Central Garden & Pet Co (CENT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you very much for your patience and welcome to the Central Garden & Pet Fiscal Third Quarter 2007 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to introduce Mr.

Paul Warburg, Vice President of Investor Relations for Central Garden & Pets.

Please go ahead, sir.

Thank you, operator.

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

With me on the call today are Glenn Novotny, Central's president and chief executive officer, Stu Booth, our 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'd like to remind you of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The statements made during this conference call which are not historical facts 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 press release, Form 10 K for the fiscal year ended September 30, 2006, and other Securities and Exchange Commission filings.

Today's agenda is as follows: Glenn will discuss fiscal third quarter operating results, Stu will revenue the financial results for the quarter, and then we'll 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 Novotny.

Glenn?

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

As you have seen from our release, it was a very difficult quarter in what has been a challenging year.

We continue to be greatly impacted by extraordinary grain cost increases and adverse weather that has resulted in the worst garden season in our memory.

For the quarter, net sales decreased 8% to $467 million compared to third quarter 2006.

Operating income decreased approximately 38% to $37.2 million over the comparable quarter.

Operating results for the third quarter of fiscal 2006 included a pre-tax net gain of $9 million or $.08 per fully diluted share comprised of a $9.9 million gain from the Herbert Axelrod litigation, settlement less expenses of approximately $900,000.

Net income was $15.5 million and earnings per fully diluted share was $.22 compared to $.43 a year ago.

The results we announce today reflect the lowered expectations we discussed in early June.

If you recall, we said at that time the softness in lawn and garden and pet sales that we experienced in April and communicated publicly in early May has continued throughout May, reflecting the challenging environment overall for retailers as well as unfavorable weather conditions in many parts of the United States, and that the weather conditions in particular, including the severe drought in the Southeast, had adversely impacted our lawn and garden business.

These trends continued throughout the month of June and were only exacerbated with heavy rains and flooding in the Texas area.

In addition, in our Pet Group, while overall segment sales were strong, we did experience weaker than expected sales and profits in aquatics as the category continued to soften.

The combination of these issues, with continued adverse grain cost pressures in our wild bird feed operations have resulted in a very challenging year for Central, both in terms of year-to-date performance and as we look into the fourth quarter.

In other words, in this fiscal year we are experiencing a perfect storm.

Not surprisingly, weather was the principal factor in the garden segment shortfall in the third quarter.

Garden segment sales declined 19% to $227 million when compared to last year.

Garden segment operating income declined approximately 41% to $16.1 million.

While a number of factors, including weather, were good in the fiscal second quarter, generating strong early season sales, extremely poor weather conditions throughout the fiscal third quarter erased any residual optimism.

Many parts of the Eastern third of the country experienced one of the wettest and coldest month of April in decades.

As you know, April is typically the peak month of the garden season in these regions and crucial, especially for grass seed sales.

Additionally, Texas was inundated by heavy rains resulting in heavy, extensive flooding in May and June.

And on the other extreme, the Southeast experienced a severe drought, including water restrictions in many regions that range from parts of the Carolinas and Georgia down to and throughout Florida.

Our Garden segment [inaudible] products portfolio is heavily skewed to these reasons due to our relative strengths in grass seed and control products, including insecticides and herbicides.

As a result, we experienced a dramatic decline in sales and a disproportionate adverse impact on operating earnings due to the margin profile of the product lines affected, our increased brand building and advertising, and the lack of operating leverage related to lower sales volumes.

While the garden season is largely behind us, the weather conditions -- which are improving -- cause us to be prudent and take a cautious outlook to our fiscal fourth quarter.

Now turning to Pet, the bright spot is we experienced strong demand for our branded products, particularly in the companion animal categories of dog and cat.

In our Pet Segment, sales increased 5% to $240 million, operating income improved approximately 1% to $29.9 million, and branded products sales increased 8% to $205 million.

Our dog and cat, including animal health operations, delivered solid double-digit sales growth and operating profits in the quarter.

Notably, our TFH/Nylabone and Four Paws brands of pet supplies, chews and toys performed very well.

We continue to be pleased with the ongoing rollout of Pinnacle, AvoDerm and Active Care brands of Breeders' Choice ultra premium dog and cat food, and our Central Life Sciences' strategic business unit had strong performance, especially in its flea and tick and behavioral control products.

Additionally, the flea and tick brand repositioning efforts we are going through and line extensions are going very well.

Despite these successes in Pet, bird and small animal and aquatics were a drag on Pet performance segment segment performance.

The good news in the bird and small animal category is that the supply chain for speciality pet animals -- mostly hamsters, gerbils and rabbits is improving.

We are starting to see improved sales performance in our small animal supplies.

However, pet and wild bird feed margins continue to be eroded due to products mix shift and higher cost, which I will discuss in greater detail in just a few minutes.

In aquatics, despite market share gains, we experienced a decline both in sales and operating profits as the category continued to soften.

While sales in aquatics were down mid-single digits, we estimate the category as a whole was down double digits.

Our sales of new products -- including food, water care and other accessories -- were up over 20%, signifying the success of our business strategy emphasizing consumable aquatic supplies under the three umbrella brands Aqueon, Oceanic and Zilla.

Tank sales which still comprise the majority of our product line, declined.

In order to help stimulate the turnaround of the aquatics category, our strategy is twofold.

Internally, we are creating innovative branded products that simplify both the initial consumer purchasing process and the recurring consumable supplies related to effective aquarium maintenance and upkeep.

Equally important to attracting a new entrant to the aquatics category is to retain the hobbyist by creating ease-of-use maintenance products so fish will live healthier and longer.

This also increases the likelihood of trade-ups to larger, more expensive aquariums in the future.

Externally, the challenge for the aquatics industry is to increase the number of new entrants into the hobby.

In order to help attract new entrants to the category, we are working with the industry including the APPMA and manufacturers -- to develop consumer campaigns designed to educate and promote the ease, beauty and other positive attributes of the fish-keeping hobby.

Our strategy to expand into aquatic consumable supplies with innovative products is working.

We believe we are taking market share and are well positioned to benefit once growth in the category returns.

That being said, we believe the category may continue to further weaken and once again are taking a more cautious outlook for the balance of the year for aquatics.

Now I will provide you with a quick update on the grain cost environment related to our wild bird feed operations since our last conference call on May 7.

The grain cost environment continues to be challenging.

In the third quarter, we did not receive as much of the anticipated benefit of the retail order price increases taken in March.

Two of our primary grain ingredients sunflower and millet -- moved away from us.

Specifically, since our May 7th conference call, the price of sunflower has increased more than 25%.

Millet, another key crop, increased approximately 10% in the same period.

The cost of corn and milo have declined between 5% and 8% since our last conference call, but not near enough to offset the extraordinary rise in sunflower and millet prices.

Since June of 2006, the cost of our key crops -- milo, millet, sunflower, and corn -- are up between 40% and 100%.

That being said, we continue to project a year-over-year grain cost increase of approximately $25 to $30 million for fiscal 2007.

We continue to expect that our price increases taken to date will offset approximately half the grain cost increases, consistent with our previous disclosures, and we have just raised wild bird feed prices again to offset the latest increased cost of sunflower and millet.

Despite the grain cost pressures, we are experiencing a strong year in wild bird feed in terms of sales demand and market share.

Unit POS at retail is up mid to high single digits and we believe we are taking market share, particularly at the high end with our Kaytee premium brand.

Many of you have asked me over the course of the past several months if there is anything that we could have done differently.

The answer is yes, but hindsight is always 20-20.

I have issued a challenge to our business leaders and the organization as a whole as we enter our fiscal 2008 planning sessions to identify and implement measures that will not only drive stronger growth and profits but also help mitigate earnings fluctuations.

As I reflect back on both the quarter and the year, I am aware that the bulk of the factors impacting on our business are largely out of our control, such as weather and abnormal increases in grain costs.

But the fact that these were external factors does not make us as a company rest any easier.

We have taken steps during this challenging time to reduce costs and adjust our buying and pricing strategies.

For example, in Garden distribution, we've recently consolidated our operations into a national platform and we are reducing operating costs to improve our effectiveness and profitability in fiscal 2008 and beyond.

Initiatives such as these should allow us to react more quickly to dynamics in the marketplace.

In addition, our fiscal 2008 listing reviews with our retailers and planned price increases are progressing well.

Some of you have heard me say it before, but this year has been one of the most -- if not the most challenging year in my career.

Between the worst gardening weather imaginable and the extraordinary increases in grain costs, we have been both buffeted and tested.

We are doing all we can to learn from these challenges and to make the necessary adjustments in our buying and pricing strategies and cost structure to enable us to better manage our business and mitigate earnings uncertainty.

We do have great brands and a great platform for growth.

While we have significant work to do, we are fundamentally optimistic about a rebound in 2008.

Fiscal 2007, quite frankly, is a year to reset and emerge ultimately stronger than we were at the beginning of the year.

We will do everything we can in this fiscal year to make the company more agile and to better position us for improved and more consistent performance for our employees and shareholders.

I will now turn the call over to Stu, who will discuss our financial and operating results in more detail.

Stu?

Thanks, Glenn.

Turning to consolidated results for the third quarter, as Glenn mentioned, net sales for the third quarter of fiscal 2007 were $467 million, a $40 million or 8% decrease from the same period last year.

Branded product sales decreased 7% to $390 million.

Gross profit for the third quarter decreased approximately $21 million dollars or 12% to $151 million.

Gross profit as a percentage of net sales decreased 150 basis points to 32.4% from 33.9% in the year-ago period.

The margin erosion is due primarily to mix shift and higher raw material costs.

Operating results for the third quarter of fiscal 2006 included a pre-tax net gain of $9 million, or $.08 per fully diluted share, comprised of a $9.9 million gain from the Herbert Axelrod litigation settlement, less expenses of approximately $900,000 associated with accelerated brand building and other strategic opportunities.

Selling, general and administrative expenses for the third quarter of fiscal 2007 were approximately $114 million compared to $112 million a year ago, or essentially flat.

SG&A expense as a percentage of net sales increased 230 basis points to 24.4%.

This increase is due primarily to the lack of operating leverage caused by lower Garden segment sales in the quarter, increased advertising, and the litigation settlement net gain recorded in 2006.

Operating income for the quarter was $37.2 million compared to $59.9 million in the prior year.

As a percentage of net sales, operating margin was 8%.

Net interest expense for the quarter was $12.9 million compared to $10.6 million a year ago.

Other income was $1.2 million compared to $1.4 million last year.

The tax rate for the quarter was 38% compared to 38.3% in the year ago period.

Net income for the quarter was $15.5 million.

Earnings per fully diluted share was $.22 compared to $.43 in the same period last year.

Depreciation and amortization for the most recent quarter totalled $7.6 million compared to $7.4 million last year.

Capital expenditures for the quarter totalled approximately $17 million, an increase of approximately $4 million compared to last year.

This increase is due primarily to the addition of new manufacturing capacity.

Turning to the balance sheet, comparing June 2007 balances to June 2006 balances, accounts receivable were $277 million, flat compared to last year.

Inventories were $382 million, an 11% increase compared to last year.

The increase is due primarily to lower than anticipated Garden sales in the quarter.

We intend to reduce some of our excess inventory, especially in grass seed this fall, during the final months of this year's garden season.

However, due to the seasonal nature of the Garden business, we expect to carry excess inventory into fiscal 2008.

As of June 2007, total debt stood at $616 million compared to $594 million last year.

As we look to the balance of fiscal 2007, there remains some lingering headwinds that make us cautious, namely, the weather improved in July but it remains to be seen if insect control product sales and the fall grass seed season returns to more normal levels, especially in Texas and the Southeast.

We remain cautious about our aquatics operations for the aforementioned reasons, and the potential for continued grain cost increases related to our wild bird feed operations.

Turning to fiscal 2008, our plan is to provide you with our outlook on our year-end conference call in late November.

I will now turn the call back to Glenn.

Glenn?

Thank you, Stu.

Let me provide you with a couple of additional thoughts before we open up the call to your questions.

Without question, this has been and continues to be a very difficult year.

Stu just outlined to you the issues that give us caution for the balance of the year.

As we look out beyond fiscal 2007, we expect to implement initiatives that are intended to mitigate the impact of the current rising grain cost environment and, as I've noted, to challenge the organization to identify and implement measures that will drive sales and profit growth and mitigate earnings fluctuations.

I know we have disappointed shareholders and ourselves this year, but we are optimistic about a rebound in 2008.

I'm committed to doing everything in my power to make that happen.

With normal weather and more stable grain costs, I believe we can deliver stronger results in fiscal 2008.

I'm confident in our businesses and management team as well as our long-term growth outlook.

We do have an outstanding portfolio of leading brands, supported by dedication of innovation.

We continue to leverage our distinct competitive advantages to promote our brands.

We are continuing to improve our effectiveness and efficiency day in and day out.

And we continue to attract and retain great people who are going to help in this next level of growth.

With that, we will now take your questions.

Operator?

Thank you very much.

[OPERATOR INSTRUCTIONS]

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

Please proceed.

Good afternoon.

I guess first, I'm not sure if you're going to give us actual guidance for the fourth quarter or just kind of walk through some of the issues that are impacting it, but I mean, should we expect EPS to be up on a year-over-year basis for the fourth quarter?

And, you know, will you start to see some relief from the wild bird seed pricing in the fourth quarter or maybe not even until next year?

We won't give you a specific number for the fourth quarter, Bill.

I would expect that we would -- we hope to see the EPS up over last year.

That'd be first and foremost.

We did just take another price increase in wild bird feed just recently, in fact, so that should help us as well.

What we're really concerned about now is we think about the grass seed.

If we have a return to the grass seed sales -- which we hope will happen in our fall quarter here -- as well as insect control, especially in your neighborhood of the country.

And we understand that at least some of the water restrictions are now being relieved down in your area.

Yeah.

Not in Atlanta, but I'm sure other places.

I guess the second question would be, as you look to '07 -- I mean, look to '08 -- what headwinds are there?

I mean, it seems like weather will be working with you, assuming wild bird seed prices or the costs remain pretty much flat -- which is, I know, a big assumption.

What's still going to be dragging into '08 that would hurt you?

Possibly aquatics, Bill.

It depends on how much those recover.

Grain, you can't expect it to do again what it did this year, but nobody can guarantee that, Bill.

And as far as the weather, if we have a -- like I said earlier, if we have more normal weather, more normal grain where you don't have the extraordinary gains -- that will help a lot.

We do not expect at this point aquatics to rebound that much, and I think those are the biggest things.

Okay, and then final question is just the elephant in the room.

Can you address the potential sale of assets from Spectrum and, you know, what you would be interested in, if anything?

Well, we've heard a lot -- as you can well imagine -- yesterday and today about the comments and speculation.

At this point, Bill, there's nothing else we can say about that.

Okay, great.

Thank you.

Thanks, Bill.

Thank you, very much.

Ladies and gentlemen, your next question comes from the line of Joe Altobello of CIBC World Markets.

Please proceed.

Hey, guys.

Good afternoon.

First question is on the weather.

This is probably a tough question, but could you guys quantify how much the weather did impact the June quarter on the Garden top-line?

This is Brad, Joe.

First of all, April was absolutely abysmal.

As we came into the quarter, things were set up very nicely and, you know, frankly there was just a huge drop in POS in the quarter and that just kind of set things off.

As you know, April and May are the two biggest months of the entire garden season, really.

So, you know, as I look at the impact, first of all, that part was huge.

Secondly, if you look at our business and how we match up versus the rest of the marketplace, we are geographically skewed towards the Southeast.

Think about what happened there in terms of the drought.

So we were disproportionately impacted in the areas where weather was the worst, that's number one.

And number two, our categories lined up to those areas that were perhaps more vulnerable within those geographic areas, for instance, grass seed.

So we took a pretty good hit, if you will, in the grass seed area.

That would obviously carry through into our distribution area.

And we also took a hit in insecticide, as you look at the heavy flooding in Texas, Oklahoma, Kansas, some of those areas.

So despite the fact that we had this significant adverse weather occurring, and I would say that was the majority -- by far, the majority -- of any impact that we saw, we feel very bullish about 2008.

As I look at how we're set up, I feel very strongly about how Garden looks going forward.

We do not believe that we've lost market share.

You know, spotty here and there, but if I look if I do it on a region-by-region basis, we certainly did not lose market share.

Okay.

So there was nothing beyond weather that was going on in the quarter in terms of competitive issues, anything like that on the Garden side?

Nothing that I would point to, no.

Okay.

And then moving on, the distribution business was down for both the Garden and Pet segments.

When do we start to see that turn around?

Well, I'll answer that on Garden.

As I started to say earlier, our distribution business, particularly in the eastern two-thirds of the U.S., is heavily impacted by the grass seed.

So as -- some of our grass seed business flows through that, so as the grass seed market is down, our distribution business is down.

Secondly, we've also seen a little bit of shift as we've moved more towards our own branded product sales.

That should show us some improvement as we look to the future.

And third, we have just recently made, as Glenn mentioned early on, we have made some changes in our structure so that we will have one distribution business as opposed to multiple distribution businesses across the U.S., and that should begin to help us both manage our inventories better as well as provide greater service to our customer base.

Yeah, and on the Pet side, our distribution of business was fairly good, with the exception of a loss of one major customer.

Okay, gotcha.

If you take a look at it totally, I think we're up just slightly.

Okay.

And in terms of the grain, or the grain cost, I should say, obviously it's tough to, you know, pin that down.

But it sounded like you guys are trying to negotiate with some of your retailers to index the cost of grain prices to your pricing.

How is that going?

We are doing a lot of work on that and have been for the last two months, Joe.

We simply cannot go through the same experiences we saw in 2007, so we are addressing both how we're buying a product as well as our pricing strategies.

What we have to do is be able to, if the grains move like they did this last year, we have to be able to increase prices faster.

And we are communicating that very clearly with our retailers and making sure that that does happen.

So we do expect to do that much better in 2008.

Okay, and then lastly if I could, if you would just -- for the Axelrod settlement in the year ago period, your SG&A was down by my math about $7 million.

That's correct.

Joe, it's down about 9 and, you know, if you're looking for the SG&A leverage, we lost about 40 basis points if you back all that stuff out -- 24.4 versus 24, something like that, from the prior year.

But in terms of a dollar-for-dollar basis, it was down, as you said, $9 million.

Yeah.

What was that delta?

It was spending on something that didn't happen this quarter.

It's just lost sales.

A couple things.

Well, we've got a lot of things going in and out of SG&A, Joe.

Okay.

I mean, it's -- that's the whole company.

But, you know, we did spend more on advertising this year.

Okay.

And less sales drives less SG&A expense, and less delivery expense.

Gotcha.

I think also taking off some costs this year versus last year as well.

Okay.

Perfect.

Thanks.

Okay.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Alice Longley of Buckingham Research.

Please proceed.

Hi.

Good afternoon.

Hi, Alice.

Can you quantify the level of pricing you're trying to establish with retailers in lawn and garden for '08?

I'll let Brad talk about it in just a second.

I will tell you we are being competitive with what our competitors are doing.

And Brad, what would you add to that?

I think you've said enough.

In being competitive, are you trying to take less pricing than they are so that you gain share or are you going to raise prices about in line with them?

No, I would say that, as we match up in categories, you'll see that our increases are similar to theirs.

I think that a couple of them are playing a little bit of catch up.

If I've heard properly on an earlier call, somebody felt they maybe dived a little too deeply in one category and they're trying to regain that in that category.

We had already taken that -- a big piece of that price increase, so we would take a smaller one in that particular category as it matches up.

But it ultimately evens out to we're both taking about the same amount.

Okay.

And then if I were to look at fiscal '08 versus fiscal '06 EPS, just X ing out fiscal '07, what would be the -- would you think EPS would be up in fiscal '08 versus fiscal '06 and well, that first.

We can't --

We'll update you on our outlook for fiscal '08 in November in our earnings call, Alice.

It's kind of premature to go there right now.

I will tell you we do feel good about fiscal year '08.

We can't tell you at this point what your question was.

Well, what would the factors be that would be worth in, you know, assuming a better -- a normal -- weather year in lawn and garden, the factors that would still be worse in '08 versus '06 would, I guess, be aquatics and the cost of wild bird food, right?

Yeah, that's the true primary ones.

That's two big drivers.

That's the two primary ones that we are concerned about; trying to make darn sure we manage our way through those.

Okay.

And then on this other subject, you've said publicly that you, in doing acquisitions, like to pay 5 to 7 times trailing EBIT before synergies.

What's the highest multiple that you would be willing to pay if you really loved a business on that basis?

I think the best way to answer that question -- look at what we paid for Farnum.

That's public information and we paid for Farnum just under 10 times before synergies.

After synergies, we were able to get it down to 7.

That's a good history, and that's about as far as we can go.

And that would be 10 times trailing EBIT for Farnum, right?

It was 10 times trailing EBITDA, that is correct.

EBIT or EBITDA?

For Farnum, it was EBITDA.

Okay, 10 times EBITDA -- trailing EBITDA -- before synergies.

All right, thank you.

You're welcome.

Thank you very much, ma'am.

Ladies and gentlemen, your next question comes from the line of Anton Diener of Cowen & Co.

Please proceed.

Hi, this is Jonathan Cramer.

Just a quick question on the aquatic session.

If you could give us some color on what type of initiatives you're going to do, and what impact, if at all, on SG&A?

I'll tell you -- this is Jim Heim.

What we're trying to do is really to innovate and energize the category by coming out with attractive new products.

Most of those, you'll probably notice, are in the consumable areas.

So far year-to-date we're very pleased with the introduction of these new items.

In fact, in the categories we've introduced new items, our business is up over 20%.

So we're very -- feel very strongly about '08 being very good.

The thing we really want to try to adjust is the number of new entrants going into the category.

And that is the big key going into '08, to really up the number of new hobbyists in the category.

And that's why the new products, to make it easier, to keep the fish alive longer.

If we do those things, I think you'll see a nice rebound in aquatics.

Should we expect an increase in advertising or other initiatives to drive consumer demand?

Absolutely.

I mean, we're participating in that right now, to do that, and we'll continue that effort in '08.

Okay.

Thank you.

You're welcome.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Reza Vahabzadeh of Lehman Brothers.

Please proceed.

Good afternoon.

Hi.

On the gross margin front, can you quantify just the impact on the year where you're changing gross margin from raw material costs?

Well, we have a combination of mix shift and our increased raw material costs go into our gross margin erosion this quarter, and we haven't broken it out.

Okay.

And in terms of pricing or price mix, what kind of benefit did you get in the quarter?

Was that more than preceding quarters or was that about the same as the preceding quarter?

Are you talking about the wild bird feed?

Yeah.

Well, we instituted the wild bird feed price's increases in March.

Right.

Offset the gains we were looking at through the costs before that.

However then what happened to us is sunflower and millet, which are two of our primary ingredients, kept on going and so we just went back to raise the prices again.

So we did not receive the benefit we had originally thought we were going to receive in the third quarter.

Right.

I guess I'm trying to find out, did the gap between your pricing and cost in that business, did that gap widen or did it contract sequentially?

It probably contracted a little bit sequentially.

Okay, but just not as much as you were hoping for?

That's right.

Right.

That's right.

Okay.

If we hadn't seen the sunflower millet, we'd have been, of course, in a lot better shape than we turned out to be.

Sure.

And with the additional price increase you just mentioned you took very recently, would you be able to fully close the gap in your fourth quarter?

Well, if by close -- this is Brad.

If by close the gap you mean will we make up everything that we're down for the year, absolutely not.

Will it put us into a position where we're no longer going backward?

Yes.

Okay.

Fair enough.

And then as you go into fiscal '08, would you consider hedging more of your input costs than perhaps in prior years?

What we are doing is we're basically adjusting our pricing and our buying strategies, and that may include some more hedging.

It will also do some forward buying.

But we want to make sure that we can do a much better job of making sure we have the right positions and are able to forecast what that is to bring a much tighter coordination between what our costs are and what we sell it for.

Got it.

And then you mentioned POS was exceptionally weak in April.

How did it flow in May and June for the Garden products?

Well, POS was incredibly weak in April.

It to some degree continued to be weak by category in some of the other months.

But I would say that on an annual basis, what I should say is it's basically flat.

POS is basically flat year-over-year.

For the quarter?

Well, no.

Year-to-date.

Year-to-date.

For the quarter, I have to take into account April and April was a very bad POS month.

We don't believe we gave up -- now, let me be sure that I'm clear on this point.

We don't believe we gave up share --

Right.

-- just because POS was off.

We're not talking about share.

We're talking about point of sale.

Now another point that leads into this and this goes to some of what Stu and Glenn talked about earlier, it has to do with inventory levels.

I can tell you that we have worked very hard with the retailers and we are in a very good retail inventory situation.

Despite the fact that we are stating that we're going to carry a little bit extra inventory ourselves, we are in a very favorable retail inventory situation, maybe even more favorable than some of our competitors.

Did you see any inventory destocking by retailers in any products this quarter?

By destocking, do you mean where they delisted us?

No, destocking means they just cut back on their, you know, inventory levels from normal levels.

Well, clearly when the sales dried up in April, they pulled back hard on the reins.

So to the extent that they were pulling back on inventory based on what an expected season would have been versus what was being delivered, sure there was a pullback definitely.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Karru Martinson of Deutsche Bank.

Please proceed.

Good afternoon.

In regards to the aquatics sales, how much of an impact would you feel that the Wal Mart live fish decision had, and then where do you see that going in the future?

We really don't see any change in that position.

And to be quite honest with you, I feel -- and the company feels -- very uncomfortable discussing confidential strategies with certain retail customers.

But we see no change, basically.

Okay.

In terms of aquatic penetration rates here in the U.S., I mean, how do they differ from, say, Europe and Japan?

I mean, is there a level that you guys are targeting?

The difference between the -- there's a lot of differences in what fish are sold between Europe and the U.S.

We don't see those things changing, where if you look at the U.K., it's basically a coldwater market.

We can go country by country on this.

It'd take awhile.

Certainly not necessary, that level of granularity.

But we don't see a significant change in that structure.

Well, I guess what I'm trying to get at is, you know, in terms of increasing the number of hobbyists, you know, are we at similar levels as we are in, say, Europe?

Or, you know, is the effort here in the U.S.

to really do something above and beyond what the rest of the markets are?

I would say the efforts right now are above and beyond in the U.S.

than they are the other markets.

That we're working with APPMA and other manufacturers to help educate new entrants, to make them more successful, to give them a better success rate of the fish living, and therefore be able to move up into higher value tanks and aquatics in the future.

And you'll start seeing some of those efforts pretty soon.

And I think you also -- we have to work on the parents of the children, as well.

We need to move the children more away from, quite frankly, video games and the computer and things like that, to get them back to doing things such as fish keeping.

And that goes across this entire industry, and so we'll be doing more things on that.

Okay.

And in terms of the upcoming season, you know, I would imagine with the heavy rains and, you know, the drought conditions in the Southeast, grass seed should be, you know, if all weather holds, should be poised for a relatively strong start to the season coming up.

I mean, is that an incorrect assumption?

You are correct that if we get some rain in the Southeast that the fall grass seed season should be a good one.

And then going into the spring season, since nobody took care of their lawns for a year, should be opportunities for replacements?

Yes.

Yes.

We saw that -- if you go back in our history, we saw kind of some very similar problems in 2004 and then we saw a nice rebound in 2005.

I think the big question is as long as the drought doesn't continue for two years, especially in the Southeast, we should see a nice rebuild down there.

But again, we're going to play that as we go.

We should see a -- we hope to see a good strong grass seed season.

Again, just lastly, I was wondering if -- are you continuing to see a lift for Breeders' Choice from concerns over Chinese pet food imports, and how is that business performing?

Absolutely is the answer, and it's performing at or better than expectations.

Thank you very much, guys.

Thanks, Karru.

You're welcome.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Michael Friedman of Noble Financial.

Please proceed.

Yeah.

Hi, guys.

By the way, Paul, I'm glad to hear it sounds like you're feeling a little better.

Thank you, Michael.

I appreciate that.

All right.

A bunch of questions still remain.

Focus on the Garden sales, you know, where do you feel you fell short?

I mean, was it one or two product lines?

Are you being challenged across the board?

Is anything, you know, showing a ray of light here on the Garden side?

Well, Michael -- this is Brad.

If I had to pick two areas to focus on on a sales front, I would have to say that it's grass seed, number one, because that flows through not just our grass but also the distribution business.

And if you think about grass seed as a subsegment of Garden, a lot of those sales would take place right at the time that the weather's been the absolute worst, which is in, you know, obviously the third quarter.

We are, as we spoke earlier, expecting a rebound there as we look to the fall and into next season.

The second area that I would point to in terms of a sales hit would also be weather related and that's insecticide, where there was a drought in the Southeast and then there was a lot of rain in the Texas, Oklahoma, Kansas area.

And that would have also been a disproportionate hit because of that.

Those are aberrant sorts of things.

We do not anticipate it, you know, happening year-over-year again.

It's not a normal weather pattern.

As it relates to wild bird feed, obviously one could look to that and say has there been an impact there?

We're actually seeing significant growth on a unit basis, so obviously on a dollar basis as well, in bird feed.

We believe we're actually taking share within the bird feed market.

Now, the downside of that is the -- because of the grain price increases and our lag time in getting our price increases through, despite the fact that we had gained some share and we see growth there, we have not seen the same level of profit margin that we historically have seen.

But as the market begins to become less volatile in grain price increases, we would anticipate that we'll see some improvement in those margins.

Okay.

You talked a lot about gaining market share in different categories.

Where do you feel that you've gained the most, I guess both for Garden and Pet, and where are you losing market share -- anywhere?

Well, I would say that -- I don't want to get overly specific about categories, but clearly we don't believe we gave up share in grass seed.

We are disproportionately large in grass seed versus, say, some of our competition and so when it's a bad season for grass seed, despite the fact that we maintain share, we see a tremendous loss in sales dollars, if you will.

In insecticides, I would say that we did lose some share in insecticide.

I won't quantify that for you, but there were a couple things going on in the marketplace where we lost a little bit.

I would say that in bird feed, as I mentioned, that we have gained share.

And I'm very pleased with what we've seen in terms of what's happening in the marketplace there.

With respect to herbicides, we also believe we've gained share in herbicides and we've gained share in some of our decor business.

So hopefully that answers your question.

Well, what about on the Pet side?

On the Pet side, we really experienced a nice share increases.

Our overall branded sales in Pet were up 8%.

Just like Glenn mentioned before, they're really strong in companion animal, which goes across our TFH, our Four Paws brands, and our Central Life Science flea and tick brands.

We also experienced, to Brad's point, really good increases in share with Kaytee that we're very pleased with.

And to answer your question, we really did not experience any loss of share in any category.

In fact, it was good share increases across the board in Pet.

Take a look at Pet -- we had 5% organic growth.

So we had share there.

To Brad's point, we had a couple issues in Garden, but other than that, we basically stayed with our market share.

Okay.

Can you quantify a little bit for me what percentage of your sales is wild bird feed and how much is aquatics.

We've never broken that out and --

Well, wild bird feed, Mike -- this is Paul -- as we have told you is roughly a $200 million business for us spread across both lawn and garden and pet.

Aquatics we have never broken out.

Okay.

And then as far as the gross profit margins, if I understand correctly, I mean, basically it's the raw materials prices and a change in the sales mix of branded product in the quarter year-over-year.

Is that right?

Right.

Okay.

And then the inventory level, you mentioned it is up a little bit.

You know, you have some excess inventory.

You mentioned grass seed.

Is there any other area where you're a little heavy?

We're heavy in quite a few of our Garden-type products.

It wasn't just grass seed.

We lost sales pretty much across the board.

This is Brad.

Keep in mind, too, that when we -- even if we carried the same units of bird feed as we did last year, we've seen a twofold increase in the cost.

So there's a significant -- just by carrying the same, you know, tonnage, if you will, there would be, versus year ago, a tremendous value difference versus what we had a year ago.

That's a big impact.

That's a big impact.

Okay.

You've mentioned before in the past reaching a 10% operating margin.

Any idea when you think you might be able to hit that target?

Still in our future.

I can still see it in the headlights, so I still haven't given up on that, Michael.

And the question is which year that will come, and let's address that when we get closer to the quarter through the course of the year.

All right.

And then one last question; it's kind of a philosophical question.

You know, with the Garden business has underperformed, I think, expectations for the past couple of years, wild bird feed the last couple of quarters, why are you still in the garden business and why are you still in the wild bird feed business?

Well, let's see, first of all I guess from -- the garden business is still a good business.

It's got more weather impacts, especially this year, than we've seen before in our history.

We still make money on it.

We still have strong brands in that, and we still feel it's good for the business going forward.

As far as the wild bird, while we've seen the grain costs, I mean, I've been now in this business for 20 years.

I've never seen wild bird food -- those grain costs do like they did.

I don't think that will continue.

But even if they do, we have to adapt to the new environment and that means we have to be able to price much, much quicker to when those grain costs went up.

And we have to do that with our retailers.

And I think our competition will do the same thing.

And if you look at our brand position, I feel very good about our brand position in those two categories.

Okay, great.

Thanks, guys.

Thank you, Michael.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Dan Skubiz of Missouri Valley Partners.

Please proceed.

Hi, guys.

Just wondering.

If I remember correctly, you have a $100 million buyback in place that either you haven't used or haven't used much.

I mean, given the optimism for '08 and kind of where the stock has been and probably where it'll be tomorrow, is there any opportunity to tap into that?

We have about $90 million left on our stock buyback authorization and we review the buy back of stock as one of our opportunities and options that demands our capital structure, so it's constantly under review.

All right.

But you're not looking at that from an opportunistic standpoint?

We look at it as one of our investment options every day.

Okay.

And kind of given the recent activity in interest rates and kind of, you know, borrowing friends and that type of thing, is it too early to see any impact to competition for acquisitions?

And how would higher interest rates or tougher lending standards impact your capacity to do additional deals?

Well, tougher standards is going to impact everyone, not just us, so we'll probably -- a rising tide raises all boats.

But we feel we're, you know, we're well positioned to be an active player in the acquisition market.

I would think also with the difference now on the credit markets and everything else, the financial buyers or the private equity will have a tougher time versus a strategic buyer.

All right.

Thank you.

Sure.

You're welcome.

Thank you very much, sir.

And ladies and gentlemen, we do have one follow up from Joseph Altobello of CIBC World Markets.

Please proceed.

Hey, guys.

One more question for Stu.

I think, Stu, you said the CAPEX in the quarter was $17 million.

Is that right?

$17.5 or $18 -- where are we there -- $17.

Okay, so year-to-date you spent $48 million on CAPEX and I think on your May call you said it was going to be $40 for the full year.

Right.

Why the increase, and what are you looking for for the full year now?

The increase is we've stepped up some investment in plant and equipment, and it's a tactical move.

The balance for the full fiscal year, we're going to be somewhere around the mid $50s.

And is that going up or down next year?

Down.

Significantly?

It's hard to quantify, Joe, because we still have some more manufacturing plant additions that we have to wrestle with.

But I'll give you a good example -- Breeders' Choice.

You know, we have to support our business and the growth trajectory of that business, so we may be looking at doing capacity additions for Breeders'.

Okay.

So, I mean, it -- capital expenses are not a bad thing all the time.

They're --

No, I was just curious why it changed.

That's all.

Yeah.

No, it's plant and equipment.

Okay.

Thanks.

Sure.

Thank you very much, sir.

And that concludes our Q&A session for today.

I'm going to turn the call back over to our speakers for any closing remarks.

Okay.

Thank you, operator, and thank everybody for your questions.

Let me close by just saying again that, quite frankly, this has been an exceptionally difficult year so far with the extraordinary grain cost increases and lousy gardening weather.

And I also understand that we have a lot to prove in order to restore investor confidence.

While we believe that we have appropriately addressed many of the issues that affect this, we know we need to regain our momentum and I'm confident that we will.

We are feeling good about 2008 with the listings we have and the prices we have in place, so our objective right now is to turn 2008 into a much better year for you and for us.

And with that, I want to thank you for joining the call and wish you all a good day.

Goodbye.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call.

This concludes the presentation and you may now disconnect.

Have a good day.