Central Garden & Pet Co (CENT) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Central Garden & Pet's fiscal first-quarter results. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded.

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

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;

Jim Heim, President of Pet Products; and Neil Pincus, President of Garden Brands.

Before I turn the call over to Glenn, I'd 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 are 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 earnings press release and Form 10-K for the fiscal year ended September 25, 2004, and other Securities and Exchange Commission filings.

And now, here's Glenn Novotny.

Glenn?

Thank you, Paul.

And thank you, everyone, for joining us this afternoon.

First, I will provide an overview of the fiscal first quarter;

Jim and Neil will then discuss Pet and Garden segments;

Stu will review the operating and financial results, and then we will open up the call to your questions.

Let me start by saying, first of all, we experienced a strong start to fiscal 2005.

We at management have systematically been working to deliver four consecutive profitable quarters.

We have successfully strengthened our Garden and Pet operations to achieve this goal, and are pleased to announce that this is the first time in Central's history that we have reported a profitable first quarter.

Sales for the first quarter increased approximately 19 percent to 266 million, when compared to the first fiscal quarter last year.

Operating income almost tripled to 9.5 million from 3.6 million a year ago.

Net income improved to 2.5 million compared to a net loss of $600,000 last year.

These results produced earnings per fully diluted share of 12 cents compared to loss of 3 cents a year ago.

There were several factors driving the solid performance for the quarter.

First, organic sales increased approximately 5 percent across the Company.

Garden organic growth was essentially flat, which is typical for Garden's seasonally slowest quarter.

Pet organic growth increased 9 percent as we continue to benefit from innovative new products and expanded penetration into all channels, including mass and grocery.

Second, gross margins increased 450 basis points to 32.4 percent, driven by new product introductions, our continued shift to high-margin products, the elimination of promotional pricing on certain products, and price increases within our portfolio where we needed them.

In 2004, we launched a series of innovative proprietary pet products that continue to experience terrific growth, and grass seed margins improved.

We are seeing positive results of our shift to higher-margin seed varieties initiated last year.

Third, we continue to benefit from the contribution of strategic acquisitions completed in 2004.

These acquisitions contributed approximately $31 million to top-line performance in the quarter.

And finally, we are expanding operating margins through infrastructure consolidation and operating efficiencies.

In the past 15 months, we have closed 5 grass seed related facilities, including the recently consolidation of the Budd Seed facility in North Carolina into our Pennington operations in the first quarter of 2005.

In our aquatics operations, last year we closed 1 aquarium manufacturing facility and consolidated our aquatics sales force administrative functions.

Today we have 2 manufacturing plants versus 3 a year ago.

In addition, in the first quarter we closed a Kaytee wild bird feed facility and consolidated that production to other Kaytee operations.

Turning to our segment performance, first in Garden.

In what is normally a loss quarter, we made dramatic improvements, reducing the operating loss in Garden Products to $800,000 from a loss of 2.9 million the previous year.

This improvement is largely due to, first of all, contribution from the seasonal holiday sales of GTI Bethlehem Lighting; and the improvements in our grass seed operations due to sales of higher-margin seed varieties and the reduction of fixed operating costs.

Neil will discuss more on the Garden Segment, particularly in new products and the outlook for the garden season.

Leave it to say we are pleased with the progress in Garden during the quarter.

The Pet Products Segments also had a great quarter.

Every brand in our Pet portfolio delivered strong top-line and excellent operating income growth.

Total sales increased 21 percent for the quarter.

Organic sales increased 9 percent.

And more importantly, operating income increased 66 percent to over $18 million.

We continued to execute our strategy of leveraging our strengths in innovation, quality, and service to gain more shelf space, as well as expanding relationships in the mass and grocery channels, while strengthening our position in the pet specialty channel.

Jim will provide you with more detail on the Pet Segment, including new product introductions and outlook.

The strategic acquisitions we completed in fiscal 2004 are performing well.

We continue to integrate these new acquisitions to meet customer needs, strengthened our product offering, and capture operating synergies.

In summary, we're often a solid start in both Garden and Pet for fiscal 2005.

Now I will turn the call over to Neil Pincus, President of Garden Brands.

Neil?

Thanks Glenn.

I will now review the performance of the Garden Products Segment.

Sales for the quarter increased 17 percent to 109 million, essentially due to our acquisitions.

We made dramatic improvements in our operating performance, and the first quarter's operating loss decreased to approximately 800,000 from a loss of 2.9 million in the same period last year.

Factors contributing to the improved results include -- our two acquisitions, Budd Seed and New England Pottery GKI/Bethlehem Lighting, our ongoing shift the higher-margin products, and facility consolidation related to our grass seed operations.

The 2005 garden season is underway as we speak.

We're in the process of stocking our retail customers for the upcoming season.

We are launching a variety of new products designed for the home improvement do-it-yourselfer, as well as the professional marketplace.

This year we launched a new trademark brand, Backyard Delights, for a major national retailer.

This is a store-within-a-store format, delivering a complete line of wild bird feed, feeders, and birding accessories supplied by Pennington, Cedar Works and Kaytee.

This program is an excellent example of Central's unique capabilities of meeting customer needs by bundling products to simplify and enhance shopping experience.

We're also excited about recent developments in AMDRO, the leading brand for fire ant control.

We have launched a new fire ant consumer-friendly package for yard treatment control, the shaker bag, The first in its category.

The bag is user-friendly, providing for broad-cast distribution, and is resealable for future use.

Second, AMDRO launched nationwide a new product, AMDRO Ant Block, which is an effective household perimeter ant control product.

This leverage's AMDRO brand and our expertise in ant control.

This product has received listings at all three major lawn and garden retailers, as well as the independent channels.

A growing trend within garden is outdoor lifestyles.

Our garden decor platform, comprised of Norcal pottery products, New England Pottery and Matthews Four Seasons, is focused on meeting consumer needs for an appealing outdoor lifestyle.

Our garden decor offerings feature several new proprietary designs and styles, capturing the current trends and fashions appealing to homeowners.

And for the third consecutive year, Superbowl XXXIX will be played on turf grown from grass seed provided by our leading brand, Pennington seed.

Pennington's Princess 77 is serving as the foundation for the field.

This is an innovative new Bermuda grass hybrid that is beautiful, drought tolerant and incredibly durable.

Princess 77 is another example of our transition toward higher-margin seed varieties for both consumer and professional use.

In conclusion, I feel we are poised for a strong 2005 garden season.

We have a strong lineup of innovative new products, excellent listings, and more streamlined operations.

Now I will turn the call over to Jim Heim, President of Pet Products.

Thanks Neil.

Pet had a great quarter.

Every brand experienced strong top-line and operating income growth.

Pet Segment sales for the quarter increased in 21 percent to approximately 157 million.

Our organic sales increased 9 percent.

And sales from the 3 key acquisitions completed in fiscal 2004 contributed 15 million.

Operating income increased significantly to 18.1 million from 10.9 million, an increase of 66 percent.

And we have a number of exciting new product launches and brand-building initiatives underway for 2005.

Nylabone recently launched a new line of animal health treats, following in the footsteps of the incredibly successful Quest Neutadent (ph) launch last year.

This new product line features nutritionally enhanced antioxidants and vitamins for dogs.

The line comes in both a granola bar style and in a bone format.

In Aquatics, we are introducing a host of new consumable supply products that complement our leading position in aquariums, including the Coralife Super Skimmer from ESU, First Step from Kent Marine, and the new Blagdon water gardening products from Interpet.

Our strategy is to offer customers a complete line of aquatic products.

In insect control, we have two new products for the professional and consumer marketplace.

The first is a new patent pending Altosid IGR (ph) 2 percent waracide (ph) designed for the professional insect control marketplace.

And for consumer use, the Pre-Strike Mosquito Torpedo, which prevents mosquitoes from hatching and maturing in standing water.

This torpedo-shaped protect provided 60 days of protection, surpassing the competition, which only lasts up to 14 to 30 days.

The Mosquito Torpedo uniquely sinks to the bottom and leaves no surface residue.

On the brand-building front, we embarked upon several initiatives aimed at raising awareness of our consumer products and the central brands.

We announced our partnership with Tony La Russa's Animal Rescue Foundation, known ARF.

Together our objective is for the humane treatment of pets, and to help provide loving homes for rescued animals.

We are also the official sponsor of the Oakland A's ground crew for all 82 home games.

We will supply uniforms and product giveaways that A's games, including co-sponsoring a "Take Your Pet to the Game Day", and other promotional activities.

And our own Glenn Novotny is scheduled to throw out the first pitch of the game between the A's and Anaheim Angels.

In fact, Glenn has promised us that he will make us proud by throwing a 90 mph fastball -- which will be split fingered, by the way -- that will hit the outside corner of the plate and it will be knee high. (multiple speakers)

(multiple speakers) just want to make sure it doesn't show up on America's Funniest Home Videos.

Finally, we're pleased to report that our very popular All-Glass mini bulb (ph) 2.5 (multiple speakers) recently surpassed the 1 million unit mark in combined sales.

The mini bulb was launched in 2002 and has been a great success in simplifying and energizing the Aquatics category.

Now hear is Stu.

Tanks Jim.

Turning to consolidated results for the quarter, net sales for the first quarter of fiscal 2005 were $266 million, a $43 million or 19 percent increase from last year.

Organic sales increased 5 percent.

Acquisitions contributed approximately $31 million in the quarter.

Gross profit for the first quarter increased to $86 million, an increase of $24 million or 39 percent.

Gross profit as a percentage of net sales increased 450 basis points to 32.4 percent from 27.9 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, sales of higher-margin branded products, and improvement in our grass seed operations.

Selling, general and administrative expenses for the quarter were approximately $77 million.

As a percentage of net sales, SG&A expenses increased 240 basis points to 28.7 percent, due primarily to acquisitions, the shift to higher-margin branded products, and the associated higher operating costs, as well as company-wide initiatives including Sarbanes-Oxley.

Operating income for the quarter nearly tripled to $9.5 million from $3.6 million a year ago.

Net interest expense for the quarter was $5.2 million compared to $3.9 million last year, reflecting higher debt balances due to acquisitions completed in fiscal 2004.

The tax rate for the quarter was 37.1 percent compared to 39.2 percent last year.

The lower rate reflects estimated state tax decreases and the impact of a non-US tax rate at our Interpet subsidiary in United Kingdom.

Net income for the quarter was $2.5 million compared to a net loss of $600,000 last year.

Earnings per fully diluted share was 12 cents versus a loss of 3 cents a year ago.

Depreciation and amortization for the most recent quarter totaled approximately $4.4 million, down slightly from $4.6 million last year.

Capital expenses for the quarter totaled $5.6 million.

We are increasing our CapEx guidance for the year to $20 million.

The increase is due to investment in new product initiatives and operating efficiency programs.

Turning to the balance sheet, comparing December 2004 balances to the December 2003 balances, accounts receivable increased approximately $30 million or 26 percent to approximately $144 million.

Inventories increased approximately $44 million or 18 percent to $288 million.

The increase in accounts receivable inventories are due primarily to acquisitions completed in fiscal 2004.

Also, with respect to inventories, we continue to see our garden retailers time their purchases closer to the garden season, which is currently underway.

As of December 2004, total debt stood at approximately $295 million compared to approximately $251 million last year.

The increase in debt over the last 12 months is due primarily to acquisition activity in 2004.

Last month, we filed a $300 million Universal Shelf Registration Statement with the SEC to increase our financial flexibility.

We just received notice from the SEC that our Shelf is now effective.

In December 2004, the Financial Accounting Standards Board issued SFAS 123(R), requiring all companies to expense stock option starting for quarters ending after June 15 2005.

The impact of this new regulation to Central commencing in our fourth quarter is approximately 3 cents per share and approximately 8 cents per share for fiscal 2006.

Our initial guidance did not account for the expensing of stock options.

However, we are reiterating our fiscal 2005 guidance of approximately $2.47 per fully diluted share, which is the midpoint of our $2.42 and $2.52 guidance range based on an estimated sales of $1.4 billion.

This guidance absorbs the impact of expensing stock options.

And now I will turn the call over to Glenn.

Glenn?

Thank you Stu.

As you can see, we had a great, profitable first quarter and solid start to the fiscal year.

We're excited about the year and the opportunities in front of us for both organic growth and potential acquisitions.

As always, we will lead with our competitive strengths of innovation, quality and customer service.

Operator, we would now like to open the call for questions and answers.

(OPERATOR INSTRUCTIONS) Bill Chappell, STRH.

First thing, congratulations on the Pet business.

Some of the things we've been hearing from Petsmart and PETCO were slightly slowing comps as they got towards the holiday season.

Are you seeing any impact there?

Can you maybe talk a little bit what you're seeing also on the mass side from Target and Wal-Mart in terms of pet products?

We experience -- we just went through the POS data at most of our major retailers, and we did not see any slowing of comp sales.

They're pretty much anticipated as we forecasted.

So we're very pleased with our POS data out of our major retailers.

Especially towards December closer to Christmas.

You had talked a little bit on a last conference call about going to Kroger, I think it was.

Has there been any further expansion there or new accounts you see in '05?

We have new accounts within the food industry, which is basically Fred Mars (ph) and Railey (ph), which we are just launching into.

And we have made some inroads into Kroger's and are looking for additional opportunities in food.

On the Garden side, can you talk about how the lighting business -- I know this is the first year you've had that lighting business under your belt -- how that did versus expectations and plans, if any, to expand that?

We actually were very pleased with the way the lighting ended up.

It was right on target, right what our expectations were.

It certainly helped contribute to our numbers during the first quarter.

And we're already launched into shows planning for next year.

Finally on the housekeeping, Stu, the interest is a little bit higher and obviously tax is a little that lower than I expected.

Can you kind of give us an update of your expectations for both of those for full year?

They're right in line with our guidance.

So the tax rate should be at the 37 percent for the remainder of the year, or could that go lower?

We are at 38 percent for the year.

This quarter was just one quarter -- one off?

Just one quarter.

We're just getting started with the year, Bill.

Got you.

So I will model accordingly.

Thanks for everything.

Joe Altobello, CIBC World Markets.

Good afternoon.

Just a couple of quick questions, if I could.

First, you mentioned that obviously the retailers, your retail customers, are buying garden supplies closer to the gardening season.

This is probably a tough question.

But is there a way to quantify how much of the sales that you normally get in this quarter have shifted towards, let's say, the March quarter?

I'm trying to figure out what that 0 or flattish organic growth rate would be on a normal basis.

I wouldn't want to try and quantify that with an exact number.

It's several million dollars.

And it's where the retailers are just doing a better job at trying to manage their inventories, which obviously builds up a little additional inventory of our bullpen right now.

We're starting to see that shift and move out literally as we speak.

January is off to a good start.

So if we look at the year, I think you guys did 9 percent organic in Pet.

I think last year you did 9 percent.

Is it fair to say that you'll probably do high-singles organic in Pet and maybe low-signals in Garden?

Is that a fair forecast?

I think it we would like to (multiple speakers) in total we will stay with our overall guidance of between 5 and 7 percent for total Company.

We would expect to see Pet somewhere 7 percent plus.

We would expect to see the Garden in 3 to 4, 3 to 5 percent, somewhere in there still for the year.

Last question -- I'm actually not going to ask about acquisitions;

I'm going to ask you potentially about divestitures.

Any thoughts about paring some of your Garden businesses and selling them to other players?

A, we're not going to buy batteries.

No, we actually made -- as I said, we have shut down 5 facilities just in gardening in the last 15 months.

That's a good paring.

We always look at things to do whether to make our businesses better; whether it's consolidating operations or whatever else.

And we have no intentions right now of selling anything off.

In fact, even though you didn't ask us, we're going to continue doing acquisitions.

Remind me how many months has it been since you've announced an acquisition?

End of August.

Stay tuned.

Thank you.

Joe Norton, Banc of America Securities.

A couple of questions for you.

Just on the new products, and sorry if this is catch up for me, but could you just sort of talk about the timeline of some of those that you mentioned or maybe tell us which ones started shipping just this quarter?

And then, any information you guys could give us on kind of how the sell-through is on some of those, particularly the Nylabone products, or POS, whatever you have?

That's a great question.

The healthy edibles, which we're talking about in Nylabone, has been at retail now for approximately about 40 days at some accounts.

The initial indications as far as POS tracking is that it's doing a little bit better than forecasted, which is good.

The other products that we mentioned, the Coralife Super Skimmers, the First Steps from Kent, the Blagdon water gardening products, we're just now shipping those out to the retail trade.

So we haven't gotten any POS data back on that yet.

We're gearing up, if you thinking about it, Joe.

We have the big pet trade show coming in March, and we will launch a lot of new products at that trade show.

We actually love the name Mosquito Torpedo.

We wanted to launch that one last year and we couldn't get in.

We are launching that for the 2005 season.

We think that will be a great seller for the whole mosquito control and very effective.

On the Garden side, Joe, a lot of the things that have been developed over the last year were really presented during our review season over the last several months.

And we're just happy that they got the placement.

We will start to see how those start checking of the stores' POS over the next several months.

But a lot of our stuff has been accepted and listed, and we're locked and loaded and ready.

And then just going back to some of the Pet products, could you estimate on the main ones how far into distribution they are?

Is it fully into distribution now, or 60, 80 percent?

Just kind of curious.

On the healthy edibles, to Neil's point we've been listed about everywhere.

We're just now shipping it.

So the listings are done.

It's now being distributed.

And to Glenn's point on the Mosquito Torpedo, that is yet to be shipped.

The sales process is in place.

And all the other ones we mentioned from ESU, Kent Marine, Interpet, are now in the shipping mode.

They have been listed.

Okay.

Then on the gross margin, I was just wondering of the various kind of buckets you talked about what drove the improvement, can you give us any -- just sort of tell us like how much of the improvement came from each sort of by -- like how much was acquisitions versus mix or other?

It's largely acquisitions, which drives the mix as well.

It's mostly mix.

Was the gross margin sort of where you guys expected it or did it perform above or below?

A little bit above.

Again, we're looking at this as a year.

Okay.

And then just a quick one on balance sheet items.

Obviously both receivables and the inventories were up.

But it looks like, at least in my model, on a day basis inventories were down, but DSOs were up.

So could you just talk about -- I mean, is there something going on with inventory that we would expect it to continue to come down like that?

And then on the DSO, any reason for the increase?

Let's take the receivables.

Receivables, we've had a tremendous amount of sales increase, especially in the last part of the quarter.

And the aging of our accounts receivable is where we like it.

So we don't see any problem there on the inventories.

It's basically a shift in mix in our inventory.

But also, we have loaded up for the garden season.

So we don't feel there is any problem there to speak of.

No, I actually thought it was sort of down on a year-over-year basis.

I just wondered, did anything happen that you would expect that to continue or --?

Things are just in line where we want them.

Remembered also, in inventory we purposely took our grass seed inventories down last quarter.

We did that on purpose.

And then just the last one on the CapEx.

Could you tell us which new products you're planning to increase capacity for?

A lot of the Nylabone products have sold so well that we have to have more capacity.

That's one thing.

The whole Mosquito Torpedo, that we decided to move in-house.

So that's part of what we're doing.

And what was the other one?

The UK.

We're also -- we are making some investments in the UK right now in our United Kingdom operation over there, which will help us to move faster and decrease costs as we take more and more of our brands to the United Kingdom.

We also have an operating efficiency investment made down at Pennington related to some of our operations down there.

Almost all of our CapEx, we look at them as these are great investments to make, either to increase production or improve our cost of operating in both of our (inaudible)

Thank you very much.

Ronald Phillis, Banc of America.

Glenn, I was wondering if you could -- I'm going to try to be subtle.

I'll probably fail, but I'm going to try.

Can you tell us where you see your best acquisition opportunities coming, in which business sectors?

(multiple speakers) we're not going to do batteries.

We're not going to do the other stuff (indiscernible).

If you think about it right now, you'll see us do both in Garden and in Pet.

And if you buy the garden (technical difficulty) if you think about it (technical difficulty) you'll see some (technical difficulty) and also the Pet ones we will bring in as they make sense (technical difficulty)

How interested -- these are all bad guy questions.

I've got to ask them.

How interested would you guys be in using your equity to make acquisitions this go around?

Actually, if you think about it, we have plenty of credit capacity.

I'll let Stu answer that.

You know what our in-house credit metrics are (technical difficulty) things like that.

We're (technical difficulty) so it really depends on the timing of acquisitions (technical difficulty) whether we use (technical difficulty)

I know that some of the properties are for sale could be kind of big, so that's why I was asking.

(technical difficulty) string of pearls all day long without doing equity (technical difficulty) have to.

Congratulations and thanks.

Tom Malder (ph), Wachovia.

Just a couple of quick questions.

One is, Glenn, I think in your opening remarks you mentioned -- you talked about closing facilities and so forth, and the impact that that had on operating margins.

I was just wondering if you could give us an insight on how much more would you have to chop in that respect?

That's an ongoing process that we look at every year.

We're in the middle of our garden season now, so we won't make any more adjustments probably in Garden until we finished our season, which we will not be out until June, somewhere in there.

We've already closed down 5 operations in Garden in the last 15 months.

We've now closed 2 significant Pet operations.

We really consolidated it into our other operations.

It made a lot of sense.

That's just something we live with and we will look at every year as we go forward.

We don't call out all the activities we do, but it's just part of our daily work around here.

But again, organically our guidance is to grow our sales 5 percent -- 5 percent organically and then 10 percent operating income contribution from organic sales.

So again, we're striving for this 2-to-1 relationship.

And that just requires operating efficiency as you go day by day.

Okay.

If I look at Pet margins, it looks, if I'm looking at it right, about 12 percent this quarter versus about 8.5 last year.

And I'm just wondering if you could give us some insight into how much of that was pricing versus how much of it, for example, would be mix or either the operating efficiencies issue.

A lot of that was driven by acquisition.

We also -- if you were hanging around the call a year ago, we had some promotional pricing on the Pet side that we didn't have this quarter.

It's really all the above.

A lot of it was because we had acquisitions that have proprietary-type products, which have higher margins.

We also took some costs out.

And to Stu's point, we did not do the promotional pricing on a couple things we did last year at this point in time.

And then just one other thing.

It sounds like the seed business went really well this quarter.

And I'm just wondering, the mix change that you're seeing, is that something that is particular to this time of year?

Or would we expect to see that kind of mix change and the margins -- the margin benefit from that throughout the summer months as well?

First of all, the grass seed business just now is really kicking in.

So we don't sell a lot in our first fiscal quarter.

What we did do is we saw the Budd Seed acquisition we did this last year is higher-margin, better -- much higher-margin varieties.

So we did sell some of that, as well as we took a lot of cost out of our grass seed operations that really benefited us in the first quarter.

And we didn't have -- we have pretty good inventories as well.

We're off to great start in grass, and we will see how it plays out over the next six months.

Thanks.

Doug Lane, Avondale Partners.

Three sort quick questions here.

Three topics, if you don't mind.

Can you give us some sort of feel for how successful your pricing initiatives were, and the rate of them sticking, and what the consumer response has been that you have seen so far?

And then the second topic, Stu, if you could just review what the drivers are to the increased SG&A as a percent of sales and whether that's something we're going to see for the remainder of the year.

And then thirdly, just if you could give us what your litigation expenses were in the quarter; what you think they will be for the full year.

How about we do them backwards?

Litigation, that's an easy one.

We spent about $600,000 in the quarter for litigation.

Our guidance for the year is $4 million.

And so that's pretty much unfortunately or fortunately in line with where we were last year.

On the drivers of SG&A, the key driver there of the $18 million increase is acquisitions.

Again, higher-margin, higher operating costs premium brands that we acquired last year.

So SG&A component is going up.

Also, we've had had more organic sales, so the organic sales increased there.

And then lastly, we've had some corporate initiatives that have impacted SG&A as well, including Sarbanes-Oxley.

How much was Sarbanes-Oxley you figure?

We have Sarbanes-Oxley and some other corporate-wide initiatives this quarter that totaled about $1 million.

When you say operating costs, is this marketing spending or infrastructure kind of spending?

Marketing spending.

So they are higher gross margin, but then they require higher marketing spending to support the brand?

Right.

And then just sort of characterization (multiple speakers)

Doug, as you remember, gross margin went up 450 BIPS.

Absolutely, I understand.

Your question on pricing, we did put pricing in place for where we had to.

One of the biggest improvements, of course, is we did not do the promotional pricing we did last year.

That helped quite a bit from that point alone.

Second of all then, we did take price increases for those products where we felt we had to, and they are sticking.

The Garden prices won't show up until we get to the garden season.

Pet did some, as well as changing some of the product mixes.

We also do a lot of reengineering of our products, and we just take out one SKU and bring another SKU in.

That's an effective way of getting a price increase where really the retailer doesn't see it and the consumer doesn't pay that much attention to it really.

We are seeing the price increases stick, both at consumer and retail.

Thank you.

Bill Brady (ph), Central Garden & Pet (ph).

Great quarter.

I was a little confused by Stu's answer to Bill Chappell's questions about taxes.

They are 37.1 this quarter, but they're going to be 38 for the year?

That's our guidance at the moment.

We were 37 and change for the quarter.

It all depends on how the year performs.

So you would expect higher than 38 in each of the next 3 quarters to reach an average --?

(multiple speakers) that's right.

Did you say that you spent 1 million in Sarbanes-Oxley in the first quarter?

No, we didn't spend 1 million on Sarbanes-Oxley; we spent 1 million on Sarbanes-Oxley and other corporate projects.

What would Sarbanes-Oxley be for the whole year, do you think?

For the whole year, it's going to be -- our internal cost will be somewhere around a couple million dollars.

Very expensive.

Okay, great quarter.

Thanks a lot.

Jack Sowsman (ph), King's Point Partners (ph).

Good quarter guys.

Actually, most of my questions have been answered.

I have one quick question.

Accounts receivable were up a little bit higher than sales, the low 20s.

Is that somewhat of an aberration or given the quarter it's meaningless?

It's a timing thing within the quarter more than anything else.

We had some pretty strong December sales.

That's it for me.

Thanks very much.

(OPERATOR INSTRUCTIONS) George Chalhoub, Deutsche Bank.

First, two quick housekeeping please.

What was CapEx for the quarter and how many -- what was the letters of credit outstanding under the line of credit please, under the revolver?

CapEx outstanding was about $5.6 million for the quarter and LOC's -- I'm going to swag it, George -- it was about $15 million.

Obviously the acquisition issue you guys spoke about fairly clearly.

Here's my only question from that regard.

Do you have a certain guidance that you will stay within or leverage ratio to stay within given the multiples you are looking at right now and potentially what you could be doing by the end of the year?

I know you're talking about the mix of debt and equity.

Obviously you want to balance things out so that your balance sheet stays as flexible as possible.

But what is kind of your -- what range of leverage ratio debt to EBITDA you would be seeing yourself staying within, even if you made all the acquisitions you basically would like to sometime this year?

First of all, let me correct what I said before.

Our Controller just pulled out the footnote in the Q, and our letters of credit outstanding are $6.7 million, so not as large as I had thought.

In terms of leverage, again it's a very fluid thing.

Our kind of house rules, we want to stay about three times debt to EBITDA.

Obviously the financial markets will accommodate a lot higher leverage.

But how we treat that is whatever acquisitions we do do, we take a look cash flow from the Company and also the acquisition and see if we were lever up above kind of our house limits how quickly we can get down somewhere in the threes.

So that is just kind of the ongoing calculus we do.

I don't have a specific number to say we're going to go from 3 to X.

But I mean if you go to a certain level that's outside of the house level that you're mentioning right now, you would expect that -- or you would hope that -- the free cash flow you would be generating on a pro forma basis will get you down to the 3 times area within the 12 months or 9-month timeframe.

What would be kind of your targeted place, if you have one on that front?

It all depends on the acquisition and basically other things we have on the plate.

Again, it's all acquisition specific if there's something that's going to lever us up.

Thank you very much.

Jamie Howd (ph), King's Point Partners.

I've got a question.

I don't know if I missed this, but on the litigation expense, the expectation for the year.

And I think we have a date.

Could you refresh me on the date for the trial?

Believe me, I can.

April 4, 2005 is when the trial begins, the Axelrod trial.

And the litigation, Stu?

$600,000 for the quarter, $4 million for the year.

As you can imagine, getting ready for the Axelrod trial is another expense of endeavor this quarter.

So we'll see more upfront on the expense there?

Yes, you will.

For the second quarter, yes.

Great.

That's it.

Thanks a lot guys.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call.

I will now turn the presentation back to Mr. Glenn Novotny for closing remarks.

First of all, everybody, thank you for your questions.

As you can tell, we are pleased with the first quarter, and our achievement of recording four consecutive profitable quarters.

That's a goal we have had for quite some time.

We will continue to execute our growth plan by growing and extending our brands, developing and launching new innovative products and packaging, leveraging our cost structure on those opportunities that we see, strengthening our Company to support controlled growth and pursuing and completing strategic acquisitions.

Just on a side note, on a socially responsible note, Wellmark, which is one of our companies, is donating mosquito control products to Indonesia for use in the tsunami stricken areas.

We are supplying over a year's worth of mosquito control products to treat drinking water for over 200,000 households to prevent the potential outbreak of mosquito-borne diseases.

We thought that was something that we enjoy doing and felt it was very worthwhile.

So with that, I will thank you for joining the call.

We look forward to seeing many of you during the quarter as we see you around the country.

And I would be remiss if I didn't say don't forget, Valentine's Day is just around the corner.

Be sure to take those who give you the most complete unconditional love and affection.

With that, thank you.

Have a great afternoon and we will see many of you around.

Good bye.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Have a great day.