Central Garden & Pet Co (CENT) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Central Garden & Pet fiscal third 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 the 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 & 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 Group; and Brad Johnson, President of the Garden 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.

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 24th, 2005 and other Securities and Exchange Commission filings.

Now here is Glenn Novotny.

Glenn.

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

We are pleased with the solid results especially in our Garden segment for the third quarter we announced earlier today.

We continue to make significant progress towards strengthening our business and delivering improved operating margins through new product innovation - especially those products with high barriers to entry; our cost reduction initiatives; and strategic acquisitions.

Our agenda today is first to provide an overview of the fiscal third quarter.

Jim and Brad will discuss the Pet and Garden groups segments respectively.

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

Turning to our third quarter results, sales for the quarter were $507 million, an increase of approximately 23% when compared to fiscal third quarter of last year.

Operating income increased 57% to approximately $60 million.

In the quarter we absorbed onetime costs in the quarter of approximately $2.1 million, primarily related to closing two aquatic manufacturing facilities in Dallas and Atlanta, and consolidating their production into our Franklin, Wisconsin operation.

Costs related to equity base compensation were $1.4 million in the quarter.

And net income was approximately $31 million, producing earnings per fully diluted share of $1.28 compared to $1.03 for last year.

However, in the quarter we recognized a net pretax gain of $9.0 million.

This is comprised of a $9.9 million gain from the litigation settlement with Herbert and Evelyn Axelrod, less expenses of approximately $900,000 associated with increased brand building and other strategic opportunity work.

Excluding these items, operating income was approximately $51 million and the resulting earnings per share for the quarter was $1.05.

We are off to a good start in our fourth quarter particularly in pet and garden insect control signals and believe that we are on track to deliver the $2.80 to $2.90 earnings per share estimate for the fiscal year, excluding any net gain from the litigation settlement or impact from any future acquisition.

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

First, simply stated.

Garden had an excellent quarter after a slow start in April due to the heavy rains on the West Coast.

Organic sales in Garden increased more than 8% after adjusting for discontinued operations.

These numbers include the adverse impact of the destocking initiative by a major retailer.

We estimate the sales impact to be approximately $4 to $6 million in the quarter which was lower than our original forecast due to stronger than anticipated demand by the retail consumers.

Garden operating margins improved 120 basis points to 9.8% from 8.6% a year ago due primarily to improved sales mix and more volume.

Second, our profit acceleration program is progressing as planned.

Our objective is always to be effective first and efficient second.

On the effectiveness front, we continue to partner with our retail customers to help drive store traffic, increase average sales tickets and make it easier for them to do business with us.

To this end in Pet we have consolidated and created four distinct sales forces in Aquatics, Life Sciences, Bird and Small Animal and Dog and Cat.

This category-focused structure aligns Central with our retail customer needs and improves both effectiveness and efficiencies.

We also launched a variety of packaging and promotional activities including cross promotions, value packs, and stepped up the number of consumer activities that Jim will elaborate on later in his discussion.

We're also in the process of rolling out Breeder's Choice - the Ultra Premium dog and cat food and treat company we acquired last quarter.

We are rolling it to Texas first, then Florida and ultimately up the Eastern Seaboard.

We remain excited about the future potential for this business.

During the quarter, we completed the closure and consolidated of two aquatic facilities that we talked about earlier in Dallas and Atlanta.

The entire Aquatics operation including manufacturing, sales, R&D and administration is now based in Franklin, Wisconsin.

In our Life Sciences group, which is Wellmark and Farnam, aside from the sales force we have completed the consolidation of administration, and research and development functions.

We continue to be very impressed with the quality of the people and the competencies of the Farnam team.

We are more optimistic than ever that our strategic expansion into the animal health and nutrition category will be very successful for the Company.

Third we finally completed our outstanding litigation with Herbert and Evelyn Axelrod.

As previously announced, we received $26 million in settlement of all outstanding claims.

Out of this 26 million we recorded a onetime gain as a reduction to SG&A expense in the amount of $9.9 million after consideration of the outstanding note and other related amounts previously accrued on our financial statements.

We have now started to reinvest these proceeds back into the business.

First, we have and expect to continue to purchasing shares.

Since the announcement of the settlement we have repurchased approximately 240,000 shares for approximately $10 million.

Our Board approval is an authorization up to $100 million.

We plan to continue to opportunistically repurchase shares from time to time.

Second, we elected to step up our brand building activities above our original budgets and have retained consultants to also help us pursue certain strategic opportunities.

We expect to invest most if not all the remaining pretax gain of 9 million to create long-term shareholder value.

Needless to say, we are pleased with the outcome of this litigation and to finally have the issue behind us, ending many years of legal expense and management distraction.

I will now turn the call over to Brad Johnson, President of our Garden group, to provide additional detail into the Garden segments results.

Brad.

As most of you know the third fiscal quarter got off to a pretty slow start, due largely to the excessive rains on the West Coast in March and April.

The business however rebounded dramatically as our third quarter results indicate.

Total sales were 279 million - an increase of approximately 29 million or 12%.

Sales of our own branded products increased nearly 17% while sales of other manufacturers' products as plans decreased by 6%.

Organic sales adjusted for discontinued operations increased by 8.2%.

As expected and as Glenn mentioned earlier, the inventory reduction initiative by a major retailer adversely impacted our sales results by approximately $4 to $6 million in the quarter.

We are pleased, however, that we were able to post such excellent results in spite of the adverse weather conditions in the early part of the quarter in the retailer reduction initiatives.

Even more significant, our operating profit in the quarter increased 38% to approximately $27 million due primarily to the increase in higher margins, branded product sales and continued realization of our supply chain efficiencies.

Most categories within garden posted year-over-year improvement with point-of-sale purchase for our products at the major retailers up by 9% in the quarter.

Grass seed had a spectacular quarter with sales up 28%; and we significantly increased our market share.

Specifically in grass seed our new innovative varieties and mixes continue to be very well accepted by retailers and more importantly are purchased off-the-shelf by consumers.

The Garden group is leveraging our unsurpassed leadership and speed development technology, with a more consumer-focused product development and marketing effort.

A specific example is the consumer need to repair damaged areas of their lawn quickly and with minimal effort and yet still produce a gorgeous yard.

As a solution to this opportunity, we have launched our new All-In-1 line of grass repair kit products from Pennington.

This exceptional new product helps simplify the consumer late season lawn care and repair, by combining growing [media] and seed technologies into easy applications.

The initial sell-in and sell-through of the All-In-1 products has exceeded our expectations.

We also witnessed a pickup in our Lawn and Garden Controls business, late in the quarter, once the heat and increased moisture impacted several key regions.

Specifically Texas, California, and Florida.

Consistent with our forecast, this trend is carrying over into the September quarter.

Continuous ongoing improvements in the quantity and variety of our product offerings, supply chain optimization, and sales and merchandising capabilities have enabled us to successfully sharpen our focus upon the top retail players in our segment.

As the retail environment continues to consolidate, we are driving growth at the major retailers at a faster pace than the growth rates of the broader categories.

We are underway with our planning and program reviews for the 2007 garden season with our major retailers and remain very optimistic that we will improve upon our retail listings from a year ago.

This is an environment where our retail partners continue to drive sales growth up and inventories down.

Our point of sale, the sell through trends and in-stock rates remain very strong.

Our market share is at or above historic levels and the trend lines are favorable.

In summary, we are pleased with the results of the third quarter and are encouraged with our momentum as we enter the final quarter of the fiscal year.

As we close the year, we will continue to focus on innovation, brand building, and cost synergies in order to deliver superior results in the years to come.

Additionally, we are focused on obtaining selected price increases that are necessary to offset energy and raw material costs for the 2007 season.

Now I'll turn the call over to Jim Heim who will discuss the Pet Group results and outlook.

Jim?

Thanks Brad.

Throughout the quarter, the pet group made great strides in strengthening our relationships with our retail partners while focusing intently on our consolidation initiatives.

Turning to the pet segment results, sales were 228 million, an increase of 64 million, or approximately 39% when compared to the same period last year.

Branded product sales increased 51% while sales of other manufacturer products increased 1%.

Organic sales were up 1%; operating income increased 29% to approximately 30 million which includes cost of 2.1 million in the quarter relating to our profit acceleration program primarily in Aquatics.

Clearly the categories in Pet that continue to perform well are the consumable supplies that generate recurring sales.

In Dog and Cat, items including flea and tick and other health and control products, treats, and food continued to outperform.

Small animal and Specialty Pet Consumable Supplies - including aquatic lighting systems and water conditioners and supplements - also continued to perform well.

The relative soft areas in Pet are the economically sensitive, discretionary items such as mid to high-end aquariums and the broader Bird category, which includes expensive pet bird supplies and food and the feeding of wild birds.

As a result of this, our retail partners reduced their inventories in many of these discretionary categories.

We estimate this sales impact to be approximately 6 million in our third quarter.

Year-to-date organic growth is up approximately 2%.

In light of the current economic environment, we are much more proactive in working with our retail partners to introduce new, meaningful products to improved packaging design and retail promotions that will benefit our brands, help drive our traffic and improve category cells.

First, we are doing more cross promotions of our product lines.

This includes creating premium quality branded kits to simplify the shopping experience as well as convince consumers to try something new and different.

We are also creating more value packs so the consumer is incentivized to purchase larger quantities at a relative discount.

We are pleased and excited about our extended business with Target.

We have entered into a co-branding relationship with Animal Planet that is currently being rolled out to Target nationwide.

This program features over 80 new co-branded SKUs in the Bird, Small Animal and Aquatic product lines.

The introduction started in July.

We expect the rollout to be complete by September.

We're also launching a large number of new products in our fiscal fourth quarter.

In fact, we are currently launching over 300 new SKUs across all channels.

Finally, we purposely increased the numbers of our Power 3 marketing and promotional events including our Fantasy Days at the Park and Bark at the Park; bring your dog to the game with our Major League baseball partners.

In the September quarter, we are more than doubling the number of sponsored ballgames compared to last year.

This has resulted in more than a 50% increase in the number of retail stores or approximately 1300 that are featuring Central Pet brands on end caps and other premium promotional displays.

Turning now to our Profit Acceleration program.

We are making good progress.

We completed the closure and consolidation of the remaining two aquatic facilities into our Wisconsin headquarters.

And as Glenn mentioned before, the Farnum integration is going very well.

And we are in the process of launching Breeder's Choice nationwide, our recently acquired Ultra Premium dog and cat food and treat lines, to specialty pet retailers.

The initial launch in Texas has been well-received by both retailers and consumers.

We are increasing our consumer trial advertising and brand building activities for Breeder's Choice in our fourth quarter to accelerate and ensure a successful launch nationwide.

Now given all these activities, we expect Pet organic sales to be between 5 and 6% in the fourth quarter.

And July sales are on track to achieve this forecast.

We continue to feel very good about our innovative products as our relationships with our retail partners, our consumer marketing initiatives and margin enhancement efforts become more effective and efficient.

We fully understand that to succeed in this uncertain consumer demand environment, we must continually improve and innovate in the categories we participate in.

Our strength and key to achieving our goals is to launch new meaningful products that improve the lives and enjoyment of our pet parents and their companion animals.

We will continue to support our new product launches and brands by increasing our Power 3 brand-building initiatives.

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 third quarter of fiscal 2006 were our $507 million, a $94 million or 23% increase from last year.

Acquisitions contributed approximately $80 million in sales in the quarter.

The elimination of certain third party sales and discontinued operations in both our Garden and Pet segments adversely impacted sales by approximately $8 million.

Gross profit for the third quarter was approximately $172 million, an increase of $41 million or nearly 32%.

Gross profit as a percentage of net sales increased to 33.9% from 31.5% in the year ago period - reflecting a favorable sales mix, price increases and contribution from acquisitions.

Selling, general, and administrative expenses for the quarter were $112 million - an increase of approximately $20 million.

Included in SG&A are $2.1 million of costs related to our profit acceleration program, and $1.4 million of costs associated with equity-based compensation.

As mentioned earlier, we recorded to SG&A a net pre-tax gain of $9 million related to the $9.9 million litigation settlement, partially offset by our $900,000 of increased brand building and strategic work.

Excluding the net gain, SG&A expense was $122 million or 24% as a percentage of sales, an increase from 22% last year.

The increase is due primarily to greater contribution from sales of branded products - including those from acquisitions which have higher operating expenses - and higher energy and fuel cost of $4.1 million.

Operating income for the quarter was $59.9 million, an increase of approximately 57% compared to a year ago.

Excluding the $9 million net pre-tax gain from the litigation settlement, operating income was $50.9 million, an increase of 33% and now as a percentage of net sales improved 80 basis points to 10%.

Net interest expense for the quarter was $10.6 million, an increase of $4.6 million.

The higher interest expense is due primarily to higher debt balances related to the acquisitions completed in fiscal 2005 and 2006.

The effective tax rate for the quarter was 38.3% compared to 36.9% a year ago.

The effective tax rate was lower a year ago due to a favorable resolution of various tax matters plus additional recognition of tax credits.

Minority interests relating to the Pet Pack acquisition was $809,000.

Minority interest is the deduction of 20% of pet tax net income not owned by Central which we are consolidating in our results for the first time in the third fiscal quarter.

Net income for the quarter was $30.7 million, an increase of nearly 38% over the same period last year.

Earnings per fully diluted share was $1.28 compared to $1.03 last year, an increase of 24%.

Earnings per fully diluted share was $1.05 excluding the net pre-tax gain of $9 million for the litigation settlement, an increase of 2% over the same period last year.

Fully diluted share count for the quarter was 24.1 million, reflecting the impact of a two million share equity offering completed in March of this year.

Depreciation and amortization for the most recent quarter totaled approximately $7.5 million, compared to $5.1 million last year.

Capital expenditures for the quarter totaled $12.5 million versus $3.5 million a year ago and $30.7 million year-to-date.

The increase in capital expenditures is due primarily to our SAP conversion and modernization and expansion of plant and equipment.

Turning to the balance sheet, comparing the June 2006 balances to the June 2005 balances, accounts receivables increased approximately $71 million or 35% to $279 million.

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

Inventories increased approximately $65 million or 24% to $343 million due primarily to acquisition.

When compared to this year's second fiscal quarter, inventories declined nearly $22 million.

As of June 2006, total debt stood at approximately $594 million compared to approximately $345 million last year.

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

Now turning to guidance we are reiterating our fiscal 2006 guidance range of $2.80 to $2.90 per fully diluted share from normal operations which excludes any net gains from the litigation settlement.

This guidance, therefore, implies normal fiscal fourth quarter earnings per share estimates to be in the $0.43 to $0.53 range.

Once again, excluding any increase spend related to brand building and strategic work which we will disclose on our fourth quarter earnings call.

I will now turn the call back to go Glenn.

Glenn.

Thank you, Stu.

With three quarters behind us, we are on track for another solid year.

Year-to-date our sales have increased approximately 14%.

Operating income excluding the net pre-tax gain and litigation settlement has improved over 20% as we continue to focus on improving operating efficiencies and driving sales of higher margin products.

We are improving our future operating effectiveness and efficiencies with our profit acceleration program we have previously discussed.

We believe we are positioned for growth with the strategic acquisitions completed in fiscal 2006 of Farnam, Breeder's Choice, [Tecpack], the intellectual property assets of [Shurtile] and most recently Ironite products.

We have the financial capacity to continue to make strategic acquisitions and we continue to lead with our strength in new product innovation.

For the fourth quarter as the gentlemen discussed here, the month of July is off to a good start in both Garden and Pet.

Specifically as expected insect control products for mosquitoes, ants and other pests are in high demand.

And as Jim discussed we are launching over 300 new products and those 300 will cross both Pet and Garden.

We're also excited about our plans to invest the litigation settlement proceeds to drive our branded products sales in the fourth quarter and 2007 and to pursue strategic opportunities.

We also believe 2007 will be another strong growth year for the Company.

We are currently in the middle of our listing reviews with retailers for next year and so far, so good.

Once our retail listings and budgets are complete, we will schedule a call in early November to give you our detailed guidance for 2007.

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

(OPERATOR INSTRUCTIONS) Bill Chappell with SunTrust.

Good afternoon.

I guess, first, just jumping into the guidance I'm certainly glad to see you reiterating the full year range, but is there any reason why you have a $0.10 range for the fourth quarter?

And I guess within that reiterating the revenue guidance, it seems to imply that you might have down garden product sales year-over-year in the fourth quarter.

Is that the right way to look at it?

No, we're not looking at down garden sales.

In fact as we said we are seeing good strong insect control sales right now.

So we are not expecting that.

We felt at this point we'd just leave the guidance where it was.

So don't read too much of into the revenue range being the same even though you have the upside?

Right.

Then, in terms of the $0.10 range the same type of thing?

Same thing.

Also looking to the, I guess the garden business.

We are cycling in with I'm sorry -- the pet business.

We are cycling it with easier comps year-over-year.

Are you expecting it to accelerate as we move to September, October, November?

We are in anticipating, Bill, that we will have comps that are over where we are participating at in year-to-date.

So to answer your question we expect the comps to improve the trendline so well above what they are right now.

I think there's a couple of reasons for that, Bill.

First of all as you said we have a much easier comp in our fourth quarter versus what we had in third quarter last year.

Number one.

Number two, we also saw the retailers pull down their inventories in the third quarter compared to last year so we see both of those trends going out of favor and as Jim stated we expect our fourth quarter to be in the 5 to 6% organic growth rate.

One last question on the quarter, just want to make sure I understood.

You reinvested in kind of a separate process acceleration program $900,000 in (indiscernible).

That is not part of the other program this year?

That is correct.

Once we -- we suspected that the money would be coming in from the settlement with Herbert and Evelyn Axelrod; we didn't know quite when it was coming in but we did that.

Once we knew that we decided to increase our brand building and some certain strategic work but primarily brand building, especially in some of our Breeder's Choice rollout.

And also we did a little more advertising for our insect control in the third quarter.

We would not have spent that extra $900,000 if there was not a settlement.

And that was about $0.03 a share?

2.5 (MULTIPLE SPEAKERS)

2.5 in round numbers.

Something like that.

$0.02.

One last one.

On the Breeders expansion I think you had said in the past to move breeders to the East Coast you might have to add a different distribution facility.

Is that part of these costs?

No, we are using our standing distribution facilities that we have already in place.

Thanks.

Good quarter.

Thank you.

And I just add on the Breeder's Choice - what we are trying to do here is we don't need the extra manufacturing cost here right now but we are going to invest more money as Jim stated into our consumer trials giving out free samples, interventions at stores, more advertising and try to make sure that we kickstart this thing right because we see a lot of potential opportunity for that business.

Thank you, Bill.

Next question.

Joe Altobello with CIBC World Markets.

Good afternoon.

Question on the pet supply business.

Obviously you said 1% organic growth in the June quarter guiding to five or six for September.

How much confidence do you have that business will show that much acceleration?

I mean, obviously July looks like it's off to a good start but it's only one month at this point.

To answer your question, we are pretty confident considering that we have the current trend lines in from July we are very positive.

And the other things, Joe, to really look at are the new product launches.

Obviously we know the number of SKUs, where they are going, when they are shipping so we factored all of that into our guidance on the fourth quarter and we feel good about that.

Why the dip in June?

Was it really gasoline prices or consumers (MULTIPLE SPEAKERS)

Yes, we experienced unanticipated softness in discretionary sales probably due to that.

Yes.

And retailer behavior too.

And the retailer behavior when they saw that, Joe, they actually really pulled back as we mentioned on the inventory levels.

And then in terms of the profit acceleration program, when does that turn accretive?

A little bit in the fourth quarter this year and then really most of it will be 2007.

Okay and your still guidance may be a $4 million cost this year, 7 million benefit next year basically?

That's in our guidance right now.

Last if I could on Petco obviously going private now, any impact for you guys?

Are they going to slow down store expansion?

Maybe get a little more aggressive on pricing with you?

We have experienced, no unusual behavior.

Its business as usual and we are very pleased with our business here.

Jim Myers is probably more relaxed than he was before.

Thanks.

Michael Cox with Piper Jaffray.

Good afternoon.

My first question is on the SAP implementation.

I was wondering if you could give us an update on how that is progressing.

Yes it is on time and on budget.

The next big installation that we are working on right now is our new Aquatics strategic business unit which will be up and running this fall.

Okay.

So the plan still is to largely have this complete by the end of your fiscal year?

Or I'm sorry the end of next fiscal year.

Is that correct?

No it's a four-year implementation for SAP companywide.

We are just taking in meaningful and manageable bites.

Okay.

Then in terms of the acquisition impact to the quarter.

You said 80 million.

How does that break out between the two business segments?

It's almost all (MULTIPLE SPEAKERS).

Because that's really what is -- Farnam, Breeders Choice primarily are the very large ones there.

That is the biggest impact.

I was wondering if you could qualify the Animal Planet rollouts to Target in terms of perhaps the number of SKUs or the potential impact you see?

How's that happening on the financials?

We mentioned that the number of SKUs -- there the SKUs across three different categories.

And then that rollout is going on as we speak.

My last question is on the organic growth was in the Garden segment.

You mentioned five to six in the pet business.

I was wondering what that might look like in the fourth quarter, what you're expecting?

Well, the Garden business will continue to be in the low single digits for growth for the quarter; but year-to-date we are at 5.8 and will be probably slightly under that pace for the fourth quarter itself which would be pretty difficult for us. (MULTIPLE SPEAKERS)

Some of that is because of discontinuation of some previous business, the soil business etc..

Thanks a lot.

Alice Longley with Buckingham Research.

Good afternoon.

When you gave your guidance for the year the 280, 290 and you took $0.43 to $0.53 for the fourth quarter.

What's the number you are assuming for the third quarter?

What are you working off of? $1.05?

Yes.

We are trying to make it very clear.

As clear as we can for you folks to call out that that litigation settlement was completely different.

We are trying to make it very clear what our normal operating [rates] should be.

Well if I add -- if I use that then take $0.43 the fourth quarter I get to 277.

I don't get the 280.

The 237 plus whatever numbers should get you somewhere between 280 and 290.

290.

I will go over that with you off-line, I guess.

In the organic growth, the 1% that we were talking about in Pet, does that include discontinued operations or have you -- or discontinued brands?

Have you taken them out?

That does not include any discontinued operations.

That's straight organic.

(MULTIPLE SPEAKERS) That's straight organic.

And we didn't discontinue any brands.

There are always changes, Alice, within SKUs and resets and -- but that is straight organic.

There are no adjustments basically.

When you talk about Pet you alter the number for discontinued brands but you don't -- when you talk about Garden you (MULTIPLE SPEAKERS)

(MULTIPLE SPEAKERS) garden organically year-to-date we are up 5.8%.

And that's -- well, in Garden when you are up 5.8% year-to-date, is -- are you up more if I were to adjust for discontinued brands?

That gets you to 8.2%. (MULTIPLE SPEAKERS)

8.2.

Year-to-date?

(MULTIPLE SPEAKERS) looking for but year-to-date number. (MULTIPLE SPEAKERS) in the quarter it would have been 8.2.

The 5.8 is the year-to-date number from an organic standpoint.

And would that be higher as well if I were to take out discontinued brands?

That is with the discontinued brands taken out.

That's with the discontinued brands take out?

Yes that's correct.

The soil business was taken out of that number and that's (MULTIPLE SPEAKERS)

Maybe I'm mincing words here but it is not discontinued brands.

It is discontinued operations or SKUs when we look at the Company.

That was an underperforming asset.

If you look at our margins having increased and despite the fact that that is out of the numbers you are actually seeing our margins increase.

And that is part of what is going on too.

We are trying to improve our overall operating margins and in some cases that means we discontinued some operations.

Now back to Pet with this acceleration we are expecting into the fourth quarter.

Do you think we're going to get inventory destocking by retailers in the fourth quarter or was that pretty much tied to the third quarter?

That was nearly all tied to the third quarter.

In fact, we are tracking that every week.

They look to be where the retailers want them and business is ongoing very good.

So we think that is over.

So they're all typed?

Yes.

And so the reasons for the acceleration are that that's ended, we've got easier comparisons, you have your stepped-up sports, the sponsorship program and you have your program with Target and Animal Planet.

As well as other increase spin against the consumer on any trial of new products outside the sports arena.

Farnam.

Was Farnam dilutive in the third quarter?

Do you expect it to be accretive in the fourth quarter?

That was the original statement you made at one point.

Yes, we said it would be basically neutral for the entire year.

It will be accretive in our fourth quarter.

What it had to be basically.

Do you know how much it was -- could you tell us how much it was dilutive in the third quarter?

No.

Not right here.

But you still hold to that statement?

Yes.

Do you expect to take more restructuring charges next year?

I know you are not giving us guidance yet but --?

Yes.

We will take some more next year and we laid out I think a year ago when we laid that out that we would spend -- it won't be as much as we spent in 2006 but we will not finish everything in 2007 but the number will be quite a bit smaller, if I recall.

Do you know how much (MULTIPLE SPEAKERS).

No just stay tuned, Alice.

We will have that all baked into 2007 guidance.

I think the key thing is we are not going to have the size program we are having in 2006.

I guess that's it; thank you.

Dara Mohsenian with J.P. Morgan.

Glenn, can you review for us in a bit more detail, specifically where the reinvestment in litigation gain is going?

Which brand building area it is and what are the strategic opportunities you mentioned that consultants are looking at?

I will talk about the brands first.

We basically are -- we've already done some of this and we are continuing to do it as we speak right now and we are going to increase it over the next couple of months as we are sitting here now.

First of all there's the Breeders roll-out.

As we said we are very excited about taking that product nationwide where it's not been.

So we are definitely going to invest more than we had previously thought about from their standpoint.

The other one is, of course, insect control.

I think Brad will also do some more on probably grass seed and then we're also going to push this against our other products out there across our entire segment in both Pet and Garden.

We are now entering primarily of our Pet business so we will spend a lot of that right now in the fourth quarter on the Pet.

But we are doing this for both the fourth quarter as well as putting us in a much better position for 2007.

On the strategic work we have hired a consultant or two to help us on understanding our business better as well as a strategic opportunity that I am not going to discuss on this call; but we think it is important.

What kind of dollar amount, can you give us some kind of breakdown between how much is going to these strategic opportunities and how much is related to the brand building?

I would say the most of it will go to brand building.

That is No. 1 and I will leave it at that.

All right.

And what kind of incremental payoff do you expect from this incremental spending next year?

That we will lay out for you and we will give you your guidance for 2007 in early November.

And should we think about this brand building as a onetime occurrence or is this something that continues longer-term?

Well, we will see how it all pays off.

I'm just going to give you a straight answer here.

We did see what I recall this windfall from this settlement with the litigation.

And we said we have an opportunity to invest this for our future business, both now and the future.

We are taking this opportunity.

We are going to measure, monitor how it goes.

I would say right now I would view this onetime but if we have tremendous success then we will continue at least a portion of that.

And what has been the success this year?

You already had a big marketing increase behind the business.

What do you think has been the success of that marketing increase?

Well, kind of comeback to what Stu went through his number.

While we look at our quarter we are actually pretty pleased with it especially when we had to offset - as Stu called out - about what. $4.1 million.

$4 million of energy costs.

Well, you know you do the sample math, that's over a dime.

Probably $0.11.

If it hadn't been for the increased energy costs, we would've had a much stronger quarter than what we saw.

So I thing that really helped us to offset what I would call that headwind a lot, as well as we saw some discretionary consumer spending fall off in the third quarter that Jim talked about.

I'm afraid if we hadn't done some of this we would not be where we are today.

Last question.

I'm overstaying my welcome.

Can you just give us an update on the potential pot light of acquisitions at this point?

Are you close to anything there?

We have lots of discussions going on.

That will continue.

As we said, we have already purchased five acquisitions in 2006.

We have taken a breather.

You noticed for the last couple of months and we said we would do that and we will continue to be disciplined about the acquisitions that we look at.

I will tell you that the pipeline we have opportunities in front of us.

Thanks.

Doug Lane with Avondale Partners.

So I want to be clear on this settlement.

The settlement itself was $9.9 million and that was the windfall, if you will, source of cash.

The .9 is really marketing spending, which is going back into the business.

How much more of that incremental 9.0 million are you going to spend back in the marketing spending in the fourth quarter and then into next year?

First of all, if there had not been the settlement, we would not have spent the $900,000.

That's No. 1.

No. 2, we wouldn't be increasing our spending in the fourth quarter if there hadn't been a settlement either.

We are looking at that $9 million we have left of that $9.9 million and we are looking at the best way to invest that, primarily in our brand building and some strategic work we talked about.

And we will put that into primarily brand building.

In the fourth quarter?

A lot of it will be in the fourth -- a lot it will probably (MULTIPLE SPEAKERS)

Some of it will be in the fourth quarter.

We will add all that on the fourth quarter call, exactly how much we do spend.

Yes but regardless of the source of funds, Glenn, you are reinvesting in marketing in your business.

I mean, you're not going to call out the benefits in the marketing reinvestment when you report the fourth quarter, are you?

Pretty hard to tell.

Pretty hard to do it in the fourth quarter but we will call out what we actually spent.

Yes.

I mean just for my standpoint the 9.9 was the onetime and then the marketing spending is reinvesting in your business which is what you should be doing anyway.

So that the 0.9 then is, what? $0.02 or $0.03.

So if you include the marketing as an ongoing business expense to run your business then the quarter was more like 102 to 103.

Is that correct?

We would not have spent that $900,000 if we hadn't had the settlement.

I'm not really questioning the source of the funds.

I'm questioning the application of the funds and it seems like ongoing brand building activities to me which is all good and healthy.

I think you have to think about -- we have a normal burn rate if you will on marketing and brand building.

We had the opportunity to take a discretionary incremental spend and that's the root of the $900,000.

So yes you get say, yes, we are continually investing in the business.

But every once a while you make a business decision to incrementally spend and that is what we did.

And we spent it mostly in late in the quarter so we really didn't have any impact on our top line in the third quarter.

We think it will help in our fourth quarter.

I think the best thing to do is to wait until the fourth quarter.

We will be able to tell you more specifically some of the products and brands that we have applied this money to and it will be a lot clearer for you then.

Do you plan to report the fourth quarter -- I can't remember if you did this last year.

I think last year you gave the update before you actually reported the quarter.

Is that going to be the sequence of events this year or will you report the fourth quarter before you give your 2007 guidance?

We will give you the 2007 guidance before we give you the fourth quarter.

Thank you.

Jack Salzman with Kingspoint Partners.

Nice quarter.

Quick question on inventory in general.

No. 1, would you characterize both garden and pet, essentially, as hand to mouth right now or do you think that there are still some overages at retail or wholesale?

You're talking about retail inventories? (MULTIPLE SPEAKERS)

Inventories or inventory in the pipeline?

Okay.

I will let the two gentlemen talk from Garden & Pet.

In the Pet division we experienced what we already mentioned in the quarter.

And we see inventories as being appropriately tight but not out of stock.

So we think the whole industry is changing where people are going to call the inventories a little bit closer to gain turn rates at retail and we have adjusted for that.

So we see our stock at decent levels but, historically, they are not going to carry the level of inventory they've had had in the past.

We happen to be better about delivering.

Our delivery is 99% on time and complete for the division.

So we can deliver to the consumer -- to the customer when they want it.

Okay.

Apparently most of that 6 million shortfall in Pet was - I assume in wild bird seed?

No.

Some of it -- a majority of it was very proportionate to our businesses.

So, yes, we are big into wild bird and pet bird; and it was appropriate.

Jack, I think probably the easiest way to think about this one is that if you look at back at last year, pet sales were rocking along very strong up until about July 4, 2005.

That is when the gas prices went to $50.00 a barrel overnight as you may recall.

Then the retailers, the consumer stopped going to the stores and the consumers really pulled back.

So we are looking at this now kind of annualizing that and retailers are simply carrying less inventory this year than they did last year at the same time at the end of June.

Especially Jack in discretionary areas where you don't need it to sustain the life of the animal.

In Garden I would say, in general, it is very similar to what Jim talked about on the Pet side, where we are seeing some of our major retailers pulling back on inventory.

We did mention in our comments that we saw $4 to $6 million in reduction from one of our major customers.

On the other hand, we do have another customer where they are a bit longer than they were a year ago.

However, we have also experienced dramatic increase in volume with that customer in that we have picked up new distribution.

So it is a little bit murky but I would say in general, yes, we have seen a pullback in inventory overall.

We are right about where we expected to be.

Just two or three other quick questions.

I think you folks indicated that you are looking for organic growth in Pet at 4 to 5 -- 5 to 6%, excuse me, in the fourth quarter.

That's correct.

How much would you say is organic growth year-to-year and existing product lines versus channel bills with the launch of so many of these new products?

Okay.

You have got to remember our organic for No. 1 doesn't include the acquisitions for this year so when I said we expect fourth quarter to be 5%, 5 to 6%, Jack, that was organic.

Right.

(MULTIPLE SPEAKERS) So, Breeders is out;

Farnam is out.

Acquisition sets are out of that.

So it is pure organic growth.

I guess my question is really you are going to launch new products into the system.

So there is going to make new SKUs in retail.

So that's a sale in.

How much of that 5 or 6% would represent sell-in versus sell-through?

That's hard for me to ascertain right now since the product is just now hitting retail.

So I would be really guessing on what the turn rates are going to be.

Quick question to Glenn, please.

You guys have been buying stock, I guess, a little above 41.

I'm assuming that in the fourth quarter, you'll be somewhat consistent in share repurchase or is that an opportunistic plan, based on what you want to do with money in terms of new product flow?

Yes to all that.

Jack, I guess the way to think about that, we could not buy stock in the third quarter until we could really announce the settlement on the actual litigation.

I think, otherwise, we would have bought before that.

To be honest with you.

Then we are into our quiet period right now until this call.

We will look at this as we go through the quarter and make decisions appropriately as we always do, whether to invest it in our own stock or to do other things with it.

But as we said in our press release, we would expect that we will probably be back in the market.

One other quick question, Glenn.

Energy costs which have obviously clipped you guys.

Are there any plans for you to initiate price increases to offset those?

Are the energy costs really in raw material costs more than anything else?

And could you give us a feel for what your plan would be on pricing?

Sure.

We'll talk about Garden first then we will talk about Pet.

As Brad said in garden as we are going through our listings right now, we are requesting price increases and I think our competition as far as we know is doing the same thing.

I would estimate the price increases required just to cover the higher energy costs are somewhere going to be between 1% to probably a maximum of 2% across all the lines in Garden.

Do you agree with that, Brad?

From an energy perspective, yes.

In raw materials, would be (inaudible).

And in Pet, what that is is, that is much easier for Jim and his folks to increase prices as they go along.

The problem is that the energy prices have been out in front of everybody so you can't raise prices as fast as the fuel is going up.

That is just a continual battle that we fight in Pet.

We are increasing prices quite often from that standpoint and, again, normally you would expect to be in that 1% range, should be able to cover.

We also have to get more efficient into how we are doing things which is much easier to do and also as you well know, what part of this is bringing out new product lines, we are able to bring out price increases with new products without the -- you know what I mean by that.

Okay.

Thanks very much.

Mimi Sokolowski with Sidoti & Co..

I just have one or two quick ones.

Jim, I think most of my type questions have been answered but I just want to get a sense of what was your expectation ahead of the quarter for organic growth?

Much better than it was maybe to be quite honest with you.

It really was unexpected - the soft discretionary sales.

Okay.

What, if you could prioritize or put on a hierarchy those things which took you by surprise.

What did you would you put first, second?

One for the Pet division would be just the softness and discretionary spend by the consumer.

We did not anticipate as most of the world did not anticipate the rapid rise in energy and how that affected the consumer.

And the destocking, was that something that took you by surprise and --?

That was a result of just what I've talked about and yes, that was unanticipated.

Okay.

Can you explain to me how that happens?

The way I understood it is that retailers generally give a heads up if they are going to implement or get more aggressive with some strategy that they have.

We have got a heads up from the planning in our major accounts in the quarter.

In the midst of the quarter?

Yes.

Is that something that's unusual or is that a fairly common (MULTIPLE SPEAKERS)?

I've been doing this for 25 years and I have -- that's not unusual.

Okay.

That's all I had.

They didn't guess energy prices were going up that high, either.

That's helpful.

Thank you, Jim.

[Reade Kem] with Merrill Lynch.

Thanks.

Stu, question for you.

Can you tell us what cash flow from operations was in the quarter?

Cash flow.

I'm going to give you a real simple proxy for it.

Taking net income in D&A and excluding CapEx and changing working capital, it's about $38 million for the good.

Okay.

And the debt balance, the components there, what did you have on your revolver at quarter end?

Revolver is 300 million -- I'm sorry. 144 million and then we have about $200 million of availability.

And incorporated in your guidance where do you see that coming down at year-end?

Do you expect to be out of the revolver?

No.

Think it will be down and cut in half from there or --?

No.

Yes.

We have a little bit more seasonal working capital requirements to burn off here in the fourth quarter; but it's not going to be a huge change from where we are right now.

And on the CapEx front, what are we looking at for the fourth quarter to round out the year as we look at our free cash flow calculations?

We are at 30 -- $30 million right now.

So we will be out another something in the mid to high teams.

Mid to high teams?

Yes.

So we will end up the year pretty close to guidance.

I think guidance is about $48 million for the year.

And you are doing your budgets now.

Do you expect to see SAP spend on the CapEx line a little bit more in '07 or will that come down?

And we should maybe, prospectively, think about CapEx coming down in '07?

CapEx -- first of all, the SAP spend is a little front end loaded actually in this year because we have to do all the software licensing and things like that.

For 2007 we will give you a much better insight into that on the call.

One thing that's the bigger part of the CapEx this year is the modernization of our plant and equipment and so expansion for new products.

So that is the lion's share of our CapEx this year.

Now that we have five additional acquisitions to consider this year, we are going to have to kind of zero-base this one again.

So it is kind of hard to guess where it is all going to shake out.

Whether it is going to be below or something similar.

Then just a question for Brad, just on the optimism about the market share pickup that they might do next year as you look at your listing processes.

Is that mostly a function of just your momentum in the business?

Some of the new products you have online?

How much of it is related to some of the fingers that your competition is doing or may not be doing whether it relates to new products or other things?

The majority of that we anticipate to be new products and incremental listing.

In many cases, our product lines have what I will call regional distribution.

And as we expand that into greater geography, we will be picking up additional shelf space and sometimes the same account as we are proving ourselves successful on those product lines.

So it is really two things.

It will be organic sales growth of existing products that we expanded to additional geography; and it will also be new products that are being launched into the marketplace.

And did you see anything of note in the first year that [Scotts] (indiscernible) anything competitively there that was worth noting?

Certainly they have been out in the marketplace.

I would never try to understate Scotts as a competitor.

They are certainly a very worthy competitor.

What I can tell you is that year-to-date as I look at this total birdseed marketplace, we are outpacing the numbers that we see from the rest of the category.

Now that having been said, the top line is down and bird feed sales that we are down less than the category.

So you can read into that that we are doing pretty well vis a vis our competition.

Last question for me to Jim actually.

The strength and consumables that you are seeing, I was wondering if you dig a little bit deeper into that whether you are seeing as you talk to your retailers any move as a consumer feels pinched to some of the -- I will call it cheaper products.

For example in dog chews, raw hide.

Some of them might be more house brand products or is that not the case?

In fact, that would be in good assumption but it's not true.

We are finding that Ultra Premium treats are doing extremely well.

Yes, we've talked to every major retailer.

And they are encouraging us to faster, more Premium treats and Premium items.

So it doesn't have -- people are going to continue to buy good products that enhance the lives of their pets.

Are some of the independent retailers who may actually sell animals are they saying anything about those sales or existing animals are still being well tended to but maybe they're selling --?

We are not in the animal business.

It's hard for me to really -- we don't track live animal sales.

So I would be guessing if I gave you an answer.

To reiterate your question we see on the Premium traits and supplies market to be very strong.

Karu Mortenson with CIBC World Markets.

Just a housekeeping question here.

I thought I heard 2.4 million in restructuring costs during the quarter and 1.4 million of equity compensation?

(MULTIPLE SPEAKERS) 2.1 and 1.4, I believe.

Thank you.

In terms of the Aquatics business with gasoline prices up, what are the kind of steps are you taking to try (indiscernible) on a mid to higher end business or is that sort of just kind of hanging out there for the time being?

That's a great question.

I think we mentioned this in the script; we are making it a lot simpler and easier for consumers to buy mid to high-end aquariums by launching products that are [kidded] so they don't have to go around the store as a very complicated normal consumer.

So you go in, you buy the kit and it's basically plug and play.

So we are in the process of launching that right now and we will continue to do that throughout the fourth quarter and then into next year.

Also we've redesigned the furniture which is a major part of Aquatics.

So we have hired a furniture designer which is something new for our industry that's redesigning all of our furniture business and Aquatics and we are in the process of launching the new furniture.

The reason for that is because most cases when people especially buy high-end aquariums it's like living art in your house and furniture -- the furniture look will sell as much as what the actual glass aquariums. (technical difficulty) that's very critical.

To Jim's point, we are increasing our expertise and fashion in that area.

And is there going to be increased marketing speed behind the Aquatics side of the business as part of that 9 million brand support?

Absolutely.

Then just in terms of the inventory destocking are we truly through that period or do you expect to see some additional steps here coming forward?

As far as we know -- I will answer as best I can and then Brad and Jim can chime in.

I think we are through that in both Garden and in Pet. (MULTIPLE SPEAKERS)

As fast as we can ascertain that yes -- to Glenn's point we are finished with that.

Thank you very much.

Reza Vahabzadeh with the Lehman Brothers.

Good afternoon.

You mentioned in the Garden business that the grass seed business did particularly well.

Were the product lines within the Garden business that did perform below the average for the Garden business?

To get an average something has to (MULTIPLE SPEAKERS).

Clearly grass seed was a star for us during the quarter, being up well into the 20% ranges being up.

As I mentioned earlier, birdseed birdseed within the garden segment was off slightly so, yes, we did have a down area there.

And as we put in our announcement the nonbranded product the third party sales that we sell, we also saw a decrease as anticipated in the quarter in some of those sales.

So, yes I would say that there were some ups and some downs.

But overall we were very pleased with the performance of our business.

Certainly grass seed was the star.

And we saw some, importantly, some nice improvement out of our insect control businesses as well.

And how did (indiscernible) it ?

Did you say it was up mid single digits?

No, I didn't give you a number on that.

Nor will I.

As far as the POS trends, I am assuming the POS trends for grass seed was comparable to the 20% you mentioned?

(MULTIPLE SPEAKERS)

Got it.

On inventory when do you reach the low point in terms of your overall working capital - especially with Farnam in there, is the low point in the working capital for you now still going to be the first fiscal quarter?

It will be somewhere in the fourth, our first fiscal quarter.

It depends on sales and how things are transacted in the fourth quarter.

Fair enough.

I'm not sure if you had addressed this or not but CapEx for next fiscal '07.

Would it be lower than '06 or --?

We will call out CapEx for '07 in our guidance call.

Great.

Thank you much.

Alexis Gold with UBS.

I will try to be as quick since I know it's been a long call.

But just wanted to follow up on your line reviews a little bit.

I know you said that they're ongoing and they're going fairly well.

But any areas of particular strength or anything that is performing ahead of your expectations?

Because it is still early to make a call I don't want to indicate which way I think it's going with which accounts; but, clearly, we are anticipating and continue to be very optimistic about some of the new products that we are bringing to major retailers and also around the increased geographical distribution with existing products.

We have not received final notification as these processes sometimes take a while and so I'd rather not second guess ourselves with a final number at this point.

But, clearly, we are feeling optimistic about where we are headed.

And you talked about price increases going forward but you did mention in your commentary some pricing action during the quarter that benefited the results.

Can you quantify your pricing that you had during the quarter?

We didn't.

If it came across that way it was not intended that there was pricing action within the third quarter that impacted us in the quarter; but because we are having those ongoing discussions with the retailers about where we are headed for the next season we are having to present price increases as a part of what we're going to do for '07.

Now that having been said, there are certain product categories whether in the fall season - for instance, grass seed has a fall season to it - and we have seen a significant move in the commodity pricing for instance, the tall fescues that we've had to take a price increase forward on that.

There would be some modest increase in the fourth quarter because of that; but most of that would go into next year.

You also have to take into consideration that as we look to what is going on in the upper Midwest at the moment with the weather patterns there is a rather severe drought underway in the upper Midwest; and a number of the crop yields are in some level of a challenged situation, shall we say?

So dearly as those come home we will be looking to increase price to recoup whatever cost increase we see.

That process is underway as well.

You mentioned early on, I think, the sales force consolidation in certain areas.

Has there been any business interruption from that at all and what's the vendor reaction been to that?

The vendor reaction was at the request that we did this.

We aligned our sales force versus how they aligned their merchandising staff in nearly every major account it cut.

So when Glenn mentioned we basically have consolidated into four groups that was largely at our customers' request.

And no, there hasn't been a great disruption.

Steve [Riccio] with Landmark Capital.

Question on the fourth quarter.

Just refresh my memory.

Do your revenues usually come in sort of evenly throughout the quarter or are they front end loaded, back end loaded?

It varies year-to-year depending on the purchasing patterns of the retailers.

It's basically pretty flat through those three months.

I mean as far as how it comes in.

A lot of new products are being launched both in July and August.

Last question.

You've already touched on this, I guess.

But just in general, your thoughts on consumer spending?

I know you said you had seen a pullback in some consumer discretionary spending.

Have you seen in the short period of time, obviously here in the fourth quarter, any changes or any reason that you think that it would further decline?

We definitely saw some discretionary consumer spending fall off in June.

And somewhat in May when we saw those gas prices come in.

We maybe have seen some of it come back a little bit stronger in July.

I think that is part of the reason why we saw July sales.

I think the biggest question here is what happens to both the gas prices and interest rates.

We don't have a crystal ball on that but so we can't tell you but it all depends on that.

Operator, any more questions?

Mitchell Spiegel with Credit Suisse.

Just a couple of quick questions.

Could you clarify how much Farnam has contributed to the year-to-date results of the 80 million?

No we have not.

Have you provided or will you provide any targets that where you expect your key work in capital accounts to end this fiscal year?

We have not yet.

No.

We'll give that to you on our fourth quarter of course.

And then in response or the question regarding price increase has offset energy, the answer was somewhat narrow.

What is the price increase required to offset both energy and increasing raw material costs?

We don't know all of the raw material cost yet to Brad's point.

They are still coming in with some of the harvest and things like that.

So we will not know that until the crop comes then.

As far as the fuel costs, (technical difficulties) it is going to be somewhere at 1%, 1 to 2% at the most.

Thank you.

[Richard Dill] with [Coebank].

My questions have been addressed.

Thanks for your time, anyway.

William Reuter with Banc of America Securities.

Good afternoon.

Just a couple of quick ones.

It sounds like you are looking at acquisitions right now, or at least entertain you have those -- I think on your last call you commented that you would be probably looking at String of Pearls acquisitions or smaller ones.

Could you comment at all on what the maximum size these might be that you are looking at currently?

The way we define String of Pearls would be anywhere from, like, 10 million to say $70 million in sales.

And we would be able to purchase them between five to seven times trailing EBIT.

I'll tell you that most of the acquisitions we are looking at are in that -- in that area.

Is there a level of leverage that you would feel comfortable operating with?

Or does it depend upon what the acquisition was that you might potentially acquire?

We generally try to operate somewhere in the three times debt to EBITDA on a pro forma basis and we are right about three-and-a-half times right now.

We are digesting a pretty heavy acquisition program this year and kind of our house limits we talked about in the past.

We tried on a kind of a steady base to get to about three times debt to EBITDA.

But we [will] spike above that if we are comfortable with the investments and the future success of those acquisitions.

One last one.

In terms of the increase of the distribution for Breeder's Choice do you have any sort of timeline set?

It sounds like you're going to Texas now and a couple of other states.

But do you have a timeline in your own mind for when this distribution might go up the Eastern Seaboard and throughout the rest of the country?

Yes.

We have a very detailed launch plan.

As Glenn mentioned in the script that we are moving to Florida; and we will move up the Eastern Seaboard.

We're also living up the Western coastline as we speak.

We are already in Texas; yes, we have a very detailed plan.

Any idea of when we might get to see them in New York?

Probably within the next six months.

Great.

I'm going to keep an eye out for them.

Thanks.

We hope you will.

Please buy some.

[Suzanne Hagar] with [Forest Menliffe].

I have a question on the aberrant heat wave I just wondered if there is anything material that would either impact your business both Garden and Pets favorably or unfavorably?

Material not just minor things.

We didn't hear your first like three or four words.

Could you repeat (MULTIPLE SPEAKERS)?

On the heat way.

Oh, the heat wave.

Okay.

Yes the aberrant heat that is across a lot of the country.

From a Garden perspective probably the single most important area there would be the potential crop impact in the upper Midwest; and that would have an impact on the prices. (MULTIPLE SPEAKERS)

Crop prices going forward.

Probably the biggest thing from a consumer demand, most of your garden season is now over in the summer month and now you are really into insect control.

There are -- there's two things that drive insects that make them much much worse and heat and moisture.

So for July and August the heat as well as a little bit of rain, you have a lot more mosquitoes, ants, and other pests that we have your solutions for.

So as long as people are willing to go outside, they are going to need your products?

Not just the outside because in some cases it will drive the insects inside so - and we have products both directions so we are covered both ways.

And in terms of next year, I mean I'm assuming there is a lot of grass damage that you will maybe get a benefit in the grass seed from I hope you have a repair kit for drought-tolerant areas.

We do indeed.

Patrick Stowe with Priority Capital.

Sorry to be so late in the day here.

Maybe just a big, big picture questions since you've covered so much ground.

Glenn, obviously it is still early in the Profit Acceleration program but from where you sit today - given energy costs, consumer pressures on one side but also the mix improvements and facilities, rationalization, all the improvements you guys have made in the short but very busy year - do you feel more or less confident about a 10% margin target?

Can you just kind of talk about that, in general?

Just made it for the quarter.

So we feel - I have not changed my view on that 10% operating margin target.

That's the reason we did all these changes.

I'm glad that we did all these changes because if you look at it, some of our costs - like especially fuel - has gone up.

If we hadn't made these changes to pull out some of our manufacturing facilities and reduce some of our costs, we would not be where we are at.

So I think we made the right decision.

I feel comfortable and the team here does as well that we are on the right track and we are going to stick with our 10% operating margin.

Great.

Good luck.

[Matt Haggarty] with [Penn and Capital].

I just wanted to revisit the previous question on why you would exclude the brand-building expenses in that September quarter.

I guess I've just never seen that treatment before.

I know you are saying the linkage is that you wouldn't have spent it, if you didn't have the settlement.

But is this something you found a precedent for out there or did you speak with your auditors about this?

It's not a question of the auditors.

It's trying to communicate to Wall Street basically what our normalized earnings are.

I mean, how often do you get a good guy and a $9.9 million settlement and then a discretionary opportunity to put money back into the business.

We are trying to manage it the way to simplify the communication among ourselves and allow you guys to really true -- see what the true benefit of the operations are.

Thank you.

Grant Jordan with Wachovia Securities.

It's [Greg Wilcox] for Grant Jordan.

Just real quickly and you guys have gone beyond the call of duty by the way on this call.

Thanks for taking the call.

On your organic growth for next quarter for Pet, you mentioned 5 to 6%.

Can you drill down a little further for your Aquatic segment and just say what kind of what you are looking at there from an organic standpoint?

All I will say is we are encouraged by our July results in Aquatics.

And Aquatics is part of the 5% total.

So you can't comment higher or lower than the 5?

We don't generally don't do that.

Thank you.

Alice Longley with Buckingham Research.

I have some follow-up questions about Garden products.

The shipments are 12right?

And you said your organic sales were up 8?

I'm sorry.

Say that again?

Your Garden product sales were up 12%.

Right?

Total.

For the quarter?

Right.

Yes and organic --

And your organic was up 8.

Yes. (MULTIPLE SPEAKERS)

So that means there was -- there were acquisitions in there.

Right? (MULTIPLE SPEAKERS)

In the 12 there would have been acquisitions but in the 8.2 organically, there were not. (MULTIPLE SPEAKERS)

I mean you would -- I'm trying to figure out this 80 million in acquisitions.

And I am backing out that there were maybe 10 million in Garden.

Does that seem reasonable to you?

I mean that would be the difference between 12 and 8.

We are looking through our numbers right now.

Just a second.

We haven't disclosed anything so I don't --.

Well you just disclosed those different growth rates.

So -- we can (MULTIPLE SPEAKERS)

Yes, right, well there are two pieces in Garden that you would be seeing different versus a year ago would be Ironite and the additional purchase of the Tecpack pieces but --.

Okay.

I'm just trying to make these numbers (MULTIPLE SPEAKERS)

12 to 10 million incremental.

Pardon me?

Yes; you're in the ballpark on the Garden side for the acquisitions between Tecpack and Ironite would be a little above 10 million.

Good.

The other question was, you said that your Garden sales at retail were up did you say 9%, POS up 9%?

If we look at our top five customers we are up 9% versus the rest of the competition up a lesser amount.

That's point-of-sale; that's not (MULTIPLE SPEAKERS)

Okay.

If your sales at retail were up 9% and your -- does that include your acquisitions by the way?

In that instance know it is not.

That again that's only our top five retailers.

That does not include -- there's another chunk of retailers out there obviously beyond that.

Because I'm trying to see where the inventory destocking is.

If your shipments organically were up 8 and your sales at retail were up 9, I don't see any evidence of inventory destocking by retailers at all.

Those shipments are in line with sell-throughs.

Again, remember, we had some significant increases in some of our product categories.

For instance in grass seed and some of that is also based on picking up incremental geography in some retailers.

So it would be very difficult to back into those numbers unless you're looking at some customer by customer and that is not something that we are prepared to share with you.

So you are implying if there was inventory destocking in Garden that your point-of-sales if you were to include all of your retailers were really up more than 9%.

Is that right?

It's possible.

Yes.

Because otherwise I don't see inventory destocking here.

In particular we were calling out one customer that we anticipated a inventory reduction program.

We talked about it at the second quarter call.

We indicated that we thought the number would be a higher one and it ended up being about $4 to $6 million that we saw, based on our projection.

Now I can understand where you may want to try to back into it in total but remember we also had a very robust quarter and we were shipping new product.

And so there is some pipeline fill in there that can muddy the waters from an inventory destocking standpoint.

Then, maybe if we put everything together - the inventory destocking at some retailers and the pipeline fill at other retailers - there -- it sounds like the inventory destocking occurred over in Pet but not here in Lawn & Garden in this quarter anyway.

If I put all the pieces together.

It was one particular retailer we did definitely see a destocking situation going on.

With a number of other retailers it had already happened and with one there may be still something yet to come.

But in total, we feel comfortable with where we are as we look to close out the end of the year.

And we are thankful that the inventory destocking not as much as (technical difficulties).

Then the last piece of this question is one of the reasons you've given for the guidance for the fourth quarter is, there will be less product return at the end of the quarter because of all this destocking that occurred during the year.

And do you still anticipate that?

Yes we do because, remember, we had the destocking in the second quarter as I recall -- 5 million.

Another, let's say about $5 million in the third quarter.

That's approximately $10 million less that we will not have to face any issues with in our fourth quarter.

So it sounds like you are getting fewer returns from a few retailers who were doing this destocking?

That's correct.

It is our anticipation that it will be less but there are no guarantees.

You never know what the drought, whatever, if sales dry up all of a sudden.

Anything can happen but our expectation is that we will be fine.

And with the returns, the reduction in returns be something like 5 million in sales in the fourth quarter?

Alice, how about if we talk about this off-line if we can.

We've gone quite a while here.

Yes.

Okay.

And we have more questions to come.

Okay.

Sorry.

Thank you.

Sorry Alice.

But we answered a lot of questions and we got a few left.

Mimi Sokolowski with Sidoti & Co..

I promise to be quick.

Another one for Jim.

I'm picking up on an inconsistency with the shopping pattern.

If you could just dispel that for me you got a super premium products doing really well.

At the same time looks like that marginal consumer some of the discretionary spending is going down.

And yet your high-end aquariums aren't doing as well.

Not yet anyway.

Can you discern the differences there for me?

Yes; it's really a fact that high-end consumable products are doing extremely well.

So it's the consumable nature?

Yes.

And you have to remember high-end aquariums are very energy-related, too, so that wouldn't be the case.

Okay.

I will leave it at that.

Thank you.

Thank you.

Jack Salzman with Kingspoint Partners.

This one's for Stu.

I think you indicated that SG&A was about 24% to sales ex acquisitions?

Yes.

Is that something I should be using going forward for the fourth quarter and next year?

Is the Company likely to improve that ratio in the next 12 months or so?

Categorically, I hope to improve it, Jack.

We haven't spent a lot of time trying to fine-tune what it is going to be for 2007.

I think you know where we are headed directionally on that; but I can't give you a precise answer today.

But the 24 generally looks a little high for projections going forward.

We've added so much new branded product to our mix that -- then again branded product sales are driving a big part of that increase in SG&A.

So it's going to be -- we will have to take that all into careful consideration.

Thanks.

Sure.

At this time there are no questions in the queue.

Okay.

Thank you.

Thank you for your questions, ladies and gentlemen.

Had quite a few of them there and that's just fine.

We had rather answer your questions and be as clear as we can with you.

First of all, I guess as we recap our quarter there, we are pleased with our results from a financial operational industry perspective.

I would like to personally thank Brad and the Garden team for coming in with a good strong performance in the third quarter; and Jim, it's your turn now for the fourth quarter as the Pet takes off here.

So in summary, we will continue to execute our growth plan by growing and extending our brands, developing and launching new innovative products that are truly -- have better efficacy than anything else out there and strong packaging.

Leveraging our cost structure to improve both our effectiveness and our efficiency, strengthen our Company to achieve the growth we all desire, we will continue as you all heard, pursuing and completing strategic acquisitions.

With that, ladies and gentlemen, we would like to thank you for joining the call and we wish all of you - have a great afternoon.

Goodbye.

Thank you for your participation in today's conference call.

This concludes the presentation.