Central Garden & Pet Co (CENT) 0 Q0 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to Central Garden & Pets fiscal fourth quarter 2007 year end conference call.

At this time all participants are on 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 Operations with Central Garden & Pet.

Thank you operator, and thank you everyone, for joining us.

With me on the call tody are Bill Brown, Central's Chairman and Chief Executive Officer; and Stu Booth, our CFO.

Before I turn the call over to Bill, 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 earnings press release, Form 10-K for the fiscal year ended September 29, 2007, that we plan to file tomorrow.

And other SEC commission filings.

Today's agenda is as follows.

Bill will provide a brief business analysis and discuss his vision for the future of the Company.

Stu will review the financial results for the quarter and our outlook for '08, we will then 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 Bill Brown.

Bill?

Thank you, Paul.

And thank you for joining us this afternoon.

As you've seen from our release, it was a very difficult quarter, in what's been an extremely difficult year.

The Company's performance has simply been unacceptable and I know we can do better, a lot better.

As Central's Founder, Chairman, largest individual shareholder, and CEO, my interests are very much aligned with yours.

I've taken over the CEO role again because I intend to dig in and to do what it takes to make Central successful.

More agile and more focused.

We must execute better and we must deliver for all our shareholders.

Stu will take you through the quarter in a moment, but frankly, it's history already.

My objective today is to communicate to you my views of the future.

My immediate priority is to refocus and reenergize the Company.

While the external challenges we faced last year of extreme weather, inflationary grain costs were significant and unexpected they're not the only reasons for our subpar performance.

It's clear that certain parts of our business did not operate as well as they should have, even taking into account these external challenges.

Accordingly, we're examining each part of the business from the ground up.

We're sharpening our effectiveness, operating performance, and accountability.

Put simply, our objective is to quickly to get the business back on operating and financial profile to return to and ultimately surpass historical performance.

After nearly six weeks back on the job, my initial observations are as follows.

Most of the business is operating on what I refer to as on financial profile.

Our Life Sciences business is on profile.

They completed the integration of Wellmark and Farnam Companies this last year and they continue to strengthen the pet platform and deliver outstanding results.

Our Pennington operations including our grass seed and garden control product lines are on profile in normal weather years, additionally, our Four Paws Nylabone branded dog and cat operations are operating properly.

On the other hand, our aquatics, bird and small animal, and garden decor operations are underperforming.

They're off profile.

We are making the necessary changes that will put each of these businesses back on track.

While this work will be intensely driven, it will still require time to see the results.

I want to now turn my attention to our outlook, my outlook, for fiscal 2008.

It's obvious we've not been firing on all cylinders in certain of our businesses.

While the issues impacting these operations are very fixable they won't be performing up to standard in fiscal 2008.

Additionally, we are carefully monitoring the weather conditions, particularly the severe drought in the Southeast.

Based on the latest forecast from a variety of weather services, we're anticipating the continuation of the water restrictions and the ban on the Southeast as we head into the 2008 gardening season.

And finally, while we will recapture some of the profit margin we lost last year due to higher grain costs, we don't expect to recapture all of it for 2008.

Because of this, we're expecting that the fiscal first quarter of 2008 will be substantially weaker than last year.

That being said, for the full year I would hope for modest improvement over fiscal 2007 results and a return to a more acceptable run rate by the end of the year as we head into 2009.

And now, before turning the call over to Stu, I would like to take a moment to recognize the efforts of Glenn Novotny who, as mentioned earlier resigned after 17 years working with Central.

Glenn helped us build Central from a small garden distribution Company with $200 million in sales to a leading garden and pet branded consumer products Company we are today with $1.7 billion in sales.

All of us on the Board and throughout the Company want to thank Glenn for his contributions and friendship.

We wish him the best.

With that, I'll turn it over to Stu to recap the quarter numbers and then we'll take your questions.

Thanks, Bill.

As Bill mentioned earlier, the disappointing sales for the quarter capped off what was a very challenging year.

Net sales for the fourth quarter of fiscal 2007 were $401 million, a $20 million or 5% decrease from the same period last year.

Please keep in mind the results from last year include an extra week.

Branded product sales decreased 2% to $342 million.

Garden segment sales declined approximately $4 million or 2% to $180 million due primarily to lower sales of garden control and grass seed products.

Resulting from adverse weather conditions, particularly the drought in the Southeast.

Pet segment sales declined approximately $16 million, or 7% to $221 million due primarily to the continued slowdown in the aquatics category.

As a reminder, while the percentage of sales continues to shift toward consumable supplies, we are still skewed toward tank sales which remain very soft.

And the loss of distribution customers earlier in the year.

The Company's growth profit for the fourth quarter decreased approximately $17 million or 13% to $117 million.

Gross profit as a percentage of net sales decreased 270 basis points to 29.3% from 32% in the year ago period.

The margin erosion occurred in pet and is due primarily to higher grain costs in our bird and small animal operations and the delay in passing the price increases through to our customers.

Selling, general, and administrative expenses for fourth quarter were approximately $107 million compared to $113 million a year ago.

A decline of approximately 5%.

SG&A expense as a percentage of net sales was 26.8%, an improvement of 20 basis points when compared to last year.

Operating income for the quarter was $10.1 million -- was $10.1 million, a decline of $11.3 million, compared to $21.4 million in the prior year period.

Contributing to lower operating income was a decline in garden segment operating income of $1.4 million, due primarily to lower sales of our garden control products and a nearly $14 million decline in pet segment operating income.

This decline in the pet segment was due primarily to higher grain costs in bird and small animal and continued softness in aquatics.

These were partially offset by lower corporate expenses of $4 million.

Net interest expense for the quarter was $12.1 million compared to $11.8 million a year ago.

The net loss for the quarter was approximately $1.7 million or $0.02 per fully diluted share.

This compares to net income of $6 million or $0.08 per fully diluted share in the same period last year.

Depreciation and amortization for the most recent quarter totaled $8.8 million, compared to $5.3 million last year.

The increase is due primarily to increased amortization of intangibles related to acquisitions completed in fiscal 2006, and 2007, and the finalization of purchase accounting for several of such acquisitions in the quarter.

Capital expenditures for the quarter totaled approximately $13 million, compared to $17 million last year.

Now turning to the balance sheet, comparing September 29, 2007, balances to the September 30, 2006, balances, accounts receivable were $247 million an increase of approximately $8 million or 3% compared to last year.

Inventories were $378 million, an increase of approximately $46 million, or 14% compared to last year.

The increase in inventories is due primarily to lower than anticipated garden sales and the higher cost of inventory related to our wild bird feed operations.

As we discussed last quarter, we expect to carry excess inventory into fiscal 2008 due to the seasonal nature of our garden business.

As of September 2007, total debt stood at $611 million, compared to $568 million last year.

Now, quickly recapping the fiscal year, net sales improved 3% or $50 million to $1.7 billion, garden segment sales declined 3% to approximately $778 million.

Pet segment sales increased 9% to $893 million.

Organic sales decreased approximately 1%.

Acquisitions contributed approximately $73 million, of which approximately $13 million was related to garden.

And approximately $6 million was related to pet.

Gross profit was $534 million, essentially flat compared to last year.

Now, as a percentage of sales, gross profit was 32%, a decline of 100 basis points.

Due primarily to higher input costs for our products.

Selling, general, administrative expenses increased approximately $36 million or 9%, due primarily to expenses attributed to annualizing fiscal 2006 acquisitions, mainly Farnam, TekPak, and Ironite As a percentage of sales SG&A increased approximately 140 basis points to 26%.

This is due primarily to higher costs associated with the increased percentage of branded product sales.

Third party costs related to professional and legal services.

IT services related to our SAP implementation.

And insurance costs.

As a result, operating income declined approximately $37 million or 27% to $99.4 million.

Interest expense increased approximately $10.4 million, due primarily to higher debt balances resulting from acquisitions and a decrease in earnings from operations and increased inventories.

Net income for fiscal 2007 was $32.3 million, a decline of 51%, compared to fiscal 2006.

Earnings per fully diluted share was $0.45, compared to $0.95 last year.

Now, taking a step back and examining the lower operating results for the year, which translated into lower earnings per share, garden was plagued by adverse weather conditions that impacted our operating profits by about 10 million to $15 million.

Both garden and pet were impacted by extraordinary increases in grain costs.

Net of price increases which accounted for approximately 12 million to $15 million of our shortfall.

Pet was impacted by softness at aquatics and bird and small animal by approximately $10 million, excluding wild bird feed impacts.

And finally, corporate expenses for the year increased approximately $15 million, due primarily to third party costs, related to our professional legal services and IT services related to our SAP implementation and increased insurance costs.

These head winds were only partially offset by gains primarily in our dog and cat operations as well as Central Life Sciences.

Turning to our outlook for fiscal 2008, as Bill mentioned, we would anticipate a modest improvement over fiscal 2007.

As mentioned we are addressing our operations that are not on profile, and continue to experience adverse weather conditions and higher grain costs.

The combination of these factors however, will have a disproportionately large adverse impact on our fiscal first quarter.

Last year we reported an EPS loss of $0.04, it is conceivable that this loss could be 2 to 4 times larger in the first quarter, taking into account the weather the full impact of grain costs, and underperforming businesses.

Addressing our loan covenants, in August we amended our credit facility to provide us with additional financial flexibility.

Our current financial models suggest that we will remain in compliance with our loan covenants.

I will now turn the call back to Bill.

Bill?

Thank you, Stu.

We have a great, great deal of work to do.

As I mentioned at the start, as Central's Founder and largest individual shareholder, my interests are aligned with yours.

I'm committed to taking all of the steps necessary to improve the operations and derive superior financial results.

I would expect following a year of transition that fiscal 2009 will produce much improved results and relaunch Central onto the trajectory of consistent growth and a record performance.

With that, now, we'll take your questions.

(OPERATOR INSTRUCTIONS) Your first question will be from the line of Bill Chappell of SunTrust Company.

Good afternoon.

Hi, Bill.

I guess first right into the guidance.

You have go back into September and the Company is expected -- and I forgot the exact verbiage, but to have a significant increase from '07 to '08.

But not as high as '06.

In September we were in the middle of a drought, grain prices were pretty much where they are.

Help us understand what's happened in the last two months to change that?

Or I guess a better question, have you come to realize that your forecasting ability is just not that good right now, and you need to get your arms around the business before you really need to give more detail around that?

Well, you've poked at a lot of areas.

First of all, there obviously are new things that we understand about our business that were not visible back in September.

Part of that is the continuation of the drought weather projections forward into this next year.

Part of it is a deeper understanding of these businesses that are underperforming.

And the third element is a very detailed SKU by SKU analysis of our bird seed operations, particularly a KT on how much margin they recaptured with all of the price increases they have put through.

The net of that is while many price changes had been put through, they were not as sufficient to fully recapture as much as people had thought they had recaptured.

So there will be further price increases in December on the wild bird side and in February on the pet bird side.

We are still playing catchup.

When I look at it, it's simply a matter of the Company didn't have the skills in place, and they didn't need them because the grain prices didn't move like this historically.

Obviously we'll have them going-forward and we will examine things in a different way.

Those are some of the factors.

You asked me about the ability to forecast.

Obviously when you miss four quarters in a row in terms of giving guidance, there's something wrong with the Company's ability to have adequate foresight and forecast in a quality way.

While the procedures and the methods of forecasting and projecting have been in place for the last 4 or 5 years, and up until this last year seemed to serve the Company satisfactory, they clearly are not adequate to deal with what's been going on the last two years, and we are aggressively going through and working on building from sales by SKU, by customer, by business up.

All of the financial metrics and the control systems, getting all of that in place is going to take some time.

But I expect coming out of that we would have a better handle on the businesses and our projections should have more accuracy.

Okay.

And turning it over to the pet side.

Clearly that was a disappointment in the quarter and really for the past couple quarters, and comparing it to kind of what Spectrum said recently.

They had actually decent results with a pretty big exposure to aquatic.

Is there a way to compare and contrast your results versus theirs or is it different businesses?

What am I missing here?

Well, Bill, I'm not an expert on Spectrum's pet business, but, we're in slightly different markets.

They have an international aspect to the business that we don't have a large exposure to.

So that creates a currency advantage for them especially this year.

We just have -- they have slightly different comps than we have this year as well.

And I guess one last thing, would you look to -- I mean, does it make sense at any point to sell some of these divisions, raise capital, repurchase shares, pay down debt, do other things to streamline the business?

Well, I've always been an individual who keeps looking at every possibility.

And we will continue to do that going-forward.

Having said that, we don't have a deep history of having sold assets.

So I wouldn't think that that's a highly likely event.

What I do see that goes to your point is we have an opportunity and we will be focusing on and have made changes in the organizational structure and accountability within this last week to focus on taking a minimum of $50 million, but something more like $100 million out of our working capital.

I think about the business in two ways.

You need outstanding profits and you need outstanding return on investment.

And there's -- the investment side is every bit as important as the profit side.

So I would say that's the first and foremost order of business.

Thank you.

Thank you, Bill.

Your next question will be from the line of Joseph Altobello of CIBC Oppenheimer.

First question is for Bill, you talked about some of the businesses that are not on plan, aquatics, large bird, small animal.

How much of that is within your control to fix and to change, and how much of that is really just a market issue and a macro issue?

I think the vast majority is within our control to change.

Can't really speak to the aquatics slowdown.

But everything else, I think is -- and I think that's a relatively small part of the aquatics issue, we have a business there that we consolidated four different operations into one.

We have this slowdown, we've introduced a wide range of consumable new products.

So there are a lot of moving parts.

And when I look at the business, it's in our hands to make it better.

Okay, because it seemed like in the past, you guys have talked about weakness in each of these businesses and a lot of the -- the reasons for those weaknesses have been people are owning fewer fish, or owning fewer hamsters or owning fewer large birds, so I'm curious, if that's the case, how can you reverse that?

I come from a different school and a different point of view.

I think all costs are variable, I think that any business can be realigned to take care of the market unless the market goes away.

Clearly the markets that we're in, they're not going away.

They're stable.

They have good demographics.

There may be some ups and downs and there may be some shifts, our job is to make the appropriate changes in our business models, to get the kind of performance and returns that we expect.

I think it's in our hands.

Are these markets growing at this point?

I'm not prepared to comment on that.

I mean, I'm back six weeks, try me in another quarter.

I'm not bothered about the size of the markets, I'm focused on -- and we're focused on what are we doing to optimize the performance of our share.

And how are we maintaining and growing our share.

Okay.

And then secondly for Stu, could you remind us where your covenants are and where you currently are in terms of a leverage ratio?

Sure.

Our covenants, we have two restricted covenants, one's interest and that's 2.5 times interest at EBITDA.

And then we have debt to EBITDA of 5 times and we came in on the debt to EBITDA which was the most restricted covenant this last quarter at 4.9 times.

Okay.

Great, thanks.

Where did we come in on--?

2.8 times.

Okay.

Thanks.

Your next question will be from the line of Reade Kem of Merrill Lynch.

Thank you.

Stu, could you share with us what your current outlook is for CapEx in '08.

It's going to be lower than this year.

It's probably going to be somewhere in the $45 million range.

That's what will be in the K tomorrow.

Okay.

About how much of that is related to the ongoing rollout of SAP and integration activities?

$10 million.

Will that be substantially complete this next fiscal year?

No, it won't.

We're going on a very measured approach to deploying SAP to take the risk out.

So we have probably a couple more years of SAP in front of us.

Okay.

And then Bill, along those lines, do you see any of the internal challenges you were talking about earlier as related to some of the SBU combinations and activities you've been up to?

Maybe the speed of those activities?

I think we could have executed some of those more effectively than we have.

In contrast, I think what Wellmark and Farnam did in putting together Life Sciences is kind of textbook ideal, but I think that other places, and aquatics would certainly be one of them.

And perhaps bird and small animal have not been as effective.

This is kind of a good point to talk about, what do we do going-forward?

And somebody asked about CapEx, and obviously CapEx is important.

But I think the most important capital that we have as a Corporation, is what I call change capital.

Every Company has an ability to make so much change.

You can do things to grow your ability to make more change effectively.

But I think the most important decisions that we will make this year is where to deploy our efforts at making change, that we do it at the highest leverage places, and we do it in the most focused way, so that we succeed every time we make a change and we get a very high payoff on it.

You'll see me and hear me talk about focused deployment of change capital.

Okay.

Just a couple more.

I guess with the leverage to ratio being what it is, and the focus this year, should we assume that you're pretty much out of the market for acquisitions?

Or if you are, they would be very small?

How do you think about that?

Well, I think that the likelihood of acquisitions has been reduced with the reduction and the value of our stock currency substantially.

As I said earlier, I think that it's important while we are working inside on doing all of the right things to get this Company back on track to be the great Company we believe it can and should be, we wouldn't want to be so buried internally that we didn't pay attention to external events that might be important inflection points.

So I think that you will see us possibly do very specific acquisitions if they really move the needle and if they're quite important.

I think they'll be small in size.

If they come to be.

I hope that gives you some insight.

That's helpful.

Then just the last one for me, I was wondering, specifically on the seed related businesses as you go back and see the price increases that you've had to do repeatedly, does that -- are your competitors doing much the same thing?

Or does the fact that you have to go back to your customers present some openings to them from a competitive point of view?

Thanks a lot.

I don't think it presents so much of an opening for them from a competitive point of view.

Because if we need to take a price change and we have more business and are larger and believe that we're quite efficient.

I don't think there's a lot of room for other people.

I think the challenge is more detailed, where every retailer is looking at their competitive position.

It would be one another.

And nobody wants to move.

And I think as the market leader in this area, if we don't move, I don't see how anybody else can move.

Next question?

Yes, your next question will be from the line of Alice Longley of Buckingham Research.

I basically have the same question that a couple of other people have asked, which is, what are you talking about when you say you are going to do things differently?

Could you give some more examples?

I mean, what we see of these sharp external forces, including terrible weather and a scared consumer for expensive goods.

And what can you do to confront those forces, you've given the example of taking more price increases, you didn't take enough price increases, what other things did you do wrong or can you do differently?

Well, I like to focus on what we can do differently.

Certainly the weather will change.

Whether it changes this coming year or not is an open issue.

I do not believe that our products are expensive.

They're consumables and they deal with two areas that, whether there's recession or tough times or not consumers continue to buy.

And that's lawn and garden where they stay at home, spend the time in their garden instead of vacationing or going to the movies.

We've seen that trend in the industry for over 30 years, so I feel good about the external demographics on that.

What you can't deal with is when there's a drought, there's no water to do the gardening, and things don't grow, so you don't sell seed, and insects don't come out, so you don't sell insecticides, so that just has to be managed through.

On the -- kind of the KT and the grain costs, had we been more agile, and in one of our operations they were, we would have been quicker to get these changes through and get on track, and in the aquatics business we would have certainly made some different decisions and we can make different decisions going-forward in light of the new environment.

Like what decisions would be different?

Well, I'm not going to go backwards and address those things, as we make the changes, we'll announce them, and I think you'll see logically improved results.

Is it cutting people out, are you cutting costs, or is it increasing marketing in some way?

I think when you look at the businesses, when I think about the businesses, I think about the job is to get superior return on capital.

And superior profitability relative to investment.

That means working on the capital side and reducing the amount of capital in the business to be more efficient.

It means reducing the expenses to get the profits up.

It means taking costs out of cost of goods, it means finding ways to grow and expand the sales through new products.

And new customers.

And we'll be working on all of those things.

For me, the way you get performance is to go identify, very frankly and candidly where you are.

No it inside and out, at the most detailed level.

And then to decide where it is you need to be to have excellent performance.

And most importantly, determine what action items, what initiatives will cause you to move from where you are to where you want to be.

And then do those things well.

I don't focus on achieving specific numbers or time frames, it's do the right work that will end up with the right result and do it with a sense of urgency, quickness but thoroughness?

One other related question, when you're talking about a superior return on capital, I assume you're talking about the inventory being up so much?

And year over year, it's like seasonality.

So first of all, I was wondering what you meant by the increase being explained by seasonality?

And then secondly, is that a focus and should inventory be up more in line with sales by the March quarter, let's say?

Well, Alice, the inventory is up at year end 2007 because we had a tremendous falloff in garden seed and sales the second half of the year.

That's product that's good and marketable.

It just didn't sell through in 2007 garden season.

So there is a dramatic change in terms of our working capital position and our inventories, especially on the garden side.

On top of what Stu has just mentioned, which is probably the single largest impact, I think we have a substantial opportunity to tighten up the whole supply chain and the replenishment cycle and the amount of inventory in the system so that we improve our return on investment and reduce our debt.

And we are going to take the steps to do that.

The only way you do that, though, is SKU by SKU, business by business.

Better forecasting, better buying control.

Thank you.

Your next question will be from the line of Karru Martinson.

Good afternoon, in terms of the covenants, you seem rather tight, especially when we consider the loose guidance that you gave for the first quarter, what is your confidence level that you will be able to maintain those results?

Well, our current forecast is, as -- has assumed that we are in compliance with our covenants, if our financial performance is not up to our expectations, we will go back -- or may be required to go seek a waiver for our financial covenants with our credit agreements.

It's just that simple.

What Stu has reviewed with me is the current budgets and the current projections, and then run a series of sensitivities around those.

Stress testing them within all of that, within those set of numbers and that stress testing, which has been pretty aggressive, we need to test.

We've also talked about given the forecasting issues that we've had over the last four quarters, are the numbers good enough?

And I think Stu has said very clearly what the course of action would be if for some reason we didn't track.

Are we expecting any cash restructuring costs here in fiscal 2008 and also were there any one-time charges that we should be aware of for the fourth quarter?

There are no one-time charges for the fourth quarter, restructuring charges for 2008.

I don't see any right now, no.

Not enthused about spending cash.

Understood.

In terms of inventory at retail.

It sounds -- since you lack the kind of sell through that we would see in some overhang there, is that the case?

I cannot comment too much on what's at retail.

Certainly we're carrying the inventory on our side of the equation, but the garden season is relatively over.

So there's not a lot of inventory in the channel that's, I'd say as seasonal.

General feedback, Karru, this is Paul.

General feedback I've had is that inventory at retail is in fine shape from our perspective.

It's pretty light, as Stu said.

We're sitting on the bulk of it.

Okay.

And just lastly in terms of one of your large retailers who halted kind of live fish sales at certain locations, is there any update on that?

I mean, we haven't really seen the program expand, we've seen live fish coming in at new locations.

Kind of what's the outlook there for that, and what's the impact on your aquatics business?

I -- regardless of what has -- what the actions of one large retailer may or may not be, because we're not going to comment on that, generally speaking, we are watching the broader aquatics category.

Not the specific motion of one significant retailer.

That one retailer alone didn't derail or dip the quarter for you here on aquatics?

That's right.

There's no new news there.

Thank you very much, guys.

You're welcome.

Your next question will be from the line of Reza Vahabzadeh of Lehman Brothers.

Good afternoon.

Hi.

How are you?

Fine.

Thank you.

As far as the grain costs did you quantify the impact in your commentary for what it was for the whole year?

Yes.

It was about $30 million of a gross price increase for us.

We recovered through price increases to our customers about half of that.

So a net adverse impact of about $15 million for the year.

Okay.

And from a pricing standpoint versus costs, when do you expect to catch up?

Is it going to be in the second quarter?

Because I think in '07 your pricing was in -- was kind of lagging the cost increases.

Well, if we knew with precision where grain prices were going to be throughout 2008, I'd give you a straight answer, but it's a moving target.

And last year we were in catch up mode, hopefully we can catch up this year.

Okay.

So does that suggest that your grain costs you are basically on the open market in part because now the grains are not hedgable?

That's correct.

I see.

And then as far as the aquatics business, you obviously mentioned it's very soft.

Does that imply that it got significantly softer in your September quarter and it's still that soft?

I think more of it is that we are -- is that we hadn't yet annualized the softness of the fourth quarter last year.

I see.

It was not an overly soft aquatics quarter, but now you're seeing the softness throughout the year catching up into the fourth quarter.

Right, but is it still soft on a year over year basis in the first quarter?

Yes.

Yes.

Yes.

Okay.

So on that point do you have other levers that can offset the softness in aquatics going-forward?

Except for the weather normalizing, which won't happen until the third quarter?

I don't -- I'm not sure what you mean by other levers?

Well, other businesses that can be growing to offset the decline in aquatics?

Do you have other earnings, growth drivers or sales drivers that can offset the aquatics business softness?

I think if we had those, our outlook for the year would be stronger.

I see.

And then Stu, you mentioned that you're comfortable with the banks covenants.

But you're already at 4.9 times, which doesn't leave a lot of room for error.

Does that mean that your first quarter will mean -- will resolve in significant cash inflow from working capital or something else?

We expect to have some improvement in working capital first quarter, that is correct.

Is there a number that you can throw out directionally?

Directionally, it's up.

It's better.

Okay.

Thanks much.

Sure.

Operator, next question?

Yes, sir, your next question will be from the line of Mitchell Spiegel.

Thanks.

Could you give us your liquidity as of 9/30 and what the bank availability is as of today?

As of today, I don't have a number for you.

As of the end of the quarter, it was again we were very close to the top end of the covenants.

We're at 4.9 times on a 5-times debt to EBITDA leverage covenant.

Right.

But my question was, how much bank availability.

In terms of within the covenants, $10 million.

Okay.

And just so we're clear, you have or you haven't amended the covenants since August?

We have not.

Okay.

And when you look at the historical working capital cycle of your business, if you take in some monies, there's a significant ramp up in cash used in the second quarter.

Do you expect to have adequate access to your banks to fund that swing?

In the past couple years it's been in excess of $100 million.

As we talked about earlier, as we forecast our business performance for 2008 today, we will be in compliance with all of our loan covenants throughout the year, we will have access to capital based on the models that we're running right now.

Okay.

And my last question is, how do you envision or how do you see the second, third and fourth quarters in terms of year-over-year improvement given your comments regarding the decline in the first quarter '08?

Are you expecting a significant improvement in third and fourth quarter, is it all in the fourth quarter to get to the annual improvement that you're shooting for?

Well, again, we forecast a modest improvement year over year.

We've got obviously, we just talked about a more disappointing fiscal first quarter, it's going to be spread throughout the remaining quarters of the year, that will get us back to a modest improvement.

But if you look at last year, the most significant deviation was the third quarter when the impact of the drought really hit.

And so if it were a normal year--.

Third quarter.

Third quarter would be up significantly.

And, of course, the fourth quarter?

Okay.

Thank you so much.

Sure.

Your next question will be from the line of Alex Yaggy of Morgan Stanley.

Good afternoon, everyone.

Bill I wanted to go back to a comment you made earlier in the call, when asked about potential asset sales, and I'm just wondering why that's not being considered?

I mean, your stock is obviously down quite a bit, if you listen to the questions that are being asked, there are questions about liquidity, why not -- why isn't everything on the table garden decor, whatever, to look at trying to reduce some of that debt and give you some more flexibility to get you through these tough times?

Well, I think the simplest thing is, I run an analysis that says when all of the businesses perform on profile, what kind of performance do we have?

And when all the businesses are running on profile, and the working capital's on profile, we have all time record results.

And then I look at it and say, what do we need to do to get from here to there?

Think about each business and what it contributes to achieving that.

There's some pretty significant ups by getting those things accomplished.

If you talk about selling to really good businesses, which would be highly valued you're giving away what I would say is some of the strength of the future.

And if you're talking about selling underperforming businesses, you're really not getting value for value.

Compared to what you'll get if you go do the work.

We do not see a situation -- we see a situation where we have the room and the freedom to go ahead and make the changes and improve the business performance.

By improving the business performance, the EBITDA will go up, therefore the multiple will go up, and the availability of capital to have the flexibility will be created.

Also, by reducing the working capital, substantially, additional capacity will be created.

Did you say 100 million to 150 million earlier about working capital?

Is that correct and what time frame are you thinking about for that?

No, it's not correct.

I said at least 50 million.

And I'm thinking about 100 million.

And in terms of time frame as I said earlier, I don't focus so much on time frame as I do focus on where should we be and what are the actions we need to take to get there?

And then how quickly can we move to get those things done and done well?

I haven't tried to quantify it in time frame.

Your next question will be from the line of [Joseph Lynn] of BDG Capital.

Operator, I don't think he's there?

Hello?

Oh, there.

I was wondering how much ERP costs are in the SG&A line for 2008?

For 2008, we don't have a number that we've broken out.

Are there some costs attributable to the ERP implementation in the SG&A line?

There will be?

There is in 2007 as well.

We have increased depreciation and costs which get expensed.

Ballpark, about what's that number?

I think I just gave you the answer, we haven't broken out.

Okay.

And your estimation that grain costs hurt EBITDA by about $15 million -- or that you had $30 million in price increases and got back half that.

That's correct.

That's similar to what you've said previously.

Yes.

But you cite that as a reason for missing the guidance in early September.

So why -- that doesn't seem to follow.

What other reasons might have driven the difference in between the early September guidance and the actual results?

Some of the other parts of pet that we've called out, aquatics and bird and small animal have had additional softness.

Okay, thanks.

Sure.

Your next question will be a follow-up from the line of Alice Longley.

Two questions, just on that one that was just asked.

I understand that aquatics might have gotten weaker since early September.

But birds and small animals, has the demand for birds and small animals gotten worse since then?

I don't have the impression that that's the case.

I think what I indicated earlier is that when we got in and did the more detailed work to see specifically item by item how the margins with the current pricing compared to the margins 18 months ago, that we had not recaptured as much as people thought they had recaptured, and that there were further increases required to get back as I refer to it on profile.

Okay.

My other question is about your distribution of other manufacturers products.

In this quarter, like others, their sales are down a lot more than your own sales.

I think maybe by a wider degree this quarter, is one of the problems maybe that the retailers just don't want these small brands that you're distributing?

And they are maybe not great for you to have longer term anyway?

Because they're low margin, but they covered overhead.

And maybe are they sort of slipping away faster than you're able to adjust to overhead?

Well, first of all, we're not concerned about that trend at all.

One of the things that we worked on very aggressively for this fall is which of those items really make a profit contribution and which of those items were we not making out on.

And we keep focusing on the relationships that are attractive to us, in terms of improving shareholder return.

And if you will, slowing down those that aren't.

Additionally, from time to time, a significant third party player may change its go to market strategy.

That's something they control, not us.

And that can have an impact.

Those two factors are the principle reasons for the change.

And they are not, in my mind, material to what we are or where we're going.

What percentage of your sales are now distributed products of other company's products.

Alice, it's about 15%.

That's not a very precisely calculated number, but it's in that area right now.

And do you anticipate gradually getting out of that?

I mean, why do you do that?

Because it increases our prominence with the retailer in terms of the products that they are able to get from us.

If lowers our overall costs by sharing the infrastructure of our logistics and distribution operations.

And where we have done it right it contributes to our bottom line.

Okay.

Thanks.

Your next question will be from the line of [Matt Zahid].

Hi, good afternoon, guys.

Hi, Matt.

Bill you were willing to buy stock back in September.

And the stock price was at 10, I guess $10.

Are you willing to buy now that the stock price is at like 6.00, $6.50?

I think that the stock price of the Company right now is an incredible buy.

And certainly attractive as you must know, as an insider we're not able to buy until a few days after these earnings calls, and then only for a short window.

And during that time I and other people in management will have to make their decision, but if people ask me if this was an attractive buy, I think it's substantially more attractive than when I was willing to buy the shares earlier.

Matt, is there anything else?

No, that's it.

Operator, we have time for one more question, please.

Yes, that will be from the line of [Brett Sinsinelli].

It's Brett and Jeff at (inaudible) My first question is, maybe Bill, could you just recap the personnel changes you've made in the past 30 days or so?

Well, I think you're all aware that Glenn Novotny resigned.

He felt that his life was out of balance and he felt that, because of the nature of the offering being pulled that, and the performance during the year that his credibility and effectiveness had diminished and to get some balance back in his life he made the decision to make some changes.

The change on our end was for me to step in, back in as CEO.

The other change is Brad Johnson who headed up our garden business.

Brad and his family moved here from Ohio.

They have strong ties to the East Coast, his wife and his family did not integrate in a nice comfortable way to California and my impression is for personal and family reasons that they are going to locate to the Eastern United States.

It was my view that we needed to address right up front where the long term fits were and who was committed to being side by side with me for this journey.

And--.

--(inaudible - multiple speakers) who is an Executive Vice President with the Company, and is the group executive whom the successful Life Sciences business has reported to has assumed the additional responsibility for the garden business, and I think Mike is 7 years with us, a very strong performer, has been well received by the group, and will be leading the garden group.

And as far as -- I mean, I understand the need for changes, and I understand exactly the issues I think you're grappling with, and, you've said nothing that I would disagree with about how to address these issues, and the urgency, but I guess my question is why are you -- and I don't mean this with disrespect, but why are you the right guy to do this?

It would seem that a lot of the issues facing Central Garden are at base just blocking and tackling.

Organizational issues, putting the right people in place, accountability.

Kind of day-to-day blocking and tackling to deal with internal issues as well as deal better with some of the external issues that you've been thrown.

My sense of you, particularly for the last five to seven years has been more of a strategic, more M&A, more of a Board level vision.

Why are you the guy to successfully do this?

Why do you want to do it versus going outside and bringing in another operator?

Yes, I thought about it, and the Board thought about it a lot.

If you go outside, it takes a lot of time to do the search.

And so what do you do to fill the void?

The second thing is, when the new person comes in, it takes a certain amount of time for them to learn the business.

And that's a long time to wait.

And then you have the question of, when you bring somebody in from the outside, is the fit really going to work?

I describe the situation that evolved with Brad and had to do with personal and family reasons.

You've seen the situation at Home Depot with Nardelli.

There's a certain amount of risk when you bring somebody in.

When you add up -- when I add up as a very large investor in Central and a guy who knows the place pretty darn well.

Is it in my interest, is it in your interest as shareholders to go through this search, to go through this start-up time and hope that we will get a payoff and hope we'll have a fit and leave that void there.

And obviously the Board felt and as a shareholder of -- I felt that the payoff was much greater by changing my plans and coming in and doing the work.

And while your observations about me strategically I think are correct, there is another side of me that happened in the early days and happened in the 2000 period when the Company needed significant turnarounds, and significant fixes.

And you remember we're the guys that had $800 million of our business go away when the Monsanto relationship ended.

Had to do significant restructuring, bought back something like close to half our stock and then took the Company from that level to five times the profitability.

I'm a very focused guy on identifying and driving the changes that are needed to get the Company to perform.

You don't build a great Company unless you have great performance, you can't do the strategic stuff without mastering the day-to-day operations of the business and having excellence in all your people and all your operations.

And the other question I had, I guess, you weren't in the room, Bill, but Stu was.

In what I guess I affectionately call the world's shortest road show.

There was a definitive expectation at the Company that -- the worst selling season weatherwise in 90 year history, et cetera, and all else being equal, we should see a -- certainly a pretty decent swing from this year to next year, and that really just sort of baked in improvement.

And now if I go back and elicit the transcript, what I think you're saying is we're weather forecasting and we don't see that happening, I'm just curious, what in three months gives you confidence or any comment one way or another of why there wouldn't be this innate improvement of going from the worst weather in 80 years to just decent weather or just merely bad weather, and why that wouldn't have this enormous I think uptick in the lawn and garden business?

Well, I think there are two things.

And I would like to speak to both of them.

At the time my impression is that people were thinking about a normal year for weather next year.

And people were thinking that adequate price increases have been accomplished relative to the grain businesses.

As we sit here today, 90 days later, it's known to us from the work that we have done, that grain prices have continued to move, and we have not recaptured those margins, so that deals with that one.

With regard to the weather.

It's 90 days later and we're seeing water restrictions and water bans being implemented or continuing when there should have been enough activity for them to have ameliorated.

For my own self, I go back to the early '70s here in California.

It's the only time in my life, and I'm a native Californian, that I ever remember a drought and water restrictions.

And everybody thought at the end of the first year, the next year would be gone.

But it carried over and we had the two-year effect.

And once -- what I learned from that is, once these bands go in place and restrictions, they come on too late, and they -- they come -- they get off too late and so given the fact that they haven't come off now and my partner Sonny Pennington is reporting to me that the lake that his house is on is like 6 feet lower than he's ever seen it in his lifetime, back to when he was 6 or 7 years old.

You get a real feel for the severeness of this.

So I think that it would be imprudent of us today, 90 days later to be talking about a bounce back.

This is a time when we need to prepare for the worst and hope for the best.

And my last question is, Spectrum and Central Garden have been doing this little dance for the past year and you have a new large shareholder who has a history of agitating for interesting combinations among their large holdings which would include you and Spectrum.

And I was wondering if you would comment given your financial condition, given the need to get operations back on track, what your mental thinking is in that regard?

I think I'd be disinclined to comment.

All right.

Let me ask it another way.

How -- one disappointment from this call, besides just the facts, is given you're at 4.9, given you're not expecting any intermediate improvement, I'm not quite sure why you would not utter the statement, we are putting an absolute lid on acquisitions, we need to get our house in order, we need to get our balance sheet in shape, and when we have accomplished these goals, then we're willing to look at the opportunities to continue the consolidation of our industries.

Why wouldn't you make that statement out loud?

I think I did everything but say absolutely.

I think I've said everything that you said, except being a guy who keeps an open mind and knows that things in the world change, situations evolve, I didn't say absolutely.

And it's not my nature to.

But if you say where is the focus, it's exactly what you described.

Great.

I appreciate your time.

Thank you.

Thank you, Jeff.

We need to move on.

Operator.

Yes.

There are are no more questions.

I'd like to turn the call over to Mr.

Brown for closing remarks.

Thank you.

Thank you for your questions.

As you can tell, we're working hard to restore the performance of the business.

We're looking forward to providing progress reports throughout the year.

Thank you for joining the call.

Thank you for your participation in today's conference.

This concludes our presentation, and you may now disconnect.

Have a great day.