Central Garden & Pet Co (CENT) 2007 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Central Garden & Pet's fiscal first quarter 2007 earnings conference call.

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

Later, we will conduct a question and answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS).

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

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

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'd like to remind you of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Statements made during this conference call which are not historical facts, including future earnings guidance, are forward-looking statements.

Central undertakes no obligation to publicly update forward-looking statements to reflect new information, subsequent events or otherwise.

These statements 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, Form 10-K for the fiscal year ended September 30, 2006, other Securities and Exchange Commission filings and will be updated in our Form 10-Q for the quarter ended December 30, 2006.

Today's agenda is as follows.

Glenn will discuss the first quarter results and update our outlook for fiscal 2007, and Stu will review the operating and financial results for the first quarter and provide additional detail behind our updated fiscal 2007 guidance.

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

Our plan is to keep the call to approximately one hour.

I will now turn the call over to Glenn.

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

As we announced on January 22, and as you have seen in our press release, there were a number of factors that impacted our disappointing first-quarter results.

These and certain other factors that we will discuss have also caused us to revisit our expectations for the full year.

None of us are happy with the change in our outlook for our financial results this year, but we believe that we are taking the appropriate steps to address our challenges and to strengthen our fundamentally sound position in the lawn and garden and pet industries.

We're in good, growing businesses, we continue to make progress in building a strong higher margin branded products portfolio through innovation and cost reduction and we are in an excellent position to pursue acquisitions.

These factors we believe will continue to drive long-term growth and share owner value.

So, what happened in the first quarter?

Clearly, it fell short of our expectations.

Net sales increased 8% to $317 million, while operating income decreased approximately 39% to $6 million.

The net loss in the quarter was approximately $3 million or $0.12 per fully diluted share before the distribution of the special stock dividend.

Translating to this recent special stock dividend, the loss per fully diluted share was $0.04.

As you may recall from which our January 22 earnings prerelease, the key factors that adversely impacted performance (technical difficulty) were the late quarter shift in purchases by land and garden retailers, the lower sales and mix shift within pet, bird and small animal and a more adverse impact of higher grain costs than we had previously anticipated.

Each of these factors had roughly the same impact on the bottom line for the quarter.

First was the shift in timing of lawn and garden sales to major retailers.

Retailers are continuing to manage their inventories tighter.

We saw this happen again in our fiscal first quarter, shifting their initial seasonal purchases compared to last year.

We believe this resulted in the deferral of approximately $12 to $14 million in sales, or approximately 2% of our annual land and garden sales forecast to the remaining three quarters.

That said, the decision to defer purchases can sometimes impact ultimate sales as retailers could experience stockouts as they continue to manage inventories tighter and tighter.

The next factor was the lower forecast of pet, bird and small animal products which appears to be due primarily to supply shortages of pet, birds and small animals and a corresponding unfavorable product mix shift.

Pet, bird and small animal sales declined approximately $4 million in the quarter when compared to last year.

The lower sales were primarily in high-margin product, which was partially offset by increased sales of lower-margin wild bird feed.

The final factor is related to the continuing grain cost environment.

In our first fiscal quarter, the cost of milo, corn, millet and sunflower, the primary ingredients for wild bird feed, increased approximately 40%.

We highlighted on our December guidance call that these rising costs would impact us by an anticipated $8 to $10 million in operating profit for the full year.

We experienced, however, greater than anticipated sales in wild bird feed in the (technical difficulty) quarter.

Some retailers appeared to opportunistically purchase product in advance of our announced price increase, which negatively impacted profitability in the quarter.

Let's now discuss our updated outlook for the year.

As noted in today's press release, we are adopting a more cautious full-year outlook given the current uncertainties and dynamics.

First, consistent with our first-quarter experience, we are forecasting lower operating profits in our Pet, Bird and Small Animal category due primarily to increased grain costs and an unfavorable mix shift toward lower-margin products.

Our outlook for the Pet, Bird and Small Animal categories is mixed.

We believe the Pet Bird category is likely to remain soft for the foreseeable future.

We believe the outlook for Small Animal products, however, is more favorable once the supply of live small animals issue at retail is resolved.

Turning to the grain discussion, rising costs also continued to impact our wild bird feed operations.

As we indicated on our December conference call, we have gone to our retailers with price increases for wild bird feed.

We are finalizing our price increases on wild bird feed, and they have been widely accepted.

The new pricing is going into affect this quarter, albeit a little later than anticipated.

Through all of this, at a minimum, we believe we have maintained market share.

However, these increases will only partially offset the total cost impact for the year as grain costs continue to rise and are projected to do so for the foreseeable future.

For example, since our December 7 conference call, corn has increased almost 15%, milo is up 10%, sunflower is up over 5% and millet is up nearly 5%.

We believe there is up to $5 million more in cost exposure due to the continued rising grain prices.

It is also a possibility that price increases currently being passed through to consumers could result in lower demand for wild bird feed.

Third, we are also projecting lower than forecasted sales and operating profits in Aquatics.

Our change in outlook in our Aquatics business is due primarily to an announcement last week by a major retailer saying that it will no longer stock and sell live fish in approximately 700, or 20%, of its stores nationwide.

We expect this will have a direct impact on our Aquatics supply sales to this retailer.

As a result, we think it is prudent to assume that this retailer will eventually decide to extend this initiative more broadly, and that this will adversely impact our sales outlook for the rest of the year.

Longer-term, we expect to see these sales shift back toward the independent channel for live fish and related supplies.

The performance of the rest of Pet products portfolio continues to perform well.

We're pleased with our TFH, Nylabone and Four Paws brands of dog and cat supplies in this fast-growing category.

The early results of our national rollout of the Breeder's Choice dog and cat food in its ultra premium brands Pinnacle, AvoDerm and Active Care are very encouraging.

The equine categories performing well and the integration and performance of our Central Life Sciences strategic business unit, featuring the animal health operations of Farnam and Wellmark, is right on target.

Focusing on Garden, the majority of our operations are expected to perform as forecast.

However, in addition to our concerns regarding higher grain costs and the shift in garden sales to later in the year, there are two areas that have caused us to revise our outlook.

Our garden distribution operation is now expected to perform below our previous expectations.

This business continues to be challenged with the consolidating retail environment, declining sales, lower margins and higher operating costs.

We need to improve pricing, operating cost and inventory turns in order to generate a reasonable rate of return on investment.

It is now clear that we need to move with increased urgency to change and improve our garden distribution business model for better performance.

As the result, we have formed a special project team to give this issue the attention it deserves and we are working on that.

And finally, as you all know, major retailers are looking to partner with suppliers that have relevant national and regional brands, combined with manufacturing and distribution scale.

In order to satisfy the demand of our garden retailers and at their request, we're adding manufacturing capacity to expand a regional product line.

We had anticipated the new manufacturing capacity would be up and running by January.

As a result of construction delays, we now believe this capacity will be fully online in the fiscal third quarter.

We have communicated this production delay to our customers and they understand and agree to this revised time line.

Due to the above combination of factors, we are revising our estimates for the full year.

We now project fiscal 2007 sales to be in the $1.72 and $1.75 billion range.

We estimate Pet sales to be approximately $10 million lower and Garden sales to be approximately $20 lower than our original projections.

Operating income is now projected to be in the $144 to $150 million range.

Approximately half of this decline applies to the Pet segment and the other half applies to the Garden segment for the reasons I expressed earlier.

We expect earnings per fully diluted share to be in the $2.50 to 2.65 range, or $0.83 to $0.88 range, reflecting the impact of the special stock dividend on our projected share count.

In addition to our normal business risks, the exposures we see today also include a significant move upward in grain prices from current levels, all of our planned wild bird feed price increases are accepted and implemented within the quarter, a decline in consumer demand for wild bird feed as a result of higher prices at retail, any additional slowdown in the broader product Pet category, any further unplanned erosion of our garden distribution operations or a delay in our geographic manufacturing expansion objectives, and potential stockout issues by our (technical difficulty) issues by our retailers resulting from their inventory reduction and management initiatives.

We feel our updated guidance reflects a prudent approach to the outlined uncertainties.

Looking ahead, we remain committed to our 10% operating margin objective.

Despite the challenges outlined above, we believe it is still realistic to achieve this goal, but the timing may slip up to a year or into fiscal 2009.

I will now turn the call over to Stu to discuss the specifics of the financial and operating results in detailed revised guidance.

Stu?

Thanks, Glenn.

Turning to the consolidated results for the quarter, as Glenn mentioned, net sales for the first quarter of fiscal 2007 were $317 million, a $25 million, or 8%, increase from last year.

Organic sales declined approximately 3% due primarily to the shift in Lawn and Garden sales and lower sales in the Pet, Bird and Small Animal categories.

Sales from acquisitions contributed approximately $33 million in the quarter.

Branded product sales increased 14% to $260 million.

Gross profit for the first quarter increased approximately $10 million, or 11%, to $102 million.

Gross profit as a percentage of net sales increased 70 basis points to 32.1% from 31.4% in the year-ago period, due primarily to increased contribution from acquisitions and higher margin branded product sales, partially offset by higher grain costs and an unfavorable product mix.

Selling, general and administrative expenses for the quarter were approximately $96 million compared to $82 million in the year-ago period due primarily to acquisitions completed in fiscal 2006.

As a percentage of net sales, SG&A expenses increased to 210 basis points to 30.2%, reflecting the impact of the acquisition of several branded product manufacturers in 2006.

As a reminder, branded products have higher gross margins and higher operating expenses.

Operating income for the quarter declined 39% to $5.9 million.

Net interest expense for the quarter was $10.7 million, compared to $5.6 million a year ago due primarily to acquisitions completed in fiscal 2006 and higher interest rates.

The tax rate for the quarter was 38.4%, relatively flat when compared to the year-ago period.

The net loss for the quarter was approximately $3 million versus net income of $2.6 million a year ago.

The loss per fully diluted share was $0.12 compared to earnings per share of $0.12 last year.

Translated for the special stock dividend, the loss per share was $0.04 compared to earnings per share of $0.04 in the year-ago period.

Now, turning to segment results.

As you know, the first quarter is the off-season for Lawn and Garden.

In the Garden segment, sales declined approximately 8% to $115 million.

Garden organic sales declined approximately 10% due primarily to the sales shift in the first quarter.

Acquisitions contributed approximately $2 million of sales, branded products sales declined 4% to $96 million, and the operating loss was approximately $2.1 million compared to a loss of $0.5 million a year ago.

In the Pet segment, sales increased approximately 21% to $202 million.

Organic sales growth was approximately 3%.

Acquisitions attributed approximately $31 million of sales, branded product sales increased 28% to $164 million, and operating profit declined 4% to $17.8 million.

Depreciation and amortization for the most recent quarter totaled $6.8 million, an increase of approximately $1.7 million compared to last year.

Capital expenditures for the quarter totaled approximately $11.3 million, an increase of approximately $2.5 million compared to last year.

The increase is due primarily to our strategic business unit consolidation initiatives and SAP implementation.

Turning to the balance sheet comparing the December 2006 balances to the December 2005 balances, accounts receivables increased 13% to $176 million from $156 million last year.

Inventories increased 26% to $407 million from $323 million last year.

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

As of December 2006, total debt stood at $582 million, compared to $323 million last year.

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

Looking ahead to fiscal 2007, we now project sales to be in the range of $1.72 billion to $1.75 billion; gross profit margin to be between 33.5% and 34.5%; operating income to be in the $144 to $150 million range; net interest expense to be approximately $45 million; other income to be approximately $2 million; minority interest, the portion of income related to [Tech Pack] not owned by Central, to be a deduction of $2 million; and net income to be between $60 and $65 million.

This translates into an earnings per fully diluted share range of $2.50 to $2.65, or $0.83 to $0.88, reflecting the special stock dividend, which is much like a 3-for-1 stock split.

We estimate the fully-diluted share count on a post-dividend basis to be approximately 72.7 million shares.

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

This guidance does not include any contribution from future acquisitions.

We continue to strive to increase shareholder value through capital management efficiency.

In addition to evaluating and making acquisitions, we will continue to opportunistically pursue stock repurchases to create additional shareholder value.

I will now turn the call back to Glenn.

Glenn?

Thank you, Stu.

We have given you a great deal of information to digest on this call.

However, before we take questions, I would like to try to put today's information in perspective.

Central is a great company.

Our businesses are sound and our strategies are well-thought-out.

Clearly, we are managing some near-term challenges.

However, there is no doubt in my mind that we will successfully manage our way through these challenges and resume our long-term growth track.

While we have lowered our forecast for our Bird and Small Animal and Aquatics operations, the rest of Pet is strong and growing.

As mentioned, the integration of Farnam into the Central Life Sciences strategic business unit and the national rollout of Breeder's Choice Ultra-Premium Dog Food continues to go well.

Our first results and the fiscal 2007 outlook in the broader Pet category, including Dog and Cat, Equine and Animal Health and Nutrition categories, remain strong.

We also continue to build out our operating platforms to further improve our effectiveness and efficiency.

In Garden we have solid listings, particularly in grass seed, pottery and insect control and other in Lawn and Garden control products.

We're also proud that Pennington's Gro-Tech operation last week was recognized at Wal-Mart, winning its prestigious Vendor of the Year Award.

I would like to pass on my congratulations to the entire Pennington team for this great award.

In summary, we are executing our strategic plan.

We have a strong portfolio of brands and we believe we continue to grow market share.

We remain dedicated to new product innovation.

We have improved our effectiveness at retail with a more clearly defined brand strategy, we will continue to deploy capital through strategic acquisitions and/or share repurchases, and we are focused on improving our financial performance for our shareholders.

The team and I are now ready to take your questions.

Operator, we would now like to open the call to Q&A.

(OPERATOR INSTRUCTIONS) Bill Chappell, SunTrust Robinson Humphrey.

First, I just want to dig in a little bit more on the fish tank issue in terms of not selling live fish at a large retailer.

First, I guess why are they doing this, what do you see them replacing that aisle with, and is your guidance assuming that they shift to all 3000 stores or whatever stores by year end?

Bill, we think that we have seen and we're pretty sure that we've said -- seen lower POS sales, first of all, for their category.

We know they have had difficulties at times in the past keeping fish alive and keeping them fresh and everything else like that.

And they announced it last week, they were going to reduce by the 700 stores approximately.

We suspect -- we do not know this, but we suspect and we're planning that they will go further on this.

We think that is prudent for what we now know.

So that's what you've baked into this guidance here, that it does expand throughout the year?

Yes, we think that is the proper way to look at it, at this point.

And any idea what they're going to do with that aisle, in terms of other Pet Products?

Bill, right now, the Dog and Cat category is pretty much getting any space that opens up in the Pet department.

That would be our guess going forward.

So, could you see some benefit from that side as you add new products there?

Could be.

We really don't know what's going to go in that space.

We're guessing.

They're making other changes in their store besides Pet category as well.

I think there could be, Bill, but I think at this point, we're going to have to remain more cautious on this one.

And so with this, the biggest impact should be over the next couple of quarters, or it's just going to be throughout the year?

We would suspect it would be throughout the year.

And second, on the grain side, you had talked that there's an incremental $5 million I guess hit from higher grain costs with the price increases going through.

What are your assumptions?

Are your assumptions that we have hit a peak for grain costs on current prices, or are you baking in some further increases as we go into the planting season?

We have baked into both what the current prices are, and we suspect that corn will go slightly higher.

Okay, but in terms of sunflower, milo and millet, you are not expecting great increases from here?

We hope not.

That's the best way to put it, Bill.

In terms of -- you said you widely accepted on the price increases.

Have you gotten the price increase at your largest customer?

Not everything is done yet, Bill, so we're still in the process of that.

Most of our customers have accepted it.

Okay, great.

I will turn it over and get back into queue.

Joe Altobello, CIBC World Markets.

Thanks, good afternoon, guys.

Just a follow-up on Bill's last question regarding the big large retailer, your guidance assumes they do accept your price increase?

Our guidance does assume that, yes.

Okay, great.

Moving onto the garden situation, obviously shifting out from the December quarter into the March and June quarters, this seems like it had been an issue that has been ongoing for a few years, and it didn't seem like Scotts was that impacted this quarter.

I was curious why it seemed like it just jumped up and bit you guys sort of out of nowhere I guess.

Joe, this is Brad, a couple of things.

We saw a shift partly due to our distribution business, which Glenn talked about earlier.

But I would say if I had to draw a circle around one area, we saw a shift in grass sees, in terms of when that was taken into the accounts.

And if I look across the quarter, that's where we saw the biggest shift in terms of the change, and that would disproportionately hit us as opposed to some of our competitors.

And this is unusual versus previous years?

Yes.

And, Joe, I would also tell you that we have seen a lot of those sales come back in January.

Okay.

In terms of the construction delays, when did you know that you would have delays?

It kind of moved on and it moved out throughout December.

Right, because if you were expecting your facility to be up in January, and now you're talking 3Q, it seems like it was pushed out at least three months.

So I assume you guys knew this in December, or no?

Not when we gave the guidance, Joe.

No.

If that's what you're asking, no, we did not.

We did not expect a lot of sales of this in December as you start up a new facility, but we were expecting to be up fully online by early January, and that has not happened.

Lastly, in terms of the SG&A, I guess as a percentage of sales, it was up about 200 basis points.

I would have thought your gross margin would have gotten hit by the higher grain costs.

It looked like the gross margin was actually okay, and I was wondering why it got hit so much on the SG&A line.

There's a bunch of offsets going on on the gross margin.

Obviously, we have -- the number is up in aggregate because of the large contribution from acquisitions in the quarter compared to year-over-year.

So that is driving the lion's share of the increase.

Offsetting that, as you point out, is the grain costs.

So you go down to the SG&A percentage and it's up again 200 basis points, and that's just driven by branded products sales.

A lot of that comes from our Farnam acquisition, which most of their sales are going to happen in our second, third and fourth quarters, and yet, you carry those costs in the off-season.

Okay, great.

Thanks.

Alice Longley, Buckingham Research.

There seem to be two different execution issues highlighted on the press release, and maybe I'm confused, but something about challenges with distribution in Garden, and then they delayed startup in manufacturing.

Are these two different execution issues?

Definitely.

Could you talk more about -- we understand there was a delay in construction.

What was the -- could you elaborate more on the execution issue with distribution?

I will start off on that.

The execution is primarily in our western operations, is where most of it is located, West Coast.

We have just seen -- continued the sales to move away from that, of course (technical difficulty) planned and vendors move away to sell more direct, and we have not been able to get our costs in line.

And it has been moving farther than we had planned on, number one.

Number two, this is a business that we continue to look at and we have to take a look at different changes for different models.

And Brad, what would you add to that?

I guess also, what I would add to that is, as we see the sales transition more to the bigger customers, the big three, big five customers on the West Coast, we're seeing a degradation in our density of deliveries, which causes a cost imbalance as we look at our internal trucking, that sort of thing.

So we're needing to go back in and take another look at the model in terms of profitability.

We are in absolutely no jeopardy of 2007 commitments to our customers.

There is no issue in terms of execution, getting the product to the customers.

That's not what we're talking about.

What we're talking about is, we do not like the change in the cost structure that we're seeing as we continue to see the consolidation into the bigger customers, and the speed with which this has moved along is slower than we would like, so we have deployed project team to correct it quickly and move on.

What does degradation of density of delivery mean?

Does that mean you're not having enough full truckloads?

What it means is, in short, yes.

What we don't like is that we're now having to go further out from our DCs with our trucks to be able to make the deliveries with one truckload.

So, obviously, that's higher fuel costs, that is more driver time, that sort of thing.

And when you're dealing with a distribution business, you are talking about a business that is typically a lower-margin business, so you have to watch your costs very closely.

All we're suggesting is, we need to get back on top of that in a more aggressive way because of the change in the marketplace to having less dense deliveries outside of those big three.

Can I assume that you might cut distribution business more sharply than you have been doing so?

If the business is not profitable, we will be aggressive about making sure we make it profitable, whatever that answer leads us to.

And then I'm just wondering what kind of restructuring might be lying ahead of us.

And if you do that, are you going to have to be cutting back on distribution centers in order to get more efficient?

Alice, I guess what I would say there is that logistics/distribution to our customers is always going to play a role in this Company.

We will always need to deliver product to our customers.

So I would not want to presuppose what that means until we spend some time to analyze it more fully.

But you should not read into this that we have a plan in place that we're going to be dropping distribution centers.

Okay, one last thing.

While you're having these various execution issues, are you going to put acquisitions on hiatus for awhile?

No, we're not.

We have been looking at things, we will continue to look at things, and I'd say, stay tuned on that.

We would not do an acquisition in a unit that was having trouble, I will tell you that.

But, for units that are performing well, we should continue growing our business.

Thank you.

Michael Friedman, Noble Financial.

A question -- a couple of years ago, if I remember correctly, you guys were out on the road, talking a lot about return on assets and return on -- RONA, etc.

I'm looking at this thing here, and since that time, it looks like the return on assets and equity are steady or down.

What went wrong, and is that something that's fixable here?

(MULTIPLE SPEAKERS) Return on assets have gone up.

Return on equity has stayed flat because we issued more equity last year.

(MULTIPLE SPEAKERS) wasn't that a focus of what -- you guys are going to get that to go up significantly?

Yes.

And that was a couple of years ago?

And we have made improvements year-over-year on return on invested capital.

As Glenn said, last year, because of additional share count, our return on equity went down several basis points;

I'll call it relatively flat.

ROIC was up 110 basis points.

I'm looking at, at least in my model, I'm looking at it on average here, and as I said, it looks like it's flat to down.

But, again, the idea is that you guys are going to pump this thing -- pump that up.

That was a focus, and to your admission, it has been flat to up.

Is there any way we can get that up higher?

We're chipping away at it every year, Michael.

That's the way to approach it.

We're trying to get our operating margins up, and that will also help drive capital efficiency.

But, if you go back and look at one of our slides from one of our investor presentations, there is a page in there that gives you the year-over-year results on return on invested capital and return on equity.

You will see, they do trend up.

Michael, to be fair, we're facing some headwinds right now in 2007 that we did not expect to face, and that is -- we don't like it, quite honestly with you, we don't like it, and we have to get those challenges past us to get back on our track.

Let me ask the question in a different way.

Your internal goals -- are you guys getting the return on investments on the most recent acquisitions that you had expected?

Yes, we are.

And what about -- can you talk a little bit about, give us a little bit more color as we get closer to fiscal '08?

We've been talking about 10% operating for awhile, now we're scaling that back a little bit.

Potentially it's maybe the next quarter.

Can you give us a little bit more flavor of on how exactly you expect to get there?

Is the top line going to push that, is it going to be cost cutting?

Can you give us a little bit more on that?

Sure.

It's a combination of those things, Michael.

If I could tell you what the grand price forecasts are going to be for next year, I could tell you a lot more -- I can't do that.

We have been really shocked by how much the grain prices have moved up this year and continue to move up.

That's a big question mark in our mind.

But as we think about moving up -- what I tried to say in the prepared script there was that, look, we are still after the 10% operating margins that we strive for, and I still think we can reach it.

I don't know whether we can do it in 2008, so that's why we tried to say, we'll strive for that.

But I have to be fair with you -- it's better to push it out to 2009 to be safer.

But sort of conceptually, the top line there, you're looking at organic growth probably in the mid- to low-single digits -- is that fair?

Yes, mid-single digits should be where we should be from the organic basis.

So in order to get that, you would have to either -- combination of get the gross profit margin up, which I assume is part of the plan, and kind of cut SG&A?

That's correct.

And so, what was the shift there then?

In other words, the top line does not seem to have changed, and it seems as though -- is it the sales mix, is it cost cutting that's not going to go as quickly, or can you give any --?

Cost of goods.

The cost of goods has gone up.

If we just look at our grain prices alone versus last year, our grain prices in both our combination of Garden and Pet businesses is up over $20 million, over last year.

And, lastly, when you're looking at acquisitions, obviously you've done an awful lot, you had Farnam and a couple of others.

You're consolidating plants here, building new plants on the manufacturing side.

You have some challenges on the distribution side, and you're putting in the SAP system.

There's a lot going on there.

On the acquisition front, can't say exactly what you're looking at, but is it more on the smaller side, medium side, bigger side?

Can you just give us a sense of that?

I would say that you should look at our history there, and our history has been primarily what we call our string of pearls.

And I would suspect that it will still continue to be that, which would be more like $20 to $60 million in sales, or $70 million, somewhere in there.

We will always look at big ones and we continue to do that, but we like to stay within our guidelines of buying the businesses between five to seven times trailing EBIT.

That said, you're primarily going to do the string of pearls, but as the big ones come along, and if they come along and we look at the economics, like Farnam, which we paid above nine times, that business that we're telling you right now, we still feel very good about Farnam, but those are going to be more few and far between.

One last quick question.

Do you think that you need -- you can hold SG&A relatively steady as to where you project it's going to be at the end of '07, into '08?

I'm going to give you a quick answer.

Yes, we need to look at that.

I think yes.

I think a lot of it depends on what we do from an acquisition perspective.

Right, assuming no acquisitions.

(MULTIPLE SPEAKERS) products have higher operating costs.

Right, I'm sorry, but assuming no acquisitions, do you really to add much overhead.?

SG&A is not out of control, Mike, if that's your question.

Okay, great.

Thank you, guys.

Doug Lane, Avondale Partners.

Can you drill down a little bit on the wild birdseed pricing between brands, Kaytee versus Pennington, if you're having more or less success in one versus the other, and then just give us an update on the competitive environment in wild birdseed?

I would say, let's at this point, because of the competitive nature, Doug, we're going to say, we're going to be very similar between Pennington and Kaytee.

That would be first and foremost.

And as far as competitive nature, we know, we have gone with price increases, and we know our competitors, both large and small, have done the same thing.

This is a factor that's not just facing us, it's facing all of us.

And what we know as of right now, as of today, that is where we are.

And what is the magnitude of the price increasing on average?

Is it low-single digits, mid-single digits?

It sounds like the commodity is up pretty substantially.

And maybe if you could give us, to the extent that you're willing to share it, what you think sort of a breakeven price increase would be, if you were able to offset the increase in commodity costs?

I will just say double-digit, and leave it at that.

I don't want to say too much on this call, as you can well imagine, Doug, but it had to be double-digit.

And what do you think you're actually getting, or where do you think it will shake out at the end of the day, once everything is put through?

Well, as I said, we went back to our retailers with, as we looked at grain prices back in December and knew we had to raise it X, and we have done largely that.

We're not all done yet, but we're getting close to that.

And now, what we have seen since then, actually the grain prices have actually moved up in a second wave.

So that's why I called out on the call, that we see a potential up to $5 million more that we do not have covered in our current prices we have gone back with.

Okay.

So to be clear, is the double-digit number what you -- at least double-digits, what the breakeven would have been, and then you are actually getting something in the single digits on balance?

Is that the way to look at this?

No.

I think we have probably gone too far on this one, Doug, but it's double-digit.

Okay.

That's what you're getting, in other words?

Right.

I see.

Thank you.

Karru Martinson, CIBC World Markets.

Apologies on hammering you some more on wild birdseed pricing, but I was wondering, is there an opportunity to continue or put in a second wave of price increases, following the continued grain environment?

That's something we're going to be facing, and this is not -- this impacts both our wild bird, as well as our pet bird, as you can well imagine.

And if these prices continue to go up like they are, we will likely have to go back, but you can't do it right away.

We just did one.

And so, we will have to go back later in the year.

Because your competitors were out saying in essence that you guys as category leaders were kind of dragging your feet, not to disparage you on that.

So I'm thinking, what is the kind of time frame that you would see such a transaction taking place?

I have to be careful here. (MULTIPLE SPEAKERS).

I'm sorry, Karru, but I kind of chafe at that question a little bit.

I'm sorry for that, but I couldn't think of any other way to phrase it.

I think we went back as fast as we could.

But yes, we are the category leader and we're responsible for that.

We've gone back as fast as we felt it was appropriate.

We've gone out with the prices we think are appropriate.

We're making changes as quickly as we can.

Unfortunately, these grain prices have continued to move up beyond that, and we know we're going to have to go back, but you cannot do it right away.

It just does not make sense.

You're not hedged on any of your prices, correct?

No, because really, all of our grains, the only one you can hedge is corn.

The others, you cannot hedge.

And corn, we use it in part of our operations, it's a driver, but it's not the biggest driver.

In terms of your cash flow, if you had to prioritize between strategic acquisitions, debt repayment and share repurchases, how are you looking at these [with] your cash flow?

Acquisitions first and foremost.

We're here to grow the business.

But, you also look at the economic returns -- of each of those three that you just looked at, you take a look and say, how do we maximize shareholder value?

Acquisitions will be our first choice, but we'll all say -- what is the best way to maximize shareholder value?

That's what we're hired to do.

Okay.

And just, lastly, in terms of the SG&A increase, was that all Farnam, or was there any other moving prior parts in that number?

That was all related to acquisitions.

It was Farnam, it was Breeder's Choice, it was all of the acquisitions that we did last year.

It is all acquisition related.

Thank you very much guys.

Reza Vahabzadeh, Lehman Brothers.

Good afternoon, just a couple of follow-up questions.

On the grain costs, did you quantify in at least ballpark terms what was the impact to the P&L from grain costs in this quarter?

No, we did not in this quarter.

What we said is that, looking forward, that we see a potential exposure of the current grain prices we're looking at up to $5 million more exposure looking forward.

That's what I said.

Got it.

And then, is that $5 million just on the gross grain costs, or is that net of pricing?

That is the grain cost.

With the current prices we're looking at, we have not covered up to $5 million more, and that's basically because of grain prices, how far they have moved even since December, early December.

That's what we want to characterize as the second wave of grain price increases.

From a retailer perspective, we're trying to finalize the first wave of cost increases through price increases at retail.

This is the next, basically the next wave, if you will, of economic exposure that we're trying to manage through.

You mentioned that corn, sunflower, milo and millet has increased something in the 40% range.

Your entire input cost bucket, what percentage increase are you seeing in that?

Any sort of offsetting costs declines, anything else that is in your grain cost environment that hasn't changed?

No.

We may change our mix a little bit.

Wheat has gone down just a little bit finally, but not a whole lot.

But everything else that we use is all moving up, and we're tracking it daily, weekly, moving along that.

And if you think about wild bird feed, you're basically putting grains and the bags to put it in, and that's your raw material.

Got it.

In terms of your revenue outlook for 2007, I thought you said it's a mid-single-digit organic growth number.

Yes.

And how much of that is pricing versus volume?

That is probably going to be -- assuming with the prices increases now in our wild bird feed, it will be probably between 1 and 2%.

1 and 2% pricing, and the rest volume?

Yes, that is ballpark.

Alexis Gold, UBS.

This is actually [Andie Davis] for Alexis.

Quick question.

Can you remind us what the split is between mass and home retailers in the Pet and Lawn and Garden business?

I can do it quickly.

As far as -- you mean, our big three customers, is that what you're thinking of?

Yes.

In the garden segment, it will be Wal-Mart, Home Depot and Lowe's are our biggest three, and they account for 60% of our sales, Brad, approximately?

Right.

That is in the Garden, segment.

And in our Pet business, our big three accounts are PetSmart, Petco and Wal-Mart in that order, and they're right around total combined 25% -- about 20% of our sales in total.

That just shows you how much more fragmented the retail side is on Pet versus Garden.

Okay thanks.

And also wondering -- are there any opportunities to pick up the lost revenue with regards to your live fish business?

What we think will happen is as that large retailer discontinues selling live fish, you will find other retailers will fill that void.

But we tried to be as prudent as we could as we thought about 2007.

That is not going to happen in 2007.

So we would expect to see those sales come back in the future, but I think it's prudent for us right now to really think that's going to be gone for 2007.

Thank you.

Jeff Bronchick, RCB Investment Management.

Obviously one last question on the grain.

Can you look back in your organization and systems and your ability to price and roll out with retailers, and again, given the fact, this is a fairly unusual increase in input costs, are you satisfied with the way it went, or would you -- are you disappointed with your ability to recognize input costs, price get in front of your customer, pass it through?

How would you grade yourself in that process?

You can always do better, Jeff, I would say that first of all.

I think what we saw and it would continue to move up -- when you see prices move up as fast as they did, and I just go back and I look at how fast they moved in our first quarter, and from where we originally put our guidance together, my gosh, they just continued to move very, very fast every week.

So we recognized that, went back to our retailers, and we have told them, we need price increases.

There is a lag effect.

We did everything that we consider we did well.

We had some retailers of course that have bought ahead of the price increases.

That was a little more than we thought would happen at that point in time.

But as I look back, I wish the grain prices had not moved up.

That is of course.

But as I think [is] what we're doing, I would probably give us a B+ on that.

It would not been A+, but it would not be a C either, and I would say probably a B+ to maybe an A- on that.

I had not thought about it that way, but --.

Would you say that you're -- as the leader in the category, you're providing price leadership for the category, you were trying to get ahead of this, you're being aggressive?

Yes, I would say that.

And somebody out there back to the earlier question said well we could have gone faster.

Come on -- when they move the fast as they have, we went out as quickly as we possibly could, and the lag thought that you have to get [retailer's notice] on that, is longer than we all wish.

We have gone back as quickly as we can.

And in the past quarter, you did not expect to see at that time any volume decreases at retail, given the price increases that are going through.

And on a per-bag basis, are you seeing any signs that I'm just not paying that for the bag, I will throw bread at them?

What are you saying there?

Good question.

I guess we haven't answered that.

We did not see the retail prices move up in our first quarter.

We are seeing them move up now.

You have seen retailers moving up quite significantly, and I would expect you will see that in the coming weeks.

And we've let that out as a risk factor in the call here, and you will see it in our [Form 110-Q], our Q1 Form 10-Q as an additional risk factor that we may see some decline in sales at the consumer level because of the higher price increase.

And lastly, one of the other callers, in the interplay, I won't even mention dividend because I don't think it's in your mental mindset, but clearly, share repurchase, debt repayment and acquisitions, debt relatively cheap, relatively accessible, and so that leaves -- you seem very hell-bent on acquisition.

And obviously, at some point, and who knows, it could be tomorrow morning, the best and cheapest acquisition, given some of the prices out there, may be your own stock.

And I know the man upstairs is not a friend of share repurchase, but at what point do you say my stock is the cheapest acquisition out there?

You've seen us -- Jeff, A, I respect your question, I understand it.

B, and if you look back at what we did back in 2000, we bought back half of our shares at that point in time.

And we will continually look at that.

If it looks like that is the best thing to do for shareholders, we will do that.

And what was the last acquisition you made for 5 to 7 times trailing EBIT?

Breeder's Choice, Inonite, those are two that we did just this last year.

We did five acquisitions last year, and all but Farnam were between 5 to 7 times.

Thank you very much.

Reade Kem, Merrill Lynch.

Glenn, we did not spend any time I don't think on the call talking about the Pet, Bird and Small Animal category.

I was wondering if you could remind us as a percentage of your own branded pet supply business what that is, and just give us a little bit more color on what was going on there.

I would say that the Small Animal, first of all, we think that is a temporary problem there, and that we had some breeders that went out of business and we're seeing more and more regulations as that was going and you're going to find larger breeders and some of your smaller breeders will go out of business as regulations become more and more.

So we think that is more of a short-term issue.

On the Pet Birds, what has happened there is, this is really more around the larger Pet Birds, more the exotic ones.

The government has really cracked down on more of the importation of some of those larger birds than we've seen in the past.

We've also seen some of our large retailers in fact stop selling the really truly big birds, and that of course is where your really high margin products are.

That is where you sell the supplies, the very expensive food, and also the big cages to go with that.

So we've seen a mix shift within that.

Jim, what would you add to that?

The encouraging is that, in Small Animal, as Glenn mentioned, there are small animals that are really hard to get for a variety of reasons.

We are seeing animals like rabbits are now growing at really rapid rates, and we are well positioned for that to happen with both food and with habitats.

So we are encouraged by what will happen with Small Animal.

And was the issue on the bird side, is that something that was happening towards the end of '06, and it may affect you throughout this year, and then kind of adjust itself so to speak, or how should we think about that?

I think what you just said is correct.

It has been happening for awhile.

There's a lot of issues.

Like Glenn said, our major retailers, a lot of them have quit selling large birds.

That, we don't think they're going to out those birds back in.

There's government sanctions on the importation of a lot of those birds, so we will shift our emphasis to small birds where that still seems to be an okay business, and we will just shift the emphasis to what we're doing.

Okay.

And on Farnam, I was curious, what was the -- any key integration milestones in the quarter?

That is going just fine.

I really can't complain about the Farnam thing.

And in fact, I'm very happy how that integration is going and the success at that.

We think Farnam is going to be a very good acquisition for us, and I would give us on that one a grade of A or A+, to be honest with you.

Are organic sales tracking positively within Farnam's portfolio?

Yes, but remember, almost all their sales for this year are in front of us, because most of their sales will happen in our second-third quarters, not very much in the first quarter.

The listings we are looking at, our outlook, we're still very positive on that.

And then on M&A -- final question, just in terms of the activity in your pipeline, is it any more active on either side, or equally active?

How would you talk about that?

It will always be more active on the Pet side, simply because back to the consolidation in the industry, the Pet is much loss consolidated than garden is, and there's more of the entrepreneurial founder type companies that are coming up on the market each year, and that's where we have our -- that's our fishing hole, I guess I would say it, as we continue to nurture relationships in those categories.

I would say it will always be Pet, but at the same time, we look at Garden all of the time too.

So unlikely to see you do anything big in Garden anytime soon?

I would never say never, but let's just say I will never say never.

Okay, thanks a lot.

Sorry for being so obtuse on that, but I think that's appropriate.

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

I would like to turn the call back over to Mr. Glenn Novotny for closing remarks.

Thank you, operator.

First of all, everybody, thank you for your questions.

I think as you can tell, we are disappointed in our first quarter, but at the same time, we have to stand back and say, okay, wait a minute, this business is actually in a very good shape, and we will get through this.

We will overcome these obstacles and I feel very confident about the future.

So first of all, thank you very questions.

And as we look forward towards 2007 and beyond, we are not changing our strategy.

We will continue to build and strengthen our brands, we will continue to bring out a whole bunch of new products.

I hope several of you can come to the Global FedExpo later this month in Orlando.

You're going to see a lot of really cool things there that we will be launching.

We're very focused on becoming more effective and efficient through our strategic business unit consolidation and improve our operating leverage, we're very committed to that.

We will continue to pursue strategic acquisitions that make sense, number one, and are at the price that we're looking for.

And with that, I want to thank you for joining the call today and we hope to see many of you later in Orlando this month, and then at the investor conferences over the next couple of months.

Thank you very much and good afternoon.

Ladies and gentlemen, this concludes your presentation.

You may now disconnect and have a great day.