Central Garden & Pet Co (CENT) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Central Garden & Pet fiscal first-quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now like to introduce Vice President Paul Warburg for Central Garden & Pet.

Please go ahead, sir.

Thank you, operator.

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

With me on the call today are Bill Brown, Central's Chairman and Chief Executive Officer; Stu Booth, our Chief Financial Officer; Jim Heim, President of Pet Group; and Mike Reed, representing the Garden Group.

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

The statements made during this conference call which are not historical facts 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, and in other Securities and Exchange Commission filings.

Additionally, the discussion on this call will include use of noncash financial measures.

We have provided a reconciliation of the measures to the nearest comparable GAAP measure in our earnings press release, which is available on the Investor Relations portion of our Web site at www.central.com.

Today's agenda is as follows:

Bill will provide a brief business analysis and discuss his priorities for the company.

Stu will review the financial results for the quarter.

We will then open the call up for Q&A.

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

I'll now turn the call over to Bill Brown.

Bill?

Thank you, Paul.

And thank you for joining us this afternoon.

This was my first full quarter returning as CEO.

Based on my experience during this time, I can tell you several things.

First, the entire organization is working diligently to improve performance.

We have a great, great group of people in this company, and they want to get the kind of performance that you want to see.

Second, we have taken quick action on the obvious opportunities for improvement in margins, expenses, and working capital.

Third, we are taking the time and effort required to analyze our performance and implement measures to build and deliver excellent results for 2009 and beyond.

We believe it's important to fix the short term and to do the right things for the long term.

In the first quarter we took decisive action to address the most immediate near-term issue facing the company, that was assuring compliance with our bank credit agreements.

We strengthened our financial position by implementing additional price increases in our wild birdfeed operations.

We lowering cost in our aquatics operations, including expenses and head-count reductions.

We aligned those costs with the current market conditions.

The third thing we did is we exited a small business, we divested some noncore real estate, and we settled some litigation on favorable terms.

All of this resulted in cash payments to us during the quarter.

As a result of these actions, the combined performance of our ongoing operations included we created a larger financial cushion.

We continue to be in compliance with our bank credit agreement, and we expect to remain in compliance.

We are now focused on the operational initiatives to help get specific businesses back on profile and improve our overall performance.

Many of these actions, while in progress, are not apparent to investors.

Some of them will show results quickly.

Others, it will take a longer period of time to see these measurable results.

I want you to be assured the actions are being taken, the work is being done to get the changes in place to see superior results.

As I mentioned on the last conference call, the concept of operational and financial, quote, "on profile performance" is an important thing.

Our initiatives are focused on ultimately deriving superior results by reducing the amount of working capital to be more efficient, improving the profitability through gross profit margin expansion and lowering our overall cost structure.

In addition, we'll be increasing sales with innovative new products and developing new customers.

To this end, we've established two key organizational priorities.

The first is working capital management, and the second is margin improvement.

Addressing working capital, as I said on the last conference call, I believe we can reduce our working capital $50 million or more.

While that remains a goal, we are currently not at acceptable levels.

We carry too much inventory.

Accordingly, we have developed an action to substantially reduce inventory levels.

For example, we recently designated one of our most senior executives to focus full time on working capital improvement.

His mission is to work closely with each of our operating businesses to improve their working capital performance.

His job is to oversee, inspect, and correct.

In addition, we're changing our compensation metrics to make sure that each of our key executives has a real, personal financial incentive to operate his business with lean inventories and the efficient use of working capital.

We're also focused on margin improvement, including expense reduction.

In our underperforming businesses, we are identifying those items where margins fall below the levels that we experienced in 2005 and 2006.

Where we identify those SKU's with unacceptable margins, we are taking the appropriate actions, whether by price increases, cost reductions, or the elimination of that item.

As part of this effort, we implemented price increases in some of our businesses in December and are currently implementing additional price increases to help offset rising costs and get margins back where they need to be.

In some instances, however, taking price is not enough; we must lower costs.

Where that is the case, we are taking the necessary actions.

Turning to the announced, noncash goodwill impairment charge, this is a technical accounting issue, and I probably know more about it today than I ever wished to.

It does not reflect management's outlook for this business whatsoever.

It is essentially a mark-to-market exercise, and I don't believe it is all in any way indicative of the value of our company today or its prospects.

I'll let Stu cover this in detail in his section.

I'll summarize by saying that, as Central's founder and largest individual shareholder, I feel a sense of urgency throughout the organization.

I know it's real in me, and I know it's real in my partners in this business and all of our employee base.

We are focused and committed to deliver real, improved performance.

With that, I'm going to turn it over to Stu to recap the numbers, and then we'll open it up for Q&A.

Stu?

Thanks, Bill.

As we indicated on last quarter's call, we projected that the first quarter would be challenging, addressing the three primary factors that impacted the business.

Weather conditions, primarily the drought in the Southeast, continued to adversely impact our results.

Calendar 2007 was the second driest year in recent history in that region of the United States.

We are beginning to see signs of improvement, but it is still too early to make any definitive statements.

The critical months of the garden season are still ahead of us.

The cost of grain, related primarily to our wild birdfeed operations, continued to increase, and we continued to respond with additional price increases.

Sales of aquariums and related supplies continued to be soft due to the ongoing weakness in that broader category.

Now, turning to the financial performance, net sales for the first quarter of fiscal 2008 were $314 million, relatively unchanged compared to sales of $317 million a year ago.

Branded product sales were relatively unchanged at $261 million.

Garden segment sales declined approximately $3 million to $112 million in the seasonably slow quarter.

Garden branded product sales increased approximately $1 million to $98 million.

Sales of other manufactured products declined approximately $4 million to $14 million.

Pet segment sales were relatively unchanged at approximately $202 million.

Pet branded product sales were relatively unchanged at $164 million.

And sales of other manufacturers' products remained relatively flat at $38 million.

The company's gross profit for the first quarter decreased approximately $8 million, or 7%, to $94 million.

Gross profit as a percentage of net sales decreased 200 basis points to 30.1% from 32.1% in the year-ago period.

The margin erosion is due primarily to product mix shift and, to a lesser extent, rising costs in both garden and pet segments.

Selling, general and administrative expenses for the first quarter were approximately $85 million, compared to $96 million in the year-ago period, a decline of approximately $11 million.

Included in SG&A for the quarter is a gain of approximately $11 million related to the sale of properties and a favorable legal settlement.

Absent the benefit of the $11 million gain, SG&A expense was $96 million, or 30.6% as a percentage of sales, roughly flat to last year.

The operating loss for the quarter was $391 million.

Excluding the noncash charge of $400 million related to the goodwill and other intangible impairment, operating income for the quarter was $9.4 million, compared to $5.9 million in the prior-year period.

Excluding the goodwill and other intangible impairment and the aforementioned $11 million gain, the operating loss for the quarter was $1.7 million.

The garden segment operating loss was $7.3 million, compared to a loss of $2.1 million last year in its seasonably soft quarter.

Included in this number is a $3.5 million noncash impairment of other intangibles related to the goodwill impairment charge.

Pet segment operating income was $17 million, compared to $17.8 million in the prior-year period.

Interest expense for the quarter was $11.2 million, compared to $10.7 million a year ago.

The reported net loss for the quarter was approximately $290 million, or $4.07 per fully diluted share.

Excluding the noncash goodwill and other intangible impairment charges, net loss for the quarter was approximately $800,000, or $0.01 per fully diluted share.

This compares to a net loss of $3 million, or $0.04 per share, in the same period last year.

Further excluding the aforementioned $11 million gain, the net loss was $0.11 per fully diluted share.

Turning to the balance sheet, comparing December 29, 2007, balances to December 30, 2006, balances, accounts receivable were $183 million, an increase of approximately $7 million, or 4%, compared to last year.

Inventories were $435 million, an increase of approximately $28 million, or 7%, compared to last year.

As discussed last quarter, we expect to carry excess inventory into the first part of fiscal 2008, due primarily to the lower-than-anticipated sales that occurred in fiscal 2007.

As of December 29, 2007, total debt stood at $602 million, compared to $582 million last year.

The noncash goodwill and other intangible impairment charge was the result of decline in the company stock price, not on the fundamentals of our business.

On July 1, 2007, we passed our annually required SFAS No.

142 goodwill impairment assessment which requires, among other things, a reconciliation of equity market capitalization to shareholders equity.

We performed a required intermediate assessment this quarter following the recent decline in our market capitalization.

At recent stock levels, the company shareholders equity significantly exceeded its market capitalization, which is considered to be an indication of goodwill impairment.

This noncash charge is unrelated to recent results or management's long-range forecast, which continue to call for earnings growth and margin improvement.

However, the company is required by current accounting convention to place greater emphasis on current trading values than on management judgment and projections in performing its impairment assessment.

Addressing our credit agreement, as Bill mentioned, we continue to be in compliance with our loan covenants.

Our current debt-to-equity ratio is approximately 4.25 times, compared to 4.9 times at the end of fiscal 2007.

The maximum leverage per the covenant in the credit agreement is 5 times.

The initiatives completed in the first quarter created additional financial cushion, and based on our current forecast, we expect to remain in compliance with our loan covenants.

I will now turn the call back to Bill.

Bill?

Thank you, Stu.

In the past three months, we took decisive action that strengthened our financial position, refocused the business, and then established organizational priorities.

The building blocks are being set in place to support future sustainable growth and improved performance.

We are making important progress.

With that, we'll now take your questions.

Operator, we'd like to open the call to Q&A, please.

(OPERATOR INSTRUCTIONS)

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

Please proceed.

Hi.

Good afternoon.

Hi, Bill.

I guess a few questions around the birdseed business.

Last week Scotts talked about seeing 18% growth in that business for their most recent quarter, and I'm assuming most of that came on pricing.

Just wanted to see if, one, you're seeing similar trends on the top line, if you've gotten all the pricing you now need -- I think you talked about doing an additional price increase in February on the domesticated bird side -- and then what's, kind of, your outlook for commodity costs through the rest of this year?

Well, we saw similar types of growth, and it is driven by price.

I think the encouraging thing on the birdseed business is, as price has gone up, consumer unit demand has remained -- it just hasn't declined as much as people would have thought, and that's encouraging.

We have gotten those prices through, and we are experiencing the kind of margins that we need to experience.

However, I was with Paul -- I think it was yesterday or the day before -- and we were looking at revisiting the grain cost movement, and grain costs have continued to move and move significantly.

So the business will continue to face issues of increasing input costs and will have to address that in terms of pricing as we move forward.

But are you still, kind of, behind the eight ball, like you were last year, or have you caught up close enough where it's smaller incremental price increases?

Well, the pricing that we put in place got us pretty much on profile with where we wanted to be in terms of margin.

But, you know, when you put a price change in place, you announce it, you give lead time to the customers to make adjustments in their business, which is a fair amount of weeks, and eventually it gets implemented and starts to flow through your business.

During that same period of time, Bill, much to my frustration -- and I'm sure our people -- as well as the rest of the industry -- grain costs have continued to move up.

So there will be more that will have to be done to address these changing grain costs.

Okay.

And then just switching to pet, obviously, aquatics remains weak.

Are you seeing incremental weakness in other categories, or has it been pretty steady in the companion pet or other categories that you participate?

Bill, this is Jim Heim.

Our other categories were -- broadly speaking -- are going very well.

And you're correct in your statement that aquatics is the major issue.

Great.

Thank you.

Next question, please.

Your next question comes from the line of Joe Altobello with Oppenheimer.

Please proceed.

Thanks.

Good afternoon, guys.

First question, on the gross margin, I think, Stu, you said it was down largely due to mix.

Could you give us a little more insight into what's going on there?

We're just seeing -- again, this is slow garden season so we've had just a little bit of mix shift on the garden side, and then we've had mix shift within the pet side as well.

Again, the aquatic sales were down so we've lost some opportunity to sell some of the higher margin product there, and that's been offset in large measure by price increases that we've seen on wild bird -- I'm sorry -- pet bird.

Okay.

I'd like to add to that, Joe.

We have both active ingredients through our life-science businesses, and we have active ingredients through our controls business, whether that be insecticides or fire ant control products.

All of those carry strong gross margins.

And because people are deferring purchases from December into January, the active ingredient -- which is one of the richest parts of the margin of the business -- was down, and that's a significant part of this mix issue.

Got it.

Okay.

What was the grass seed business up in the quarter?

It was up some, Joe.

I don't have the actual percentage number in front of me, but it was up year over year.

Any sense that you guys are losing share there?

No, we are not losing share there.

Okay.

I think from a listings point of view, we would think that it would indicate we should be gaining, but we'll see what happens when the season actually happens.

Got it.

Okay.

And then just moving on to the balance sheet for a second, did deferred income tax and other line on the balance sheet was up pretty significantly.

Can you talk about what happened there?

That's primarily results of the goodwill impairment and the tax consequences of that.

Okay.

And then we actually had deferred, kind of, switch positions on the balance sheet.

Okay.

And then, lastly, the cash flow in the quarter?

It's about $3 million positive.

Positive.

On a precash flow basis.

Versus what last year, Stu?

It was down $15 million - a consumption of $15 million last year.

So that's an $18 million swing?

Right.

Got it.

Okay.

And then, lastly, if I could -- good for pointing that out, Bill, by the way.

In terms of your guidance for this year, obviously, you guys don't give much guidance.

But I think, Bill, in the last call you said you expect modest improvement on the bottom line this year versus last.

This is a bit technical, but does that include the gain on the sale and the legal settlement?

I think my exact words, I was hopeful that we would experience a modest improvement over last year.

And to your question about including these gains, I hadn't been -- I think one of the buildings was known to me, and the other two pieces weren't in my thinking.

So it's kind of a mixed bag.

Okay.

Great.

Thanks.

Your next question comes from the line of Alice Longley with Buckingham Research.

Please proceed.

Hi.

Could you give more detail on an updated guidance?

I didn't see anything here.

Are you still hopeful for a modest increase in '08?

Yes, we were talking about this before the call.

In the roughly -- I think about eight weeks since we were last talking -- there have been no changes in the marketplace that are significant -- you know, what's important is this garden season coming up -- that would cause me to change my view.

So I remain exactly where I was before.

I see the actions we're taking internally, and that's where we stand.

And does it make sense to think that the March quarter might be a significant drop because of the comparison against the year ago in lawn and garden and also maybe retailers pushing requests for shipments out into the June quarter?

It's certainly a possibility.

We're not in the business of giving that kind of guidance, and so I think at that point I'm going to stop.

Okay.

Now, you've said that you've encouraged everybody to look very closely at inventory controls.

Are you looking carefully at your brands and your businesses and the SKU's that you're in?

I guess my question is, when you're looking over your business, what percentage of your revenues are brands and SKU's that you like?

Do you have plans to cut back on SKU's, cut back on brands, cut back on distribution of other manufacturers' goods?

Well, I think in a broad base we like all our brands, we like all the businesses that we're in, and we really like many of the partnering brands from other manufacturers that complement us.

What is going on here is a very rigorous analysis to determine profitability by item by customer.

And that goes to our brands, and it goes to brands that we might distribute.

And where items are not returning good results, we need to make changes.

We're not in the business of subsidizing something that's not performing.

So the answers to that will be either get the item to be profitable or move it out.

Now, I think, by and large, most of the items that tend to not be profitable tend to be the ones that have lower sales volumes, tend to be things that got into these lines over the years and haven't been looked at and tuned up.

Some of those lower sales volumes are terrific; others aren't.

So you'll see us doing surgical adjustments to get things right, rather than any broad-sweeping moves.

And you basically haven't really finished the study of this?

Is that what I'm hearing?

Well, certain businesses, the work is done and the actions are being taken.

In other businesses, the analysis is still being completed.

Because, when you want to determine that level of profitability, you have to allocate, not only your variable cost but your fixed cost, and that gets to be an interesting discussion within the organization and takes time and work to get it right.

Okay.

And then --

The answer is partly yes and partly no.

Okay.

And then just a couple of housekeeping questions.

What was pricing in the quarter, and what is reasonable to expect for the year overall for the two divisions?

Well, Alice, we haven't broke it out specifically garden and pet.

I think we've thought that pricing would probably contribute -- and we said this on the last call -- I believe it was low single digits.

In certain areas we'll be raising prices more, but on a blended basis, in that neighborhood.

Okay.

And that's probably accurate for both the divisions?

Yes.

That's probably fair.

Okay.

And then can you give some guidance for interest expense for the year and tax rates for the year?

Tax rate for the year after our goodwill impairment, I can't tell you it's 38.2%, like I used to be able to.

So that's a number we're going to have more precisely calculate.

Interest expense --

We haven't given that guidance but --

But you should be able to get pretty close.

I know your miles are pretty well tuned up, Alice.

So what I have is right?

Must be.

Must be.

Thank you.

Your next question comes from the line of Reza Vahabzadeh with Lehman Brothers.

Please proceed.

Good afternoon.

Reza Vahabzadeh from Lehman Brothers.

Hi, Reza.

Just as far as the cost savings that you talked about in the aquatics business.

You talked about some head-count rationalization.

Can you talk about order of magnitude, what kind of cost savings we are talking about either in this quarter or the run rate on an annualized basis?

You know, we talk about segments, and I don't -- I'll share something real quickly with you.

A lot of folks were saying, "Bill, share a lot of specific examples.

It's going to let people know you're really doing something as an organization." And I started to do that and looked at it, and as I began to think about it and think about the last call -- you know, these calls are listened to by our customers, not only the investment community, our competition, various vendors, the employee group -- it's a wide base of audience.

And while there's a great effort and desire on our part to have a lot of transparency, as we start to drill down and talk about these things in much more detail, subsequent to the call, there can be undesirable -- from all of our points of view -- backlashes to drilling in too deep, and so I'm just not going to do it.

But rest assured, we're taking action.

I'm assuming that this cost savings will be material benefit to bottom line in the coming quarters then?

That's our expectation.

Okay.

And then, Stu, on bank covenants, I don't know if you could share with us where you are on bank covenants on the maximum leverage ratio?

I heard you mentioned something about debt to equity, but what about maximum leverage?

That is the maximum leverage ratio.

It's 4.25 times.

Well, we're at 4.25 times, and the max is 5 times.

Five times.

Yes.

Okay.

And do you know what EBITDA you used to get to that?

I don't have it in front of me.

There's a few add backs here and there, but it's all non-GAAP stuff so --

The gain on the sale on the properties, I'm assuming, is not in that?

It is in there.

It is in there.

It's in EBITDA?

It's cash.

It's earnings.

Got it.

It's all in accordance with GAAP.

Okay.

And then, as far as commodity costs, where have they gone since the last call?

I mean, are they meaningfully higher than before?

How should we think about that?

Grain costs are up meaningfully higher.

One of the things we looked at was by specific grains since 9-30.

And I was telling Paul that, on a routine base going forward, we need to come up with a weighted-average movement so that we can speak to the mix of grains that we use, rather than as we typically have talked about the change in model, the change in corn, the change in millet because they all move differently.

None of them were down, all of them were up to various degrees, and we'll be addressing it.

Right.

So, I mean, pricing versus commodity costs in the March quarter, are you going to be better off or worse off than your December quarter just general directionally?

Commodity costs will be up.

And then pricing will be up.

And pricing will be up.

I think that, because we carry certain inventories and in certain areas, to the extent it's reasonable and possible, we buy forward contracts, you know, we should be covered for the quarter.

It's the period beyond, as we begin to flow in the new purchases and they cycle through.

Got it.

And as far as the gardening business, what's your outlook on that business given some lingering droughts in certain areas, and how do you think your set up vis--vis retailer inventory levels?

Well, we have very good listings.

We're well positioned for a good season if we get a good season.

But as we were on the last call, we remain cautious.

We haven't seen the drought go away.

Paul, something you want to add?

I would add that, obviously, people are always trying to gauge the garden season well in advance.

And while weather conditions in the South and Southeast are certainly improving, I would -- it's way too early to call it.

Fair enough.

I can tell you, internally from our business, we prepare for both the best and the worst, and we deal with what comes.

Got it.

Lastly, how is your animal health equine business performing in this quarter, as well as your dog food business?

The dog food business is up strong double digits.

And on the animal health, as I mentioned earlier, there has been some shifting of sales from the December quarter into January.

And so we would not see the kind of ups that you'd like to see, but we know specifically what customers and why.

Thank you.

Your next question comes from the line of Doug Lane with Jefferies.

Please proceed.

Good afternoon, everybody.

Hi, Doug.

I have three questions.

Have we anniversaried all the acquisitions so on the sales line that's entirely organic at this point?

Yes.

Okay.

Secondly, can you comment and elaborate on the logic and the reasoning, the thought behind the late December $500 million shelf offering, what the purpose there is?

Well, sure.

I'll do it.

Doug's that's more housekeeping than anything else.

When our market cap went below $700 million, we needed to file a different form of shelf registration.

And as we've always talked about, we like to have as many arrows in our quiver for financial flexibility, and this is one we just needed to update.

We put the original shelf in place to have flexibility so that, if something happened, that it was important to be able to move.

We put in long-term fundamental foundation flexibility in the shelf.

I was quite surprised when the market cap dropped below and our counsel informed us that there's a threshold and you have to be above $700 million in market cap or your shelf is no longer any good.

So we went to having something in place to not having it.

And our question was, so what do we to put it back in place?

And it was to file the shelf.

We filed the shelf simply to reperfect what we already had, nothing more.

Got it.

Okay.

I didn't realize that.

Then, lastly, Stu, how much annual saving can you expect from lower depreciation and amortization after the write-offs?

There should be no change to speak of.

I mean, really what we impaired was nonamortizing goodwill, and then we had some intangibles that were nonamortizing that we impaired as well.

So no basic change.

No change?

Okay.

Thank you.

You bet.

Your next question comes from the line of Karru Martinson with Deutsche.

Please proceed.

Good afternoon.

Just to follow up on Reza's question just so we're clear here, the 4.25 leverage ratio is including the gains on the sale of properties and legal settlement; correct?

That's correct.

Okay.

Are there other properties that you hold or are marketing for sale at this time?

Kind of, what's your outlook there?

Well, we clearly hold a lot of other properties, and we routinely now look at those properties and look at the prospects for their use in the business and the possibility of gains relative to what it might do to our financial strength.

There are no specific plans, as I sit here at this moment, but it is certainly routinely evaluated these days.

In terms of a -- perhaps you gave it and I missed it -- CapEx for the quarter?

$8.2 million.

$8.2.

Thank you.

And then, in terms of SG&A, I know we're taking out some head count here and we've added some new people, but is this on an adjusted basis?

Is this the kind of rate that we should expect going forward?

Well, I don't think that there's any reason for you to expect anything different unless the company were to do something different, and at this point there hasn't been.

And I think the prudent thing is to assume that it is what it is.

That's the way I look at it.

Okay.

And in prior quarters you had talked about trying to get some index pricing to help offset your grain costs, and it certainly doesn't seem like that's been the case.

Has there been an effort to go to the retailers, and what, kind of, has been the retailer reaction with the price increases that you're pushing through?

They didn't like the increases at all.

However, at the end of the day, by and large, across the broad sweep, we have successfully implemented the price increases.

We did not at that time attempt to enter into a more sophisticated discussion of indexing.

And that is not currently being worked on.

It is something to think through.

I think the hope in the business is that the grain markets will stabilize so that the need for that kind of arrangement goes away.

However, based on what I shared with you earlier, that hasn't happened, and it is a matter that we'll have to relook at.

We think there's some better low-hanging fruit right now to address in other ways.

Would you describe the market in India -- the birdseed site -- as rational?

Is everybody, kind of, following your lead as market leader, or are there, kind of, attempts to take some market share here?

I consider it a healthy competitive market, and I don't consider it irrational, nor do I consider behavior to be in lockstep.

It's a normal competitive market.

Thank you very much, guys.

Thank you.

Your next question comes from the line of Bill Reuter with Banc of America Securities.

Please proceed.

Good afternoon, guys.

Hi, Bill.

How frequent do you guys purchase grains, and, I guess, when you do purchase these, I guess, do you have long-term contracts or -- if you can give me any color there, that would be useful.

We purchase grain every day.

Some of its purchased on longer-term arrangements, some of its hedged, some of its in the spot market, some of its with the growers.

Mike, would you add some more color or --

Well, it simply is an opportunistic approach.

If it looks like the price is good and you can lock in some volume, that's what you do.

If there's a spot buy that seems to make sense, you do that.

We've been fortunate, as has been mentioned, that our volumes of these products have stayed strong, and so we are out buying when there are opportunities.

We like to buy ahead if the pricing makes sense.

Jim, anything you'd add?

No, I'd agree with that.

Okay.

I guess, looking back six months, when grain prices weren't so high, did you guys purchase -- I mean, they were still obviously high, but they've continued to go up -- did you guys purchase any long-term amounts of those at some of the lower prices, or should I assume that you guys purchasing, kind of, at spot prices or (inaudible) of today?

No, we're not purchasing at the spot prices across the board.

There's an attempt to get out ahead of this.

We only have so much storage capacity, and to merge costs, if you don't have the capacity to store it, when you start going out real long and it requires delivery, starts to change the cost structures.

So our buyers are really very, very competent.

They have decades of experience, and they strike a good balance.

I don't think we have an issue at all in the way that we buy from the inspections that I've done.

Okay.

I'm not trying to hammer this, but, I guess, do you guys -- if you can give me any data points in terms of how much your capacity for holding grain you guys do have?

Bill, you're, kind of, getting way down into the weeds, and we're not going to provide that level of detail.

Okay.

Can you guys give me a general breakdown of fiscal year '08 CapEx uses?

About $25 million (inaudible) maintenance CapEx, and maybe $10 to $15 million would be IT related, and then the rest is for initiatives -- new plant and equipment to grow our business.

Okay.

And then just a couple of questions on market share.

Bill, we do have other people in the call and the call's running on a little longer so let's just pick one more question.

And then we'll go on to the next question, please, operator.

So go ahead, Bill, with your next question, please.

Okay.

Lastly, do you guys have a sense for your market share in the flea and tick category or on the wild birdseed?

They're good.

We like them.

That's very useful.

Thank you very much, guys.

Thanks, Bill.

Hey, operator, we'll take two more questions, please.

Your next question comes from the line of Jeff [Blanchett] with RCB Investment Management.

Please proceed.

Good afternoon, gentlemen.

Hey, Jeff.

Just -- if I understand correctly here -- on the coverage ratio and, sort of, the working capital walk over the next six months, as you go through the season, and tying it back to Bill's comment of "There's no reason why we can't take $50 million out of this," is that $50 million for the year or long term you should be running the current business with $50 million less of working capital?

We should run the business with $50 million less of working capital, and the issue is to get there as quickly as possible.

So to the extent that all of the inventory is perfectly balanced and would turn perfectly, you could get there in the inventory cycle, you know, one click.

It doesn't turn out that inventories work that way.

So it will take a period of time.

It's conceivable probably the end of the year that we could have achieved that goal, but it's more likely it'll flow into a portion of the next year.

And when we talk about, again, just maintaining some comfort level in leverage and with your bank agreement, one would expect that ratio to kick up over the first half and then decline back down as you go through assuming a reasonable spring season?

Is that a fair estimate?

Yes, that's correct.

We're a consumer of capital in the first half of our year and a repayer of capital the second half.

And you mentioned you sold the business.

As part of a review process of everything, you've accumulated a number of business.

Is that a direction we might see more of?

We talked about that on the last call, and let me just kind of quickly refresh.

Businesses that aren't performing on profile usually are the things that people would think about, but when you think about, if you get them to perform on profile, they're worth so much more, why would you not do that?

And so I don't see any of those businesses being sold at the moment.

And, really, once they're on profile and they're contributing what they should contribute, there's no reason to sell them going forward because they're creating the kind of shareholder value that we want.

For the rest of the businesses that are on profile, you wouldn't mess with that.

So there would have to be some very specific reason that I don't see at the moment for that to happen.

Got it.

And so, in conclusion, on a go-forward basis here, assuming that there is something other than a hundred-year drought in the Southeast, the economy will probably remain tough as you see it, grain prices remain high but don't triple again, you don't see a reason why, with your internal improvements and just your basic focus and blocking and tackling, there's no reason why you would have to go to the banks, and, in general, you're cautiously optimistic that you'll do a little bit better this year than last year?

Is that a reasonable statement?

It's a different statement than the statement I made.

It sounds like it's fairly close, but I'll stick with my earlier comments.

Thank you very much.

Thanks, Jeff.

Operator, last question, please.

Your last question comes from the line of Dick Hillman with First Wilshire Securities.

Please proceed.

Hi, gentlemen.

Just a couple questions.

Could you give me a sense of the size of the sales for active ingredients either in the first quarter or the fourth quarter or 12 months or any kind of indication of that?

I'm looking around the room, and everybody's shaking their head, no, we don't give that information out.

So --

That's a prized secret.

Thank you.

Okay.

Fine.

I'll move on to a different area.

Just a question of the research focus at Central life sciences.

Could you just talk about the research focus there and whether they're capable of coming up with any blockbuster animal drugs?

The research at life sciences is primarily applied research.

In other words, we are either gaining rights to active ingredients or we own distribution of active ingredients.

And in either case, we're finding new ways to use them.

Application -- that is, topical application or perhaps internal application to the animal -- there's a variety of applications -- but we're not doing basic drug research in that business unit.

That would be terrific if some day we got to that category, but that's not the business in which we're engaged.

Having said that, is it a possibility of blockbuster products based on the formulations and the work that they do and the registrations that they get, whether it's through animal health or EPA, the answer is absolutely yes.

Okay.

Great.

I got an idea for a drug for you, but I'll do it off line.

Just one last thing about -- you know store traffic at Pet Smart or scan data -- have you seen any scan data for Pet Smart for your sales of Central Garden & Pet products?

That's something we do not share.

That's a confidentiality agreement with the retailer.

But the answer is you see it.

Yes, we see it.

But you can't talk to it.

And we can't talk to it.

Then just what's your intuitive subjective?

I think you must go into Pet Smart stores occasionally -- what's your sense of store traffic in those stores?

Foot traffic?

Since I'm not sitting there counting it, I really don't want to comment on it.

I mean, I have no idea.

If we talk about our customers, they don't like it, and I can understand that.

If the roles were reversed, I'd feel the same way.

Those are the folks to talk to about those kind of things.

We have a wonderful business with these folks, we really appreciate them, and I think enough said on it.

Okay.

And then, finally, what would be, like, a target capital structure for your company or --

On an ongoing basis -- we've tried to target three times debt to EBITDA on an ongoing basis.

So we're a little overleveraged right now relative to our target.

Okay.

Great.

Thanks, gentlemen.

Sure.

Thank you.

At this time there are no more questions.

Well, thank you for your questions.

We're working quite hard to restore the performance of the business.

In fact, beyond quite hard, we're working intensely.

We look forward to providing progress reports to you throughout the year with calls like this, and we appreciate you joining us on the call.

Good-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.