Central Garden & Pet Co (CENT) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Central Garden & Pet’s Fiscal Second Quarter Results 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.

If anyone should require assistance during the call, please press the star, followed by the zero on your touchtone phone.

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 & Pets.

Please go ahead, sir.

Thank you, Operator.

Good afternoon, everyone, and thank you for joining us.

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

Stu Booth, our Chief Financial Officer;

Jim Heim, President of Pet Products; and Brad Johnson, President of the Garden Brands.

Before I turn the call over to Glenn, I’d like to remind you of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The statements made during this conference call, which are not historical facts, including future earnings guidance, are forward-looking statements that are subject 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 10-K 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.

We are pleased with the record results for this second quarter.

At the midpoint of fiscal 2006, we have made significant progress toward both improving our business and delivering key strategic acquisitions.

Our agenda today is, first, I will provide you a quick overview of the fiscal second quarter.

Jim and Brad will discuss the respective Pet and Garden segments.

Stu will review the operating and financial results.

And then we will update you on our financial projects for the balance of fiscal 2006 before opening the call up to your questions.

We will also cover Farnam on the call.

The strength of our branded products portfolio, our profit acceleration program, and strategic acquisitions produced record results in the quarter.

In short, we are executing our strategy for internal and external growth.

We delivered a solid quarter, both in terms of sales and profits.

We continue to be recognized as the industry leaders in product innovation.

We completed three strategic acquisitions in the quarter.

And we strengthened our financial position and increased our flexibility by recapitalizing our balance sheet.

Turning to the second quarter results, our sales for the quarter were 401 million, an increase of approximately 6% when compared to fiscal second quarter last year.

Operating income increased approximately 15% to nearly $46 million.

We absorbed one-time costs of approximately 1.6 million related to our profit acceleration program and another 1.6 million related to the early retirement of our previous credit facility.

Costs associated with the equity-based compensation were 1.4 million in the quarter.

Also in the quarter, we recognized a $2.6 million gain from the reversal of a tax reserve that was no longer required.

Net income was approximately $26 million, producing earnings per fully diluted share of $1.17, compared to $1.04 last year, an increase of nearly 13%.

We are pleased with the quarter’s results for the following reasons --

First, total Company-branded product sales increased 9.4%.

Driving this strength is our enduring commitment to innovation and contribution from acquisitions.

Central Pet had an outstanding show at this year’s Global Pet Expo, winning 14 out of 33 new product awards, the most by any company.

In garden, our grass seed operations continue to outperform due to the introduction of new proprietary seed varieties, effective advertising campaign, and increased shelf space of retail.

The pet supplies industry continues to return to more normal growth rates, and in both garden and pet, we effectively managed our portfolio of businesses despite weather conditions that adversely impacted wild bird feed sales in both the Pet and Garden segments, and record rains have significantly dampened garden sales on the West Coast for the quarter.

The effect warm winter is twofold.

When it is warm and there is no snow on the ground, consumers feed birds -- wild birds less, and birds have more natural food sources and tend to eat less from feeders under these conditions.

We estimate the impact of unseasonable warm winter on the East Coast and Midwest, especially, on the wild birdseed sales for the total Company to be approximately $10 million in the quarter.

The wet weather on the West Coast, which we hope is finally over, we believe, adversely impacted sales by approximately $7 million in the quarter.

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

Year to date, we have spent approximately $3 million related to our profit acceleration program, and our SAP implementation is running smoothly.

We are on time and on budget.

On the acquisition front, we were busy and made three key strategic acquisitions in the fiscal second quarter and one so far in our fiscal third quarter that we believe positions Central for even stronger growth opportunities.

We announced in April the acquisition of Ironite products brand and intellectual property.

Ironite is a registered trademark since 1956 and is the leading brand of environmentally friendly soil supplements that promote healthy plant color and deep root structures.

The Ironite acquisition is consistent with our strategy to build a portfolio of leading, highly efficacious branded products.

In the fiscal second quarter, we also purchased an additional 60% stake in Tech Pak, increasing our total interest in that Company to 80%.

We previously owned a 20% stake in Tech Pac through the Gulfstream acquisition we completed last year.

Through Gulfstream and our interest in Tech Pac, we now have control over the leading garden brands Sevin, a broad-based insecticide, and Over ‘n Out! the leading fire ant contact killer.

The benefits of the Tech Pac acquisition are, first of all, the increased equity position in Tech Pac is expected to provide Central with greater access to active ingredients required to develop highly efficacious products and the opportunity to leverage the strong consumer awareness of these leading brands.

Turning to pet acquisitions, we firmly believe there is significant potential for growth in improving animal health and nutrition.

Consumers are clearly spending more on their animals in the areas of nutrition, vitamin supplements, medical care, and other related categories in both the over-the-counter and veterinary channels.

As part of this increased focus on animal health, we purchased Breeder’s Choice, a leading producer of ultra-premium, all-natural dog and cat food and treats.

Ingredients include trout, salmon, chicken, duck, beef, and avocado.

Currently, Breeder’s Choice is primarily a West Coast brand.

Our plan is to significantly expand distribution nationwide and extend the brand by launching additional new high -- health-related nutritional products into the pet specialty channel.

On February 28, we closed the Farnam acquisition.

Farnam is the leading brand in horse healthcare, with approximately 60% of the over-the-counter equine market and has a strong and growing presence in the animal healthcare category.

Its products include vitamins and nutritional supplements, internal and external parasite control applications, and other healthcare products for horses, household pets, and livestock.

We are currently in the process of combining our existing Wellmark operations, the Shirlo intellectual property assets, and Farnam into a new strategic business unit, which we have named Central Life Sciences.

The purpose of this SBU is to create new highly innovative products in the animal health category for both the consumer and veterinary channels.

Our objective is to leverage our technology portfolio, which now includes nearly 450 EPA/FDA registrations, significant barriers to entry.

Additionally, we plan to leverage our sales and marketing competencies and expanded customer base to drive new product development and incremental sales.

Within this strategic business unit, on the cost side, we are rationalizing and improving utilization of manufacturing, marketing, sales, and general administrative functions.

Specifically, we are in the process of consolidating three manufacturing facilities into two, eliminating redundant sales and marketing activities, and moving Farnam’s outside contract work into Wellmark’s state-of-the-art research and development center in Dallas, Texas.

We expect Farnam’s profits, net of incremental interest and amortization, to be relatively neutral to fiscal 2006 results.

For fiscal 2007, we expect Farnam to contribute approximately $0.10 to earnings per share based on an anticipated fully diluted share count of approximately 24.3 million shares for 2007.

I will now turn the call over to Brad Johnson and Jim Heim, President of our Garden Group and Pet Group, respectively, to provide additional detail into each segment’s results.

Brad?

Thanks, Glenn.

As you know, the second fiscal quarter is our traditional sell-in and start of the garden season, and the early results of this year’s garden season are mixed.

Sales were strong in the Southeast, and they were challenging, frankly, on the West Coast.

Total sales were 214 million, a decline of 6 million, or 3%.

Organic sales, adjusted for discontinued operations, were essentially flat in the quarter and are up 4.2% year to date.

Acquisitions contributed approximately 4 million in sales, and the 6 million decline in garden sales is due primarily to three factors --

First, the planned reduction in third party distribution sales and the distribution of a soils business last year, which, combined, accounted for approximately $8 million.

Second, an unusually warm winter adversely impacted wild bird feed sales nationwide in the Garden segment by approximately 7 million.

And, third, an unusually wet spring season in California delayed the start to the garden season.

Thankfully, the weather here on the West Coast has finally turned, and this past Saturday and Sunday was our first nice weekend of the gardening season here in California.

Turning to profits, operating profit in the quarter increased 9% to approximately $26 million.

This was driven by our ongoing operating and supply chain efficiency initiatives.

Additionally, we are performing well in several major retailers’ initiatives to lower inventories and drive sales.

We anticipate retail inventory reductions to continue in the third quarter.

Point of sale is up double digits, and store in-stock levels are at or above year-ago levels for our products.

All this is occurring while warehouse inventories in certain of our product lines are declining, thus, clearly, demonstrating our ability to work within this new environment and drive sales.

As the garden season is now in full swing, several product categories are performing well.

Grass seed continues to excel due to new and innovative premium varieties and mixes that provide consumers with more beautiful lawns and require less maintenance; better merchandising via more item-specific in-store displays and high traffic locations that simplify the buying experience and educate the consumer; and more effective advertising with our retail partners; and, finally, favorable weather conditions in major consumption areas, particularly the South, the East, and the Midwest.

Garden décor is also benefiting due to improved retail listings and successful new product introductions.

In summary, the second quarter was a good quarter for Garden due to product mix and expense control despite the fact we had adverse weather conditions.

Turning to the third quarter, rains in California and the West Coast negatively impacted our sales in April.

However, we expect to recover part of these lost sales in the balance of the third quarter.

Additionally, due to the warm winter weather experienced throughout most of the country and the excessive moisture on the West Coast, we expect stronger-than-normal sales of our higher-margin insect control products this summer.

And now I’ll turn the call over to Jim, who will discuss the Pet Group results and outlook.

Jim?

Hey, thanks, Brad.

As reported on last quarter’s conference call, the pet supplies market continues to improve, and we believe we are outpacing the industry.

Turning to the Pet segment results, sales were 187 million, an increase of 29 million, or approximately 18% when compared to the same period last year.

Branded product sales increased 23%.

Organic sales grew approximately 3%, and acquisitions contributed approximately 24 million, which includes one month of the recently acquired Farnam operation and Pets International acquired last year.

Operating income improved nearly 6% to approximately 25 million, which includes costs of 1.6 million in the quarter relating to our profit acceleration program.

Dog and cat continues to lead the recovery of the Pet segment, delivering strong growth in the quarter, followed by animal health, aquatics, and finally, bird and small animal.

As we mentioned earlier, wild bird feed sales were adversely impacted by the warm winter by approximately $3 million in the quarter for the Pet segment.

Now, turning to new product innovation, we had our most successful showing ever at the Global Pet Expo, which is the largest North American pet industry trade show, in March.

Our brands won a record 14 out of 33 new product awards, including seven best-in-show awards.

This is an outstanding accomplishment and underscores our enduring commitment to new product innovation.

I would like especially to recognize the efforts of the bird and small animal strategic business unit team, consisting of the brands Kaytee and SuperPet, which won a combined seven new product awards, including three best-in-show awards.

Now, turning to our consumer awareness initiatives, we have broadened our successful [Power of Three] marketing campaign to include several new large baseball market teams, specifically, the New York Mets, the Seattle Mariners, and the Atlanta Braves, to complement our established relationships with the Oakland athletics and Texas Rangers.

Now, some of the major benefits of this initiative include expanded shelf space with valuable end-cap displays in approximately 1,000 retail stores.

Turning to the profit acceleration program and our SBU initiative, we continue to make good progress.

We are in the process of consolidating three additional aquatic facilities in the U.S., and we expect this effort to be complete by the fiscal year-end.

At the midpoint of the year, we remain on track to deliver mid-single-digit organic growth.

This growth is driven by new product innovation, increased shelf space at retail, and a passion -- passionate, results-oriented management team, committed to helping our retail partners and strengthening the bond between pets and their parents.

Now, I’ll turn the call over to Stu for a more detailed review of the financial performance.

Stu?

Thanks, Jim.

Turning to consolidated results for the quarter, net sales for the second quarter of fiscal 2006 were $401 million, a $23 million, or 5.9%, increase from last year.

Acquisitions contributed approximately $28 million in sales in the quarter.

The elimination of certain distribution accounts and discontinued operations in our Garden segment adversely impacted sales by approximately $8 million.

Gross profit for the second quarter was approximately $137 million, an increase of $10 million, or nearly 8%.

Gross profit as a percentage of net sales increased to 34.1% from 33.5% in the year-ago period, reflecting a favorable shift in product mix and price increases.

Selling, general, and administrative expenses for the quarter were approximately $91 million.

As a percentage of net sales, SG&A expenses decreased 30 basis points to 22.7% due primarily to improved operating leverage, partially offset by $1.6 million of cost in connection with our profit acceleration program and $1.4 million of cost associated with equity-based compensation.

Operating income for the quarter was $45.7 million, an increase of approximately 15% compared to a year ago.

Net interest expense for the quarter was $9.6 million, an increase of $4.1 million.

This is reflecting higher debt balances due primarily to acquisitions completed in fiscal 2005 and fiscal 2006 and $1.6 million of cost related to the early retirement of our senior secured credit facility.

The tax rate for the quarter was 30.8%, compared to 38.1% a year ago.

The effective tax rate was reduced by approximately $2.6 million due to reversal of the tax reserve as a result of the IRS closing its examination of our consolidated 2003 and 2004 tax returns.

Net income for the quarter was $26.2 million, an increase of nearly 17%.

Earnings per fully diluted share was $1.17, compared to $1.07 last year, an increase of 13%.

The fully diluted share count for the quarter was 22.4 million shares, reflecting the impact of issuing stock options and our equity offering of approximately two million shares completed in March.

Depreciation and amortization for the most recent quarter totaled approximately $6 million, compared with $4.6 million last year.

Capital expenditures for the quarter totaled $9.5 million versus $4.4 million a year ago and $18.2 million year to date, an $8 million increase over last year.

We expect CapEx to be approximately 46 to $48 million for the year.

This increased spending, we believe, will provide us with greater operating efficiencies and increased capacity.

Turning to the balance sheet, comparing the March 2006 balances to the March 2005 balances, accounts receivable increased approximately $52 million, or 22%, to $289 million.

The increase is due primarily to acquisitions and the relatively late start to the garden season.

Inventories increased nearly $60 million, or 20%, to $365 million due primarily to acquisitions completed in fiscal 2005 and fiscal 2006.

As of March 2006, total debt stood at approximately $656 million compared to $369 million last year, an increase of $287 million.

The increase in debt over the last 12 months was due primarily to acquisition activity in 2005 and 2006.

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

We are updating our guidance to include the acquisitions completed in fiscal 2006 and our corporate financing activity completed in our second fiscal quarter to support future growth.

We estimate full-year sales to now be approximately 1.55 to $1.57 billion, a projected increase of approximately 13% versus last year.

We estimate gross margin to be between 32 and 33%.

We estimate operating income to be between 133 and $137 million, taking into account the costs associated with equity-based compensation, the costs associated with our previously announced profit acceleration program, and costs associated with the amortization of intangible assets related to our recent acquisitions.

The blended full-year tax rate is expected to be 35%.

The tax rate is expected to be approximately 38% for the second half of the year.

Net income is expected to be between 65 and $68 million.

The fiscal year weighted average share count is expected to be approximately 23.3 million shares, and we forecast depreciation and amortization for the full year to be approximately $27 million.

We are anticipating our fiscal third quarter to be more in line -- more or less in line with last year.

We are taking a near-term conservative outlook due to weakness in West Coast garden sales due to April rains and cold weather.

While we expect stronger sales in May and June, we do not expect to make up all of the lost spring season West Coast garden sales.

The relatively hot and dry weather [inaudible] forecast to continue through June for most of the south, extending from Arizona to the Eastern seaboard, the continued inventory reduction initiatives at our major retailers, and finally, we are monitoring rising gas prices and its potential effect on our sales, costs, and profits.

On the positive side, we are expecting a relatively stronger fiscal fourth quarter due to improved profitability for both our Garden and Pet segments attributable to our profit acceleration program.

As mentioned earlier, we anticipate a relatively stronger fourth quarter in Garden and Pet due to increased projected demand for higher-margin insect control products.

Accordingly, we are increasing our advertising and promotion to drive increased demand and increased sales in Pet due to the success of our new product introductions.

And now I’ll turn the call back to Glenn.

Glenn?

Thank you, Stu.

First of all, we have had a solid first half of the fiscal year.

Year to date, our sales have increased approximately 8%, net income is up 16%, and earnings per fully diluted share has increased 13%.

We continue to focus on improving operating efficiencies through our profit acceleration program, and we are positioned for future growth with the strategic acquisition of Farnam, Breeder’s Choice, Tech Pac, the intellectual property assets of Shirlo, and most recently, Ironite products.

We also have the financial capacity to continue to make strategic acquisitions when and where they make sense, and we continue to lead the industry in new product development.

It’s also worth saying we view 2006 as a building block for us on the path to achieve a 10% operating income margin by 2008.

During the year, we will spend approximately 7 million in our profit acceleration program in addition to absorbing over 5 million in equity compensation.

Getting these two items behind us will make for easier comps in 2007, and we are feeling very optimistic about our future.

The other thing we should take about very, very quickly, we are expecting a much stronger fourth quarter this year due to the things that Stu talked about.

And with that, we will open the call to questions and answers.

Operator, we are ready for Q&A.

[OPERATOR INSTRUCTIONS]

Bill Chappell, SunTrust Robinson Humphrey.

I guess the first question on the guidance.

Did your original guidance include the reversal on the tax and the refinancing expenses, or are they new to the guidance?

They are new to the guidance, Bill.

The guidance, first of all, is not a precise thing, all the things that we have moving around in a company of this size and complexity.

But the refinancing was definitely not.

The tax reserve -- reversal was one of the things that we had in our kind of call it the bottom layer of things that go in and out in a forecast.

So if I’m looking at it and I’m seeing a net million-dollar benefit from that and that you’re raising it another $1 million above those items; is that the right way to look at it?

I don’t know if I’d look at it that way.

I just kind of look at a lot of ins and outs.

Well, maybe second on the quarterly stuff, are you saying that on an EPS basis, June should be flat with last year and most of the up side will come in the fourth quarter?

It will be more predictable in that way, Bill.

Yes, we expect -- and given the slow start to the third quarter, we elect right now to be conservative on the third quarter, but we are expecting fourth quarter to be stronger than last year by quite a bit.

Okay.

Switching over to the Pet business, even if I was to exclude the restructuring cost, it looked like Pet margins were down year over year.

Is there anything -- is that mix, or is there anything else to that?

Yes, just generally, that’s right, Bill.

It’s generally a mix issue.

And one of the things you had said is you still expect a mid-single-digit.

That implies organic growth in that business.

That implies a pretty strong second half.

I mean high single digits to almost double digits in the second half.

Is that the right way?

That is the right way that we will hit what we told you at the beginning of the year --

Okay.

-- organic growth rates.

Bill, it’ll be in the mid-single digits we will end the year, and all that gets into, Bill, real quick, is new product innovation, a lot of our new product this year at the Global Pet Expo was one month later than it was previous year.

Our new products are now shifting, so a lot of the organic growth will be on new product growth coming up.

Okay, and one last, and I’ll turn it over.

I didn’t quite understand.

On the wild birdseed, did you say it penalized Garden 7 million and Pets 3 million, or is there --

That is correct, Bill.

Correct.

So it’s now semi-classified in both categories?

It always has been.

Okay.

That’s all I have right now.

Thanks.

Okay, Bill.

Joe Altobello, CIBC World Markets.

Just to do a follow-up on Bill’s question regarding the Pet sales and the return to health on your organic front, you guys mentioned gas prices obviously spiking up recently.

The last time we saw this, as you well know, was late last summer, I guess, and around the time of Katrina, and it obviously had a pretty big impact on the whole pet supplies industry, although it sounds like this time around, you guys are pretty optimistic that the same impact won’t happen.

Is that the case?

Joe, I guess the best way to answer that is we’re looking at this gas price.

We’re not sure what is going to happen here.

In our plans, we did assume oil would be in a 50 to $60-a-barrel range, not the 70 to 75 it is right now.

We’re not that good at forecasting what the oil will do.

We are watching that issue very closely.

We do know that in past consumer recessions, that consumers have stayed home more, and they typically will spend more on garden and pet.

What we don’t know is will we have the gas price shock that we had last summer, when it went from basically $2 a barrel -- $2 a gallon to $3 a gallon overnight.

So that’s part of the reason why we’re being a little bit conservative right now, more of a wait-and-see.

We still expect that we will achieve our EPS for the year, though.

Okay.

And then, secondly, on aquatics, I think one of your competitors that reported earlier, they mentioned that the aquatics business had improved sequentially throughout the quarter, and I was curious if you’re seeing the same trends there, particularly on the high end of the aquatics business?

We see, Joe, every area that we compete in aquatics that we are outpacing nearly every area.

So we see it’s improving.

So we’re encouraged by that.

Okay, great.

Thank you.

Michael Cox, Piper Jaffray.

I was just wondering if you could be maybe a little more specific on what you see that will drive this high single-digit growth in the Pet segment given some of these headwinds and the relative performance in the first half of the year?

It’s a pretty meaningful increase, and I was just wondering if you could provide a little more detail there?

Yes, I’ll be more than happy.

We’ve mentioned that we had a very successful show at the Global Pet Expo.

That is where, Michael, that we’ve introduced most of our new products.

So we’ve got already good customer feedback.

These products are now starting to launch, and that is going to drive our new product pipeline, will drive our organic sales rates.

And, also, if you take a look, what we already mentioned, part of the bad weather is actually a positive because it’s really producing an unbelievable opportunity for bugs.

We’re in the business of mosquito control and pest control, so that should help us as the season goes on.

One of the highest-margin items that we sell, of course, is our mosquito-control products, Michael, and that is out of our Pet segment, our Wellmark division.

And if it follows history here, we should expect to see much stronger mosquitoes -- a lot more and stronger mosquitoes in really July and August especially.

We would expect to see strong -- I don’t think we’ll see double-digit in the third and fourth quarter, but it will be high single-digit, and by the end of the year, we will average out to be high single-digit for Pet for the entire year.

Okay, and in terms of the Garden business, it sounds like you have yet to see that meaningful acceleration through the month of April, whereas it appears some of your competitors have seen stronger trends through this time period.

I was just wondering if you could highlight some of the product differences that you have that could speak to the relative performance difference?

Well, Michael, there are a couple of things that play into that.

First of all, we’re a little bit more heavily weighted towards the West Coast than some of our competitors would be.

And given the weather patterns that we had out here, clearly, that hit us a little bit to the tune of the $7 million that we were talking about earlier.

Secondly, though, as we look to the future, we are having some very strong sales now as we’re coming out of that weather pattern, we’re seeing our point-of-sale up sold double digits, and so as we look to the future, we believe that we’ll recapture a fair percentage of what was maybe amiss in April, if you will, but we are feeling very, very good about what we see going forward.

And as Jim mentioned, clearly, we’re going to pick up in the back part of the year some of our insect control as well on the fire ant side, so on and so forth, based on the weather patterns.

But the short answer to your question is we’re a little more heavily weighted on the West Coast than some of our competitors, but overall, we’re still staying solid with where we thought the year would come in.

Okay, my last question is, jumping back to the Pet segment, I was just wondering if you could speak to any trend different you’re seeing between your end customers from the specialty channel to the mass channel, any significant growth rate differences you’re seeing between those two?

Yes, the amazing thing is we took a look at that, and what we stated at the beginning of the call, the thing that’s really leading the peg segment is dog and cat, and that’s true across all segments.

So it’s very similar.

Okay, great.

Thanks a lot.

You’re welcome.

Dara Mohsenian, JP Morgan.

Stu, can you give us an exact number for the contribution from acquisitions to inventory and accounts receivable in the quarter?

We don’t break -- we haven’t broken that out, Dara.

For both AR and inventory, acquisitions is the leading contributor to the change.

Okay.

And the net EPS impact from the acquisitions and the offering, the equity offering that’s now in your full-year guidance, what was the net EPS impact from those items?

We haven’t netted the two.

We can tell you what the EPS impact is from the acquisitions.

It’s -- projected for the year; it’s expected to be $0.04.

Okay.

The biggest difference on that, Dara, especially on Farnam, with the increased interest rates, as well as the amortization that we had, Farnam is neutral, and that was, by far, our largest acquisition during the year.

The other acquisitions add about $0.04.

Okay.

Then the equity offering for the year on an average basis, I’m going to call it rough swag, is approximately 5% diluted because we did it about mid-year.

That’s just very rough.

Okay.

Fair enough.

And the amortization behind Farnam, what is that related to specifically?

The intangibles?

We have to -- basically, we have to finalize our calculation of intangibles and the amortization life for the intangibles, but that’s basically what’s driving it.

Okay.

And that’s an ongoing number in the out years?

Well, it’s an exercise that we haven’t completed yet.

We’ll expect to complete it by year-end.

And then the amortization life will be multiple years.

Okay.

Given higher commodity costs in oil prices, are you planning to take any price increases in the pet supply business, or will you continue to focus on mix and new products to drive pricing there?

Obviously, the answer is yes to all of them -- yes, yes, and yes.

Yes, we’re looking right now at areas where there’s obviously cost increases and passing that along, so yes to all three.

Okay.

Well, that’s a pretty clear answer.

Thanks.

Thanks, Dara.

Doug Lane, Avondale Partners.

I’ve got a couple questions on getting these numbers reconciled.

Stu, if the equity offering was 5% dilutive, then that’s, what, minus $0.12?

And then we make up $0.04 on the acquisitions.

Where did the other $0.08 come from?

It’s a variety of things, Doug.

It’s profit acceleration program, but, also, it’s our new product sales.

This is really one of these quarters in the rest of the year where we have lots of ins and outs going through the year.

So you are boosting your outlook operationally by $0.08 from the success of new products, how you feel about your profit acceleration program, and other internal factors is the way to look at that?

It’s the overall mix.

There were lots of other ins and outs.

Sarb-Ox is going to be again lower this year.

Litigation will be lower this year.

We expect both of those to be a positive contribution as well.

Okay.

You know, it’s just kind of things.

You followed our story for years.

There are always lots of things in the SG&A category that go in and out.

This year, we’ll see some -- hopefully some positive pick-up in that area.

And we’ve got some other offsets that we’ve already seen so far this year -- the extinguishments of our prime facility and the write-off of $1.6 million and expensing stock options and so forth.

And if I look through the quarters, I mean you’re looking for a big quarter in the fourth quarter.

I’m coming up with something $0.48, $0.58 range.

If I’ve got 1.29 year to date, you do something approaching the buck three you did last year, that gets you nine months to the low 2.30s.

And to get to the 2.80, 2.90, that’s going to be a $0.50 kind of quarter on top of $0.31 last year.

Is that what we’re looking at here?

That’s correct.

That’s right.

Okay.

And, again, we felt kind of the -- we’re looking at right now with the uncertainty, we are choosing to be more conservative on third quarter than perhaps necessary, but we think that’s wise right now.

Okay.

Switching around to CapEx, what did you say the CapEx number was going to be this year?

Forty-six to 48.

And what was it last year?

It was roughly 22, I think.

Eighteen.

Eighteen.

Wow.

Now, the breakout of that, we just increased our -- in our guidance here, we increased CapEx to about $8 million.

Our CapEx last -- our last guidance on CapEx was --

It was about 37 --

Thirty-seven to $40 million.

It’s now 46 to 48.

First of all, let’s take the jump from the prior year to the earlier guidance.

Most of that is SAP, which we’re implementing.

Started this year.

Right.

So we’ve got some front-end costs there.

Approximately $15 million of that is SAP-related.

Okay.

The increases that we just called out today are for basically plant and equipment upgrades and improvements and additional capacity to support some of our better selling products.

Okay.

And then I know you’re not talking ’07 yet, but where do you think CapEx sort of settles out here in ’07 on kind of an ongoing basis?

It’s a little too soon to tell, but it shouldn’t be at the level we’re at this year.

But it will be somewhere around there.

Maybe a little lower.

But not much lower?

It -- really, it depends on how much we approach our SBU consolidation plus all the other initiatives we have in front of us for expanded sales and efficiencies.

Okay.

Okay, fair enough.

Doug, part of what’s driving that is, for instance, we’re consolidating facilities, and we are doing another one right now, in fact.

As we’ve done that, we take out a lot of cost in a facility, but then we invest it in automation in the facility we get into, so we get our operating costs down, and that’s the portion we’re doing.

I would guess 2007 CapEx will be somewhat lower than this year, but it’s too early to tell how much.

Okay.

And did you give us what the interest expense is you’re looking in fiscal ’06, Stu?

No, we didn’t.

We didn’t call it out.

I guess I can figure it out between --

Yes, you should be able to figure that out.

Net and operating.

Yes.

Then, lastly, organic growth.

We were talking about the Pet and the mid-single-digits despite the below-trend start to the year, and you went through that in some detail.

Can you update us on Garden and organic growth expectations there?

I would think the organic growth for Garden should finish the year probably in the 3% range would be the best guess.

I mean 3 to 4%.

Three to 4%.

And what is it year to date, 4, right?

After adjusting for discontinued operations, right around 4%.

Oh, that’s right, ex the divestiture.

Yes.

Right, right.

Thank you.

Thanks, Doug.

Alice Longley, Buckingham.

Could you quantify what is left in terms of divested businesses and discontinued businesses because that keeps taking more off the sales than I’m projecting?

Well, we will do that as we do our budgets.

Alice, what we do, we do our budgeting process beginning September/October, and we go through our complete look at that time, and then that’s when we make the decisions which businesses to close down or to sell off.

But I think, historically, Alice, I think you’re looking -- and we said on our initial guidance call last year that we walked away from about $20 million’ worth of sales last year.

So we --

Between the soils business and some of the distribution operations.

Oh, and what should we assume for this year?

Say it again, Alice?

And what should we assume for this year?

Well, that’s about right.

That’s right, 20 million.

Oh, all right.

So that was for this year?

Yes, that’s correct.

All right.

Yes, Paul misstated; it’s for this year.

Okay.

And again on the June quarter, what kind of organic growth should we look for in the two divisions in the June quarter per se?

I think what we’d rather say is that on the Pet side, I think you’re going to see that mid-single digit, maybe a little bit higher in the third quarter.

That will be a good call for that.

And really depends on how much we pick back up in May and June on Garden.

Right now, we’re at 4%, so we should probably be somewhere in -- 2 to 3% would be my best guess.

Brad, would you agree with that?

Yes, I would.

We stand by where we think the year is going to come in, in that low single-digit 4 or 5% range for the year.

Okay, well, then I’m having trouble because in the March quarter here with organic growth that’s flat in lawn and garden, your profits were still up nicely because of mix and cost cutting, I guess.

And I’ve got organic growth here in the June quarter in both categories, I guess.

So why is EPS less?

We’ve got margin expansion going on.

We’ve got acquisitions that are either neutral or accretive, upward shifts in mix, some organic growth.

I think what --

Remember, we did have April sales that were down that we’re having to catch back up some of the quarter there.

In addition, the product mix may be slightly different in the third quarter than what we were initially talking about.

But it’s pushing things out more into the latter part of the third quarter, the early part of the fourth quarter, which is why we’re suggesting that our fourth quarter profits are going to be much stronger because you’ll see more of our insect-control products coming online later in the year than versus a normal year.

Well, I understand why the fourth quarter would be stronger than the third quarter, but I mean even with a pretty lousy environment for lawn and garden in the March quarter, your profits were up in that division, and --

Because we took costs out.

We took costs out, and there may be some other things where we’ll take additional costs out in the third quarter as well as we look to the future.

And as Glenn indicated, we’re trying to be a little bit conservative for the third quarter.

All right.

Well, I really don’t see why it’s flat as compared to -- your operating profits were up in the March quarter, and even adjusting for the nonrecurring refinancing fee, your pretax profits would have been up, and the environment isn’t worse in the June quarter than March quarter.

Alice, I guess the way we’d answer this is that we are sticking by our forecast for the entire year.

What we are trying to communicate to you is we think that we will have a stronger fourth quarter than you were thinking and a weaker third quarter than you were thinking, but we still think they’re going to be both good quarters.

All righty.

Okay?

Thank you.

You’re welcome.

Kristine Koerber, JMP Securities.

Hi, this is [Jennifer Bennett] filling in for Kristine.

Thank you, Jennifer.

My question is on the competitive front, we’ve noticed Wal-Mart and Target now expanding into the private label premium pet, mostly dog and cats.

My question is how is that affecting you?

It doesn’t -- Jennifer, this is Jim Heim.

It doesn’t have any effect on us because we don’t compete in those areas.

We have no mass dog food or cat food.

Don’t plan on having.

So to answer your question exactly, it has zero effect on us.

In fact, the Breeder’s Choice, the acquisition that we purchased in dog and cat food --

Right.

-- ultra-premium, we will only take that to that specialty.

We have no desire or plans to take that to mass or grocery.

Well, from what I can tell, Target is also trying to get into that ultra-premium.

And maybe -- I mean you would know the pet food market better than I, but they say that they have lamb and rice dog food and other ultra-premium food offerings.

I’ll laugh at this one to answer your question, Jennifer.

But if you look at Breeder’s Choice, it has trout, salmon, duck, avocado.

It’s very holistic, very all natural.

These dogs and cats eat better than you and I do.

They do.

Look at this food.

I’m going, “I should be eating this stuff,” especially the active joint stuff.

But as you look at this, what we’re trying to communicate to you is that, yes, we do see Wal-Mart and Target going into that.

That will be more in competition with Iams, Hills Science Diet, and those types of things.

Breeder’s Choice is ultra-premium even above that.

That’s the difference.

It’s a completely -- Jennifer, I mean we’re -- go into a specialty pet store, and you get a bag of Breeder’s.

It could be anywhere up to $50 a bag, but that is not where Target’s playing.

To Glenn’s point, it’s right at Iams, Beneful.

I mean it’s not in that market.

Okay, thank you.

You’re welcome.

Reade Kem, Banc of America Securities.

Just had a question about the inventory reductions at retail, whether that’s possibly going hand in hand with any sort of review and maybe taking SKU count down as far as you could tell?

We are seeing an impact of inventory reductions.

That’s certainly the case.

However, we’ve also seen our in-stock levels increasing.

We’ve seen our point of sale up double digits, which indicates that we’re performing very well in that new environment.

If you said, “Gee, what do we expect across the year?” it’s probably two to three weeks of inventory that will be eliminated, and for us, at least on the Garden side, I’d say that’s probably weighted one-third second quarter, two-thirds third quarter.

But the good news in some of that is that we typically anticipate some returns in the fourth quarter and because of the lower inventory levels, we will see a lower level of returns in the fourth quarter.

And what that means is that, yes, there will be an impact, but it’s not going to be one that’s overly severe.

Okay.

So perhaps yourselves and some other companies are seeing some reduction in just absolute number of SKUs that the retailers want to take on?

Well, certainly, retailers are looking to pair inventory and pair non-performing SKUs, but that’s really no different than any year.

And when you’re a number-one or a number-two brand, typically, we’re not the ones that get hurt the most.

Okay.

And then just -- I might have missed it, but on the controls business, can you just refresh my memory on how we ended the year in terms of inventory in that specific area where we -- a little bit heavier because the season, how it panned out last year and that may have affected [indiscernible] inventory reduction goes on?

We did not end the year with high inventories of insect-control products.

Okay.

I think some other competitors did, but we did not.

Okay.

Then just turning to the financials, I was wondering if we could get a cash flow from ops number -- or I guess it would be a use in this quarter?

We’ve got a free cash flow of 125 million for the negative, but that’s including the working capital addition of about $150 million.

But, again, we’ve closed three big acquisitions this quarter.

Right.

Okay.

And, Stu, for the second half, where do you think working capital goes and maybe embedded in your guidance where might we see, ballpark, the debt balance go to at September?

Working cap, I think we’re probably -- well, working capital should turn favorable at the end of the year because, again, we’ll be at the tail end of the garden season.

So there will be a positive contribution from working capital at the end of the year.

In terms of pro forma debt to EBITDA, right now, we’re about 3.8 times.

We’ll be down approximately a quarter to a half a turn by the year-end in terms of leverage.

Okay.

And I guess just last one, as usual, M&A environment -- any commentary on what you’re seeing out there in terms of multiple expectations and what your thoughts are there and whether with Farnam keeping you busy whether that might be about all we see from you for the rest of the year?

I think it’s time for us now to digest what we have.

That doesn’t say we won’t do something again, but we have done now basically five acquisitions so far this year.

We’d just as soon digest what we have.

If the right property comes up at the right time, we would do that, but I think you’ll see us now move our performance now towards looking at digesting what we have, making sure we do it right, and then really go back on the acquisition front more in 2007 than in the next four or five months.

Gotcha.

Okay, thanks a lot.

Alexis Gold, UBS.

Just a few follow-up questions, I guess, just talking about the stocking at mass.

I was just trying to get a sense for when you look past that, historically, Wal-Mart has not put as much support behind the lawn and garden category as it seems like they should have.

If we exclude that two to three-week inventory reduction, it sounds like you’re actually seeing inventory levels at or above last-year levels.

Do you do actually more support behind the category than we’ve actually seen in the past?

Well, I guess what I would say is there is a delay to the start of some portions of the season due to weather, and any inventory adjustment is probably more due to that than anything else.

With respect to support from our retailers, we’re very pleased with the support levels that we see.

You specifically mentioned Wal-Mart.

We’re very pleased with our working relationship with them and the support we’re seeing.

I think the bigger thing you’re seeing with Wal-Mart this year is -- traditionally what they would do is they would stage their product in their warehouses in the quarter and then ship them out to their stores.

What they’re doing is really taking their inventories down in their warehouse locations, not necessarily in their stores.

So what that means is you’re now selling closer to the season than you ever were before, and you have to be much quicker at response.

So you are seeing some inventory come out of the pipeline, and we’ve talked about that here.

But at the end of the season, it also means that we would have fewer take-backs because there will be less in the pipeline to take back, which is a portion of the reason why we’ve given you stronger guidance on the fourth quarter.

All right, great.

And just to follow-up on the acquisition question, it sounds like you’re going to hold off for at least the time being unless the right acquisition comes up.

But just in terms of multiples, I mean I think we’ve seen some acquisitions in the pet space.

That seems substantially higher maybe than we’ve seen over the last couple years and even seeing financial sponsors get more involved in this space.

Is part of the reason that you might hold off a little bit because you think that multiples are getting too high?

Are you comfortable with where they’re at?

And would you -- okay, I’ll just let you speak.

All right, Alexis.

Wow, okay.

Let me see if I can get all those questions, but I’ll try.

I guess, first of all, we actually have seen -- and while you’ve seen us do more acquisitions this year, the acquisition prices have come down to more rational territory.

If you think about the string of pearls that we’ve done this year, we did every one of them in that five to seven times trailing EBIT.

We did pay more for Farnam because it’s what we call a golden nugget, and that is much more strategic, and we paid 9.8 times that, and that’s public information.

So that one was more.

But as we’re looking at it right now, we’re just going -- Alexis, we’ve done a lot of acquisitions this year.

It’s time to make sure that we digest them right.

And while we’ve also leveraged our balance sheet to the right proportion so that we have the flexibility, both management and capital, to do more in 2007.

I don’t want to communicate that we will not do any more in 2006, but if we do, it will be smaller in nature and definitely be a string of pearl.

Okay, great.

And just lastly, on the Farnam integration, it sounds like you’re making a lot of progress.

Anything that’s sort of better than you’d expected it to be as you go through this process?

Actually, I’m very pleased with how the two organizations are coming together, and what we’re seeing is really the people there -- the cultural fit between these two companies has been quite amazing to watch.

And we’re really doing some things there, doing some very smart things that the people are actually doing.

We’re not doing it here in Walnut Creek; believe me, they’re doing it out there in the strategic business unit to say, what can we do better?

What is the “best of breed” of the people that we have to make sure we have the right processes?

And the whole thing with the R&D tech capability, the manufacturing, the sales capability, right now, I’ve got to tell you, I am very pleased with how that is going so far to date.

I think it will be a terrific acquisition going forward for us.

Great.

Thanks very much.

Didn’t mean to go on so much on that, but you can tell I’m kind of excited about that one.

Reza Vahabzadeh, Lehman Brothers.

You mentioned sales contribution acquisitions were 28 million bucks.

Would you happen to know what was the contribution from acquisition in terms of EBIT or EBITDA?

We don’t contribute -- or we don’t disclose that.

Okay, but would you say that the margins, EBIT margins, on the acquired sales were comparable to yours?

I would say that the EBIT margins on most of our acquisitions would be higher than our average.

But then we have the intangible [inaudible] that we’ve started to do on Farnam.

So, again, from a gross margin perspective, yes.

From an EBIT contribution, no.

But from an EBITDA margin contribution, you would say yes?

No, from a gross margin --

Gross margin perspective, yes.

This first year for some of our -- from our larger acquisitions, the EBIT contribution is smaller percentage-wise.

Right, although Farnam will have a higher EBITDA margin than the base business.

It will in 2007 and going forward.

This year, we absorbed the amortization.

We are doing some restructuring of businesses we’re doing through that.

Okay.

Sounds good.

And then as far as Breeder’s Choice, where is it being sold right now, and how do you plan on positioning it vis-à-vis some of the other super premiums that are being marketed by some large companies?

Reza, that’s a good question.

Right now, as we said before, it’s basically a West Coast brand.

So you will not find this product pretty much anywhere east of the Mississippi River.

Starting now, there is a rollout schedule that’s very aggressive that will get the Farnam -- I mean the Breeder’s Choice product out across the United States in the next 12 to 18 months, and that will be starting next month.

And you’re going to be positioning that as a premium to Iams and Science Diet and so forth?

Ultra-premium.

It’s going to be well above Eukanuba, Science Diet, pretty much anything that’s out there currently.

Okay.

And have you tested this at the specialty channel?

Yes.

And it’s already currently distributed, remember, on the Western U.S., so we have very good point-of-sale data at some very prominent accounts right now.

Okay.

And do you think that the pet specialty channel is expanding overall allocation to dog and cat food, or are you going to be taking share away from somebody else?

Both.

Okay.

And then as far as your overexposure to California, can you give us a feel for how overweighted you are to California in pet or garden?

On the Pet side, I mean it’s pretty well evenly distributed across except for the Breeder’s deal, which is more than California; it’s West Coast.

On the Garden side, Brad, I think, answered that, but he’ll answer it again for you.

Yes, year to date, if I had to say West Coast -- I’ll call it West Coast as opposed to just California -- I’d say we’re off about 7 million, but that’s because of the weather and where the season has come in.

Now that it’s come back in, we expect to recoup a portion of that.

Right.

Let me rephrase my question.

As a percentage of your Garden sales, how significant is West Coast?

We’re not going to break that down, although it is one of our larger markets.

I will tell you that, but we’re not going to break out specifically.

It is just a little known fact that -- some of you may not know -- but one in 12 Americans live in California.

And then you include Washington and Oregon, you’ve got a good portion of the population in the U.S. on the West Coast.

Okay.

Thanks much.

You’re welcome.

[Karu Mortenson], CIBC World Markets.

Good afternoon.

I’m CIBC.

With you guys selling close to the season, what is the ability to reduce inventory levels beyond the current level that we’re at, or are we really kind of near the bottom here with these inventory reductions?

Retail?

Are you talking about retail inventory reductions, or are you talking about our inventory reductions?

Both.

Well, at retail level, I would say that we’re probably a little bit more heavily weighted towards third quarter, meaning that it will continue into the third quarter.

The good news portion of that is that as we’ve seen those numbers go down, our point of sale is up double digits, and we have maintained or improved our in-stock levels, which means that we are performing very, very well in that environment.

Not all of the competitors out there can say that they are able to maintain that level of in-stock and performance.

So we expect that, based on that, that we will do quite well.

I guess if I could rephrase that -- you know, at the level that you’re operating right now, you have the improved stock.

If your retailer said, “I think we want to take out another turn, you know, another week of inventory,” I mean are you kind of at that inflection point where in-stock levels become an issue for you, or is there more pushback from the retailer that could be yet to come?

Well, it could become an issue if it gets pushed too far.

Certainly, that’s the case -- any time that it gets too low, mix can become an issue.

But as we stand today, we’re just fine.

And we would anticipate that our inventory levels will come in line as the season comes to conclusion.

And perhaps I missed it, but have you quantified the impact of the inventory reductions for the quarter and the third quarter coming up?

Well, for the total year, we would anticipate the impact in the 15 to $20 million range.

Spread across most --

Spread across the second, third quarter.

But, again, that also means that in fourth quarter, we would get less returns back, and it will be more heavily weighted toward the third quarter in terms of the impact.

And in terms of the national rollout for Breeder’s Choice, are there any capacity issues here, or is that going to be part of the capital expenditure spend going forward?

Right now, there are no capacity issues on the initial rollout, and I’m sure when we get into the budgetary process that we’ve mentioned in September/October, we’ll take a strong look at that going forward.

Okay.

And then just lastly on the aquatic side of the business, is it possible to get a little bit more color in terms of what parts of that business performing well in terms of the high end versus the low end, or was that truly across the board?

Obviously, as Glenn mentioned before, when we saw gasoline prices go up, before, we saw a dip in the very high end of the aquatic industry, which means very large tanks and more expense, more out-of-pocket expense.

The attraction right now is that we had some segments of the aquatic industry where the retail cost is lower, and those were selling okay.

I mean just like any industry, we think that in every segment we compete in, we’re doing well, but, yes, we’re still -- as Glenn said before, we’re still tracking this gasoline pricing and looking at POS to see how that’s affecting us.

But to answer your question, I mean the first thing it picks up are generally the consumables just because there are so many tanks out there.

People are still going to feed their fish.

They’re still going to take care of the water, and that’s great for chemicals and food.

As time goes on and we introduce new products, we think -- we’re very sure that the rest of the business will pick back up because of innovation.

That’s the same as it’s always been.

Thank you very much.

You’re welcome.

Bill Chappell, SunTrust Robinson Humphrey.

Just a couple housekeeping.

On the restructuring charges for this year or profit acceleration, I guess we’ve done about 1.6 million per quarter for the past two.

It sounds like it’s going to be a little bit faster rate in the third quarter.

Are we going to see a majority of, I guess, remaining 3.8 million in the third quarter?

It will pick up a little bit in the third quarter as we’re doing some of those manufacturing consolidations on the Pet side that we talked about, so you’ll see a little bit more in the third quarter.

Well, how about, I guess, benefit?

It sounds like of the $4 million benefit, how much have we seen so far?

Not enough!

Okay.

And then legal costs, what they were in the quarter and what your estimate is for the full year?

Legal costs were very, very low in the quarter, below $1 million for the year.

We expect again -- the budget was $3 million.

Hopefully, we’ll be under budget this year, Bill.

Okay, but you’re still using 3 million in your guidance?

Yes.

Okay.

And then just finally, trying to understand the acquisition, what is your capacity for financing?

And maybe kind of give us the rationale of the secondary that you did in addition to the financing to kind of pay for some future acquisitions.

Well, if we just did no more acquisitions, we have availability under our bank facilities right now called $140 million.

But as you add more EBITDA to the equation, you can continue to expand and finance beyond that.

So it’s an iterative process.

But we don’t feel we’re capital constrained for the acquisition program that we -- you know, we have in our sights and the strategic plan.

Bill, it’s more to get inside of our heads.

As you reflect back, I think, when you first met us several years ago, when we missed the [Tetra] acquisition because we didn’t have the financial capability, we want to make sure that we have the financial capability to take on whatever comes up over the transom.

It’s really more for flexibility.

Okay, thank you.

You’re welcome.

Patrick Stowe, Priority Capital.

I wonder if you can just give us kind of a progress report update on the SAP rollout and implementation, how that’s going?

The SAP rollout is -- it’s on time and on budget.

We’ve had corporate up and running for about a month, and we are in the midst of implementing SAP in two of our business operations as we speak.

They should be up and running all on about August 1.

So that will be our first wave of the full-blown ERP.

So far, so good.

Okay, good.

And then on the Farnam kind of integration and just an update on, I guess, how we’ll report that business, any updated thoughts on whether that becomes a separate SBU?

You mentioned maybe an animal health SBU.

Can you update us on that?

It will be part of the Pet division, which it already is today, and it’s really -- it’s the combination of Wellmark, Farnam, and the Shirlo intellectual property assets, and we have named that right now Central Life Sciences.

It’s really about biology, about new things developing, especially with a lot of EPA and FDA registrations.

So that’s what we expect that business to do.

Okay, but no chance that that will eventually be broken out into separate reporting units?

No, because even there, a good portion of their sales are exactly where our pet sales go.

Right.

Yes, I understand.

Okay, and then lastly, some on the wild bird.

Any change in the competitive environment with Scott’s obviously being there now?

That’s fairly new.

They just bought [Morning Song] -- I think it was in three months ago?

[Indiscernible] October/November.

So, okay, back then.

No, I think what really more -- we pay attention to, we talk to -- have consumer panels that we talk to on wild bird feeding.

We participate in a study with the major universities, and we look at this all the time.

And so we want to understand what happened to wild bird feed.

And what we do know is that we had the warmest January, I think, in 112 years in the United States on record, and we also know that when that happens, that wild birds will not come to the feeders as much as they normally do because they can find their food on the ground when it’s not covered by snow.

And so what we did find out talking to our super group of -- a focus group, what they did was they fed less because the wild birds were not coming to the feeders near as much.

We think that is a very seasonal -- and we also look back in history with our -- it looks like this happens about every 18 years.

Hence, we do know that.

I mean we know more about this than you want to know.

So you guys have done some work on the topic?

Absolutely.

We continually do work every 90 days.

We want to understand what happened and what can we do differently.

And one of the things we are doing differently is we’re paying more attention now to making sure with our launch of [Nature’s Defense] from Kaytee, the healthy supplements we put on our Pennington Wild Bird Feed label, we’re trying to make sure that they’re more healthy as well.

And that one of the things we learned from our super groups.

And I would assume the point-of-sale trends at retail were fairly similar in the period?

Yes, they were, for everybody.

All right.

Well, thanks for the time.

Good afternoon to you.

Thank you, Patrick.

Mitchell Spiegel, Credit Suisse.

Just had a couple questions.

On the cash -- on your restructuring plan, how much of that is going to be cash this year, and how much will carry forward next year?

The restructuring plan we’ve called out is for 2006.

About $7 million we expect to spend in 2006.

That’s all cash?

Yes.

Yes.

On the working capital side, you said you expected some improvement in the back half of the year.

Can you share with us some targets you have for year-ending levels or cash balances at the end of the fiscal year?

The cash balance one is easy.

We just assume essentially zero that we’re net borrower.

Working capital, it’s kind of hard to tell right now.

But, generally, our seasonal peak is somewhere -- again before these acquisitions, we might peak about 50 -- 40, $50 million, so that should come out of the equation by year-end from a working capital perspective.

Right, okay.

And in terms of being a cash taxpayer --

Yes?

-- what’s the timing difference between your book rate and your deferral?

I don’t have that on top of my head.

I’m sorry.

That’s okay.

All right.

Thank you.

You’re welcome.

Alice Longley, Buckingham.

Just to look at the numbers differently, could you tell us again -- may you have -- what your increase at point-of-sale was in the quarter in lawn and garden and pet?

Point of sale for the quarter?

On an organic basis.

Can you do that excluding the acquisitions?

No.

Or either way?

Okay, are you asking for retailer point-of-sale?

Is that what you’re asking [inaudible]?

Yes.

How much were -- you know, we know that your lawn and garden shipments organically were flat, taking out acquisitions and also divestitures.

What was the point-of-sale performance?

The point of sale was -- I think we looked at that -- was right around 10%, I believe it was, Brad?

It was up double-digits.

And is that including or excluding the acquisitions?

Oh, that excludes.

That [includes].

This, there were no acquisitions to speak of in garden.

Not for garden.

But does it exclude the terminated businesses?

No, it actually includes the terminated businesses because we did not back that out of the calculation.

So it’s up.

We did not adjust that POS data for the terminated businesses.

Okay, that’s interesting.

Okay, and then on --

Did we lose you?

Alice, you there?

Hello?

Operator?

Yes, let me see if I can try and get her.

Okay, I thought we lost her.

Just one moment.

Just one moment.

They cut me off.

Oh, you’re back, okay.

Hello?

You’re back!

I’m back.

I guess they decided I was done.

What was the point of sale in Pet?

It’s very similar to what our organic sales rate was.

Okay, so that -- so you’re not really seeing inventory destocking in Pet?

We don’t have the same issue with inventory as Garden.

Okay.

And going into the June quarter, the inventory destocking for Lawn and Garden, not Pet?

That’s correct.

That is correct.

All right.

That’s good.

And then for the quarter overall -- well, for the two divisions, what was pricing?

You said you were getting pricing.

Well, you asked -- I think what we answered that, Alice, was this was on the last call we did.

The price increases we put in place for 2006 were a little bit above 1%.

What we’re looking at is, going forward, if these gas prices stay where they’re at, I think all of our competitors and ourselves are going to have to address pricing going forward because you’re just going to have to.

And when you say that about 1%, is that Lawn and Garden and Pet or both or either?

That’s across the board.

Across the board.

Was it more Lawn and Garden?

I’m sorry; can you say it again, Alice?

Was it pricing higher in Lawn and Garden than Pet?

One would think that’s where your pressures would be higher.

I would say they were about the same.

It’s more -- in Garden what you do is you go in and you get your listings once a year.

You negotiate your prices at that time because it’s a very seasonal business.

In Pet, it’s more what we call hidden price increases as you replace SKUs and bring out new products.

Okay, so that 1% sort of includes mix shift?

Yes, and the other thing different about us, Alice, which I think you know, we do very little fertilizer, almost no fertilizers.

We do not have the urea exposure that our competitors do.

Right.

Okay, that’s true.

And my final one here is I understand why insect controls might be strong this year with all the wetness, but why wouldn’t you be shipping those in the June quarter for the September quarter?

We could, but it will normally be -- what happens, if you think about it, when mosquitoes really come out or other bugs is when it’s hot and humid.

So traditionally, that will be your July and August months is when that really happens.

And we know here in the West Coast especially that we will expect to see a bumper crop of those.

And the other things going on is that retailers in their taking down their inventories that they’re talking about will move more and more towards just-in-time inventory.

So that’s also built into our planning that traditionally we might have shipped those in June.

We now think if they continue their current patterns, we’ll ship them more in July versus June.

We’re just following the retailers.

I thought there were a lot of bad insects in June.

There are.

We hope there’s more.

There are, but really, if you think when they really come out, it’s July and August.

All right, thanks.

Okay.

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

Okay.

Thank you, Operator.

Well, first of all, everybody, thank you for your questions today.

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

As always, we will continue to execute our growth plan.

We are continuing to [inaudible] extend our brands.

We are continuing to move and move faster on developing and launching new innovative products and packaging.

We are taking specific steps to leverage our cost structure and make our business improvements.

We are continuing to strengthen our Company to achieve consistent, profitable growth.

And you will see us continue to move towards pursuing and completing strategic acquisitions when and where they make sense.

With that, I would like to thank everyone for joining the call today.

We will see many of you, I know, at the many scheduled investor conferences over the next two or three months.

And with that, I want to thank you and wish everyone a happy afternoon.

Bye.

Thank you for your participation in today’s conference.

This concludes the presentation.

You may now disconnect.

Thank you, and have a good day.