Central Garden & Pet Co (CENT) 2005 Q2 法說會逐字稿

Welcome to the Central Garden & Pet’s fiscal second quarter results. [OPERATOR INSTRUCTIONS] I would now like to 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 Chief Financial Officer;

Jim Heim, President of pet products; and, since Neil Pincus is out of the country today, Bill Thorpe, the CFO of our garden division will be filling in for him.

Before I turn the call over to Glenn, 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 in, or implied by forward-looking statements.

These risks are described in the company’s earnings press release, and Form 10K 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.

Now here’s Glenn Novotny, Glenn.

Thank you Paul and thank you everyone for joining us this afternoon.

We are pleased to report another record quarter of profits.

Today we will provide an overview of the fiscal second quarter, and a preliminary look at April results.

Bill and Jim will discuss the garden and pet segments in more detail.

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

First of all, reviewing financial performance for our fiscal second quarter, sales for the quarter increased approximately 6% to $379m, when compared to the second fiscal quarter of last year.

Operating income increased 15% to $40m.

Operating margin increased to 10.5% in the quarter, compared to 9.6% last year.

Net income improved 19% to $22.4m.

These results produced earnings per fully diluted share of $1.04, compared to $0.91 a year ago, an increase of 14%.

At the midpoint of our fiscal year, we continue to post solid results.

In particular, through the first six months of our fiscal year, earnings per share have increased over 30%, and sales have increased over 10%.

Our business model continues to benefit from focusing, and literally focusing, on two strong growth categories that are driven by demographics and consumer trends that are largely recession resistant.

We believe we are well on our way to achieving our growth targets of 10% top line, [transmission gap]

Sales increased 8.5% to $296m (ph) in the quarter.

Sales of other manufacturers’ products, as expected, declined 4% to $83m.

In garden, sales of our own branded products increased 7.8% to $174m, sales of other manufacturers’ products, as planned, declined nearly 12% to $46m.

Garden organic sales declined approximately 1% due to the late start to the garden season, which was caused by adverse weather conditions that impacted industry wide sales in the month of March.

By comparison, the March quarter last year benefited from an early start to the garden season.

This year, when the sun finally came out in April, consumers were anxious to get outside and start their gardening.

As a result, April sales were very strong.

We experienced strength across our garden portfolio, including grass seed and lawn and garden control products.

Based on our April sales and our past history of late breaking garden seasons, we think we are in good position to make up a lot of the soft market sales.

In pet, branded product sales increased nearly 10% to $122m, sales of other manufacturers’ products actually increased 8% to $37m.

Second quarter pet organic sales were flat.

Year to date, pet organic sales are 4.9%, and yes, we still expect to meet our 5% - 7% organic growth target for the year for our pet segment.

Our discipline, as many of you know, is to continually examine our portfolio of brands, products and customers, in order to deliver better returns to our shareholders.

For example, in the second quarter we chose to walk away from approximately $5m in unprofitable sales to certain pet retail customers.

And we decided to delay the launch of our new pet product introductions to coincide with the Global Pet Expo in mid March.

Last year we launched a series of new products in January.

We believe this planned delay impacted sales by approximately $3m in the second quarter.

Turning to acquisition growth, we announced the acquisition of Gulfstream Home and Garden in February.

Gulfstream is the exclusive marketer of the leading garden product brands Sevin, Over’n Out, and RooTone.

On the innovation front, pet had another very successful showcase at the Global Pet Expo in Orlando.

We won the most awards of any supplier.

This, once again, demonstrates Central’s unique position as the industry leader in innovation.

In garden, we continue to energize the outdoor lifestyles category through our garden décor line of Norcal and New England Pottery, and Matthews Four Seasons product lines.

We strengthened our wild bird category management relationship with a major retailer through the creation of an exclusive brand, Backyard Delights, in the quarter.

This features a complete set of wild bird food, feeders, and accessories from our Pennington, Kaytee, and Cedarworks operations.

This store within a store concept is an example of enhancing the consumer shopping experience, and providing the retailer with a unique way to merchandise a fragmented category.

On Monday of this week we acquired the remaining 60% in Cedarworks, a leading manufacturer of birdfeeders and birdhouses, for approximately $4m.

This acquisition augments our wild bird and outdoor lifestyles category management strength with retailers, and we expect Cedarworks will be neutral to fiscal 2005 earnings, and is expected to contribute approximately $0.01 – $0.02 per share in fiscal 2006.

Our third growth initiative is to continue to create greater operating leverages in our businesses.

Second quarter operating margin improved to 10.5%, an improvement of 90 basis points over the same quarter last year.

The year to date operating margin improved 110 basis points, to 7.6% compared to the same period last year.

We think this is significant, and exactly on our goal.

In summary, at the midpoint of our fiscal year, we remain optimistic about our growth prospects and achieving our 2005 guidance.

April was an excellent start to the third quarter for garden.

Pet also had a strong April, with many more new product launches scheduled for the balance of the year.

Our acquisition pipeline remains full, and we expect to continue to improve margins, both short and long term.

Now I will turn the call over to Bill Thorpe, who is filling in for Neil Pincus today.

He is the CFO of garden brands.

Bill, take it away.

Thanks Glenn.

I will now review the performance of the garden product segment.

Sales for the quarter increased 3% to $220m.

Acquisitions contributed nearly $16m in sales.

Operating income declined 9.9% to $24.2m. accounting for the second quarter’s decline in operating profit was the late start to the garden season, the fact that we increased television and radio advertising spend by approximately $1m, to build brand equity, and finally, the inclusion of our GKI Bethlehem Lighting Christmas seasonal lighting business for the full quarter in 2005, versus only one month in the second quarter of 2004.

This is traditionally a loss quarter for this business.

As Glenn mentioned, our retail customers felt the impact of a late start to the garden season, due to the adverse weather across the majority of the country in March.

This was compounded by the particularly strong start to the garden season in the March quarter a year ago, creating a tough comparison.

That being said, April gave us a great start to our fiscal third quarter.

In April we experienced strong, and in some cases, record order flow across multiple category lines, including grass seed, insect and weed control products, and outdoor lifestyles.

In garden we continue to make progress on a number of fronts to improve margins and build brand equity.

Margins in grass seed continue to improve, due to our efforts to shift to premium varieties, and reduce costs stemming from our facility closures in the past year and a half.

We launched a new TV advertising campaign.

George Toma Superbowl grass, highlighting the introduction of the Superbowl tested Princess 77 grass seed to the consumer marketplace.

The two leading fire ant control brands, AMDRO and Over’n Out, produced excellent results this quarter, and we believe we gained market share supported by increased television and radio advertising campaigns in this growing category.

We formed an exclusive partnership with P. Allen Smith, the renowned garden expert, who is on television and doing a nationwide tour this summer, promoting his new book “Container Gardening”, which features many exclusive designs from Norcal and New England Pottery.

This partnership is designed to build our brands by increasing consumer awareness of our unique outdoor lifestyle products, and the beauty they bring to consumers’ homes and gardens.

In conclusion, as Glenn mentioned, April sales were strong, and the third quarter is off to a good start.

Now I will turn over the call to Jim Heim, President of pet products, Jim.

Thanks Bill.

Pet had a solid quarter, characterized by innovation in margin improvement.

Pet segment sales for the quarter increased 9% to approximately $158m.

Increased sales from the two acquisitions completed in the second half of fiscal 2004, Interpet, and Energy Savers Unlimited, contributed nearly $14m in the quarter.

Operating income increased significantly to $23.6m from $15.7m, an increase of 50%.

Now driving the performance in the quarter was strong sales and operating profit contribution from our Wellmark subsidiary across all insect control product lines, in both the consumer and professional marketplaces.

Our Four Paws brand contributed strong sales and operating profits due to the launch of several new innovative products.

We showed margin improvement at Kaytee, our bird and small animal operation, and solid profit contributions from the acquisitions completed in fiscal 2004.

Now on the innovation front, we had another successful new product debut at the Global Pet Expo industry trade show held in Orlando in mid March.

Central, once again, was recognized as the leader in innovation.

We won five new product awards, including a best in show award for Oceanic’s unique and show stopping 144 gallon half circle aquarium.

This aquarium represents the latest innovations by All-Glass Aquarium and Oceanic in both living art, and ease of use.

We won more awards than any other manufacturer, a remarkable achievement considering that there were approximately 600 submissions and entries to the new product showcase.

At the expo we launched our first wave of over 30 new products.

We are now in the process of launching our second wave of new products as we speak.

One of the award winning products that we are really excited about is the pre-strike Mosquito Torpedo, which prevents mosquitoes from hatching and maturing in standing water.

Each torpedo-shaped briquette provides 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 unsightly surface residue.

It is safe to use in birdbaths, Koi ponds, horse troughs and any other instance of standing water.

The relatively wet weather experienced on the West Coast and throughout most of the country has created strong demand for our mosquito, flea, tick, and other insect control products, and we are focusing on brand equity.

We will continue to rollout our creative marketing campaigns via such events as the satellite media tour that our brands participated in at Global Pet Expo.

This live satellite feed featuring our new products was aired 19 times in 18 media markets across the country, reaching approximately 400,000 households.

This feed has now been produced into a video news release that will be made available to stations nationwide for the next 13 weeks.

This release should reach an additional 800,000 households.

In April we co-sponsored a successful pet adoption day with the Oakland A’s, and our own Glenn Novotny threw out the first pitch.

Now these are Glenn’s words, definitely not mine, he’s going around saying he tossed a no-hitter.

Of course you’ve got to remember, there was no batter.

Now, we will continue to have other, similar promotions with the A’s for the remainder of the season.

And, we are also sponsoring similar promotions with the San Diego Padres and the Texas Rangers.

In summary, we are very pleased with our results, both in the quarter and year-to-date.

We are on track to achieve our new product innovation and organic growth targets of 5% to 7% in improved margins.

Now, I will turn the call over to Stu.

Stu?

Thanks, Jim.

Turning to consolidated results for the quarter, net sales for the second quarter of fiscal 2005 were $379m, a $20m, or 6% increase from last year.

Increased sales from acquisitions contributed approximately $24m in the quarter.

Sales of branded products increased 8.5%, to $296m.

Sales of other manufacturers’ products declined 4%, to $83m.

Gross profit from the second quarter increased to $127m, an increase of $15m, or 13%.

Gross profit, as a percentage of net sales, increased 230 basis points, to 33.5%, from 31.2% in the year ago period.

The margin improvements were due primarily to contributions from acquisitions, favorable product mix and an improvement in our grass seed operations.

Selling, general and administrative expenses for the quarter were approximately $87m.

As a percentage of net sales, SG&A expenses increased 140 basis points, to 23%, due primarily to acquisitions, the shift in branded products and their higher associated operating costs.

Included in SG&A are third party costs, associated with Sarbanes-Oxley, Section 404 compliance, and the unsuccessful efforts to acquire Tetra.

We are making painful, but excellent progress on our 404 compliance program.

Unfortunately, like many other companies, the cost to achieve compliance is higher than previously anticipated.

We now anticipate that the external costs associated with Sarbanes-Oxley compliance for the year will be approximately $5m, which is $2m above our initial projections.

So far, $1.5m was spent in the March quarter, and $1.8m spent year-to-date on this effort.

Professional fees and other expenses associated with our unsuccessful efforts to acquire Tetra, cost approximately $1.5m in the quarter.

Litigation expenses, related primarily to the Herbert Axelrod litigation, totaled approximately $700,000 in the quarter, and $1.3m year-to-date.

The trial is now underway and we continue to project legal expenses for the year to be in line with our previously stated guidance of $4m.

Operating income for the quarter increased 15%, to $40m, from $34m a year ago.

Net interest expense for the quarter was $5.5m, compared to $4.3m last year, reflecting higher debt balances, due to the acquisitions completed in fiscal 2004 and 2005.

The tax rate for the quarter was 38.1%, compared to 39.2% in the same period last year.

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

Net income for the quarter was $22m, compared to $19m a year ago, a 19% increase.

Earnings per fully diluted share were $1.04, versus $0.91 a year ago, a 14% improvement.

Depreciation and amortization for the most recent quarter totaled approximately $4.6m, up slightly from $4.3m last year.

Capital expenditures for the second quarter totaled $4.3m and $9.9m year to date.

Turning to the balance sheet, comparing March 2005 balances to the March 2004 balances, accounts receivable increased approximately $12m, or 5% to approximately $237m.

This increase in accounts receivable is due primarily to acquisitions.

Inventories increased approximately $52m, or 21%, to $305m.

Inventory balances increased due primarily to acquisitions, the late start of the garden season and production buildup for new product and program launches, primarily in Pet.

As of March, 2005, total debt stood at approximately $369m, compared to approximately $312m last year.

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

Turning to guidance, we are reiterating our full-year earnings-per-share expectation of $2.44 to $2.54.

By the way, the benefit of the SEC’s recent delay in recognizing the cost of expensing stock options is more than offset by the higher-than-anticipated Sarbanes-Oxley compliance cost.

Now, I’ll turn the call back to Glenn.

Glenn?

Thank you, Stu.

Operator, we would like to go ahead and open the call for Q&A at this point.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Mr. Chappell.

Mr. Chappell, if you could state your first name and your company’s name, you may proceed.

Sure, Bill Chappell, SunTrust Robinson Humphrey.

I have a couple of questions, I guess first on the revenue side.

I’m trying to—maybe you can quantify on the Garden side.

How much was, you know, loss in March and what you mean by a very strong April?

And what was maybe pushed from one quarter to the next?

And with that, I’m just trying to understand;

I thought last year you had kind of a $5m drop off in the grass seed business, so the comp wasn’t as hard.

Maybe you could help us understand how the grass seed season is starting off there as well.

The grass seed we had, as you remember last year, we had a very good second quarter.

It was the third quarter where it fell off.

So, we had a pretty tough comparison on the grass seed for this year, versus last year, in the second quarter.

It will be easier in the third quarter.

Okay.

And, if we think about--the other one was the organic sales, you asked?

Yes, just trying to understand what, internally, what you think was pushed out of March due to weather and what you picked up in April and May and June?

Well, we do know that our April sales in our Garden, organic, were up around 9%.

So that will tell you quite a bit.

Across all the categories too.

From March, went into April.

And then, I guess maybe the same question on the Pet.

Pet was a little bit below, maybe, my expectations in growth.

Can you help us quantify the push-out of the new shipments?

Will you see that all pick back up in kind of the June quarter?

Yes, Bill, the new products that I mentioned, we started launching those.

We’re doing it currently and you’ll see pick up in this quarter.

Also, you’ve got to remember that, as a planned act that we closed several facilities.

We had an aquatic facility that we closed that affected the quarter.

We also closed a bird seed facility.

Those two closing affected this quarter’s sales.

And then, we also took a look at some of our businesses that were unprofitable, and we discontinued those.

If you take a look at April, just to give you a little pickup on that, organic sales in April were up 9%.

Pet sales were up 13%.

So, we’re off to a good start in this quarter.

Great, and then there‘s one last question, Stu; maybe I’m just trying to understand.

Is it right to say that the loss of Tetra cost you about $0.05 to $0.06 in the quarter, to EPS?

No, it’s $340,000, pre-tax is a penny.

So, call it $0.03 or $0.04.

$0.03 to $0.04, and then, what you’re saying, going forward is, Sarbanes-Oxley is another $0.03 to $0.04 assigned incremental cost?

It would be about another $0.06 incremental.

Okay, thank you.

Bill, I think it’s also important that, as Jim said there, we will go through our business portfolio every year at every time.

If we find business that is unprofitable, we chose to walk away from some of that in the quarter, which I think is healthy for the business, long-term.

Hey Bill, I was just thinking of the Delta on Sarbanes-Oxley.

Go forward, it should be about $3m.

So, it’s about $0.09.

The total program is $5m for the year now.

Next question please?

Your next question comes from the line of Mr. Altobello.

Mr. Altobello, if you could state your full name and your company’s name.

Please proceed.

Thanks, good afternoon;

Joe Altobello, with CIBC.

I just had a question on the top line.

You guys, obviously, this afternoon basically reaffirmed your $1.4b target.

And, I think previously, I guess, going back to, you know, late last year, you had talked about 1.4 to 1.43.

And now, backing off of the high end there, I was curious what has changed.

Because it sounds like basically, the only thing that I can see is the delay of some pet product shipments, which is roughly 3m.

And, maybe the late start to the garden season, but you’re going to catch up most of that in April.

So I was curious why you’re backing off of the high end at this point?

Hey Joe, this is Paul.

Actually, we are not backing off.

We just rounded it to basically being 1.4b.

We just rounded it.

Okay, so nothing essentially has changed there, right?

Exactly right.

Okay.

Next question, in terms of your organic growth, and I think I missed this because you guys cut out a little bit.

What was the overall organic growth in the quarter?

About flat.

About flat, okay.

Essentially flat.

Okay, and then, lastly, I guess you guys are going to do about, oh, call it a little north of 100 basis points of margin expansion on the EBIT line this year.

And, this is probably a tough one, but is that a good run rate, going forward for the next couple of years at least?

Well, we’ve thrown our hat over the fence on this one.

I won’t hold you to it, by the way.

The heck you won’t!

We’ll hold ourselves to it, more importantly.

We have a goal; we’ve talked about this now to you and others several times is that, we want to get our operating margin up to 10%.

We think we’ll get about 1% up this year, we believe.

And our guidance will tell you that, and so if we’re going to achieve that in the next three to five years, then yes, we need to keep moving up about 100 basis points each year.

And that’s exactly what our goal is.

And that’s also why you see us sometimes, as we did this quarter, let’s take a close look at our portfolio, which helped us get there.

If there are certain product lines or certain businesses, or certain customers that we need to make a change, we will do that.

Okay, great.

Thank you.

You’re welcome.

And your next question comes from the line of Mr. Lane.

Mr. Lane, please state your first name and your company’s name, and you may proceed.

Yes, thank you.

This is Doug Lane, from Avondale Partners.

A couple of questions; first of all, can you go into a little bit more color, on what it was that you de-emphasized on the pet side that resulted in lower than, sort of, baseline organic growth in the quarter?

Specifically, we deleted some pet carriers.

We pulled out of some wild bird business at some accounts.

And then, as I mentioned before, we had some plant closings.

If you add all that together, we would’ve been within our range of 5% to 7% organic growth, if you discount those changes.

Okay, I’m sorry, I had some noise here.

You deleted pet carriers, wild bird at some accounts.

That was – (multiple speakers).

At some accounts.

We had some plant closings that I mentioned.

Okay.

[Inaudible] facility, which was about one year ago, Doug.

And Doug, if you take that into account, our organic growth rate would have been right in the 5% to 7% range.

And how much do you think this attributed to the margin expansion in the quarter, which was, you know, pretty strong?

We like that.

It did, and that’s the reason why we walked away from the business and why we closed the plants last year.

It helped quite a bit.

At the same time, as Jim said, we had a very strong performance at our Wellmark business, especially, with the mosquito business and the flea and the tick and the same thing at a couple of other businesses.

They’re a good product mix, Doug.

We had very good product mix, as well as being able to walk away from those types of product lines and accounts.

Were they actually money-losing?

They were, at best, around breakeven, which obviously had a negative effect on margin.

And just to clarify some numbers that you gave before, was I right that in April, both the pet and garden side had 9% organic growth?

You’re correct.

Okay, it’s just the same number.

Okay.

Just by coincidence.

Got it, got it.

Can you give us an update on pricing?

I know you took some pricing over the winter here, and how much do you think pricing impacted sales?

And just, how is it holding up at the retailer?

Well, we did take some price increases.

It’s going to be approximately 1% would be our guidance for you on that.

Really, what we really focus on as our innovation in launching these proprietary patented products that we are so happy about and there you do basically blind price increases.

But if I had to give you a straight answer, it would be about 1%.

Okay, and I am looking at your first quarter press release, and you said 1.4b in sales there, so really it sounds like, on the top line you’re very comfortable with April making up for the weak March here and feel that you’re fully back on track for the year?

Yes, Jim told you pet – we delayed our launches, that will pick up, I don’t think there’s any question about that.

As long as the weather stays halfway decent in May and June, we should pick up a lot of that business that we did not get in March.

Any way to rank these months in order of priority, March through June?

It’s a season.

Every year is different.

I’ve been in this industry now for 15 years, my hair is turning gray on some of that, at least I'm still keeping it at this point but that is subject to interpretation, but there is never a normal garden season, there just isn’t.

So each year is different.

Normally what you find, your biggest month is going to be April normally, and it really counts, it’s late March, April, May and early June is really a normal season as you think about that.

Okay, thank you.

Mr. Norton.

Thanks, Joe Norton, Banc of America Securities.

First of all just going back to, I thought you said, Stu, in the comments, the Tetra class were $1.5m, was that a year-to-date number?

It just seems like you gave two different numbers for that.

Stu Booth No, its 1.5m, that’s the cost, and it was all expensed in the quarter.

Okay.

Then secondly, I was wondering if you guys could talk any more about the margins on the pet side.

Obviously those were up pretty substantially, but is there any way you could break it down a little bit more in terms of what was new product or mix, what was acquisitions.

Are there any kinds of integration cost savings or anything going on in there?

You just answered the question.

But I want to know how much from each.

We had really favorable mix changes across a lot of our businesses, and at the same time we had efficiencies in our process and how we go to market, so it’s literally all across our businesses, we had really good results.

And it did help closing down the manufacturing facilities and increasing our throughput.

And getting rid of the products that had very little margin.

Okay so should we expect these kinds of margins going forward?

Stu Booth We’re getting back to our guidance here for the year.

Our margins for the year were 31% - 32.5%, so we’re halfway through the year; we’ve got another six months to go, so that’s kind of where we’re shooting.

At the portfolio.

Then on the inventories, Stu or whoever wants to take it, what did you say? 53m increase on a year-over-year basis?

I was wondering if you could break that down for us at all.

That seems like it’s getting to be a fairly high number.

Yes it was.

I'll take the first one – (multiple speakers).

The cut is, a lot of it is, of course, the acquisitions that we did contributed a good chunk of that.

The late season, we also did elect to hold back on some of those products that are launching as we speak, and really launching a lot in May and June, so build that, and then probably more important for us, we pay a lot of attention to the inventory turn ratio at retail.

If we think about us, we elected to keep the inventory in our warehouses and our manufacturing plants versus putting it on the retail shelf back in March.

We just think that’s better for the retailer.

It makes our inventories go up, but we think that’s better long term for us and for the retailer.

What would you add to that?

You got it.

You did a great job!

Is there, I guess especially on the lawn side, is there any potential margin impact to that as we go into the third or fourth quarter?

If you were producing to a certain level of sales, do you have to cut back production at some point?

All of our product launches are factored into our forecast going forward, and obviously the new products are all at very good margins.

If you think on the garden side, which I think you’re hinting at there Joe, is that, on the garden side, we produce now -- we’re now in the season so it’s just in time, as you think about manufacturing your product as well as delivering your product.

So yes, we will start winding down our manufacturing as the season comes to a close.

So to make a long answer short here, we feel comfortable we’ll have inventories back in line where we want them to be, definitely by the end of the fourth quarter, and we’ll make a lot of progress in the third quarter as we ship these out.

You saw our April sales, which took our inventories down significantly as well.

Can you just remind me what’s your goal for the end of the year, like on a day’s basis?

I don’t have that handy.

Stu Booth We don’t have that, it’s lower.

Hopefully substantially lower.

Yes, but we don’t have that in our hands right here.

Okay.

Then finally did you say, or can you tell me, what operating cash flow was?

I don’t have a number for the quarter;

Howard, do you have something?

Yes, give me --.

We’ll get that to you in a sec.

Do you have another question while we look it up?

I do have one, which is that if -- going back to the organic growth in garden, if you take out the 16m from acquisitions; it looks like it was actually more like negative 4?

No, it was in that 1% range.

Okay, but acquisitions was 16m?

The increased sales from acquisitions is what you have to keep – you have the acquisitions, acquisitions were roughly just under 16.

Joe the cash flow, negative $37m operating cash flow for the quarter, which is typical.

We’re building up for the season.

No one’s asked the question what our debt balances are today.

We’re starting to be cash flow positive now, we’ve turned the corner, our debt balances are down about $15m from the end of the quarter.

So that’s $15m operating cash flow paying down debt.

Okay, good, great, thank you very much.

Mr. Cox.

Mike Cox from Piper Jaffray, good afternoon.

Just drill into the inventories, approach this in a little different direction.

Could you give us the inventory by segment of that $53m increase, is that predominantly on the garden side, or is it evenly split?

It’s pretty evenly split.

Okay, and on the P&L, the other income line item of about 2m, could you give us a little insight as to what that was?

We had one of our five equity investments have a very, very strong quarter.

They sold to one of their customers several months of product within the quarter, so it’s a little bit of a timing issue within the year there, for that one equity investment.

Okay so it sounds like it was one time in nature?

Yes, it’s a little bit of front loading of one customer by that equity license (ph) so it will even out for the year.

Then if you could comment on, the April trends sound like they’re off to a very good start, could you comment any more granular in terms of as April progressed, as you see the POS data, given that April weather trends have deteriorated to some extent, later in the month?

A lot of that came in the early part of April, so we achieved 9% by the end of April, so that tells you we were stronger at the beginning and lower down at the end.

Okay, thanks a lot.

Miss Gold.

Hi it’s Alexis Gold with CIBC World Markets.

Just a couple of questions.

I know you’ve talked about higher overall margins, and it sounds like there are some savings from facility closures, de-emphasizing sales to certain accounts.

Was any of this offset by pressure on the cost side, and raw materials on the shipping side?

Sure, the increased fuel prices cost us, and you don’t always get those passed along as fast as you want, so that offset against us, but even with that we still had very strong operating margin improvement.

And you feel comfortable with that going forward, as gas prices continue to rise?

Yes, with some of your smaller customers you can pass along those fairly quickly, especially as I think about the pet side to the independent customers, you can pass those along right away, or as close as you can, with fuel surcharges and whatever else.

It’s harder to do with the large customers, but eventually if they stay high you have to, as well as our competition has to.

Just to expand on that a little bit, you did mention the facility closures; can you quantify the cost savings from those closures?

We’d rather not on this call.

Okay.

Then in terms of overall Wal-Mart support of the lawn and garden category, I know it hasn’t been as strong as we probably would have liked to have seen in the past, are they showing more support for the category this year, and do you think that’s some of the pick up you’ve seen in April?

Yes, it is.

They’re still very strong in garden, and remember we do their -- we sell the premium brands to them, but we also do their private label for them, and their private label products have done fairly nicely.

Great, thanks very much.

Ms. Longley.

Fulcrum.

Back to this organic growth question, a definition, when you’re talking about organic growth, do you just look at your shipments of brands, so you're taking out the other manufacturers’ shipments?

We include both Alice.

Organic sales comes from basically products or brands and business that has been with us for a year or more.

Including your sales of other manufacturers’ products?

That’s correct.

And then you take out your acquisitions?

That is correct.

Okay.

When you said April organic sales up 9% for both garden and pet, that’s year-over-year, right?

That’s the month of April this year versus the month of April last year.

All right.

Then when you said in pet you expect 5% - 7% for the year, again that’s not just brands, that’s the division overall?

That’s correct.

That's all-in, yes.

Then if I add back some of the sales shortfall that you had in this quarter and get to your guidance for the year, it looks like – will most of it be made up for in the June quarter?

In the garden, of course, for the garden.

Pet will be really through the last six months.

It looks as though your sales might be up double-digits in the June quarter.

Is this something you’re comfortable with, once you include acquisitions?

Yes, let's see, what's our guidance?

No, we didn't give --.

We don’t give guidance for the – (multiple speakers).

We look at the seasons.

All right, so you're not going to bite on that?

Then back to the inventory question, can you tell us how much of inventories are from acquisitions?

We can back out the acquisitions from sales, and it would be nice to back out acquisitions from inventories and receivables actually.

Acquisitions was the largest contributor to the increase, and I think we’d better stop there.

You’re not going to give us the number?

No.

All right.

Your pet product operating margins were wonderful, they were 15%.

Can you tell us which products have operating margins above 15% in pet?

I could but – (multiple speakers).

We look at is as a portfolio of products, and we report it that way.

The things we already mentioned before, the new items obviously have good margins associated with them.

The decisions we made to get out of low margin products and accounts all contributed.

I think corporate was down year-over-year, whereas it was up in the first quarter.

Is there a reason corporate was down?

It looked like maybe that was the way you got your number. (indiscernible) just a little bit.

When you’re growing rapidly usually corporate expense grows rapidly with you, or somewhat rapidly, and it was up year-over-year quite a bit in the first quarter and it was down slightly, but certainly not up in the second quarter.

You back it out once you take operating profits for the -–(multiple speakers).

It was essentially flat.

But normally -- in the first quarter it was up, and normally one would expect it to be growing with the acquisitions and with your business.

Again, quarter to quarter it's essentially flat.

We look at it on an annual basis, some of that is just timing.

Things like litigation and things like that go quarter to quarter.

Can you give us some guidance for what it might look like for the year?

We give guidance for the whole company; we don’t give it by segment.

You can back into it, Alice.

If you want we can talk offline, but you should be able to back into that one.

It’s basically the operating profit of the two segments and then the operating profit for the whole company, you kind of get there.

Alice, why don't you talk to Paul?

Yes, Paul will give you a call afterwards.

Okay.

I guess my final question is, within pets, a lot of people are enthusiastic about the fish category.

Is that category overall for you growing faster than your corporate average, and does it have margins higher than your corporate average?

The portfolio brands make up what our corporate average is.

Obviously, we’ve introduced a lot of new products in the aquatic area.

We just won “Best-In-Show” at the Global Pet Expo, and orders for that product, the margins are extremely strong.

So, we’ve very excited about the aquatic category, going forward.

All right.

Thanks a lot.

Your next question comes from the line of Mr. Chalhoub.

Please speak your first name and your company’s name.

You may now proceed.

Your mic is open sir.

Hey George?

Hello.

George, you’re there?

Yes.

Okay.

I’m sorry.

I just wanted to check on the seasonality of the business.

Obviously, you mentioned some of the push in the lawn and garden from March into April.

Now, if I remember correctly, we had a little bit of the same dynamic last year.

We had a slow start to the spring season.

We had a damp start to the season.

Is the year-over-year comp from an overall weather perspective, is that a difficult comp?

Or, is it like a similar comp?

Where do we stand exactly on that front?

Last year, George, we had an early start to the spring.

So, we had a strong second quarter, which made a hard comparison for this year.

And then, remember the weather really turned bad in May and June, especially for the grass seed business.

So, we should have an easier comp this year for the third quarter.

We can’t tell until the season’s over.

Right, so basically the season wasn’t great last year, but it was more back-end loaded into the spring time, more so than this year?

No, you’ve got it just backwards, George.

Last year, we had an early spring, with a late fall off.

So, this year, we’re having a late spring, which we normally would think should have a stronger second half to the garden season if it follows history.

Right.

I mean, your expectations for the season overall, are for it to be comparable to last year?

You know, notwithstanding those variations you’re mentioning?

In total, yes.

Okay.

On that structure, do you mind breaking down, you know, what was the term loan, versus the revolver, are they outstanding?

George, we have $150m outstanding on the senior subordinated, which is our high-yield offering.

And then the rest is largely term-loan revolver.

Right.

I was wondering if you can split those two, if you don’t mind.

Because, the 150 is obviously a fixed number.

Well, the revolver is, I don’t have the number exactly; hang on a second here.

The revolver is approximately 60m.

Term loan is 173.5.

But those are both in the same bucket, they’re the same agreement.

So, they’re almost interchangeable, George.

That’s the way we look at it.

Right, absolutely.

I was just trying to get the working capital swing on the revolver.

And my last question, your Cap Ex budget, I have it at 21.

Has that changed?

I’m sorry, at 20.

It hasn’t changed.

It hasn’t changed.

Great, thank you very much.

You’re welcome, George.

Next question?

We do have a next question, a follow up question from Mr. Doug Lane, from Avondale Partners.

Mr. Lane, please proceed, sir.

Yes, thanks.

I just wanted to follow up on your comments about the control products.

We know about the wet weather in California.

And then, just in general, it seems to be a pretty wet start to the year.

How does that work?

Was that really a March quarter phenomenon?

Are you seeing that extend into the June quarter here?

It was really a March phenomenon, and what we do expect, because of all the early rain, we would expect, based on history, when that happens, you have a pretty strong, I’ll use this word that I hate here, a bumper crop of fleas, ticks and mosquitoes.

We also saw a lot of slugs and snails.

I never used more in my home than I ever have in the past this year, with all of the rain we had here, especially in March.

Well, will that continue on in June, sort of, repercussions from that?

Or, is that a one-shot deal, do you think?

Slugs and snails are more of an early-type deal.

As far as the fleas, and ticks and mosquitoes, with all the weeds that are out there across the country, a lot of water, we would expect to see a strong demand this year for insect control, for us and for our competition as well.

Sure.

Okay, that’s helpful.

Thanks.

Your next question comes from the line of Mr. Phillis.

Mr. Phillis, please state your first name and your company’s name.

You may now proceed.

Wow, finally!!

I thought you guys, like, shut me out, didn’t want to talk to me anymore.

I thought you hate me.

Oh come on.

Alexis got in front of you.

It’s getting painful.

Hey, Alexis got in front of you, Ron.

I know.

It’s terrible, and George too.

Oh man, listen, I’ve got some interesting questions.

Are the folks over at Spectrum Brands going to pull their distribution now from you guys, the United, and then—I don’t now, do you distribute Tetra?

Yes, we do.

It’s too early to tell.

We’re used to competing with businesses.

We buy from customers; we sell to customers [transmission break].

I mean, when you’re a large business like we are, that’s the life you live.

We like the people at Tetra, always have.

We will still like the people at Tetra.

We’ll see what changes that the Ray O-Vac, or the Spectrum folks now make there.

We’re not anxious to go out and start shooting.

We’re going to be more disciplined, see how things work out and make sure that we don’t do anything, A, to mess up customers.

And B, I don’t care what happens in the future, we’re both going to need each other in the future.

Okay.

I think we know the distribution business is definitely the lowest margin and, maybe, not that great of a contributor.

But, you know, for us paranoid bond guys, and girls, can you tell us what the, if they were to pull, how much that would represent to you folks, in some way?

Not enough to worry about.

Not enough to move the needle.

Very cool.

Okay, also, Stu, can you tell us what your liquidity is, or was at the end of the quarter?

It’s hundreds of millions of dollars.

Okay.

I guess we’ll get that one from you offline.

And then, if we could take a look at the acquisition front, obviously you guys are extremely interested in making acquisitions, 1.5m worth of interest.

When you look at what’s out there, you know, is it mostly Pet?

Is it mostly lawn and garden?

Is it mixed?

Is it big stuff, is it small stuff?

I mean, what, kind of, is out there right now?

We’re focusing more on what we’ve always looked at was our string-of-pearls acquisitions.

And, we’ll do them both in pet and garden.

The Cedarworks one we just told you about today, that’s a fairly small one.

That’s more on the garden side.

We would now expect, given this time of the year, you’d rather not buy any more garden businesses right now.

I wouldn’t say we wouldn’t, but that’s most likely, because now you’re moving into the off season.

Pet, we would look at those year-round.

We still look at string-of-pealrs acquisitions.

We are very disciplined, as you already know, what we’re going to pay, what we do in our due-diligence and then strategically.

And we have, we are continuing to look at things that make sense for us.

Even though the folks at Ray O-Vac have gone out and paid a whole bunch for some of these businesses, we think we can still bring businesses in at our range.

We’re looking between five to seven times trailing earnings.

Got you.

And then finally, your friends in the lawn and garden business, you know, on this side of the continent, have--we’ll use the term friends loosely, of course.

They have made a big deal of talking about a settlement on the law suit.

Can you tell us about that, you know, you’re going to have to fund that, all that sort of good stuff?

Oh yes, we’ve heard the, I guess, the comment.

We’re not going to go down into [inaudible]

A nasty comment, huh?

Yes, basically, what we’re saying is, look there is a legal process to be followed.

We’re following that legal process.

We are fully reserved for any money that we owe Scott’s, and when it’s done, it’s done.

Can you tell us, you know, in terms of cash, which, you know, us bond folks think about cash, of course, what that may look like?

Ron, we’ve reserved, and have restricted investments of about $15m on the balance sheet.

And, it’s all tucked away.

It’s just a matter of timing.

Okay, all right.

Have a good day guys, thanks.

Thank you, Ron.

Your next question is going to come from the line of Mr. Brady.

Mr. Brady, state your first name and your company’s name.

You may now proceed.

Mr. Brady, your mike is open.

Hello, Brady, Bill?

Now Sarbanes-Oxley seems to have migrated from 3m to 5m.

Is that, are you guys going through a learning curve?

Or, do you think it’s going to be 5m?

And, would it be 5m every year?

We hope not.

Well, there are a couple of parts to the question.

I think every company out there, just about most of them, not the broad generality, but, you know, everybody I’ve talked to on the financial side says that this is an incredibly painful process.

The documentation and the steps that are required to be compliant with Sarbanes-Oxley continue to grow in scale and scope.

But, now things have been defined.

And that definition of what scope and scale is now was really tightened up after we put together our initial estimates for the year.

So, we’re in the thick of it right now, and we think the $5m number is adequate for us to get through the certification process.

The ongoing costs for Sarbanes-Oxley is a little bit of TBD for next year on the roll-forward costs for us, and I think, for a lot of other companies.

But it should be measurably less than $5m, in the year going forward.

Measurably less could be 3?

It’s really going to depend a lot on how the external auditors approach this.

Because that’s the biggest cost going forward, is the external audit cost.

I think you’re hearing not only us, but about every company I’ve talked to.

Sarbanes-Oxley has turned into a much larger animal, than I think anybody expected.

There are some good things about it, but it’s like anything.

It’s kind of swung too far.

It’s costing you $0.14 this year.

That’s just outrageous.

It’s costing our shareholders real money, and us.

We hope that the laws will change so it comes back to more reasonable levels.

It probably will, but the question is when.

But we don’t expect to spend 5m next year.

Okay.

Thanks, Glenn and Stu.

Your next question comes from the line of Mr. Salzman.

Mr. Salzman, state your first name and your company’s name.

You may now proceed.

Jack Salzman, Kings Point.

Actually, there’s literally nothing I have left to ask you.

It’s all been asked, as usual for me.

I don’t know if you touched on this before.

I was jumping in and out, but can you bring us up to date on your infamous litigation?

Oh boy!

Well, the trial started there in Freehold, New Jersey.

Excuse me, Glenn.

We’re talking about [inaudible], for those people who aren’t necessarily aware, this is the Herbert Axelrod litigation.

The trial started April 4th, and it is well into process now.

We expect it will last at least through May into June.

We have no idea right now, and it’s like a whole new story coming out, and we’ll just have to wait and see.

If this thing actually goes in your favor, is there any appeal process past that point for him?

Yes, there is.

But he has some problems, given that he’s in jail.

I think that’s as far as I want to go on this call.

Okay, Glenn, thanks.

Okay.

Sorry, Jack.

Okay, any other questions, operator?

That was the last and final question, sir.

I would like to turn the call over to you.

Okay.

Thank you, Audrey.

First of all everybody, thank you for your questions.

As you can tell, we are pleased with the quarter, especially our profits and our progress year-to-date.

We are committed to continue to execute our growth initiatives, by innovating and growing our brands, expanding our profitable sales with existing and new customers and improving our operating margins.

We have thrown our hat over the wall to go get that 10% operating margin, in the next three to five years.

And we will continue to pursue a strategic and disciplined strategy.

I guess I should say also, in response to Jim, by the way, I am officially retiring from my short-lived baseball pitching career while my record is still perfect.

I’ve been there, done that and that’s enough, Okay?

So we’d like to thank you for joining the call.

We look forward to updating you on our progressing and seeing many of you throughout the quarter and at the various scheduled investor conferences the next few months.

We also should remind you that Mother’s Day is this Sunday.

You know I can’t get by without a plug here.

May we suggest that you have a beautiful outdoor garden party, with lots of our beautiful pots as gifts for the mothers across the country.

And also, don’t forget your dogs and cats, who will appreciate a summer free of fleas and ticks.

With that, we would thank you and everyone have a great afternoon and evening.

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

This concludes your presentation.

You may now disconnect.

Have a good evening.