify $1 million for acquisition related costs and for the additional professional accounting fees for Sarbanes-Oxley.

So you’re talking about $0.2 to $0.3 cents of EPS?

Yes.

Then just on your forward guidance, are you assuming, for the fourth quarter and the full year thing that you do 4 million in legal fees?

Yes.

And also on the tax rates going forward, it was a little bit lower than I expected.

Do you expect this 36, 37 percent rate to stay going forward?

Somewhere around 38.

38?

Somewhere around there.

I guess, the final question on the Pet business, it was 5 percent growth for the quarter, though it has been 8 percent for full year.

Was the slowdown this quarter -- was it weather-related, tougher comps or was there anything else going on there?

It was largely just a slowdown in the point-of-sale.

I think, across the retail trade in May and June we saw a little slowness during that time frame.

Our presence in a variety of channels helped the earnings to stay strong in that period.

Okay, great.

Thank you.

Is really more in June than anything else.

But it kind of bounced back.

Ron Phillis, Banc of America Securities.

Last time we chatted, we -- I was trying to go over why -- I was trying to go over and understand better if this was sort of a central situation with the grass seed or if the whole industry had some similar problems.

I know that I tried to convince my gardener to put grass seed down and he said he wouldn't do it because it would just wash away, by the way.

So I have experienced a bit of it myself.

So it will be helpful if you could explain to us whether or not you thought you had gained or lost share in the quarter.

Ron, yes, we've looked at every way we possibly can.

We do not believe that we lost market share.

It was across the industry.

Especially, as we talk about in that kind of Texas, Oklahoma over the to the Carolinas, which is where we are the strongest in that part of the market, there, as far as grass seed.

But it wasn't across the entire industry.

Okay.

And then was the fertilizer or controls businesses similarly impacted?

And if not, why were they different?

Not near as much.

I think as we look at that as I think we said earlier, we had about a 7 percent increase in some of our week controls and that was not impacted as much in the southern half of the market, plus that sells all of the country.

So we did not see the downturn in that period.

Okay thanks.

Bye-bye.

Alexis Gold, CIBC World Markets Corporation.

Just a couple of questions -- just to get back to grass seed for a second -- I'm sorry to harp on it.

But you talked obviously, about the weather impact in Texas, the Carolinas but Wal-Mart has obviously talked about lawn and garden being soft and they've pulled back on inventory levels.

Have you seen that across the board as well?

Can you sort of quantify any impact that might have had on the numbers as well?

I think that in general, we've seen that most resellers have said that their Garden sales started tailing off a little bit at the end of May and followed all the way through June, particularly in the grass seed, a lot of reseeding happens when there is not a lot of rain in the lawns don't look as green.

So when there's a lot of rain and things are green, it's maybe the grass seed sales that we see a little slowdown on.

Fair enough -- and I know you're going to have a call to talk about your guidance later on.

But just in terms as we look forward, obviously we've had a couple of years in a row now of sort of unfavorable weather.

Is it fair to start thinking sort of typically, that these run rates might be more sort of typical of what we'd see going forward or should we expect to see numbers come back a bit next year?

We hope not, Alexis.

We would expect --

We did look back on the history on this and we paid a lot of attention to the history of how this has happened.

We've never seen it happen like this before in our 5 years.

And so, we would expect 2005 to be returned to, hopefully, more normal levels and that's exactly how we'll be thinking about doing our planning for next year.

So we don't think this is an on-going problem.

And we are taking the actions that Stu talked about to try and mitigate those risks as much as we possibly can and we think we can do some things.

Great and just finally, can you give us a breakout between branded and third party sales?

I think you usually do that and I didn't -- maybe I missed that but I don't think I got that.

Yes we can. (multiple speakers) Why don't you go ahead and say that?

24.5 million were increased front sales. 4.8 were sales of other manufacturer's products for the quarter.

And was there an -- obviously, I know you talked a little bit about gross margin, but does that have a positive impact on gross margin on the CMA?

Yes.

The acquisitions do.

Great.

Thanks, very much.

Some of those acquisitions have very nice gross margins.

Great, thanks very much.

Doug Lane, Avondale Partners.

A couple of questions.

On the -- we're getting back to the question about fertilizers and controls, why they weren't as impacted as grass seed in your view?

There wasn't bad weather across the entire country, Doug.

It was more in certain parts of the country, so that was the first thing.

Second of all, even when you have rain, you still have insects and it also brings weeds as well.

So in essence, rain, and as long as you don't have floods, that brings out mosquitoes and snakes, which you don't want to talk about.

But the floods won't hurt you a certain time, but as you have more moisture it does bring out more insects and more weeds and so you would normally follow-up after that's -- pretty good sales in your insect control and weeds.

Would you agree with that Neal?

Yes.

It's a pretty good description.

I see.

So a key point is that the grass seed business is more geographically concentrated in that southern and southeast markets and your control business is more dispersed?

In the summer season, that is correct.

Okay.

Kind of moving around here -- but getting back to the increase in the SG&A a percent of sales -- 280 basis points.

Can you just break that down in some order of magnitude between Sarbanes-Oxley, between the acquisitions that didn't materialize and whatever other kind of swing factor there was in there?

The Sarbanes-Oxley and acquisitions that didn't materialize was 1 million and the rest is over in the Garden group and that's just a variety of cats and dogs.

Some of it's going to be recurring some of it's going to be nonrecurring.

In our acquisitions.

In our acquisitions.

But as a percentage of sales that's -- and again, we have more branded product sales than that's a little bit higher SG&A margin as we discontinue on with growing our branded product sales.

Were the costs for the acquisitions more than the costs for Sarbanes-Oxley?

Yes.

Okay.

Just order of magnitude here?

Sure, because we bought New England Pottery, which is a very large business.

That was bought in the quarter.

And then were the costs associated with the UPG and the Hartz acquisitions, or is that something you can't talk about?

We look at all major acquisitions (multiple speakers) in the industry.

It's just important, because they were obviously, huge and there were events in the industry.

So we can assume that it was even more than just New England Pottery just from what we know about what went on in the industry.

Is that fair?

Doug, these are for unsuccessful acquisition efforts by the Company.

We have (technical difficulty) acquisition that was capitalized those costs.

Okay.

Oh I see, okay, fair point.

And we may well have that in the future as well, because we are always looking at acquisitions.

But I mean that was a pretty -- when you say it was a pretty unusually active time, though?

Well two very large ones.

Nice weather out today.

Let's move on.

Realistically, assuming that there's no substitute for grass seed that we don't know about out there, if we have a more normal year next year, a lot of us lowered our numbers because of the lower number this year.

But theoretically, if what you said is the extent of the shortfall, couldn't -- for all intents and purposes you do the original number 2, 7 or whatever it was out there, assuming you just go back to a more normal grass seed season?

Let's wait until October or November for that one.

We'll have, again, some better insight into more of a bottoms-up forecast with our new listings, and our new acquisitions, what they will do for us after they've got a partial year under our belts for our new acquisitions.

But, as you go into your -- talking to your retailers this fall, is it your function (ph) that the inventories -- that are occurring going into the fall are a lot leaner than they were this time last year?

We know that are grass seed inventory is leaner right now that was last year because we did hold back shipments in June to make sure of that.

And we want -- we're doing things to make sure that it continues in September as well.

Okay.

I don't think we anticipate losing any shelf space to grass seed on the shelf space here, either.

Okay fair enough.

Thanks.

Bill Brady, Presidio management.

(inaudible)

Please go ahead with your questions, sir, your line is open.

Can you hear me?

Yes we can, now, thank you.

(inaudible)

Bill?

Bill, we cannot hear you now.

Please go ahead and open your line.

Can you hear me now?

Yes, we can.

On the tax rate, it dropped down to 37.1 from 40 percent last year and 38 percent for the 6 months.

So -- and you're guiding going forward at 38 percent.

Was this a onetime event of some sort that knocked it down 3 percentage points quarter-over-quarter?

Why wouldn't it stay there?

Last year we took a conservative view on our tax rate.

We have a lot of things going on.

We started the year with a 39.2 percent tax rate for our guidance and continue to refine our state --effective combined state tax rate throughout the year.

We took an adjustment to that for the first time this year in the third quarter and then I'm adding on top of that was Interpet, which was the new acquisitions that we consummated in the third quarter.

So we did two adjustments to our forecast in 39.2 taking place in the third quarter.

Going forward, for next year again, in our guidance, we will have the full benefit of Interpet, which is a lower tax rate investment.

Then again, we will have some more precision on our state tax rate.

Yes, okay.

Remember, Bill, Interpet is over in England.

Right, and so it remains 38 for the rest of the year because of Interpet?

Interpet is lower, so you're going forward and it's 38 percent?

Bill, it will be approximately that.

Maybe a little lower.

Yes.

Okay.

Glenn, can you flesh out the new retail channels -- you mentioned this twice now on conference calls and say, going back to last year, say what percentage was in mass or in drug or if those are the new retail channels you're approaching and then what will it be this year and what are you doing to drive it and how big a percentage of your sales could it be?

First of all, I will give you some color, but I will not give you the specific percentages, Bill, for competitive reasons.

But I will tell you that what we're doing is -- we're making inroads into mass grocery and drug on the Pet supply side, as they are turning to looking for more higher end products.

That's what we're doing there.

If you think about it, if you compete in the marketplace, you have choice -- you basically have 3 choices.

You want to be a best brand, a better brand, or a good brand.

We really want to be on the 2 extremes -- either the best brands or the value brands, which would be good.

The last place we want to be is in the middle.

That's better.

That's a no man's land.

You get attacked from both sides.

So what we're doing is we're taking market share with our best brands into national grocery, but at the same time we're being very careful about that, to not lose our focus or our strength in the Pet specialty channel.

To do that -- we do it smartly.

We hope we do is smartly -- we try to, I will tell you that.

And then the other areas we're really focusing on, too, is really on more on the professional side -- we talked a little bit about the grass seed and some of the things that the Garden folks are doing.

We're doing some more of that.

Some of the international sales are growing for us.

Then, on the professional side as well, with some of our insect control is growing nicely.

So it's really across-the-board in lots of areas.

Okay.

And on the mass grocery and drug, when did you actually start that?

We actually started that -- we've always done it -- really, what's happened is a lot of the retailers have looked and said -- you know what, we need to have not 3 choices on our shelf, but 2 choices, a premium brand and a value brand.

And so -- they've gotten rid of that middle brand.

A lot of them are continuing to do that and they are also finding out that a lot of people walking through those stores are looking for higher priced, higher quality products.

That's what we're doing in that area.

Do you think this is another leg on the stool, so to speak over a number of years?

It's going to grow for us, but it will be continuing growing for us.

But I'm not going to tell you that our sales are going to switch 100 percent over there.

It just doesn't make any sense.

Yes.

Of course not but --

Gratuity is where we see it.

Okay, thanks a lot.

Michael Friedman, Sidoti & Company & Co.

I had a question -- SG&A lines a little surprising to me -- we talked about it.

I don't want to harp on it too much, but the whole idea here was that you're going to grow sales, improve the gross margin and leverage your expenses, but it seems as though the SG&A is growing a little faster than sales and I realize we have the grass seed situation here.

But, it's a little disconcerting.

How much do you think you can save from the consolidation of the aquarium and the grass seed and do you think you can take out some costs from the recent acquisitions you made?

Well, Michael, there are a bunch of things going on in SG&A.

First of all, we continue to talk about leveraging on a 2-to-1 basis, our organic sales and our operating costs.

That's what we're still doing.

And what we continue to strive on that, without getting you in the middle of making a sausage, because we work on that everyday -- everything from insurance to facilities to infrastructure costs, sales force -- you name it, we continue to try to get scale.

Things are lumpy, though, in that line, as well.

One thing we did this year compared to last year, because you're comping last year.

We stepped up our advertising -- and we mentioned that for AMDRO.

A lot of those costs blew through SG&A this quarter.

We had the unsuccessful acquisition costs this year in the quarter.

Those may continue, but maybe not at the magnitude of this quarter.

Sarbanes-Oxley costs -- we sometimes call that the dreaded Sarbanes-Oxley.

But it's a cost of doing business that's going to be continuing.

We're in the development phase of Sarbanes-Oxley, so there's a little bit of upfront cost for that.

So those kind of things that are -- they're always kind of nicking at our side, but we're trying to make again, at a broad brush, lots of strides to get our structure costs down and more streamlined so we can leverage additional throughput sales.

I guess the other point, too, is some of our raw material costs went up as they have across-the-board and so we know we have to do some things on some pricing issues, which normally will lack that.

We are addressing that.

Okay.

Do you think you could take some costs out of the acquisitions you made?

Yes, we can.

And you guys mentioned -- did you say you guys are looking to get -- there's a corporate goal to 10 percent operating margin?

Yes.

How long you think it would take to reach that goal?

(laughter) Too long. (multiple speakers) Too long for us.

Is that something that's feasible if things go your way in 2 years, 3 years?

Yes.

We'd like to get there in the next few years if we can.

We did not expect to see the grass seed problem happen this year.

So that kind of said whoa, let's make sure we do the thing right and that's a good business most of the time.

So we still like that business.

We're going to continue moving forward.

But we'd like to get that up there in the next few years.

Thanks guys.

(Operator Instructions).

Joseph Altobello, CIBC World Markets Corporation.

I just had a quick question when you talked about expanding -- or actually, and more emphasizing these new retailer channels, mass, drug, grocery.

How is the specialty channel reacting to that, if at all?

Well, I guess the best way to say that, Joe, is that first of all, they react to that in that we try to be very careful as we do that to change our sizes, change our packaging, change our way so that hopefully, there is not a 1-to-1 comparison.

Because, remember especially in Pet, most of our sales are to the Pet specialty.

Those people who brought us to the dance.

We're going to continue to make sure that we remain strong there, but at the same time, we can't ignore the growth in the mass and grocery.

But we're going to do it as smartly as we can and make sure that we stay in good graces with our Pet specialty.

So someone cannot go to Petco and then walk down the street to Wal-Mart and see the same except thing?

In most cases, that is true.

Okay.

And for the guidance you guys gave out, $1.92 to $1.96, what share count are you using in terms of average diluted shares for the year?

I think it was 21.

Around 21?

21.

21.

Okay.

Great.

Thank you.

Brett Chickanelli (ph), RCB.

A couple of questions around grass.

I'm just curious as to your discussion with retailers -- if you're able to track the level of promotions at retail and really, especially tracking specialty -- the level of inventory there and promotion versus, say, big box retailers?

Yes, we do track that, because we do sell into the big box retailers.

We sell into the mass.

We sell into -- a little bit into grocery and of course a lot into the independent plumbing, garden centers.

So we do track that.

We have picked up our promotions -- in-store promotions in June and going forward into this quarter to get our inventories in line.

So we're continuing to do that.

Okay.

Thanks.

We do have a few more, sir.

Doug Lane, Avondale Partners.

I just wondered if you could elaborate on the cost increases that you're seeing and what your plan is on putting through pricing to offset them?

Yes, Doug, we're seeing cost increases in the last several months -- I mean we're seeing raw material costs go up more than we've seen in the last several years.

I think that's true across all industry.

That's just not unique to us.

And so, we know we're going to have to be very selective and go for price increases as we look forward to 2005 and even the rest of this year.

So we're getting those, but we're being very selective as we do that.

Some items we're able to take costs out and other ones we can't.

We're going to -- we have to address those.

And we are.

Can you give us a couple of specific examples where you're seeing the cost increases?

Sure.

Fuel cost is going up, plastic cost is going up, we saw -- that's -- the energy costs are going up.

It's rubber -- it's just amazing how much the cost has gone up across the world.

What you think -- what typically has been -- how successful have you been in taking prices up in the past we've seen these upticks in raw material prices?

In most cases we've been able to do this by just changing out skews, where you take a skew out and replace it with something else and you can get your price increased that way.

In most cases, that's how we do that.

We still try to do that whenever we can.

But in the cases where you kind of have across-the-board increases, like we're seeing into many raw materials, we don't have any choice but to go to our retailers and put a price increase through.

We're not alone in that.

That's true across our competition, I know, as well as across other industries.

And what has been the response of the retailers so far?

We're in a process right now and I would rather not say that on a call.

Okay.

Thank you.

Greg Wilcox, Wachovia.

I had a couple of questions on your bank facility.

What was the balance of your revolver at the end of the quarter?

And two, what was the coupon on the revolver and the term loan and where was it on the grid from a leverage standpoint at the end of quarter?

Whoa, too many questions.

(multiple speakers)

Greg Wilcox First question, just what was the balance on the revolver?

About $40 million.

Greg Wilcox And then from -- the coupon, I know it's based on your leverage.

Where was that at the end of quarter?

What was the coupon on the term loan?

I think we're -- I don't have the exact number.

We're somewhere about LIBOR plus 2 right now.

Okay.

Thank you and good luck next quarter.

Walter Landauer from Landauer Capital Management.

I have two questions.

One, is there a noticeable change in competitive conditions, say versus involving such very large market organizations like Wal-Mart and is there -- is that a significant problem for you?

No.

Wal-Mart is our largest customer.

They're right around 20, 21 percent of our sales for the Company.

If you just looked at that account, is that something that is growing more than your average growth in sales?

Right along with it.

We're growing right along with it.

Right along. (laughter).

The other question is a general question.

If you have -- do options play a significant role to do and what is your policy on stock options?

I got asked that question on CNBC about a month ago.

We do have a policy.

We try to keep it at a rate that is very competitive out there.

I'd rather not say what that is on this call.

But we try to be competitive with what we have to be in the marketplace.

At the same time, you do not see us going out -- and I was asked on the CNBC, do you give gazillions of options to your top 5 or 6 senior executives?

We don't do that.

But what about expensing options?

You are linking it to repurchase of shares if you don't expense it.

Well, as you know, there's a whole bunch of changes going on right now in the accounting standards as whether to expense or not.

We're studying that.

We have not decided to do that yet.

But that is an issue that we continue to look at.

In fact, right now we're looking at that.

So there's no policy?

What is the past -- in the past, you have given options out and it did not expense it.

That's true in the past.

We think the laws are going to be changing on that on that in the future.

The question is when.

Maybe they changed and maybe they did not.

We're looking at that right now, Walter.

All right.

That's all.

(Operator Instructions).

And I'm not showing any further questions at this time, gentleman.

Okay.

Thank you Operator.

First of all everybody, thank you for your questions.

As you know, all of our energies are dedicated to making this business stronger and return greater value to our shareholders.

As we look to the future, we will continue to execute against our 5 key strategies.

They are -- to continue to grow and expand our brands, develop and launch new innovative products and packaging in both garden and in Pet, to achieve our goals of 15 percent of sales.

Leveraging our cost structure, strengthen our Company to support controlled growth and pursuing and completing strategic acquisitions that make sense.

So with that, I would like to thank you all for joining the call.

We look forward to updating you on our progress and I know we will see many of you throughout the quarter at various scheduled investor conferences that we're scheduled to attend.

So with that, thank you everyone and have a good day.

Thank you, sir.

Thank you ladies and gentlemen today for your participation.

This concludes your conference call.

You may now disconnect.

Have a great day.