Central Garden & Pet Co (CENT) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Central Garden and Pet's fiscal third quarter results.

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

Later, we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the call, please press star followed by the zero on your touch-tone telephone.

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

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 Operating Officer;

Stu Booth, our CFO; and Neal Pinkus (ph), President of the garden brands.

Before I turn the call over to Glenn, I would like to remind you of the Safe Harbor provisions of the Private Securities Litigation 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 25, 2004, and other Securities and Exchange Commission filings.

And now, here's Glenn Novotny, Glenn?

Thank you, welcome to everyone for joining us on the call this afternoon.

We're pleased to report another record quarter of profits.

Today, we will provide an overview of the fiscal third quarter, and I will review the results of the pet segment for Jim Heim, our pet president, who is visiting a major customer-sponsored event today.

Neal Pinkus will discuss the garden segments, Stu will review the operating and financial results, and I will then provide insight into the balance of fiscal 2005, and our preliminary view for fiscal 2006, and then we will open up the call for your questions.

Let me start by saying, as I said earlier, that we produced a record quarter in sales and profits.

Sales for the quarter increased approximately 10% to $413 million when compared to the third fiscal quarter last year.

Operating income increased 20% to $38 million.

Operating margin increased 9.2% in the quarter compared to 8.5% last year.

Net income improved 24% to 22.2 million.

These results produced earnings per fully diluted share of $1.03 compared to $0.86 a year ago, an increase of 20%.

I will now place the third quarter results in the context of our primary growth initiatives which are to extend and build our brands, primarily through innovation and brand building initiatives, to enhance operating leverage and improve our margins.

We will continue to achieve these objectives through a combination of organic growth and strategic acquisitions.

Our total branded product sales increased 13% to nearly $320 million in the quarter.

Sales of other manufacturers' products increased approximately 2% to 93 million.

We're pleased to report that total Company organic growth for the quarter was 7%.

In Garden, our total segment sales increased 9.3%, to $250 million.

Sales of our garden branded products increased 13.5%, to 193 million.

Sales of other manufacturers' products in Garden, as planned, declined 3% to $56 million.

Garden organic sales increased 6.7% for the quarter.

There were several factors contributing to our strong performance in Garden.

First, the relatively late start to the garden season did push sales from our fiscal second quarter into our third quarter.

Second, we did experience relatively normal weather this garden season, especially when compared to last year.

Most importantly, our continued drive toward higher-margin proprietary branded products, including grass seed, and our lawn and garden control labels paid off for us.

Grass seed, specifically, experienced both a relatively strong quarter and benefited from a more normalized garden season.

Operating margins in grass seed improved due to our continued shift toward higher-margin proprietary seed varieties, as well as facility closures and consolidations implemented last year.

We also launched and executed a successful advertising campaign to build consumer demand for our high-quality grass seed products.

I would personally like to thank Pennington team for implementing a successful profit improvement plan in our grass seed operations.

As somebody once said, what a difference a year makes.

Pet continued to perform very well.

Total pet segment sales increased 12% to 163 million.

Branded product sales in Pet increased 12.8% to 126 million.

Sales of other manufacturers' products increased 9.5% to approximately $37 million, and third quarter pet organic sales increased 7.5%.

Helping to drive the strong performance in Pet was the launch of numerous new product innovations.

We launched over 30 new products at the Global Pet Expo in March and they are experiencing strong sell-through even today.

We also executed a number of innovative targeted marketing and advertising programs to build consumer awareness and demand for our products.

Turning to acquisitions, we continue to pursue our string of pearls acquisition strategy.

We have completed three of these string of pearls year-to-date.

These acquisitions are higher-margin branded products companies that complement our existing portfolio and are strategic.

Each of these acquisitions strengthened our position in its respective category.

First, was Gulfstream Home and Garden, which includes the leading brands Sevin and Over'n Out, with exclusive active ingredients for the insecticide marketplace.

Second, was Cedar Works, and its wild bird houses and feeders, complements our market leading wild bird feed products and strengthens our position in the outdoor lifestyles category, and then in June, we announced the acquisition of Pets International.

Super Pet is a brand for high-quality innovative habitats, toys and chews for rabbits, gerbils, hamsters, birds and reptiles, is a leader in this category.

Super Pet, in fact, won the first, second, and third place awards for new product innovation at the Global Pet Expo in the small animal category.

The addition of Super Pet, along with our Kaytee brand, gives us a complete and leading position in the small animal and bird category.

In total, the three acquisitions completed year to date are expected to contribute approximately $50 million in sales and approximately $0.10 per share on a pro forma annualized basis.

Turning to operating leverage, we continue to create greater operating leverage in our business.

Third quarter operating margins improved to 9.2%, an improvement of 70 basis points over the same quarter last year.

The year-to-date operating margin improved 90 basis points to 8.2%.

This is an important step toward achieving our stated goal of 10% operating margins for the Company.

As a major step toward this goal, we recently announced the formation of our first Strategic Business Unit Central Pet Aquatics.

This change combines the R&D, sales and marketing, and all back office functions for our All-glass Aquarium, Oceanic Systems, Kent Marine, and Energy Savers Unlimited operations.

We appointed Mark Cavanaugh, a 15-year veteran of Central Garden and Pet, who was most recently the President of Central Pet Distribution to lead this group.

Our objective is to coordinate and align R&D, sales, and administrative functions in accounting across each brand to position the aquatics pod, for its next phase of growth, both domestically and internationally and create greater operating efficiencies.

This organizational change is the first step of several to come.

We plan to continue streamlining and improving our businesses by creating more product centric units.

We continued to take these and other cost-saving steps in our drive toward our goal of 10% operating margins within the next three to four years.

Turning to litigation, the Herbert Axelrod trial appears to be going well.

However, legal expenses have been significantly higher than planned.

The trial started in early April and is still under way.

We now expect a verdict in the trial in September.

We initially budgeted approximately $4 million in litigation expenses for the year.

To date, through the third quarter, we have spent 4.6 million.

We now expect litigation expenses to total approximately $7 million to $8 million for the full fiscal year, primarily related to the Herbert Axelrod trial.

While I am unable to comment further on the specifics of the trial, we continue to feel good that our position is strong.

I am also pleased to report that in July we finally concluded all litigation with Scotts and there was no impact on current results.

Through the first nine months of the fiscal year, we continue to post strong financial and operating results.

Sales have increased over 10% and earnings per share have increased over 25%.

The themes for our success are the same.

Innovative new products and services continue to fuel our organic growth and margin improvement.

Strategic acquisitions that strengthen our portfolio of leading brands and enable us to provide a more complete category offering, and we continue to streamline and strengthen our businesses by improving focus and reducing redundant costs.

Now I will fill in for Jim Heim and cover the pet segments for the quarter.

Pet had a strong quarter, characterized by a slew of successful new product introductions, the acquisition of Pets International, and targeted brand development initiatives.

Pet segment sales for the quarter increased 12% to approximately 163 million.

As I said earlier, organic growth was a strong 7.5%.

The acquisitions in Pet contributed approximately $6.6 million in sales for the quarter.

Operating income increased to 23.6 million from 19.7 million, an increase of 20%.

And operating margins increased 90 basis points to 14.4% from 13.5% a year ago.

Driving Pet's top line and bottom-line performance continues to be new product innovation, one of our key competitive strengths.

In the quarter, new products accounted for 17% of total pet branded product sales.

Wellmark, and its leading brands in insect control, Altosid in the professional marketplace and in the consumer marketplace Zodiac Prestrike, and the award-winning Mosquito Torpedo continue to experience strong sales and margin growth.

In aquatics, Oceanic's new 144-gallon half circle aquarium is surpassing expectations.

Some of you were at the Global Expo, as you saw, this best in show award-winning product continues to wow customers with its appeal, brilliant optics, and ease of maintenance.

We also continue to experience strong growth in our line of innovative aquarium kits that lower the barrier to entry into fish keeping by simplifying the hobby.

Our dog and cat brands, TFH Nylabone and Four Paws, continue to successfully launch new products, as well.

Nylabone recently announced the launch of the next generation of incredibly successful Nutradent product.

It now comes in a new 360-degree brushing action shape and includes 25 minerals, vitamins and omega fatty acids.

Believe me, dogs will have cleaner teeth and be even more healthy when they eat our delicious Nutradent.

Four Paws' line of grooming supplies, toys, and other pet care items experienced strong sales growth due to its new product launches, including the award-winning Kitty Cat Circus and new line of premium dog shampoos.

We're also excited about the opportunities in the bird and small animals specialty pet category.

Kaytee's sales growth and margin expansion was driven by its continued emphasis on higher margin branded products, and they also launched a new line of bird cages and vitamin supplements for birds and a new small animal food line called Timothy Complete.

We're pleased with the addition of Super Pet and its line of innovative products including the award winning critter operated chopper, and off-to-school bus for hamsters and gerbils and the new innovative critter trail.

Yes, and the hamsters can get in the chopper and make it run across the floor.

It's cool to watch.

We believe the combination of Kaytee's high quality food and treats, the Super Pet's highly innovative small animal pet products, strengthens our category leadership position and the opportunity to create future generations of new products and kits that will continue to expand the category.

As part of our brand building initiatives, we are continuing our efforts to build consumer demand and greater goodwill between pets and their owners.

Similar to our initiative with the Red Hot Oakland A's, we like them by the way, we signed partnership deals with the Texas Rangers, San Diego Padres, and Colorado Rockies to build consumer awareness for our garden and pet brands and promote greater and healthier pet ownership.

We remain loyal supporters of the Animal Rescue Foundation, and we just announced that we're proudly supporting the Armstrong Project, part of the Dogs4Diabetics Foundation's initiative to train high quality medical alert dogs to save lives by detecting Type 1 diabetes in both youths and adults.

To date, the brands of Central Garden and Pet have been a part of numerous community events and other activities that promote pet ownership, including ballpark-event sponsorships and television advertising around David Letterman's pet tricks segment.

Our initial brand building programs have created over 35 million consumer impressions and we were able to place numerous in-store displays for both our garden and pet brands tied to these programs.

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

We continue to shift our customers to new, higher-margin branded products through product creativity and successful innovation.

We are on track to achieve our new product innovation and organic growth targets and improved margins and we continue to invest in our brands and support initiatives designed to create greater bonds between pets and their owners while building consumer demand for our products.

Now I will turn the call over to Neal Pinkus, President of Garden Brands.

Neal?

Thanks, Glenn.

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

Sales for the quarter increased 9.3% to $250 million.

Organic sales increased 6.7%.

Acquisitions contributed approximately 6 million in sales.

Operating income increased 28% to $21.4 million.

And our operating margin increased 130 basis points to 8.6% from 7.3% a year ago.

In the quarter, we continued to strengthen our branded product portfolio and deepen our relationships with leading retailers.

We made significant improvements in our grass seed operation by advertising and placing greater emphasis on higher quality proprietary seed products.

Both quarter-to-date and year-to-date sales and operating profit have made significant improvements.

During the quarter, we made significant progress in our pottery platform, combining both the Norcal and New England pottery brands on a national basis in preparation for 2006 garden season and beyond.

As a leader in this category, our focus is on product development, marketing, and execution both in the mass and independent channels.

At the recent National Hardware Show held in Las Vegas, our terra Sienna (ph) pottery displays for the independent channel was recognized by the industry's Golden Hammer award for its merchandising and differentiation program.

Also during the quarter, our partnership with gardening expert and personality P. Allen Smith, continues building consumer demand for container gardening on several media platforms, including his nationally syndicated TV series, and in addition to frequent appearances on network television shows such as NBC Today, CNN and The Weather Channel.

Our portfolio of high margin active ingredient brands, AMDRO, Grant's, Lilly Miller, and our control label business, continues to help drive operating profits with solid growth.

AMDRO, the country's leading fire ant bait, TV and radio campaign for the quarter, also included syndicated radio spots for its new home perimeter ant control solution called [inaudible.] Our wild bird feed products experienced strong double-digit sales growth in the quarter.

Operationally, we are through the peak of the 2005 garden season.

At the height of the season, we experienced record demand for many of our products.

Our supply chain continues to be up to the task of meeting and/or surpassing the expectations of retail customers.

In recognition of such efforts, Buy-Mart, a significant retail customer in the Pacific northwest, recently awarded us as a vendor partner of the year.

We are well underway with our planning and program reviews for the 2006 garden season with our major retailers.

We continue to innovate, build our brands and create greater operating leverage within our business.

We now know that we will have a net gain in listings at Wal-Mart for the 2006 season.

Line reviews with retailers, such as Home Depot, Lowe's, and others are taking place, as we speak.

In conclusion, as we look back on the 2005 garden season, as many of you know, our branded products experienced a strong demand spike in April and remained healthy throughout the quarter.

We continue to take cost-reduction steps to create greater efficiencies in our operations, to generate greater future returns.

And finally, we're off to a good start securing improvements to our business for fiscal 2006.

Now, I'll turn the call over to Stu Booth.

Thanks, Neal.

Turning to consolidated results for the quarter, net sales for the third quarter of fiscal 2005 were $413 million, a $39 million, or 10% increase from last year.

Sales from acquisitions contributed approximately $13 million in the quarter.

Sales of branded products increased 13% to $320 million.

Sales of other manufacturers' products increased 2% to $93 million.

Gross profit for the third quarter increased to $130 million, an increase of $12 million, or 10%.

Gross profit as a percentage of net sales was flat compared to the prior year at 31.5%.

SG&A expenses for the quarter were approximately $92 million.

As a percentage of net sales, SG&A expenses decreased 70 basis points to 22.3% due primarily to greater operating efficiencies in garden.

Included in SG&A are third-party costs associated with Sarbanes-Oxley Section 404 compliance and the aforementioned litigation expenses.

We continue to make great progress on our 404 compliance program and continue to anticipate approximately $5 million in expenses for the year. $1.2 million was spent in the June quarter and $3 million spent year-to-date.

Litigation expenses related primarily to the Herbert Axelrod litigation totaled $3.3 million in the quarter, and $4.6 million year-to-date.

As Glenn mentioned, the trial is well underway, and we project legal expenses for the year to be above our previously stated guidance of $4 million, and now total approximately $7 million to $8 million for the fiscal year.

Operating income for the quarter increased approximately 20%, to $38 million from approximately $32 million a year ago.

Net interest expense for the quarter was $6 million compared to $4.9 million last year, reflecting higher debt balances due to the acquisitions completed in fiscal 2004 and fiscal 2005.

The tax rate for the quarter was essentially flat at 36.9% compared to 37.1% in the same period last year.

Net income for the quarter was $22 million compared to approximately $18 million a year ago, a 24% increase.

Earnings per fully diluted share were $1.03 versus $0.86 a year ago, a 20% improvement.

Depreciation and amortization for the most recent quarter totaled approximately $5.1 million, up from $4.7 million last year.

Capital expenditures for the quarter totaled $3.5 million, and $13.4 million year-to-date.

Turning to the balance sheet, comparing the June 2005 balances to the June 2004 balances, accounts receivable increased approximately $20 million, or 11% to $207 million, in line with sales growth and acquisitions.

Inventories increased approximately $34 million or 14%, to $277 million.

The increase was due primarily to increased sales and the acquisitions of Pets International, Energy Savers Unlimited, and Cedar Works.

As of June 2005 total debt stood at approximately $345 million compared to $290 million last year.

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

I will now turn the call back to Glenn to discuss our outlook for the balance of fiscal 2005 and a preliminary glimpse into fiscal 2006.

Glenn?

Thank you, Stu.

As you can tell, we're pleased with our record third quarter operating results which overcame higher than anticipated litigation and Sarbanes-Oxley costs.

Turning to guidance, we remain on track and are tightening our earnings per-share estimate to $2.50 to $2.52, and sales of approximately $1.4 billion for fiscal 2005.

This represents a 10% top line, and 25% earnings per share growth for the fiscal year.

Now let's talk about 2006.

We anticipate the following.

Our garden and pet operations are expected to grow and continue to perform well.

We expect to continue to benefit from higher margin products, targeted brand building activities, as well as our emphasis on improving profits.

We are currently in the process of completing our line reviews in Garden and locking down our fiscal 2006 budgets across the Company.

At this point, we are comfortable with providing initial 2006 guidance of approximately $3 per diluted share from our existing operations.

We will host a guidance call in late October or early November to update and provide more detailed insight into fiscal 2006.

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

[Operator Instructions.] And your first question comes from the line of Bill Chappell of SunTrust Robinson Humphrey.

Please proceed.

Good afternoon.

Hi Bill.

First, on my least favorite subject of litigation, am I right in saying that litigation is going to cost you about $0.20 to EPS this year, and about $0.08 in the fourth quarter versus what we were looking for?

You're in the ballpark.

Yes, especially the Herbert Axelrod trial has gone on longer than anybody thought it would and is now expected to end in September so it's in that ballpark of $0.18, Stu?

Yes, somewhere around there, including SarbOx.

So your guidance, excluding this, would've been more like $2.52 to $2.60?

Is that the right way to look at it?

You could say that yes.

It's just doing math at that stage, Bill.

What are you looking it in terms of litigation expenses, hoping the Axelrod case is done in September, for next year, and kind of help us understand if you take $0.20 and put it back into the model, what is the organic growth expectations?

Well, let's see, I would say we'll always have some kind of litigation going on and it would be more appropriate for us to think at least $2 million, I think, for fiscal 2006.

Stuff will happen.

I think one thing we need to do, Bill, is really let the Herbert Axelrod trial come to a conclusion and see what's left to clean up, and also the same thing with SarbOx, we're in the final stages of SarbOx, the 404 compliance program, and we really have to figure out after we see what the results are this year, what's going to be recurring for next year when we put together our guidance.

We have baked in a fairly conservative estimate on SarbOx and litigation for 2006, but also, as Glenn mentioned, in this call, we're going to continue to increase our development spending and brand building efforts in 2006, as well.

So it's all kind of baked into the $3 estimate we gave you this year for 2006 is a pretty hefty reinvestment in the business, or a reasonably conservative outflow for Sarbanes-Oxley and litigation.

Bill, I guess, the best way to put this we'll give you more detail in October/November but at the same time we're going to increase some of our brand building activities in 2006.

So it will not all fall to the bottom line.

Okay.

Same question, just looking at the gross margin.

I guess, help me understand why, if the branded business grew that much faster and you had such a strong contribution from new products, why gross margin was flat.

Is that just because the lower-margin grass seed was a bigger contributor this year versus last.

Yes, it's generally a mix issue and grass seed, as you know, is below our average.

Okay, and then on the other income line, that was a lot higher than unexpected, how should I model that going forward, and, maybe, help me understand it for this quarter?

Other income is probably, again, this is a little early because the year's not through yet, Bill, but all of our investments performed better this year, and so, I think, it is probably kind of more of a flat, stay the same.

Got it, and then, I guess, finally, and I'll turn it over.

The tax rate I should be using for the fourth quarter and for next year?

Our guidance for the year is 38%, Bill.

I think that's where we're at right now.

Again, this is a fourth quarter thing, we'll have to kind of dig into it a little bit more.

So more of the same next year, even though you're doing more business internationally?

Yes.

Yes.

Okay, thank you?

You're welcome, Bill.

And your next question comes from the line of Joe Altobello, CIBC World Markets.

Please proceed.

Thanks.

Good afternoon, guys.

Hi Joe.

I wanted follow-up on the $3 guidance you guys gave out for next year.

It's awfully early in the year, and I know a lot of lawn and garden companies don't give guidance at this stage, and typically you guys don't either.

I'm reading that that must be awfully conservative for you guys to provide it, at least early August.

Joe, we're comfortable with that number.

We will lock it down as we -- we haven't completed all our budgets yet, but as Neal said we're feeling pretty good about our listings, we have several things in the pipeline to get done, excluding acquisitions, by the way.

So at this point we felt it was appropriate that we feel at least that good about 2006.

Okay, and then just to follow-up on that.

I think, Glenn, in the past, you and I have had discussions about going forward it’s sort of going to be a step function growth pattern for Central, where some years will be acquisition years and some years will be integration years.

Is it fair to say that this year was somewhat of a acquisition year, and next year is more of an integration year, or is that not the way to look at it?

I think this year we have done, especially toward the last half and the early part of next year, you'll see us do some really optimization with, putting together aquatics pods, some other things we will be telling you about in the near future here that we're going to take to improve our operating margins.

We did not, as far as on the acquisition side, we spent a lot of time as you are well aware on Tetra this year and so it took a lot of our time away from some of the acquisitions we probably would've gotten done.

We're back on that but acquisitions are still very important to us and we're going to do both.

Okay, and then lastly, in terms of pricing, sounds like some of your competitors might be taking pricing next year, at least in lawn and garden, is that on the plan for you, as well?

We will do some selective price increases.

I think our competitors are primarily talking about fertilizer, which is really more -- we don't do, as you know, we do very little fertilizer and that is driven, of course, by oil prices, a lot more impact on them than on us, so we're doing selective price increases where we think it is important to do, but it's not going to be a huge price increase across the board.

Okay, thank you.

Thank you, Joe.

Your next question comes from the line of Dara Mohsenian of JP Morgan Chase & Co. Please proceed.

Hi guys.

Hi, Dara.

You seem to hint that with the focus on strategic business units perhaps there's an opportunity for cost cutting going forward.

Is that correct?

It's both for cost cutting, as well as to be more effective, and that is where we can combine our sales to be -- like we had, like three to four different sales forces.

We'll have one now doing aquatics.

We’ll have one accounting system working on that, so we see opportunities to make it both better operationally, as well as take out costs, and it also gives us more scale so we can spend on the brands and grow our brands.

Okay.

And could you give us an update on the potential pipeline of acquisitions at this point, and if you're more focused on opportunities in pet, or in lawn and garden?

Well at this time of the year we're going to be more focused on pet because garden, you prefer to do really when the garden season takes off.

So those are more likely to occur late in the calendar year, or early in the calendar year, if possible, so you don't have to take the losses in the next six months in garden.

So it will be more pet right now.

But we look at both.

Okay, and is there a large pipeline right now at this point that you guys are looking at?

Do you think you're close to anything? [LAUGHTER.]

Let's see, I couldn't tell you if we were.

That's the first.

We have lots of discussions going, but as you well know, we are very disciplined on both our strategy, price and timing, on doing acquisitions.

And we're also still recovering from that shock when Spectrum paid that much for Tetra, so we're getting past that.

I think we've got past that now, and we have several discussions going as we speak.

Okay, great, that's helpful, thanks.

You're welcome.

Your next question comes from the line of Doug Lane of Avondale Partners.

Please proceed.

Yes, hi, good afternoon everybody.

Hi Doug.

A couple questions on the 404 compliance.

The number you talked about for the full year this year was 5 million.

That's correct Doug.

Is that the same that you were talking about on the second quarter conference call, or did that number change?

No, we increased it on the second quarter call to $5 million.

Our original estimate was $3 million when we performed our guidance estimate last year.

So as like a lot of other companies have gotten into it has taken a lot more time and a lot more money.

The good news is as you’re coming down to the wire the number didn't get any bigger over the summer.

Right.

How much do you think that will go down next year?

That's something, again, is back into what we just said a few minutes ago about preparing our 2006 guidance.

It's really going to be hard to tell at this stage what's going to be recurring.

We have some good estimates what they're going to be, in what chunks and categories of spend but it is premature right now.

Well, you think it will be lower than the 5 million?

Absolutely.

It better be.

I can tell you that.

Fair enough.

What do you have modeled in for incremental stock options expense in '06, Stu?

We haven't put a lot of precision to the $3 number right now.

It would probably track pretty close to what we did last year, or this year.

So about $0.02 or $0.03 a quarter?

About that.

Okay, and then finally, on the acquisition contribution you sort of gave a run rate for sales, and then incremental earnings per share of $0.10.

How much of that $0.10 do you think you realized in fiscal '05?

Because you made a lot of those acquisitions part way through the year.

We can't go there right now because we really don't disclose individual unit profitability.

I would say we're on track.

I mean I'm assuming the $0.10 is a run rate, right, on an annual basis?

It's fair to say you got some of that in '05, you're going to get some more incremental of that, the remaining $0.10 in '06.

That was an incremental contribution in '06.

Okay, so the $0.10 is '06 fully loaded and then you got some part of that $0.10 in '05, correct?

No, we did not.

Not very much of it.

No, we didn't do Pets International until late June.

Okay.

Just came in.

Okay so that's mostly incremental to '06, then?

Yes.

Okay that's helpful, thanks.

Your next question comes from the line of Pasha Mishgaggy (ph) of Nicholas-Applegate.

Please proceed.

Hi, guys.

Good afternoon.

Just got a question for you.

Last time you mentioned inventories were actually higher because of the new products that you were launching and you were going to try to spread that throughout the year.

Just wondering -- I think I mentioned you launched 30 new products.

Have those all been shipped to the source?

Yes they have.

Yes.

Okay, and can you give us an update on how much more do you have for the rest of the year?

Should we assume that it's half and half, half of your new products are already launched, and you have another half coming, or for the fourth quarter, actually?

Product launches, we just, we built up and we're just launching that new Nutradent, the 360-degree brushing activity for the healthy dog.

We just launched that, so we built up our inventory specifically at the end of the third quarter to do that.

We're on track, we're comfortable with our inventories, and we think we will be back to where we need to be by the end of our fiscal year.

A lot of new product launches at Super Pets.

Would you say the new product launches for the fourth quarter would actually be higher than the third quarter because of the seasonality?

No.

Okay, and then the other thing could you give us some update on the facilities and the numbers that you have right now and how much -- how many you closed for the quarter?

Let's see, in the quarter we didn't close any.

We are examining options right now, as we speak, and we'll speak to that in our next conference call with you, which will have some news for you because we’re putting plans together right now we're trying to finalize.

Okay, thanks a lot.

You're welcome.

Your next question comes from the line of Michael Cox of Piper Jaffray.

Please proceed.

Hi Michael.

How's it going, guys?

Congratulations on the quarter just a couple of quick questions here.

Thank you.

As we look at the bookings and listings for the lawn and garden season, you mentioned net gain at Wal-Mart.

Are there any significant changes to any of the key relationships that we should be aware of heading into next season?

No.

Neal, you want to cover that?

I think we're just very pleased with the progress we're making at a lot of the major customers, as you know, you start that process a couple of months ago and right now we're just getting some good information back from Wal-Mart and we're well underway with our other major customers.

Right now we're feeling good about 2006 across-the-board.

Okay.

I was wondering if you could provide any color on pet products sales by the different channels you service.

There's been a lot of talk about competition within that part of the industry.

I was wondering if you could give any color on that?

Well, we had a 7.5% organic growth in the quarter so we feel good about that, and we have seen our supplies -- I think what you're seeing more is some of your grocery brands on food are having some issues at some of your pet retailers, but as far as supplies for us and for our retailers, I think, those are still going fairly strong.

Across both the mass channel and the specialty channel, then?

Yes.

And just quickly on the sales expectations in the pet category, it sounds like the fallout from the Tetra acquisition is now smoothing out and you're seeing sellers expectations are coming back, more in line with your targeted range.

Is that fair to say?

Yes.

We are because we just did Pets International in June and we did buy that within our target range.

Okay.

But it's been slower than I thought getting down, it's like okay it's great, but we’re going that's not what the market really should bear, nor what we're willing to pay.

Okay, great.

Thanks a lot, guys.

You're welcome.

Your next question comes from the line of Alice Longley of Fulchrum.

Please proceed.

Good afternoon.

Hi, Alice.

Hi, my question is about, back to the margins, would the general trend going ahead be the gross margins would be going up with upward shift in mix and profitability improvements, and maybe the SG&A ratio would be going up because of intensifying marketing, but less so than gross margins would be going up, and that gets you your operating market expansion?

That's a long-winded question.

I think we're trending up on gross margins and hopefully, we're going to keep our SG&A percentage of sales flat or down.

So it's going to be a combination of both items to improve our bottom line operating margin.

We have to get to our 10% operating margin goal that we have.

But, Alice, I will say that it's a little early for us to give you any sort of precision as to how much one is going to offset the other.

We will start to give you more detail in late October, early November.

Okay, but in general the SG&A ratio will come down despite intensifying marketing ratios?

Well, that may change if we do acquisitions, that will take it up, but barring acquisitions, we should see improvement on that, even though we are going to spend more money on advertising and brand building.

Okay, and the corporate ratio, aside from the Sarbanes-Oxley and the legal, the corporate ratio, might also keep improving?

That's too early to tell.

There's a lot of things we do within the corporation that are strategic and tactical and, that is not operationally related, and that stuff all falls into SG&A.

Okay, and then the gross margin being flat, if that's associated with the grass seed comparison would it be reasonable to expect the expansion resuming in the fourth quarter?

So it is just like a one quarter thing?

And how much were raw material costs pressuring gross margins?

Our guidance for the year on gross profit is 31% to 32.5%.

And raw materials.

Raw materials, we have so many different SKUs and different businesses here, there's no one way you can put your finger on it and say it's –- a material driver.

You do see is some fuel costs and our job is to get more efficient and pass those prices along where we can and where it makes sense.

As I said earlier, we're not in the fertilizer business to a large extent, so it doesn't drive us near as much as our competition, and we also don't do a lot of things in plastic, so we're in a relatively good position.

It's too early to comment on the commodities on the grains right now.

So you can't tell us how much raw material costs as a percentage of sales might have changed year-over-year, like for the first nine months of the year or something like that?

We choose not to at this point.

Okay, and you're not changing your gross margin guidance for the year?

We are comfortable with our gross margin guidance for the year.

Okay, excellent, thank you.

I didn't mean to be short there, Alice, but also don't want to disclose certain competitive things to our competitors.

Right That’s great.

Thank you.

You're welcome.

Your next question comes from the line of Joe Norton of Banc of America Securities.

Please proceed.

Thanks, hi guys.

Hi Joe.

First of all, just quick, on the $3 for next year, did that exclude or include the stock options?

Includes.

Includes.

That includes the stock options.

Great.

Yes.

And then secondly, I just wanted to come back to the margins this quarter.

So if we take out the legal, or litigation, it seems like the underlying SG&A was down pretty significantly.

Could you just talk about what was going on there?

I'm sorry we're getting a note here.

Just a minute.

I can't deal with that.

Okay Joe go ahead, sorry.

I'm sorry that was internal here.

Go ahead, Joe.

The question was on the SG&A in the quarter, if we exclude the legal, it seems like the underlying spending, or rate of spending, was down significantly year-over-year.

Could you just talk about that?

Well, the SG&A was down already, as a percentage of sales, it was down 70 basis points and we'll have the Q filed tomorrow.

You can peel it back some more.

But, yes, there's a lot of spending there for the quarter for Sarbanes-Oxley and litigation.

We called out the numbers, I think it was about $5 million in total.

So yes, we're gaining a lot of traction in some of the operating efficiencies that we've been looking for, we just happen to continually get nicked away at things like litigation and SarbOx.

But net, net we're gaining ground.

Okay, and then not to be too much on the gross margin but was that -- I mean we're you guys pleased with the gross margin in the quarter.

I really – I just would have thought it would have been up, somewhat?

We're pleased with the overall results for the quarter.

Of course we'd like to have higher gross margins, but if you look through everything that we've done, it still came out to be a great quarter.

And then you've talked some about the, we heard about the one new SBU, could you give us any more on, ultimately, how many new SBUs there will be, and what the time frame is for rolling those out?

Joe, I prefer to do that in our October call with you, because we need to do some things internally before I announce it externally.

Okay, and then the last one --

I think it's a wise move.

You heard it first.

Okay, and then the last one is just a follow-up on tax rates.

Stu -- you made some kind of a reference to finalizing your work on the tax rate.

Is that, I just know last year in the fourth quarter the tax rate was actually a fair amount lower.

It's that built in, or can you just tell us -- do you think the fourth quarter tax rate is going to be fairly in line with this 38%?

The whole year should be pretty much in line with 38%.

There is a couple of things on the bubble for the fourth quarter, just like there will be for 2006, but time will have to occur before we can get that finalized.

It's too early to give you an estimate, Joe.

It is generally what's out there in the guidance is pretty good for planning purposes right now.

Okay.

Thank you.

Sure.

Thank you, Joe.

Your next question comes from the line of Jamie Hold (ph) of Kingspoint Partners.

Please proceed.

Hi guys.

Great quarter.

Thank you Jamie.

I'm going to ask one more question on the $3 number.

Is -- are acquisitions included in that?

No, they are not, no new acquisitions.

Ones we already have in the tent.

And your 10% operating margin, could you see hitting that next year -- [LAUGHTER] You know, the questions I'm going to ask you, so I'm probably going to do it mostly offline.

We'd love to, but I would not forecast 10% for 2006, but we are still after that.

Internally and externally we have thrown our hat over the wall and we're going to go get it.

Okay, perfect.

All right, guys.

Thanks a lot.

You're welcome, Jamie.

You next question comes from the line of Reed Kim (ph) of Banc of America Securities.

Please proceed.

Hey guys, it’s actually Ron, are you there, Stu?

Hi, Ron.

Hey, Stu, I was thinking of whining a little bit, and fawning you really urgent tone and asking you a really important question like North American growth rates for hamsters and chinchillas, but I've decided to break rank and let you guys and everyone else enjoy the good results in peace.

Have a good day.

Okay. [LAUGHTER.] May we suggest you get some hamsters and chinchillas?

You can make a major dent in the growth rate.

We'll even send you a chopper form to run around the floor with.

Once again ladies and gentlemen if you would like to ask a question please key Star plus one on your telephone.

At this time gentlemen there are no further questions.

Thank you, operator, and I hope everybody enjoyed that.

Nice to have a great quarter and be able to have a few laughs with some good friends on the phone here, and in the room here, as well, thank heaven.

First of all, we're pleased with the quarter and our progress year-to-date.

We will continue to execute our growth initiatives by innovating and growing our brands which we've done for a long time, to expand our sales with existing and new customers and, as you can tell, we're very focused on improving our operating margins.

And we will continue, as we said, to continue to pursue a strategic and disciplined acquisition strategy.

I can't resist this, I always leave you with kind of a final thought, so I'll leave you with the final thought as we are, hopefully, thinking about a barbecue this weekend, or even better, preparing to go on a summer holiday.

About last month, I was at an investor conference where an investor asked me to describe how Central Garden & Pet was different from our competition.

I quickly told her that we're focused on the steak and they're focused on the sizzle.

She laughed, of course, but it made me think, we of Central need to continue to take care of the steak, but we need to improve our sizzle to take our results even higher.

That is why we are taking deliberate brand building steps through advertising, promotions, and consumer event sponsorship.

My dream is to simply have the highest quality, best tasting steak with the right amount of sizzle.

With that, we wish you all a pleasant evening, and a happy balance of the summer.

We thank you for joining the call.

We look forward to updating you on our progress and seeing many of you throughout the quarter, and may I wish happy barbequing.

Thank you and goodbye.

Once again, ladies and gentlemen, we thank you for your participation in today's conference.

This concludes today's presentation.

You may now disconnect.

Have a great day.