Central Garden & Pet Co (CENT) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to Central Garden & Pet's fiscal fourth quarter and fiscal 2006 year end results and fiscal 2007 guidance.

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

Later we will conduct a question-and-answer session, and instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce Mr. Paul Warburg, Vice President of Investor Relations for Central Garden & Pet.

Please go ahead, sir.

Thank you, operator.

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

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

Stu Booth, our Chief Financial Officer;

Jim Heim, President of 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 risk factors 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.

In addition, this presentation includes certain non-GAAP financial measures.

You will find a reconciliation of these items to the most complete GAAP measure in our earnings release which is located on our website at www.central.com.

Today's agenda is as follows.

Glenn will provide an overview of the fiscal fourth quarter, a recap of fiscal 2006 and our outlook for fiscal 2007.

Brad and Jim will discuss the Garden and Pet segment results and the opportunities for fiscal 2007.

Stu will review the operating and financial results for the fourth quarter and fiscal 2006 and provide additional detail behind our 2007 guidance.

Then we will open the call up for Q&A.

Now, I will turn the call over to Glenn.

Glenn?

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

Let me start off by saying we had a solid year capped off by an excellent fourth quarter.

We executed and delivered against our strategic objectives of building and strengthening our brands, improving our operating effectiveness and efficiency, driving increased profitability, and improving our return on invested capital.

Our continued dedication to innovation, quality and service yielded strong results.

Our increased spending and brand building helped drive stronger sales and increased market share.

We also completed five strategic acquisitions which will contribute over $200 million in sales on an annualized basis.

We made significant strides in our profit acceleration program initiative which should reduce costs by over $7 million annually, and we are pleased with our progress and confident that we are well positioned to continue to building on our platform and brands in fiscal 2007, albeit with some headwinds and grain costs which we will go into shortly.

First, let's turn to the fiscal fourth quarter.

Consistent with our plan outlined to investors last May, we had a strong quarter.

Sales increased approximately 30% to $42 million when compared to the fourth quarter last year.

Branded product sales increased 38% to $350 million.

Sales of other manufacturers products increased 3% and our organic sales growth was approximately 14%.

Performance was strong and we also did benefit from an extra week in the quarter.

Operating income increased approximately 68% to $21 million.

Net income was approximately $6 million for the quarter, and earnings per fully diluted share was $0.25 compared to $0.31 a year ago due primarily to the increased discretionary spending on brand building and strategic work, as well as a 10% increase in share count compared to last year.

These quarter results included $2.1 million in net costs related to our previously announced profit acceleration program and $1.1 million in costs related to equity compensation.

As we indicated on last quarter's conference call relating to the $9.9 million net gain from the Axelrod litigation settlement, we spent $9 million of these proceeds on increased discretionary brand building and strategic work in the fourth quarter.

We believe our increased discretionary brand building and strategic work initiatives will benefit Central for years to come.

I will provide more detail on the specific initiatives in a few minutes.

Excluding these specific initiatives operating income was approximately $30 million and the corresponding earning per fully diluted share was $0.49 resulting in increases of 139% and 58% respectively compared to fiscal 2005.

We are pleased that both Garden and Pet segments delivered strong results in the quarter.

Very briefly, in Garden sales increased 13% to $184 million, organic sales growth in Garden was 10%, and operating profit increased 86% to $4.2 million compared to last year.

In our Pet segment sales increased approximately 48% to $237 million, and organic sales growth was 18% and operating profit increased 69% to $31 million.

Clearly, our new product launches, increased brand building initiatives, and [INAUDIBLE] net retail, combined with consumer demand, delivered strong sales and profits in both the Garden and Pet segments.

We accomplished a great deal in the fourth quarter and throughout the year.

All of our initiatives were focused on strengthening the business, building our brands and improving our effectiveness and efficiency to drive stronger performance.

Innovation remains the cornerstone of our Companywide brand building efforts.

We had an excellent year in new product development.

Once again, approximately 15% of our branded product sales came from products launched within the past two years.

We were also recognized at each of the major industry trade shows and leading publications for innovative new products and service excellence received more awards than ever before.

As we have noted, we stepped up our brand marketing advertising and promotional efforts to support our market leading products and to further strengthen our brands and market share.

For example, we launched the co-branded Animal Planet initiative at Target which is now rolled out nationally.

We also increased our number of the Power of 3 major league baseball and football fantasy days for consumers and other promotional events.

On the effectiveness and efficiency front we are starting to see the early benefits of our profit acceleration program in which we've spent over $7 million in fiscal 2006.

We expect to recoup these costs in fiscal 2007 just as we said.

For example, we completed the aquatics operational consolidation, which Jim Heim will provide additional detail in his section.

The accelerated national roll out of Breeder's Choice and its ultra premium brands Pinnacle, AvoDerm and Active Care dog and cat food treats is going very well.

The Farnam [app] integration with Wellmark and its transformation into our Central Life Science SBU is on plan.

We are pleased with the progress.

Central Life Sciences is now presenting a complete line of flea and tick control products to the retail channels, segmenting the Adams, BioSpot and Zodiac brands by class of trade.

The consolidation process of Farnam and Wellmark's manufacturing operations and administrative functions is on track and we expect this integration to be completed by the third quarter of fiscal 2007 and are reiterating our $0.10 accretion forecast related to the Farnam acquisition.

Following the settlement of the Axelrod litigation in the fiscal third quarter, we spent the proceeds of the $9.9 million net gain from the settlement on increased discretionary brand building and strategic work.

Approximately $9 million was invested of these proceeds in the fourth quarter.

We spent over half of the proceeds on brand building initiatives to accelerate the roll out of several of our brands, including the national rollout of Breeder's Choice and the launch of our new umbrella aquatic brands Aquion and R-Zilla all supported by new advertising and promotion campaigns.

We also increased advertising for our grass seed and insect controls in the fourth quarter to take advantage of increased consumer demand for these products.

We also signed Richard Petty to serve as a spokesperson and engaged in a number of other marketing and promotional activities to drive increased sales.

We believe the benefit of the increased discretionary spending on brand building should result in an increase of approximately $15 million to $20 million in sales for fiscal 2007.

We spent the balance of the proceeds on strategic work including new growth in human capital initiatives.

In new growth, we engaged outside consultants to help us identify and pursue additional avenues of growth examining both internal investment opportunities and acquisition opportunities, as well as to collaborate, to consolidate our portfolio into fewer, more powerful brands with greater scale in both Garden and Pet.

Jim will provide more information on this in his section.

In evaluating our growth opportunities, we accelerated building our management team by adding key talent as well as severing ties with a number of employees to improve our depth and effectiveness.

In general, the proceeds from the settlement provided us with a one time financial benefit to accelerate the pace of investment into further building our business.

These initiatives definitely had a positive impact on fourth quarter sales.

More importantly, we believe the brand consolidation and brand building activities and strategic work will benefit us for years to come.

These were all smart business decisions that were not part of our original fiscal 2006 plan.

Turning to fiscal 2006, sales increased approximately 17% to $1.62 billion.

Organic sales adjusted for the disposition of our soil operation and the elimination of certain third-party accounts related to our garden distribution operations increased nearly 7% for the year.

Sales of our branded products increased approximately 23%, while sales of other manufacturers products declined slightly as anticipated.

Operating income for the year increased 37% to $137 million.

Included in the operating income are $7.6 million in expenses related to our profit acceleration program and $5.1 million in expenses related to equity compensation as well as significantly higher than planned energy and fuel costs.

The $9.9 million net gain related to the Axelrod litigation settlement reported in the third quarter was offset by costs in the fourth quarter associated with our increased discretionary brand building and strategic work which we just covered.

Net income increased 22% to $65.5 million, and the corresponding earning per diluted share was $2.85, an increase of 14% over the prior year.

Looking ahead to fiscal 2007, in addition to driving our business through innovation and strengthening our brands we will continue to improve our [INAUDIBLE] business by focusing on SKU rationalization, improving margins and reducing costs by consolidating operations and facilities.

Both of our business segments are still expected to have a good year.

We are projecting sales to increase approximately 10% and operating profits to increase approximately 20%.

However, we have had a dramatic change in external events over the last 30 to 90 days.

Grain costs have moved to significantly higher levels than we ever expected.

This is now going to impact fiscal 2007 profitability.

Even after anticipated price increases to retailers, we estimate the impact of the higher grain costs to be $8 million to $10 million, or $0.20 to $0.26 per share in fiscal 2007.

In addition, we expect our interest expense for the year to be approximately $44 million which is $6 million or $0.16 per share higher than last year.

The combined effect of these two factors is approximately $0.34 to $0.42.

We project earnings per share to be in the range of $3 to $3.10.

Our fiscal 2007 outlook does not include any acquisitions.

Stu will provide detail on 2007 guidance in his section.

Looking ahead to fiscal 2008, we are expecting to achieve the full benefits of the Farnam acquisition and believe we are on pace to deliver a 10% operating margin.

We believe we can continue to expand operating margins by approximately 80 to 100 basis points per year for the foreseeable future.

We are comfortable that our strategy is working.

We will continue to focus on building and strengthening our brands, to continue to improve our effectiveness and efficiency, and very importantly to improve our return on invested capital and return on equity.

We will accomplish these tasks through a combination of organic growth and through the pursuit of strategic acquisitions.

I will now turn the call over to Brad who will discuss the Garden segment results and outlook.

Brad?

Thanks, Glenn.

The Garden segment had a strong quarter and an outstanding year.

Sales for the fourth quarter increased 13% to $184 million.

Branded product sales increased 21%, and sales of other manufacturers products, as expected, declined 14%.

Organic sales increased 10% and acquisition sales contributed $5 million.

Our point of sale at our major Garden accounts was up 15% for the quarter.

Operating income increased 86% to $4.2 million.

Garden operating margin expanded 90 basis points in the quarter.

Driving the quarter's performance was strong consumer demand in the Lawn and Garden insect controls and grass seed segments.

As predicted on previous calls, weather patterns led to high demand for our insect control products in the quarter, and as forecasted, one of our major retailers took shipments more in line with consumer pull through.

Our targeted advertising programs also had a positive impact on point of sale for our retail partners.

Similarly, grass seed had another strong quarter.

The traditional grass seed products sold under the Pennington and the Rebel brands continued to experience strong pull through helped by our increased advertising and the launch of new products.

This performance capped off a strong year for the Garden group.

Sales increased 8% to $802 million.

Operating profit increased 22% to $57.5 million.

We made significant strides strengthening and building our brands, improving our effectiveness with our retail partners in capturing more operating efficiencies.

The strength of our brands led by our focus on innovation and investment in marketing and promotional activity produced strong results.

Branded product sales increased 12% in the year.

Organic sales increased 6.7%, and point of sale at the major accounts increased 8% for the year.

Garden operating margin for the fiscal year expanded to 7.2% up from 6.3% last year due primarily to increased operating leverage.

We also strengthened our branded products portfolio with the acquisitions of Tech Pac and Ironite.

Acquisitions in total contributed about $29 million in incremental sales for the fiscal year.

To promote future growth, we signed the king of NASCAR, Richard Petty, to serve as Central Garden spokesman for our leading brands of the Rebel, AMDRO and Ironite.

The results to date have been very, very promising.

On the effectiveness front, we continue to work hard to support a number of initiatives instituted by our major retailers.

We successfully handled a major inventory reduction initiative at a top customer that we estimate negatively impacted full year sales by approximately $12 million.

More importantly, due to our improved execution we were able to successfully meet the customer's accelerated supply needs to be more in line with consumer demand.

Along those same lines we are very proud that Pennington won the Supplier of the Year Award at Lowes for the third time in 10 years.

Looking ahead to fiscal 2007.

We had another successful planning and program review for the 2007 garden season with our major retailers.

We feel very good about our position at retail and our ability to drive sales through increased brand building efforts.

However, as Glenn mentioned, on the cost side of the equation we are facing significant grain cost pressures, primarily in our wild bird feed operations where grain prices have skyrocketed over the last 60 to 90 days.

Yields were poor in the key crops, most notably milo and millet and sunflower which represent approximately 80% to 90% of our grain input.

Furthermore, the crop shortfall was exacerbated by farmers shifting to high demand biofuel crops such as corn and soybean to produce ethanol.

The price of corn on the Chicago Board of Trade has increased 60% since mid-September due to increased demand.

A driving force for these higher prices is the announcement that approximately 100 new ethanol plants are expected to come online in the Midwest.

During this same period, the price of milo has increased more than 30% and is selling at record prices.

Reports also indicate that the amount of acreage dedicated to sunflower is down 30%.

The cost of sunflower just this is week reached another record high increasing $1.50 or 10% to $16 per hundred weight.

This represents a cost increase of over 30% since mid-September and 60% versus year ago.

We had anticipated grain costs to increase moderately for 2007, but not nearly to the degree which we have recently experienced.

These historically high grain costs necessitate our need to increase prices to our retailers and further reduce operating costs.

Due to the lag effect of price increases, we expect grain costs to negatively impact operating profits by $8 million to $10 million across the Garden and Pet segments, primarily in the first half of fiscal 2007.

In summary, fiscal 2006 was an outstanding year both in terms of sales and profits.

Furthermore, we are well positioned to continue to grow our brands and reduce operating costs through a variety of initiatives.

Fiscal 2007 looks to be another good year in terms of sales though we are taking what I will term a prudent and cautious profit outlook to the aforementioned grain cost pressures.

With that I will now turn the call over to Jim Heim to discuss the Pet segment results and outlook.

Jim?

Thanks, Brad.

Pet had a strong quarter across the entire portfolio.

Every category within our Pet business posted double digit gains in the quarter.

Store traffic continues to strengthen.

Our retailers appear to be taking a more optimistic outlook.

Sell through to the consumer was strong in the quarter.

Sales for the quarter increased 48% to $237 million.

Branded product sales increased 55%.

Sales of other manufacturers products increased 21%.

Organic sales increased 18%.

Acquisitions contributed $47 million in sales for the quarter.

Operating income increased 69% to $31 million.

Pet operating margins expanded 170 basis points in the quarter.

Driving the quarter's performance was stronger consumer demand at retail, new product launches, increased promotional activity and contributions from acquisitions.

In the quarter, we completed the national roll out of the Animal Planet initiative at Target.

We also launched a plethora of new consumable products across the portfolio which are performing well.

One of our brightest spots was in aquatics.

As Glenn mentioned, we began consolidating the portfolio into fewer, more powerful umbrella brands for our aquatic and reptile products.

The benefits are greater brand recognition and consumer recall, line extension opportunities, larger scale and greater operating leverage.

Our aquatics branding strategy is now much simpler and more powerful.

The Oceanic brand represents our high end line of saltwater aquariums and supplies.

Kent Marine and Coralife are specialty high end aquatics brands are specifically geared toward the serious aquatic enthusiast.

All other aquatic products are in the new Aquion and R-Zilla umbrella brands.

Aquion is our complete line of fresh water aquariums and supplies.

R-Zilla is our complete line of reptile habitats and supplies.

To simplify the aquatic experience in gross sales, we have expanded our offering of easy to purchase kits to draw new consumers into the hobby and facilitate the trade up cycle from small to larger aquariams.

It makes the buying decision for the consumer much easier and it simplifies the sale at retail.

These comprehensive kits have all the basic supplies including the components needed for fish or reptile keeping.

All components in the kits are clearly branded, thereby driving increased repeat sales in our consumable supplies.

We also experienced successful retail movement on our new award winning BioCube aquariams launched at the Global Pet Expo.

This product is a perfect example of combining better technology in a fashionable style to prompt consumer demand.

In general, we are proud of our new product innovation accomplishments.

Central Pet fared extremely well at the major industry trade shows throughout the year winning a record 20 awards for innovation and service.

In the quarter, to support our brands we increased our marketing and promotional activities.

As planned, we more than doubled our Power 3 events, including our highly successful "bring your dog to the game" promotion at targeted major league baseball teams.

We also accelerated the national roll out of Breeder's Choice ultra-premium dog and cat food to include the West Coast, Texas, Florida, and now, the Northeast.

Additionally, we launched the AvoDerm and Active Care brands into Pet Smart and gained considerable traction in several other large regional retail accounts.

Also, we are now selling more pet products in nontraditional pet accounts, such as farm and feed stores.

And finally, we made great strides in our SBU alignment and cost rationalization initiatives.

The aquatics SBU, as mentioned, is performing well and bird and small animal likewise is progressing well.

Now looking ahead to fiscal 2007.

We are projecting another strong year in terms of both sales and profits.

We believe the pet supplies industry has resumed its mid-single digit organic growth trends.

Remember, approximately two-thirds of all U.S. households own at least one pet.

And nearly half of all households own multiple pets.

We are well positioned to continue to benefit from the humanization and indulgent trends in the pet supplies marketplace as consumers continue to trade up to more premium and healthier products.

We are aggressively rolling Breeder's Choice out nationally to the pet specialty channel.

Our new product development efforts are geared toward value added consumables and pet applications.

We will also continue to recognize the benefits of the Farnam acquisition later in the year.

But, however, as Brad outlined for you, we are experiencing much higher grain commodity cost pressures in our pet bird, wild bird and small animal pet product lines.

In conclusion, we are proud of our fiscal 2006 accomplishments and feel confident that fiscal 2007 will be another solid year.

I will now turn the call over to Stu to discuss financials.

Stu?

Thanks, Jim.

Turning to consolidated results for the quarter, as Glenn mentioned, net sales for the fourth quarter of fiscal 2006 were $421 million, a $98 million or 30% increase from last year.

Organic sales increased approximately 14%.

Sales from acquisitions contributed approximately $52 million in the quarter.

Gross profit for the fourth quarter increased $35 million or 36% to $135 million.

Gross profit as a percentage of net sales increased 120 basis points to 32% from 30.8% in a year ago period, due primarily from increased contribution from acquisition and higher margin branded product sales.

Selling, General and Administrative expenses for the quarter were $113 million.

As a percentage of net sales, SG&A expenses increased 10 basis points to 27%.

Operating income for the first quarter increased 68% to $21 million.

Included in operating income are costs of $2.1 million related to our profit acceleration program and costs of $1.1 million related to equity compensation.

Also in connection with the $9.9 million gain related to the Axelrod litigation settlement reported in our fiscal third quarter, we spent $9 million of the settlement proceeds on increased discretionary brand building and strategic work in the fourth quarter.

Excluding this $9 million increase and increased discretionary brand building and strategic work operating income for the quarter was $30 million.

Net interest expense for the quarter was $11.8 million compared with $4 million a year ago, due primarily to acquisitions completed in fiscal 2006 and higher interest rates.

The tax rate for the quarter was 36%, up from 23% in the year ago period.

The tax rate of the year ago period benefited from a true up in deferred tax assets and liabilities.

Net income for the quarter declined slightly to $6 million versus $6.7 million a year ago.

Earnings per fully diluted share was $0.25 compared to $0.31 last year.

However, excluding the incremental $9 million spent in increased discretionary brand building and strategic work earnings per share was $0.49 an increase of 58%.

Depreciation and amortization for the most recent quarter totaled $5.3 million, relatively unchanged from last year.

Capital expenditures for the quarter totaled approximately $17 million.

For fiscal 2006, our capital expenditures totaled approximately $48 million compared to approximately $19 million in fiscal 2005.

The increase is due primarily to investment in plant and equipment to support new products and future growth, and SBU consolidation initiatives and our SAP implementation.

Now turning to our fiscal year 2006.

Net sales were $1.62 billion up $241 million or 17% over fiscal 2005.

Organic sales increased 6.6% and acquisitions contributed approximately $174 million of the sales growth.

Gross profit as a percentage of sales increased 90 basis points to 33%.

Operating income increased approximately 37% to $136.8 million.

The margins as percentage of sales expanded 110 basis points to 8.4% compared to the 7.3% in fiscal 2005.

Net income for fiscal 2006 was $65.5 million an increase of 22% over 2005.

Earnings per fully diluted share increased 14% to $2.85.

Now turning to the balance sheet comparing the September 2006 balances to the September 2005 balances.

Accounts receivable increased to $239 million from $185 million last year.

Inventories increased to $332 million from $271 million last year.

The increases in accounts receivable and inventories are due primarily to acquisitions completed within the past year.

As of September 2006, total debt stood at approximately $568 million compared to $323 million last year.

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

Similar to our efforts to improve our operating margins we are focused on our capital efficiency metrics.

Return on invested capital increased 90 basis points to to 9.3% and ROE remains steady at 10.3% reflected in our equity issuance in the March quarter.

Now looking ahead to fiscal 2007, we forecast sales to be in the range of $1.76 billion to $1.78 billion, an increase of approximately 6% to 10%, reflecting a combination of approximately 5% to 6% organic growth and $90 million of contribution from acquisitions completed in fiscal 2006.

These sales figures assume approximately $12 million of reduced third-party garden distribution sales.

Gross profit margin to be between 34% and 35% due primarily to contribution from acquisitions and higher margin branded products, which are partially offset by rising grain costs in our wild bird feed operations.

Operating income to be in the $162 million to $166 million range, an increase of approximately 20% over fiscal 2006.

From our original plan, we anticipate approximately $1 million in costs carried over from our 2006 profit acceleration program and an additional $1 million for consolidating our Farnam and Wellmark manufacturing facilities from three to two.

Net interest expense to be approximately $43 million to $45 million reflecting higher debt balances.

We are assuming interest rates to be approximately 7.4%.

Our peak seasonal borrowing to be approximately $80 million.

And Farnam is expected to contribute a majority of its operating profits in the second half of the year.

We also forecast other income to be approximately $2 million and minority interest, the portion of income related to Tech Pac not owned by Central, to be an outflow of $2 million.

Net income to be in the $73 million to $75 million range.

This translates into earnings per fully diluted share in the range of $3.00 to $3.10.

We estimate the fully diluted share count to be approximately 24.2 million shares compared to 23 million in fiscal 2006.

Capital expenditures are estimated to be approximately $40 million and depreciation and amortization to be approximately $29 million.

We are forecasting a change to the timing of earnings this year due largely to the current grain cost pressures combined with higher interest expenses associated with our acquisitions in fiscal 2006, increased share count, and the earnings profile of Farnam.

The aforementioned commodity cost pressures will impact us primarily in the first half of the year.

Interest expense related principally to the Farnam acquisition will be approximately $5 million higher in the first quarter of fiscal 2007 compared to last year.

Farnam sales and profits occurred primarily in the spring and summer or the third and fourth quarters, with the first quarter being the lightest in terms of sales and profits.

In addition, the share count for the first quarter is approximately 2.2 million shares greater than last year.

As a result, we believe the first quarter will result in operating earnings of approximately $11 million to $12 million compared to $9.8 million a year ago.

And earnings per share to be approximately break even compared to $0.12 last year.

In conclusion, we are confident of our sales outlook, the progress we have made in our profit acceleration program, and the Farnam integration.

We are projecting operating earnings growth of approximately 20% and an 80 to 100-basis-point increase in operating margins for the year.

I will now turn the call back to Glenn.

Glenn?

Thank you, Stu.

As a quick wrap up here.

In summary, due to our commitment to strengthening and building our brands through innovation and the incremental promotional spend and our effectiveness and efficiency initiatives our business produced solid results in fiscal 2006.

As Stu said, we expanded our operating margins by 110 basis points.

We completed the five strategic acquisitions.

We improved return on invested capital by 90 basis points to 9.3%.

And we positioned the Company for future further growth in sales and profits.

As we look forward to fiscal 2007, we believe our brands are well positioned.

We are excited about our new product pipeline.

We experienced a strong [INAUDIBLE] review season with our leading retailers.

The business environment and demand for our products continues to improve as consumer confidence rebounds.

And our financial capacity and appetite will allow us to continue to pursue strategic acquisitions and we are focused intently on further improving our capital efficiency metrics.

As you have heard on this call, extraordinarily high grain costs are unfavorably impacting fiscal 2007 profits.

In fiscal 2008 and beyond, we expect to return to more normal operating profits in our wild bird feed operations and our traditional growth rates.

As Stu mentioned, despite these cost pressures we still expect our operating profit to increase 20% in fiscal 2007.

We are in two great growing segments.

We have clear leadership positions and our fundamental operations remain solid.

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

And thank you for that presentation. [OPERATOR INSTRUCTIONS] Please stand by for your first question.

Your first question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

Please proceed.

Good afternoon.

The first question may dig a little bit more into the grain costs.

Can you help us understand is that the impact due to the timing of price increases or is it?

I am trying to understand I would think since the big quarters for wild bird seed are December and the March quarter you would have hedged some where the recent spike wouldn't have had as big of an impact on your business.

Help us walk us through in how you came up with your guidance for this year, the impact and when you do expect price increases to bring the margins back to where they should be?

Bill, this is Brad Johnson.

In the first sense, yes, we did anticipate some moderate increases in cost as we came into the year.

What has happened, though, is due to some crop shortages and some acreage being taken out that were largely unanticipated by, in many cases, the whole industry, we are seeing tremendous moves in the market.

You know, 60% over a two-month window, that sort of thing.

And although in this type of a market you anticipate seeing some fluctuation, that is a huge move.

So we are in the process of taking price increases.

Price increases do lag the market, though.

So that is why Glenn and I have both stated it will take through the first half of the year before we see it back on an even keel.

As we look to future years, we don't anticipate that this situation will continue.

And, as you know, these markets do fluctuate up and down.

We always anticipate a little bit conservatively.

The fact of the matter is when there is an 83% year-over-year increase in some areas, that is a fairly significant price increase.

A lot of that move has occurred just in the last 60 days.

Bill, I guess when you think about it the wild bird feed business has been a good business for us and will continue to be with us.

We have not seen prices move this far or this fast in our lifetime, certainly.

It is a basic part of our business.

I would say to build on Brad's point we are going out with price increases.

We would expect to have those show up really sometime in February or March or April at the very latest.

Well, I guess as a follow up.

You know, I understand the price increases will offset the cost.

With the commentary around increased acreage being planted for corn and ethanol.

I think that's right that there are 100 ethanol plants on line and another 40 to 50 coming on next year, and what makes you think that prices will actually recede as we go towards next year and not actually go higher?

Go ahead, Brad.

Bill, there are a couple of unusual things that also happened this year.

There was a drought in the northern plains states that until recently the full effect was not felt on the milo and the millet crops.

In addition, because grains tend to be more of a global business than ever before there was some situations going on in China which have exacerbated the corn situation for this year.

Now remember, we stated that about 80% of our crop grain usage is not corn based.

It is milo, it's millet, sunflower and things of that sort.

As the more acreage come back out of the federal program such as the crop reduction program or the CRP program you will begin to see a lot more settling out, if you will, in the marketplace.

There will be more acreage being brought into production.

And I would think, Bill, just to add on to that.

If you think about it.

It is a case of supply and demand.

I would not expect the prices to be this high again next year, but we can't see a crystal ball to make sure of that.

However, we do feel that if they are, all of the manufacturers of wild bird feed, ourselves and everybody else, have to adjust their prices up accordingly, and supply and demand will finally come together.

That is probably the best answer we can give you.

Okay, and then just quickly on the marketing spend on Breeder's and others, I think you had quantified you expect maybe $15 million of incremental sales going into next year.

Do you expect that to be accretive or profitable sales, or would you continue to be spending pretty heavily behind this to roll out Breeder's or [INAUDIBLE] in the next six to nine months?

Those will be accretive to us.

Okay.

Thank you so much.

You are welcome, Bill.

And from the line of Piper Jaffray with the next question we have Michael Cox.

Please proceed, sir.

Good afternoon.

Thank you for taking my questions.

My first question is related to the booking season, the shelf space at some key retailers in the Garden segment.

I was wondering if you could provide any more detail around that?

Well, Michael, I am not sure that I can answer you specifically by customer because I won't do that.

But what I can tell you is that we had a very strong selling season across our major customers.

We have increased shelf space and we are looking to have an even stronger year in '07 than we did in '06.

You can see that we did have, in fact, we had an outstanding year, up a total of 8%.

Okay.

In terms of fuel costs, I was wondering if you could comment on the impact on the fourth quarter relative to expectations and what is embedded in your '07 guidance on the fuel costs then?

Stu, you want to handle that one?

Fuel costs year-over-year we are projecting relatively flat the last year.

For guidance we are about $55 to $58 a barrel.

We're about $60 a barrel for fiscal 2007.

There really wasn't much impact on fuel costs for our fourth quarter year-over-year.

Okay.

Thank you, Stu.

I have another question for Stu here.

You mentioned an extra week in the quarter.

What impact did that have to sales and earnings?

Well, there was 8% more shipping days in the quarter, so, I guess, the best way to do it is the simple math.

Okay.

We had a strong quarter regardless.

It did help. but we had a strong quarter regardless.

My last question is on the profit acceleration plan.

It it sounds like there is a little bit spilling over into 2007.

Will that all be completed in the first quarter, and as you look forward on the Farnam perspective, how do you foresee the margin structure of Farnam as you look out over the next couple of years now that it is part of Wellmark?

Let's talk about the profit acceleration.

I think Pet will largely be done in the first quarter, so that is the first million.

The Farnam and a couple other small things will happen really in the late second, early third quarter.

By the end of the third quarter that is all done that we can see right now.

As far as the thing about Farnam that people, perhaps, didn't really pick up is that Farnam is much more of a seasonal business than people think about.

Most of their sales will occur really in the spring and summer, again around insect control and horses and animal health and everything else like that.

As I think about going forward.

We are bringing in new technology and better technology.

So we would expect the Farnam actually to see their margins go up along with Wellmark's.

And we love both those businesses.

Great.

Thank you very much.

You're welcome, Michael.

And representing Buckingham Research, the next question comes from Alice Longley.

Please proceed, ma'am.

Hi, good afternoon.

Hi, Alice.

Hi.

More questions about wild bird feed.

What percentage of sales in each category, the Lawn and Garden and Pet, does that represent?

What are the brands affected?

Alice, I will answer it in kind of a bigger picture for you.

Our wild bird feed operations, or basically our grain-based operations largely are Pennington and Kaytee.

Pennington is in our Garden business and Kaytee is in our Pet business.

Those businesses represent over $200 million in annual sales.

Is, more of that is Pennington than Kaytee, right?

A little bit more on Pennington.

Could you repeat, how is grass seed affected by wild bird feed?

Grass seed really is not affected by wild bird feed.

It is Pennington wild bird feed?

Yes, ma'am.

Oh, all right.

I'm sorry to get confused.

Let me be clear.

It is Pennington wild bird food brand is what I'm talking about, not all of Pennington.

If I combine the Pennington wild bird feed along with the Kaytee, those two product lines are over $200 million.

Okay.

And if there are going to be big price increases coming in March and April shouldn't we assume that consumer spending on these products might be affected by that?

We don't know that, Alice.

We would expect that there will be some.

We really can't forecast that at this point.

We are trying to be prudent and cautious in our outlook.

There may be some of that, but we can't really tell you how much because we're not sure.

We believe we are being prudent and cautious.

Are you assuming that volume in those two brands is down in fiscal '07 because of this?

No.

Why wouldn't that be the prudent thing to do?

You asked me if they were down, you didn't ask me if they were up.

You are assuming maybe they are flattish?

Yes.

That is closer.

And you think that is prudent enough.

Yes.

How much did they grow this last year so that we know what their past growth rate has been?

The best way to put that would be, think about our organic growth.

You would be pretty close.

All right.

And then on housekeeping, you gave us the organic growth in Pet and Lawn and Garden.

Could you, then you further broke out branded and other manufacturers products, and I know that's a different breakout.

Can you look at those branded numbers, which is what we really care about, and tell us how much of those increases were acquisitions?

Actually, I'll answer that for you.

Keep in mind the acquisitions that we made did not have, we did not acquire any distribution operations.

I know, but we can't do the math within the segments of organic versus -- I mean of other manufacturers versus your own.

For instance in pet supplies the 55% increase in branded.

How much of that is yours and how much of that is acquisition?

We'll go back, we said it in our script.

It's in our script.

No, because, well, never mind, I will ask this offline.

Okay.

Thank you, Alice.

We will give it to you, it's in our script.

But why don't you call back and we will give it to you.

Wait a second.

Howard, have you got it?

Yes, for fiscal 2006 the Garden branded product sales increased $73 million.

In Pet, the branded product sales increased $150 million.

Okay, I will ask later.

Thank you.

[OPERATOR INSTRUCTIONS] And with Merrill Lynch you have a question from the line of Reade Kem.

Please proceed.

Thanks for taking the question.

I was curious if you could comment on the acquisition environment and given where you're at with Farnam what your appetite is looking out into '07?

We still have, we definitely have appetite.

We have the financial capacity.

We have ended the year with our debt too EBITDA ratio about, what Stu, about--

Pro forma basis about 3.5 times.

So we definitely have the ability to pursue those.

We have appetite.

You should, we expect to accomplish some more in 2007.

Are there any that you are looking at in the pipeline that might be on the size magnitude of a Farnam?

I think I will say I can't comment on that.

What about the usual question we like to ask you about how high you would be willing to take leverage?

Could you address that?

Yes, I'll answer the question the same way I always do is that we are comfortable taking our leverage up somewhere around four times or a little higher.

Then we make an evaluation of how quickly we can cash flow the business back down to our comfort level of about three times.

If you take a look at our 2007 plan and pencil it out, we will be well below three times debt to EBITDA by the end of the year absent any further acquisition.

Okay.

And then a question actually for Jim away from the seed questions, but just in general, pet supply pricing.

Could you comment on what that's like and how that may differ by category as part of your guidance incorporating some price increasing next year?

Yes, a good guidance on that would be 1% to 2% excluding the other issues.

It does vary a little bit by category.

Okay, and on on market share within Pet, Jim, which categories did you pick up meaningful share in and which did you -- were there any categories that you actually feel like you might have lost share?

We actually lost no share in any category.

We were pleased with all the share gains in the categories we anticipated we'd get them in.

I think especially, we were very especially pleased with the bounce back we saw in aquatics.

That was very nice to see.

A lot of new product innovations are now on the shelves and we are very pleased with the way those are performing.

Last question, still within Pet is are you seeing among your larger, more branded oriented competitors any greater promotional activity than in the past?

We are seeing very normal levels of promotional activity.

Nothing has surprised us really.

Okay.

Thanks a lot.

You're welcome.

And your next question comes from the line of Arthur Weiss with Bank of New York.

Please proceed.

This is Arthur Weiss.

I just wanted to ask what is bird seed's contribution from a profit standpoint versus its contribution from a top line standpoint?

And given the direction of the Company, is this a business that is more of a legacy business?

Or is this something that we really want to be in going forward?

Arthur, those are great questions.

We will not disclose what our operating margins are for competitive reasons.

We will tell you that this business is a very good business and it has been year after year.

So we are not going to get out of the business.

We have a very large market share, in fact, and we like it a lot.

We are being pressured this year because of the unprecedented grain costs.

We think that will settle out and that business will come back to be a very good business for us in the future.

All right, great.

Thank you.

You are welcome.

And at this time, there are no further questions.

I would now turn the call over to management for closing remarks.

Thank you, operator.

Well, first of all folks, we thank you for your questions and joining us today.

As we look forward to 2007 and beyond, we will continue to execute against our key strategies to build and strengthen our brands through product innovation.

That is what we live with.

We are very good at and like to do that.

We are, as you can tell, we're becoming much more effective and efficient through our strategic business unit alignment initiative.

We are focused on improving our costs and improved operating leverage.

As we have said many times, the 10% operating margin objective we have for fiscal 2008 is still within our sights.

We are also focused very much on improving our capital efficiency metrics, both our return on invested capital and return on equity.

We realize that 2007 is a challenge as far as the bird seed goes.

We will manage our way through that and we will come out just fine on the other side.

We want to thank you all for joining the call, and we wish all of you a Happy Holidays and New Year.

Good-bye.

Thank you for your participation in today's conference.

Ladies and gentlemen, this concludes the presentation.

You may all disconnect, and have a good day.