Central Garden & Pet Co (CENT) 2008 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good afternoon, ladies and gentlemen, and welcome to the Central Garden & Pet Fiscal Second Quarter 2008 Earnings Conference Call.

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

  • Later we will conduct a question-and-answer session.

  • 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 Paul Warburg, Vice President and Treasurer for Central Garden & Pet.

  • Please go ahead, Sir.

  • Paul Warburg - VP and Treasurer

  • 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, and Stu Booth, our Chief Financial Officer.

  • 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-Q for our fiscal second quarter of 2008 which will be filed tomorrow, Form 10-K for the fiscal year ended September 29, 2007 and in other Securities and Exchange Commission's filings.

  • Additionally, the discussion on this call will include the use of non-GAAP 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 website at www.central.com.

  • Today's agenda is as follows.

  • Bill will provide a brief business discussion of the first half of the fiscal year.

  • 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.

  • The prepared remarks will be brief in order to get to your questions more quickly.

  • I will now turn the call over to Bill Brown.

  • Bill.

  • Bill Brown - Chairman and CEO

  • Thank you, Paul.

  • And thank you for joining us this afternoon.

  • My objective today is to discuss what we have done and what has been accomplished in the first six months since my return as CEO.

  • Looking at the first half of this fiscal year, we've strengthened our financial position.

  • We significantly reduced our use of cash during the first six months and we decreased our total debt by $18 million compared to a year ago.

  • As a result, we continue to be in compliance with our bank credit agreements and we expect to remain to do so.

  • More importantly, we have made meaningful progress towards our goal of returning Central to on-profile financial performance.

  • We have done this byte relentlessly focusing on margin expansion; expense reduction; and working capital improvement.

  • Addressing margins we implemented price increases in key areas of our business, most notably our wild birdseed operations.

  • In spite of this our margins remained below historical averages.

  • Looking ahead we expect grain costs to continue to rise.

  • We will be working diligently to improve margins through a variety of initiatives including additional price increases.

  • Turning to the topic of expenses, we have implemented many cost reduction initiatives.

  • While the full impact of these results are not visible to investors, we are aggressively lowering our expenses through a combination of headcount reductions, the elimination of certain discretionary expenses and process improvement initiatives.

  • The benefits of these initiatives will begin to be felt later this year and more so in fiscal 2009.

  • Addressing working capital levels, we have made some progress, but clearly have more work to do.

  • We have reduced our seasonal working capital bill this year by approximately $28 million.

  • From September 2007 to March 2008 the net change in working capital was $121 million compared to $149 million over the same period last year.

  • As mentioned on the previous calls, we're carrying too much inventory.

  • Now this is due to primarily a poor garden season last year, but we have meaningful work to do in all areas of our business on inventory.

  • We are seeing progress, however, in some of our Garden and Pet Operations which are now carrying less inventory than they did at the end of March last year.

  • On the other hand, some of our inventory build is acceptable.

  • For example, grass seed is higher.

  • It supports our new water efficient Smart Seed launch which has been quite well-received by the marketplace.

  • Similarly inventories at Central Life Science are higher, supporting its new product introductions.

  • That being said, I continue to expect working capital to improve throughout the year through tighter inventory controls; better attention to detail on our accounts payable; and our accounts receivable functions.

  • Before turning the call over to Stu, I will summarize by saying that I believe we are making measured, meaningful progress.

  • We continue to have a great deal of work in front of us.

  • Looking toward, we are mindful of a variety of factors.

  • Namely, it appears that the weather will be a net positive this year compared to last year.

  • However some water restrictions remain in place in key regions.

  • Second, the outlook for the consumer is uncertain.

  • Our assumption is that the economic environment is going to get any easier for the foreseeable future and we are scaling our business accordingly.

  • Third, Aquatics remains challenging.

  • We are cutting SKUs, lowering costs and implementing other measures to align our operations with a considerably weaker market.

  • Fourth, grain costs continue to increase.

  • We continue to sharpen our buying practices.

  • Ultimately, though, our ability to pass through price increases will determine our success at returning to on profile performance in our wild bird feed businesses.

  • And, finally, we will have to raise prices further to offset the rapid increase in the cost for oil and imported goods which impact many of our businesses.

  • Despite these headwinds, as indicated on prior conference calls, we are still hopeful that our results for the full year will be modestly better than last year.

  • Our senior priority is to get our businesses, both operationally and financially, on profile for 2009.

  • This now appears to be more difficult to achieve than we had previously thought three months ago, largely due to the factors I've just described.

  • With that I will turn it over to Stu to recap the quarter numbers and then we will take your questions and answers.

  • Stu Booth - CFO

  • Thanks, Bill.

  • Although we face difficult comparisons to the prior year, I am pleased to report that our results are roughly in line with last year's.

  • Positive factors contributing to performance were the launch of our Smart Seed line of grass seed, price increases and continued solid performance in sales of our Dog and Cat and Central Life Sciences operations.

  • This performance was sufficient to largely offset continued weakness in Aquatics and Garden Decor, which consists primarily of our pottery operations.

  • Net sales for the first quarter of fiscal 2008 were $485 million, relatively unchanged compared to sales of $486 million a year ago.

  • Branded product sales increased modestly to $414 million from $409 million a year ago.

  • Garden segment sales declined 1% to $254 million from $256 million a year ago.

  • Garden branded product sales increased 1% to $221 million; and sales of other manufacturers declined as planned, 12%, to $33 million.

  • Pet segment sales were relatively unchanged at approximately $231 million.

  • Pet branded product sales increased 1% to $193 million.

  • Sales of other manufacturers' products declined 4% to $38 million.

  • The Company's gross profit for the second quarter decreased approximately $4 million or 3% to $160 million.

  • Gross profit as a percentage of net sales decreased 70 basis points to 33% from 33.7% in the year ago period.

  • The slight margin erosion is due primarily to rising costs.

  • Selling, general and administrative expenses for the second quarter were approximately $115 million compared to $118 million a year ago, a decline of approximately $2.5 million or 2%.

  • Estimate expenses as a percentage of net sales was 23.8%, an improvement compared to 24.2% last year.

  • The improvement was due primarily to lower corporate expenses and reduced operating expenses in Pet.

  • Operating income for the quarter was $44.7 million, compared to $46.2 million a year ago.

  • Garden segment operating income was $26.1 million compared to $28.8 million last year.

  • Included in this number is a $2 million impairment of [trade] credits.

  • Pet segment operating income was approximately $28.2 million compared to $29.3 million in the prior year period.

  • The decline is due primarily to continued softness in Aquatics.

  • Net interest expense for the quarter was $9.5 million, compared to $12.4 million a year ago due to lower interest rates.

  • Our borrowing rate for the quarter was approximately 5.6% compared to 7.4% a year ago.

  • Other income for the quarter was $1.2 million compared to $1.6 million last year.

  • Our tax rate for the quarter was 43% compared to 38.2% a year ago.

  • Impacting the tax rate for the quarter was a $1.7 million charge to true up tax charges related to our goodwill impairment in the fiscal first quarter.

  • Net income for the quarter was $20.5 million or $0.28 per fully diluted share compared to net income of $21.5 million or $0.30 per share a year ago.

  • Capital expenditures for the quarter totaled approximately $4.9 million compared to $19.6 million a year ago.

  • Turning to the balance sheet, comparing March 29, 2007 balances to March 31, 2008 balances, accounts receivable were $343 million, an increase of approximately $10 million or 3% compared to last year.

  • Accounts payable decreased $22 million to $127 million in the quarter compared to $149 million last year.

  • Inventories were $417 million, an increase of approximately $8 million or 2% compared to last year.

  • As discussed last year -- sorry.

  • As discussed last quarter, we have carried excess inventory in the first part of fiscal 2008, due primarily to lower than anticipated garden sales in fiscal 2007.

  • While inventories remain high, we made progress limiting the seasonal build and expect inventory to decrease throughout the balance of the year.

  • As of March 29, 2008, total debt stood at $696 million compared to $713 million last year.

  • In addressing our credit agreement as Bill mentioned we continue to be in compliance with our loan covenants.

  • Our current debt to EBITDA ratio as defined in our credit agreement is approximately 4.5 times.

  • A maximum leverage covenant in our bank credit agreement is five times.

  • We believe we have adequate financial capacity entering the second half of the year and as a result we expect to remain in compliance with our loan covenants.

  • I will now turn the call back to Bill.

  • Bill.

  • Bill Brown - Chairman and CEO

  • Thank you, Stu.

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

  • We are aggressively analyzing, identifying and implementing measures that will drive working capital lower, improve margins, and reduce operating costs.

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

  • I believe we are making progress.

  • However, the external environment due to rising costs, inventory reductions at retail and overall consumer uncertainty is more challenging than it was three months ago.

  • With that, we will take your questions.

  • Paul Warburg - VP and Treasurer

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

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Bill Chappell with SunTrust Robinson Humphrey.

  • Bill Chappell - Analyst

  • I guess first, Bill, I know you are not going to give me a perfect definition of on profile, but does on profile mean getting back to historical margins over time?

  • Or you know how do you look at that versus on a historical basis with everything going on in commodities and consumer and what have you?

  • Bill Brown - Chairman and CEO

  • I actually think I'm going to give you a more precise answer than you thought I might.

  • When we look back historically for each of our businesses, there are periods of time when their margin and EBIT contribution and are working capital were at levels that were attractive and it happened for several years.

  • We are not picking the very best year, but we are looking at years where it was quite good and acceptable.

  • Those are things we have done in the past in each of our businesses and in many of our businesses continue to do today.

  • But there are other businesses that are off that profile and what we see is there are specific reasons why they are off.

  • It may be margins, it made the expenses, it may be market share changes, it can be any number of factors.

  • Our job is to make appropriate adjustments to the business to get them back on that historical profile.

  • So.

  • Bill Chappell - Analyst

  • Even with the economic hit to the Aquatics business and the commodity hit with birdseed getting back on profile is possible in '09?

  • Bill Brown - Chairman and CEO

  • Yes.

  • Let's talk Aquatics for a moment.

  • The Aquatic sales are down quite a bit in the market.

  • We need to maintain or grow our share.

  • We need to adjust the size of the business, tend our pricing accordingly to deal with that.

  • So we get on profile.

  • That is going to mean taking some fixed costs out as well as adjusting variable costs, but if we do all those things, our return on capital and our margins overall should be able to be at levels they were in the past.

  • It may not be that we will have as much sales if the market doesn't come back, but we will still be on profile from a financial performance point of view.

  • The answer is, we would simply deploy that other capital into other business areas where we can get the returns.

  • Bill Chappell - Analyst

  • Got it.

  • And then on the birdseed side I think the comment was that you're sharpening your buying prowess or how you buy the (inaudible).

  • Can you give us a little more color what you are doing now versus what you are doing a year ago to try to improve or try to catch up with the commodity rise in the business?

  • Bill Brown - Chairman and CEO

  • You know I almost didn't put that sentence in the script.

  • There are, relative to what is going on in terms of price increases, sharpening our buyer, or buying might pick us up about 5% or 10% of the issue that we are dealing with in terms of leverage.

  • Most of it is cost and margins and margin expansion.

  • We do some things that are related to hedging.

  • We do some things related to forward buying.

  • We look at mixes, some of those elements.

  • That is not where the leverage is.

  • It comes down to you have got to get the prices up and it is very hard to do.

  • Bill Chappell - Analyst

  • Okay and then just, finally, Stu, a couple of things to make sure I caught -- I'll throw them out real quickly.

  • Interest expense, should we kind of use that similar rate on a go-forward basis for the year?

  • Impairment did you say there was a $2 million charge in the quarter that is, is that recurring or is that just a onetime issue?

  • Then tax rate, what should we be looking at for the rest of the year?

  • Stu Booth - CFO

  • The interest expense for the quarter is probably just as good at terms of a rate perspective going forward for now.

  • The impairment charge, we had a $2 million trade credit that we took a reserve against.

  • That is not a recurring item.

  • I am going to call that just a onetime event, at least related to that activity and the tax; that is a $1.7 million true up for our goodwill impairment last quarter.

  • And that's not a recurring item either.

  • Bill Chappell - Analyst

  • So just to make sure the trade impairment penalized EPS by $0.02 taxes benefited by let's say, $0.017 and so now net is kind of a neutral for the (multiple speakers)

  • Stu Booth - CFO

  • Regular run rate on the taxes is 38.2.

  • Bill Brown - Chairman and CEO

  • Other way around actually the -- yes the $1.7 million on the tax piece went against us.

  • Bill Chappell - Analyst

  • Got you.

  • Stu Booth - CFO

  • So our regular run rate tax rate is about 38.2 versus 40.

  • Bill Chappell - Analyst

  • So really it was a $0.04 hit on kind of onetime issues?

  • Stu Booth - CFO

  • Thereabouts.

  • Bill Brown - Chairman and CEO

  • Roughly.

  • Bill Chappell - Analyst

  • Perfect.

  • Thanks a lot.

  • Operator

  • Joe Altobello with Oppenheimer.

  • Joe Altobello - Analyst

  • First question.

  • Just want to go back to Bill, your comments about getting back to on profile in '09.

  • I want to make sure I understand it.

  • It sounds like you are still looking for '08 to be better than '07, but it will be difficult to go back to on profile in '09.

  • Does that mean that you still expect '09 to be better than '08, even if you don't get back to historical levels?

  • Bill Brown - Chairman and CEO

  • Oh gosh, I would hope so.

  • Joe Altobello - Analyst

  • Given where commodities are and where they're going?

  • Bill Brown - Chairman and CEO

  • We are aggressively managing the business and doing things that -- you know, when you have headwinds you don't stop moving forward.

  • You just don't move forward as fast.

  • Joe Altobello - Analyst

  • Okay.

  • So some of the comments were more on a relative basis not an absolute basis, but you still expect to make progress next year.

  • It is not the profit you might have liked three months ago, let's say?

  • Bill Brown - Chairman and CEO

  • Our goal is to be on profile in 2009.

  • That's miles better than what we did last year or we are hopeful for in 2008.

  • To get on profile by 2009 and achieve that goal now looks more difficult than it did three months ago.

  • Joe Altobello - Analyst

  • Got it.

  • Then on commodities, could you guys quantify the hit this year?

  • On commodities?

  • Stu Booth - CFO

  • We haven't put a number around it.

  • The grain prices have increased 30% versus 15% for the same period last year.

  • So that's just a relative measure, but we haven't talked about our input costs -- .

  • Bill Brown - Chairman and CEO

  • or quantified how much of a hit it is --.

  • Stu Booth - CFO

  • In terms of price recovery gross or net.

  • Joe Altobello - Analyst

  • Could you quantify the percentage of price recovery?

  • Are you getting that 75% of that hit from pricing?

  • Bill Brown - Chairman and CEO

  • No, I will comment on that.

  • We did the work very aggressively last December to get our margins back on profile and we announced -- I guess we did the work in November and we announced price increases of substantial amounts and if we had had stable grain prices, those margins would have put us in reasonably good stead.

  • In the ensuing quarter, we got something approaching another 30% in grain price increases.

  • So now we have to go back again and, so, quantifying this is both how much is the rise?

  • How much of the change do you get through price changes?

  • And how quickly do you get it.

  • And those are too many variables and we simply don't give out that information.

  • Joe Altobello - Analyst

  • Last, in terms of volumes, since you raised prices and while bird feed has been -- I guess you probably doubled prices off the bottom in the last year, year and a half -- have you seen any noticeable slowdown in volumes or are consumers still buying it?

  • Bill Brown - Chairman and CEO

  • Consumers still continue to buy it.

  • There continues to be a general concern in the business that there will come a time of slowdown.

  • I personally am not aware of really good hard data that says that indeed has happened.

  • Operator

  • Alice Longley with Buckingham Research.

  • Alice Longley - Analyst

  • Just to clarify a point.

  • You said a minute ago increases in grains prices are hurting you $0.13 in this quarter.

  • $0.13 more than a year ago or is that nine months to date?

  • Bill Brown - Chairman and CEO

  • We didn't give you $0.13.

  • We said where there's been in terms of input cost there has been a 30% increase in grains year-to-date this year versus a 15% increase in grains for the light period last year.

  • Stu Booth - CFO

  • We have not given any EPS impact to that whatsoever.

  • Alice Longley - Analyst

  • Thank you, I am glad I asked.

  • Well at least I got the number right.

  • Can you tell us in the numbers you reported for Lawn and Garden, how much of the increase in the branded products, well, how much of the increase there is pricing?

  • And could you answer the comparable question for Pets?

  • Stu Booth - CFO

  • I think probably most of the growth or what you are seeing is grass seed as Bill mentioned in his earlier remarks, Smart Seed is really doing quite well.

  • And so there's not necessarily like meaningful price increases that a new product launch that continues to perform well for us.

  • Alice Longley - Analyst

  • So that's mix, okay?

  • How about on the Pet side?

  • Stu Booth - CFO

  • Pricing on the Pet if you blend it all?

  • Alice Longley - Analyst

  • Yes.

  • Stu Booth - CFO

  • Low single digits.

  • Bill Brown - Chairman and CEO

  • Yes.

  • As we said, low single digits.

  • Alice Longley - Analyst

  • Okay and is it --?

  • Stu Booth - CFO

  • On the Pet side too we had some new product launches at Central Life Sciences so there's not necessarily price increases.

  • Like for like price increases there.

  • Our Nylabone had some price -- had some new product (inaudible).

  • So we are taking a stab at low single digits.

  • Alice Longley - Analyst

  • All right.

  • Can you update us as to what percentage of Pet is Life Science?

  • Stu Booth - CFO

  • We've never broken that out.

  • Bill Brown - Chairman and CEO

  • And today will not be the day we do it.

  • Alice Longley - Analyst

  • If I guessed 20% with that be far off?

  • Bill Brown - Chairman and CEO

  • We're not going to comment.

  • Alice Longley - Analyst

  • Can we talk about distribution business?

  • It sounds in your comments as though sales of other companies' brands were down sharply.

  • Have you made any decision, relative to the profile you are looking for to maybe move away from distributed brands more than you might have in the past or is there --?

  • Bill Brown - Chairman and CEO

  • No, I gave some pretty expensive comments on, I believe it was the last call.

  • These third party brands are examined carefully to make sure that they contribute in a profitable way to us and that they are of value to our retailers and a complement to our relationship with the retailers.

  • Where they don't meet those criterias, we will selectively reduce our activity with particular brands; and from time to time, a manufacturer will decide to handle this stuff directly and move away.

  • So this is an orderly planned evolution of our business more to our own brands, but we value the third party brands and what they do to complement our business.

  • Alice Longley - Analyst

  • Do you value them in good part because they help cover overhead?

  • In which case one wonders maybe if you could just cut overhead?

  • Bill Brown - Chairman and CEO

  • They are of value to the customer.

  • They are of value to the infrastructure that we already have in place.

  • Remember, we have a long history there and they are a value to us in other, more subjective ways that I won't go into for the value of maintaining brevity on the call.

  • Operator

  • Reade Kem with Merrill Lynch.

  • Reade Kem - Analyst

  • Stu, I was wondering if you could just take us throughout the leverage ratio that you cited there; I think this is the quarter where you deduct, I think it's $50 million from the debt balance to come up with that.

  • And if you do, I was wondering if there might be any other nonoperating gains or losses that were in that number for the second quarter.

  • So I guess if you could just walk us through that calculation?

  • Stu Booth - CFO

  • I don't have the calculation in front of me but there are some exclusions for non-cash charges on the EBITDA side of it.

  • Reade Kem - Analyst

  • So what are -- can you tell me what you are using for adjusted EBITDA in the quarter?

  • Stu Booth - CFO

  • No.

  • I don't have it in front of me.

  • Reade Kem - Analyst

  • Maybe I will follow-up with you later.

  • I was also wondering on the wild birdseed business with the higher pricing whether you had seen the competition do similar things there and whether there was any impact as you looked at point-of-sale data from higher prices on the customer and market share impacts.

  • Anything on those two fronts?

  • Bill Brown - Chairman and CEO

  • We think we're doing fine.

  • Everybody buys the same kind of grain.

  • Some little different here and there, but in the main the market moves are so traumatic, everybody has to deal with it.

  • Reade Kem - Analyst

  • And then on the Pet side I was wondering just given the tougher conditions out there, whether and maybe this relates to the Trade Credit Reserve, but the health of the independent pet store base.

  • If you could just comment on that and what you're seeing?

  • Bill Brown - Chairman and CEO

  • They continue to do a good job.

  • Our Pet distribution business largely functions [as] serving them and as a reasonable proxy for the good health of those businesses.

  • Usually the better operators continue to do well and the poorer operators drop to the side.

  • Reade Kem - Analyst

  • But nothing really that out of line even though we are in a slower economic phase?

  • Bill Brown - Chairman and CEO

  • Haven't seen it in such a way that it would be material enough to rise to a discussion on the call.

  • Reade Kem - Analyst

  • I also wanted to asked on the Aquatics category specifically, is there a level of sales volume that you think you might approach later this year where you start to bump up against the hobbyist level of demand.

  • In other words you start hitting the bottom.

  • You think that's something that might happen in calendar '08 or is there just not enough visibility?

  • Bill Brown - Chairman and CEO

  • Well, I would have not expected it to have moved as low as it has moved.

  • In these types of situations, there's a big question of all the different parts of what's going on.

  • How much of it is actual consumer demand?

  • How much of it is slowdown of retailers' buy because they want to tighten up their inventories.

  • You know and you just sort of back up through the consumer, the retailer and a number of cases, a good portion of that business goes through distributors either our own or others.

  • So if you get compression in that, we can see more of a slowdown kind of like the crack of the whip, then might actually be with the consumer.

  • We are doing work on assessing what that is.

  • Reade Kem - Analyst

  • And just two more slightly different questions, but on the weather do you think is there anything this year that is more or less favorable for some of the Life Sciences businesses (inaudible) the pest controls for the pets and the foreign business.

  • And then last one is, Stu, if you could just give us your quarter end revolver availability that would be great/

  • Bill Brown - Chairman and CEO

  • Yes.

  • The additional moisture means that there's going to be more bugs and mosquitoes and so that is a regional positive given the drought in the Southeast last year, but no big traumatic event.

  • Stu?

  • Stu Booth - CFO

  • The revolver availability on our most restrictive covenant is about $77 million.

  • Operator

  • Reza Vahabzadeh with Lehman Brothers.

  • Reza Vahabzadeh - Analyst

  • I don't know if you could give us a bit more color on sales trends by product line.

  • You mentioned Aquatics was weak.

  • Is that a high single digits kind of decline?

  • Stu Booth - CFO

  • I think what you saw what our competitors did and if you keep in mind what the number of our competitor announced and they have more consumable supplies.

  • We are a little more weighted toward the tank market.

  • So that will be a little more on the leading-edge.

  • So you can make your own relative judgment from there.

  • Reza Vahabzadeh - Analyst

  • I mean, is the trend getting -- is the sales trend whether it is POS or shipment is it generally getting weak here or has it bottomed out?

  • Bill Brown - Chairman and CEO

  • Haven't seen what I would call a flat point to call about them yet.

  • Could be there right now.

  • Don't know.

  • Reza Vahabzadeh - Analyst

  • Got it.

  • Then I assume your Garden business was flat to up in sales.

  • Is that a reasonable assumption?

  • Stu Booth - CFO

  • For our own brands, it was up very modestly.

  • It was basically flat.

  • Then when you include the sales of other manufacturers' products, it was down slightly.

  • Reza Vahabzadeh - Analyst

  • Then on the other side -- animal health, I am assuming it's still growing?

  • Stu Booth - CFO

  • Centralized Sciences and such is doing fine.

  • Reza Vahabzadeh - Analyst

  • Okay, I mean we are talking about mid single digits or better?

  • Stu Booth - CFO

  • We are not going to go into that -- let's just say.

  • Bill Brown - Chairman and CEO

  • We like the business.

  • It's a great business.

  • Reza Vahabzadeh - Analyst

  • I appreciate that.

  • Then so in total, when you look at the flat sales performance, is this benefiting from some price mix and so volumes are slightly lower I suppose?

  • So price --.

  • Stu Booth - CFO

  • As we said on the last on Alice's question, we had some new product launches and so some of those carry higher prices.

  • You know, in terms of like for like products, the place where we had the meaningful increase and price increases would be in the wild bird feed side.

  • Reza Vahabzadeh - Analyst

  • Okay.

  • Then you touched on cost savings and general efficiency.

  • Did you benefit from some of that already in this March quarter?

  • Did you have meaningful --?

  • (multiple speakers)

  • Bill Brown - Chairman and CEO

  • I would have to say we achieved some cost savings but we also had some expenses associated with achieving those.

  • And it's probably more like a net wash.

  • Reza Vahabzadeh - Analyst

  • So looking out over the next couple of quarters, I assume we would see more material benefit of the cost savings over either the June or September quarters?

  • Bill Brown - Chairman and CEO

  • We will probably see those internally.

  • In the aggregate there's enough moving parts that I'm not so sure you will see much of it.

  • But we will know it's there.

  • Reza Vahabzadeh - Analyst

  • Then you touched on the retailer inventory tightness.

  • Did that have a material impact on your sales in this quarter that you could quantify?

  • Stu Booth - CFO

  • Not quantify -- we are not going to quantify it, but yes it did have a pretty meaningful impact on sales in the quarter.

  • Reza Vahabzadeh - Analyst

  • And is it mostly on the Garden side or is it across the board?

  • Stu Booth - CFO

  • Heavily on the Garden side.

  • Operator

  • Michael Friedman with Noble Financial.

  • Michael Friedman - Analyst

  • Discussing inventory, you said you're holding too much.

  • Could you give us a target inventory and maybe even receivable turn days and what are you guys looking for in that regard?

  • Bill Brown - Chairman and CEO

  • I don't think we will put that out.

  • I think we have been very clear, we want our inventories down $50 million.

  • And we think there's room for more to come out of it and if you want to play with the numbers, you can compute the turns.

  • Each business has a different cycle associated with it.

  • Depending on the types of materials that are involved in the business where we source those materials, how we buy them.

  • And so our targets vary from business to business.

  • And so, talking about them in the aggregate gets involved in both mix and specific targets.

  • So I decline to go further on that.

  • Michael Friedman - Analyst

  • And on a year-over-year basis, not sure if you look at it this way, but if you were to eliminate the impacts of wild bird feed and Aquatics, do you think your operating margin would have widened?

  • Stu Booth - CFO

  • If you were to eliminate wild bird and Aquatics?

  • Michael Friedman - Analyst

  • Right the impact of those two business segments.

  • You highlighted those as being two that have been challenging.

  • Bill Brown - Chairman and CEO

  • Without answering it directly, I will say this.

  • We like Central Life Sciences and it continues to perform well.

  • Dog and cat we mentioned upfront in Stu's remarks.

  • It's doing well.

  • Those are two of our higher margin products or higher margin categories.

  • Stu Booth - CFO

  • And the question goes to if you eliminate the off profile businesses would it look better?

  • It would.

  • Looking at year-over-year how much better?

  • I've not looked at it that way.

  • Can't respond.

  • Michael Friedman - Analyst

  • Fair enough.

  • Have you given any thought to divesting some of the operations, especially maybe as a way to deleverage the balance sheet?

  • Bill Brown - Chairman and CEO

  • Yes.

  • I got that question two calls ago and I got that question again last call and I will be happy to revisit it.

  • We have a long history of acquiring and building businesses; and we aspire to have a great business and to continue to grow.

  • Where businesses are performing well, they are an important part of our stable and have an important part in going forward.

  • Where businesses are off profile, if we were to sell them we would get a low value reflective of their current performance.

  • By doing the work and putting the energy in to get them on profile, they become an important part of the family group of Central companies that are making meaningful contribution, and their values are up significantly.

  • So unless we were to see a situation where we simply did not believe we have the skills set and the capabilities to get a business on profile, I wouldn't see and you should not expect to see sales of businesses.

  • Michael Friedman - Analyst

  • Okay.

  • Specifically to the cash flows, can you give us a sense for how much cash from operations it generated in the quarter?

  • Stu Booth - CFO

  • For the first six months ended I've got those members handy here in front of me, but cash used for the first six months of 2008 were -- or was $90 million versus $116 million last year.

  • So I've got a $26 million, roughly, improvement.

  • Michael Friedman - Analyst

  • And then can you give us an idea exactly -- it's sort of a sliding scale, I know it's been talked a lot about, implementing significant price increases on the wild bird feed side.

  • When exactly did that kick in?

  • So I'm trying to get a sense for when we anniversary against these meaningful price increases.

  • Was it last quarter, this quarter, can you just give us a sense of that?

  • Bill Brown - Chairman and CEO

  • I think the wild bird prices went in December, February last year.

  • Paul Warburg - VP and Treasurer

  • Yes.

  • February of last year the first (multiple speakers) the first eight weeks.

  • (multiple speakers) February '07 was our first meaningful one.

  • Bill Brown - Chairman and CEO

  • You have to plot both grain cost increase, which we have done.

  • We have a graph that shows our price, our cost increase, our input increase and then our pricing increase and we, simply, as I shared on the last call we simply didn't keep up with the cost increases.

  • And that's why margins are below historical levels.

  • And we made big moves this year to get them back up and the grain moved yet again.

  • And so we have more work to do.

  • Michael Friedman - Analyst

  • Then one last question.

  • Do you see out there in the marketplace any missteps by some of your competitors that you think you might be able to take advantage and take some shares even during these tough times?

  • Bill Brown - Chairman and CEO

  • [We don't] focus on that.

  • We focus internally on our business getting on profile, increasing margins, reducing expenses and reducing working capital.

  • Operator

  • Bill [Reuter] with Banc of America Securities.

  • Bill Reuter - Analyst

  • I have you guys operating with plenty of room under your financial covenants and your bank agreement for the next three or four quarters.

  • Are you guys comfortable with these levels?

  • Bill Brown - Chairman and CEO

  • Yes.

  • Bill Reuter - Analyst

  • When you talked with a 30% increase in grain this year, were you talking this calendar year or was that this fiscal year?

  • Bill Brown - Chairman and CEO

  • Fiscal year.

  • It's the first six months of this fiscal year versus the first six months of fiscal '07.

  • Bill Reuter - Analyst

  • Do you have any sense for what it might have been just in the quarter?

  • Stu Booth - CFO

  • For the -- I don't have our actual costs, but I mean, when you take a look at the actual market price for grains, Milo -- of our three primary grains, Milo was up 22% and in our second quarter, millet was up 27% and sunflower was up 22% in our fiscal second quarter.

  • Bill Brown - Chairman and CEO

  • And those are our key three ingredients.

  • Stu Booth - CFO

  • Right.

  • Bill Reuter - Analyst

  • So it sounds like the lion's share of that 30% was in the second quarter not the first.

  • Is that right?

  • Stu Booth - CFO

  • Well there was some in the first quarter.

  • Year-to-date, you've got Milo up 41%.

  • Millet up 27% and sunflower up 62%.

  • Bill Reuter - Analyst

  • I might follow up on those later.

  • Will the next -- the price increase you guys plan on taking on your grain-based products, will this be kind of enough to offset the increases or would you kind of go above that or would you still probably be playing catch-up?

  • Bill Brown - Chairman and CEO

  • I don't think the market place is prepared to let anybody go above it.

  • So there is still quite an effort to "catch up".

  • And it is painful for all participants in the market.

  • Secondly, our forward projections on grain would expect them still to keep increasing.

  • Bill Reuter - Analyst

  • Was there much push back from retailers, meaning whether did you guys lose any significant accounts when people said we simply can't afford to pay that?

  • Bill Brown - Chairman and CEO

  • We don't recall having lost any significant accounts, but I don't follow it that closely.

  • Bill Reuter - Analyst

  • In terms of your market share in the Aquatics category, do you guys have a sense for where if this is -- if there's been any significant trends here or if it's just pretty much category degradation?

  • Bill Brown - Chairman and CEO

  • All indications are is category, consumables, volumes because their consumables do better than tanks, filters and pumps which are larger onetime purchases.

  • Bill Reuter - Analyst

  • Then I guess just lastly, I was wondering -- I don't know if you can comment on this at all, but some of your competitors have been out there saying that April was particularly strong.

  • I was wondering if you guys experienced a strong April as well?

  • Stu Booth - CFO

  • Yes our sales were pretty strong in April with especially like our Dog and Cat category.

  • It was up solid double digits.

  • (multiple speakers) Garden sales were strong.

  • Pet sales overall are strong as well.

  • Operator

  • Bob Wetenhall with Royal Bank of Canada.

  • Bob Wetenhall - Analyst

  • Two housekeeping questions.

  • Your accounts payable is down by $20 million or $22 million.

  • Any reason for that?

  • Bill Brown - Chairman and CEO

  • Sure.

  • We bought less during the quarter because we were already carrying high inventory.

  • So that's not the complete answer but that's a good part of the reduction in accounts payable.

  • Bob Wetenhall - Analyst

  • Okay.

  • What is your full year CapEx spend look like?

  • Bill Brown - Chairman and CEO

  • We are just polishing off the Q right now.

  • We are staying with $35 million for the year.

  • (multiple speakers) -- that's the number.

  • Bob Wetenhall - Analyst

  • And it looks like you're falling through on your plan to lower SG&A.

  • On a dollar basis what's kind of the magnitude of savings you think you can pull out?

  • Bill Brown - Chairman and CEO

  • I don't give that kind of a number out.

  • I mean, there's a lot of elements going on and when it becomes visible we will be happy to share it.

  • Operator

  • [Randy Hecht] with [Goodenow].

  • Randy Hecht - Analyst

  • My question also pertained to the payables and let me just ask you this and -- your, this time of year you'd normally would have obviously your receivables go up, your inventories go up because for seasonal purposes and normally your accounts payable go up as well and I understand that you bought less.

  • But have you experienced your terms, your vendors tightening terms, given the circumstances?

  • And if so how big of a challenge does that create for you?

  • Bill Brown - Chairman and CEO

  • It's not a challenge because we haven't experienced it.

  • Randy Hecht - Analyst

  • All right.

  • That was my question.

  • Thank you.

  • Operator

  • Joe Altobello with Oppenheimer.

  • Joe Altobello - Analyst

  • Two quick ones.

  • First, interest expense, I don't know if you covered this and if you did I apologize.

  • But that number was up about $100 million from the December quarter and interest expense is actually down.

  • Why was that?

  • Bill Brown - Chairman and CEO

  • Yes.

  • Year over year, interest expense is down a couple of million dollars and it's all right.

  • Joe Altobello - Analyst

  • It's LIBOR basically.

  • Bill Brown - Chairman and CEO

  • Yes it's all (inaudible).

  • Yes.

  • It's LIBOR.

  • Joe Altobello - Analyst

  • Secondly on the SG&A side, it's about flat on a dollar basis the first half of this year.

  • Was there anything unusual in the second half of last year that would cause that trend to change or do you SG&A in dollar terms to be flat year-over-year in the second half as well?

  • Bill Brown - Chairman and CEO

  • There's always little ins and outs in the SG&A line, but there's nothing big last year that I can recall right now.

  • Stu Booth - CFO

  • I can't think of anything either.

  • Operator

  • Alice Longley with Buckingham Research.

  • Alice Longley - Analyst

  • In that SG&A, I think you said that you are achieving cost savings, but there's some near-term costs associated with those savings that, could you just comment on whether -- it sounds as though those should disappear, right?

  • And in essence there are -- there's some nonrecurring costs in SG&A that will go away?

  • I assume some severance costs, stuff like that?

  • Bill Brown - Chairman and CEO

  • Yes.

  • Alice Longley - Analyst

  • So the SG&A number is maybe better than it looks because of those near-term costs?

  • Bill Brown - Chairman and CEO

  • I would think so.

  • Alice Longley - Analyst

  • On something else you said, you said when somebody asked about how independents were doing that your Pet Distribution business largely serves independents and might be a reflection of how they are doing.

  • Your distributed brands were down 5% and your brands were up 1%.

  • Can I imply from this that there is a shift in the pet retailing -- in your pet retailing customers from the independents through the chains?

  • Bill Brown - Chairman and CEO

  • No.

  • That's probably -- probably a better away to characterize it, would be a mix shift within the products that we are serving to the independent channel.

  • We are selling more of our branded products as opposed to third party, but the numbers are small.

  • You can look at third party sales, quarter-over-quarter last year.

  • Last year, we had $39 million of third party sales.

  • This year, we had $38 million.

  • So there's real small numbers.

  • Alice Longley - Analyst

  • Then, my final question is back to this comment about green costs are up 30% from the first six months of the year.

  • Is that 30% from the beginning of the year to now or is that the grain costs are 30% higher than the year ago period?

  • Bill Brown - Chairman and CEO

  • No.

  • It's from September 30 and the 30% is a rounded number.

  • I think the weighted more precise number is somewhat higher.

  • Alice Longley - Analyst

  • So that's a sequential percent increase?

  • Stu Booth - CFO

  • Yes.

  • Operator

  • [Mary Clark] with MSF Investment Management.

  • Mary Clark - Analyst

  • Question has been asked and answered.

  • Thank you.

  • Operator

  • And this concludes the question and answer session.

  • I will turn it over to management for closing remarks.

  • Bill Brown - Chairman and CEO

  • Thank you for your questions.

  • We are working hard to restore the performance of the business and we look forward to providing progressive reports throughout the year.

  • Thank you again for joining the call.

  • Operator

  • We thank you for your participation in today's conference.

  • This concludes the presentation and you may now disconnect.

  • Good day.