Central Garden & Pet Co (CENT) 2007 Q2 法說會逐字稿

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

(OPERATOR INSTRUCTIONS) I would now like to introduce Mr.

Paul Warburg, Vice President of Industrial Relations for Central Garden and Pets.

Please go ahead, sir.

Thank you, operator.

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

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

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

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

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, our form 10-Q for the quarter ended March 31, 2007 and other Securities and Exchange Commission filings.

Today's agenda is as follows: .

Glenn will discuss the fiscal second quarter results and our outlook for fiscal 2007.

Brad and Jim will discuss the operating results for the garden and pet segments, respectively.

Stu will review the financial results for the quarter and then we'll open up 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.

Our objective today is to brief you on our second quarter results and update the operating plan we outlined to you in February.

Reviewing the quarter's results, net sales increased 21% to $486 million.

Operating income increased approximately 1% to $46 million, net income decreased approximately 18% to $21 million, and earnings per fully diluted share was $.30 cents and our organic sales increased 11% in the quarter.

In the quarter, we benefited from an early start to the garden season driven by favorable weather in key early season markets, most notably California and Florida.

You may recall last year the season got off to a very slow start due to unusually wet conditions in these key markets..

Augmenting the favorable weather conditions, Daylight Savings Time began three weeks earlier this year than last year which we believe further stimulated sales.

In addition, our strong listings at retail and consumer pull through during the quarter was excellent.

In each of our key garden categories, point of sale data was strong, both on the sales dollars and a per unit basis.

Finally, this year's Global Pet Expo, the major pet industry trade show, was four weeks earlier than last year.

This timing prompted the sales of some of our award-winning pet products earlier than in previous years.

In spite of our strong sales increase, our operating profit as a percentage of sales declined 190 basis points to 9.5% from 11.4% a year ago.

The primary reason for the decline was higher grain costs in our wild bird feed operations.

We were able to raise prices in late February but not enough to cover the escalating grain costs.

As a result our wild bird feed operating profit declined substantially, despite an over 25% increase sales and an approximately 7% increase in unit POS.

This caused an unfavorable sales mix shift in the quarter.

We are continuing to manage through this volatile grain environment.

Since our early February conference call, there continues to be a great deal of volatility in the grain markets, largely related to anticipated demand from biofuel producers.

Since the last call, the cost for corn and milo increased as much as 10% in the quarter before dropping back to mid-December levels following the much anticipated crop indication report released on March 31st.

Millet spiked as much as 14% in the quarter and, as of Friday, is still nearly 10% higher since our February call and sunflower continues to set new highs.

It is currently up approximately 19% since our last call and continues to trend higher.

That being said, we remain comfortable with our February 7th issued outlook for wild bird feed despite the continued volatility in grain prices.

We now expect that grains, in total, will cost us in excess of $25 million more this year compared to last year .

Price increases taken to date should offset approximately half of the increased cost which means that we are absorbing approximately 12 to $15 million of net gain costs for the year.

Turning to garden, the season got off to a strong start especially the month of March with favorable weather in the sun belt states.

However, the first two weeks of April were cold and wet, which dampened sales and performance.

As outlined on our last call, we are addressing and making progress on the business execution issues in our west coast garden distribution operations and the construction of increased manufacturing capacity in existing product line is essentially complete and ramping up, according to our revised plan.

In pet, we had another excellent award-winning showcase at Global Pet Expo.

March marked the first anniversary of the (inaudible) acquisition, it is now largely integrated into our Central Life Sciences Strategic Business Unit and is performing well.

the aquatics category remains soft.

The aquatics category remains soft.

In conjunction with this trend, as previously disclosed, the deletion of fish sales at a major retailer is having an adverse impact on the sales and the profits in aquatics.

The bird and small animal category continues to work through the animal supply shortage issue, and the dog and cat remains strong but has recently been challenged by the issue of pet food recalls..

The good news is that our Breeders Choice brands have not experienced any of these problems.

While we are reiterating our sales and earnings outlook for the year, we are closely watching the performance of our garden business which experienced lower than anticipated sales in April and the continued volatility of the grain-cost environment, for the rest of the year.

I will now turn the call over to Brad to discuss the garden segment operating

Thanks, Glenn.

Turning to the garden segment operating results.

Net sales for the second quarter of fiscal 2007 were $256 million, an increase of approximately 20% when compared to last year.

Organic sales increased approximately 15%, due primarily to a favorable start to the season and strong branded product sales.

As expected, the strong performance also reflects approximately $5 million in sales shift from the fiscal first quarter into the second quarter.

Sales from acquisitions accounted for approximately $9 million in the quarter.

Branded product sales increased approximately 24%, while sales of other manufacturers products declined approximately 2%.

Operating profit increased approximately 9% to $29 million.

As a percentage of sales, garden segment operating margins declined approximately 100 basis points due primarily to input cost pressures related to wild bird feed.

The early start to the garden season translated into particularly strong sales both into the retail channel and through to the customer.

Total garden point of sale for the quarter increased approximately 16%, indicating strong demand for our products.

Each of our garden categories continues to benefit from new product launches and our increased building initiatives.

In particular, we are very pleased with our relationship with NASCAR legend, Richard Petty, supporting our Rebel's brand of grass seed, AMDRO fire ant control products and Ironite soil supplements.

This exciting advertising and brand-building campaign is definitely driving incremental sales and building customer loyalty.

No pun intended.

In March we acquired ASP research, a leading developer and breeder of turf grass.

This acquisition further strengthens our ability to develop the next generation of higher margin proprietary grass seed for the consumer and professional market places.

And looking ahead, we expect to have a good garden season due to our branded products and our targeted promotional activities..

The slow start to April and continued grain costs volatility; however, lead us to maintain our cautious outlook for the balance of the year.

I will now turn the call over to Jim, who will discuss the pet segment.

Jim.

Thanks, Brad.

Turning to the pet segment operating results.

Net sales for the second quarter of fiscal 2007 were $230 million, an increase of approximately 23% over last year.

Organic sales increased approximately 7%.

Sales from acquisitions contributed approximately $30 million in the quarter.

Branded product sales increased 27% to $191 million, operating profit increased 17% to approximately $29 million.

Operating margin as a percentage of the pet segment sales declined approximately 70 basis points, due primarily to the cost pressures in the wild bird feed.

First, I will update you on the two topics we outlined as challenges on the last call.

The deletion of fish sales at a major retailer and continued-- and continued supply shortages of small animals at retail.

So far, a major retailer has discontinued fish sales in over 500 stores.

We expect this retailer will continue to decrease its fish sales in the future though the timing is uncertain.

Additionally, we are witnessing softer demand in the aquatics category across all channels.

That being said, our POS tracking indicates that we are increasing our market share in this category..

In order to sustain additional market-share growth we are launching new products and better positioning our brands.

We are particularly excited about the launch of our comprehensive line of fresh water aquariums and supplies sold under the Aqueon brand.

Following our successful launch of the newly created our RZilla brand of reptile supplies in the first quarter, Central Aquatics introduced its Aqueon branded products line at the Global Pet Expo and began shipping them in late in the second quarter.

In total, Central Aquatics, including the primary brands, Aqueon, Oceanic and, RZilla is launching over 300 new and rebranded SKUs in fiscal 2007, mostly in the second half of the year.

We expect to continue to increase our market share with these initiatives.

Now turning to the supply shortage of small animals.

While there is still strong consumer demand for small animals, there continues to be a shortage of small animals at retail.

The timing remains unclear as to how quickly the shortage will be corrected.

Now, once again, similar to aquatics, we are seeing increased market share gains for our products in our POS analysis.

Now shifting to our position within the pet industry and the emphasis on innovation.

We had another stellar, award winning showcase at the Global Pet Expo in Orlando this year.

Once again, we led all manufacturers winning nine out of 33 new product awards, including five prestigious best-of-show awards.

We experienced some sales benefits of these new products in the second quarter, but we expect the bulk of the positive impact to come the second half of the fiscal year when the majority of the new items ship.

Another recent development pertains to the pet food recall.

Our ultra premium Breeders Choice lines of food,including the brands Pinnacle, AvoDerm, and Active Care,have not been impacted.

We do not use wheat gluten in any of our dry or canned dog and cat foods.

All of our ingredients in our foods are from certified sources within the United States with the exception of premium New Zealand lamb.

Breeders Choice has been making high quality, natural pet foods in its California plant for over 60 years.

We are actively working with both retailers and consumers to demonstrate the health and safety aspects of Breeders Choice dog and cat food products.

For example our in-house marketing and distribution capabilities allow us to reach thousands of pet retailers weekly.

Placing in-source signage and other marketing materials that educate and promote the safety and health attributes of our Breeders Choice products to consumers.

Our market share is increasing as consumers are switching to brands that have not been impacted by the recall.

I will now turn the call over to Stu, who will provide greater detail into our financial and operating results.

Stu?

Thanks, Jim.

Turning to consolidated results for the quarter as Glenn mentioned, net sales for the second quarter of fiscal 2007 were $486 million, an $85 million or 21% increase from the same period last year.

Organic sales increased approximately 11%, due primarily to the early start of the lawn and garden season and brand of product sales.

Sales from acquisitions contributed approximately $39 million in the quarter.

Branded product sales increased 25% to $409 million.

Gross profit for the second quarter increased approximately $27 million or 20%.

to $164 million.

Gross profit as a percentage of net sales decreased 40 basis points to 33.7% from 34.1% in the year ago period, due primarily to higher raw material costs and mixed shift.

Selling general and administrative expenses for the second quarter were approximately $118 million compared to $91 million a year ago, due primarily to the five acquisitions completed in fiscal 2006.

As a percentage of net sales, SG&A expenses increased 150 basis points to 24.2% reflecting the impact of these acquisitions.

As a reminder, branded products have higher operating expenses.

Operating income for the quarter increased 1.1% to $46 million.

As a percentage of net sales, operating margins declined 190 basis points to 9.5%, due primarily to input cost pressures in our wild bird feed operations.

Net interest expense for the quarter was $12.4 million compared to $9.6 million a year ago.

The increase is due primarily to acquisitions completed in fiscal 2006 and higher interest rates.

Other income was $1.6 million, relatively flat when compared to last year.

The tax rate for the quarter was 38.2% compared to 30.8% in the year ago period.

Last year we benefited from the reversal of the tax reserve related to the IRS closing its examination of our consolidated 2003 and 2004 tax returns that totaled approximately $2.6 million.

Net income for the quarter was approximately $21.5 million versus $26.2 million a year ago.

The decline is due primarily to the aforementioned cost pressures related to wild bird feed, higher interest expense related to acquisitions completed in fiscal 2006, and the higher tax rate I just mentioned.

Earnings per fully diluted share was $0.30 compared to $0.39 last year.

Depreciation and amortization for the most recent quarter totaled $7.4 million, an increase of approximately $1.4 million compared to last year.

Capital expenditures for the quarter totaled approximately $20 million, an increase of approximately $10 million compared to last year.

This increase is due primarily to the addition of new manufacturing capacity and our SAP implementation.

Now turning to the balance sheet, comparing March 2007 balances to the March 2006 balances, accounts receivable increased 15% to $333 million.

Inventories increased 12% to $409 million.

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

As of March, 2007 total debt stood at $713 million compared to $656 million last year.

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

Now looking ahead to fiscal year 2007, we are reiterating our guidance.

We continue to expect sales to be in the range of 1.72 to $1.75 billion.

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

Net income to be between 60 and $65 million translating into an anticipated earnings for fully diluted share range of $0.83 to $0.88.

This guidance does not reflect any contribution from future acquisitions.

I will now turn the call back to Glenn.

Glenn.

Thank you, Stu.

Central continues to focus and execute against our strategic plan, first to build and strengthen our branded products portfolio, for our commitment to new product innovation, and focused marketing and advertising.

While weather is a driver, the early season strength in garden is also due to our increased brand building and new product innovation initiatives and our ability to capture greater shelf space at retail.

In pet we continue to be recognized by the industry as a leader in new product development and our ability to get products to market faster than our competition.

We are also focused for being effective and efficient.

We continue to streamline our brands and focus our operations through our strategic (inaudible) alignment thereby putting more power behind those brands which we can scale long-term.

This enables us to more effectively and efficiently develop new products, support our brands with concentrated marketing and advertising, and present an even stronger face to our retail partners and consumers.

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

Operator, we would like to open the call to questions.

(OPERATOR INSTRUCTIONS) The first question comes from the line of Bill Chapell with Sun Trust Robinson Humphrey.

Please proceed, Sir.

Good afternoon.

The first question-- just help me understand on the SG&A the growth being up 30% year over year.

I guess I understand the branded products carry a higher amount of selling and marketing expenses, but, I would have thought there was some leverage on the administration-- on the G&A side where it wouldn't be out pacing sales quite this fast.

Should I expect that for the rest of this year.

Yes, we are anniversarying in the [Partum] acquisition, Bill.

We saw this trend last quarter as well.

So, we should expect this for the rest of year.

Okay, I guess I was just surprised on the line of performance that, that would continue.

Second, I guess, help me understand on the wild bird seed costs, Glenn I think you said with pricing you'll be able to offset about half of the $25 million of costs.

If you had had the pricing at the start of the year, does that mean you would have been able to fully offset it?

Or-- 'cause I guess it didn't go into effect until halfway through your fiscal year.

That is correct, Bill, just the way that you said that.

That is the impact and we have most of that have behind us right now.

But, that is the impact we've seen so far this year.

So, assuming all else is equal, which is a big assumption, as you go to fiscal -08 you should be able to return those margins back to where they were?

Boy, that's the $64 question, Bill.

What we are seeing is continued volatility with the market out there.

And we also see a lot more demand from the ethanol producers for corn and the farmers are switching to more corn.

In fact, we see it-- some of the corn is not coming through.

So we are concerned still about 2008 and we'll just have to stay tuned on that.

We hope we do not see the same issue in 2007, but right now it is too early to call that one.

Have you seen any major changes in volume with the price increases?

Actually, what we've seen as far as more volume, we've also seen and Brad you might mention about the unit POS.

Yes, Bill, our unit sales are actually up.

We're up strong single digits up in the 8, 9% range year to date on unit sales.

That wouldn't have any impact on the price increase.

That is strictly sunt sale basis.

Okay, good.

Then one last-- any way to quantify what the organic pet sales growth would have been year over year excluding the pet expo?

Excluding the pet expo?

Including it being in the second quarter this year versus--second quarter versus third quarter.

Bill, I'm sorry, I haven't calculated that.

I'm not sure .

Bill, I would tell you that most of the benefit from the Global Pet Expo will be really our third and fourth quarter.

Thanks a lot.

You are welcome.

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

Please proceed.

Hay, guys, good afternoon.

First question I have to ask on the sales guidance.

You didn't bring it up, and it looks like the back half of the year, the high end you guys implied about 3% growth.

Are you guys just waiting to see what May looks like in lawn and garden?

Yes, largely we've seen a little slower start to April because of the weather.

We'll see how May really comes out, but there is really no change from what we have told you before.

Okay.

In terms of the softer demand on aquatics, why is that?

Is there any sense of why you've seen (inaudible) how long has that been going on for?

Joe, this is Jim Heim.

We've been noticing some softness in aquatics business for awhile now, in fact we're working with other groups to do some research and exactly why that's going on.

What we are doing to counteract that now is exactly what we are telling you, innovation, new items, rebranding, more focus to draw the category back.

Okay.

And then in terms of Wal-Mart, in the stores that Wal-Mart has stopped discontinuing-- or has discontinued live fish, what kind of sales decline have you seen for supplies?

It's dramatic.

Let's put it at that.

I don't think we wish to disclose that because it is Wal-Mart proprietary information but it has been dramatic.

Okay, then lastly the CapEx for the year?

Should be about $40 million, Joe.

Okay, great.

Thanks.

Next question from the line of Alice Longley, with Buckingham Research.

Hi, good afternoon.

Hi, Alice.

A couple of clarifications.

You said, I think this was in lawn and garden sales, up 60% POS, and yet your organic growth,--.

so that was in -- basically in line with organic growth?

Is that right?

Am I getting that right?

Or is that 16% increase POS including acquisitions?

There is very little acquisitions in garden so it would be pretty close to the same.

That's right, Alice.

All right.

And then the comment on pricing offsetting the cost increases, if you had gotten it at the beginning of the year.

Does this imply, since this issue is the biggest pressure on margins, according to you, that the margins in the June and September quarter will be-- what does this imply for margins for the rest of the year?

If we now have the pricing and the pricing's basically offsetting the cost increases, can margins be up in the second half of the year?

Alice, this is Brad Johnson.

What we've seen so far is, yes we have offset a significant portion of the price increase.

However, we are still seeing additional price pressures right now.

For instance, sunflower is up significantly.

Millet is up again.

We are seeing a little bit of back slide on corn.

But, depending on what they get into the ground, in terms of the corn planting and so on and so forth, that will give us a better sense of what it looks, like as we start coming into harvest season.

We are not in a position right now, to tell you there's going to be any let up.

We are sticking to our forecast.

That's the best that we've got at this point in time to tell you.

Alice, I would say, first of all, you can tell, it is a very volatile market.

We do have a lot of our price increases in right now, so we should not have this quite as dramatic impact the last half, as we did in the first half.

Most of this was seen in the first half.

So is it accurate to say that the price increases are offsetting the cost increases up to the time that you established the price increases a month ago?

And the further cost increases are not being offset with price increases this year?

There is too many questions there, Alice.

But let me try.

I guess the idea is pricing lags cost trends.

Is that right?

So as long as costs keep accelerating your pricing will probably keep lagging that?

That's right.

That's correct, yes.

And so what nobody can forecast right now, that I know of anyway, is what are the grain markets going to do the next six months, three months, or for next year.

We have never seen volatility in all the markets like we've seen so far.

What we do know is that we would expect that we're going to have a hit to the total year margins between 12 and $15 million in this category compared to last year.

And when would be the next time you might take further pricing?

That we will-- we will take pricing as it is needed.

And we'd rather not communicate that right now.

Okay, so it's not necessarily just sort of one time during the year?

It's conceivable that you could do it several times during the year?

We'd prefer not.

But it is conceivable.

Okay.

Thank you.

You you're welcome.

Your next question comes from the line of with .[Carou Martison] with Deutsche Bank Please proceed.

Good afternoon.

Hi guys.

In terms of the April sales for gardens, can you give us an idea of the magnitude of how far you're off plan?

Are we talking about a 5% dip here in the first two weeks, or more?

This is Brad, I'm not going to give you a specific number for the first two weeks.

What I will tell you because of the weather patterns in the eastern two-thirds of the U.S., we did see a significant downward trend, as did everybody in terms of point of sale.

We have seen a similar kind of turn around, though, in the last couple of weeks.

I'm not going to call it a complete offset.

But certainly, we are encouraged by what we see.

Tell me what the weather's going to be in May and there we are.

But certainly we're cautiously optimistic.

I think that's where I'd like to leave it.

But there was a fairly significant down turn in the first two weeks.

And as a result,the inventories at retail with the turn around, we're not seeing an inventory overhang there, are we?

Well, as a result of those first two weeks, because it happens right at the time that there is significant ship in, there was some inventory in the accounts during thos two weeks that have to be pushed out.

So there is a little bit of a lag time if that is what your question is, yes.

I don't think we are drastically over inventoried in the accounts though, if that's where you are going.

Okay, I'm sorry, I think I missed it.

The CapEx for the quarter?

$49.

Carou, for the quarter, it was about $20 million.

Just to be clear.

Just on the Breeders Choice, do you have the capacity here to kind of roll-out and take advantage of what is an unfortunate situation if kind of the premium market.

Is there market share gains beyond just kind of temporary trial?

We believe that there is market share gains beyond the temporary trial.

We have seen this recent data that shows us that our times at retail are increasing.

Meaning that consumers that are back in buying bigger bags.

We saw a huge increase in sales of our smaller bags and a couple weeks later we are seeing the big bag sell.

So, yes, and we are looking right now at expansion opportunities for capacity.

But as we do that with all the issues with the food recall we'll be very, very careful how we do that?

Yes.

Just lastly, I have to ask this.

In terms of acquisitions outlook for the immediate future or say at the end of the summer, any guidance that you could provide us there?

I would tell that you we, as always, we have several discussions going and depending upon which acquisition the timing and the price.

But we are still active on the pipeline.

Historical multiples kind of still hold?

We want to, yes.

Thanks a lot, guys.

You are welcome.

Your next question comes from the line of Doug Lane with Avondale Partners, please proceed, Sir..

Hi, good afternoon, everybody.

On the-- just in general on the March quarter with sales were very strong.

Certainly more than I had forecast, in organic growth was better than a trend line number, was it in line with your expectations?

Or did it beat your internal expectations when we last talked in February?

Oh, I think it did beat our expectations by a slight amount.

Okay, so it wasn't like it came in right where you thought it would.

The numbers were good but they were good even based on your internal thoughts here in February?

Yes, but think about the March month.

That is when we saw a lot of the sales happen in March, especially in California and Florida as the weather was so nice so early..

Remember, Doug, you also had the shift.

Remember the sales in our fiscal first quarter in lawn and garden weren't as strong as most people have modeled.

But, we did see the shift move into our second quarter

That's right.

So you knew in February about the $5 million that got moved out?

Yes, we did.

You haven't talked about your insect control business.

Can you give us an update on with where that stands so far this year and what your outlook in '07 versus '06?

Most of your insect control business happens later in the summer.

Very little happens at this time, because they don't start coming out until it gets hot and moist.

Most of those sales are going to be in front of us and we would expect to have another good year in insect control.

But, we'll have to see where the rains are and where the heat is and everything else.

But, we see no difference on that.

There is nothing so far in the weather patterns to really give you any kind of indication to call the season this year, Still just a little bit too early?

It is still too early.

It;s now May the 7th and really what counts now is really June, July and August.

Okay.

All right.

Thank you.

You're welcome.

Your next question comes from the line of Michael Friedman with Noble Financial.

Please proceed.

Hi, guys.

A couple of questions for you.

You talk in the past about operating margin for fiscal '08.

Can you give us an indication as to where you think that may fall out as you sit today?

It really would think about-- one of our biggest concerns is what are the grains going to do for this next year?

If they stay flat, then we'll have some very nice progress, especially on our wild bird feed business.

And, if not, then we will continue to be challenged and we can't call that right now.

I would expect to still see us move upward.

But I can't give you a good number right now until we see better how the harvest goes in the crop plantings for all the grains.

That is our biggest wild card.

I remember correctly talking ten and below ten.

You still feel you can come in, I guess, somewhere I guess in the nine range?

This is Paul.

I think when you take a look at our guidance, and if you assume the mid-point of our guidance that comes out to roughly mid-eights.

Right I was talking to the following year.

Ultimately we are looking to get to roughly a 10% operating margin somewhere between '08 and '09.

So, there is no change for that outlook.

Is there any way you could change the formula for the wild bird feed to reduce some of your raw material costs?

We do that all the time which we-- within reason.

You still have to have the mix that the birds will want to eat.

That's number one, and number two, the consumers look that you are not trying to make the bag look bad.

So, it's a fine balance here.

We are always balancing back and forth between the primary ingredients.

How elastic or unelastic do you think you are right now on the pricing of wild bird feed?

In other words, is there more pricing that you think you could pass along, or are we going to get to a point where that's it-- no more.

Well, what we can tell you at this point is that since we are seeing our unit sales up in the high single digits, 8, 9%, that would indicate that so far we have been all right.

But this is not a one-way ticket up.

And certainly we are a little concerned that there is some point where consumers aren't going to be paying that much more money for a bag of bird feed.

Right now, though, we are continuing to see our sales go up on a unit basis, though.

So we have not reached that point yet.

Okay and you talked about maybe looking at acquisitions getting in.

Can you give us any color any thought of getting out of a category or two?

We'll always look at our portfolio analysis to see where you are making money.

It's always the case.

We do this every year.

You tried to feed the winners as much as you can and you look at those that are not winning as much.

And do you make a change?

We'll continue to examine that.

I'm not ready to say anything on this phone call, though.

Okay, lastly, looking at your balance sheet, are you comfortable with the debt situation?

And where do you expect debt to be by the end of the year?

Yes, we're comfortable with the debt situation.

By the end of the year, we should be somewhere around where are you, Roger?

We are lacking at the wall here.

We are looking at the wall here.

Somewhere around 550, 560, somewhere around there.

Great.

Thank you very much.

Sure.

Your next question comes from the line of [Reed Kim] with Merrill Lynch.

Please proceed.

Thanks.

Actually Stu, on that last question, where was your revolver at the end of the quarter?

Was it about 265?

Exactly.

Bingo.

Are you sitting in here with us?

That's scary.

What was on our term line?

I don't know.

295.

Wow.

Was that the peak?

This is pretty much our seasonal peak right now.

Okay.

And I missed it.

Sorry if you mentioned it.

The cash flow from opposite number in the quarter.

If you've got that?

$132 million negative.

Okay.

Which is a lot of working capital adjustments.

$100 million negative after adjusting out.

Okay.

Any chance you could give us the revolver balance today?

Or within the last week or so?

Just to see how fast that's coming down with the season?

No.

We'll just have to track it through.

It's coming down.

Okay.

And on the CapEx spent in the quarter, could you elaborate a little bit more what you are doing on the manufacturing front?

Yes, well there is a fair amount of replacement activity.

The first part of the year, especially in the garden season we put in a lot of line equipment and things like that, the first and second quarters of the year to get ready for the season.

Also we did add some additional manufacturing capacity for some expansion of existing product line.

So that's pretty much behind us.

We've also been ramping up our SAP investment this year.

That's going as planned.

In fact, we just brought on another business unit today, which is working well.

So all in all, yes most of the CapEx is behind us this year.

Our CapEx spend for the year is going to be about $40 million again.

Okay, and then on the SAP projects to date, has that gone pretty much according to plan?

Have you had any sort of supply or communication issues in terms of moving the product around?

No.

None whatsoever.

There is always a learning curve within the operations and data conversion challenges and all that kind of stuff but there's nothing that's impacted our ability to manufacture or ship.

Again, Reed, what we are doing there we are not covering the whole company.

We are doing a strategic business unit at a time and we're making sure those work very well before moving onto the next one.

At the destock-- or not destocking but the loss of fish supplies at Wal-Mart are you seeing that stay within the pet category generally?

Based on your comments to sounds like it's not going to be aquatics any more, but anything you could help us with on that?

If I understand your question right, the only thing we are seeing a delisting of is what we mentioned already.

Not any other categories for retailers.

Okay.

Then just lastly, small one, I was curious.

Your comments on some of the other impacts within the companion animals on the food supply issues.

What are some of those other dynamics is that affecting [Nylabone] for example?

No the other example that we brought out is with small animals.

There is a supply issue just with getting the small animals to the retailers and we are working with other industry groups to solve that.

The total dog and cat category continued to be fine.

Which we detailed.

Thanks a lot.

Thanks, Reed.

Your next question comes from the line of [Gary Gibling] with Goldsmith and Harris.

Please proceed.

Hi, there.

Just wondering whether the market share gain for Breeders Choice, because it is not-- luckily not being recalled, does that suggest a shift in your retail customer mix?

And how might that affect your margin mix as that plays out?

It really done reflect any change in channel, how we go to market, what the channels we do business with.

It's just a matter of-- , just like we stated, there is a lot of foods that got recalled and consumers are out looking for another choice and, we absolutely got some sales off

Okay.

There's Breeders Choice is not a heavily skewed toward the independent channel versus --

It is.

We are an independent and pet specialty.

We do not sell to food, drug or mass channels.

And that was before the recall and it is that after the recall.

Okay.

There is no difference between.

let's say a Petco and an independent in terms of their percent of sales that they would drive from (inaudible).

In other words, they are both major brands, or fairly major brands?

Is that how it is?

Yes, the percent of sales we see from fairly major brands.

Yes, the percent of sales we see from our customers are very similar now to what they were before.

Okay.

Great.

Thank you.

Thank you.

Your next question is a follow up from the line of Alice Longley with Buckingham Research.

Please proceed, Ma'am.

Hi.

Your guidance repeating your 83 to 88-cent guidance, what does that assume for your (inaudible) cost trends?

Our current plans would assume what we have in our budgets right now.

I guess, you know, with you went through how much sunflower costs just gone up since the February call, et cetera et cetera.

Are you assuming that those costs remain where they are today in that guidance?

Or are you assuming they go up another big chunk?

Or what?

No.

We have a price forecast that we are relying on right now, Alice, that we built it awhile back.

It was based on projection in the futures.

So, we're not-- we're not holding a price for the year.

We are taking a look at a price deck.

But we are also not expecting grains to go double down again by any stretch.

It's going to be more similar to what we are seeing right now.

If they really take off and go much higher, then that's a concern.

Okay.

That's kind of what I wanted to hear.

Then you had said that you know sales came in above what you would have expected.

When you gave your guidance in February.

Are margins below what you expected then, because of the movement in grain costs?

Yes.

They are.

Because again we saw a big increase in our wild bird feed.

And, you know our margins are severely challenged there right now.

So, we had the double whammy of lower margins and when you sell more of it you had the mix change as well.

Right, okay, thank you.

You're welcome.

There are no further questions in the queue at this time.

I would now like to turn the call back over to management.

Okay.

Thank you, operator.

First, everybody, thank you for joining us on the call today.

We thank you for your questions.

As we look toward the rest of 2007, we are going to continue to execute against our key strategies, build and strengthen our brands, bring out lots of new products, and continue to work on improving our effectiveness and efficiencies in our strategic business units, improve the operating leverage, and of course, we will pursue those acquisitions that make sense to us both strategically and at a price that makes sense for us.

Again, we thank everyone for joining the call today, and wish you a good afternoon.

Bye.