Central Garden & Pet Co (CENT) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Central Garden & Pet Company's fiscal first quarter earnings and conference call.

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. [OPERATOR INSTRUCTIONS] 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 and Pet.

Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone and thank you for joining us.

With me on the call today are Glenn Novotny, Central's President and Chief Executive Officer, Stu Booth, our CFO, Jim Heim, President of the Pet Products group, and Brad Johnson, President of the Garden Brands Group.

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.

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 for the fiscal year ended September 24, 2005, and other Securities and Exchange Commission filings.

And now here's Glenn Novotny.

Glenn?

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

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

Jim and Brad will discuss the Pet and Garden segments.

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

Fiscal 2006 is off to a very solid start.

Sales were strong.

We are creating operational leverage through cost reduction initiatives, and we had significant improvement in our operating results before the impact of previously outlined restructuring and equity compensation costs.

We delivered results in-line with last year while incurring one-time restructuring costs in expensing equity compensation, that cost approximately [2] million in the quarter, or $0.07 per share.

Turning to our first quarter results, sales for the quarter were $293 million, an increase of 10% when compared to the fiscal first quarter of last year.

Operating income, including the aforementioned charges increased approximately 3%, to $9.8 million.

Net income was 2.6 million, producing earnings per fully diluted share of $0.12.

We are pleased with the quarter's results for the following reasons.

First, total Company branded product sales increased 11%, and organic sales increased 5%.

Gross margins declined 100 basis points, due primarily to relatively more Garden sales contributions compared to last year, increased raw material costs not yet offset by the price increases secured for this garden season, and a tough comparison, due to extraordinary sales last year of high margin mosquito-control products associated with the Florida hurricanes.

Second, we made significant progress consolidating our operations to reduce costs and improve efficiencies.

In the quarter, as planned, we consolidated 4 West Coast Pottery and Distribution Centers into two facilities.

We also, in the United Kingdom, we consolidated 6 facilities into 1 new efficient operation for our Inter-pet business in Bridgewater, Wales.

We continue to build out the Aquatics Strategic Business Unit, or SBU, and made organizational alignments, related to the formation of the Bird and Small Animal SBU.

To that end, we recently appointed Bob Krause as President of the Bird and Small Animal group.

Bob was the Founder and CEO of Pets International, a company we acquired last year, we wish Bob the best of luck in his new role.

Associated with these consolidations and creating these strategic business units, we experienced approximately $1.6 million of restructuring costs in the quarter.

As part of our annual plan, we also increased our brand-building initiatives in the quarter.

In garden, we signed an expanded agreement with P. Allen Smith to represent and advertise our brands on his television shows, books, and public appearances.

We also did consumer advertising with several professional and collegiate athletic teams, including the Super Bowl-bound Seattle Seahawks.

Yes, we did help them get there, we think.

And on the acquisition front, in December, we made a significant investment in the future by acquiring the intellectual property assets of Shirlo, Inc. and its exclusive licensing rights to Etofenprox, a leading adulticide active ingredient.

Etofenprox combined with our Wellmark larvicide (S)-Methoprene, enables to us combine both active ingredients for more effective insect control solutions for pet and garden uses.

Then, in January, we announced the Farnam acquisition, which will give us a leading brand position in the Equine category, and strengthen our veterinary and livestock presence, as well as access to its extensive portfolio of EPA and FDA registrations, formulas, and technologies.

These intellectual property assets, combined with the pending Farnam acquisitions are important steps in our strategy to develop new more efficacious products for both professional and consumer markets, especially in the animal health category.

The acquired assets of Shirlo and Farnam will be combined with our Wellmark International operations, to form a new animal health strategic business unit.

This new group, we believe, gives us a strong, leading position in the animal health category, with a deep portfolio of EPA and FDA product registrations.

Plus, we need technologies to develop new products and licensing opportunities to other manufacturers.

This new group will be led by Kay Schwichtenberg.

Kay came to Central when we purchased Wellmark from Santos back in 1997.

Please join in congratulating Kay on this expanded strategic adventure.

I will now turn the call over to Brad Johnson, who's been with us now for about 90 days, close to that, who is President of the Garden group, who will review the garden segment results.

Brad?

Thanks, Glenn.

Our first quarter traditionally does only a small percentage of the garden business, and this year was no exception.

However, we are encouraged by the results seen to date, as our year-over-year comparables showed very strong gains.

Sales were $126 million, an increase of 15%.

Sales of branded products increased nearly 16%, but especially encouraging was the nearly 12% increase in organic sales.

The organic results were driven by strong fall season grass seed, and wild bird seed sales.

Acquisitions contributed approximately $4 million in sales and as planned, the first quarter showed a loss of about $500,000.

Year-over-year, this was an improvement of $300,000.

And the improvement again was driven by the 15% increase in sales, primarily grass seed, wild bird seed, and chemical lines [inaudible].

Additionally, we eliminated some marginally profitable distribution-related accounts and product lines, including the sale of our small Georgia Soils business in 2005.

These benefits were partially offset by the consolidation costs associated with the merging of four West Coast Pottery and Distribution operations into two.

As the garden season selling gets under way, we are optimistic about our position, and have several new product introductions.

New introductions in branded lawn and garden chemicals include Amdro Ant Block, which we launched last year, and is a very effective perimeter ant bait, that is placed around the exterior of the home.

Placement has tripled for a leading retailer for the 2006 season, and can now be purchased nationwide.

The IMAGE line of lawn and garden specialty control products picked up additional shelf space and placement is double, and in some cases triple the number of stores in 2006.

Additionally, we launched and received incremental shelf space for our de-icer products, and experienced store-count increases for products under the Eliminator private label brand at Wal-Mart.

Turning to grass seed, we are positioned well to build on our first quarter results and expect a strong year.

In the first quarter, we gained momentum at all major accounts, capturing a larger percentage of shelf space going into the spring season.

For the 2006 garden season, we have developed a variety of new propriety high margin seeds under the Rebels and Pennington brands.

Additionally, we developed innovative new yard-patching technology, which combines mulch, seed, fertilizer and a water-absorbing element, to simplify and more effectively repair damaged lawns.

The product will be marketed under the Pennington label.

Now, before I turn the call over to Jim and the Pet group, I'd like to take a moment and share with you some of my preliminary assessments of the Central Garden's business.

I came to Central believing that the garden business had a solid foundation of great product and strong market position.

I'm pleased to say that that assessment was accurate.

Central's products are of market-leading quality and our customer relationships and access to the market are the envy of our competitors.

Additionally, I'm encouraged by the opportunities.

Our brands although strong, have been underutilized and undersupported.

Our decentralized approach to the market, although effective, provides ample opportunity for synergy improvements.

In short, I believe the Garden group has significant room for growth.

Over the coming quarters, Glenn and I and our team will begin the process of laying out our growth plans for the Garden group.

Our business is gardening, so we know it will take time to plant, grow, feed, weed and harvest this new crop.

We believe this effort will though, bear significant fruit.

As the growth and synergy acceleration process begins, we will focus initially in two areas.

One, internal.

Return on investment.

And one external, making it easier for our customers to do business with us.

Internal ROI focus means reducing our inventories and increasing our turns, it also means SKU rationalization and it means gross margin improvement through an increased focus on new product innovation, and refinement of our cost structure.

Externally, making it easier for our customers to do business with us, means an increased urgency to be one face to the customer.

Rationalizing our brands and focusing our promotional efforts on what drives consumer sales and finally, it means being more proactive, to use our knowledge and technology, trends and spending patterns to hone our product-developed machine, to bring innovative and relevant products to the marketplace more quickly.

In closing, I'm excited about both the upcoming garden season, and putting the foundation in place to launch the Garden group to new levels of success.

The entire Garden group feels a sense of urgency and anticipation about our bright future, and we look forward to sharing the journey with you.

Now I'd like to turn the call over to Jim Heim, who will discuss the Pet group results and outlook.

Jim?

Thanks, Brad.

In general, the pet supplies market continues to improve.

Some areas are clearly growing faster than others, most notably dog, cat and small animal products.

We did experience lower demand for high-end aquariums and mosquito-control products in our first quarter, as previously mentioned by Glenn.

And several retailers, after resuming relatively normal purchasing patterns in October and November, sharply curtailed orders in December to reduce inventories.

Business trends continued to improve and our strong listings and new product introductions make us feel confident in our mid-single digit organic growth forecast for pet supplies in 2006.

Now, turning to the pet segment results.

Sales were $167 million, an increase of nearly 7% when compared to the same period last year.

Branded product sales increased 8%.

Organic sales grew approximately 1%.

And acquisitions contributed a little more than $9 million in sales in the quarter.

Operating income improved by half a million to $18.6 million, which includes restructuring costs of $400,000 in the quarter.

Now, looking forward, we are preparing a series of innovative new products for launch at the Global Pet Expo Industry Trade Show in March, in our dog and cat SBU, we have a series of new edible chews, toys and pet care items, including from Nylabone, chubby buddies, a line of plush toys for dogs with resilient cores in a variety of different animal shapes, and a patent-pending bacon-flavored barbecued cob bone.

Similar in concept to our very successful double-action chew, the cob bone resembles a corn cob, and helps dogs clean their teeth, while providing a safe and fun outlet for chewing dogs.

Four Paws is releasing a variety of pet care products, including a combination carrier and stroller for small animals that will come in a variety of different colors.

A new line of grooming supplies, including shampoos and coat wipes, and various care products and training devices.

In our Bird and Small Animal SBU, Kaytee, the leading brand in food for pet and wild birds, and small animal and specialty pet, recently launched a brand-new line of wild bird feed called Nature's Defense.

Nature's Defense is an all-natural, scientifically developed formula of feed that has been proven to build bird's immune systems to help prevent Avian disease.

We introduced this product on a limited basis in late December and early January and the initial sales are promising.

Now turning to the Animal Health SBU.

Obviously there has been a great deal of activity with the acquisition of the Shirlo intellectual property assets, and the pending Farnam acquisition.

Now not to be lost in this is the launch of two exciting new products for the professional and consumer marketplace.

The first is a new Altosid IGR liquid.

The only insect growth regulator in liquid form designed to control mosquitoes, flies and other insects for the farm industry.

The second launch is a series of shaped flea and tick-control optical applicators for dogs and cats, designed to ensure proper application to the right pet.

For dogs, the shape of the applicator is a dog bone.

For cats, the shape of the applicator is the shape of a kitten head.

These are just a few examples of some of the exciting new products, that we will be introducing into the marketplace over the next several months.

Now, turning to the profit acceleration program and our SBU initiative.

We are clearly making progress.

As Glenn mentioned, Bob Krause was appointed President of the Bird and Small Animal SBU.

We are in the process of combining the Kaytee and Super Pet sales and marketing functions and product development functions, and this is going extremely well.

We consolidated our U.K. operations from six facilities into one to improve efficiencies.

The Aquatics SBU is progressing nicely and is rounding out its team, and is poised for a solid year on the strength of a series of new and exciting product launches, the dog and cat SBU formation is in the planning stages and we will begin shortly.

Now, in conclusion, we feel that we are well-positioned for a strong year.

We have an exciting lineup of new, differentiated products.

We are helping our retail customers energize their stores and increase traffic, and we're following on our success of last year.

We continue to drive brand awareness through our Power 3 marketing program.

Our marketing program designed to benefit consumers at professional and collegiate athletic and community events.

To drive store traffic to our retail partners while promoting our brands.

We are improving our cost structure, and by combining the product development functions within each SBU, we believe we are creating the strongest platform in the industry, to launch generations of more effective and innovative new products for years to come.

I will now turn the call over to Stu for a more detailed review of our financial performance.

Stu?

Thanks, Jim.

Turning to consolidated results for the quarter.

Net sales for the first quarter of fiscal 2006 were $293 million, a $27 million, or 10% increase from last year.

Organic sales increased 5%.

Acquisitions contributed approximately $14 million in the quarter.

Gross profit for the first quarter increased to $92 million, an increase of $6 million, or 7%.

Gross profits as a percentage of net sales decreased 100 basis points, to 31.4% to 32.4% in the year-ago period, reflecting a shift in product mix and the impact of higher raw material costs, not yet offset by price increases secured for the 2006 garden season.

Selling, general and administrative expenses for the quarter were approximately $82 million.

As a percentage of net sales, SG&A expenses decreased 70 basis points to 28.1%, due primarily to improved operating leverage, and lower litigation expenses of $400,000.

These were partially offset by $1.6 million of cost, related to our profit acceleration program, and $1 million associated with the stock-based compensation due to the adoption of SFAS No. 123R.

Operating income for the quarter was $9.8 million, an increase of 3% from a year ago.

Net interest expense for the quarter was $5.6 million, an increase of $400,000 reflecting higher debt balances, due primarily to acquisitions, and higher interest rates, partially offset by increased interest income.

The tax rate for the quarter was 38.5%, compared to 37.1% last year.

Net income for the quarter was $2.6 million, an increase of nearly 2%.

Earnings per fully diluted share was $0.12, flat compared to last year.

Depreciation and amortization for the most recent quarter totaled approximately $5.2 million, compared to $4.5 million last year.

Capital expenditures for the quarter totaled $8.8 million.

Turning to the balance sheet, comparing December 2005 balances to the December 2004 balances, accounts receivable increased approximately $12 million, or 9% to approximately $156 million.

Inventories increased approximately $35 million, or 12% to $323 million.

The increases in Accounts Receivable and inventories are due primarily to acquisitions completed in fiscal 2005, and are in-line with increased sales.

As of December 2005, total debt stood at approximately $323 million, compared to approximately $295 million last year.

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

We are reiterating our fiscal 2006 guidance range of $2.80 to $2.90 per fully diluted share.

Based on estimated sales of approximately $1.46 billion.

This guidance reflects approximately $4 million in net costs, associated with our profit acceleration program, and approximately $5 million in costs related to equity compensation, related to the adoption of SFAS No. 123R in fiscal 2006.

As we previously announced, the pending Farnam acquisition is expected to be earnings neutral in fiscal 2006.

I will now turn the call back to Glenn.

Glenn?

Thank you, Stu.

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

Sales were strong, especially in Garden.

Operationally, we are continuing our efforts to put in place the SBU structure to reduce costs and improve efficiencies, and made a lot of progress on that in the quarter, and will throughout the year.

We also positioned the Company strategically in the Animal Health category for future growth, with the acquisition of the intellectual property assets of Shirlo, and the pending acquisition of Farnam.

And we continue to see opportunities for future acquisitions, that meet our 'string of pearls' criteria.

Needless to say, we're excited about 2006 and the future.

And finally, we believe we are on-pace to achieve our 10% operating margin objective for the Company by 2008.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Bill Chappell with SunTrust.

Please proceed.

Good afternoon.

Hi, Bill.

Hi, Bill.

A couple -- I guess -- great quarter.

I guess the question first on the top line.

It was certainly stronger than I was looking for in the Garden business.

And yet you maintained full year guidance.

Is that just we're so early in the year?

Or are there other things in terms of timing of shipments that might have taken into effect for this quarter?

First of all, we're early in the year.

One quarter does not make a year, although it's nice to be ahead of the game so far.

So, we like that.

I'll let Brad talk a little bit about the garden now.

Okay.

Well, Glenn, as you know, we did have strong sales for the quarter.

A lot driven by our grass seed business.

We saw new distribution.

We also introduced some new products.

We took share and a lot of that was due to some advertising spending that we had out there, and also some lower returns that we saw.

But as Glenn has mentioned, it's too early in the game for us to declare victory.

Certainly we're encouraged by the early showing, but the real season is yet to come.

So, --

Stay tuned.

We're standing right to our number.

And I guess staying on the garden theme for a second.

I was surprised that the division posted I guess a profit for the quarter, excluding restructuring charges.

Is this because of the Gulfstream acquisition?

Because the revenue base was so high?

Is this something we can model going forward?

Bill, I think it's -- the point now where we're, you know, we will have to look at every quarter at a time.

It's just a lot of mix shift in there, as well.

And timing.

One quarter -- and especially our lowest quarter in the garden season is so hard to model.

And finally on the Pet business, can you maybe talk about how that business played out month-to-month to month throughout the quarter, and maybe how it performed in the month of January?

I think we touched on it a little bit, but how it performed, we started out pretty good and then it was very interesting to take a look at geographical POS data, and in areas where there was a lot of concern over heating fuels, and if you remember back then, the heating oil prices were going through the ceiling, we showed some effect to our business on a point of sale basis.

But looking into the future, we're showing, you know, increases in every category.

We are still remitting to our mid-single digit organic growth forecast.

Household and [inaudible] Pets look very good.

And Aquatics we are making, you know, some progress on.

The other thing just looking forward, too, Bill, is we have really, I think, a really strong new product offering that's going to be starting to be shown at Global Pet Expo, and that in nearly every single category we compete in with our major customers, the important thing is that even in a soft market, Bill, we showed market share gain.

We did not lose share in any competing categories.

And like last year, most of those new products won't be shipped until after the Pet Expo, so in the June quarter, right?

That's correct.

Okay.

Thank you.

You're welcome, Bill.

Your next question comes from the line of Joe Altobello with CIBC World Markets.

Please proceed.

Hey, guys, good afternoon.

Hi, Joe.

First question, I wanted to be sure I heard you right.

Your organic sales growth for the garden was 12%?

That's correct.

And I think for the first two months of the quarter it was 3%.

Yes, that's right.

So, December was a monster month?

Is that the way to look at it? [ laughter ] Up 30%?

We're delighted with the results!

We had a good December.

Was there anything unusual in the month?

I think a couple of things and I will speak to that.

Normally you do see some product returns at the end of year, and because the fall grass season was so good, we had a lot of sales, we did not have the inventory returns we had in the past, plus the money that we put into advertising, building our brands, coming out with better products, we have better sell-through, and had a fairly easy comp compared to the year-ago quarter, as well.

Okay.

Okay.

Moving on to the Pet side, you talked about the retail inventory reductions and I'm not sure if you touched on this earlier, but did that carry over into January?

We just relooked at the results, Joe and no, they didn't.

Which is good news.

January, we see some sales coming back, even in our Aquatics business, while it was slow at Christmas, we are seeing nice increases in our Aquatics in January.

We think that the market has adjusted and likes getting back to normal.

And any idea how much that cost you guys in the quarter?

Too much.

Okay.

And finally, one last one, in terms of the wild bird feed category with Scott's now in it, are you seeing any difference in terms of competition?

Are they doing anything with their new asset?

Or is it still sort of status quo?

Brad, you want to touch on that?

Well, for the quarter, our bird seed business on the garden side saw a good top line improvement, and we're certainly encouraged by that result.

And I would say that the Nature's Defense, when you listen to that on our script there, Nature's Defense is something we've been working on for quite some time that really is very healthy for the wild birds, and we think will help prevent the Avian diseases we're looking at.

So, we're doing marketing and advertising on that to build up brand awareness with the consumers, and that's new technology that we think will make a difference.

Okay.

Great.

Thanks.

You're welcome.

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

Please proceed.

Good afternoon, guys.

Congratulations.

Thank you.

Thank you, Mike.

My first question on the Pet side with the inventory reductions at retail, was there differences between the retail channels that you guys sell into?

Or was it across the board?

It was in various channels, I will tell you that.

Including independent and other channels it was pretty much across the board.

Okay.

And on the price increases that you're putting into place, it sounds like primarily on the Garden side, will that serve to offset, to a large extent, the raw material cost increases that you guys are facing?

We think so, yes.

As long as oil stays about where it is.

If it goes to 70 or 80, which we don't think it will, or hope that it doesn't do that, that would be different.

But if it stays where it's at, we should be fine.

Okay, great.

And on the systems implementation, any update on that?

It's moving along at the scheduled pace that we have established.

We're on-time and on-budget.

My last question on the increase in advertising spend.

You cited that as a potential driver on the Garden side.

Any order of magnitude you can provide us in terms of -- maybe a percent of sales that your ad spend is up in the first quarter?

We're not going to disclose that on this call, Michael.

Okay, great, thanks a lot, guys.

It is up, though, I will tell you that.

Okay.

Your next question comes from the line of Alice Longley with Buckingham Research.

Please proceed.

Hi, good afternoon.

Hi, Alice.

Hi.

In the Pet side, the organic growth of 1%.

Could you take that apart, in terms of branded and distributed business?

Which was up and which was down?

Basically it comes to, Alice, one real clear thing, is on the organic side, in the previous year, we really had a tough comp.

I mean like Glenn mentioned in the call, we had the large mosquito control, which was a branded product in some areas.

And so we have the comp and then the hurricane, basically was the reason for the 1% organic growth.

Alice, this is Paul.

Obviously branded products were up solid.

We don't break out branded organic versus anything else, but obviously branded products were up strong.

Organic growth was up about 1%.

Okay, but that branded increase of 8% included acquisitions.

That's correct.

That's correct.

I'm trying to take the organic growth of 1% and within the organic growth, was your distributed business down?

Are you moving away from distributed business, and so that maybe the branded business that's organic was up more than 1%, or vice versa?

We will always move our brands up.

That's where our strategy is, and where we're going and distribution will gradually [winnow] away.

Okay, but you just won't break that out for me?

Not right now, no.

But it's fair for me to think that distributed business was down, and organic branded business was up more than 1%?

I wouldn't say that, Alice.

No.

I'd say probably flat.

Okay.

I will talk to you more about that offline.

Within the Aquatics business, Spectrum said their aquatics business was down 5% in the quarter.

Was yours down about that much?

No.

What's wrong with aquatics?

What happened is just like we discussed in the call, is that if you take a look at it, with everything going on, with the price of fuel oil and home economy, that people really, especially on the high-end aquariums, is where we experienced our trouble, and that was soft.

On the other lower end units, we experienced really good sales.

So, that's all at the high end, higher dollar volume aquariums.

And January, as I said earlier, has come back and we believe we took market share in the quarter.

We did gain, in every single major account in Aquatics, Alice, even if it was a flat category or a down category in certain accounts, we showed increases versus the category.

Growth increases.

Okay.

Because there's a theory out there that, you know, the category was growing for a while because of 'Finding Nemo' and now that's over, and there's this sort of secular decline going on.

Low end was strong.

Low end was still fine.

We had several launches that we mentioned in other announcements of 1 gallon mini bowls.

Those were extremely strong during the quarter.

Do you think Aquatics will be up in the mid-single digits for the year?

Excuse me?

Do you think aquatics could be up in the mid-single digits for the year?

I think Aquatics will fit into the range of obtaining mid-single digit organic growth.

I think it's more likely, Alice, that it will come out where just as we've seen already in the quarter and in January, even, the dog and cat are growing faster than aquatics.

Whether it's 1 or 2%, it's in that ballpark.

So, you would think that Aquatics will still have nice growth.

It will probably not be growing as strong as the rest of the pet products.

Okay.

And I guess one other question, the effect of your cost-cutting program.

Is that the cost net of the benefits?

Yes.

That you gave us?

Yes.

Can you break out the two, tell us what the costs were in the quarter and the benefits?

Because, of course, the benefits are here to stay, and the costs are going to go away.

We're just going to give the net number today, Alice.

When we take a look at the year and get a little more traction in the program, we may go gross to net for you.

Was advertising up more than sales?

Not answering that, Alice. [ laughter ] We don't break that one out, you know that.

And one final thing, was Sarbanes-Oxley down, will it be down this year?

Sarbanes-Oxley for the quarter was down, you just have to take a step back.

We've gone from last year, which was a development year in Sarbanes-Oxley to complete our first year of testing, to now a maintenance year, our Sarbanes-Oxley testing for 2006, really starts in ernest in a couple of weeks.

Okay.

Our total Sarbanes-Oxley cost for this year should be in the range of 2.5 to maybe $3 million, versus $6 million last year.

Excellent, okay.

Thank you very much.

You bet.

Your next question comes from the line of Dara Mohsenian from JPMorgan.

Please proceed.

Hi, guys.

Hi, Dara.

I wanted to pin down the strength of the lawn & garden category a little more.

Was the strong organic growth driven more by ship-in to retail with improved listings and new products, or was it more strong consumer take-away and lack of returns?

Well, it was really a combination of things, Dara.

We did see some very strong second tier account sales and new distribution.

Second tier was up 55% for us in the quarter.

We also saw strong new listings mentioned earlier, that we had some new grass seed products, and those products have gotten traction and some new listings there.

And as Glenn mentioned, we did, in fact, see a lower level of returns, primarily because we had a stronger fourth quarter, in terms of the take-away.

So, from a consumer standpoint, so you're right on all of the areas that you touched.

It wasn't one magic bullet.

It was a whole bunch of things that work together, that say that our business is doing quite well.

And also we had lower inventories going into this quarter than we had a year ago.

It's all of the above.

But strong consumer demand certainly helped.

Okay.

And did you guys repurchase any shares in the quarter?

No.

Okay are you planning to this upcoming quarter?

That's hard to tell.

We put the program in place, but it's really a tactical tool at this moment.

Okay.

What would the decision be based on going forward, whether you do share repurchases or not?

We will look at that throughout the quarter and make the decision as we go! [ laughter ]

Okay.

And then just last, the tax rate was a little bit ahead of what I expected.

What's your full year tax rate guidance at this point?

38%.

38%?

Okay.

Thanks.

Yes.

Thank you, Dara.

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

Please proceed.

Hi, good afternoon, everybody.

Hi, Doug.

Hi, Doug.

I just have two questions.

One, with your increased advertising budget, can you give us a little bit of a preview of what we should look for in the spring, Home & Garden side, will we see TV advertising, for instance, and which brands in particular, will you be focusing on this spring on Garden side?

And my second question is, Stu, do you have trailing 13-week scanner data numbers for the Garden side that covers that December quarter?

No. [ laughter ]

Let's answer a couple.

You're going to see us do both TV and radio advertising for the Garden season.

A lot will be driven around P. Allen Smith, and the television programs he does.

It will go through all of that, throughout the garden season.

He will also be doing things for our wild bird seed, as well.

Both in the Garden and the Pet side.

And we expect that to go up significantly.

It's mainly loaded, as you can tell, in the garden season.

In addition, what Jim Heim talked about, we are signing with more major league professional baseball teams, to do more of like 'take your dogs to the ballparks', highly informative and fun if you do that, by the way.

So, we're going to do all of that.

We found a lot of success in that in 2005.

We found it to be very effective advertising, very effective brand-building, and really ties us in with our retailers, by doing consumer promotions with them in stores for end caps and displays.

So, as far as our IRI data.

We have that where we can get it.

We get that from, of course, grocery and mass, and Wal-Mart does not participate in that.

So, there we have to do another thing.

But we have that, we normally don't share a lot of that on the call here, other than give you trends.

Do you think the scanner data for the 13 weeks ending at the December month end was up double digits?

In grass seed?

Just for your garden portfolio.

Well, think about our garden portfolio.

It's a lot in the fall, in the fall business it's going to be grass seed and wild bird feed is a good portion of that.

And that was up, if you now know that our sales were up 12% organic, that says that they had to be double-digit.

I'm just wondering if you didn't borrow some sales from the March quarter here?

Oh!

Let's see.

I wouldn't think that we did, but Brad, do you want to add that?

Sure.

You know, could there be some shifting between first and second quarter?

Certainly timing can always come in to play, but we were up strongly enough that any -- any of that would have been minimal.

Okay.

That's just what I was driving at.

And one last thing on the TV, what networks would I find the advertising on?

Would it be local?

Would it be cable?

Would it be network?

Just some sort of strategy on which particular channels?

Both the TV and the radio would be national syndicated type programming.

And P. Allen Smith pops up on a number of [public] locations.

He has his own show, He's also on the "Today" show, those sorts of things with segments, but his show is on PBS, so if you're looking for that, he is on the public television.

And also we like to see him on The Weather Channel.

Yes.

Okay.

Thank you.

You're welcome.

Thanks, Doug.

Your next question comes from the line of [Pasha Misagi] with Nicholas-Applegate.

Please proceed.

Hi, guys.

Hi.

Just a question, you mentioned you're not going to tell us how much you're spending on advertising.

But is this the trend we're going to see going forward?

Or just a strategic move for this quarter?

And also on the Farnam acquisition, I was wondering if you could either quantify, or kind of quantitatively give us some synergies you might see in the business?

Advertising, yes it is going up and it will continue to go up.

And that's why we're being a little more cautious with what we say on the call.

We think that makes sense for us to do that.

But it will go up in the future.

As far as the synergies on Farnam that business, we expect it to close sometime in this quarter.

Once it closes, then as we said a couple of weeks ago, we will have integration teams put together.

We will then put together what we think the real synergies are.

We think it's more prudent to be more cautious on that, and when we give you synergy numbers, ones we know we can deliver, versus giving you ones now we're not sure of.

We know there are some, we think there are going to be some nice synergies for us, but we will hold on that until we're more confident of that.

Okay.

And just last question on that, shares outstanding, 21.8 this quarter.

Is your guidance still at 22.3 for the year?

Yes.

Okay.

Thank you.

Your next question comes from the line of Reade Kem with Banc of America.

Please proceed.

Hi, everyone.

Hi, Reade.

A couple of questions for you on the Farnam you just announced a couple of weeks ago, obviously, but where do you sit right now, in terms of thinking about your financing arrangement, and maybe going to the agencies and so on?

Is that after the numbers have come out today?

That process has been under way in parallel with the whole, you know, Farnam acquisition for over a month now.

We have selected a bank, lead bank group to syndicate a $650 million senior secured financing facility, to finance the acquisition of Farnam, and replace our senior secured debt that's outstanding with Central today.

We've been to the rating agencies, the process is under way.

And it will, the process should close concurrently with the Farnam acquisition this month, or this quarter.

Okay.

And then related to the share repurchase question that came up earlier, I was wondering, would the new facility limit you on how much you can do?

We're still negotiating that.

Okay.

And just in terms of overall comfort, if I understood the acquisition is going to take you up to 4 times pro forma leverage, is there a comfort level that you have in terms of where you'd want to reduce leverage before you do some share buyback?

Or what's your current thinking on maximum leverage there?

Maximum leverage is, you know, it depends on how much all the businesses can support.

As we've said for quite a while, that our house limits are somewhere around 3 times total debt to EBITDA on a pro forma basis.

Obviously the Farnam acquisition will close at about 4 times.

It's really now once we get the business adjusted, and we start working on synergies and everything, what we really have to figure out how quickly we can deleverage the business, and how quickly we can deleverage it, and how comfortable we are with the pace.

You know, share repurchase will be obviously put into that equation, but right now it looks like we're a little bit on the higher leverage side than the underleveraged side in the next couple of months here, or maybe a little bit longer.

So, share repurchase, I don't think, is going to drive a lot of financing decisions right now.

Okay, that's helpful.

And I also had a question, maybe you addressed this on the call when you discussed Farnam, but I was wondering if given the hits that the Aquatics category has taken, how do you feel about cyclicality with the Equine business?

I realize that it is a higher-end customer, but how should we think about that, if we're thinking about how you'd perform in a weaker economy with that business under your wing right now?

I think we'd rather tell you that when we close on this, and give you the full story on Farnam.

It will not be as cyclical weather-wise as the garden business, for instance.

It will be more year round.

But we will give you that in a future call, if we could, please.

Okay, sure.

And one last one, maybe for Jim on the Pet business, I was curious, which categories or brand areas you felt you were seeing the most cost pressure on, and where you might have the best pricing power just generally in the pet business, how does that work, is that a discussion you can have with the retailers every month?

Is it dynamic?

Every quarter?

If you could just elaborate a little bit?

Generally it really matters by channel.

As you know, you go through a review process at the major accounts, and that happens one time a year.

At other channels, because of our market strength, we have it at various times during the year, but we really try to study what we need, and then pass those along one time a year.

We're not a gasoline company.

I think more likely because of all the new products being launched in Pet, it's more likely what we do is we will try to replace the SKU, and it's really a hidden price increase when you replace that SKU.

With the technology, and/or we try to engineer costs out.

Okay, all right, thanks a lot.

Your next question comes from the line of Mimi Sokolowski with Sidoti & Company.

Hello, everyone.

Hi, Mimi.

Stu, I really just have one for you.

What you said about the degree of leverage, where you're going to be post-Farnam, does that limit you for what you might do, in terms of acquisitions for the balance of the year?

And is that how we should think of that?

No, you shouldn't you know, assume we're limited.

We have a shelf registration out.

That's readily accessible and we you know, we have access to capital in all forms right now.

So, we're not viewing this as a capital constraining item.

Okay, good.

And I do have one more I wanted to ask about the price increases in Garden.

How broad is that?

Are there certain areas of concentration?

And what's the magnitude of the price increases, if you do disclose that?

Well, I guess what I would say is that we're trying to recover where we see our costs hitting us.

And you could assume that it's about 1 to 2% as you look at the group as a whole.

I'd rather not get into the specifics of exactly where it is because there's some ebb and flow in that.

If you looked at the group and said 1 to 2%, that's about where we are.

Does that mean you're not going to talk about which product it is, which sub categories?

That's right. [ laughter ]

Just want to be sure!

Don't leave anything on the table.

All right, thank you very much.

As a reminder, ladies and gentlemen [OPERATOR INSTRUCTIONS] Your next question comes from the line of John Anderson with William Blair.

Please proceed.

Good afternoon, hi, everybody.

Hi, John.

Question, Glenn, coming back to the advertising for a minute.

The trend toward increasing your advertising spend, does that signal that these categories are becoming more competitive?

And that, you know, you feel you need to increase spending to maintain market share?

Or is this something you're really looking at as a way to, you know, grow and enhance your market share in these categories.

And how do you measure the return on that investment as you kind of increase that spend over time?

I will answer your first question.

It's definitely due to grow our business and support our brands.

It's just in our future, we are just more and more and have been now for the last several years, a consumer products company.

And it makes sense to build your brand awareness through advertising with your consumers.

It also works with the retailers.

So, you mostly just continue to do that.

I think it's just good business sense.

How we measure that, we try to measure that by oftentimes looking at, okay, how many more end caps do we write?

How many more off-shelf displays do we hit?

What do our sales look like in a given market?

When we, for instance, have a take your dog to the park day, in Dallas, Texas, the Texas Rangers or the Oakland As, or wherever else we go, we want to see what our sales are for the following two weeks, POS out-the-door at key retailers.

So, we measure in lots of ways, but those are just some of the ways.

Okay.

Thank you.

And this may be for Stu.

The 100 basis point decline in gross margin, could you kind of attribute that to, how did that break out by mix, in the Garden mix being higher, versus the increase in raw materials?

It's mostly mix.

Okay.

Great.

Thank you.

That's all I had.

Sure.

Sure, John.

Your next question comes from the line of [Christine Corber] with JMP Securities.

Please proceed.

Yes, hi.

Looking at the Aquatics side of the business, you talk about the large aquariums being soft.

What portion of the business is large aquariums versus small?

Anything we consider 20 gallons and up.

Most of the aquatic sales would be in the 100, you get the 110s, 140s, 150s and up, if you're starting to talk in that area, it's a pretty good consumer outlay.

So, as far as your overall aquatics category, what percentage?

In units, I really don't want to get into that because I don't have the information available, but in units it's not anywhere near 20%.

Okay.

Okay.

And you mentioned a couple of times on the call about market share, taking market share in some of the categories.

Who are you taking market share from?

Is it from the larger competitors?

Yes.

And it varies by category.

Whether in it's lighting or tanks or other areas.

Thank you.

Plus you also have to think, Christine, there are about 2,000 vendors in the pet category, so it's both from large and small, and Jim and his group do look at IRI data, they do look at POS.

We do monitor that.

Great, thanks.

You're welcome.

[OPERATOR INSTRUCTIONS] Your next question is a follow-up from Pasha Misagi.

Please proceed.

Just one last question, on the restructuring charges that you had for the quarter, should we expect the remainder of the year to be almost the same, equal to this quarter?

Or do you think it's going to be different each quarter?

The restructuring charge is going to be a little lumpy.

The next two quarters, we will probably see more restructuring charges, you know, as we get under way with especially some of Jim's business unit formations.

Most of the restructuring charges, as you kind of heard on our call, Garden in our first quarter because we wanted to get those behind us before the garden season started.

Now it's pretty mild, what Jim and his group are doing on the Pet side, with some consolidations in those categories.

And those will occur more in second and third quarters.

And did you guys breakdown how much it was for this quarter?

On the restructuring?

Yes, we did.

Okay.

It's $1.6 million in restructuring. $1.2 million in Garden. $0.4 million in Pet.

Thank you.

You're welcome.

Your next question is a follow-up from Alice Longley.

Please proceed.

Hi.

I'm asking the same question as somebody else did earlier in a different way.

Spectrum said that aquatics is 69% of pet sales in dollar terms.

What percentage of your pet sales are aquatics?

First of all, I don't think that number you just heard from them is close.

It can't be 69% of their total sales --

Of their pet sales --

Pet sales.

That's because of Tetra.

Oh, okay, I thought you said total Spectrum.

Now, ask your question again, I wasn't listening that close! [ laughter ]

What percentage of your pet sales are aquatics?

We are not going to break that out.

We have a [balance] portfolio there but it's a nice chunk of our sales.

Is it under 50%?

Yes, it is.

But over 25%? [ laughter ]

Alice!

Alice, you tried before!

We're not breaking it out for you!

Okay.

It's substantially under 50.

Substantially under 50.

All right!

Oh, boy!

Thank you.

Okay, Alice.

Your next question comes from the line of Patrick Stowe with Priority Capital.

Please proceed.

Hey, good afternoon.

Most of my questions have been answered.

I just wondered, in terms of the Farnam acquisition, and this Animal Health business unit, are you guys looking at that kind of as a third piece of the business?

Or just a business unit underneath the pet umbrella?

Well it's kind of we're looking at it both ways.

It will be underneath the pet umbrella, but it is really an adjacent leg of growth.

That's why we call it the Animal Health.

Of course why we're attracted to Animal Health, is animals are living longer, they have the same issues that people do with problems, whether it's wounds or diseases or whatever else.

And we see it as a technology business.

What we're all about is about doing that, taking technologies we now have between these three, what we think are the three great properties.

With the intellectual properties, the technologies, the active ingredients and producing more efficacious products for the health, the pets so they can live longer and more healthy, whether it's horses, cats, dogs or whatever else.

And we see that as a very nice growth business for us, and one that we have a leading position in now, especially equine, and really opens the door for us for new channels.

So, we're very excited.

As you can tell.

Yes, there seems to be some, certainly some interesting opportunities there.

Anyway I know you haven't closed on the deal and it probably makes you very hesitant to say anything about specifics, but a general idea once you combine that Farnam with Wellmark, and any other properties that go under that business unit, of how big that business is?

We're not going to break that out today.

We want to make sure the business closes, which we fully expect that it will.

And we want to have our plans well laid out before we say what that is.

All right, well, I appreciate the time.

Thank you, Patrick.

At this time, there are no further questions in queue.

Okay.

Thank you, operator.

First of all, everybody, thank you for your questions and joining us today.

We are pleased with our results from a financial, operational and strategic perspective.

We will continue to execute our growth plans, by continuing to grow and extend our brands, developing and launching new innovative products and packaging.

We're very excited about the upcoming Global Pet Expo, and things that the Pet group are going to launch.

We're very excited about what the grass seed business is doing right now.

Garden is in good shape we think, for the year.

We are leveraging our cost structure, strengthening our Company to support controlled growth, and we continue to pursue and complete strategic acquisitions.

We have two nice ones underneath our belt for 2006, and we would still like to do some others, especially more like 'string of pearl' types.

So, we want to thank you for joining the call.

We do look forward to joining you, updating you on our progress and seeing many of you at the various scheduled investor conferences, and of course, after living in Seattle for a good portion of my adult life, I cannot help but say 'Go Seahawks!'

Thank you and have a great afternoon.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.